WorldCom Inc. spiraled toward the brink of bankruptcy after the communications giant reported it had disguised $3.8 billion in expenses.
The disclosure reveals one of the largest in a series of accounting scandals that have shaken faith in corporate America.
WorldCom, which owns the nation's No. 2 long-distance carrier MCI, said Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, thus not reflected in its earnings results. That means the company may have actually lost millions of dollars when it reported profits.
WorldCom said Tuesday it would restate earnings for all of 2001 and the first quarter of 2002. Its auditor during that period was Arthur Andersen.
"Our senior management team is shocked by these discoveries,'' said CEO John Sidgmore, who was appointed in April to replace Bernard Ebbers amid questions about the company's growth and finances.
WorldCom also announced Tuesday that its chief financial officer, Scott Sullivan, has been fired. In addition, the company said it would lay off 17,000 workers beginning Friday. The news could be the final blow to WorldCom, which is reeling from a low stock price, a crumbling telecommunications market and an ongoing Securities and Exchange Commission investigation.
"Clearly, it means ... that the company has made a few giant leaps toward bankruptcy,'' said John C. Hodulik, an analyst for UBS Warburg.
The Nasdaq Stock Market halted trading in the two stocks representing WorldCom Inc.'s business, saying it was seeking more information from the company. Shares of WorldCom Group, which represent the company's data and commercial telecom services, last traded at 83 cents, down from a 52-week high of $16.06. MCI Group stock, which tracks the company's consumer long-distance business, last traded at $1.68, down from as high as $17.33 in the last year.
WorldCom's sudden fall comes at a time when the nation is dealing with a rash of corporate scandals that have rattled Wall Street and created a flood of shareholder lawsuits. Enron Corp. collapsed last year in what was the biggest bankruptcy in the nation's history amid revelations that it kept millions of dollars in losses off the books through shady accounting practices.
Scandals followed at several other big-name companies, including Tyco International Ltd., Global Crossing and Adelphia Communications, which filed for bankruptcy Tuesday.
Andersen, convicted of obstruction of justice in the Enron case earlier this month, said its work for WorldCom was in compliance with SEC standards.
"It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom. The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment,'' Chicago-based Andersen said.
The SEC said in a statement late Tuesday that WorldCom's disclosures "confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets.''
The agency said it has ordered WorldCom to file "under oath, a detailed report of the circumstances and specifics'' of the accounting problems.
The Washington Post, citing unnamed sources, reported in its Wednesday editions that the Justice Department had begun a criminal investigation. WorldCom, second to only AT&T in the long-distance market, grew from a small long-distance company into a telecommunications force through more than 60 acquisitions in the past 15 years.
The growth was stopped in 2000 when federal and European regulators blocked WorldCom's proposed $129 billion merger with Sprint Corp., citing competition concerns. Still, WorldCom's stock was one of the better performers of the late 1990s.
The stock traded as high as $15 in January, but has stumbled since then over concerns about the company's $32 billion in debt, slowing revenues and the SEC investigation.
Drawing scrutiny and investor displeasure were $408 million in loans WorldCom had given to Ebbers. The stock dropped sharply in after-hours trading Tuesday, falling 63 cents to 20 cents a share. Rick Black, analyst for Blaylock & Partners, L.P. in New York, said he wants to know if Ebbers knew about the accounting practice.
"The people who were running the company prior to this should know what's going on. That's the most logical assumption,'' Black said.
"If the CFO knows, the next question people are going to ask is what did Bernie Ebbers know, and of course they're going to ask what did the board know.''
Black said bankruptcy could be the only alternative for WorldCom.
"For a company with $30 billion in debt, that has a sector deteriorating from competition ... it's not looking good,'' he said.