1. Explain the nature of the accounting fraud.

Fraud occurs when one takes an unfair advantage over another. In WorldCom‟s case, Ebbers
demanded Sullivan to produce the results Wall Street expected through any means.

Sullivan did this by wrongly releasing accruals to lower line costs and later capitalizing them once the
accruals ran out. In addition, he “closed the gap” between expected and actual revenues by physically
making a round number adjusting journal entry in the system. To prevent the internal auditors from
discovering his schemes, Sullivan limited their access to the financial statements. This action created
suspicions among the internal auditors that in the end led to the discovery of the fraud.

2. What pressures that led executives and managers to “cook the books”
 First, the pressure from Wall Street and from Ebbers led Sullivan to initiate the process.
 Second, the weak internal control environment of the company was an opportunity that
allowed the fraud to go undetected for as long as it did.
 Third, Sullivan most likely thought he was not causing anyone any physical harm and he
expected that once the economy would get better, the extra revenues and growth
would make up for the fraudulent misstatement. He did not see he was committing any
wrong doing.
3. What is the boundary between earnings smoothing or earnings management and fraudulent
reporting?

In order to alter their financial results, firms take actions that range from decisions within
accounting standards to outright fraud. Decisions made within accounting regulations are often viewed
as earnings management and legal practices. This view is based on the acceptability of accounting
regulations so that it can draw the line on the continuum distinguishing legitimate earnings
management from financial fraud. However, determining whether or when such behaviour in the
earnings management crosses the line of legitimacy to fraud, in some situations, is not always easy
owing to a number of different reasons.

 The first reason is that earnings management and financial reported fraud, in some cases,
share the same objective.
 The second reason is that earnings management practices via accounting accruals usually
result in financial fraud.
 The third is that both are driven by the same incentives.
4. Why were the actions taken by WorldCom managers not detected earlier? What
management control processes or systems should be in place to deter or detect quickly the
types of actions that occurred in WorldCom?

WorldCom‟s Audit Committee failed to meet with the Internal Auditors of the company,
who had the duty to provide the Audit Committee with an independent and objective view on how
to improve and add value to WorldCom‟s operations (Louwers, Ramsay, Sinason, & Strawser,
2008). Not only were the personnel in the internal audit department not enough for a large
company, but they also lacked the proper training and experience to conduct the testing of the
company’s controls.
 5. Were the external auditors and board of directors blameworthy in this case? Why or why
not?

At WorldCom, it appears there were no checks and balances in auditing. The internal
auditors were not sufficiently staffed to work on the internal controls and the audits of the
company which prevented them from correctly reporting to the Audit Committee about the
operational and financial situation of WorldCom. The Committee itself did not meet on a regular
basis either and was unable to properly take actions to fix the situation. Yet, the external auditor,
Arthur Andersen, was the one responsible for providing an independent opinion of the financial
situation at WorldCom for investors and creditors. The auditing firm also failed to carry out its
duties properly.

6. Betty Vinson: victim or villain? Should criminal fraud charges have been brought against
her? How should employees react when ordered by their employer to do something they do
not believe in or feel uncomfortable?

Betty Vinson was the director of management reporting at WorldCom. She had worked
there for five years when the fraud was uncovered and received two promotions during that time.
Vinson’s salary increased from $50,000 when she started to $80,000 in 2002. A hard worker who
often stayed late or brought work home, Vinson considered herself lucky to land the job at
WorldCom. Asked by her bosses there to make false accounting entries, Ms. Vinson was shocked
and worried. Over the course of six quarters she continued to make the illegal entries to bolster
WorldCom’s profits at the request of her superiors. Each time she worried. Each time she hoped it
was the last time. At the end of 18 months she had helped falsify at least $3.7 billion in profits.
She testified for the prosecution in its case against Bernie Ebbers, was sentenced to five months
in prison and five months home detention for her role in WorldCom's accounting scandal.

One thing to learn from this unfortunate incidents is that you don’t have to do everything
your boss tells you to, especially if runs afoul of the law. Clearly, breaking the law can get you in
real trouble, but blindly following orders and engaging in illegal or unethical activities on the job
can wreak havoc on your career and possibly hurt other people. When you’re being asked to do
something that just doesn’t feel right, you talk to your supervisor about it. If, however, you
believe your job could be at risk by talking to your boss, go above his or her head and find
someone you trust who has integrity, or go to your human resources department. You can also go
to local authorities, and under whistleblower laws have your identity remain anonymous.