Aggressive Accounting Policies Used In Financial Statement Accounting Essay

Hearers need to be independent to add credibleness to the fiscal study or other capable affair. APES 110 s.290.10 requires the hearer to place and measure menaces to independence and to react by using precautions that eliminate the identified menaces or cut down them to an acceptable degree. WorldCom will non hold collapsed if Arthur Andersen would be able to observe the fraud with proper reappraisal and scrutinizing techniques. However, Andersen had approved most of the WorldCom ‘s coverage without traveling through in-depth on unusual coverage, which the direction was seeking to conceal by non giving entree right. Andersen feedback that there were no important or unusual minutess or material minutess and direction had equal controls to forestall a material mistake in the fiscal statements. Last, Andersen responded that there were no accounting place take by WorldCom with which Andersen was non comfy without seting in excess attempt on substantial testing of information maintained in fiscal accounting statements.

Parties most responsible for the crisis

Auditor ‘s function in being the most responsible for the crisis

In order to extenuate the hazard in scrutinizing WorldCom, Arthur Anderson relied on WorldCom ‘s control systems without carry oning sufficient trials. They overlooked the certification and controls that were exploited by WorldCom ‘s finance forces, ensuing in a major defect in the auditing attack. Harmonizing to ASA500, hearers are required to obtain sufficient appropriate grounds to back up their audit sentiment. However, the WorldCom forces were non to the full co-operative with Arthur Andersen in the class of its audits.

They exerted unreasonable control over Andersen to entree the information ( S 310 Right of entree the records ) and alter paperss for Andersen, doing it hard to detect accounting abnormalities. In fact, Arthur Anderson should hold disclosed to WorldCom ‘s Audit Committee and overcome the job when it is confronting the right to entree the accounting records.

Management ‘s & A ; Directors ‘ function in being the most responsible for the crisis

In order to run into the net incomes projections, Ebbers directed the CFO Sullivan to help him in implementing the deceit of accounting entries to make the fiscal studies that meet the fiscal marks promised by Ebbers. This resulted in exaggeration of net income and lessening in cost. The CFO besides tried to detain the internal audit on capitalisation of line costs for fees paid to rent parts of other companies ‘ telephone web boulder clay Q3 of 2002.

Myers and Yates assisted Sullivan by giving instructions to Ron Lomenzo ( Senior Vice President of Financial Operations ) to set line cost to travel international consequences closer to budgeted borders. Though there were others in WorldCom who suspected in improper accounting, cipher raised the issue up to Human Resource Department or Internal Audit Committee.

Aggressive accounting policies used in fiscal statement

WorldCom ( under the way of Scott Sullivan ( CFO ) , David Myers ( Controller ) and Buford Yates ( Director of General Accounting ) ) used fly-by-night accounting methods which were non in conformity with GAAP ( Generally Accepted Accounting Principles ) to dissemble its worsening fiscal status by falsely professing fiscal growing and profitableness to increase the monetary value of WorldCom ‘s stock. There was a transportation of entire $ 3.852 billion from ‘line cost ‘ disbursals to plus histories.

Two keys countries on WorldCom ‘s improper accounting:

1 ) Decrease of reported line costs

WorldCom manipulated the procedure of seting accumulations by improperly let go ofing the accumulations without any seeable analysis on extra accumulations and kept the accumulations, to let go of them when necessary to better the reported consequence. Capitalization is besides one of manner that WorldCom had used to cut down reported line cost. They merely avoided acknowledging incurred standard operating disbursals and postponed them into the hereafter.

2 ) Hyperbole of reported grosss

WorldCom made usage of the non-recurring points to make a double-digit gross growing.

Beside the two keys countries, WorldCom had besides improperly reduced 3 classs of disbursals ( Selling, general and administrative cost, depreciation and income revenue enhancements ) . General accumulations from other histories were besides accumulated, so as they could be subsequently released to countervail disbursal and compose down plus histories.


Auditor ‘s Role in Fraud

The hearer has a responsibility to describe fraud, irrespective of materiality, to an appropriate degree of direction when leery aroused during the class of normal, careful assemblage of grounds. In WorldCom ‘s instance, Andersen had limited the opportunity to observe fraud on accounting abnormalities due to the defects in its audit attack. Therefore, Andersen missed many chances to detect the abuse of accumulations, capitalisation of line costs, and improper acknowledgment of grosss.


In order to run into the high growing outlook from Wall Street, WorldCom ‘s direction made an attempt to cut down the modesty by $ 2.8 billion. The money reduced was so moved into the gross of its fiscal statement. They manipulated the procedure of seting accumulations and capitalising the operating costs. All these had caused WorldCom to be able to accomplish a high gross growing when in fact it should be well lower.

Auditor ‘s carelessness and contributory carelessness

Auditor ‘s carelessness

A professional hearer has a responsibility to exert the sensible attention and accomplishment when executing their responsibilities as the hearer ‘s responsibility of attention to a client arises both in contract and in the civil wrong of carelessness. If the hearer breaches this responsibility of attention and has been negligent in carry oning the audit work or has committed fraud, the hearer will be apt for any loss suffered as a consequence of the hearer ‘s actions. In WorldCom ‘s instance, Arthur Andersen has failed to execute what a professional hearer expected to execute.

First of wholly, there were defects in Arthur Andersen ‘s audit attack and hence, Arthur Andersen failed to observe accounting abnormalities and frauds. Arthur Andersen applied the audit attack that concentrated more on identifying hazards and measuring whether equal controls is in topographic point in the company to extenuate those hazards, instead than stressing the traditional substantial testing of information maintained in accounting records and fiscal statements. If there is failure in placing a important hazard, or trusting on company control without adequately finding by Arthur Andersen, there will be deficient proving to do sensing of fraud which is the effects of this audit attack. Besides the effect of the audit attack, it seems that equal proving were non performed by Arthur Andersen to warrant trust on WorldCom ‘s controls as there were journal entries and accrual reversals without proper support.

Second, Arthur Andersen failed to unwrap to WorldCom ‘s Audit Committee that they were non having full cooperation from WorldCom forces on critical facets of the work by commanding tightly over information that Andersen needed and supplying modified paperss with the evident intent of hiding from Andersen points that might hold raised inquiries.

Last, Arthur Andersen did non invent sufficient scrutinizing process to observe the possibility of fraud as it trusted and relied on senior direction of WorldCom. Furthermore, Arthur Andersen assumed that there was no cause for heightened examination for the absence of discrepancies in the fiscal statement and agendas in WorldCom ‘s concern environment without verifying with relevant people.

Conducive carelessness by WorldCom

Conducive carelessness is a failure by the complainant to run into the criterion of attention required for Ti ain protection where this is a contributing cause, together with the suspect ‘s mistake, in conveying about loss.

WorldCom forces were non concerted in supplying the information that Andersen needed. They exerted inordinate control over Andersen ‘s entree to information, every bit good as the entree to the computerized General Ledger, that caused the trouble for Andersen to execute its responsibilities.

Furthermore, important paperss were altered by certain members of WorldCom ‘s direction before supplying them to Andersen in order to halter Andersen ‘s ability to place jobs at the Company.

Traveling concern

Harmonizing to ASA 570.2, traveling concern premise is defined as the entity is viewed as go oning in concern for the foreseeable hereafter without any purpose or necessity to neutralize or otherwise cease its operations. ASA 570.10 requires that hearer must see the rightness of the traveling concern premise that underlies the fiscal study when planning and executing audit processs and measuring the consequences. Arthur Anderson failed to measure the “ traveling concern ” of WorldCom at the planning phase and overlook the traveling concern premise as WorldCom is the major client and they had fright of losing future relation and audit fees. And therefore, Arthur Andersen rendered an indifferent sentiment on WorldCom ‘s fiscal statement.

In decision, we concluded that both WorldCom ‘s direction and Arthur Anderson were the cause of WorldCom ‘s fraud.


Hi there, would you like to get such a paper? How about receiving a customized one? Check it out