The condition of WorldCom Inc. became critical Tuesday,
as the Securities and Exchange Commission (SEC) slammed the company’s explanation
of its $3.8 billion overstatement of earnings and WorldCom opened the
door to the revelation of more murky accounting.
Late Monday, hours after WorldCom issued a sworn statement meant to explain
how it overstated
earnings by nearly $4 billion, the SEC called WorldCom’s response
“wholly inadequate and incomplete.” Last week, the SEC ordered WorldCom to
issue details of its revised financial statements and an explanation of how
the overstatements occurred.
In its statement yesterday, however, the Clinton, Miss., company gave little
more information about the restatement, the largest in U.S. corporate
history, saying only that it improperly accounted for some expenses as
capital expenditures.
SEC Chairman Harvey Pitt, already under fire for his own ties to the
accounting industry, took the gloves off when expressing the SEC’s
displeasure. WorldCom’s response “demonstrates a lack of commitment to full
disclosure to investors and less than full cooperation with the Securities
and Exchange Commission,” he is quoted saying in a prepared statement.
The hard line taken by the SEC, which has already filed civil
fraud charges against the company and its executives, bodes ill for
WorldCom, which might reveal more accounting problems.
WorldCom’s statement yesterday hinted that the $3.8 billion restatement
announced a week ago might not be the only instance of bad bookkeeping. The
telecom said its audit committee, along with accountant KPMG, would look
into “certain material reversals of reserve accounts during 2000 and 1999.”
That opened the way into probing how WorldCom accounted for its expenses
during its acquisitions binge under the leadership of Bernie Ebbers, who resigned
two months ago after the company disclosed it gave him $366 million in
loans and loan guarantees to cover losses from the decline in WorldCom
shares he owned.
Also yesterday, two WorldCom lenders holding credit facilities worth a total
of $4.25 billion notified the company that they reserved their rights to
call the loans in immediately. WorldCom said the notifications were
expected, and it is in talks with the lenders to work out new loan
arrangements.
The news caused an investor stampede out of WorldCom’s already battered
shares, sending them down to trade at just pennies a share. Nasdaq informed
WorldCom that it would move to delist the company’s stock on Friday, but
WorldCom can request a hearing to stave off delisting.
WorldCom’s CEO John Sidgmore has a press conference planned for this
afternoon in Washington, D.C., as he tries to stop the spiraling crisis from
unraveling the company.
