Accounting Fraud at Worldcom

A.  Why were the fraudulent actions taken by WorldCom managers not detected earlier? What processes or systems were not in place to prevent and detect the types of fraudulent actions that occurred at WorldCom? Please address the Leadership, Cultural, Structural and Operational related issues.

Many factors contributed to why the fraudulent actions taken by WorldCom managers were not detected earlier.

Leadership

1. Ebbers and Sullivan had more power and authorizations than they were supposed to. The two were able to do as they pleased in the company without being challenged or questioned. For example, they granted compensation beyond company’s approved salary and bonus guidelines. The company’s human resources department never really objected such special awards. This sets the way for senior managers to commit fraud because they had an attitude that they could do anything, given that they are the leaders of the company and should be allowed to execute their power anyway they wanted.  
2. There was an inner exclusive circle among company leaders, which led to lack of transparency. Checks and balances of power were not in place among management. For example, Ebbers did not like when his lawyers gave him advice and did not include senior lawyers in his inner circle. He created a company culture where legal function was less welcomed compared to a healthy corporate environment. This could leave to weak internal control because leaders could potentially override decisions.
3. Regular communications between outside directors and Ebbers, Sullivan, or any other WorldCom employee was pretty much non-existent. Board of director’s mean responsibility was supposed to be overseeing senior leaders in the company. However, at WorldCom the Board played far too small a role in the life, direction and culture of the company.  
4. Tone at the top, which should emphasizes ethical behavior, was almost non-existent, given that there was lack of written policies and Ebbers thought that the internal effort in creating a corporate code of conduct was a “colossal waste of time.

Culture

1. Employees did not have an independent outlet to express their concerns about company policies or behavior. There was no independent hotline where employees could call to discuss unethical behaviors at the company. Had there been such resource, these fraudulent actions would have been able to being detected earlier.
2. Employees were discouraged from questioning their superiors and were told to simply do what they were told. They were not able to make ethical decisions for themselves because challenges to senior managers were often met with personal criticism or threats.

Structure

1. The company was extremely decentralized. Each department had its own rules and management style; nobody was on the same page. WorldCom was growing so fast through frequent acquisitions that no one really knew exactly what was going on. With its headquarters being located in one place, human resources department in another, and legal department in another place, this could have led to miscommunication among the company.
2. The internal audit department was structured to report directly to Sullivan. This structure made employees feel like the department was useless as a tool for reporting issues regarding financial transactions, which made it harder for the department to function. The internal audit department was actually effective and Cynthia Cooper played a significant role in uncovering the fraud. If internal audit department was not structured to be under Sullivan, people would have reported to it more and the fraud would have been discovered sooner.

Operational

1. While there was an internal audit department to report issues to, it was not run very effectively. Many people did not know the internal audit department even existed. If operations had been improved and more people trained to know about the department and utilize it, the fraud would have been caught earlier.
2. The internal audit department performed operational audits rather than financial audits so they did not even have an opportunity to see the fraudulent transactions occurring.
3. Arthur Andersen used an analytic audit approach rather than the traditional approach of testing thousands of transactions. This prevented Andersen from seeing the fraudulent transactions themselves.
4. The audit committee did not function properly. It did not have an understanding of WorldCom’s financial workings nor did it try to be involved in solving the complex financial issues WorldCom faced.

Conclusion

The fraudulent actions taken by WorldCom managers were not detected earlier due to factors including Ebbers and Sullivan exercising too much power, lack of supervision as well as checks and balances of power within WorldCom from personnel such as lawyers and board of director. The company and its leaders did not set a tone at the top that emphasized upholding ethical behaviors. Employees did not have an independent reporting line and they were discouraged from questioning their authorities. Moreover, the company was extremely decentralized and unorganized due to its fast growth, which led to lack of effective communication and synchronization between departments. The internal audit team also lacked independence and was not allowed to do financial audit. The audit committee was not functional and was also not independent because it reported to Sullivan. Had the company had leaders and code of conducts that emphasized ethical behaviors, equipped with independent reporting lines, gave independence from the audit committee and internal auditors, had centralized organizational structure with board of directors overseeing firm executives, the fraud would have been avoided or detected earlier.