Extraordinary Circumstances
The Journey of a Corporate Whistleblower In June 2002, WorldCom announced that it was in serious financial trouble. The enormous telecommunications company had $38 billion in annual revenues, operations in 65 countries and 100,000 employees, but it was imploding due to the largest corporate fraud in history. The announcement stated, “As a result of an internal audit of the company’s capital expenditure accounting, it was determined that certain transfers…were not made in accordance with generally accepted accounting principles.” That news flash was the PR understatement of the year. At the time of the release, WorldCom told the U.S. Securities and Exchange Commission (SEC) that it had to “restate its financials by $3.8 billion.” The SEC quickly brought a civil suit against WorldCom, although its stock had long been a Wall Street favorite. Just a few years earlier, it had ranked first in shareholder return.
Prior to its demise, only four companies had more stockholders. But after its first 17,000 layoffs and the SEC suit, WorldCom’s stock value dropped from its all-time high of $64 to $0.09 before NASDAQ suspended its trading. WorldCom investors lost everything and its sudden fall shocked the global business community. One day WorldCom was the leading performer in the once super-hot telecommunications industry. The next day, the company had blown itself to pieces. WorldCom applied for Chapter 11 bankruptcy protection, the largest such filing in history. Soon after, a federal jury found deposed CEO Bernie Ebbers, 63, guilty on nine counts of corporate fraud and sentenced him to 25 years in federal prison. The court sentenced
CFO Scott Sullivan to five years in jail, and gave lesser sentences to comptroller David
Myers and other executives. In 1983, businessman Murray Waldron decided the time was right to get into the telecommunications business. Waldron planned to buy long-distance minutes wholesale from AT&T and sell them. He and a partner set up the Long Distance Discount Company (LDDC), soon renamed LDDS (for “Services”), in Hattiesburg, Mississippi. But the company needed some $650,000 in capital. Waldron and his partner found an investor,
Mississippi motel owner Bernie Ebbers, who was worth nearly $3 million in the early
’80s. He became the owner of 14.5% of the new company.
By 1985, LDDS had nearly $1.5 million in debt and was losing some $25,000 monthly.
Ebbers became CEO to protect his investment. He knew the company couldn’t turn around without reducing its long-distance costs, and that required securing more customers. Ebbers, who had made his motel fortune through acquisitions, pursued the same economies-of-scale strategy at LDDS. It quickly became an aggressive “reseller consolidator,” buying other telecom firms to get their customers. Ebbers’ strategy worked.
Once it had a large local customer base, the company could get lower prices for the long-distance minutes it resold. It quickly began to make a profit. By 1991, its annual revenues exceeded $700 million. LDDS became the U.S.’s fourth-largest long-distance firm (after AT&T, MCI and Sprint) when it purchased reseller ATC. In 1993, Cynthia Cooper became head of its internal auditing department. She insisted that her internal auditing unit should report functionally to the board of directors’ audit committee, which would give internal auditing, “some independence from company management” since it approved their budget and “annual audit plan.” Cooper and her auditors also had to report administratively to the CFO, soon to be
Scott Sullivan. LDDS had grown so fast and absorbed so many firms, that internal controls were shaky and many operations were redundant. Cooper’s first audit recommended large changes, including creating a department to calculate sales commissions, splitting sales and operations at the executive level, and consolidating call and service centers. Ebbers
was