A thorough restatement of the company's 2000 and 2001 financial records shows it overreported its income by $74.4-billion.
By wire services
Published March 13, 2004
The dust finally settled on WorldCom Inc.'s accounting fraud Friday.
Almost two years after the phone company disclosed it had incorrectly booked expenses to make itself appear more profitable, it filed new financial statements that reduced its income by $74.4-billion in 2001 and 2000.
Most of that comes from recognizing that various assets were worth nearly $60-billion less than previously calculated. Much of that was goodwill, which is the difference between the price it paid for acquisitions and the true value of those assets.
Although immense, those sorts of writedowns are legitimate accounting transactions that occur frequently across corporate America.
But WorldCom's restatement for 2000 and 2001 also includes at least $10.6-billion of wiped-out profits that the firm attributed to accounting "errors" as well as "improper" and "inappropriate" accounting.
"The numbers are stunning. It's amazing what those guys did way back when," Thomas Mullen, a WorldCom bondholder and general partner at hedge fund TWM Capital, told Bloomberg News.
"They were basically cooking the books to a gargantuan degree," said Dan Meader, a certified public accountant and president of Trinity Advisors LP in Dallas.
In court documents, the total amount of overstated profits as a result of the nation's largest accounting scandal has been put at roughly $11-billion dating to 1999.
Without admitting or denying guilt, WorldCom agreed last year to pay $750-million in cash and stock to settle federal regulators' charges that it engaged in improper accounting to overstate profits.
For the long-distance giant, which is changing its name to MCI, the restatement is a key step to putting its past behind it.
"This filing culminates the largest and most complex financial restatement ever undertaken," WorldCom chief financial officer Bob Blakely said in a statement. "It is one of the last remaining milestones on our path to emerge from Chapter 11 protection."
Yet, Blakely said, "while these restatement adjustments are substantial, they do not have any impact on our current substantial liquidity position."
But experts said the company faces significant tests.
"The real question that has been lingering and hasn't been answered and won't be answered for a while is, what does the new MCI do now?" said Robert C. Atkinson, a research director at Columbia University's Institute for Tele-Information. "Are they going to be price leader, the price follower?"
Separately Friday, Oklahoma Attorney General Drew Edmondson settled his criminal fraud case against WorldCom in exchange for its cooperation in prosecutions of former executives.
Oklahoma has charges pending against six former company officials, including former chief executive Bernard Ebbers, who also has pleaded not guilty to federal fraud charges.
As part of the settlement with Oklahoma, the company also agreed to add 1,600 jobs in the state over 10 years, with an average annual salary of $35,000 a year, Edmondson said.
The deal left experts uneasy, however, because it implies that a company can make amends for criminal actions by hiring more workers.
"Since when can criminal defendants buy themselves out of criminal prosecutions?" Atkinson said. "I can understand civil litigation settled that way. It sounds unusual to say the least."
WorldCom spokeswoman Brittany Hoff said the company's final major hurdle is filing its 10-K annual report for 2003, which is eagerly anticipated by Wall Street to shed light on current performance.
Hoff said it likely will be filed close to the company's emergence from bankruptcy, which is anticipated in April.
Although Wall Street quickly dismissed Friday's report as covering ancient history, it is historical nonetheless. The $74.4-billion is by far the largest restatement in U.S. history, surpassing a $54-billion writedown recorded by AOL Time Warner in April 2002 to reflect to the declining value of the America Online business.
In filing its restatement, WorldCom also released audited 2002 results for the first time, posting a net loss of $9.2-billion on revenue of $32.2-billion.
Revenue was down more than 14 percent from the restated 2001 level, but the net loss shrank from $15.6-billion.
WorldCom also disclosed that it paid auditor KPMG, which replaced Andersen in May 2002, more than $143-million to audit 2002 and the restated 2000 and 2001 results.
In contrast, it said Andersen was paid $4.4-million to audit original 2001 results.
Blakely said WorldCom had roughly $6-billion in cash at the end of the year, though Hoff said it has yet to pay the $500-million cash portion of the settlement with the Securities and Exchange Commission.
