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Misteps since 99 { July 2 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A10998-2002Jul1.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A10998-2002Jul1.html
WorldCom Missteps May Go Back to '99
By Christopher Stern
Washington Post Staff Writer
Tuesday, July 2, 2002; Page A01
WorldCom Inc., which already faces charges of defrauding investors during 2001 and part of 2002, revealed yesterday that an internal investigation has uncovered questionable accounting practices stretching back as far as 1999.
WorldCom's report outlining its serious accounting problems rattled financial markets, as investors traded almost 1.5 billion of the company's shares, setting a record for the number of shares traded in one day for one firm and sending the stock down 93 percent to close at 6 cents. And the report failed to satisfy Securities and Exchange Commission Chairman Harvey L. Pitt, who said it was "wholly inadequate and incomplete" because it failed to go far enough in detailing the firm's financial problems.
Meanwhile, the General Services Administration added to WorldCom's woes by saying it is considering a ban on new federal contracts with the telecommunications company. In response to the litany of bad news, which began last week, WorldCom's MCI Group has decided to withdraw its offer to sponsor the July 4 fireworks on the Mall.
Last Tuesday, WorldCom announced that it had improperly accounted for $3.9 billion in expenses and said it would have to restate its earnings for last year and the first quarter of this year. The company, once a driving force in the telecommunications industry, could be forced by its lenders to file for bankruptcy protection from creditors.
The Justice Department is reviewing events, and the SEC has charged the company with defrauding investors. Last week, the SEC demanded that WorldCom file a sworn statement explaining how it uncovered that the company had improperly accounted for the $3.9 billion. It was in that statement, made public yesterday, that the company revealed that it has also found potential problems in its financial statements for 1999 and 2000.
But the statement did not contain enough details of WorldCom's accounting problems to satisfy Pitt. "It demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC," Pitt said.
WorldCom spokesman Brad Burns said yesterday that the company made its best effort to comply with the agency's demands. "We are very surprised by the chairman's comments," Burns said. "Based on the order we received and conversations with SEC staff, we believe the SEC was clear on what we could produce at this time."
According to the four-page, 24-paragraph memo signed and sworn by WorldCom's general counsel, Michael Salsbury, the improper accounting of the $3.9 billion was turned up by the company's internal auditor, Cynthia Cooper. Cooper also uncovered the separate potential accounting problems in 1999 and 2000.
A WorldCom spokeswoman said yesterday that Cooper discovered the problems during a "routine internal audit." Cooper began her investigation sometime in May, after Bernard J. Ebbers stepped down as the company's chairman amid mounting questions about $408.2 million in previously undisclosed loans he received from the company.
According to a statement released yesterday by the SEC, Cooper discovered that, beginning in 2001, the company began transferring costs -- which had been previously been treated as expenses -- to its capital expenditure accounts.
The company benefited from the transfer because capital costs can be deducted over a longer period of time, while expenses must be immediately subtracted from revenue. The change made the company appear more profitable than it really was.
The WorldCom report said its chief financial officer, Scott D. Sullivan, and comptroller, David F. Myers, authorized the accounting change. Last week, Sullivan was fired and Myers resigned.
Sullivan argued that his accounting methods were proper, but he found no support for his position from either the company's new auditor, KPMG LLP, or its former auditor, Arthur Andersen LLP, according to WorldCom. Andersen, which certified WorldCom's financial statements, was fired on May 16.
The full extent of the company's accounting problems came to a head during a conference call on June 24, according to WorldCom. The call included the firm's senior management, board members, outside lawyers and representatives from Andersen. Andersen denied knowledge of the $3.9 billion worth of improperly allocated expenses, according to WorldCom's account.
The Andersen representatives "stated that Andersen had not known of the transfers, but declined to respond to questions regarding how Andersen's audit activities could have failed to discover the transfers," WorldCom states in its report.
WorldCom said that after that conference call, Sullivan and Myers were warned they would be fired if they did not resign by the next day.
It was also after that conference call that the audit committee met with William McLucas, a lawyer who conducted an internal investigation for the board of the now-collapsed Enron Corp. McLucas was hired to conduct a similar investigation for WorldCom. He expects to wrap up the inquiry in the next six to eight weeks.
An Andersen spokesman said the company has no comment on the WorldCom report. Speaking on the condition of anonymity, a senior Andersen official reiterated the company's position that "it's extremely difficult, if not impossible, for an audit to detect information that is purposely withheld, for possible fraudulent activity, by senior executives."
A spokesman for KPMG said the firm could not comment, citing client confidentiality.
Shares of WorldCom resumed trading yesterday for the first time since the revelations. WorldCom's statement, which was made public just minutes before the markets openned, created a stampede among shareholders to dump the company's shares. In just the first 15 minutes of trading, more than 250 million shares of WorldCom changed hands.
Shares of WorldCom, which were already trading below $1, fell 77 cents. During its peak in 1999, WorldCom stock sold for more than $64, making billionaires out of the largest shareholders and allowing the company to use its stock as a currency to buy up more than 70 of its rivals.
WorldCom also confirmed yesterday that its banks had formally informed the company that it was in default on two lines of credit for a total of $4.25 billion. The banks have the right to demand immediate repayment, which would force the financially struggling WorldCom into bankruptcy.
WorldCom was negotiating with its bankers last week to extend existing lines of credit when it made the announcement that it had improperly accounted for billions of dollars. That event put the company in technical default on its loans, allowing the banks to demand repayment.
Talks between WorldCom and the banks have continued. Many key participants in the talks said they expect WorldCom to eventually file for bankruptcy protection.
Staff writers Jonathan Krim and Yuki Noguchi contributed to this report.
© 2002 The Washington Post Company
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