Question

1. What are the pressures that lead executives and managers to “cook the books?”
2. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?
3. Were the external auditors and board of directors blameworthy in this case? Why or why not?
4. Betty Vinson: victim or villain? Should criminal fraud charges have been brought against her? How should employees react when ordered by their employers to do something they do not believe in or feel comfortable doing?

Answer 1

1. What are the pressures that lead executives and managers to “cook the books?”

• To keep Investors and the stock market happy about the financial performance of the company so that Stock value continues to grow or at least maintains the current prices.
• When executive benefits and incentives are tied to the financial performance of the company, certain lead executives and managers may have an unethical inducement to cook books for reaping immediate financial benefits.
• Certain CEOs yield to the pressure for more power and incentives which are possible only if a rosy picture of the performance of the company is established.
• There might be other pressures like loss of job or loss of fat paychecks or other benefits if not co-operated in the cooking of books of accounts.

In the Case of Worldcom:

The goal was to increase revenue by any measure, as it continues with its acquisitions.

The CEO had $400 million loan secured by pledging his worldcom shares.

The Line of managers were pressurised by CEO for showing good financial performance for the company.

Why were the actions taken by WorldCom managers not detected earlier?

In brief,

• Culture of the Company. Complete top-down management approach and employees have to do whatever management wants to do even they are against generally accepted accounting principles.
• Absence of whistle bowling mechanism and because of this, employees would not come forward to report malpractices even if they are aware of it fearing repercussions and loss of job.
• Position of Bernad Ebber, principal architect of Worldcom fraud, in the dual role as Board  Chairman and CEO. This means, no proper supervising authority on his actions as CEO.
• Lack of proper knowledge or application of knowledge & GAAPand lack of understanding of moral obligations on the part of the accounting team. When the term ''Prepaid capacity'' is used to capitalize expenses, the accounting director Sethi or external auditors have not questioned or asked for support in the never heard term ''Prepaid capacity''.
• External auditors, Anderson, prior to its merger with KPMG, had followed a moderate-risk approach in auditing the Worldcom which failed to detect the accounting scandal.

What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?

• The Chairman of the board & CEO must be different persons.
• Internal controls are to be strengthened and segregation of duties to be properly defined.
• Need for the effective whistle-bowling mechanism
• Criminal penalties for committing fraud should be increased.
• Prevalence of Audit committee on internal audits, internal controls, and relationships with external auditors.
• Change of external auditors in every 3 or 5 years period. And these auditors must be independent of the Company's influence.
• Developing ethical culture among the employees of the company.
• Adherence to GAAP principles, periodical review, and reconciliation of accounting balances.

Were the external auditors and board of directors blameworthy in this case?

Yes, Keeping Ebber as Chairman and CEO in the duel role and allowing him to execute this fraud at Worldcom, its board should be blamed

External auditors did not give a true and fair view of the financial performance of the company. They treated it as a moderate risk company even though they did not receive full information from the company. The external auditors also need to be blamed.

Betty Vinson: victim or villain?

Difficult to say. She was threatened with the loss of Job by Sullivan, the CFO when she was opposed initially to cook the books. But she knows what was done is wrong and she continued with it for more than a year, so she is definitely part of the fraud.

Should criminal fraud charges have been brought against her?

Yes

How should employees react when ordered by their employers to do something they do not believe in or feel comfortable doing?

• Request your boss to explain once again
• Then analyze the request with questions about ethical, possibility, responsibiility and impact etc.
• Discuss or enlighten the boss about the wrongs and impact.
• Offer an alternate solution which is legal and better
• Still insisted with the original request, think about reporting to whistle bowling committee or higher ups.
• Decide on your options