WorldCom's fraud was simple and blatant but hard to spot

San Francisco Chronicle ^ | June 30, 2002 | Kathleen Pender

[sarcasm]

Financial experts say there were no red flags in WorldCom's financial statements that would have tipped off investors to its massive fraud.

After it acquired MCI, the company maintained dual order-booking and billing systems, which employees used to book the same sale twice. WorldCom fired three top salespeople who allegedly generated $3 million in unearned commissions.

[mewzilla]

Huh? Simple and blatant, but hard to spot? Aren't those two clauses mutually exclusive?

[PogySailor]

"The really good con men don't act and look like con men," says Harry Hu, a law professor at the University of Texas.

Right. They look and act like smooth talking Arkansas govenor

[Chad Fairbanks]

Not necessarily... I mean, something can be simple, and blatent, but if nobody is really looking or paying attention well, then it can be hard-to-spot...

[mewzilla]

But people were paying attention. And it seems to me that I saw in the news a report that some magazine had done a story on World Com's ethical lapses back in April. Or maybe it was some analyst who had come out and said don't buy. Either way, someone was looking. This story sounds like a way to get the subject off the front page now that the Dems have been dragged into the discussion. In other words, if Dems are involved then it's now a non-story and no-one's to blame.

[AntiScumbag]

"That may have triggered a question," Harden says, "but it would have been very difficult to deduct the alleged fraud."

yup, i deduce that it would be very difficult, probably impossible, for someone who so clumsily expresses his inability to infer

since worldcom's problem is that they didn't deduct the alleged fraud amount, i wonder if he ever worked for arthur andersen...

[JonH]

It is easy to agree that investors would not see the WorldCom accounting fraud. The bogus entries were hidden in the mountain of transactions in the cost and capital expenditure lines.

More important, the audit firm had to totally look the other way to miss this problem because this particular fraud required throusands of transactions and many employees to make the accounting entries.

Any reasonable review of the general ledger for capital accounts would have exposed the fraud.

[chance33_98]

Great post. This is similar in many ways to what happened to the company I worked for. But what made it so obvious to most of use was the blatant misuse of money within the company and no control procedures. They took investor money, and spent it like crazy but still showed it on the books. Even though some was capital exp. it still boiled down to one thing - not enough cash. Maybe on paper for awhile there was, but it just was not there. The monthly outflow was greater then the income, something which could be shored up with investor money, but the money was blown on huge bonuses, new buildings, etc. I know they did not need them. After the big round of layoffs we were down to less then 50% of the people, less office spaces around the US, etc - and we were still able to do the job as well as before. They wanted to grow, grow, grow. And they did for awhile. But shell games with money eventually come back to haunt you (unless you keep getting more money from investors).

Sad thing is, loads of investment companies gave us a buy to strong buy, and Janus even ran commercials on our stock - and here is why, Janus held a HUGE amount of our stock, and as it slipped, so did their money. So they lied in commercials and got more people to throw away their money.

[WL-law]

I always thought MCI was one of the sleaziest companies around, based on personal interactions with them. I guess sleaze at the customer interface level may be a good indication that it runs all the way to the top.

[doosee]

More important, the audit firm had to totally look the other way to miss this problem because this particular fraud required throusands of transactions and many employees to make the accounting entries. Any reasonable review of the general ledger for capital accounts would have exposed the fraud.

From my experience, the outside auditors spend 90% of their time fishing around the company they are supposed to audit looking for a dream job. They are highly motivated to tell mgt. what mgt. wants to hear. This is the conflict of interest that needs to be closed down. But, the market knew WCOM was failing, that is why it went from $80/share to .80 prior to the disclosure of the fraud.

[JonH]

I know that what you are saying is true. Regardless, in working with serious audit firms (Price Waterhouse and Ernst), they didn't miss much and certainly not transactions like this.

[TheCPA]

This aritcle is excellent. The auditors should have looked at the debits to the fixed asset accounts and asked what they were and where the assets were located. However, a cursory review of the overall financial statements by an investor would not result in knowledge of the error. I do not understand how an auditor could miss something like this.