02 Mar

Why Audits Fail to Find Fraud

I am reading Cynthia Cooper’s book, Extraordinary Circumstances, which documents her experiences uncovering the massive fraud at WorldCom. I want to finish reading the book so I can write a proper review here and elsewhere. But I admit I’m having a hard time finishing the book due to all the other demands on my time…

Nonetheless, I wanted to share this passage from the book because it illustrates so perfectly the main reason why audits fail to find fraud: Those committing fraud know how to hide it from the auditors. Because of that active concealment, there is little chance of the auditors finding the fraud. Read More

28 Jan

Cynthia Cooper’s book – Extraordinary Circumstances: The Journey of a Corporate Whistleblower

cooper.jpgCynthia Cooper, WorldCom whistleblower, is releasing her book in just few days. Extraordinary Circumstances: The Journey of a Corporate Whistleblower is her story. If it is anything like the speech I heard her give a few years ago at the Association of Certified Fraud Examiners Fraud Conference, it will be fantastic.

Unlike other so-called whistleblowers of the Enron, WorldCom, and Tyco era… Cynthia is the true hero. She stood up for what she knew was right and she suffered for it. Make no mistake that she was in danger as she and her team attempted to get to the bottom of accounting shenanigans at WorldCom.

Publishers Weekly writes:

In Cooper’s thorough and efficient narrative about the fantastic collapse of telecommunications giant WorldCom there are two distinct themes: her insider’s view of the corporation’s widespread wrongdoing and the life experiences that led Cooper to becoming a courageous whistleblower. Cooper, former vice president of WorldCom’s internal audit department, is most successful with the former. She brings us into the boardrooms, the backrooms and, somehow, into the heads of key players as some struggled with and others embraced the deceptions that would bring WorldCom down.

I’ll be reviewing the book in the next couple of weeks and can’t wait to share my thoughts.

29 Jul

Conviction of Bernie Ebbers Upheld by Appeals Court

Today the U.S. Court of Appeals for the Second Circuit upheld the conviction and prison sentence of former WorldCom CEO Bernard Ebbers. The 64-year-old defendant was convicted in 2005 of nine counts of conspiracy, securities fraud, and false SEC filings. He received a 25-year prison sentence, which all but assures that he will die in prison.

WorldCom’s demise was an $11 billion accounting fraud that included improper capitalization of operating costs, among other things. It sent WorldCom, a company with stock previously valued at $180 billion, into bankruptcy. Ebbers’s defense was that the CFO, Scott Sullivan, and his subordinates committed the fraud without his knowledge.

Ebbers’s attorney argued that the sentence was excessive and that Ebbers did not receive a fair trial because potential defense witnesses weren’t offered immunity from prosecution in exchange for their testimony. The witnesses said they would use the fifth amendment to avoid testifying.

Ebbers has been free while the appeal was pending, and is expected to be ordered to prison soon.

02 Jan

Sarbanes-Oxley Cost Versus Benefit

The New Yorker recently printed a commentary on Sarbanes-Oxley. While the legislation was viewed by politicians as an important step toward protecting investors from fraud, corporate executives aren’t so impressed.

Corporate executives believe that the high cost of implementing the Sarbanes-Oxley regulations is not justified by the small benefits. The cost of implementation is particularly high for smaller companies, which may discourage them from going public. Read More