1、ACCOUNTING FRAUD AT WORLDCOM,WorldCom Overview,WorldCom Overview,WorldCom Overview,Financial statements,Definition :Accounting fraud is the intentional misrepresentation of financial statements in order to obtain wrongfully an advantage, retain a benefit, or avoid a detriment,Nature of Accounting Fr
2、aud,Pressure to “cook the book”a) The growing pace of income is generally slowing downb) Driven by interests (political interest like personal fame and image in the public, economical interest ),Nature of Accounting Fraud,Typical methods to “cook the book”Cost of assets Inventory is not realFixed as
3、set is fake Unreal liabilities Accounts payables is overvaluedAccrued expenses are not real Inflated income,Nature of Accounting Fraud,Difference between earning smoothing and accounting fraudConsistency MatchingConservatism choosing of accounting item,Nature of Accounting Fraud,What did WorldCom do
4、 :Accounting fraud in two method:improper release of accruals improper capitalization of operating expense,Nature of Accounting Fraud,Problems (Internal),Failure to acquire SprintThe poor performance,Loss of strategic direction,employees should not question their superiorsthere is no written policie
5、s. Each department had its own rules,Corporate culture,legal function was less influential and less welcome than in a healthy corporate environmentThe corporate governance structure is so complicated Information is not consolidated,Organizational structure,50% of nonexecutive members No regular comm
6、unication Decisions not based on the interest of shareholders, but personal interests.,Board of directors,Problems (External),Formerly big five,External Auditor,Fast growing sales revenue,External Auditor,Testing information accuracy rather than comparable testsChanged the rating from high risk acco
7、rding to software to moderate risk,External Auditor,NASDAQ stock price from 1994 to 2008,Economical downturn,Impact of the accounting fraud,Fall of WorldCom,Fall of WorldCom,What happened on senior management Ebbers-CEO 25 years in prison Sullivan-CFO 5 years in prison Myers-controller 1 year in pri
8、son Yates-Dir of Acctg 1 year in prisonVinson-Acctg Dept 5 months in prison Manager 5 months house arrestNormand-Acctg Dept 3 probationManager,Board of director 12 director agreed to pay a total of $25m to settle securities class action caseInvestment Bankers :settlement of security class action Cit
9、i Group $2.6 billionJP Morgan $ 2.0 BOther $ 1.4BGrubman and Soloman Brother Securities Analyst fined $15M and banned for life from practice.,Fall of WorldCom,Accounting SystemProblem: Each department had its own rules and management style. Nobody was on the same page. Solution: Build fair, clear an
10、d integrated accounting system. Ensure accurate, reliable accounting records.,lessons from it,Accounting SystemProblem: employees should not question their supervisorSolution: Reduce managements intervene to the normal daily recording.,lessons from it,Auditing SystemProblem: Betty Vinson, Senior man
11、ager of General Accounting, followed supervisors illegal instruction of record entry although her professional judgment tell her that is wrong. Solution: Build up the proper auditing system that allows whistle blowing internally.,lessons from it,Auditing SystemProblem: Internal Cynthia Cooper, Head
12、of Internal Audit department. Found the accounting issues but wasnt allowed to check in depth. Solution: Enforce the power of internal auditing department.,lessons from it,Auditing SystemProblem: ExternalConflict of “satisfying” customers and auditing ethics Solution: SEC regulation on external audi
13、ting firms and industry self regulation rules.,lessons from it,Suppose you were : A mother for two kids In mid 40 Pursuing promotion What you would do if you were Betty Vinson?,Ethical choices,As Betty Vinson, you could have:Talk to internal auditing department and provide the information But before
14、 you blow the whistle , always remember to protect yourself by :Saving the relevant evidenceidentify the sources of support,Ethical choices,Always remember:No jobs is worth breaking the laws or committing unethical actions. Your personal integrity is your most important asset- you own it and control it!,Ethical choices,THANK YOU!,
