VI.

Internal Control

The WorldCom controversy was caused by the inappropriate utilization of

accounting principles. In 2001, management miscalculate operating expenses and
overstated capital expenses, allowing the company to proclaim financial gain and
convey a reasonable financial statement position conversely to the company's actual
position. The company's management created an environment in which fraud could be
easily perpetrated. As a result, a few senior members silenced the internal audit
function, which was designed to supervise and hold employees accountable, in an
attempt to prevent the publicity of relevant information. This was accomplished by
maintaining the internal audit department unmanaged, underskilled, and busy with
other tasks while also maintaining relevant data from them. They also impeded internal
auditors' attempts to locate information once they become secretive and doubtful of the
accounting processes used. The management controlled the number of individuals who
could have access to the monthly revenue in order to prevent financial reporting fraud
from being encountered. Furthermore, WorldCom had a tendency to acknowledge
earnings from long-term contracts that had not yet been received even before the
precise service was provided and this was an additional violation of US GAAP.
Cynthia Cooper, Vice President of Internal Audit, actively supported the effort to
investigate the financial records. She eventually assisted in determining the truth by
collecting information afterward to minimize these risks and monitoring by her
restrictive supervisors. Cynthia interrogated external auditors Arthur Anderson
concerning some of the processes, and they initially were unable to respond, eventually
asserting that the approaches had been confirmed and that she should leave it at that.
Internal controls intended to aid constant monitoring were held in check by the
directors, rendering them ineffective because relevant data could be altered,
interrupted, or revised.
In collaboration with Arthur Andersen as their Auditor of WorldCom, they should
have identified the discrepancies in the company's accounting records as there is also
the involvement of Arthur Andersen with the issue of Enron. WorldCom shifted to
another auditing firm which is the Klynveld Peat Marwick Goerdeler (KPMG). As a result
of failing to perform their responsibilities, Arthur Andersen lost the trust of the people
and was accused of being involved in the WorldCom and Enron frauds.
VII. Cause of closure of WorldCom

The apparent lack of accountability from some of the company's top management
was one of the reasons for the downfall of WorldCom. In his defense, Ebbers claimed
that he was a non-interfering director who wasn't associated with the detailed
information of the company and thus was not engaged in fraud; however, he had
executive power and obligated anyone else to cooperate. Since there were several
consequences as a result of his wrongdoings, there wasn't any direct accountability
towards him to correspond with his and the company's goals of providing accurate and
truthful account information. The evidence seems to indicate that the accounting fraud
was encountered as early as June 2001, when several former employees testified about
instances of bad debt concealment, underestimating costs, and collective bargaining
agreements backdating.
A shareholder lawsuit had been filed against WorldCom in June 2001, but it was
dismissed due to a lack of evidence. The preceding claims were found to be valid only
when the Securities and Exchange Commission (SEC) actually released its own
investigation in March 2002. As a result, the SEC filed a civil fraud case against
WorldCom, and several executives were charged federally. The internal auditors and
the majority of the board not only did not oppose Ebbers and his CFO, Scott
Sullivan but even provided external financing to Ebbers as well as others. As a result,
Ebbers was permitted to pursue other interests, including the establishment and
operation of other businesses using WorldCom loans. After all, the latter has generated
a few disagreements regarding involvement and independence difficulties, as well as
enabling the CEO's consideration to be diverted from his primary duties and
responsibilities.
 After many years that the fraud was discovered, Bernard Ebbers, who had already
decided to step down as CEO of the company, was found guilty and was sentenced to
25 years in prison for fraud, conspiracy, and record-keeping fraudulent information. In
April 2004, WorldCom appeared from Chapter 11 as MCI, with Michael Capellas as CEO
and Robert Blakely as CFO. They were then tasked with negotiating the company's
remaining balance of $35 billion, with the help of 200 KPMG people employed and an
additional 600 Deloitte & Touch employees. MCI eventually ceased to operate as an
independent company after it was decided to purchase by Verizon Communications for
$8.4 billion in February 2005.