Wrong Numbers

RAY SUAREZ:

The statement filed today with the Securities and Exchange Commission is the latest chapter in the accounting scandal surrounding the nation's number-two long-distance phone company. For an outline of the report and its importance, we're joined by New York Times reporter Kurt Eichenwald.

RAY SUAREZ:

Kurt, why did WorldCom have to file this statement, and what had to be in it?

KURT EICHENWALD:

Well, primarily because the Securities and Exchange Commission told them to. What this is, is a document that lays out the circumstances surrounding the discovery of the improper accounting that WorldCom announced last week — gives the names, the times, dates, who was where, when they talked about it in fairly excruciating detail. It also lays out at the end some additional accounting issues that they are still working on to determine whether or not there might be a need for even further re-statements.

RAY SUAREZ:

So what interested you as a reporter who has been covering this story to see it laid out step by step?

KURT EICHENWALD:

Well, to me, the most interesting things was the possibility of other accounting issues, these being potential problems with what is known as a reserve account, which is sort of a cookie jar that companies have in the event of a problem with a particular contract. You have… you've taken a reserve to protect yourself against losses.

Apparently there's some indication that the folks who were in charge of the finances at this company were backing, undoing certain parts of the reserve account, essentially booking it as revenue, and it's not clear why they were doing it, and that they're investigating now. The rest of it, it was a lot of detail, but a lot of it we already knew.

RAY SUAREZ:

So none of it was sort of a corporate smoking gun that pointed to things that were being done behind the scenes at WorldCom that might get the company into even hotter water?

KURT EICHENWALD:

Well, I mean, the interesting thing about WorldCom is, unlike Enron, which was this massive collection of complex accounting issues and thousands of entities all working together to create this disaster, WorldCom was a single decision. It was shifting expenses from one part of the income statement to another part, and doing it improperly. It's very simple. It is very likely fraudulent. You do have issues of intent in that. But ultimately WorldCom is a huge number, but for aficionados of fraud, it's very simplistic. It's very easy to understand because it really is only one transaction just done over and over and over again.

RAY SUAREZ:

Well, in addition to the Securities and Exchange Commission that demanded the filing of the report, who are the potential audiences for this kind of information?

KURT EICHENWALD:

You and me. The audience here tonight. Investors — certainly the stock started trading again today — investors took WorldCom down. I believe the last price I saw was down to six cents. It was already trading below a dollar. And that's really what this is about. It's about getting information out to the marketplace so that investors who have this stock or who for some reason might want to buy this stock, are able to look at the situation, get as much information as possible, and price that stock based on what the circumstances dictate.

Now, the fact that they are still looking at other areas of potential fraud– and they may end up being nothing, but at this point they are open areas– certainly would be disturbing to the marketplace. Certainly these events are disturbing to the marketplace, and we're seeing that in the stock price now.

RAY SUAREZ:

The current management of WorldCom is trying to reorganize things to keep the company afloat. Does this report make that work harder?

KURT EICHENWALD:

I don't think it could be much harder. The primary thing that they have to accomplish is to convince the banks to provide them loans on an ongoing basis, and to reach a final agreement that everyone has signed off on. Even agreements in principle are going to take time to get a final signed agreement. So ultimately what WorldCom faces is a… certainly an increased probability of a bankruptcy filing.

This does not mean WorldCom is out of business. This means WorldCom gets to reorganize itself. They have a lot of assets. They have a lot of things that make them a decent candidate for a bankruptcy filing. And going forward in that scenario it's much easier to get financing than it would be now when the banks all have to be looking at this company saying, "if you file for bankruptcy, I might just be one of many on the list who have to take, you know, a percentage of what I gave you on the dollar." So right now that's really the main outstanding question: Will there be a bankruptcy filing? This announcement doesn't really affect it that dramatically, because it is such a difficult situation for the current management.

RAY SUAREZ:

Kurt Eichenwald, thanks a lot.