Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay
In this case, there are several conspirators who is involved in the fraud receiving punishment from either SEC or federal government. Robert Levin, the AMRE executive and major stockholder, and Dennie D.Brown, the company’s chief accounting officer, were subject to the punishment in the form of a huge amount of fine by the SEC and the federal government. This punishment came from reasons. After AMRE going public, the company have the obligation to publish its financial reports but its performance did not meet expectation. The investigation by SEC shows that Robert took the first step of this scam, fearing the sharp drop of AMRE’s stock price because of the poor performance of company. He abetted Brown, to practice three main schemes to present a false appearance of profitable and pleasant financial reports. Firstly, they instructed Walter W.Richardson, the company’s vice president of data processing, to enter fictitious unset leads in the lead bank and they originally deferred the advertising cost mutiplying “cost per lead” and “unset leads” amount, so that they deferred a portion of its advertising costs in an asset account. The capitalizing of advertising expenses allowed them to inflate the net income for the first quarter of fiscal 1988. Secondly, at the end of the third and fourth quarters of fiscal 1988, they added fictitious inventory to AMRE’s ending inventory records, and prepared bogus inventory count sheets for the auditors. Thirdly, they overstated the percentage
The stakeholders in this fraudulent case of WorldCom consist of Bernie Ebbers, Scott Sullivan, Buford Yates, David Myers, Cynthia Cooper, and Betty Vinson belong to the company. While the other stakeholders would consist of the creditors, Andersen (accounting firm), investors, and the public. This fraudulent act committed within WorldCom impacted every single stakeholder in a way. Either in a negative or positive way, most of the impact was caused with harm to everyone. The main individuals such as Ebbers, Sullivan, and Vinson all had major consequences as resulting with the fraud. Criminal trials were a major result with their fraudulent acts within WorldCom. Cooper was a lifesaver by most of the community. Aside from these individuals, the rest also got affected by the fraud. Investments conducted by the investors were all lost within the fraud process. The impact towards much of the image for Andersen was ruined. Many of the public lost their trust on the honesty and professionalism of Andersen and other certified public accounting firms. The entire employees from the top management to the smaller group of workers stayed unemployed and some with criminal punishment.
Sen. Sarbanes's bill passed the Senate Banking Committee on the 18th of June 2002, by a vote of 17 to 4. On the 25th of June 2002, WorldCom revealed it had overstated its earnings by more than $3.8 billion during the past 15 months, primarily by wrongly accounting for its operating costs. Sen. Sarbanes introduced Senate Bill 2673 to the full Senate on the same day and it passed 97 to0 less than three weeks later on the 15th of July
The company became successful through the process of buying over 65 assets, and enormous about of money spent. After the internet downfall the company stocks had increased, but putting the company into a lot of debt. Worldcom was soon to be discovered by wall street bankers, investors, etc. Later to become one of the second largest long distance telephone company in the United States. The accounting collapse didn't happen right away. However from the early 2000s Bernard Ebbers, and other employees used fraud and invalid accounting procedures to deceive investors and others. Some people saw it as an honor, until it was involved in one of the largest accounting crimes in American History, Worldcom led to bankruptcy. "WorldCom then admitted to inflating its profits by $3.8 billion over the previous five quarters. A little over a month after the internal audit began, WorldCom filed for bankruptcy.When it emerged from bankruptcy in 2004, WorldCom was renamed MCI. Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison, but is free on appeal." (Case Study: Worldcom, Lee Ann
The similar circumstance occurred with other companies. As such, the government decided that they must do something about this issue and in 2002 Congress passed the Sarbanes-Oxley Act. Not only this act had an immediate effect on us corporations, but the accounting profession was revolutionized by this new introduction. The act gave more regulatory power to lawyers, analysts, and auditors. WorldCom, who was one of the biggest bankruptcies in history, admitted to overstating profits by billions throughout the years. The
Another corporate accounting scandal that occurred in the United States before the Sarbanes-Oxley Act came into effect was the WorldCom scandal in 2002. Seventeen thousand employees were fired and $3.8 billion dollars in profit were removed from their accounting books after an internal audit discovered improper expense accounting in 2001 and 2002. This improper accounting inflated the cash flow so the company would not report a net loss, only a net gain (Hancock, 2002).
After completing both vertical and ratio analyses, there is potential evidence to substantiate the need for a fraud hypothesis. Out of the five financial relationships that could lead to fraud, the relationship in question for WorldCom’s financial statements is Assets versus Liabilities. It is customary that companies maintain a balance between what they own and what they owe. However, a shift in the balance in either direction could result from a change in company policy or fraud. Overall, WorldCom’s Debt to Assets’ ratio is relatively stable with a slight increase of 1.69% from 2000’s 40.55% to 2001’s 42.24%. However, the decrease in the Current Liabilities account from $17,673,000,000 in 2000 to $9,210,000,000 in 2001 results in a 52% drop in Total Current Liabilities. The source of the significant drop is the $7,028,000,000 decrease in Short-Term Debt and Current Maturities of Long-Term Debt. There is a possibility that WorldCom paid off these debts, but there is also the possibility that WorldCom wrote them off. Current Ratio, Acid Test, and Net Working
This leads into my second pressure, which deals with personal lives. Employees were receiving tremendous benefits due to the company’s great performance. However, if the company did not improve, people’s salaries would be cut or even worse, their jobs would be cut. That is why so many people were willing to engage in the fraud, because they felt WorldCom was supplying a salary and benefits that other companies would not be able to match. Betty Vinson was a prime example. She knew that releasing line accruals was wrong, but needed to
On March 15, 2005 former CEO of WorldCom, Bernard Ebbers sat in a federal courtroom waiting for the verdict. As the former CEO of WorldCom, Ebbers was accused of being personally responsible for the financial destruction of the communications giant. An internal investigation had uncovered $11 billion dollars in fraudulent accounting practices. Later a second report in 2003 found that during Ebber’s 2001 tenure as CEO, the company had over-reported earnings and understated expenses by an astonishing $74.5 billion dollars (Martin, 2005, para 3). This report included the mismanagement of funds, unethical lending practices among its top executives, and false bookkeeping which led to loss of tens of thousands of its employees.
Preventative measures could have been instituted to avoid the WorldCom corporate fraud. First, WorldCom should have had an external Board of Governors comprised of businessmen
P., & Coulter, M. K., 2012, p. 152), although it seems none of WorldCom’s executive management team seemed to feel this way. Many steps could have been taken to prevent the collapse of the WorldCom empire, but only a few key managers held the power and none were willing to take action. One control that did not exist in WorldCom’s culture was allowing both internal and external auditors access to all necessary documents and statements. Without full disclosure of these items no one could see how many risks the company was taking by making fraudulent entries against their books. Also the external audit team, Arthur Anderson, held WorldCom as one of its best customers which was a major conflict of interest. This relationship lead to many fundamental mistakes from Anderson not keeping pressure on WorldCom and getting all vital information that would prove how poorly the company was being run. Had they been operating transparently, auditors and employees would have seen the accounting deception and could potentially have stopped it prior to the company’s collapse. In addition, by employing multiple auditing firms many of the mistakes being made may have been caught and discontinued from the beginning.
This research paper will explore the fraud at Tyco and focus primarily on accounting and auditing issues related to the fraud. One thing worth noting about this case is that fraudulent financial reporting was not at the core of the fraud, which was the case with majority other big frauds at the time, such as Enron and Waste Management. On the contrary, fraud consisted of misappropriation of assets, and fraudulent financial reporting came as a consequence of trying to hide misappropriation of assets and the use of corporate money for personal benefit.
There were several people responsible for the WorldCom scandal, as well as, whistleblowers that first discovered the accounting fraud. The former CEO, Bernard Ebbers was found to be the main offender of the fraud. He did it by capitalizing inflated revenues with phony accounting entries and he was eventually sentenced to 25-years for fraud, conspiracy and filing false documents with regulators. Scott Sullivan, the former CFO, pleaded guilty to one count of conspiracy to commit securities fraud and was sentenced to 5-years after testifying against Bernard Ebbers. The former Director of General Accounting, David Myers, pleaded guilty to
WorldCom acquired Arthur Andersen as the independent external auditing for the company. As WorldCom grew after the merger with MCI, Andersen began to invoice less than they should have. The charges were defended as an opportunity to prolong business with WorldCom. (Kaplan and Kiron, 2007). This is an immediate red flag for a company. Where were the ethical practices of the independent auditor? If the auditor has no ethics, how can one possibly be assured that the company is performing its intended function appropriately? The board of directors should have immediately been informed of Andersen’s practices and made a decision to confront Andersen’s practices and possibly obtain new independent auditors.