Question

WORLDCOM, A failure of Professionalism and Integrity

Answer 1

WORLDCOM, A failure of Professionalism and Integrity:

In corporate scandals World Com, we can see the disregard for ethics not only in the leaders of those companies but also in the auditors who committed professional misconduct. The downfall of these two companies not only shocked the corporate world but also affected many common people’s lives, their dreams were shattered as many years of their savings disappeared. Who should be blamed for these? Auditors or the management of the company? Both are equally responsible and if auditors had obeyed their code of ethics, the result would have been different.

The stock markets got another king-sized jolt as WorldCom revealed what could turn out to be one of the biggest accounting scandals in U.S. history. The stock market and investor had to face another shock when WorldCom’s internal auditor Cynthia Cooper and her team uncovered $3.8 billion of fraud which was committed by inflating $11 billion worth assets – capitalized recurring expenditures.

SEC launched an investigation and finally WorldCom declared bankrupt. Around 30,000 jobs were lost, investors had to suffer $180 billion losses. WorldCom lost many of it’s large customers, Bush administration disqualified WorldCom in taking up further federal government contract and WorldCom’s bid to Federal aviation admission was rejected. Chicago’s Anderson who was earlier convicted fraud in Enron’s scandal was also the external auditor of WorldCom during five financial quarters.

What went wrong with WorldCom? And what are the audit failures:

World Com has misrepresented their profits by capitalizing the general expenditures. There are two benefits on doing these things firstly yearly profit increased as expenditures transferred to balance sheet from profit and loss account. Secondly, expenditure can be written off over periods in the form of depreciation in case of fictitious assets or general write off expenditures. This system in simple terms called as postponing expenses to next year which is against to the accounting standards of GAAP.

According to GAAP, recurring expenditures should be written off in the same year in the profit and loss account. This is a clear and basic rule that every auditor should keep on the audit checklist. Anderson as the external auditor of the company not only failed to verify on these transactions but also failed to comment on these misrepresentations.

This shows the violation of AICPA Integrity principle. But WorldCom’s Inter auditors work in bringing out the truth behind these transactions is appreciable.

While internal auditors contacted Anderson auditors to know more information about these fraudulent transactions they replied “Any aggressive accounting entries in wireless (were) balanced out on a corporation wide basis”. Anderson being an external auditor has to support to internal auditors of the company. This rejection of support shows the involvement of Anderson auditors in the fraud.

It is the responsibility of an auditor to extend his support to other auditors towards making a true and fair financial statement.

According to SEC final rules to Auditors, every auditor should ensure the quality of work and should ensure that no second look is required. We can say that Anderson auditors failed to comply with this rule when Cooper, internal auditor raised questions on the Anderson’ work.

World Com had an expansion strategy of acquiring small companies. Many transactions have taken place towards acquisitions, in a short span of 15 years, 60 acquisitions happened and this lead to the shortfall of liquid cash flow in the books and adopted a policy of “acquisition without consolidation”. This is also a reason for fraudulent capitalization.

When there are acquisitions taking palace, liquidity positions and current ratios of both companies should be verified before and after the acquisition. Anderson failed to report on these easily identifiable drawbacks of acquisitions made. This shows the violation of AICPA’s objectivity rule.  

Cynthia Cooper, Internal Auditor– The whistle blower

As an internal audit vice chairman of World com, Cooper and team’s work should be appreciated for their detective work in exposing the accounting fraud. Cooper’s ethical and moral values made to whistle blow the fraudulent activities, made Scott Sullivan CFO of WorldCom and other related executives resign from their designations. Upon facing many obstacles, Cooper did not violate any of the professional code of conduct. Following are the list of ethical standards obeyed by Cooper, which kept an end to the fraud in her company.

• Being an auditor, she was independent. Without worrying about her job at WorldCom, she courageously brought this scandal before the public.
• Dedicated towards representing fair and truthful financial reports.
• Thorough research on the suspicious transactions.
• Identified fraud was reported to related department officials and then brought before the public.
• Never compromised with her integrity and objectivity and independence as an auditor.

Positive affect of these scandals

It is known that investors lost billions of dollars of money, thousands of employees lost their jobs, and common people lost their pension funds. But, these disasters brought a significant effect in law to make drastic changes. Keeping in view of Globalization, Sarbanes – Oxley legislation made many regulations like, increasing the requirement of review and CEOs and CFOs are made more responsible and accountable.

SOX also created Public Company Accounting Oversight Board (PCAOB), it is a new body created to regulate auditing matters, applicable to all the SEC registrants including foreign company registrants, to all the accounting firms who audits SEC registrant companies, even foreign accounting firms who participates in auditing of SEC registrants. PCAOB inspects these accounting firms on a regular basis. The inspection takes place in the large accounting firms annually and in the small accounting firm for every three years.

Launching of these new acts not only reduces the risk of fraud but also regulates accounting firms in such a way that it helps to maintain integrity and independence in the profession.

Conclusion

We are in danger of destroying ourselves by our greed and stupidity. We cannot remain looking inwards at ourselves on a small and increasingly polluted and overcrowded planet”. Development of technology and success of globalization, changing the definition of necessity and luxury. These two words are slowing getting replaced with selfishness and greedy. The difference between an educated and uneducated is vanishing, people who are very well educated are becoming very comfortable to be greedy till they were caught.

It is not a convincing fact that standards, regulating acts will control this kind of frauds. Change should happen internally, ethical conflict arises only if the person has and is willing to follow some ethical standards.

It is not the AICPA code of ethics, SOX or TSBPA professional conduct, it is the person who should be convinced to follow them. Rules and regulations of those regulated standards are just the paths showing factors if a person is convinced to be ethical.

After these corporate accounting disasters, government introduced SOX act and PCAOB to regulate on the corporate mentors but, we need to think if this really stop and prevent frauds as in WorldCom case it not the lack of proper law, it is the lack of internal control of the company.

GAAP has several standards, but WorldCom made use of those standards in a different way and committed the fraud. This all prove that the change should be among the professionals. Unless, one himself get convinced to stop these frauds it is not possible to prevent. It is inner conflict of ethics that made Cooper to whistle blow the fraud in the company WorldCom.

WorldCom is an example of corporate greediness. They proved that a person can do anything for money. It is failure of corporate management, Auditors, Investors, employees and also the Act. To erase this impression, an auditor should always respect his profession and should deal with integrity and transparency. Cynthia Cooper stood as an icon for accounting profession. New acts implemented, existing standards were more regulated, and we hope these kind of situations will not repeat in future. Of course, it is not possible to see an error free world but it is possible to see a responsible corporate world.   

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