Case Studies

Case 4.4: WorldCom

Even the WorldCom's audit committee, was scheduling yearly audit, their functions wasn't effective. The management of WorldCom had an influence over activities of internal audit department and superseded these over audit committee. Also management was able to direct internal auditors to work on audit on the areas, which weren't previously approved by audit committee and notified the committee about these changes after the fact. These actions are not in compliance with the Paragraph 25 of PCAOB AS No.5 -" control environment". Also serious reporting issues had taken places. Thus, Internal audit department reported directly to CFO and management, instead of reporting to the audit committee, and this is in dissonance with SARBOX, Section 204. "(k) Reports to audit committees - Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer"

Also another standard of SARBOX, Section 301: "The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation and oversight of the work of any registered public accounting firm employed by that issuer, for the purpose of preparing or issued an audit report or related work and each such registered public accounting firm shall report directly to the audit committee", was denied. In case with WorldCom, not an audit committee, but the management and, in particular CFO, had control over audit department's promotions, compensations, bonuses, etc. Also, CFO involved internal auditors to the participation in different projects within the company, not related to the audit. Considering all these factors, we can make a conclusion, that auditors were dependant of CFO and management and the audit committee was ineffective and dysfunctional.

which is opposite to the directive of SARBOX Section 301., which says that