Goal Congruence: Analysis of WorldCom - Assignment Example

Goal Congruence: A review of WorldCom Goal Congruence: A review of WorldCom Executive Summary The beginning of this millennium sawa number of corporate scandals in America. Among them were Enron, Global crossing, WorldCom among others. The WorldCom case is considered to be the biggest fraud case in the History of America with over $ 11 billion accounting fraud. When this incident took place, WorldCom was Americas second largest long distance telecommunication company. On 25th of June 2002, the company announced that it had intentionally overstated its earnings in 2001 as well as the first quarter of 2002 by over $3.8 billion. These shocked most financial analysts in America and all over the world. The US government intervened in the case and tried to solve the issues at hand. The purpose of this report is to critically analyze the decisions and goals set by the then CEO of the company Mr. Bernie Ebbers. A number of factors contributed to this fraud and this include corporate culture, leadership, and communication style among others. The report use literature reviews form financial analysts, business journals and investigation reports to understand how the above factors contributed to the massive financial fraud as well as the failure of the company. The report will show how the CEOs ambitions and need to satisfy the Wall Street expectations led to fraud as well as failure of the internet communication slow growth after massive investment. Introduction WorldCom was established in 1983 under the name Long Distance Discount Service by two businessmen Murray Waldron and William Rector. Two years later, a new investor Bernard Ebbers became the CEO of the company. At that time, the company was based in Jackson Mississippi. In 1989, the company acquired Advantage companies Inc and consequently became traded publicly as a corporation. A couple of other acquisitions were done by the company in the following decade including Resurgens Communications group Inc, Metromedia Communications Corp in 1993. In 1995, after the acquisition of Williams Telecommunications, the company changed its name to WorldCom Inc. Perhaps the biggest acquisition yet was MCI Communications Corps, Brooks Fiber Properties Inc. and CompuServe Corp in 1998. The next big merger with Sprint was blocked in 2000 by both the European and US regulators. This was the beginning of catastrophes to the company. Operations and nature of business The company was actively involved in telecommunication services which included internet, emails, voice calls among others. Before the fraud case in 2002, the company had made investments to expand its internet capabilities as there was high expectation on the growth of the dot-com after the millennium. Flournoy (2004, p. 58) says that almost from the start of the global internet, WorldCom had dominated IP-data transmissions and still does. Between 2000 and 2002, WorldComs UUNet hosted the worlds biggest IP backbone with almost 3,000 US ISPs connected to it. Expansion and growth As a way to expand its operations as well as its market, WorldCom relied mainly on acquisition of other companies offering related services. The company also diversified its services from internet to phone calls and IPS hosting. The acquisition method was effective because it guaranteed a bigger market share and at times it would help reduce competition because some of the companies acquired were their competitors like MCI Communication Company. According to Albrecht (2012 p. 487) WorldCom began as a small company but with more mergers and acquisitions of over sixty companies in latter half of 1990 alone the company grew into a corporate giant in the US. The value of WorldCom stock followed the growth of the company and reached around $65 per share. Failure of WorldCom In the year 1999 the revenue growth in the company started to slow down and this affected the stock prices. The expenses at WorldCom compared to its revenue were increasing because the growth rate of the earnings dropped. The Wall Street analysts had big expectations on high revenues from the company due to good perforce from previous years. The companys top executives led by Ebbers used $2.8 billion from the companys reserves and added it to the revenue area of its financial statements. According to Malik (2003, p. 27) Ebbers with other top management individuals would use reserves to make up for short falls. This would give an impression to other people that the company was growing drastically and in an effect the stock prices would continues to escalate high. The money from the reserves was not enough to boost the earnings and revenues that they wanted to portray to the public. Consequently, in 2000 WorldCom started classifying the companys line costs as capital expenditure. This made the operating cost look small and this helped them acquire an extra $3.85 billion. The newly classified long-term capital expenditure was actuallyexpenses that the company was paying other companies in order to lease phone network lines. According to Brooks and Dunn (2010 p. 122) WorldCom improperly recharacterised certain operating costs as capital assets. This reduced their expenditure while at the same time making their assets look more valuable. The fraud was discovered after one of the internal auditors noticed a misclassification of the line costs as long-term capital expenditure. The auditor discussed the issue with heads of account and KPMG was asked to carry out an independent audit t establish the cause of misclassification. At that time, other telecommunication companies were experiences losses because much of the investments made for the dot-com bubble had not been so fruitful. A company like AT&T who were the leading telecommunication company was experiences losses. This incident raised eyebrows. The Securities and Exchange Commission (SEC) asked WorldCom to give explanations regarding their accounts and the consistencies. The companys CEO Mr. Bernard Ebbers resigned from office on April 30th. On June 25th the company came out stating the mistatements made regarding the expenses and capital assets. WorldCom Organizational goals Bernard Ebbers had made it clear overtime that they goal was not only to make profits but to be the number one stock in the WallStreet. This is quite evident looking at the extent to which he went in order to make sure that the company does not record a fall in revenue or losses. Due to the expectations from the analysts in WallStreet WorldCom manipulated its revenue by injecting funds from reserves and misplacing operating costs. According to Gup (2007, p. 113) Ebbers and Sullivan (CEO and CFO) were regarded as one of the best managerial pair in the use. The analysts of WallStreet had so much confidence in them and always expected better revenue each financial year. This made Ebbers aspire to be on top at WallStreet. The other goal that was set by Ebbers was dominance in the market share. This is evident considering the fact that within a span of 15 years the company was able to acquire sixty firms. Some of the firms acquired were completely unrelated to telecommunications. This was an effort to win control of the market. Fernando (2009, p. 15) says that Ebbers resorted to series of acquisitions as well as mergers taking more companies in order to build his empire. Nearly every one of these transactions was financed by highly valued stock of WorldCom. The company was doing well and more people investors were interested. Company culture Under the leadership of Ebbers, WorldCom employees were made aware that they have to work towards success at all cost no matter the extend that one will have to go. It is reported that Ebbers never wanted to hear any news that was discouraging or simply bad news. This made the employees work excessively hard in order to avoid failure. In as much as this might seem like a good thing, the truth is that this affected the effecciency and effectiveness of the employees. The fraud case might have been reported eelier but maybe one of the accountants was not willing to point out the issue to Mr Ebbers. Laufer (2006 p. 68) indicates that the investigations to WorldCom focused mainly on corporate culture set by Mr. Ebbers. The culture was strongly based on making revenues and profits targets above all else. The fact that the junior members of staff were under pressure to deliver and to make sure that they achieve results, put a company at a risk of fraud knowingly and unknowingly. Mr. Ebbers was more concerned about making profits in fastest way possible. He is reported to have been harsh on the employees and occasionally use of abuse language to push employees with bad news. Due to this employees found it easier to manipulate their results in order to please Mr Ebbers. In general the company had a hodgepodge culture that did not have any defined rules for behaviors for anyone. The company designed developed an attitude where employees must do what they are told to do without asking questions Fernando (2009, .p 220) The management style at WorldCom The management style used at WorldCom can be said to be management by results. WorldCom was characterized by chain of command and hierarchy of standards, objectives, goals and controls. It is reported that WorldCom had departments of accounting that some of the staff had never heard about. There was also distribution of accounting departments from all over the world. By placing accountants thousands of miles away from each other, the company would prevent any chance of the accountants discussing and sharing about any form of inconsistency with the books of accounts. The management did not have any code of conduct. Mr. Ebbers was known to have high disregard to lawyers and their practice. When suggestions were given to him concerning code of conduct, he insisted that it was a waste of time. Majority of the employees had to work without any written policies or guidelines as far as they required results have been achieved. Each department had their own rules and policies developed by themselves. Some employees innocently opted for teamwork. According to Jeter (2003, p. 57) the teamwork strategy by the employees paid out handsomely as the company got a bigger market share. The management at WorldCom did not make much effort to work on long term strategies and plans but rather worked on objectives and goals within annual calendars and financial years. WorldCom could not even make preparations for the dot-com bubble. They ended up making investments in the industry where as the growth rate was very slow. This is mainly because the company did not have a well informed team that was working on long term strategic plans. Ebbers were one of the first investors in the company. He had shares in the stock. For that reason, he made decisions that would help generate high share cost in the stock market at the present time other than make decisions that would sustain the companys future. The fact that he was not going to be the CEO forever was like a threat to him. This made him to use all means necessary to make sure he has secured his shares. Form of communication As stated eelier, the management at WorldCom was characterized by a series of hierarchies and protocols. There was a high level of secrecy among the top executives. This is definitely because they did not want junior staff or any other member of the staff to know about their activities. Mr. Ebbers warned his employees of not communicating negative or bad news. This scared the employees. There could not even share their opinions or advice the CEO. As an autocratic leader, communication was inclined so much to his side. It is reported from the investigations report that Mr Ebbers never preferred the use of emails while communicating to senior managerial officers. The irony is that his company was handling about 50% of world’s emails. Communication with internal audits was not stable at all. There is a possibility that there are accountants who noticed the fraud in accounts but could not dare share this information. When employees got the chance to ask questions, the management answered them in evasive ways or in confusing ways that left more questions. The board of governors was not actively involved in the decision making. Most of the members of this board were the former CEOs and governors of the many firms and companies they had acquired and merged with. They were only updated on the progress of the company but did not have time to go through the financial statements. To most of the members of the BOG, the news regarding the fraud was a shock to them. Conclusions WorldCom grew from a small telecommunication company and gradually built itself into a corporate giant in the US. The companys goal to have a huge and wider market share led to the company acquiring over sixty companies between 1985 and 2000 within this period, the company’s stock price was growing at the stock market. Towards the end of the millennium, most telecommunication companies made investments on facilities that can sustain internet. This was known as the dot-com bubble. In the beginning of the millennium, the expectations were not met. The industry stared picking up at a slow pace. Most companies started making loses including WorldCom. Mr. Ebbers together with other members of the executive team were not ready to accept losses. They were also under pressure from the WallStreet analysts who had high expectations for the company to do well. WorldCom opted to manipulate its books of accounts by misplacing the operating costs with the capital expenditure. In addition to that, the company allot used some more money from its reserves. These were mistakes that led to the fall of WorldCom. Investigations found the executive team to be guilty for causing the biggest fraud of accounts ever in the US. A new CEO was selected to the company and a new board of governors. The company also changed its name in April 14th 2003. Mr Ebbner was found guilty by the judge and was charged for 25 year in prison. He has however been able to appeal for his freedom. The WorldCom case has led to the state government setting up policies and regulations to such related activates. This is a means of trying to control the situation. The new management team has been very instrument in rebranding itself den restores of the companys regulation References Top of Form Flournoy, D. M. (2004) the broadband millennium: communication technologies and markets. Chicago, Ill, International Engineering Consortium Bottom of Form Top of Form Albrecht, W. S. (2012). Fraud examination Mason, OH, South Western, Cengage Learning Bottom of Form Top of Form Malik, O. (2003). Broadbandits: inside the $750 billion telecom heist. Hoboken, N.J., John Wiley & Sons Bottom of Form Top of Form Brooks, L. J., & Dunn, P. (2010) Business & professional ethics for directors, executives, & accountants Mason, OH, South Western Cengage Learning. Bottom of Form GUP, B. E. (2007). Corporate governance in banking a global perspective Cheltenham, UK, Edward Elgar Top of Form Fernando, A. C. (2009). Business Ethics an Indian Perspective Prentice Hall Laufer, W. S. (2006). Corporate bodies and guilty minds the failure of corporate criminal liability Chicago, University of Chicago Press Top of Form Fernando, A. C. (2009). Corporate governance: principles, policies and practices. New Delhi, Pearson Education. Bottom of Form Top of Form Jeter, L. (2003) Disconnected: deceit and betrayal at WorldCom. Hoboken, New Jersey, Wiley Bottom of Form Bottom of Form Read More