Two former Arthur Andersen auditors have settled charges with the Securities and Exchange Commission accusing them of failing to exercise due professional care and skepticism in their 2001 audits of bankrupt telecommunications giant WorldCom.
The SEC instituted public administrative proceedings against former Andersen audit partners Kenneth M. Avery and Melvin Dick but said both the auditors submitted offers of settlement agreeing to be barred from appearing or practicing before the SEC as accountants. Avery will be able to apply to be reinstated in three years and Dick, who was the lead audit partner, in four years.
The SEC noted that WorldCom improperly removed approximately $3 billion in line cost expenses from its balance sheet in 2001, fraudulently characterizing the expenses as assets on its balance sheet. Andersen had assigned the maximum risk classification to WorldCom in prior audits, and the SEC said the auditors knew that WorldCom CEO Bernard Ebbers owed substantial personal debt that was secured by the WorldCom stock he owned.
They were also aware that in 2000, WorldCom's former controller had directed a post-closing journal entry that had no documentary support to reduce line cost expenses at WorldCom's United Kingdom subsidiary by approximately $33.6 million. The SEC said the auditors failed to exercise due professional care in the planning and performance of the audit, or to exercise an attitude of professional skepticism throughout the audit.
They also failed to obtain sufficient evidence to afford a reasonable basis for their opinion of WorldCom's financial statements, and failed to plan and perform the audit to obtain reasonable assurance about whether the financial statements were free of material misstatement, according to the SEC. The auditors issued an audit report that falsely stated that the audit was conducted in accordance with generally accepted auditing standards, said the SEC, and that WorldCom's financial statements were presented in conformity with generally accepted accounting principles.
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