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ran the company, the internal control environment at the company, and the
existence of any unusually high audit risks at WorldCom. Andersen holds itself
out as an expert in auditing and accounting rules regarding the
telecommunications industry, and thus was familiar with WorldCom’s business
and the proper accounting standards WorldCom had to follow to fairly present its
financial statements in accordance with GAAP.
160. Andersen did investigate WorldCom’s key accounting principles and
practices, transaction processes and judgments, including its treatment of Line
Costs. For example, in a Report to the Audit Committee for year ended December
31, 2001 which was dated February 6, 2002 (Exhibit “C”), Melvin Dick, on behalf
of Andersen, summarized the audit approach and audit results for the year ended
2001, discussed Andersen’s views regarding WorldCom’s key accounting
principles and practices, transaction processes and judgments and estimates used
in preparation of its financial statements, and communicated matters required by
professional standards. On page 8 of the report, Andersen specifically discusses
Line Costs. Andersen gave its assessment that WorldCom’s processes for Line
Costs, including Line Cost accrual, Line Cost Disputes and Line Cost Allocation
Report was effective. Additionally, Andersen represented that WorldCom had
effective processes for: “allowance for doubtful accounts, accrued line costs, line
cost disputes, legal reserves and contingent liabilities, asset depreciable lives and
impairment of long-lived assets.” Id. at 10.
161. Therefore, Andersen specifically analyzed and knew about
WorldCom’s account for the Line Costs. Andersen described WorldCom’s Line
Cost accruals as “Line costs represent charges from LECs for leased lines or traffic
termination.” It stated, “Line costs as a percentage of revenues have remained flat
at 41.9% of use and revenues” and “Line costs are allocated between the
WorldCom group and MCI Group based on minutes of use and revenues.”
Andersen discussed “Accruals are based on metered traffic as determined by
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COMPLAINT