WorldCom Feels Heat In House HearingJan 1, 2002 | AP
Top WorldCom Inc. officials, along with auditor Arthur Andersen LLP and a Wall Street analyst, are drawing heat from lawmakers as the accounting scandal radiates political shock waves.
Senior executives of WorldCom clashed with a former auditor at a House hearing Monday over responsibility for nearly $4 billion in accounting improprieties at the major telecommunications company that have rocked already-battered U.S. markets.
WorldCom's former CEO and finance chief refused to testify to the House panel investigating the debacle, becoming the latest in a parade of corporate leaders who have trooped to the Capitol this year and invoked the Fifth Amendment.
President Bush ( news - web sites), meanwhile, faced a rising chorus of calls from Democratic leaders and some Republicans — notably Sen. John McCain ( news, bio, voting record), R-Ariz. — for the resignation of Securities and Exchange Commission ( news - web sites) Chairman Harvey Pitt, in part because of Pitt's former ties to the accounting profession.
Aiming to shore up investor confidence, Bush delivered a speech in New York City Tuesday on corporate responsibility and proposed tougher penalties, including jail time, for company officials who lie on financial statements.
"We will use the full weight of the law to expose and root out corruption," Bush said.
Bush stood behind Pitt, saying he "was put in place to clean up a mess and he's working hard to do that."
Bush gave qualified support to legislation now before the Senate written by Banking Committee Chairman Paul Sarbanes, D-Md., that would tighten oversight of the accounting industry.
Democratic leaders in Congress continued to criticize Bush as talking tough but failing to take strong action.
"It is not enough to talk about accountability; you have to act to ensure it," Senate Majority Leader Tom Daschle, D-S.D., said Tuesday at a news conference with House Minority Leader Dick Gephardt, a laid-off employee from WorldCom and one from Enron.
Without support for the accounting oversight bill, Daschle said, Bush's speech "will ring hollow."
Accounting firms can no longer be trusted to police themselves, Sarbanes said in a Senate speech Monday as he began pushing for passage of the bill.
The Justice Department and the SEC, which has filed civil fraud charges against WorldCom, are investigating the company.
Those ongoing probes prompted the attorney for WorldCom's former chief executive officer, Bernard Ebbers, to advise him not to answer lawmakers' questions at the packed hearing of the House Financial Services Committee.
"I do not believe I have anything to hide," Ebbers said. When all the facts are out, he said, "I believe that no one will conclude that I engaged in any criminal or fraudulent conduct."
WorldCom's former chief financial officer, Scott Sullivan, also invoked his constitutional right against self-incrimination.
Former Andersen partner Melvin Dick, who did testify, said that auditors rely "on the honesty and integrity of the management of the company." He noted that Sullivan apparently has acknowledged he never told the accounting firm about the questionable bookkeeping.
Members of the panel — Democrats and Republicans alike — attacked WorldCom, the Andersen accounting firm and Wall Street analyst Jack Grubman, who promoted WorldCom stock while his Salomon Smith Barney firm did investment-banking business for the telecom company.
The committee chairman, Rep. Michael Oxley R-Ohio, said no other company in recent scandals "has yet shown the audacity to commit fraud on the scale that has been alleged here."
Several lawmakers grilled company founder Ebbers, asking, for example, about the $400 million in loans he received from WorldCom and his $1.5 million annual severance payment for life. Ebbers, sitting stonily with arms crossed, repeatedly cited his Fifth Amendment privilege and declined to answer.
Later, Rep. Jim Leach R-Iowa, told WorldCom Chairman Bert Roberts and the company's president/CEO, John Sidgmore, that it was "a dereliction of duty" for the company's board to approve the loans to Ebbers.
Sidgmore, who replaced Ebbers at the end of April, allowed that, in hindsight, he wouldn't have voted to approve the loans.
"We are fighting for our life," he testified as the hearing dragged into the evening. Sidgmore did not rule out bankruptcy but said he was confident the company could revive. WorldCom has laid off 17,000 of its 80,000 workers and Sidgmore has said additional layoffs were possible.
WorldCom, whose interests include the nation's No. 2 long-distance telephone company, MCI, is battling to avoid bankruptcy after disclosing it disguised $3.9 billion of expenses as capital expenditures to appear more profitable. The company's shares have plunged from more than $63 in June 1999 to 22 cents on Monday.
Clinton, Miss.-based WorldCom is the latest major corporation to face allegations of executive wrongdoing and accounting irregularities — eroding public confidence in business and the stock market. Congress already is investigating the bankruptcies of Enron Corp. and telecommunications company Global Crossing and the role played by accounting firms. Andersen has been convicted of obstruction of justice for destroying Enron-related documents.
Then Monday came news that a major drug maker, Merck & Co., had in the past three years counted $12 billion in revenue that it never collected.