Case 1: The Fraud Continues
July 17, 2011
Focusing on the internal control weaknesses that existed at MCI, which contributed to the commission of Walt Pavlo’s famous multi-million dollar fraud. Discussing the approach that should have been taken if fraud was suspected and applying one theory related to crime causation of this case. As well as critiquing the ethical behavior of Pavlo and MCI – discussing what actions could have been taken to prevent the crime.
1. Discuss the internal control weaknesses that existed at MCI that contributed to the commission of this fraud.
When we listen to Pavlo and outside sources, like ethics professor Stephen Henn in his book ...view middle of the document...
” And while these memos from Pavlo warning of large amounts of new debt that are inevitable, we do have the facts: MCI recognized $150 million in bad debt impacts during the execution of Pavlo’s fraud (Lyon, Tocco 2008). And no doubt other people were seeing this coming. But there is, without a doubt, a climate and tone at the top of MCI that pushed Pavlo towards a fraud. A climate that pushed employees to “make the numbers work” (Jacka 2004) rather than create new business. And a lack of oversight only fueled the fire. Jacka goes on to say that “the only audit function Pavlo ever dealt with was the one he established.” It’s a comment that says two things: 1) Pavlo had developed the internal controls he was now using – creating an employee capable of intelligent fraud and manipulation and 2) MCI was not monitoring their employees actions in a responsible, ethical fashion.
Ultimately, the internal control weaknesses inside MCI are twofold. The push to conceal and rework debt and receivables created a climate of unethical accounting practices – a mantra that came from upper management’s inability to lead employees in an ethical manner. And second, a lack of internal auditing function allowed the problem to persist longer than it should have. So both a lack of ethical and strong business practice attributed to the internal control problem and the commission of this fraud.
2. Identify and justify the approach you would take if you suspected fraudulent activity within an organization where you work.
I think you have to start with legal counsel, an investigator or a previously laid out approach from similar situations. But an interview must take place with suspects, potential informants and anyone who may be related. The questions must be tactful. The Association of Certified Fraud Examiners (ACFE) offers a ten-question approach that takes the interviewer from nonthreatening “calibration” questions like “how long have you been with the company” all the way to “who in this company…is beyond suspicion [of] fraud.”(ACFE 2008)
Certainly, it would be nice to be able to care of this “in house.” But listening to Certified Fraud Examiners like Steve Franklin, Director of CBIZ, who can “identify and analyze patterns of financial behavior indicative of fraud,” we hear things like “every month [the owner] should select six to twelve checks and request to see the backup for these checks” (Franklin 2011). And hearing this and other techniques, it becomes apparent that CFE’s can bring any number of new ideas and investigative techniques to a fraudulent situation. Because of the complexity of new internal controls and accounting techniques, financially fraudulent activities need an expert to assist in the investigation.
I would take the time to hire a CFE for, at a minimum, some initial guidance before beginning the investigation. After contact with a CFE, I would contact the creator of any technical system I suspected is involved with the fraud to...