|Type of paper:||Research paper|
|Categories:||Company Accounting Business ethics|
Accounting fraud is generally the intentional manipulation of financial documents in the bid to create a false outlook of corporate financial health. It mainly involves the organization, employees, and particularly the accountant misleading shareholders, and investors. An organization can commit accounting fraud by embezzlement, misstating liabilities, and assets, not recording expenses or overstating its revenue. Embezzlement is one of the most common accounting frauds across the world as it involves illegal utilization of company finances by the person in control of managing the funds. In most cases, the accountant is often in the mix of such scandals as he makes it possible for the other fraudsters to use the funds for personal needs. It is also rarely shown in the media as governments, and companies would rather protect their reputation by solving such scandals privately in the bid to avoid a negative public reaction. Misstating current assets, and liabilities is also common as it allows the company to misrepresent its short-term liability. On the other hand, overstating revenue is common, especially when a company is operating in losses, thus not generating enough revenue. Such a situation would drive up the company's share price and attract more investors by creating a false image of its financial situation.
Based on economic conditions, the type of the industry, and the pressure created by the top management, WorldCom would most probably be involved in embezzlement and manipulation of financial statements. It was evident that fraudulent behavior and improper conduct were taking place on different levels of the organization as even the top management took part in these activities regularly (Breeden & Rakoff, 2003). WorldCom's culture, which instilled the idea of making profits above all other competitors, and keeping financial information from those who needed to know encouraged fraudulent behavior in the company. According to Beresford, Katzenbach and Rogers (2003) the regression of the telecommunication industry also compounded pressure on the company to display false figures of growth (Beresford, Katzenbach & Rogers, 2003). Additionally, the ego of Bernard Ebbers, who was the co-founder, and the chief executive officer could not allow him to inform Wall Street that the company needed time to consolidate its acquisitions.
WorldCom Organizational Structure
I feel that the fraud was orchestrated by Bernard Ebbers and Scott Sullivan, who was the chief financial officer of the company. Additionally, the top executive officers of the company also had some hidden interest in the fraud in order to get financial gains from these activities. This is evident in the organization's compensation plan, which had three critical elements, long-term incentive, annual incentive compensation, and base salary. This meant that without showing the company showing financial health, the top executives would be obligated to liquidate a large amount of their investments for compensation. Ebbers was encouraged to commit the crime as a result of the fall of the telecommunication industry, and the end to a wave of mergers put enormous pressure on the company's share price. According to Lyke and Jickling (2002) he had also invested most of his fortune in the company, and he had already more than $300 million with the falsified shares as collateral (Lyke & Jickling, 2002). This shows that Ebbers had a lot to lose if the company collapse, which made him desperate to do anything in the bid to save his fortune, and the money borrowed from investors (Kaplan & Kiron, 2004). Furthermore, as a founder, and the chief executive officer of the company, he ought to have known what was going on behind the scenes since he had utmost control of the business. In a different dimension, the management protocol entailed that employees do not have the right to ask any questions about their superiors (Scharff, 2005). Ebbers directed Sullivan to make accounting entries that had no basis as long as they were universally accepted by the accounting principles.
WorldCom fraud was perpetrated by improper accounting and embezzlement of funds. Thus, I would start the investigations by having an initial background assessment. During this step, I would come up with a work plan, and an initial information request to make sure that I have all the needed information (Lyke & Jickling, 2002). This step would also entail performing a high-level financial analysis of the previous performance of the company from a financial perspective. The second step would involve data collection as one of the most important processes during the investigation. Data collection would include activities such as conducting interviews with relevant operational and financial personnel (Pearson & Singleton, 2008). The interviews would incorporate several former, and present employees who performed finance, and accounting functions in the organization as well as the company's internal audit personnel, the legal team, and the board of directors. I would also review the internal controls, and financial system such as processes, procedures, and policies in the bid to establish the genesis of the problem. Preparing supplemental informational requests, and reviewing the available documents would also be important in this step.
The third step would incorporate evaluation, and analysis where I would conduct a profound analysis of the data, and problems arising from them. I would also perform an analytical evaluation of the financial information in pursuit of identifying the irregularities. This step also involves quantifying the possible losses and impacts (Ramaswamy, 2005). The last step in my investigation would typically be summarizing the findings and reporting. The report would also include results, internal controls, and recommendations for future improvements that can hedge against such risks, and weaknesses.
Information and documents to be used include:
- The memorandum of association
- Financial, and accounting reporting records such as balance sheets, statement of financial position, and cash books.
- Documents related to the structure and function of the organization, which includes the duties, and responsibilities assigned to various business units, and employees.
- Documents relating to executive bonuses, compensations, and other benefits upon consolidation of the company.
- Documents concerning the company's internal control functions and oversight that are related to the reporting system.
- Records representing various corporate acquisitions, and other transactions.
- Documents related to the loans made by the company to the chief executive officer, Ebbers, and his predecessor.
- Records related to dealings with investment banks, security analysts, and its employees.
It is also important for the investigator to request for access into the company's computer system to perform activities such as restoring deleted emails, voicemail messages, and any attachments, which can be recovered (Rezaee, Crumbley & Elmore, 2004).
The Sarbanes & Oxley Act was established in 2002 to protect investors from fraudulent companies by improving the reliability and accuracy of disclosures made by limited public organizations. It was basically meant to regulate financial reporting even though other provision s of the act applies to all businesses, including not-for-profit organizations and private companies. According to Coates and John (2007). Section 302 of the act mandates all managements to personally certify in writing the financial statements of the company which have to comply with the act's disclosure requirements (Coates & John, 2007). This makes officers who sign off these statements liable to criminal penalties if they are found guilty of any misappropriations. Similarly, section 404 of the Sarbanes & Oxley Act requires that all auditors and management to create internal controls and reporting methods in the bid to establish adequacy. However, some opponents of the act feel that the requirement can have adverse impacts on public limited companies bearing in mind that it is expensive to create and maintain the internal controls.
During the Ebbers trial, He suggested that he was not aware of any fraudulent activities and depended on the accounting sector for all matters to do with finance since he had little knowledge of financial statements. This may be one of the reasons he was charged guilty since the act mandates that officers who sign off these statements liable to criminal penalties if they are found guilty of any misappropriations. Similarly, no 99 of the Sarbanes & Oxley Act implies that the auditor has the power to conduct audits to establish whether financial statements are free of misappropriations, whether by fraud or error. The section also offers guidelines to auditors on how to detect fraud. For instance, one of the guidelines involves interviewing the management within a company about the risks of fraud and analyzing the procedures conducted during the planning of the audit. Additionally, Gordon, Loeb, Lucyshyn and Sohail (2006) suggest that section 802 of the Sarbanes & Oxley Act contains rules that affect record-keeping such as the particular business records that a company is supposed to keep, the retention period for storing records and the falsification and destruction of records (Gordon, Loeb, Lucyshyn & Sohail, 2006).
Regarding fraud risk inquiries, auditing standards suggest that the auditor should utilize his knowledge of the company and its environment to and other risk assessment techniques to determine the nature of misconduct in financial statements. Some of these risk inquiries may include characteristics of potential suspects, knowledge of the fraud triangle and discussions among engagement personnel (Piotroski, & Srinivasan, 2008). Other inquiries needed during forensic accounting investigations include declining conditions of the company's industry, lack of enough capital to continue operations, and ineffective control of the environment. Some other fraud risks might not be need but might be significant depending on the situation knowing the circumstances that internal controls can be overridden, the steps for making adjusting entries and knowledge on the company's revenue recognition policies. It is also important to note that every case is often different, and the auditor should, therefore, be aware of the defect factors that affect each one of them.
Beresford, D. R., Katzenbach, N., & Rogers Jr, C. B. (2003). Report of investigation by the special investigative committee of the board of directors of WorldCom, Inc. Clinton, Miss.: Worldcom Incorporated.
Breeden, R. C., & Rakoff, J. S. (2003). Restoring Trust: Report to the Hon. Jed S. Rakoff, the United States District Court for the Southern District of New York: on Corporate Governance for the Future of MCI, Inc. Worldcom, Incorporated.
Coates, I. V., & John, C. (2007). The goals and promise of the Sarbanes-Oxley Act. Journal of economic perspectives, 21(1), 91-116.
Ge, W., & McVay, S. (2005). The disclosure of material weaknesses in internal control after the Sarbanes-Oxley Act. Accounting Horizons, 19(3), 137-158.
Gordon, L. A., Loeb, M. P., Lucyshyn, W., & Sohail, T. (2006). The impact of the Sarbanes-Oxley Act on the corporate disclosures of information security activities. Journal of Accounting and Public Policy, 25(5), 503-530.
Kaplan, R. S., & Kiron, D. (2004). Accounting fraud at WorldCom (pp. 9-104). Boston, MA: Harvard Business School.
Lyke, B., & Jickling, M. (2002, August). WorldCom: The accounting scandal.
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