Understanding WorldCom's accounting fraud: did groupthink play a role?

Journal of Leadership & Organizational Studies, Spring, 2005 by M.M. Scharff

WorldCom, Inc. perpetrated the largest accounting fraud in U.S. history. WorldCom, now called MCI, emerged from bankruptcy protection on April 20, 2004 after being fined $750 million. In total, WorldCom reported accounting irregularities of $11 billion. While employees and investors look for individual culpability, much of WorldCom's organizational structure and culture potentially contributed not only to the fraud but also to the length of time over which it occurred. In many ways, groupthink may help explain some of the issues and fraudulent activities at WorldCom as well as the pressures that were placed on employees extending the period over which the fraud occurred.

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We were duped, how could we have been so stupid, and the more humorous my 401K is now a 101K. These and many others are all sentiments heard around the halls and coffee machines at WorldCom (now named MCI) after the largest accounting fraud in history occurred. Currently the nation's second largest long-distance phone company, MCI is headquartered in Ashburn, VA. MCI emerged from bankruptcy protection on April 20, 2004 reporting accounting irregularities of $11 billion (Young, 2004). Young (2004) reported that the company, as part of a settlement with the Securities and Exchange Commission (SEC), will pay fines totaling $750 million and former bondholders will receive 36 cents on the dollar in stock and bonds in the new company. According to U.S. District Judge Jed Rakoff, Richard Breeden, the court appointed bankruptcy monitor, will probably stay on for an additional two years (Lublin & Young, 2004)

A recent SEC report (2003) found that WorldCom's ex-Chief Executive Officer (CEO), Bernie Ebbers, initiated much of the culture and pressure that allowed the fraud to transpire. In concurrence with this finding, on March 2, 2004, Ebbers was charged with conspiracy to commit securities fraud, securities fraud, and falsely filing with the Securities and Exchange Commission (Davidson, 2004; Moritz, 2004) after Scott Sullivan, WorldCom's ex-Chief Financial Officer (CFO) agreed to testify against him (Pulliam, Latour, & Brown, 2004). On the same day, Reuters television reported that Sullivan stated, "as CFO at WorldCom I participated with other members of WorldCom to conspire to paint a false and misleading picture of WorldCom's financial results." On May 24, 2004, six additional counts were filed against Ebbers (Davidson, 2004). Each additional charge alleges that Ebbers filed false quarterly documents with the SEC from the fourth quarter 2000 through the first quarter 2002. In total, Ebbers now faces charges with a maximum penalty of 85 years in prison and an $8.25 million fine (Davidson, 2004).

Although employees and investors look for individual culpability, WorldCom's organizational structure, group processes, and culture contributed to the fraud and the length of time over which it occurred. Within WorldCom, there was a great deal of focus on teamwork and being team players. In hindsight, however, were many of the senior level managers being team players or was it a well-orchestrated scheme to perpetrate a fraud for the personal gain by a handful of executives?

Morgan (1997) equated the type of behavior at WorldCom to the metaphor of employees being held in a psychic prison. He associated the psychic prison to Plato's cave whereby individuals could only see the shadows, or illusions of reality, on the wall in front of them. Plato's cave dwellers, even when faced with a truth that their reality was flawed and only revealed the shadow of reality, would reject that paradigm change to the point of ostracizing the individual attempting to change their reality. In business, Morgan (1997) suggested that any attempt to change these organizational norms would create "all kinds of opposition as individuals and groups defend the status quo in an attempt to defend their very selves" (p. 245).

Analogous to Morgan's (1997) psychic prison, Irving Janis laid the foundation and basis for groupthink in a 1971 article in Psychology Today. According to Janis (1982), groupthink is a "mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action" (p. 9). Further, Sims (1992) found that the indicators of groupthink include "arrogance, over commitment, and excessive or blind loyalty to the group" (p. 652).

Janis (1982) contended that some well-known examples of groupthink were America's decision to escalate the war in Vietnam, President Kennedy's decision to invade Cuba at the Bay of Pigs, and President Nixon's Watergate cover-up. Whyte (1989) added some more contemporary examples of groupthink as the space shuttle Challenger disaster and President Reagan's Iran-Contra arms for hostages dealings. Each of these examples displays the symptoms or characteristics of groupthink and each ended in disaster. The characteristics of groupthink include a feeling of invulnerability, ability to rationalize events and decisions, moral superiority within the group, group pressure on dissenters, use of stereotypes, self-censorship within the group, and unanimity.