Accounting Fraud at WorldCom Harvard Case Solution & Analysis

CRITICAL EVALUATION OF THE ALTERNATIVES

Processes or Systems that Could have Prevented from Detection of Management’s Actions

            It is seen that WorldCom had focused a lot on just a single ratio, which is the E/R ratio. The CFO of the company, when faced with price pressures and revenue decline, he decided to use accounting entries through creative accounting to decrease the expenses and increase the expense to revenue ratio of the company and maintain it to 42%. Therefore, the managers of the company should not have focused on only one performance indicator. Rather, they should have focused on several performance evaluation tools and ratios. If they just focus on one ratio, they will do anything to maintain it.

            Other than this the external auditor should perform his work correctly. The role of the external auditor was just to look the quarterly summaries. The external auditor should also have consulted with the company’s management and its board of directors if they refused to provide the necessary financial information. If the company was doing this, the auditor should have reported to SEC to perform a closer investigation at the company.

            Lastly, the company should have encouraged a culture where the employees could have expressed their grievances freely without getting any threats. The policies of the company should have been in written form and the board of directors themselves should have overlooked the work of the company. The board of managers also needed to continually be in touch with each and every employee and also lower level managers so that the operations could have been managed properly.

Actions of External Auditor and Board of Directors

Yes, the external auditors and the board were blameworthy in this scenario. Ebbers, always maintained a distance from following the GAAP, the legal regulations and accounting standards. The CEO and the CFO of the company we're constantly using creative accounting to maintain E/R ratio and increase revenues. The using accrual releases and capitalization of expenses to do this. The industry was becoming more competitive, however, the external auditors and the board of directors had no access to the financial information of the company. Still, neither the auditors nor the board questioned this which made them blameworthy.

Criminal Charges against Betty Vinson

            Betty Vinson was completely aware of the situation at WorldCom. She was aware about the fraudulent activities being conducted. However, she was put into a very difficult position. The thing that pressurized her to do this all right from the first time was the fact that management always told her that this was not anything illegal. She also decided to resign, but she never did, maybe due to the handsome salary and her position in the company.

            If an employee is in a situation where his opinions are in conflict with those of the management he should do what he believes to be right. He should talk to the management. If that’s not possible he should refuse and quit the job. If quitting job will worsen his condition due to job opportunities then he should become a whistleblower.

CONCLUSION

The company should have made its internal controls and its internal department stronger. The external auditors and the management should have been provided with complete financial information about the company. The management of the company should have inspired their employees through their management styles and never threatened them. The company should have encouraged a corporate culture where employees were given freedom to express their concerns and give further creative ideas. Along with this the company should have used several performance indicators to evaluate and analyze the financial health of the company.  However, if  the company was still facing serious problems it good have bought back its shares. This would have increased its share price. Along with this all the accounting systems of the company should have been integrated into one system and of all departments. This would have made the coordination between the different departments effectively. If the company would have done this it could have improved its financial ratios as shown in 2002 and would not have been bankrupt as shown by the Z-Score model. (APPENDIX A & B)................................

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