he Securities and Exchange Commission filed additional fraud charges against WorldCom yesterday, saying that the company inflated earnings by almost $2 billion more than it had previously disclosed in accounting manipulations that began in 1999, earlier than was originally charged.
WorldCom, which is in discussions with the S.E.C. to settle the case, said yesterday that it expected to make more financial restatements as a result of the discovery of additional accounting problems. The S.E.C learned about the problems from the company. WorldCom, which is now operating under bankruptcy protection, had previously disclosed $7.2 billion in financial misstatements. The new disclosure brings the total amount to more than $9 billion.
In the amended complaint, the S.E.C. also added new fraud charges, accusing WorldCom of engaging in fraud in the offering of securities to the public, and of maintaining false books and records in violation of federal securities laws. Both of those charges relate directly to the company's having misled investors by reporting inflated profits as a result of accounting manipulations.
The revised complaint also expands the types of manipulations that the S.E.C. says occurred. The original complaint cited only WorldCom's efforts to shift billions of dollars in operational expenses into capital accounts — a move that allowed costs that should have been recognized each quarter to be charged instead in much smaller amounts over many years.
The new complaint accuses the company of an additional scheme, asserting that WorldCom retained secret reserves that could be used almost as a cookie jar — tapped whenever the company needed to offset expenses, and thus improperly increase profits.
The New York Times reported yesterday that WorldCom and the S.E.C. were in negotiations to settle the case, and that a deal was expected to be completed in the coming weeks. S.E.C. officials denied yesterday that such a settlement would entail the dismissal of fraud charges against the company, as The Times reported.
WorldCom and the commission have been discussing the additional restatements for several weeks, according to people involved in the case. A full settlement would need to resolve the additional charges filed yesterday.
In its statement yesterday, WorldCom said that the anticipated additional restatements of almost $2 billion, an estimated total "based on very preliminary reviews of past accounting," would have no impact on the company's ability to continue to provide service to its customers or on its ability to emerge from bankruptcy protection. WorldCom said that it had more than $1 billion in cash on hand, and access to an additional $1.1 billion in financing.
But the S.E.C. also signaled that the full scope of the accounting problems at WorldCom might still not be fully understood, in part because of what the agency described as the company's consistent violations of generally accepted accounting principles, or GAAP.
"As a result of, among other things, WorldCom's chronic and pervasive failures to follow GAAP standards, and to mandate and institute appropriate internal controls, the exact amount and extent of WorldCom's overstatement of its income has not yet been quantified," the S.E.C. complaint says.
The WorldCom scandal has involved a series of expanding revelations about the practices of a company that was once a Wall Street favorite and a symbol of the highflying telecommunications business of the late-1990's.
In June, WorldCom revealed that its chief financial officer, Scott D. Sullivan, along with others at the company, had improperly shifted more than $3.8 billion in operating costs for access to telecommunications lines into capital accounts, which enabled the company to overstate profits by billions. Within two months, the company had disclosed additional improper expense shifting that exceeded $3.3 billion.
In addition to the S.E.C. inquiry, prosecutors with the United States Attorney's office in Manhattan have been investigating the events at WorldCom. Already, Mr. Sullivan has been indicted on criminal fraud charges, but has maintained he committed no crime. Several other WorldCom executives involved in the cost shifts — including David F. Myers, the former controller of the company — have pleaded guilty and agreed to testify against Mr. Sullivan.
WorldCom executives were able to engage in sweeping manipulations of the company's reported finances because of a complete breakdown in the controls and oversight at the company, according to a report released Monday by Richard L. Thornburgh, who was appointed an examiner by the federal bankruptcy court overseeing the case.
According to the Thornburgh report, the company's internal audit efforts largely failed, in part because the department with that responsibility was excessively focused on trying to identify operational inefficiencies rather than on financial auditing. The department was also understaffed and underfinanced, the report said. However, the report commended the personnel in that department who ultimately discovered the accounting schemes at WorldCom and reported them to the board.
