Running Head: Forensic Accounting f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 1
Milestone Three: Forensic Accounting – WorldCom
Forensic Accounting f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 2
III Hypothesis Development
a. Possibility of fraud in the environment
In the business setting that has been investigated, fraudulent practices can be made relating to a
diverse range of areas, such as the passing of false and fabricated accounting entries, inflating the
revenue of the organization for a specific period of time, as well as insider trading. The inability of
auditors of a business entity to identify malicious elements can escalate the seriousness of the issue
and magnify the intensity of fraudulent activity within an organization. In the case of the
WorldCom organization, the adoption of poor business practices by the leaders and decision-
makers led to the major accounting scandal that was uncovered in the year 2002. WorldCom had
overstated the business earnings by over $ 3.8 billion. The opportunity to engage in fraudulent
activities and practices arose due to the absence of a robust internal control framework and the
presence of a weak corporate governance model (D'Antonio, 2021).
b. Employees with incentives and opportunities to commit fraud
The possibility of committing fraud by employees increases when they get incentives or
opportunities for such malpractices. In the context of WorldCom, the leaders, auditors and board
members were some of the key players that took part in the fraudulent activity and manipulated the
financial records of the business entity. The leaders have a high opportunity to conduct fraud as
they function at a top position and there is limited control or supervision over their activities. It has
been argued that fraud by executives of an organization can cause disastrous consequences for the
entire entity, including its diverse stakeholders (Bechir Chenguel, 2022). Similarly, auditors who
are responsible for checking the accuracy of internal transactions and operations also have an
opportunity to carry out fraudulent activities as they can use their knowledge to engage in such
Forensic Accounting f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 3
practices. Employees operating in the financial department have an opportunity to manipulate the
numbers and figures of a business and represent an inaccurate picture of its performance and
profitability. In the context of WorldCom, some of the key employees that were involved in the
accounting scandal were Bernie Ebbers (CEO), Scott Sullivan (CFO), David Myers (Controller),
Buford Yates Jr. (Director of General Accounting), and Arthur Anderson (Auditor). f f f f f f f f
c. Employees with opportunities to cause financial anomalies
Out of the employees that had the opportunity or incentive to commit fraudulent activities, the ones
that are in a position to cause financial anomalies are the leaders that head the finance department.
For instance, in the case of WorldCom, Myers, who was looking after the general accounting
practices, played a key role in adopting unethical and inaccurate accounting practices, which led to
the manipulation of the financial results of the business. He would direct the members of the
Finance department to make entries relating to ‘prepaid capacity’ although there was no accounting
standard that supported such transactions (Petra & Spieler, 2020). He used his position to make the
staff indulge in poor accounting practices. f
IV Investigation Planning
a. Investigation process
A comprehensive investigation process needs to be adopted, which can help in identifying and
uncovering the possibility of accounting fraud in a methodical manner. The concept of forensic
accounting needs to be adopted in order to look for evidence that may shed light on crime (Handoko
& Rosita, 2022). A well-planned process needs to be adopted that can help in investigating the
matter by facilitating transparent information exchange. The chief steps that need to be integrated
into the investigation process are the identification of probable fraud, organizing a competent and
Forensic Accounting f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 4
ethical investigation team with skilled members in diverse areas like accounting, law, etc.,
preservation of collected evidence, conducting interviews and assessing financial records,
reviewing internal control measures and reporting the results.
b. Required documents
While investigating a potential fraud, the investigating team might require a broad range of
documents such as financial statements, including balance sheets, income statement, cashflow
statement, emails and other electronic communications, bank statements of the business, billing
invoices and receipts and contracts. By evaluating these documents, it is possible to identify
irregularities and abnormalities which give an insight into the fraud. It may be necessary to talk to
people who have passed accounting entries relating to business transactions.
c. Impact of regulatory issues on the investigation
The forensic accounting investigation process can get significantly affected by regulatory issues
such as Sarbanes–Oxley or SAS (Statement in Auditing Standards) No. 99. These regulations can
increase the need to carry out detailed scrutiny to check the internal controls that are in place.
Similarly, the firm is also required to identify its material weaknesses that exist in the internal
controls, which have the potential to impact the financial reporting practices. f
d. Need for other fraud risk inquiries
In order to investigate a suspected fraud at a comprehensive level, other fraud risk inquiries that the
investigating team needs to relate to the revenue recognition practices, reporting of diverse
expenses by the accounting team and the adoption of ethical practices while following appropriate
Forensic Accounting f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f 5
accounting practices. The knowledge of employees in the accounting area needs to be assessed to
ascertain they are capable of carrying out their functions effectively and accurately.
Reference
Bechir Chenguel, M. (2022). Financial fraud and managers, causes and effects. Corporate Social
Responsibility. https://doi.org/10.5772/intechopen.93494
D'Antonio, R. (2021). The WorldCom fraud under the COSO framework analysis.
Handoko, B. L., & Rosita, A. (2022, April). The Effect of Skepticism, Big Data Analytics to
Financial Fraud Detection Moderated by Forensic Accounting. In Proceedings of the 6th
International Conference on E-Commerce, E-Business and E-Government (pp. 123-130).
Petra, S., & Spieler, A. C. (2020). Accounting scandals: Enron, Worldcom, and global crossing. In
Corporate fraud exposed. Emerald Publishing Limited.
