Audit and Wall Street

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The WorldCom fraud case exemplifies almost everything that is wrong with corporate America today. People become obsessed with money and success and forget what it means to be an honest human being. Business is a natural human concept. Barter and trade for goods and services are necessary to the proper function of a society. However, throughout time, rules have been put in place to ensure fair practices and a level standard for which profits can be evaluated. As meticulous and frustrating as they may have seemed in Accounting 201 last year, I can understand that there are legitimate reasons for all of the rules and regulations the industry has put in play. These rules are the definition of industry standard; every accountant is aware of them.

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Off Balance Sheet Techniques. The research of Giroux (2008) revealed that Enron resourced to complex and deceptive initiatives of fabricating fictitious and guaranteeing its own Special Purpose Entities (SPE) and off-shore accounts to move debt off the balance sheet and transfers the liabilities of the special purpose entity by recording cash as a cash from operations rather than cash from financing (p.1216). The research of Ahmad et al. (2013) on WorldCom indicated that the top executives overstated earnings by routinely manipulating and treating operation expenses as capital (pp.8-10). Likewise, Crumbley et al. (2013) research on WorldCom indicated that the internal auditor discovered the shift of line cost expenses to capital accounts (p.4121). The research of Crumbley et al. (2013) on Adelphia Communication specified that the company’s management and owners falsified number of cable TV subscribers, created false management fees and were hiding off-balance sheet debt from investors (p.4191). Ahmad et al. (2013) research on Tyco International showed that the companies inflated its cash flow by improperly recording booking expenses as capital (pp.8-10).

WorldCom was involved in two major forms of financial statement fraud schemes, overstatement of revenue and understatement of line costs (Vance, 2016). WorldCom was overstating there revenue by regularly monitoring revenue through the sales groups’ performances measured against the revenue plan (Vance, 2016). Every two to three months a meeting was held that brought each sales channel’s manager and they were obligated to present and defend their sales channel’s performance compared to the budgeted performance (Vance, 2016). The major tool that measured and monitored the revenue performance at WorldCom was the monthly revenue report (MonRev) which was prepared and distributed by the revenue reporting and accounting group (Vance, 2016). The MonRev included detailing revenue data from all the company’s channels and segments but the full MonRev also contained the Corporate Unallocated schedule (Vance, 2016). The key players in this fraud scheme were WorldCom’s Chief Financial Officer (CFO) and Treasurer Scott Sullivan and senior vice president of financial operations, Ron Lomenzo. Sullivan had total control for the items booked on the Corporate Unallocated schedule (Vance, 2016). The Corporate Unallocated schedule amounts reported usually spiked during the quarter-ending months, and the largest spikes occurred in quarters when the operational revenue was farther away from meeting the quarterly revenue targets (Vance, 2016). WorldCom

Employees of a company are the drivers for its growth and success. In the report of World Com It shows that In less than a decade Ebber helped the company grew with small investment of 30$ billion revenue which indicates: Misappropriation of using monetary assets because Ebber got easy access of cash and cash equivalents as World com lacked poor internal controls which helped him to gain a lot money.

The institutional investor, who has owned significant amount of investment concern with monitoring duties of management, as they gain benefit from it. They require high quality of information and have a power to carry out financial analysis. Their monitoring role become important since there is increase in agency conflict between managers and shareholders. The institutional investor tend to pressure manager in order to protect shareholder interest. Since the institutional investor need to control their investment and assess portfolio choice, they need reliable accounting information. The reliable accounting information came from annual report, as annual report provide assurance on firm health and performance. Therefore, annual report give impact to market reaction, so do the auditors brand name and their reputation. Big 4 audit firm who have good reputation, considered as good in delivering audit quality. Big 4 audit firm consists of Deloitte, PricewaterhouseCoopers, Earnst & Young (EY) and KPMG. Based on research, Big 4 audit firm may help their client to reduce agency conflict and lead to lower agency cost. Besides, Big 4 audit firm give the firm confidence to detect fraudulent financial statements and help to reduce information asymmetry (Azibi, Tounder, & Rajhi, 2010).

Needed for the Houston office of Andersen, an audit partner that understands the role of being a "public watchdog" with "ultimate allegiance to the creditors and shareholders" . Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including the failure to consolidate, failure of Enron to make $51million in proposed adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries . Another example is Lord Wakeham joined Enron as a non-executive director in 1994 and also sat on Enron's audit and compliance committee. In addition, Andersen also provides internal audit service to Enron, which in fact impact