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WORLDCOM

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Avoid conflicts of interest (integrity ... performed mainly operational audits. ... go along with accounting practices External Auditors could have questioned more ... – PowerPoint PPT presentation

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Title: WORLDCOM


1
WORLDCOM
  • Presented by
  • Eric Barr
  • Stephanie Jenkins
  • Robert Provost
  • Adam Wear

2
WorldCom
  • What are the facts?
  • Ebbers (CEO) had used his company stock as
    collateral for both professional and personal
    loans
  • Ebbers and Sullivan (CFO/CPA) frequently made
    the decision to grant excessive compensation
  • Line Costs were capitalized as Prepaid Capacity
  • A long time ensued before Cynthia Cooper came
    forward with the inaccurate accounting practice

3
What are the Ethical Issues?
  • Was capitalizing line costs ethical?
  • Was going along with the capitalization ethical?
  • Was using company stock as collateral for loans
    ethical?
  • Was having a no-question culture ethical?
  • Should Andersen have questioned treatment of
    capitalization more?

4
Alternatives
  • Ebbers could have changed his business strategy
  • Sullivan could have refused to go along with
    accounting practices
  • External Auditors could have questioned more
  • Internal employees could have come forward
  • Internal Audit could have had stronger presence

5
Stakeholders
  • Employees (Including Upper Management)
  • External Auditors
  • Shareholders of Stock
  • Competitors
  • Lenders
  • Customers

6
Practical Constraints
  • Ebbers would have gone bankrupt
  • Company would suffer large losses
  • Employees could lose job
  • External Audit Firm could lose client
  • Internal Audit kept busy away from auditing

7
Did the Top Executives Act Ethically?
  • Bernard Ebbers, CEO
  • Participated in improper lowering of expenses and
    inflating revenues.
  • Had continued to acquire companies and put
    WorldCom into debt and had used WorldCom stock as
    collateral for his own investments
  • Scott Sullivan, CFO
  • Also participated with Ebbers in improper
    accounting
  • Made sure the internal auditors time was spent on
    operational audits almost exclusively
  • Pushed employees to make entries with no evidence
    and meet numbers no matter what

8
Did the Top Executives Act Ethically?
  • David Meyers, Controller
  • Pressured along with Sullivan for reduced line
    costs in whatever way possible
  • Made entries to falsify financial reports with no
    documentation or justification
  • Ronald Lomenzo, Sr. VP Financial Operations
  • Prepared MonRev and Corporate Unallocated
    Schedule reports
  • Booked entries on the schedule and restricted
    distribution

9
Did the Top Executives Act Ethically?
  • Buford Yates, Director General Accounting
  • Participated in and encouraged the improper
    accounting even though he saw no justification
    for it
  • Cynthia Cooper, VP Internal Audit
  • Uncovered the accounting fraud and blew the
    whistle
  • Steven Brabbs, Europe Asia Executive
  • Questioned unjustified entries to top exectutives
    and Arthur Anderson
  • Refused to make the entry, but eventually did
    record it through a management company adjustment

10
Did the Top Executives Act Ethically?
  • Delores DiCicco, VP Wireless Finance
  • Refused make an entry with no support despite
    heavy pressure
  • Troy Normand Betty Vinson
  • Felt uneasy about some of the entries but did
    nothing to stop them
  • Normand says he was scared of losing his job and
    putting his family in financial jeopardy

11
Why Record False Entries?
  • Bonuses/Perks dealt with bottom line performance
  • Mandated to make false entries by upper
    management
  • Assumed it was correct, no support asked for
  • Fear for Job
  • Raise Company Stock Price

12
What would you have done?
13
What are the facts?
  • Steven Brabbs
  • Vice President of International Controls in
    London
  • One of first to notice accounting irregularities
  • Notified Senior executives at WorldCom
  • Notified Arthur Andersen auditors
  • Refused to make the entry on the international
    companies books
  • Troy Normand
  • Director of Legal Entity Accounting
  • Warehoused balance sheet accruals
  • No documentary support for any of the entries
    posted to these general accounts
  • Initially questioned the entries
  • Later thought about resigning

14
What are the Ethical Issues?
  • Steven Brabbs
  • Should he make the entry without backup?
  • Does the entry fairly represent company events?
  • Who should he inform about the issue?
  • Troy Normand
  • Are the accruals appropriate?
  • Should he have taken a stronger stance?
  • Who should he inform about the issue?

15
What are the Alternatives?
  • Steven Brabbs
  • Follow corporate orders and make the entry
  • Make the entry on separate books
  • Refuse the entry
  • Report the incident
  • Resign
  • Troy Normand
  • Follow corporate orders and make the entry
  • Make the entry on separate books
  • Refuse the entry
  • Report the incident
  • Resign

16
Who are the Primary Stakeholders?
  • WorldCom Employees
  • Family Members
  • Stockholders
  • Creditors
  • Arthur Andersen Auditors

17
What are the Practical Constraints?
  • Disobeying could prevent future promotions
  • Difficult to identify when your boss is wrong
  • Need to support a family
  • Difficult to blow the whistle on something that
    you are involved in

18
Who Was More Ethical?
  • Steven Brabbs
  • Notified Arthur Andersen on at least two
    occasions
  • Refused to make entries to international books
  • Set up a non-legal entity to make the entry
  • Troy Normand
  • Never contacted auditors
  • Made non-GAAP entries to his account
  • Ignored initial reservations

19
Internal Auditing
  • Portray the firms financial situation as
    accurately and truthfully as possible.
  • Maintain the highest standards of ethical
    conduct.
  • Disclose fully all relevant information that
    could reasonably be expected to influence an
    intended users understanding of the records,
    comments, and recommendations presented.
  • Maintain an appropriate level of knowledge and
    skill (competency).
  • Refrain from disclosing confidential information
    except when authorized or required by law
    (confidentiality).
  • Avoid conflicts of interest (integrity).
  • Communicate information fairly and objectively
    (objectivity).

20
Independent Auditing
  • Must Follow GAAS which includes both field work
    and reporting standards.
  • Cohen Commission
  • Primary Role Serve as intermediate between the
    financial statement and the users of those
    statements.
  • Determine whether the judgments of managers in
    the selection and application of accounting
    principles were appropriate or inappropriate for
    use in the matter at hand.
  • Express an opinion on internal accounting
    control.
  • Detect and report errors, irregularities, and/or
    fraud.

21
Independent Auditing
  • Judge Burger (Arthur Young Case, 1984)
  • Examine the corporations books and records.
  • Determine whether the financial reports of the
    corporation have been prepared in accordance
    wither generally accepted accounting principles
  • Issue an opinion as to whether the financial
    statements, taken as a whole, fairly present the
    financial position and operations of the
    corporation for the relevant period.
  • Maintain total independence from the client at
    all times.
  • Maintain complete fidelity to the public trust.

22
Operating Audit vs. Financial Audit
  • Purpose of Audit
  • Emphasizes effectiveness and efficiency concerns
    operating performance for the future
  • Distribution of Reports
  • Reports are intended primarily for management.
  • Inclusion of nonfinancial areas
  • Cover any aspect of efficiency and effectiveness
    in an organization and involve a wide variety of
    activities.
  • Emphasizes whether historical information was
    correctly reported oriented to the past
  • Report typically goes to many users of financial
    statements.
  • Limited to matters that directly affect the
    fairness of financial statement presentations.

23
WorldComs Internal Auditors and Audit Committee
  • Internal auditors performed mainly operational
    audits.
  • Avoided financial audits that might overlap with
    the work of external auditors on the grounds of
    cost savings.
  • Internal Auditors only reported to audit
    committee at year-end.
  • Reported to Scott Sullivan the rest of the year,
    who controlled their promotions, salary
    increases, bonuses, stock options, and more.
  • Assignment of special projects with no audit
    purpose, which consumed most of the time of the
    Internal Audits staff.
  • Audit committee accepted proposed Internal Audit
    Plan that focused on operational effectiveness
    and efficiency, systems, and internal controls.

24
What are the Facts?
  • Salomon Smith Barney offered 1 million shares of
    IPOs to WorldCom CEO
  • Salomon Smith Barney gave WorldCom positive
    reports despite suspect financials
  • WorldCom CEO eventually made more than 11
    million from trading

25
What are the Ethical Issues?
  • Bankers were selectively doling out IPO shares to
    individual executives instead of the public
  • Financial reviews were being completed by the
    same company that depended lucrative banking
    business from the client

26
What are the Alternatives?
  • Require that clients purchase their stock shares
    through public forum
  • Set guidelines for selling IPO shares to clients
  • Disclose financial relationships of clients
    during reviews
  • Require holding period for IPO purchases for
    clients

27
Who are the Primary Stakeholders?
  • Salomon Smith Barney
  • WorldCom CEO and IPO holder
  • The general public
  • The company offering the IPO
  • Analysts in charge of reviewing WorldCom

28
What are the Practical Constraints?
  • Trying to maintain practical professional
    relationships
  • Competitive environment pressures institutions to
    provide incentives

29
What Actions should be Taken?
  • IPOs should not be given out selectively by the
    bank to clients
  • Analyst reviews of clients should declare that
    relationship

30
WorldCom
  • 2002 saw an unprecedented number of corporate
    scandals Enron, Tyco, Global Crossing.
  • WorldCom went from being the nations second
    largest long distance carrier to the brink of
    bankruptcy as a result of massive fraudulent
    accounting practices.
  • WorldCom is another case of failed corporate
    governance, accounting abuses, and outright
    greed.
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