Worldcom Erm

1. What were the pressures that lead executives and managers to cook the books?

To answer this question, it’s useful to examine the case using the criteria offered by Robert Simons in his risk exposure calculator. To gauge the risk that is present in a certain company, he uses a series of pressure points.

The first set of pressures are those related to growth. In this section he puts the pressures for performance, rate of expansion and key employees’ inexperience.

A examination of the Worldcom case indicates that there were certainly pressures relating to growth. The initial growth that made Worldcom into a sizeable company was achieved through an aggressive takeover policy. They then also focused on building revenues and acquiring capacity sufficient to handle the expected growth. The goal was, according to Ebbers (CEO), to be the no. 1 stock on wall street.

This translated itself into pressures relating to performance. Simons lists as indicators to measure the risk score: Aggressive goals set by the top-management with very little input by the subordinates, Special bonuses for high performers and the expectations of the capital markets. These can all be applied to the Worldcom case. Ebbers outlined aggressive goals using the Expense-to-Revenue ratio, (royal) rewards were also frequently handed out to selected employees for appeasing Ebbers and Sullivan’s demands and finally Ebbers put value on wall street above steady, sustainable growth and the growth on wall street in turn fueled capital market expectations.

This also resulted in pressures relating to the rate of expansion. Due to the sacrifice of sustainable growth for quick revenue, Worldcom neglected to build on its infrastructure and entered into long-term fixed rate leases for network capacity in order to meet the anticipated increase in customer demand. These leases contained punitive termination provisions and made it so that even if capacity was underutilized, worldcom could not avoid lease...