Business 8th Edition by Marianne Jennings

Exercise 28

During his trial testimony, Bernie Ebbers, the former CEO of WorldCom, who was charged with, among other things, financial fraud, said that he did not always read the company's 10-K, the annual financial report filed with the SEC (see Chapter 20), from cover-to-cover. His purpose in testifying was to show that he was not aware of all the financial information that his officers were releasing. However, through the testimony of former officers and employees, a different picture emerged. Scott Sullivan, the former CFO, who testified against Ebbers said that he learned that line cost expenses would be almost $1 billion greater than expected. He reported that unexpected amount to Mr. Ebbers who emphasized that the company had to hit its quarterly earnings estimates. Mr. Sullivan instructed Controller David Myers and his subordinates Buford Yates, Betty Vinson, and Troy Normand to reduce line cost expense accounts in the general ledger while also reducing reserves in the same amounts, which lowered the reported line costs by about $828 million. As a result, WorldCom's reported earnings were increased by the same amount.
Ms. Vinson and Mr. Normand believed the entries were wrong and considered resigning. When Mr. Sullivan told Mr. Ebbers that the accounting staff might quit, Mr. Ebbers said, "We shouldn't be making adjustments; we've got to get the operations of this company going; we shouldn't be putting people in this position." Mr. Ebbers then spoke to Controller Myers, apologizing for the position that Myers and his staff were put in. Did the government prove intent to defraud? Is Mr. Ebbers criminally liable if he didn't make the entries? [ U.S. v Ebbers, 458 F.3d 110 (G A. 2nd 2006), cert. den. 127 S.Ct. 1483 (2007)]