Worldcom Case

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Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom? The first reason is that both internal audit and external audit of WorldCom were not performing their role as intended. Generally, internal audit mainly focus on the reliability of financial reporting and the effectiveness of operations, and reports directly to the Board of Directors. In WorldCom, however, internal audit rarely or even never conducted a financial audit. Moreover, WorldCom’s audit reported to CFO Sullivan instead of the Board of Directors, which means CFO Sullivan could easily restrict any audit request. The external auditor, Arthur Andersen, also failed to perform financial audits. Even when Arthur Andersen’s audit requests had been repeatedly refused, Arthur Andersen still tried to maintain its relationship with WorldCom. Arthur Andersen’s blind trust on WorldCom led them to believe there was nothing wrong with WorldCom’s financial statement. To be conclude, the failure of audits is the primary reason why accounting fraud were not detected earlier. Another reason is that employees in WorldCom did not have a way to report fraud activities. The WorldCom’s policies and culture discouraged its employees to question their managers, and their employees “did not have an independent outlet for expressing concerns” (page 3). Without a reporting system, the Board of Directors lost many chances to detect these frauds. In order to prevent or detect fraud activities quickly, an independent and professional internal audit team or investigative team must exist. This team should be put to the task of evaluating the reliability of financial reports and evidence of fraud. In addition, the company should also place a reporting system for employees to report any suspicious activities.
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