Lessons for Auditors and Regulators from the WorldCom Fraud Essay

Lessons for Auditors and Regulators from the WorldCom Fraud - Essay Example The fraud was undertaken by representing line costs as capital, rather than expenses and inflating revenue on the financial statements. However, a team of internal auditors later on came to discover the fraudulent representation of financial statements and notified the Company’s board of directors and audit committee, who acted swiftly although the company had already become bankrupt (Albrecht, Albrecht, Albrecht & Zimbelman, 2011, 457). Lessons from WorldCom Fraud Lessons learnt from WorldCom fraud presents a broad range of issues to put into consideration such as, the importance of fraud auditors to have knowledge and an understanding of corporate systems and processes. Lessons have it that routine internal audit processes may not expose fraud, since auditors focus on providing assurance with respect to effective controls, rather than detecting irregularities as `possibilities of fraud. Fraud auditors should actively seek to identify irregularities and anomalies as indicator s of fraudulent behaviors among financial executives and general corporate staff, and use the knowledge to undertake further in-depth analysis to root out fraud. Fraud detection in corporate organisations relies on the knowledge and understanding of auditing and detection by officials of the fraud background, fraud schemes, principles, and indicators (Singleton & Singleton, 2010, p.145). WorldCom internal auditors were well conversant with the organisation’s culture and choices of recording the financial statement, which helped them immediately to recognise the $2 billion operating cost recorded as a fixed asset. This came out as a red flag unlike the normal culture of the organisation, more so when an official referred to the expenditure as prepaid capacity. Auditors’ understanding of the normal organisations culture was able to detect the omission of lease line cost in the operating expense account as a fraud (Rezaee & Riley, 2010, p.212). However, new loopholes in f inancial statements often require auditors to improve and devise new ways of detecting fraud, since past indicators may not be applicable in future fraud cases. Corporate fraud has continuously advanced with the computerisation of operations, and thus requires fraud auditors to be proactive in improving their fraud detection schemes. Corporations need to put in place mechanisms for assessing fraud as an organisation’s risk, and approach the risks using relevant internal audit methodologies. Fraud auditors should also be seen with regard to the presence of indicators of fraud, and design relevant controls and prevention methods of fraud. However, proactive fraud seeking auditing activities may be costly for organisations, though not comparable to extent of loss in case of successful fraud. Cost involved may include knowledge expansion in the area of fraud detection and more so, the use of electronic-detection tools. Internal auditors have the mandate to understand an organisat ion’s corporate culture, conditions, and choices that may have been used by fraudsters in engaging in financial statement fraud. Such an understanding would go a long way in providing accurate indicators of fraud and possible fraud in future of the organization's inconsistency with fraud risk levels that organizations face (Rezaee & Riley, 2010, p.213).