Peeling away financial reporting issues one layer at a time

“Extraordinary Circumstances”: Take it to the Beach

It may be an understatement to say that the general public is rarely engrossed by a story about the trials and tribulations of an accountant at work.  Time will tell whether “Extraordinary Circumstances” by Cynthia Cooper will be that rare case, but at least it has a chance.  Cooper was the leader of WorldCom’s internal audit department that discovered the first $3 billion dollars in false accounting entries.

I decided to read “Extraordinary Circumstances” because I wanted to learn  more about the major players at WorldCom, how the fraud was discovered, and how it was perpetrated.  I was also curious to learn how the story of a fraud that was so simple at its core could take more than 350 pages to tell.

As it turns out, the story I was expecting could have easily been told in about one hundred pages; even the chapter titles indicated that it would take me at least 200 pages to get where I thought I actually wanted to begin.  But, as I was reading the book, impatient to get to the good stuff, I got hooked on the seeming mundaneness of how a smart — but not brilliant, hardworking — but not obsessed –teenager picked accounting as a career, got hired and fired, married, became a mother, divorced, and remarried to a stay-at-home Dad.  Much of this was skillfully interwoven with the history of WorldCom, along with the pathos of good corporate soldier accountants meeting their end, and the tragedy of telecommunications demigods going to any extreme to avoid experiencing the consequences of their own fallibility.

Ironically, the parts of the book that I expected to be best were actually a big fizzle.  I already knew before I started reading that accounting manipulations at WorldCom were multi-faceted.  To begin, there was the fraud discovered by Cooper: improper capitalization of period expenses to the tune of about $3 billion.  That, alone, would have set a record for an accounting manipulation.  But, an additional $8 billion would be discovered soon thereafter; and the reader has hardly a clue about where those cookie jar reserves came from, and how they were used in the fraud.  I suppose that’s OK, because after the first layer of cream cheese, the second might be anticlimactic.  But I think Cooper missed, or barely mentioned, two other important elements that explicate the WorldCom culture leading up to the fraud.

The first element was the accounting for business combinations. As WorldCom grew through an aggressive acquisition strategy, rigging the accounting (a la Cendant) to ensure that each acquisition would be accretive to earnings per share from day one would be critical.  It must not have been very easy to manage the favorable accounting when some or all of the purchase price was paid for in WorldCom stock.  It also wouldn’t have hurt to use the opportunities in business combination accounting to create cookie jar reserves in all sorts of accounts, but Cooper didn’t even allude to any of this.

The second element was that a company as reliant on Wall Street’s favorable opinions as WorldCom was, must have been fiddling with their earnings for years.  Yet, it wasn’t even mentioned until page 338:

“…Bernie and some of his top lieutenants had a process called ‘close the gap,’ whereby they would compare quarterly revenue to Wall Street expectations, analyze potential items they could record to make up the difference, and book revenue items that had not been booked in the past.”

I suspect that Cooper, as an internal auditor, may not have been aware of the practice, or even have recognized how insidious it is–and how interwoven it had become in corporate cultures prior to Enron, WorldCom, and ultimately Sarbanes-Oxley.

So, here’s the bottom line.  Would I have paid $27.95 to read “Extraordinary Circumstances” if the publisher hadn’t given me a free copy?  I doubt it.  But if you’re looking for some light beach reading and tired of fiction … wait for the paperback.

But, now that I own the book, I’m going to give it to my son to read.  He’s a freshman in college and is thinking about majoring in accounting.  I’ll be curious to know how much of the accounting and finance in the book he can understand, and more curious to know if he thinks that he could be a whistle blower like Cooper–if he were the one between a rock and a hard place.

Blowing the Whistle on Cynthia Cooper

I’m now going to address an aspect of the book that many would see as minor, but I can’t bring myself to let pass.  I was particularly put off by Cooper’s thinly-veiled religious proselytizing — along with her disingenuous assertions that Mississippi, where the story takes place, is unfairly tarred with a reputation for backwardness, racism and bigotry.  Maybe I’m overly sensitive to Pollyannas because my parents are Holocaust survivors, or maybe it’s from my first-hand experiences with late 20th century bible-belt style bigotry.

Or, maybe it’s because I remember that one of the more prominent bigots during the period Cooper writes about was Kirk Fordice, the two-term governor of Mississippi from 1992 – 2000.  Fordice wore a tie featuring a Confederate battle flag as he announced his opposition to a plan setting aside $4 million of state construction contracts for minority-owned firms.  And when the U.S. Supreme Court considered ordering the state to spend more money on its historically black colleges, Fordice suggested that he might call out the Mississippi National Guard rather than comply.

Fordice also made the claim that “the less we emphasize the Christian religion, the further we fall into the abyss of poor character and chaos in the United States of America.” South Carolina governor Carroll Campbell quickly proffered an amendment, adding “Judeo-” as a prefix to Christian, but Fordice snapped back he meant what he said.

Like Fordice, it seemed that every person Cooper was close to in Mississippi was a churchgoer and/or openly devout — Bernie Ebbers said a prayer before each analysts’ conference.  But, the fear of God didn’t seem to deter the fraudfeasors; and this ineffable irony was passed over by Cooper, even though it is surely provocative and instructive.  It certainly would have made for more interesting reading than how their love of God helped the whistleblowers tolerate the pressures they were under.  When Cooper’s doctor prescribed anti-depressants and time away from work to cope with her own stress, she would not reveal the name of the drug or its effect; but in the same paragraph she thought it apropos to plug the bible-inspired self-help book she was reading at the same time she was taking her meds.

In any case, I’m one of those guys who believe that one’s religious views should be a private matter.  But, I sure would like to know if Cooper voted for Fordice.

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