WorldCom Admits $3.8 Billion Accounting Trick

June 26, 2002 -- In one of the largest corporate accounting scandals ever, long-distance phone company WorldCom has revealed it cooked its books by nearly $4 billion, prompting government fraud charges and a rebuke from the president.

WorldCom said it inflated profits for five quarters, and instead of making $1.4 billion last year, actually lost money. In a statement, WorldCom acknowledged it had incorrectly listed expenses of $3.055 billion from 2001 and $797 million from the first quarter of 2002 as capital investments.

By accounting for routine operating expenses as long-term capital expenses, the firm's quarter-to-quarter financial picture was made to seem much rosier than it actually was.

This evening, Securities and Exchange Commission chairman Harvey Pitt announced the agency has filed a fraud charge against WorldCom in a federal court in New York.

"The SEC is filing an action against WorldCom … charging it with fraud," announced Pitt, adding "We are seeking an order to prevent the disbursement of assets and of payouts to executives … and to prevent any destruction of documents."

In Canada today for the opening of the G8 summit, President Bush called WorldCom's announcement "outrageous," adding that the government "will fully investigate and hold people accountable."

An official at the Department of Justice indicated to ABCNEWS that the DOJ was looking into the matter as well.

Company in Peril

This latest news could be the final blow to a company that has already been in a stunning decline. The company's value has gone from more than $115 billion to less than $1 billion.

At the same time, WorldCom's stock has fallen from a high of $62 to a low of under $1. Trading of the stock on the Nasdaq exchange was halted this morning, after the company's shares closed at 83 cents on Tuesday.

"This has been a very tough week for WorldCom, there's no doubtabout it," said WorldCom chief executive JohnSidgmore in a taped Webcast. Sidgmore replaced former WorldCom founderBernie Ebbers in April and he called the accounting disclosure "a shock" and "an undeniable setback."

On the heels of WorldCom's admission, the company's chief financial officer, Scott Sullivan, was immediately fired.

And now, with the future of the company in doubt, around 17,000 other WorldCom workers are expecting to begin losing their jobs by Friday, although most of the cuts had already been in the works. The company employs 80,000 people worldwide.

Analysts agree the latest revelations seem certain to lead to bankruptcy, if not criminal charges.

"Even before the news came out, here was a company whose stock was trading at less than a dollar," says John Ryding, chief market economist with Bear Stearns in New York. "Clearly, the market had already raised serious questions about the long-term viability of WorldCom."

More Pressure on SEC?

WorldCom's stunning announcement raises even more questions about the accounting practices of major corporations, coming after months of revelations about dubious bookkeeping at the Enron Corp., Global Crossing, and other big firms.

It may also put more pressure on the Securities and Exchange Commission to police the activities of the nation's public companies. The watchdog agency announced today it was "actively investigating" the "events relating to the veracity of WorldCom's financial statements and disclosures."

In a related development, the House of Representatives voted today in favor of a 77 percent increase in the SEC's budget, to $776 million.

"It is absolutely vital for the SEC to have the necessary resources to protect investors," said Rep. Michael Oxley, R-Ohio, chairman of the House FinancialServices Committee.

And Pitt defended his agency today, saying the SEC "has laid out and is actively implementing creative and effective solutions to the problems I inherited."

The House Energy and Commerce Committee is also promising an investigation of WorldCom.

Ebbers, the firm's former chief executive, is already under scrutiny after resigning in April amid questions over $400 million in loans the company gave him.

Meanwhile, Arthur Andersen, the embattled accounting firm that audited WorldCom during that period, has said it was not aware of the accounting discrepancies, and pointed a finger directly at WorldCom CFO Sullivan. Arthur Andersen was convicted earlier this month of obstruction of justice in the Enron debacle.

"Our work for WorldCom complied with SEC and professional standards at all times," asserted an Andersen statement released late Tuesday. The statement added that "important information … was withheld from Andersen auditors by the chief financial officer of WorldCom."

Initial Blow to Fragile Markets

The WorldCom news has hurt already weakened financial markets. Stocks plunged on U.S. markets at the opening today, and the news hammered overseas markets overnight, sending stocks in Asia and Europe on a nosedive.

The leading U.S. stock indexes rallied in the afternoon, though, with the Dow Jones Industrial Average closing down just 6.71 points, at 9120.11, and the Nasdaq finishing up 5.43, at 1429.42.

"The market was up and down like a yo-yo," said Art Cashin, director of floor trading at UBS PaineWebber in New York. "With the lack of clarity that has continued over the last few months because of corporate shenanigans and world events, small individual investors are staying away. The market was volatile because the key players are big investors who scrambled for every short-term twist and gain."

Still, some observers expect more fallout to come.

"This is yet another blow to the American financial system, says Nick Parsons, an analyst with Commerzbank in London. "It comes after the well-documented scandals at Enron. There are others that are in the pipeline or, at least, shall we say under SEC investigation."

On a wider level, some analysts say this latest corporate disclosure could even complicate the U.S. economy's recovery. Economists have already questioned whether the stock market's slide will hamper the economic recovery, and a revelation that one of the nation's largest companies defrauded its books surely will not help investor confidence.

"It just delays the point in time which people can get confidence back in the economic recovery," says Bear Stearns' Ryding.

ABCNEWS' Correspondent Betsy Stark told Good Morning America: "What the market did not need was one more reason not to trust Wall Street and not to trust Corporate America and that's what they have big-time in this scandal."

Will Customers See Service Interruption?

WorldCom, which purchased long distance provider MCI in 1997, serves 20 million customers nationwide and is the second-largest long-distance carrier in the country, as well as the backbone of the Internet.

But even if the company slides into bankruptcy, many of its customers probably won't experience any near-term interruption in their phone or Internet service.

Despite that, massive customer defections could be a big problem for the company. Many customers could suffer a major loss of faith in a company that has declared bankruptcy, faces criminal charges and may ultimately go out of business.

"Its competitors are well aware that this might be an opportunity to reach some of those customers," notes Stark.

ABCNEWS' Betsy Stark, Ramona Schindelheim and Jon Bascom contributed to this story.