WorldCom was founded in 1983 as Long Distance Discount Services. Monks and Minow says that WorldCom relied heavily on acquisition to fuel its growth (577). Since its founding through 1999, WorldCom made 60 acquisitions on its way to becoming the second largest long distance company in the United States. Monks and Minow noted that almost all of WorldCom’s acquisitions were paid with WorldCom stock.
Enron was founded in 1985 with its headquarters in Huston Texas. During the 1990s Enron transformed itself from a small gas pipeline company into the largest energy trader in the world. The company effectively abandoned interest in producing or transporting energy and made itself the key trader in electronic energy markets. Clarke says that Enron business model appeared to be based on brilliant innovation, but it was the dramatic and sustained profit growth that really captivated investors (152).
Tyco, on the other hand, was founded in 1960 by Arthur J. Rosenberg. It was initially a research laboratory that produced science and energy material products. The company went public in 1964. Bhattacharya says that Tyco was in the spree of acquiring other companies right from the beginning (334).
What did they do wrong? When?
WorldCom collapsed because of Bernard Ebbers’ orgy of acquisitions. During the 1990s the pace of growth was excessive, outrunning WorldCom’s capacity to integrate its acquisitions, but also many of the purchases were ill judged on strategic or costs grounds (Micklethwait 73). The excessive costs and heavy loan burden incurred during the acquisition spree meant that the company was not able to ride the shock of the downturn in the telecoms market. Micklethwait further noted that the fraud did not cause WorldCom’s downfall; it occurred in order to cover up the deficiencies in Ebbers’ management, and was allowed to occur because of the total failure of internal and external controls (73).
The fall of Enron started in the 1990s. During this period it was noted that in order to accomplish it objectives Enron relied heavily on complicated transactions with convoluted financing and accounting structures. Clarke says that the company carried out transactions with multiple special purpose entities, hedges, derivatives, swaps, forward contracts and prepaid contracts (152). When Enron encountered business problems, the chief financial officer created off-balance sheet entities to hide tens of billions of liabilities and boost reported earnings. Enron executives devised complex financial schemes to defraud Enron and its shareholders through transactions with off the books partnerships that made the company look far more profitable than it was (Clarke 152).
By 1968 Tyco had acquired 16 companies and it achieved its rapid growth acquisitions, which were in the areas of manufacturing, packaging products, plastics and undersea fiber optic cable. Bhattacharya says that by 1980s the company formed into subsidiaries based on different business categories. During 80s and 90s Tyco acquired about 40 companies. In 1999 Tyco was alleged to have indulged in accounting irregularities, and this negative news in the media pulled the Tyco stock during the year with its stock declining with 80% in value.
Who was involved?
Bernard Ebbers played major role in the downfall of WorldCom. Micklethwait indicated that Ebbers is not contented with running a huge global enterprise, he built a personal empire. To finance these purchases, Ebbers took on a huge volume of debt estimated at between $500 million and $1 billion at its peak using WorldCom stock as collateral. Scott Sullivan used certain accounting treatment that had no basis in the generally accepted accounting principle. These activities were supported by David Myers, controller at WorldCom. This was on the basis that it was the general practice at WorldCom to make accounting entries that were not supported by documentation at the directive verbal or through e-mail of the top brass of the company. Sullivan was responsible for much of the manipulation of line costs.
Arthur Andersen played a role in the collapse of WorldCom. This is because, according to Micklethwait, he did not exert considerable control over the company’s reporting systems (70). In 1990s, Andersen revised its audit approach from one of heavy, detailed testing to a risk-based model, which required fewer audit hours. Andersen was willing to rely heavily on management’s own explanations, without, it seems much hard questioning
Research shows that Enron’s chief financial officer reaped over $30 million from dubious transactions between Enron and the partnerships, while other executives made millions more. Markham says that Enron chief executive officer was involved, because the SPE structures were centred in the Financial Reporting Group (110). Andrew Fastow was indicted on October 31 2002 for wire fraud, money laundering, obstruction of justice, and conspiracy aiding and abetting. Kenneth Lay was the Enron’s former chief executive and chairman since 1986, was also involved in overseeing subsequent acquisitions. David Duncan Enron’s chief auditor at Andersen played a key role in shredding key documents relating to the case. This is because it was his job to check Enron’s accounts.
Does the company still exist?
Yes WorldCom still exists, but under different trade name (MCI). Monks and Minow says that WorldCom’s place in history was not limited to a well-timed legislative intervention (576). In July 2002, WorldCom became the largest U.S. Company ever to file for bankruptcy protection. A year and a half after emerging from bankruptcy protection, WorldCom then known as MCI merged into Verizon.
After the scandal Enron still exists as a shell corporation without assets. This is because the company emerged from bankruptcy in November of 2004. In September 2006, Enron sold Prisma Energy International, and it was to be dissolved after the restructuring process.
Tyco still exists and its survival proves that some companies can survive major ethical scandals if they take the correct courses of action. Company still restated its financial results by hundreds of millions of dollars. Company’s existence is on the basis that the company took measures to restore shareholders’ confidence (Ferrell and Fraedrich 445).
What happened to the stockholders of the company?
Moyer, McGuigan and Kretlow say that stockholders of WorldCom lost virtually all their investment, as the company emerged from bankruptcy proceedings (227). The estimated value of the newly reconstituted MCI (the new name for the company) was about $13 billion, a far cry from its peak value of $194 billion. Moyer, McGuigan and Kretlow also indicated that of the $13 billion, about $8 billion was to be inform of stock, when the company emerged from bankruptcy proceedings (227). This stock went to bondholders of the old firm, and an estimate of $5.5 billion was to be in the form of debt that was to be awarded to other creditors. The stockholders fared badly losing the value of their entire investment.
The Tyco scandal cost stockholders who lost directly through the loss due to malfeasance by top mangers as well as from decreases in share prices. The Tyco scandal cost owners of CIT who spent at least $20 million on Walsh to broker the Tyco-CIT deal and whose company lost goodwill (Ferrel and Fraedrich 445). On the other hand the stockholders at Enron lost their stock. At the same time, investors and employees whose retirement plans included large amounts of Enron stock lost their wealth.
Punishment to those involved
WorldCom’s chief financial officer Scott Sullivan pleaded guilty to conspiracy, fraud and making false statements to regulators about WorldCom’s financial condition. Bernard Ebbers was also eventually convicted of conspiracy, fraud, and filing false documents with regulators and was sentenced to 25 years in prison (Monks and Minow 576).
According to Thornburgh, the two major officials of WorldCom involved in the fraud were convicted in federal court of serious criminal charges, with Bernard Ebbers receiving a twenty five year jail sentence and Scott Sullivan a five year term (368). Other subordinates, who cooperated in the investigation, received lesser sentences. No one evidently involved appears to have escaped punishment.
Following the Enron scandal, Kenneth Lay was convicted of multiple counts on charges of conspiracy to commit bank fraud, wire fraud and giving false statements. He however died before he was officially sentenced. The charges would have been life imprisonment. Franzese says that Jeff Skilling held the position of chief operations officer. In May 2006 along with Kenneth Lay was found guilty on federal charges of committing securities fraud and insider trading (235). As a result he received 24 years sentence in federal prison. Andrew Fastow, who was the former chief financial officer, was one of the masterminds behind Enron scandal and he received six years sentence in a federal prison. He was also forced to forfeit $24 million of his assets.
Following the Tyco scandal, Dennis Kozlowski was sentenced in 2005 to twenty fives in jail for grand larceny, securities fraud and other crimes of stealing $137 million in unauthorized bonuses as well as selling $410 million in inflated stock. The chief financial officer of Tyco Mark H. Swartz was charged and sentenced to 3 years in prison for misappropriating more than $170 million from the company. Former general counsel Mark A. Belnick was also charged with concealing $14 million in personal loans.
Lessons learned from the research
The collapse of Enron, Tyco and WorldCom according to Monks and Minow illustrates the importance of strong well-functioning gatekeepers, including boards of director’s auditors and securities analysts in protecting investors (580). In times of market and sector expansions, such as the one from which WorldCom, Enron and Tyco benefited in the 1990s such checks may seem superfluous or even overly burdensome. Such checks ensure that managements, such as WorldCom, Enron and Tyco are confronted with competitive pressures and a shaky business model does not succumb to the temptation to fudge the numbers. The three scandals offer major lessons for the business world especially in areas of corporate conduct.
Leadership in organizations is expected to help set the tone for the rest of the organization and to establish both norms and culture that reinforce the importance of ethical behaviour. It is important to note that the basic premise behind ethical leadership is that since top managers serve as role models for others, their every action is a subject to scrutiny. It is therefore important that CEOs and CFOs vouch personally for the truthfulness and fairness of their firms’ financial disclosures. The WorldCom, Enron and Tyco scandals reveal the decreasing tolerance that today’s government and investors have for misconduct in any form, because the board of directors in the three organizations faced consequences, as a result of their unethical behaviour.