Extreme Makeover

How Robert Blakely and an army of accountants turned fraud-ridden WorldCom into squeaky-clean MCI.

Dennis Beresford, a former chairman of the Financial Accounting Standards Board who now chairs MCI’s audit committee, led one of two internal investigations into the fraud. He’s convinced that everyone involved has been removed from the company. Beresford says WorldCom asked about 50 executives in the finance department to leave after the investigation showed they either took part in the accounting fraud or should have known about it. “We had too many people who looked the other way,” he says.

In March, Sullivan agreed to plead guilty to securities fraud, conspiracy, and giving false statements to regulators. Those crimes could carry a sentence of up to 25 years in prison under federal sentencing guidelines, but Sullivan hopes to get less in exchange for his testimony in the trial against Ebbers that is scheduled to begin in November. Former controller David Myers and accounting executives Betty Vinson and Troy Normand have also pleaded guilty and are cooperating with authorities.

Do the Right Thing

Impressive as it was, cleaning up the fraud wasn’t enough to restore the confidence of WorldCom’s customers; Blakely had to make sure that nothing remotely like Sullivan’s manipulations could ever happen again. In July 2003, WorldCom’s largest customer, the federal government, had barred it from bidding on federal contracts while it reviewed whether the company should be placed on an “excluded parties” list. “Getting that [ban] lifted was the highest priority,” says Blakely. “If the government doesn’t want to do business with you, why should anyone else?”

The two main concerns identified by the General Services Administration, which administers the list, were controls and ethics. Indeed, KPMG, which succeeded Arthur Andersen as WorldCom’s auditor, had identified 96 control issues, and a separate assessment by Deloitte zeroed in on several other “high risk” areas. With help from both accounting firms, Blakely’s finance team put together a “heat map” that listed high-priority risk areas, and then went about fixing them. The solutions included adding basic checks and balances such as segregation of duties among finance staffers, limited access, and documented policies. The company then implemented a much more stringent, and inclusive, policy for closing the books. “It is impossible to completely eliminate the possibility of fraud,” says Blakely. But, he says, the hundreds of added controls will greatly diminish the chances of it reoccurring.

MCI was also forced to implement what is likely the most stringent set of corporate-governance practices ever adopted. As part of WorldCom’s $750 million cash and stock settlement with the SEC, it agreed to accept all the recommendations of the court-appointed monitor. Breeden’s 150-page report on corporate governance, “Restoring Trust,” lists 78 recommendations, including the separation of the CEO and chairman roles, and the required removal of one board member each year to make room for a new director. “Some [of the requirements] go beyond what is reasonable,” contends Beresford. “But we have no choice but to accept them.”

As for ethics training, MCI put the entire company of 50,000 employees through a course designed for it by professors at New York University’s Stern School of Business. In addition, 90 executives attended a two-day ethics program at the University of Virginia’s Darden School. Not surprisingly, MCI is trying to keep ethics in the foreground. Large banners proclaiming the company’s “guiding principles” festoon the halls of its Ashburn, Virginia, headquarters. They include such mottos as “Everyone should feel comfortable to speak his or her mind” and “Do the right thing.” The principles are also printed on the back of employee security badges.

Discuss

Your email address will not be published. Required fields are marked *