Auditor turns WorldCom witness
Prosecutors line up worker who questioned company books
By Susan Pulliam, Jared Sandberg and Dan Morse
THE WALL STREET JOURNAL
msnbc.com
July 3 — The internal auditor who uncovered WorldCom Inc.’s alleged accounting fraud is cooperating with the Justice Department’s criminal investigation, and her version of events has called into question the company’s account, according to people familiar with the matter.
PROSECUTORS HAVE secured Cynthia Cooper as a witness as they decide whether to bring criminal charges against the country’s second-largest long-distance provider and some of its executives. Ms. Cooper, the 37-year-old auditor, discovered the alleged fraud on her own initiative and met with resistance from WorldCom’s former chief financial officer, Scott Sullivan, when she confronted him with evidence of questionable accounting procedures, according to a person close to the investigation. She then went to the head of WorldCom’s audit committee, who delayed taking action on her findings, this person said.
This account of events conflicts with WorldCom’s version. The company has claimed that Ms. Cooper uncovered the accounting problems as part of a routine audit. WorldCom also hasn’t disclosed that Ms. Cooper might have encountered resistance in her efforts to make her findings public. Such discrepancies have led investigators to suspect the company has been less than forthcoming in its disclosures.
WorldCom has been charged with accounting fraud in a civil lawsuit brought by the Securities and Exchange Commission. The company also is being investigated by the House Financial Services Committee, which has called Ms. Cooper and other officials from WorldCom and its former auditor, Arthur Andersen LLP, to testify Monday.
John Sidgmore, WorldCom’s chief executive, on Tuesday apologized for the company’s “past transgressions.” In his first media conference since the WorldCom scandal broke last week, Mr. Sidgmore insisted the company has been working hard to uncover the problem. “We moved as fast as humanly possible,” he said. “What the outside auditors didn’t catch we picked up on our own,” he added. Mr. Sidgmore became chief executive after WorldCom’s previous CEO, Bernard J. Ebbers, was ousted in April. Mr. Sidgmore said he didn’t know if Mr. Ebbers had any previous knowledge of the alleged accounting fraud.
WorldCom last week disclosed it had discovered that $3.8 billion in operating expenses had been improperly accounted for, inflating the company’s profits in 2001 and part of 2002. It fired Mr. Sullivan as CFO. Earlier this week, WorldCom also said it was investigating additional accounting problems, which people familiar with the matter said could add at least $1 billion to the company’s accounting discrepancies.
These potential new problems put Mr. Sidgmore at the center of criticism that the company may not have adequately disclosed the extent of its accounting misdeeds. On Monday, SEC Chairman Harvey Pitt blasted the company for failing to come clean about its accounting problems.
WorldCom spokesman Brad Burns, referring to the company’s disclosure that there may be other questionable accounting issues, said, “There’s no conclusive evidence that there’s a problem there at this time. If there is we’ll certainly be forthcoming with it.” Mr. Burns declined to comment on Ms. Cooper’s involvement with federal prosecutors.
WorldCom, which is in default on its bank borrowings, could be on the verge of filing for bankruptcy-court protection. WorldCom’s $3.8 billion planned revision to its financial statement is six times the size of that of Enron Corp., whose bankruptcy filing late last year shook U.S. financial markets. Ms. Cooper’s cooperation with prosecutors has other echoes of the Enron affair — that of Sherron Watkins, an Enron executive, who early on spotted accounting issues that contributed to the energy company’s collapse.
Ms. Cooper, a vice president at WorldCom, began an internal audit of WorldCom’s books in May with a specific focus on its capital expenditures, according to people familiar with the matter. Ms. Cooper, after allegedly being rebuffed by Mr. Sullivan, took her findings to Max Bobbitt, chairman of the audit committee of WorldCom’s board, who delayed taking action on her findings, according to a person close to the investigation. WorldCom has said that Mr. Bobbitt later turned over Ms. Coopers’ findings to KPMG LLP, the company’s current outside auditing firm.
Mr. Sullivan couldn’t be reached, and his attorney declined to comment. Mr. Bobbitt couldn’t be reached to comment.
Prosecutors are investigating whether other WorldCom executives, members of the board or staff members may also have tried to dissuade Ms. Cooper from carrying out her review or to extinguish it before her findings were made public, people familiar with the investigation said. Prosecutors also have turned their focus on whether others at WorldCom, notably Mr. Ebbers, the former CEO, had prior knowledge of the questionable accounting.
Ms. Cooper may be a compelling witness for the government. Friends and former colleagues describe her as a professional and dedicated worker with a solid reputation. She grew up in Clinton, Miss., where WorldCom is based, and attended the local high school. She graduated from Mississippi State University and then got a master’s degree from the University of Alabama and was certified as an auditor.
Ms. Cooper first joined WorldCom, then known as Long Distance Discount Service, as a consultant in the finance department in the early 1990s. She left for a time to join paging company SkyTel, but returned to LDDS in the mid-1990s to run its internal audit department. A former executive at the company said Ms. Cooper was motivated and dedicated, telling LDDS management at the time, “I want to be a vice president some day.”
Friends aren’t surprised Ms. Cooper came forward with the information about WorldCom’s accounting problems. “If she did find something it would have been an exercise in futility to expect her to cover it up,” said Bobbie Maglathlin, a neighbor of Ms. Cooper’s mother.
Ms. Cooper’s cooperation with the government may explain why some people close to the company have said that she has acted mysteriously in recent weeks. At one point, when a company lawyer asked for transcripts of interviews she had conducted with WorldCom accountants during her internal audit, she initially resisted supplying them, according to a person familiar with the matter. That “infuriated” some officials, who needed the documents as part of the company’s efforts to supply the SEC with details, this person said. Ms. Cooper told WorldCom management that “she didn’t feel like she worked for the company” but rather that she reported to the audit committee of the board, the person said.
State and federal officials also stepped forward Tuesday to put pressure on WorldCom. New York Comptroller H. Carl McCall filed a motion to lead a shareholder lawsuit against WorldCom and its former accounting firm, Arthur Andersen, after the state pension fund lost $300 million in the company’s stock.
At the same time, Sen. Chuck Grassley asked the SEC and Mr. Sidgmore to provide him with a list of WorldCom managers who received more than $100,000 in bonuses over the past three years. Mr. Grassley, a member of the Senate Finance Committee, said he is considering an amendment to the accounting-standards reform bill that would call for spot-checking the accounting of publicly traded companies.
Mr. Sullivan, the former CFO, will be one person on the list. He received a bonus of $10 million in 2000 with the condition that he stay as an officer for at least two years. When he was fired last week, however, he wasn’t given any severance and the company is considering trying to recall the $10 million bonus, according to a person close to the company.
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