Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 14, 2008

SEC Settles Discriplinary Proceedings Against Two Worldcom Auditors

The SEC settled actions against two former Arthur Andersen LLP (Andersen) partners, Melvin Dick (Dick) and Kenneth M. Avery (Avery), who served on the WorldCom, Inc. (WorldCom) audit for the fiscal year ended December 31, 2001. Dick, former lead engagement partner for the WorldCom audit, and Avery, an audit partner on the engagement, consented to settled administrative proceedings which found that they had engaged in improper professional conduct in connection with their work on the WorldCom audit. Dick and Avery each consented to the entry of an order pursuant to Rule 102(e) of the Commission's Rules of Practice denying them the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after four years and three years, respectively. The respondents settled without admitting or denying the findings in the Commission's Orders.

The SEC found that during the 2001 audit, Andersen had designated WorldCom as a "Maximum Risk" client, and Dick and Avery were aware of several factors that increased the potential for fraud at WorldCom. Nevertheless, they failed to alter their planning and execution of the audit to take these risks into account as required under Generally Accepted Auditing Standards (GAAS). In addition, Dick and Avery failed to carry out certain audit procedures in critical audit areas, such as WorldCom's Property, Plant & Equipment (PP&E) and line cost accounts, where WorldCom's management posted its fraudulent accounting entries.

The SEC's Orders found that Dick's and Avery's failure to implement fundamental audit steps violated GAAS in that they failed to: exercise due professional care and professional skepticism in the planning and performance of the audit, obtain sufficient evidential matter to afford a reasonable basis for Andersen's opinion regarding WorldCom's financial statements; expand the extent of the audit procedures applied, apply procedures closer to or as of year end, particularly in critical audit areas, or modify the nature of procedures to obtain more persuasive evidence, in light of the significant risks of material misstatement that existed at WorldCom; plan and perform the audit to obtain reasonable assurance about whether the financial statements were free of material misstatement, whether caused by error or fraud; and issue an audit report that accurately stated that the audit was conducted in accordance with GAAS and that WorldCom's financial statements were presented in conformity with Generally Accepted Accounting Principles. Based on these findings, the Commission found that Dick and Avery engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii).

SEC Action | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference SEC Settles Discriplinary Proceedings Against Two Worldcom Auditors:


Post a comment