Accounting in Fraud Examination: The Essentials

Question One  

Accounting fraud has devastating and far-reaching effects on the image and reputation and may lead to the eventual collapse of the entity. The intentional overstating of WorldCom's assets is the critical accounting issue that led to a scandal of $11 billion, making the biggest fraud of its time. This led to a disastrous blow to WorldCom's business image and reputation, leading to its bankruptcy and significant issues with their creditors, further compounding their problems. According to the Statements of Auditing Standards, the accounting fraud committed by WorldCom related to the manipulation of accounting records or supporting documents used in the preparation of financial statements. The justifications for the planning and undertaking of accounting fraud, such as overstating the assets as is WorldCom's case, are motivated by meeting the Wall Street expectations to attract investor confidence to make smooth earnings. A corrupt corporate culture and financial pressures occasioned by the prevailing business environment are compelling factors that may have contributed to WorldCom's accounting fraud. The management of the earnings at WorldCom to create an impression of how good they were doing in business to cultivate investor confidence to raise their stock or share prices could be why they overstated their assets. The full disclosure and revenue recognition are the critical accounting principles contradicted by WorldCom when they overstated their assets in preparing their financial statements. The intention was to lure investor confidence by attracting more people to invest with the business and create a false impression of successful business practices. Effective accounting reporting standards and guidelines in the preparation of the financial statements should provide a true representation of the reality in the financial status of the assets and liabilities of a business entity. 

Question Two  

The environmental factors that led to WorldCom's alleged fraud were the growth of the internet bubble to its peak and its eventual burst in the early stages of 2000. When the internet bubble burst in early 2000, WorldCom's share prices reduced to its lowest due competition from fast-rising telecommunications companies. This was an environmental factor leading to assets overstatement to create an impression that their share prices regain their glory in a short while. The greed at Wall Street is another environmental factor that led to the masterminding of the accounting fraud for shares listed on the globally recognized financial platform synonymous with success. The accounting fraud at WorldCom would have been prevented through proper end to end internal controls. These internal controls would have deterred the chief financial officer who was the mastermind and the brains behind the fraud from ordering changes in the company's account to allow the company to record pretentious profits. The magnitude of the accounting fraud WorldCom was immense that it led to the adjustment of the law regarding the international securities markets and enhanced regulation of auditors globally. Congress passed a bill on the securities market in effect to the fraud at WorldCom. This sealed the loopholes that existed before and made it a criminal offense that attracted dire consequences and punishment on a person and a business entity. The accounting profession needs to have extensive stakeholder engagement and deliberations with an intention to uphold high standards of integrity, transparency, and credibility that are required for effective accounting practices. The preparation, storage, and dissemination of financial information and records of a company should be a task that needs to be handled by people of known ethical, moral, and professional integrity. Contravention of the accounting principles and standards should be condemned and an immediate remedy provided to avoid future recurrence of the matter. 

Reference 

Clikeman, P. M. (2013).  Called to Account: Financial frauds that shaped the accounting profession . Routledge.