WorldCom Collapse: Analysis of Causes and Threats to Audit Quality

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
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AUDITING AND ASSURANCE
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Introduction
The main purpose of the assessment is to analyse the case of WorldCom Collapse which
appropriately reflected a misconduct which had occurred in the business. The case of WorldCom
reveals that the management of the company was reporting inappropriate accounting entries in
the financial statement of the business in order to demonstrate to the shareholders that the
company was performing appropriately. The company had committed a fraud by overstating the
earnings in the financial statements of the business by 3.8 billion in 2001. The management of
WorldCom has overstated the earnings of the business by not representing ordinary expenses in
the income statement but depicting the same as capital expenditure of the business (Latimes.com.
2019). This technique allowed the business to overstate the profits of the business as well. This
was done in order to attract more investors and keep the market price of the shares of the
business high. This was a fraud as the investors of the business depended on the information
which was stated in the financial statements for making investments and the management of the
company undermined the confidence of the general public. The role of audit in a business is very
important as the same provides an opinion regarding whether the financial statements of the
business are showing true and fair view or not. It is also to be noted that it is on the basis of the
opinions which is provided by the auditor of the company that investor takes important
decisions. The auditor decides whether the financial statements are showing true and fair view or
not is completely on the basis of the evidences which is collected by the auditor from internal
and external sources of the business (Tran 2002). The discussion would be revealing the causes
for the downfall of WorldCom and the threats which affects the overall quality of the audit of the
business.

AUDITING AND ASSURANCE
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The case of WorldCom also reveals that the management of the company was closely
involved in the scheme of overstating the financial statement of the business so that the financial
statement showed an appropriate view of the financial position of the business. The CEO of
WorldCom Scott D. Sullivan was closely involved in the scheme (Eichenwald 2002). It was a
case where the management of the company would overstate the profits in one year and make up
the financial statement in the next year when the business would have generated appropriate
profits. However, the downfall of Enron had alerted the market and it was due to these reasons
that the major fraud was discovered during the period. The downfall of the WorldCom can be
regarded as big downfall of a company which was considered to be the 2nd largest in the
telecommunication sector.
The auditor of the business Anderson Accounting firm can be said to be at fault as well as
the auditor of the business was not able to recognise the fraudulent activities which were being
conducted in the business of WorldCom. The reasons which can be identified which was
responsible for the downfall of the company are listed below:
 Self Interest: One of the main principles which the auditor needs to follow while
conducting an audit of a business is the principle of independence which is severely
affected in case a situation of self interest arises. The general auditing principles requires
the auditor to follow appropriate procedure while conducting audit for a business. As per
the provisions of APES 110, an auditor should conduct the process of auditor without
getting influence by any conflict of interest. In case a conflict of interest situation arises
in the business, the quality of the audit which is conducted would suffer heavily (Kumar
and Sharma 2015). In the case of WorldCom, the auditor Anderson Accounting Firm was
already under pressure due to the fall of Enron and can be regarded to be at fault as