Two reports into the collapse of WorldCom argue that a strong culture of secrecy saw management repeatedly burying financial data from its board and auditors.
The second report of Dick Thornborough, the bankruptcy court examiner for the disgraced telcom, calls WorldCom a "poster child for corporate governance failures" and argued that management fostered a culture that "implicitly forbid scrutiny and detailed questioning," laying the groundwork for a host of misdeeds at the firm.
"WorldCom appears to have represented the polar opposite of model corporate governance practices during the relevant period," wrote Thornborough, whose report was published on Monday. "Its culture was dominated by a strong chief executive officer, who was given virtually unfettered discretion to commit vast amounts of shareholder resources and determine corporate direction without even the slightest scrutiny or meaningful deliberation or analysis by senior management or the board of directors."
The board of directors' failures extend particularly to their lacklustre efforts at scrutinising billion-dollar acquisitions championed by management, including transactions dating to the late 1990s. In one instance, Thornborough said, the Board approved the purchase of Brooks Fiber, a competitive telco, after a 30-minute oral presentation from management and without reading any background due diligence materials. A member of management said the Brooks deal, worth USD2.4 billion, was handled so quickly because it was considered a "gnat" compared to the mega-merger with MCI also due to be discussed at that meeting.
Another report released on Monday presents information drawn from interviews with WorldCom management and former staff and presents a host of damning e-mails and testimony from former employees. The Report of Investigation by the Special Investigative Committee of the Board Of Directors of WorldCom gives shocking evidence of the culture of secrecy inside the company, where staff who questioned accounting discrepancies were berated and threatened.
One employee claimed that when he had gone to Buddy Yates, WorldCom's then director of general accounting, for an explanation of a large discrepancy, Yates said, "Show those numbers to the damn auditors and I'll throw you out the f*****g window."
Elsewhere, e-mails uncovered by the Special Investigative Committee put Lucy Woods, who previously headed WorldCom's UK operations, in an extremely bad light.
Woods claimed she had been instructed by US management not to discuss certain numbers when she met WorldCom's UK auditors, Arthur Andersen. In an e-mail to US management, Woods mentions "getting through the meeting" with Andersen without showing them certain detailed figures and "pretending ignorance" on capital expenditure and asset impairment. A reply from Woods' ultimate US superior, CFO Scott Sullivan, congratulated her for her handling of the UK auditors, writing, "Thanks Lucy! Great job!"
Woods told the investigators that the e-mail doesn't accurately reflect the meeting with the auditors and that she had given them whatever information she had; on matters where she didn't have detailed information, like asset impairment, she says she referred the auditors back to US management.
But the investigators noted, "It is telling that both Woods and Scott told us that words like 'pretended ignorance' were used to impress and please senior management. Such words only would have impressed a management team that turned communications and information-sharing with external auditors into a game of hide-and-seek...In our view, any manager who values an open and honest relationship with external auditors, and who saw this e-mail, should have reacted with condemnation, not praise."