Tag Archives: WorldCom

No more kool-aid any more: Sherron Watkins and Enron

Power Failure

  • I am taking an ethical stand
  • You are a whistle-blower
  • He is a grass

The ethical complexities of whistle-blowing tap deeply into the issues of divided loyalties.  It is hard to predict what you’d do faced with this sort of dilemma, and I’ve always been interested in the stories of those who have. Power Failure is co-credited to Sherron Watkins the woman usually described as ‘the Enron whistle-blower’.  I was eager to compare it with Cynthia Cooper’s book Extraordinary Circumstances about blowing the whistle in Worldcom which I reviewed a while ago.

I was curious to understand the differences in the two women’s experiences. Cooper was head of internal audit and her job was to prevent just the sort of fraud (simple, but huge) which she found at Worldcom. The horns of her particular dilemma were her professional accountability vs corporate loyalty. Watkins on the other hand was only one of dozens of insiders expressing concern about Enron both within and without the company, others had leaked for years to market analysts, to the press, even to Yahoo message boards. Watkins just happened to be the one who failed to maintain her anonymity.  The irony is that she kept her concerns within the company, taking them to CEO Ken Lay instead of narrow-casting them outside.

This is one of the few books about Enron not put together from clippings, and it shows.  Swartz clearly obtained access to a number of senior or at least central insiders.  It provides a real sense of why Enron was an addictive place to work, which I’ve not found in any other book.   The only other book with an Enronian’s name on the cover Brian Cruver’s book, ‘Enron, Anatomy of Greed‘, but he arrived late and was just one of thousands of low-level employees dismissed with a $4,000 pay-off just before Christmas 2002.

Reading both these books though, three things stand out for me other than the eye-wateringly huge amounts of money.

The first is the absolute importance of operational controls. Yes, ethics and risk management matter both morally and in business terms, but operational controls come first, because operational chaos not only permits these kinds of fraud it may even require them.  Frequent organisational re-structures and high levels of executive churn are bad signs.  Beware of companies which are overly acquisitive or growing too fast, because things will fall down the cracks.

The second is that it is hard to be faced with the morning-after when you have stopped drinking the kool-aid.  ‘Power Failure’ and ‘Extraordinary Circumstances’ both touch on how difficult it was for Watkins and Cooper to determine what the right thing to do was, let alone how hard it was to do it.  I’d like them to have covered the consequences to themselves in a bit more detail, but I guess we don’t like the idea that good people can suffer for doing what’s right.

Finally, while reading the book I found myself wondering what it is like to be Jeffrey Skilling or Andy Fastow right now, in jail.

Enron was a long time ago and I do feel that I’ve read all I need to on the subject, but Lehmans, Goldman, RBS and HBOS remind us that arrogance, chaos and greed enable companies to fall as well as rise.

PS – ‘Power Failure’ is written in the third person by journalist Mimi Swartz. For a more a direct insight into Watkins herself look at the BBC programme Hard Talk where Watkins exchanges wry regrets with the HBOS whistle-blower, Paul Moore.  (This will only be watchable for another two months).

Book Review: WorldCom ‘Extraordinary Circumstances’ by Cynthia Cooper

Extraordinary Circumstances

Extraordinary Circumstances

I’ve wondered for a while why there are over half a dozen books about the collapse of Enron, but only two about WorldCom. Maybe it was because Enron happened first.  Maybe it was because Enron disappeared but WorldCom survived in the form of MCI, who presumably have lawyers. Maybe it’s because Enron’s story is sexier and more complex.

One of the few books available about WorldCom was written by the Vice President of Internal Audit, Cynthia Cooper: Extraordinary Circumstances the Journey of a Corporate Whistleblower.  Let’s get the housekeeping out of the way: it’s written in the present tense and has no illustrations, and both these things are constantly annoying.

So what actually happened at WorldCom?  According to Cooper, it was a fairly simple accounting fraud, well hidden but nowhere near as specialised as the off-balance sheet stuff at Enron, and it was committed to save the company not so a Fastow-figure could skim off illicit cream for personal gain. Basically, WorldCom played PacCom in the 1980s and 1990s munching up telecoms and internet companies but failing to integrate them.  Cooper asserts that it wasn’t the fraud or exposing the fraud that killed WorldCom; it became a dead company walking when the internet bubble burst in 2000 and sucked telecoms into its wake.

The most engaging section of the book is when Cooper tells the story of the few months before and after she and her team of internal auditors discovered the fraud, reported it to the internal audit committee and all hell broke loose. WorldCom had become a lumbering Frankenstein’s monster of acquisitions but it had no single set of operating systems. You can only only make savings from acquisitions by doing the boring operational stuff of cutting out duplication and waste. Instead it was faced with the rising costs involved in managing a hodge-podge of companies, falling revenues as telecoms tanked, and a share-price that burst with the bubble, and that was when CFO Scott Sullivan instigated the fraud. WorldCom started making a loss, but Sullivan reported non-existant profits by moving the cost of renting lines from operating costs to capital, to the tune of $3bn over 5 quarters and (according to Wikipedia) by over-stating sales.

The final few chapters of the book are among the most interesting. It’s clear that CFO Sullivan was, as the judge said, the architect of the fraud. Cooper says she could not decide in her own mind about CEO Bernie Ebbers’ guilt. The book is well lawyered, so although these doubts are phrased in the present tense they are located in the section before the jury came to their verdict.But in Cooper’s mind at that time at least the case against Ebbers was not-proven. Ebbers is serving 25 years, mainly on Sullivan’s testimony.  Sullivan has just finished a 5 year jail term.

The case against Ebbers hinged on the financial pressure he was under following the fall of telecoms stocks.  In April 2002 PacCom’s cigar-chewing, cowboy booted CEO packed up his stuff and left. He faced personal bankruptcy. He had been the king of the deal, driving forward to one takeover after another, and Cooper comments on how his personal style changed as he grew in hubris and then fear kicked in. By the end of his tenure he’d cancelled the free coffee and was issuing memos telling staff not to use the colour copiers. All his wealth was in WorldCom stock, and he borrowed against it, so when telecoms stocks collapsed he effectively ended up with ‘negative equity’ to the tune of $300 million dollars. Even so, there is no concrete proof he instigated, encouraged or permitted the fraud.  The only evidence against him was Sullivan’s testimony saying that Ebbers told him to commit fraud quarter by quarter by telling him ‘we must make the numbers’.

It’s hard to tell if this was plausible deniability in action, or a matter of style.  Cooper implies the latter, and the implication that a nod is as good as a wink in the C-Suite, or the C-Suite of WorldCom at least, is one of the other interesting aspects of the book. Because it’s a first person account, Cooper reports what was said and what she thought at various meetings throughout her career.  Most corporate auto-biographies are not about how people interact, being the narrative equivalent of a series of photographs of the mighty hunter clutching his rifle, one foot on an animal’s corpse.  Those biographies leave me wondering to what extent the C-Suite is a foreign country and how differently they do things there. Cooper casts some first-person light on this, and WorldCom appears to have been political and focused but less testosterone-fuelled than Enron, running at a rapid pace on cryptic comments, laconic remarks and inference.  One could argue, though Cooper is careful not to, that Ebbers is a modern-day Henry II.  If so, then the disparity in sentencing is troubling, to say the least.

As a British reader, there were two things I found intriguing which Cooper didn’t even notice.  One is that the main players are actively religious: Ebbers started each board meeting with a prayer, Cooper’s main contact with colleagues out of work is through their Church.  The second is that both WorldCom and Enron were companies located in the South, these are stories of hicks made good who went bad.  That’s not to say the patricians on the East Coast don’t do the same – look at our current banking crisis and the Wall St scandals of the 1980s.  Cooper mentions but does not explore the cultural differences between the various organisations that ultimately comprised WorldCom.

The book (like this review) is over-long and (unlike me) Cooper leaves it up to you to do your own analysis or not as you see fit.  But there is one extraordinary Ozymandias-like vignette:

It’s November, 2004.  The double glass doors to the executive suite are locked.  I peer through to see drops of water leaking from the ceiling in several spots, and a dimly lit room, many of the lights burned out and the remaining ones flickering, a ghostly symbol of the fall of a company and an executive team that once seemed invincible. The guard unlocks the doors and we file in.  Brown cardboard boxes are everywhere, each labeled with the name of a former WorldCom executive. There is barely room to walk. It feels as if we’re somehow trespassing on private property.  I read the names of people I used to work with as we slowly walk through. Bernie’s office is completely empty, not even a hook on the wall.

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