Telecommunications and Internet service provider WorldCom announced Tuesday it will restate its financial results for 2001 and the first quarter of 2002 as a result of accounting irregularities and has terminated its chief financial officer (CFO), Scott Sullivan. It will also reduce its workforce by 17,000, beginning Friday.
The announcements came on the heels of a series of setbacks for the Clinton, Mississippi, company, and helped send its stock (WCOM) down nearly 76 percent Tuesday on The Island ECN Inc. after-hours market. On Tuesday evening, the stock was trading at US$0.20.
The Nasdaq stock market suspended the trading of WorldCom shares Wednesday, pending the company's providing requested information to the market, according to a press release issued by the Nasdaq.
U.S. President George W. Bush weighed in on the matter Wednesday during a visit to Kananaskis, Alberta, for the G8 summit, calling WorldCom's announcement "outrageous."
"We will fully investigate and hold people accountable for misleading not only shareholders, but employees, as well," Bush said, according to a transcript on the White House Web site. "When we find egregious practices, such as the one revealed today, we'll go after them."
Markets continued to react badly throughout the day, with the Dow Jones Industrial Average down 109.86 points, or 1.2 percent, in mid-afternoon trading.
Certain transfers from line cost expenses to capital accounts during 2001 and the first quarter of 2002 were not made in accordance with U.S. generally accepted accounting principles (GAAP), according to WorldCom's statement. The transfers totaled $3.05 billion in 2001 and $797 million in the first quarter of 2002.
Without the transfers, WorldCom's earnings before interest, taxes, depreciation and amortization (EBITDA), would be reduced to $6.34 billion, and for the first quarter of 2002 would be cut to $1.37 billion. The company would have reported net losses for both periods, it said.
Also Tuesday, WorldCom said it had accepted the resignation of David Myers as senior vice president and controller.
In late April, WorldCom President and Chief Executive Office Bernard Ebbers resigned in the face of mounting debts, a U.S. Securities and Exchange Commission (SEC) investigation and layoffs. WorldCom will begin a round of previously announced layoffs on Friday, which will see the company shed as many as 17,000 jobs, saving the company an estimated $900 million per year.
The company has notified the SEC and asked its recently hired external auditor, KPMG LLP, to undertake a comprehensive audit of the financial statements from those periods, according to the statement. The company expects to provide a restatement of its results as soon as possible.
"The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets," the SEC said in a statement released Wednesday.
The SEC said it is investigating WorldCom's statements and disclosures and that it is ordering the company to file a detailed report on this matter. The body also called for reform in financial market regulation.
Previously, WorldCom used Arthur Andersen LLP as its external auditor. Arthur Andersen issued a statement late Tuesday laying the blame on Sullivan and disclaiming any knowledge of the transfers.
Saying that its work for WorldCom "complied with SEC and professional standards at all times," Arthur Andersen said that "the WorldCom CFO (Sullivan) did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment."
After Arthur Andersen learned about the transfers and conferred with WorldCom's management, it told the telecommunication company that its financial 2001 statements should not be relied on, the account said.
WorldCom does not expect a restatement of those results to affect its cash position or its customers or services, the statement said.
Jeff Kagan, a telecommunication industry analyst based in Marietta, Georgia, agreed that WorldCom customers are likely to be untouched by this announcement.
"The customers should be unaffected because the asset (WorldCom's network) is already in place," he said.
More than a service issue, "this is an issue about trust," he said.
While the company's disclosures are "a big blow to the public perception ... it shouldn't impact the customer," he said. "Nobody's going to pull any plugs."
"Whether they go into bankruptcy or not, the network isn't going to turn off," said Jeff Phillips, director of consulting at market analysis firm TeleChoice Inc.
"I don't think it's going to have any impact in terms of service disruption," he added.
What may be disrupted, however, is the rollout of new services and network expansion, he said.
The financial news, combined with the layoffs set for Friday, could force WorldCom to slow down network expansion plans and change services offerings, and could cause some large enterprises to deploy their own services and applications in the future, rather than rely on a carrier to do it, he said.
Large enterprises won't necessarily be looking to get out of their contracts immediately, though, he said.
"There will be less than people expect by way of churn," he said.
That churn will likely be small because "switching carriers in the midst of a crisis ... is difficult, if not impossible," according to Courtney Quinn, senior analyst at Yankee Group. Many enterprises have service contracts with more than one carrier, she noted, which means they may not need to switch at all.
But while WorldCom may not lose many customers, it won't be gaining many in the near-term either, she said. Businesses that had been considering WorldCom for service will now look to other vendors, she said, adding that she's already talked to some clients who are doing this.
For customers that stick with the company, network service should not be greatly affected, though customer service may be, Quinn said.
"WorldCom has struggled in the past with their customer service," she said. As some of the layoffs are likely to come from customer service departments, "it's going to be a challenge to continue to serve (their existing customers)," she said.
Though customers may not be seriously affected by the news, investors, stockholders, creditors and WorldCom itself won't be so lucky, he said.
The disclosure is "huge," but "the event itself is not fatal," Kagan said. "The question is, 'what chain of events will it trigger,'" he said.
The best-case scenario would see the mistakes chalked up to the previous management at the company, he said. The delisting of the company's stock and bankruptcy would be the worst-case scenario.
Bankruptcy is not assured, however, he said.
"WorldCom won't file for bankruptcy unless they have no other option," he said. "It wouldn't be in anyone's interest to see the company go belly up."
Still, WorldCom faces big challenges, Kagan said.
"It's going to take a while to build back that trust," he said. "They're not going to be able to brush it off."
"How they respond ... in the next few days is going to tell us whether or not they're going to be able to win the trust back," he said.