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Worldcom Issues

Essay by   •  November 15, 2012  •  Case Study  •  1,463 Words (6 Pages)  •  707 Views

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Financial statement fraud is "the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements in order to deceive financial statement users." Management fraud is synonymous with financial statement fraud because the production and presentation of financial statements is management's responsibility. If financial statement fraud occurs, management almost always has knowledge of the fact.

The effects of fraud

1) Fraud affects every level of society. Fraud has a negative impact on individuals, organisations, businesses and communities.

2) Individuals who fall victim to fraud can experience physical, psychological, financial and social damage. The effect from doing fraud, Mr. Myers became depressed (murung), increasingly irritable (cepat marah) and distant (x mesra). Because of the high pressure burden by Mr. Myers', he turn to suicide by trying to making his own fatal car accident. Mr. Myers' family also directly effected with this impact.

3) For society- the collapse of the telecommunication giant resulted in the loss of more than 17,000 jobs and billion of dollar in pension and investment.

On February 6, 2002, there was an article published by the popular press that focused on the aggressive accounting methods used by WorldCom in reporting revenue. Over the next few months, the same popular press were released that indicated WorldCom may have engaged in a variety of fraudulent accounting tactics.

4). Impact on institutional investors

To put the extent of WorldCom's institutional ownership in perspective, we note as of December 31, 2001, there are 830 institutional investors that own 56.5% ofWorldCom's shares outstanding. By June 30, 2002, there are only 408 institutional investors that own 44.9% of their shares outstanding.

Table 2 provides a partial list of WorldCom's institutional investors. Specifically, the top 20 institutional owners and the number of shares as ofDecember 31, 2001& June 30, 2001.

17 out of 20 largest institutional were making drastic reduction in their WorldCom holdings,

By June 30, 2002. This show that reputation of the WorldCom has been scratched.

We suspect that another 3 institutions making substantial increase in their exposure to WorldCom over the period of concern do not go unnoticed (mmg dia sengaja tambah ownership). In particular, the market penalize those institutional investors that substantially increase their relative exposure to WorldCom, when On July 19, 2002, WorldCom that has $103.9 billion in assets as of December 31,2001, made history as the largest bankruptcy in U.S. history.

5) Impact on competitors

Bankruptcy announcements generate a dominant contagion effect; that is, the stock price of competitors declines because the bankruptcy reveals adverse information about industry asset values and future prospects.

On the other hand, that bankruptcy announcements also have competitive effects; that is, some competitors actually gain, including competitors in concentrated industries, which are more likely to benefit from the potential for increased demand and market share arising from the demise of a competitor.

Nonetheless, The contagion effects clearly dominate the competitive effects. Even small firm bankruptcies have a dominant contagion effect for smaller sized competitors.

6) The impact of fraud can also be detrimental (kemudaratan) for corporate victims. Small/medium sized companies are sometimes unable to recover from the financial or reputational damage caused. Large multi-national organisations can feel the effects through the increased cost of doing business.

7) The cost to Government is passed on to the public through increased taxes.

Responsibilities of accountants when they are instructed by their superiors to engage in unethical conduct.

Accountants engaged in unethical behavior can hurt the reputation of the business or organization they represent. Various ethics boards have been established in the accounting industry to help maintain a uniform ethics code throughout the industry. Some of these include the Association of Chartered Certified Accountants (ACCA), International Ethics Standards Board for Accountants (IESBA) and the Accounting Professional & Ethical Standards Board (APESB).

* Act in a manner that always puts the public's interest ahead of your own. According to Section 53, Article II, of the American Institute of CPA's code of ethics, the heavy reliance upon accountants by the public requires that all accountants recognize and accept their own individual responsibility to the public and its interests. The institute also notes that when conflicting pressures arise, you should act with integrity in such a manner that it protects the public interest. The institute defines integrity as candidness and honesty, "within the constraints of public confidentiality."

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