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 CaseRelevant 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.”

2

WorldCom CaseRelevant Technical KnowledgePCAOB 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.”

3

WorldCom CaseRelevant 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.

4

WorldCom CaseRelevant Technical KnowledgePCAOB 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”

5

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

6

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

7

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

8