An Environment for Fraud
With jail not yet a distant memory, Walter Pavlo recounts the decisions that
led him to hide MCI's bad-debt expenses and embezzle millions.
By J. MIKE JACKA, CIA, CPCU, CFE, CPA, CLU
Regional Auditing Manager
Farmers Insurance Group
IN 1997 — BEFORE MCI WAS AQUIRED by WorldCom — Walter Pavlo, a former
MCI billings manager, was sentenced to 41 months in federal prison for wire fraud and
money laundering. Over a six-month period in 1996, Pavlo and two associates defrauded
MCI customers out of approximately US $6 million. In addition, at the direction of his
supervisors, Pavlo helped manipulate the telecom company's accounting records to hide
bad-debt expenses totaling US $180 million. The road he traveled to get to this point
should be a stark reminder to internal auditors about the benefits of controls and a lesson
to anyone who doubts the necessity of those controls or the potential for committing
fraud that's within everyone.
Pavlo did not begin his business career with a plan to defraud MCI and its customers. "If
someone asked me on my first day at MCI, how I was going to steal US $6 million after
working here only a couple of weeks," says Pavlo, "I would have said that I would never
do such a thing and I wouldn't even know how to do it." With an engineering degree from
West Virginia University and a position in the aerospace division of Goodyear Tire &
Rubber Co., Pavlo began his career. After a couple of years, he moved on to GEC
Avionics and concurrently finished an MBA degree in finance. In 1992, he began
working for MCI as a manager in the collections division.
Telecommunications companies and long-distance carriers as they are known today did
not exist 25 years ago. But in 1983, the U.S. government gave final approval to break up
telecom giant AT&T.
From this decision, AT&T was forced to lease long-distance phone
lines at a 40 percent to 70 percent discount to small, regional companies. These
companies could then resell the bandwidth at a profit, while still undercutting AT&T's
price. In the feeding frenzy that followed, innumerable small companies were created to
take advantage of this lucrative situation. For all industries, the 1980s and 1990s spawned
a new kind of growth that was often fueled more by acquisition than by internal
development. Telecommunications was no different and, from this cannibalization,
giants like MCI and WorldCom emerged.
The reselling of long-distance can be a complicated process. But, Pavlo explains, it's
really just like the sale of widgets: A company sells its widgets wholesale and other