Worldcom: The Ethics of Whistle-Blowing Term Paper

Pages: 10 (3066 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Business

SAMPLE EXCERPT:

[. . .] There was intense pressure that came not just from external investors and analysts, but also from within WorldCom from the CEO himself, whose financial well-being was precariously dependent on WorldCom's stock price. CEO Ebbers pledged his vast holdings of WorldCom stock as collateral for loans to finance the purchase of his personal outside business interests. If WorldCom's stock price fell substantially, the collateral would be of insufficient value to secure his loans, thus forcing margin calls that he could not meet. Another performance pressure came from the fact that WorldCom marketed itself as a high-growth company, with revenue growth playing a significant role in WorldCom's early success. Analysts marveled at WorldCom's ability to outgrow an industry that was, itself, outgrowing the overall economy. Ebbers repeatedly heralded the Company's impressive record on revenue growth during his quarterly conference calls with analysts. He believed that continuing revenue growth was crucial to increasing WorldCom's stock market value so the stock could be used as currency for corporate expansion through acquisitions. In addition, top executive compensation and bonuses were dependent on achieving a double-digit rate of revenue growth. Corporate performance just had to meet expectations. Miraculously, even as market conditions throughout the telecommunications industry deteriorated, WorldCom continued to post impressive revenue growth numbers.

Bernie Ebbers was very interested in having employees add value to the corporate bottom line. As a consequence, the Internal Audit function at WorldCom justified its existence by concentrating on operational audits where the benefits of its work could be quantified. In fulfilling their oversight function of the company's operational and financial internal controls, they avoided working on financial audits that might overlap with the role of the external auditors on the grounds of cost-savings. Officially, Internal Audit held a dual-reporting role. Each year, Internal Audit presented its final report of completed projects for the year just ended along with its plan for proposed audit projects for the current year to the Audit Committee of WorldCom's Board of Directors for their discussion and approval. The rest of the year, they reported to Scott Sullivan, who controlled and directed their ongoing efforts and approved their promotions, salary increases, bonuses, stock options, and more. The "Second Interim Report of Dick Thornburgh, Bankruptcy Court Examiner," filed in the United States Bankruptcy Court, Southern District of New York on June 9, 2003, described the extent to which management directed Internal Audit's assignments.

Resolution

Ultimately, it is the role of leadership that failed WorldCom. The fact that there was no real accountability in place or the procedures for internal knowledge of such practices, lead to the downfall. As part of a resolution, it is safe to assume a good plan of action would be to have multiple levels of the organization involved in a checks and balances type protocol when not just management has a look. In the case of WorldCom, leadership fell on the shouldered of two men who strategize the practices. It was the employees' belief in these two men that also contributed to the failure of this company. Pfarrer explains how easy it can be to fall into corrupt patterns as "charismatic leaders' ability to excite followers to follow their mission, and their impression management skills in interacting with stakeholders, could also lead to increased opportunity" (par. 19). This is same type of darkness that led the Nazi Party during the Holocaust. Loyalty was apparently well compensated, with select employees compensated beyond the guidelines of the company's approved salary and bonus schedules allowable for their positions. Ebbers and Sullivan frequently made the decision to grant excessive compensation, perhaps to ensure future employee loyalty. When top management requested compensation outside-of-policy guidelines, approval by the Human Resources Department was virtually assured. When asked later why HR let this happen, key members admitted they did not want to say no to Ebbers.

For a future at MCI, strong leadership based on values will remain key. This type of leadership involved a certain level of emotional intelligence where feelings of powerful do not become overwhelming. Of course if leadership and responsibility are equally shared, then power will be as well. The key to effective leadership does not come from charisma but from integrity and sharing information. Hughes writes an effective leader will have impact upon their team and this is "apparent in the growing interest over the past decade in topics like the leader's genuineness, authenticity, credibility and trustworthiness" (3). A leader's reflection of these attributes is found in their level of connectedness with employees. As a result leaders are more interested in mentoring and training their team rather than focusing on output of numbers or turn around time. These qualities are a good indicator for selecting a potential manager. This development in team building allows for "providing people opportunities to learn from their work rather than taking them away from their work to learn" (Hughes 4).

Long-Term Effects

Davidson explains the consequences of such actions "WorldCom's accounting fraud, drove it into bankruptcy protection with Sullivan pleading guilty and agreeing to testify against Ebbers" (par. 9). Last year the company clawed its way out of bankruptcy in just 21 months despite an $11 billion dollar scandal and its key management figures being indicted on fraud charges. WorldCom was able, due to its acquisition of MCI, to slash its debt from $41 billion to $5.8 billion (Davidson, par. 5). Still this does not change the fact that while the debt was being reorganized so was the company workforce. Davidson writes, "a recent layoff shed 4,000 telemarketing workers and WorldCom has suggested more of its 50,000 employees also be cut" (par. 25). The company's competitive edge also been compromised due to the scandal. As a result of the bankruptcy, MCI has missed out on numerous opportunities to invest in new technologies such wireless infrastructures for Internet users. This will cost them terribly in the future.

This, however, does not compare with the price the public has paid for such corporate crime. Johnston expresses, "the cost of the scandal was likely to be in the billions. There are direct financial costs such as lost salaries, company stock portfolios and investment in governmental inquiry" (p. 1). These direct costs do not include federal court fee still being incurred by class action lawsuits or the costs of new regulations to be paid with tax dollars. Still is the indirect effect on the public personal assets that is most damaging. Should WorldCom be accountable for these losses? Johnston writes, "one in two U.S. households are now invested in the stock market" (p.1). This does not include the segment of the public that used WorldCom stock to diversify their 401K portfolios. It is as a result of such a scandal that the public is more aware such white-collar crime and "this may mean more laws protecting whistle-blowers from harassment and retaliation at work" (Johnston, p.2).

Recommendations

As mentioned earlier, the role of effective leadership is vital to the resurrection of WorldCom. Not only is leadership so vital but also a plan of action must be set into place. A system of checks and balances to implement regulations is needed across the board. This starts policy change. MCI'S new management has implemented a zero tolerance policy for ethics and they have set into action at the ground level. This meant hiring a new employee to act as ethics officer but it also meant putting into practice training and reinforcing the message on a consistent basis. This new governance procedure "gives more power to the shareholders and limits executive pay" (Davidson, par. 27). What this really does is sets boundaries for upper management while looking to the employee population for action. Another practice that should be effective is as Grossi discusses "the auditor needs to play an strong, proactive role in the organization" (par. 4) and be in the forefront of everyday practices. This creates an environment of ethical behavior and promotes trust within the ranks. It also creates new barriers to aid in stopping executive misbehaviors and provides data of accountability.

Conclusion

The full scandal includes accounting and auditing issues, corporate governance issues, finance issues, management issues -- all intensified by economic problems. The actual fraud spanned four years: 1999-2002, not just the few incidences that are the focus of this case. The range of fraudulent activities extended beyond lines cost under accrual, the improper capitalization of line cost expenses, over-recognition of revenue, and disclosure omissions. Income tax accruals, among others, were also manipulated. WorldCom's Board of Directors was far too passive. Management was not forthcoming with the independent auditors. Grossi writes, "blowing the whistle is an act of desperation, not desirable business strategy" (par. 2). Even though it took time to uncover, the auditors did risk a fair amount in publicly speaking out about WorldCom. Still I am of the belief such practices would have come to the surface eventually as the leadership started to crumble. There is not way a company can continue to function based on lies because eventually the truth… [END OF PREVIEW]

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