1. CASE STUDY
SECTION C
GROUP 1
Business Ethics
Accounting Fraud at WorldCom:
A case study

2. What is/ are the Business Ethics
Issues in this Case?
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How did they reach here?
Who was/were/are responsible?
When did it occur?
When did it come to light?
Which of the Ethics Principles
compromised/flouted?
Where do we go from here? Solutions?

3. Overview
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WorldCom Inc. began as a small
Mississippi provider of long
distance telephone service called LDDS.
1996: Acquired MFS Communications (internet
backbone)
1998: Acquired MCI
2000: Failed merger with Sprint
2000: Dotcom Bubble Burst (rapid decline in
telecom stock values)
2002: Accounting Fraud uncovered
2002: Filed for Bankruptcy Protection

4. The Key Players
Source: IIT Kharaghpur

5. What Happened?
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From 1998-2000, WorldCom reduced reserve
accounts held to cover liabilities of acquired
companies
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Reserves didn‟t cut it; An e-mail was sent in
December 2000 to a division in Texas directing
misclassification of expenses.
CFO told key staff members to mark operating
costs as long-term investments to the tune of $3.85
billion.
Huge losses turned into enormous profits.
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WorldCom added $2.8 billion to the revenue line from
these reserves
$1.38 billion in net income in 2001
Inflated the company‟s value in its assets

6. 
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The whistleblower sent
tips to the internal
audit team
Accounting
irregularities were
spotted in MCI's
books.
The SEC was
suspicious because
while WorldCom was
making so much
profit, AT&T was losing
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Capital expenditures
as well as the $500
million in
undocumented
computer expenses.
Another $2 billion in
questionable entries
Admitted to inflating
its profits by $3.8
billion over the
previous five

8. Why it Happened?
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Corporate Culture
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Autocratic style of management and followed a top down
approach.
Ebbers was obsessed with revenue growth and
insisted on a 42% E/R ratio.
Lack of courage of employees to communicate the
fraudulent activates – believed it would have cost
them their jobs
A financial system in which controls were extremely
deficient
The BOD and Audit Committee did not appear to have
had an adequate understanding of the company and
culture
Inadequate audits by independent auditors

10. Why „good‟ managers make bad ethical
choices
10
Four Rationalizations To Justify Questionable Conduct
1)
2)
Belief that the activity is not “really” illegal.
Belief that it is in the individual’s or corporation’s best
interest.
3)
Belief that it will never be found out.
4)
Belief that the company will condone actions that are taken in
its interest and will even protect the managers responsible.

11. Key Take Aways
11
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History repeats itself.
Be aware of your environment.
If it seems too good to be
true, it probably is.
No job is worth breaking the law
or committing unethical acts for.
Your personal integrity is your most important
asset – you own it and control it.
“Trust, but Verify”.

12. Ethical Values Violated
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Unethical Work Culture
Pressurising employees to manipulate
accounts
No productive outlet for employee dissent
Employees who played along were rewarded;
others were threatened.
Fudged up the accounts; mislead the various
stakeholders

13. Corporate Whistleblowing
 Cynthia Cooper and her team were the first people who
uncovered the major fraud at Worldcom.
 The voluntary release of non-public information, as a moral
protest, by a member or former member of an organization
outside the normal channels of communication to an appropriate
audience about illegal and/or immoral conduct in the organization
or conduct in the organization that is opposed in some significant
way to the public interest.
 Traditional corporate monitoring occurs through a variety of
overlapping means, including: the company‟s board of directors,
external auditors and attorneys, and the government.
 “The highest good was the good will. To act from a good will is to
act form duty. Thus, it is the intention behind an action rather than
its consequences that make that action good” – Immanuel Kant.
 As businesses continue to grow larger and more complex,
whistleblowing has emerged as a valuable tool for eliminating
future corporate fraud.
 A reported 90 per cent of whistleblowers lose their jobs or are
demoted.

14. What the Group Recommends
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Inculcation of ethical values into the work culture
Embracing a bottom top approach
Stringent auditing, both internal and external,
procedures
Divesting control in a larger number of hands
Comparing companies in the same industry and
sector based on performance indicators
Keeping various stakeholders‟ interests in mind.

15. Bibliography
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Kaplan, R. S., and Kiron., D. (2007) Accounting Fraud at WorldCom. Harvard Business
School Case 104-071, September 2007. (Revised from original April 2004 version.)
Lyke, B. (2002). “WorldCom: The Accounting Scandal.” CRS Report for Congress, August
2002.http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/RS21253_0829200
2.pdf
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Romar, E., and Calkins, M. (2006) WorldCom Case Study Update. University o
Massachusetts-Boston http://www.scu.edu/ethics/dialogue/candc/cases/worldcomupdate.html
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American Institute of Certified Public Accountants (2005) The Worldcom Fraud
http://www.aicpa.org/InterestAreas/AccountingEducation/Resources/DownloadableDocum
ents/worldcom.ppt
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WorldCom: The Case Against Bernard Ebbers
(2011)https://www.youtube.com/watch?v=DW03eVMtOY4
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WorldCom – What Went Wrong (2008)https://www.youtube.com/watch?v=7g_d-phoUrU

16. Bibliography
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Bernard Ebbers Photo :
http://www.time.com/time/specials/packages/article/0,28804,1903155_1903156
_1903277,00.html
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Scott Sullivan Photo: http://www.guardian.co.uk/pictures/image/0,,1070329609307,00.html
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Buford Yates Photo:
http://news.bbc.co.uk/2/hi/business/2307845.stm
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David Myers: http://www.bloomberg.com/news/2012-06-21/obama-stimulusaids-worldcom-felon-with-health-care-loan.html
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Betty Vinson Photo: http://www.deseretnews.com/article/600153804/2-workerssentenced-in-WorldCom-scandal.html?pg=all
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Troy Normand Photo: http://www.deseretnews.com/article/600153804/2workers-sentenced-in-WorldCom-scandal.html?pg=all

17. THE END