WorldCom Overstated $3.8B in Cash Flow

WorldCom disclosed Tuesday night that it
overstated its cash flow by almost $4 billion over the last 16 months,
putting the telecom giant’s future in grave doubt and adding it to the list
of former corporate titans felled by shady bookkeeping.

The already troubled telecom said an internal audit had discovered the
company overstated its cash flow by $3.8 billion over the past five
quarters, wiping out a $1.4 billion profit in 2001 and $130 million in the
first quarter of 2002.

The disclosure might be the coup de grace for the nation’s second-largest
long-distance carrier, which has faced a host of problems, from a Securities
and Exchange Commission (SEC) investigation to a crushing $30 billion in
debt to the sudden resignation of its CEO.

In an attempt to salvage the company, WorldCom announced it would cut 17,000
of its 85,000 employees. WorldCom also fired its chief financial officer,
Scott Sullivan.

“Certainly, in the near term it looks like things are going to be very dicey,” said Giga Information Group telecom analyst Lisa Pierce. “This is certainly going to make customers who are thinking of signing with WorldCom rethink how much they should be committing to them.”

Pierce said she had already fielded calls from concerned customers of WorldCom’s Falls Church, Va.-based UUNet unit, which provides corporate Internet services.

“The questions come down to the stability” of the company, she said. “Some customers may find they are obligated to continue with the carrier they are with until they have fulfilled their obligations.”

But with WorldCom’s future in the balance, UUNet customers run the risk of major disruptions. Pierce said she is advising businesses using UUNet to diversify their risk profile by shifting some contracts to another provider, such as Sprint or Genuity. But in the hard-hit telecom sector, stability is a tough commodity to come by.

“We don’t know where another shoe is going to drop with another facilities provider,” Pierce added.

WorldCom said its internal audit had revealed that Sullivan had improperly
accounted for network maintenance as a capital investment, allowing WorldCom
to sweep expenses off its balance sheets.

The company’s auditor during the period was Arthur Andersen, the accounting
firm in charge of checking the financial reports of Enron and Global
Crossing.

The news comes just two months after WorldCom was rocked by the
resignation of Bernie Ebbers
, its longtime CEO. Ebbers left under a cloud
created by $366 million in loans and loan guarantees the company made to him
in the days when WorldCom’s stock was flying high.

After helping found WorldCom in 1985, Ebbers built the Clinton, Miss.,
company from a mid-tier telecom to the second largest through a five-year
acquisitions binge highlighted by the $30 billion merger with Sprint in
1998.

WorldCom’s demise is the latest blow to the severely depressed telecom
sector, which has been battered by high debt loads, over-expansion, and weak
demand. In addition to Global Crossing’s retreat into Chapter 11 protection in January, the sector has seen former
up-and-comer Qwest Communications teeter
under federal probes and high debt
. The SEC is probing the company’s
accounting, while its chief executive, Joseph Nacchio, resigned
last week
.

This morning, shortly after the opening bell, Nasdaq halted trading of WorldCom’s shares, which had plunged to sell at 83 cents.

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