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Forensic Accounting, Forensic Techniques, and Fraud Detection Copyrighted 2001 D. Larry Crumbley, ... - page 268 / 352

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© D.L. Crumbley

Reducing Bad Debts

Before MCI was acquired by WorldCom, Walter Paulo a billing manager, had to reduce a $180 million bad debt expense down to $15 million.

Eventually MCI had to write-off $650 million in bad debt.

His schemes:

  Allow a customer to sign a promissory note to turn the receivable into a short-term asset.

Redacting invoices.

Developing interpretations to explain why some items are aged so long.

Using questionable codes.

Used unapplied cash to cover.

Arthur Andersen did not audit the smaller bad debt accounts where the questionable accounts occurred (e.g., the third tier).

Paulo said that the AA auditors were young, inexperienced, and fresh out of college.

Source: J.M. Jacka, “An Environment for Fraud,” Internal Auditor, April 2004, pp. 49-52

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