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Massive fraud uncovered at WorldCom
Wednesday, June 26 2002
by Sheila McDonald


WorldCom has admitted to a massive fraud in which the firm inflated profits by
incorrectly accounting for more than USD3.8 billion in costs.

News of the fraud, which was quickly dubbed "another Enron," was broken by
CNBC late on Tuesday night. Citing sources close to the situation, CNBC said that
the WorldCom fraud is connected to the overstatement of EBITDA (earnings before
interest, tax, depreciation and amortisation). WorldCom sought to boost its
profits by booking certain ordinary expenses as capital expenditure in order to
spread those costs over a longer period. 



The amount of expenses improperly booked totalled USD3.8 billion. If the company
had booked its expenses correctly, it would have reported a net loss for 2001 and
for the first quarter of 2002.



WorldCom said the irregularities came to its attention after an internal audit.
The company has now fired its chief financial officer and will re-state its
results for 2001 and the first quarter of 2002. The company will also slash
17,000 jobs starting Friday in an attempt to cut annual costs by USD900 million.
In Ireland the company employs 180, but a 10 percent workforce reduction was
announced this week.



The Securities and Exchange Commission said in a statement that it has demanded a
detailed report from WorldCom of the circumstances which led the company to fire
CFO Scott Sullivan.



The regulator said it had confirmed that "accounting improprieties of
unprecedented magnitude have been committed in the public markets." The SEC is
already investigating WorldCom for its accounting practices and questionable
loans to its former chief executive, Bernie Ebbers.



WorldCom, which is facing USD30 billion in debt, is currently in talks with its
banks to secure new financing and has informed the banks of the accounting
irregularities. But the new scandal may make it impossible for the company to get
finance, and analysts say it is "very likely" that the company will have to
file for bankruptcy protection.



Shares in the embattled telecommunications company, which had fallen below the
USD1 level earlier in the week, collapsed completely in after-hours trading,
plunging 88 percent to USD0.08 per share. 



The shocking news instantly sent ripples through the bond and currency markets,
and stock markets are widely expected to suffer on Wednesday. Even before the
news, the technology-laden Nasdaq index had a bad day on Tuesday, closing down
more than 36 points to close at 1423, a fall of 2.5 percent.



Ironically the revelations come just days after Lucy Woods, WorldCom's head of
sales and its senior executive in Europe, told the Irish Times that despite its
difficulties WorldCom was not facing the same scandals currently plaguing some of
its rivals in the telecoms market. 

"I don't believe we've anything to hide and we didn't do the type of capacity
swaps which other telecoms firms did," Woods told the newspaper.



Fellow telcos Qwest and the bankrupt Global Crossing have come under scrutiny for
alleged "roundtripping," where companies lease space on each other's telecoms
networks. Although no money changes hands, these swaps were reportedly booked as
revenue, artificially inflating each company's earnings.