Worldcom Case

1078 Words Apr 8th, 2013 5 Pages
3) Roots of the scandal
The roots of the fraud and the role of internal auditors
As explained above, the fraud was implemented by the former CEO Bernard Ebbers and commited by his financial director Scott D. Sullivan. The technique used by Worldcom was pretty simple; indeed, he cooked the books by saving pure operating expenses such as maintenance network in capital expenditure instead of expenses in order to hide its decreasing earnings and to maintain the price of Worldcom’s stock. In summary, certain expenses charged by regional operators to reroute calls were not taken into account. Of "current expenses" (line cost expenses), these charges were recorded in "capital" in total contradiction with GAAP accounting standards.
Once again,
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U.S. GAAP are only conceptual frameworks that provide general objectives.
Before the SOX law was signed, it was relatively easy to cook the books as the companies were not obliged to publish information such as off balance sheet commitments or the report of the audit whereas now they have to do it. Besides, now the SEC verifies the financial situation of the company every three years and the law also regulates the intervention of external auditors and the company cannot keep the same auditors for several years. If that was implemented before the Worldcom case, the SEC would have been aware of the fraud between Worldcom and Arthur Andersen.
In addition, there is also an obligation for the CEOs and CFOs to personally certify the accounts (section 906).This increases criminal responsibility of managers in front of the accounting and financial information of the company. Section 404 requires companies to implement internal controls whose effectiveness must be demonstrated. Indeed, the WorldCom fraud could have been prevented if the company had good enough internal controls to prevent Scott D. Sullivan from ordering changes in accounts just to allow the company to report phony profits.
The creation of the Public Company Accounting Oversight Board (PCAOB) which is a new regulatory and supervisory organism created to oversee audit firms, establish standards, inspect and sanction persons with deviant behavior is another important point. This

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