ACCT 2211 Forensic Business Investigation


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ACCT 2211 Forensic Business Investigation 

Semester 1, 2016

Objective:

The purpose of this assignment is to assist students understand the challenges facing accountants when working in a forensic capacity with limited financial and nonfinancial information.

Brief Background

The WorldCom scandal which involved a $US3.85 billion accounting fraud during the FY2000 and FY2001, wiped out the value of shareholder investments and created significant public outcry. By late 2003, WorldCom had engaged 1,500 people to work on correcting (i.e. restating) its financial statements at a total cost of $US365 million (McCafferty, 2004).

The accounting fraud essentially involved the capitalisation of expenses, creation of fictitious assets, the use of balance sheet reserves to write off costs including uncollectible debtors, litigation costs, company acquisition related costs and overvaluing goodwill. This accounting fraud was concealed and was not discovered by the market until 25 June 2002 when WorldCom announced that it was restating its financial statements by $US3.85 billion.

 

Instructions

  1. The folder contains several articles. The first article is titled ‘Behind Closed Doors At WorldCom: 2001’. The second article is titled ‘Accounting Spot-Check Unearthed A Scandal In WorldCom’s Books’ and includes the fraudulent WorldCom financial statements for FY2000 and FY2001. The third article is the amended Complaint filed by the U.S.

Securities and Exchange Commission (‘SEC’) against WorldCom in 2002. These articles provide you with specific insights into the WorldCom fraud. WorldCom financial statements for FY1999 (including FY1998 comparative year) are also included in this folder.

  1. You must read these articles and conduct your own research to answer the assignment questions below. Failure to conduct your own research limits the quality of responses to assignment questions.
  2. There is no need for an executive summary or conclusion as you are not writing a ‘report’. Simply answer the assignment questions.
  3. The maximum length of the assignment is 4,000 words, excluding appendices, and attachments.
  4. Format is Arial 11 point, 1.5 spacing, paginated, use a separate page to answer each question. Answers to questions must be clearly identified.
  5. Please refer to the Assignment Rubric on Blackboard.

 

1.

 

Assignment Questions

  1. Using theories of fraud, analyse how Scott Sullivan’s behaviour contributed to the collapse of WorldCom (10 marks).
  2. The following events feature in the WorldCom fraud:

Event 1

WorldCom employees Dan Renfroe and Angela Walter made journal entries in the amount of $150 million and $771 million, respectively, without detailed support.

Event 2

A journal entry was made to recognize $35 million of revenue in 2001 from the EDS contract based on performance projections. Required:

Assuming WorldCom was a company operating in Australia at the time of the fraud, select ONE of the above Events only and discuss if the selected event represents ‘false accounting’ pursuant to Section 83 of the Crimes Act. Your discussion must consider relevant accounting principles and specifically consider the elements that make up the fraud offence of false accounting, as discussed in lectures (15 marks).

  1. Assume that you are part of the SEC team investigating the financial statement fraud committed by WorldCom, prepare a brief forensic accounting plan to support the investigation of Event 1 or Event 2 above (5 marks).
  2. Analyse the FY2000 and FY2001 WorldCom financial statements using the following analytical methods, and discuss any material red flags which may be revealed by each analytical method. Please show all calculations (25 marks): (a) Horizontal Analysis (b) Vertical Analysis.

(c) Ratio Analysis (select any five key ratios only)  (d) Beneish ratios.

(e) M-scores using both the five variable and eight variable models.

 

  1. Up to a maximum of 5 marks will be awarded for quality. That means the assignment is formatted appropriately, no spelling errors and no grammatical errors. Please note that RMIT University Academic Integrity policy applies to all written work, including this assignment. The policy can be viewed here http://www1.rmit.edu.au/students/academic-integrity.

 

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