WorldCom Inc., was a Mississippi-based telecommunications company, that became the 25th largest U.S. company by 2002. The company grew primarily through an aggressive merger and acquisition growth strategy. Bernie Ebbers, was the WorldCom CEO, and Scott Sullivan, was the WorldCom CFO. Cynthia Cooper, WorldCom’s General Audit Executive, led the company’s internal audit staff, which reported administratively to Scott Sullivan, CFO. Cynthia Cooper and others in the internal audit staff discovered and reported an alleged $3.4 billion fraud in June 2002 that ultimately grew to an alleged $11 billion fraud. Following the announcement of the fraud, WorldCom filed for bankruptcy protection, representing the largest bankruptcy in U.S. history. Arthur Andersen, LLP, served as WorldCom’s external auditor until June 2002 when it was replaced by KPMG following Andersen’s guilty verdict related to the Enron debacle. The fraud at WorldCom involved the erroneous capitalization of billions of dollars of network expenses as assets. Normal lease operating expenses related to fees paid by WorldCom to local telephone companies for use of their telephone networks were capitalized on the balance sheet. The fraud allowed the company to report a profit of $2.4 billion instead of a $662 million loss. During the initial stage of Cynthia Cooper’s internal audit investigation, she was asked by Scott Sullivan, CFO, to delay her investigation. When Ms. Cooper initially approached the audit committee chairman, there was a delay in his taking action to her findings. At points during internal audit’s investigation, internal audit staff members began to work secretly at night and copied key files for backup purposes. Ultimately, BernieEbbers was convicted for his role in the fraud and sentenced to over 20 years in prison. Scott Sullivan pled guilty and assisted the proscecution’s case against Mr. Ebbers. Mr. Sullivan was sentenced to five years in prison. In December 2002, Time magazine named Cynthia Cooper as one of its "Persons of the Year" along with two other whistleblowers: Sherron Watkins of Enron and Colen Rowley of the FBI.
a. Document your views about the effectiveness of regulatory reforms, such as the Sarbanes−Oxley Act of 2002, in preventing and deterring financial reporting fraud and other unethical actions. Discuss whether you believe the solution for preventing and deterring such acts is more effective through regulation and other legal reforms or through teaching and instruction about moral and ethical values conducted in school, at home, in church, or through other avenues outside legislation.
b. Assume that a close family member came to you with information about a potential fraud at his or her employer. Prepare a summary of the advice you would offer as he or she considers taking the information forward.