The case of accounting fraud at WorldCom is one of the biggest scandal since 21st century, that had deceived wall street and caused a great loss to its customers and stakeholders. This passage will analyze the problems that occurred at WorldCom from an ethical perspective.

Normative analysis:

This fraudulent accounting is so ethically wrong. Most of the people involved in this case had violated the fiduciary duty. Fiduciary duty means one has the duty to honestly serve for the profit of stakeholders in his company and do his job right. There’s duty of care which implicates that they should care about interest of their clients, but clearly they had totally neglected this. We can see that, the firms who’s using WorldCom’s service, the investors who invested in WorldCom’s stock, the banks who loan large amount of money to it all suffered a great loss from this fraudulent accounting. Also, there’s duty of loyalty which forbid them to gain profit from their jobs and prevent personal interest conflict. But clearly those people involved had earn a great deal for their own benefit using the power and authority of their high position. To be specific, we can take a closer look and analyze what they have done. Like Ebbers, who created a bad atmosphere in the company that look down upon laws. He even wanted to get money from WorldCom Company to make up for his loss in his other own business. This is a violation of his fiduciary duty to the firm. He didn’t create a better culture for the firm and even want to take money from the firm for his personal usage. Also, the employees in audit apartment who agree to help with the fraudulent accounting for a promotion and better salary violated fiduciary duty as well. The duty of loyalty would never allow them to use their job to do these illegal things for their own good. When it comes to stakeholders,which means the people whose interest would be influenced by the company’s financial circumstance, as I mentioned, people who bought the stock of WorldCom lost money because of this fraudulent accounting making the stock price jump down to the lowest level. They had bought the stocks so they had the right to know about the financial situation in the company. However WorldCom gave out fake statistic which violated their rights to know what’s really going on in the Company. Banks that had loan money to WorldCom also suffered a great loss because the bankrupt of it so the banks can never get their money back. If the banks can also get to know the real financial circumstance inside WorldCom, they would have not loan those money to it. So the rights of the banks to know the accounting truth was also violated. And there’s the board of directors, who were also hold back from the real financial condition of the company, their rights of managing the company had also been violated due to the manipulation of few people.

For the question that whether the company or the shareholders alone should shoulder this consequence, I think this is totally the company’s responsibility to take those consequences. Because companies have corporate social responsibilities, which means companies cannot just think of their own profit, but still need to care about the responsibilities they should shoulder towards the society. According to operational responsibilities, WorldCom had clearly violated by doing so much harm to the stakeholders economically and treating the employees unfairly by forbidding questioning to superiors. WorldCom hadn’t taken any responsibility in promoting social welfare either, which means no citizenship responsibility at all. So after this fraud happened, I think WorldCom should start to fulfill its corporate social responsibility and make up for everyone it had harmed in this incident.

So obviously, in the debate of Friedman and Mackey, I stand on Mackey’s side. According to Friedman, caring about social responsibilities conflicts the principal of making the greatest profit for the company. However, this is exactly how the fraudulent accounting generates, just considering profits despite of considering any of the social responsibility that it should take towards the whole society.

Causal analysis:

Attachment creates bias in accounting because the auditors are attached with the company they are auditing, which means they are in a both side beneficial relationship and they don’t want to break this relationship. For example, in this case, the staffs in accounting department were asked to help make the fraudulent accounting to deceive everyone. Since those were in the accounting department of WorldCom, so they are attached to the company so much. They didn’t want to get fired because not cooperating with the boss for what the company wanted them to do. On the other hand, if they help the company with the fraudulent accounting, they can get promotion and better salary since then. So they have to do it for both their own good and for pleasing the company because the attachment.

Familiarity also creates bias in accounting because when facing the client that they are familiar of and other stakeholders of the company they don’t know and won’t meet ever, auditors would very likely to choose to stand on the side of their clients. For example, the outside auditor Arthur Andersen, who in the article considered WorldCom to be its flagship and most highly coveted client, and the firm’s crown jewel and viewed its relationship with WorldCom as long term and wanted to be considered as a commited member of WorldCom’s team.[ ROBERT S .KAPLAN, DAVID KIRON. (2007). HARVARD BUSINESS SCHOOL: ACCOUNTING FRAUD AT WORLDCOM,8] We can see that Arthur Andersen was also really attached to WorldCom company. What’s more, they were really familiar with each other. Arthur Andersen had done auditing for WorldCom for over 10 years. The relationship between them are kept really good. So when WorldCom was doing the fraudulent accounting and Arthur Andersen came to audit, Arthur Andersen thought its completely fine to be refused the request to access the computerized general ledger. And the absence of variance was also fine to Anderson, which led Anderson to conclude that no follow-up was required.[ ROBERT S .KAPLAN, DAVID KIRON. (2007). HARVARD BUSINESS SCHOOL: ACCOUNTING FRAUD AT WORLDCOM,9] Anderson must had been through lots of consideration that time. He’s not stupid and he must knew that the weirdness of WorldCom this year means something unusual. But instead of digging into the unusual, Anderson chose to neglect it. He must have balance this in his mind between this old client for more than 10 years that he still wanted to keep a good relationship with and the stakeholders that WorldCom may harm but have nothing to do with Anderson himself. So the conclusion is evident, Anderson didn’t choose a ethically correct solution but a beneficial one. Because he’s far more familiar with his client WorldCom.

The foot-in-the-door technique influences people when making the right judgment too. This technique means taking someone into doing a big thing step by step by talking into some small deeds first. Just like Vinson and Normand in the general accounting department, when the boss asked them to released a large amount of money of line accurals into income statements, they rejected to do so until Myers assured them that this would never happen again. This was like the first step in the door because later on we all know that Myers lied. This happened again and again. Vinson and Normand wanted to resign but Sullivan told them “Think of us as an aircraft carrier. We have planes in the air. Let’s get the planes landed. Once they are landed, if you still want to leave,then leave. But not while the planes are in the air.”[ ROBERT S .KAPLAN, DAVID KIRON. (2007). HARVARD BUSINESS SCHOOL: ACCOUNTING FRAUD AT WORLDCOM,6]

This was how they continued to do the fraudulent accounting for WorldCom. It’s like they already had a foot in the door and could not get out, they could only step inwards since then. So this led to the illegal road of more and more fraudulent accounting with no return.

Recommendations:

To address the problem of bias cause by attachment, company should maintain impartial of the audit department. This department should obey orders from no other bosses in the company than the board of directors. And the boss should be untitled the right to hire or fire any of the member in audit department so that the people there will be much less attached to the company. In this case, they can be far more justified when facing the financial condition in the company, without bearing the stress from superiors telling them what to do. If this department is still under the control of superiors, superiors would manipulate the personnel involved in auditing, the ones who obey stay and the ones who disobey leave, this will cause much trouble. So it’s important to restrict the power of any hierarchy in the company and keep the independence of some important departments.

When it comes to the problem of familiarity, it’s not easy to avoid this. Because in business, everyone wants to develop a long-term and nice relationship with each other, so getting familiar is really unavoidable. However, there’re still some ways to avoid the injustice brought by familiarity. For example, the outside auditor doesn’t have to be the same one over years. They can pick three to four outside auditors and let them take turns in doing the job annually, so every year the outside auditor will not be the same. This move will also help staying fair because those outside auditor will be in competitive positions, they will do their best job and be justice to show that they are better than others. In this case, the competitive relation will prompt all of them to stay justice. Also boards in the company should award the auditors who have discover something wrong about the company. Because if discovering something wrong by the auditors means breaking the familiar relationship between them, auditors would probably avoid or ignore it just to keep familiarity. But if this is highly encouraged and awarded, auditors will be more likely to do so.

To avoid being trapped in a ethical dilemma by the foot-in-the-door technique, one should never step that first foot in the door. This is a serious problem about the ethics on everyone. Ethical fading usually happens when we face seduce of money and power, and this is exactly what lure us to step the first foot in the immoral door and can never come back. Consequently, every company should create a decent core value and corporate culture that one should do no harm to others and always do good to the environment and society. Respect laws and ethics, never hesitate when facing the choice between doing the right thing and earning filthy profits.

All illegal deeds and corruption start from the first small step, so never ever make that step in the door. Also, when someone is talking you into those immoral behaviors, reject it and also try to bring him back to the justice side, or report it as soon as possible for the good of the majority.

To conclude, this fraudulent accounting case teaches us a valuable lesson. We should all make the right choice when facing ethical dilemma. Deceiving and doing illegal things should never be our option. In spite of so many factors that lead to injustice, as long as we follow ethics and law, we can resist all the temptations and be a decent man.

Reference:

1. ROBERT S .KAPLAN, DAVID KIRON. (2007). HARVARD BUSINESS SCHOOL: ACCOUNTING FRAUD AT WORLDCOM