“Follow the money.” That was the mantra of Deep Throat, the mysterious source whom investigative reporters Bob Woodward and Carl Bernstein met in an underground parking garage in their real-life thriller, All the President’s Men.
Cynthia Cooper, the internal auditor who unearthed the WorldCom accounting scandal, doesn’t record such a refrain in Extraordinary Circumstances, her gripping new book about her investigation. But Cooper’s bywords might well have been: “If you don’t understand it, and nobody can explain it, keep digging until you find out what it means.”
Woodward and Bernstein followed a winding path papered with laundered campaign money that led up through President Richard Nixon’s inner circle and ultimately to the Oval Office itself. For her part, Cooper wasn’t following money, but information — or, rather, the lack of it. Time and again, as she worked her way through a labyrinth of misplaced accounting entries, she encountered jargon that sounded authoritative, but proved to be completely phony.
It was the kind of empty language that investors at the time had heard from Enron as well, as executives of the energy company tried to justify assetless accounting and bogus special-purpose entities. Indeed, the arrival of Cooper’s book is timely: after all, today’s economic crisis, too, relied on authoritative smooth-talk that somehow suggested lending to people with bad credit was a low-risk investment. And just as few people questioned the financial underpinnings of the housing bubble, few investors, regulators, or reporters thought to penetrate the accounting smokescreen that WorldCom’s executives were putting forth.
“At times, it is a slow, plodding development of facts, checking theories, trying to find connections, and thinking through the issues until you get it right.” — Cynthia Cooper, former WorldCom Internal Auditor
Intuitively, Cooper knew better. When an accounting piece of financial reporting didn’t make sense to her, she asked about it — even if it meant questioning two of the most powerful executives in the country at the time: Bernie Ebbers, the cigar-chomping, megalomaniacal CEO, and Scott Sullivan, the brilliant, cryptic CFO.
At one point, under pressure from Cooper, Sullivan invoked a “rule of 10″ to justify a transaction. That puzzled the internal auditor, who hadn’t heard the phrase in any of her accounting classes. So she asked around and found that her skepticism was justified: the phrase is meaningless — except to whist players or gas chromatographers.
More serious was the company’s use of another phony term. In the midst of a 2003 audit of WorldCom operations, Cooper and her trusted colleague, Glyn Smith, found differing amounts of capital spending in two overlapping schedules provided by the finance department. One of the finance directors told the auditors that part of the difference could be explained by “prepaid capacity.”
Cooper and Smith, having never heard the term before, asked for an explanation. Oddly, the director — who oversaw capital spending — couldn’t provide one. His explanation for his ignorance: he got his information from the controller, David Myers.