Profs assess WorldCom’s accounting

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Published: July 22,2002

Since a $3.8-billion accounting error was revealed June 25, all eyes have been focused on WorldCom and corporate accounting practices have come under even closer scrutiny as Congress pushes for financial reform to avoid future corporate disasters.

“It’s a black eye to the industry and we didn’t need another one,” said Dr. James R. “Jimmy” Crockett, an accounting professor at the University of Southern Mississippi. “There’s no excuse for missing $3.8 billion. I’m very disappointed.”

Dr. Rick Elam, an accounting professor at the University of Mississippi, called it “more tragic news.”

“Those of us in the accounting profession are dazed by all the things that have occurred with Enron, WorldCom, Sunbeam and the Arthur Andersen situation,” he said. “It’s going to cause the profession to take a real hard look at standard setting and internal management.”

The unraveling

The accounting debacle of the nation’s second largest long-distance telephone provider began with a discovery by internal auditor Cynthia Cooper, who was in the middle of a routine audit in May when she noticed some questionable transfers.

Cooper advanced the audit of WorldCom’s capital expenditures and capital accounts, originally scheduled for the third quarter of 2002. Cooper stated that she discussed her investigation with then CFO Scott Sullivan on June 11, but he asked her to delay the review until the third quarter to allow him to address the situation.

WorldCom’s questionable accounting practices involved counting the cost of leased telecommunications lines as capital investments. Unlike operating expenses, which are expensed as they are incurred, capital expenses are deducted from profits in increments over an extended period, which dilutes their impact on the bottom line. Capitalized expenses were allegedly spread across multiple accounting categories in a manner not immediately obvious.

“It’s certainly the case in accounting that there can be an argument about which way things should be appropriately entered,” said Elam. “It’s not always black and white.”

When asked if it’s common for a CFO of a major international corporation to make decisions in a vacuum, Elam said no.

In a statement to board members dated June 24 and released in an updated SEC filing July 8, Sullivan said he considered the contracts as investments because the expenses paid in 2001 and 2002 would have eventually generated significant returns in future years.

Mitigating factors

“We’re in a new industry (telecom) that is changing quickly and radically,” said Crockett. “We’re learning as we go. But we knew better than to increase an asset rather than increase an expense. That’s one of the first things you look for in an audit.”

Another factor: using analytical procedures.

“I understand how using analytical procedures, where we take past history to forecast expectations, might have caused some problems,” he said. “When projections were compared to expectations, WorldCom’s numbers were apparently very close. But apparently two things happened. WorldCom had previously invested heavily in capital equipment and had quit making as much investment. The stock prices had plummeted, so it was a lot cheaper. If they’d been paying basically the same amount in investment and the prices hadn’t gone down … and when you add $3 billion plus on top of that, it would have lighted up ‘tilt,’ and they would’ve investigated it further. I’m not saying that’s exactly what happened, but it might be.”

Twists and turns

In the House Financial Services Committee hearing on July 8, Melvin Dick, a former Andersen partner and the senior Andersen audit partner for WorldCom, who testified that neither he nor anyone on the Andersen team “had any inkling” of the improper accounting, said that 10 to 12 accountants worked on WorldCom books, fewer than many people speculated.

Before he resigned in April, former CEO Bernie Ebbers had allegedly proposed chopping the budget in half for the company’s internal audit unit, a congressional source told Reuters news service on July 7.

Calls to WorldCom were not returned by press time.

In the aftermath of the Enron scandal, WorldCom fired Arthur Andersen, LLP.

On May 15, KPMG announced that two former partners and nine staff members of Arthur Andersen, LLP, in Jackson had joined the local firm, but names were not listed in the press release. Both accounting firms were housed in One Jackson Place in downtown Jackson. KPMG is located in Suite 1100. Arthur Andersen was located in Suite 1300.

“For eons, auditors have moved around from one firm to another, so it’s not unusual,” said Elam. “It’s also not unusual when a corporation changes auditors for some of the auditors from the predecessor firm to join the new firm.”

On July 11, a KPMG spokesperson said that no former Andersen staff members or partners identified with the WorldCom case were currently working on it at KPMG.

Watch and wait

Elam said the WorldCom accounting scandal will provide plenty of new material for his graduate accounting ethics and accounting information systems courses this fall.

“My course on accounting policy — and how standards are set — will be all Enron, WorldCom and Andersen,” he said.

The Securities and Exchange Commission has already sued the Clinton-based company, alleging that it improperly booked the expenses as capital expenditures for five quarters starting in 2001 and hiding losses of $1.22 billion. WorldCom is also the subject a federal investigation by the U.S. Justice Department. Some industry watchers say that’s not all.

“There may be some more surprises,” said Crockett. “We’ll see.”

Contact MBJ contributing writer Lynne W. Jeter at (800) 993-3392 or lwjeter@yahoo.com</a.


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