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WorldCom errors hit $7.1-billion

The bankrupt company, parent of MCI, also warns that more accounting problems may be found.

Compiled from Times wires

© St. Petersburg Times, published August 9, 2002

The bankrupt company, parent of MCI, also warns that more accounting problems may be found.

NEW YORK -- Bankrupt telecommunications company WorldCom said Thursday it has uncovered an additional $3.3-billion in bogus accounting stretching back to 1999, bringing the total to a mind-boggling $7.1-billion.

The disclosure, which nearly doubles the scope of what was already the largest corporate scandal in U.S. history, comes two months after the company said it improperly accounted for $3.8-billion in expenses.

It also calls into question whether the company ever had the financial wherewithal to be considered one of the nation's premier telecommunications firms.

The revelation is sure to exacerbate worries among investors and lawmakers of widespread corporate malfeasance and increase pressure on prosecutors to bring charges against Bernard Ebbers, WorldCom's longtime chief executive who was forced out in April. And it could trigger further action in Congress, which was prompted to pass sweeping corporate reform laws after WorldCom's initial disclosure of improper accounting.

WorldCom, which is the parent of MCI, the nation's second-largest long-distance company, and a major operator of the Internet, also warned it may find more accounting problems as it continues an internal investigation.

The company previously reported finding accounting irregularities for 2001 and the first half of 2002. The latest discovery was made as the company reviewed its books for 1999 and 2000, with most of it tallied in 2000, the company said.

As a result, WorldCom said it would restate its financial statements for all of 2000, 2001 and the first quarter of 2002.

WorldCom also said that when the earnings are restated, it will further reduce the reported value of various assets by as much as $50.6-billion. It said the new findings and plans had been disclosed to the Securities and Exchange Commission, which is conducting its own wide-ranging investigation of the company's accounting.

WorldCom, based in Clinton, Miss., did not disclose whether its internal investigators or KPMG, its new outside auditor, identified the new problems. It hired William McLucas, the former head of the SEC's enforcement division, in late June to lead its internal investigation. Arthur Andersen LLP had been WorldCom's auditor until May.

The new disclosures include more instances of operating expenses being improperly classified as capital investments, the main violation of commonly accepted accounting practices previously disclosed, according to an executive close to the audits, the New York Times reported. Operating expenses must be subtracted from revenue immediately while the cost of capital expenses can be spread over long periods of time. Improperly spreading the costs inflated WorldCom's reported profits before interest payments, taxes and other accounting adjustments by billions of dollars.

But the major new twist, the executive said, involved reserves WorldCom set up to cover uncollected payments from customers, judgments in lawsuits and other potential losses.

Companies that establish large reserves report them as a one-time charge against earnings. Until recently, most investors ignored such special charges and focused instead on revenue and expenses expected to recur year after year.

Companies setting up reserves can argue that they are merely being cautious, but the practice can be abused to create the accounting equivalent of a slush fund. When the company needs to lift reported operating profits in a quarter where it is in danger of falling short of Wall Street's expectation, it can transfer the necessary sums from the inflated reserve.

Such earnings management became an accepted practice in the 1990s. Executives justified it as a way to smooth out earnings, protecting investors from volatility. Critics, like Arthur Levitt, the former chairman of the SEC, who argued that the growing use of "rainy day reserves" distorted financial reporting, were largely ignored.

But WorldCom apparently resorted to such accounting on a huge scale during the time when Ebbers was chairman and chief executive, Scott Sullivan was his chief financial officer and David Myers was the company's controller.

The new disclosure may pose additional challenges for Sullivan and Myers, who were arrested and charged last week with securities fraud and filing false statements with the SEC. Such white-collar criminal actions are frequently amended to include expanded charges as investigations progress, said John C. Coffee Jr., a professor at Columbia Law School.

Some analysts said that the new disclosures made it harder to believe that Ebbers had no knowledge of WorldCom's accounting irregularities. Ebbers has said he was unaware of any accounting transgressions. Remaining senior managers are also expected to face growing doubts about their complicity and calls for their removal, including John Sidgmore, the current chief executive, who was vice chairman in 1999.

WorldCom spokesman Brad Burns said the additional findings won't affect the company's ability to keep operating.

"The company identified the financial issues to the investigative authorities and we are working hard to get the company back on solid financial footing," Burns said.

Other telecommunications experts said that the expanded accounting scandal could make it harder for WorldCom to hang on to business it needs if it is to successfully reorganize in bankruptcy

"It will make people that much more nervous about the long-term viability of the company," said James Harris, president of Seneca Financial Group, which advises troubled companies in a number of industries on how to reorganize.

When the company filed for bankruptcy protection last month, it claimed assets of $107-billion and debts of more than $41-billion.

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