WorldCom was the United States’ second largest telecommunications company. It grew largely by acquiring other telecommunications companies. At the beginning of 1999, the CEO Bernie Embers, CFO Scott Sullivan and Controller David Myers, used fraudulent accounting method to mask its declining earnings as the market was facing difficulties. They showed false financial statements, inflating growth and profitability to increase WorldCom stock prices. The fraud was committed by overstating revenues by at least $ 958 million and understating line costs by over $ 7 billion. WorldCom’s longstanding auditor, Arthur Andersen, failed to recognize the fraud.
This paper discusses, firstly, whether Andersen’sindependence was violated and if they performed the audit with professional skepticism and due care. Following the appropriateness of their audit procedures is discussed and lastly, recommendations towards controls that can address the risk of management override are presented.
2a. What is auditor independence and what is its significance to the audit profession?
Auditor’s independence is defined in two ways: independence in fact and independence in appearance. Independence in fact “allows auditors to form an opinion on the entity’s financial statement without being affected by influences that might compromise that opinion”. Independence in appearance “relates to others perceptions of auditor’s independence” (Louwers, Ramsay, Sinason, Strawser and Thibodeau, 2011, p.43).
A critical element of the quality of an audit is the auditor’s independence. It is fundamental in lending credibility to an auditor’s report, without it, creditors will have little confidence in them. To be credible, an auditor’s opinion must be based on an objective assessment of whether the financial statements are presented fairly in conformity with generally accepted accounting principles (Wootton, Tonge, & Wolk, 1994). According to Gramling, Jenkins and Taylor (2010) ‘the...