Auditing & Assurance Concepts

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

Auditing & Assurance Concepts 2
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.