WorldCom Accounting: What's Up?

A whole laundry list of questions from the SEC gives the telecom market that sinking feeling

March 12, 2002

3 Min Read
WorldCom  Accounting: What's Up?

When it rains it pours, and right now the telecom industry seems to be in the middle of a monsoon.

WorldCom Inc.'s (Nasdaq: WCOM) Monday night announcement of a Securities and Exchange Commission (SEC) inquiry hasn't helped matters. The SEC requested that WorldCom turn over documents related to a long list of accounting issues. Qwest Communications International Inc. (NYSE: Q)also announced an SEC probe into its accounting practices yesterday (see Qwest Prepared to Answer Feds).

Despite the confidentiality of the inquiry, WorldCom decided to post the entire document on its site.

The SEC request, which was dated last Thursday, covers 24 topics in all. These include WorldCom’s accounting since January 1999 for the value of the companies it has acquired, all loans the company made to any of its officers or directors, and all documents concerning the company’s policy for accounting and reporting goodwill, as well as pertaining to revenue recognition.

In a statement yesterday, WorldCom said that it believes it has complied with all applicable accounting standards and laws, but that it would cooperate with the Commission’s inquiry and respond to its request as promptly as possible. The SEC has asked WorldCom to comply with all of its requests by March 21.

“This is disappointing,” says David B. Burks, an analyst with J.B. Hilliard, W.L. Lyons Inc. “Especially after its fourth-quarter earnings, when we thought it had dispelled a lot of the negative rumors. Now [those rumors] have been rekindled. This cloud will hang over the stock for the foreseeable future. There’s nothing financial markets hate more than uncertainty."

The result has been a drastic drop in WorldCom’s stock since yesterday. The company, which was already experiencing financial difficulties, saw its stock decline by nearly 12 percent in trading today, closing at $7.93 per share. Since the beginning of 2002, the company’s shares have plummeted about 45 percent.

"On the surface, it doesn’t look good,” Burke says. “I don’t know if they’ve done anything illegal, but it certainly doesn’t look good.”

While there’s little doubt that as long as the SEC inquiry lasts, it will continue to have a negative impact on WorldCom, observers are quick to point out that the probe is not proof of any wrongdoing.

Crédit Lyonnais Securities Inc. analyst Rick Grubbs goes further: “This is just a witch-hunt. The SEC is going back and covering their butts for what they should have done [earlier].”

Grubbs points out that accounting is all about interpreting rules and regulations. There is nothing wrong with this, he says, as long as it stays within GAAP guidelines.

“They might be guilty of a lot of things,” he says, “but I don’t think it’s fraud.”

“The SEC might just be casting a wide net so that it can’t be blamed down the road,” F. Drake Johnstone, an analyst with Davenport & Company LLC, agrees. “I expect them to be cleared.”

While WorldCom might have fallen victim to the growing mistrust of accounting procedures in the telecom industry, Burke says that with its history of acquisitions, the company is a more likely candidate than many for an SEC probe. And indeed, this isn’t the first inquiry launched by the Commission into the company.

The question now is, which company will be the next one investigated by the SEC?

“Is it possible that some of the other major carriers will be looked at at some point?” Burke says. “Sure; why not?”

— Eugénie Larson, Reporter, Light Reading

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