What Congress Doesn't Know Will Hurt You
Basic accounting know-how would improve questions at hearings.
Tuesday, July 23, 2002
By Daniel Roth
When the House Committee on Financial Services hauled top WorldCom executives onto Capitol Hill in early July, its intent was to uncover how and why the telco booked nearly $4 billion of operating expenses as capital expenditures. But with ex-CEO Bernie Ebbers and ex-CFO Scott Sullivan taking the Fifth, little was revealed--except this: Many members of Congress need a refresher course in accounting (remedial American history wouldn't hurt either). In the interest of helping our Representatives, we asked a few professors to deconstruct some of the questions:
Richard Baker (R-Louisiana) to Ebbers: "Did you authorize or were you aware of the $3 billion off-balance-sheet transaction which resulted in the restatement at a subsequent time?"
Lawrence Revsine, accounting professor at Northwestern's Kellogg school: "This has nothing do with off balance sheet. It's just the opposite. WorldCom put it on the balance sheet rather than charging it to expenses. That's a screwed-up question."
Carolyn Maloney (D-New York) to former Andersen partner Melvin Dick: "How did you not see some red flags when the taxes, the filed taxes of WorldCom, were so different from what they reported as their earnings?... Would that have helped you possibly uncover the fraud?"
Jim Duncan, assistant professor of accounting at Ball State: "That was the most hilarious question asked. That poor lady failed to understand that tax treatment is governed by the Internal Revenue Code that Congress creates. Accounting is treated by GAAP (Generally Accepted Accounting Principles). There are two sets of rules there. It's not uncommon at all for transactions to have different requirements under the tax code than they have under typical accounting standards. That was a crazy question."
Mike Ross (D-Arkansas) to new WorldCom CEO John Sidgmore: "It seems like you keep wanting to blame the auditors.... But I also think people at the helm of WorldCom also ought to be going to jail. And here's why. I'm a small-business owner, sir. Nothing to the magnitude of what you have.... [But] I know that my cash flow is based on my checkbook and my bank statement. And whether you're a little business or a big business, it looks like to me you would catch on the checkbook, if nothing else, a $3.8 billion misreporting error."
Pat Hughes, accounting professor at UCLA's Anderson School: "I don't know what he's trying to say, do you? There was a cash outflow. Your checkbook wouldn't tell you how to classify that cash--whether it's a capital expenditure or not."
Spencer Bachus (R-Alabama): "Mr. Sidgmore, when you operated an Internet backbone company, did you ever expense capital expenditures?"
Duncan [laughing]: "If he had expensed capital expenditures, he would have been writing things to the income statement that should have been put on the balance sheet. He would have been understating his earnings. Most Internet companies were not of that inclination."
Sue Kelly (R-New York) to Dick: "The public has a certain amusement in the Wild West atmosphere of business, but we really think of the accountants as being the cavalry. And in this instance, it's sort of like you were General Custer and the people at WorldCom were the Indians, and you got slaughtered."
Gregory Urwin, Temple University history professor: "What Congressperson was this? Custer fought two Indian battles. In 1868 he surprised the Cheyenne camp on the Washita River and annihilated it, and then he found another Indian camp, a bigger one, in 1876 with Little Big Horn and--to make a long story short--got annihilated himself. So where accountants fit into that kind of scenario, I'm not sure."