Examining_a_Business_Failure

Examining a Business Failure (WorldCom) LaToya Poullard LDR/531 October 12, 2010 Gale Luquette Examining a Business Failure (WorldCom) A business consists of senior leadership, board of directors, internal and external auditors, and administrative staff. They are the key roles in an organization. Their collaboration, good decision-making and collective efforts will determine whether the organization will become successful or not. The chief executive officer (CEO) or the senior leadership cannot operate the organization alone. Therefore, the senior leadership needs input from board of directors before making decisions. The administrative staff gathers information and data that allows the decision-making process to operate smoothly for the CEO and the board of directors. The internal and external auditors make sure that every transaction in the finance department is accounted for. If these key roles do not take their part seriously, it could cause a business to fail. In 1983, WorldCom started as a long distance discount service (LDDS) provider. Within 15 years, it grew rapidly through mergers and acquisitions (WorldCom, 2002). The company became known as the world’s second largest telecommunication provider service. In 1989, the company became public and Bernard Ebbers was its CEO. The company merged with MCI in 1998, which was the largest merger in history at the time that equaled to $40 billion. Wall Street highly favored the company’s stock because of its financial status (WorldCom, 2002). In 1999, the success began to unravel with the accumulation of expenses and debt, the fall of long distance rates, revenue, and stock market. Around the same time, CEO Bernard Ebbers was receiving pressure from the banks to cover margin calls on his WorldCom stock, which he was using to finance other businesses enterprises such as yachting and timber (WorldCom Scandal, 2009). Therefore, he found a way to cover the margin calls by convincing the board of directors of WorldCom to issue him corporate loans and guarantees that totaled to an amount of $400 million. As the board of directors did further researching, Ebbers’s strategy failed and he was fired as CEO in April 2002. The company was still experiencing a downfall in finance. Therefore, the company used vague accounting methods such as falsely affirming financial growth and profitability to raise the price of the company’s stock. The fraud occurred in two main ways. First, the accounting department did not report line costs between other telecommunication companies and capitalized the costs on a balance sheet instead of accurately expensing the costs. Second, the company aerated revenues with false accounting entries from corporate unallocated revenue accounts. In June 2002, the company’s internal auditor, Cynthia Cooper, who discovered $3.8 billion of fraud. She promptly notified the audit committee and the board of directors. The chief financial officer (CFO), Scott Sullivan was fired, the controller, David Myers resigned, and the Securities and Exchange Commission (SEC) did a thorough investigation. The company’s total assets were boost up by $11 billion (Knowledge Wharton, 2002). The company had to file for Chapter 11 bankruptcy protection. At that time, it was largest bankruptcy filing in the United States history. The account scandal caused WorldCom to lose its creditability. Many customers such as government agencies and large manufacturers suffered from WorldCom’s problems. WorldCom had lengthy contracts that consisted of huge penalties for switching carriers. However, the clients could not switch carriers under the bankruptcy protection. They were forced to take a huge hit in its services and finances. Stockholders had no success in recovering its losses. The result caused 17,000 employees to lose their jobs. In the end, Bernard Ebbers was sentenced to 25 years in prison; Scott Sullivan took a plea bargain. He pleaded guilty to one count of securities fraud, one count of conspiracy to commit fraud, and one count of filing false statements (WorldCom, 2009). David Myers pleaded guilty to the same counts as well. The accounting director, Buford Yates, pleaded guilty to fraud and conspiracy charges. The accounting managers, Troy Normand and Betty Vinson, both pleaded guilty to securities fraud and conspiracy charges (WorldCom Scandal, 2009). After researching this business failure, it appeared that the organizational behavior was very dysfunctional. The key roles failed to do their parts properly and ethically. The accounting department wrongly book line costs as capital expenditures with approval from the CEO. This is fraud and there is no excuse for this action. The CEO behavior had a negative impact on the organization. The group behavior was not based on integrity because the accounting department worked together to falsified account statements to increase money in their pockets. The department did not think about how they were mistreating their stakeholders and stockholders. Social psychology and anthropology theories explained the company’s failure. Social psychology is based on people’s affect on each other, communication, group behavior, building trust, power, and conflict. Anthropology helps people to understand the differences in attitudes, behaviors, and values among individuals within various organizations (Robbins, 2007). These theories could have been used to prevent the company from failing. If Ebbers’s actions were monitored more carefully by the board of directors and auditors, they could have refrain Ebbers from developing a negative impact on others. His negative impact influenced the accounting department to help commit fraud. His power caused him to make hasty decisions. The contribution of leadership was based on lack of integrity and ethics. An organization should have a leader who has integrity and ethical values. A leader influences his or her followers to behave like him or her. Bernard Ebbers had no integrity or ethical values. He had no interest in the company’s success or its stakeholders. All he thought about was making more revenue for his self. He presented his mischievous idea to his followers and convinced them to do same to increase their revenue. This is why WorldCom failed. All contributions of leadership, management, and organizational structure were equal because they chose to use shady accounting methods to cover the downfall in the financial department. An organization works together to meet its goals. One person can change an organizational behavior to good or bad. He or she can have followers who trust him or her and will follow orders under any circumstances. However, there are employees who will do what is morally right for the company. It will be their decision to get rid of the bad apples. An organization does not have to undermine its stockholders and stakeholders to become successful. All organizations should have ethical values and beliefs. References History of WorldCom. Retrieved on October 7, 2010, from www.worldcomnews.com/worldcomhistory.html Robbins, S., Judge, T. Organizational Behavior, 12e. Ch. 1: What is Organizational Behavior' Copyright 2007, Prentice Hall, Inc. A Pearson Education Company What Went Wrong at WorldCom' Retrieved on October 7, 2010, from http://knowledge.wharton.upenn.edu/articleid=587 WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. Retrieved on October 7, 2010, from www.associatedcontent.com