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WorldCom’s Woes Reminiscent of a Three Stooges Routine
Gregory J. Rummo
When one thinks of the phrase, “The Buck Stops Here,” it’s President Harry Truman who comes to mind. The buck to which he referred is a slang word for the counter passed from one poker player to another to indicate whose turn it is to deal the cards.
President Bush spoke earlier this week on Wall Street, expressing similar buck-stopping sentiments to the CEOs in corporate America. Only the bucks he was talking about are the ones you carry around in your wallet. And if you were an investor in Enron or WorldCom or Global Crossing or Merck, to name a few - you have less of them these days.
While the president was proposing longer jail time for corporate financial fudgers, WorldCom executives, amid Fifth Amendment invocations, were blaming their auditors for their financial woes. Bert Roberts, the chairman of WorldCom, blamed Melvin Dick, the Arthur Andersen partner for failing to uncover the firms accounting irregularities. Let’s throw in Jack Grubman, the Salomon Smith Barney analyst who hyped WorldCom’s stock to the unsuspecting hoi polloi, and we’ve got the financial equivalent of Moe, Larry and Curly.
Well, whose fault was it anyway, chowder head?
Like the Three Stooges, all three should shoulder the blame.
An accounting firm audits the work of its clients it doesn’t author that work. Like the computer adage, “garbage in equals garbage out,” the job of the auditor is to provide a professional critique of the financial statements that have been provided by the firm it is being paid to audit. If the auditor is also acting as a consultant to its client - most accounting firms do - that is yet another conflict of interest.
As the CEO of a small, privately owned company, I am familiar with this process. Once a year we have an outside accounting firm come in and audit our books. It’s not only a requirement of our two lenders, but three of the four share holders are located 12,500 miles away on the other side of the globe in Hong Kong. They are entitled to have an opinion about the company’s financial position other than what our own accounting department gives to them on a monthly basis.
When my bookkeeper presents me with the company’s income statement at the end of the month, I can look at the bottom line and immediately tell if it’s a reasonable number based on my expectations from the ebb and flow of the business over the prior four weeks.
It’s no big deal, really. It’s my job to have my finger on the pulse of our business. And WorldCom’s former CEO, Bernhard Ebbers, should have had his finger on the pulse of his business.
When the accountants come in at the end of the year, we present them with our own, internally generated year-end statements along with a tome of supporting documentation, which they then pore over for the better part of a week.
There’s no way we can make up the numbers here and expect to get away with it. Every dollar must be accounted for. Debits must match credits in the exact science of accounting.
At the end of the week, I sit down with the number crunchers and we have a wrap-up discussion. If the auditors have managed to find some unpleasant surprises, there might be some wiggle room, some give and take.
This is what President Bush meant when asked by reporters at a news conference about his decades-old involvement as an oil-company director. The President replied, “Sometimes things aren’t exactly black and white.”
But in WorldCom’s case, black became white when it should have been all red.
The rules dictating generally accepted accounting practices weren’t just tweaked or bent, they were clearly broken.
Executives managed to convince their auditors that it was okay to capitalize almost $4 billion in expenses. To put it simply, WorldCom spent $4 billion and attempted to convince everyone that it really didn’t spend $4 billion.
And somehow, incomprehensibly, their auditors went along with this charade while stock analysts continued recommending shares of the company to the rest of us poor suckers.
I can almost hear the boardroom discussions now from high atop WorldCom’s plush headquarters.
The chairman, a man dressed impeccably in a white shirt, red power tie and a blue pin stripe suit, clears his throat and speaks in a soft yet steely voice. “Alright, which one of you knuckleheads is responsible?”
“HE DID IT!!” Comes the chorus of replies in unison from the group of finger pointing executives seated around the long, well-polished mahogany table.
You get the picture?
Unfortunately, no one’s going “nyuk, nyuk, nyuk, nyuk.”
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