Andersen Embroiled in $4 Billion WorldCom Accounting Fraud
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.
Number of comments: 3
AccountingWEB.com Jun-26-2002
Categories: Financial Reporting, Firms, News Archives
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Jim Gombert , 28 June 2002 @ 19:08 PM
Andersen's Worldcom Response Apparently everyone with any intelligence has left Andersen, based upon the absolutely ridiculous response they issued with respect to their failure to find improper fixed asset capitalization. Fixed assets/repairs and maintenance is one of the areas generally audited by the most junior members of an audit team, because of the lack of complexity of the relevant accounting. To cite the CFO not telling them about line cost transfers as the withholding of important information strikes me as absurd, and almost a confession that they did not perform the most basic of audit work with respect to fixed assets. While I felt some sympathy for AA with regard to their sacrificial lamb status in the Enron case, I now feel simply disgusted that the industry in which I worked for so long (and with great pride) has deteriorated into one in which a (previously) premier player issues a press release claiming no responsibility to actually do an audit. |
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CHUCK ODONNELL , 27 June 2002 @ 14:16 PM
Who is to blame? I wouldn't be surprised that within the next several months the SEC will be issuing some type or regulation concerning stock options and executive sales of stocks. It seems that the problem all of the companies that have been caught so far is that they are trying to manipulate the bottom line and make a killing on inside information...What happened to good old management running an efficient organization without some young financial analyst giving a company a bad rating because the companies bottom line never met their projections. What I would really like to know is how many of these financial analysts have actual experience in the industry that they are responsible for...I'm not talking about maybe 5 years as a staff accountant or 5 years in a finance dept of these companies but upper management positions where the real knowledge of the industry is needed. Maybe the SEC should try looking at the financial community and maybe pass a reporting requirement that to be a lead financial analyst in an industry, actual experience in a management position must be one of the job requirements. Also, the business community (CEO's, CFO's etc) should finally decide which is more important. Should I try to run an efficient organization and maybe not meet the street's unrealistic EPS number and maybe miss it by a few cents but have a strong efficient growing corporation. Growth should not always be one of the factors that the street seems to be always looking for. If a company has been a profitable company for many years, has been steadily been paying dividends without hurting its cash flow and maybe showing a little increase in sales every year, what is wrong with that? How much increase must a billion dollar organization need to make the analysts happy? Wouldn't a nice 1-2% increase on a few billion dollars of revenue be a nice hefty increase? As a final closing thought, I'm not condoning what some of my fellow CPA's have done by cooking the books but maybe its time that we start standing up for our responsibilty and worry about the correct and proper accounting treatment and reporting. I have been involved with SEC reporting for 30 years now and I have seen the game played many times. Now that many companies have dropped pension plans and IRA's, 401k's, 403b's and other deferred tax savings plans are our only viable retirement vehicles, give this some thought, if we continue to close our eyes to the wrongful accounting treatments, how much is our very own retirement plan going to be worth if there isn't any more faith in the market. Just take a look at the value of your retirement plan this year and how much it has decreased in value within the last two years. |
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Zwelakhe Mzwakhe Mnguni , 27 June 2002 @ 08:09 AM
Compromising audit staff training to increase partners'perks is unethical. As a student studying towards my professional accounting qualification, I find it unacceptable and shocking at the same time that some auditors fail to recognise very basic misstatements in the financial accounts. In fact all of the Big Five audit firms have been embroiled in at least 10 fraudulent accounting litigations. One of the reasons is that, graduates are placed without sufficient training in client engagements. The intention being to cut down on operating expenses (this is unethical as far as it leads to compromisation of professional standards. To qualify as a member of the Big Five only Turnover(quantity)is considered instead of good quality services.Some of them are trying to be seen as smart after Andersen/Enron (and now Worldcom) saga in an attempt to take away market focus on their own blunders. The markets have also allowed themselves to be fooled by the quantity as an indication of high level services. I am appealing to audit partners to sacrifice some of their perks to comprehensively train junior clerks before placing us with their clients. |