On June 9 2003, the U.S. Bankruptcy Court of New York issued a report on the WorldCom accounting fraud that expands on the court's earlier findings of mismanagement, lack of corporate governance, and concern regarding the integrity of the company's accounting and financial reporting functions.
Supervised by former U.S. Attorney General Richard Thornburgh, the study was commissioned by the court to investigate allegations including fraud, mismanagement, and irregularities within the company. One section of the more than 200-page report, "Accounting and Related Internal Controls," details WorldCom's weaknesses in internal and external audit processes. It also expands on the failings within the internal audit reporting structure, where the tone at the top "fostered an environment to allow the fraud to go undetected." The report cited a lack of independence in the company's internal audit reporting structure, which was not challenged by the audit committee or external auditors.
Observations on internal audit reporting and processes
Internal auditing mission and scope According to Thornburgh's report, internal auditing was focused primarily on maximizing revenue, reducing costs, and improving efficiencies. The group performed audits and projects that would be seen as adding value to the company, rather than monitoring the adequacy of internal controls to reduce risk. It did not, for the most part, trace transactions to the general ledger or verify journal entries that supported financial accruals. Internal controls with an impact on accounting policies were not systematically evaluated or monitored by internal auditing, and findings were not communicated with the external auditors.
Thornburgh's report noted that this was a serious weakness in the internal control evaluation process that was not questioned by the audit committee or external auditors. He indicated that internal auditing's narrow focus may...