A U.S. flag flies outside WorldCom Inc. headquarters in Clinton, Miss. The company announced on June 25 that it had improperly accounted for $3.8 billion in expenses and would restate its financial results for the last five quarters.
(Rogelio Solis/File - AP)
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Video: WorldCom announced it had improperly accounted for $3.8 billion and will restate earnings. What does this mean for the future WorldCom?
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Transcript: Investing columnist James K. Glassman discusses the latest news on WorldCom.
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Transcript: Ed Soule, Ph.D., assistant professor at Georgetown's McDonough School of Business and former CFO of Edward Jones Investments, discusses corporate ethics.
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Transcript: Techway freelance reporter Keith Epstein takes questions about WorldCom's $3.8 billion restatement of earnings.
Company financial statements based on this maneuver were approved by Arthur Andersen LLP, the company's outside auditors until May.
"This is Accounting 101," said David Larcker, a professor of accounting at the University of Pennsylvania's Wharton School. "There is very little question that network maintenance costs and other operating expenses should be booked and paid for up front. This was overt manipulation."
John W. Sidgmore, WorldCom's chief executive, said yesterday that he was first told last Thursday by a member of the company's audit committee that the company faced a potential accounting problem.
Sidgmore said he only realized the full extent of the problem Monday night after meeting with officials of KPMG LLP, which had replaced Andersen as WorldCom's auditors. WorldCom notified the SEC that an internal audit had turned up the accounting problems after the close of stock market trading on Tuesday. At the same time, Sidgmore told WorldCom's chief financial officer and secretary, Scott Sullivan, that he was fired.
Sidgmore said he had planned to make a public announcement yesterday, but word of the restatement leaked on CNBC Tuesday night, and a statement was hastily released. It disclosed that if the $3.9 billion in expenses had been properly accounted for, it would likely have wiped out the company's reported profit of $1.5 billion in 2001 and $130 million for this year's first quarter.
WorldCom officials also told the SEC that the company had hired William McLucas, a former agency official and lawyer at Wilmer, Cutler & Pickering, to do a top-to-bottom investigation, similar to the one he performed for Enron's board of directors last year. McLucas will interview officials at WorldCom as well as people outside the company.
Representatives from WorldCom told the SEC they would turn over information as it became available and pledged "to do whatever it takes to clean this situation up," according to a WorldCom source.
Under the leadership of its colorful founder, Bernard J. Ebbers, WorldCom, based in Clinton, Miss., was once a powerhouse that threatened the dominance of telecommunications giant AT&T Corp. The company made a name for itself by aggressively acquiring other telecommunications companies, including Washington-based MCI, but it began to suffer from a severe industry downturn in early 2000. The company initially claimed that it was weathering the storm better than rivals, but its troubles were clear when Ebbers resigned in April amid questions about more than $400 million in personal loans granted to him by the company.
Some analysts said yesterday that they expect to hear much more about WorldCom's accounting methods in the weeks ahead.
Scott Cleland, a telecommunications analyst with the Washington-based Precursor Group, said dozens of rapid-fire mergers and acquisitions over the years made it difficult for investors to get a true picture of the company's health. "When you have 60 acquisitions, you can report your financials any way you want to because it's so complex to report," Cleland said.
How the company's prepared its public documents for finances were a mystery, even to those close to the preparation of them, according to a source familiar with the company.
"You prepared numbers, threw them into a black hole to [Mississippi], and you never understood how that figured into the end result," the source said. Although it should have been possible to trace back each unit's results, "I could never understand how those were correct," the source said.
At most, there were five people at the top who understood how all the financial pieces fit together, the source said.
Despite the mounting investigations, dealing with its bankers and creditors could be WorldCom's most immediate problem. "The capital markets are closed to them," said John Culver, a debt analyst with Fitch Ratings. While WorldCom is likely to be able to meet $172 million in debt payments due this year, its ability to pay $5.8 billion due next year is in great question, Culver said.
Fitch Ratings and Standard & Poor's Corp. lowered their ratings on WorldCom's already battered long-term debt in anticipation of a possible bankruptcy filing by the company. Both rating agencies cited the pending restatement of earnings, heightened federal scrutiny and the potential flight of customers.
"These events increase the likelihood of a debt restructuring or Chapter 11 filing near term," said Rosemarie Kalinowski, a credit analyst with Standard & Poor's. If WorldCom, which is struggling under $32 billion in debt, were to file for bankruptcy, it would be the largest corporate collapse in history, eclipsing recent filings by Enron, Kmart Corp., and Global Crossing.
Locally, WorldCom's 8,000 employees were bracing for massive layoffs that are expected to begin tomorrow. About 17,000 of the company's 80,000-strong workforce are expected to lose their jobs as a result of already announced cost-cutting measures.
Staff writers Carrie Johnson, Shannon Henry, Dan Eggen and Kathleen Day in Washington and Karen DeYoung in Calgary, Alberta, contributed to this report.
A U.S. flag flies outside WorldCom Inc. headquarters in Clinton, Miss. The company announced on June 25 that it had improperly accounted for $3.8 billion in expenses and would restate its financial results for the last five quarters.
(Rogelio Solis/File - AP)
