Angeles University FoundationAngeles City

ACCOUNTING INFORMATION SYSTEM

Group 4

Abad, Jane PaulaMaybituin, MandyMiclat, John MichaelRecede, JemmalyneVilladolid, Ma. Antoinette

WorldCom FraudWorldComtook the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of alle-mailsworldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002.

In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements.That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found.These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more valuable.

After tips were sent to the internal audit team and accounting irregularities were spotted in MCI's books, the SEC requested that WorldCom provide more information. The SEC was suspicious because while WorldCom was making so much profit,AT&T(another telecom giant) was losing money. An internal audit turned up the billions WorldCom had announced as capital expenditures as well as the $500 million in undocumented computer expenses. There was also another $2 billion in questionable entries. WorldCom's audit committee was asked for documents supporting capital expenditures, but it could not produce them. The controller admitted to the internal auditors that they weren't following accounting standards. WorldCom then admitted to inflating its profits by $3.8 billion over the previous five quarters. A little over a month after the internal audit began, WorldCom filed for bankruptcy.

When it emerged from bankruptcy in 2004, WorldCom was renamed MCI. Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison, but is free on appeal. Sullivan pleaded guilty and took the stand against Ebbers in exchange for a more lenient sentence of five years.

SUMMARY

Company WorldCom Telecommunications Company; now MCI , Inc.

What happened: Inflated assets as much as $11 billion, leading to 30,000 lost jobs and $180 billion in losses for investors.

Main player CEO Bernie Ebbers

How he did it Underreported line costs by capitalizing rather than expensing Inflated revenues with fake accounting entries.

How he got caught WorldComs internal auditing department uncovered $3.8 billion in fraud

Penalties CFO was fired, controller resigned and company filed for bankruptcy Ebbers sentenced to 25 years for fraud, conspiracy and filing false documents with regulators

CASE REVIEW

The importance of Accounting Information System is vital, given the essentially total reliance of accounting and auditing on computerized information systems. An essential component of AIS is internal control, which provide reasonable assurance that objectives are achieved and that responses to risks are carried out. An organizations system of internal control must be designed to address the risk of fraud.

WorldCom is a case of failed corporate governance, accounting abuses, and outright greed. Its management has the responsibility to maintain a system of internal control to ensure accurate record-keeping, accountability for corporate assets, and adherence to GAAP. The management then would have the opportunity to make internal control which works to the extent they want it to work. This also explains why management overrides internal controls or freely manipulates transactions.

Accountants have the responsibility of recording andreporting financial information without bias. External users are supposed to be ableto trust the financial statements given by companies in order tomake informed decisions. In the case of WorldCom, financial data became biased and fraudulent. External users then made what they thought were sound decisions when in reality they could have been making a grave mistake. Bernard Ebbers and Scott Sullivan were two of the most powerful people in the company. They wanted power, money, and success no matter the cost.With this mentality accountants and employees within the company could no longer complete their tasks objectively. Accountants were asked to capitalize expenses andrelease accruals even when it wentagainst the generally accepted accounting principles. When they declined they were threatened or persuaded to do the task anyway. The managements need for powerand money caused the objectivity of financial reporting to be undermined.

Following WorldComs case, we can infer that any control can give only reasonable, but never absolute, assurance to reach a tracked business target. Fraud is overwhelmingly detected through tip-offs or by accident instead of systematic development of internal control activities or subsequent internal auditing. And when fraud is conducted by collusive action of top management and their accountants, as was the case at WorldCom, almost any control can be overridden.