Posted on 06/28/2002 12:27:07 AM PDT by sarcasm
CHICAGO — What did Arthur Andersen know, and how could it have approved financial statements full of corporate chicanery?
The questions that arose in Enron's meltdown have surfaced again with WorldCom. And while Andersen blames WorldCom for the latest debacle, some experts say the manipulation of the telecommunications giant's books should have been clearly evident to its former auditor.
The concept is so fundamental, says accounting professor Roman Weil, that he teaches it in the second week of class at the University of Chicago Graduate School of Business.
"It's basic accounting stuff," said Weil. "An auditor who looked into this would say it's wrong. Andersen said it wasn't consulted. Who knows?"
WorldCom's bookkeeping maneuvers, while involving a sum several times greater than the amount hidden by Enron, were far simpler and more transparent, according to those familiar with both situations.
Enron used a complex web of partnerships to conceal more than $1 billion in debt, hedging against losses with an esoteric and bogus strategy that experts still find hard to decipher.
WorldCom, by contrast, counted $3.8 billion in basic telecom costs as long-term investments, making it look far more profitable than it was. Such capital investments can be written off over a period of as long as 40 years, meaning only a fraction of the actual cost is visible to investors on current earnings.
Arthur Bowman, editor of Atlanta-based Bowman's Accounting Report, said he couldn't fathom how it was missed.
"It wasn't just a one-time booking; $3.8 billion is a lot of money to miss," he said.
Andersen's response: Just as with Enron, WorldCom officials held back critical material concerning its financial dealings.
WorldCom fired Andersen as its auditor in the spring, making it one of many corporate clients to desert the struggling firm after the Enron scandal broke.
The Enron and WorldCom cases are not isolated. Andersen has settled at least a dozen cases over the past 20 years to end investigations into allegations its auditors missed, ignored or hid clients' financial problems from unwitting investors — most notably involving Waste Management and Sunbeam. Its role in the recent crash of Global Crossing is currently under investigation.
Other large accounting firms also have been implicated, but far less often.
Weil blames a freewheeling culture at Andersen that results from the fact that it's the only Big Five firm not to require that the head office have the final say on significant accounting issues.
"People in the field could have known about the situation at WorldCom and decided to wink at it, fearing they could lose a client," he said. "We know that in the Waste Management case, Andersen knew they were doing wrong and went along with it anyway.
"I'm not saying it happened that way with WorldCom, but you want to be suspicious about it," he said.
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