WorldCom Fraud Scandal
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WorldCom Fraud Scandal
Description
WorldCom fraud scandal of 2002 is recognized as the biggest accounting scandal in the history of the United States. This specific event is identified as a major form of bankruptcies that affected the business in an extensive manner. Between 1991 and 1997, the company of WorldCom attained a significant corporate position in the telecommunication industry. It was a time when a huge form of acquisition strategy was attracted by the growing business of WorldCom. This company initially gained a great form of financing benefits due to repeating cycles of acquisitions. The corporate boom of WorldCom turned as the biggest accounting fraud in the country’s history when CEO of the company, Bernard Ebbers along with other senior management started different deceitful and improper accounting methods to maximize financial benefits. Two specific approaches to the reduction of reported lines, costs, and the exaggeration of documented revenues were adopted by the company to mislead investors in a great manner.
WorldCom fraud is examined as accounting and financial statement fraud through which the company altered the financial statistics for investors. Duplicitous financial reporting is a basic issue established by the company that eventually turned as one of the greatest financial crises in the country. During the time period of 2002, WorldCom developed its corporate position as one major long-distance telephone and data services provider. In the same year, the higher management of the company announced that it is essential for the organization to revise its current financial statement considering the statistics of $3.85 billion. At that moment, Bernard Ebbers played his role as a key shareholder to avert the hazards of selling of personal holdings ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"joqOdB6A","properties":{"formattedCitation":"(Ashraf, 2011)","plainCitation":"(Ashraf, 2011)","noteIndex":0},"citationItems":[{"id":1343,"uris":["http://zotero.org/users/local/7Hi3kAOD/items/N35DGXGN"],"uri":["http://zotero.org/users/local/7Hi3kAOD/items/N35DGXGN"],"itemData":{"id":1343,"type":"article-journal","title":"The accounting fraud at WorldCom the causes, the characteristics, the consequences, and the lessons learned","author":[{"family":"Ashraf","given":"Javiriyah"}],"issued":{"date-parts":[["2011"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Ashraf, 2011). It was one failed attempt by the higher management of the company to avoid the problem of bankruptcy. This specific accounting fraud turned as bankruptcy agreement for WorldCom and also required to reaffirm its financial statements for investors. All financial records in the form of financial statements were critically examined to determine the prospect of fraud.
Relation to Fraud Diamond
It is vital to evaluate the approach of the WorldCom fraud scandal by considering the theoretical domain of fraud diamond. There are four significant elements related to the approach of fraud diamond. This sort of critical assessment is essential to examine the actual stakeholders in the context of the biggest accounting fraud of WorldCom. The prospects of incentive, opportunity, rationalization, and capability are used as four main factors to examine the thought procedure of fraudster ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"9HYLC7NK","properties":{"formattedCitation":"(Wolfe & Hermanson, 2004)","plainCitation":"(Wolfe & Hermanson, 2004)","noteIndex":0},"citationItems":[{"id":1340,"uris":["http://zotero.org/users/local/7Hi3kAOD/items/7B6LDCGQ"],"uri":["http://zotero.org/users/local/7Hi3kAOD/items/7B6LDCGQ"],"itemData":{"id":1340,"type":"article-journal","title":"The fraud diamond: Considering the four elements of fraud","author":[{"family":"Wolfe","given":"David T."},{"family":"Hermanson","given":"Dana R."}],"issued":{"date-parts":[["2004"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Wolfe & Hermanson, 2004). The case analysis in the context of WorldCom fraud indicates that the factors of fraud diamond were overlapped that ultimately appeared as major accounting fraud. The growing trend of investment market was a great opportunity for the higher management of the company to adopt different fraudulent approaches. Professionals working at different operational levels such as management, auditors, the internal accountants, etc. play a critical role to deceive investors by manipulating financial statements.
Implications and Impact
The implications of WorldCom fraud can be explored in both forms of direct and indirect perspectives. The economic consequences of this event were huge as it caused great financial tribulation in the country. The aftermath of this incident has appeared as a bad reputation on the approach of accounting. Market perception of reliability and trust greatly damaged by the deceitful incident of WorldCom fraud. The extensive scale of the problem of the WorldCom fraud scandal eventually led to the Sarbanes-Oxley Act to develop better forms of disclosure requirements. Adoption of the approach of penalties, in case of fraudulent accounting is identified as an indirect implication of the scandal of WorldCom scandal. The prestige of different accounting corporations, investment banks, and credit ranking agencies was questioned as to the implication of the WorldCom fraud scandal.
Prevention
Comprehensive assessment of the WorldCom fraud scandal makes it easy to find out necessary preventive measures to minimize the risks of this kind of incident in future. Application of business ethics is the basic criteria to avoid this kind of fraudulent accounting approaches. Active consideration of profit margins can be ranked as a necessary practical feature to prevent the investment industry from this type of fraud scandal. Another preventive action is to deliver the necessary awareness and training to all staff members about business ethics. Active involvement of stakeholders of corporate governance is another significant option to prevent investment businesses from the risk of various forms of investment scams and corporate frauds.
Speedy Detection
Early detection of business fraud makes it easy for the market to avoid adverse implications of this calamity. Exploration of the WorldCom fraud scandal makes it easy to figure out the need for speedy detection to avoid this form of scam in the future. It is observed that investment and accounting irregularities were not timely detect by the accounting department of the company. The phenomenon of continuous assurance is necessary to condition to ensure early identification of any deceitful action ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"SI93DjaK","properties":{"formattedCitation":"(Kuhn & Sutton, 2006)","plainCitation":"(Kuhn & Sutton, 2006)","noteIndex":0},"citationItems":[{"id":1341,"uris":["http://zotero.org/users/local/7Hi3kAOD/items/KH67QLRK"],"uri":["http://zotero.org/users/local/7Hi3kAOD/items/KH67QLRK"],"itemData":{"id":1341,"type":"article-journal","title":"Learning from WorldCom: Implications for fraud detection through continuous assurance","container-title":"Journal of Emerging Technologies in Accounting","page":"61-80","volume":"3","issue":"1","author":[{"family":"Kuhn","given":"J. Randel"},{"family":"Sutton","given":"Steve G."}],"issued":{"date-parts":[["2006"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Kuhn & Sutton, 2006). Adoption of different and feasible risk management instruments in the context of corporate organizations is an integral aspect to meet the standards of timely recognition of the risk of accounting fraud.
Investigation
The services of forensic accountant need to be adopted to ensure proper assessment of the event of investment fraud. The approach of this form of practical implications is essential to identify all hazards and complications involved in case of financial and accounting frauds. The issue of business frauds recognized in case of three main forms of corruption, asset misappropriation, and financial statement fraud. The specific fraud case of WorldCom is the example of financial statement fraud. Auditors need to be specific fraud examiners to ensure proper investigation of hazard of different forms of financial and accounting fraud. Forensic accounting is solution to efficiently develop the approach of investigation of corporate fraud. This specific practical option is useful to determine different business situations in the context of the threat of investment fraud ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"91YQlHfK","properties":{"formattedCitation":"(Okoye, 2009)","plainCitation":"(Okoye, 2009)","noteIndex":0},"citationItems":[{"id":1342,"uris":["http://zotero.org/users/local/7Hi3kAOD/items/PBMJGUGU"],"uri":["http://zotero.org/users/local/7Hi3kAOD/items/PBMJGUGU"],"itemData":{"id":1342,"type":"paper-conference","title":"The role of forensic accounting in fraud investigation and litigation support","container-title":"The Nigerian Academic Forum","volume":"17","author":[{"family":"Okoye","given":"Emmanuel Ikechukwu"}],"issued":{"date-parts":[["2009"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Okoye, 2009). Consideration of different business situations is an essential step to investigate the actual threat of fraud in the scenario of business approach. Adoption of the proactive approach of investigation is essential to avoid the problem of business frauds.
Concealment
Detailed examination of WorldCom fraud scheme revealed that two significant methods were adopted of fraudulent accounting to hide the detrimental financial situation of the company. The disaster of WorldCom was rapidly unraveled with the consideration of different and major complications. Different practical measures were adopted to ensure proper cover-up of all the implications of investment fraud. The corporate culture of a WorldCom company is the basic factor of consideration which was established by Bernard Ebbers. His authority turned as the immense pressure for all staff members to adopt the perspective of cover-up in case of accounting fraud. The problem of fraud mainly appeared by concealing the actual extent of the expenses. The actual financial statistics were concealed through the practical paradigm of financial statements of different investors.
Conversion
The approach of unravelling in case of conversion of the fraud is essential aspect to determine the actual implications of investment fraud. This domain is also vital in case of WorldCom fraud scandal. The extensive form of misclassification ultimately, greatly increased the profit level of company. Furthermore, it is observed that the borrowing costs in case of company were immensely decreasing, considering the paradigm of investment. It was argued by management of the company that internal auditors of the organization assess the approach of fraud. However, this argument raised a question on the credibility and performance of the higher management of the company considering the approach of investment in case of approach of financial statements.
Further Recommendations
It is critical to identify necessary recommendations from the incident of WorldCom fraud scandal to avoid this kind of issue in the future. The analysis of this financial incident indicates that there is a need for proactive governance changes to meet actual standards of business ethics and investment. It is critical for financial organizations to adopt necessary and valid form of code of ethics to minimize the hazards of any kind of financial or accounting fraud. Proper and timely check and balance on all financial activities in case of business market are integral to avoid the complications in the form of accounting disasters. Corporate governance needs to be correctly aligned with basic standards of business in the form of ethical considerations. The problem of illegal profit needs to be critically and timely detected to ensure the proper functioning of the business market.
Lessons
Lastly, it is important to identify specific lessons that can be learned from the WorldCom fraud scandal to meet business standards in an effective manner. Active consideration of risk management is necessary practical measure to timely assess the risk of accounting fraud and adopt necessary measures as early as possible. Adoption of proper and rational decision making is critical step to avoid all the complications of accounting fraud. Furthermore, it is critical for the management of investment companies to develop strong ethical domain in a workplace setting to minimize the chances of different types of accounting and investment frauds. It is also crucial to avoid individual stocks to adopt better forms of diversification of investment.
References
ADDIN ZOTERO_BIBL {"uncited":[],"omitted":[],"custom":[]} CSL_BIBLIOGRAPHY Ashraf, J. (2011). The accounting fraud at WorldCom the causes, the characteristics, the consequences, and the lessons learned.
Kuhn, J. R., & Sutton, S. G. (2006). Learning from WorldCom: Implications for fraud detection through continuous assurance. Journal of Emerging Technologies in Accounting, 3(1), 61–80.
Okoye, E. I. (2009). The role of forensic accounting in fraud investigation and litigation support. The Nigerian Academic Forum, 17.
Wolfe, D. T., & Hermanson, D. R. (2004). The fraud diamond: Considering the four elements of fraud.