WorldCom Paves The Way For Fast-Action Audit Reforms
On June 25, 2002, barely a week after the U.S. Securities and Exchange Commission (SEC) and the Senate Banking Committee proposed alternate accounting reform bills, WorldCom announced its intention to restate its recent financial statements. The timing is expected to have far-reaching political implications, particularly when taken together with the statement issued by its former auditor Arthur Andersen.
Andersen denied knowledge of the accounting improprieties and said, "Our work for WorldCom complied with SEC and professional standards at all times." In an audio-taped interview, former SEC Chairman Arthur Levitt was asked for his reaction to the "accounting fraud" and Andersen's statement. His carefully measured reply: "We're not totally certain that it's fraud. . . If that [Andersen's statement] is so, we may have a flaw in standards, or we may have malfeasance, which no amount of auditing can necessarily uncover."
Either way, Mr. Levitt said, the WorldCom announcement will have "very profound political implications" in the U.S." Most notably, he predicted that the Senate Banking Committee bill will become an "almost certainty" because the country and politicians will want faster action than the SEC's plan will provide. The SEC's plan contemplates only minor changes in accounting and auditing standard-setting, at least in the short-term. After the surprises associated with both Enron and WorldCom, Mr. Levitt explained, these minor changes will likely not seem tough enough. "The whole process of standard-setting in the U.S. appears to have been flawed," he concluded, "and I think it's long overdue to review that process and correct it."
Prophetically, the Senate Banking Committee bill, known as "The Public Company Accounting Reform and Investor Protection Act of 2002" was introduced in the Senate on June 26, 2002 as S.2673. The expectation is that the bill will be passed by the full Senate soon after Congress returns from its July 4th recess. That very same day, the SEC posted its Release No. 33-8109 entitled, "Framework for Enhancing the Quality of Financial Information Through Improvement of Oversight of the Auditing Process."