Case Study - Accounting Fraud at Worldcom

...

WorldCom needed more transparency in addition to a proper code of conduct and a corporate culture that encouraged reporting and greater internal communication. The corporate culture should encourage and expect ethical conduct, exemplified by senior management in order to set the standard and show their commitment to ethical conduct. The culture should also make the legal function influential by giving them space to help in decision making process and in the management of the company. Strict accounting policies and procedures should be implemented and strictly enforced by internal controls and audits to prevent fraudulent acts. External auditors should also be used and given access to the financial data to know the real condition of the company.

4. Ultimately, the board of directors and external auditors are both to blame in this case of accounting fraud. The board of directors, who make up the governing body of WorldCom and exist to advise the strategic direction of the company, failed to appropriately oversee the actions of upper management. Mr. Ebbers, CEO of WorldCom, somehow always found a way to maintain a significant distance from lawyers, ethical and legal procedures. In addition to his role as CEO of WorldCom, Mr. Ebbers also owned several other businesses, where he inappropriately solicited WorldCom’s financial advisory to help to maintain his other assets. Despite using WorldCom to obtain loans for these other business he did not provide any significant collateral to back these loans. Also, Mr. Ebbers and the CFO, Mr. Sullivan, consistently tried to show consistent revenue growth at WorldCom by manipulating accounts. Fraudulent tactics included releasing accruals, and capitalizing line costs. Furthermore, Mr. Sullivan forced other employees to change the account entries to meet the illogical and poorly substantially forecasts of the CEO.

From an external audit perspective, Arthur Andersen did not show independence and unbiased actions in the final reviewing decision of WorldCom. Because WorldCom was Arthur Andersen’s “flagship” and most highly coveted client, they turned the other cheek to cover their fraudulent activities. Instead of recognizing WorldCom’s fraudulent behavior, they officially noted them as only a “moderate risk” client, which was falsely published to many stakeholders. Even though, they were restricted in gaining access to full company information, Arthur Andersen still managed to perform audits that showed clues of fraud. It can be clearly seen that the auditing party was involved with WorldCom as part of the fraud as a whole, since the rating of WorldCom was deemed fair, where the release of the audit information showed the company was in good standing and condition.

At the end of the day, the board of directors and external auditors never had access to the correct information. Even during a time where the telecommunications industry was not performing well as a whole, WorldCom somehow was showing great performance amid facts and figures that were too good to be true. Both parties, the board of directors and external auditors, are obliged to raise question, confirm facts, and carry out due diligence; this failure to interrupt and scrutinize places the initial blame on them.

5. I think in this situation Betty Vinson is actually a victim, because Vinson knew that what she and Normand were asked to do was something wrong as “the proposal was not good accounting” but their boss Yates who also admitted that he was not happy about the transfer either convinced them that the director David Myers had assured him that it would not happen again. Betty being a royal employee, she was put in a very difficult position and ended up releasing the accruals. Fraud is illegal and there is no excuse for participating in such activities and therefore all the unlawful things that she had done, it is right for criminal charges to be levied against her.

As a loyal employee, it is never easy to reject a request from the employer, as there could also be consequences, such as losing their job. But without a question when an employee is asked to do something wrong, they should reject it should have the courage to denounce it and report to the authorities.