INTHEBLACK September 2024 special edition - Flipbook - Page 48
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COGNITIVE BIAS
BIAS BUSTING
While cognitive biases are often
natural, automatic mental
processes, they can lead to errors
that go unnoticed until it is too
late. For accountants, the
implications may be catastrophic.
WORDS MEGAN BREEN
T
he WorldCom scandal, which first came to
light in June 2002, is one of the most famous
cases of corporate fraud in history, involving
a company that was the second-largest longdistance phone company in the US at the time.
48 INTHEBLACK September 2024 SPECIAL EDITION
Between 1999 and 2002, WorldCom’s senior
executives – including CEO Bernard Ebbers –
exaggerated the company’s assets to inflate earnings
and maintain its stock price.
Through an internal audit led by accountant
and corporate whistleblower Cynthia Cooper,
US$3.8 billion in fraudulent balance sheet entries
were discovered. WorldCom ended up admitting that
it had overstated its assets by about US$11 billion
(A$16 billion), before it went bankrupt in 2003.
The case highlights the role cognitive biases can
play in decision-making and how easily those biases
can result in a negative outcome. For instance:
• Overconfidence bias potentially contributed
to the failure of auditors to question the
company’s financial statements.
• Confirmation bias may have prompted
executives to focus on information that
confirmed their belief in the company’s
financial health and ignore signs of trouble.
