Consider potential frauds and perpetrators of fraud at WorldCom, how the fraud could
be investigated, the regulatory issues, and any other fraud risk inquiries that are
required. Once you have developed your fraud hypothesis, propose an investigation
plan for WorldCom. Describe the process of how you would investigate the potential
fraud and all of the factors that must be considered for carrying out the investigation of
The hypothesis: The top management team at WorldCom is committing fraud.
Fraud can be investigated by:
Determining the control environment of WorldCom
Conducting the risk assessment of WorldCom
Examining the past and the present financial performance of WorldCom
Contacting the creditors of the firm relating to their status with
Regulatory issues to be considered are:
The accounting policies that are used by the firm to record transactions
The accounting procedures and the assumptions of WorldCom
The going concern state of WorldCom
Investigation plan and the factors that will be considered are:
Categorize all the issues
Confirm the validity of all the allegations
Determine the severity of the fraud allegations
Conduct the investigation and find the facts
List the type of the information that should be maintained confidential
Determine the information that needs to be documented
Retain all the relevant documents
This could be summarized into: Evidence collection, interviews and the analysis of the
facts that have been collected.
III. Hypothesis Development
System fraud: This is the type of fraud that the management or the perpetrator will take
advantage of the weak controls of the company. For example at WorldCom, the control
environment was very weak; this made it much easier for the perpetrators to defraud the
Friendship fraud: The top management of WorldCom colluded to defraud the firm
by$11 billion. This was largely contributed by the friendship factor.
Overpayment fraud: The top level management were able to award themselves
bonuses that increased the costs of operations in the firm.
The top level management or the CEO has the most chances of perpetrating fraud. This
is because of the nature of the policies that are established in the firm. The Chief
Executive Officer has all the powers to make the decisions that will affect the
organization. The CEO also understands all the weaknesses at WorldCom and can
easily use them for his or her gain
The management and accountants have the highest opportunity to perpetrate the fraud.
This is because they are the ones who are relied upon by the company to prepare
reports, write checks and maintain updated accounts of WorldCom. The accountants
could easily manage to escape detection because they understand the control
weaknesses that had existed at WorldCom.
IV. Investigation Planning
Understanding the entity: Before audit is conducted, the knowledge about WorldCom
must be carried out. The auditors must determine how the entity operates and gain
insights into the company. These include the internal controls, regulatory of the entity,
the financial performances and the external factors.
Risk assessment: After gaining understanding of the company, the next thing is to
determine the level of risks that could be available with WorldCom. This will include
determining the audit risk at WorldCom, the inherent risk and the detection risk.
Review the plan: The final stage is to review the plan so as to ensure that all the critical
elements are captured.
The documents needed includes: The financial statements for the past 3 years to
determine any unusual changes, the management documents such as the board
meetings, the payroll, the creditorâ€™s accounts and the revenue accounts.
The persons that I will need to speak to about the fraud are the employees and the
management. The employees could act as the whistle blowers in the organization, and
therefore they can offer helpful information. The management also is expected to
provide consistent information. In an event that the different managers are providing
different information, then these will lead to fraud detection.
The SAS No. 99 requires that the auditors should perform the following in order to
Gather sufficient information that could lead to identification of the material
misstatement by WorldCom
The auditor should determine the risks that will lead to material misstatement
To evaluate the control programs in order to determine the probability of the fraud
The creditors need to be contacted in order to determine whether the amounts that are
indicated in the books are true. The positive and the negative circularization could be
used in order to determine the truth of the matter.
Others you can include are those related to the transactions. This will lead to possible
grounds of the frauds in the organization. The related party contracts are one of the
leading areas of frauds that the auditor needs to capitalize on in order to detect any
form of fraud.
Angiulli, F.; Pizzuti, C. (2002). Fast Outlier Detection in High Dimensional Spaces. Principles of
Data Mining and Knowledge Discovery. Lecture Notes in Computer Science. p. 15
Rezaee, Zabihollah. Financial Statement Fraud: Prevention and Detection. New York: Wiley;
Sawyer’s Guide for Internal Auditors 1. The Institute of Internal Auditors Research Foundation.
2012. p. 36
Smith, M. R.; Martinez, T. (2011). "Improving classification accuracy by identifying and
removing instances that should be misclassified"
The Fraud Act 2006 (Commencement) Order 2006 – SI 2006 No. 3200 (C.112
SAS No. 99