TOPICS > Economy

WorldCom Admits to Inflating Earnings by Nearly $4 Billion

BY Admin  June 26, 2002 at 2:45 PM EDT

WorldCom, the parent company of long-distance carrier MCI, said it inflated corporate earnings for the past five quarters, when it had reported profits of nearly $1.5 billion. WorldCom said it actually lost money during these periods, although it did not say how much, and said it would restate its earnings. The accounting improprieties were exposed during an internal corporate audit.

This announcement, coming in the wake of accounting scandals like Enron and Global Crossing, is expected to represent the largest corporate earnings restatement in U.S. history.

Late Tuesday night, WorldCom’s board fired its chief financial officer Scott Sullivan and accepted the resignation of controller David Myers.

WorldCom also requested that its independent accountant, KPMG LLP, undertake a comprehensive audit of its financial statements for the past five months, the company said in a press release.

Until last month, WorldCom’s independent auditor was Arthur Andersen, the accounting firm indicted several weeks ago for obstructing justice in the Enron case. On Monday, Andersen informed the telecom giant that its financial statements for the last five quarters “could not be relied upon,” the company’s press release stated yesterday.

The earnings restatement could force WorldCom to seek bankruptcy protection, leaving creditors with $30 billion in bad debt. Such a bankruptcy filing would rank as the largest corporate bankruptcy case in U.S. history.

The company has been struggling to refinance its debt and rebuild investor confidence after the departure of its longtime chief executive, Bernard J. Ebbers, in April. Last month, its credit rating was reduced to junk-bond status and, even before this announcement, its stock price fell from $13 to 83 cents over the past year.

The company said it inflated earnings by improperly counting some of its routine expenses as long-term capital expenditures, which do not have to be deducted as business costs. By transferring its routine expenses to capital accounts, the company avoided having to mark down a total of $3.06 billion in 2001 and $797 million in the first quarter of 2002.

These transfers were not “made in accordance with Generally Accepted Accounting Principles (GAAP)” and the company would have otherwise posted a net loss for 2001 and first quarter of 2002, the company said in a press release.

President Bush said the news was “outrageous” and that the government will hold company officials accountable.

“We’ve had too many cases of people abusing their responsibilities,” President Bush said from the G-8 summit of industrialized nations. “People just need to know that the SEC (Securities and Exchange Commission) is on it, our government is on it, and Arthur Andersen has been prosecuted. We will pursue, within our laws, those who are irresponsible.”

The Securities and Exchange Commission was already investigating other aspects of WorldCom’s accounting practices.

“The public can be assured that we are actively investigating these and other events relating to the veracity of WorldCom’s financial statements and disclosures,” the Securities and Exchange Commission said in a prepared statement today.

“These events further demonstrate the need for comprehensive market regulatory reforms that the administration, the Congress, and the SEC have been advocating and implementing.”