Worldcom

WorldCom Fraud Case

Robert Shulzinsky

Southern New Hampshire University

19 September, 2017

Introduction

WorldCom is a telecommunications organization that changed its name to MCI, Inc. The company has had issues with its finances in the past couple of years and in the year 2002, it made an overstatement of assets worth $11 billion while at the same time understating its expenses to a tune of $3.8 billion (Biegelman, 2013). After some investigations, it was found out that the key issues that caused the fraud in the company was linked to the issue of costs capitalizing that was supposed to have been expensed as well as having overstated revenues. In this, it is important to note that the company led to the creation of vast billions in terms of illusory earnings (Frunza, 2016). The bankruptcy of the company has in a significant way gone through jittery financial markets and it has a very high likelihood of being felt in the entire economy with suppliers, banks, and other telephone organizations developing various strategies to cover themselves from the company’s effects. As such, thus report will give a highlight of the company in terms of its past, the company’s business environment and industry, hypothesis development, investigation planning, and a report on the organizations management.

Elements of WorldCom fraud

There are a number of methods that can be used in the process of engaging in financial fraud activities. One of the techniques that are used by individuals to engage in these activities is by overstating the organization’s assets or even by capitalizing on the company’s expenses (Biegelman, 2013). As such, the case of this company can be described as one of the perfect examples of how a number of fraud risks that relate to having long-lived asset accounts in an organization. The case of the company involved its management engaging in the process of reducing the organization’s accumulated depreciation account through the process of debiting the involved account as well as debiting the company’s depreciation expense (Frunza, 2016).

From this, it is important to note that one element of the organization’s fraud entailed the organization managers significantly reducing the organization’s accumulated depreciation account through the process of debiting the account as well as crediting the accounts depreciation expense (Ramamoorti, 2013). In this, it is important to understand that all these entries were carried out regularly but the auditors who were engaged by the company did not see them as being unusual thus making them not to call for any specialized audit for the account.

The other important element to note from the fraud case of the company is that of its management misstating its assets on a regular basis through the process of capitalizing all the cash paid to the other mobile net carriers when the company in question adopted the other organizations’ lines to make their connections (Sadka, 2006). It is also important to note that on those instances when the actual expenses of the company declined, the management engaged in the process of debiting its liabilities as well as crediting the organizational expense this improving its net income in its successive period (Biegelman, 2013). The other elements of the fraud included that of selling assets and failing to record them, sold assets not being removed from the record books, estimating the value of the assets in the organization fairly, and amortization of intangible assets being not properly calculated in the organization by the involved individuals (Frunza, 2016).

In this, it is important to note that the knowledge of the fraud is important to the stakeholders as they will know exactly what has been going in their organization as well as understanding where the lost money in the organization got lost. Having this knowledge is also important as it helps the stakeholders to understand the individuals who involved themselves in the process as well as helping to get the organization out of its current status (Biegelman, 2013). Having the right information about fraud could help the stakeholders to put up the best protection strategies that would protect the organization from getting into the same situation again. It will also help the stakeholders to be in a good position to predict any incidents in the organization that might lead to inefficiencies and later fraud in the organization (Ramamoorti, 2013).

Theories of crime causation

There are various crime causation theories that could be used to understand the crime in the organization. In the case of this organization, it would be effective if the sociological theories were used in the process of understanding the cause of the fraud in the organization. The use of these theories will help the organization to know more about the organization and the motive behind the involved individuals engaging in what they engaged in (Biegelman, 2013).

The process of identifying the cause of the fraud is important, as it will help those investigating the organization to know the possible department from where the fraud happened and from where it was organized. Through this, a strong basis of understanding the organization as well as understanding those who were involved will be formed thus leading to a better conclusion being made effectively and appropriately (Frunza, 2016). In an example, if the cause of the crime has been found to be that of meeting some personal goals, it would be easy to carry out an investigation to know the exact person who engaged in the fraud as well as making it important to link the involved people to the reported crime in the organization (Sadka, 2006).

Fraud Triangle

On using the fraud triangle, it is very easy to note some of the pressures of the organization that includes the expectations of the stakeholders to have more profits being realized from the organization as well as the pressure to keep the image of the organization clean and attractive to potential investors (Biegelman, 2013). On the other hand, the opportunity that presents itself to the organization is that of having the management being offered with an opportunity to clean up their mess and make things right as they are supposed to be. The rationalization aspect of the fraud is that of having those involved being given an opportunity to accept their mistakes and make things work right just like there are supposed to work (Ramamoorti, 2013).

Regulatory and legal factors that impact fraud detection and prevention

It is important to note that there are a number of regulations as well as legal factors that affect fraud detection and prevention process. One of the notable factors is that of having ever evolving regulations and laws that are governing the accounting industry. Additionally, it is important to note that the Insurance Regulatory as well as the development authority has offered an insurance fraud monitoring framework that guides most of the operations possible thus making it effective for those in the accounting sector to go on with their activities effectively (Biegelman, 2013). There have been no mobile application policies that have been developed to deal with mobile banking and this has affected the fraud detection and prevention process effectively.

Recent developments that affect accounts fraud investigation

There are a number of trends that can be easily identified in the process of detecting and preventing fraud in the accounting sector. One of the recent developments of system hacking that works effectively in interfering with any evidence that might be developed in an organization for purposes of interfering with the process of fraud investigation. Online fraud has generally made it hard to effectively carry out fraud investigation since a number of cases presented may lack effective evidence to deal with the involved individuals (Frunza, 2016). Generally, technological advancements have played a significant role in the process of affecting the way in which accounts fraud investigations have been done. In some way, technology has aided the entire process of investigation while in other way; it has altered with the investigations as people can use it to hide some of the important information that is needed in carrying out the investigations (Ramamoorti, 2013).

Business Environment and the Industry

Challenges in the accounts industry

The telecom industry is one of the industries that have a lot of challenges affecting it. In this, it is important to note that the main challenge in this industry is that of excessive competition from other businesses offering the same services to the customers involved. In this, it is important to understand that the key competition for this industry comes from the OTT services (Biegelman, 2013). The growth of these services can be linked to the fast development of the mobile messaging applications that has been evident in the last couple of years that have definitely reduced the amount of revenue made by the telecom companies (Frunza, 2016). The development of the services has significantly affected the number of voice calls made by individuals as a good number have invested all their efforts in using the applications for their communication rather than using voice calls (Sadka, 2006).

The process of gearing up for the IoT

It is important to note that IoT integration into individual lives on a daily basis has been edging very closer and this has made it difficult for telecommunications companies to carry out their activities effectively as it is expected that the number of connected devices will generally increase in the next few years. In this, it is important to note that for purposes of supporting these platforms, there is a need to have platforms with very high levels of connectivity in a given setting (Frunza, 2016). The need for this systems, has presented a number of challenges to the telecommunications companies, as they are needed to come up with one of the most effective and efficient system to offer all the functionalities needed. It is important to note that the integration of technology firms with different telecommunication services for purposes of developing the needed IoT could generally lead to the compression of the telecommunication infrastructures (Ramamoorti, 2013).

A decline in voice revenue

The other challenge that has affected the telecommunication company is the significant decline of voice revenue. The emergence of internet messaging, the use of smartphones to communicate and the development of Wi-Fi in the past few years has generally made it hard for telecommunication companies to realize any significant revenues from their operations. In this, it is important to note that most of the revenues in these types of companies used to be made as a result of voice calls in a good number of telecommunication companies (Frunza, 2016). There is thus a need for the telecommunication companies to develop effective and appropriate strategies that will be used against the text and voice services.

The development of 5G

5G technologies is one of the things that are highly anticipated in the next few years. In this, it is important to note that the adoption of the right technologies to actualize this development has been challenging to a good number of companies. The upgrade needed is expected to be very expensive and it presents a nightmare to almost all the telecommunication companies. Having these challenges presents a real challenge for organizations to develop and be at the same level with the others as they all strive for the top spot in the organization (Frunza, 2016). In this, it is important to note that a god number of the companies may maximize on the challenges and up their game towards being market leaders as they keep up with the trends happening in the industry.

Behaviors from employees that are indicative of fraud

Some of the behaviors that were noted during the investigation that could indicate fraud included having some employees in the accounts department living above their means as a good number of them owned luxurious cars that could have taken the savings of an individuals lifetime if they were to own them in the right way. The other indicative behavior was that of having some employees in the organization being too busy as well as avoiding any outside contact that could make individuals to get the right information about the fraud case. During the investigation, most of the employees whom we were working with changed their attitude and made it hard to investigate more about the organization and the possible cause of the fraud in the organization (Frunza, 2016). Some employees generally overreacted to the questions that were asked thus making this a clear indication of fraud in the organization.

Pressures that led to the fraud

The main pressures that led to fraud in the organization are that of being forced to perform without having the right resources to carry on the tasks involved. The employees were required to make profits with the management failing to put in the right resources for purposes of making this process realizable and easily achievable (Ramamoorti, 2013). The pressures could have been avoided through the provision of the needed resources to perform and realize more profits in the organization that would lead to improved profits without forcing the employees to realize profits.

Strengths and Weaknesses of the organization’s internal controls

Some of the organizations strengths include that of being the second greatest telecommunication organization in the United States thus making it highly effective for the organization to make informed decisions that could improve its profits. The organization also has the ability to make new acquisitions that makes it to have an upper hand compared to the other companies (Frunza, 2016). The main weaknesses of the company include having understaffed auditing department that makes it easy for fraud to be carried out in the organization. Additionally, most of the stakeholders of the organization are all board members thus affecting the quality of decisions made in the organization (Ramamoorti, 2013).

Anomalies in WorldCom Financial statements

Some of the anomaly that could be detected from the company’s financial statements is that of having a growth in the company’s revenue without a corresponding growth in cash flows in the organization. It was also easy to note some misstatements in the organization’s financial statements thus making it easy for any auditor to note that something bad had happened in the organization (Frunza, 2016). The anomalies directly relate to the company’s fraud activities as they are directly related to the anomalies that were detected in the organizations accounting department.

Hypothesis development

There are a number of frauds that could happen to the telecommunication sector. Some of the frauds that may happen in this industry include arbitrage fraud, call and short message service spamming, global revenue share fraud, phishing and premium rate service fraud. The other form of fraud that is common in this industry is the spamming fraud. In this, it is important to understand that arbitrage fraud is that type of fraud that entails the process of exploiting the variations in settlement rates that exist in varied nations (Sadka, 2006). Linked to call and text spamming, organizations are very much likely to send various text messages to their customers. All the other forms of frauds that may affect the company can be prevented from happening if the right strategies are adopted. The frauds are related to the telecommunication industry as they generally affect the way in which businesses are done as well as the performance of the companies in terms of their productivity. The revenues realized by the organizations will generally be affected by these frauds negatively.

Of all the mentioned employees, the employees in the audit department as well as those in the accounts departments have a very high likelihood of committing fraud in a number of ways. The employees who could commit to the fraud in the organization are the accountant and the auditor in the organization. The reason for this choice is linked to the ability of the involved employees to have a direct link to the company’s finance documents and manipulate them as per their wish or as per the instructions given to them by those in the management (Sadka, 2006). Additionally, it is important to note that the account of the organization has a very high likelihood of committing the fraud and the anomalies exhibited in the organization as he only has the access to the financial records of the organization and he may manipulate the numbers to fit his or her own needs (Biegelman, 2013).

Investigation plan

There are a number of steps that I could adopt for purposes of carrying out fraud investigations in a telecommunication organization. The main steps that should be followed while investigating the fraud case include the following.

Initial analysis

Initial analysis for the organization will entail carrying out an investigation analysis by taking all the immediate steps of the plan that should be followed in detecting fraud in the organization. This step will also entail the process of selecting the most appropriate team for the investigation (Sadka, 2006). The selection of the team will entail the process of choosing the best from the available manpower.

Planning and leading

After making the initial analysis for the situation, it would be effective to come up with an appropriate investigation plan that would be followed during the investigation. Additionally, this phase will include the development of an effective communication plan as well as developing a timetable that will be followed by the team to achieve its objectives (Sadka, 2006). Additionally, issues to do with case files as well as leading and advising will also be significant in this specific step.

Fact-finding, interviewing, and re-interviewing

This step will entail the process of coming up with an effective plan, arranging the collected evidence, starting the fact finding process and conducting research aimed at getting facts concerning the fraud (Biegelman, 2013). After getting facts from the involved individuals, it gets important to close the entire process and embark on carrying other activities that would lead to progress being made in the sector.

Analyzing the evidence

The process of analyzing the evidence obtained includes examining each piece of evidence. The process of analysis will include identifying what is missing in the collected data, the conflicts in the evidence collected and the reliability of evidence collected during the analysis process (Frunza, 2016).

Reporting

The reporting process entails giving a report of who was interviewed in the process, the documents as well as the evidence that were considered in the investigations, as well as the facts found and the expert opinions given in relation to the analysis conducted (Sidak, 2002).

Carrying up a follow up process

After collecting and analyzing data as well as making the right recommendations for the organization, it is important to undertake a follow up exercise aimed at knowing if the recommendations given have been followed to latter (Sadka, 2006). The follow up activities will include regulatory reporting, noting any concerns about retaliation, as well as taking any other important steps that could be important in the entire process.

Documents needed to investigate the fraud case

Some of the documents that are needed to carry out the fraud investigation cases include the financial documents of the organization as well as the audit reports of the organization. In this, it is important to note that some of the employees that I need to talk to include the accountant and the chief auditors of the organization (Sadka, 2006). In this, it is important to note that these individuals are individuals in the organization who have the financial know-how of the organization as well as having first hand information in the organization that would give the right information about the organization (Sidak, 2002).

How regulatory issues would impact the investigation

Regulatory issues may affect the investigation in that, the regulation will generally limit the extent to which the investigations would be done as it will restrict the access that an individual has towards accessing information from the organization.

Fraud risk inquiries that are needed to investigate the suspected fraud

Some of the extra risk inquiries that might be needed during a fraud investigation might include various discussions among engagement personnel as well as the knowledge of the fraud triangle as well as the characteristics for potential suspects (Sadka, 2006). Other fraud inquiries that are not generally needed as well as being recommended include knowing the organization’s revenue recognition policies, identifying any circumstances that might entail internal controls potentially being overridden by the management as well as identifying all the procedures needed for making adjusting entries (Sidak, 2002).

Report to management

The findings will be presented to all stakeholders of the organization. The management as well as the employees should be given a copy of the findings. My recommendations to the organization include having the directors improving the organizational internal controls as well as getting new auditors for the organization. The management should also be involved in the daily operations of the organization (Sadka, 2006). Sociological theories can easily be linked to this organization and can be prevented by getting the right policies in the organization to prevent cases of fraud happening. There are no legal issues that are related to the findings of the organization as all policies investigation policies were closely followed during the investigation and the reporting phase.

Conclusion

To conclude, it is important to understand that organizations should by all means get the right strategies towards fighting fraud activities in the settings. Fraud is not always good and it detriments the image of an organization and affects its financial performance significantly. The organization that has been analyzed in this paper experienced fraud at one point in time and that act significantly affected the performance of the organization. As a result of this, there is need for organization to rethink its audit department and come up with policies as well as the right strategies that would make it easy for it to avoid fraud cases in the near future.

References

Biegelman, M. T. (2013). Faces of fraud: Cases and lessons from a life of fighting fraudsters. Hoboken, NJ: John Wiley et Sons, Inc.

Frunza, M. (2016). Enron-WorldCom. Solving Modern Crime in Financial Markets, 393-401. doi:10.1016/b978-0-12-804494-0.00029-2

Ramamoorti, S. (2013). A.B.C.'s of behavioral forensics: Applying psychology to financial fraud prevention and detection.

Sadka, G. (2006). The Economic Consequences of Accounting Fraud in Product Markets: Theory and a Case from the US Telecommunications Industry (WorldCom). SSRN Electronic Journal. doi:10.2139/ssrn.906153

Sidak, J. G. (2002). The Failure of Good Intentions: The WorldCom Fraud and the Collapse of American Telecommunications After Deregulation. SSRN Electronic Journal. doi:10.2139/ssrn.335180