The scandal at WorldCom Inc. goes much deeper than the $7.68 billion in accounting discrepancies already uncovered, according to the court-appointed examiner delving into the telecom giant’s bankruptcy filing.
The company took “extraordinary and illegal” steps to manipulate its financial records and had a “number of troubling and serious issues,” according to the 118-page report released Monday. Sources say Clinton, Miss.-based WorldCom, which filed for the world’s largest bankruptcy in July, may reveal as much as $3 billion more in accounting discrepancies.
The harshly worded report adds to the likelihood that WorldCom won’t emerge whole from bankruptcy proceedings, experts said.
Richard Thornburgh, the former U.S. attorney general appointed to monitor WorldCom, also used the report to criticize WorldCom’s board for letting former Chief Executive Bernard Ebbers leverage his company stock for more than $1 billion in personal and business loans–more than double the $400 million previously disclosed.
“Our investigation strongly suggests that WorldCom personnel responded to changing business conditions and earnings pressures by taking extraordinary and illegal steps to mask the discrepancy between the financial reality at the company and Wall Street’s expectations,” Thornburgh wrote.
“Initially this looked like an accounting scandal,” said Ram Ramakrishnan, head of the accounting department at the University of Illinois at Chicago. “But this goes much deeper as a business fraud in a culture fraught with corruption.”
The report didn’t detail specific evidence supporting Thornburgh’s findings to avoid tainting criminal and civil proceedings against executives at WorldCom, parent to MCI, the nation’s No. 2 long-distance carrier. Thornburgh said he will continue to probe more areas, which sources said will likely add to the scope of the scandal.
WorldCom’s acting CEO, John Sidgmore, issued a statement Monday saying he takes the report’s allegations very seriously and is working to correct the problems.
“We are working to create a new WorldCom,” he said. Sidgmore earlier this year attempted to step aside as acting CEO, but so far no replacement has been named.
Thornburgh said WorldCom’s board, its audit committee, system of internal controls and independent auditor, Chicago-based Andersen, all bear some blame for the debacle.
WorldCom’s close relationship with its investment banker, Salomon Smith Barney, was called problematic by Thornburgh, as was Ebbers’ close friendship with Jack Grubman, a Salomon analyst whose reports helped boost WorldCom’s stock price.
Ebbers’ attorney maintains that his client was ignorant of accounting practices at his firm. Moreover, the investigations will uncover “not a shred of credible evidence that Bernie Ebbers had a thing to do with those [accounting] decisions,” said Reid Weingarten, Ebbers’ attorney.
But Thornburgh’s report suggests that actions far more obvious than questionable accounting practices were under way.
“It’s not a crime to be incompetent, and that’s Ebbers’ defense, I guess,” said Richard Tilton, a veteran bankruptcy attorney.
Tilton said that Ebbers’ loans from the company “now look subject to challenges as fraudulent conveyances. Ebbers is going to be sued by everybody, and the report seems to say there are grounds for criminal investigation against him.”
An extraordinary finding of the report, Tilton said, is that while Ebbers was acquiring dozens of companies, he never had a strategic plan, but rather just snapped up communications companies as he found them, almost on whim.
Providing a strategic plan is essential to successfully emerging from bankruptcy, Tilton said. The company’s failure to craft such a plan when it appeared healthy argues strongly that it cannot create one now that it’s losing money, he said.
Even before Thornburgh’s explosive report, others familiar with WorldCom expressed doubts that it could emerge whole from bankruptcy because of internal strife within management ranks.
“They’re looking for a new CEO, looking for a new board, and probably for a new top tier of management,” said Farooq Hussain, a partner at Network Conceptions LLC, a consulting and research firm based in Vienna, Va. “Who are they going to find? Who would take such positions when it’s so hard to tell when the company may bottom out?”
Hussain, who formerly worked at MCI, noted that executives at Verizon Communications, Sprint Corp. and AT&T Corp. have all argued that it would reward criminal behavior to allow WorldCom to emerge from bankruptcy debt-free so that it could compete against responsible companies that continue to pay their creditors.
“It’s a strong argument that this would be bad public policy,” he said.
Jim Speta, a telecom expert and assistant law professor at Northwestern University, said that “the notion of this company emerging as its own entity is unlikely, as opposed to it being sold off in pieces.”
