The Big Lie

In her gripping new book, former WorldCom internal auditor Cynthia Cooper tells how she blew away CFO Scott Sullivan's smokescreen.
David KatzJanuary 25, 2008

“Follow the money.” That was the mantra of Deep Throat, the mysterious source whom investigative reporters Bob Woodward and Carl Bernstein met in an underground parking garage in their real-life thriller, All the President’s Men.

Cynthia Cooper, the internal auditor who unearthed the WorldCom accounting scandal, doesn’t record such a refrain in Extraordinary Circumstances, her gripping new book about her investigation. But Cooper’s bywords might well have been: “If you don’t understand it, and nobody can explain it, keep digging until you find out what it means.”

Woodward and Bernstein followed a winding path papered with laundered campaign money that led up through President Richard Nixon’s inner circle and ultimately to the Oval Office itself. For her part, Cooper wasn’t following money, but information — or, rather, the lack of it. Time and again, as she worked her way through a labyrinth of misplaced accounting entries, she encountered jargon that sounded authoritative, but proved to be completely phony.

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It was the kind of empty language that investors at the time had heard from Enron as well, as executives of the energy company tried to justify assetless accounting and bogus special-purpose entities. Indeed, the arrival of Cooper’s book is timely: after all, today’s economic crisis, too, relied on authoritative smooth-talk that somehow suggested lending to people with bad credit was a low-risk investment. And just as few people questioned the financial underpinnings of the housing bubble, few investors, regulators, or reporters thought to penetrate the accounting smokescreen that WorldCom’s executives were putting forth.

Cynthia Cooper final
“At times, it is a slow, plodding development of facts, checking theories, trying to find connections, and thinking through the issues until you get it right.” — Cynthia Cooper, former WorldCom Internal Auditor

Intuitively, Cooper knew better. When an accounting piece of financial reporting didn’t make sense to her, she asked about it — even if it meant questioning two of the most powerful executives in the country at the time: Bernie Ebbers, the cigar-chomping, megalomaniacal CEO, and Scott Sullivan, the brilliant, cryptic CFO.

At one point, under pressure from Cooper, Sullivan invoked a “rule of 10” to justify a transaction. That puzzled the internal auditor, who hadn’t heard the phrase in any of her accounting classes. So she asked around and found that her skepticism was justified: the phrase is meaningless — except to whist players or gas chromatographers.

More serious was the company’s use of another phony term. In the midst of a 2003 audit of WorldCom operations, Cooper and her trusted colleague, Glyn Smith, found differing amounts of capital spending in two overlapping schedules provided by the finance department. One of the finance directors told the auditors that part of the difference could be explained by “prepaid capacity.”

Cooper and Smith, having never heard the term before, asked for an explanation. Oddly, the director — who oversaw capital spending — couldn’t provide one. His explanation for his ignorance: he got his information from the controller, David Myers.

Rather than going straight to Myers, who along with Sullivan had resisted Cooper’s earlier attempts to make sense of the company’s ensnarled accounting, she decided to find proof that her mounting skepticism was justified. Methodically, with the help of Gene Morse, a technology whiz she worked with, Cooper traced the amounts of prepaid-capacity entries as they branched swiftly in and out of other accounts for no apparent reason.

When all was said and done, she discovered, the effect was to move large, rounded dollar amounts — a tell-tale sign of fraud — from the income statement to the balance sheet. “It is a spider-web of amounts moving as many as three times and finally spread in small-dollar increments across a multitude of different assets, mostly telecom fiber and equipment,” writes Cooper. Her department’s painstaking work revealed 49 prepaid-capacity accounts totaling $3.8 billion over five quarters. The movement of those amounts from the income statement to the balance sheet boosted earnings.

Cooper explains that “prepaid capacity” was designed to represent the costs of leasing fiber-optic lines that had fallen out of use in the wake of the telecom bust and produced scant revenue. Instead of booking the costs as lease expenses as they occurred, however, Sullivan and his mates entered the costs as capital assets, allowing them to record the expense over time — as a company normally would for an asset like a building. It was the CFO’s way of buying time until wished-for revenue caught up with the misclassified expenses.

Receiving no substantiation for the prepaid capacity from Sullivan and Myers, Cooper decided to follow the trail through accounting. What ensued is the high point of her book, which builds suspense like a crackerjack detective novel. She and Smith go door-to-door up the chain of command. Before their first interview, with accounting manager Betty Vinson, Cooper’s hands were shaking. It’s no mean feat to turn a well-known story of an internal audit into a thriller, but such small personal details not only encourage readers to identify with Cooper, they also build an exquisite level of tension.

Vinson blandly told the auditors that although she made prepaid-capacity entries involving hundreds of millions of dollars, she didn’t know what they were for and couldn’t back them up with any data. Instead, Vinson simply said Myers and general accounting director Buddy Yates had provided her with the figures. Confronted by Cooper and Smith in his office, Yates passed the buck up to Myers. It stopped there, with the WorldCom controller admitting that the entries had no support. Once the first false entry was made, there was no turning back. The rest is history, with the company unraveling into the biggest bankruptcy in corporate annals.

Grim as it sometimes gets, Cooper’s tale isn’t without humor. Much of it stems from the author’s recollection of Ebbers, who comes across as a ravenous serial acquirer — of personal effects no less than corporations. Seeking projects for his retirement, the CEO frantically bought up rice fields, timberlands, and the biggest ranch he could find with borrowed cash, and was the proud owner of an aptly named boat, the Aquasition.

Ebbers’s ignorance often seemed as outsized as his ego. Early on in Cooper’s tenure at the company, then-CFO Charles Cannada told the new internal audit director that “Bernie doesn’t want you to use the words ‘internal controls’ in any more of your audit reports.” The phrase aggravated Ebbers because he didn’t know what it meant — a telling gap for the chief of a company soon to spin out of control. Ebbers would later use his alleged lack of accounting knowledge to unsuccessfully argue in court that he wasn’t in on the fraud.

To be sure, Extraordinary Circumstances (soon to be published by John Wiley & Sons) has its flaws. The book, which is strongest when it reflects Cooper’s first-hand experience, dwells too much on recapping the familiar corporate history of the rise and fall of WorldCom and the broader Wall Street scene during the bubble. As a former auditor, Cooper also displays some of the tics of a beginning writer, reporting “it’s 2001” or “it’s the summer of 1992” whenever she wants to move the plot along.

But those are minor quibbles. This is a heroic, often exciting tale of a person who, in the course of doing her job, stumbles on a big lie and pushes on to get to the bottom of it. Worthy as her achievement was, Cooper reminds us how tough it can be to get to the truth. “At times,” she writes, her work was “a slow, plodding development of facts, checking theories, trying to find connections, and thinking through the issues until you get it right.”