WORLDCOM AUDITOR, ANALYSTS FACE SKEPTICAL HOUSE QUESTIONERS
Accounting practices, analyst ratings and even declaration of 5th Amendment protection came under skeptical questioning from members of House Financial Services Committee during much anticipated hearing Mon. on WorldCom’s financial scandal. Several members expressed frustration with answers by Arthur Andersen auditor Melvin Dick and Salomon Smith Barney telecom analyst Jack Grubman about their involvement in company’s problems. Those members suggested telecom analysts were being “modest” about their roles in WorldCom meltdown and were dodging questions about accounting problems that would have suggested culpability in scandal.
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Some members appeared particularly incensed at ousted CEO Bernard Ebbers, who pleaded 5th Amendment and read statement in which said he would like to testify about his role but couldn’t because of pending investigations. Several members said his statement was self-serving and amounted to waiving of his 5th Amendment protections from self- incrimination. Others said members should be able to question Ebbers about his statement. Committee Chmn. Oxley (R-O.) said he would review record and said Ebbers could be called back to answer questions about his brief statement before declaring 5th Amendment protection. Rep. Sandlin (D- Tex.) said Ebbers should be charged with contempt of Congress for refusing to answer. Recently fired WorldCom CFO Scott Sullivan also invoked 5th Amendment protection, but made no other statements and his immunity to questioning wasn’t challenged by members.
Both Dick and Grubman said they had acted properly. Dick said auditors depend on accuracy of financial data provided by company. “As with any audit, we planned our audit of WorldCom in general reliance on the honesty and integrity of management of the company,” Dick said. “One of the key elements of evidence all auditors rely upon are management’s representations.” Reliance on records provided by WorldCom brought several questions from members. Rep. Frank (D-Mass.) asked whether auditors simply “checked the math.” Dick said auditors test transaction systems and other recordkeeping systems for accuracy, but don’t review sets of numbers those systems are said to produce. He also said WorldCom financial documents were certified by company management, which prompted Rep. Green (R-Wis.) to suggest Andersen should consider legal action against WorldCom, since company’s questionable financial dealings damaged Andersen’s reputation.
Rep. LaFalce (D-N.Y.) questioned why 1998 lawsuit filed by investors against WorldCom hadn’t raised concerns from Dick or Grubman. Grubman also defended his work, saying he was “saddened” by WorldCom’s fate after he had “wholeheartedly” believed in company for many years. He said he began downgrading WorldCom stock months before company’s June 25 announcement that it had misclassified $3.8 billion of expenses as capital expenses. Grubman also was questioned about his close relationship with Ebbers. Grubman said he attended 3 WorldCom board meetings and on occasion was privy to proprietary information before it became public, which he said was unusual but not unethical. He also was asked about his compensation and how his ratings of companies affected his pay. Grubman said formula for compensation was complicated, but he hadn’t received bonuses or pay directly related to investment banking deals. However, he did say banking was factor in that complicated formula, but he hadn’t benefited from WorldCom relationship in end because his reputation was damaged by company’s performance.
Several members, including Reps. Bachus (R-Ala.) and Maloney (D-N.Y.) suggested SEC Chmn. Harvey Pitt wasn’t up to task of investigating WorldCom and other recent accounting scandals. Rep. Royce (R-Cal.) said Pitt’s future should depend on his ability to retrieve bonuses from executives who profited from financial mismanagement. LaFalce said House Financial Services Committee had squandered attempt to pass meaningful legislation when it voted financial accounting bill in April. He expressed support for financial overhaul legislation currently being considered by Senate. Rep. Leach (R-Ia.) said Commodities Futures Trading Commission (CFTC) should merge with SEC.
Current WorldCom CEO John Sidgmore and Chmn. Bert Roberts submitted written testimony. (Their oral testimony occurred after our deadline.) Sidgmore said in written testimony that when he took over WorldCom he knew there were problems, but “I never imagined what was in store for us.” He said WorldCom was to conduct its own internal investigation and emphasized that it still had assets and he pledged to “restore public trust in WorldCom.” Sidgmore said company was “streamlining the business by selling noncore assets and taking other steps to raise capital and trim expenses, allowing us to focus on our core business and our customers’ needs.” Roberts’ comments were similar, emphasizing WorldCom’s assets and willingness to fix problems.