Question

When WorldCom Inc.’s former chief executive Bernard Ebbers was found guilty of participating

In one of the largest U.S. accounting frauds ever, the ruling sent a message to corporate

Executives: Professing ignorance won’t necessarily save you.

Mr. Ebbers, who died Feb. 2 at age 78, was a former gym teacher who rose to head a

Telecommunications Company with a peak market value of about $180 billion. In the late 1990s

And early 2000s, WorldCom improperly boosted profit by booking operating expenses as capital

Spending, which can be deducted from earnings in small chunks over time.

During a trial in 2005, he pleaded not guilty to accounting fraud and said he didn’t know about

The misdeeds. The jury didn’t buy it. His 25-year prison sentence “put an exclamation point behind the old phrase ‘the buck stops here,’ ” said Patrick McGurn, special counsel at proxy advisor Institutional Shareholder Services. The dot-com bust and accounting scandals at WorldCom and Enron Corp. helped spur Congress to enact the Sarbanes-Oxley Act of 2002, whose provisions include requiring a public company’s chief executive and chief financial officer to certify that financial statements are accurate. The scandals also hastened a trend toward more independent corporate directors willing to challenge CEOs. Charles Elson, who heads a corporate-governance center at the University of Delaware, has this epitaph for the WorldCom fiasco: “As bad as it was, some good came out of it.” The regulatory changes didn’t mean corporate scandals would automatically land CEOs in prison. The aftermath of the 2008 financial crisis was notable for a lack of CEO scalps. Corporate leaders, wary of prison, may have become more cautious and less likely to leave paper or email trails, said Peter Henning, a law professor at Wayne State University, in Detroit. Mr. Ebbers, who built WorldCom through dozens of takeovers, was released from prison 13 years into his sentence in December because of deteriorating health. He followed an unconventional route to the CEO suite. The second of five children, Bernard John Ebbers was born Aug. 27, 1941, in Edmonton, Alberta, in Canada. His father worked as a traveling salesman and mechanic. The family moved to California in the late 1940s. Mr. Ebbers attended a boarding school on a Navajo reservation in New Mexico. As a young man he held odd jobs as a milk delivery man and a nightclub bouncer. Twice he gave up on college because of poor grades. He graduated from Mississippi College, where he played basketball, with a degree in education in 1967. Early in his career, Mr. Ebbers taught physical education and worked in a garment factory. He later began buying motels, starting with one in Columbia, Miss., where he lived in a two bedroom trailer in the parking lot. When AT&T’s “Ma Bell” system was broken up in the early 1980s, small rivals began reselling long-distance service. Mr. Ebbers and a handful of investors backed a company called Long Distance Discount Service, later renamed WorldCom. Dubbed the “Telecom Cowboy,” he earned a reputation as a hard-driving boss. He began to borrow money from the company in the late 1990s and used some of it to buy company stock. As the company expanded, Mr. Ebbers said he relied heavily on experts. “I’m not an engineer by training; I’m not an accountant by training,” he told the New York Times in 1998. “I’m the coach. I’m not the point guard who shoots the ball.” WorldCom began to show signs of stress in 2000 as its share price sank amid the dot-com meltdown. Mr. Ebbers was fired as CEO in April 2002. Soon afterward, an internal auditor spotted accounting irregularities. After his ouster, Mr. Ebbers appeared at his Mississippi church. At the end of the service, he walked to the front of the church and spoke to the congregation: “I just want you to know you aren’t going to church with a crook.” WorldCom’s former chief financial officer, Scott Sullivan, who engineered the fraud and worked closely with Mr. Ebbers, was sentenced to five years in prison after cooperating with prosecutors. He testified that Mr. Ebbers knew of the accounting methods used. Mr. Ebbers insisted he was blind-sided by the fraud. “I know what I don’t know,” he testified in a federal court. “I don’t, to this day, know technology. I don’t know finance and accounting.” As a judge delivered the sentence in 2005, Mr. Ebbers hung his head and cried while hugging his wife, Kristie Ebbers, who filed for divorce in 2008. He drove himself to prison in a Mercedes the following year and spent part of his sentence as inmate No. 56022-054 in a low-security prison in Louisiana. He was later transferred to FMC Fort Worth, a federal prison hospital in Texas. Paul Watson, a Mississippi resident and former WorldCom investor, lost $135,000 when the company collapsed, and supports a relative who lost $2.2 million. Still, he said, he feels little anger toward Mr. Ebbers and thinks “others have done far worse and been punished less.”

1. Why do you think, Charles Elson, from University of Delaware, said: “As bad as it was, some good came out of it.”?
2. Do you believe Mr. Ebbers was at fault of what happened with Worldcom despite he claimed in court that”…. I don’t know finance and accounting.” Why?
3. Why was Bernie Ebbers called the Telecom Cowboy?
4. Did the agency problem take a role in the Worldcom fiasco? Explain why yes or no? (note: there is not a clear answer here, so whatever you answer will be ok as long as you can explain it)

Answer 1

"As bad as it was, some good came out of it.”? this was said by Mr.Charles Elson because the worldCom fraud paved a way to better corporate goverance in the US. The Congress was quick to enact the Sarbanes-Oxley Act of 2002, whose provisions include requiring a public company’s chief executive and chief financial officer to certify that financial statements are accurate. It also brought a change in croporate culture, directors were now more independent and were ready to question the CEO. So the sercurities and regulatory bodies were more vigilent, tough laws were brought into place to cut off frauds and there was more awareness among the participants in the corporate world itself which did help in reducing frauds to great extent. Thus with WorldCom fraud along Enron Corp brought some good changes in the world of corporate with terms of regulation and decipline.

Mr. Ebber surely had fault in what ever happened , may be Mr Ebber was not good at accounting and finance , may be he did not know how journal entries worked but he surely was the CEO and they knew the simple thing "to increase your profit you have to cut down your expenses" , even layman knows that. Scott Sullivan, who was CFO just followed Mr Ebber's instrution, it was clear the company had to hide it's expenses and show better profit and Mr. Sullivan knew how exactly he needed to do that, may be Mr. Scoot Sullivan took care on how to manipulate the balance sheet and other financial statement but it was clearly form the instruction of Mr Ebber, he just wanted the numbers and other executive officers delivered that for him, so Mr Ebber should be hold accountable for the fraud and surely is responsible for the same. Mr. Ebbar surely wanted to do well in WallsStreet that commited him to do these frauds.

"The agency problem is a conflict of interest that occurs when agents don't fully represent the best interests of principals or Shareholders. Principals hire agents to represent their interests and act on their behalf. Agents are frequently hired to allow businesses to obtain new skill sets that the principals lack or to accomplish work for the firm's investors. In the business world, this relationship is represented by a company's management team and the corporation's shareholders". So our case there surely was a agency problem, WorldCom's shareholders or investors would only benefit if it did well in the stock market and WorldCom's management's interest was to earn more by making the company do well in the walls street. It was surely the job and responsibility of the management at WorldCom to safeguard the interest of its investors, but they oversighted that which lead to such a big accounting scandal. With the fear of dropping price in the stock market and cover all it's debts and expenses it hid all such expenses. So, it did not work in the best interest of their shareholders, they concealed the facts and real financial information just to keep their company float in the stockmarket, so there surely is agency problem involved.