Previously we discussed WorldCom, Inc, a classic case of fraud detected by a whistleblower. WorldCom grew to be a leading telecommunications company in the 1990s. Much of the company growth was obtained through acquisitions. Most of that acquisition activity was accomplished through using WorldCom stock to buy other organizations. WorldCom used questionable application of accounting rules to reduce expenses and increase income yielding higher WorldCom stock prices. Similar to the progression of most frauds, WorldCom looked for additional ways to improve financial performance. The next phase of the fraud included reclassification of expenses to assets. In accounting, when a company spends money, there are multiple ways to record that expenditure. If the money was spend for current period operations, such as monthly utilities, then an expense is recorded - if spent for a future benefit, such as the purchase of of a building, then an asset is recorded. Expenses have no future benefit, while a purchased asset, such as a building, can be used in future years. WorldCom was a large long-distance company. When a customer made a call that extended beyond WorldCom's physical network, and was carried on other companies' telephone lines, then WorldCom had to pay the other company for the use of those lines. The payments, called LINE CHARGES, are an expense. There will be no future benefit - it is like an individual paying their monthly phone bill. In an attempt to reduce expenses, and make the company look profitable; WorldCom recorded these expenses as assets. The false profitability and assets made the the company look good to investors. It kept company's stock price high. And also enabled the possibility of purchasing additional compainies using inflated WorldCom stock. At the time, WorldCom was the largest financial fraud in history. In this fraud, the primary purpose was to make it look like the company was growing rapidly. To give this impression the fraud was focused on making sure income increased significantly each year. To provide this consistent, or smooth growth, accounting rules were inappropriately applied regarding reserve accounts. This part of the fraud related to reserve accounts was over 950 million dollars. The next major component to reduce expenses which directly increased income, involved ignoring proper treatment of line costs. While recorded correctly by the accounting system, management ordered that adjustments be made to reclassify over 7 billion dollars of these costs and pretening that they were assets with future value. There were also more than 500 million dollars in adjustments, for which there was no documentation. We will never know the purpose behind these, but we do know that the costs to run the company were understated by that amount. The final group, Other Items, includes a variety of schemes and misrepresentations and totaled more than 400 million dollars. The entire fraud included over nine and a quarter billion dollars of misstatements over the four year period. There are many estimates related to the misstatements. Because of the extent of the fraud and the lack of complete documentation, we may never know the exact amount of the fraud, although some report amounts in excess of 11 billion dollars. The numbers presented are from a report available on the Securities and Exchange Commission’s web site. Many people lost significant money in the WorldCom fraud. Some of those people lost savings and retirement funds, altering their lives forever. WorldCom’s top management did not escape punishment. Bernie Ebers, the company founder and CEO was convicted of Securities Fraud, Conspiracy, and filing false reports with regulators. Ebers received, and is serving a 25 year prison sentence. If he serves his full sentence, he will be 90 years old when released. In contrast to Ebers, Scott Sullivan, the CFO, cooperated with prosecutors and investigators. He admitted to directing the fraud. Sullivan pleaded guilty to charges of securities fraud, conspiracy, and filing false reports with regulators, but due to his cooperation, received a sentence of only 5 years. For their roles in the fraud, WorldCom’s Accounting director and controller each received one year plus 1 day sentences. Consider WorldCom employee Betty Vinson. According to newspaper accounts, she had a well-ordered life, played on her high school’s tennis team, married her college sweetheart and attended her kid’s soccer games. Like most of us, she periodically completed home improvement projects, taught Sunday school and maintained to-do lists on the refrigerator. By most accounts, Ms. Vinson is a normal American citizen, going to work to improve her family’s lot in life. To supplement the family’s income, in 1996, she took a job as a mid-level accountant at WorldCom. She earns a reputation as diligent and hardworking. She’s reliable and gets things done. After two years, she is promoted to senior manager in accounting. Her duties include compiling the quarterly results and analyzing operating expenses and loss reserves. By mid-2000, the telecommunications industry is in a severe slump and WorldCom is not immune. WorldCom also has a structural problem. Its line leasing costs are expected to rise in the future at a time when competition is fierce and customers’ bills are falling in response that competition. In the 4th quarter, Ms. Vinson finds herself on an ethical slippery slope. She is asked to reverse $828 million of bad debt reserves to boost earnings. Ms. Vinson understands that this is a questionable accounting technique. She suffers pangs of guilt and considers resigning. Yet she is assured by WorldCom leadership that this is a one-time fix – it will never happen again. WorldCom simply needed to buy a little time until its economic environment and financial performance improved. Reluctantly, Betty Vinson agreed to make the adjustments. Despite the promises of a one-time event, as Dr. Dull previously explained, the illicit financial transactions at WorldCom continued to be recorded in the accounting records and be reflected in the published financial statements. Ms. Vinson rationalizes – she is “just following orders.” She can’t sleep, she's losing weight. Then, in December of 2002, she accept a promotion to Director, earning $80,000 annually. Despite the promotion and raise, she vows to begin looking for a new job. In contrast to Betty Vinson, consider WorldCom internal auditor Cynthia Cooper. She was a 38 year old, CPA, who was the company’s vice president of internal audit, responsible for a department of 24 people. Prior to WorldCom, she worked in public accounting, at some of the largest, most respected firms in the world. Ms Cooper’s WorldCom efforts were supported by two other auditors, Gene Morse and Glyn Smith. The fraud began to unwind in March 2002, when a complaint was received from accounts receivable manager, John Stupka. He was concerned about account transfers that would have a future negative impact on his department. He saw no valid purpose behind the transfers. As Cooper began and continued investigation of questionable transactions, she asked about the accounting treatments of some of the transfers. Some of her questions were ignored, to others, she was told the treatments were correct. Not only was Ms. Cooper told that things were okay, and she was also told not to interfere with Stupka’s business. Cooper ignored the warnings, and kept the investigation moving forward. She also expanded it into additional areas of concern. She and her team worked secretly, and at night, so as to not raise suspicions. As the investigation continued, they found 2 billion dollars in capital expenditures that were not authorized by the board of directors, and 500 million dollars in computer expenditures that were recorded, but had no supporting documentation. June of 2002 brought two very busy weeks for Cynthia Cooper. On June 13, she and Mr. Smith met with WorldCom’s audit committee chair and told him her findings. The chair asked Ms Cooper to brief WorldCom’s new auditors on what she had discovered. The new auditors suggested that Ms Cooper make sure that she was correct. On the 17th, Cooper and Smith visited Betty Vinson where they discovered that while she made many of the questionable entries, Ms. Vinson had no supporting documentation for her work. Next they visited David Myers, WorldCom’s controller, who admitted that he knew the accounting treatment of the entries were wrong. On June 20th, the company CFO, Sullivan attempted to defend the treatment of the entries before WorldCom’s audit committee. He ask for the weekend to prepare his defense. On June 24, the audit committee gave him and Myers the option to resign or be fired. Mr. Myers resigned, Sullivan was fired. The next day, WorldCom issued a public announcement that there had been 3.8 billion dollars of inflated profits over the 5 previous quarters. Ulitmatley, the final estimates were closer to 11 billion dollars and the actual fraud period covered 4 years (both nearly 3 times the original announcement). On June 26, the SEC filed a civil fraud suit, and the NASDAC halted trading on WorldCom’s stock. Betty Vinson versus Cynthia Cooper – the rest of the story. So what happened to Cynthia Cooper and Betty Vinson? Before we get to that, note the similarities of these two women – similar lives, seemingly similar all-American values, but two diametrically differing choices. Betty Vinson, became integral to the fraud. While Cythia Cooper blew the whistle. Here is how it turned out: Cynthia Cooper becomes one of three Time Magazine “persons of the year,” joining Enron’s Sherron Watkins and Coleen Rowley of the FBI. In contrast, Betty Vinson pleads guilty – the judge indicates that she is the “Least culpable” person in the WorldCom fraud. Her maximum possible sentence under federal law was 15 years. Her actual sentence included 6 months in jail and 6 more in home confinement. In the end, Ms. Vinson had to tell her 12-year old daughter that she’d be spending the next six months in jail. Initially, Betty Vinson was assisting the FBI with their investigation of WorldCom and believed that she would be exonerated as a coerced person. The FBI came to believe that the evidence suggested she was integral to the fraud act and decided that she was a person that they would target with their investigation. Now, Given Vinson versus Cooper it might appear that the choice to become a whistleblower is easy. If one can choose to either blow the whistle or go to jail – choose whistleblowing. In fact, the life of a whistleblower is a hard one. Many lose their jobs and are oustracized by their coworkers and community.
