WorldCom in $4BN fraud

A multi-billion dollar accounting fraud exposed at WorldCom has sent shock waves across international capital markets in the latest scandal to rock corporate America.

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By  Richard Brown Published  June 26, 2002

The No. 2 U.S. long-distance telephone and data services company has fired its chief financial officer, Scott Sullivan, after discovering improper accounting for close to $4 billion in expenses, the most recent unravelling of a corporate crisis that threatens to dwarf the Enron saga.

Arthur Andersen had been the company’s auditors. Citing unnamed sources, The Washington Post said the US Justice Department had begun a criminal investigation.

Investors dumped shares on the London stock exchange in early morning trading, pushing the FTSE down 185.6 points to 4,445.4, close to its post-September 11 low. US index futures traded sharply lower and on Wall Street the Dow Jones Industrial Average was 185 points lower and Nasdaq down 43 points.

WorldCom fell 61 percent to 32 cents on the electronic brokerage system Instinet. The shares had hit a low of 20 cents in after-hours trade.

John Sidgmore, who took over from WorldCom’s cavalier CEO and founder Bernie Ebbers, claimed “our senior management team is shocked by the discoveries”. Ebbers quit the firm in April following revelations that he borrowed $360 million from the company to pay for vast tracts of property and to cover the inflated prices he had paid for the company's own shares.

The alleged expenses fraud apparently worked like this: When spending is accounted for as a capital expense, a company can postpone applying it against earnings and instead amortise its cost over many years. In this way profits seem higher than they would be had the charges been levied at once.

Generally accepted accounting principles (GAAP) are straightforward about what can and cannot be listed as capital expenses. Operating expenses must be deducted immediately from profits. Sullivan allegedly transferred WorldCom’s operating costs and treated them as capital expenditure.

The apparent fraud may also scare off lenders in talks with WorldCom to advance $5 billion in financing. WorldCom said it would restate results for 2001 and Q1 of 2002 admitting net losses in one of the biggest revisions in commercial history. The firm also stated it is to slash 17,000 jobs starting this Friday in an attempt to staunch huge $30 billion debts it amassed in the 1990s and to save an estimated $900 million a year.

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