CASE STUDY: WorldCom was a telecom company in the late 1990s that experienced strong growth in profits. The company was frequently raising capital to finance expansion. Subsequently, WorldCom disclosed that it had $3.8 billion in operating expenses that had been improperly accounted for, inflating the companys profits in 2001 and part of 2002. Scott Sullivan, the CFO, and Bernard J. Ebbers, the CEO, were fired. Sullivan used two methods to inflate earnings. First, he took line costs, or interconnection expenses with other telecommunications companies, and capitalized them. This allowed these expenses to be moved from the income statement to the balance sheet. Second, he inflated revenues by recording revenue from corporate unallocated revenue accounts. Ebbers used his WorldCom stock to finance other personal activities. When the stock price of WorldCom declined, he needed additional cash for financing. At his request, the board made a personal loan to him of $400 million. During this time, Jack Grubman was a telecom analyst who remained bullish on WorldCom despite growing evidence of poor performance. Grubmans favorable ratings were tied to his ability to secure investment banking business for his employers. In the subsequent investigation by Elliot Spitzer, then attorney general for New York, e-mail messages suggested that Grubman upgraded his rating on AT&T stock to help his employer, Citigroup, get a piece of AT&Ts spin-off of its wireless division. In exchange, Grubman asked Sandy Weill, CEO of Citibank, for help in getting his children into an exclusive preschool. Cynthia Cooper was the internal auditor at WorldCom who uncovered the fraud. Initially, when she encountered the accounting irregularities, she brought them to the attention of the CFO, Sullivan. But she encountered resistance. She then expressed her concerns to Max Bobbitt, chairman of the boards audit committee. After some delay, Bobbitt brought Coopers concerns to KPMG LLP, the companys current outside auditing firm. WorldCom executives and the company were charged and convicted of accounting fraud in a civil lawsuit brought by the Securities and Exchange Commission.

DISCUSSION QUESTIONS 1. What do you think Sullivans motivations were for perpetrating and perpetuating the financial fraud? 2. Do you think the boards delay in responding to Coopers concerns would be justified? If so, under what conditions? 3. What role do you think the board and Ebbers had in facilitating the fraud? 4. What do you think of Coopers actions? Grubmans? What does this say about personal interests versus doing the right thing? What does this say about personal integrity?