Significant Business Acquisitions Case 3.3 WorldCom: Significant Business Acquisitions Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
WorldCom Case Relevant Technical Knowledge PCAOB AS #12 – Paragraph #7 “The auditor should obtain an understanding of the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement.”
WorldCom Case Relevant Technical Knowledge PCAOB AS #13 – Paragraph #6 The auditor should determine whether it is necessary to “make pervasive changes to the nature, timing, or extent of audit procedures to adequately address the assessed risks of material misstatement. Examples of such pervasive changes include modifying the audit strategy to: a) Increase the substantive testing of the valuation of numerous significant accounts at year end because of significantly deteriorating market conditions, and b) Obtain more persuasive audit evidence from substantive procedures due to the identification of pervasive weaknesses in the company's control environment.”
WorldCom Case Relevant Technical Knowledge PCAOB AS #5 – Paragraph #33 the auditor should follow Appendix B to determine which locations need to be visited. PCAOB AS #5 – Paragraph #B10 Must assess the risk of material misstatement related to each location or business unit and then increase or decrease audit work depending on risk.
WorldCom Case Relevant Technical Knowledge PCAOB AS #12 – Paragraph #65 “fraud risk factors are events or conditions that indicate (1) an incentive or pressure to perpetrate fraud, (2) an opportunity to carry out the fraud, for example, the absence of controls, ineffective controls, or the ability of management to override controls—that provide an opportunity for a fraud to be perpetrated, or (3) an attitude or rationalization that justifies the fraudulent action”
Psychology Literature - How to Best Acquire Knowledge Feature Repeated Case Experiences with Feedback; and Teach Technical Concepts within Real-Life Contexts Consider the following additional cases: Waste Management: Understanding the Client’s Business and Industry Sunbeam: Incentives and Pressure to Commit Fraud Qwest: Understanding the Client’s Business and Industry
Epilogue - WorldCom CEO Bernard Ebbers sentenced to 25 years in prison CFO Scott Sullivan pardoned from paying $13 million settlement due to having no significant assets remaining after selling $11 million mansion and surrendering his IRA
Epilogue - WorldCom SEC set up a $150 million fund to compensate investor losses WorldCom emerged from bankruptcy as MCI, which was later bought by Verizon Communications