The economic prosperity during the late 1990s was marred with an opinion of expansive growth that elevated the anticipations of company’s performance. In this paper, I will analyze WorldCom, which is a telecommunication firm, and which fell in trap of the expectations. The events led to WorldCom’s evaluation of a fraud which was designed to mislead the public till there was an improvement of economic outlook. Through the understanding of the events that led to fraud at WorldCom, the means with which the fraud grew and developed, the related effects, I will also express some of the lessons that can be extracted to achieve a better understanding of the reasons that led to fraud as well as to prevent similar future frauds from taking place, and growing as big as that of the WorldCom Telecommunications (Dorminey et al, 2012).
Situation before the Fraud
WorldCom was a communication provider of long-distance phone services to residents as well as companies. It began a company referred to as Long Distance Discount Services (LDDS). The company developed into the third largest communications organization in the U.S. as a result of the management of Bernie Ebbers, the Chief Executive Officer. WorldCom composed of 85 000 employees base at its ripe time and occupied at least 65 nations across the world. The company began in 1983 and in 1985 Bernie Ebbers was employed as the first investor of the business as well as became the CEO. The company went public within the duration of four years. With Ebbers management skills, the company grew into a $30 billion returns business. In a span of ten years, it had sixty acquisitions of different telecommunication businesses. In 1999, one of the richest Americans was Ebber. His net worth was $1.4 billion. From the public view, WorldCom seemed to be a strong developmental leader. However, in reality it was just a perception of the appearance.
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In 2002 towards the end of June, the company made a revelation that it had been involved in false reporting of its figures. WorldCom reported $3 billion gain when actually it had recorded a loss of half-a-billion dollars. After carrying out an investigation, a sum of $11 billion was revealed as misstatements. Therefore, the fraudulent events that took place at WorldCom before and after the fraud, the accounting mechanisms employed to complete the fraud will be captured in the following paragraph (Wisner and Brown, 2015).
Causes of Fraud, Ethical Structures and Violations
Situation after the Fraud
In examining the causes of fraud, I will categories them into internal environment that include strategy or the lack thereof, the culture of the company and its corporate governance. In addition, I shall look at the company’s auditing statements which includes internal and external and the information from the audit committee. Lastly, I will scrutinize the external environment through the double bubble strategy and Greed at Wall Street (Tang Dik Ying and Wong Hei Yu, 2015).
The company’s internal environment was already a mess in waiting. It appears that even with the lack of fraud, WorldCom would have buckled. The external environment was the storm, and the unavailability of efficient personnel to foresee and mitigate the problem was the failures due to auditing. The internal problem of the company included lack of strategy to manage competition, the internal controls were week, the company’s culture lacked aggressiveness that required high profits and the failure to scout for what was best the company and the stake holders. It is both crucial for the company to be sustainable as well as focus on the long term as opposed to the next quarter reports. By carrying out the activities, the company stresses that it creates value for both Wall Street and its customers who are its drivers (Bansal, 2014).
Employees of a company are as well the drivers for its growth, development and success. Nonetheless, the competitive nature experienced at WorldCom was that of loyalty to the company’s management without regarding ethics, integrity and honesty. They were simply doing the right thing. The board of directors’ functions was to carry out internal controls and they failed in their part (Wisner and Brown, 2015). The responsibility of the board of directors was to make corrections regarding the weakness of WorldCom that the management could not see as a result of lacking independence from WorldCom. Nevertheless, the board seemed to be mostly independent as most of its composition was friends to the Chief Executive Officer, Ebbers. As a result of friendship, the board of directors began looking out for a management that is pleasing as opposed to that which fulfills their responsibilities to protect the stakeholders (Harrington, 2016).
In the board of directors, there was the audit committee whose mandate was to make communications with the external and internal auditors. The board of directors only met for about three up to six hours each year. However, it never attempted to make communications with the auditors. Nonetheless, Arthur Anderson communicated to the auditing committee that WorldCom is experiencing misappropriated GAAP; the members of the committee ignored him. The external environment was a storm that was slowly moving into an already worsened system. The WorldCom’s decrease in stock prices was due to the failure of the Telecomm bubbles and Internet. The decline was only decelerated due to the presence of Jack Grubman. He continuously bought ratings for WorldCom (Tang Dik Ying and Wong Hei Yu, 2015).
At the end, we learn some of the lessons from the causes of WorldCom failure that when a company seems to be performing well within the external environment that is extremely austere, it is the responsibility of the internal auditor to conduct an investigation. Further, the external auditors are the persons that must come in with an objectives, and unbiased set of mind to audit the company while upholding the integrity, independence and honesty. In any organization, the process of conducting an objective is based on planning, design, implementation and evaluation. Throughout research methodology, the data collected proposes that there are very crucial guidelines that are available to offer an in-depth outline of operating and sustaining a company. Unfortunately, while the plan and design of a good ethics and culture of work are available and are accessible in the guidelines, the management of the companies only fails to implement them (Harrington, 2016).
Conclusion
Fraud takes place when an individual takes unfair advantage over another. In the case of WorldCom, Ebbers requested Sullivan to produce the outcomes Wall Street anticipated through whatever means. Sullivan carried on the activity wrongly and released accruals to costs of lower lines and afterwards capitalizing the costs once the accruals were no more. Moreover, he sealed the gap that existed between the anticipated and actual returns by adjusting journal entry in the system through physical making of a round number. Sullivan was unavailable for the internal auditors to scrutinize the financial statements, since he did not want them to discover the plan. His actions raised suspicions among the auditors that at long last led to the exposure of fraud. It is vital to comprehend the particulars of the case to establish the reason as to why the fraud took place.
By use of the case as an illustration, there was the creation of a fraud triangle. The triangle has got the answers to the activities that led to the fraud, the ways in which it was executed without early noticing and the reasons it proceeded as long as it did. First, the pressure from both Ebbers and Wall Street led Sullevan to start the process. Second, the company had weak internal environment of control which was a gap that enabled the fraud to take long before it was detected. Third, Sullivan thinking was based on the theories that he is causing none of the persons any harm physically and his expectation were that when the economy improves, the additional returns and growth would cover the fraudulent misstatement (Bansal, 2014). On his side he did not observe that he is committing a wrong. Therefore, prevention of fraud is the first priority which is a crucial control, since when it begins to develop, the damage already exists. The pressures will always exist, yet organizations must create cultures that stress on openness, honesty, and integrity so that employees are less likely to experience pressures to implement anything unethical. Further, the company must develop strong internal control systems with checks as well as balances to reduce the urge of initiating a fraud, thus the company prevents fraudulence from taking place.
The causes, the consequences and the characteristics of WorldCom situation tell a story from which we can learn lessons. Therefore, causes are indictors that auditors and stakeholders of a company should look forward to preventing a fraud. Suspicions should be raised in case the conditions within a company as well as its external environment indicate a dissimilar situation different from what is outlined in the financial statements. The external auditor has to elevate the level of evidential persuasion required and increase the tests conducted in a bid to offer objective view.
The characteristics too serve as indicators for conducting an audit of the financial statements. In the event fraud took place in the company’s industry before, it is the responsibility of the auditor to gather as much information regarding the previous fraud in terms of the relevant journal entries as well as other accounting mechanisms applied to monitor fraud triangle. This is important in identifying if the same pressures continue currently as they were in the former fraud.
The consequences are also important in serving as an alarm for the auditors. The auditor’s objective is to offer independent view regarding the company and maintains the trust of the public in him or her. In the case they fail to comply, the outcomes can be damaging and can lead to demanding conditions for the company, the stakeholders and the country’s economic state.
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References
Bansal, A. (2014). An empirical study of teaching ethics on accountancy students. International Journal of Business and Administration Research Review , 1 (3), 152-157.
Dorminey, J., Fleming, A. S., Kranacher, M. J., & Riley Jr, R. A. (2012). The evolution of fraud theory. Issues in Accounting Education , 27 (2), 555-579.
Harrington, E. B. (2016). Social Structure, Power and Financial Fraud.
Tang Dik Ying, J., & Wong Hei Yu, S. (2015). Changing rules, changing roles-Managing it all: Part 2. Governance Directions , 67 (2), 117.
Wisner, D. L., & Brown, B. A. (2015). Corporate Toxicity: The WorldCom/MCI Scandal.
