This week's admission by WorldCom that it improperly booked almost $US4 billion of expenses in 2001 and the first quarter of 2002 may be the ghost of the 1990s telecom boom that finally forces a major US government crackdown on accounting practices.
WorldCom said last week that it had booked costs as capital expenses -- about $3.05 billion in 2001 and $797 million in the first quarter of 2002 -- in violation of US Generally Accepted Accounting Procedures (GAAP). As a result, the company said it would restate its results from those periods to show losses instead of profits. At the same time, WorldCom said it had fired chief financial officer Scott Sullivan and accepted the resignation of David Myers, who was senior vice president and controller.
The company said it had asked it's recently hired external auditor, KPMG, to carry out a comprehensive audit of those results, and had informed the US Securities and Exchange Commission (SEC). Its previous auditor was Arthur Andersen.
The disclosure, which the SEC called "unprecedented", kicked off a series of legal actions.
- Last Wednesday, the SEC filed suit against WorldCom in the US District Court for the Southern District of New York, charging the company with fraud and asking a court to block any destruction of documents and the payment of extraordinary bonuses to executives.
- Also Wednesday, the US House of Representatives' Energy and Commerce Committee launched an investigation into WorldCom's accounting. Citing similarities to the Enron financial scandal, Billy Tauzin, a Louisiana Republican and the chairman of the committee, ordered the panel's investigative staff to review the facts surrounding the matter.
- US President George W. Bush on Wednesday called the disclosure "outrageous" and promised a full investigation. In a speech last Thursday, he condemned financial improprieties by US companies and vowed, "there will be consequences for those who have done wrong".
- On Thursday, the House Financial Services Committee announced plans to hold a hearing July 8 on WorldCom. The committee announced plans to subpoena former WorldCom chief executive officer Bernard Ebbers; current president and CEO John Sidgmore, who replaced Ebbers; former chief financial officer Sullivan, and Jack Grubman, a telecommunications analyst at Salomon Smith Barney Holdings.
- Also Thursday, a judge in Mississippi issued a temporary restraining order barring WorldCom, its former employees, and its current and former auditors from destroying any documents or records that could be subject to a Mississippi investigation into the scandal. WorldCom is based in Clinton, Mississippi.
- On Friday, adding to the furor over corporate financial behavior, Xerox announced that it would have to restate its 1997 to 2001 earnings due to accounting irregularities, a move that will reduce the company's pretax income over that period by $US1.4 billion.
WorldCom's disclosure has led many observers to predict that the company, one of the world's largest providers of voice and data services, will seek bankruptcy protection and undergo reorganisation. That prospect, disruptive as it sounds, follows the financial collapse of some major service providers and accounting woes at others, including Qwest Communications International.
The financial problems and accounting practices at WorldCom are part of the dues the industry is paying for a heady period of growth in the late 1990s, when carriers built out network capacity for an expected boom in Internet-based commerce and entertainment, analysts said. When that boom fizzled, revenue couldn't cover the cost of expansion and some carriers were stuck trying to meet inflated profit projections.
Faced with the prospect of fundamental changes in communications and business that the Internet has the potential to deliver, carriers and others in the industry didn't know how to predict future demand or business success, analysts said. Helping to fuel the overblown expectations was a flood of money from America's baby-boom generation as they invested in the stock market.