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Inquiry on WorldCom Extended Back a Year

Accounting: Rep. Tauzin releases documents that he says indicate that the telecom firm might have started some improper practices as early as 1999.


WASHINGTON — Just a few months after completing its late-1998 acquisition of long-distance giant MCI, WorldCom Inc. may have begun boosting its profit by improperly reclassifying operating expenses, a House committee chairman said Monday.

"We're actually interviewing several witnesses at the moment who indicate to us that the problems may go back as far as 1999, not just the year 2000," said W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee, which is investigating WorldCom's accounting practices.

Tauzin released 14 pages of documents Monday that showed that WorldCom managers told company executives that WorldCom was improperly reporting operating costs as capital items at least two years before the telecom giant disclosed last month that it improperly accounted for $3.9 billion in expenses in 2001 and 2002.

But the concerned managers were rebuffed by then-Chief Executive Bernard J. Ebbers and then-Chief Financial Officer Scott D. Sullivan, Tauzin said.

"It was Scott Sullivan who, in fact, ordered the company to engage in that kind of accounting treatment," Tauzin said during an hourlong news conference held with other lawmakers looking into the financial scandal. "This is the clearest and most definable violation of accounting statutes we have seen; this is Fraud 101."

Neither Ebbers nor Sullivan could be reached for comment.

WorldCom spokesman Brad Burns said that as news of WorldCom's 2001 revenue overstatement broke late last month, the company learned about possible problems with its books for 1999 and 2000. He said Washington lawyer William McLucas, the former SEC enforcement chief whom the company hired to conduct an independent investigation, was asked to check into the previous two years as well.

"We have told Mr. McLucas to look into whatever he needs to," Burns said, adding that the company is cooperating fully with the government because "we, more than anyone, want to get to the bottom of this."

Using its highflying stock, WorldCom acquired MCI Communications Inc.--the nation's No. 2 long-distance phone company--in a $30-billion deal that catapulted WorldCom to the top ranks of the world's communications companies.

But the deal came at a time when long-distance growth was slowing, complicating matters for WorldCom, which consistently had regaled Wall Street with double-digit revenue growth through more than 40 acquisitions since 1992.

As WorldCom's growth slowed, the company became desperate to engineer a rosier financial picture, the documents released by Tauzin suggest.

In a March 5, 2001, e-mail, WorldCom Comptroller David Myers told a co-worker that Sullivan told him to "do whatever is necessary to get Telco/Margins back in line."

The numbers to do so were supplied by Sullivan, who put them in a spreadsheet e-mailed to Myers that same day.

In addition to documents allegedly showing Sullivan ordering accounting irregularities, Tauzin released minutes of a March 6, 2002, meeting of WorldCom's audit committee during which Ebbers recommended that WorldCom slash its internal audit budget by 50%. The recommendation came more than four months before internal company auditors uncovered the accounting irregularities.

WorldCom announced late last month that it hid $3.9 billion in costs for five quarters by reclassifying operating expenses, which are deducted from annual revenue, as long-term capital investments that can be spread out over many years.

The scandal has sparked the introduction of half a dozen bills in Congress calling for new accounting standards, limits on corporate executive loans and other measures. Lawmakers also have singled out the government's lack of regulatory oversight. Several have called for the ouster of Harvey L. Pitt, chairman of the Securities and Exchange Commission, as well as stepped up enforcement of the telecom industry by the Federal Communications Commission.

Sen. Ernest F. Hollings (D-S.C.) and two House members have written FCC Chairman Michael K. Powell in recent days, asking what the FCC is doing to protect consumers from financially troubled telecommunications companies.

In a letter sent Monday to Rep. Edward J. Markey (D-Mass.), Powell responded that although the FCC is not "powerless to protect consumers and prevent service disruptions," he invited Congress to give the agency greater power to crack down on financially troubled carriers to avoid any service disruptions.

Also Monday, WorldCom moved to finalize a debtor-in-possession funding agreement that would give it money to operate under a possible bankruptcy reorganization, sources familiar with the situation said. With the threat of a Chapter 11 bankruptcy filing looming, WorldCom hopes to secure a financing pact from Citigroup Inc., J.P. Morgan Chase & Co. and General Electric Co.'s GE Capital financing arm, sources said.

That money would allow the company to maintain its networks, serve customers and pay employees during the protracted bankruptcy process. Representatives of WorldCom, Citigroup, J.P. Morgan and GE Capital declined to comment.

A bankruptcy filing by WorldCom, which has $104 billion in assets, would eclipse the Chapter 11 filing by collapsed energy trader Enron Corp. as the nation's largest.

WorldCom also opted on Monday not to make a $74-million interest payment, a decision that allows it to save money it may need to continue to operate.

WorldCom did not make payments on two 7.375% notes, one maturing in 2003 and the other maturing in 2006, according to Keri Branin, a spokeswoman for J.P. Morgan, trustee for the bonds.


Times staff writer James S. Granelli contributed to this report. Reuters and Bloomberg News were used in compiling it.

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