There were two very distinctive roles for the auditors in the WorldCom scandal. One role being that of the Whistle-blower played by Cynthia Cooper a former chief audit executive at WorldCom. She blew the whistle on an $11 billion accounting fraud scheme. Since uncovering the scandal, Cooper has been speaking publicly about her role and the role that whistle-blowers play in the business world. Cooper described how she and a few colleagues performed their own secret internal audit of the telecommunications giant beginning in early 2002. They uncovered 50 suspicious entries in WorldCom ledgers that added up to $3.8 billion in assets the company didn't really have.
Beginning in 1999 and continuing through May 2002, the company under Scott Sullivan (CFO), David Myers (Controller) and Buford Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings. She was able to implement the whistle blower steps that were outlined by Trevino & Nelson in their book Managing Business Ethics. When Ms. Cooper confronted Scott Sullivan, he claimed that the financial transfers were appropriate. The companies lease payments were for the purchase of capacity the company intended to use them in the future, making them appear as a capital expense.
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Despite all of Mr. Sullivan's efforts to delay her, Ms. Cooper continued her review of the company's books. She demanded him to produce documentation on the purchasing of these capital expenditures, when he failed to produce the needed evidence she report her findings to the board of directors for WorldCom.
"Courage", she said," isn't doing something without fear, but doing something in spite of fear". She also said "as long as there are human beings on Earth, we will continue to see frauds and scandals. Students may have to face similar dilemmas sooner than they might think, Cooper warned.
She continues to say" you just need to stick with your morals and stick to your values." She also point that out by referring to the two key accountants who first altered the books they wrote their resignation letters but never resigned. Afraid to lose their incomes, one of them said, "It just goes to show how easy it can be to cave under pressure."
In my opinion Cooper helped reestablish some faith in the profession showing that people will take the steps they need to keep the profession honest even when it might affect their own lives. On the other hand, we can see the role played by Arthur Anderson, and was one of the so-called "Big Five" accounting firms in the United States. Represented by Dick Marvin Former CPA and used to be an audit partner for the Firm, he was the lead engagement partner for WorldCom Audit.
In 2008 The SEC denied him the privilege of appearing or practicing before the Commission as an accountant. This is a as a result of failing to conduct or supervise the audit of world com's financial statement in accordance with GAAS. Dick Marvin failed to take engagement risk into consideration even after Arthur Anderson audit team had rated WorldCom as a "Maximum" risk client, He was aware of CEO Bernard Ebbers substantial personal debt owned and secured by WorldCom Stock price. He also should have been aware of the deteriorating market conditions and the significant downturn in the telecommunications industry all which created a pressure to increase the risk of fraud. He did not exercise due professional care in the planning and performance of the audit. Which resulting a violation of the professional standards.
In the WorldCom case Arthur Anderson became so involved with their client that it would turn a blind eye to any fraud, Melvin Dick denies wrong doing and he testified that Andersen carefully reviewed the company's statements and conducted stress tests, computer analysis and other sophisticated reviews that failed to detect the transfers, which occurred during their audit of the financial reports.
As an accountant, I am just embarrassed,'' said John J. Fahy, a New Jersey accountant and former prosecutor. ''This should not have been missed. Andersen has to confess to incompetence or complicity". In the end I think any set of rules alone. Disconnected from the values, which those rules are ultimately meant to reflect is like a body without a soul.
How was the audit firm affected by the fraud?
Always on Time
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Generally the Public Companies have two types of auditors: internal auditors and external auditors. Each of the members of the internal audit team for WorldCom was able to find good jobs after the 2002 scandal. Jon Marbry works as a contractor. Ten former WorldCom internal auditors work with Jon Marbry. Glyn Smith, who was senior manager in Internal Audit, works as an Internal Auditor Director position with Blockbuster in Texas. Gene Morse and Tonia Buchanan who were senior auditors were able to find jobs in the Jackson area.
Dean Taggart is the Vice President of Internal Controls in charge of the Sarbanes Oxley compliance at HealthSouth. Lisa Smith is a Director of Internal Controls with HealthSouth as well. Cynthia Cooper was chief audit executive and she is the person who blew the whistle on what became one of the biggest accounting scandals in the corporate history. Since she left WorldCom she speaks for corporation, professional groups and students about her experience. She also wrote a book called "Extraordinary Circumstances" about her journey with WorldCom. In 2002 the Time magazine named her "Person of the Year "because she " took a huge professional and personal risks to blow the whistle on what went wrong at WorldCom, and in so doing helped remind us what American courage and American values are all about". Also she was nominated in 2004 for the AICPA Hall of Fame and she is the first woman to receive this distinction.
The external auditing firms before and after the fraud was Arthur Andersen and KPMG. Prior to May 16, 2002 Andersen LLP was the WorldCom's external auditing firm. Andersen audited the Company's 2001 financial statements and reviewed the Company's first quarter 2002 financial statements. During this period, Andersen's engagement partner on the company's audits was Melvin Dick. Andersen gave an unqualified opinion on the company 2001 financial statements following its audit.
Six years after the collapse of WorldCom Inc., the Securities and Exchange Commission barred two of the Arthur Andersen auditors from practicing before the agency. Melvin Dick and Kenneth Avery didn't admit or deny any wrongdoing on their settlements.
One of the external auditors from Arthur Anderson, Kenneth Avery currently serves as Vice President for Monsanto Vegetables covering Japan to Australia and over to India. Arthur Anderson, once the fifth largest US accounting firm, collapsed in 2002.
On May 16th 2002, KPMG LLP was appointed as the Company's external auditing KPMG would later be accused in a report by WorldCom's bankruptcy examiner, Richard Thornburgh, a former U.S. attorney general who is now a lawyer at Kirkpatrick& Lockhart LLP of its flawed tax advice to WorldCom. The report said the company had avoided state taxes by charging subsidiaries more than 12 million dollars in royalties in over 4 years. KPMG assigned Farrell Malone as the engagement partner on this audit. In 2004 the Accountingweb.com says "The Commonwealth of Massachusetts is claiming that it was denied $89.9 million in tax revenue because of an aggressive KPMG-promoted tax strategy that helped WorldCom cut its state tax obligations by hundreds of millions". KPMG is still in business and Farrell Malone is still with KPMG.
What could have been done to prevent the fraud?
In my opinion to reduce the fraud in the future and what we should have done to prevent the fraud in the past we definitely first need to spend more time teaching the young generation especially in schools about ethics, moral values and leadership.
Secondly to prevent the fraud, the Security and Exchange Commission needed to come up with new rules and regulations. The Sarbanes-Oxley Act of 2002 also known as the 'Public Company Accounting Reform and commonly called Sarbanes-Oxley or SOX enacted on July 30, 2002. It is named after sponsors U.S. Senator Sarbanes, Paul and U.S. Representative Oxley, Michael. Sarbanes-Oxley contains 11 titles that describe specific mandates and requirements for financial reporting including and some the titles are: Auditor Independence, Corporate Responsibility, Corporate and Criminal Fraud Accountability, White Collar Crime Penalty, Corporate Tax Return, and Corporate Fraud Accountability. PCAOB is working on establishing a financial-reporting fraud center for collecting information on preventing and detecting fraud. The regulator published a job posting for a director last month.
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Thirdly, the Congress and IRS should have come up that time with changes in Internal Revenue Code which was in discordance with the Exchange Commission (SEC) rules. Under IRS rules, a company is not allowed to expense an item until the item has been put in service.
Finally, the Federal Bureau of Investigation (FBI), Department of Justice, U.S. attorney general, and other federal agencies should have extensive investigative and prosecuting powers to bring white-collar criminals to justice to protect people from these kinds of financial frauds.