Assessment: For the following three Companies: 1) WorldCom. 2) American International Group 3) Enron. Part I 1. Identify and critically discuss the fraud schemes (types) committed with referring to...

Company: WorldCom
Fraud and Fraud types
WorldCom was part of one of the biggest frauds of all time which happened between the later 1990s and the early 2000s. The fraud which occurred at the company was an ‘Accounting Fraud, i.e., Misstatement of Financial Statements. The different activities that were undertaken by the company do this fraud were:
· Reduction of line costs
· False adjustments to report revenue growth
· False revenue reporting
· Capitalization of expenses to reduce the expense
The above-mentioned practices were undertaken by the company’s management and other executives to ignore the GAAP, and it also involved not informing the investors and the users of financial statements about the changes in the accounting practices. The biggest change they did in the accounting parts was to change the accounting measures in such a manner that it improved the E/R ratio which is the main key metric used to measure the performance of the company.
The company did not do this fraud in like a year or two but the activities undertaken to do the fraud were done for like more than 5 years which involved unscrupulous business practices, i.e., personal relationships with the vendors who were given the contract for various company related activities and this contractor was paid exorbitant rates (higher than the industry).
The managers at the company often modified the assumptions which were used to calculate the accounts receivables which in result increased the total amount of receivables. Here they used the help of the reserves which the company had to cover the bad debts, this was done mainly to increase the revenue when the company managers wanted to. And the other thing which the managers used was while selling the accounts receivables to other 3rd parties where the amount of sale was as calculated by changing the reserves which also increased the overall earnings of the company.
The line costs, which was another method that was used to commit the fraud were also exploited very smartly which they did to reduce the overall costs and increase the profits of the company. Because line costs are important to the company’s bottom line the manipulation gave a great boost to margins. This whole activity made sure that the company maintained a high growth rate which was expected by the market to increase the stock price.
In a statement to the court, the finance chief of the company also claimed that this manipulation was so big that the accounting department reduced the Wireless Division’s expenses by around $150 million during the period of the fraud.
All of these would have stopped if the company could not do any merger or acquisition, but to keep the fraud continued the company went on to acquire different companies and utilized the same fraud methods to the newly acquired companies.
Though the company fraud could have stopped and been made public earlier the company auditors preferred not to. The auditor Arthur Anderson who was the company’s external auditor also preferred not to report the activities.
In my opinion, the fraud could have been stopped and a lot of the investor money could have been saved but frauds are inevitable which means that unless the company executives are ethical fraud will happen and it will keep happening all the time. The other thing which could be done to prevent fraud is by tightening the rules for auditor reports which did happen after all these frauds which happened in the early 2000s.
So, overall frauds are inevitable but with a host of measures, the number of frauds can be reduced as seen over the last few years.
Financial and Non-Financial Consequences
The financial consequence was that the company involved in the fraud was ultimately admitted to bankruptcy and was considered bankrupt making the investors and the creditors lose a lot of money which was invested in the company.
The non-financial consequences of the fraud were that many of the investors lost trust in the financial system, and they completely moved out of the investing world after this fraud and lost out on their money. The other non-financial consequence was that the employees lost jobs which led them to go below the poverty line and also they could not find new jobs because of their names being associated with a fraudulent company.
The other consequences which cannot be categorised as financial or non-financial were that the auditors involved, and the executives all lost their jobs which created a mess which cannot be recovered from.
Dark Triad Traits
The three dark triad traits are:
· Narcissism
· Machiavellianism
· Psychopathy
The dark triad traits are all about how the system, the companies, and the executives are all self-centred, caring only about themselves and not about others. This is the main reason the fraud took place when the senior management tried to manipulate everything to get more benefits out of the variable pay that they will be getting if they deliver outstanding growth for the company. Therefore, the company’s senior management undertook so many fraudulent activities to deliver outstanding revenue and profit growth for the company which ultimately increased the share price of the firm, and in return, they did get a lot of bonuses which they cashed in for the hard work (which was a fraud, not hard work).
This whole activity which was undertaken by the senior management of WorldCom is explained by the three dark triad traits which are...