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Ethics in the Corporate World

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Submitted By amgreear76
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Ethics in the Corporate World
ACC 557 Financial Accounting
January 26, 2014

In today’s society, it seems that most companies are out to chase the almighty dollar and have little to no concern for the repercussions of their actions. In this paper, we will address five aspects of the corporate world and the ethical breaches that have been made in the last few years. The company that we will look at for examples is WorldCom. WorldCom was one of the companies that led to the creation of the Sarbanes-Oxley Act of 2002.
The five questions that we will address in this paper are: 1. Is current business and regulatory environment more conducive to ethical behavior? 2. What impact was done to WorldCom because of the accounting ethical breach? 3. How was WorldCom caught and how they failed to be ethical? 4. What accounts were impacted and the resulting impact on operations? 5. What measures could have been taken to prevent this breach?
The first thing that we will do is to describe how WorldCom came to be one the biggest companies in the telecommunications industry. WorldCom began in 1983 in Clinton, Mississippi as a long distance company called Long Distance Discount Services. As a result of several mergers that began in 1985 after the board elected Bernie Ebbers as the company CEO, the company grew by leaps and bounds. On November 4, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the largest corporate merger of U.S. history. On October 5, 1999, Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement between the two companies. This deal did not finalize because of opposition from the U.S. Department of Justice and the European Union because of concerns of it creating a monopoly.
According to the Library of Economics and Liberty, a monopoly is defined as an “enterprise that is the sole provider of a good or service”. If the merger with Sprint has been allowed to go through, WorldCom would have become the largest telecommunication company in the U.S. The first question that we will answer is to determine if the current business and regulatory environment more conducive to ethical behavior in today’s society. According to Halbert & Inguilli, ethical theory is defined as “the framework for decision making in corporations”. There are currently five different ethical theories: * Free Market Ethics * Utilitarianism * Deontology * Virtue Ethics * Ethic of Care
The ethical theory that most corporations use in the beginning is Free Market Ethics. This theory deals with the underlying goal that a company has is to make money without engaging in any type of illegal behavior or fraud. With the creation of the Sarbanes-Oxley Act of 2002, more companies are being held accountable for their business choices and decision making. According to Section 802 of the Sarbanes-Oxley Act, the government has the right to “impose penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. It also imposes penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and wilfully violates the requirements of maintenance of all audit or review papers for a period of 5 years”. Taking this information into consideration, it would be easy to state that the current business and regulatory environment is more conducive to ethical behavior in today’s society. It is more conducive simply because many corporations have the fear of the repercussions that they would face for failure to have ethical behavior. The next issue we will address is to look at the impact that was done to WorldCom because of their accounting ethical breach. After the accounting fraud was discovered, the Securities and Exchange Commission launched an investigation that led to the discovery that the company’s assets had been inflated by approximately 11 billion dollars (WorldCom). Faced with the public knowledge of their misdeeds, WorldCom filed for Chapter 11 bankruptcy protection in 2002. Their filing was one of the largest in U.S. history and after the bankruptcy proceedings ended in 2004; the company still have 5.7 billion in outstanding debt. The next issue that we will look at is how WorldCom’s financial officers were caught and how they failed to be ethical. The accounting breach came to light in June of 2002 when an internal audit committee discovered approximately 3.8 billion in fraud (WorldCom). Once the committee became aware of the fraud, both Scott Sullivan (CFO) and David Myers (Controller) were removed from the company. Sullivan was fired and Myers resigned from his position. The third person that was involved in this fraud was Buford Yates, the Director of General Accounting. Yates was let go from the company and later faced criminal charges along with Sullivan, Myers, and Bernie Ebbers (CEO) related to the scheme to defraud investors by falsifying the financial condition of WorldCom. All four of these individuals failed to be ethical because they felt it was better to line their own pockets than to be truthful to the investors about the rising debt that the company was facing. The next question we will answer is what accounts were impacted and the resulting impact on operations. The fraud was accomplished in two ways. The first action taken was to underreport line costs by capitalizing the costs on the balance sheet instead of correctly expensing them. Line costs are interconnection expenses with other telecommunication companies. The second action taken was to inflate revenue with fake accounting entries from the corporate unallocated revenue accounts (WorldCom). The resulting impact on operations from these actions was the ultimate demise of the company. When the company went bankrupt, the stockholders lost about 180 billion and over 20,000 employees lost their jobs (BBC). The final issue that we will address is what measures could have been taken to prevent this breach. Many of the measures that could have been taken have been introduced in the Sarbanes-Oxley Act of 2002. In addition to Section 802, Sections 302, 401, 404, and 409 addresses the measures that all corporations are required to follow. Section 302 addresses the certifications that now have to be included in the financial statements. Section 401 addresses the accuracy of these statements. Section 404, which is the most widely discussed section, addresses the scope and adequacy of the internal controls within the corporations. The final section, Section 409 addresses public disclosure requirements. The exact nature of these sections and their implementation are laid out in detail in the SOX Act. After addressing all of the questions and concerns of this paper, we are left with the idea that ethical behavior and corporate decision making do not always appear to be on the same page. Before the creation of the Sarbanes-Oxley Act, most companies and their financial officers had the ability to do as they wanted with company funds with little to no worry of punishment or retribution for their actions. Scott Sullivan, David Myers, Buford Yates, and Bernie Ebbers are all infamous for their actions that led to the downfall of WorldCom and the loss of billions by stockholders – many who lost all of their savings. While each man was sentenced to prison time: Sullivan received a five year prison sentence; David Myers and Buford Yates both received prison sentences of one year and one day; and Bernie Ebbers received twenty-five years in prison for his involvement. The only reason that the other three individuals did not receive such lengthy sentences is because of their cooperation in the conviction of Ebbers. Both Myers and Yates received the lighter sentences because the presiding judge felt that they had been pressured by Sullivan to falsify the books and therefore commit the fraud in question.

Reference Page
Stigler, George J. "Monopoly." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved January 26, 2014 from the World Wide Web: http://www.econlib.org/library/Enc/Monopoly.html

Halbert, Terry & Inguilli, Elaine. Law and Ethics in the Business Environment. 7th edition. 2012. Cengage Learning: Mason, OH.

Sarbanes-Oxley Act Section 802. Retrieved on January 26, 2014 from: http://www.soxlaw.com/s802.htm

WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. Retrieved on January 26, 2014 from http://voices.yahoo.com/worldcom-scandal-look-back-one- biggest-225686.html

WorldCom’s ex-boss gets 25 years. BBC News July 15, 2005. Retrieved on January 26, 2014 from http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/4680221.stm

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