Revisiting WorldCom’s Financial Statement Fraud

With the passing of the 20th anniversary of WorldCom filing bankruptcy in the aftermath of the whistle being blown on its reporting of fraudulent financial statements, I wanted to revisit Cynthia Cooper’s page-turner, Extraordinary Circumstances. Former CFO Aaron Beam helps us to understand how and why this fraud was committed as he draws on his experience in the financial statement fraud at HealthSouth. Aaron is an author and sought-after public speaker at major universities nationwide.

Interview Highlights

1. The reason no one remembers the HealthSouth fraud.
2. Revisiting Aaron’s role in the fraud at HealthSouth.
3. Why is studying fraud at WorldCom or any other company important for any business student?
4. The business model distinctions of HealthSouth and WorldCom were vastly different. That meant the drivers or causes of those frauds were different, too.
5. The probing process Michael Anderson uses when investigating wrongdoing. He was the FBI agent who was the head of the Enron investigation.
6. What the heck is prepaid capacity?
7. Why weren’t the financial analysts looking at operating cash flow?
8. Lower-level accountants who participated in manipulating the numbers and why they gave in.
9. Is there still a stigma attached to being a whistleblower?
10. Huge props to every internal audit department around the globe.
11. Cynthia’s book is also a memoir.
12. You’ve got to be kidding – seeking an IRS refund for overstating revenue and profits and the $200 million to restate income tax returns.

In Her Own Words

I cannot even try to understand what Cynthia Cooper was experiencing as she was trying to unravel the thousands of bogus journal entries that propped up earnings at WorldCom as it was experiencing financial pressures.

If you have not read Extoradinary Circumstances, here are a few lines from the book on whistleblowing, fraud, internal audit, and cleaning up a mess.

I never aspired to be a whistleblower.

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People don’t wake up and say, “I think I’ll become a criminal today.” Instead, it’s often a slippery slope and we lose our footing one step at a time.

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I start to think of internal audit as the best-kept secret in corporate America.

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The restatement required the team to make over three million accounting entries. It was “the largest and most complex financial restatement ever undertaken,”

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I have come to believe that WorldCom outgrew the man most responsible for building it. The entrepreneur who builds a company is often not the best person to lead it as the company matures. But entrepreneurs sometimes have difficulty letting go and drawing a clear line between themselves and the company they’ve helped build.

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Aaron Beam’s Books

Don’t forget to check out Aaron’s books. HealthSouth: The Wagon to Disaster is a 5-star book about the perpetrator behind one of the biggest financial statement frauds in the history of U.S. business. His other book is Ethics Playbook: Winning Ethically in Business, which is used in many college classrooms nationwide.

You can also listen to our first interview with Aaron, where we dive deeper into the fraud at HealthSouth.

While on the topic of books, Aaron recommended two titles at the end of our conversation. The first is one of the best leadership books I’ve ever read. I just started reading the second title:

• Team of Rivals by Doris Kearns Goodwin
• Gertrude Bell: Queen of the Desert, Shaper of Nations by Georgina Howell

Agents of Change

I applaud the work of Richard Chambers and the Institute of Internal Auditors. Below is a recent interview with Cynthia Cooper as she reflects on her internal audit work while detecting, probing, and revealing the fraud at WorldCom.