WorldCom: Another $2 Billion?

If you thought WorldCom Inc.’s (OTC: WCOEQ) woes couldn’t get any worse, think again. News reports today indicate that an internal review of the bankrupt telecom’s accounting for 2000 has disclosed more than $2 billion in additional improperly booked items.

Less than two months ago, WorldCom’s announcement that it had wrongly listed $3.85 billion in operational expenses as capital expenses sent the company spiraling into the largest bankruptcy filing in history (see WorldCom Goes Boom and WorldCom Files for Bankruptcy). If today’s reports are accurate, the company’s misstatements of earnings exceed six billion dollars.

According to a report in the The Wall Street Journal, at least some of the additional accounting problems have to do with reversals of reserves, or funds that the company had set aside to cover upcoming events, like lawsuits, taxes, and uncollectible receivables. During the internal probe of WorldCom’s books, the company’s auditor, KPMG (which replaced notorious Arthur Andersen LLP in May this year) apparently found that the carrier had reversed some of these reserves into operating income, thus boosting its earnings further.

WorldCom wouldn’t comment on the reports, but the company has said earlier that it might have to restate additional items as it moves forward with its internal investigation of its accounting for the last three years (see WorldCom Wobbles On ).

While the new numbers once again are staggering, they're not unexpected. In fact, 72 percent of the 633 people who took Light Reading's recent poll on the scandal said they expected further skeletons in WorldCom's cupboard (click here to see the results). “I’m not surprised,” says Craig Johnson, an independent industry analyst based in Portland, Ore. “These revelations just keep coming. [But] if they’re up to $6 billion, you’ve got to ask yourself, what were their revenues for the past year or so?”

And $6 billion might not be the end of it. The additional items were reportedly found in WorldCom’s 2000 books. According to the WSJ report, the company’s accounting for 1999 has yet to be scrutinized.

— Eugénie Larson, Reporter, Light Reading
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papabear 12/4/2012 | 9:59:13 PM
re: WorldCom: Another $2 Billion? The deeper they dig the more it is going to be. I can't believe they have only arrested 2 people involved with this.

They should have some of Ebbers' and Sullivan's severance to buy batteries for their calculators. Maybe their accountants are from the new school and calculators is the only way they can add or subtract.

Calculated based on the last mistake I guess this will cost another 7,906 jobs. Of course they do not get any severance. Ebbers and Sullivan ran off with it.

Lite_Rider 12/4/2012 | 9:59:13 PM
re: WorldCom: Another $2 Billion? Folks,

In the "Laid Off, Leaving Telecom" thread, I lamented that Telecom is cannibalizing itself. With today's revelation at WorldCom, this makes that cannibalization worse.

If the the US's #2 LD carrier can't make a profit in LD and data (the new "growth" areas) then why do SBC, VZ, Q and BLS think they can. (I state some reasons in that other post.)

Moreover, if WorldCom is spending $150M per month with SBC (for which they [SBC] requested an "emergency lien"), then that means SBC has a liability sitting out there for about $150M x 12 = $1.8B per year or about ~5% to their revenue at ~$40B (worst case scenario, likely less as revenue moves from one company to another).

However, that $150M covers SBCs fixed and variable costs (briefly mentioned in that other post). So, net income will drop more precipitously than just the 5%.

This is all worst case, mind you. However, everything else has been worst case so far. So the likelihood that more bad news is coming is increasing.

I love telecom, but it's time to RUN, not walk out of this industry. Trust me, you will see layoffs around Christmas time (for the RBOCs to gussy up their books for 2003) that will make last year look like a statistical aberration.

Oh, and remember, those layoffs at the RBOCs are rarely on the CWA (Union) represented employees. They are of the management folks.

So, when you read RBOC X is laying off 10,000 of a 200,000 work force, the story is they are laying off 10,000 of 100,000 non-represented folks (the "union to management" ratios at the old bell system were around 1:1 or 1.25:1 when I was at AT&T). It's likely still around that number now.

I really don't mean to sound like a harbinger of doom, however, one has to ask oneself: if WorldCom can't make money in LD, then why is everyone looking at this like a panacea of glad tidings.

If you have a job start looking. If you are out of a job in telecom, go to school, change fields...whatever you do, please don't do what all the old "AT&T Pioneers (those with 17+ years of service)" do: lament how good it was, but don't do anything about it.
runrabbitrun 12/4/2012 | 9:59:09 PM
re: WorldCom: Another $2 Billion? For an RBOC LD represents incremental revenue. The problem Worldcom had was investors demanded growth and management's salaries were tied to stock performance. Since all of their income came from LD already they had to show growth in more creative ways. MCI use to stand for "Money Coming In", I wish McGowen could see his MCI now.

The RBOCs' monopoly will allow them to use existing infrastructure for new LD revenue. For example today they provide 800 service today, but when the call crosses a LATA boundary they have to hand it off to a partner and share the revenue. Once in LD they get to keep it all. The major cost in providing Telephony service is not in the network it's in the maintenance, business office and billing systems. All of these can scale to accommodate InterLATA service, while using their monopoly position to subsidize the costs. They have to build very little new stuff for LD - note SBC uses Williams for InterLATA transport at fixed (known) costs.

You are right the RBOCs will downsize 10% this year to cook their books.
papabear 12/4/2012 | 9:59:09 PM
re: WorldCom: Another $2 Billion? I guess the RBOC's are waiting until 8/14 to sign their accounting certifications. Do you think they will or do you think they will request a waiver at the last minute?
Lite_Rider 12/4/2012 | 9:59:06 PM
re: WorldCom: Another $2 Billion? Runrabbitrun:

You are partially correct, sir or madam.

You are correct that they can leverage their in-region network. However, an RBOC is still strapped with "271" for 3 years after getting regulatory relief.

However, I propose that your assertions fall apart for the following reasons:

* An article recently posted in LightReading states that RBOCs are getting "the dregs of Telecomville"...averaging $3 ~$4 per month.

* RBOCs are not winning the big enterprise customers for their service - which many are in-sourcing into their own (unregulated) networks, leasing circuits from LD companies.

So, this revenue is more of a hassle than a profit center...and, again, the US's 2nd largest LD player couldn't make it work. (Economies of Scale, Laffer Curve for Commodities,...etc.)

In fact, SBC specifically had a major debacle in late 2000 and early 2001 where they killed all their out of region efforts. So, that is not a growth market either.

As for the monopoly position, access lines are down, so the monopoly position of the RBOCs is tenuous at best. The total addressable market is frozen in terms of size due to wireless alternatives and other cannibalizing technologies: LMDS, Cable Modems, etc.

Assuming the above point is a "neutral", the CLECs getting the local loop at actual cost (not the puffed up cost the RBOCs CLAIM it costs), will cut into the profitability, too. Either way, that total addressable market is shrinking.

The only place I have heard that the local loop is "growing" is the South. Access lines are up in the South, but so are Indoor Plumbing and Dentists. (Both of which just recently came into vogue -- see "Deliverance".) So, that doesn't impress me as a long term trend.

As for what Williams is paid, well that revenue has certainly kept them afloat, eh? :-)

I agree that the RBOCs will slice at the end of the year. Let's do a calculation for SBC due to their legal filing today.

As a result of missing their numbers ALREADY this year, they are whacking 3,000. That has already been called insufficient by the analysts.

Assuming they get 50 cents on the dollar for what they are owed (which WorldCom already claims the access fees are already too high). SBC will lose $150M on the outstanding owed.

Assuming an average, fully-loaded (bennies, etc) employee (management) at $90k per year: $60k in Salary; 50% more in benefits, pension, matching 401k, etc. (Now, the $60k is arbitrary, so that will mean that using a lower pay scale makes the headcount getting whacked will go up.) The loss of $150M = 1,700 employees more.

Now, $150M is the per month revenue. Assuming 1/4 of that goes away during the "restructuring" due to WCOMs customer throwing in the towel. $150M x 25% x 12 months = $450M in lost revenue.

At $90k per employee, that is nearly another 5000 employees. Total of the above: 3000 + 1700 + 5000 = 9700 employees (again conservative and assumes no revenues return to SBC from other LD providers).

Place that against about ~90,000 management employees (for whom the $90k figure was derived): That is about 10% ~ 11%.

However, that doesn't even begin to position them (SBC) for the competitive strength of a "out of bankruptcy" WCOM and ICG and XO in the next 18 months. So, look for that number above to double. You know, the companies with reinvigorated balance sheets (in 18 months)?

My personal position has always been that telecom will have 40% less people in it by the time this stuff comes to pass. And that the RBOC will lose or be relegated to also-rans against the best positioned, least regulated companies: Cable Companies.

Just my $1 and 2 cents worth.

Rabbit, I would enjoy hearing your opinion on my statements) above.

BobbyMax 12/4/2012 | 9:59:04 PM
re: WorldCom: Another $2 Billion? WorldCom is not alone in committing fraud on the US citizens. There are at least 10,000 US based companies that are involved in someway relazing income throgh some form of cheating. SEC is not pursuing all the public traded companies.

The lax accounting practices and stock options had the most corrupting influence on upper tear of the management. It will take at least a decade to catch all the crooks who cooked the books and others who simply stole the money.
sigint 12/4/2012 | 9:59:03 PM
re: WorldCom: Another $2 Billion? It's a relief that this new discovery was in the books of known crooks. It would have been much worse if this came from a new company, hitherto believed to be impeccable.

I guess it's time for a strong hard (re)look at all compnies that Arthur Anderson worked for (or worked in collusion with).

It made a pretty sight on TV watching the disgraced executives from Worlcom being led away in handcuffs. I guess all of us eagerly await more such visuals.
erbiumfiber 12/4/2012 | 9:59:01 PM
re: WorldCom: Another $2 Billion? Wow. Some real words of inspiration in today's Washington Post from John Sidgmore. When asked how the new disclosure changes matters, he answered with the above quote. I know MY confidence was racheted up a few notches. he also says he doesn't know what else will be found then later states that he is confident that they know "a lot." Not to mention the billions in write-offs coming for over-valued acquisitions.

Here is the blurb from the Post:

>>Sidgmore noted last night that there is no guarantee the company has uncovered the last of its accounting problems. "You never really know for sure," he said.

However, Sidgmore added that the company is growing more confident about its accounting. "We feel like we know a lot," he added.

WorldCom also announced last night that it may write off $50.6 billion in goodwill and other intangible assets when it restates its finances to correct its faulty accounting. That would be one of the largest write-offs of assets in corporate history.

When the company filed for bankruptcy protection last month, it claimed assets of $107 billion and debts of more than $41 billion. The expected goodwill write-off would effectively cut the book value of the company almost in half. Sidgmore said the expected write-offs were mostly due to declining value of the company's investments, including its acquisitions of other companies. "We paid billions and billions of dollars for companies that are not worth as much now," Sidgmore said.

Analysts say it will be virtually impossible to get an accurate reading on the value of the company until a comprehensive audit for the past several years is completed -- a process that is expected to take at least several more months.

"This ratchets up the level of distrust," said Scott Cleland, an analyst with the Washington-based Precursor Group.

Asked if the latest disclosures will affect the company's plans to emerge from bankruptcy, Sidgmore said, "Given that we are already bankrupt, it's hard to see how this changes the situation." <<

gea 12/4/2012 | 9:59:00 PM
re: WorldCom: Another $2 Billion? Bobby Max (aka Harvey Mudd wrote...

"There are at least 10,000 US based companies that are involved in someway relazing income throgh some form of cheating"

As usual, you pulled these numbers entirely out of your behind. Where did you get the figure "at least 10,000 companies"? Your numbers are always completely, wildly large, showing no coherent relationship to reality.

And even if this were true, what is your point? That crooked business men exist? That they'll cook books if they can? What a suprise! But your numbers would seem to indicate than anyone with two arms and two legs is crooked or corrupt. Are you trying to tell us something, Bobby Max? One wonders what corruption YOU have been involved in...
gea 12/4/2012 | 9:58:59 PM
re: WorldCom: Another $2 Billion? So what I'm not understanding is, how exactly does one "hide" over $7 BILLION in losses? Isn't that kind of like "hiding" a Tyrannasorous Rex in a playground? Does this not involve dozens, if not hundreds of people looking the other way?
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