WorldCom Inc., the nation's No. 2 long-distance phone company, stunned already reeling investors late Tuesday by disclosing what may be the largest case of accounting deception in U.S. history -- a $3.8 billion sleight of hand designed to boost profits.
The huge manipulation of WorldCom's finances, which the company said it uncovered in an internal audit, was designed to hide what would have been massive losses in 2001 and the first quarter of 2002. The revelation raises questions about the survival of Mississippi-based WorldCom, which acquired the MCI long-distance company in 1999.
WorldCom said it fired its chief financial officer, Scott Sullivan, after discovering a scheme in which routine business costs were improperly recorded as capital investments. The company, which had seen its stock price plummet amid a Securities and Exchange Commission investigation of its accounting practices, said it would proceed with plans to lay off 17,000 workers, starting Friday.
The disclosure couldn't come at a worse time for the stock market. The collapse of Enron Corp. and revelations of other corporate misdeeds have scared investors away from Wall Street, pushing major stock indexes to near their post-Sept. 11 lows.
Chicago's Andersen accounting firm, convicted earlier this month of obstruction of justice for destroying Enron-related records, was WorldCom's auditor during the five financial quarters in question.
In a statement released Tuesday evening, Andersen contended that it had been misled by WorldCom's Sullivan. The accounting firm said it had warned the WorldCom board earlier this year that it couldn't trust the information it received for its 2001 audit.
"The WorldCom CFO did not tell Andersen about the line-costs transfers nor did he consult with Andersen about the accounting treatment," the statement said. "It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom."
WorldCom disclosed that it improperly booked more than $3 billion in 2001 and $797 million in this year's first quarter as capital expenditures. The company said it would restate its earnings for 2001 and the first quarter of 2002.
"Our senior management team is shocked by these discoveries," said John Sidgmore, who was appointed WorldCom CEO in late April after the resignation of Bernard Ebbers. "I want to assure our customers and employees that the company remains viable and committed to a long-term future."
In a statement released late Tuesday, the SEC said 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.
Shortly after the SEC began investigating various WorldCom practices, including controversial swaps of network capacity with other telecom companies, WorldCom changed auditors, appointing KPMG.
Even before Tuesday's disclosure, WorldCom had seen its stock price fall 94 percent this year. The company's stock traded as high as $15 in January but has fallen over concerns about the company's $32 billion in debt, slowing revenue and the SEC investigation.
The latest news, analysts speculated, may be enough to drive the company into bankruptcy, as banks move to foreclose on loans made to WorldCom.
WorldCom's disclosure is "another nail in the coffin for the whole telecom industry, at least from the standpoint of investor confidence," said Bob Atkinson, a former deputy chief of the Federal Communications Commission who now studies the telecom industry for Columbia University in New York.
Atkinson said that even if this latest disclosure pushes WorldCom into bankruptcy and reorganization, "there's no reason to expect that WorldCom customers won't continue to get service."
Shares of WorldCom dropped sharply in after-hours trading, falling 57 cents to 26 cents a share, down 68 percent from its closing price of 83 cents. It closed under $1 for the first time on Monday.
Jeff Kagan, a telecom analyst based in Atlanta, said WorldCom's serious troubles aren't necessarily fatal.
"This is a company with 25 million customers and tens of billions in revenues. Whatever happened with the books happened to the old WorldCom, and it's not in anyone's interest to see that company fail," Kagan said. "But this is really big no matter how you slice it, and the demands on the company's credit, the hit its stock takes--all these things could push the company into bankruptcy."
The SEC investigation that began in the spring is focusing on disputed customer bills and sales commissions, loans by WorldCom to officers and directors, customer service contracts and personnel records for former employees.
Drawing scrutiny and investor displeasure were the $408 million in loans WorldCom gave to former CEO Ebbers, who resigned under pressure in April.
Sullivan, the fired CFO, was extremely close to Ebbers. Until recently, Sullivan was a Wall Street darling credited with helping to cobble together the many deals that created the company. Sullivan was unavailable for comment on Tuesday.
Andersen was the auditor for other telecom firms that have come under scrutiny this year for accounting irregularities. The SEC also is looking into the aggressive accounting practices of Global Crossing Ltd. and Qwest Communications International Inc.
The SEC also is investigating "swaps" of network capacity between telecom companies, transactions that critics say were intended to artificially inflate revenue.
As the auditor for WorldCom and other telecom firms, Andersen has been accused in shareholder lawsuits of signing off on financial reports that didn't accurately reflect the current standings of the companies.
"Andersen is a handy dog to kick right now," said Arthur Bowman, editor of Bowman's Accounting Report. "Historically, it is difficult for an accounting firm to find fraud, if not impossible, when executives collude."
He added that the pressure to perform in the fast-growing telecom sector may have added to the accounting problems.
After expanding rapidly throughout the late 1990s, the telecom market collapsed amid a glut of capacity and intense competition for customers. In all, investors saw $2 trillion disappear in plunging stock prices.Copyright © 2014, The Baltimore Sun