WorldCom, once a thriving multi-million dollar business which became the second largest telecommunications company in the United States was forced to close their doors when discovered that unethical practices and fraudulent activity were exposed thanks to a strong willed internal auditor. WorldCom was at the heart of one of the largest accounting fraud scandals in corporate history. WorldCom filed for bankruptcy protection after the company admitted to accounting fraud.
After rigorous investigations into WorldCom’s fraudulent transactions it was discovered that in total they amounted to $11 Billion dollars.Key Activities in the WorldCom Case A $500 million entry with no backup or documentation triggered the events that came later and resulted in the downfall of WorldCom. Cynthia Cooper Vice President of Internal Audit for WorldCom, Gene Morse also a WorldCom employee discovered $3.8 billion in expenses that were allocated incorrectly on WorldCom’s books.
This was one of the incidents that led Cooper and Morse to suspect that this multi-million dollar organization was “cooking the books”.According to "United States Securities And Exchange Commission Complaint filing" (2002), “From at least as early as 1999 through the first quarter of 2002, WorldCom misled investors. WorldCom has admitted that during this period, as a result of undisclosed and improper accounting, it materially overstated the income it reported in its financial statements by approximately $7.2 billion. In an effort to conceal losses.
” WorldCom manipulated their financials by reducing its operating expenses and reclassifying certain operating costs as capital assets.AICPA Code of Professional Conduct The unethical accounting practices that WorldCom partook in were unquestionably not in agreement with the AICPA Code of Professional Conduct. WorldCom violated the AICPA Code of Professional Conduct principles by the fraudulent accounting entries that were facilitated by key WorldCom personnel resulting in lack of integrity, responsibility, and complete disregard of protecting the public’s interest.Internal and External Stakeholders Equitability The equitability of stakeholders involved was affected in many ways. The stakeholders who felt the direct negative impact of these events included: WorldCom personnel, families, customers, investors, creditors, auditors, and the telecommunication industry. Corporations and the accounting profession were additionally equitably affected.
There was disgrace and dis-honor brought to those involved along with severe legal ramifications that changed lives forever. Thousands of WorldCom employees suffered job loss and huge financial losses when they closed their doors and stock prices fell. Both the internal and external auditors lost their credibility. Investors both big and small, lost millions, retirement plans, and 401k plans were completely wiped out.Ethical and Unethical Accounting Activities The most unethical aspect of the WorldCom case is that upper management completely deceived the public and even internal users by failing to book line rental expenses correctly on their books (Mintz & Morris, 2011).
Line rental expenses were classified as assets on their financials (Mintz & Morris, 2011). The unethical practices continued when several individuals including Scott Sullivan, the CFO and Arthur Anderson attempted to discourage Ms. Cooper from continuing the internal audit investigation and she refused (Mintz & Morris, 2011). The well thought out scheme made it so the fraudulent accounting entries were buried behind other transactions to make them seem more difficult to correct and more difficult to trace (Mintz & Morris, 2011). Actions of Ethical and Unethical Key IndividualsScott Sullivan Scott Sullivan was a key player in this case as the company’s chief financial officer.
Sullivan had a business mind but lacked accounting rationale (Mintz & Morris, 2011). Scott Sullivan gave direction to the key accounting staff to enter operating expenses on the books as capital expenses. On the financials, this means that operating expenses such as maintenance costs were recorded as capital investments, thus making them assets on the balance sheet. Sullivan orchestrated this deceit with his intention personal gain only, rather than protecting the stakeholders According to the New York Times Company (2005), “Though Mr.
Sullivan received $700,000 in salary and a $10 million bonus in 2000 - the year he started fraudulently manipulating WorldCom's accounts - his 401(k) will ultimately produce only $200,000 because most of his money was tied up in WorldCom stock, which became worthless when the company went bankrupt”.
