WorldCom Finds $3.8 Billion Error, Fires CFO

Tue Jun 25, 9:29 PM ET

By Peter Henderson

SAN FRANCISCO (Reuters) - WorldCom Inc., the No. 2 U.S. long-distance carrier, on Tuesday said it had fired its chief financial officer after uncovering improper accounting of almost $4 billion in expenses, in the latest financial scandal to rock Corporate America.

WorldCom also said it would cut 17,000 jobs, or more than 20 percent of its work force, starting on Friday, a cost-cutting move expected to save $900 million on an annual basis.

The Clinton, Mississippi-based company said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.

The accounting irregularities, which did not conform to Generally Accepted Accounting Principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.

Accounting firm Andersen, whose role as the auditor of Enron helped lead to the energy trader's collapse, had audited WorldCom's financial statements for 2001.

Shares of WorldCom had plunged in after hours trading on Tuesday following a report by CNBC that the company had uncovered accounting irregularities.

The stock fell to 20 cents a share on the Island system from a close of 83 cents on Nasdaq. The previous closing low was 87 cents, while the stock had traded as high as $16.06 in the past 52 weeks.

WorldCom also said it had fired Chief Financial Officer Scott Sullivan and accepted the resignation of David Myers as senior vice president and controller.

"Our senior management team is shocked by these discoveries," said John Sidgmore, WorldCom CEO for less than two months.

"I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter," he said in a statement.

WorldCom said it had notified the Securities and Exchange Commission ( news - web sites) and had asked auditor KPMG to undertake a comprehensive review of its financial statements for 2001,

-- (corporate@deception.continues), June 25, 2002

Answers

LOL, they call THAT an "error"?? That might be what the CFO's attorney says, but I don't think too many people are buying it.

-- (stockholders@fucked.again), June 25, 2002.

Report: WorldCom Engaged in Massive Fraud Tue Jun 25, 7:38 PM ET

NEW YORK (Reuters) - Telecommunications giant WorldCom Group Inc. has been engaged in a massive fraud, inflating its cash flow by about $3.6 billion over the past five quarters, according to a news report.

Citing sources close to WorldCom's board of directors, CNBC reported that Chief Financial Officer Scott Sullivan -- who it said was fired over the past 48 hours -- inflated WorldCom's earnings before interest, taxes, depreciation and amortization, a measure of cash flow know as EBIDTA.

The beleaguered telecom firm has been reporting as capital expenditures costs that should have been treated as ordinary expenditures, and is planning to restate its financial statements in the near term, CNBC said.

Shares of WorldCom sank on Tuesday after-hours trading plunged to 36 cents per share on Instinet, down from a close of 83 cents on Nasdaq.

WorldCom could not be reached immediately for comment on the report.

"This is absolutely wrong," said Patrick Comack, an analyst Guzman & Co. who covers WorldCom. "This is shocking, it's mind-boggling. If it's true, it'd be hard for them to avoid bankruptcy."

WorldCom has been in talks with its banks and they are aware of the alleged fraud, the report said. This new revelation will make it very difficult for WorldCom to raise any new money and they may have to file for bankruptcy, the report said.

"I would assume the banks would do an about-face," Comack said, adding that WorldCom needs the credit line to meet its debt maturities next year.

The report, if true, would be the latest in a string of troubles for the firm. It would also add to a larger crisis of confidence on Wall Street where some of America's biggest companies are under federal investigation for accounting fraud and management chicanery.

An SEC spokesman declined to comment when asked if the agency was aware of the alleged financial fraud at WorldCom being reported by CNBC.

In April, WorldCom said it may sell up to $2 billion in assets, including the wireless resale business, as well as its stakes in Latin American telecom companies Avantel of Mexico and Embratel of Brazil. Proceeds from any sales would be used to pare WorldCom's debt load, which totaled $27.9 billion at the end of the first quarter.

The company last month said it would scrap its tracking stocks and dividend payments, saving $284 million a year. Analysts expect the company to cut its already reduced capital spending budget by another $1 billion to about $3.5 billion.

WorldCom faces a regulatory inquiry into its accounting practices and personal loans it made to former Chief Executive Bernie Ebbers. WorldCom Group's stock was removed from the Standard & Poor's 500 Index, and credit ratings on its $30 billion in debt were slashed to "junk" status.

The company is in talks to secure $5 billion in new funding to help restore investor confidence after its stock plunged 90 percent this year. It said expects to have the financing in place this month.

-- (more foul air @ spills out of. the tech bubble), June 25, 2002.

WorldCom Reveals Accounting Scandal, Markets Reel

Wed Jun 26, 4:22 AM ET

By Peter Henderson and Jessica Hall

SAN FRANCISCO/PHILADELPHIA (Reuters) - WorldCom Inc. said it had uncovered improper accounting for almost $4 billion in expenses, raising bankruptcy fears for the U.S. telecoms company and shocking investors reeling from accountancy scandals.

The No.2 U.S. long-distance telephone and data services said late on Tuesday it had fired its Chief Financial Officer Scott Sullivan after discovering the irregularities, which the Securities and Exchange Commission ( news - web sites) said were of a magnitude never before seen.

WorldCom said it would restate results for 2001 and the first quarter of 2002 to show net losses, in what may be the largest such revision ever. It joins a growing list of U.S. companies that have revealed accounting improprieties.

The news rocked Asian stocks, with Tokyo's Nikkei index sinking four percent and Seoul's Kospi losing 7.15 percent on Wednesday. Technology and telecom stocks were especially hard hit. Asia telecom bonds fell, and the dollar dropped to a seven-month low.

European shares opened with sharp losses and Wall Street appeared poised to follow suit.

The SEC, which had been investigating WorldCom, said it had ordered the company to file a detailed report on the disclosures, which rocked already shaky investor confidence in U.S. accounting practices.

"The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets," the SEC said in a brief statement.

The Washington Post reported on Wednesday that the Justice Department ( news - web sites) had begun a criminal investigation.

FINANCING TALKS THREATENED

The massive accounting problems could also derail WorldCom's talks with its lenders to secure $5 billion in financing, without which it may face a cash-crunch next year, or even bankruptcy, analysts said.

Robertson Stephens, which downgraded its rating on WorldCom to "market underperform" from "strong buy," said "a bankruptcy filing is highly likely within the next 12 months."

WorldCom, which gets 89 percent of its revenues from the United States, said it planned to cut 17,000 jobs, or more than 20 percent of its workforce, starting on Friday, in a bid to save $900 million a year. Its 2001 revenues were $35.2 billion.

It also said it would slash another 40 percent from sharply lower capital spending plans, taking its annual investment budget to $2.1 billion.

The revelations and restructuring came just seven weeks after co-founder Bernie Ebbers, who built the company through more than 60 acquisitions over the past decade, resigned as chief executive officer.

"When you look at the history of WorldCom, and their acquisition trail, you have a classic wheeler-dealer. And now this is the age were wheeler-dealers get called for what they are," said Frank Dzubeck, president of consulting firm Communications Network Architects.

Shares of WorldCom plummeted, losing almost three-quarters of their remaining value as they hit a low of 20 cents in after-hours trade from a close of 83 cents on the Nasdaq market.

The stock had traded as high as $15 at the start of the year and had touched a peak of more than $64 in June 1999.

WorldCom suppliers also found themselves on the firing line. Fujitsu ( news - web sites) Ltd, which is estimated to receive $40 million from WorldCom in revenues, saw its shares drop over four percent.

ANDERSEN INVOLVED

Clinton, Mississippi-based WorldCom is the latest company linked to auditing firm Andersen to face accounting problems. Andersen, whose role as the auditor of Enron helped lead to the energy trader's collapse, audited WorldCom's financial statements for 2001.

In a statement, Andersen said that WorldCom had withheld key information and not consulted its auditors about the accounting treatment of the expenses.

WorldCom said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.

The accounting irregularities, which did not conform to Generally Accepted Accounting Principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.

"SHOCKED BY DISCOVERIES"

"Our senior management team is shocked by these discoveries," said John Sidgmore, WorldCom's CEO of less than two months. He previously served as the company's vice chairman.

WorldCom said it had notified the SEC and asked its new accounting firm, KPMG, to review of its financial statements for 2001 and 2002.

Restating the results was not expected to hurt WorldCom's cash position, the company said. WorldCom has $30 billion in total debt, but no debt payments due in the next two quarters.

The grim news would make it harder for WorldCom's new management to assert control and may put creditors in power since WorldCom has so much debt, said Blair Levin, an analyst at Legg Mason in Washington and a former FCC ( news - web sites) official.

-- (Dumbya's buddies @ clean up. again), June 26, 2002.

W's buddies, you're such a stupid fuck. How is this related to Bush?

-- Maria (anon@ymous.com), June 26, 2002.

The amount of euphemism used in these articles is amazing. Misaccounting for $3.8 billion does not add up to "accounting irregularities". It adds up to massive, calculated fraud.

Accountants do not make math errors. They have practises and systems that catch math errors. What has happened here is a result of applied judgement. Some line items can be treated in more than one manner and the accountant is expected to select the manner that seems the most appropriate.

But accountancy does not give you $3.8 billion worth of leeway in judgement. Accounting practises are either regular, accepted and legal or they are illegal and fraudulent. The same practise cannot be both "irregular" and legal.

-- Little Nipper (canis@minor.net), June 26, 2002.

"The same practise cannot be both "irregular" and legal."

I object! It all depends on what your definition of the word "legal" is. We at Arthur Andersen believe it is legal to rip people off, if they don't know you're doing it, and they let you get away with it until after the fact. Once the money is stolen, it's not theirs anymore, so they have no basis for saying we stole "their" money, since they are no longer in possession of the said money. They willingly gave us the money and they can't ask for it back because Indian-giving has been a no-no since before America became a nation. The founders of our great country despise Indian-giving, which is why we banished the Indians from their homeland and put them on reservations. Only a communist would suggest that we allow Indian-giving to take place again in our great country as it would cause our forefathers to roll over in their graves. It is much too disruptive to the free market system.

-- (Arthur Andersen @ Defense. Attorney), June 26, 2002.

"W's buddies, you're such a stupid fuck. How is this related to Bush?"

A simple matter of statistics, that's all. Recent data shows us that if a party is engaged in lying there is a 33% probability they are related to Dumbya. If they are engaged in both lying and cheating, the probability goes to 66%. But if they are engaged in lying, cheating, and stealing (as in this case), there is a 99% probability they are either directly related to Dumbya, or they were encouraged by Dumbya to engage in these activities.

-- Mr. Statistics (proof@in.numbers), June 26, 2002.

Global Crossing, Terry McAuliffe, DNC, Bill Clinton.

Hypocrites.

-- (Roland@hatemail.com), June 26, 2002.

Thank you Arthur Anderson @Defense Attorney for the best chuckle all day. Indian giving, lol.

-- Uncle Deedah (unkeeD@yahoo.com), June 26, 2002.

Roland, would you enlighten us as to the political leanings of WorldCom? At the moment, I couldn't tell you whether they have contributed a dime to either major US party.

Or this a prophylactic measure, just in case WorldCom turns out to be a big contributor to a party you approve of?

In that case, of course, it never hurts to cry "hypocrite" as soon and as often as possible. At the very least it lets you raise the spectre of Bill Clinton -- and that can never be done too much! Like the Alamo and the USS Maine, Bill Clinton (and his cock) must never be forgotten. It is the wingnut war cry!

-- Little Nipper (canis@minor.net), June 26, 2002.

Oh Nipster, methinks thou doth protset too much. I simply provided the Global Crossing link so as to balance trollboy's WorldCom link. Any smart corporation spreads its lucre in every direction. I know of no one who reuses to it.

-- (roland@hatemail.com), June 26, 2002.

"reuses to it" => refuses to accept it

protset = protest

-- (errata@rata tat.tat), June 26, 2002.

There was a group of Republicans who tried to make Clinton's cock the primary issue. The Republican Party suffered greatly from that stupidity. I don't think the anti-Clintonites are doing that any more.

It was especially stupid considering all of the valid reasons for harsh criticism of the former Chickenshit-in-Chief, such as national security.

-- Peter Errington (petere7@starpower.net), June 26, 2002.

To add insult to injury, they've blocked all trading on their stock so that the stockholders can't even sell their shares to get back the few pennies they might still have invested. Since they owe a lot of debt it looks like this is being held for the creditors when they file bankruptcy. Total bullshit.

WorldCom Stock Halted After Shares Plunge

Wed Jun 26, 8:24 AM ET

NEW YORK (Reuters) - Shares of WorldCom Inc. were halted after they lost almost all of their remaining value in premarket trading on Wednesday after the No. 2 U.S. long distance phone company said it discovered accounting inaccuracies of nearly $4 billion.

The irregularities, which the Securities and Exchange Commission ( news - web sites) (SEC) said were of a magnitude never seen before, caused the company's already battered share price to plummet to 9 cents in premarket trade on Instinet.

By 7:10 a.m. EDT on Wednesday 13.6 million shares had changed hands on Instinet since 7 p.m. EDT the night before, according to a trader there.

The stock, which closed at 83 cents on Tuesday, had traded as high as $15 at the start of the year and had touched a peak of more than $64 in June 1999.

WorldCom, which joins a growing list of companies involved in accounting scandals, said late Tuesday it had fired its Chief Financial Officer Scott Sullivan after discovering the accounting discrepancy that would cause it to restate results for 2001 and the first quarter of 2002 and report net losses.

The news also rocked Asian stocks, with Tokyo's Nikkei index sinking more than 4 percent. Technology and telecom stocks were especially hard hit. Asia telecom bonds fell, and the dollar dropped to a seven-month low.

European shares opened with sharp losses and Wall Street appeared poised to follow suit.

WorldCom said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.

The accounting irregularities, which did not conform to generally accepted accounting principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.

The SEC, which had been investigating WorldCom, said it had ordered the company to file a detailed report on the disclosures, which rocked already shaky investor confidence in U.S. accounting practices.

The revelations and restructuring came just seven weeks after co-founder Bernie Ebbers, who built the company through more than 60 acquisitions over the past decade, resigned as chief executive officer.

-- (corporations@morally.bankrupt), June 26, 2002.

"considering all of the valid reasons for harsh criticism of the former Chickenshit-in-Chief, such as national security."

LOL, spoken like a true Monday Morning Quarterback! Dumbya wasn't going to do jack about security either until 911 came along. In fact it is suspiciously convenient that these kinds of things just "happened" to occur when Dumbya and Poppy were in office so that they could get their ratings up and make all their asshole criminal buddies in the defense and oil industries rich. You may not talk about cocks Errorton, but you're at least as dumb as those who do.

-- lol (you@love.dumbya), June 26, 2002.

Now LL, please get a grip. I don't "love W." How many times have you read my repetition of his mantra "let no big contributor go unrewarded."

So in the future, why don't you "turn over a new leaf." Before you post something, pause and ask yourself "am I really being fair?"

I'm sure you want to be fair.

-- Peter Errington (petere7@starpower.net), June 26, 2002.

Before you post something, pause and ask yourself "am I really being fair?"

Yeah, that's exactly what you should have asked yourself before you made your dimwit "chickenshit" remark.

-- (talking@to.yourself), June 26, 2002.

Roland, please excuse LN, he misses the point quite often. :)

-- Maria (anon@ymous.com), June 27, 2002.

I thought this would fit here.

REMAINING U.S. CEOs MAKE A BREAK FOR IT Band of Roving Chief Executives Spotted Miles from Mexican Border

San Antonio, Texas(Reuters) - Unwilling to wait for their eventual indictments, the 10,000 remaining CEOs of public U.S. companies made a break for it yesterday, heading for the Mexican border, plundering towns and villages along the way, and writing the entire rampage off as a marketing expense.

"They came into my home, made me pay for my own TV, then double-booked the revenues," said Rachel Sanchez of Las Cruces, just north of El Paso.

"Right in front of my daughters."

Calling themselves the CEOnistas, the chief executives were first spotted last night along the Rio Grande River near Quemado, where they bought each of the town's 320 residents by borrowing against pension fund gains. By late this morning, the CEOnistas had arbitrarily inflated Quemado's population to 960, and declared a 200 percent profit for the fiscal second quarter.

This morning, the outlaws bought the city of Waco, transferred its underperforming areas to a private partnership, and sent a bill to California for $4.5 billion.

Law enforcement officials and disgruntled shareholders riding posse were noticeably frustrated.

"First of all, they're very hard to find because they always stand behind their numbers, and the numbers keep shifting," said posse spokesman Dean Lewitt. "And every time we yell 'Stop in the name of the shareholders!', they refer us to investor relations. I've been on the phone all damn morning."

"YOU'LL NEVER AUDIT ME ALIVE!" they scream. The pursuers said they have had some success, however, by preying on a common executive weakness. "Last night we caught about 24 of them by disguising one of our female officers as a CNBC anchor," said U.S. Border Patrol spokesperson Janet Lewis. "It was like moths to a flame."

Also, teams of agents have been using high-powered listening devices to scan the plains for telltale sounds of the CEOnistas. "Most of the time we just hear leaves rustling or cattle flicking their tails," said Lewis, "but occasionally we'll pick up someone saying, 'I was totally out of the loop on that."

Among former and current CEOs apprehended with this method were Computer Associates' Sanjay Kumar, Adelphia's John Rigas, Enron's Ken Lay, Joseph Nacchio of Qwest, Joseph Berardino of Arthur Andersen, and every Global Crossing CEO since 1997. ImClone Systems' Sam Waksal and Dennis Kozlowski of Tyco were not allowed to join the CEOnistas as they have already been indicted.

So far, about 50 chief executives have been captured, including Martha Stewart, who was detained south of El Paso where she had cut through a barbed-wire fence at the Zaragosa border crossing off Highway 375. "She would have gotten away, but she was stopping motorists to ask for marzipan and food coloring so she could make edible snowman place settings, using the cut pieces of wire for the arms," said Border Patrol officer Jenette Cushing. "We put her in cell No. 7, because the morning sun really adds texture to the stucco walls."

While some stragglers are believed to have successfully crossed into Mexico, Cushing said the bulk of the CEOnistas have holed themselves up at the Alamo. "No, not the fort, the car rental place at the airport," she said. "They're rotating all the tires on the minivans and accounting for each change as a sale."

-- Maria (anon@ymous.com), June 27, 2002.

New York Times

July 2, 2002

Everyone Is Outraged

By PAUL KRUGMAN

Arthur Levitt, Bill Clinton's choice to head the Securities and Exchange Commission, crusaded for better policing of corporate accounting — though he was often stymied by the power of lobbyists. George W. Bush replaced him with Harvey Pitt, who promised a "kinder and gentler" S.E.C. Even after Enron, the Bush administration steadfastly opposed any significant accounting reforms. For example, it rejected calls from the likes of Warren Buffett to require deduction of the cost of executive stock options from reported profits. But Mr. Bush and Mr. Pitt say they are outraged about WorldCom.

Representative Michael Oxley, the Republican chairman of the House Financial Services Committee, played a key role in passing a 1995 law (over Mr. Clinton's veto) that, by blocking investor lawsuits, may have opened the door for a wave of corporate crime. More recently, when Merrill Lynch admitted having pushed stocks that its analysts privately considered worthless, Mr. Oxley was furious — not because the company had misled investors, but because it had agreed to pay a fine, possibly setting a precedent. But he also says he is outraged about WorldCom.

Might this sudden outbreak of moral clarity have something to do with polls showing mounting public dismay over crooked corporations?

Still, even a poll-induced epiphany is welcome. But it probably isn't genuine. As the Web site dailyenron.com put it, last week "the foxes assured Americans that they are hot on the trail of those missing chickens."

The president's supposed anger was particularly hard to take seriously. As Chuck Lewis of the nonpartisan Center for Public Integrity delicately put it, Mr. Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive." Mr. Lewis was referring to the saga of Harken Energy, which now truly deserves a public airing.

My last column, describing techniques of corporate fraud, omitted one method also favored by Enron: the fictitious asset sale. Returning to the ice-cream store, what you do is sell your old delivery van to XYZ Corporation for an outlandish price, and claim the capital gain as a profit. But the transaction is a sham: XYZ Corporation is actually you under another name. Before investors figure this out, however, you can sell a lot of stock at artificially high prices.

Now to the story of Harken Energy, as reported in The Wall Street Journal on March 4. In 1989 Mr. Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Mr. Bush was C.E.O. Explaining what it was buying, Harken's founder said, "His name was George Bush."

Unfortunately, Harken was also losing money hand over fist. But in 1989 the company managed to hide most of those losses with the profits it reported from selling a subsidiary, Aloha Petroleum, at a high price. Who bought Aloha? A group of Harken insiders, who got most of the money for the purchase by borrowing from Harken itself. Eventually the Securities and Exchange Commission ruled that this was a phony transaction, and forced the company to restate its 1989 earnings.

But long before that ruling — though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble — Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.

Given this history — and an equally interesting history involving Dick Cheney's tenure as C.E.O. of Halliburton — you could say that this administration is uniquely well qualified to chase after corporate evildoers. After all, Mr. Bush and Mr. Cheney have firsthand experience of the subject.

And if some cynic should suggest that Mr. Bush's new anger over corporate fraud is less than sincere, I know how his spokesmen will react. They'll be outraged.

-- Cherri (whatever@who.cares), July 02, 2002.