CHINHOYI UNIVERSITY OF TECHNOLOGY
GROUP ASSIGNMENT
PROGRAMME: BACHELOR OF SCIENCE HONOURS DEGREE IN
ACCOUNTANCY
COURSE: CORPORATE GOVERNANCE AND PROFESSIONAL ETHICS
CODE: CUACM414
LEVEL: 4.1
SURNAME NAME REG. NUMBER
MAKOMO WADZANAI PRECIOUS C20142082D
AARON WISDOM C20141323D
SITHOLE EVIDENCE C20141934M
TEMBO GRACE F C20141599S
MAUWA MOREBLESSING K C20141050L
MUFANDAEDZA NYASHA C20143141F
MATOWE NICHOLAS C20141170R
TANYONGANA AUTHENTIC A C20141355T
NDEBVU JACQUELINE A C20141187K
PUTIRE ENOCK C20143037R
Introduction
The WorldCom Case Study
The WorldCom case refers to one of the largest accounting scandals in history involving the
telecommunications company WorldCom, which was based in the United States. The scandal
came to light in 2002 and resulted in the company filing for bankruptcy. WorldCom led by CEO
Bernard Ebbers was a major player in the telecommunications industry. The company
experienced significant growth through a series of acquisitions during the late 1990s.
In order to maintain the appearance of financial health and meet Wall Street’s expectations,
WorldCom engaged in fraudulent accounting practices. The company inflated its earnings by
improperly inflating revenue and capitalizing expenses. Specifically, WorldCom falsely
classified operating expenses as capital investments which allowed them to spread the costs over
a longer period. This practice violated generally accepted accounting principles (GAAP) and
inflated the company’s reported earnings.
A WorldCom internal auditor named Cynthia Cooper along with her team discovered
irregularities in the company’s financial statements during routine audits. They found large,
unexplained entries in the accounts and traced them back to improper accounting adjustments.
Cooper reported her findings to the company’s audit committee, who then launched an internal
investigation. The investigation uncovered the accounting fraud and revealed that the company
had overstated its assets by approximately $11 billion.
Definition of terms
Whistle blowing
According to Boatright (2000, p.109), it is the voluntary release of non-public information, as a
moral protest, by a member or former member of an organization outside the normal channels of
communication to an appropriate audience about illegal and/or immoral conduct in the
organization or conduct in the organization that is opposed in some significant way to the public
interest.
Whistle blower
This is the individual who notices something anomalous and detrimental to an organisation and
decides to blow the whistle.
What were the issues at stake?
Accounting fraud
WorldCom engaged in fraudulent accounting practices to inflate its earnings and deceive
investors and regulators. This raised concerns about the accuracy and reliability of financial
statements and highlighted the importance of maintaining transparency and integrity in corporate
accounting.
Corporate governance
The company’s board of directors and audit committee were criticized for their lack of oversight
and failure to detect the fraudulent activities. The case emphasized the importance of robust
corporate governance practices, including independent oversight, effective internal controls and
ethical leadership.
Legal and ethical accountability
The fraudulent activities led to criminal charges against top executives including CEO Bernard
Ebbers who was found guilty of multiple charges. The case highlighted the importance of
holding individuals accountable for their actions and reinforcing ethical conduct within
organizations.
What was the response or position of the executives?
Bernard Ebbers (CEO)
Initially he denied any knowledge or involvement in the accounting fraud. He maintained that he
was unaware of the fraudulent activities and blamed the company’s CFO, Scott Sullivan, for the
accounting irregularities. However, during the trial, evidence emerged suggesting that Bernard
was aware of the fraud and had had pressured subordinates to manipulate financial result.
Other executives
Several other high ranking executives were implicated in the accounting fraud. Some of them
cooperated with authorities and provided information during the investigation and trial. Others
maintained their innocence or attempted to distance themselves from the fraudulent activities.
Ultimately, several executives were convicted for their involvement in the fraud, including the
former controller, director of general accounting and director of management reporting.
How was the whistle blower treated?
Initially Cynthia Cooper faced resistance from the company’s executives and board members
when she began conducting an investigation into accounting irregularities. However, she
persisted and collected evidence that proved the extent of the fraud which ultimately led to its
bankruptcy and the conviction of its CEO. After the scandal broke, she was hailed as a hero for
her courage and dedication to fraud. She was awarded the 2002 Time Person of the year award
along with two other whistle blowers. However, Cynthia faced some criticisms and backlash
from some WorldCom employees and investors who saw her as partly responsible for the fall of
the company.
Was the treatment fair enough to encourage whistle blowing?
Overall, it is difficult to say if the treatment of Cynthia was fair enough to encourage
whistleblowing in the WorldCom case. While the positive recognition she received may have
encouraged others to speak up about wrongdoing, the negative backlash may have deterred
potential whistleblowers. Additionally, the fact that WorldCom ultimately went bankrupt and
many employees lost their jobs could send the message that speaking up about fraud and
misconduct can lead to negative consequences for both the company and its employees.
Comment on how the whistle was blown. Was there a better way to blow the whistle?
The whistle was blown in the WorldCom case by Cynthia Cooper. Cooper and her team had
discovered suspicious items and entered into a deeper investigation and by May 2022, she
had discovered several accounting irregularities that indicated a massive fraud had taken
place. Cooper decided to blow the whistle after finding millions of dollars unrecorded
expenses that had been kept off the company’s statement of financial position to boost the
bottom line. After discovering the fraud, Cooper went to the CEO and informed him of her
findings but he refused to take action. Despite encountering resistance from executives,
Cooper persisted in her investigations and reported her findings to the company’s board of
directors. The board then initiated an investigation into the fraud and later disclosed the
findings publicly. The fraudulent practices were ultimately uncovered and the company was
forced to declare bankruptcy.
In general, the most effective way to blow the whistle depends on the situation and there is
no one size fits all approach. Some possible options include reporting the misconduct through
internal channels such as whistleblower hotline or internal audit department, or reporting to
external organizations such as regulatory authorities or the media. Whistleblowers may also
choose to seek legal representation to protect themselves from retaliation and help them
navigate the complex of reporting misconduct.
What accounting or control measures do we learn from the wrongs that were
perpetrated?
Stronger internal controls
The WorldCom case was made possible by weak internal controls which allowed accounting
manipulations to go unnoticed for years. Companies now recognize the importance of
implementing stronger internal controls to detect and prevent financial fraud.
Greater whistle blower protections
The WorldCom case highlighted the importance of protecting whistle blowers who report
financial wrongdoing. The Sarbanes Oxley Act provided greater protections for whistle
blowers by prohibiting retaliation against employees who report fraud.
Greater transparency and disclosure
In response to the WorldCom scandal companies are now required to provide more
transparency and disclosure around their financial statements. This includes more detailed
reporting requirements and greater transparency around off statement of financial position
transactions.
Independent audit committees
The WorldCom case revealed the potential for conflicts of interests between board of
directors and management. To address this issue, the Sarbanes Oxley Act of 2002 required
publicly traded companies to have independent audit committees that oversee financial
reporting.
Conclusion
Overall, the WorldCom case stands as a prominent example of corporate fraud and the
importance of ethical financial practices and regulatory oversight in maintaining the integrity
of the financial markets.
References
American Institute of Certified Public Accountants (2005). The WorldCom fraud
Boatright (2000, p.109)
WorldCom: The Case Against Bernard Ebbers(2011)
WorldCom-What went wrong(2008)