Running Head: CASE STUDY
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Case Study Analysis and Report for Management - WorldCom
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Contents
I Introduction ........................................................................................................................................ 3
II Business Environment and the industry ........................................................................................ 5
III. Hypothesis development and investigation planning ................................................................. 8
Hypothesis Development .................................................................................................................. 8
IV Investigation Planning ........................................................................................................................ 9
V. Report to management .................................................................................................................... 11
References:........................................................................................................................................... 15
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I Introduction
The elements of fraud
Fraud is defined as a criminal or wrongful deception intended to result in personal or
financial gain. According to Metka and Sandra, there are many elements of fraud that comes
under the common law (Tekavčič & Damijan, 2021). It includes a material false omission or
statement, the suspect aims to induce the victim to depend on the false omission or statement,
the suspect had an idea about the false omission or statement, and the victim depended on the
false omission or statement and suffered damage or injury.
Therefore, it is important for all individuals to have a good understanding and research
knowledge about the fraud concept. This can help the individual to determine the fraud
incidents in their running firm. It has been identified that individuals need to pay attention to
past fraud records, which can give them a clear idea about past events and how they have
occurred. This understanding can help to prevent their firm from the same fate by
implementing fail-safes in their systems.
Stakeholders play a significant role3 in organizational settings. They are the
individuals or groups whose funds are invested in the organization or firm either directly or
indirectly. When fraud incidents happen within the organization, it affects the whole company
and makes it face a major loss, so the stakeholders get impacted directly or indirectly. It has
been identified that sometime a fraud situation may lead to the loss of jobs among employees,
deprive consumers of accessing commodities, or may loss of tax revenue sources. Thus, it
becomes important for the stakeholders to have a good knowledge of fraud beyond the
accounting departments to help.
Different theories of crime causations
Many theories are associated with crime causations, including The strain theory
suggests that a lot of stress or strain may lead to making people involved in crime. On the
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contrary, conflict theory refers to the set of criminological theories that states antisocial
behaviour is observed in society because people possess economic and social power, resulting
in social or economic inequality and class conflict (Morin, 2014). In general, a crime refers to
the violation of social behaviour or social rules expressed or interpreted by criminal law. The
investigator can easily determine the perpetrator and the crime extent with the identification
of the fraud by conducting the fraud analysis. Through this analysis, they can mitigate
damage quickly, avoid finds, and mitigate reputational damage and financial loss. For
example, the fraud may get engaged in violence or criminal activities to end harassment, or
they may steal to minimize the financial losses of the company.
Evidence
When fraud occurs in a company, three conditions are observed that include pressure,
opportunity, and rationalization (Sandhu, 2016). In general, the fraud triangle has three
aspects; where the first angle pays attention to the intensive or pressured fraud perpetrators
who are in financial need but cannot tell others. The second angle focuses on the opportunity
to commit fraud by getting influenced by the actors. The third angle pays attention to giving
justification for commenting on fraud.
Regulatory and legal factors
A fraud prevention strategy is usually implemented by companies to detect fraudulent
banking actions or transactions and prevent these actions from creating reputational and
financial damage to the financial institution and customer. However, the fraud pentagon
theory states that the fraud detection process might get affected by five factors Arrogance,
Competence, Opportunity, Pressure, and Rationalization (Soepriyanto et al., 2021). It has
been identified that the auditor is completely responsible for obtaining reasonable assurance.
It is essential to provide the right training to the auditor and other employees about fraud
activities to combat fraud and defalcations within the business settings.
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Recent developments
A recent development to address frauds and defalcations within business settings can
significantly impact fraud investigation and the accounting industry. The integration of
artificial intelligence (AI) in the accounting industry can help to reduce human errors as well
as reduce fraud activities. Automating the accounting process may also reduce the stress,
responsibility, and workload of the employees, reducing fraud incidence. For instance,
WorldCom fraud cases can be changed in the fraud investigation with the integration of
automation that can help them identify the fraud easily.
II Business Environment and the industry
a) The industry-specific challenges
WorldCom is a well-known telecommunications company operating in over 65 countries
(Pandey & Verma, 2004). The company has recently faced many industry-specific
challenges, including competition, specialization, and growth. It has been identified that the
company is facing challenges with specialization in the telecommunications industry.
Telecommunications are categorized into different sub-sectors, and specialization in some
sub-sector might not have the expertise or knowledge to venture into different sectors.
Accordingly, the company had to specialize in a specific sector to stay relevant and remain
competitive in the business. WorldCom is facing challenges with intense competition from
different telecommunications companies. As the telecommunication industry has many
competitive market players, it is highly competitive. In such a scenario, WorldCom needs to
remain competitive by developing the right strategies, including expanding its service
offerings, investing in new technologies, and increasing customer satisfaction (Pandey &
Verma, 2004). Moreover, the company is also facing a significant challenge with growth. The
telecommunication industry has a rapid pace of technological innovation, so WorldCom
company requires to adapt the new technologies. In such a scenario, the company needs to
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focus on investment in research and development, innovate to stay with the pace of change in
the industry, and acquire new technologies. All the mentioned challenges are related to the
company's business environment, which is specified by intense competition, the need for
specialization, and rapid technological advancements. The company needs to develop the
right strategies to combat these challenges. These strategies can help the company to stay
relevant and competitive in the telecommunication industry.
b) Behaviours indicative of fraud
The early detection of fraud is essential in organizational settings. An inexpensive and
effective way is required to identify fraudsters by investing in personnel behavior (Sandhu,
2019). The exhibited behaviors indicative of fraud in WorldCom include falsifying financial
statements, manipulating financial records, and inflating revenue and earnings to meet
expectations. The unethical behavior of the employees, including overriding internal controls
and ignoring ethical standards, can also be indicative of fraud in the company. The company's
management team pressurizes the employees to achieve financial targets, maintain the
company's share price, and increase revenues.
The employees faced immense pressure from management to meet financial targets,
increase revenues, and maintain the company's share price. This pressure was evident in the
company's aggressive growth strategies, which included acquisitions and expansions, and the
focus on short-term financial performance (Anindya & Adhariani, 2019). To avoid such
fraud, WorldCom needs to give more focus on promoting a culture of accountability and
transparency, prioritize ethical behavior, and establish strong internal controls. In addition,
the company needs to encourage employees to report any unethical behavior or suspected
fraud through anonymous reporting channels. Moreover, the company can also engage
external auditors and implement regular internal audits to prevent and detect any fraudulent
activities within the organizational settings.
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c) The organization’s internal controls
In the early 2000s, Worldcom got collapsed because of fraudulent accounting practices
(Ashraf, 2011). However, the company had some internal controls in place, like an ethics
hotline and code of conduct, that were ineffective in preventing fraud. It has been identified
that the lack of segregation of duties was the weakness in the company’s internal control that
allowed the employees to have control over various aspects of financial reporting. In addition,
the lack of monitoring and oversight by the board of directors and upper management has also
allowed fraudulent practices within the organization.
d) Address of weaknesses
Many measures can be taken to address Worldcom's weaknesses and try to improve its
internal controls. The company could focus on a strong segregation of duties policy to make
sure no one has too much control over the financial reporting. Moreover, maintaining regular
audits can also ensure compliance with these policies, and the management team could
monitor the financial reporting practices. Further, the company needs to provide regular
training to the employees to learn about the consequences of fraudulent practices and the
importance of ethical behavior (Irianto et al., 2012) to ensure the effectiveness of these
measures.
e) A financial statement analysis
Many anomalies are found in Worldcom's financial statements that were indicative of
potentially fraudulent activity. The company's inflated revenue figures are a significant
anomaly, which was achieved by manipulating financial records and accounting
irregularities. In addition, WorldCom reported its artificially high earnings without any taxes,
interest, amortization, and depreciation figures that do not show the company's true financial
position.
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III. Hypothesis development and investigation planning
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 practices. Employees operating in the
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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). b b b b b b b b
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.
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 ethical investigation team with skilled members
in diverse areas like accounting, law, etc., preservation of collected evidence, conducting
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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. b
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 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.
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V. Report to management
a) To whom do you need to address your findings? Why are these appropriate parties?
The study revolved around the WorldCom company. In the organisational context, the
fraud identification should occur at an early stage. It is necessary to develop a low-cost and
efficient method to detect criminals by paying attention to employee behavior (Sandhu,
2019). The actions used by WorldCom to commit fraud include misleading financial
statements, change with financial data, and inflating revenue and profit in order to exceed
objectives. The immoral actions of the employees, such as disobeying ethical rules and
avoiding internal controls, may also be a sign of corporate fraud. The business's management
team puts pressure on the staff to meet financial goals, keep the stock price of the business
stable, and boost sales.
This strain could be seen in the company's aggressive development, which included
acquisitions and developments, as well as the emphasis on immediate financial results
(Anindya & Adhariani, 2019). In order to prevent this type of fraud, WorldCom must put
more of a priority on encouraging an environment of accountability and visibility, give ethical
behavior top priority, and set up effective internal controls.
b) What are your recommendations to improve internal controls to reduce the
likelihood of fraud? Be sure to support your recommendations.
Worldcom went bankrupt in the early 2000s due to illegal accounting methods
(Ashraf, 2011). Moreover, the company had certain internal controls in place, such as an
ethics department and a code of conduct, all of which were unsuccessful in preventing fraud.
It has been determined that the company's internal control was inadequate, allowing the
workers to influence several elements of financial reporting because of the absence of work
separation. Furthermore, the absence of control and monitoring from the board of directors
and higher management has encouraged fraudulent acts within the company.
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However, certain recommendations may be taken to address WorldCom's problems
and attempt to strengthen its internal controls. To ensure that no one has excessive influence
over the financial reporting, the organization should concentrate on implementing proper
techniques of duties approach. Furthermore, by conducting routine audits, the management
group can guarantee that these policies are being followed, and they can also keep an eye on
how financial reporting is done. Moreover, to guarantee the success of these measures, the
business must regularly instruct its staff on the effects of dishonest behavior and the value of
ethical conduct (Irianto et al., 2012).
c) Determine which theory of crime causation is present in the fraud you identified.
How is this theory of crime causation directly related to this fraud and how could it
have been prevented?
The theory that is involved in the crime causation that directly relates to this fraud is
‘The Strain Theory.’ The strain theory proposes that experiencing a great deal of anxiety or
strain may cause someone to become involved in crime. The strain theory is significant to the
research because it takes into account situations like huge and administrative organisation
where performance may be more challenging to accomplish, business with strict rules,
unachievable goals, and unreasonable achieving targets which all can be a cause of anxiety
that lead to fraud (Van Akkeren and Buckby, 2015).
A crime is often defined as an act that violates societal norms or behavior expressed or
implied by criminal law. With the fraud identified and the fraud analysis performed, the
investigator may quickly discover the criminal and the scope of the crime. Using the theory of
crime causation, the WorldCom company can avoid mistakes, swiftly reduce harm, as well as
moral and economic loss. Recent developments such as artificial intelligence (AI) can be
integrated in the accounting sector of the company that can help prevent human error and
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lower fraud rates. Therefore, by integrating automation technology that can make it easier to
spot the fraud, the fraud investigation for WorldCom incidents can be modified.
d) What legal or regulatory issues were related to your findings? How will these impact
all parties involved?
Companies often use a fraud management plan to identify unauthorized banking
activities or transactions and stop them from harming the financial institution's and the
customer's reputations as well as their bottom lines. However, the Fraud Pentagon Theory is
taken into account that comprises five factors such as Pressure, Opportunity, Competence,
Rationalisation and Arrogance could have an impact on the process of detecting fraud
(Soepriyanto et al., 2021). It has been determined that achieving reasonable assurance is
entirely the investigator's responsibility. To prevent defalcations and fraud in corporate
settings, giving the auditor and other staff the appropriate training on fraudulent activities is
crucial.
Regulatory issues like Sarbanes-Oxley or SAS (Statement in Auditing Standards) No.
99 can considerably impact the forensic accounting research process. These rules may raise
the requirement for thorough examination of the internal controls in place. According to this,
the company must recognize any deep flaws in internal controls that might have an effect on
financial reporting procedures.
e) What suggestions do you have for management to prevent this fraud from occurring
in the future? What evidence could you present to prove your suggestions would be
effective?
There are few suggestions for the management to prevent this fraud from occurring in
the future. Accounting professionals should be approached where they can using their
technical knowledge and practical experience to examine, solve, and reduce fraud. In an effort
to find the offenders or criminals, their work should involve looking into the financial
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irregularities, analysing the evidence, speaking with the possible suspects and generating
expert reports. Moreover, a key component of their job is the capacity to profile possible
suspects, which may need a fundamental insight into how criminal minds operate, what drives
a person to commit fraud, and how the fraud was carried out (Van Akkeren and Buckby,
2015).
Three elements are present when a fraud arises in a company: pressure, rationalisation
and opportunity (Sandhu, 2016). The fraud triangle often has three sides, with the first angle
focusing on motivated or under pressure criminals who cannot inform others about their
financial problems. The possibility for fraud to be committed by being persuaded by
individuals is the subject of the second perspective. The third perspective emphasizes
providing support for statements written regarding fraud.
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