WorldCom employees challenged accounting
Internal documents show concerns raised as far back as 2000
By Christopher Stern, the Washington Post, 7/15/2002
boston.com
WASHINGTON - As far back as 2000, WorldCom Inc. employees challenged the company's accounting and in at least one case raised those concerns with auditor Arthur Andersen LLP, according to internal documents released yesterday.
The documents, released by House Energy and Committee chairman Billy Tauzin, Republican of Louisiana, showed that WorldCom employees in the United States and Europe believed as early as March 2000 that the company was moving money around on its internal books in an effort to make the company look more profitable than it was.
The documents also show that WorldCom's senior financial managers, including former controller David Myers and former chief financial officer Scott Sullivan, had ordered lower-level employees to record transactions on its books that the workers viewed as improper.
WorldCom, based in Clinton, Miss., is expected to file for Chapter 11 bankruptcy protection and is struggling to find financing to remain operational. The company has been on the edge of financial crisis since late June, when it announced it had improperly claimed $3.9 billion in regular expenses as capital investments during 2002 and 2001. The documents now show that the practice, which made the company appear profitable when it was not, extended back to at least the spring of 2000.
The Securities and Exchange Commission has charged the company with defrauding investors. WorldCom is the subject of a federal criminal investigation and has been targeted by congressional investigators as well.
Tauzin, who is leading his own investigation, said yesterday on ABC-TV's ''This Week'' that other documents showed that Myers, who resigned last month, acknowledged WorldCom resorted to improper accounting to save itself from collapse.
In one of the documents, according to Tauzin, ''[Myers] said, `If we don't do this, we close our doors, we can't operate. We have to keep hiding these losses or our business fails.'''
WorldCom declined to comment yesterday on the memos. ''We are fully cooperating with all external investigations,'' WorldCom spokesman Brad Burns said. ''We want any wrongdoers brought to justice and our business to move forward.''
Separately, speaking on NBC's Meet the Press yesterday, SEC chairman Harvey Pitt said he supported ''the thrust'' of legislation that would strengthen oversight of corporate accounting. But Pitt brushed off calls from some members of Congress that he step down in the wake of accounting scandals at several companies including Enron Corp. Global Crossing Ltd. and Adelphia Communications Inc.
Pitt has been criticized, particularly by Democrats, for his close ties to the accounting industry, which he represented in his private law practice.
The documents released yesterday show that on June 26, the day after WorldCom announced that it claimed $3.9 billion in regular expenses as capital costs, Steven Brabbs, a London-based employee, wrote WorldCom auditors that he had been required to record $33.6 million in expenses, which he believed were unjustified in March 2000.
At the time he was ordered to make the entry, Brabbs held the title of director, international finance and control. Brabbs found that WorldCom had issued financial statements in the United States that made his divisions appear more profitable than he knew them to be. Brabbs became concerned and began to ask how WorldCom had come up for such a profitable figure for its overseas operations.
''After phone calls and e-mails to the US, we were told that the entry had been made on the basis of a directive from Scott Sullivan,'' Brabbs said in the memo.
Sullivan was fired by the company June 25, the same day WorldCom told the SEC about the improper accounting.
''Despite repeated requests, we were given no support or explanation for the theory,'' Brabbs said in the memo.
Brabbs, according to his account, eventually informed Andersen about the issue. ''Shortly after, I received an e-mail from David Myers indicating he was not pleased this matter had been raised with [Andersen] without his knowledge.''
Brabbs's claim that Andersen had been informed about his concerns is significant since at a congressional hearing last week, a former Andersen official in charge of the WorldCom account repeatedly denied his firm had been told about efforts to reclassify regular expenses as capital investments.
Brabbs also writes that the $33.6 million in question was related to line costs - or fees charged by other telephone companies for connecting WorldCom's long-distance customers to the local network. WorldCom has said a majority of the $3.9 billion in improper expenses it reported during 2001 and the first quarter of 2002 was related to telephone-line costs.
When he continued to raise the issue with senior WorldCom financial managers, he was told the US entry ''had been made at Scott Sullivan's direct instruction.''
Brabbs, however, refused to make the entry into his ledgers and instead created a separate ''management company,'' to which the $33.6 million in disputed expenses were attributed. In his memo, Brabbs said the new entity was ''not a legal entity,'' but did not provide further details. To further emphasize his concern about the entry, Brabbs included a note with the entry saying: late adjustment ''as instructed by Scott Sullivan.''
A second document released yesterday was a report of an interview between the company's top internal auditor, Cynthia Cooper, and mid-level accountant Troy Normand. The report showed that US employees in 2000 had raised concerns about the way the company was accounting for the cost of leasing telecommunications lines from other companies. |
