A WorldCom filing would rank as the largest corporate bankruptcy case in U.S. history and leave creditors with nearly $30 billion in bad debt.
"You get the feeling that people have not finished lifting up rocks and finding all the worms," said Henry Hu, a securities law professor at the University of Texas.
WorldCom, parent company of MCI, also said Tuesday that it would begin laying off 17,000 workers this week, continuing a retrenchment that began last year.
The irregularities were discovered during an internal audit, WorldCom said. The firm informed the Securities and Exchange Commission, which already was investigating other aspects of the company's accounting.
WorldCom's board fired Chief Financial Officer Scott D. Sullivan. Controller David Myers resigned.
"This clearly qualifies for financial fraud," said Alex Mou, a telecom analyst with Hotovec, Pomeranz & Co. in San Francisco. "What it tells you is all the statements the company made in the past basically become a lie."
The accounting maneuvers masked the financial troubles that engulfed the entire telecommunications industry amid a plunge in sales as the economy slowed.
Beginning in the first quarter of 2001, WorldCom began labeling some of its routine expenses as capital expenditures.
By classifying normal expenses as long-term capital expenditures, WorldCom, which had revenue of $35 billion last year, avoided having to deduct the expenses as a cost of doing business. The result was a massive overstatement of net income, the firm said.
The improper transfers totaled $3.06 billion in 2001, with an additional $797 million in the first quarter of 2002. Had WorldCom reported its expenses properly, the company said it would have had a net loss for 2001 and the first quarter of 2002.
WorldCom previously said it earned $1.4 billion in 2001 and $130 million in the first quarter.
"This is really, really shocking, really mind-boggling," said analyst Patrick Comack of Guzman & Co. in Miami. "This could damage overall investor psychology. It would be just like another Enron."
The SEC, in a statement late Tuesday, said the WorldCom disclosures "confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets." The agency said the cases "demonstrate the need for comprehensive market regulatory reforms."
WorldCom and Enron Corp., the discredited energy trader now mired in the largest bankruptcy case in U.S. history, shared the same auditor: Arthur Andersen.
On Monday, Andersen told WorldCom that its audit reports for 2001 and 2002 "could not be relied upon," the company said. WorldCom recently replaced Andersen with KPMG.
"Our work for WorldCom complied with SEC and professional standards at all times," Andersen said in a statement. "It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom."
The disclosure comes at a critical time for WorldCom, which is struggling to rebuild since the departure in April of its longtime chief executive, Bernard J. Ebbers.