Accounting & Tax

”Hitting the Numbers” at WorldCom

Former CFO Scott Sullivan testified that at one point, he fired off a letter to former CEO Bernard Ebbers criticizing the accounting manipulations ...
Stephen TaubFebruary 10, 2005

Former WorldCom chief financial officer Scott Sullivan spent the past three days blaming former chief executive officer Bernard Ebbers for encouraging the finance department — both tacitly and overtly — to fudge the financials at the former telecom giant.

Sullivan also insisted he warned his former boss that the company may be engaging in improper accounting practices.

Testifying on Wednesday, Sullivan said he warned Ebbers at a 2001 dinner meeting that in order to meet Wall Street expectations, accountants would need to classify certain expenses as assets, according to the Associated Press. Sullivan said he told Ebbers “that it wasn’t right, that it was a shortcut to earnings,” according to the wire service’s account of the trial.

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“Did Mr. Ebbers tell you not to make the shortcut adjustment that you had proposed?” prosecutor William Johnson reportedly asked Sullivan.

Sullivan’s response: “No, he did not.”

Shortly after Ebbers told Sullivan that the company must crank up its revenue, WorldCom finance execs covered up more than $700 million in expenses for the first quarter of 2001 by classifying them as capital expenditures — that is, as an asset — according to the AP.

On Tuesday, Sullivan asserted that he told Ebbers in the fall of 2000 that the company could only meet Wall Street’s forecasts by booking erroneous figures to boost revenue and hide expenses, according to the wire service.

“I told Bernie, ‘This isn’t right,’ ” Sullivan testified, recounting a plan to create $133 million in revenue by improperly drawing down reserve accounts. “He just stared at it, and he looked up at me and he said, `We have to hit our numbers,’ ” Sullivan reportedly told jurors.

Prosecutors argue that Ebbers’ statement was an order for Sullivan and the rest of his department to commit fraud.

Sullivan agreed to testify for the prosecution as part of a deal when he pleaded guilty for his role in the $11 billion WorldCom fraud.

He reportedly explained to jurors that sometime in 2000, he started to suspect the numbers were wrong when revenues fell sharply and expenses swelled. Sullivan added that he urged Ebbers to issue an official revenue growth projection of 9 percent to 10 percent for 2001, and 12 percent at most, according to the AP.

But according to Sullivan, Ebbers protested, saying “12 percent? This is a growth company, WorldCom Group. We’ve got to be focused at 15 percent growth.’ ” Sure enough, WorldCom forecast several days later was for 12 percent to 15 percent growth, Sullivan added.

Ebbers’ defense is the same employed by most top executives in recent fraud and accounting-related cases — that he knew very little about accounting and the numbers, let along the daily maneuvers being conducted in the finance department.

For his part, Sullivan said that at one point he fired off a letter to Ebbers criticizing the accounting manipulations, adding, “from here on out it was up to operations to make something, not the accountants,” according to Bloomberg.

He recalled telling his accountants “not to jump out of the plane,” and assured them they would not be asked again to make false entries, added the wire service.