A Case Study of the WorldCom Audit Failure: its Implications to Auditor Independence and Audit Effectiveness of the Audit Risk Approach
Once an accounting fraud is exposed auditors might be held liable for the audit failure. Based on whether such liability is due to the auditors' intentional act or negligence prior audit research seems to classify audit failures into two types: those recognized as a matter of auditor independence and those rec ognized as a matter of due professional care. This paper is a case study of the WorldCom audit failure notorious as one of the greatest accounting scan dals in United States history. The purpose of this paper is to show which type of audit failure the case belongs to by reviewing various materials and to get an insight into how such a massive audit failure occurred. From this research it was found that the WorldCom case presents the possibility of a third type of audit failure. Though such cases are not caused intentionally it is necessary to examine them in terms of audi tor independence as well as due professional care. In the WorldCom case the auditor independence was threatened by many factors leading to mistakes in audit procedures and resulting in the failure to detect the accounting fraud. In addition it was found that audit risk approach has its own dangers in that it allows for the omission of substantive tests depending on the result of risk assessment. Originally the approach was developed to improve audit effectiveness but in practice it might increase only audit effi