Accounting Fraud at Worldcomm Essay Example
Accounting Fraud at Worldcomm Essay Example

Accounting Fraud at Worldcomm Essay Example

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  • Pages: 12 (3070 words)
  • Published: November 16, 2016
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In June 2002, the SEC found that WorldCom had engaged in a significant accounting fraud. This resulted in an overstatement of pretax income by around $7 billion since 1999. The deception committed by WorldCom is considered the most substantial deliberate misrepresentation seen in American companies. This case study focuses on Betty Vinson's role as the Director of Management Reporting and her involvement in facilitating WorldCom's illegal activities.

Betty Vinson, a 40-year-old resident of Jackson, Mississippi, became an employee at WorldCom in 1996 when the company's main office and financial department were also situated in Jackson. This close proximity provided various benefits for Vinson and her family. Although she had only worked at WorldCom for a relatively short period of time, Vinson demonstrated her dedication as an employee and appreciated


the opportunity to both live and work in her hometown. By the time WorldCom went bankrupt, she had advanced to the role of Director with an annual salary of around $80,000.

This position at WorldCom made her the main breadwinner for her family. In addition to the salary, Vinson considered the insurance benefits and the limited employment opportunities in Jackson, making her feel fortunate to have such a job. The case involves two other key figures, Bernard Ebbers, the CEO, and Scott Sullivan, the CFO. Ebbers openly admitted that his only real qualification was "being the meanest SOB they could find," as he lacked technological expertise or experience (Kaplan and Kiron, 2007).

However, during the companies’ infancy, Ebbers proved to be the right man for the job. His aggressive M;A strategy made WorldCom profitable in less than a year. However, i

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1999, when the WorldCom - Sprint merger failed to happen, a new growth strategy became necessary. Regrettably, Ebbers appeared to lose direction, likely due to his own personal limitations and unwillingness to give up control. As for Sullivan, he was regarded as a “financial whiz kid” (Kaplan and Kiron, 2007). However, he also displayed some of the negative traits seen in Ebbers, especially in terms of his personal morals and ethics.

Hiring someone such as Sullivan was probably deliberate, as Ebbers had full control and preferred to maintain an informal and authoritative management style. For instance, both Ebbers and Sullivan disliked written policies and the legal department in general. They also preferred to award bonuses based on their own judgments rather than following approved bonus salary guidelines. In general, Ebbers cultivated an unhealthy and unethical corporate culture, resulting in employees feeling obligated to unquestioningly follow orders without questioning them.

Due to Ebbers' ambition to make the company the top stock on Wall Street and his aggressive growth strategy, regardless of the consequences, there was a significant potential for disaster. Vinson, who typically displayed loyalty and unquestioning obedience towards authority figures, may have been taken advantage of in this regard. Although it cannot be definitively proven that Vinson did not contribute to devising the plan, it seems unlikely that an employee earning only $80,000 per year and being aware of the illegal nature of their actions would willingly participate in such behavior.

Despite the reasons and justifications that will be discussed, Vinson still proceeded to make fraudulent entries based on her manager's instructions. This case study will examine the circumstances and justifications

that led to her choices, as well as suggest potential strategies that could have resulted in a more positive outcome for Betty Vinson.
Situation Analysis: As mentioned earlier, WorldCom experienced rapid growth in the 1990s through an aggressive M;A strategy. In 1997, Ebbers stated, "Our aim is not to capture market share or become global. Our aim is to be the #1 stock on Wall Street" (Kaplan and Kiron, 2007).

The Expense-to-Revenue Ratio (E/R) was a crucial performance indicator closely monitored by financial markets and analysts. Ebbers, however, seemed to overlook this fact and lacked strategic thinking when he prioritized short-term growth and stock performance over long-term sustainable growth. This was particularly unwise for a company providing an essential service. As a result of their focus on the E/R ratio, WorldCom adopted risky revenue growth strategies, such as entering into long-term fixed rate leases for network capacity based on anticipated future increases in customer demand. These leases included hefty financial penalties for early termination or unused capacity. Unfortunately, WorldCom failed to anticipate the dot-com bubble and the subsequent recession in the late 1990s and early 2000s. These unfavorable economic conditions severely impacted WorldCom's financial performance and their ability to maintain the coveted 42% E/R rating.

Ebbers and Sullivan realized that their growth strategy might have been too aggressive, so they decided to manipulate the accounting entries in hopes of overcoming the challenging economic period. Betty Vinson played a significant role in this scheme. With a comprehensive understanding of their company's dire financial situation, Ebbers and Sullivan seemed to have fully embraced the idea of committing fraud. It seemed to them that this was

their only solution to escape from their current predicament.

They are determined to avoid failure, specifically bankruptcy caused by poor management. However, Ebbers and Sullivan will rely on the support of certain members of the accounting group in order to execute their plan. On October 2000, Buddy Yates summons Betty Vinson and Troy Normand, both Directors in General Accounting, to his office. At that time, Yates serves as the Head Director of General Accounting and is the supervisor of Vinson and Normand. Yates holds a position lower than David Myers, Corporate Controller, who is second-in-command to Sullivan.

In this instance, Vinson is being asked to participate in unlawful activities for the first time. Yates informs Vinson and Normand that Myers and Sullivan have instructed the team to release $828 million of line accruals. This would cause a boost in revenue by artificially decreasing operational expense in the income statement. As a competent accountant or financial expert, Vinson promptly recognizes that this constitutes improper accounting and is likely aware of the underlying intent behind this action.

Yates, Vinson, and Normand all express reservations about the directive. However, Yates informs the accounting directors that Sullivan has approved it as a one-time incident and advises them to also consent. This plays a significant role in both the case and Betty's overall life. Throughout her time at WorldCom, Betty has consistently obeyed authority without hesitation and has established herself as a dependable team member.

Furthermore, WorldCom had a corporate culture where questioning superiors was not encouraged. This culture allowed Vinson to justify the inappropriate strategy. There were three main rationalizations she used: being the family's

main breadwinner, lack of alternative employment opportunities in the community, and the belief that Sullivan knew what he was doing. One could argue that Vinson employed all four classic rationalizations in her decision to remain silent and follow the plan.

Despite her concerns and attempts to rationalize the situation, she failed to recognize her responsibility as a CPA to question such decisions (Paine, 2007). Vinson, however, likely understood this since she later feels guilty and contemplates resigning after carrying out the transfer and reporting fraudulent results for the third quarter (Gentile, 2009).

Vinson is likely aware that her stress level has led her to cross a boundary, from being a loyal team player to potentially engaging in criminal behavior or aiding corporate fraud. Despite initially considering resigning, Ebbers and Sullivan convince Vinson otherwise after learning of her intentions. During a meeting with Normand and Vinson about their plans to resign, Sullivan compares the situation to an aircraft carrier with planes in the air.

Despite appearing weak as a case study a decade later, it is difficult to disregard the opinion of any senior executive in a face-to-face meeting. As evidenced, numerous senior executives (and coincidentally, psychopaths) possess exceptional storytelling skills and can significantly sway others (Alster, 2006). Additionally, considering Vinson's personality and her wish to stay in Jackson, it comes as no surprise that Sullivan successfully persuades her and Normand not to resign.

In the following two quarters, Vinson and Normand were once again approached by Sullivan to assist in manipulating WorldCom's financial performance. However, this time the transfer was even more unjustifiable than the previous accrual release plan. Revenues fell

short of the forecast due to worsening external conditions. Nonetheless, as there was insufficient funds remaining in the accrual accounts to release and meet the 42% E/R ratio, Sullivan's new instruction was to classify the line costs as a capital expenditure, despite them typically being viewed as an operational expense.

According to Investopedia, it makes almost no sense to capitalize a cost unless it is tangible and benefits more than one operating cycle. In terms of line usage, it is neither tangible nor useful over time (i.e. only useful in the instant to respond to increased demand capacity). This put Vinson in an extremely difficult position as she mentions feeling overwhelmed and trapped. In my opinion, this was truly the crossroads for Vinson, despite already having made one illegal entry.

At this point, based on Sullivan's risky plan it should have been obvious that the company was in deep trouble. One transfer would not be enough to solve WorldCom's issues and likely no amount of creative accounting would make up for deteriorating market conditions, stronger competition, and financial mismanagement. Although Vinson agrees to the transfer yet again, complete with a backdated entry to the previous year, this was a key decision in her career at WorldCom and as an CPA in general.

It is predictable that both Ebbers and Sullivan give Vinson a promotion as a result of her behavior. However, this promotion comes at a great cost. Vinson is obligated to continuously capitalize line costs throughout 2001, which negatively impacts her physical health and mental well-being. When considering alternative solutions, I will begin by addressing the initial requirement to release the accruals, which

was a crucial moment for Vinson. Additionally, I will discuss what actions she could have taken when faced with the directive to capitalize line costs, which served as another significant turning point.

Additionally, the text discusses Vinson's realization that the mentioned behavior should continue indefinitely, along with other potential actions that could have been taken from the beginning. In October 2000, when Vinson and Normand were called into Yates' office, they should have insisted on receiving written confirmation of the accrual release directive. This does not necessarily imply that they should have demanded or requested an email. Instead, Vinson could have utilized her newcomer status in the corporate accounting group to send an email regarding the accrual release (Gentile, 2009).

In other words, she may qualify her statement as "thinking out loud as a new member of the team" or something similar. However, the important question to ask is why we expect lower future billing despite the release of these accruals. If Sullivan once again explains it as a result of the MCI merger, Vinson should demand physical evidence and quantitative support, as it is her responsibility as a CPA and Director of Accounting to confirm such transfers.

In order to release accruals, it is necessary to receive the actual bills for a lower cost than expected or to have evidence of the MCI merger. This approach allows the new employee to remove personal emotions, leverage her position, and challenge Sullivan's rationale for the MCI merger. Additionally, it would be prudent to keep a separate journal of directives from managers in case WorldCom faces scrutiny for questionable accounting practices.


spite of Vinson's viewpoint, I am of the belief that Ebbers and/or Sullivan will provide a convincing explanation to persuade Vinson that the accrual release is either an allowable one-time tactic or a defensible transfer as long as it does not become a routine procedure. Nevertheless, it is clear that Vinson acknowledges the illicit nature or extreme impropriety of this accounting method. Consequently, aside from documenting any emails regarding these transfers, it would be prudent for Vinson to enlist the assistance of legal counsel.

Engaging a lawyer will bring Vinson a sense of relief during this difficult period in her profession. It will also support her claim that she made illicit transfers due to family situations and had the intention of revealing the misconduct once she gathered enough evidence. In April 2001, Vinson and Normand are once again summoned to save WorldCom, but Sullivan's plan at this time is even more obvious.

He suggests reclassifying line usage costs, traditionally treated as operational expenses, as capital expenses. This change would reduce WorldCom's overall expenses since these costs would be transferred to the balance sheet and depreciated gradually (Investopedia). However, line usage contracts are not classified as capital assets, as recognized by Vinson, Normand, and most industry professionals with a basic knowledge of US GAAP (Generally Accepted Accounting Principles).

Obviously, Vinson and Normand should be greatly surprised by the request, which indicates the distress that WorldCom is currently experiencing. Vinson now faces a critical moment where she must carefully evaluate the future of her company and consider the demands being made of her. It is unclear why Vinson consistently classified operational expenses incorrectly

for the benefit of her employer, particularly without any written agreement or proper documentation of the high levels of corruption she encountered.

Despite the stressful and anxious circumstances, Vinson's lack of action, except for following orders, resulted in her failure. If she had refused to continue with the fraud, kept evidence of the emails or instructions, or sought legal counsel, her punishment would have likely been less harsh.

Another option could have been to include WorldCom’s Internal Audit Department in the investigation. However, because the department reported directly to Sullivan, many WorldCom employees doubted its credibility and impartiality. Vinson may have believed that questioning financial transactions in this department would only bring negative attention to her efforts to gather information. Nevertheless, the internal audit department was already aware or strongly suspected some level of fraud as early as August 2001.

Despite the potential comfort and support Vinson could have received from involving the internal team, particularly after August 2001, she had no way of determining whom to trust, given the toxic environment fostered by Ebbers. Hence, I cannot blame Vinson for not opting to confide in the Internal Audit Department with such sensitive information at that time. Moving forward, I will propose a realistic solution where Vinson releases the accruals in October 2000. Nonetheless, her approach to this process and subsequent decisions will be altered.

Furthermore, I have chosen to merge the solution and implementation plan sections as this is not a corporate effort, but an individual strategy to avoid legal consequences. Beginning with the meeting in October 2000 with Yates and Normand, I would advise Vinson to appear less

startled and more inquisitive regarding the directive. While Vinson and Normand quickly identify the potential unlawful activity, openly expressing this concern does not benefit them. Instead, I suggest it immediately alerts Ebbers and Sullivan to the mindset and awareness of their accounting directors.

Ebbers and Sullivan should be careful when dealing with Vinson and other accountants connected to their scheme. To protect himself, Sullivan might consider providing written instructions instead of leaving a paper trail in the ERP system, where the General Ledger is typically stored. This step could be taken if Sullivan believes that Vinson and Normand are completely unaware of his true intentions. If Vinson can effectively feign ignorance about the full extent of the fraud they are involved in, she may gather additional evidence implicating both him and WorldCom's financial records.

Shortly after the October 2000 meeting, I would instruct Vinson to send an email requesting further clarification on the accrual release before proceeding with the transfer. The email should be written in a positive manner to encourage Sullivan to communicate his directive or intentions in writing. Vinson should save any response from Sullivan on a personal external drive. Additionally, I would advise Vinson to consult with a lawyer and share/store any evidence or information she can gather.

In April 2001, it becomes evident that WorldCom is in trouble. The transfer of $771 million from line usage operating expense to a capital account, as I mentioned before, cannot be justified. It is clear that Vinson's plan to act unaware and take advantage of her status as a newbie needs to be reconsidered. Instead, I believe that Vinson should express

her assessment of the directive without hesitation. As a CPA and Director of Accounting at WorldCom, it is her responsibility to prevent situations like this from happening (Paine, 2007).

Moreover, it should be noted that management has exploited their authority by asking her to carry out this transfer, imposing unjust pressure for engaging in an unlawful action. Despite Vinson's professional conduct and appropriate stance, her actions may face disapproval and verbal attacks from both Sullivan and Ebbers. There is also a real possibility of her being terminated. However, due to the measures she has already taken, I believe Vinson can have more confidence in her legal position.

After an employee hires a lawyer and documents suspicious instructions from superiors, there are multiple paths to seek justice against WorldCom. These options include starting legal proceedings for wrongful termination or contacting the SEC directly. Although both choices come with potential stress and risk, it is clear in hindsight that not taking any action or going along with management's plan would have resulted in much worse consequences. In conclusion, this case demonstrates the ethical dilemmas that dedicated and conscientious employees may face, although on an extraordinary scale with significant implications.

The analysis of Betty Vinson's involvement in the WorldCom fraud case emphasizes the significance of ethical conduct in overseeing corporate operations and finances. The case has been subject to diverse interpretations, making it uncertain whether Vinson was fully conscious of her participation in the situation. In my view, she may have rationalized that obeying instructions would shield her from any repercussions. Nevertheless, considering her education and position, it is evident that Betty Vinson possessed a

remarkable level of intelligence.

Considering her extreme guilt, displayed through physical symptoms, it is clear that she understood the risks involved. Unfortunately, Vinson did not realize that higher positions come with greater responsibility to both the company and society's laws. It is sad to see well-intentioned individuals experience unfortunate events, which I firmly believe applies to Vinson. However, it is hard to deny that she failed in neglecting her ethics, morals, and overall understanding of right and wrong throughout this challenging situation.

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