Beginning of a Whistleblower
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Beginning of a Whistleblower
Bernie Ebbers, Scott Sullivan, and other members of top management intentionally led Mississippi’s pride and joy, WorldCom, on a 5-quarter charade filled with smoke, mirrors, and much intimidation. They did it hotly pursuing success, monetary gain, and the praise of their fellow statesmen. They did it by abusing work relationships and intimidating employees with promises and threats. Ultimately, they ended up “losing their footing” which caused them and, in turn, others to slip down the proverbial “ethical slippery slope” and on the path to committing fraud.
Cynthia Cooper, the Vice President of Internal Audit, was among the people who were pushed to compromise.
When pushed, however, her instinct and ethical values could not be overrun by her personal desire to see Mississippi’s pride continue on in its deceptive success.
Cynthia Cooper loved her company. She loved it because she too had been born and raised in Mississippi. The later location of WorldCom’s headquarters, Clinton, Georgia, had been the same small town where her and her husband had gone to high school. She then went on to Mississippi State University to obtain a bachelor of science in accounting and then a master of science in accountancy from University of Alabama. She became a highly qualified accountant after working at both PricewaterhouseCoopers and Deloitte & Touche in Atlanta. In addition, becoming a Certified Public Accountant (CPA), Certified Information Systems Auditor (CISA), and Certified Fraud Examiner (CFE).
She began working for WorldCom with just a staff of two others in their internal Audit department. She witnessed the growth of the company to the Telecom giant it became and endured the heartbreak of having to be the one to take it down. No one wanted WorldCom to legitimately succeed more than Cynthia Cooper and part of her died with it.
The Fraud Begins
Later in her career Cooper began to unravel the scandal that became WorldCom. She lays out each player in her story’s development by humanizing them. First, she describes David Myers, the controller, who is a family man and a loving husband. However, he is also the first person to touch the first and biggest source of WorldCom’s fraud… line cost expenses.
Line costs are the costs of carrying a voice call or data transmission from its starting point to its ending point. They are WorldCom’s largest single expense: from 1999 to 2001, line costs accounted for approximately half of the Company’s total expenses. As a result, WorldCom management and outside analysts paid particular attention to line cost levels and trends.
One key measure of performance both within WorldCom and in communications with the public was the ratio of line cost expense to revenue (the “line cost E/R ratio”). In 1999 and 2000, WorldCom reduced its reported line costs by approximately $3.3 billion. This was accomplished by improperly releasing “accruals,” or amounts set aside on WorldCom’s financial statements to pay anticipated bills. These accruals were supposed to reflect estimates of the costs associated with the use of lines and other facilities of outside vendors, for which WorldCom had not yet paid. According to GAAP, “Releasing” an accrual is proper when it turns out that less is needed to pay the bills than had been anticipated. It has the effect of providing an offset against reported line costs in the period when the accrual is released. Thus, it reduces reported expenses and increases reported pre-tax income.
WorldCom manipulated the process of adjusting accruals in three ways. First, in some cases accruals were released without any apparent analysis of whether the Company actually had an excess accrual in the account.
Second, even when WorldCom had excess accruals, the Company often did not release them in the period in which they were identified. Instead, certain line cost accruals were kept as “cookie jar reserve” funds and released to improve reported results when managers felt this was needed. “Cookie jar accounting” or “cookie jar reserves” are an accounting practice in which a company uses generous reserves from good years against losses that might be incurred in bad years. The usual result of cookie jar accounting is a “smoothing” of net income over the course of several years. The United States Securities and Exchange Commission (SEC) does not permit cookie jar accounting by public companies because it can mislead investors regarding a companys financial performance.
Third, WorldCom reduced reported line costs by releasing accruals that had been established for other purposes. This reduction of line costs was inappropriate because such accruals, to the extent determined to be in excess of requirements, should have been released against the relevant expense when such excess arose, not re-characterized as a reduction of line costs.
These line cost expenses, David Myers, Scott Sullivan, and the other accountants manipulated numbers knowing they were manipulating numbers to give the appearance that WorldCom was continuing to meet its earnings guidance set by executives, to keep the stock prices steadily rising, and to keep the telecom analysts’ opinions high.
The rationale of Myers and his cohorts, that Cooper gives insight to in this decision-making process, is initially loyalty to one’s boss. Dave Myers had loyalty to Scott Sullivan and Buddy Yates to Dave Myers. Next, Cooper describes the mid-level accountants, Betty Vinson and Troy Normand, in terms of their economic status. They are both their families’ breadwinners and are counted on and finding a job in Jackson would be hard. These pressures were enough to cause both Troy and Betty to go along with the fraud.
Following the first fraud, everyone was anxious. Scott decided, at the suggestion of Dave Myers, to invite a few of them into his office for a personal explanation. During which he commends them with extensive flattery and encourages them by saying it was a one-time thing, the earnings guidance will be reduced in the future, and that they were not in any danger- only he potentially was.
Both Betty and Troy intended to resign. So much that they both drafted their letters of resignation and held them while they waited to see how the next quarter went. They liked their jobs, and the quarter ending was a very little portion of what they did. Cynthia describes their waning resolve to quit as the 1st fraud became a memory. However,