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Worldcom Whistleblower Case Study Answers

This is the second article of a two-part series on corporate whistleblowing. The first feature examines the issue from the company’s perspective, while this article focuses on the employee’s point of view.

Groupthink. Rationalization. Fear. These are just some of the psychological hurdles faced by would-be whistleblowers when they make the decision to expose corporate wrongdoing.

Cynthia Cooper, the former vice president of the internal audit group at WorldCom, knows a thing or two about being caught up in workplace ethical dilemmas. In 2002 she was the key whistleblower in her company’s $3.8 billion accounting fraud case, which at that time was the largest instance of corporate fraud in history.  

Cooper — author of “Extraordinary Circumstances: The Journey of a Corporate Whistleblower” and one of Time magazine’s three People of the Year in 2002 — now travels the nation to share her tumultuous experiences during the onset and aftermath of the WorldCom crisis.

Speaking at McCombs in April as part of the Ethics and Corporate Social Responsibility Speaker Series, Cooper explained the factors that lead otherwise ethical people to cheat or commit fraud. Corporate conflicts have now become so common, she said, that employees need to strengthen their ethical judgment so they are ready when the time comes to make tough choices.

“It’s important to prepare yourselves now for the ethical dilemmas you’ll face in the workplace,” said Cooper. “Because it’s not if — it’s when.”

Cutting Corners

Cooper’s story unfolded in a time when WorldCom’s stock value and earnings were on the decline, putting pressure on the firm to deliver better results for investors.

In 2000, two of the company’s mid-level managers, Betty Vinson and Troy Normand, encountered a significant ethical dilemma. They were five days away from having to release earnings to the public, and there was an error in the books they couldn’t resolve: The line costs expense had jumped up dramatically and was completely out of line with the company’s revenues. The expenses had been moved from the income statement to the balance sheet, cutting it as an asset to make the company seem more profitable.

Troubled and feeling the pressure of the approaching deadline, the two managers confronted Former WorldCom CFO Scott D. Sullivan. Instead of providing direct answers, he instructed Vinson and Normand to cover up the mistake by drawing on excess reserves. That way, everything would seemingly be aligned with the expectations of external auditors and Wall Street analysts, and they could be given time for the error to “reveal itself in future quarters.”

Sensing their uneasiness and growing guilt, the CFO began praising their work and appealing to their loyalty.

Cooper said Sullivan’s pep talk went something like this: “He said, ‘Look, guys — I want you to think of this as an aircraft carrier: We’ve got planes out. Let’s get all the planes landed safely. Once all the planes have landed safely, then if you want to leave the company, you can leave. … No one’s going to prison. If anyone were going to prison, it would be me. You’re just following orders.’”

Fearful of losing their jobs and financial security for their families, Vinson and Normand followed the orders of their superior, changing the numbers on the balance sheet and hiding the truth from the public.

“Difficult to Stop”

In the months that followed, Sullivan planned to fix the problem through accounting tricks. But to do so, he needed Cooper to delay her internal audit. Growing suspicious of her superior’s increasing persistence, Cooper withstood the pressure to play along.

Once Sullivan realized the auditor would not back down, he decided to come clean, justifying his poor decisions by telling her “it was difficult to stop” cooking the books after the first time he manipulated the numbers.

Cooper didn’t buy it, and with the help of her internal auditing team, she sniffed out the discrepancies and became one of the world’s most famous whistleblowers.

Vinson and Sullivan received prison sentences of six months and five years, respectively, and Normand received three years of probation. WorldCom CEO Bernard Ebbers is still serving a 25-year term for his role in the fraud.

Risks, Rewards and Repercussions

The decision to come forward did not come easily to Cooper, as she contemplated the potential repercussions of her actions. Despite some high-profile exceptions — such as the IRS’ record $104 million award to UBS whistleblower Bradley Birkenfeld last fall — corporate truth-tellers don’t always come out on top.

Most whistleblowers end up leaving their companies (voluntarily or involuntarily) within a year of speaking up, and many others suffer through hardships such as long-term unemployment, financial instability, anxiety, alcoholism, social isolation, and marital problems. Cooper, who experienced depression and major weight loss throughout the ordeal, described the experience as “by far the most difficult thing I’ve ever been through.”

“It was literally all I could do but get out of bed and put one foot in front of another,” she said. “I realized I had a choice to make. I could either let this ruin my life or I could try and find a way through it and do something completely new.”

Cooper still feels empathy for the managers, board members, auditors, and other employees who were working at WorldCom at the time — even those who were involved in the scandal.

“The people who were complicit with the fraud were not just numbers to us—they were people who we had worked with for many years,” Cooper said. “Nobody wakes up and says, ‘I want to become a criminal today.’ It’s a slippery slope, and people go down that slope one step at a time.”

“We all have the power of choice,” she added. “You can give it away, but you all have the power of choice, so prepare yourselves.”

 

Case 4: ACCOUNTING FRAUD AT WORLDCOM

CASE 4 SUGGESTED ASSIGNMENT QUESTIONS (Individual Assignment) Due: 21 November 2013

1.

What are the pressures that lead executives and managers to “cook the books”?

The main pressures were coming from the economic recession and the aftermath of dot-com  bubble collapse which then causes the industry conditions began to deteriorate in 2000. The competition among existing company and the new entrants were becoming more heightened; the company became overcapacity and the demand for telecommunication services reduced significantly. And the pressure to maintain a 42% of expense-to-revenue ratio (E/R ratio) had also becoming one of the forces that lead the executives and the manager to cook the books in order to make it looked

good at the public’s eyes.

From the perspective of the executives, the main pressure would be to ensure that the investor or the shareholder to keep on trusting the company and continue to keep their investment or inject more investment into the company. This is so much important as the

shareholders’ trust greatly depending on the company performance. When the performance

indicator shown not a good result, the shareholder will most probably take off their

investment and this will impacted the company’s stock price. Besides that, the executives

were also surrounded by their self-interest. Having a good position, good title in the company with a good salary, had made them comfortable with current situation. If they choose to reveal the actual company performance, then it is just like digging for their own grave. They

would lose everything that they had. Therefore, they prefer to ‘cook the books’ or to cover

the real performance by doing some improper accounting practices. For example, in the first quarter of 2000, WorldCom was having revenue, pricing and its highly committed line costs  pressures that making it hard to maintain an E/R ration of 42%. This was then lead to Ebbe

rs’s emotional speech to the senior staff about how he and the other director will lose

everything if the company did not show good performance. From the perspective of the managers, the employee benefits that they had receive was all  because of the great

company’s performance. If the company did not improve, then many of

them will be fired or loss

their job as a way of saving the company’s cost. And due to

 preventing this thing from happened, the employee had no other choice other than to obey the senior

management’s command of cooking the books, or to not engage with the fraud by

quitting the job. For example, Betty Vinson, who was previously a manager in the

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