Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 2-10 WorldCom
The WorldCom fraud was the largest in U.S. history, surpassing even that of Enron. Beginning
modestly during mid-year 1999 and continuing at an accelerated pace through May 2002, the
company—under the direction of Bernie Ebbers, the CEO; Scott Sullivan, the CFO; David
Myers, the controller; and Buford Yates, the director of accounting—“cooked the books” to the
tune of about $11 billion of misstated earnings. Investors collectively lost $30 billion as a result
of the fraud.
The fraud was accomplished primarily in two ways:
1. Booking “line costs” for interconnectivity with other telecommunications companies as
capital expenditures rather than operating expenses.
2. Inflating revenues with bogus accounting entries from “corporate unallocated revenue
accounts.”
During 2002, Cynthia Cooper, the vice president of internal auditing, responded to a tip about
improper accounting by having her team do an exhaustive hunt for the improperly recorded line
costs that were also known as “prepaid capacity.” That name was designed to mask the true
In an interview with David Katz and Julia Homer for CFO Magazine on February 1, 2008,
Cynthia Cooper was asked about her whistleblower role in the WorldCom fraud. When asked
when she first suspected something was amiss, Cooper said: “It was a process. My feelings
changed from curiosity to discomfort to suspicion based on some of the accounting entries my
team and I had identified, and also on the odd reactions I was getting from some of the finance
executives.”
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collateral. Cooper believed that Ebbers’s personal decisions then affected his business decisions;
he ultimately saw his net worth disappear, and he was left owing WorldCom some $400 million
for loans approved by the board. Ebbers was sentenced to 25 years in jail for his offenses.
Betty Vinson, the company’s former director of corporate reporting, was one of five former
WorldCom executives who pleaded guilty to fraud. At the trial of Ebbers, Vinson said she was
told to make improper accounting entries because Ebbers did not want to disappoint Wall Street.
Questions
1. Identify the stakeholders in the WorldCom case and how their interests were
affected by the financial fraud.
The stakeholders in the WorldCom case are Vinson, Cooper, Sullivan, Ebbers, the
owners, other employees, investors, creditors, the accounting firm (Andersen), and the
public. Vinson, Sullivan, and Ebbers had criminal trials as a result of their part in the
2. Do you think Betty Vinson was a victim of “motivated blindness”? Are there steps
should could have taken to stand up for what she believed? Explain.
Betty Vinson’s situation at WorldCom: she knew it was wrong to “cook the books” but
she did not act on those beliefs. Instead, she followed the orders from superiors and later
justified her behavior by rationalizing it as a one-time act and demanded by people who
Ethical Obligations and Decision Making in Accounting, 4/e 3
knew accounting better than herself. Thus, Vinson did not act on her ethical intent and
did not display ethical behavior.
Although we have more trouble seeing our own unethical behavior than we do seeing
others’ unethical behavior, Max H. Bazerman and Ann E. Tenbrunsel, the authors of the
book Blind Spots: Why We Fail to Do What’s Right and What to Do about It, have found
that people have a tendency “to overlook the unethical behavior of others when it is not in
their best interest to notice the infraction.” They call this “motivated blindness.”
A gap exists between who we think we are and how we actually behave. People need to
more clearly understand their own behavior and, in the process, raise themselves up to the
ethical standards they already hold. Betty Vinson never bridged this gap perhaps thinking
she was “justified” in going along with the fraud because smarter people told her it was
OK; perhaps because she didn’t want to see what became so obvious to Cynthia Cooper;
most likely because she was blinded by her own self-interests and compromised her
ethics and reputation in the process.
What about moral blindness? Moral blindness is used to describe someone who can’t tell
3. In a presentation at James Madison University in November 2013, Cynthia Cooper
said, “You don’t have to be a bad person to make bad decisions.” Discuss what you
think Cooper meant and how it relates to our discussion of ethical and moral
development in the chapter.
Cooper meant that everyone will make some bad decisions at some points. There can be
all sorts of reasons and rationalizations why we made the bad decisions: tired, stressed, in
a hurry, wanting to be liked, wanting to keep job, needing the job for the family’s