The WorldCom Fraud Under A COSO Magnifier

A close look at what went wrong at WorldCom gives CFEs a good understanding of how COSO concepts work. The COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework has been recognized since the early 1990s, as the No. 1 internal control framework for any for-profit or nonprofit organization in any geographical area or culture in the world.

The framework is explicitly recommended by international standard-setting governmental, private, and professional organizations worldwide. (See sidebar below.) Furthermore, COSO can be used not only for the setup and development of an internal control system but also for the analysis and understanding of control system failures in historical fraud cases. In this column, I’ll demonstrate the effectiveness of the five COSO control components in the framework to highlight former WorldCom’s major control weaknesses, which led to the spectacular $11 billion fraud.

WHAT DOES COSO ENTAIL? 

According to www.coso.org, the basic COSO concept covers three areas:

1. Organizational core objectives comprising effectiveness and efficiency of operations, reliability of financial reporting and compliance

2. Organizational processes, business units and activities, to which the core objectives have to be applied