Sunday, March 26, 2000

In this assignment, I have chosen to do the case study “Verizon: The Legacy of WorldCom and MCI” on pg 351 – 356 of Business Ethics: Ethical Decision Making and Cases. In the following paragraphs, I will address the following four questions: a.) What are the factors that caused WorldCom to crumble? b.) Why did MCI bail out WorldCom? c.) Why did Verizon and Qwest go after MCI? d.) Are there any ethical concerns in the future for Verizon, Qwest, and others?

The factors that caused WorldCom to crumble were illegal accounting practices by finance CFO Scott Sullivan, improper transparency of the well being of the company, and the improper use of company stock by unqualified, CEO Benard Ebbers in order to obtain a controversial loan worth $408 million dollars. CEO Bernard Ebbers also borrowed $2.65 billion from multiple banks which was supposed to be paid in one year; instead WorldCom used the entire amount in six weeks before the banks had a complete discloser. Even when WorldCom was audited by an outside auditor, the illegal activities either were not recognized, or for whatever reason, auditors assumed that WorldCom’s accounting practices were within legal guidelines; however, per the SEC inquiries, the outside auditor’s reply was questionable in its failure to recognize illegal accounting activities in WorldCom. The scenario broke down as following: WorldCom was paying its expenses and attributing that expense to another asset; whereby, not applying it to stockholders equity; which in essence, showed no decrease in net income when it should have. Normally, an accounting formula is assets [cash, land, building(s)] has to equal liabilities [what you owe] , plus stockholder’s equity [how much the company is worth to investors] . Due to their improper accounting practices, WorldCom was unable to pay their 7.7 billion dollars in debt and finally filed for Chapter 11 bankruptcy. The most interesting concept that was brought out in the failing WorldCom investigation was that the Board of Directors were bending to Bernard Ebbers demands and were not looking out for the shareholders; therefore, stock prices for the shareholders have dropped immensely to only 9 cents a share. It appears to me, another point that was brought out by the investigation was some of the accounting employees had a ‘differential association’ like syndrome; whereby, in this case the employees in the accounting department, learned unethical behavior by their fellow associates and used loyalty for superiors as a standard for their behavior. In the final conclusion, the whole ordeal with WorldCom had shattered trust of the shareholders and other stakeholders. (Business Ethics, pg 182, 2008) (Business Ethics, pp 354-355, 2008) (Wikipedia, 2009)

The reason why MCI bailed out WorldCom is initially MCI was subsidiary of WorldCom; whereby, it was only connected by its parent company which was WorldCom and it could still survive, because of Citigroup. MCI was WorldCom’s long distance giant subsidiary. MCI was still in service when WorldCom filed for Chapter 11, thereby, stayed afloat, with the support from Citigroup. To eliminate any uncertainties, Citigroup paid $2.65 billion to alleviate any protracted litigations. Citigroup’s CEO also created a global ‘compliance’ function and had a tight rein on stock ownership rules by making senior managers own 25% of the company’s shares. They also created an ethics hotline for staff issues (Business Ethics, pp 354-355, 2008) (Wikipedia, 2009)

Verizon and Qwest were competing for MCI merger, because MCI had the telecommunication technology with Fortune 500 companies and the federal government; however, Verizon won the merger agreement. Verizon was dominating in the Northeast. Verizon was already larger and in better shape than Qwest; whereby, this knowledge for compatibility was very alluring to MCI. To MCI’s advantage, it owned a portion of Internet backbone via Tier 1 ISP UUNET which in itself was very complimentary to Verizon. Verizon was well aware that customers demanded different high-tech products and services. The solution for Verizon was to buy MCI. Verizon was only a regional provider, but MCI would boost business with corporate clients with a sales force as competitive as AT&T. MCI brings a large residential customer base as well as cable TV services. (Business Ethics, pp 355-356, 2008) (MSNBC, 2005) (MSN Money, 2005)

The question that may be asked is whether there is any ethical concerns in the future. For starters, there are now just five major players for phone service which includes Verizon, Qwest, AT&T, Sprint and a newcomer Vontage. So far, competition among the five is good for the consumer, price-wise. One ethical issue that Verizon has already touch base with is allowing National Security Agency to obtain customer data. To some people this may be considered an invasion to their privacy. To others, they have nothing to fear, because they feel that it needs to be done to keep our homeland safe. This ethical issue is debatable; however, Verizon has experienced civil lawsuits arguing this issue. Another issue for Verizon is some employees are concerned about fair compensation. At the present, Verizon deducts sales commission when the employee fails to persuade directory advertisers to renew accounts. Verizon also deducts employees’ wages if the company has to credit advertisers, which is obviously out of the employees’ control. The outcome of this issue is the employees are now fighting back with a lawsuit. For Vontage, having based its business on Voice-over-IP, there are ethical concerns on packet sniffing and TCP/IP hijacking (both eavesdropping) which can be avoided with encryption streams. The Federal Communication Commission would enforce that if need be. The state-of-the-art G.729 speech codec can be in service over a regular phone line. (Business Ethics, pp 355-356, 2008) (PCworld, 2007) (Vocal, 2009) (ZDnet UK, 2003)

I believe the major point that I acknowledge in this assignment, is ethical issues will eventually arise when CEOs believe that their company can survive, be profitable, and not be accountable even though their ethical company’s culture is very tainted or non-existent. I believe it breeds corruption. Another point is mergers, in itself, is not a necessary evil, rather it can help a company become more competitive and profitable for the company and their stakeholder. It is only when the competition narrows to a limited few that it becomes dangerous to all of us, because now we’re entering the fixed-price-zone without competition, limits choices and may create dissatisfaction among its stakeholders.

References
Ferrel, O. C., Fraedrich, J., & Ferrell, L. (2008). Differential Association In Business Ethics
Ethical Decision Making and Cases (pg 182). Boston, New York: Houghton Mifflin
Company
Ferrel, O. C., Fraedrich, J., & Ferrell, L. (2008). MCI Becomes WorldCom In Business Ethics
Ethical Decision Making and Cases (pp. 354-355). Boston, New York: Houghton Mifflin
Company
Ferrel, O. C., Fraedrich, J., & Ferrell, L. (2008). Verizon in the Future In Business Ethics
Ethical Decision Making and Cases (pp. 355-356). Boston, New York: Houghton Mifflin
Company
Anonymous (2009). MCI Communications
Retrieved February 29, 2009, from Wikipedia website:
http://en.wikipedia.org/wiki/MCI_Communications
Shrader, K. (2006, May 16). NSA denied access to Qwest files by ex-CEO
Retrieved February 29, 2009, from Wikipedia website:
http://findarticles.com/p/articles/mi_qn4188/is_20060513/ai_n16369663?tag=content;col1
Anonymous (2005, February 14). Verizon to buy MCI for $6.7 billion
Retrieved February 29, 2009, from MSNBC website:
http://www.msnbc.msn.com/id/6964419/
Anonymous (2005, February 14). Verizon steals MCI away from Qwest
Retrieved February 29, 2009, from Money Central website:
https://moneycentral.msn.com/content/invest/extra/P109480.asp
Anonymous (2009). G.729 Speech Codec
Retrieved February 29, 2009, from Vocal website:
http://www.vocal.com/data_sheets/g729.html
Dunn, J. (2007, November 23) Expert scares world with VoIP hacking proof
Retrieved February 29, 2009, from PC World New Zealand website:
http://pcworld.co.nz/pcworld/pcw.nsf/feature/19161B2A5CDFF8E2CC25739B006A7693
McCullagh, D. (2007, November 23) FBI seeks power to eavesdrop on Net
Retrieved July 23, 2003, from ZDnet UK website:
http://news.zdnet.co.uk/security/0,1000000189,39115339,00.htm

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