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Research Findings. The phenomenal rise and downfall of WorldCom will go down in history as one of the most turbulent times witnessed in corporate America. The issues related to WorldCom, brought to light many ethical dilemmas, which professionals in the Accounting and Internal Audit functions face, in their working life. The internal auditing function is an activity which helps an organization, by improving its operations and achieves that by implementing systematic processes and a disciplined approach to risk management, control and governance. The profession is based on ‘trust’ and its ability to objectively control governance and risk management. According to the Institute of Internal Auditors, the Code of Ethics has been designed to “promote an ethical culture in the profession of internal auditing” (The Institute of Internal Auditors, “Code of Ethics”). It has four basic tenets. Integrity is the first tenet and is critical; since it helps to establish trust. The trust, in turn, establishes confidence in their decisions. The second tenet is Objectivity. It is important that internal auditors gather facts and seek information about any activity or process, objectively. This ensures that they make decisions and judgments, without any prejudice or catering to any interest – self or others’. Internal audit professionals must ensure confidentiality, the third tenet. They encounter many facts during the course of their work and it is important that confidentiality is maintained, unless demanded by due process of law or profession. Competency is the fourth tenet; which requires auditors to use their core skills, knowledge and expertise during audit services. The IIA also defines the “Rules of Conduct” for internal audit professionals (The Institute of Internal Auditors, “Code of Ethics”). Audit professionals are required to display behavior which is in compliance with these rules. They have to work with a sense of honesty, diligence and responsibility and make necessary disclosures as required by law and policy. They must ensure that they are not part of an illegal activity which would bring disrepute to the profession and the organization. They are bound to uphold the ethical goals of the organization and to avoid any activity or relationships, which would betray a conflict of interest. They are required to disclose all the facts that they are privy to, when it is understood that the suppression of such facts may hamper the reporting of audit activities. Auditors are also required to be cognizant of the nature of information and facts they possess and how these can be shared. They are required to conduct their activities with a high sense of morality, effectiveness and accountability. Association of Chartered Certified Accountants, a global body, also defines the Rules and Code of Conduct for global accounting professionals. The ACCA rulebook is similar to the one defined by IIA in the U.S. The added framework in the ACCA rulebook acknowledges that the fundamental ethics principles could be under threat under certain circumstances and professionals must be vigilant to ensure that they are not violated (ACCA, “Code of Ethics and Conduct”).
After the financial crisis of 2008-2009, many companies have initiated training programs for audit professionals. New regulations like the Sarbanes-Oxley Act were passed to ensure adherence to high ethical standards and compliance processes. Many research articles have delved on the benefits of ethics and compliance programs. A 2010 survey involving members of the Ethics and Compliance Officer Association (ECOA) was carried out and compared to the results of surveys done in te six previous years. The objective was to understand the evolution of the compliance and ethics programs over the sample years. The 2010 survey involved individuals who were responsible for launching and managing ethics programs, in addition to company employees and management. The targeted companies had 5,000 to 50,000 employees and reported revenues of $5 billion to $50 billion, annually (Bolt-Lee, Wu and Zimmerman, “Highlights of ethics research”).
According to Bolt-Lee, Wu and Zimmerman, the analysis of the research showed that unlike in the 1980s and 1990s, when the inclusion of ethics programs was used to portray socially responsible behavior; companies in the post 2000 period showed genuine motivation to practice these principles and become ethical and legally compliant. The research attributes this behavioral change to the promulgation of new laws like the Foreign Corrupt Practices Act (FCPA), the Federal Sentencing Guidelines (FSG), and SOX.
According to the new survey, the majority (98%) of U.S. corporations has introduced ethics training as part of employee training programs. In addition, there is a 50% increase in the number of companies who have set up telephonic and email communication platforms where employees can pose questions and concerns, pertaining to ethics and compliance, anonymously. This increase is also attributed to the implementation of the new laws (Bolt-Lee, Wu and Zimmerman, “Highlights of ethics research”).
The primary responsibility of managing an effective ethics and compliance program has now shifted to corporate board members and compliance officers in large organizations. In fact, around 60% of the organizations surveyed, showed the involvement of the board in actually drafting the corporation’s code of ethics. The application of the code of ethics has also seen a change, with many corporations applying it not only to employees, but to senior management and the board of directors, as well. Many organizations have introduced new ways to inculcate the culture of ethics and integrity, by using ethics based performance appraisals and risk assessments. Up to 75% of companies have also integrated the ethics component in the determination of employee promotions, salaries and bonuses (Bolt-Lee, Wu and Zimmerman, “Highlights of ethics research”).
Relevant Facts. It is known that WorldCom CEO Bernie Ebbers had a dislike to the term ‘internal controls’. Cynthia Cooper, in her role as VP, Internal Audit, helped the senior leadership see value in the activities of the audit function. Although WorldCom experienced fast growth and expansion in the 1990s; by 2001, the telecom market was getting saturated and this led to a decrease in WorldCom earnings. Management was under pressure to enhance financial performance. Cynthia and her team began unraveling the fraud in March 2002. They encountered immediate pressure from the CFO and the external auditors; who convinced her not to focus on this, since it was not part of internal audit’s role and was not an issue. Cynthia and her team refused to be intimidated and continued probing these activities. They noticed that the Corporate Accounting team had transferred $400 million out of their reserve account to boost consolidated revenue. It was revealed that network lease expenses worth billions of dollars were capitalized as assets in the balance sheet, to show a profit of $2.4 billion instead of a loss of $662 million. On June 11, 2002, in a meeting with Scott Sullivan, CFO, Cynthia was ordered to delay the investigation to the latter part of the year (Beasley, Buckless, Glover and Prawitt, “WorldCom – The Story of a Whistleblower”).
Ethical Issue. The facts of the case clearly violated various ethical and professional standards of any organization, in addition to violating ethical principles and code of conduct for accounting professionals. It was in contravention of the Code of Ethics and Rules of Conduct. The fraudulent activity was carried out surreptitiously, probably with the support of the CFO, which made it more detrimental. The rules of conduct require that accounting professionals conduct activities with a sense of honesty and responsibility. The corporate accounting team had engaged in activity that was blatantly illegal and against the good professional judgment. It seemed like they may have involved themselves in a fraudulent relationship with the CFO, in their self interest, but against the organization’s interest. The CFO and the external auditors (Arthur Andersen) seemed to be complicit in the cover-up considering the added pressure that the internal audit teams faced. The corporate accounting team had violated the code of objectivity. They had allowed for bias, conflict of interest and came under the undue influence of the CFO to indulge in fraudulent action. They had also failed to act diligently and responsibly. They did not discharge their duties to the best of their professional ability and competence, in the interest of their employer and professional ethics and standards. The issue also violated the rules of conduct – to comply and adhere to existing legislation.
Internal auditors are tasked with maintaining high moral and ethical grounds and are responsible for maintaining those standards in the organization. This activity violated all the norms of financial regularity and ethical behavior. International standards in accounting were also not adhered to; nor were GAAP standards, as defined by the SEC. People had acted based on their self-interest, without objectivity and professional judgment, to fraudulently enhance financial performance of the organization.
It is also important to analyze the code of ethics and its compliance from the perspective of Cynthia and her team. They were in compliance with the code of ethics, since it requires them to not only identify threats to compliance with fundamental principles, but also analyze the threats and implications; and use methods to eliminate such compliance threats or reduce them to a lower level, which is acceptable to the organization. The level of acceptability was supposed to be determined with the advice of an informed third party, to ensure that basic principles were not compromised.
Parties Affected and How They Are Affected. The unraveling of the fraud, affected many people. It would affect Cynthia’s own ethical and moral compass, her professional stature, her future career and family. Cynthia’s relationships within the organization would also be affected. It would undermine her relationship with her superior, Scott Sullivan, CFO and the external auditors (Arthur Andersen). The CFO and Arthur Andersen were involved in stymieing her efforts to unravel the truth, since it would mean an end to his career and their organizational reputation, respectively. It was clear that the corporate accounting team had perpetrated this fraud on the direct or tacit advice of Scott Sullivan. People, who opposed the exposure, would probably make life for her and her team difficult. She could also face termination, which would ruin her reputation externally and add an element of risk to her family, which she supported as a single mother. The internal environment was not conducive to such truthful revelations - it was even abhorred by the CEO. The fraud was detrimental to the reputation of WorldCom, which was expected to display high ethical and moral standards, in general and pertaining to financial disclosures, in particular. It also affected relationships with her team and other employees – including the corporate accounting team. Many would have preferred to continue with the cover-up, in their own self interest (high value of personal stock). This was in direct contravention of the code of integrity – being silent when an illegal act has been noticed. At a professional level, the various auditor bodies, who seek to uphold the principles of ethics, integrity and compliance; would be adversely affected. Lastly, the fraud would be against the general interest of the investors and the public. It would lead to distrust of financial systems and reporting processes; besides resulting in financial losses of small investors.
Alternatives. In light of the unraveling of the fraud and the subsequent order from the CFO, on June 11, to delay the investigation; there are many alternatives that come to mind. One is being silent. The second is internal whistle blowing – seeking support from legal and other groups. The third is external whistle blowing – approaching the SEC and media directly and the fourth is to apprise the CEO and the Board about the misdemeanor in a formal meeting, providing the facts of the case and its wide-ranging implications for the future of the organization.
Consequences of Alternatives. Being silent would mean giving consent to fraudulent action and being seen as complicit in illegal activity. It goes against the code of ethics and is also illegal.
Internal whistle blowing would be a good option in an organization which valued integrity and ethical culture. It wasn’t the case with WorldCom and it would amount to violation of the code of confidentiality. External whistle blowing – going public with the SEC, FBI and media, would bring instant disrepute and adversely affect the financial systems and investor confidence.
It would also lead to a media trial and a presumption of guilt, implicating herself, many in the Board, senior leadership and the external audit organization, without recourse to a sound hearing. Calling for a special board meeting would ensure that all the senior stakeholders are informed of the case and its future repercussions, but this action could be seen as adversarial.
Appropriate Action. Given the facts, the best course of action is to formally inform the leadership and the board; about the fraud that has occurred, providing them with a recommendation on specific next steps, dates and actions to be taken; failing which the external whistle blowing option emerges as the most appropriate action.
References
Association of Chartered Certified Accountants. Code of Ethics and Conduct, 2016. Web.
2 February 2016.
Beasley, M., Buckless, F., Glover, S., and Prawitt, D., “WorldCom – The Story of a Whistleblower”. Auditing Cases: An Interactive Learning Approach, 5. (2012): Print.
Bolt-Lee, C., Wu, Y., and Zimmerman, A., “Highlights of ethics research”. Journal of
Accountancy, (2014). Web. 3 February 2016.
The Institute of Internal Auditors. Code of Ethics, 2016. Web. 2 February 2016.
