Capitol Hill (CNSNews.com) - The man formerly in charge of auditing WorldCom's financial records for the Arthur Andersen accounting firm told the House Financial Services Committee Monday that he and his team relied on "the honesty and integrity of the management" of WorldCom, as they do with every company they audit.
"In connection with our quarterly reviews and our year-end audit, the Andersen audit team specifically asked WorldCom's senior financial management whether there were any significant 'topside entries,'" said Melvin Dick, former senior global managing partner for the technology, media, and communications practice of Arthur Andersen. "On each occasion, management represented to Andersen that there were no such items."
The "topside entries" to which Dick referred were nearly $4 billion in expenses that WorldCom listed as "capital expenditures" allegedly to avoid public revelations that it was losing money.
Jack Grubman, the Salomon-Smith-Barney analyst responsible for monitoring WorldCom, told the committee that he suffered from the same lack of accurate information as Andersen's audit team.
"I am aware that there is speculation that I had advance knowledge of this fraud. That speculation is categorically false. I had no advance knowledge, whatsoever, of this fraud," he insisted.
Responding to charges that he "kept WorldCom alive" longer than the company could have otherwise survived without his positive recommendations, Grubman again insisted that he knew only what the company had publicly reported.
"If the public statements are fraudulent, I and other analysts have flawed information to go on," he said. "If we had had a truer picture of WorldCom's financial results earlier, no doubt our opinion would have changed."
Grubman did acknowledge that, on at least three occasions, he and other employees of Salomon-Smith-Barney attended at least three WorldCom board meetings in a 12-year period to advise the board about "potential investor reaction" to changes proposed by the board.
Grubman continued to insist that he received no "material" information that affected his recommendations to Salomon-Smith-Barney clients.
WorldCom's former chief financial officer, Scott Sullivan, invoked his Fifth Amendment right against self-incrimination, as did Bernard Ebbers, the company's chief former executive officer. Sullivan was fired the same day WorldCom reported the improper accounting.
But Ebbers, who led the company for 17 years prior to the public revelation of the questionable accounting practices, did make a brief statement prior to stating that he would not answer questions.
"When all of the activities at WorldCom are fully aired, and when I get the opportunity - and I'm very much looking forward to it - to explain my actions in a setting that will not compromise my ability to defend myself in the legal proceedings arising out of the recent events, I believe that no one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom," he told the committee.
"Until that time, however, I must respectfully decline to answer the questions of this committee on the basis of my Fifth Amendment privilege."
Ebbers was ousted in April amid a controversy that included the revelation that he took out a questionable personal loan from WorldCom. His statement angered several members of the committee, including Rep. Max Sandlin (D-Texas), who called it "an outrage."
"Mr. Ebbers appeared before us today and took an oath," Sandlin said. "He then attempted to make an affirmative statement, a self-serving statement before this committee, and then attempted to take the Fifth Amendment.
"It's my position that he has waived the Fifth Amendment. He's subject to the jurisdiction of this committee. He must testify," he said. "I'm asking that the committee hold him in contempt, that it be submitted to the floor of the House, that the U.S. Congress hold him in contempt, and he be required to testify."
Rep. Richard Baker (R-La.) attempted to question Ebbers about the nearly $4 billion dollars in expenses that was incorrectly reported in WorldCom's books, but Ebbers again invoked the Fifth Amendment and refused to answer.
"Anything brought to the attention of the committee in the gentleman's statement may be within the purview of appropriate question," Baker argued. "Matters not raised by the gentlemen in his statement would be subject to Fifth Amendment protection."
Rep. Barney Frank (D-Mass.) came to Ebbers' defense.
"We still have a Constitution," Frank said. "I just think that this is a time that we have to be very careful that our understandable determination to deal with a lot of problems doesn't lead to any diminution of the Constitution.
"I'd rather err on the side of over-interpreting rather than under-interpreting Constitutional rights," he said.
Committee Chairman Michael Oxley (R-Ohio) consulted with the committee's legal staff and determined that Ebbers would not be required to testify, or be held in contempt, until further research into the legal requirements and limitations on invoking the protection against self-incrimination could be conducted.
That ruling did not stop several members of the committee from asking Ebbers questions, all of which he refused to answer.
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