Reports Blast Corporate Culture That Caused WorldCom Collapse
The nation’s second-largest long distance company was the victim of executive hubris, the reports found.
"The fraud was the consequence of the way WorldCom's chief executive officer, Bernard J. Ebbers, ran the company," one report read. "He was the source of the culture, as well as much of the pressure, that gave birth to this fraud."
WorldCom filed for bankruptcy last July after it revealed a huge accounting fraud, which now totals $9 billion. Poor accounting practices gave the company a picture of health during a time when it was in fact losing money.
One of the reports, prepared for the company's board of directors, said the timing of the fraud can be linked to a threat to Ebbers' personal fortune and the report said the fraud wasn’t discovered until he left the company. The report blamed former chief financial officer Scott D. Sullivan for overseeing the fraud with complicity from other executives. More than 40 executives have left the company because of their involvement.
The second report was prepared by former U.S. attorney general Richard L. Thornburgh at the request of a New York bankruptcy judge. The two reports cost more than $40 million to prepare and were more than 500 pages in length.
Combined, the two reports show the illusion of a company that looked good on paper but was actually free falling toward collapse. They tell the story of a chief executive so consumed with generating a personal fortune that he willingly misled Wall Street and his own employees. The organizational culture was one where employees knew about or were concerned about fraud but were too afraid to report it; the board was passive and ineffective; outside accountants were preoccupied; and bankers were so permissive, they failed to uncover routine warning signs.
The reports blast Ebbers for belittling efforts to create a corporate code of conduct, which he called a "waste of time" and where Sullivan handed out personal checks for $10,000 to loyal employees. The report says that in one extraordinary instance of corporate culture gone amok, an executive is told he will be thrown out a window if he reports suspicions of fraud to auditors.
Ebbers and Sullivan declined to be interviewed for either report. Sullivan has pleaded not guilty to fraud charges. Ebbers has not been charged, because, as the reports confirm, there is no direct evidence linking Ebbers to the schemes Sullivan is accused of orchestrating.
"After spending tens of millions of dollars and nearly a year investigating this matter, the reports of investigation released today do not point to a single piece of paper or any witness demonstrating that Bernie Ebbers participated in or knew about any purported fraud at WorldCom," Ebbers' attorney, Reid H. Weingarten, said in a statement released yesterday. Ebbers left WorldCom in April of 2002 when it was discovered that WorldCom had loaned him several hundred million dollars to cover losses in the WorldCom stock he owned. Ebbers has since been selling off his assets to repay the $408 million in loans.