Don’t ever tell yourself, “that won’t happen to me.” Just ask Cynthia Cooper, former Vice President of Internal Audit at WorldCom.

Cynthia Cooper was a typical accounting student as an undergrad at Mississippi State University. Raised in Clinton, Mississippi, Cynthia was “the girl next door.” Growing up in a family with a modest income, she attended the local high school, worked as a waitress at the local Golden Corral, and headed off to one of the state’s well-known universities.

After graduating from college, she later completed her Master of Accounting degree at the University of Alabama and became a certified public accountant. Her career began like most accounting graduates in the field of public accounting, working with one of the major accounting firms in Atlanta.

Most likely, she never thought she would face the challenge of her lifetime before reaching the age of 40. However, a few short weeks in May and June of 2002 changed her life forever. This case summarizes how she unraveled a $3.8 billion fraud that ultimately grew to over $ 11 billion and sent one of the country’s largest and most visible companies to its knees in bankruptcy.

Consider how you would have handled the situation if you had been in her shoes.

WORKING FORWORLDCOM Cynthia Cooper joined the company that eventually became WorldCom after returning from Atlanta to her hometown of Clinton, Mississippi in the early 1990s. Following a recent divorce, she moved with her two-year-old daughter to be closer to family. She first joined Long Distance Discount Service (LDDS), which later became known as WorldCom, as a consultant in the finance department earning $12 an hour. She left LDDS for a short stint to join SkyTel, a paging company, but later returned to LDDS to head up its internal audit department in the mid-1990s. WorldCom started as a small “mom and pop” company in the early 1980s. Bernie Ebbers moved the WorldCom headquarters to Clinton, Mississippi, because it was the college town of his alma mater, Mississippi College. By 1997, the company had emerged within the telecom industry and caught the eye of many on Wall Street when it issued a bid to acquire the much larger and better known company, MCI.

Cynthia Cooper enjoyed the rising status of WorldCom’s growth in the business community. She was promoted to Vice President of Internal Audit in 1999, leading the internal audit function in what became the 25th largest company in the United States. WorldCom’s stock price continued to rise through 2000, and she and her colleagues dreamed of retiring early and starting their own businesses. Cynthia dreamed of opening a bead shop and actually purchased a couple hundred thousand beads that she stored in her garage.

Establishing internal audit’s role in the company wasn’t easy. WorldCom’s CEO, Bernie Ebbers, was forceful about his distaste for the term “internal controls” and allegedly banned the use of the term in his presence. At one point, Cynthia called a meeting with her boss, WorldCom CFO Scott Sullivan, Bernie Ebbers, and a few others to help them see how an internal audit department could help the company’s bottom line. Despite being almost 30 minutes late to the meeting, Ebbers was the last person to leave the meeting. At that point, internal audit’s focus on efficiency of operations became its primary charge, leaving the financial audit-related tasks in the hands of the external auditor, Arthur Andersen, LLP. Cynthia, as Vice President of Internal Audit, would report to the CFO, Scott Sullivan.

While WorldCom’s growth skyrocketed throughout the 1990s, the telecom market was saturated by 2001 and WorldCom’s earnings began to fall. WorldCom executives began to feel tremendous pressure to maintain their stellar track record of financial performance............

REQUIRED

 [1] At the time Cynthia Cooper discovered the accounting fraud, WorldCom did not have a whistleblower hotline process in place. Instead, Cynthia took on significant risks when she stepped over Scott Sullivans head and notified the audit committee chairman of her findings. Conduct an Internet search to locate a copy of the Sarbanes-Oxley Act of 2002. Summarize the requirements of Section 301.4 of the Act.
[2] Use the Internet to conduct research related to whistleblower processes. Prepare a report summarizing key characteristics for the operation of an effective corporate whistleblower hotline. Be sure to highlight potential pitfalls that should be avoided.
[3] As Vice President of Internal Audit, Cynthia Cooper reported directly to WorldCom’s CFO, Scott Sullivan, and not to the CEO or audit committee. Research professional standards of the Institute of Internal Auditors to identity recommendations for the organizational reporting lines of authority appropriate for an effective internal audit function within an organization.
[4] Conduct an Internet search to locate a copy of the Sarbanes-Oxley Act of 2002 and summarize the requirements of Section 406 of the Act. Then, search the SEC’s web site (www.sec.gov) to locate the SEC’s Final Rule: “Disclosure Required by Sections 406 and 407 ofthe Sarbanes-Oxley Act of 2002 [Release No. 33-8177]. Summarize the SEC’s rule related to implementation of the Section 406 requirements.
[5] Often the life of a whistleblower involves tremendous ridicule and scrutiny from others, despite doing the ’right thing.” Describe your views as to why whistleblowers face tremendous obstacles as a result of bringing the inappropriate actions of others to light.
[6] Describe the personal characteristics a person should possess to be an effective whistleblower. As you prepare your list, consider whether you think you’ve got what it takes to be a whistleblower.
[7] Assume that a close family member came to you with information about a potential fraud at his or her employer. Prepare a summary of the advice you would offer as her or she considers taking the information forward.
[8] Conduct an Internet search to locate a copy of the Sarbanes-Oxley Act of 2002. Read and summarize the requirements of Section 302 of the Act. Discuss how those provisions would or would not have deterred the actions of Scott Sullivan, CFO at WorldCom.
[9] Document your views about the effectiveness of regulatory reforms, such as the Sarbanes-Oxley Act of 2002, in preventing and deterring financial reporting fraud and other unethical actions. Discuss whether you believe the solution for preventing and deterring such acts is more effective through regulation and other legal reforms or through teaching and instruction about moral and ethical values conducted in school, at home, in church, or through other avenues outside legislation.