Stricken Andersen has found itself at the center of an alleged $3.8 billion fraud at telecom giant WorldCom. If true, this could be the world's biggest accounting scandal to date.
Chief financial officer Scott Sullivan has been fired after an internal audit discovered that transfers from operating expenses to capital accounts amounted to $3 billion in 2001 and $800 million in the first quarter of 2002.
This increased cashflow and profit margins, and led to a net loss being reported instead as $1.4 billion profit.
Without these transfers, the company’s reported EBITDA would be reduced to $6.3 billion for 2001 and $1.4 billion for first quarter 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002. WorldCom reported a profit of $1.4 billion for 2001 with the transfers.
On June 24 2002, then-auditor Andersen told WorldCom that, in light of the inappropriate transfers of line costs, Andersen's audit report on the company’s financial statements for 2001 and Andersen’s review of the company’s financial statements for the first quarter of 2002 could not be relied upon.
The audit firm reportedly said that it was unaware of a breach in accounting rules.
KPMG - WorldCom's recently-appointed auditor - has been asked to conduct an audit of the company's financial statements for 2001 and 2002.
As such, the group may well have to restate results for the past five quarters, but this is "not expected to have an impact on the company's cash position and will not affect WorldCom’s customers or services", the firm said.
John Sidgmore, appointed WorldCom CEO on April 29, 2002, said that the senior management team was "shocked" by these discoveries.
"I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter, and our dedication to meeting customer needs remains unwavering,” he added.
Cutting capital expenditures significantly, and cutting 17,000 jobs, are moves intended to safeguard the future of the company.
Meanwhile, the SEC has asked WorldCom for a detailed account of what happened.
Statement from Arthur Andersen LLP
The following statement was issued by Arthur Andersen in response to the announcement by WorldCom.
CHICAGO, June 25, 2002 -- Our work for Worldcom complied with SEC and professional standards at all times. It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of Worldcom. The Worldcom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment. Upon recently learning of the transfers, Andersen conferred with the Worldcom audit committee and new management, and advised the company that Worldcom's financial statements for 2001 should not be relied upon.