Worldcom Scandal Summary

Great Essays
SUMMARY
Originally founded in 1983 as LDDS Communications, today, MCI, Inc. is known as the American telecommunications company that was originally formed as a result of the merger of WorldCom. Currently, MCI, Inc. is headquartered in Ashburn, Virginia but originally WorldCom was headquartered in Clinton, Mississippi (Reardon, 2006). WorldCom’s growing success through acquisitions of other telecommunications firms led it to become the second largest long distance telecommunications company in 2001. However, on June 21, 2002 the aspiring company filed for bankruptcy protection after disclosures displayed accounting regularities. On June 25, 2002, they announced that it had overstated earnings in 2001 by more than $3.8 billion (Lyke & Jickling,
…show more content…
If there is no trust in the system and financial statements, it will simply be unable to operate. Immanuel Kant helps us understand this through the universalizability principle that states, “Act so you can will the maxim of your action to be a universal law.” In other words, consider the actions you choose and how the corporate world would be affected if everyone chose similar actions. Auditors are known as the watchdogs of accounting. Their primary responsibility is to guard the best interest of the public. “The auditor’s obligations are to certify that public reports depicting a coronation’s financial status fairly present the corporation’s financial position and operations” (Duska, Duska, & Ragatz, 2011). During the WorldCom scandal, Arthur Anderson, originally one of the big five accounting firms, failed their duty as auditors and overseers of the accounting profession. As external auditors, they have a duty to detect any fraud and irregularities and fell short of that duty. Instead, the well-known accounting firm simply stated that it “was unaware of a break in accounting rules” (Accounting Web, 2002). After a $3.8 billion fraud, Andersen responded by saying, “Our work for WorldCom complied with SEC and professional standards at all times. It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom. The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment. Upon recently learning of the transfers, Andersen conferred with the WorldCom audit committee and new management, and advised the company that WorldCom’s financial statements for 2001 should not be relied upon” (Accounting Web, 2002). Andersen lost their independence, violated the trust of the public and breached several ethical violations. WorldCom was a very profitable client and Andersen

Related Documents

  • Improved Essays

    However, Norton (2002), believed that WorldCom alone should not be blamed for the reactions of the market and the economy. He stated that the blame is on the accounting legislation and regulations, and that WorldCom was just a result. As for the effect on the economy, he considered that to be part of the business cycle. The Imclone scandal in 2002 included insider-trading charges against the former CEO. After the FDA rejected a new drug, the CEO sold his shares.…

    • 1217 Words
    • 5 Pages
    Improved Essays
  • Improved Essays

    6. The film the Inside Job highlights many deficiencies at all levels that contributed to the financial meltdown. Actions could have been taken in order to avert the meltdown. The public ratings agencies such as Standard & Poor’s or Moody’s should have been accurately rating companies and investments rather than being concerned about protecting their business. It’s ridiculous that representatives would claim that their ratings are merely “opinions” and that they had no responsibility.…

    • 771 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    If it was done, there should not have been bankruptcy and other events leading to the closure of the company. SAS99 insisted on the consideration of the fraud in a financial statement audit but does not require it to occur in the statement. It is required as per the part of the protocol; the internal auditors should show sufficient professional expertise in critical evaluation of the financial statements and with skepticism. SAS 99 emphasizes that the internal control mechanism and the auditors should take risk of fraud, and should adapt the audit based on the skeptism and the findings. The mechanism of noticing the fraud detection hotline is absent in the Kmart.…

    • 1343 Words
    • 6 Pages
    Superior Essays
  • Improved Essays

    Toshiba’s lasting reputation in innovation and constant growth was stunted when over $1.2 billion dollars was deemed fraud. Profits over seven years were overstated and undetected by independent auditors of Ernst & Young. When the fraud was eventually discovered, minimal was done to the culprits including resignation and probation. Since the discovery of the fraud, Toshiba has started to see the consequences of the fraud be alleviated and trust be regained. This paper serves as an insight into the aspects behind the fraud and how auditors could potentially discovered the fraud.…

    • 884 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    The investigation revolved around the suspicious accounting principles of the company’s acquisitions, including a practice known as “spring-loading” (Forbes). In spring-loading, earnings of an acquired company are underreported, allowing the merged company’s earnings to have a boost afterwards. The SEC decided not to pursue Tyco any further after 2000, however in 2002 Tyco’s books came into question once again after a payment of $20 million went to their director Frank Walsh (Bloomberg). This is when things began to rock, Kozlowski was then investigated for tax evasion due to the fact that he did not pay sales taxes on one of the many pieces of artwork he purchased in New York with company funds. While he was under investigation Kozlowski…

    • 822 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    Barings Bank Case Study

    • 1619 Words
    • 7 Pages

    Barings top management less familiar business proprietary problem (transaction for his own interests). If Barings Auditors and top management understands the business of trading, they would know that it is impossible for Leeson obtained a profit of which he reported, if not taking greater risk anyway. And of course top management and Auditors questioning where the origin of the spider. Lack of knowledge about the trading Barings business is indeed justified in considering the most senior Barings managers have a background of merchant banking. The members of the Assetand Liability Committee (ALCO), which monitors market risk, stated it's a matter of quantity of positions taken Leeson, but later felt comfortable with the thought that eksposure Barings over market risk is relatively small because Leeson over the hedgethe position.…

    • 1619 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    Such involvement is a necessity in preventing another Enron scandal. An added necessity is independence and segregation of duties. Auditors and boards of directors must be independent to ensure such fraud cannot go undetected. If these safe guards are in place, it’s my belief that a scandal the size of Enron will not have the ability to…

    • 725 Words
    • 3 Pages
    Improved Essays
  • Improved Essays

    Villalobos Case Summary

    • 800 Words
    • 4 Pages

    The loan was paid back during the Securities and Exchange Commission’s investigation. Falcone was found guilty of asset misappropriation when he used the firm’s fund assets to cover his taxes. Therefore, asset misappropriation is the utilization of company-owned equipment to accommodate personal needs. Cash misappropriation is more popular due to the asset’s tangibility, but Falcone participated in inventory and all other assets misappropriation, which led to larceny. By not telling investors of the misappropriation, he eliminated warning signs (Wells 2001) (Philip A. Falcone and Harbinger Charged with Securities Fraud 2012) (Neubauer 2012) (Roche 2013).…

    • 800 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    GAAP stands for General Accepted Accounting Principles and the purpose in this article is to point out what is wrong with financial reporting, and the authors want all people are doing business have to usefully describe the truth, and nothing with the truth in financial reports. The authors are using description, exemplification, comparison and contrast strategies to express their purpose on…

    • 1414 Words
    • 6 Pages
    Great Essays
  • Improved Essays

    Fiduciary Duty Essay

    • 1368 Words
    • 6 Pages

    Furthermore, in cases where the fiduciary has several principals, the fiduciary should make sure that is there is no conflict of interest between the principals (Cassidy, 2006, pp. 219). The relationship between a director and a company is an example of a fiduciary duty. This paper examines the extent to which fiduciary duties can prevent directors from pursuing their own interests in a company. Directors have various duties to the company that prevent the directors from pursuing their own interests.…

    • 1368 Words
    • 6 Pages
    Improved Essays