An Environment for Fraud

An Environment for Fraud - An Environment for Fraud With...

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An Environment for Fraud With jail not yet a distant memory, Walter Pavlo recounts the decisions that led him to hide MCI's bad-debt expenses and embezzle millions. By J. MIKE JACKA, CIA, CPCU, CFE, CPA, CLU Regional Auditing Manager Farmers Insurance Group Source: Internal Auditor, April 2004 IN 1997 — BEFORE MCI WAS AQUIRED by WorldCom — Walter Pavlo, a former MCI billings manager, was sentenced to 41 months in federal prison for wire fraud and money laundering. Over a six-month period in 1996, Pavlo and two associates defrauded MCI customers out of approximately US $6 million. In addition, at the direction of his supervisors, Pavlo helped manipulate the telecom company's accounting records to hide bad-debt expenses totaling US $180 million. The road he traveled to get to this point should be a stark reminder to internal auditors about the benefits of controls and a lesson to anyone who doubts the necessity of those controls or the potential for committing fraud that's within everyone. The Start Pavlo did not begin his business career with a plan to defraud MCI and its customers. "If someone asked me on my first day at MCI, how I was going to steal US $6 million after working here only a couple of weeks," says Pavlo, "I would have said that I would never do such a thing and I wouldn't even know how to do it." With an engineering degree from West Virginia University and a position in the aerospace division of Goodyear Tire & Rubber Co., Pavlo began his career. After a couple of years, he moved on to GEC Avionics and concurrently finished an MBA degree in finance. In 1992, he began working for MCI as a manager in the collections division. Telecommunications companies and long-distance carriers as they are known today did not exist 25 years ago. But in 1983, the U.S. government gave final approval to break up telecom giant AT&T. From this decision, AT&T was forced to lease long-distance phone lines at a 40 percent to 70 percent discount to small, regional companies. These companies could then resell the bandwidth at a profit, while still undercutting AT&T's price. In the feeding frenzy that followed, innumerable small companies were created to take advantage of this lucrative situation. For all industries, the 1980s and 1990s spawned a new kind of growth that was often fueled more by acquisition than by internal development. Telecommunications was no different and, from this cannibalization, giants like MCI and WorldCom emerged. The reselling of long-distance can be a complicated process. But, Pavlo explains, it's really just like the sale of widgets: A company sells its widgets wholesale and other
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companies buy them, putting their own brand name on them. MCI gave its customers access to the long-distance network — just like wholesaling — and the customers resold the access, putting their own brand on it. At MCI, these customers — or carrier accounts — were separated into
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This note was uploaded on 02/26/2012 for the course ACC 575 taught by Professor S during the Spring '12 term at Syracuse.

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An Environment for Fraud - An Environment for Fraud With...

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