Case 2-1

Topics: Auditing, Internal audit, Audit Pages: 9 (3141 words) Published: September 29, 2013
Case 2-1
Cynthia Cooper and WorldCom
Cynthia Cooper details her trials and tribulations about her experiences at WorldCom in the book Extraordinary Circumstances: The Journey of a Corporate Whistleblower. The following excerpts from the book describe the actions she took to uncover the fraud at WorldCom and reactions of key players in the accounting department, top management, the audit committee and the external auditors.

Cooper was first alerted to the fact that there may have been a problem with capital expenditures when she read an article called “Accounting for Anguish” that appeared in the Fort Worth (Texas) Weekly on May 16, 2002. It described the ordeal of Kim Emigh, a former WorldCom financial analyst who was laid off from the company after complaining for many years about potential abuses related to capital spending. Glyn Smith, a senior manager in Internal Audit, suggested to Cooper that they do an internal audit of capital expenditures immediately. Cooper agreed. The first sign of a problem was when one of the Finance directors provided capital spending schedules for the audit and two of them disagreed in amount. The director said the difference was due to something called “prepaid capacity.” When asked to explain the director couldn’t and said that David Myers, the controller of WorldCom, provides the data to record. He added: “David provides [me] with the amounts for [the] schedule.”

Later on a member of the internal audit team with technology knowledge, Gene Morse, is asked to examine the system and see if there was anything designated as prepaid capacity. Morse found prepaid capacity amounts “jumping all over the place, from account to account.” There were numerous examples of items moved from account to account apparently to mask the true nature of the expenditures. As news spreads of the internal audit of capital expenditures, Myers suggested that the team was wasting its time on the audit and that their time would be better spent to find ways to save money in operating cost. The reaction of Myers only made Cooper more suspicious of what may really be going on.

Cooper then approached Farrell Malone, the external-audit partner at KPMG, the firm that replaced Andersen after its collapse following the Enron audit. Cooper explained about the movement of amounts to accounts and unexplained prepaid capacity designations. Farrell recommended not going to the audit committee at this time. Still, Cooper decided to take a closer look. Morse downloaded thousands of entries searching accounts with more than 300,000 transactions each month spread across a hundred legal entities. Cooper learned that Scott Sullivan, the CFO, had found out about the audit. He questioned Morse about the work. This increased Cooper’s suspicion since Sullivan rarely took such a direct interest in an internal audit matter. She asked her staff what they thought about Morse’s discovery. Most believed there is a good explanation. But Cooper knew as auditors they were obligated to “stay with leads and keep reviewing the issues. At times, it is a slow, plodding process of checking and re-checking facts, developing theories, trying to find connections, and thinking through the issues until you get it right.” On June 10th, Morse found several entries labeled “prepaid capacity.” They appeared to be moving large amounts from the income statement to the balance sheet -- $743 million in the third quarter of 2001, $941 million in the fourth quarter of 2001, and $100 million in the first quarter of 2002. The auditors went about tracing the amounts from account to account through the system to see where they landed.

The next morning Cooper received a message that Sullivan wanted to speak to her right away. He talked about becoming more involved in internal audit matters, an unusual step for him. Cooper also overheard a conversation while in Sullivan’s office that Max Bobbitt, the chairman of the Audit Committee, would be leaving the audit...
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