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June 27, 2002
In remarks that seemed crafted to exonerate executives from what could be one of the largest fraud cases in U.S. history, WorldCom Inc. (www.worldcom.com) CEO John Sidgmore said late Wednesday his own management blew the whistle.
WorldCom’s auditing committee “immediately” informed independent auditor KPMG LLP (www.kpmg.com) that the No. 2 long-distance carrier had inflated earnings by $3.8 billion during the last five quarters, after an internal investigation found the company was not complying with generally accepted accounting principles, Sidgmore said in remarks broadcast over the Web.
“WorldCom reported itself in this matter and moved swiftly to do so once the situation became apparent,” said Sidgmore, who was hired last month to replace former CEO Bernie Ebbers. “We turned ourselves in.”
Tuesday’s disclosures marked one of the harshest blows to corporate America and the embattled telecommunications sector as the Justice Department (www.usdoj.gov), the Securities and Exchange Commission (www.sec.gov) and Congress vowed to launch separate probes into WorldCom’s accounting methods.
“I am deeply concerned about some of the accounting practices that take place in America,” President Bush said Wednesday, as he labeled as “outrageous” revelations concerning WorldCom. “We will fully investigate and hold people accountable for misleading not only shareholders, but employees, as well.”
The disclosures could not have come at a worse time for WorldCom, owner of the world’s largest Internet backbone, UUNET.
Saddled with $32 billion in debt, the Clinton, Miss.-based carrier recently announced a sweeping restructuring plan that includes negotiations to sell non-core assets, raise a $5 billion bank facility, and reduce its headcount by 17,000 employees.
Sidgmore said the accounting blunders would not impact cash flow for the previous five quarters, adding that no debt was maturing for the remainder of the year.
But financial analysts said the accounting mess could bring the telecom giant a step closer to filing for bankruptcy protection, a move that would threaten to alienate the Fortune 500 companies and other large corporate clients WorldCom serves.
“This development brings into serious question the company’s ability to close on a new bank deal and raises the likelihood that the company will file for Chapter 11,” Marc Crossman, a securities analyst for J.P. Morgan (www.jpmorgan.com), said in a report Wednesday.
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