I listened to part of the C-SPAN coverage yesterday of the House Financial Services Committe’s hearing with several WorldCom execs, the lead Arthur Andersen partner on WorldCom, and Jack Grubman, analyst with Solomon Smith Barney.
The most fascinating part of this episode was the auditor’s attempt to tell his story. The committee simply could not understand how any auditor worth a damn (actually worth $4.5 million — what WorldCom paid Arthur Andersen for the audit) could certify financial results containing a $3.8 billion mis-statement.
Melvin Dick, the Andersen auditor, kept trying to explain that an audit involves following ‘generally accepted accounting standards’ to review what management has provided and that they only do spot checking of various items prior to signing off on the audit. In other words, don’t expect an audit to readily identify this kind of bad corporate behavior. This was very tough for the committee to a) understand and b) follow.
Because auditors simply can’t review all of the gory details of a big company’s accounting, the SEC has adopted new rules which require the CEO and CFO to personally certify the final statements under oath.