VideoThe difficulty of the audit work was compounded by the sorry state of WorldCom's records. In some instances, Post-it notes were attached to journal entries in lieu of proper documentation. The FBI had taken documents that had to be tracked down and retrieved. In the end, Blakely's team made more than 3 million new or revised entries.
But even with Deloitte's help, WorldCom couldn't finish the audit before Judge Gonzalez's February 2004 deadline. It was forced to request a 60-day extension. "To bring [the audit] to closure was devilishly hard, because it's so complex. It just kept going on and on," says Blakely.
Finally, on March 10, Blakely's team finished a version of the 10-K restatement that would serve as a foundation for future financial statements. MCI executives planned a signing ceremony for March 11, at a previously scheduled meeting of the board. But later on the 10th, company personnel and KPMG discovered two significant errors in the deferred tax balances, which rippled through about 100 pages of the 192-page document. Dave Schneeman, vice president of general accounting, and Jim Renna, vice president of controls and remediation, led a small team that worked through the night to make the necessary fixes.
"I called at midnight, and they said they were making progress," says Blakely. "I called again at 6:00 a.m. the next day, and they said they had just finished, and I cried," he admits.
To WorldCom's investors, the story told by the restated results was a real tearjerker. Sullivan and Ebbers had claimed a pretax profit for 2000 of $7.6 billion; the reality, according to the restatement, was a loss of $48.9 billion (including a $47 billion write-down of impaired assets). For 2001, WorldCom had reported a pretax profit of $2.4 billion; the restatement showed a pretax loss of $15.6 billion. For the year 2002, the company was $9.2 billion in the red, pretax.
Blakely claims WorldCom's restated 2002 10-K is the most complex document ever filed with the Securities and Exchange Commission. He calls it "my Mount Everest" and keeps a copy, signed by the major participants, in a glass-door cabinet next to his desk. The audit, he says, "is the hardest thing I have done in my career." Total cost to complete it: a mind-blowing $365 million.
Hush Money
The audit provided new insights into the nature and the magnitude of the fraud at WorldCom. In fact, the same complexity that made the audit so difficult was one reason the fraud was able to go undetected for so long. As a result of Ebbers's acquisition spree, WorldCom had also acquired a slew of accounting systems that were integrated loosely, if at all. By Blakely's reckoning, there were 60 billing platforms and more than 20 accounts-receivable systems. The numbers rolled up from the various operating units to the company's former headquarters in Clinton, Mississippi. There, it was easy for accounting staffers to simply change the numbers.
"It was a very low-tech fraud in a sense," says Richard Breeden, a former SEC chairman and MCI's court-appointed corporate monitor. "If [a WorldCom employee] didn't like the figure he got, he just changed it." He says it was not unknown for accountants at headquarters to come to the office and find Post-it notes on their computer monitors telling them to change numbers. Breeden says that in some quarters, imaginary revenue was added to the books using consolidated entries in big, round numbers that "didn't even look real."
Breeden also describes a command-and-control structure with a lot of power concentrated at the top. In his report of recommended reforms, he noted that Ebbers ruled with "nearly imperial reign." "The attitude at the company was that orders were to be followed, and it was clear that anybody that didn't would be fired," says Breeden. Along with the big stick came a few carrots. A generous stock-option plan was supplemented by a $238 million "employee-retention program" that was dipped into and doled out at the discretion of Ebbers and Sullivan. "It was basically a slush fund to give out quiet money," says Breeden. Sullivan wrote personal checks for $10,000 to some employees, he says, and gave $10,000 more to their wives.
Breeden and Blakely say that the fraud involved fewer than 50 people, mostly those who rolled up the financial statements in Clinton. When managers at operating units saw the consolidated financials, they were surprised how well the rest of the company seemed to be doing when the numbers they reported were so poor.
Dennis Beresford, a former chairman of the Financial Accounting Standards Board who now chairs MCI's audit committee, led one of two internal investigations into the fraud. He's convinced that everyone involved has been removed from the company. Beresford says WorldCom asked about 50 executives in the finance department to leave after the investigation showed they either took part in the accounting fraud or should have known about it. "We had too many people who looked the other way," he says.
In March, Sullivan agreed to plead guilty to securities fraud, conspiracy, and giving false statements to regulators. Those crimes could carry a sentence of up to 25 years in prison under federal sentencing guidelines, but Sullivan hopes to get less in exchange for his testimony in the trial against Ebbers that is scheduled to begin in November. Former controller David Myers and accounting executives Betty Vinson and Troy Normand have also pleaded guilty and are cooperating with authorities.
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