Jun 27, 2002 5 min read

By John Porretto AP Business Writer

JACKSON, Miss. (AP) – WorldCom Inc. spiraled toward the brink of bankruptcy after the communications giant reported it had disguised $3.8 billion in expenses. The news dragged down the stock markets Wednesday, and President Bush said the federal government would investigate.

The company’s acknowledgment reveals one of the largest in a series of accounting scandals that have shaken faith in corporate America.

Bush, speaking in Alberta, Canada, said the Securities and Exchange Commission and the Justice Department would investigate and “hold people accountable.”

The SEC already is looking into lending and accounting practices at the company.

WorldCom, which owns the nation’s No. 2 long-distance carrier MCI, said late Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, thus not reflected in its earnings results.

That means the company may have actually lost millions of dollars when it reported profits. The Clinton, Miss.-based company said it will restate earnings for all of 2001 and the first quarter of 2002.

“Our senior management team is shocked by these discoveries,” said CEO John Sidgmore, who was appointed in April to replace Bernard Ebbers amid questions about the company’s growth and finances.

WorldCom also announced Tuesday that its chief financial officer, Scott Sullivan, has been fired. In addition, the company said it would lay off 17,000 workers beginning Friday.

A source within WorldCom’s accounting department, speaking on condition of anonymity, said the company has worked for weeks under the scrutiny of auditors from the SEC and KPMG, WorldCom’s internal accounting firm.

The source said accountants were unaware that any of their work was possibly fraudulent.

“WorldCom considered it aggressive accounting,” the source said. “KPMG thought otherwise.”

The news could be the final blow to WorldCom, which is reeling from a low stock price, a crumbling telecommunications market and an ongoing Securities and Exchange Commission investigation.

“Clearly, it means … that the company has made a few giant leaps toward bankruptcy,” said John C. Hodulik, an analyst for UBS Warburg.

The Nasdaq Stock Market halted trading in the two stocks representing WorldCom Inc.’s business, saying it was seeking more information from the company.

Shares of WorldCom Group, which represent the company’s data and commercial telecom services, last traded at 83 cents, down from a 52-week high of $16.06. MCI Group stock, which tracks the company’s consumer long-distance business, last traded at $1.68, down from as high as $17.33 in the last year.

WorldCom’s sudden fall comes at a time when the nation is dealing with a rash of corporate scandals that have rattled Wall Street and created a flood of shareholder lawsuits.

Enron Corp. collapsed last year in what was the biggest bankruptcy in the nation’s history amid revelations that it kept millions of dollars in losses off the books through shady accounting practices. Scandals followed at several other big-name companies, including Tyco International Ltd., Global Crossing and Adelphia Communications, which filed for bankruptcy Tuesday.

The accounting firm that audited WorldCom’s financial statements during 2001 and the first quarter of 2002 was Arthur Andersen LLP, which was convicted of obstruction of justice in the Enron case earlier this month.

Andersen said its work for WorldCom was in compliance with SEC standards.

“It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom. The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment,” Chicago-based Andersen said.

The SEC said in a statement late Tuesday that WorldCom’s disclosures “confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets.”

The agency said it has ordered WorldCom to file “under oath, a detailed report of the circumstances and specifics” of the accounting problems.

WorldCom, second to only AT&T in the long-distance market, grew from a small long-distance company into a telecommunications force through more than 60 acquisitions in the past 15 years. The growth was stopped in 2000 when federal and European regulators blocked WorldCom’s proposed $129 billion merger with Sprint Corp., citing competition concerns.

Still, WorldCom’s stock was one of the better performers of the late 1990s. The stock traded as high as $15 in January, but has stumbled since then over concerns about the company’s $32 billion in debt, slowing revenues and the SEC investigation. Drawing scrutiny and investor displeasure were $408 million in loans WorldCom had given to Ebbers.

Rick Black, analyst for Blaylock & Partners, L.P. in New York, said he wants to know if Ebbers knew about the accounting practice.

“The people who were running the company prior to this should know what’s going on. That’s the most logical assumption,” Black said. “If the CFO knows, the next question people are going to ask is what did Bernie Ebbers know, and of course they’re going to ask what did the board know.”

Black said bankruptcy could be the only alternative for WorldCom.

“For a company with $30 billion in debt, that has a sector deteriorating from competition … it’s not looking good,” he said.

The SEC investigation also focused on disputed customer bills and sales commissions, loans by WorldCom to officers and directors, customer service contracts and organizational charts and personnel records for former employees.

Eliot Spitzer, the New York State Attorney General, told reporters outside a Senate subcommittee hearing Wednesday that his office was looking at the role of analysts’ recommendations on WorldCom’s stock’s stunning rise.

While he would not discuss specifics, when asked about star telecom analyst Jack Grubman of Salomon Smith Barney, Spitzer said, “It did catch many people’s eye that he did finally come out with a downgrade.”

Grubman, long a supporter of WorldCom stock, downgraded his outlook on the company Monday, sending WorldCom shares plunging 25 percent.

Grubman told CNBC his downgrade had nothing to do with the latest troubles at WorldCom.

“I’m as shocked abut this as everyone else,” he said.

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On the Net:

http://www.wcom.com