WorldCom's whistle-blower tells her story

By
Greg Farrell, USA TODAY
16 February 2008, 08:38
4 min read

— -- Cynthia Cooper is not a politician and has never run for public office. And yet without
her efforts, the Sarbanes-Oxley Act — the most sweeping investor-protection legislation
passed by Congress since the Great Depression — might never have been enacted.

Six years ago, following the collapse of Enron, angry lawmakers held hearings, threatened
auditors and warned CEOs that sleight-of-hand accounting tricks would not be tolerated.
The Justice Department even indicted one auditing firm, Arthur Andersen, essentially
putting it out of business.

But by June of 2002, the sound and fury surrounding Enron's collapse had subsided.
Congress planned to pass some form of legislation, but the passions that swayed lawmakers
in the winter of 2002 had eased. Business as usual was coming back into fashion.

Then WorldCom dropped a bombshell: It disclosed a $3.8 billion accounting fraud of its
own, sowing panic among investors. The company filed for bankruptcy protection, wiping
out its shareholders, and the public demanded immediate action. Congress complied,
passing the law known as the Sarbanes-Oxley Act.

But the only reason WorldCom's board of directors discovered the accounting fraud was
through the efforts of the company's internal auditor, Cynthia Cooper, and her dedicated
subordinates.

For her efforts, Cooper was named one of Time magazine's "persons of the year" for 2002,
along with whistle-blowers Sherron Watkins of Enron and FBI agent Coleen Rowley.

Since then, Cooper, 43, has maintained a low profile, giving speeches to universities and
trade groups.
Now, with the publication of her new book, Extraordinary Circumstances: The Journey of a
Corporate Whistle-blower, (Wiley, 367 pages, $27.95) we finally get an inside account of
what really happened at WorldCom.

It's a powerful tale. Cooper's story has been partially told before, most notably in The Wall
Street Journal and in a report prepared for WorldCom's board of directors.

But her adventures at WorldCom come to life in this first-person account. The Mississippi
native describes how, early in 2002, at the request of a colleague, she began investigating
some unusual accounting entries over at WorldCom's wireless division. Little did she know
at the time, but Cooper had picked up a thread that would eventually lead to WorldCom's
accounting manipulations.

She approaches a partner at WorldCom's auditing firm, Arthur Andersen, to discuss the
matter further. The Andersen partner assures her that any aggressive accounting entries in
wireless are balanced out on a corporationwide basis.

The next day, Cooper leaves work early to squeeze in an appointment at the hairdresser.
With an 8-month-old daughter at home, it's a rare opportunity for some quiet time. But
while she's in the middle of the bleaching process, shrouded in tin foil, with hairdryers
blaring all around, she gets a call saying that Scott Sullivan, WorldCom's boy-wonder chief
financial officer, wants to speak to her immediately.

She phones in to the office, and Sullivan chides her for snooping around the wireless
accounting treatments. He tells her not to discuss the matter with Andersen auditors, but to
channel all her queries through his own deputy, David Myers.

It's like a scene from a Lifetime "Moment of Truth" movie. Cooper has no idea that Sullivan
is hiding a massive fraud that will result in the biggest bankruptcy in U.S. history, sending
him and his boss to jail, but her gut instinct tells her that something is amiss.

"No one wants to believe their boss is perpetrating a fraud," says Cooper during an interview
last week at a Manhattan hotel, where she was promoting her book. "You want to believe
there is a valid explanation."
After several months, Cooper's team figures out that Sullivan's department has made $3.8
billion in questionable accounting entries that had the effect of inflating WorldCom's
earnings.

Despite being lauded months later in Time magazine, Cooper says she never felt like a hero.
Just the opposite: In the aftermath of the disclosure of the fraud, with the press and lawyers
and congressional investigators constantly on her trail, Cooper is seized by depression and
anxiety. She comes to understand that her life will never be the same.

Sullivan, the CFO, ultimately pleaded guilty to several crimes and testified on behalf of the
government against WorldCom CEO Bernie Ebbers. Ebbers was convicted and sentenced to
25 years in prison. Sullivan, because of his cooperation, got five years.

These days, Cooper spends most of her time talking to high school students and college
students, urging them to be prepared for that moment when an ethical choice presents itself.
"People don't often realize that they're facing a dilemma," Cooper says. "There are a lot of
pressures that come to bear in the workplace, and people should prepare beforehand."

Human Capital & Careers

February 1, 2008

WorldCom Whistle-blower Cynthia Cooper

What she was feeling and thinking as she took the steps that, as it
turned out, would change Corporate America.

Julia Homer and David Katz

Think of her as the mother of 404. Not that that’s a goal she ever imagined or
one she has embraced. But the odyssey that began when Cynthia Cooper, the
then–vice president of internal audit at WorldCom, decided to investigate
anomalies in the company’s accounting entries ended by inspiring critical — and
heavily criticized — legislation: the U.S. Senate responded to revelations about
massive accounting fraud at the telecom giant by adding Section 404, on the
assessment of internal controls, to the Sarbanes-Oxley Act. For public
companies, the rest is history. For executives, Cooper’s experiences challenging
then-CEO Bernie Ebbers and then-CFO Scott Sullivan, brought to life in her new
book, Extraordinary Circumstances (John Wiley & Sons, February), offer lessons
that are as fresh today as when the scandal first broke.

When did you first suspect that something might be wrong at

WorldCom?

It was a process. My feelings changed from curiosity to discomfort to suspicion

based on some of the accounting entries my team and I had identified, and also
on the odd reactions I was getting from some of the finance executives.

For example, the CFO [Scott Sullivan] asked me to delay our capital-expenditure
audit. When I received an E-mail from the controller telling me that I was wasting
my time auditing capital expenditures, it made me uncomfortable. When I
showed [our evidence] to the external audit partner, he wasn’t initially
concerned. In fact, the audit committee actually gave Scott the weekend to write
a white paper supporting his position.

Nobody wants to believe that the CFO is perpetrating a multi-billion-dollar fraud,

especially somebody as respected as Scott Sullivan. But as my suspicions grew,
my team and I began working at night and behind closed doors because we
didn’t want to be detected. We were running so many queries of the accounting
system that we were starting to crash it.

When did it come together for you?

Eventually we went door-to-door in the accounting department, working our way

up the chain of command. When we finally confronted the controller, David
Meyers, he confessed. His wife later told The Wall Street Journal that he had
decided that if I came to him and confronted him directly he would tell me the
truth. He also said he felt better that day than he had in years.

How long was it after the MCI merger before people thought, “Uh-oh,
this is a mistake”?

I would say that there was a consensus across the company that it was a
mistake. First of all, the company had to take on a huge debt load to acquire
MCI. And a significant portion of MCI’s business came from residential sales. Up
until that point WorldCom’s strategy — and Bernie Ebbers really kept to this
philosophy — had been to stick to business customers, a market with higher
margins and less turnover.

Who was really behind the decision — Ebbers or Sullivan?

Scott was the one who convinced Bernie to buy MCI, in addition to Jack Grubman
and Salomon Smith Barney. Other than the CEO, the CFO at WorldCom had the
greatest influence on the company’s strategic decisions. Bernie had a great deal
of respect for Scott. As much as anyone, Scott had influence on Bernie as well as
on the board. At one point, Bernie was going to acquire a company called Nextel.
Scott balked at that decision and actually threatened to quit, so Bernie backed
out of the deal.

Was there anything about the culture of WorldCom that contributed to

the scandal?

I think Bernie’s personal propensity for taking risks contributed to both the rise
and fall of the company. He loaded it with some $40 billion in debt to fund one
acquisition after another. He followed the same strategy with his own
investments, taking out loans and using his WorldCom stock as collateral. His
personal decisions then affected his business decisions, because he ultimately
saw his net worth disappear, and he was left owing WorldCom some $400 million
for loans approved by the board.

In light of your experiences at WorldCom, what’s your view generally of

the internal audit function?

The reporting structure for the internal-audit function often presents a conflict of
interest that, so far, Corporate America has been content to live with. Many chief
audit executives still report to the CFO, who determines their compensation. If
we want the most independent internal-audit function possible, internal audit
should report both functionally and administratively to the audit committee. The
next best option would be for it to report functionally to the audit committee and
administratively to the CEO. That said, internal audit has come a long way.

In general, internal audit has better relationships now with the audit committee,
and more chief audit executives are reporting functionally to the audit
committee. The one problem I do see post-Sarbanes Oxley is that the role of
internal audit has, in many departments, been narrowed because of Sarbanes
Oxley 404 testing, which has been moved to internal audit, consuming their time
and preventing them from performing risk based audits.
Section 404 wasn’t initially part of the Sarbanes Oxley Bill that passed the
House. It was added in the Senate only after the WorldCom fraud. These two
paragraphs in the act have proven to be an albatross for corporate America.
What Worldcom and a lot of the recent corporate scandals have in common is
collusion at the very highest levels of the company, which means most of the
basic controls can be bypassed.

Has 404 had any positive effect?

One of the most positive impacts of 404 is that executive management and the
board now recognize the importance of a strong internal-control framework,
which means support for internal-audit departments that have often struggled
for resources and stature. At one point early in my career I was told not to use
the words internal controls in my audit reports because it aggravated Bernie; he
didn’t understand it. I doubt that there’s a CEO in the country today who would
say that.

What would you want to leave people with regarding the recent
corporate scandals?

I encourage people not to give in to the thinking that fraud won’t happen in their
companies. History has a way of repeating itself, and based on human nature
there will always be fraud. When there’s increased pressure due to another
boom-and-bust in the market, there may well be another rash of frauds. I think
we have to do our best not to forget what we’ve been through and hold tight to
the positive changes in corporate governance that so many people have worked
to achieve.