By Pete Miller, CPA|CFE, and Mike Nurse, CPA|CFE|CGMA
Has cheating and fraud always been a part of human history? According to Andrew Beattie in his article “The Pioneers of Financial Fraud,” evidence of fraud stretches all the way back to 300 B.C. when a Greek merchant named Hegestratos orchestrated a loan fraud that ultimately ended in his demise. In modern times, stories of financial fraud and corporate scandals have become ubiquitous in daily news feeds, providing a critical call to action for anyone involved in business.
For National Fraud Awareness week, we are highlighting five of the largest accounting scandals in U.S. history. Each day, we will bring you a short description of a prolific fraud in the hopes that raised awareness will ultimately help us to understand and mitigate fraud risk. In doing so, we can help to ensure ethical and sound business practices, which will benefit society as a whole.
“I know what I don’t know. To this day, I don’t know technology, and I don’t know finance or accounting.” – WorldCom CEO Bernie Ebbers
WorldCom has roots stretching back to 1983, when the company was originally founded as LDDS (Long-Distance Discount Service) Communications. In 1995, as the result of a $2.5 billion acquisition of Williams Telecommunications Group Inc., the company rebranded and the name WorldCom emerged onto the market. WorldCom quickly became the nation’s second-largest long-distance company (after AT&T) and the largest handler of Internet data.
Blamed largely on a corporate culture that stressed aggressive growth through acquisition, WorldCom was caught inflating assets by as much as $11 billion, a fraud that eventually led to 30,000 lost jobs and $180 billion in losses for investors. During the investigation, it was found that WorldCom had been capitalizing costs that should have been expensed, and inflating revenues using fake accounting entries. As a result, the company’s CEO, Bernie Ebbers, was fired, the controller resigned, and the company filed for bankruptcy. Additionally, Ebbers was sentenced to 25 years in prison for fraud, conspiracy and filing false documents with regulators.
Within weeks of the scandal (and as a result of a number of other high-profile accounting scandals), Congress passed the Sarbanes Oxley Act, introducing the most sweeping set of new business regulations since the 1930’s.
Takeaway: You could point to culture as a catalyst for the fraud in this case, but this also speaks to the lack of risk awareness at the enterprise level (by the way, culture and risk awareness are closely related concepts). An enterprise risk assessment process likely would have surfaced the risk of “what if we don’t meet earnings expectations?” The risk that someone could cook the books to make sure those expectations were met, would have likely been discussed in that session along with techniques to prevent that from happening.
Co-author Mike Nurse is a manager in the Accounting and Consulting Group at Clark Nuber PS. Reach him at email@example.com.
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