Was Mum the Word at WorldCom?

Controller Myers reportedly forbade staff accountant from talking to auditor about bookkeeping; "don't make me ask you again." Elsewhere: Citi larded WorldCom execs, SEC investigates U-Haul, and FASB mulls impairment -- again.


WorldCom Inc.’s former controller, David Myers, who was arrested earlier this month, reportedly told an accountant in the company’s U.K. office to stop talking to auditors at Arthur Andersen.

On Jan. 22, Myers sent an E-mail to staff accountant Steven Brabbs. In that memo, Myers reportedly told Brabbs: “Don’t have any more meetings with” Andersen, WorldCom’s independent auditor at the time. The E-mail was released on Monday by the House Financial Services Committee, which is investigating the company’s bankruptcy and its misreporting of $7.2 billion in operating costs.

The message to Brabbs continues: “I spoke to AA this morning and hear that you are talking about asset impairments and facilities. I do not want to hear an excuse. Just stop. Don’t make me ask you again.”

Bloomberg News reports that the message was part of a campaign by executives at WorldCom’s Clinton, Miss., headquarters to restrain lower level employees who questioned the company’s accounting practices.

Brabbs apparently first raised questions about the company’s financial statements two years ago, when he was director of international finance and control in WorldCom’s London office, Bloomberg reported. According to Brabbs, the telco’s U.S.-based executives revised the first quarter 2000 statements for the company’s U.K. operations by lowering the costs of maintaining phone lines by $33.6 million.

Reportedly, Brabbs was also pressured by former CFO Scott Sullivan to alter the books for the second quarter of 2000. It’s not clear what Sullivan allegedly asked Brabbs to do.

Both Sullivan and Myers were arrested on Aug. 1 and charged with securities fraud.

(Editor’s note: To read an exclusive interview with WorldCom internal auditor Glyn Smith, see “The View From Inside.”)

Citi: We Gave WorldCom Execs IPO Shares

In response to a subpoena from the U.S. House Financial Services Committee, Citigroup Inc. has acknowledged that its investment banking arm, Salomon Smith Barney, set aside shares of hot IPOs to executives from WorldCom Inc.

“The IPO allocations to WorldCom officers and directors at issue here were reasonable since these were high net worth individuals and substantial retail clients,” Citigroup lawyer Jane Sherburne said in a letter sent to the committee on Monday afternoon, according to Reuters.

But Bloomberg News reported that Sherburne also wrote that some of the share allocations, although lawful, “were sufficiently large enough to raise questions about the appearance of conflicts.”

In addition, Sherburne wrote that new rules governing the IPO process may be required.

Surprise! Creditors Want Kopper’s $12 Million

Michael Kopper may have settled his case with the Department of Justice, but his legal problems are far from over. On Monday, Enron Corp.’s creditors filed a lawsuit in federal bankruptcy court in New York seeking the $12 million he agreed to turn over to the U.S. government, Bloomberg News.

Kopper, the former managing director of Enron Global Finance, and a close colleague of the company’s former CFO Andrew Fastow, pled guilty a week ago to two counts of conspiracy. As part of his settlement, he agreed to disgorge the $12 million he made from Enron’s off-balance partnerships.

But apparently, the creditor’s committee wants to get that money before Kopper turns it over, Bloomberg reported. The panel is claiming that they are owed as much as $50 billion. The bankruptcy court scheduled a hearing in New York on Wednesday.

NYSE Chairman Didn’t File Right Papers

In the wake of the rash of corporate scandals, few institutions have raced as quickly as the New York Stock Exchange to establish new standards for corporate governance and board independence. Indeed, the NYSE’s chairman Richard Grasso has been outspoken about the need for better behavior by corporate executives.

But Grasso himself apparently needs to pay a little more attention to his own accounts. As a board member of Computer Associates International Inc., a company which itself is being questioned about its accounting practices, Grasso reportedly failed to submit the proper documentation about his holdings to the SEC.

Bloomberg News reported that Grasso and four other directors relied on CA’s counsel for instructions on filing the shares they receive as compensation for being board members. In Grasso’s case, the errors go all the way back to 1996. The NYSE Chairman corrected the mistake with an amended filing this month, but CA noted the error in its recent annual proxy statement.

SEC Investigates U-Haul For Dumping PwC

U-Haul International Inc., a unit of Reno, Nev.-based holding company Amerco, is being investigated by the SEC for firing PricewaterhouseCoopers as its auditor, FT.com reported. The company has admitted to material weaknesses in its internal controls.

U-Haul dismissed PwC last year after 24 years of using the Big Five firm as its outside auditor. The new auditor is BDO Seidman.

Before the accounting firm was fired, PwC had reportedly recommended that U-Haul’s procedures be examined and augmented. PwC wanted U-Haul to assign responsibility for each account in the general ledger to an “appropriate” person, FT.com reported. The changes were needed “to help detect mis-stated account balances on a timely basis”. The auditor also said too many people had access to the books, and the company had to improve its inventory controls.

U-Haul’s audit committee reportedly approved PwC’s recommendations. But U-Haul canned its independent auditor -— apparently, before the changes were implemented.

Amerco has been criticized by some analysts for having too few independent directors on its board. The company recently consolidated SAC Holdings’ financials onto its books, FT.com reported. SAC does several millions of dollars worth of business with Amerco. What’s more, its voting shares are held by Mark Shoen, an Amerco board member — and the brother of Chief Executive Joe Shoen. A third Shoen brother, Jim, also has a seat on the board. Amerco was founded by L.S. Shoen, the father of the three board members. Two other Amerco board seats are held by other Shoen family relatives.

Amerco management also acknowledged that in its last fiscal year it purchased more than $3 million of printing from Form Builders. That company is controlled by Mark Shoen and other members of the Shoen family, FT.com reported.

FT.com said that Amerco’s management believes the Form Builders and SAC Holdings deals were done on terms equivalent “to those that prevail in arm’s-length transactions.”

Joe Shoen told FT.com that the company’s books have been reviewed by its new auditors at BDO Seidman.

FASB To Review Purchase-Method Accounting

At FASB’s open meeting on Wednesday, board members will discuss applications of “fair value measurement guidance for initial measurement of assets acquired and liabilities assumed in a purchase business combination.”

The review of purchase-method accounting is among the many initiatives in which FASB is collaborating with its London-based counterpart, the International Accounting Standards Board. But the current review of the purchase method will stop short of looking at matters already covered by FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets.

FASB and IASB will discuss the current purchase method project on Sept. 18 at FASB’s headquarters in Norwalk, Conn. At this week’s meeting, FASB will also discuss financial reporting by business enterprises and alternatives to its current project to replace FAS 107, Disclosures about Fair Value of Financial Instruments. A discussion will also be held regarding the valuation of intangible assets with representatives from the Financial Valuation Group. But the board does not plan to make any decisions on this issue.

Dow Will Expense Options, Unisys Won’t

Dow Chemical Co. issued a statement Monday noting that it will begin expensing options in 2003. The company expects the change to cost it approximately $0.02 per share on its bottom line next year, and about $0.06 per share in 2005.

Currently, about 3,600 employees of Dow’s total workforce of 50,000 hold stock options. The chemical maker has included historical information about the pro forma impact on earnings per share of stock options in its annual report since 1996.

But apparently, Unisys Corp. won’t be joining the parade of companies that have lately decided to change their bookkeeping treatment of options. Lawrence Weinbach, the Unisys CEO, told FT.com on Monday that the computer company has no plans to expense options.

Likewise, executives at a number of technology companies, including Microsoft and Cisco Systems, have said they too oppose treating options as expenses. Certainly, expensing options would have a sizeable impact on the earnings of many tech specialists. Over the past few years, awarding stock options to workers has been a favorite way for IT companies to attract top talent.

But as CFO.com “reported yesterday, TechNet, a Palo Alto, California-based trade association (whose 250 members include such blue-chip names as Intel, Microsoft, Oracle, Cisco Systems, and Hewlett-Packard,) is considering a new proposal put forth by Intel. Intel’s idea: computer companies should create a “quarterly impact sheet” detailing the number of option grants, the timetable for exercising them, and the potential effect on the corporate bottom line.

TechNet’s president Rich White told Bloomberg News: “We recognize that there has been some abuse of stock options at the senior level, and our main focus is to preserve stock options for rank-and-file employees.”

Among the initiatives the group is considering are a requirement that executives hold options for five years before exercising them and restrictions on executives’ ability to sell shares. The group is not ready to treat option costs as an expense.

Short Takes: Nestle’s Battle, XO’s Funding, Uniroyal’s DIP

  • Nestle SA has emerged as the favorite to win the bidding for Hershey Foods Corp., with its proposed $11.5 billion acquisition. But the deal is not likely to close quickly, given that Pennsylvania Attorney General Mike Fisher has asked a judge to stop the sale.

The chocolate maker is 77 percent owned by the Milton Hershey School Trust, which also manages a $5.4 billion fund that supports the Milton Hershey School for disadvantaged children. On Friday, Fisher, who is the Republican candidate for governor, filed a motion to block the sale, saying it would cause irreparable harm to the community…

  • XO Communications Inc.’s reorganization plan was approved by the bankruptcy court on Monday, giving the go ahead for the company to borrow $800 million from Forstmann Little and Telefonos de Mexico.

Forstmann and Telefonos initially agreed to supply the funding in June, but then backed away from the agreement as XO’s finances worsened, Bloomberg News reported. XO, which was founded by cell-phone pioneer Craig McCaw, sought to enforce the June agreement as part of its reorganization strategy…

Whatever’s in store next for XO, its reorganization is not likely to be a simple affair. Carl Icahn‘s High River LP already holds $170 million of the company’s $1 billion in bank debt — and has agreements to take up an additional $410 million. Reportedly, Icahn is seeking to gain control of the remaining $420 million in debt as well. Reportedly, Icahn had battled earlier with Forstmann over XO. Now, if the legendary corporate raider gains controls of all of the company’s bank debt, his consent will be needed for any steps XO management takes to restructure the business…

  • Uniroyal Technology Corp., a Sarasota, Fla.-based maker of semiconductors, optoelectronics, and plastics, filed for bankruptcy protection. The company management said it received $15 million in debtor-in-possession financing from CIT Group, according to Reuters. CIT was recently spun-off from parent Tyco International.

In a bankruptcy petition filed with the U.S. Bankruptcy Court for the District of Delaware in Wilmington on Sunday, Uniroyal listed $85.8 million in assets and $68.7 million in liabilities.

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