Wednesday, February 13, 2008

Book review: Extraordinary Circumstances: The Journey of a Corporate Whistleblower by Cynthia Cooper, Former Vice President, WorldCom

How brave are you? Are you brave enough to stand up for what you know is right even when what is right is not what is popular? Would you have the stones to confront your employer after you discovered inappropriate business practices, even if your employer was an aggressive, multi-billion dollar telecommunications company? Cynthia Cooper had the stones. She’s the woman who blew the whistle in 2000 and ultimately brought down MCI/WorldCom for fraudulent accounting. This is her story in her own words.

A Mississippi native and lifelong Southerner, Cooper was already making her family proud: the first to go to college; getting an undergraduate degree in accounting from Mississippi State, a Master’s in accounting at the University of Alabama at Tuscaloosa and passing the CPA exam. Her first job was as an auditor for Price Waterhouse in Atlanta; after a stint at another prominent public accounting firm and then with a private client, she moved back to Mississippi in the early 1990s and, after some time, got a position at the company that will become WorldCom in just a few years. She quickly moved up the corporate ladder, adding to her credentials and building the Internal Audit department for the company.

Meanwhile, WorldCom was growing like crazy during this time. During its heyday, the company employed around 100,000 people, a good number of them in employment-sparse Mississippi. Lots of people owned a lot of stock in WorldCom; lots of WorldCom employees placed the bulk of their savings into the company’s retirement plan; and the WorldCom executives made oodles of money. Cooper says that when she started there in 1996 annual revenues were around $1.5 billion; in 2000, annual revenues “[were] tracking toward $40 billion.” Unfortunately for all involved, this was also when the trouble started. The government nixed the WorldCom/Sprint merger, the stock price took a tumble and Cynthia Cooper, in a seemingly routine internal audit investigation into the company’s capital expenditures, found a trail of numbers that led her and her team to discover approximately $3.8 billion worth of fraud, covered by revenue inflation and the underreporting of line costs.

WorldCom’s CFO, Scott Sullivan, and layers of management below him threw as many roadblocks in Cooper’s way as they could: refusing to cooperate with the internal audit, withholding documents, intimidation. Supportive family fortunately surrounded Cooper and she hired a good team of lawyers to protect herself. Finally, in late 2002, succumbing to the massive investigation initiated by Cooper and then taken over by multiple agencies (the FBI, the Justice Department, the SEC, a congressional committee), WorldCom filed for bankruptcy. Its stock price had fallen to $0.83 from a high of $64. However, as Cooper notes, “[n]either the fraud nor the discovery of the fraud caused the downfall of WorldCom … Deregulation, Internet mania, conflicts of interest, delusions of quick riches, and low interest rates created the perfect storm.” She was just there as the ship went down.

The case that the government took against WorldCom was directed at Bernie Ebbers, saying that he knew of and orchestrated the fraud between 2000 and 2002. Ultimately, the lower level accountants and managers implicated in the case received nominal sentences for their cooperation; even Scott Sullivan, the CFO whom the judge describes as the “architect” of the fraud, got only five years for his invaluable testimony against his boss. Ebbers, who was 63 years old at the time, received a sentence of 25 years and ends up being incarcerated in a medium-security prison. Cooper spends a long time detailing WorldCom’s origins and impressive development under Ebbers. It’s clear that she liked him, even after the whistle was blown. I got the sense that she feels he got screwed over a bit, that the man behind the curtain, Sullivan, got off more lightly than he should have.

For her part, Cooper was named one of Time’s “Persons of the Year” in 2002, along with the other Whistleblowers, Coleen Rowley of the FBI and Sherron Watkins from Enron. She resigned from MCI in 2004 and now travels, speaking to corporations, students and other groups about her experiences.

Extraordinary Circumstances is an absorbing and entertaining book. Being a straightforward narrative, it’s a fairly quick read. Cooper even does a decent job explaining all the accounting principles involved so that those parts - which are necessary to explain the fraud - kept my focus. Less interesting were the anecdotal bits about her home life, childhood, etc.: you’re a good Southern girl; we get it, move on. What it all comes down to, however, is that it took an enormous amount of courage and strength of character for Cooper to have taken on the corporate Goliath she did. “Extraordinary circumstances” indeed – pretty extraordinary woman.

02/22/08 - NEW: PLEASE CHECK OUT THE COMMENTS FOR A DIFFERENT PERSPECTIVE.

2 comments:

  1. This is the text of an unsolicited email I received on 02/22/08 from Gene Morse, a former WorldCom internal auditor alongside Cynthia Cooper. Just goes to show that there is always more story to the story.

    Greetings Friend Mouse, I saw your review of Ms. Cooper's book and felt compelled to forward this email to you. I sent the original to USA Today after they published an article about Ms. Cooper. I hate to see people get duped, as I once was, and through their being deceived facilitate the deception of others. Best of luck, Gene Morse

    Date: February 19, 2008 04:37:13 PM CST
    Subject: WorldCom's whistle-blower tells her story

    Ms. Cooper knew there was a $2.3 billion undefined capital expenditures issue relating to the first nine months of 2001 capital expenditures at least by December 2001 and most likely some time prior to that (the $2.3 billon problem was uncovered during Glyn Smith's 2001 Capital Expenditures Review). Ms. Cooper and Mr. Smith did not bring this to the attention of the Audit Committee or anyone else and did not demand support for this (which presented about 1/3 of all of WorldCom's publicly reported Capital Expenditures through the first nine months of 2001). The $2.3 billion was not highlighted or even disclosed in the 2001 Capital Expenditures Review that was distributed in January of 2002.

    Hiding behind the excuse that the WorldCom Internal Audit department only performed Operational Audits simply does not hold water and is not the case. During that same time period I was involved in an International Capital Expenditures Audit that revealed large accounting based frauds designed to protect internal capital budgets, not to defraud stockholders (the evidence was pulled by internal auditors from the accounting system). If the Operational Audit excuse is what Ms. Cooper wants to stand behind, then the 2001 Capital Expenditures Review simply chose to ignore 1/3 of the Operations as reflected by ignoring the $2.3 Billion in Corporate Allocations of Capital Expenditures. If Ms. Cooper had required support in December 2001 (which she had the full right and authority to do as given to her by the Board of Director's Audit Committee), then the Line Cost Capitalization number would have been that $2.3 billion rather than the ultimate $3.8 billion.

    For whatever reason, Ms. Cooper stood idly by and allowed the $2. billion to grow to $3.8 billion in capitalized line costs. Just some of the events that occurred over the six months after the discovery of the $2.3 billion that may have prompted Ms. Cooper to finally take action include: (1) an SEC investigation, (2) discovery of other WorldCom financial fraud activity - the Wireless Bad Debt reversals, (3) changing external auditors from Arthur Anderson to KPMG, (4) replacement of Bernie Ebbers as CEO, and (5) internal and external talk of bankruptcy. Finally in May 2002, when bankruptcy was truly being seen as imminent and with all of these events forboding huge changes at WorldCom, Ms. Cooper decided to investigate the $2.3 billion in undefined 2001 Capital Expenditures. All she had ever needed to do was use Internal Audit's Board of Director's given authority to ask the accountants for support for that number. Who knows how radically different the outcome might have been had she made that query in December of 2001, rather than June of 2002.

    Ask any Auditor you know if they would ignore and choose not to report a $2.3 billion unexplained issue to their superiors.

    The evidence of the $2.3 billion can be found on page 118 of the following document.

    >http://news.lp.findlaw.com/hdocs/docs/worldcom/bdspcomm60903rpt.pdf

    Ms. Cooper must have chosen her motto that is in the USA Today article long after these events: from Goethe: "Things which matter most must never be at the mercy of things which matter least." And she was most likely, "seized by depression and anxiety" because
    she feared someone in authority may determine that she bore some
    responsibility for her inaction.

    Regards, Gene Morse CFA, CPA,

    "A person may cause evil to others not only by his actions but by his inaction, and in either case he is justly accountable to them for the injury." - John Stuart Mill (1806 -1873)

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  2. Internal Auditor in IL.September 12, 2008 at 12:28 PM

    It's certainly interesting to hear Mr. Morse's view, but as a fellow internal auditor I feel compelled to ask what steps Mr. Morse took to act on these concerns at the time.

    From Mr. Morse's account, it would seem that these red flags were clear to any reasonable auditor at the time. Does he include himself?

    If he was aware of some or all of the indicators for potential fraud, he was bound by professional obligation to act on them himself if he saw that his supervisor did not. Otherwise he would be just as guilty of standing "idly by."

    On the other hand, if he was not aware of these indicators, perhaps he's not in the best position to decide what Ms. Cooper did or did not know or what actions she took.

    It's easy to attack from afar and with hindsight. Might Mr. Morse be guilty of "hiding behind [an] excuse" by declaring that any errors by IA were all his supervisor's fault?

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