And the Fraud Continues
Tanya Niessen
Professor Bill Makkawi
Forensic Accounting
April 22, 2012

Existing Internal Control Weaknesses at MCI There were several existing internal control weaknesses at MCI in which Walt Pavlo used to his advantage when he perpetrated the fraud. One weakness was that Pavlo helped create the accounts receivable process and therefore knew the strengths and weaknesses of the process (Lyons & Tocco, 2007). This allowed Pavlo to manipulate the records to his advantage and defraud MCI within about two years before being caught by Jim Wanserski. Another weakness is the fact that Pavlo seemed to do all the steps in the accounts receivable process by himself, which included receiving payments and writing off receivables. Pavlo used his position to his advantage and came up with tricks to help him steal millions of dollars from his employer. Pavlo’s tricks allowed him to hide his fraud from everyone until he was caught. One such trick was that Pavlo converted accounts receivable items into notes receivable. This allowed the accounts receivable item to be listed on the balance sheet as an asset rather than an expense. Another trick Pavlo used was to mask the bad debt by using the unapplied cash from the funds that were not allocated to specific accounts within MCI. In order for the expenses from the write-off receivables not to hit the income statement, Pavlo would allocate the additional funds over $50 million to the delinquent or bad debt receivables (Lyons & Tocco, 2007). Next, Pavlo used “placeholder credits”, which means that client payments were recorded before they were received. Pavlo’s last step in defrauding MCI was to use a loan broker and reseller, Harold Mann, as well as a co-worker, James Wilkie, to perpetrate the perfect plan. Pavlo would threaten companies whom he knew would not pay their past due