The collapse of World did not just affect their employees, retailers, the government but also bankers. World was a multi-billion dollar telecommunications company that was founded in 1983. The company starts their business under the name ‘Long Distance Discount Services’ (OLDS), providing long distance telecommunication services. The venture was profitable right from the start.
In 1985, Bernie Beers became the company’s CEO. The company changes its name to World in 1995.
During the 1 ass’s, the company starts to grow through series of successful acquisition and merger. However, during the late 1 999, the company’s performance begins to slip due to heightened competition, overcapacity and educed demand for telecommunication services at the onset of the economic recession and the aftermath of the dot. Com bubble collapse.
Other than that, falling telecommunications companies and new entrants were drastically reducing their prices leads World. All these pressures caused World to involve in accounting fraud.
Scott Sullivan, World’s CUFF, begins the process of miscalculating as capital expenditure what should have been normal expenses, thus turning losses into profit, creating a smokescreen that the company is performing well. Things start to come under light at June 2002 and the company’s stock price lunged. Investigations were carried out. On June 25, World admits that it had inflated its earnings by $3.
8 billion the largest accounting fraud in history. After series of investigation, the total amount discovered from improper accounting procedures raised to $9 billion causing World to file bankruptcy in July.
Several top management personnel were held responsibilities for the fraud. Question 1 What are the pressures that lead executives and managers to “cook the books”? Issue When 1990, revenue growth slowed and the stock price began falling. World’s expenses as a percentage of its total revenue increased because he growth rate of its earnings dropped.
This also meant World’s earnings can’t Wall Street analysts’ expectations. These situation pressures World to cook the books. Analysis of Issue In an effort to increase revenue, Beers put pressure his employees that he wanted by the number one stock in Wall Street.
He demanded his employees to increase the revenues that focused on building revenues and acquiring capacity sufficient to handle expected growth even if the long-term cost exceeds the short-term profit. Revenue growth was a key to increasing the company’s market value.
As a result of this demand by Beers, executives ND managers needed to show increasing in the revenues that they started cooking the books. World entered into long-term fixed rate leases for network capacity in order to meet the anticipated increase in customer demand. World could avoid lease payments only by paying hefty termination fees.
If customer failed to meet expectations, World would pay for line capacity that it was not using. The telecommunication industry began to fall apart as a result of the high competition along with the low demand at the onset Of the economic recession and the aftermath Of the dot- com bubble collapse.
As new entrants began to enter the market, this led the prices to decrease further and World forced to match. Due to this, World faced a higher pressure to increase its revenues Also, World struggled to maintain the same level of E/R ratio, closely monitored by analysts and industry observers.
They also are facing pricing pressures and its high committed line costs. Moreover, World was faced by that the company may not be attractive to investors anymore. Beers, the CEO, BASAL 3063 Integrated Case Study treated the senior managers by saying that they will lose everything. He made motional speech to senior managers about how he and other directors would lose everything if the company did not improve its performance.
This has actually encouraged the managers to do whatever it takes in order to n boost the revenues and remain in their jobs.
Consequently, Sullivan decided to entries to achieve targeted performance. Sullivan fined that the only way, which he and his two staff used main accounting tactics that accrual releases and capitalization of line costs to manipulating with the figures in order to show that company is in a better position. Conclusion Pressures such as meeting market expectation, economy recession and intense competition within the industry has lead executives and managers to “cook the books”.
BASAL 3063 Integrated case study 3 What is the boundary between earnings smoothing/earnings management and fraudulent reporting?
Earnings Management strategy management influence of used Fraudulent reporting by company manipulate the to reported earnings by using specific accounting methods, such accelerating expense deferring revenue transactions. L Fraudulent financial reporting is an aggressive act taken by executives within a company to intentionally conceal financial information about the C This practice is carried out for the repose of income smoothing. Thus, company and to deceive others about the wealth of the company. He company will be able to make its earnings relatively stable from year to year. C Earnings management is not an illegal act. 0 Earnings C Fraudulent reporting is an illegal act.
C Fraud reporting consists usually management manipulating or omitting involves the artificial increase (or important financial figures, with the decrease) of revenues, profits, or difference being that fraud usually has earnings per share figures through substantial mistakes that can drastically aggressive cocoa noting tactics. Change the bottom line or stock price f a company.
BEAK_ 3063 Integrated Case Study C Occurs when managers use judgment financial structuring transactions and in alter financial reports to either mislead some stakeholders about underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers. C When a company commits fraud by fraudulent reporting and is caught, the penalties are substantial.
They are usually expected to pay enormous fines to the government and compensate their shareholders, as well as the executives potentially paying time in In my opinion, the boundary between income smoothing and fraudulent porting is blurred.
This is because both actions will prevent investors or creditors, who usually rely on the company’s financial information in making decision, from receiving consistent and reliable results. So, implementing either earning management or fraudulent reporting would give the same misleading information regarding the company s earnings. 5 Why were the actions taken by World managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in World? There are quite a handful reasons that actions taken by World managers ere not detected earlier.
These reasons are divided into internal and external factors.
Internal Factors Top management is the heart of a company. They are the one who runs the company and making the best decisions for the company. In the case of World, persons who involved in fraud were the ones from the top management such as the CEO, CUFF and controller. If the top management were involved in fraud, most likely they would use their influence in the company or abusing their power in order to achieve their personal interest and cover up their tracks.
Furthermore, if the top management is involved in read, there are limited channels for the subordinates to report about the fraud. Corporate culture of World is one of the contributing factors.
The organization culture in World is flawed and induces fraud to happen. In World, its employees are prohibited to question their supervisors and require them to follow every instruction given. Other than that, the operation in every department is not uniformed. Every department has its own rules and management style. Communication is important for a company.
Through communication, departments could exchange information, getting new updates and decisions can be made through the reporting. Poor and lack of communication is what that happened in World. We can see that through the relationship between the employees and their supervisor, between departments, between internal and external auditor and between boards of director. Information was limited and being blocked causing the true picture of the company stays in the dark. Last but not least, the mindset and awareness of the employee.
The mindset of employees in World is to follow their supervisors instruction, do not question the instruction given and mind their own business.
They do not challenge their supervisor or report about anything suspicious because they re afraid if there are any inevitable consequences. Besides that, their awareness about fraud is low. The employees do not know how to handle the situations when there is fraud happening in the company and being victimized by the management. External Factors External auditor plays an important role in a company.
Their job is as a watchdog and expresses their opinion of the financial report. An auditor also upholds principles such as independence, objectivity, integrity and competency and due care, confidentiality, professional behavior and technical standard.
However, most the principles mentioned above weren’t seen in World’s auditor, Arthur Anderson. In the case of World, there were signs and symptoms of fraud, however, the auditors failed to detect any fraud and issued unqualified audit report for years. This shows the ignorance and incompetence of Arthur Anderson while conducting audit work.
Recommendation processes or systems should be in place to prevent or detect quickly the types of actions that occurred in World includes enhance code of corporate governance, implement whistle blowing policy, conduct proactive auditing, enhance the communication within the organization and annually reviewing he performance auditor. The company should comply and enhance the code of corporate governance. Corporate governance is a mechanism for monitoring the actions, policies and decisions of corporations.
The compliance of the code of corporate governance it would enhance 7 transparency and efficiency of the overall company performance.
This would minimize the risk of misconduct and fraud from happening. Furthermore, the company also may implement whistle blowing policy in the company. Employees are sensitive to changes in a company and they often know more and clear about the current situation of the company.
The implementation of whistle blowing policy would allow the management team to find out the flaws in the company and actions can be taken immediately. The information regarding of the whistle blower should be kept confidential and rewards can be given accordingly if the information given by whistle blower turns out to be true to encourage whistle blowing.
Due to its complicated business nature, the company also may request its auditors to perform quarterly or half yearly proactive audit. It can be considered as a preventive measurement. Proactive audit are able to minimize the risk or reverting fraud from happening and detecting fraud at early stage. Other than that, the company also should enhance the communication within the company.
The company may mend the bond between the audit committee, internal auditor and external auditor through communication which allows them exchange information, express their opinion and free from third party interference.
Board meeting being held also should include outside directors, so that they can do their job such as question the management’s decision. The audit committee of the company also should annually review the company auditor. Review should be done based on auditor’s fundamental ore competencies and performance.
If the auditor is no longer fit for the position, they should terminates its service and appoint another auditor in board meeting. 8 The reason is that actions taken by manager are unable to be detected earlier is because of the top management was acting in collusion with the auditor in concealing the act of fraud.
The flawed company culture, the mindset and awareness of the employees and poor communication were also part of the contributing factors. Actions such as enhancing and complying corporate governance, implement and encourage whistle blowing policy, enhancing immunization, annually reviewing auditors performance and conducting proactive audit would prevent or detect quickly the types of actions that occurred in World.
9 Were the external auditors and board of directors blameworthy in this case? Why or why not?
External Auditor According to SIS 200, it requires that an audit be designed to provide reasonable assurance of detecting both material errors and fraud in the financial statements. There are several reasons that Arthur Andersen as World’s external auditor failed carry out its duties properly to discover fraud. One Of the reasons is Arthur Andersen lack Of professional skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit services.
In the case, Arthur Andersen just took orderly the corporate general ledger which made by General Accounting without any questioning mind and assume that the information recorder by General Accounting was valid. This is because a flaw in Andersen’s approach that was limited its testing of account balances which relying on World’s perceived strong internal control environment. However, World’s internal control environment was inefficient which allowed Andersen to overlook serious deficiencies in the internal environment.