Unfortunately, the scandals have continued: If whistleblowing protection had been in place would the issues at Worldcom have been discovered sooner? Has Sarbanes-Oxley Act reduced the number of accounting scandals in the US?Īs a result of the Enron and Worldcom and other scandals, Sarbanes-Oxley Act was passed by congress in 2002 to mandate certain practices in financial record keeping and reporting for corporations. The Internal audit team were under resourced and under qualified to carry out their responsibilities effectively and were not independent of management as they were diverted away from their auditing responsibilities to look at cost savings and efficiencies by management. The audit committee did not have a work plan with the internal and external auditors to facilitate proper monitoring and oversight and had initially not acted when the fraud was discovered. Senior management were granted lucrative stock options so there was a greed culture within Worldcom as some executives had done very nicely out of them. Not only is providing loans to executives questionable the board didn’t question the size of the loans or his time commitments in managing the business. He used his Worldcom stock to secure loans for other external business activities. The compensation committee approved loans of more than $400 million to the CEO to prevent him selling his Worldcom stock to meet margin calls on his securities account, which would have resulted in the stock price falling further. The board failed to monitor the debt levels and there was no oversight of management. The board approved everything the CEO suggested even multi-billion dollar deals with little discussion or papers to support the decisions and often without a board meeting taking place. The board, compensation and audit committees did not fulfil their duties and obligations to the shareholders, and its stakeholders. The directors were so tied up with Worldcom financially that they had little incentive to question management decisions for fear of losing their wealth. So, it was in their interests to let management make decisions to keep the stock price up. Their wealth was tied to the value of the Worldcom stock. The board was like an ‘old boy network’ where a majority of board members were associates of the CEO who received multiple perks from him including millions of dollars in Worldcom stock and use of the corporate jet. There was a complete lack of corporate governance with no effective internal controls and lack of oversight and monitoring by the board of directors. Andersen’s collapsed in 2002 as details of its questionable accounting practices were revealed following the Enron and Worldcom scandals.Īs the saying goes ‘a fish rots from the head’ and this was true of Worldcom. They did not carry out the necessary tests that were expected of a professional auditor. The SEC highlighted the part played by Arthur Andersen’s grossly inadequate auditing and that there were clear flaws in Andersen’s audit approach. They had also been the auditors of Enron as well as other companies where accounting scandals had occurred. The auditors for Worldcom were Arthur Andersen. Where were the auditors in this massive fraud? So what were the governance failings at Worldcom? This was the largest accounting fraud scandal at the time, displacing Enron, the famous 2001 accounting scandal in which the company declared bankruptcy. It was later discovered that total assets had been overstated by $11 billion. The CEO was sentenced to 25 years in prison and CFO for 5 years following a plea agreement. Worldcom filed for Chapter 11 bankruptcy in July 2002. They set out to review the financial statements and discovered profits were overstated by US$3.8 billion by capitalizing expenses. In 2001, The Vice President of Internal Audit, Cynthia Cooper, and her team, looked into these claims. Inflating revenues with bogus accounting entries from corporate unallocated revenue accounts.Ī former financial analyst at Worldcom had been fired after raising concerns over accounting entries to the Chief Operating Officer.Booking ‘line costs’ as capital expenditure on the balance sheet instead of expenses on the income statement.The senior management began ‘cooking the books’ to disguise declining profits. Revenues grew during the dotcom bubble until it burst, and revenues began to fall. It grew its telecom services by acquiring companies. Worldcom was one of the world’s largest telecommunications companies with a market cap of a staggering US$180 billion. Can you remember one of the largest accounting frauds in American history?
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |