June 25, 2002 6:05 PM PDT

WorldCom finances in upheaval; CFO fired

WorldCom fired its top financial executive Tuesday after discovering that the company had improperly accounted for almost $4 billion on its corporate balance sheets during the past five quarters.

In a statement issued late Tuesday, the company said an internal audit revealed that expenses had been booked as capital expenditures. Taking the new information into account, the company said it would have reported a net loss for 2001 and the first quarter of 2002.

"As a result of an internal audit of the company's capital expenditure accounting, it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles," the company said.

Worldcom's revelation is only the latest and most dramatic example of the financial chaos in a sector crumbling into bankruptcy and confusion. Massive debt overhang, falling revenues and domino-like collapses of network companies and vendors has left telecommunications as the blackest spot in a tech sector that remains clouded by dismal earnings and uncertain prospects.

The amounts under investigation included more than $3 billion in 2001 and $797 million for the first quarter of 2002, the company said.

WorldCom said it had fired Scott Sullivan as chief financial officer and secretary. The company has also accepted the resignation of David Myers as senior vice president and controller.

In its statement, the company said that Arthur Andersen, which also came to notoriety in the Enron collapse, had audited the financial statements in question. Its current auditor is KPMG. On Monday, after being notified of the results of WorldCom's internal audit, Andersen said its audit reports for 2001 and the first quarter of 2002 "could not be relied on," according to the WorldCom statement.

WorldCom said that it would release unaudited financial statements for 2001 and the first quarter of 2002 "as soon as practicable," and that it would release audited statements as soon as a new audit is performed.


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The company is also reviewing its past financial projections.

"Our senior management team is shocked by these discoveries," said John Sidgmore, who was appointed CEO of WorldCom on April 29. "We are committed to operating WorldCom in accordance with the highest ethical standards."

Sidgmore said the company would continue to cut expenditures, including a previously announced plan to lay off 17,000 employees beginning this Friday.

The company has been struggling to win back the confidence of Wall Street and bond analysts, who have taken an increasingly dim view of its prospects. WorldCom recently was cut to junk-bond status, and shares fell below $1 for the first time Monday.

"We intend to create $2 billion a year in cash savings in addition to any cash generated from our business operations," Sidgmore said. "By focusing on these steps, I am convinced WorldCom will emerge a stronger, more competitive player."

WorldCom shares plummeted 58 percent in after-hours trading, dropping from 83 cents a share to 35 cents a share.

The Nikkei exchange in Japan, which opened within hours of the news, was down sharply, dropping more than 2 percent or 222 points, to 10,275. DoCoMo, Japan's dominant mobile phone operator, was down 3.4 percent, and the communications sector subindex was off 2.88 percent.

Representatives for WorldCom could not be reached for comment.

In its statement, the company said the expected restatement of its past quarters' earnings would likely not have an impact on its cash position and would not affect its customers or services.

News.com's Ben Charny contributed to this report.

 

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