Scathing Reports Detail WorldCom Faults

Two reports about bankrupt telecommunications company WorldCom, now called MCI, are pointing accusing fingers at company executives for “serious mismanagement,” including fraudulent practices, and a lack of oversight by its board of directors that led to the financial collapse of the telecom giant.

The reports’ scathing critiques of the company’s top officers, especially former CEO Bernard Ebbers, and its board of directors arrives on the same week that WorldCom’s landmark $500 million fraudulent accounting settlement with the Securities and Exchange Commission is slated to go before a judge.

One of the two reports released late Monday was an independent auditor’s report known as the Thornburgh Report, based on former U.S. Attorney General Richard Thornburgh’s leading role in gathering the findings of federal investigators of WorldCom.

A second, internal report was chaired by former SEC director of enforcement William McLucas and assisted by accounting firm PricewaterhouseCoopers. The McLucas report points to practices by Ebbers and his chief lieutenants, saying that Ebbers engaged in “financial gimmickry” when he was the head of the company.

Among the findings criticized in the Thornburgh report was Ebbers’ move to sell $70 million worth of company stock, despite advice by outside counsel that he not do so. The report said that Ebbers ignored warnings about financial improprieties, and brazenly flouted the law.

The reports also detailed reportedly “lax internal financial controls” and reportedly “weak oversight” by the board of directors over a period of several years. Those errors of judgment and policy, the reports said, led to WorldCom amassing $41 billion in debt and to eventually overstating its earnings by $11 billion.

“The board was removed and detached from the operations of WorldCom to the extent that its members had little sense of what was really going on within the company,” the McLucas report said.

Neither Ebbers nor former former WorldCom CFO Scott Sullivan were interviewed for the reports, largely due to ongoing federal investigations into both men regarding securities fraud, conspiracy and allegedly making false statements in SEC filings.

The reports said other areas still may be investigated, including the relationship between WorldCom and financial analysts, the participation of WorldCom officer and directors in initial public offerings, and allegations of improper treatment of transactions to generate unearned commissions.

Although MCI said in public filings with the SEC on Monday that it was responding to or making moves to respond to the reports’ suggestions to address the management problems, the severity of the details in the reports raise questions as to whether the findings could be used by federal regulators to bring more charges against the company.

As a result of the reports issued Monday, Ebbers is named on several occasions for wrongdoing. Both reports said WorldCom masked the company’s true financial results with tactics such as keeping a second set of books and a variety of fraudulent practices.

In addition to a swath of new management policies the company’s new management said it is implementing, MCI said it hired accounting firm KPMG to help it oversee the process. Also, former SEC director Richard Breeden, the court-appointed monitor overseeing some of the changes at the newly-organized WorldCom, is expected to detail other management recommendations to be made public later this month.

Breeden has said publicly that he will recommend that the offices of CEO and chairman be separated, which would mean that the current CEO Michael Capellas, would have to relinquish one of those titles.

Breeden believes that board member qualifications need to be improved with new term limits established. He goes onto say that at least one board member should change every year with shareholders having a role in the board make-up and selection process.

KPMG, for its part, has said WorldCom should boost the experience and depth of its financial management and accounting personnel, improve oversight of its business units and provide complete documentation of non-routine transactions.

“We noted certain matters involving internal control and its operation that we consider to be material weaknesses,” KPMG said in a filing with the Securities and Exchange Commission.

Additionally, WorldCom needs to establish a consistent policy for retaining electronic data and hard copy records, since it cannot locate some electronic files for billing and accounts receivable platforms, KPMG said.

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