WorldCom’s Collapse And The Accounting Profession
The decade which came before the turn of the millennium was a period of great economic expansion for North America and the global community. Advances in communication and web technologies, changes in the nature of the global economy and a period of generally robust corporate growth would suggest limitless opportunities for Americans at every level of the economy. However, this period would also be characterized by widespread deregulation of corporate behaviors and entitlement. The would create an environment of corporate lawlessness. Companies and CEOs would commit many dishonest acts in terms of the presentation of financial outlooks, accounting realities and performance reports for major upstarts and long-standing, reputable financial firms alike. The turn to the 2000s would bring with it new circumstances such as those that would accompany the events of September 11th and a bevy of devastating revelations concerning the behaviors or America’s leading corporations. Across the next decade, Enron, Adelphia, Tyco, Nortel, Worlcom, Lehman Brothers, Merrill Lynch, Bear Stearns, AIG and Bernie L. Madoff Investment Securities LLC, just to name some of the most noted examples, would either fall into financial ruin after the revelation of massive corruption or would declare bankruptcy due to gross mismanagement. Among these, WorldCom is an instructive example of the accounting scandals that dismantled American economic growth over just a few years
At the time of its collapse, WorldCom was the single largest corporate bankruptcy declaration in American history. And the event of its collapse seems to have been foretold by a pointedly negative corporate culture. Highly decentralized and absent of any internal control mechanisms, Kaplan & Kiron (2007) report that the culture at WorldCom largely reflected that of American corporate culture on the whole. That is, an atmosphere of deregulation and poor administrative oversight would allow for a lack of accountability. This was particularly so in a legal regard. So indicates the text by Kaplan & Kiron, which finds that the company’s CEO, Bernard Ebbers was particularly resistant to any meaningful legal oversight. The article notes that “Ebbers did not include the company’s lawyers in his inner circle and appears to have dealt with them only when he felt it necessary. He let them know his displeasure with them personally when they gave advice — however justified — that he did not like. In sum, Ebbers created a culture in which the legal function was less influential and less welcome than in an healthy corporate environment.” (Kaplan & Kiron, p. 3)
According to the article by Kaplan & Kiron, the ambition to be the top earning company on the stock market produced a culture of aggressive growth orientation. This was precipitated on the idea of ever-increasing revenues. It is thus that, in the face of the market downturn to which the whole global community has been exposed, Ebbers and his cronies began to project earnings according to this ambition rather than the reality. The reality was that a company which aspired to be “the No. 1 stock on Wall Street” was instead steadily bleeding money while claim growth in the billions.
The pressure placed upon accountants at WordCom was reflective of the pressure facing accountants throughout the economy during this period of widely absence securities oversight. Indeed, the relationship between regulation and accounting is essential, and this diminished link would have catastrophic implications for the profession as a whole. Such is shown by the Scott text, which tells that “efficient securities market theory has major implications for financial accounting. One of these is that supplementary information in financial statement notes or elsewhere is just as useful as information in the financial statements proper. Another is that efficiency is defined relative to a stock of publicly known information. Financial reporting has a role to play in improving the amount, timing, and accuracy of this stock, thereby enabling capital markets to work better and improve the operation of the economy.” (Scott, 115)
The reverse is also true. Weak and disinterested Securities oversight produces the type of financial reporting deception that fueled individual wealth at the expense of the economy. Today, the accounting profession has seen a significant amount of discredit, with the regulatory conditions of Sarbanes-Oxley demonstrating the public will to impose greater oversight on this profession. We are also inclined to note that greater encouragement and protection must be created to facilitate whistle-blowing where appropriate. (Skeel, 110) Given that thousands of WorldCom employees saw their pension plans frittered away by the gross criminality of their core leadership, we can see that the motivation to serve as a whistleblower should inherently be the preservation of one’s job security.
These recommendations are a demonstration of the necessity for honest and transparent financial reporting and internal communication. Ultimately though, we also conclude that the current American corporate culture remains far too unregulated. Therefore, a proper step would be the governmental placement of strict limitations and conditions on the bonuses which can be awarded to corporate CEOs based on company performance, with some level of proportion to internal salaries being used to determine this. Legislation is recommended to create parameters that restrain the corruptive impulses of these CEOs while simultaneously respecting the value of free market behaviors. In the absence of these, greedy CEOs such as Ebbers can distort the market and create a chain reaction of economic events that, in this case, have plunged us into a depression.
Kaplan, R.S. & Kiron, D. (2007). Accounting Fraud at WorldCom. Harvard Business School.
Scott, W.R. (2006). Financial Accounting Theory, 4th Ed. Pearson-Prentice Hall.
Skeel, D. (2005). Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From. Oxford University Press.
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