Sun, Jun 30, 2002 page10

• Looks like WorldCom tampered

  COOKING THE BOOKS An ongoing investigation by the US' Securities and Exchange Commission is turning up evidence of false reports on corporate expenses

  • NY TIMES NEWS SERVICE
  • • 
    • 
    • 

  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.

  

  Bernard Ebbers of WorldCom, right, with Bert Roberts Jr., of MCI, announcing at a press conference in Manhattan in 1997 that WorldCom would acquire MCI. An ongoing inquiry by the US Securities and Exchange Commission is exposing evidence of fraud at the company.

  PHOTO: NY TIMES

  "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.

  Sullivan presented his case to the company's directors, who were dumbfounded as they listened to the explanation, according to people close to the company. Afterward, the directors asked the company's new accountants, from the firm KPMG, if the explanation sounded appropriate, and the KPMG auditors said it did not. WorldCom replaced their former outside accountants, Arthur Andersen, with the firm of KPMG.

  Afterward, according to people close to the company, Sullivan was questioned more thoroughly. Where, he was asked, was the documentation that supported the dollar figures he chose to shift from operating to capital expense accounts? Each time, according to people close to the company, Sullivan replied that he had none.

  "There was no model he was using in coming up with those numbers," one person close to the company said.

  Corporate transactions, particularly those involving billions of dollars in capital, always generate reams of paper that are used to explain how values were selected to auditors and accountants to ensure that managers do not simply create numbers to achieve desired results. The lack of such records in the WorldCom case has led investigators to believe that the transactions had no business basis.

  Internal audit

  The discrepancies were discovered by an internal auditor during a routine check of the company's capital accounts. Repeatedly, according to people close to the company, the auditor could find no records to support the dollar amounts in the accounts, a suspicious clue that ultimately led to the discovery of the shifting of expenses.

  The ease of the discovery led some directors to question why the discrepancies had not been detected by associates with Arthur Andersen, WorldCom's former accountant. The lead Andersen partner on the WorldCom account was changed in 2001, according to people who have reviewed records of the accounting. That partner, Melvin Dick, earlier this month became the chief financial officer of Coldwater Creek, a clothing retailer. Dick did not return calls.

  Separately, WorldCom showed signs on Thursday of losing business as customers flocked to competitors for local and long-distance phone service. SBC, the regional telephone company based in San Antonio, said last night that call volumes surged an average of 25 percent Wednesday at call centers that specialize in handling customers that want to switch their local service to SBC.

  The House Financial Services Committee focused on WorldCom on Thursday as a growing list of banks disclosed losses on the company's bonds and stock. The financial services industry has also come under scrutiny for financing WorldCom's rise and hyping its prospects even as they began to dim last year.

  "Sadly, the news brings us yet another incident of accounting overreach," said Representative Michael Oxley, chairman of the Financial Services Committee. "These alleged short-term gains created by the executives are going to cause long-term pain for WorldCom families."

  As WorldCom proceeded with the dismissal of 17,000 employees, or about a fifth of its work force, part of a program intended to cut US$2 billion of costs that begins Friday, the company was also struggling Thursday to avoid an exodus of senior executives.

  A retention program created two years ago that paid more than 550 top executives an average of US$425,000 each to prevent them from leaving the company expires July 30. Recruiters said Thursday that many senior operating, marketing and technology executives at WorldCom were planning to leave the company.

  Heavyweight involvement

  Treasury Secretary Paul O'Neill called Thursday for thorough prosecution of the executives responsible for the accounting irregularities at WorldCom. The SEC filed fraud charges against WorldCom on Wednesday. The Justice Department and another House committee, Energy and Commerce, opened investigations of the company's accounting practices this week.

  The House Energy and Commerce Committee requested Thursday night that WorldCom turn over a detailed list of financial records to the committee by July 11, 2002.

  In addition to information on WorldCom's accounting for last year and this year, the period already under scrutiny for the US$3.8 billion transfers, the committee requested details on WorldCom's accounting for swaps of communications capacity, transactions that have raised concern at companies like Global Crossing and Qwest Communications.

  The collapse in value of WorldCom's stock and bonds, meanwhile, continued to reverberate among investors. State pension funds lost at least US$1.6 billion, according to preliminary estimates that still exclude large state pension systems such as those in Texas and Massachusetts.

  The California Public Employees' Retirement System, the nation's largest pension fund with nearly US$150 billion of assets, estimated that it lost US$565 million on its investments in WorldCom securities.

  The New York State Common Retirement Fund said Thursday that it lost about US$300 million on WorldCom-related investments.

  "As a nation, we believe in holding individuals accountable for their actions when a crime is committed, and that value must extend to corporations -- such as WorldCom -- and their executives," H. Carl Mcall, the New York state comptroller, said in a statement.
• Most Popular

  • 1

    Dozens of Taiwanese missing in China

  • 2

    PRC likely to launch drills after National Day speech

  • 3

    US military declines to fire adopting Marine Mast

  • 4

    Formosan black bear punching Winnie the Pooh badge a hit at Japan festival

  • 5

    PRC could not be ‘motherland,’ William Lai says