HI6026 Audit and Compliance: WorldCom’s Accounting Scandal

Part B: Individual Contributionent

• write a reflection on this as a group task (ie. what you have learned about yourself, group dynamics, and the application of collaborative exercises). You do not need to discuss auditing principles/concepts as this is a reflection.

ch was reported in January, 2002. In order to maintain its market worth, the management of the WorldCom entered into fraudulent accounting practices. The company adopted those accounting methods that could disguise its decreasing revenues to deceive WorldCom’s stakeholders. The management of the company was highly focused on increasing its revenues than the actual profit margins and the lack of integrated accounting systems had allowed the executives of WorldCom to switch customer accounts from one accounting system to another. Due to this high revenues were reported by the employees in order to gain performance based incentives. Moreover, it was also identified that the company had underreported its line costs so as to show desired profitability in the financial statements to its stakeholders. As a result of this, various anomalous accounting entries were traced by the internal auditor of WorldCom. Those unusual accounting entries reflected the fact that the reserves and provisions which were prepared to deal with the situation of financial loss were inappropriately transferred to the financial statement’s revenue line. Further, WorldCom’s operating expenses were recorded as the long term capital investments so as to avoid reflection of huge losses in the annual reports. In total, the company inflated the profits of around $ 3.8 billion in its financial reports of 2001-02. All these earnings management practices were undertaken to mislead the stakeholders of the company so that funds in large sums could be obtained from the investors.

In case of WorldCom, Arthur Anderson LLP– Kenneth M. Avery and Melvin Dick were holding the position of Primary Auditors of WorldCom for the first five quarters in question. The chief internal auditor of the company was Cynthia Cooper. While carrying the internal audit of WorldCom, Cynthia reported to the external auditing firm of WorldCom about company’s false accounting practices. After examining the internal audit reports, which revealed heavy manipulation of WorldCom’s finances, Anderson decided to disclose the facts of company’s accounting scandal to its shareholders and other investors.

When the news of WorldCom’s collapse came out in public at large, its auditors were convicted for destroying the annual financial records of the company for those financial quarters when the accounting scandal actually occurred. However, the auditors contented that the CEO of WorldCom, Scott Sullivan, had misled their auditing firm to a huge extend, due to which auditors could provide a correct opinion about the material misstatements in the financial statements of the company. The auditors also contented that they had already warned the board company about the material misstatements identified by them on time but the management and board did not take the appropriate course of action. In response to the conviction against the auditing firm of WorldCom, Anderson issued a formal statement contending that the Chief Financial Officer of the company did not disclose the matter of line-costs transfers to the auditing firm nor did the company consulted the firm for the accounting treatment given by them.

Arthur Anderson was also the auditor of various other telecommunication corporations which had come under the scrutiny during the period of 2001-02, for their respective accounting irregularities. Therefore, Anderson had been accused in multiple law-suits for his fault of approving the financial reports which did not accurately depict the true financial standing of the companies. The further section details the role of auditor in the entire scandal.

In case of WorldCom, the internal controls of the company were found to be weak due to the negligence of audit committee of the company. The internal auditor of the company and the audit committee could not cooperate to strengthen WorldCom’s internal controls which allowed the employees of the company to manipulate the key information in the financial statements. Also, the members of internal audit department of the company were not adequately skilled and trained to manage its internal controls. They did not report to the audit committee about the accounting irregularities on the timely basis. Moreover, the chairman of WorldCom’s audit committee, Max Bobbitt, was in support of CEO of the company and therefore he ignored the reporting of company’s fraudulent practices to the statutory auditor. The principle of corporate governance was deeply affected at WorldCom as the board of the company was not working in the interest of its stakeholders. Further, the firm of external auditors blindly relied on the internal auditors of the company and hence they did not pay significant attention to material irregularities of accounting process of WorldCom. The auditors did not carry sufficient testing of various balances of WorldCom.

The statutory auditors of the company should have applied the concept of professional scepticism at all the stages of their audit engagement where they were encountered with anything suspicious and unreasonable. If they had performed their audit procedures adequately, they could have identified the weakness in the internal control system of company which could have ultimately allowed them to identify and report about the entire accounting scandal to the external stakeholders of the company. The fundamental principles of auditing such as integrity, objectivity, professional behaviour and professional competence seem to have severely affected in case of WorldCom because of negligence of its auditors towards their professional obligations.

Hope, you find this information relevant and appropriate for the purpose.

Yours Sincerely,

John Smith

Part b

In the today’s dynamic and complex corporate world, team work in business organisations has gained great significance. The increasing competition in the market does not generally allow the owners of business to work in isolation. Particularly, the corporations which are engaged in wide business operations require hiring of large number of employees to achieve the organisational goals and objectives effectively and efficiently (Belbin, 2012). Considering at the importance of the concept of team work in real word, the educational institutions have started assessing their students on the basis of their skills of performing the group tasks. For the same purpose, all the students of our class have been assigned various group assignments which are to be performed by us within the team allocated to us. This report is being prepared to explain my overall experience on the group assignment.

Before allocating the task, our professor has formed teams with 4 students in each team. Each team has been assigned with a task related to auditing field. The teams for the purpose of the assignment have been formed in accordance with the individual calibre and competence of each student. In each team, one top performer of the class, two average performers and one student who is performing below average have been accommodated so as to balance equally all the teams. The basic purpose of this group task is to create a practical understanding of how to contribute to the overall goals of an organisation by working individually and collectively towards its common goal. This assignment covers a significant weightage of marks in our total academic results. Hence, we are instructed to work on such tasks in the best possible way to achieve higher grades.

The group task that we are assigned is aimed at:

• Enabling us to generate a wide array of all the possible alternative solution to a particular problem;
• Giving us a chance to work on the projects which are complex and large in nature so as to develop our understanding as to how to deal with practical projects while we move to the corporate world after achieving our academic degrees;
• Allowing us to work with the students with different calibre, potential, background so that interaction with them can enhance the scope of our knowledge and learning;
• Improving our interpersonal skills so as to develop confidence among us;
• Giving us a chance to make other students learn about something for which we have good learning and understanding (Turner, 2014).

Before working on this task in a team, I personally used to feel a lack of confidence in me and due to this I had never found myself to be comfortable in interacting with the other students of the class. Moreover, I had a perception that team work causes disturbance and disruption in performing a task because of presence of different individuals in the teams. I used to feel that working as a team often leads to conflicts because of differences in opinion of different people. However, while practically working within a team for the given assignment, my actual experiences have absolutely changed my views about the concept of team work and its significance. The group task has allowed me to learn much from my practical experiences. It has allowed me to gain an understanding of how an individual’s contribution can affect or influence the performance of overall team. This task has literally developed by interpersonal skills to a great extent that now I possess enough of confidence to deal with practical situations where team work is required to accomplish the overall goals.

To complete the group assignment in the most effective way so as to achieve maximum grades we had clearly divided the work among all the members of our team (Salas & Rosen, 2013). Each and every person of the team has been allocated the task as per their potential and knowledge. Also, we clearly defined the deadlines within which all of us had to complete our task so that any delays in submission of final assignment report could be avoided. While working for the assignment, we as a team were always readily available to help each other so as to achieve highest efficiency of the team. We used to interact with each other in person on a regular basis while performing our individual tasks so as to take regular work update and to clear any sort of confusion (Brunetto, et. al., 2013). All of the team members were highly committed to achieve the success of the given. The major part of the assignment was to collect as much of the data as was possible from different sources on the real world case where auditors had a significant role. We chose WorldCom’s case to proceed with the task. After collecting the relevant and necessary information about the accounting scandal at WorldCom we started analysing the data for the purpose of creation of report on the entire issue of accounting scandal and the role of auditor in such scandal (Tran, 2002). The facts of the case were quite interesting and this factor has helped us to stay intact to the topic.

After working on this group assignment we have obtained a sound learning on how the concept of team work is implemented in the practical world. I have now clearly understood that in order to achieve the organisational goals, each and every individual working in the organisation has to perform the individual function assigned to him in such a way that his efforts efficiently contributes to the overall success of the organisation. For the smooth and efficient functioning of the business and to achieve the common goal, coordination and cooperation among different responsibility centres and units of the organisation, is indispensible. In the end I can conclude that my overall experience while working in the team was quite good and I actually enjoyed performing the assigned task.

References:

Ashraf, J., 2011. The accounting fraud at WorldCom the causes, the characteristics, the consequences, and the lessons learned. Available at:

Belbin, R.M., 2012. Team roles at work. Routledge.

Brunetto, Y., Shriberg, A., Farr?Wharton, R., Shacklock, K., Newman, S. and Dienger, J., 2013. The importance of supervisor–nurse relationships, teamwork, wellbeing, affective commitment and retention of North American nurses. Journal of Nursing Management, 21(6), pp.827-837.

https://stars.library.ucf.edu/cgi/viewcontent.cgi?article=2106&context=honorstheses1990-2015 Accessed on 10.09.2018.

Salas, E. and Rosen, M.A., 2013. Building high reliability teams: progress and some reflections on teamwork training. BMJ Qual Saf, 22(5), pp.369-373.

Tran, M. 2002. WorldCom accounting scandal. Available at: https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2 Accessed on: 10.09.2018.

Turner, M.E. ed., 2014. Groups at work: Theory and research. Psychology Press.

Ulick, J., 2002. WorldCom blames auditor. https://money.cnn.com/2002/07/08/news/companies/worldcom/index.htm Accessed on 10.09.2018.

Van, J. & Alexander, D. 2002. Andersen was WorldCom auditor. Available at: https://www.chicagotribune.com/sns-worldcom-andersen-ct-story.html Accessed on: 10.09.2018