By Yuki Noguchi and Renae Merle
The Washington PostJune 26, 2002
WorldCom Inc. said last night it had improperly accounted for $3.8 billion in expenses and would restate its financial results for the last five quarters. The company fired a top financial officer and accepted the resignation of another, and sources said the Justice Department had begun a criminal investigation.
The earnings restatement is expected to be the largest in business history, and it appeared likely last night to wipe out all of WorldCom's profits from the beginning of 2001. The revelation by the nation's second-largest long-distance telecommunications company stunned a business world already grappling with scandal.
"Our senior management team is shocked by these discoveries," John Sidgmore, the company's newly appointed chief executive, said in a statement issued last night. "We are committed to operating WorldCom in accordance with the highest ethical standards."
The WorldCom revelation is the latest in a startling series of developments that have spawned new mistrust of corporate America and thrown into question much of the fantastic business growth of the late 1990s. The business world was already reeling from the collapse of Enron Corp., the conviction of Arthur Andersen LLP for obstructing the Enron investigation, and the indictment of former chief executives from ImClone Systems Inc. and Tyco International Ltd.
It appeared last night that the WorldCom restatement would far surpass any of those scandals, likely heightening investor skepticism about the nation's financial markets.
"I would be stunned if [the restatement doesn't] trigger bankruptcy," said Rob Gensler, an analyst for T. Rowe Price, the Baltimore mutual fund company. "I am almost certain it will. The math doesn't even work anymore."
WorldCom said that despite its shaky financial condition it would be able to continue normal operations. It owns long-distance company MCI Group and UUNet, which controls a major portion of the Internet "backbone," the system of cables and electronic switches that allows access to Internet e-mail and Web pages.
The company said it had fired Scott Sullivan, its chief financial officer and secretary, and accepted the resignation of David Myers, senior vice president and controller. Efforts to reach them or their lawyers were unsuccessful last night.
WorldCom revealed that it had swept $3.8 billion in ordinary expenses off its profit-and-loss statement by counting them as capital expenditures, which are deducted from revenue over a longer period, not immediately. The company had previously reported profits of $1.5 billion for 2001 and $130 million for this year's first quarter.
Company financial statements based on this maneuver were approved by Andersen, the company's outside auditors until May. WorldCom said it had informed Andersen of the newly discovered accounting transfers and that Andersen had replied that its audit "could not be relied upon." Andersen was replaced as WorldCom auditor May 15 by KPMG LLP.
WorldCom said it alerted the Securities and Exchange Commission, and sources said Justice Department prosecutors were looking into the case. In a statement released late Tuesday night, the SEC said it had ordered WorldCom to file "under oath, a detailed report of the circumstances and specifics" of the accounting problems, the Associated Press reported.
"Our work for WorldCom complied with SEC and professional standards at all times," Andersen said in a prepared statement. Sullivan didn't tell the external auditors about the transferred expenses, Andersen said.
KPMG is doing new audits, WorldCom said.
The accounting discrepancies were discovered by an internal auditor at WorldCom, who brought them to the board of directors' audit committee, chaired by Max Bobbitt, earlier this week, said Stiles A. Kellett Jr., a WorldCom director.
"That was a shock to us. We had to take immediate action," Kellett said last night from his home in Atlanta. He said Sullivan, the chief financial officer, "tried to explain his thought process and the accounting method he used, but our audit committee and KPMG could not get comfortable with it. Nowadays, you can't sleep on stuff."
Enron was devastated last fall by disclosure of violations of accounting rules that forced it to restate financial results back to 1997. Its announcements in October and November cut reported earnings since 1997 by $508 million, added $628 million in debt and reduced shareholder equity by $1.2 billion. Failed accounting strategies also caused a $544 million loss in last year's third quarter.
Bernard J. Ebbers, a former schoolteacher who became a brash, hard-charging chief executive, orchestrated more than 70 mergers during the technology boom to build WorldCom into a global telecommunications giant that operates in 65 countries and employs 80,000 people, 8,000 of them in the Washington area.
WorldCom has deep roots in Washington. In 1998 it bought MCI Communications Corp., the Washington company that had challenged, and eventually broken, the AT&T long-distance monopoly, revolutionizing telephone service in the United States. Another acquisition was UUnet Technologies Inc., the Ashburn company that controlled a large portion of the Internet's backbone.
In the past year, as telecommunication companies nationwide have crashed, investor faith ebbed in Ebbers's ability to guide the company out of debt. He resigned under pressure in April and was replaced by Sidgmore, the former UUNet chief, who promised to reduce debt, sell underperforming divisions, and cut costs dramatically. His plans included laying off 17,000 people.
In his statement last night, Sidgmore said he wanted "to assure our customers and employees that the company remains viable and committed to a long-term future."
Ebbers, whose resignation came during an SEC investigation of WorldCom's finances, owes the company more than $408 million in loans, one focus of SEC investigators. Many of the loans were made by the company to compensate Ebbers for paper losses he suffered as WorldCom stock declined.
Just three years ago, Ebbers had been at the top of his game, standing on a ballroom stage in a New York hotel to announce his most stupendous merger plan yet, the acquisition of Sprint Corp.
But the deal was blocked on antitrust grounds and as tech stocks began their retreat, WorldCom plunged along with many other companies.
When the Sprint merger fell through, WorldCom's stock was trading at $48 a share. Yesterday the stock closed regular trading at 83 cents and fell to 33 cents a share in after-hours trading after CNBC first reported the restatement.
WorldCom is not the only telecom company audited by Andersen to face SEC scrutiny. Qwest Communications and the now bankrupt Global Crossing have also drawn SEC attention.
Staff writers Neil Irwin, Carrie Johnson, Peter Behr, David S. Hilzenrath and Justin Gillis contributed to this report.
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