WORLDCOM (WCOM)
June 26, 2002
WorldCom may have to revise earnings statements, possible fraud
WASHINGTON - US telecommunications giant WorldCom could be forced to revise its last five quarterly earnings statements after an internal audit revealed a possible "massive" fraud, CNBC reported overnight.
WorldCom may have falsely inflated its earnings before interest, taxes, depreciation and amortisation reports, an indicator of a company's financial performance, by US$3.6 billion during this time, notably by passing off operating costs as investment expenditures, said CNBC, quoting sources close to the company.
Involvement by Bernie Ebbers, who just stepped down as WorldCom's CEO, or knowledge of the fraud, is not yet known, said CNBC.
Last month WorldCom changed auditors from Arthur Anderson to KPMG. Anderson has been embroiled by the recent Enron scandal.
WorldCom refused to comment on these reports, said CNBC.
business-times.asia1.com.sg
WorldCom Reveals Accounting Scandal, Markets Reel
Wed Jun 26, 4:22 AM ET
By Peter Henderson and Jessica Hall
SAN FRANCISCO/PHILADELPHIA (Reuters) - WorldCom Inc. said it had uncovered improper accounting for almost $4 billion in expenses, raising bankruptcy fears for the U.S. telecoms company and shocking investors reeling from accountancy scandals.
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WorldCom Accounting Scandal
The No.2 U.S. long-distance telephone and data services said late on Tuesday it had fired its Chief Financial Officer Scott Sullivan after discovering the irregularities, which the Securities and Exchange Commission ( news - web sites) said were of a magnitude never before seen.
WorldCom said it would restate results for 2001 and the first quarter of 2002 to show net losses, in what may be the largest such revision ever. It joins a growing list of U.S. companies that have revealed accounting improprieties.
The news rocked Asian stocks, with Tokyo's Nikkei index sinking four percent and Seoul's Kospi losing 7.15 percent on Wednesday. Technology and telecom stocks were especially hard hit. Asia telecom bonds fell, and the dollar dropped to a seven-month low.
European shares opened with sharp losses and Wall Street appeared poised to follow suit.
The SEC, which had been investigating WorldCom, said it had ordered the company to file a detailed report on the disclosures, which rocked already shaky investor confidence in U.S. accounting practices.
"The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets," the SEC said in a brief statement.
The Washington Post reported on Wednesday that the Justice Department ( news - web sites) had begun a criminal investigation.
FINANCING TALKS THREATENED
The massive accounting problems could also derail WorldCom's talks with its lenders to secure $5 billion in financing, without which it may face a cash-crunch next year, or even bankruptcy, analysts said.
Robertson Stephens, which downgraded its rating on WorldCom to "market underperform" from "strong buy," said "a bankruptcy filing is highly likely within the next 12 months."
WorldCom, which gets 89 percent of its revenues from the United States, said it planned to cut 17,000 jobs, or more than 20 percent of its workforce, starting on Friday, in a bid to save $900 million a year. Its 2001 revenues were $35.2 billion.
It also said it would slash another 40 percent from sharply lower capital spending plans, taking its annual investment budget to $2.1 billion.
The revelations and restructuring came just seven weeks after co-founder Bernie Ebbers, who built the company through more than 60 acquisitions over the past decade, resigned as chief executive officer.
"When you look at the history of WorldCom, and their acquisition trail, you have a classic wheeler-dealer. And now this is the age were wheeler-dealers get called for what they are," said Frank Dzubeck, president of consulting firm Communications Network Architects.
Shares of WorldCom plummeted, losing almost three-quarters of their remaining value as they hit a low of 20 cents in after-hours trade from a close of 83 cents on the Nasdaq market.
The stock had traded as high as $15 at the start of the year and had touched a peak of more than $64 in June 1999.
WorldCom suppliers also found themselves on the firing line. Fujitsu ( news - web sites) Ltd, which is estimated to receive $40 million from WorldCom in revenues, saw its shares drop over four percent.
ANDERSEN INVOLVED
Clinton, Mississippi-based WorldCom is the latest company linked to auditing firm Andersen to face accounting problems. Andersen, whose role as the auditor of Enron helped lead to the energy trader's collapse, audited WorldCom's financial statements for 2001.
In a statement, Andersen said that WorldCom had withheld key information and not consulted its auditors about the accounting treatment of the expenses.
WorldCom said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.
The accounting irregularities, which did not conform to Generally Accepted Accounting Principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.
"SHOCKED BY DISCOVERIES"
"Our senior management team is shocked by these discoveries," said John Sidgmore, WorldCom's CEO of less than two months. He previously served as the company's vice chairman.
WorldCom said it had notified the SEC and asked its new accounting firm, KPMG, to review of its financial statements for 2001 and 2002.
Restating the results was not expected to hurt WorldCom's cash position, the company said. WorldCom has $30 billion in total debt, but no debt payments due in the next two quarters.
The grim news would make it harder for WorldCom's new management to assert control and may put creditors in power since WorldCom has so much debt, said Blair Levin, an analyst at Legg Mason in Washington and a former FCC ( news - web sites) official.
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