Massive fraud reported at WorldCom
EBITDA said to have been inflated by $3.6 billion in last year
By David Faber
CNBC
msnbc.com
June 25 — WorldCom has engaged in what people close to the company describe as a massive fraud, which has only recently come to the attention of its board of directors. According to sources close to the company, WorldCom has inflated its EBITDA by some $3.6 billion over its last five quarters, by taking as capital expenditures, costs that should have been treated as ordinary. The company is planning to restate its financials in the near term to reflect the financial misstatements that have taken place.
WORLDCOM OFFICIALS AND officials at its banks have either not returned calls or declined comment.
Given the massive overstatement of EBIDTA (earnings before interest, depreciation, taxes and amortization) — the key gauge by which companies such as WorldCom are measured — assumptions about how much debt WorldCom can carry may have been similarly overstated.
The company has been in negotiations with its banks, which are being made aware of the size of the restatement in meetings Tuesday.
It is unclear what impact this will have on WorldCom’s negotiations to obtain new financing. But it seems sure to make it very difficult for WorldCom to raise any new money and could very likely result in WorldCom being forced to file for bankruptcy.
The company’s chief financial officer, Scott Sullivan, has been dismissed by the board of directors in the last 48 hours, said sources close to the board.
The broad outline of the fraud, as described by people familiar with it, transpired like this: Each quarter in 2001 and during the first quarter of 2002, Sullivan would allegedly transfer a similar amount of WorldCom’s ordinary costs and treat it as a capital expenditure. The costs are believed to have been related to WorldCom’s network, but should not have been treated as a capital expenditure. The amount in question would have reduced the company’s reported earnings before interest taxes, depreciation and amortization by $3.6 billion over those five quarters.
Because of its vast overstatement, WorldCom’s 43 percent margins were also a fiction. An internal audit is said to have uncovered the fraud. On May 15, the company replaced its former auditor Arthur Andersen with KPMG.
It is unclear how far back the effort to misrepresent costs may have extended. The period in question for the restatement is only five quarters, but Sullivan has been the company’s CFO since 1996.
It is unknown whether former CEO Bernie Ebbers, who resigned from the company at the end of April, was aware of the fraud, sources said. |
