Question

Discuss the following topics for the WorldCom scandal:

1. Discuss Cynthia Cooper’s role in uncovering the accounting fraud.

2. Identify what Arthur Anderson’s role in the scandal.

3. Identify at least three specific Canadian quality control standards that in your opinion would have affected the outcome had they existed at the time of the scandal. Explain your reason why they would have had an impact.

4. Identify at least three Rules of Professional Conduct that have been violated as a result of this scandal? Explain the nature of each violation.

5. Identify at least two independence threats for Anderson and explain your why they were threats to Anderson’s independence.

6. If you were a shareholder of WorldCom at the time, would you have pursued legal action against the auditor? Assuming your answer is yes, under which law or laws would you sue and why?

Answer 1

1. Cynthia Cooper’s role in detecting the scandal at worldcom:

She was vice president of internal audit at worldcom. She developed suspicion about the accounting entries passed by the company and started investigating into the capital expenditure accounts. The CFO of the company “Scott Sullivan”, asked her to delay the capital expenditure audit. This made her more uncomfortable and started digging into the accounting entries by running severl accounting queries by working at night hours. Thus she played crucial role in uncovering the scandal.

2. Anderson’s role:

The auditor of the company Arthur Anderson had ignored crucial audit procedures that would have unearthed the scandal.

1. They ignored to verify the significant amount of entries transferring amounts from current account to capital expenditure. They overlooked to devise the scope of audit covering broad areas of transactions of the company.
2. There was analytical review of the company’s performance in contrast to the peers in the industry.
3. They failed to review properly the client’s internal control, instead they relied upon them.
4. For such a large transactions, documentary supporting was not verified. There was lapse in verifying the inventory and other assets of the company.

3. Canadian quality control standards that would have prevented the scandal:

1. The control standard which requires that “The firm firm shall establish policies and procedures requiring, for appropriate engagements, an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. (this would have ensured critical review of the audit judgments made)
2. Monitoring of quality control policies and procedures at regular intervals, to provide reasonable assurance that quality control policies are adequate and operating effectively.
3. Familiarity Threat, that may be created by using the same senior personnel on an assurance engagement over a long period of time and the safeguards that might be appropriate to address such threats. One measure could be rotating the senior personnel or requiring an engagement quality control review.

4. Rules of professional conduct violated;

a. Failure to carryout Proper internal control review

b. failure to provide independent assessment of the company’s accounting numbers, which basically means that the “independence of the auditor” is compromised

c. Failure to conduct appropriate substantive procedures (of vouching of accounting transactions with underlying documents), performance of analytical review procedures including sampling techniques.