WorldCom Inc. disclosed late Tuesday that it has fired chief financial officer Scott Sullivan, after the beleaguered communications company misstated approximately $3.8 billion in earnings during the past five quarters.
WorldCom also has accepted senior vice president and controller David Myers’ resignation.
The Clinton, Miss.-based long distance and Internet giant said it would have posted a net loss during 2001 and during the first quarter of this year, had the company complied with generally accepted accounting principles. Distressed accounting firm Andersen was the auditor.
Andersen responded swiftly at the news by telling reporters for CNBC that its work for WorldCom complied with professional and Securities and Exchange Commission standards.
“The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment,” the accounting firm said in a statement. It added that that WorldCom’s financial statements for 2001 should not be considered reliable.
WorldCom said it will issue unaudited financial statements for 2001 and for the first quarter as soon as practicable.
“Our senior management is shocked by these discoveries,” said recently appointed CEO John Sidgmore in a prepared statement. “We are committed to operating WorldCom in accordance with the highest ethical standards. I want to assure our customers and employees that the company remains viable and committed to a long-term future.”
Explaining the financial errors, WorldCom said that an internal audit of its capital expenditure accounting found “certain transfers from line-cost expenses to capital accounts during the period were not made in accordance with generally accepted accounting principles.”
The amount of the transfers totaled $3.055 billion last year and $797 million during the first quarter. Without the invalid transfers the company’s reported earnings before interest, taxes, depreciation and amortization (EBITDA) would have been $6.339 billion last year and $1.368 billion for the first quarter. As a result, WorldCom acknowledged it would have recorded a net loss during those five quarters.
Industry experts have speculated that WorldCom could be the next telecom titan to file for Chapter 11 bankruptcy protection, a scenario that appeared more plausible following the disclosures.
Investors began to dump the company’s stock after the disclosure, and its shares were trading after hours at 20 cents each, according to electronic marketplace Island ECN WorldCom stock had closed Tuesday at 83 cents, a far cry from the $15 per share at the start of the year and its peak of $64 in June 1999.
Responding proactively to the financial quagmire, WorldCom said it has notified its lead bank lenders and the SEC, which says the irregularities are of a magnitude never before seen.
Now, saddled with nearly $30 billion in debt, the No. 2 long-distance company is in the midst of a massive restructuring plan that includes the elimination of 17,000 jobs, which it had announced previously. The scheduled layoffs are not a result of Tuesday’s disclosure. WorldCom is trying to secure a $5 billion, as it increases its efforts to shed noncore businesses, including its wireless resale unit
The company has retained KPMG LLP to examine the carrier’s books in a move that it hopes will lead to a sweeping restatement of its financial results.
In the meantime, the SEC has retained William McLucas of the law firm Wilmer, Cutler and Pickering to conduct an independent investigation. McLucas is the former SEC enforcement division chief. And according to unnamed sources in a The Washington Post article, the Justice Department has begun a criminal investigation.
Earlier this year the SEC launched a separate probe into loans WorldCom granted to former CEO and cofounder Bernie Ebbers, who stepped down seven weeks ago. Ebbers built WorldCom through more than 60 acquisitions during the past decade. It is unknown whether Ebbers was aware of the fraud, CNBC reported, quoting sources.
News of this latest telecom industry scandal rocked Asian stocks, as Tokyo’s Nikkei index fell more than 4 percent. Technology and telecom stocks were especially hard hit. European shares also opened with sharp losses as did Wall Street.
