Worldcom:
The Fall of a Telecom Titan
Nailed for the biggest
bookkeeping deception in history, a fallen telecom giant
gives investors one more
reason to doubt corporate integrity
BY DANIEL KADLEC
TIME MAGAZINE
Sunday, Jun. 30, 2002
Soon after WorldCom CEO John
Sidgmore revealed the most sweeping
bookkeeping deception in
history, a marked-up copy of his internal memo on the
scandal was e-mailed to
folks around the telecom industry. Under his
predecessor, Sidgmore
announced, WorldCom had overstated a key measure of
earnings by more than
$3.8 billion over five quarters, dating back to January
2001. The company's
reported profits, it turned out, were really losses. In his
memo to employees
explaining America's latest corporate disgrace, Sidgmore
wrote last Wednesday,
"Our customers can count on WorldCom to meet their
communications needs
today and tomorrow." The memo that circulated included
one wag's cynical
addition: "Friday is sort of doubtful." Sidgmore went on to write,
"I know I can count
on you to be with me." To which the wag had tacked on:
"Don't bother with
a resume; no other telecoms are hiring."
As WorldCom — once big
and rich enough to swallow No. 2 long-distance carrier
MCI — struggles to
survive, it is laying off 17,000 workers. Its stock, which
peaked at $64.50 three
years ago, stopped trading last Tuesday at 83[cents],
having all but wiped out
employee retirement accounts. The plunge in WorldCom
shares has cost
investors upwards of $175 billion — nearly three times what was
lost in the implosion of
Enron. WorldCom is not yet financially bankrupt, but it's
clear that it — like a
fat slice of corporate America — has been ethically bankrupt
for years. We're only
now getting a look at the red ink on the moral balance
sheets, and new
revelations of malfeasance in one company after another are
sending shocks around
the globe.
The dollar is falling.
Stocks are in a swoon. Foreigners are calling home capital.
Corporate insiders are
dumping shares by the bucketful. Individuals are
redeeming mutual-fund
shares. Pension funds are getting socked. Banks are
taking loan-portfolio
hits. This is all a direct result of the spreading collapse of
confidence in U.S.
companies and the executives and board members who run
them — a crisis that
threatens to untrack a fragile economic recovery. Speaking
at an economic summit in
Canada, President Bush said he was "concerned
about the economic
impact of the fact that there are some corporate leaders who
have not upheld their
responsibility." The Federal Reserve seems concerned as
well. At a meeting last
week, it left interest rates unchanged — signaling that the
recovery isn't firmly
rooted. Some economists speculate that the Fed will soon
cut rates to guard
against a "double-dip" recession.
In the context of recent
developments, President Bush's musings on CEO
responsibility are as
understated as the expenses in WorldCom's financial
statements, the
flashpoint for new worries of widespread accounting abuse.
WorldCom said that an
internal review uncovered huge hidden expenses —
mostly line charges that
it pays to other telecom carriers — that were
characterized as capital
investments, a gimmick that boosted its profits.
The company fired its
longtime chief financial officer, Scott Sullivan, 40, and is
turning over its
findings to the Securities and Exchange Commission. The SEC
has filed fraud charges
and is launching an investigation — as is the Justice
Department, at least two
congressional committees and the state of Mississippi,
where WorldCom is based.
All current and former employees, along with
WorldCom's ex-accounting
firm, Arthur Andersen, have been ordered to refrain
from Enron-like paper
shredding. Investigators are especially eager to hear from
WorldCom founder Bernie
Ebbers, who resigned as CEO in April, not long after it
was revealed that he
owed the company $366 million in low-interest loans.
Ebbers had worked
closely with Sullivan, whose office adjoined the CEO's.
Ebbers could not be
reached for comment.
In the same week that
the veil was lifted from WorldCom's books:
* Xerox restated $6.4
billion in revenues dating to 1997. A restatement had
been expected under an
agreement Xerox reached with the SEC three months
ago, over the company's
practice of immediately booking revenue from long-term
leases of copiers and
other equipment. But the amount turned out to be more
than triple what
investors had expected and sparked a 13% sell-off of Xerox's
stock.
* Tyco's former CEO,
Dennis Kozlowski, already charged with evading $1
million of sales tax,
was indicted anew, accused of tampering with evidence. He
allegedly lifted a
shipping document from a file before turning it over to
prosecutors in New York
City. He pleaded not guilty to the latest charges.
* Martha Stewart faced
fresh doubts about her explanation of why, after
buying stock in a drug
company run by a close friend, she sold her shares just
ahead of bad news about
the company's cancer drug. Stewart, recently
appointed a director of
the New York Stock Exchange, denies wrongdoing, but
shares in her Martha
Stewart Omnimedia have declined 40% in the past month
over fears of damage to
her image.
* The Justice Department
charged three former bankers in Britain with wire
fraud in a $7.3 million
scheme involving Enron-related partnerships.
* Minneapolis-based
supermarket chain Supervalu revealed that, like
WorldCom, it has been
overstating profits — in its case, for four years.
* A federal grand jury
in Harrisburg, Pa., indicted three former Rite Aid
executives on fraud
charges.