3) Roots of the scandal
The roots of the fraud and the role of internal auditors
As explained above, the fraud was implemented by the former CEO Bernard Ebbers and commited by his financial director Scott D. Sullivan. The technique used by Worldcom was pretty simple; indeed, he cooked the books by saving pure operating expenses such as maintenance network in capital expenditure instead of expenses in order to hide its decreasing earnings and to maintain the price of Worldcom’s stock. In summary, certain expenses charged by regional operators to reroute calls were not taken into account. Of "current expenses" (line cost expenses), these charges were recorded in "capital" in total contradiction with GAAP accounting standards. Once again, the audit firm Arthur Andersen is at the heart of the scandal. Indeed, after being convicted of obstruction of justice in the case of the bankruptcy of the oil giant Enron for destroying documents related to the accounting group, the firm had also audited the accounts of Worldcom in 2001 and in early 2002. The audit firm probably acted negligently in this case just like in the Enron case. The Worldcom case is particular in the sense in the way the fraud was discovered by an internal audit. Indeed, several employees led by Cynthia Cooper, an internal auditor at Worldcom assigned in operational auditing, started to be more and more suspicious about the situation of their company when a senior line manager complained to Ms. Cooper that her boss, CFO Scott Sullivan, had usurped a $400 million reserve account he had set aside as a hedge against anticipated revenue losses. The internal audit team went outside their assigned responsibilities to investigate and worked together to find if something was wrong with the financial situation of Worldcom. They used to work at night and secretly to be as discreet as possible in order to avoid the suspicions. After combing through hundreds of thousands of accounting entries, they finally found a...
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