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)
•
Video: WorldCom announced it had improperly accounted for $3.8 billion and will restate earnings. What does this mean for the future WorldCom?
_____Live Onlines_____
•
Transcript: Investing columnist James K. Glassman discusses the latest news on WorldCom.
•
Transcript: Ed Soule, Ph.D., assistant professor at Georgetown's McDonough School of Business and former CFO of Edward Jones Investments, discusses corporate ethics.
•
Transcript: Techway freelance reporter Keith Epstein takes questions about WorldCom's $3.8 billion restatement of earnings.
By Christopher Stern and Yuki Noguchi
Washington Post Staff Writers Thursday, June 27, 2002; Page A01
The Securities and Exchange Commission yesterday charged WorldCom Inc., the nation's second-largest long-distance telephone company, with defrauding investors by improperly accounting for $3.9 billion in expenses during 2001 and the early part of this year.
"In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting" that made the company appear more profitable than it was, the SEC said in a suit filed in U.S. District Court in New York. The agency asked the court to block WorldCom from destroying or altering any documents or making any extraordinary payments to executives and said it would also seek financial penalties against the company.
President Bush promised that both the SEC and the Justice Department would "fully investigate and hold people accountable" for what he called "outrageous" accounting methods that company executives disclosed Tuesday night. The revelation is expected to result in the largest earnings restatement in business history.
Speaking at a news conference in Kananaskis, Alberta, where he is attending a summit of leaders of the world's eight main industrial nations, Bush said: "There is a need for a renewed corporate responsibility in America. Those entrusted with shareholders' money must -- must -- strive for the highest of high standards."
But Bush said the accounting scandals that have plagued companies including WorldCom, Enron Corp., Global Crossing Ltd., Tyco International Ltd., Qwest Communications International and Adelphia Communications are not representative of American business. "The good news," he said, "is most corporate leaders in America are good, honest, open people who care deeply about shareholders and employees."
WorldCom's disclosures gave new impetus to efforts in Congress to tighten laws covering the accounting industry, particularly a bill sponsored by Sen. Paul S. Sarbanes (D-Md.). Senate Majority Leader Thomas A. Daschle (D-S.D.) said yesterday that he now has 80 votes in support of the bill.
In addition to probes by the SEC and the Justice Department, House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.) also promised to conduct his own investigation into WorldCom's practice of improperly booking ordinary expenses, such as the care and upkeep of its vast networks, as capital expenditures.
Trading in WorldCom stock was halted on the Nasdaq Stock Market yesterday as the viability of the giant telecommunications company seemed increasingly doubtful. In pre-market trading, WorldCom shares sold for 23 cents. Even before Tuesday's announcement, the company was threatened with delisting by the Nasdaq because its shares were trading for less than a dollar.
If the company -- which has more than $30 billion in outstanding debt -- does file for bankruptcy, it's not clear what would happen to its vast telecommunications network. Its fiber-optic web handles half of the nation's business communications and a third of all residential long-distance customers.
At the heart of the accounting probe is the company's practice of booking the cost of leasing telephone lines from other companies as a capital cost, according to the SEC's lawsuit. WorldCom needed the lines to service businesses in places where its network did not have enough capacity to handle the additional load. Experts said yesterday that the company could only have booked the cost as a capital investment if it had built out its own network to reach those customers.
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)
