Post a reflection
Now, I just need to respond to two post. See post 1 (in yellow) and post 2 (in green) to respond to below.
EXAMPLE OF A RESPONSE FOR 1:
Thanks for your post.
I agree with Jeff Hoops, E&Y’s compliance officer, notes, “we all make occasional mistakes in judgment. What’s essential is not to make a second mistake trying to fix the first one”, working with different companies the results have always been the same, correct your errors as soon as you discover them because avoiding them or looking for temporary fixes will only lead to large problems in the long run. I have seen firms support an employee for being honest of their mistakes and attempting to do the right thing and I have seen firms turn on their employees when it is discovered that the employee willingly chose to be dishonest or look for short cuts. Overall, even large companies like Worldcom and its executives will eventually fall by going the unethical route.
EXAMPLE OF A RESPONSE FOR 2:
Hi!
Great statement! I've been in a risk management field for over 12 years and companies have been very aggressive with checks and balances both internally and externally to be ethically oriented to themselves and show the public that investing in them will be safe. After many scandals such as WorldCom and Enron, officers are liable in a personal level for any fault or malicious acts they commit. This was a good act to have going forward for future CEOs and Presidents of companies that think they can go above the law.
1.
Worldcom’s scandal compromised trust with shareholders, employees, and the public. Worldcom’s CFO Scott Sullivan and accounting team intentionally took actions against a basic accounting rule, which in turn led them from a year that should have been a loss to a profitable year. Sullivan had the accounting department shift a large portion of their operating expenses to their capital expenditures account. The largest operating expense for Worldcom were the charges paid to local telephone networks to complete calls. These irresponsible changes were problematic because this type of expense is considered an ongoing activity. In order for a charge to be considered a capital expenditure it has to be connected to a long term investment activity. This is problematic because it allowed Worldcom to show false profits. Mr. Sullivan believed that he would be able to shift these capital expenditures to operating expenses as Worldcom’s revenues became profitable to cover them. Unfortunately, Worldcom revenues did not improve in time and internal auditor Cynthia Cooper spotted a suspicious accounting entry which she reported and set the wheels in motion to the Worldcom scandal.
In my opinion, Scandals like Worldcom and Enron are unfortunately a relevant issue in our financial industry. Mr. Myers was a well educated, successful accountant but still a human being. Pressures placed on him by Worldcom led him to ignore his ethical obligations, even after going over the numbers multiple times and consequently leading to Worldcom to “cross the line.” One cannot ignore that each individual has their own personal agenda. The idea of climbing the corporate ladder and becoming successful will lead some to do anything possible to please their employers, in return for the hope of career success. The other path could be doing the right thing even if it means not moving forward in your career at this time, instead now you know that you did what is ethical.
Overall, as new regulations and accounting rules are adopted in order to protect the public, one cannot ignore that there will always be individuals that will put company profits before ethics. Personally, I work in the Financial Services industry which requires me to go through many ethics and compliance training, just like the ones mentioned by the E&Y employees. The employees even made it clear that what Mr. Myers did was wrong and they would have done things differently. Regardless of what we know is right or wrong we sometimes still choose to do the wrong thing. Despite these systems human behavior is still a contributing factor in company decision making. It is for this reason that a system of checks and balances both internally and externally is critical in running an ethical company.
2.
The WorldCom accounting fraud case is a prime example of why not to follow superiors blindly. Decisions in both the workplace and in life are not always consistent with what is appropriately ethical or moral, and it is critical to conduct oneself to their own high standards without compromise. As is shown in this case, something that seems like a negligible and reasonable compromise can turn into a major problem with significant consequences, up to and including jail time.
As the video and articles show, WorldCom fraudulently reduced reserves and capitalized operating expenses, leading to a significant overstatement of their pretax income over a four year period. As the text states, assets are capitalized on the balance sheet and only transferred to the income statement as those assets depreciate over time. WorldCom’s improper classification of operating expenses as capital expenses allowed them to recognize large net incomes that would have otherwise been a loss. WorldCom believed that revenue would increase in subsequent years allowing for them to cover up this fraudulent activity.
The situation described in the E&Y video is a cautionary tale. Although the key players here were two major executives and the controller, this situation can occur at any level of an organization. Although we focus on those three players in the video, the theme of blindly following a superior permeated throughout the story, as junior accounts were held accountable with jail time. All were comfortable violating major accounting principles such as capitalization, the expense recognition matching principle, and made adjustments without proper support. This shows how the ethical dilemma occured at multiple levels of the organization. Had only one of those levels raised a red flag, this fraud could have been avoided.
This situation is absolutely one I can identify with as characteristics of this case are present in the workplace daily. Having had the opportunity to work in both small and large organizations, I recognize how these conditions can foster potential moral and ethical challenges. The organization size in the WorldCom case likely played a big role given that the multiple levels of employees involved were able to justify their actions, conforming to norms and feeling protected by the group. Conversely, the large organization also had the means to conduct appropriate internal audits, which ultimately led to the discovery of this fraudulent activity. Small organizations do not always have these means, nor the same group dynamic of a large organization, and these circumstances can also empower others to act in bad faith. The caution tale of WorldCom is relatable to organizations of all sizes and types.
The component of the E&Y video that most caught my attention was the closing. Jeff Hoops, E&Y’s compliance officer, notes, “we all make occasional mistakes in judgement. What’s essential is not to make a second mistake trying to fix the first one”. I agree with this statement in whole as it is important to acknowledge that human behavior inherently leads to mistakes. These mistakes need to be mitigated by risk management and ethical considerations, as some mistakes are often positive in the overall picture of work and life; after all, we learn from our mistakes. Learning underscores the second part of Jeff’s statement, that we must not make a second mistake. On the other hand, I reflect on a statement by David Myers’, the controller in the WorldCom case. David notes that he still does not believe he was doing anything wrong when he manipulated the first quarter’s report. It was only after the second and third quarter that he recognized this pitfall. I disagree (as did the courts) with David’s rationale here, and believe he is still trying to justify his initial actions. More important than not making a second mistake is to recognize the first one.