Homework #1-Accounting Fraud by Trang Carnes

Part 1-World Com and Cynthia Cooper

WorldCom was a second largest telecommunications company in the U.S. WorldCom tried to
expand their acquisition by acquired other telecom firms, but the industry became to declined
and they couldn’t find enough customers to cover the cost. The CEO and his subordinates
initiated their accounting created some unsupported entries trying to boost the company revenue
for better stock price.
Betty and Troy were mid-level manager in the Accounting Department, they’re working under
the Controller, and three ranks below the CFO. Two of them discover the errors from the books
five days ahead before it released to the public, and unfortunately, they can’t resolve the issues.
They found the expenses and revenue didn’t match, in fact, they moved the expenses from
income statement to balance sheets as an asset to make the company earning more profitable.
Betty and Troy tried to confront the CFO, Scott D. Sullivan, because it was closed to the
deadline. The CFO had no intentioned to fix the problem, instead he told them to cover it up and
promised he’ll reversed the entries next quarter and everything would be fine with the rule of ten.
Betty and Troy were encountered ethical dilemma at this point and they’ve very difficult time to
makes decision. Betty and Troy were uncomfortable to obey the superiors ordered but they’re
convinced by the CFO that it’s only the first and last time they’ve done it. Two of them once
considered to resign but they’re fearful to lose their job and financial security at the same time.
David Myers, former Controller of WorldCom, when being asked about the “prepaid capacity”
entry by Cynthia. Myers gave Cynthia an honest answer about the entry had no support and he
regret since he created that account. His wife later said that he was relief after he committed to
Cynthia because was under pressures but keep it to himself rather than sharing it with his family.
He was attempting to committed suicide by driving over 100 MPH on the road and stay
depressed.
Cynthia Cooper, former Vice President of the internal audit group at WorldCom, was a key
whistleblower of WorldCom because she helped to uncovered over 3 billion accounting fraud
case, and it was the largest incident case in history. At first Cooper discovered some suspicious
entries in the books, then she tried to meet with the external auditors, Arthur Andersen, to
discuss about the entries, but unfortunately, they didn’t discover any issue at the time. The CFO
called for Cooper after he heard about the meeting with external auditors. Scott want Cynthia to
delay her audit and told her drop the matter. But Cynthia didn’t step back, instead she tried to
find the way to push through. She and her teammate worked late each night to conducted private
investigation over those suspicious entries. The CFO once again told Cooper to back off and the
CEO want to meet her in private, but Cooper didn’t give up. Few months later Cynthia and her
group uncovered the fraud and report to board of directors.
Although Cooper did the right thing but didn’t get appreciate by others, for instance, some blame
her for the company downfall and thousands of people lost their jobs. Cooper life has changed
since then. Cooper and her family had a difficult time tried to avoid the press, and herself
suffering from depression and lose excessive weight. Once again, with the encouragement of her
families and friend, Cooper finally stand up and push forwards. Cooper did not regret over her
action but she empathy for all the WorldCom employees and staffs. If I’m in Cynthia shoe, I’m
not sure I would have enough strength to blow the whistle, but I be positive that I won’t initiate
with fraud because it’s against business ethics. I might initiate privately or choose to leave the
company.
Cynthia and her teammate didn’t gain full access towards the accounting system because the
Controller intentionally cut her team from access to the system. They’re later use a new home-
grown program from their IT developer to have a full access to the accounting system. During
the investigation, they’re identified numbers of Allowance for Doubtful Account with balance
went in a wrong direction and those entries being reversed through the system when it being
traced. They’re also identified numbers of “prepay capacity” from the accounting system, and
they tried to investigate those suspicious accounts, but no one could give them an adequate
answer. As the investigation continue, they’ve found over 40 “prepay capacity” back in 2001
(first quarter) with total 3.8 billion in fraud.
The work of external auditors different from internal auditor because they have no access to the
company accounting system. External auditors not company employees. Most of the time they
get all the information from the management, and they would have a difficult time to detect fraud
early because most of them only conduct a single annual audit. The internal auditors, on the other
hand, are the employees of the company and they gain a full access to the company accounting
system. They could examine any issues that would related to business practices and risks, and
they do have a chance to detect fraud early.
After listen to Cynthia, I do realize that we’ve many lessons to learn throughout our lifetime. I
learned from her story that we’re responsible for our actions, we must think about the
consequences before making decisions (usually bad one).
Part 2-Enron
Enron and Andersen had very closed relationship, for instance, the top executive went on a
vacation together or Andersen took over internal audit service for Enron, and some of Enron
employees became Andersen employees and shared the building too. They’re violated GAAS
standard because it stated that auditors and their clients should remain independent, no
consultation towards their clients for fairness report. When Andersen did both audits and
consulting, there were conflicted of interested between Andersen auditors and Enron audit
committee due to the difference between consulting fees and audit fees. Because of the two roles
played by Andersen at Enron, Andersen didn’t fulfill their professional responsibilities over
Enron financial statements or didn’t bring attention to the board of committees. Additionally,
Andersen was found guilty of obstructing justice by destroyed all of Enron’s audit documents to
cover billion of lost in summer 2002, and David Duncan, partner at Andersen, was in charged for
his course of action. Arthur Andersen was forced to surrender their practice in the U.S after
Enron scandal.
After the failure of Enron and other giant corporations, the government and other regulation
committees took a closer investigate the matter between the auditors, management team and
board of audit committee. The failure of Enron and WorldCom mostly because there were lack
of attention from board of director and external auditors (Arthur Andersen represent both of the
companies). Both companies tried to make themselves look good to keep the stock price stay at
decent rate but ended up with fines and penalties (prison time).
Enron and WorldCom cased had promoted Sarbanes-Oxley Act (or SOX) of 2002. The Act
include 11 sections ranging from corporate governance responsibilities to criminal penalties. The
Act was created to prevent accounting malpractice and to protect investors from fraudulent
activities made by publicly traded company. Section two implied auditor role, and it said auditor
had to be independent and it restrict them from performing non-audit service for the same client
to avoid conflict of interest. Auditor roles is detecting fraud and be the company “watch dog”,
blow the whistle if necessary. Top executive would not allow to loan money from the board
because it would give them an opportunity to commit fraud due to easy earning money.