World Com Case

WorldCom inner(a) analyse lessons to be learnt On June 9 2003, the U. S. Bankruptcy hook of New York issued a report on the WorldCom accounting fraud that expands on the courts earlier findings of mismanagement, lack of corporate governance, and concern regarding the integrity of the companys accounting and fiscal describe functions. Supervised by former U. S. Attorney General Richard Thornburgh, the submit was commissioned by the court to investigate allegations including fraud, mismanagement, and irregularities within the company.One section of the to a greater extent than 200-page report, Accounting and Related Internal Controls, details WorldComs helplessnesses in immanent and outdoor(a) visit butt againstes. It also expands on the failings within the intragroup scrutiniseed account reporting structure, where the tone at the top fostered an environment to allow the fraud to go undetected. The report cited a lack of independence in the companys inner scrutinize repor ting structure, which was non challenged by the visit committee or out-of-door meeters.Observations on inner inspect reporting and processes Internal take stocking mission and backcloth According to Thornburghs report, intragroup auditing was focused primarily on maximizing revenue, step-down costs, and improving efficiencies. The group performed audits and projects that would be seen as adding value to the company, rather than monitor the adequacy of internal controls to reduce risk. It did not, for the most part, trace transactions to the oecumenic ledger or verify journal entries that supported financial accruals.Internal controls with an impress on accounting policies were not systematically evaluated or monitored by internal auditing, and findings were not communicated with the external auditors. Thornburghs report noted that this was a serious weakness in the internal control evaluation process that was not questioned by the audit committee or external auditors. H e indicated that internal auditings condense focus may have contributed, in part, to the companys chastening to detect almost of the accounting improprieties.Managements influence over The internal audit plane sections mission and orbit was not internal auditingtruly independent. In spite of the dual reporting air travel to the audit committee, the internal audit group reported and answered to aged(a) management, including the political boss financial officer and chief executive officer, who were both implicated in the fraud. Thornburgh indicated that the viability of the internal audit department was dependent on the whim of senior management.For years, internal audit leadership sought to gain company sufferance by focusing on value-added audits and projects rather than monitoring the sufficiency of internal controls. Management would assign special, non-audit projects using unscheduled resources, and the internal audit department did not meet its audit plan objectives, in part, because of the time and resources prone to these projects. Lack of budgetary resources seriously Internal audit resources were insufficient in comparison to impacted the internal audit function peer companies.The audit committee failed to follow through on discussions with internal auditing about the adequacy of provide. WorldComs internal audit department was half the size of internal audit departments in peer telecommunication companies, according to the 2002 Global Auditing Information meshing study, necessitateed by The Institute of Internal Auditors. The Thornburgh report concluded that internal auditings circumscribed resources were inappropriate from an internal control perspective, given the international breadth and circumstance of the companys operations and challenges.Lack of substantive interaction with After 1997, internal auditing had little interaction with the external auditors companys external auditors, other than at quarterly audit committee meetings where both gave presentations. The external auditors did not receive internal audit reports and did not rely on internal audit work in their audits. compensate though internal auditing identified internal control weaknesses in its last reports, there was no coordination with the external auditors to ensure that those weaknesses were not material, because the external auditor would report no material weaknesses in its own audits.No one substantiate whether or not the internal and external auditors were communicating about such issues and analysing the materiality of the weaknesses identified by internal auditing. Deficiencies were noted in the annual The risk estimate used during the internal audit planning internal audit planning process process did not involve vicenary factors to measure risk with respect to internal control weaknesses or preliminary audit findings. The level of risk was determined by assessing whether or not the audit would add value, i. . , enhance reven ue or detect authoritative cost savings. If an audit areas level of risk did not meet these criteria, the audit would be considered low risk and would not be performed. Deficiencies were noted in the Thornburgh was concerned by the influence of management internal audit process and on the conduct and scope of internal audits as well as the the completion of audit reportsfinal reports. From the inception of the internal audit department in or about 1993 until January 2002, nternal auditing did not have identical internal procedures relating to the conduct of audits, preparation or retention of reports and associated work papers, compilation and dissemination of managements chemical reaction to recommendations, conduct of follow-up audits, or steps to address repeated failure to take corrective action. Thornburgh found no explanation why uniform procedures were not developed antecedent to January 2002. In addition, he found unjustifiable influence by management in the preparatio n of final audit reports and recommendations.He felt that the language of many audit reports appeared to be negotiations between the internal auditors and management. In addition, managements responses were not always presented to the audit committee. The report did note that internal auditing appeared to have performed its responsibilities diligently, given its limited resources and management pressures. Most internal audit reports identified internal control weaknesses, and many highlighted weaknesses identified in prior audits that ere not corrected to the satisfaction of the internal audit department. Internal audit improvements The internal audit department made several changes to improve the internal audit function in the company since the 2002 financial restatement and the adoption of the Sarbanes-Oxley conduct of 2002. Internal audit management Increased staff by adding 1215 auditors who are licensed certified public accountants, and anticipates hiring approximately 10 addi tional auditors. Strengthened training by requiring each professional staff member to obtain 80 hours of continuing education annually. Added financial audits to the audit schedule, in addition to operational audits. Created an internal audit team to working class with the external auditors in connection with financial audits, communication, and planning. Strengthened the risk assessment methodology to include an evaluation of materiality, audit frequency, changes in internal controls, and concerns by management, the audit committee, and the external auditor.