Two distinct types of auditors, the internal auditor and the external auditor, serve many organizations. Fraud at WorldCom was uncovered by an exceptional internal audit team. On the other hand, Enron’s fraud was enabled by the external auditors whose responsibility lies in detecting errors and fraud, illegal acts, and an organization’s ability to continue as a going concern.

Using the Library, locate one article involving WorldCom or Enron. Make sure that you select an article that is different from your peers. Discuss one of the following questions:

1. What role did internal auditors and external auditors play in uncovering the fraud? Share an example from your article.
2. Provide an example of when the internal and external auditors worked together. Share your thoughts on the relationship.
3. Select one item from your article related to the role of internal and external auditors that you found interesting. Explain.

Just do response ach posted # 1to 3 down below

Posted 1

In my opinion, the internal and external auditor kind of swapped their roles from an independenc Bruno Akinaga posted Oct 29, 2020 9:40 PM

In my opinion, the internal and external auditor kind of swapped their roles from an independence standpoint. Even though both teams should act with skepticism, it was expected the external auditor to be ‘more’ independent from WorldCom’s interests and perform the audit procedures without any bias. The Internal Audit function at WorldCom mainly justified its existence by concentrating the audits where the economic benefits could be measured. Therefore, they avoided working on financial audits that might overlap with the external auditor role (Zekany, Braun & Warder, 2004).

But what happened was that the internal audit team, led by Cynthia Cooper, was the one that insisted on investigating the “suspicious accounting entries in the company records” related to the capital expenditures, even after the CFO asked her to stay away from this topic and to delay the audit for a few months. They were extremely skeptical and ethical when conducting the audit procedures and reporting all the issues to the Audit Committee.

On the other hand, Arthur Andersen, which had been WorldCom’s independent auditor from 1990 to 2002 and had considered the company to be its ‘flagship’ and most ‘highly coveted’ client(Pandey and Verma, 2004), did not have the same independent conduct as the internal audit team had. Because of these 12 years relationship with the company, its status and the high fees paid to Arthur Andersen, the external audit team just ignored the fact that the Company was initially identified as a ‘high risk’ client and ended up reporting a ‘clean’ audit report to the Audit Committee.

Posted 2

Back in 2005, while pursuing my bachelors degree in accounting, I did my final auditing project on Worldcom and the gross unethical misconduct of the CEO. I did not understand the magnitude of his actions back then having lived through it, but now I fully understand it was the worst accounting fraud in US history. After reading my article I found it interesting that Mr. Sullivan, the CFO of Worldcom at the time, asked Ms. Cooper to keep away from such inquiries. Referring to her asking for explanations of transfers of $400 million of accruals and bad debt expense from the Wireless business unit being used to pump up company earnings. I originally understood Mr. Sullivan to take the position of not being aware of the understatements of expenses and overstatement of company earnings. I also found it interesting that Mr. Ebbers was not happy to have Ms. Cooper conduct internal controls. Back in 2004/2005 I always wondered how a CFO did not know what was going on “financially” with his company. I also find it laughable that he asked her to delay her capital expenditure audit until the third quarter of 2002. I see now that Mr. Sullivan was a willing participant in the perpetration and the attempted cover up of the fraud that was committed by Worldcom, which caused billion of dollars in loses to stakeholders.

Posted 3

Mrs. Cynthia Cooper was the vice president of internal audit at WorldCom, now known as MCI.

Together with her staff of internal auditors, she spot checked the capital expenditures records and she realized that for two years, fees that the company was paying to be able to connect into other telephone networks should have been expensed as operating costs, but the $2 billion were recorded as capital expenditures instead and amortized over a certain period of time.

The team of the internal auditors followed up on an email to a newspaper from a former WorldCom employee fired for raising question on capital expenditures. Such significant capital expenditures were not budgeted which further sounded the alarm.

The internal auditors also uncovered computer costs not supported by vendor’s invoices capitalized for an amount of $500 million (Boynton & Johnson, 2006).

I found courageous and ethical that she continued investigating the matter even though chief financial officer Scott Sullivan had asked her to delay the audit investigation and during a discussion on what she considered an under-accrued bad debt, the CFO engaged in a very rageful opposition (Boynton & Johnson, 2006). She did not slow down the audit nor she resigned, but she persisted with the audit demonstrating her integrity and independence.

As a consequence of these transactions, the company showed earning before tax for an amount of 2.4 billion just in 2001 instead of a loss of $662 million (Young & Harris, 2020).

Arthur Andersen was WorldCom’s external auditor during the time the fraud was committed and, at the time the fraud was uncovered, it had been just convicted of obstruction of justice for having destroyed Enron records. (Jon & Delroy, 2002).

The issue was first noticed during the change in senior management and of the external auditor (Daniel et al, 2002).

KPMG was the new external auditor hired and, together with the internal auditors it produced evidence of fraud (non-application of GAAP). The audit committee and the BOD the next day made public a restatement of 3.8 billion of company earnings (Boynton & Johnson, 2006).

The collaboration of the internal audit team with the new external auditor team was instrumental in bringing KPMG up to speed on accounting issues in a brief time period. Early in the audit Mrs. Cooper informed Mr. Malone (KPMG) of the CFO’s resistance to her 2002 Capex Audit (Beresford et al., 2003). This close communication and planning among auditors has ensured that the external audit resources were directed to the high risk area.

I found interesting the role of the external auditors. Arthur Andersen stated that it was not aware of capitalization of the costs because management altered or concealed documents from them. However, critics blame Andersen’s failure to identify the fraud on their audit approach which was more concerned on identifying risks and the effectiveness of the internal controls in mitigate those risks rather than focusing more on testing the accounting records and financial statements. Andersen relied heavily on the info provided by senior management however in many occasions it was restricted the right to access supporting work documents and access to employees, understood the internal audit limitations and nevertheless did not report it to the audit committee (Beresford et al., 2003).