If the resellers knew that they could avoid paying mci what does it say about their corporate
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If the resellers knew that they could avoid paying mci what does it say about their corporate ethics?
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Fresh out of graduate business school in 1992, Pavlo, 29 years old at the time, joined Microwave Communications, Inc. ("MCI") as manager of its carrier finance department Atlanta. Over the course of four years, Pavlo manipulated the company's accounting records to hide hundreds of millions of dollars in uncollectible receivables and, with an outside partner, bilked MCI out of $35 million. The two pocketed $6 million for themselves. Pavlo, who's on a speaking tour, told his story at a conference sponsored by the New York Society of Certified Public Accountants last June. It's an insider's account of intense pressure to "make the numbers," no matter how, at a high-flying company in the 1990s where stock options flowed like water. The culture was about pumping the stock price. Gung-ho salespeople signed any new customer. The carrier finance department waived these customers through, regardless of their creditworthiness. Management shunned bad debt write-offs. In this setting, the temptation to steal was great and, for some people, too great. Walt Pavlo was one of them. At MCI in 1992, roughly 80% of its revenue and less than 20% of its profit came from low- risk/highvolume resellers of telecom capacity such as AT&T, Sprint, and Qwest. Some of these accounts were money losers for MCI; others had profit margins of no more than 2%. But the high-risk/low-volume customers-a raft of start-up companies selling prepaid phone cards and 900-number services carried over MCI's network-were pulling in less than 20% of revenues and 80% of profits. Margins on these accounts exceeded 100%. But MCI didn't do a credit check on these companies. There was no security deposit required, no background check, no financial analysis of the customer's ability to pay. These resellers soon learned they could default on or delay payments to MCI with impunity. They had no assets. If MCI disconnected their service, the reseller would be out of business. That would ensure MCI would never get paid. As total reseller billings grew from $250 million a month in 1992 to more than $1 billion a month by 1995, aging receivables mounted as well. Pavlo told his superiors about the delinquent accounts, and they said, "We can't write it off; it's not in the plan." The company enthusiastically reported most of its high-risk sales, meeting analyst expectations. In reality, though, Pavlo was constantly chasing these high-risk resellers for unpaid balances. He visited them across the U.S., trying to set up payment plans, usually to no avail. Under pressure within MCI to hold the losses to a minimum, Pavlo began hiding bad debt-at first as a temporary fix-but the need for it continued, on and on. Because he designed the accounts receivable system, he knew how to detect anomalies and how to hide them. He used unapplied cash to cover receivable balances, applied current payments to old balances, accelerated credits from unsigned contracts, and delayed credits Fresh out of graduate business school in 1992, Pavlo, 29 years old at the time, joined Microwave Communications, Inc. ("MCI") as manager of its carrier finance department Atlanta. Over the course of four years, Pavlo manipulated the company's accounting records to hide hundreds of millions of dollars in uncollectible receivables and, with an outside partner, bilked MCI out of $35 million. The two pocketed $6 million for themselves. Pavlo, who's on a speaking tour, told his story at a conference sponsored by the New York Society of Certified Public Accountants last June. It's an insider's account of intense pressure to "make the numbers," no matter how, at a high-flying company in the 1990s where stock options flowed like water. The culture was about pumping the stock price. Gung-ho salespeople signed any new customer. The carrier finance department waived these customers through, regardless of their creditworthiness. Management shunned bad debt write-offs. In this setting, the temptation to steal was great and, for some people, too great. Walt Pavlo was one of them. At MCI in 1992, roughly 80% of its revenue and less than 20% of its profit came from low- risk/highvolume resellers of telecom capacity such as AT&T, Sprint, and Qwest. Some of these accounts were money losers for MCI; others had profit margins of no more than 2%. But the high-risk/low-volume customers-a raft of start-up companies selling prepaid phone cards and 900-number services carried over MCI's network-were pulling in less than 20% of revenues and 80% of profits. Margins on these accounts exceeded 100%. But MCI didn't do a credit check on these companies. There was no security deposit required, no background check, no financial analysis of the customer's ability to pay. These resellers soon learned they could default on or delay payments to MCI with impunity. They had no assets. If MCI disconnected their service, the reseller would be out of business. That would ensure MCI would never get paid. As total reseller billings grew from $250 million a month in 1992 to more than $1 billion a month by 1995, aging receivables mounted as well. Pavlo told his superiors about the delinquent accounts, and they said, "We can't write it off; it's not in the plan." The company enthusiastically reported most of its high-risk sales, meeting analyst expectations. In reality, though, Pavlo was constantly chasing these high-risk resellers for unpaid balances. He visited them across the U.S., trying to set up payment plans, usually to no avail. Under pressure within MCI to hold the losses to a minimum, Pavlo began hiding bad debt-at first as a temporary fix-but the need for it continued, on and on. Because he designed the accounts receivable system, he knew how to detect anomalies and how to hide them. He used unapplied cash to cover receivable balances, applied current payments to old balances, accelerated credits from unsigned contracts, and delayed credits
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Introduction Corporate ethics refer to the principles values and standards of conduct that govern de... View the full answer
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Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle
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