Arthur Andersen At Center Of Scandal Again

Arthur Andersen

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 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's Graduate School of Business.

"It's basic accounting stuff," Weil said. "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 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 counted $3.8 billion in basic telecom costs as long-term investments, making it look far more profitable. 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 Andersen could have missed it.

"Three-point-eight billion dollars 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.

The Chicago-based accounting firm said in a statement this week that important information "was withheld from Andersen auditors by the chief financial officer at WorldCom." Andersen said the officer--Scott Sullivan, who was fired Tuesday--didn't tell Andersen about the accounting in question "nor did he consult with Andersen about the accounting treatment."

Andersen spokesman Patrick Dorton declined to comment Thursday, referring back to the earlier statement.

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.

Securities and Exchange Commission investigators who have been looking into WorldCom for months haven't accused Andersen of any impropriety. Former SEC chairman David Ruder said Andersen wasn't necessarily at fault, noting that the audit examines a representative sample of a company's financial statements rather than all of them.

"If a company is intending to make fraudulent entries, it's often very difficult for the auditor to find the fraud," he said.

But Andersen nonetheless is getting criticism in some quarters for missing such whopping accounting misstatements _ and it comes less than two weeks after being convicted of obstruction of justice for shredding Enron documents.

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.

Other large accounting firms also have been implicated, but far less often.

Weil blames a freewheeling culture at Andersen that results from the fact 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.

"I'm not saying it happened that way with WorldCom, but you want to be suspicious about it," he said.

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