Accounting Fraud at Worldcom 3

3340 Words Feb 19th, 2012 14 Pages
Accounting Fraud at WorldCom

1) What are the pressures that lead executives and managers to “cook the books?”

After the rapid evolution of the telecommunication industry in the 1990s, WorldCom shifted its strategy to focus on building revenues and acquiring capacity sufficient to handle expected growth. Their biggest goal was to be the No. 1 stock on Wall Street rather than capturing the market share. As a result, their Expense-to-Revenue (E/R) Ratio was their measurement for their main objective (increase revenues and become the No. 1 stock on Wall Street).

Due to heightened competition, overcapacity and the reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble
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Thus, Cooper had the incentive to go along with accounting fraud to continue making a large salary and to not ruin personal relationships.

Arthur Anderson, the outside auditor, also had many incentives that prevented the auditing company from reporting WorldCom’s suspicious actions. Anderson considered WorldCom its most “highly coveted” and “flagship” client, and wanted to maintain a long term relationship with WorldCom. With these goals in mind, Anderson ignored WorldCom’s many denials for pertinent financial information and meetings and continued to audit WorldCom at a “moderate-risk” level, instead of a “maximum risk” level which Anderson’s risk management software program rated WorldCom as.

Finally, the board of directors had too little connection with WorldCom to even realize fraudulent practices were occurring. Over 50% of the Board of Directors were nonexecutive members of WorldCom, and had little contact with any WorldCom managers besides board meetings, which occurred four to six times a year. Thus, the board members were fooled by the fraudulent packets of information about WorldCom’s financial health that Ebbers prepared before each board meeting.

3.2) What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?

Several systems should have been in place to both…