The Internal Controls

WorldCom and the Sarbanes-Oxley Act

WorldCom accounting matters have majorly influenced the last stage of legislation of the Sarbanes-Oxley Act (Green, 2004). The Enron scandal resulted in the call for the Sarbanes-Oxley Act. However, it was WorldCom that rebuffed the Senate into taking actions and passing the Act (Hermanson, Edwards, & Maher, 1998). This huge scandal at WorldCom was 4 to 5 times bigger than that of Enron, and in 2022 the reply was passing the Sarbanes-Oxley Act into law (Zhang, 2007). Ineffective internal regulations were behind the enormous bankruptcy at WorldCom which turned into huge losses for employees, stakeholders and other companies.

Weak Internal Controls

In accordance with COSO, internal controls have the aim to provide assurance on the efficiency of operations, the reliability of financial reporting, and compliance with laws. WorldCom control systems and oversight were weak, and this is how the management was able to show profitability whereas the company was making losses. Between 1999 and 2002, the company has overstated profits by close to $11 billion. The overstatement in profits was carried out through the capitalization of operating expenses that is, recording as assets instead of recognizing them as expenses. The company also engaged in the manipulation of its reserves to offset its expenses (Green, 2004) and this is an indicator that its financial reporting was fraudulent.

Weak Control Environment

The control environment within WorldCom was weak because the top management and the board of directors were not concerned about the financial statement misstatements. There were no checks or controls that assessed whether operations are occurring properly and the board failed by not putting a restraint on the behavior of the CEO, Bernard Ebbers. For instance, he got access to loans over $400 million, and this is an indicator that the environment simply encouraged fraud.

Ineffective Policies and Procedures

In conclusion, the internal controls at WorldCom were ineffective, and this resulted in the massive fraud. The control environment was weak because the board was not concerned with overseeing the actions of the management and the risk assessment process did not identify the red flags of misstatements in the financial statements. Also, the policies and procedures could not stop the management from acting irresponsibly, and no monitoring and evaluation of its activities was conducted.

References

Green, S. (2004). A Look at the Causes, Impact and Future of the Sarbanes-Oxley Act. Journal of International Business and law. 3 (1). Retrieved from http://scholarlycommons.law.hofstra.edu/jibl/vol3/iss1/2

Zhang, I. X. (2007). Economic consequences of the Sarbanes–Oxley Act of 2002. Journal of Accounting and Economics, 44(1), 74-115

Hermanson, H. R., D. S., & Edwards, J. D., Maher, M.W. (1998). Accounting Principles: A Business Perspective. Chicago: Irwin