JACKSON, Miss. (June 26) - WorldCom Inc. may have taken a giant leap toward bankruptcy in disclosing what appears to be one the largest cases of accounting fraud ever - nearly $3.8 billion in disguised expenses.
More than $3 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, the company said Tuesday, and thus not reflected in its earnings results. The Clinton-based company said late Tuesday it will restate earnings for all of 2001 and the first quarter of 2002.
WorldCom's chief financial officer, Scott Sullivan, who is also a director, was fired, the company said. The company also said it accepted the resignation of David Myers as senior vice president and controller.
In a story posted on its Web site late Tuesday night, The Washington Post, citing unnamed sources, said the Justice Department had begun a criminal investigation.
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,'' said John Sidgmore, who was appointed WorldCom's chief executive officer on April 29. ''We are committed to operating WorldCom in accordance with the highest ethical standards.''
Sidgmore replaced former president and CEO Bernie Ebbers, who resigned amid questions about the company's growth and its finances.
''Clearly, it means...that the company has made a few giant leaps toward bankruptcy,'' said John C. Hodulik, an analyst for UBS Warburg.
''The company has drawn down $2.6 billion of a credit facility, given the misstatements over the last year and a quarter, I think it's unclear if they'll still have access to that.''
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 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.
Tuesday's news could be the final blow to WorldCom, which is reeling from a low stock price, a crumbling telecoms market and an ongoing Securities and Exchange Commission investigation.
The nation's second biggest long-distance provider said it notified its auditor, 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.
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.
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,'' Chicago-based Andersen said.
Andersen said it told WorldCom that the company's 2001 financial statement ''should not be relied upon.''
Rick Black, analyst for Blaylock & Partners, L.P. in New York, said he wants to know if 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.
Hodulik said he doesn't believe any bank will loan WorldCom money now. ''They might feel there are better ways to get their money back,'' he said.
Shares of WorldCom dropped sharply in after hours trading Tuesday, falling 63 cents to 20 cents a share, down 75 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 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. |
