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The Ethical Violation of WorldCom

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The Ethical Violation of WorldCom

What Went Wrong at WorldCom

WorldCom is the worlds’ largest stock market star that saw the rise in the past decade. It is also one of the biggest telecom companies that has more than 20 million consumers and almost 80,000 employees. The issues related to accounting fraud take a central stage in a discussion about the WorldCom’s bankruptcy. The company’s slowdown reached its lowest level in 2000. WorldCom was looking at new profit revenues and escaping from the long distance market that was on overcrowded field of small and big players. There was some overheating in stock that caused absence of new funds. It resulted in a slowdown of revenues that were to be used to sustain business (“WorldCom accounting scandal: The wrong call (Part 2),” 2012). The low demand and margins added to the company’s quandary. As a result, the company was added to the list of the US major accounting scandals (“Wrong numbers: The accounting problems at WorldCom,” 2002). However, in 2001, the internal auditors of the company found that huge expense amounts related to the telecom system building were treated as a capital expense rather than a regular cost. That led to a significant increase in the WorldCom’s earnings before taxes, interest, depreciation, and amortization that were used by the company as a critical growth gauge.

The company confessed that its audit committee uncovered more than $3 billion in expenses stating that they were not properly booked as capital expenditures. It resulted in the increase of the cash flow and profit and could be treated as one of the largest frauds in the history of accounting. In case the company had followed the generally accepte principles of accounting, it would have reported a net loss of $1.4 billion profit for 2001 and $130 million profit for the first quarter of 2002. The mislabeled costs reached more than $3 billion for 2001 and almost $800 million for the first quarter of 2002. The shareholders lost more than $2 billion within a few minutes. Hence, WorldCom took the outflows of cash that should have been treated as capitalized costs.

WorldCom has entered the category of bankruptcy because of the accounting misuse that should have been detected by auditors. However, the only thing that can be learnt from the company’s fraud is that investors cannot rely only on financial metrics to measure performance of a company. One of the most alarming factors about the company’s negative experience is that WorldCom was not previously known for its aggressive accounting. The trick implemented by the company is not a sophisticated one and it even hard for many experts to believe that it has attempted to do it. In 2002, the fraudulent action of the company was hotly discussed in the media and was treated as one of the largest accounting scandals that was noted in the corporate history of the USA. The company had unconsciously moved on the path of a great disaster and ruining.

How the Ethical Violation Was Committed

During 1998-2000, the company reduced reserve accounts that were suggested to cover the acquired company liabilities. As a result, WorldCom added almost $3 billion to the revenue line. The key staff was asked to make false accounting entries. It helped to turn operating expenses into assets. In addition, the company managed to turn other financial misstatements to a total of almost $4 billion.

The main ethical issue of WorldCom was the false reports and the idea of keeping them secret from the investors. This was the point when the ethical violation was committed. It is wrong and unethical to withhold information from others, especially people who are investing money. Hence, the key ethical issue that was missing while making business decisions was outright honesty. According to Carroll (2006), “the hidden control box violated company policy and the union contract.” The managers did not realize the pressure that was implemented to meet production goals.

It was stated that the unethical behavior of the company might have been a result of groupthink caused by concurrence. It is believed that groupthink might have contributed to the number of employees involved in the fraudulent and unethical behaviors and prevented the resolution of main ethical concerns with the board of directors or the senior level executives responsible for the corporate culture creation.

It was found that the main WorldCom’s ethical tragedy was because of complicit and weak board of directors that was treated as a source of the ethical slides, whereas a responsible board of directors should be aimed at eliminating wrongdoing. Moreover, excessive pressure to meet the numbers was another ethical issue of the company. However, it is the responsibility of top management to ensure that excessive pressure is not the option to be used to achieve financial targets (Carroll, 2006).

Thus, WorldCom is one of the companies that were caught in ethical violations. The negative effects of ethical violations were enormous. The bankruptcy had enormous adverse effect on investors and employees.

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