Compromising Financial Arrangements - Personal financial troubles drove the need for success as well as financial gratuities: Bernie Ebbers had obtained multiple loans to support other personal business ventures. He was in financial trouble and was not able to cover margin calls on his WorldCom stocks. He eventually persuaded the board to provide him with corporate loans. To drive loyalty, Bernie Ebbers in turn provided loans to the COO, Ron Beaumont. The CFO, Scott Sullivan also provided personal checks (bonus) to key managers involved in fraudulent accounting activities.
Business Environment - Sudden downturn in industry and incorrect company strategy: By the year 2000, WorldCom was ...view middle of the document...
The questions issued by the SEC were fortunate to have fueled Cynthia Cooper involvement to extend beyond her role. If it were not for the "late night" non-approved computer access followed by her tenacity to present it to the Board, the standard WorldCom internal audits may not have exposed the issue to what it is today.
When internal audits fail, third party audit was thought to be the safety net for investors and the industry. Arthur Andersen, the third party auditor, was never held liable for its failure to detect the deficiency within WorldCom’s accounting book. Enron's problem which coexisted at the same moment, whether fortunate or unfortunate was enough to bring the large auditing company down. This issue raised much public attention as to the role and responsibility of third party auditors. It was evident that Arthur Andersen had intentionally neglected to acknowledge the 'maximum risk' rating that WorldCom deserved in exchange for the long term relationships it was trying to establish. Arthur Andersen also failed to address why they neglected to challenge WorldCom’s refusal to provide information. This also included some very obvious issues that were missed and not investigated as a result of their confidence and reliance on WorldCom’s management. WorldCom lacked the professional skepticism in their course of audits. The following red flags were not properly addressed by Andersen:
1. WorldCom was still profitable while other telecom companies were reporting large losses.
2. WorldCom still has stable financial ratios during a period of severe decline in the telecommunication industry. It can still meet aggressive revenue target and maintain a 42% line cost expense-to-revenue ratio.
3. Andersen did not perform comparable tests for the international line-cost group even after WorldCom employees told Andersen about a corporate reversal of $34milion in line-cost accruals.
Balance of organizational power not in place - Organizational structure did not support balance of power: The internal audit group reported directly to Scott Sullivan who was directly involved in the accounting misconduct. This can explain the lack of internal controls in many processes that are critical.
Corporate Governance Lacking
Ineffectiveness of the Board of Directors: In following the WorldCom culture, Bernie Ebbers was "autocratic in his dealings with the Board, and the Board permitted it. " Reluctance to challenge was often due to the respect for Ebbers reputation. The Board was reluctant to intervene despite awareness to Ebbers outside personal business interest. With conflicting actions, Ebbers had enacted a set of policies regarding the sale of company stocks for company employees but he himself had disregarded the newly introduced policies. No disclosure was made to the Board or to the public in regards to an associated airplane lease from a WorldCom employee which is required by the SEC. In essence, WorldCom lacked accountability to the...