by Julio Viskovich MBA

Created on: April 12, 2009   Last Updated: April 15, 2009

Ethics and Accounting: The Failure of Worldcom

In the late 1990s and early 2000s, Worldcom was a successful company and leader in the telecommunications world. They had merged with MCI and had almost merged with Sprint. The company was regarded for being innovative and growth hungry. However, In the midst of all of these mergers and acquisitions Worldcom CEO Bernie Ebberly began to mismanage the company. Worldcom has no longer meeting their numbers and it looked like stock prices would fall. Rather than let this happen, executives at Worldcom "cooked the books". CFO Scott Sullivan, as well as some other auditors, used accounting practices and judgments that were highly illegal and unethical.

Worldcom's financial executives used fraudulent accounting methods to present a false representation of the company's financial stability. They hid various costs by capitalizing them by listing these costs as assets on their balance sheet instead of properly recording them on the income statement. In other words, revenues and profits were inflated expenses were deflated and disguised. Throughout the scandal, $2.8 billion dollars was added in revenue from reserves, and $3.85 billion was deducted from operating costs and listed as long-term investments (Moritz, 2004). Users of this data were given the idea that profits were growing and Worldcom's stock rose because of this misrepresentation. False journal entries were also created in Worldcom's financials to inflate revenues. They did this for 11 straight quarters between 1999 and 2002. Arthur Andersen, who was highly involved in the Enron scandal, was Worldcom's auditor during this period.

Auditors from Arthur Andersen signed off on annual reports and helped Worldcom misrepresent its financial health. These corrupt acts by both the internal and external auditors eliminated all checks and balances that made sure proper accounting methods were being used. Due to the actions of Worldcom executives, an unethical corporate culture was created at the company. It's important to note that merging different companies together can make maintaining a healthy corporate culture next to impossible. In fact, the company purchased over 60 firms throughout the late 1990s. Worldcom's acquisitions made it increasingly difficult for CEO Ebbers to manage the company effective and maintain an ethical culture. An organization's leaders help define the culture, values, standards, and moral character of the organization having ramifications both inside

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