SEC Chairman: WorldCom Will Pay for Accounting Mess
WASHINGTON – Poppycock is the sentiment expressed by the chairman of the Securities and Exchange Commission about WorldCom, Inc.'s explanation of its $4 billion in underreported expenses.
The SEC has taken up a new investigation into the telecommunications giant's accounting of reserve accounts, which it artificially inflated, SEC Chairman Harvey Pitt said Tuesday. WorldCom already faces civil fraud charges, and its stock has dropped to pennies per share.
On Monday, WorldCom sent a statement to the SEC saying that its audit committee had not yet come to a conclusion on why $3.8 billion had disappeared in the last three years from reserve funds set up to offset foreseeable future expenses and liabilities. The company said it continues to cooperate with the investigation.
"Today's filing is consistent with our pledge to be forthright and open and to cooperate fully with both internal and external investigations," WorldCom's president and chief executive officer, John Sidgmore, said in a statement.
Later, Sidgmore said any wrongdoing was the fault of the "past administration", a reference to the firm's founder, Bernard J. Ebbers.
Corporations are allowed to set money aside for liabilities, expected bills and other known expenses, but they are not allowed to take that money and put it in general operating accounts to make it look like they are in better financial shape than they are.
WorldCom's statement said that four years ago it had added $2.81 billion to a reserve account used to pay liabilities from the purchase of smaller companies, but it could not explain where that money went since the fund was spent and its debts were still on the books.
Pitt called WorldCom's statement "wholly inadequate and incomplete" and said the company "demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC."
"Criminal charges may be too good for the people who brought about this mess," Pitt said.
"We were very surprised by (Pitt's) comments," company spokesman Brad Burns said Tuesday. "Based on the SEC order and conversations with SEC staff, we believe they were clear on what we would be able to provide at this time. Our response was entirely in line and is in fact a summary of what we know at this point."
Despite WorldCom's claim of good intentions, the stock will be removed from the Nasdaq on Friday. It had dropped from a high of $64 a share to 6 cents a share on Monday, and was the most heavily traded stock in a single day in U.S. history. During the day, 1.47 billion shares moved. Sidgmore said he hoped to avoid bankruptcy for the company which still has about $2 billion in available cash.
Several lawmakers and political parties have decided to donate their contributions from WorldCom, and President Bush said Monday that he will do whatever he can to go after corporations who act irresponsibly.
The company's problems have continued to go since the surprise revelation last week that it was hiding its debts. A WorldCom accounting manager who has sued the company for firing him said employees in his division in Richardson, Texas, received an e-mail in December 2000 directing them to misclassify expenses.
The employee, Kim Emigh, called WorldCom's activities "fraud."
"I can't understand how or why anybody would do this," Emigh said.
Shareholders have already sued the company in federal court in Mississippi accusing the company of artificially inflating its stock prices. The General Services Administration said it will review all of WorldCom's government contracts.
The company, whose rating was downgraded by Standard and Poor's credit-rating agency, has laid off 17,000 employees and defaulted on $4.25 billion in bank loans.
The Associated Press contributed to this report.