Telecom Giant’s Troubles Deepen
Nearly doubling the scope of what already was the largest corporate financial scandal in U.S. history, battered telecom giant WorldCom Inc. said Thursday that its auditors have uncovered an additional $3.3 billion in faulty accounting dating to 1999.
The disclosure, two months after the company said it had improperly accounted for $3.9 billion in expenses, is expected to turn up the heat under Bernard J. Ebbers, WorldCom’s longtime chief executive who was forced out in April. It also raises the question of whether the company ever had the financial wherewithal to be considered one of the nation’s premier telecommunications firms.
The revelation is sure to exacerbate worries among investors and lawmakers about widespread corporate malfeasance and to increase pressure on prosecutors to bring charges against Ebbers and others connected with the rash of corporate scandals.
And it could trigger additional regulatory actions, after Congress was prompted to pass sweeping corporate reform laws in the wake of WorldCom’s initial disclosure of improper accounting.
Clinton, Miss.-based WorldCom, the parent company of MCI, already is the focus of several federal investigations of accounting irregularities that covered up the telecom firm’s mounting losses amid an industrywide meltdown. Taken together, the company now is suspected of misreporting $7.2 billion on its books over the last 3 1/2 years.
WorldCom’s latest disclosure raises doubts about the company’s financial health in 1999 and 2000, when the company posted record sales and profit and enjoyed star status on Wall Street.
In a statement, WorldCom did not provide corrected figures for the years in question.
The accounting high jinks don’t completely erase WorldCom’s profit for those years.
But they stand to further erode the trust of skittish investors after a series of corporate scandals this year.
“Investors are completely fed up with the sector,” said David Willis, a telecommunications analyst at Meta Group, a technology research firm in Stamford, Conn. “Nobody really knows what to believe anymore.”
WorldCom said Thursday that the newly discovered bookkeeping irregularities boosted its operating income since 1999 through the improper counting of money that had been set aside to cover unpaid customer accounts.
That is a different sort of accounting sleight of hand than the methods used to hide $3.9 billion in expenses in 2001 and 2002, which also boosted earnings.
The company said in a statement that its internal financial review is not yet complete and that “additional amounts of improperly reported [earnings] and pretax income may be discovered and announced.”
Crippled by debt and undermined by news of the scandal, WorldCom filed July 21 for Chapter 11 bankruptcy protection. The case displaced that of Enron Corp. as the nation’s largest bankruptcy filing.
WorldCom, which listed $104 billion in assets and debt of $41 billion, is the country’s second-largest long-distance provider and is home to a network considered critical to the country’s Internet infrastructure.
“We knew the problem was a lot bigger than WorldCom told us, but the extent of this fraud is staggering,” said Ken Johnson, spokesman for Rep. W.J. “Billy” Tauzin (R-La.), who heads the House Energy and Commerce Committee and is the driving force behind investigations of WorldCom and Enron. “It’s hard to believe that Bernie Ebbers had no idea what was going on.”
Last week, federal officials arrested former WorldCom Chief Financial Officer Scott D. Sullivan and former Controller David F. Myers on seven criminal counts of fraud, conspiracy and submitting false statements to the Securities and Exchange Commission.
Both men were released on bail, and their attorneys have said they would plead not guilty.
Observers believe prosecutors hope to strike a plea agreement with one or both men to gain evidence against Ebbers, who drove WorldCom’s rapid rise on Wall Street and pocketed millions of dollars in salary, loans and bonuses.
“It’s going to come back around to Bernie,” telecom analyst Willis said. “They were relying on just a few people who knew all the pieces of the business, and they were relying on those same people to make the numbers. That was really a bad formula.”
Myers and his attorney met Thursday with the chief of U.S. Atty. James Comey’s white-collar fraud unit.
None of the participants would discuss the meeting’s purpose.
The news also looks increasingly bad for accounting firm Arthur Andersen, which served as WorldCom’s auditor until it was replaced recently by KPMG.
The new auditing team found the additional accounting flaws while scouring WorldCom’s books.
WorldCom spokesman Brad Burns said the company is committed to cleaning up its books.
Additional disclosures of improper accounting still may be in the offing, the company said in a statement.
“We’ve got a shop to clean up, and we’re going to continue to do so,” Burns said. “We’re doing a full investigation.”
Separately, WorldCom warned Thursday that it could write off as much as $50.6 billion in intangible assets when it restates its financial results.
