WorldCom

This fraud occurred in a major public company and went undetected for 3-4 years. How could this occur? Why did this occur?

Was Betty Vinson a victim or a villain?

Sarbanes-Oxley 2002

Passed in July 2002 in response to accounting failures at Worldcom & Enron

Expanded the rules for corporate governance, reporting, and disclosure

Impact on CEO’s, directors, auditing firms, & whistleblowers

Company Audit Committees All need to be independent/outside

members No affiliation with the company other than audit

committee Staffed by at least one financial expert (knows

GAAP & has prior auditing and financial statement preparation experience)

If not, must explain why Establish procedures for complaints regarding

internal controls, accounting & auditing matters Appoint and oversee work of auditors

Executives

CEO & CFO must personally certify the accuracy and completeness of financial reports and accuracy of internal controls Up to 20 years in jail for

willfully/knowingly certifying noncompliant financial reports

Companies Report on internal controls Disclose whether code of ethics adopted

for senior financial executes – if not, say why not

Minimize loans to directors/officers Whistleblowers

Company must reinstate with back pay, pay attorney fees, special damages to whistleblowers retaliated against for assisting in an investigation

Public Accounting Firms (outside auditors) Rotate lead partner every five years Strict limitations on non-audit services that

can be provided to clients Such as bookkeeping, outsourcing of internal

audit, financial information systems, valuations Pay fees to the PCAOCB

Public company accounting oversight board Clients CEO, CFO, controller, chief

accounting officer could not have been employed by the auditor within the prior year

Federal False Claims Act (1986 amendment)

False claim Falsified reports, “hot stamping”

(stating product has met qualifications, yet it has not been tested or in fact failed to meet government specifications)

Medicare & Medicaid (Columbia) Defense contracts (Hercules example)

Applies ONLY when federal government money is involved

Financial incentives for the whistleblower Whistleblower may receive between

14% and 25% of the amount of the amount recovered by the government

Recovery amount: Triple the amount of the false claims,

plus a penalty for of $5,000 to $10,000 per occurrence, plus everyone’s attorney’s fees