Scandals in the cooperate sector have taken place from time to time some of which are discovered as soon as they start whereas others take time before they come to light. These fraudulent activities have negative effects in the product market like reduction in value of share (Johns 2010). The telecommunication fraud is a major scandal that will always be talked about for a long time. The following is a case study on the fraudulent activities behind the doors of WorldCom, the second largest telecommunication firm in the USA. Questions on why, how, where and who was involved in this scandal always cross the minds of business and common people at large. The top management of WorldCom initiated and fuelled the scandal. It was headed by Bernard Ebbers, the CEO, Scott Sullivan , the Chief Financial Officer, and David Myers, the Comptroller.
After the economic boom, WorldCom was affected by the economic meltdown across the globe and could not generate the sales they had projected. Customer demand declined hence WorldCom could not sell its surplus telecom products. They had to pay third party distributors for long distance telecom lines that were not utilized properly as they should be. Furthermore, the high cost of line capacity plus the declining customer demand decreased the net revenue (Jeter 2003). Pressure had also mounted for them to generate more revenue and increase profit levels. This was what was perceived to have led to the scandal.
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There was a lot of inconsistency in WorldCom's books of accounts as the accounting department underreported line costs by capitalizing the cost on the balance sheet instead of properly expensing them. This lead to the notion, that expenditure was low and hence incorrect valuation of their assets. The fraud was also accomplished through inflating revenues with "ghost" accounting entries from corporate unallocated revenue accounts. The inflation was high to a tune of 11 billion dollars. The fraudulent activities were discovered by a group of internal auditors who had previous suspicions on the validity of the asset base of WorldCom. The subsequent discovery of the fraud led to a massive drop on the shares of WorldCom in the market. There were massive losses to the share holders and the company plunged into a huge debt crisis forcing to it file for chapter 11 bankruptcy protection (Khan 2006).
The capitalized assets at WorldCom were not really assets but expenses incurred on purchasing products with were not going to generate any future income or of lasting value. The items WorldCom took were operating expenses but the pretence that they were capital expenses was on the attempt to convince investors and lenders that the company was making a profit when it was actually not.
WorldCom's accounting department escaped discovery by Arthur Andersen, its auditing firm by covering up on their losses and pretending to purchase items of lasting value when they losing billions of dollars through massive cost and expenditure. The auditing firm should have used a substantive audit procedure to determine if WorldCom's financial statements were misstated through capitalizing expenses. This would have been though direct tests using relevant and specific information from the company's accounting system and financial statements. The auditor was supposed to check the details on all the capitalized assets to obtain audit evidence regarding the value of the capitalized assets. Also, he was supposed to check the time and the rates in which expenses are charged. Basically, capitalized expenses should be charged once in a year and not on a monthly basis. Moreover, the auditor was to ensure that the capitalized expenses appeared once in that financial year. The basic process of performing this procedure is by first examining the policies of the company on how to capitalize expenses. The auditor then had to ensure that the accounting department capitalized the expenses according to the set out procedures and norms set out. If they hadn't followed the procedures, it was to be classified as an anomaly and hence fraud. In order to get best results, the WorldCom auditor was to increase the accounting samples on the books of accounts of WorldCom.
WorldCom auditor was also supposed to base his auditing through putting focus on using analytical procedures. These procedures are involved in evaluating financial statements information by reviewing the connection among financial and non financial data (McDaniel 2007). An example on the application of analytical procedures is the expected existence of logical relationship among data. The auditor can therefore use these relationship reviews to obtain evidence of the financial statements values of WorldCom. He should have compared the revenue and expenses amounts for the current fiscal year of WorldCom to those of prior years noting any significant difference. Afterwards, the auditor evaluates the consistency and reliability of data from his expectation of recorded values he has come up with, taking into account the comparability, source, relevance and nature of information available. This would have helped him note the huge and suspicious profits WorldCom was making. He should have then determined the difference of the recorded amounts by the accounting department from his expected values. The difference would have helped the auditor prevent the possibility of any fraudulent activity.
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In any institution, organization, firm, company or cooperation, there should be the presence of internal and external auditors. The internal auditors have the responsibility of performing audit activities and reporting to the external auditors who are directly answerable to the board of directors (Cattrysse 2005). Public listed companies are required to have an independent of validating their financial progress and reports. This is to make sure the company management is not defrauding the affected investors. External auditors validate accounting records and express opinions on financial statements (Rittenberg, 2012). They should be free of misstatements .WorldCom auditor, Arthur Andersen main role was to confirming if the findings of the group of internal auditors had value or if they were baseless.
In conclusion, the WorldCom scandal was one sophisticated and planned fraudulent activity of all time. Detection on the faultiness of the records on the books of accounts was at its minimal as the top brass in the firm were involved. All in all, nothing lasts forever. They were caught and sentenced to specified jail terms. WorldCom had to file for chapter 11 bankruptcy protection in 2002. It was the major topic at that time in Wall Street. In the end, the WorldCom emerged from chapter 11 bankruptcy during 2004 with about $5.7 billion in debt and $6 billion in cash. After the scandal, there were new appointments in the top management, from the CEO to the CFO. Later on, April 14, 2003, WorldCom changed its name to MCI and relocated its corporate headquarters from Clinton, Mississippi, to Dulles, Virginia.