World Com Case

WorldCom internal scrutinize lessons to be learnt On June 9 2003, the U. S. Bankruptcy Court of naked as a jaybird York issued a report on the WorldCom accounting fraud that expands on the courts earlier findings of mis watchfulness, lack of corporate goernance, and concern regarding the integrity of the clubs accounting and monetary reporting functions. manage by former U. S. Attorney General Richard Thornburgh, the study was commissioned by the court to investigate allegations including fraud, mismanagement, and irregularities within the company.One section of the more than 200-page report, Accounting and Related midland Controls, details WorldComs weaknesses in internal and outdoor(a) analyse processes. It also expands on the failings within the internal audit reporting structure, where the tone at the top fostered an surround to allow the fraud to go undetected. The report cited a lack of independence in the companys internal audit reporting structure, which was not chal lenged by the audit mission or external auditors.Observations on internal audit reporting and processes Internal auditing mission and scope According to Thornburghs report, internal auditing was focused primarily on increase revenue, reducing costs, and improving efficiencies. The chemical group performed audits and projects that would be seen as adding value to the company, rather than monitoring the adequacy of internal pull wiress to reduce risk. It did not, for the most part, trace transactions to the normal ledger or verify journal entries that supported financial accruals.Internal controls with an impact on accounting policies were not systematically evaluated or monitored by internal auditing, and findings were not communicated with the external auditors. Thornburghs report noted that this was a serious weakness in the internal control evaluation process that was not questioned by the audit military commission or external auditors. He indicated that internal auditings n arrow focus may have contributed, in part, to the companys failure to detect some of the accounting improprieties.Managements influence over The internal audit departments mission and scope was not internal auditingtruly independent. In spite of the dual reporting line to the audit commissioning, the internal audit group reported and answered to senior management, including the chief financial officer and chief executive officer, who were both implicated in the fraud. Thornburgh indicated that the viability of the internal audit department was dependent on the whim of senior management.For years, internal audit leadership sought to gain company acceptance by focusing on value-added audits and projects rather than monitoring the adequateness of internal controls. Management would assign special, non-audit projects using unscheduled resources, and the internal audit department did not meet its audit plan objectives, in part, because of the time and resources prone to these projects . Lack of budgetary resources seriously Internal audit resources were insufficient in comparison to impacted the internal audit function lucifer companies.The audit committee failed to follow through on discussions with internal auditing about the adequacy of staff. WorldComs internal audit department was half the size of internal audit departments in peer telecommunication companies, according to the 2002 Global Auditing Information Net practice study, conducted by The Institute of Internal Auditors. The Thornburgh report concluded that internal auditings limited resources were inappropriate from an internal control perspective, attached the international breadth and scope of the companys operations and challenges.Lack of substantive interaction with After 1997, internal auditing had little interaction with the external auditors companys external auditors, other than at quarterly audit committee meetings where both gave presentations. The external auditors did not receive interna l audit reports and did not rely on internal audit work in their audits. Even though internal auditing identified internal control weaknesses in its final reports, there was no coordination with the external auditors to ensure that those weaknesses were not material, because the external auditor would report no material weaknesses in its own audits.No one confirmed whether or not the internal and external auditors were communicating about such(prenominal) issues and analysing the materiality of the weaknesses identified by internal auditing. Deficiencies were noted in the annual The risk legal opinion used during the internal audit planning internal audit planning process process did not involve quantitative factors to measure risk with respect to internal control weaknesses or prior audit findings. The take of risk was determined by assessing whether or not the audit would add value, i. . , enhance revenue or detect significant cost savings. If an audit areas level of risk did no t meet these criteria, the audit would be considered low risk and would not be performed. Deficiencies were noted in the Thornburgh was concerned by the influence of management internal audit process and on the conduct and scope of internal audits as well as the the completion of audit reportsfinal reports. From the inception of the internal audit department in or about 1993 until January 2002, nternal auditing did not have akin internal procedures relating to the conduct of audits, preparation or retention of reports and associated work papers, compilation and spreading of managements response to recommendations, conduct of follow-up audits, or steps to address repeated failure to take corrective action. Thornburgh found no explanation why uniform procedures were not developed prior to January 2002. In addition, he found unwarranted influence by management in the preparation of final audit reports and recommendations.He matte that the language of many audit reports appeared to be negotiations between the internal auditors and management. In addition, managements responses were not always presented to the audit committee. The report did note that internal auditing appeared to have performed its responsibilities diligently, given its limited resources and management pressures. Most internal audit reports identified internal control weaknesses, and many highlighted weaknesses identified in prior audits that ere not corrected to the happiness of the internal audit department. Internal audit improvements The internal audit department made several changes to improve the internal audit function in the company since the 2002 financial restatement and the adoption of the Sarbanes-Oxley Act of 2002. Internal audit management Increased staff by adding 1215 auditors who are licensed certified macrocosm accountants, and anticipates hiring approximately 10 additional auditors. Strengthened training by requiring each professional staff member to obtain 80 hours of co ntinuing education annually. Added financial audits to the audit schedule, in addition to operational audits. Created an internal audit team to task with the external auditors in connection with financial audits, communication, and planning. Strengthened the risk assessment methodology to include an evaluation of materiality, audit frequency, changes in internal controls, and concerns by management, the audit committee, and the external auditor.