Tone at the Top

1. In January 2001, Walt Palvo received a 41-month prison sentence. What white-collars crime did he commit?

Walt Pavlo was a Senior Manager in Billing Collections at MCI/WorldCom and dealt with customer payments, credits, and reconciliations of accounts.

He committed financial statement fraud at MCI/WorldCom. In January 2001, he received a 41-month prison sentence for money laundering, wire fraud, and obstruction of justice.

2. How did Palvo manipulate the uncollectible debt to boost the company’s assets and profits?

Palvo felt the pressure from upper level management at MCI/WorldCom to constantly achieve revenue growth in the company. As Pavlo watched his bosses manipulate the company’s financial records, he soon began to manipulate them himself.

Pavlo and his supervisors met to devise ideas on how to cook the company’s books. Financial records were manipulated by Pavlo, his superiors, and his colleagues in a widespread effort to fraudulently make the company look like it was meeting revenue growth projections, even though it wasn’t.

Pavlo learned how to conceal uncollectible debt through entering unusual, fradulent journal entries, delaying write-offs, which boosted the company’s assets and profits.

3. What were the factors that led Palvo to commit the crime?

There were three major factors that led Palvo to commit the crime.

i) Meeting analysts’ expectations

Palvo was preoccupied with meeting analysts’ expectations. This preoccupation can lead to the pressure to commit fraud. Pavlo felt extreme pressure from his superiors to meet revenue projections. Thus, he had to find different ways to manipulate the records so that it looked like MCI/WorldCom was living up to analysts’ expectations.

ii) Compensation and incentives

Compensation and incentive plans may encourage unacceptable, unethical, and illegal conduct.

In Pavlo’s case, in addition to his annual salary, he was eligible for thousands of dollars in stock options each year if he was able to meet his financial targets. He knew there was a financial incentive for cooking the books, so he manipulated the numbers. This created a financial gain for him and kept his bosses happy at the same time.

iii) Pressure to reach goals

The degree of fear and pressure associated with meeting numerical goals and targets also play a major role in fraud. The more pressure and fear that an employee feels to meet revenue goals, the more likely they are to do whatever it takes to meet those goals.

Pavlo stated that he learned how to conceal uncollectible debt and artificially boost the company’s assets and profits from his supervisors. With their help, he delayed write-offs and made the revenue numbers seem more attractive by making them look like they were collectible.

4. How was Palvo’s fraudulent activities uncovered?

Auditors eventually found unusual journal entries made by Pavlo and confronted him about it. It was then that he confessed to his fraudulent behavior.

5. What are the three types of workplace loyalty? Explain.

i) Personal Loyalty

Personal loyalty is the lowest level of workplace loyalty. It consists of employees’ basic acceptance and compliance with the orders of their superiors.

ii) Institutional Loyalty

Institutional loyalty is the next level and is organizational in nature, consisting of accepting and complying with the mission of the organization.