The Regents - University of California | Office of The President

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
27
28
and consented to have its audit opinion attached to public documents. These red
flags included the following:
! Andersen deemed WorldCom to be a maximum risk client with overly
aggressive revenue and earnings targets and a history of
misapplication of GAAP principles. According to the First Interim
Report of Dick Thornburgh, Bankruptcy Court Examiner dated
November 4, 2002, pages 50-51:
In planning the 1999 audit of the Company, Arthur
Andersen personnel noted in workpapers that (1)
historical purchase accounting adjustments represented a
significant portion of the 1999 budgeted income; (2)
WorldCom had misapplied GAAP with respect to
certain investments; and (3) due to WorldCom’s use of
multiple billing systems that require significant human
intervention, there was a high degree of risk in the
Company’s billing and collection areas.
Moreover, a memo in the 1999 Arthur Andersen
workpapers states that, “in the past, we have noted
situations where management has taken aggressive
accounting positions, particularly in the area of
purchasing accounting.” In addition, in its meetings
with WorldCom’s Audit Committee for the 1999 audit,
Arthur Andersen expressed that the items in
WorldCom’s financial statements that represented
particularly sensitive accounting estimates were:
Purchase Accounting, Evaluation of Asset Impairment,
Line Cost Accrual, Tax Accrual; Litigation, and
Depreciation Reserves. (Emphasis added.)
The report also notes that Andersen, in rating the overall risk
assessment of WorldCom and its management team in connection
with the planning of its audits for the years ended December 31,
1999 through 2001 found significant risk for “accounting and
financial reporting risk” and “overly aggressive revenue or
earnings targets.”
! Andersen knew that financial fraud by accounting for costs as capital
investments rather than expenses was not a new scheme. There have
been significant examples of companies which have improperly
60
COMPLAINT