Royallen Wiley, MBA, CMA

ACCOUNTING FRAUD AT WORLDCOMHARVARD BUSINESS SCHOOL ETHICS CASE STUDY NOVEMBER 20, 2015

Bernie Ebbers – CEO

Scott Sullivan – CFO

David Myers – Controller

Buddy Yates – Director General Accounting

Betty Vinson – Director Management Reporting

Troy Normand – Director Legal Equity Reporting

Cynthia Cooper – VP Internal Audit

Gene Morse – IT

Max Bobbit – Board Audit Committee Chair

KEY PLAYERS

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PARTIAL LIST OF LDDS/WORLDCOM M & A

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1991 – Advanced Telecommunications Corp. - $850M 1993 – Metromedia Communications - $1.25B 1995 – Williams Communications Group - $2.5B 1996 – MFS - $12.4B 1998 – Brooks Fiber - $2.0B 1998 – CompuServe - $1.4B 1998 – MCI - $40.0B 2001 – Intermedia - $6.0BSource: Exhibit 1 HBR Accounting Fraud at World Com

FALSE SEC FILINGS – EXHIBIT 3

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PRISON SENTENCES

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Bernie Ebbers – 25 years Scott Sullivan – 5 years David Myers – 1 year 1 day Buddy Yates – 1 year 1 day Betty Vinson – 5 months prison, 5 months home detention Troy Normand – no sentence Arthur Andersen – ceased practicing before SEC August, 2002.

LESSONS LEARNED

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One lie leads to another. When times get tough, corporate culture and ethics is important. It’s one thing to cut a deal to buy a company, it’s another to

successfully integrate it and run it. Focus on the task at hand. Remind yourself how you look wearing orange.

SARBANES-OXLEY ACT OF 2002

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The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. It is named after sponsors U.S. Senator Paul Sarbanes (D-M D) and U.S. Representative Michael G. Oxley (R-OH). As a result of SOX, top management must now individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors.

The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the US securities markets.

Source: Wikipedia

SOX SECTION 302 – DISCLOSURE CONTROLS

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Section 302 of the Act mandates a set of internal procedures designed to ensure accurate financial disclosure. The signing officers must certify that they are "responsible for establishing and maintaining internal controls" and "have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared."

The officers must "have evaluated the effectiveness of the company's internal controls as of a date within 90 days prior to the report" and "have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date." Id..The SEC interpreted the intention of Sec. 302 in Final Rule 33–8124. In it, the SEC defines the new term “disclosure controls and procedures," which are distinct from internal controls over financial reporting. Under both Section 302 and Section 404, Congress directed the SEC to promulgate regulations enforcing these provisions.

External auditors are required to issue an opinion on whether effective internal control over financial reporting was maintained in all material respects by management. This is in addition to the financial statement opinion regarding the accuracy of the financial statements.

Source: Wikipedia

SOX SECTION 404 – ASSESSMENT OF INTERNAL CONTROL

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Under Section 404 of the Act, management is required to produce an "internal control report" as part of each annual Exchange Act report. The report must affirm "the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.") The report must also "contain an assessment, as of the end of the most recent fiscal year of the Company, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting."

To help alleviate the high costs of compliance, guidance and practice have continued to evolve. The Public Company Accounting Oversight Board (PCAOB) approved Auditing Standard No. 5 for public accounting firms on July 25, 2007. This standard superseded Auditing Standard No. 2, the initial guidance provided in 2004. The SEC also released its interpretive guidance on June 27, 2007. It is generally consistent with the PCAOB's guidance, but intended to provide guidance for management. Both management and the external auditor are responsible for performing their assessment in the context of a top-down risk assessment which requires management to base both the scope of its assessment and evidence gathered on risk. This gives management wider discretion in its assessment approach. These two standards together require management to:•Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks;•Understand the flow of transactions, including IT aspects, in sufficient detail to identify points at which a misstatement could arise;•Evaluate company-level (entity-level) controls, which correspond to the components of the COSO framework;•Perform a fraud risk assessment;•Evaluate controls designed to prevent or detect fraud, including management override of controls;•Evaluate controls over the period-end financial reporting process;•Scale the assessment based on the size and complexity of the company;•Rely on management's work based on factors such as competency, objectivity, and risk;•Conclude on the adequacy of internal control over financial reporting.

Source: Wikipedia

NCACPA - CONDUCT AND ETHICS

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The reliance of the public and the business community on sound financial reporting and advice on business affairs imposes on the accounting profession an obligation to maintain a high standard of technical competence, morality, and integrity. To this end, a CPA should at all times maintain independence of thought and action, hold the affairs of clients in strict confidence, strive continuously to improve professional skills, observe generally accepted principles and standards, promote sound and informative financial reporting, uphold the dignity and honor of the accounting profession, and maintain high standards of personal conduct.

The Rules of Professional Ethics and Conduct adopted and enforced by the Board cover a broad range of behaviors but do not enumerate every possible unethical act. These rules are applicable to all certificate holders. When interpreting or enforcing these rules, the Board may give consideration, but not necessarily dispositive weight, to relevant interpretations, rulings, and opinions issued by other boards of accountancy and by appropriately authorized ethics committees of professional organizations such as the North Carolina Association of CPAS (NCACPA) and the American Institute of CPAS (AICPA).

NCACPA – ADMINISTRATIVE RULES – SEC 08N

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Section 100 – Scope and Applicability

Section 200 – Rules Applicable to all CPA’s

Section 300 – Rules Applicable to all CPA’s that use the CPA Title in Offering or Rendering Products or Services to Clients

Section 400 – Rules Applicable to CPA’s Performing Attest Services

Source: NCACPA Website

NCACPA – CONDUCT & ETHICS

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Subchapter 08N – Professional Ethics and Conduct■21 NCAC 08N .0201 – Integrity■21 NCAC 08N .0205 – Confidentiality■21 NCAC 08N .0212 – Competence■21 NCAC 08N .0303 – Objectivity and Conflicts of Interest

Section .0215 – International Financial Accounting Standards (IFRS & IAS)

Section .0400 – Rules Applicable to CPAs Performing Attest Services

http://nccpaboard.gov/welcome/subchapter-08n-professional-ethics-and-conduct/

NCACPA – CONDUCT & ETHICS ENFORCEMENT

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The Enforcement (Professional Standards) section of the Board is responsible for all matters pertaining to the professional ethics and conduct of CPAs. The Professional Standards staff works closely with the Board’s Executive Staff and the Board’s Staff Attorney to enforce the Rules of Professional Ethics and Conduct adopted by the Board pursuant to NCGS 93-12(9).

Contacting the Professional Standards Staff

Frank Trainor, Staff Attorney (919) 715-9185

Mary Beth Britt, Specialist (919) 715-2455

Jean Marie Small, Specialist (919) 733-1424

Kayla White, Assistant (919) 715-8412

Mailing AddressProfessional StandardsNC State Board of CPA ExaminersPO Box 12827Raleigh, NC 27605-2827

IMA CODE OF ETHICS

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CompetenceConfidentialityIntegrityCredibilityIMA Ethics Helpline Number: 800-245-1383

RESOLUTION OF ETHICAL CONFLICT

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Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior's knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.

Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action.

Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Source: IMA Website