WorldCom investigating more possible irregularities

Marcy Gordon

Monday, July 1, 2002 | 9:55 a.m.

WASHINGTON -- WorldCom Inc., already facing charges over nearly $4 billion in disguised expenses, told the government today that it is investigating possible irregularities in its reserve accounts.

The embattled telecommunications company submitted a sworn statement to the Securities and Exchange Commission, which had demanded a report after filing the civil fraud charges on Wednesday.

WorldCom's woes deepened, meanwhile, as it received notice from the Nasdaq Stock Market that its shares would be removed from trading starting Friday. The delisting could be put on hold if WorldCom requests a hearing to object to the move.

WorldCom Inc. stock fell 76 cents, or 92 percent, this morning to 7 cents as trading resumed following a trading halt ordered last week. WorldCom's MCI Group stock fell $1.52, or 90 percent, to 16 cents this morning.

In its statement, WorldCom said its audit committee is reviewing financial records for 1999 through 2001 because "questions have been raised" regarding significant changes in reserves against potential financial losses.

"No conclusion has been reached regarding these entries," the statement said.

Companies use reserve accounts to set aside revenue to be used against predictable, upcoming costs, such as clients who don't pay bills or a pending lawsuit. Companies have a lot of latitude to reduce or increase those reserves, but they are not supposed to do it simply to make revenues look better.

"Today's filing is consistent with our pledge to be forthright and open, and to cooperate fully with both internal and external investigations," WorldCom President and Chief Executive Officer John Sidgmore said in a statement. "We will continue to be proactive in reviewing our operations and reporting our findings. This company is absolutely committed to operating in accordance with the highest ethical standards."

Former CEO Bernard Ebbers, who was recently ousted from the company, told members of the congregation Sunday at his Baptist church in Mississippi: "I don't know what all is going to happen or what mistakes have been made ... No one will find me to have knowingly committed fraud."

Ebbers received more than $400 million in loans from WorldCom. He and Sidgmore have been subpoenaed to testify at a congressional hearing July 8.

WorldCom, second only to AT&T in the long-distance market, grew from a small telephone company into one of the telecom industry's biggest players through more than 60 acquisitions over the past 15 years -- notably its purchase of MCI Communications in 1998 for $30 billion.

WorldCom also said it had asked its auditor, KPMG LLP, to review its records for possible problems during the period. KPMG took over from Arthur Andersen LLP as the company's outside auditor in mid-May.

Andersen had approved the company's financial statements for 2001 and the first quarter of this year, which were the subject of the stunning restatement that roiled the stock market last week.

Before the report was made public, SEC Chairman Harvey Pitt said that "criminal charges may be too good" for those responsible for the WorldCom accounting scandal.

"We think the American public is entitled to a full accounting of what went wrong here," Pitt said on NBC's "Today."

"I don't want to prejudge any case but ... from what I've heard, I'm outraged. The American public is outraged. Criminal charges may be too good for the people who brought about this mess," Pitt said.

WorldCom, based in Clinton, Miss., disclosed last week that it misrepresented $3.8 billion in expenses to make earnings appear greater. The company has laid off thousands and seen its stock become almost worthless and is on the verge of bankruptcy.

The company's woes, coming on the heels of major accounting problems with Enron Corp., Andersen and Xerox Corp., has traumatized stock markets. Pitt said Sunday that if the WorldCom report is truthful "and people get to know at least what the circumstances are, then we'll have an informed market, and there won't be insiders who can play games with the unsuspecting public."

"If there's even an iota of false statement in there, people will pay heavily," Pitt said Sunday on ABC's "This Week."

President Bush appears to have left open the possibility of a criminal investigation, pledging Friday that the Justice Department will "hold people accountable" for mismanaging their companies through deceit and corruption.

Bush plans to address the issue more fully in a speech July 9. Advisers are prepared to recommend that he propose new criminal penalties for corporate executives who certify misleading financial statements, a senior aide has said.

A Democratic-written bill to tighten oversight of the accounting industry with a new private-sector body is expected to reach the Senate floor after Congress returns from its July Fourth recess.

The White House has said the president might support the legislation if it is changed to give the SEC greater administrative authority.

"What we want is a much tougher set of rules that is subject to the SEC's oversight and jurisdiction, and that's the way we hope ultimately the Senate bill will go," Pitt said Sunday. "I want the toughest, most pragmatic approach that we can take."

Xerox Corp. announced Friday that it improperly recorded billions of dollars more revenue in the past five years than the SEC had estimated when it took enforcement action against the company this spring.

"We're not finished with the Xerox case," Pitt said. "Everyone who may have been involved is still under investigation. And before much longer, we're going to make all of them responsible for what they've done."

The SEC also is investigating Halliburton Co. for its accounting practices in 1998, when Vice President Dick Cheney was its chief executive.

Asked if the administration's tough stand on the responsibility of corporate bosses would apply in that case, Pitt said: "We don't give anyone a pass. If anybody violates the law, we go after them."

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