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WORLDCOM CASE ANALYSIS

BASICS:
WorldCom declared bankruptcy after Cynthia
Cooper finally blew the whistle on the
company and its financial shenanigans
amounting to a colossal 3.1 Billion $s
Several key officers went to prison for
varying lengths of time
We will apply the fraud triangle(see image on
right) to Bettys situation for our analysis

Source: Navran Org. Ethics

KEY METHODS USED BY CEO FOR FRAUD:

Booking Accruals: Essentially, there is an unbilled and billed portion for expense, and
the CEO basically asked the accountants (and later himself) to make adjustments on the
basis that expenses would come in lower (which he obviously stretched too far). The
incentive here was to chase an expense/revenue ratio(non-GAAP) as a performance
metric
Capitalizing/ Expensing: Most companies have a choice under some ambiguous
circumstances to capitalize a portion of their costs, given that they will create future
benefit. However in this case, these costs were primarily immediate expenses, and were
inaccurately capitalized on purpose

BETTY VINSON: VICTIM OR VILLAIN?

PERSONAL DETAILS:
40 years old; Manager of International
Accounting
Reputation for hard work and working long
hours
Loyal employee, did anything you told her

Betty earned more than her husband (Not doing it for

myself, but for my family argument)

WorldCom paid for insurance / benefits

SCENARIO AT WORLDCOM:
Yates initially told her and a co-worker to
make 28 Million $s in accrual adjustments
Vinson was shocked by the proposal and
offered to resign
Sullivan tried to convince her to stay(fear of
whistleblower) and asked them to give him
some time
This essentially became the turning point =>
Bettys dilemma
The chart on the right shows how Betty
justified in her head, her choice of quitting /
not quitting (i.e. based on outcome)

Difficult to find another job with similar pay

She believed that Sullivan was a whiz kid and knew

what he was doing (Appeal to authority argument)

She decided against quitting

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INSTITUTIONAL SETTING /
PRESSURES:
Both the CEO and the CFO were extremely
unethical in their requests
Since Betty fell under the CFOs span of
control, he had a more significant impact on her
decision making
More generally since WorldCom didnt have a
code of conduct or moral guideline policy
framework, it was extremely difficult for Betty to
decide what to do via independent thought
The market was becoming more competitive for
the company, and everyone knew that times
were tough i.e. something radical had to be
done to keep hitting the earnings #s

Opportunity: I
have access to
systems, I can
do it; no one will
notice

Pressure:
Senior
management
said so

Rationalization: Im not
doing it for myself

BETTYS CHOICE SET / REASONS

FOR JUSTIFICATION AGAINST
PERSONAL MORAL POSITION:
Bettys choice set was essentially split
into two dichotomous parts
To refuse to make the accounting
adjustments i.e. risk losing her job
and everything else that came with it
(as discussed on last slide)
OR to make the adjustments as the
CFO guided her to for the time being,
and leave resignation decision for
later
Thus while (before) the decision was
made, Betty was consequentialist
She justified her actions because she
did it for her family not for herself
She saw it as a temporary decision
After the decision was made she
justified it by saying that she was
blinded by pressure of senior mgmt.
Thus, under bounded rationality, it
was not her rational self who did the
act

Source: Personal Analysis;

application of fraud triangle

CYNTHIA VS. BETTY

In contrast to Betty, we know that Cynthia
Cooper was a strong willed person, but we
dont know enough about her personal life to
judge why she didnt utilize a similar
rationalization
Regardless we can say that Cynthia made
the correct choice by over-ruling Sullivans
order and expanding the scope of her audit
Even though Cynthia was under the same
organization pressures, she did not fall under
the trap of typical consequentialist (she didnt
care about getting fired) thinking; but judged
her acts by thinking about the wrongness of
the act(Deontological)
WHAT IF I HAD THE ROLE OF BETTY?

It is very hard to put yourself in the shoes of some

ones elses personal life. Objectively, now that we
know what happened, it is easy to say I wouldnt
have done it
Personally, I empathize with Bettys situation and
would have done the same. In fact, I would have
been more concerned about providing for my family
Thus under bounded reality, stress and
organizational pressure, I dont think I would have
done anything differently

2001 Coopers began routine audit of CAPEX in the

company

Coopers finds CAPEX out of proportion at 2.3 Billion

$s without proof

Externally Coopers gets a complaint from a BU head

that accruals are wrong (200 Million $s)

Coopers asks auditors at Anderson but they are not

helpful (Go dig); essentially auditors become puppets
for Sullivan and only report to him

Coopers unilaterally goes ahead(without Sullivans)

authorization and expands the scope of the internal
audit team

Cooper eventually blows the whistle and discloses to

Audit committee the fraudulent practices