WorldCom's at $7.1 Billion and Counting
WorldCom Inc. (OTC: WCOEQ) announced late last night that during its internal investigation of its accounting for the last three years it found an additional $3.3 billion that had been wrongly accounted for. And yes, that’s in addition to the $3.8 billion we already knew about (see WorldCom Misplaces Another $3.3B).
Following WorldCom’s revelation in June that it had misstated $3.8 billion, the company was forced into the largest bankruptcy in history, two executives were fired and later indicted, and the rest of the already hard-hit, scandal-ridden telecom sector spun further out of control (see WorldCom Goes Boom, WorldCom Files for Bankruptcy, and Ex-WorldCom Execs Charged With Fraud). Although yesterday’s revelation almost doubles the sum of WorldCom’s bogus accounting, observers barely batted an eye.
"I don’t think it’s unexpected at all,” says Philip Jacobson, a general partner at Network Conceptions LLC.
While WorldCom’s June report related to booking operating expenses as capital expenses, thus artificially boosting earnings, the company is being tight-lipped about how the additional accounting irregularities were misstated. A source inside the company, however, says that, while a small portion of the additional $3.3 billion was also opex listed as capex, the majority of the new sum involved the manipulation of WorldCom’s reserve accounts. Reserves are funds the company sets aside to cover upcoming events, like lawsuits and taxes. Apparently, a large sum of money was taken out of the reserves, and then booked as revenues for the company.
And, while the June numbers were found on WorldCom’s books for 2001 and the first quarter of 2002, the additional $3.3 billion was found while the company’s new auditor, KPMG, was pouring over accounting for 1999 and 2000. Most of the discrepancies were found in 2000. As a result, WorldCom says that it will have to restate earnings for all of 2000, 2001, and the first quarter of 2002. The company also warns that the investigation hasn’t been completed yet and that it might turn up further discrepancies.
Many observers say they think new revelations are likely. “I think it’s not over yet,” says Bart Schachter of Blueprint Ventures. “And I don’t think it’s over in many companies. From an investor's standpoint, there’s just a freeze out there.”
As if having invented more than $7 billion in earnings weren’t enough, WorldCom also said in yesterday’s release that it expects to have to write off $50.6 billion in goodwill and intangible assets, mainly left over from the company’s 60-company merger and acquisition spree. If the company does write off all of the goodwill, it will be one of the largest writeoffs in corporate history.
The writedown was only to be expected, Jacobsen says. “Any company with goodwill on their books that did acquisitions between 1998 and 2000 will be writing down,” he says. “Certainly, what they paid then isn’t what those companies are worth today.” When WorldCom filed for bankruptcy on July 21, it listed $107 billion in assets and $41 billion in debts. If the company were to be split up and sold off at this time, however, Jacobsen says he expects the company would turn out to be worth less than $15 billion.
WorldCom said yesterday that the findings had already been reported to the Securities and Exchange Commission (SEC). Amidst growing concerns, the company continues to insist that its services won’t be affected by its problems.
— Eugénie Larson, Reporter, Light Reading