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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 WorldComs
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 WorldComs
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 WorldComs 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 companys
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 managements own
explanations, without, it seems much hard
questioning Research shows that Enrons 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 Enrons former chief executive and
chairman since 1986, was also involved in
overseeing subsequent acquisitions. David
Duncan Enrons 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 Enrons accounts.
Does the company still exist? Yes WorldCom
still exists, but under different trade name
(MCI). Monks and Minow says that WorldComs
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. Companys 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 WorldComs
chief financial officer Scott Sullivan pleaded
guilty to conspiracy, fraud and making false
statements to regulators about WorldComs
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 directors
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 todays 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 behavio