Worldcom Scandal

WORLDCOM ACCOUNTING SCANDAL

SYNOPSIS WorldCom aims to be one of the largest telecommunication companies in the world. WorldCom has built its global presence through a multitude of financial acquisitions and investments. But due to these acquisitions, they failed to properly manage and led them to do fraudulent acts. The driving factor behind the WorldCom’s fraud was the decision made by the top management which desires to attract their investors with their manipulated profit. Through the acts by the top management it resulted to bankruptcy which is one of the largest accounting frauds in the history of US.

MATRIX Stiles Kellett Chairman, Compensation Committee

Bernie Ebbers CEO He was convicted of fraud and conspiracy as a result of WORLDCOM’s false financial reporting. -25 years of

Has resigned and agreed to pay the bankrupt telephone company about $120,000 to resolve controversy over his

Arthur Andersen LLP Paid the amount worth of $65 million in the involvement of the scandal

WORLDCOM Scott Sullivan CFO In August 2002, Sullivan was arrested and charged with seven counts related to fraud at WorldCom. -5 years of imprisonment

John Sidgmore COO Sidgmore worked to revive WorldCom after disgraced CEO Bernard

Cynthia Cooper Her team was the first people who uncovered the major fraud at WORLDCOM. -Vice President of Internal

Max Bobbitt Chairman, Audit Committee

ETHICAL VIOLATIONS COMMITTED 1. Objectivity a. The company violated this standard in a way that they did not release an unbiased and complete information for the external auditors to check. Moreover, they’ve allowed undue influence of others to compromise their professional judgement. If Sullivan did not do what Ebbers told him to do, which was to not disclose the false statements, the whole scandal would have been avoided and WorldCom could have fixed the problem within their boundaries. 2. Professional Behavior a. This was violated in a sense that the accountants took an action that discredit their profession, especially Arthur Andersen and the internal accountants of WorldCom. To practice professional behavior means not bringing the profession into disrepute. Because of wanting to attain having WorldCom as their client, though Arthur Andersen discovered violations, he still issued an unqualified opinion on WorldCom’s Financial Statements. The Accountants of WorldCom, on the other hand, even though they have an idea that the top management manipulated the journal entries, they did not take an action to insist on reporting the appropriate journal entries. 3. Integrity a. Another ethical standard violated was the standard of integrity. The accountants involved in the scandal did not practice being straightforward and honest in professional and business relationships. They’ve allowed themselves to be associated in reports and information which omit or obscure information required to be included where such omission or obscurity was misleading

EFFECTS OF THE SCANDAL To Accountancy Profession The result of the scandal which involves some accounting professionals discredit the professions. It will give an impact and minimize the trust of the public to the professional accountants. Accounting professions is very important in the business community that communicates the business to the owners. If they don’t trust the work of their accountants it will create conflicts between them. To Filipino CPA’s The Filipino CPA’s must learn in the events of the scandal to avoid professional misbehavior. Having known the particularity of the Philippine Code of Ethics for Professional Accountants, extra competence and due care is really important because one wrong move may cause great harm to their name and profession. Corruption may be rampant among politicians, but they should bear in mind that no matter how wonderful an offer from someone may be, if this would cause him/her dishonor, he/she should not consider such offer. Filipino CPA’s will be more careful with the work they do and would always remember this issue/scandal every time they’d face a dilemma synonymous to the issue/scandal. To future CPA’s In the wake of the corporate scandal caused by WorldCom, the CPA profession has taken numerous steps to turn crisis into opportunity. In particular colleges, universities and their accounting faculties have changed their course offerings and other aspects of accounting program to better equip students to cope with the ethical challenges of the accounting profession. The scandal has helped instructors emphasize to the students the importance of accounting. The attitudes of the students themselves have not changed significantly into the postscandal period. In general, the more students knew about what had taken place the more positive their attitude towards accounting.

Future CPA’s, particularly students, have grown aware of the consequences they might face soon when they become CPA’s once they violate the ethical standards. They will give more importance to the profession and take full consideration about it.

INDIVIDUAL REFLECTION Rexy Anne Bañez BIG 5 TO BIG 4 To earn a high position is worth all the hard work one has to be willing to give, yet losing this position would just take a single wrong move. This seemed to be what happened to Arthur Andersen. Being part of the Big 5 was an asset for the auditing firm. The firm gets known and well-known corporations would choose the firm to be their external auditor. To maintain the status of being one of the Big 5, Arthur Andersen should have upheld the ethical standards of a professional accountant. Proper auditing and expressing of appropriate opinion should have been made the auditing firm. As a Certified Public Accountant, prioritizing a client just because of the high pay one gets is never appropriate. Andersen did not just commit a mistake to Enron but to WorldCom as well. They’ve issued an unqualified opinion though they’ve already acknowledged WorldCom as a “maximum risk client” and have mentioned to the Audit Committee that WorldCom had misapplied Generally Accepted Accounting Principles (GAAP) with respect to certain investments. Arthur Andersen lost competitiveness in the profession because of its involvement in big accounting scandals which led to its fall making the Big 5 turn into Big 4. AS A FUTURE CPA Having read the different articles about the WorldCom Accounting Fraud, it made me realize how important it is to uphold the fundamental principles of the Code of Ethics for professional accountants. Whatever circumstances I am about to face, I should take actions which would not harm my independence. It should not be harmed by either internal nor external forces – not even by the pressure I’d get when auditing for a large valued client. I should maintain my integrity as an accountant and bear in mind that if I violate any of the principles, I am not just causing dishonor to myself but to the whole profession. When performing an audit of

financial statements, I should abide by the Generally Accepted Auditing Standards. The opinion I would give should be unbiased for it is what lends credibility to the financial statements. Arianne Chryslene S. Cinco

1. Big 5 to Big 4 As to the Arthur Andersen accounting firm, I do believe that they also committed a mistake; they should have been undergo more procedures to detect fraud. They shouldn’t have been contented to what they have or what the company has given, before issuing unqualified opinion to the company. It is really doom to realize that from Big 5 it became Big 4 because of the issues (criminal acts) done by the accounting firm.

2. As a Future CPA As a CPA in the future, we should really teach ourselves to be objective and have integrity in everything we do. We should always base our decisions on facts, and we should be honest to our work. Also, we should protect our name and reputation in order for us to be trusted, internally and externally. The WorldCom really did a great mistake that everybody shouldn’t follow. It is sad to say but the company really lacking ethical behavior and never practice it. I do believe that they could avoid the issue if they have been practicing the ethical behavior.

Lynlie Phine F. Concordas

BSA-3

Big 5 to Big 4 Being removed as one of the most recognized well trusted and leading auditing firms in the world is too big to fail. It might be difficult at first especially to those companies that rely on them but it is the right thing to do. Most especially if the firm did very shameful acts. It ruined not just the reputation of the firm, the clients but also to the profession. Just like what happened to the Arthur Andersen auditing firm. They were removed due to the falsified financial records issued and implicated by them to some companies specifically the Enron. They were involved in a scandal. For me, it was the right decision made and done by the higher ups in order to maintain good and quality performance of the accountants. As we all know, accountants should do their job in conformity with the ethical standards. However, this firm did not make it. They set out to make such money for themselves as quickly as possible. With this scenario, I realized that greediness and longing for instant money would lead us to nothing. It will just cause trouble and bad remarks to the profession. Thus, it must be taken with due care, competence, objectivity, confidentiality and integrity- the ethical standards. As a Future CPA As a future CPA, this scandal reminds me to become a better one soon. For me not to face the same situation, I need to follow the ethical standards sincerely. I must always bear in mind the hardships I experience just to reach this profession. It is not easy. Thus, I must take care of it properly. It also reminds me to become responsible for everything I do. I should not follow the actions taken by the auditors of Arthur Andersen. As a CPA soon, I must continue to strive for me to be functional as I can be by giving fair judgments and opinions to my future clients.

Dacles, Cecille 1.) Big 5 to Big 4 The big 5 are the result of merging of firms. These 5 are the largest professional services networks in the world that provides extensive range of accounting and auditing services. 2002 was the start that big 5 became big 4 due to the fall of Arthur Andersen. At first Arthur Andersen has a competitive edge towards to its competitor. Because of the pressure experienced, it leaded to a negative influence on their corporate culture which enabled Andersen to be more interested in its own revenue growth through ethical and legal misconduct such as accounting irregularities and fraud. It was then much worse when Andersen handled the Enron. Their relationship was seen as a cozy one which made it easy to maintain improper accounting practices by both parties. They set out to make as much money for themselves as possible and these selfish acts led to the both company into eventually downfall. Andersen underscores the importance of personal responsibility. They forgot to behave in accordance with ethical behaviour and failed to recognize the importance of reputation. As an outcome, they loosed confidence in the profession and in public trust in the capital market. 2.) As a future CPA

“Nothing is important than a person’s integrity and commitment to the highest ethical conduct” these words was not given importance by the persons involved in making fraud. To fully become a person with integrity, I will start reflecting this to my actions through being honest even in a small thing. Though I will put in under pressure I will still value the importance of personal responsibility of making the right choice. As a person we have a norm and values that ground our actions. These will serve as a starting point to train myself to be responsible in order for me to fully prepare in the future. Through giving importance to the values that surround me will help build my confidence in my profession and

my reputation as a future CPA. As what our mentor said that the title CPA lies to the person itself. A person is the one who will give value to the title. As a future CPA I need to mould myself in becoming a good person for me to be a good future CPA.

Jessa Mae L. Silagan a) Big 5 to Big 4 The Big 5 auditing firms have proven that they are the best among the rest. To be part of the Big 5 is advantageous in the sense that they are the top suggested firm a certain company will first to choose on. It will also give a higher confidence to the public. But on the other hand, if failed to perform well, it is really a big shame most especially if a big and well-known company is involved. The Arthur Andersen accounting firm used to be part of the Big 5 accounting firms in the world. Based on this fact, it has gained such good reputation in the public. But the sad part in its journey is when such image built for years was put to an end due to different unethical performances of such profession in not just one company but of more than that. The breaking report about the WorldCom Accounting Fraud Scandal has led to the fall of Andersen. This event made the clients withdraw in the engagement because the public’s confidence on their work decreased. In addition, the once Big 5 now became Big 4. With the changes happened, the clients choices became lesser and somehow ruined the accountancy profession with regards to their integrity, objectivity, professional due care, and competence. But on the other side, it gives benefits to other firms because of the Adersen’s clients who transferred to them. b) As Future CPA As a future Certified Public Accountant, it is a challenge for me to stand firm on the set principles and follow the set standards for a Certified Public Accountant. I will make sure to be independent in mind and in appearance to gain confidence with the public. I will also make sure that I will not get involved in such unethical behavior and only do what I am ought to performed instead of doing beyond.

Accountants are mostly faced with such situation where the company that they engaged in has its management doing manipulative acts. It is challenging especially when it is a really big company. But the fact that they chose this profession, they must take full responsibility in following what was set to be performed by Certified Public Accountants.

Name: Emma Mae G. Pomicpic A. Big-5 to Big-4 An auditor’s role in an audit is very important. An auditor must be able to collect enough evidence to supports their finding, and also be on the lookout for fraud. They are very useful in many companies to attest the financial statement presented by the company, if that certain company follows standard and present financial statement that is free from error and free from bias. Arthur Andersen is one of the big-5 Accounting firms, in which this accounting firm was dropped from

the list of the big-5 after the scandal of Enron Company. Arthur Andersen had served Enron as an auditor for sixteen years and consultant of Enron. Arthur Anderson did not follow standards and improperly categorized hundreds of millions of dollars as increase in shareholder’s equity. Auditor’s must maintained independence in able to take an unbiased viewpoint in the performance of the examination and in the preparation of the report. It is very important to follow auditing standards because all users of the financial statement, depends and trust their opinion about the fairness and free form error of the financial statement that the entity presented. B. As a future CPA The scandal of WorldCom Company is the best example on why accountants should follow certain standards in order to present a fair and free from error financial Statement. It also give lesson to all CPA and future CPA’s on what will happened if they will present false financial statement. As a future CPA it is important to follow procedures and standards to present correct financial statement of the company because it is a summary report on how the firms has used the funds by its stockholders. All accountants must have an integrity having the quality of being honest and strong moral principles. They should not accept any offer or follow any order of their higher levels to falsify the journal entries of the firm. If they notice or detect any fraud or problems inside the firm they must report it to their upper level management, if the upper level of management can’t resolved the problem it is better to pass a resignation letter rather than to falsified the records of the financial statement

because the main job of an accountant is to present fair and free from error financial statement, it was never been part of their job to falsified the records of financial statement. Ella Isabel B. Oberes A. Big-5 to Big-4 Auditor plays a critical role in validating the financial statement of a company. Auditor gathers appropriate and sufficient evidence and observes tests, compares and confirms until gaining reasonable assurance. The auditor forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error. Arthur Andersen is an accounting firm that once counted itself as one of the world’s "big five" until its criminal handling of the energy company Enron led to its downfall, and bought the rights to the Andersen name. Andersen did not abide in it responsibly; it did not follow standards and improperly categorized hundreds of millions of dollars as increase in shareholder’s equity.

B. As afuture CPA What happen to WorldCom is set as a reminder to all CPAs that they should performtheir job to the standard to achieve fair presentation of financial statement.As future CPA, I must perform my tasks honestly and objectively. I must perform everything I do as a public accountant conform to the standards. And also, I should took care my reputation as an accountant in order to maintain my independence. As a CPA I shall not do things that will discredit the profession. Being a CPA is not an easy job but we should always consider what should be rightly done to benefit the users. It was quite disappointing on what Arthur Andersen did to mask the mistake done by WorldCom. Andersen didn’t just put the firm’s name at sake but also it brought discredit to the profession.

Kirk Jimwood P. Managing Introduction WorldCom made a terrible mistake when they are just focusing their growth through acquiring existing company to increase their value in the market. This acquisition resulted to lack of internal control in the company. They even neglect the code of ethics in the work environment which is one of the reasons to create fraud. Lack of fraud awareness will destroy the company in the end. Big 5 to big 4 From big 5 accounting firms to big 4 is a result when Arthur Andersen LLP being involve in Enron’s accounting scandal. The big 4 accounting firms consist of PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Earnst & Young and KPMG. The Powers Committee (apportioned by Enron’s board) with their available evidence suggest that Anderson did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions. In 2002, Arthur Andersen was charge with and found guilty of obstruction of justice for shredding the thousands of document and deleting e-mails and company files that tied the firm to its audit of Enron. This is the reason that gives a bad reputation to the firm. It ceased the confidence of their clients that they will perform their responsibilities accurately.

As a future CPA As a future CPA, all I can say is that they really need to abide with the code of ethics to avoid necessary circumstances that will lead to a bad reputation. It is not only the company involve in the scandal will be in the eye of the public but also the accounting professions. It will cease the trust of the people towards to the

profession because of the involvement to fraudulent scandal. Fulfilling our responsibilities is very important in the corporate world. The work of the CPA’s is needed so that the users will understand what’s going on with their business. The CPA’s must abide the code of ethics at all cost to.