Arthur Andersen, LLP has been named in a class action suit resulting from the firm's role as the former auditor of WorldCom. The suit, filed New York Comptroller H. Carl McCall on behalf of WorldCom shareholders, names WorldCom, Inc., and some of its officers as well as the accounting firm as defendants. Mr. McCall is the sole trustee of the New York State Pension Fund.
The legal action was prompted by the loss of $300 million from the New York state pension fund as a result of WorldCom's restated earnings. "I am seeking to lead the suit against WorldCom and Arthur Andersen on behalf of the nearly 1 million members of the New York State Pension Fund and all the other investors who lost millions of dollars," said Mr. McCall.
Other state pension funds have also been big losers as a result of the WorldCom catastrophe. Michigan and Kentucky are just two of many state funds reporting losses from their WorldCom investments, losing about $116 million and $8 million respectively.
WorldCom has been accused of concealing $3.8 billion of expenses on financial statements from 2001 and early 2002 and is preparing to restate financial statements for those periods to reflect the change in earnings. WorldCom overstated earnings in 2001 and 2002 when the firm chose to capitalize certain expenditures as reserves for future expenses rather than deduct them currently. Andersen auditors have stated that WorldCom withheld information from the accounting firm about the accounting treatment of the capitalized items. KPMG has replaced Andersen as auditors for WorldCom.
WorldCom handles about half of the Internet traffic in the world, and seven in 10 e-mail messages in the United States.
In related news, Andersen former senior partner Melvin Dick has agreed to testify before a House Financial Services committee hearing on Monday, July 8. The committee, which is investigating the events leading up to WorldCom's announcement of the necessity to restate earnings, has also subpoenaed Cynthia Cooper, the WorldCom vice president whose discovery led to the earnings restatement, three WorldCom executives (CEO John Sidgmore, former CEO Bernard Ebbers, and former CFO Scott Sullivan), and Salomon Smith Barney analyst Jack Grubman. The committee is attempting to discover information about the improper accounting for the $3.8 billion.
Last week, a Jackson, Mississippi judge ordered Andersen to cease any destruction of WorldCom related documents. Andersen's Jackson office, near WorldCom headquarters in Clinton, Mississippi, locked its doors last Thursday, preventing court officers from serving the papers.