Essay about Assignment: Internal Control and Fraud

Submitted By Tracy913
Words: 3042
Pages: 13

A whistle-blower is a member of an organization who unravels illegal, unethical or illegitimate misconduct under the control of their employers to other person or organizations that may be able to take an effective action on it. Given in this case, Cynthia Cooper, who worker as Vice President of internal audit for Worldcom, a leading telecommunications company built from over 70 acquisitions, unraveled the accounting manipulations where the key aspect is that corporate accounting team used creative accounting treatment by transferring the normal operating expenses to the balance sheet as an asset in order to misrepresent profit figure. Further investigation reveals that there is also inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts". This means Worldcom involves two types of accounting fraud resulting from fraudulent financial reporting and misappropriation of assets. This harms the financial statement users for their decision making especially the stockholders and creditors because assets are no longer available to their rightful owners. Before Worldcom filed for bankruptcy, previous bondholders ended up being paid 35.7 cents on the dollar, previous stockholders’ stock was cancelled making it totally worthless. And 5100 employees were dismissed.
During the time of gathering evidence to reveal the accounting fraud, Cynthia Cooper faced great pressure and resistance from her boss and took on significant risk of her career and personally suffer from following any devaluation of her investment in Worldcom stock. This is all because at that time there is no whistleblower hotline in practice and whistleblower took on great risk and may fear of retaliation for the rest of their life. To ensure the potential misconduct to be revealed before it causes severe consequences, an effective whistleblower hotline processed should be established. The main objective of the whistleblower hotline is to reduce employee misconduct and reduce organizational risk by identifying and resolving allegations of ethics and compliance violations-as quickly and as efficiently as possible. This is in line with the Sarbanes-Oxley Act of 2002 where the Section 301.4 states that each audit committee shall establish procedures for :(A) the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and (B) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.
The first and most important criteria for building an effective whistleblower hotline is to ensure the process is confidential and anonymous. For using a web-based system as a reporting method, company should be careful to ensure confidentiality. It is because under most e-mails systems, an employer has the ability to read the employees’ outgoing emails. It is the same with the audit committee. If audit committee wants to receive complaints through e-mails, it should develop a web-based system to ensure the sender cannot be identified. For example, the committee can use personal identification numbers by which the organization can communicate with anonymous whistleblowers to provide updates and ask follow up questions. Providing a complaint mailbox may be seen as the more anonymous way and employees can type the mail and without being identified. According to a report by Ernst&Young: 40% of employees said that they would be more likely to report a co-worker’s unethical or illegal conduct if they could remain anonymous.57% of employees surveyed chose a hotline as their preferred method for reporting fraud. The potential pitfall is the risk for being identified. For whistleblowing through telephone calls as the whistleblower’s voice can be easily identified if the listener is within the