How auditor found $4bn black hole:
Corporate fraud uncovered by second female
Whistleblower
Julian Borger in Washington and Richard Wray
Guardian
Friday June 28, 2002
The financial scandal that has enveloped WorldCom, one of
America's largest phone companies, was unearthed by an
employee running a spot check on the Mississippi-based
company's books, it emerged yesterday.
Cynthia Cooper is about to become corporate America's second
famous female whistleblower, following in the footsteps of
Sherron Watkins, whose warning to the board of the energy
trading giant Enron that the company would "implode in a wave
of accounting scandals" proved all too prescient.
Ms Cooper's role came to light as the US Congress called on
WorldCom's executives to answer for their role in the $4bn fraud
- the largest in American corporate history.
The US financial markets regulator, the securities and exchange
commission, has started a fraud inquiry while the department of
justice is also likely to begin a criminal investigation.
Yesterday the house financial services committee subpoenaed
the Salomon Smith Barney analyst Jack Grubman, who was the
company's No 1 fan on Wall Street during the boom times.
He stopped recommending that his clients buy WorldCom's
shares just a day before the disclosure of the financial scandal.
WorldCom's own links with Capitol Hill also came under scrutiny
yesterday as it emerged that the long-distance phone company
had made political donations to the Republicans.
Days before WorldCom became the latest byword for corporate
corruption, the company handed over $100,000 to the
Republicans at a fundraising gala attended by President Bush.
But there is no evidence that the payment was an attempt to
persuade the administration to save it from disaster.
The company made the same contribution last year and, unlike
Enron, WorldCom does not appear to have been well-connected
in the Bush White House. So far there is no evidence that
company executives attempted to contact administration
officials, as Enron's Kenneth Lay did, to help protect them when
the extent of the accounting scam became known.
An analysis carried out by the Centre for Responsive Politics, a
money-in-politics watchdog in Washington, found that the
Mississippi company had made campaign contributions of
$7.5m since 1989, split roughly equally between Republicans
and Democrats.
WorldCom's gala contribution was a routine part of its $3m a
year lobbying effort in Washington, aimed at influencing tax
policy and the planned deregulation of the long- distance
telephone market - legislation to which WorldCom is opposed.
The company focused on cultivating Mississippi politicians,
particularly the Republican leader in the Senate, Trent Lott.
Three years ago WorldCom contributed $1m to the University of
Mississippi to help set up the Trent Lott Leadership Institute,
just a few weeks after the Mississippi senator had appointed a
company official to an advisory panel on the issue of taxing
internet sales.
Another recipient of WorldCom largesse was the attorney
general, John ASHCROFT, who took $10,000 in contributions from
the firm for his 2000 Senate campaign. It was unclear yesterday
whether Mr Ashcroft would excuse himself from the investigation
of WorldCom, as he had done in the case of Enron, another
campaign contributor.
Much of the credit for bringing WorldCom's fraudulent accounting
to light yesterday went to Ms Cooper.
Employed as an internal auditor, she was asked to check
spending records by the company's new chief executive, John
Sidgmore, just weeks after he took over from WorldCom's
cowboy boot-wearing founder, Bernie Ebbers.
She discovered that over the space of almost a year and a half
the company's chief financial officer, Scott Sullivan - who helped
build the business with Mr Ebbers - had been using unorthodox
techniques to account for charges paid to local phone
companies to complete WorldCom's long-distance calls.
The fraud, which involved one of the company's largest costs,
had inflated WorldCom's profits by hundreds of millions of
pounds - helping it to post good results through most of last
year while the rest of the world's communications industry was
heading into the worst slump in living memory.
The fiddle distorted WorldCom's figures to the tune of almost
$4bn - almost six times the size of the hole in the books of
Houston-based Enron.
But unlike in the case of the Enron whistleblower, Ms Cooper's
information was acted on immediately by senior management.
They contacted the head of the company's auditing committee,
Max Bobbitt, and then used Ms Cooper's evidence to back up
the sacking of Mr Sullivan late on Tuesday night.
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