Auditing Analysis - Case Study Example

Auditing Essay Table of Contents General Overview of the Fraud 3 Overview of the Economic and Regulatory context of U.S. 10 years ago 4 Differences in Regulatory Cultural between US and UK 4 Arguments based on facts drawn from the research 6 References 8 General Overview of the Fraud This project provides an insight into the ups and downs of WorldCom along with the world’s largest fraud committed by it. WorldCom started as a very small company with an internal audit group comprising of two staffs without any prior auditing experience. Despite facing numerous challenges, the company’s revenue grew from $1.5 billion to $38 billion in a period of just eight years. In the year 2002, the telecommunications company received coverage from all cross the world for all bad reasons. The company had involved itself in the largest accounting scandals in the world’s history. It misinterpreted financial statements worth more than $4 million (ICMR, 2002). The people accused of the fraud were Scott Sullivan, the CFO, David Myers, the Controller, and Buford Yates who was the Director of General Accounting. The fraud was committed by using shady accounting practices in order to mask the declining financial status of the company. This was done to profess false statements regarding the company’s growth and profitability in order to increase its share price in the market (Associated Content, 2007). The illegal activity was discovered by the company’s internal audit department itself. The fraud was identified by Cynthia Cooper, who was the Chief Audit Executive in WorldCom, and her team. The company’s auditor, Arthur Anderson and Co., relied greatly on the internal controls regarding the reporting processes which remained overridden by the top executives of the company. The auditors were provided special incentives for reducing audit procedures over financial reporting. They were lured into committing such illegal practices in the form of consulting fees which were much higher than audit fees (Cannon, Godwin & Goldberg, 2008, p.1). Overview of the Economic and Regulatory context of U.S. 10 years ago Initially, the primary objective of the organisation was to maximise profits. Most often, managers used to be the owners of the firms. The owner’s interest was to maximise his own utility rather than raising the value of the company. There were instances where managers would steal assets of the company and bluff the shareholders. Such scandals were widely prevalent in the nineteenth century. The WorldCom scandal is the greatest example of such a case. Regulations during that time were loose and not well implemented. This called for firm implementation of corporate governance for the prevention of such thefts. Initially, the corporate laws allowed limited power to shareholders in way of vote. There were also a number of restrictions which prevented them from assessing the performance regularly. This was the major reason behind the misuse of corporate assets (Martynova & Renneboog, n.d., p.11). Differences in Regulatory Cultural between US and UK The United Sates corporate regulations are friendlier towards the shareholders in comparison to the United Kingdom. The law assigns greater responsibilities and power in the hands of shareholders than the corporate managers. In UK, managers of organisations are assigned greater responsibilities. But exception remains in cases when it comes to the context of takeovers. In such cases, the law does not allow managers to take actions without the consent of the shareholder on the materialization of a bid (Armour & Skeel, 2007, p.3). Attempts are made towards harmonising the accounting standards between the two. However, financial and political pressures tend to move both in two opposite directions. There are certain differences between the two with regards to their financial statements. In the United States, non purchased goodwill is not considered to be an asset, whereas in UK it is. To correct this disparity the “Global Generally Accepted Accounting Principles (GAAP)” (Ampoffo & Sellani, 2004, p.6) have been established. The main focus is to harmonise the accounting standards in nations and bring them to a common platform (Ampoffo & Sellani, 2004, p.1). Changes in the U.S. Regulations, Economic conditions and Investor awareness In response to the scandals taking place in organisations, the US government initiated a number of changes in its company’s regulatory system. A number of procedures and rules have been implemented to protect the rights of the company and its shareholders. This has been done to ensure that all transactions are done under fair conditions and transparent prices. The Government has laid special emphasis on company’s audits and financial statements. The US was involved in substantial efforts in order to improve and strengthen corporate governance. A few examples may be provided in this regard. “The New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD") sponsored a "blue ribbon" panel of experts” (CVM, n.d.). These experts were taken from the accounting and legal profession and also from the business community and their primary responsibility was to suggest ways to improve the effectiveness of the “board of directors’ audit committees in U.S” (CVM, n.d.). The organisations rely greatly on the reports presented by the panel. A number of regulations have also been designed with a view of strengthening the audit committee’s effectiveness and improving the reliabilities of the financial statements of companies. Certain rules have also been framed to allow independent operation of the audit committees. The nation’s corporate governance is not monitored by one particular statute. Instead it is done using government instruments, corporate laws and the court’s decision on each issuer. In case of publicly owned organisations, the United States Federal Securities laws regulate corporate governance in organisations (CVM, n.d.). Certain rules have also been framed with regard to external auditors. Initially the auditors would be appointed and approved by a majority of the non-interested directors in the company as well as shareholders. However, certain changes have been incorporated since January 2001. The new regulations do not allow independent auditors to be ratified by shareholders. Instead, the state laws take the responsibility of hiring and monitoring the auditors. But the auditors can be removed by majority of votes coming from the shareholders. The audit committees are comprised of financially literate and independent directors. The companies are also required to present written charters to audit committees. Alongside, the companies are also required to ensure the presence of at least one single financial and management expertise (CVM, n.d.). The Commission has left development and regulation of auditing standards under the authority of the private sector. The auditing standards as set by the auditing standards board (ASB) to define the responsibilities of the auditor and provide a guideline to carry out the same. He is also allowed to express his opinion with regards to the reliability of presentations for which he is to produce reports (CVM, n.d.). Arguments based on facts drawn from the research Going by the present corporate regulations of United Kingdom, there exist very little possibilities of occurrences of scandals like that of WorldCom. In fact the need for implementing standards in the European capital markets originated from the financial scandals in the market. It is evident that the nation has successfully implemented corporate governance in organisations, consequently reducing the possibilities of thefts and scandals. United States has had a strong influence in the process of development of the governance regulation in United Kingdom. Regulations have been made especially strict in terms of price transparencies and responsibilities of auditors. Moreover, the nation primarily looks at the protection of rights of shareholders which leaves little place for occurrence of such scandals. Based on the previous world scams, the nation has successfully changed its corporate regulations, auditing and financial reporting standards which has been able to gain the trust of the public in the United Kingdom. References Ampoffo, A. A., & Sellani, R. J. November 11, 2004. Examining the differences between United States Generally Accepted Accounting Principles (U.S. GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards. [Pdf]. Available at: http://adoptifrs.org/uploads/Nicaragua/Examining%20the%20differences%20between%20United%20States%20GAAP%20and%20IAS.pdf. [Accessed on October 30, 2010]. Armour, J. & Skeel, D. A. 2007. The Divergence of U.S. and UK Takeover Regulation. [Pdf]. Available at: http://www.cato.org/pubs/regulation/regv30n3/v30n3-8.pdf. [Accessed on October 30, 2010]. Associated Content. 2007. WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. [Online]. Available at: http://www.associatedcontent.com/article/162656/worldcom_scandal_a_look_back_at_one.html. [Accessed on October 30, 2010]. Cannon, D. M., Godwin, J. H. & Goldberg, S. R. 2008. Journey of a Corporate Whistleblower. [Pdf]. Available at: http://www.verasage.com/downloads/CooperBaker.pdf. [Accessed on October 30, 2010]. CVM. No Date. UNITED STATES. [Online]. Available at: http://www.cvm.gov.br/ingl/inter/cosra/corpgov/usa-e.asp. [Accessed on October 30, 2010]. ICMR. 2002. The WorldCom Accounting Scandal. [Online]. Available at: http://www.icmrindia.org/casestudies/catalogue/Finance/The%20WorldCom%20Accounting%20Scandal.htm. [Accessed on October 30, 2010]. Martynova, M. & Renneboog, L. No Date. A Corporate Governance Index: convergence and diversity of national corporate governance regulations. [Pdf]. Available at: http://www.aeaweb.org/assa/2009/retrieve.php?pdfid=183. [Accessed on October 30, 2010]. Read More