Accounting Scandal Pushes WorldCom To Brink Of Bankruptcy
WorldCom said it had improperly transferred line-cost expenses worth $3.055 billion in 2001 and $797 million in the first quarter of 2002 to its capital accounts, resulting in inflated earnings statements for those periods.
WorldCom's revelation Wednesday that it falsely inflated its 2001 and first-quarter 2002 financial results by concealing $3.8 billion in expenses increased the concerns of corporate customers already worried about the company's viability.
"My concern that existed previously has gone way up in terms of doing business with WorldCom under the circumstances," says John Campanella, CFO of financial news and information provider Market News International Inc. of New York. "We have to understand what happened, why it happened, and what effect it will have on the infrastructure." Market News is looking into whether it will need to replace its WorldCom services and possible strategies for doing so, he adds.
WorldCom said it had improperly transferred line-cost expenses worth $3.055 billion in 2001 and $797 million in the first quarter of 2002 to its capital accounts, resulting in inflated earnings statements for those periods. John Sidgmore, who was appointed president and CEO in April to replace ousted CEO Bernie Ebbers, says the company's top execs were "shocked" at the discovery, assuring customers that WorldCom is viable and that the situation doesn't affect any of its services.
WorldCom fired CFO Scott Sullivan and says it accepted the resignation of David Myers, senior VP and controller. WorldCom also will eliminate 17,000 jobs beginning Friday, with an estimated cost savings of $900 million a year.
The Securities and Exchange Commission has launched an investigation and said in a statement that WorldCom's revelations "confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets."
The accounting problems coupled with previous financial difficulties mean "WorldCom's definitely going to go into bankruptcy," says Don Carros, senior research analyst at Meta Group. He says business customers should "identify critical business traffic and move it over to another carrier."
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