Accounting Fraud At WorldCom Case Solution

1. Why were the actions taken by WorldCom managers not detected earlier?

There were a number of reasons why the frauds committed by WorldCom were not detected earlier. The main reason was the culture of the organization. WorldCom had a top down management hierarchy. This meant that whatever the top management decides it had to be carried out by the lower level management. Moreover, the organization culture strongly discouraged questioning the superiors. Hence, the employees only did what they were asked. It is mentioned in the case that the legal team of WorldCom was not legally strong. This means that if the employees wanted to do whistle blowing, they cannot consult anyone regarding the protection of their job. So, in order to keep their job, they had to do as they were asked.   

Secondly, as Bernard J. Ebber had double powers of both the chairman of the board of directors and CEO of WorldCom, so he clearly had an opportunity to commit such fraud without the awareness of the board of directors. Therefore, for many years he was able to maintain financial growth using fraudulent accounting methods. Had the chairman of board been separate from CEO, the CEO would have been accountable to the board. This meant that such actions could have easily been detected.

Finally, the external auditors did not give an unbiased and accurate opinion. This is because: WorldCom was a high risk company due to the volatility in the telecommunications industry. However, Andersen, WorldCom’s external auditor audited WorldCom using the approach relevant for moderate-risk clients.

Another reason why this fraud was not detected is the scattered organization structure of WorldCom. Because the head office was located in a small town and with each department located in different cities, it was hard to detect such action. In addition to this, the stock of WorldCom was one of the most highly price stocks and the company showed stable growth for several years. Therefore, due to low variances, most people could not suspect that WorldCom was in difficulty.

2. What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom? 

To avoid the fraudulent activities in an organization such as those which occurred in WorldCom, a firm should have certain controls, precautions and cultures in place. The board should not be chaired by the CEO. If there will be no one to monitor the actions of the CEO. Hence, it gives the CEO the opportunity to commit fraud. The top management should also try and make sure that realistic targets are set for the lower management. If the targets seem too idealistic, the pressure may encourage management to report a false picture. Moreover, the legal division of the firm should be strong and active. The lawyers should be consulted on most matters so as to provide employees job protection, if they revert to whistle blowing. The organization’s culture should also be made consistent throughout the firm. This culture should try and enhance the employees’ ethical values and encourage them to act responsibly, when such fraudulent activities come to their notice. Hence, whenever they are faced with an ethical dilemma to choose between financial performance and social obligation, the organization goes on to fulfill the social obligation.