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WorldCom

by Expert Lilliana | 08 Sep 2017

The recent incidents of fraud by respected organizations have brought the issue of organizational ethics especially ethics with respect to data misuse into the focus. WorldCom, a telecom giant, was one of those organizations which used fraudulent accounting practices to show a false picture of its financial position and profitability.

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The misuse of data by WorldCom

WorldCom misused its data to support its decisions for personal gains. The data was misused primarily in two ways:
Underrating costs by capitalizing these costs on the balance sheet rather than properly expensing them (bit by bit). These sorts of problems often occur with Financial Institutions when they capitalize costs under the accounting head of “Non Performing Loans” in the Balance Sheet, however, if it is reported in the balance sheet without proper disclosure, this may create a whimsical in the mind of investor (Cooper, 2004).
Inflating revenues with bogus accounting entries from ‘corporate unallocated revenue accounts’ and this problem is in relation with improper revenue recognition technique.
The results of fraudulent practices by WorldCom
As a result of its unethical practices, several acquisitions were overvalued. Consequently, profit of $10 billion was shown instead of actual huge losses of around $70 billion for year 2000 through 2002 (Cooper, 2004). All this was done to show an inflated price of its stock. Subsequently, when the fraud was uncovered, the fallout of WorldCom began which impacted not only its stockholders but also its competitors and the telecom industry as a whole.
Limitations and significance of the data
The accounting practices practiced by WorldCom used the US GAAP, which works on the basis of “rules based” accounting, conflicting with International Accounting Standards (IAS) and UK GAAP, which takes a "principles-based" approach. Although, accounting practices can be tweaked around to fit the needs of the organization, there are limitations that keeps it difficult to have gross misuse of data (Cooper, 2004). These limitations include bookkeeping controls, review of revision to entries before they are actually made, and approval of changes by internal and possibly external auditors that exceed cumulative thresholds (Belson, 2005).
Data was of enormous significance in the case of WorldCom. The tweaks in accounting practices and the concealment of the real picture of the data enabled WorldCom to continue its practices for years and consequently show inflated profitability and shrunken expenses.

Ethical implications

WorldCom’s misuse of data was ethically wrong. The fraudulent practices were committed by some of its top executives using creative accounting to cover their losses. Ethical wrongdoings for personal gains by some of its executives lead to its demise and sent shockwaves in the whole telecom industry (Belson, 2005). Leaders set the moral tone of their organizations. And when leaders do not perform their moral duties, the organization surely suffers. Without serving the interests of its stockholders, WorldCom’s case indicates how lack of ethical concerns can seriously damage the organization itself and its stakeholders and become a menace to the industry.

References

  • Moberg, Dennis J. (2006). Ethics Blindspots in Organizations: How Systematic Errors in Person Perception Undermine Moral Agency. Organizational Studies 27, 3: 413-428.
  • Cooper, Cynthia (2004). Cynthia Cooper: WorldCom Whistle Blower. Retrieved August 8, 2008, from Nationwide Speakers Bureau, Inc. 
  • Belson, Ken WorldCom's Audacious Failure and Its Toll on an Industry. (2005, Jan 18 ). The New York Times, p. C1.
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