WorldCom Inc.'s $3.8 billion in disguised expenses.
JACKSON, Miss. (June 26) -An investigation by WorldCom Inc.'s board of directors uncovered nearly $3.8 billion in disguised expenses, the company said Tuesday, revealing what appears to be among the largest cases ever of accounting fraud.
WorldCom's chief financial officer, Scott Sullivan, who is also a director, has been fired, the company said, and senior vice president and controller David Myers resigned.
More than $3 billion of expenses in 2001 and $797 million for the first quarter of 2002 were wrongly listed on company books as capital expenses, the company said, and thus not reflected in its earnings results. It will restate earnings for all of 2001 and the first quarter of 2002.
When spending is listed as a capital expense, a company can delay applying it against earnings and spread its effect over many years, thus keeping its profits on paper higher. Standard accounting rules are relatively clear about what kind of purchases, for instance office equipment, can be listed as capital expenses and which must be listed as operating expenses and deducted immediately from profits.
``Our senior management team is shocked by these discoveries,'' John Sidgmore, who was appointed WorldCom's chief executive officer on April 29, said. ``We are committed to operating WorldCom in accordance with the highest ethical standards.''
Sidgmore said WorldCom has notified the Securities and Exchange Commission about the disguised expenses, as well as its lenders, and hired an attorney to conduct an independent investigation.
In a statement released late Tuesday night, the SEC said WorldCom's disclosures ``confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets.''
The agency said it has ordered WorldCom to file ``under oath, a detailed report of the circumstances and specifics'' of the accounting problems.
Sidgmore replaced former president and CEO Bernie Ebbers, who resigned amid questions about the company's growth and its finances.
The revelation adds WorldCom to a growing list of companies struck by accounting scandals, led by Enron Corp., Tyco International Ltd. and Adelphia Communications, that have shaken public faith in business and Wall Street and created a flood of shareholder lawsuits.
WorldCom grew from a small long-distance company into a telecommunications force through more than 60 acquisitions in the past 15 years. The rapid-fire growth was stopped dead in its tracks in 2000 when federal and European regulators blocked WorldCom's proposed $129 billion merger with Sprint Corp., citing competition concerns.
The company also said it would lay off 17,000 workers beginning Friday. Those cuts would be primarily composed of discontinued operations, attrition and contractor terminations, the company said.
WorldCom, the nation's second biggest long-distance provider, said it notified its auditors, KPMG LLP, and asked it to conduct a comprehensive audit of the company's financial statements for 2001 and 2002.
The company said it notified Arthur Andersen LLP, which had audited the company's financial statements for 2001 and for first quarter of 2002.
Andersen said its work for WorldCom was in compliance with SEC standards.
``It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom. The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment,'' the company said.
Andersen said it told WorldCom that the company's 2001 financial statement ``should not be relied upon.''
The news could be a body blow to WorldCom, which is reeling from a low stock price, a crumbling telecoms market and an ongoing SEC investigation.
Rick Black, analyst for Blaylock & Partners, L.P. in New York, said he wants to know if former WorldCom CEO Bernie Ebbers knew about the accounting practice.
``The people who were running the company prior to this should know what's going on. That's the most logical assumption,'' Black said. ``If the CFO knows, the next question people are going to ask is what did Bernie Ebbers know and of course they're going to ask what did the board know.''
Black said bankruptcy could be the only alternative for WorldCom.
``For a company with $30 billion in debt, that has a sector deteriorating from competition...it's not looking good,'' he said.
Shares of Clinton-based WorldCom dropped sharply in after hours trading, falling 57 cents to 26 cents a share, down 68 percent from its closing price of 83 cents.
Shares of WorldCom this year traded as high as $15 in January but have free fallen since over concerns about the company's $32 billion in debt, slowing revenues and the SEC investigation.
In March, the SEC requested documents detailing pretax charges associated with domestic and international wholesale accounts that were no longer deemed collectible.
The SEC investigation also focused on disputed customer bills and sales commissions, loans by WorldCom to officers and directors, customer service contracts and organizational charts and personnel records for former employees.
Drawing scrutiny and investor displeasure were the $408 million in loans WorldCom gave to former chief executive Bernie Ebbers, who resigned in April.
In March, two WorldCom stockholders sued the company's board over $375 million in loans that the company has made to Ebbers. Ebbers has said he has enough personal assets to cover the loans.
Bond ratings agencies Moody's Investors Service, Standard & Poor's and Fitch all cut their long-term credit ratings on WorldCom's debt several times this year.
Shares of WorldCom on Monday closed down 25 percent after Salomon Smith Barney analyst Jack Grubman, long seen as a WorldCom supporter, downgraded his outlook on the company.
06/26/02 00:45 EDT
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