The Regents - University of California | Office of The President

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 hired Andersen to be its “auditor and certifying accountant.” During that time, Andersen provided unqualified audit opinions on the consolidated financial statements for fiscal year end 1994, 1995, 1996, 1997, 1998, 1999, 2000 and 2001 and reviewed interim statements, as well as providing tax and audit advice. Andersen consented to having its unqualified opinion included with SEC filings, including Proxy Statements. Andersen earned millions in dollars in fees from the engagements. As the purported independent auditor for WorldCom, Andersen created a conflict of interest by accepting consulting and tax fees and should have divested itself of all non-audit services to maintain its professional independence. B. Responsibilities of an Independent Auditor 154. The independent auditor had the duty to make sure that the financial statements, upon which it expresses an unqualified audit opinion, are presented fairly in accordance with GAAP. The AIPCA Auditing Standards (“AU”) 110.01 and 110.02 explain this responsibility. The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. (AU 110.01) The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. (AU 110.02) 155. The independent auditor must also comply with professional training and proficiency rules, including the following: AU 110.04 requires that auditor to have the proper qualifications: “The professional qualifications required of the independent auditor are those of a person with the education and experience to practice as such.” AU 210.03 requires that the auditor be proficient: “In the performance of the audit which leads to an opinion, the independent auditor holds itself out as one who is proficient in accounting and auditing.” 27 28 55 COMPLAINT
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 AU 210.04 requires the auditor to be aware of developments in its profession: “The independent auditor’s formal education and professional experience compliment one another; each auditor exercising authority upon an engagement should weigh these attributes in determining the extent of his or her supervision of the subordinates and review of their work. It should be recognized that the training of a professional person includes a continual awareness of developments taking place in business and in his or her profession.” AU 210.05 requires the auditor to exercise objective judgment: “In the course of his or her day-to-day practice, the independent auditor encounters a wide range of judgment on the part of management, varying from true objective judgment to the occasional extreme and deliberate misstatement. He or she is retained to audit and report upon financial statements of a business because, through training and experience, he or she has become skilled in accounting and auditing and has acquired the ability to consider objectively and to exercise independent judgment with respect to the information recorded in books of account or otherwise disclosed by his or her audit.” AU 220.02 requires the auditor to be independent: “the auditor must be independent.....he must be without bias with respect to the client since otherwise he would lack that impartiality necessary for the dependability of his findings, however excellent his technical proficiency may be. However, independence does not imply the attitude of a prosecutor but rather a judicial impartiality that recognizes an obligation for fairness not only to management and owners of a business but also to creditors and those who may otherwise rely (in part, at least) upon the independent auditor’s report, as in the case of prospective owners or creditors.” 156. Andersen was aware of these responsibilities and others which govern independent auditors. 157. Andersen also knew that there were increased responsibilities in dealing with Audit Committees because of government and business concerns about misstatements in financial statements. As part of its demonstration of its expertise in this area, in 1998 and 2000, it published a White Paper entitled “Arthur Andersen, New Responsibilities and Requirements for Audit Committees, Global Best Practices for Audit Committee” (attached as Appendix B to Blackman, Salan editors, Audit Committees: Regulation and Practice (Aspen Law and Business 2002)). In the introduction of the White Paper, Andersen states: 27 28 56 COMPLAINT
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