A rchive Date
[ 15-07-2002 ]
Category
[ International Relations ]
sub-Categoy
[ U.S ]
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[http://www.washingtonpost.com/ac2/wp-dyn/A4433-2002Jul14
WorldCom Ignored Workers' Concerns
Memos Show Challenge To Accounting in 2000
By Christopher Stern
Washington Post Staff Writer
Monday, July 15, 2002; Page A01
As far back as 2000, WorldCom Inc. employees challenged the company's accounting and in at least one case raised those concerns with auditor Arthur Andersen LLP, according to internal documents released yesterday.
The documents, released by House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.), showed that WorldCom employees in the United States and Europe believed as early as March 2000 that the company was moving around money on its internal books to make the company look more profitable than it was.
The documents also show that WorldCom's senior financial managers, including former controller David Myers and former chief financial officer Scott D. Sullivan, had ordered lower-level employees to record transactions on its books that the workers viewed as improper.
A claim by a WorldCom worker in London, who said he told Andersen about his concerns, is significant because at a congressional hearing last week, a former Andersen official in charge of the WorldCom account repeatedly denied that his firm had ever been told about efforts to reclassify regular expenses as capital investments.
WorldCom, based in Clinton, Miss., is expected to file for Chapter 11 bankruptcy protection and is struggling to find financing to remain operational. The company has been on the edge of financial crisis since late June, when it announced that it had improperly claimed $3.9 billion in regular expenses as capital investments during 2001 and 2002. The documents now show that the practice, which made the company appear profitable when it was not, extended back to at least the spring of 2000.
The Securities and Exchange Commission has charged the company with defrauding investors. WorldCom also is the subject of a federal criminal investigation and has been targeted by congressional investigators as well.
Tauzin, who is leading his own investigation, said yesterday on ABC-TV's "This Week" that other documents showed that Myers, who resigned last month, acknowledged that WorldCom resorted to improper accounting to save itself from collapse.
In one of the documents, according to Tauzin, "[Myers] said, "If we don't do this, we close our doors, we can't operate. We have to keep hiding these losses or our business fails."
WorldCom declined to comment yesterday on the memos. "We are fully cooperating with all external investigations," spokesman Brad Burns said. "We want any wrongdoers brought to justice and our business to move forward."
Separately, SEC Chairman Harvey Pitt said yesterday on NBC-TV's "Meet the Press" that he supported "the thrust" of legislation that would strengthen oversight of corporate accounting. Pitt brushed off calls from some members of Congress that he step down because of high-profile accounting scandals at Enron Corp., Global Crossing Ltd. and Adelphia Communications Inc.
Pitt has been criticized, particularly by Democrats, for his close ties to the accounting industry, which he represented in his private law practice.
The documents released yesterday showed that since WorldCom's admission that it improperly accounted for billions of dollars, some employees have begun to step forward, claiming they were forced to make financial entries that appeared to violate industry standards.
On June 26, the day after WorldCom announced that it claimed $3.9 billion in regular expenses as capital costs, Steven Brabbs, a London-based employee, wrote WorldCom auditors that he had been required to record $33.6 million in expenses, which he believed were unjustified in March 2000.
At the time he was ordered to make the entry, Brabbs held the title of director, international finance and control. He found that WorldCom had issued financial statements in the United States that made his divisions appear more profitable than he knew them to be.
Brabbs became concerned and began to ask how WorldCom came up with such a profitable figure for its overseas operations.
"After phone calls and e-mails to the U.S., we were told that the entry had been made on the basis of a directive from Scott Sullivan," Brabbs said in the memo. Sullivan was fired by the company on June 25, the same day WorldCom told the SEC about the improper accounting.
"Despite repeated requests, we were given no support or explanation for the theory," Brabbs said.
Brabbs, according to his account, eventually told Andersen about the issue. "Shortly after, I received an e-mail from David Myers indicating he was not pleased this matter had been raised with [Andersen] without his knowledge."
Brabbs also wrote that the $33.6 million was related to "line costs," which are fees charged by other telephone companies for connecting WorldCom's long-distance customers to a local network. WorldCom has said that a majority of the $3.9 billion in improper expenses it reported during 2001 and the first quarter of 2002 was related to telephone-line costs.
Because of his concerns, Brabbs was reluctant to change his books to conform with what was reported by the U.S.-based company on its consolidated balance sheet.
"However, pressure was exerted and we were instructed to make the entry (this pressure we understood was from Scott [Sullivan's] office specifically)," Brabbs wrote.
When he continued to raise the issue with senior WorldCom financial managers, he was told that the U.S. entry "had been made at Scott Sullivan's direct instruction."
Brabbs's concerns were so significant, however, that he refused to make the entry into his ledgers and instead created a separate "management company," to which the $33.6 million in disputed expenses were attributed. Brabbs's memo said the new entity was "not a legal entity," but did not provide further details. To further emphasize his concern about the entry, Brabbs included a note with the entry saying: late adjustment "as instructed by Scott Sullivan."
A second document released yesterday was a report of an interview between the company's top internal auditor, Cynthia Cooper, and mid-level accountant Troy Normand. The report showed that U.S. employees in 2000 had raised concerns about the way the company was accounting for the cost of leasing phone lines from other companies. The conversation took place June 24, the day before the company revealed it had improperly accounted for billions of dollars in 2001 and part of 2002.
Normand told Cooper that he considered quiting his job in 2000 because he was concerned about the propriety of WorldCom's accounting. In a written summary of the interview, Normand said he told Sullivan in the third quarter of 2000 that he was concerned about WorldCom's accounting approach to line costs. At the time he was told there were "business reasons" that justified the accounting. Sullivan assured Normand that there was nothing to worry about, the memo showed.
During the conversation, Normand told Cooper that he believed some of the company's ledger entries were "aggressive accounting" and others were "wrong and beyond aggressive accounting."
In 2001, Normand again raised concerns about the books, this time with then-controller Myers. Normand also said at least two other employees raised concerns about the company's accounting.
Three months ago, Sullivan issued guidance for the company that Normand believed would be impossible to meet unless the company juggled its own numbers. At the time, Normand asked to be laid off as of May 31, a deadline the company let pass. The memo does not make clear if Normand remains a WorldCom employee.
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