Investigators looking into the WorldCom scandal have found no records to support decisions to shift billions of dollars in expenses on the company's books, people close to the company said Thursday -- a fact that increases the likelihood that the transactions involved criminal fraud.
Instead, investigators have found that the sums involved, which reduced reported operating expenses over the last five quarters, were exactly those needed for WorldCom to meet its profit margin goals, these people said.
"From all appearances, this started with the desired profit margin and then backed into the expense number," one person close to the company said.
Moreover, in interviews with the company's board, the former chief financial officer, Scott D. Sullivan, reported that he independently decided to make the expense shifts without consulting with WorldCom's former accountants, Arthur Andersen, according to people close to the company. Sullivan also implied that he had made the decision without consulting other senior executives, they said.
The lack of records will most likely be crucial in the unfolding investigations of WorldCom, which have rapidly picked up pace in the two days since the company announced it had improperly accounted for more than US$3.8 billion in expenses.
The company has already been served with criminal subpoenas from the US attorney in Manhattan, people close to the company said. Those subpoenas seek virtually every record that went into the preparation of the company's financial statements dating back several years, they said.
In addition, the House Financial Services Committee said Thursday it would subpoena current and former WorldCom executives and a prominent Wall Street analyst for a hearing July 8 on how the company overstated profits and understated expenses.
The executives who will receive subpoenas to testify are the chief executive, John W. Sidgmore; the former chief executive, Bernard J. Ebbers; and Sullivan, who was fired after an internal auditor discovered the accounting problem.
Jack Grubman, a prominent telecommunications analyst at Salomon Smith Barney, who played an important role in helping WorldCom grow into one of the largest telephone companies, will also receive a subpoena. Grubman, who was close to Ebbers and Sullivan, did not recommend to investors they sell stock in WorldCom until Monday, after the shares had declined 99 percent.
"Of course, we will cooperate with any inquiry as is our practice," said Mary Ellen Hillery, a spokeswoman for Salomon. The firm handled more than US$20 billion of underwriting for WorldCom in the last five years, benefiting from a close investment banking relationship with the company.
An amazing excuse
The lack of records in support of the expense transactions was first discovered by WorldCom in the days leading up to its announcement Tuesday. Last weekend, Sullivan was asked to prepare a "white paper" to explain his decisions to shift billions of dollars of operating expenses into capital expense accounts.
Under accounting rules, capital costs can be charged as expenses in small percentages over many years, while operating expenses must be declared in the year they occurred.
In the white paper, according to people who have read it, Sullivan explained that he thought the expenses involved an investment in telecommunications line capacity, which would provide increasing revenue in future quarters. Therefore, he argued, it was appropriate to defer expenses until those future quarters.
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