In: Accounting
Financial Reporting Pressures
Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ultimately sentenced.
Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting?
A. I can't recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had problems with the entries, David Myers had informed him, and we were considering resigning.
He said that he respected our concerns but that we weren't being asked to do anything that he believed was wrong. He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the costs were so high.
He did say he believed that the initial statements that we produced, that the line costs in those statements could not have been as high as they were, that he believed something was wrong and there was no way that the costs were that high.
I informed him that I didn't believe the entry we were being asked to do was right, that I was scared, and I didn't want to put myself in a position of going to jail for him or the company. He responded that he didn't believe anything was wrong, nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail, not me.
He asked that I stay, don't jump off the plane, let him land it softly, that's basically how he put it. And he mentioned that he had a discussion with Bernie Ebbers, asking Bernie to reduce projections going forward and that Bernie had refused.
Q. Mr. Normand, you said that Mr. Sullivan said something about don't jump out of the plane. What did you understand him to mean when he said that?
A. Not to quit.
Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future?
A. Yes, he made a comment that from that point going forward we wouldn't be asked to record any entries, high-level late adjustments, that the numbers would be the numbers.
Q. What did you understand that to be mean, the numbers would be the numbers?
A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we wouldn't be asked to be recording any more late entries.
Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate?
A. No, he did not.
Q. Did anyone ever ask you to do that?
A. No.
Q. Did you ever conduct any such analysis?
A. No, I didn't.
Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make?
A. No, he did not.
Q. Did anything else happen during the meeting?
A. I don't recall anything else.
Q. How did you feel after this meeting?
A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there.
Instructions
Answer the following questions.
SOLUTION
a. The ethical issues that appear in this case are as follows:
• Troy Normand proceeded to make an entry he felt did not reflect relevant and reliable financial information
• He succumbed to management and job pressures although he had a moral obligation to ensure the financial statements reflected fairly the financial position of the company
• He did not act with the best interest of the stakeholders in mind
• Troy’s manager pressured Troy into ignoring his concerns and therefore ignoring his moral and ethical responsibilities to the shareholders
• Troy’s manager is clearly acting with his best interests in mind
b. Troy Normand acted unethically as stated above
c. Troy should have implemented a further investigation of his concerns with full documentation of his findings.
• It is evident that he was concerned about some of the costs on the income statement and he was also questioning the adjusting entry he was being asked to record
• As an accountant, he would need to follow codes of ethics where he is required to ensure competency i.e. he should have investigated the situation further to educate himself in all financial matters of the company.
• If there was doubt in any entries or accounting treatments, he was morally obligated to ensure he was educated by further investigating the situation
• He should have communicated his concerns to others (e.g. other members of management or outside authorities) rather than overlooking it
d. The stakeholders in this case are investors, shareholders and employees