Question

Betty Vinson was the director of management reporting at WorldCom. She had worked there for five years when the fraud was uncovered and received two promotions during that time. Vinson’s salary increased from $50,000 when she started to $80,000 in 2002. Vinson reported to Buford Yates, director of general accounting, who reported to David Myers, senior vice president, and controller, who then reported to CFO Scott Sullivan. (See Figure 1 for an organizational chart.) A hard worker who often stayed late or brought work home, Vinson considered herself lucky to land the job at WorldCom, as it was located in her hometown of Clinton, Miss. Vinson graduated from Mississippi College in 1978 and married her college sweetheart, Tom Vinson, a printing-equipment salesman who earned $40,000 a year. The couple had one daughter and lived a typical suburban lifestyle. Prior to working at WorldCom, Vinson worked as an accountant for various banking enterprises in Louisiana and Kansas City from 1978 to 1996. She also earned the Certified Public Accountant (CPA) credential during that time.

Problems began to emerge in the telecommunications industry in the late 1990s. The industry had over expanded, and every company was beginning to feel the effects, including WorldCom. By 2000, WorldCom’s expenses were increasing faster than revenues. In September 2000, WorldCom had to find $828 million to meet earnings targets expected by Wall Street. Vinson and her accounting colleagues found $50 million, but it wasn’t nearly enough. Senior management instructed her and her accounting coworkers to reduce reserve accounts for line costs to cover this shortfall. Reserves had been set aside based on estimates of potential losses, but they needed to have enough reason to reduce the reserve. Meeting earnings targets wasn’t a valid reason. Sullivan pressed Myers and Vinson’s boss, Yates, to make this adjustment. Yates told his accounting team that he had reservations, too, but that Sullivan promised this was a one-time adjustment. They all agreed to go along with the accounting adjustment. Vinson felt uncomfortable with this and considered resigning. The corporate accounting department’s discomfort with the entries prompted Sullivan to call the accountants into his office. He used an analogy that WorldCom was an aircraft carrier, and they needed to land the planes that were in the air. He urged them to wait until the planes had landed, and then they could leave the company if they still wanted to. Sullivan assured them that nothing they would do was illegal and that it wouldn’t be repeated. After talking to her husband, Vinson decided against resigning because of her family’s dependence on her salary and health insurance. In April 2001, the gap in meeting earnings targets was $771 million. The reserve pools weren’t large enough to cover this gap. Sullivan’s new strategy was to shift line costs, recorded as expenses, to capital expenditure accounts. Yates objected. Sullivan insisted it was the only way to cover this gap. Vinson and her coworker both felt cornered; this was clearly fraudulent accounting. The only choices now were to resign or make the entries. The three-person accounting team identified the capital accounts to use, and Vinson made the entries to transfer the $771 million. She backdated entries to February in the computer system and then indicated to colleagues at WorldCom that she was going to look for another job. These entries continued quarterly through April 2002. The Securities & Exchange Commission (SEC) was informed of the problem in June 2002 as a result of the efforts of the WorldCom internal audit team. The SEC would ultimately charge CFO Scott Sullivan, Controller David Myers, and accountants Buford Yates, Troy Normand, and Betty Vinson. According to the SEC complaint: “At the direction of WorldCom senior management, Vinson and other WorldCom employees caused WorldCom to overstate materially its earnings in contravention of generally accepted accounting principles (GAAP) for at least seven successive fiscal quarters, from as early as October 2000 through April 2002. Vinson knew or was reckless in not knowing, that these entries were made without supporting documentation, were not in conformity with GAAP, were not disclosed to the investing public, and were designed to allow WorldCom to appear to meet Wall Street analysts’ quarterly earnings estimates

Mr. Sullivan said:
Paraphrase    one    of    Sullivan’s    arguments?
This argument best describes the ____________________________________ “reason and rationalization” of GVV because
In response to Mr. Sullivan’s argument, Betty or Troy could have countered with something like:
Paraphrase another (a second) of Sullivan’s arguments, and follow the format above, etc. . . .

Answer 1

1.

- Mr. Sullivan said: "This was a one-time adjustment"
- This argument best describes the materiality “reason and rationalization” of GVV because it suggests that this action is an exception and not the rule. The firm is only thinking about the long-term numbers which would even out if this short term set was changed just once and just for now. It is meant to imply that the impact is not serious enough and no one will be hurt as it is a one off action.
- In response to Mr. Sullivan’s argument, Betty or Troy could have countered with something like: A one-time adjustment will still be fraudulent and against all accounting principles and does hurt the stakeholders and others who will get a wrong idea of the firm's profitability.

2.

- Mr. Sullivan said: "They needed to land the planes in the air"
- This argument best describes the locus of loyalty “reason and rationalization” of GVV because he is implying that the team should think about the good of the firm they work in over their own ideas and arguments. In following their own ethical guidelines the team could jeopardise the organisation which per him is a worse fate.
- In response to Mr. Sullivan’s argument, Betty or Troy could have countered with something like: The incorrect entries will only make the firm appear profitable when it is not and this can hurt the firm more in the next quarter.

3.

- Mr. Sullivan said: "Nothing you do will be illegal and it won't be repeated"
- This argument best describes the materiality “reason and rationalization” of GVV because he is trying to convey that since it is not illegal and will not be repeated, it is not of consequence and so should be ignored by the team.
- In response to Mr. Sullivan’s argument, Betty or Troy could have countered with something like: Falsifying accounting entries is against the accounting principles and in fact unethical.

4.

- Mr. Sullivan said: "It was the only way to cover the gap"
- This argument best describes the locus of loyalty “reason and rationalization” of GVV because he is trying to convey that this was the only way to safeguard their company and that there are no other options.
- In response to Mr. Sullivan’s argument, Betty or Troy could have countered with something like: There is another option and that is to report the accounts correctly.

(Gentile, 2017)

References :

Gentile, Mary C. (2017) GIVING VOICE TO VALUES: HOW TO COUNTER RATIONALIZATIONS RATIONALLY. UVA Darden.