Accounting Fraud at Worldcom Free Essays

SUBJECT: Accounting fraud at WorldCom Problem Statement WorldCom penetrated the largest accounting fraud in U. S history by overstating its tax income between 1999 and 2002. The main players in WorldCom’s accounting fraud included CFO Scott Sullivan, the General Accounting and Internal Audit departments, external auditor Arthur Andersen, and the board of directors. We will write a custom essay sample on Accounting Fraud at Worldcom or any similar topic only for you Order Now While individuals did have their own sins, employees cowardice and self-interested, the board passive and ineffective, external auditors preoccupied, and bankers permissive, WorldCom’s organization structure and culture should take most of the responsibility that Ebbers could cooked the book by misleading Wall Street and its own employees. How WorldCom’s organization structure and culture contributed to pressure and group thinking extending the long period that finally led to the fraud? Analysis The fraud heavily attributed to the way the CEO Ebbers ran the company. First of all, WorldCom’s poor company culture led to a lack of a positive mechanism for employees to propose concerns and feedback and also effective communication between departments and between the board and employees. Ebbers individually determines the whole company’s value and standards; he demanded unrealistic revenue, limited inquiry, concealed information, mislead and threat employees but there is no specific governance on his own behavior, finally resulting in the corruption growing in the company. Second, WorldCom lacked segregation duties and independence among related departments, which made the accounting tricks possible without detection. Third and the most critically, WorldCom lacked a corporate code of conduct so that an unethical corporate culture was created throughout the company. WorldCom’s acquisition of more than 60 firms in the late 1990s increased the difficulties for Ebbers to effectively manage the company and maintain an ethical culture without a written policy. Scharff[1](2005) believes that the unethical behaviors and practices of Worldcom were created by groupthink, defined as a â€Å"mode of thinking that people engage in when they are deeply involved in a cohesive in-group, and the members override any motivation to appraise alternative courses of action†. Instead of figure out their concerns, many executives like Vinson just follow suit. Recommendation(s) WorldCom should create a positive and healthy corporate culture building trust and also respect for each employees; especially middle-level managers should not be under pressure to make unethical decisions. Open, reliable and effective communication should be encouraged. Conflicts of interest should be avoided. More importantly, a corporate code of conduct should be established to guide the behaviors of all employees, including CFO and CEO, in which there is not only principles providing basic guidelines to follow such as the consistency, sincerity and good faith applying to a company’s operation, but also rules providing specific boundaries which behavior is not allowed or will suffer from penalties that help maintain a healthy and ethical corporate culture. ———————– [1] http://www. helium. com/items/1411484-ethics-failure-and-accounting-fraud-at-worldcom? page=3 How to cite Accounting Fraud at Worldcom, Essay examples Accounting Fraud at Worldcom Free Essays Accounting Fraud at WorldCom LDDS began operations in 1984 offering services to local retail and commercial customers in the southern states. It was initially a loss making enterprise, and thus hired Bernie J. (Bernie) Ebbers to run things. We will write a custom essay sample on Accounting Fraud at Worldcom or any similar topic only for you Order Now It took him less than a year to make the company profitable. By the end of 1993, LDDS was the fourth largest long distance carrier in the United States. After a shareholder vote in May 1995, the company officially came to be known as WorldCom. WorldCom culture was dominated by a strong chief executive officer (Bernie J. Bernie) Ebbers), who was given virtually unfettered discretion to commit vast amounts of shareholder resources and determine corporate direction without even the slightest scrutiny or meaningful deliberation or analysis by senior management or the board of directors and legal function was less influential and less welcome than in a healthy corporate environment. Top hierarchy granted compensation and bonus beyond the company guidelines to a select group of individuals based on their loyalty to them. The company’s human resource virtually never objected to such special awards. Inaddition, there was no outlet for employees to express their concerns. The room four improvement and corrective measures was obsolete, the consequence of all these culture irregularities were the factor to the big disaster for the company. According to Ebber, in 1997,†our goal is to be the NO. 1 stock on Wall Street. †Revenue growth was a key to increasing the company’s market value. Ebbers was obsessed with revenue growth and insisted on a 42% E/R ratio. He encouraged managers to push for revenue, even if it meant that long term costs would outweigh the short term gains. As business operations declined post the 1st quarter in 2000, CFO Sullivan used accounting tactics to achieve targeted performance, accounting principles require companies to estimate expected payments from line costs and match them with revenues in the income statement,. Throughout 1999 and 2000, Sullivan told staff to release accruals which too high compared to the relative cash payments, without considered â€Å"Matching Principe†. Over a 7 quarter period between 1999 and 2000, WorldCom released $3. 3 billion worth of accruals. Sullivan directed the making of accounting entries that had no basis in generally accepted accounting principles in order to create the false appearance that WorldCom had achieved those revenue targets. As an accountant, one should be familiar with the standards and rules of the position, accept personal responsibilities for the foreseeable consequence of actions, and realize the long-term effect of such behavior on the accounting industry and the citizens. At all times, an accountant should conduct themselves with integrity, dignity, and respect for the position held in society. Whistleblowers frequently face reprisal, sometimes at the hands of the organization or group which they have accused, sometimes from related organizations, and sometimes under law. | As Terance Miethe explains in his book, Whistle blowing at Work, many people see the whistleblower as a â€Å"snitch,† or a â€Å"a lowlife who betrays a sacred trust largely for personal gain. † In the flip side, whistleblowers are seen as â€Å"saviors† who ultimately helped create important changes in organizations. This approach to whistleblowers as guardians of public accountability is often taken by consumer advocates. I would not consider blowing the whistle. I would rather distance myself after informing my immediate supervisor if any wrong practice or misconduct similar to the WorldCom Fraud is happening in my environment. Public confidence in the accounting profession has been changed by corporate scandals, which created a crisis that affected the reputation and credibility of accounting professionals. The unethical decisions made by accountants can prove detrimental to the public who rely on information from the financial statements to make decisions. Users of financial statements rely on the information purported by an enterprise to exhibit certain qualitative characteristics that are both relevant and reliable. The impact of unethical decisions of both corporate leaders and accounting firms involving financial reporting by U. S. orporations has necessitated a new governmental regulation under SOX Act of 2002. President Bush signed this Act into law (Public Law 107-204) on July 30, 2002. The Act resulted in major changes to compliance practices of large U. S. and non-U. S. companies, whose securities are listed or traded on U. S. stock exchanges, requiring executives, boards of directors and external auditors to undertake measures to implement greater accountability, responsibility and transparency of financial reporting. How to cite Accounting Fraud at Worldcom, Papers