- The Washington Times - Thursday, June 27, 2002

The scope of the nation's worst case of accounting fraud became clearer yesterday as President Bush called for a federal investigation of WorldCom Inc. and the attempt to hide massive losses by the second-largest long-distance company pushed the deeply indebted company toward bankruptcy.

WorldCom's disclosure that it misstated $3.8 billion in expenses dragged financial markets down worldwide, forced a halt in trading of its stock, drew the ire of lawmakers, and led investors to question whether the telecommunications company will survive the accounting morass.

Mr. Bush called for more corporate responsibility and said the federal government will pursue companies that ignore accounting rules.

"We will fully investigate and hold people accountable for misleading not only shareholders, but employees as well," the president said.

U.S. Securities and Exchange Commission Chairman Harvey Pitt said yesterday afternoon the agency filed a fraud action against WorldCom in federal court in Manhattan, N.Y.

In an announcement late Tuesday, WorldCom officials said that beginning in 2001, costs associated with construction of its telecommunications network were categorized as a capital expense, not a standard expense. That boosted the company's earnings before interest, taxes, depreciation and amortization and helped increase cash flow by treating the costs as expenses that can be paid off over time instead of immediately.

Arthur Andersen LLP was WorldCom's accountant during the period that the company overstated earnings. Andersen also was the accounting firm for energy trader Enron Corp. when it filed for Chapter 11 bankruptcy protection Dec. 2. WorldCom fired Andersen in May and replaced it with KPMG LLP. Andersen has blamed WorldCom for the falsification. WorldCom has fired Chief Financial Officer Scott Sullivan.

The Clinton, Miss., company plans to lay off 17,000 workers worldwide tomorrow to save money, but it declined to indicate which employees will be fired.

"It's not something we're prepared to talk about," WorldCom spokesman Peter Lucht said.

WorldCom employs an estimated 85,000 workers and 8,000 in the Washington area. The company laid off 3,700 people in April.

Most local employees would not comment. Yesterday they received an e-mail instructing them not to talk to reporters and to refer all questions to WorldCom's public affairs office.

"We're not worried this week," one of WorldCom's Northern Virginia workers said. "This is the first round [of layoffs]; after this who knows what's going to happen."

Justice Department officials said the agency may open a criminal investigation of WorldCom.

"The matter is under review," Justice Department spokesman Bryan Sierra said.

The SEC already is investigating WorldCom.

In March, the SEC requested documents detailing pretax charges associated with domestic and international wholesale accounts that were no longer deemed collectible. The SEC investigation also focused on disputed customer bills and sales commissions, loans by WorldCom to officers and directors, customer-service contracts and organizational charts and personnel records for former employees.

WorldCom gave former Chief Executive Officer Bernie Ebbers, who resigned in April, $408 million in loans.

By charging WorldCom with fraud, the SEC will try to stop the company from paying out any of its assets to senior executives past or present, Mr. Pitt said yesterday.

"We are committed both in word and in deed to taking every conceivable action to make sure a system that was allowed to go unimproved for far too long is now improved," Mr. Pitt said. "We are eager and anxious to prove to all American investors and the world that our system is the very best in the world."

Investors said WorldCom could file for bankruptcy to purge itself of some of its $30 billion debt.

"It's pretty much up to the banks and up to the company at this point," said Susan Kalla, senior vice president at Arlington investment bank Friedman, Billings Ramsey.

WorldCom shares were halted from trading on the Nasdaq Stock Market at 83 cents a share, down 94 percent from its 52-week high of $16.06 a share and down from its all-time high of $64.50 in 1999, when investors threw money at technology and telecommunications companies.

Rep. Billy Tauzin, Louisiana Republican, said the House Energy and Commerce Committee he heads will begin an investigation of WorldCom.

"In many respects, this case appears to be eerily similar to the accounting hocus-pocus that occurred at Enron. This was not a simple bookkeeping mistake. Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it," he said.

Senate Majority Leader Tom Daschle, South Dakota Democrat, said WorldCom's disclosure emphasizes the need for reform of accounting procedures of publicly traded companies.

Mr. Daschle said he will try to get an accounting reform bill on the calendar immediately so Congress can deal with it when lawmakers return from their Fourth of July recess. A bill sponsored by Sen. Paul S. Sarbanes, Maryland Democrat, would separate auditing and consulting functions and establish an oversight board.

The Senate banking committee last week approved the bill, and the Bush administration, which had opposed the measure, said late yesterday it will support the legislation.

Mr. Daschle also criticized Mr. Pitt and said the SEC must do a better job of enforcement.

The company has deep roots in the Washington area because of a series of acquisitions.

WorldCom bought Internet access UUNet Technologies in 1996. It also picked up John Sidgmore, appointed WorldCom chief executive April 29, from UUNet.

It announced its intention to buy MCI Communications Corp. in 1997, and it closed the transaction the following year. MCI was founded in the District in 1968.

Then in 2000 WorldCom bought Digex Inc., a Web-hosting firm based in Laurel.

WorldCom could raise money by selling off MCI.

"There's certainly a market for MCI," Miss Kalla said.

WorldCom's primary holdings consist of the WorldCom Group serving large businesses and the MCI Group for consumers and small businesses.

Even though MCI Group is a wholly owned subsidiary of WorldCom, the two units have separate stocks. WorldCom is eliminating the dual listing to simplify its business, and the combined stock will begin trading July 12 on the Nasdaq stock market under the WorldCom symbol.

WorldCom Group provides data and telephone service, Web access, and computer network management.

It operates one of the world's most extensive communications networks based on the Internet protocol data format.

MCI Group is the nation's second-largest long-distance provider behind AT&T Corp. and also provides local phone service in some states.

WorldCom also owns a 94 percent voting stake in Digex, which had sales last year of $214 million.

In addition to saving money through layoffs, WorldCom will reduce spending on telecommunications equipment, and the ripple effect won't help an industry that is already in decline as investors have put money in other sectors, Miss Kalla said.

Donna De Marco and Marie Beaudette contributed to this report.

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