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WorldCom Ethical Scandal

In the late 1990’s, WorldCom was a successful company and leader in the telecommunications world. They had merged with MCI and the company was regarded for being innovative and growth hungry. However, in the midst of all the mergers WorldCom CEO Bernard Ebberly began to mismanage the company. WorldCom was no longer meeting their numbers and it looked like stock prices would fall. Rather than letting this happen, executives at WorldCom doctored the books. CFO Scott Sullivan and auditors used accounting practices and judgments that were highly illegal and unethical (Mintzberg 2003).

Over the course of its operations, WorldCom had successfully acquired a total of 65 companies, of which 11 were acquired between 1991 and 1997, and in that course accumulated around $41 billion in debt (Romar 2006). By the time it declared bankruptcy in 2002, the organization’s growth strategy through acquisitions, its loans to senior executives, and poor corporate governance contributed to the fall of the company. Through a series of fraudulent activities and unethical behavior, the company fell from a leader in the telecommunications industry to a company filing for bankruptcy.

WorldCom’s financial executives used fraudulent accounting methods to present a false representation of the company’s financial stability. They hid various costs by capitalizing them by listing these costs as assets on their balance sheet instead of properly recording them on the income statement. Revenues and profits were inflated, expenses were deflated and disguised. Throughout the scandal, $2.8 billion dollars was added in revenue from reserves, and $3.85 billion was deducted from operating costs and listed as long-term investments. Users of this data were given the idea that profits were growing and WorldCom’s stock rose because of this misrepresentation. False journal entries were also created in WorldCom’s financials to inflate revenues (Scharff 2005).

Bernard Ebbers owned hundreds of millions of dollars in WorldCom stock, which he margined to invest in other business ventures. As the stock price dropped banks began demanding that Ebbers cover more than $400 million in margin calls. Ebbers convinced the board to lend him the money so that he would not have to sell blocks of his stock (Moberg).

Ebbers’ poor leadership skills certainly hurt the moral fabric of WorldCom and created an environment that encouraged unethical behavior. Secrecy and lying to employees took place by top executives in order to cover up their actions. Codes of ethics were never created, or governed any of the actions by the CEO and CFO of the company. This corporate culture gave corruption a chance to fester and grow within the organization. The Sarbanes-Oxley Act had not been enacted so WorldCom’s CEO was able to deny knowledge of the accounting scandal. However, he was unable to deny may things that were uncovered by the SEC and MCI auditing team. Ebbers had been found to have borrowed over $360 million from the company to recoup personal losses, as well as other loans including a $100 million dollar ranch, $658 million for the purchase of the Mississippi timberlands and a $14 million Georgia shipyard (Pulliam 2002).

On March 2, 2004 Bernie Ebbers was charged with conspiracy to commit securities fraud, securities fraud, and falsely filing with the SEC and on May 24, 2004 six additional counts were filed against him. In August 2002, Scott Sullivan, CFO, was indicted by a grand jury on one count of fraud and six counts of securities fraud and false filings involving almost $8 billion.

Unethical behaviors and practices of WorldCom were created by groupthink. Groupthink is defined as a mode of thinking that people engage in when they are deeply involved in a cohesive in-group and members override any motivation to appraise alternative courses of action. Following WorldCom’s failure and scandals, studies have demonstrated...
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