Financial statement fraud case using the ACFE Global Survey of Fraud Reports

Full Answer Section

    Case Overview WorldCom was a major telecommunications company that was once the second-largest provider of long-distance telephone service in the United States. In 2002, it was revealed that the company had engaged in a massive accounting fraud scheme that had inflated its assets by over $100 billion. This fraud led to the company's bankruptcy and the imprisonment of its CEO, Bernard Ebbers. Fraudulent Activities The WorldCom fraud involved a number of different fraudulent activities, including:

• Capitalizing expenses: WorldCom improperly capitalized expenses, such as advertising and promotion costs, as assets. This made the company's balance sheet appear stronger than it actually was.
• Creating fake transactions: WorldCom created fake transactions to inflate its revenue. These transactions were often with offshore entities that were controlled by WorldCom executives.
• Using off-balance-sheet entities: WorldCom used off-balance-sheet entities to hide its debt and inflate its earnings. These entities were not included in the company's financial statements, which made it appear more profitable than it actually was.

Responsibilities for Detection and Prevention The responsibility for detecting and preventing financial statement fraud falls on a number of different parties, including management, internal auditors, and external auditors.

• Management: Management has the primary responsibility for preventing and detecting financial statement fraud. This includes establishing strong internal controls, maintaining ethical leadership, and fostering a culture of integrity.
• Internal auditors: Internal auditors are responsible for assessing the effectiveness of internal controls and identifying potential risks of fraud. They should conduct regular audits of the company's financial statements and investigate any suspected fraud.
• External auditors: External auditors are responsible for expressing an opinion on the fairness of a company's financial statements. They should perform audit procedures that are designed to detect material misstatements in the financial statements.

Ideas from the Fraud Examiners Manual The Fraud Examiners Manual provides a number of ideas for detecting and preventing financial statement fraud. These ideas include:

• Identifying red flags: There are a number of red flags that can indicate a potential risk of financial statement fraud. These red flags include unusual accounting transactions, excessive turnover in senior management, and a lack of transparency in the company's financial reporting.
• Using data analytics: Data analytics can be used to identify anomalies in the company's financial data that may be indicative of fraud.
• Conducting fraud risk assessments: Fraud risk assessments can help to identify the company's specific risks of fraud and develop appropriate mitigation strategies.

Conclusion Financial statement fraud is a serious crime that can have devastating consequences. It is important that all parties involved in the financial reporting process take steps to detect and prevent this type of fraud. By following the guidance provided in the Fraud Examiners Manual and implementing effective internal controls, companies can help to protect themselves from the risks of financial statement fraud.  

Sample Answer

 

Sure, here is a research paper on a financial statement fraud case, discussing the responsibility for detection and prevention of this fraud on the part of management, internal auditors, and external auditors, and including ideas found in the Fraud Examiners Manual:

Financial Statement Fraud Case: WorldCom

Introduction

Financial statement fraud occurs when a company intentionally misrepresents its financial performance to deceive investors, creditors, or other stakeholders. This type of fraud can have serious consequences, including bankruptcy, job losses, and economic instability. One of the most notorious examples of financial statement fraud is the case of WorldCom, which was discovered in 2002.