...CASE 3 : Accounting Fraud at WolrdCom Table of Contents Introduction....................................................................................................................... 1 Question 1 .......................................................................................................................... 2 Question 2 .......................................................................................................................... 4 Question 3 .......................................................................................................................... 6 Question 4 ........................................................................................................................ 10 Question 5 ........................................................................................................................ 16 References........................................................................................................................ 24 BKAL 3063 Integrated Case Study 0 CASE 3 : Accounting Fraud at WolrdCom Introduction WorldCom, US second largest telecommunication company shocked the world by filing bankruptcy at 21 July 2002. The WorldCom filing surpassed Enron and became the largest bankruptcy filing in United States history. Due to its rapid growth, WorldCom is also heavily in debt as they finance the company growth with debt. The collapse of WorldCom did not just affect their employees, retailers, the government...
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...shareholders would not be able to obtain useful information to make business decisions if financial information failed to reflect business operation and the company’s financial status. Broadly, the market would hurt due to the negative impact on the market efficiency. As a result, COSO, the Committee of Sponsoring Organizations of the Treadway Commission, was formed in 1985. It has published several comprehensive frameworks to help organizations to improve business operation and governance and to avoid fraud. The aim of this report was to study the development of COSO, including its history and main frameworks and guidance regarding internal control, enterprise risk management and fraud deterrence. The report interpreted the three areas under COSO framework with their key compositions and most recent updates. After the detailed interpretation, conclusion and recommendations were given. Keywords: Fraudulent Financial Reporting, COSO, Internal Control, ERM, Fraud Introduction and Background Financial information is a significant and unique composition of the world of business. Analysis on financial information can always help users to make business decisions. However, driven by short-term profit and specific business purposes, companies would take the risk of releasing fraudulent financial reporting. Fraudulent information would fail to lead to good business decisions. Back to 1970s, due to the occurrence of questionable corporate political campaign practices...
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...Accountants and Financial Professionals in Business (IMA), and Financial Executives International (FEI). Each sponsoring organization appoints representatives to periodically work together on specific projects. The goal of COSO is to provide leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence to enhance organizational governance and decrease fraud 1. The History of COSO and the Creation of the COSO Framework Due to the public criticisms against both accounting professionals and the U.S. Securities and Exchange Commission (SEC), the Treadway Commission was formed in 1985 to inspect fraudulent financial statements, especially in the aspects of reliability and accuracy. In 1987, the Treadway Commission issued its first report on fraudulent financial reporting. COSO was created because of this report. In 1992, COSO released the report titled Internal Control-Integrated Framework, which defined the concept of internal control and established a framework on how to make internal control systems work effectively. The 1992 COSO framework contains the following five integrated components of internal control1: Control environment; Risk assessment; Control activities; Information and communication; and Monitoring. The framework was revised in 2013 and the five components mentioned above remain fundamental to the updated framework. As the Sarbanes-Oxley Act of 2002 (SOX) was released, COSO framework...
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...short and long-term goals. Management uses internal controls to adapt to economic changes (AICPA, 2011, p. 2). Although there are controls in place with insurance and portfolio approaches, an efficient and cost effective internal control system is still needed. Insurance and portfolio approaches that manage and analyze risk and both plays an intricate part in the internal control system. It is important to have an effective internal control system because with Sarbanes-Oxley Act the responsibility to ensure that the financial reporting is done accurately and efficiently. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other upper level of management have this responsibility and are considered fiduciary. They have responsibilities to safeguard the assets of the company and can be held personally liable. Part of their responsibilities includes plan administration functions such as maintaining the financial books and records of the plan, and filing a complete and accurate annual return/report for your plan. Fraud and errors can occur at any point in the system. That is why it is important to establish safeguards to ensure the fiduciary responsibilities are met. An integrated internal control system should achieve operational effectiveness and efficiency, relevant and reliable financial data, and verify law and regulation compliance. (AICPA, 2011, p. 4). If the internal control system is integrated, it will assist management in planning, organizing, directing...
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...Australia, and New Zealand (Brown, DeHayes, Hoffer, Martin, & Perkins, 2012). The Santos have discovered an underserved market niche and turned it into a viable e-business. ------------------------------------------------- ISSUES/PROBLEMS (20 Points)* The first issue encountered by the Santo family was setting up the Web store. None of the family members had the expertise, not to mention the start-up capital, to contract with an internet service provider for the computer resources, software packages, or site design. The Santos overcame this obstacle by contracting with a vendor – in this case, Yahoo! – to host the store. Yahoo! provided the computer resources and integrated software necessary, as well as a customizable template for the Santos to personalize their site. Another vendor, Paymentech, was integrated with Yahoo! to validate credit cards and process payments for Cliptomania. Marketing was another issue encountered. With the dot-com bust in the early 2000s, the cost of listing the website in search engines increased based on the number of “clicks.” The Santos soon found, however, that this increased cost resulted in increased sales and now consider it an acquisition cost. Cliptomania also ventured into search engine advertising and pay for searches based on keywords that are selected by the company. ------------------------------------------------- SOLUTIONS (Taken by the company) (20 Points)* * Invest in an enterprise data warehouse and moving real-time data...
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...attitude of professional skepticism. 4. A bank using Milton Company's financial statements to determine the creditworthiness of a potential loan to Milton is a good example of the need for unbiased reporting. 5. An integrated audit requires the auditor to assess the effectiveness of internal controls. 6. In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license. True False 7. The Center for Audit Quality was started by the International Federation of Accountants. True False 8. The Center for Audit Quality has the primary authority to set auditing standards. True False 9. In an audit, management is considered the “client”. True False 10. Auditing is the process of attesting to assertions about economic actions and events. True False 11. Auditing is the process of verifying the accuracy of the financial statements. True False 12. Internal auditing only provides assurance about internal control effectiveness. True False 13. Auditing exists because users need unbiased information on which to assess management performance and make economic decisions. True False 14. A free market can only...
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...key studies COSO has done over the years. Click on the headings for “Enterprise Risk Management” “Internal Controls” or “Fraud Deterrence” and then click on “More” after the brief summary to get the executive summary of the study. I have attached the Executive Summary for Integrated Framework (1992) as a Reading Following this posting. * Under “Newsroom” and “Home” you will find descriptions of current COSO activities. COSO was an attempt by the private sector to do what congress did with SOX. At present, companies have guidance from COSO and regulatory requirements from SOX that are sometimes overlapping and sometimes in conflict. COSO was organized in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, an independent private-sector initiative that studied the causal factors that can lead to fraudulent financial reporting. It also developed recommendations for public companies and their independent auditors, for the SEC and other regulators, and for educational institutions. The National Commission was sponsored jointly by five major professional associations headquartered in the United States: the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), The Institute of Internal Auditors (IIA), and the National Association of Accountants (now the Institute of Management Accountants [IMA]). Wholly independent of each of the sponsoring organizations, the...
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...receivable. The purpose of implementing a new accounting system is to take advantage of these key new features and core technologies that will help keep the company agile in its decision making. It will also make the company better prepared to compete in today’s economy and market. Key Features The key features for the proposed accounting system include integrating the accounting system with the enterprise system, auditing software, budgeting software, integrated accounting and finance software. The use of XBRL programming language for filing reports, ERP (Enterprise Resource Planning), SCM (Supply Chain Management), CPFR (Collaborative Planning, Forecasting and Replenishment), CRM (Customer Relationship Management), and KM (Knowledge Management) are also key elements of this system (Turban & Volonino, 2011) . Financial planning and budgeting, financial and economic forecasting, as well as integrated accounting and business software will also be included in this system. IT systems will be used for auditing to help track fraud and other harmful expenditures. The financial ratio analysis will be more accurate since it can be completed faster and contain more information. The profitability analysis and cost control will be able to function at optimum...
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...insolvency which often leads to bankruptcy. The management system is not capable of detecting cases of being cheated on by other illegal businesses and at times it occurs within the organization despite existence of well formulated laws that are designed to prevent liability and unethical performances in the business sector. The Board of Directors of the company in conjunction with their audit engagement team should act swiftly in responding to fraud allegations by addressing key areas of fraud. The first step is gathering all the relevant information that relates to the case. The actions and behavioral attitudes of the top management officials should be looked into. It entails their responsibilities to matters relating to active running of the business. This is achieved by conducting an overview of their integrity and organizational ethical values. In Jersey Johnnie’s case, they should identify all the circumstances that led to the allegations by the unidentified caller and ascertain if any member of the management was involved. The management must apply the top-down approach starting with the top management governors. This method analyses the flow of information within the organization. All informal and formal communication channels must be integrated towards provision of the objected feedback. The effectiveness of these communication channels promotes stability in the organization (Cenrowski, Martin and Petro 2007). The management should therefore recognize the warning signs...
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...The AICPA’s AU Section 316 states auditors should implement considerations of fraud in their financial statement audits. An auditor is responsible for attaining reasonable assurance that the financial statements are free of material misstatement from either error or fraud. (PCAOB, n.d.a) When conducting an audit every activity implemented must be documented or there is no proof it ever occurred. The first course of action I would implement in my audit is a brainstorming session during the planning phase of the audit as is required by the generally accepted accounting principles (GAAP). An additional session before substantive testing occurs would be implemented to address issues that may have arisen during test of controls. Issues such as...
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...The Culpability of Accounting Fraud: Auditors, Managers or Both ACC 503 – Accounting for Management Abstract The purpose of this term paper is to provide insight to the reader about accounting fraud and on whom the responsibility lays whenever there is an allegation of accounting misconduct. Based on the rash of accounting fraud by major respectable corporations in recent years, no one organization is immune to accounting fraud and it is prevalent in the Federal Government down to the smallest neighborhood business. This paper will, discuss the responsibility of managers and auditors in preventing accounting fraud, show the relationship between internal and external auditors in identifying and preventing fraud, and the responsibility for managers to have strict internal controls within their accounting processes. Introduction Enron, WorldCom, Lehman Brothers, and Waste Management were three of the biggest corporations plagued by accounting improprieties. These companies were at one time multi-billion dollar entities that seemed to have unlimited growth prospects. They also were mega companies that have been involved in some sort of accounting scandal or an instance of accounting fraud. The Journal of Finance and Accountancy lists the definition of fraud as “All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions...
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... Policies Faculty and students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents: • University policies: You must be logged into the student website to view this document. • Instructor policies: This document is posted in the Course Materials forum. University policies are subject to change. Be sure to read the policies at the beginning of each class. Policies may be slightly different depending on the modality in which you attend class. If you have recently changed modalities, read the policies governing your current class modality. Course Materials Arens, A. A., Elder, R. J., & Beasley, M. S. (2006). Auditing and assurance services: An integrated approach (11th ed.). New York, NY: Pearson. Hayes, R., Dassen, R., Schilder, A., & Wallage,...
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...market. As shown in Exibit-1 of the case the company made numerous acquisitions, which helped them grow not only across the America but also expand internationally in Europe and Latin America. Throughout the 1990s the telecommunications industry grew, giving WorldCom a greater market share. By 1998, WorldCom had become a full-service telecommunications company, able to provide services to virtually any size of business with a full complement of telecom services. Its integrated service packages and Internet strengths gave them substantial competitive advantage. After its unsuccessful attempt to acquire Sprint in 1999, due to regulatory hurdles, WorldCom began drifting as Ebbers lacked strategic sense and he knew that acquisitions were not anymore a viable means of growth. Telecom market was becoming more and more competitive, revenues were falling, profits margins were depleting, and it was becoming increasingly difficult to sustain in the current market scenario. Company Culture: * Autocratic style of management and followed a top down...
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...to implement internal control programs. In response, the Treadway Commission, a private-sector initiative, was formed in 1985 to inspect, analyze, and make recommendations on fraudulent corporate financial reporting. The Treadway Commission studied the financial information reporting system over the period from October 1985 to September 1987 and issued a report of findings and recommendations in October 1987, Report of the National Commission on Fraudulent Financial Reporting. As a result of this initial report, the Committee of Sponsoring Organizations (COSO) was formed and it retained Coopers & Lybrand, a major CPA firm, to study the issues and author a report regarding an integrated framework of internal control. In September 1992, the four volume report entitled Internal Control— Integrated Framework was released by COSO and later re-published with minor amendments in 1994. This report presented a common definition of internal control and provided a framework against which internal control systems may be assessed and improved. This report is one standard that U.S. companies use to evaluate their compliance with FCPA. COSO was formed in 1985 to sponsor the National Commission on Fraudulent Financial Reporting (the Treadway Commission). The Treadway Commission was originally jointly sponsored and funded by five main professional accounting associations and institutes headquartered in the United States: the American Institute of Certified Public...
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...------------------------------------------------- ------------------------------------------------- Module 3 - CIT Case 1. Explain the three aspects of the fraud triangle and how these factors enabled fraud to occur at CIT. The three aspects of the fraud triangle were available in the CIT case. Niakan was the Director of Assets Management. He was in charge of two departments, the Remarketing Department and the End of Lease Department. These two departments made him responsible of all returning off-lease assets at the Jacksonville branch. Niakan' s position in the company provided him the opportunity to commit the fraud because he was in charge of receiving the leased assets and resell them. Niakan and his wife went through several rounds of expensive in vitro fertilization before they had their twins. These fertilization made Niakan struggled financially. Niakan rationalized himself to sell the company's assets and received the money for himself. He did not regret it that he committed the fraud. The opportunity of being in charge of receiving and reselling the same assets and the need of the money rationalized Niakan to commit the fraud. 2. What were the red flags that signaled fraud was occurring at CIT? What should auditors, fraud examiners and colleagues pay attention to that could be indicative of fraud? There were multiple red flags that signaled to the fraud that was occurring at CIT. Werle saw nonsense actions going on in the company. Werle found that there were two suspicious companies...
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