Extraordinary Circumstances chronicles the findings and challenges that Cynthia Cooper, an internal auditor of a multinational company, and her team encountered while discharging their services. Cynthia was the vice-President of the internal audit at the WorldCom, that was one of the most prominent telecommunications companies in the US, until the year 2002 when there was a huge accounting scandal that compelled the company to file for bankruptcy protection.
The book narrates how Cynthia and her team faced many difficulties in the process of uncovering the fraud. According to her, the accounting entries behind the manipulation were complex. A variety of accounts had many entries with the purpose of confusing anyone who might have the chance of looking at them. Besides, WorldCom management ensured that they paralyze any investigation process by obstructing Cynthia and her team from looking at the entries. The company began to experience a decrease in revenue in late 1999 when there was a cut in spending on telecommunication services and equipment. She reveals how the company CEO, Ebbers took a personal loan of $366 million from the company without following the due process.
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According to Cooper, WorldCom management erred in most of its decisions to expand and develop the company. The telecommunication giant embarked on an acquisition process where many small businesses, accounting systems, and managers were merged without following the right protocol and before putting up the necessary structures to accommodate the merging. She argues that WorldCom preferred acquiring companies than integrating them. She explains that merging and acquisition process can increase the balance sheet debt of the combined company. It is noted that when many different systems are pieced together, it becomes easy for the numbers and authorizations to get lost in the process.
Fernando (2012) states that WorldCom had a bewildering variety of people, culture, accounting practices and business strategies, as it had acquired as many as sixty business entities across the world, each with its unique business background. From Cynthia's book, I can note that the company looked good on paper but was collapsing. WorldCom organizational culture contributed to the company's downfall. She narrates how employees were concerned and aware of the scandal, but they feared to report it. The management board was ineffective and passive; bankers were permissive, and outside accountants were preoccupied; hence, they failed to notice frequent warning signs
The internal audit team, which Cynthia Cooper was a member was tasked with the role of providing independent assurance that the company's governance, risk management, and internal processes were operating efficiently. Despite Cynthia and her team of internal auditors' effort to unearth the fraud and advise the management, their attempts were stifled down by constant frustration and lack of cooperation from senior members of the company. WorldCom's Audit Committee declined to meet with the internal auditors of the company, who were tasked with providing the Audit Committee with an independent and objective view on how to add value to WorldCom's operations. On the other hand, the external auditor, Arthur Andersen, was the one tasked with providing an independent view of the financial situation at WorldCom for creditors and investors. The auditing firm also failed to carry out its duties properly. Beresford, Katzenbach, and Rogers (2003), argue that the failure of Arthur Andersen to detect the fraud was because of negligence and refusal of top management of WorldCom to share important information about the company's finance.It can also be noted that financial pressure existed for WorldCom top management to meet the expectations of analysts at Wall Street. In September 2000, having reviewed different reports including MonRev's, the chief financial officer, Sullivan advised Ebbers that WorldCom's financial results had become worse and that expectations of the analysts for the quarter would not be met (Indictment, 2003).
The failure of WorldCom in June 2002 led to Congress quickly passing the Sarbanes & Oxley Act (Section 404) approximately a month later on July 30, 2002 (Hamilton, Rasmussen and incorporated 2007). I believe that this Act safeguards investors by improving the reliability and accuracy of the disclosures made by the publicly traded companies. It is likely that the laws were passed as a political response, but it was also something that was a long overdue in the economic environment.
References
Beresford, D. R., Katzenbach, N. B., & Rogers, C. B. J. (2003). Report of Investigation by the Special Investigative Committee of the Board of Directors of Worldcom, Inc . S.L.s.l: Worldcom, Inc.
Fernando, A. C. (2012). Corporate Governance: Principles, Policies And Practices . S.L.: Pearson Education India.
Hamilton, J., Rasmussen, N. P., & CCH Incorporated. (2007). Guide to internal controls: Under section 404 of the Sarbanes-Oxley Act . Chicago, IL: CCH
