Accounting Scandals: WorldCom Scandal 2002
The WorldCom scandal can be called the worst case of accounting fraud in the NSE, and it prompted the initiation of radical reforms that continue to determine how publicly traded companies conduct various transactions. WorldCom was an international telecommunications company with the second largest long-distance telephone connections. WorldCom had the reputation of a telecommunication giant with immense innovation power. However, the company’s CEO Bernard Ebbers could not use WorldCom’s strengths to create a competitive advantage but instead chose to collude with some employees and defrauded the company’s shareholders of over $11 billion.
According to the Fraud Diamond and Fraud Triangle theories, four main elements define the thought process of an individual who commits occupational fraud. They include the incentive, opportunity, rationalization, and capability (Abdullahi and Noorhayati 39). The incentive presupposes that the person committing the fraud has something to gain from it. Mostly, they have a reason that drives them to commit the fraud. Opportunity implies having necessary space and time to commit the fraud. The aspect of opportunity is often exploited when there is a limited number of deterrent measures or absence of accountability systems to ensure that the culprits are held responsible for their actions within the organization (Abdullahi and Noorhayati 40). Next, rationalization means the ability to convince oneself that the risks associated with the fraudulent activity are worth of the reward if the action of fraud is not noticed. Finally, capability refers to the understanding of how to commit the fraud and how to prevent people from discovering it.
With the aforementioned elements, it may be possible to comprehend why Mr. Ebbers betrayed the shareholders of WorldCom, which resulted in an accounting scandal that has put him in jail for 25 years. It is important to note that Bernard Ebbers was not just the CEO but also the co-founder of WorldCom. In 1999, according to the Forbes 400, Ebbers had a net worth of $1.4 billion, and he was the 174th on the list of the world’s wealthiest at the time (Stanwick and Stanwick 432). While the CEO had many other gainful businesses, including a ranch, 2 farms, 9 hotels, a lumber company, a hockey team, and a trucking business, WorldCom was Mr. Ebbers’s main job and his brainchild (Stanwick and Stanwick 261). Thus, it is expected that he would do anything to keep this company from losing value on the securities market.
Furthermore, the aspect of the incentive can describe this scandal in many ways. To begin with, Ebbers’s actions indicate that his intention has been to create a false impression that he has been working to protect WorldCom from an eminent collapse. In 1999, mobile phones and the Internet were relatively new on the global market and these inventions would change the telecommunications industry for good. Moreover, Wall Street was soon going to turn their attention to such companies as Apple Inc. and Verizon among others, and WorldCom would lose its share value unless it joined the innovation wave and started focusing on the Internet in terms of their new products. In this case, it is evidently clear that colluding to misrepresent the company performance was Ebbers’s only way of keeping the company afloat at the time, though he should have found a better solution.
As the CEO of the business that lacked a stringent corporate governance structure, Ebbers chances of committing a fraud were quite visible. Under WorldCom’s organizational structure, Ebbers was the final authority in the company, and none of his employees had the right or even the interest to challenge his decisions. Ebbers instructed many of his subordinates to commit fraudulent activities including inflating the reserve account so that they could use the money to boost the revenue and keep the share prices high (Stanwick and Stanwick 436). Furthermore, most of the fraudulent activities that were committed in WorldCom were under Ebbers’s instruction mainly because there was no one representing the company’s shareholders (Stanwick and Stanwick 432). A company with good corporate governance usually ensures that only the people who protect the shareholders’ interests reside in the top echelons of power. The management may be bound by their fiduciary responsibility to the shareholders, but without a system of checks and balances, they have an opportunity to act in their personal interests.
Furthermore, concerning the issue of rationalization, it is conceivable that Ebbers felt that he was benefiting the company and possibly the shareholders by changing the business’s books of accounts so they would show that the company was making profits even though the company was facing challenges. Keeping the business afloat at the time meant that Ebbers could make the shareholders pay more than what the company was worth when buying the stakes. According to the Fraud Diamond and Fraud Triangle theories, the only reason Ebbers managed to tell the lies to the world was possibly because he was convinced that he was doing the right thing for his company and for the shareholders as a result. Keeping the company within the correct price range would have given the business enough money to improve performance and eventually regain their original market value. Rationalization implies that any possibilities of being caught and the efforts being reversed were ignored as the CEO risked his own freedom and lied to the entire stock exchange market.
As far as capability is concerned, Ebbers may not have been the accountant at WorldCom when the scandal happened, but he had run the organization for long enough and was in close contact with Arthur Andersen, the auditing firm that handled their accounting. It means that Ebbers not only has had the experience and exposure that would teach him how to hide the company’s failure, but he has also had some of the best accountants in the world on his side. The counsel and cooperation of the accounting firm must have played a pivotal role in enabling the CEO to fool Wall Street successfully. All the fraudulent transactions that were recorded, including the expenses being filed as investments thus inflating working revenue, were under Ebbers’s advisement. Such acts as the ones that the WorldCom CEO has committed are common in business and are driven by greed. In business, greed or the need for more money does not arise because of poor remuneration. Occupational fraud occurs because of the existence of weaknesses within the law governing financial reporting or asset declaration. It may be difficult for authorities to prevent fraud cases if business executives are extremely determined to exploit the weakness of the law.
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Occupational fraud has had a long history in the U.S. and the world in general with regard to the publicly traded companies. Often, the management team members who participate in committing fraud have all four elements of the Fraud Diamond theory. Ebbers may not have been spending more money than he has been earning considering the fact of his net worth of more than a billion dollars in 1999, but he was desperate to save the company that he ran and co-founded. This is an unyielding incentive especially considering how much wealth he has accumulated over the years because of the enterprise in question. Most employees and managers who are accused of committing fraud have a strong incentive, and most of them need money owing to their extravagant lifestyles that they are unable to fund.
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