The function of this report is to look back at one of the most significant US business scandals: WorldCom. WorldCom drop was the greatest bankruptcy in United States business history: 20,000 employees lost their tasks, investors lost about 180billion dollars. How did all this take place?
Unethical practices: 1. Modification in accounting policy: there was a modification in the accounting policy in 2000 to support an extra accrual release. GAAP does not allow using accruals developed through charges for one type of expense to be used to balance out another expense.
2. Capitalization of line costs instead of expensing them 3. Inflated incomes with phony accounting entries from business “unallocated profits accounts” 4. Stock allotment
Poor internal controls: 1. Major failure of WorldCom’s corporate governance: the board of directors were unaware of the fraud and the inappropriate accounting practices used. 2. The Board and its committees did not work in a method that would discover red flags: the outside directors had no or little involvement in the company’s company other than through attendance at Board meetings.
3. The Audit Committee required an understanding of the company to be reliable: the members did not have adequate understanding of the internal practices and the culture which led to devoting little time to their role, and conference as little as three to 5 hours a year. Inefficient behavior of business supervisors:
1. Bernie Ebbers developed a corporate environment, permitted by the Board, in which the pressure to get the numbers was high, the control departments were weak, the senior management’s word was final and not to be challenged.
2. Internal audit was reported directly to Scott Sullivan (CFO and also convicted for accounting fraud) and for that reason declares for misbehavior were not pursued by Sullivan. 3. WorldCom’s controller David Myers, VP of Financial reporting Stephanie Scott, and Director of Financial Reporting Mark Willson managed Arthur Anderson’s (external auditor) access to details and withheld info from him. The report of WorldCom’s investigation contains information and excessive details on all examinations following this corporate scandal. Numerous other examples which resulted in WorldCom’s bankruptcy can be noted.
Conclusion: A company to have an effective internal control there must be consistency and integration among five major components: 1. Control environment- the people and their integrity, ethical values and competence. 2. Risk and its assessment- the risks the company is facing must be identified and assessed before controls are developed. 3. Control activities- policies and procedures to be established and executed. 4. Communication and information- the company to manage and control its operations should communicate all information available. 5. Monitor- the whole process should be monitored and if modifications are necessary they should be performed aggressively.
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