WorldCom Ethical Breakdown: Who Was Responsible?
WorldCom Ethical Breakdown: Who Was Responsible?
WorldCom was the world’s second largest telecommunications company. Fortune magazine termed WorldCom as the most innovative company in the United States. It led by example when it came to making the transition from the production economy to the knowledge economy. However, the company was faced by a lot of accounting irregularities and filed for bankruptcy in the year 2002. In this paper, I will discuss how the various parties of the company may have been responsible for its financial breakdown. I will look at the management, Arthur Andersen auditors, the company’s employees, Wall Street analysts among others. I will also look at some ethical theories that were defied by the company in its business operations.
The management of a company is the one responsible for running a company and thus should be at its top performance to ensure the company’s success. It should be the driver of all the stakeholders in a company. Integrity and sense of direction are therefore important. Contrary to this, the management of WorldCom was not effective. They led a “culture of greed” as quoted by Thornburgh (2004). The board of directors did not deal with this and thus lead to the deterioration of the company.
The officials would take huge loans from the company and would not repay them like the case of the CEO who resigned with a loan of over 400 million dollars. The CEO’s collateral offered against the loan was not sufficient to cover it but the company still extended loans to him. The huge loan can suggest that the CEO had outside undertaking and thus was not fully devoted to his activities in the company. The management was also not transparent with its board members.
(Thornburgh, D. (2004). A Crisis in corporate governance: The WorldCom Experience. Page 4-10)
The board members are a vital tool in the existence of a company. They should be aware of the situation of a company so that they can be able to make decisions when the company is in trouble. The management had brought up a culture of showing what is not real. At the board meetings, figures would reflect high incomes instead of the many expenses which outweighed the incomes. The board could marvel in this ‘success’, little did they know it was not a true reflection. The misrepresentation led to a pile up of bad debts. The board was not as aggressive as it would have been expected and thus the powers to ‘run the show’ were left with the CEO and the CFO.
The board would for example authorize a large sum of money without digging into what the money would be used for. They took out more than what they could bring in. There were those officers who could suspect some misrepresentation but they took little or no effort to address the matter. The management also lacked proper monitoring for their debt levels and thus their borrowing levels raised high such that they could not manage it. They also lacked corporate governance (Thornburgh, 2004). They did not perform their duty of protecting the company’s assets and they were not transparent with the investors. Another grave thing the management did was to employ unqualified personnel and therefore the work being done in the company could have not been correct. Thus the company was collapsing little by little.
(Thornburgh, D. (2004). A Crisis in corporate governance: The WorldCom Experience, page 14-18)
The auditors to a company play a key role in a company. They check to make sure that the books of accounts represent the true and fair view of the company’s financial state. Contrary to this, the auditor to WorldCom did not do their job. I say this because if they did their job as expected, the inaccuracies in the accounts of the company could have been noted from the beginning. Arthur Andersen, an accounting firm that worked as external auditors for the company, did not put in place effective monitoring measures for the company’s financial books. All the while they did not know of the accounting irregularities. The firm had identified WorldCom as a “maximum risk” but they did not look into this.
The main reason companies use outside firm is to get rid of biasness and favor that the internal accountants would have. Arthur Andersen activities did not reflect this. The firm allowed themselves to be used to hide the accounting irregularities. They were not professional and were negligent the entire time. The firm could have followed the given accounting rules and guidelines laid down by the Securities and Exchange Commission (SEC) and WorldCom would have survived.
(Thornburgh, D. (2004). A Crisis in Corporate Governance: The WorldCom Experience. Page 10-11)
Wall Street could be said to be a contributing factor to the ethical breakdown in the company. According to Cooper (2009), Wall Street analysts closely monitor company revenue; if it begins to grow too slowly, they may decide to stop recommending the stock. The analysts failed to inform investors of the problems at WorldCom and with their knowledge of this; they still kept recommending investment into the company. In doing this, Wall Street was raising the standards and earnings target of the company and to uphold them the company was forced to result to misrepresentations.
(Thornburgh, D. (2004). A Crisis in Corporate Governance: The WorldCom Experience. Page 5-6)
Employees are the ones that enable the business to exist and grow because without their efforts it would not be possible. The employees at WorldCom continued to work even when they knew of the fraudulent activities going on in the company. They would have reported the company to firms such as SEC. they would have also questioned their managers on the inaccuracies. When one asked questions, he/she would be fired. The other employees chose to remain quiet and suffered in silence. They clearly let the frauds perpetuate and they came to lose at the end of it all. The employees were modeled to follow in the footsteps of the top management. The employee were the ones who would meet these high projections and thus had to work more and under pressure. Their rights were clearly violated and they still did nothing. In doing this they assured the management that they will always have their back in covering their mistakes. Thus the management went on with the frauds.
The internal auditors can also be held responsible for the collapse of the company. This is because their efforts were aimed at inputting into the books misrepresentations of the company’s state. They worked to hide the accounting frauds of the top management. It is evident what this did to WorldCom over time. The internal auditors were also characterized with being understaffed, underpaid and under qualified thus they could not at all be fit for the tasks they were undertaking in the company (Thornburgh, 2004).
Despite the many warning signs that emerged, the investors did not take any action on them. First of all they always came second. The conditions inside the company such as the dissatisfaction of customers and the alarming number of complaints from them were also signs. WorldCom also had a number of lawsuits in which it had to pay large sums of money in order to settle them (Thornburgh, 2004).The investors would have used this to look into the running of the firm but they did not. As a result they suffered the pain at the collapse of the company.
The board of directors could also be fouled for they did not do their work which is to oversee the running of the company. They would have been aggressive in meeting and ask questions where they were due (Thornburgh, 2004). Also when it came to making big decisions in the company, they needed to be keen not signing on something they are not aware of. They also had the duty to protect the investors but they did not do this either. Most of the staff in the company was not qualified and they would have asked the management to look into it. It is quite evident that they did not to their job being the eyes of the shareholders.
(Thornburgh, D. (2004). A crisis in corporate governance: The WorldCom Experience. Page 6-7)
The investment bankers on the other hand were perpetuating the greed culture in the company. Salomon Smith Barney (SSB) was the leasing investment banker to WorldCom and their relationship was really good. At first, it allocated a none-proportionate number of shares to WorldCom’s CEO and other executives of the company at the initial public offering of the company’s shares. SSB supported the CEO and helped get rid of his financial mishaps and this would be viewed as commercial bribery in that the bank was offering the CEO financial benefits for the assurance that the company will invest in the bank. This would thus lead to both sides going to extreme ends in order to sustain this kind of a relationship, even if it meant being fraudulent.
(Thornburgh, D. (2004). A Crisis in corporate governance: The WorldCom experience. Page 11-12)
The actions of the company at large would be clearly termed as unethical. They violate every rule in business ethics. Utilitarianism is a theory that can be applied in WorldCom scenario. The theory states that, for an action to be taken as moral, it will depend on the goodness of its consequences. Thus an action can only be right if its consequences are positive and lead to the addition of value to the parties of the action. Outcomes are evaluated to be either individualistic or impartial.
The CEO acted out of his own individual interests when he immersed wealth for himself. He did not have the well being of the company at heart and went to great length to ensure his financial well being was upright (Coenen, 2012). He thus adds value to himself. The outcomes can be evaluated through individualism. Employees also can be said to have acted individualistically since they chose to withhold the fraudulent activities of their superiors so that they could continue working. This is not ethically right because they would have reported the matter for the purpose of the greater good of all the stakeholders. The pleasures, earning one’s daily bread, derived out of working satisfy the utilitarian theory (Cooper, 2009).
Most stakeholders of the company acted not with concern for the company and in my own opinion they just wanted to get the job done. They wanted to acquire the benefits that were due to them be it pay, loans, investments and a good public image. Their individual ‘good’ could be used to evaluate that of the company. Therefore this could be evaluated through impartiality.
As it is evident, utilitarianism will portray an immoral act as morally upright since the ends to the means justify the action. Therefore it is not the best of ethical theories to adopt. Deontological theory can thus be used (Coenen, 2012).
The theory states that, “duty should be done for duty’s sake”. If one was to do a deed it should be for the greater good. If an action is to be termed as right or wrong, it must carry with it some intrinsic values. For example, the management knew what they were doing was wrong and they were aware of the consequences if they were to be found. Therefore they should never have started the fraudulent acts instead they should have looked for alternative ways to bring income into the company for purposes of running it. They had the duty not to engage in the frauds but they still did indulge into it (Cooper, 2009). The theory unlike the utilitarian theory does not use the consequences to determine the rightness or wrongness of an action rather they help one to find out what is their duty. For example, the loss of jobs was the result of the employee not addressing the rot in the management. They were aware of the consequence of their silence and thus they would have used it to determine what the right thing to do was. Thus if they would have reported the wrong doings in the company most likely they would not lose their job if steps such as change of the management was taken (Wells, 2006).
The management made the employees a means to an end rather than the employees being an end to themselves as suggested by this theory. If it were the case, the employee would work freely and would need no pressure so as to achieve their goals and the company would not have collapsed. Future orientation as a virtue should have been taken up by the management and all these outcomes would have been addressed (Thornburgh, 2004).
In conclusion, the culture of a company is what defines it. The rules and regulations put in place to govern how companies operate do not really matter. If the culture put in place is honest, the company will grow well and this culture will be in line with the rules. However if the culture in place is that of WorldCom, the rules will not be a determining factor of how thing a run. Therefore all the stakeholders in a company should seek to promote good culture for their well being. They should aim at working together and doing this with integrity and good ethical practices. Also each of them should ensure that they play the roles allocated to them at all time.
If all these are observed, then the company will comfortably grow, exist and survive in the market. WorldCom has served as a teaching to upcoming companies not to indulge in unlawful and unethical practices.
References
Coenen, T. (2012). Extraordinary circumstances: the journey of a corporate whistleblower by cynthia cooper, business ethics and corporate citizenship. Retrieved from http://www.allbusiness.com/company-activities-management/business-ethics-corporate/8518726-1.html#axzz2A2zOuAE6
Cooper, C. (2009). Extraordinary circumstances: the journey of a corporate whistleblower. Hoboken, NJ: John Wiley & Sons.
Thornburgh, D. (2004). A Crisis in corporate governance? The WorldCom Experience. Pasadena, California: The Athenaeum.
Wells, J. (2006). Will history repeat itself? Retrieved From http://www.theiia.org/intAuditor/feature-articles/2006/june/will-history-repeat-itself/
