The WorldCom scandal was actually brought to light by the internal auditor, Cynthia Cooper. Cooper and her team, Gene Morse and Glyn Smith uncovered the fact that line costs were being transferred to capital accounts. Cooper was originally tipped off to the fact that something was amiss when the head of WorldCom’s wireless business paid her a visit, upset that he was loosing $400 million that had been set aside to make up for shortfalls if customers didn’t pay their bills. Scott Sullivan, CFO of WorldCom, decided the money instead, would be used to boost revenues.
When Cooper began asking the previous auditors (Arthur Anderson) about this, she was brushed off and told they take orders from only Mr. Sullivan. The more Cooper and her team dug into the issue, the more people they found that didn’t know what was going on or didn’t want to talk about it.
While Cooper and her team were looking for evidence of what was happening with the capital expenditures, Morse found the amounts jumping between accounts to make the true nature of the expenditures hard to trace by the auditors.
Eventually Cooper got to the bottom of the issue and confronted David Myers, the controller of WorldCom. He admitted that the accounting treatment of the line costs were not correct, but he could get back up if he wanted (yet refused to do so), admitted that there were no accounting standards to back up the entries, and that they shouldn’t have been made to begin with, but were too hard to stop once they began.
The investigation began by Cooper in March 2002, by June 20th, the information of the misstatements were brought to the audit board, and on June 26th 2002, the SEC issued a civil fraud suit.
The issue began in 2001 when ‘aggressive’ accounting wasn’t enough to keep the business afloat, and Sullivan directed Myers to take the line costs of fees paid to lease networks from other companies, out of operating expenses, where they belonged, and put them into capital...
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