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Qatar Ethics Corporate Governance & Responsible Leadership in Worldcom Company Paper

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Help me study for my Business class. I’m stuck and don’t understand.

Coursework Assignment

I chose a “WorldCom Group” organisation that has been involved in corporate failure at board level. You are required to critically discuss from an ethical and corporate governance perspective the key failings in the organisation that lead to such an event occurring. Your essay must include obvious links to academic literature and ethical and corporate governance theories.

The essay should be well-presented, should contain a well-informed critical analysis, and should show a good standard of academic referencing.

The approach to the essay

You should demonstrate the breadth of your reading in the essays with reference to original peer-reviewed academic articles. There will also be a need to include media and company reports.

Important Points:

-Understanding of knowledge and theory: Thorough and Comprehensive understanding.

-Question addressed: Areas, objectives and boundaries of question clearly identified and followed.

-Identification and use of literature: Wide range of sources with most relevant literature identified.

-Original thought: Excellent original critical assessment of the issues with well-structured conclusions.

-Logic of argument: Excellent logical flow to the argument, dealing precisely with the question asked.

-Conclusion: Precise, logical conclusions perhaps providing new insights/suggestions for future research.

*** Words count = 2400 words.

*** In-Text Citations and References using Harvard style.

*** I’ve uploaded attachment named “Sample” it’s a previous work for this assignment.

*** Also attachment has been uploaded named “Accounting_Fraud_at_WorldCom” relate to the company chosen.

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rP os t For the exclusive use of B. B 9-104-071 REV: SEPTEMBER 14, 2007 ROBERT S. KAPLAN DAVID KIRON Accounting Fraud at WorldCom op yo WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late. — Richard Thornburgh, former U.S. attorney general1 tC On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Between 1999 and 2002, WorldCom had overstated its pretax income by at least $7 billion, a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets.2 WorldCom’s stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company’s bankruptcy also jeopardized service to WorldCom’s 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the Federal Aviation Association, network management for the Department of Defense, and long-distance services for both houses of Congress and the General Accounting Office. Background No WorldCom’s origins can be traced to the 1983 breakup of AT&T. Small, regional companies could now gain access to AT&T’s long-distance phone lines at deeply discounted rates.3 LDDS (an acronym for Long Distance Discount Services) began operations in 1984, offering services to local retail and commercial customers in southern states where well-established long-distance companies, such as MCI and Sprint, had little presence. LDDS, like other of these small regional companies, paid to use or lease facilities belonging to third parties. For example, a call from an LDDS customer in New Orleans to Dallas might initiate on a local phone company’s line, flow to LDDS’s leased network, and then transfer to a Dallas local phone company to be completed. LDDS paid both the 1 Matthew Bakarak, “Reports Detail WorldCom Execs’ Domination,” AP Online, June 9, 2003. 2 WorldCom’s writedown was, at the time, the second largest in U.S. history, surpassed only by the $101 billion writedown taken by AOL Time Warner in 2002. Do 3 Lynne W. Jeter, Disconnected: deceit and betrayal at WorldCom (Hoboken, NJ: John Wiley & Sons, 2003), pp. 17–18. ________________________________________________________________________________________________________________ Professor Robert S. Kaplan and Senior Researcher David Kiron, Global Research Group, prepared this case. The case was developed from published sources and draws heavily from Dennis R. Beresford, Nicholas deB. Katzenbach, and C.B. Rogers, Jr., “Report of Investigation,” Special Investigative Committee of the Board of Directors of WorldCom, Inc., March 31, 2003. References to this report are identified by alphabetic letters which refer to information in the endnotes. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004, 2005, 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for educator review use only by BIBHAS B HE OTHER until June 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860 For the exclusive use of B. B Accounting Fraud at WorldCom rP os t 104-071 New Orleans and Dallas phone company providers for using their local networks, and the telecommunications company whose long-distance network it leased to connect New Orleans to Dallas. These line-cost expenses were a significant cost for all long-distance carriers. LDDS started with about $650,000 in capital but soon accumulated $1.5 million in debt since it lacked the technical expertise to handle the accounts of large companies that had complex switching systems. The company turned to Bernard J. (Bernie) Ebbers, one of its original nine investors, to run things. Ebbers had previously been employed as a milkman, bartender, bar bouncer, car salesman, truck driver, garment factory foreman, high school basketball coach, and hotelier. While he lacked technology experience, Ebbers later joked that his most useful qualification was being “the meanest SOB they could find.”4 Ebbers took less than a year to make the company profitable. op yo Ebbers focused the young firm on internal growth, acquiring small long-distance companies with limited geographic service areas and consolidating third-tier long-distance carriers with larger market shares. This strategy delivered economies of scale that were critical in the crowded longdistance reselling market. “Because the volume of bandwidth determined the costs, more money could be made by acquiring larger pipes, which lowered per unit costs,” one observer remarked.5 LDDS grew rapidly through acquisitions across the American South and West and expanded internationally through acquisitions in Europe and Latin America. (See Exhibit 1 for a selection of mergers between 1991 and 2002.) In 1989, LDDS became a public company through a merger with Advantage Companies, a company that was already trading on Nasdaq. By the end of 1993, LDDS was the fourth-largest long-distance carrier in the United States. After a shareholder vote in May 1995, the company officially became known as WorldCom. tC The telecommunications industry evolved rapidly in the 1990s. The industry’s basic market expanded beyond fixed-line transmission of voice and data to include the transport of data packets over fiber-optic cables that could carry voice, data, and video. The Telecommunications Act of 1996 permitted long-distance carriers to compete for local service, transforming the industry’s competitive landscape. Companies scrambled to obtain the capability to provide their customers a single source for all telecommunications services. No In 1996, WorldCom entered the local service market by purchasing MFS Communications Company, Inc., for $12.4 billion. MFS’s subsidiary, UUNET, gave WorldCom a substantial international presence and a large ownership stake in the world’s Internet backbone. In 1997, WorldCom used its highly valued stock to outbid British Telephone and GTE (then the nation’s second-largest local phone company) to acquire MCI, the nation’s second-largest long-distance company. The $42 billion price represented, at the time, the largest takeover in U.S. history. By 1998, WorldCom had become a full-service telecommunications company, able to supply virtually any size business with a full complement of telecom services. WorldCom’s integrated service packages and its Internet strengths gave it an advantage over its major competitors, AT&T and Sprint. Analysts hailed Ebbers and Scott Sullivan, the CFO who engineered the MCI merger, as industry leaders.6 Do In 1999, WorldCom attempted to acquire Sprint, but the U.S. Justice Department, in July 2000, refused to allow the merger on terms that were acceptable to the two companies. The termination of this merger was a significant event in WorldCom’s history. WorldCom executives realized that largescale mergers were no longer a viable means of expanding the business.a WorldCom employees 4 Jeter, p. 27. 5 Jeter, p. 30. 6 CFO Magazine awarded Sullivan its CFO Excellence award in 1998; Fortune listed Ebbers as one of its “People to Watch 2001.” 2 This document is authorized for educator review use only by BIBHAS B HE OTHER until June 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860 For the exclusive use of B. B 104-071 rP os t Accounting Fraud at WorldCom noted that after the turndown of the Sprint merger, “Ebbers appeared to lack a strategic sense of direction, and the Company began drifting.”b Corporate Culture op yo WorldCom’s growth through acquisitions led to a hodgepodge of people and cultures. One accountant recalled, “We had offices in places we never knew about. We’d get calls from people we didn’t even know existed.” WorldCom’s finance department at the Mississippi corporate headquarters maintained the corporate general ledger, which consolidated information from the incompatible legacy accounting systems of more than 60 acquired companies. WorldCom’s headquarters for its network operations, which managed one of the largest Internet carrier businesses in the world, was based in Texas. The human resources department was in Florida, and the legal department in Washington, D.C. None of the company’s senior lawyers was located in Jackson. [Ebbers] did not include the Company’s lawyers in his inner circle and appears to have dealt with them only when he felt it necessary. He let them know his displeasure with them personally when they gave advice— however justified—that he did not like. In sum, Ebbers created a culture in which the legal function was less influential and less welcome than in a healthy corporate environment.c A former manager added, “Each department had its own rules and management style. Nobody was on the same page. In fact, when I started in 1995, there were no written policies.”7 When Ebbers was told about an internal effort to create a corporate code of conduct, he called the project a “colossal waste of time.”d tC WorldCom encouraged “a systemic attitude conveyed from the top down that employees should not question their superiors, but simply do what they were told.”e Challenges to more senior managers were often met with denigrating personal criticism or threats. In 1999, for example, Buddy Yates, director of WorldCom General Accounting, warned Gene Morse, then a senior manager at WorldCom’s Internet division, UUNET, “If you show those damn numbers to the f****ing auditors, I’ll throw you out the window.”8 No Ebbers and Sullivan frequently granted compensation beyond the company’s approved salary and bonus guidelines for an employee’s position to reward selected, and presumably loyal, employees, especially those in the financial, accounting, and investor relations departments. The company’s human resources department virtually never objected to such special awards.9 Do Employees felt that they did not have an independent outlet for expressing concerns about company policies or behavior. Several were unaware of the existence of an internal audit department, and others, knowing that Internal Audit reported directly to Sullivan, did not believe it was a productive outlet for questioning financial transactions.f 7 Jeter, p. 55. 8 Personal correspondence, Gene Morse. 9 Kay E. Zekany, Lucas W. Braun, and Zachary T. Warder, “Behind Closed Doors at WorldCom: 2001,” Issues in Accounting Education (February 2004): 103. 3 This document is authorized for educator review use only by BIBHAS B HE OTHER until June 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860 For the exclusive use of B. B Accounting Fraud at WorldCom Expense-to-Revenue (E/R) Ratio rP os t 104-071 In the rapid expansion of the 1990s, WorldCom focused on building revenues and acquiring capacity sufficient to handle expected growth. According to Ebbers, in 1997, “Our goal is not to capture market share or be global. Our goal is to be the No. 1 stock on Wall Street.”10 Revenue growth was a key to increasing the company’s market value.11 The demand for revenue growth was “in every brick in every building,” said one manager.g “The push for revenue encouraged managers to spend whatever was necessary to bring revenue in the door, even if it meant that the long-term costs of a project outweighed short-term gains. . . . As a result, WorldCom entered into long-term fixed rate leases for network capacity in order to meet the anticipated increase in customer demand.”h op yo The leases contained punitive termination provisions. Even if capacity were underutilized, WorldCom could avoid lease payments only by paying hefty termination fees. Thus, if customer traffic failed to meet expectations, WorldCom would pay for line capacity that it was not using. Industry conditions began to deteriorate in 2000 due to heightened competition, overcapacity, and the reduced demand for telecommunications services at the onset of the economic recession and the aftermath of the dot-com bubble collapse. Failing telecommunications companies and new entrants were drastically reducing their prices, and WorldCom was forced to match. The competitive situation put severe pressure on WorldCom’s most important performance indicator, the E/R ratio (line-cost expenditures to revenues), closely monitored by analysts and industry observers. WorldCom’s E/R ratio was about 42% in the first quarter of 2000, and the company struggled to maintain this percentage in subsequent quarters while facing revenue and pricing pressures and its high committed line costs. Ebbers made a personal, emotional speech to senior staff about how he and other directors would lose everything if the company did not improve its performance.i tC As business operations continued to decline, however, CFO Sullivan decided to use accounting entries to achieve targeted performance. Sullivan and his staff used two main accounting tactics: accrual releases in 1999 and 2000, and capitalization of line costs in 2001 and 2002.12 Accrual Releases Do No WorldCom estimated its line costs monthly. Although bills for line costs were often not received or paid until several months after the costs were incurred, generally accepted accounting principles required the company to estimate these expected payments and match this expense with revenues in its income statement. Since the cash for this expense had not yet been paid, the offsetting entry was an accounting accrual to a liability account for the future payment owed to the line owner. When WorldCom paid the bills to the line owner, it reduced the liability accrual by the amount of the cash payment. If bills came in lower than estimated, the company could reverse (or release) some of the accruals, with the excess flowing into the income statement as a reduction in line expenses. 10 R. Charan, J. Useen, and A. Harrington, “Why Companies Fail,” Fortune (Asia), May 27, 2002, pp. 36–45. 11 Zekany et al., p. 103. 12 The company also used aggressive revenue-recognition methods at the end of each reporting quarter to “close the gap” with Ebbers’s aggressive revenue forecasts; see Zekany et al., pp. 112–114, and Beresford, Katzenbach, and Rogers, Jr., pp. 13–16. 4 This document is authorized for educator review use only by BIBHAS B HE OTHER until June 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860 For the exclusive use of B. B 104-071 rP os t Accounting Fraud at WorldCom Throughout 1999 and 2000, Sullivan told staff to release accruals that he claimed were too high relative to future cash payments. Sullivan apparently told several business unit managers that the MCI merger had created a substantial amount of such overaccruals. Sullivan directed David Myers (controller) to deal with any resistance from senior managers to the accrual releases. In one instance, Myers asked David Schneeman, acting CFO of UUNET, to release line accruals for his business unit. When Schneeman asked for an explanation, Myers responded: “No, you need to book the entry.” When Schneeman refused, Myers told him in another e-mail, “I guess the only way I am going to get this booked is to fly to D.C. and book it myself. Book it right now, I can’t wait another minute.”j Schneeman still refused. Ultimately, staff in the general accounting department made Myers’s desired changes to the general ledger. (See Exhibit 2 for a partial organizational chart.) op yo In another instance, Myers asked Timothy Schneberger, director of international fixed costs, to release $370 million in accruals. “Here’s your number,” Myers reportedly told Schneberger, asking him to book the $370 million adjustment. Yates, director of General Accounting, told Schneberger the request was from “the Lord Emperor, God himself, Scott [Sullivan].” When Schneberger refused to make the entry and also refused to provide the account number to enable Myers to make the entry, Betty Vinson, a senior manager in General Accounting, obtained the account number from a lowlevel analyst in Schneberger’s group and had one of her subordinates make the entry.k Employees in the general accounting department also made accrual releases from some departments without consulting the departments’ senior management. In 2000, General Accounting released $281 million against line costs from accruals in the tax department’s accounts, an entry that the tax group did not learn about until 2001. tC Over a seven-quarter period between 1999 and 2000, WorldCom released $3.3 billion worth of accruals, most at the direct request of Sullivan or Myers. Several business units were left with accruals for future cash payments that were well below the actual amounts they would have to pay when bills arrived in the next period. Expense Capitalization No By the first quarter of 2001, so few accruals were left to release that this tactic was no longer available to achieve the targeted E/R ratio.l Revenues, however, continued to decline, and Sullivan, through his lieutenants Myers and Yates, urged senior managers to maintain the 42% E/R ratio. Senior staff described this target as “wildly optimistic,” “pure fantasy,” and “impossible.” One senior executive described the pressure as “unbearable—greater than he had ever experienced in his fourteen years with the company.”m Do Sullivan devised a creative solution. He had his staff identify the costs of excess network capacity. He reasoned that these costs could be treated as a capital expenditure, rather than as an operating cost, since the contracted excess capacity gave the company an opportunity to enter the market quickly at some future time when demand was stronger than current levels. An accounting manager in 2000 had raised this possibility of treating periodic line costs as a capital expenditure but had been rebuffed by Yates: “David [Myers] and I have reviewed and discussed your logic of capitalizing excess capacity and can find no support within the current accounting guidelines that would allow for this accounting treatment.”n 5 This document is authorized for educator review use only by BIBHAS B HE OTHER until June 2015. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860 For the exclusive use of B. B Accounting Fraud at WorldCom rP os t 104-071 In April 2001, however, Sullivan decided to stop recognizing expenses for unused network capacity.13 He directed Myers and Yates to order managers in the company’s general accounting department to capitalize $771 million of non-revenue-generating line expenses into an ass ...
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Running head: Ethics, Corporate Governance and Responsible Leadership

ETHICS, CORPORATE GOVERNANCE AND RESPONSIBLE LEADERSHIP IN
WORLDCOM COMPANY
Name

Course
Professor
Institution affiliate
Location
Date

1

Ethics, Corporate Governance and Responsible Leadership in WorldCom Company

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Introduction
In our country, there have been several issues of organizational failures over the years.
Most of these failures are mainly caused by a lack of ethical and corporate governance practices
in these companies. Therefore, drawing on applicable ethical and corporate governance views,
this paper broadly explores the significant faults that led to WorldCom Organization's failure.
Some of the crucial faults that piloted to the collapse of WorldCom Group are lack of corporate
organizational governance such as corporate culture, Expense-to-Revenue Ratio as well as
accrual liberties and expense capitalization which were meant to be tactics to handle accrual
releases. Also, there was a general accounting department, an internal survey, and the board of
directors.
Corporate Culture
Corporate culture is simply the behavior and believes that pertain to an organization
determining how it should manage its employees as well as the other business transactions it has.
The growth of WorldCom was through acquisitions, which were as a result of people in this
company and their culture. One accountant said that they had offices in many places that they did
not even know about. For example, WorldCom's finance division was at Mississippi, command
post for its network functions was in Texas, the human resource section was in Florida and
statutory division in Washington, D.C (Kaplan and Kiron, 2014). Ebbers, the company's leader,
never involved the attorney of the firm in any of his dealings, but only when he felt it was
indispensable. The company’s attorneys were not even based in Jackson. This showed that
Ebbers lacked transparency to his lawyers that he could only include them in his dealings when
he felt necessary. It could be that Ebbers was engaging himself in business transactions that he
did not want the company to know about.

Ethics, Corporate Governance and Responsible Leadership in WorldCom Company

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The legal function of the WorldCom Company was not welcomed as well as less
influential, which was a culture created by Ebbers. This is unlike what should be in a healthy
corporate working environment. Every division in this company had its own rules as well as
management styles. The people in this organization all worked on different pages according to
their departments. A prior manager from WorldCom pointed out that back in 1995, there were
policies put down when he started working here (Kaplan and Kiron, 2014). There was a request
made to Ebbers to create a corporate code of conduct that failed. It failed as Ebbers declared this
as a waste of time. Ebbers was not ethical as a good leader as he could have considered what the
employees were suggesting. Well, if these codes of conduct were to be made, the company could
have been working on better and common grounds.
Expense-to-Revenue Ratio
WorldCom was experiencing rapid growth in the 1990s, and it was focused on building
on revenues to acquire the sufficient funds they needed to maintain the expansion. Ebbers, their
leader in the year 1997, stated that their primary objective was not to capture the market or
operate universally, instead, it was to set off as the topmost merchandise on Wall Street. For this
reason, the growth of revenue was the main factor that could increase the company's market
worth. The pressure to bring more revenue to the company was so high that bosses were
persuaded to do all that was essential to make it happen. It signified that even if the durable
expenditur...

ProfJamesmiller (20548)
University of Virginia

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