VideoWorldCom met its deadline. But Securities and Exchange Commission chairman Harvey Pitt still isn't satisfied.
Last week, the SEC had demanded that management at the telecommunications operator provide it with a detailed account of how the company managed to improperly book more than $3.8 billion in expenses for five quarters, beginning in 2001.
In a filing with the SEC, WorldCom explained that as a result of an internal audit of the company's capital expenditure accounting, it determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles (GAAP).
In a detailed chronology, the company said the improper accounting was discovered by internal auditor Cynthia Cooper, who was conducting a routine audit in May when she noticed some questionable transfers.
Little did Cooper know at the time that she had stumbled upon the accounting ploy that allegedly enabled WorldCom to hide nearly $4 billion in expenses.
Cooper discussed her findings with chief financial officer Scott Sullivan and controller David Myers. Sullivan was fired last week when WorldCom disclosed the accounting error, and Myers resigned.
Said John Sidgmore, WorldCom president and CEO: "Today's filing is consistent with our pledge to be forthright and open, and to cooperate fully with both internal and external investigations."
Apparently, those conducting the external investigations didn't see it that way. Pitt called the report "wholly inadequate and incomplete." He added: "It demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC."
WorldCom appeared to be taking a somewhat defiant approach to its dealings with the SEC. Spokesman Brad Burns defended the company's analysis, telling Reuters: "Based on the SEC's order and conversation with the SEC staff, we believe we were clear about what we would be able to provide to them. Our response was entirely in line with the SEC's request and is in fact a summary of what we know at this point."
But given Pitt's recent get-tough stance on corporate accounting, you can bet WorldCom will be hearing from the commission today.
Meanwhile, on Monday, management at the foundering telecom giant said its audit committee is reviewing its financials for 1999 through 2001 and has asked KPMG to help in the review, including certain material reversals of reserve accounts during 1999 and 2000. In other words: there may be more accounting revelations coming.
Defaults may be coming, as well. Yesterday, the company's management noted that WorldCom was in default on more than $4.2 billion of senior unsecured credit facilities. Management added that WorldCom was warned by creditors that they could demand immediate repayment of money owed under the credit facilities.
Also yesterday: Nasdaq notified WorldCom that the company's two tracking stocks—WorldCom Group and MCI Group—will be delisted on Friday because the company has failed to comply with certain filing and fee requirements. This news knocked down WorldCom's stock price by more than 90 percent. At market close on Monday, WorldCom shares were trading at 6 cents per share. Not too long ago, WorldCom's share price was $65.
Adelphia Auditor Returns Fire
Deloitte & Touche, under attack for its role in the bankruptcy of Adelphia Communications, fired back yesterday at the embattled cable company's board of directors. D&T accused Adelphia management of withholding key information just three weeks before Deloitte was dismissed as auditor.
In a letter to the SEC dated June 27 and released Monday, D&T reportedly noted its auditors had serious concerns about Adelphia's treatment of debt, along with $102 million in cable boxes.
The auditor said representatives of D&T's auditing team met May 1 with Erland Kailbourne, then chairman of Adelphia's audit committee (currently Adelphia's interim CEO), to communicate their concerns.
"At that meeting we advised the chairman of the audit committee...that we were seriously concerned that company management was not being honest and forthright," D&T stated in the letter to the SEC.
Deloitte also noted it suspended its audit of Adelphia's results for fiscal 2001 on May 14, and did not resume that work while its dispute with management continued over the following three and a half weeks.
However, a source close to the situation told a wire service yesterday that "information that Deloitte says it should have had was information that the Adelphia investigation uncovered fairly easily, so that either Deloitte didn't find it—and that would be a cause for further doubt—or Deloitte found it and didn't share it with Adelphia."
It's getting ugly out there.
FASB Offers Guidance on SPEs
The Financial Accounting Standards Board issued its long-awaited guidance for the consolidation of special-purpose entities (SPEs), those controversial partnerships that were at the heart of Enron Corp.'s collapse.
The proposed interpretation—Consolidation of Certain Special-Purpose Entities—will apply to any business enterprise that has an ownership interest, contractual relationship, or other business relationship with an SPE, said FASB.
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