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Consider potential frauds and perpetrators in your company, how the fraud could be investigated, regulatory issues, and any other fraud risk inquiries required. Once you have developed your fraud hypothesis, propose an investigation plan. 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.

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WORLDCOM COMPANY

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 WorldCom.

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 company.

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.   

PART TWO

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.

DOCUMENTS

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 creditor’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 detect fraud:

  • 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 perpetration

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.

References

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; 2002

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     

http://www.fraud-magazine.com/article.aspx?id=2147483732

 
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