VideoWorldCom's Securities and Exchange Commission filing indicates that, during the call to the audit-committee chairman, Smith himself told Bobbitt about the key points Sullivan made in his discussion with Cooper. The points included the CFO's request for a delay of the audit review, and his claim that the capitalization issues would be cleared up in the second quarter of 2002.
On June 26, WorldCom management announced the discovery of the expense transfers, along with the firing of Sullivan and a pending restatement. All in all, the improper bookkeeping would trim nearly $3 billion from WorldCom's previously reported earnings for 2001.
While Smith insists his internal audit recommendations do not stem from his experiences at WorldCom, he maintains that audit committees need to learn more about accounting. Toward that end, Smith believes committee members should take at least 32 hours of professional-education courses in auditing and corporate governance annually. In addition, he thinks audit-committee terms should be limited to about three years. Besides boosting alertness, regular audit-committee shake-ups would supply internal auditors with a changing group of bosses, he says.
Smith readily concedes that most chief audit executives get their policy direction from audit committees. But he says they tend to be managed and evaluated by CFOs. Such a setup, however, can cause an internal auditor to become too beholden to finance or operations.
To avoid conflicts, Smith thinks some firms will install a senior vice president of risk management or governance to oversee the audit department. But the real oversight should rest with the audit committee. They should be "driving the internal audit plan and giving direction to the internal audit department," he says. —D.K.
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