3. WORLDCOM: In 1998, the telecommunications industry began to
slowdown and WorldComs stock was declining. CEO came
underincreasing pressure from banks to cover margin calls on
hisWorldCom. Beginning in 1999 and continuing through May2002,
WorldCom used shady accounting methods to mask itsdeclining
financial condition by falsely professing financialgrowth and
profitability to increase the price of WorldComsstock.
4. HOW THIS HAPPEN The fraud was accomplished in two main ways.
First,WorldComs accounting department underreportedline costs
(expenses with other telecommunicationcompanies) by capitalizing
these costs on the balancesheet rather than properly expensing
them. Second,the company inflated revenues with bogus
accountingentries from corporate unallocated revenue accounts.
5. How the Fraud took place NET INCOME xxx (Huge Increase)
Revenues xxx COGS xxx (no change) (no change)CFOs
directionsaffected the income statement:Fees companies
phoneComputer expenses:networks: xxxxxx (Huge Decrease)(Huge
Decrease)
6. Overstating Asset Frauds (WorldCom) Overstatement of current
assets(marketable securities) Overstating pension assets
Capitalizing as assets amounts that should be expensed Failing to
record depreciation/amortization expense Overstating assets through
mergers and acquisitions Overstating inventory and receivables
7. HOW WAS DISCOVER The first discovery of illegal activity was
by WorldComsown internal audit department who uncovered $3.8 b.
ofthe fraud in June 2002. The companys audit committeeand board of
directors were notified of the fraud.The Securities and Exchange
Commission (SEC)launched an investigation. By the end of 2003, it
wasestimated that the companys total assets had beeninflated by
around $11 billion.
8. Largest Bankruptcy FilingsCompanyAssets (Billions) When
Filed1. WorldCom$103.9July 20022. Enron $63.4 Dec. 20013. Conseco
$61.4 Dec. 20024. Texaco$35.9 April 19875. Financial Corp of
America $33.9 Sept. 19886. Global Crossing $30.2 Jan. 20027.
PG&E$29.8 April 20018. UAL $25.2 Dec. 20029. Adelphia$21.5 June
200210. MCorp$20.2 March 1989
9. CONSOLIDATING BALANCE SHEET (10K SEC) (IN MILLIONS) AT
DECEMBER 31, 2000 WORLDCOM MCI GROUP ELIMINATIONS WORLDCOMCurrent
assets......................................$ 9,068$ 2,312
$(1,625)$ 9,755Property and equipment, net.........................
35,1772,246--37,423Goodwill and other
intangibles...................... 36,6859,909 -- 46,594Other
assets........................................ 4,963168--5,131Total
assets......................................$85,893
$14,635$(1,625)$98,903Current
liabilities.................................$14,213$ 5,085
$(1,625)$17,673Long-term debt......................................
11,6966,000--17,696 Noncurrent
liabilities.............................. 3,6481,087-- 4,735
Minority interests.................................. 2,592-- --
2,592 Company redeemable preferred securities......
798----798Shareholders investment............................
52,9462,463 -- 55,409Total liabilities and shareholders
investment.... $85,893 $14,635$(1,625)
$98,903============================ $ 9,755 / 17,673=(7,918)
WORKING CAPITAL OR .55 CURRENT RATIOTHE HIGHER THIS RATIO THE
BETTER TO MEET THEIR CURRENT OBLIGATIONS.
10. WorldCom Statement of Cash flowCash flows from operating
activities: 20002001Net income Operating Activities
$4,153$1,501Originally Reported Revised as of April 15, 20042000
20012002NNet loss $ -48,909 -15,597 -9,173
11. HOW ENDEDOn July 21, 2002, WorldCom filed for Chapter
11bankruptcy protection, the largest such filing in UnitedStates
history. The company emerged from Chapter 11bankruptcy in 2004
becoming MCI. On March 15, 2005Bernard Ebbers (CEO) was found
guilty of all charges andconvicted on fraud, conspiracy and filing
false documentswith regulators. He was sentenced to 25 years in
prison.I dont belief this happen to me .
12. What do these dates have incommon? December 2, 2001 Enron
declares bankruptcy July 19, 2002MCI WorldCom declares bankruptcy
August 31, 2002Arthur Anderson agrees to stop auditing public
companies
13. How did this happen?Corporate IssuesAudit Firm Issues
Earnings pressure Dependency on consulting fees Lack of mandated
disclosure Assumed good intent of theirof company reporting model
client Minimal oversight into Inability to continuously
monitorcorporate business practices a companys internal controls No
documented or enforced Unable to identify violations ofinternal
controlsinternal controls
14. How Did GovernmentRespond?Sarbanes Oxley Act
15. Sarbanes Oxley Act Highlights Section 103: Your auditor
(and therefore, you should)maintain all audit related records,
including electronicones, for seven years. Section 201: Firms that
audit your companys bookscan no longer provide you with IT related
services. Section 301: You must provide systems or proceduresthat
allow employees to communicate effectively withthe audit
committee.
16. Sarbanes Oxley ActHighlights (continued) Section 302: Your
CEO and CFO must signstatements verifying the completeness and
accuracy offinancial reports. Sections 404 CEOs, CFOs and outside
auditors mustattest to the effectiveness and accuracy of
financialreports. Section 409: Companies must report
materialchanges in their financial conditions on a rapid andcurrent
basis. The act calls it real-time disclosure butis unclear on what
it means.
17. SarbanesOxley Act SarbanesOxley Law Behavior ConsequenceAny
CEO or CFO who recklessly violates hisFine of up to $1,000,000
and/or up to 10 yearsor her certification of the companys financial
imprisonment.statements.Fine of up to $5 million and/or up to 20
yearsIf willfully violates.imprisonment.Any person who corruptly
alters, destroys,conceals, etc., any records or documents with Fine
and/or up to 20 years imprisonment.the intent of impairing the
integrity of the recordor document or use in an official
proceeding.
18. Sarbanes - Oxley Impact onInformation Systems
19. The 3 Cs of Sarbanes-Oxley CEOs, CFOs and CIOsThe jobs of
the CEO, CFO & CIO got tougher onJuly 30, 2002 -- the day the
Sarbanes-Oxley Actwas signed. The legislation requires
significantchanges to financial practices and corporategovernance,
and touches all corporate areas --including technology. For the
first time ever, theCFO and CEO can look a CIO in the eye and
say,Guess what, youre on the hook with us.
20. Benefits of the New Oxley Act 1. Increased confidence of
CEO/CFO in meeting requirements 2. Improved coordination of Company
Management Team 3. Improved and clarified Corporate Governance
process 4. Systematized process for early identification of
business risks/ whistle blowing issues/incident management 5.
Systematized approach to dealing with change (i.e., transactions,
personnel, accounting principles, internal controls and operating
procedures) 6. Increased operational effectiveness
21. ENRON
22. The Enron Scandal The Enron scandal was a corporate scandal
involvingthe American energy Enron Corporation, the worldsleading
energy company and the accounting, auditing,and consultancy firm
Arthur Andersen. On October 16, 2001, in the first majorpublic sign
of trouble, Enron announces a huge third-quarter loss of $618
million.
23. The Enron Scandal On October 22, 2001, the Securities
andExchange Commission (SEC) begins aninquiry into Enrons
accounting practices. On December 2, 2001, Enron files for
bankruptcy, the largest bankruptcy in US history up to that
time
24. Consequences Thousands of employees lost their jobs and
even theirlife savings in 401(k) plans tied to the energy
companysstock. Disastrous falling down on the whole stock
marketduring the following months, especially in the
financialservice industry. Arthur Andersen, which at the time was
one of the fivelargest accounting firms in the world, was
dissolved.
25. How this happen The company used shortcomings of Rule-Based
USGAAP , special purpose entities, and poor financialreporting to
hide billions in debt from failed dealsand projects. Enrons audit
committee failed to follow up onhigh-risk accounting issues
Andersen was pressured by the company to ignoreaccounting
practices.
26. How this happen.Continued 1993-2001: Enron senior
management used.Complex and foggy accounting schemes to reduce
Enrons tax payments; to inflate Enrons income and profits; to
inflate Enrons stock price and credit rating; to hide losses in
off-balance-sheet subsidiaries; to engineer off-balance-sheet
schemes to directmoney to themselves, friends, and family; to
fraudulently misrepresent Enrons financialcondition in public
reports.
27. Profit to Enron from all this? $10 million in guarantee fee
+ fee based on loanbalance to JEDI. A total of $25.7 million
revenues fromthis source. Increase in price of Enron stock held
byJEDI. Enron recognized $126 million in the first quarter of 2000
from this. But everything began to fall apartwhen Enrons share
price started todrop in Fall 2000.
28. Generally Accepted Accounting Principles prior to 2002.
Auditing companies often consult for thecompanies they audit
(conflict of interest). Audit company partners often later
acceptjobs from their client companies. Companies often retain the
same auditingcompany for long periods of time. Auditing companies
have been allowed to policethemselves. Appointment of auditor
company is in theory byshareholders but in practice by senior
management