Auditing & Assurance Concepts

This article discusses the accounting scandal at WorldCom and the role of auditors in it. It also explains the importance of teamwork in business organizations. The article is divided into two parts, with the first part presenting a real-world case of accounting scandal at WorldCom, and the second part discussing the experience of the author while working on a group assignment related to auditing. The article provides insights into the importance of professional scepticism, internal controls, and corporate governance in auditing. It also highlights the significance of teamwork in achieving organizational goals.

Running Head: Auditing & Assurance Concepts
AUDITING, ASSURANCE AND COMPLIANCE

Auditing & Assurance Concepts 1
Part a
To: Miss Jenny Nguyen
From: John Smith
Re: WorldCom’s Accounting Scandal
Hi Ma’am,
This is to present the real world case of accounting scandal that was encountered at
WorldCom. WorldCom was the second largest long distance phone company in American
Nation. It started its operations in 1983 as a small sized telephone service provider. It
operated its business in the telecommunication industry of America. In 1989, the company
got listed on the American Stock Exchange. The company had to suffer huge losses due to its
overcapacity of bandwidth supply which was coupled with severe consume price wars in year
1999. However, to maintain its market position, WorldCom manipulated its accounting books
in the year 2001-02 to mislead its stakeholders at large and soon after this it had collapsed.
The thorough research on this scandal has allowed us to give a light to the role of company’s
auditor in the occurrence of such a huge scandal.
WorldCom’s Case:
The case of WorldCom is reported as one of the major accounting scandals across the world.
At the initiation of year 2000, the telecommunication giant had to experience significant
decline in its revenue due to oversupply of bandwidth capacity and economic recession. In
July, 2002, the company had to face serious setback when its market capitalisation felt down
to the level of US $ 150 million from the level of US $ 150 billion which was reported in

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January, 2002. In order to maintain its market worth, the management of the WorldCom
entered into fraudulent accounting practices. The company adopted those accounting methods
that could disguise its decreasing revenues to deceive WorldCom’s stakeholders. The
management of the company was highly focused on increasing its revenues than the actual
profit margins and the lack of integrated accounting systems had allowed the executives of
WorldCom to switch customer accounts from one accounting system to another. Due to this
high revenues were reported by the employees in order to gain performance based incentives.
Moreover, it was also identified that the company had underreported its line costs so as to
show desired profitability in the financial statements to its stakeholders. As a result of this,
various anomalous accounting entries were traced by the internal auditor of WorldCom.
Those unusual accounting entries reflected the fact that the reserves and provisions which
were prepared to deal with the situation of financial loss were inappropriately transferred to
the financial statement’s revenue line. Further, WorldCom’s operating expenses were
recorded as the long term capital investments so as to avoid reflection of huge losses in the
annual reports. In total, the company inflated the profits of around $ 3.8 billion in its financial
reports of 2001-02. All these earnings management practices were undertaken to mislead the
stakeholders of the company so that funds in large sums could be obtained from the investors.
In case of WorldCom, Arthur Anderson LLP– Kenneth M. Avery and Melvin Dick were
holding the position of Primary Auditors of WorldCom for the first five quarters in question.
The chief internal auditor of the company was Cynthia Cooper. While carrying the internal
audit of WorldCom, Cynthia reported to the external auditing firm of WorldCom about
company’s false accounting practices. After examining the internal audit reports, which
revealed heavy manipulation of WorldCom’s finances, Anderson decided to disclose the facts
of company’s accounting scandal to its shareholders and other investors.

Auditing & Assurance Concepts 3
When the news of WorldCom’s collapse came out in public at large, its auditors were
convicted for destroying the annual financial records of the company for those financial
quarters when the accounting scandal actually occurred. However, the auditors contented that
the CEO of WorldCom, Scott Sullivan, had misled their auditing firm to a huge extend, due
to which auditors could provide a correct opinion about the material misstatements in the
financial statements of the company. The auditors also contented that they had already
warned the board company about the material misstatements identified by them on time but
the management and board did not take the appropriate course of action. In response to the
conviction against the auditing firm of WorldCom, Anderson issued a formal statement
contending that the Chief Financial Officer of the company did not disclose the matter of
line-costs transfers to the auditing firm nor did the company consulted the firm for the
accounting treatment given by them.
Arthur Anderson was also the auditor of various other telecommunication corporations which
had come under the scrutiny during the period of 2001-02, for their respective accounting
irregularities. Therefore, Anderson had been accused in multiple law-suits for his fault of
approving the financial reports which did not accurately depict the true financial standing of
the companies. The further section details the role of auditor in the entire scandal.
In case of WorldCom, the internal controls of the company were found to be weak due to the
negligence of audit committee of the company. The internal auditor of the company and the
audit committee could not cooperate to strengthen WorldCom’s internal controls which
allowed the employees of the company to manipulate the key information in the financial
statements. Also, the members of internal audit department of the company were not
adequately skilled and trained to manage its internal controls. They did not report to the audit
committee about the accounting irregularities on the timely basis. Moreover, the chairman of
WorldCom’s audit committee, Max Bobbitt, was in support of CEO of the company and

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therefore he ignored the reporting of company’s fraudulent practices to the statutory auditor.
The principle of corporate governance was deeply affected at WorldCom as the board of the
company was not working in the interest of its stakeholders. Further, the firm of external
auditors blindly relied on the internal auditors of the company and hence they did not pay
significant attention to material irregularities of accounting process of WorldCom. The
auditors did not carry sufficient testing of various balances of WorldCom.
The statutory auditors of the company should have applied the concept of professional
scepticism at all the stages of their audit engagement where they were encountered with
anything suspicious and unreasonable. If they had performed their audit procedures
adequately, they could have identified the weakness in the internal control system of
company which could have ultimately allowed them to identify and report about the entire
accounting scandal to the external stakeholders of the company. The fundamental principles
of auditing such as integrity, objectivity, professional behaviour and professional competence
seem to have severely affected in case of WorldCom because of negligence of its auditors
towards their professional obligations.
Hope, you find this information relevant and appropriate for the purpose.
Yours Sincerely,
John Smith

Auditing & Assurance Concepts 5
Part b
In the today’s dynamic and complex corporate world, team work in business organisations
has gained great significance. The increasing competition in the market does not generally
allow the owners of business to work in isolation. Particularly, the corporations which are
engaged in wide business operations require hiring of large number of employees to achieve
the organisational goals and objectives effectively and efficiently (Belbin, 2012). Considering
at the importance of the concept of team work in real word, the educational institutions have
started assessing their students on the basis of their skills of performing the group tasks. For
the same purpose, all the students of our class have been assigned various group assignments
which are to be performed by us within the team allocated to us. This report is being prepared
to explain my overall experience on the group assignment.
Before allocating the task, our professor has formed teams with 4 students in each team. Each
team has been assigned with a task related to auditing field. The teams for the purpose of the
assignment have been formed in accordance with the individual calibre and competence of
each student. In each team, one top performer of the class, two average performers and one
student who is performing below average have been accommodated so as to balance equally
all the teams. The basic purpose of this group task is to create a practical understanding of
how to contribute to the overall goals of an organisation by working individually and
collectively towards its common goal. This assignment covers a significant weightage of
marks in our total academic results. Hence, we are instructed to work on such tasks in the
best possible way to achieve higher grades.
The group task that we are assigned is aimed at:
 Enabling us to generate a wide array of all the possible alternative solution to a
particular problem;

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 Giving us a chance to work on the projects which are complex and large in nature so
as to develop our understanding as to how to deal with practical projects while we
move to the corporate world after achieving our academic degrees;
 Allowing us to work with the students with different calibre, potential, background so
that interaction with them can enhance the scope of our knowledge and learning;
 Improving our interpersonal skills so as to develop confidence among us;
 Giving us a chance to make other students learn about something for which we have
good learning and understanding (Turner, 2014).
Before working on this task in a team, I personally used to feel a lack of confidence in me
and due to this I had never found myself to be comfortable in interacting with the other
students of the class. Moreover, I had a perception that team work causes disturbance and
disruption in performing a task because of presence of different individuals in the teams. I
used to feel that working as a team often leads to conflicts because of differences in opinion
of different people. However, while practically working within a team for the given
assignment, my actual experiences have absolutely changed my views about the concept of
team work and its significance. The group task has allowed me to learn much from my
practical experiences. It has allowed me to gain an understanding of how an individual’s
contribution can affect or influence the performance of overall team. This task has literally
developed by interpersonal skills to a great extent that now I possess enough of confidence to
deal with practical situations where team work is required to accomplish the overall goals.
To complete the group assignment in the most effective way so as to achieve maximum
grades we had clearly divided the work among all the members of our team (Salas & Rosen,
2013). Each and every person of the team has been allocated the task as per their potential
and knowledge. Also, we clearly defined the deadlines within which all of us had to complete
our task so that any delays in submission of final assignment report could be avoided. While

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working for the assignment, we as a team were always readily available to help each other so
as to achieve highest efficiency of the team. We used to interact with each other in person on
a regular basis while performing our individual tasks so as to take regular work update and to
clear any sort of confusion (Brunetto, et. al., 2013). All of the team members were highly
committed to achieve the success of the given. The major part of the assignment was to
collect as much of the data as was possible from different sources on the real world case
where auditors had a significant role. We chose WorldCom’s case to proceed with the task.
After collecting the relevant and necessary information about the accounting scandal at
WorldCom we started analysing the data for the purpose of creation of report on the entire
issue of accounting scandal and the role of auditor in such scandal (Tran, 2002). The facts of
the case were quite interesting and this factor has helped us to stay intact to the topic.
After working on this group assignment we have obtained a sound learning on how the
concept of team work is implemented in the practical world. I have now clearly understood
that in order to achieve the organisational goals, each and every individual working in the
organisation has to perform the individual function assigned to him in such a way that his
efforts efficiently contributes to the overall success of the organisation. For the smooth and
efficient functioning of the business and to achieve the common goal, coordination and
cooperation among different responsibility centres and units of the organisation, is
indispensible. In the end I can conclude that my overall experience while working in the team
was quite good and I actually enjoyed performing the assigned task.

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References:
Ashraf, J., 2011. The accounting fraud at WorldCom the causes, the characteristics, the
consequences, and the lessons learned. Available at:
Belbin, R.M., 2012. Team roles at work. Routledge.
Brunetto, Y., Shriberg, A., Farr‐Wharton, R., Shacklock, K., Newman, S. and Dienger, J.,
2013. The importance of supervisor–nurse relationships, teamwork, wellbeing, affective
commitment and retention of North American nurses. Journal of Nursing
Management, 21(6), pp.827-837.
http://stars.library.ucf.edu/cgi/viewcontent.cgi?article=2106&context=honorstheses1990-
2015 Accessed on 10.09.2018.
Salas, E. and Rosen, M.A., 2013. Building high reliability teams: progress and some
reflections on teamwork training. BMJ Qual Saf, 22(5), pp.369-373.

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Tran, M. 2002. WorldCom accounting scandal. Available at:
https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2 Accessed on:
10.09.2018.
Turner, M.E. ed., 2014. Groups at work: Theory and research. Psychology Press.
Ulick, J., 2002. WorldCom blames auditor.
https://money.cnn.com/2002/07/08/news/companies/worldcom/index.htm Accessed on
10.09.2018.
Van, J. & Alexander, D. 2002. Andersen was WorldCom auditor. Available at:
http://www.chicagotribune.com/sns-worldcom-andersen-ct-story.html Accessed on:
10.09.2018