An angry congressional panel wrapped up a hearing late Monday night on WorldCom’s burgeoning financial scandal, with often heated grilling of former and current WorldCom officials, which included company founder and former chief executive officer Bernard Ebbers and former chief financial officer Scott Sullivan refusing to testify under the Fifth Amendment.
The House Financial Services Committee, led by Rep. Michael Oxley, R-Ohio, is investigating the company’s accounting misstatement of over $3.8 billion, which artificially inflated WorldCom earnings.
Oxley said in an opening statement that the “consequences to this sort of criminal activity, should it be proved, should be severe, and that may mean time in federal prison.”
The committee’s lead Democrat, Rep. John LaFalce, D-N.Y., said, “There is an urgent need for strong and reasoned legislation to restore the market confidence that has been squandered by greed, incompetence, fraud and weak regulation.”
LaFalce added in reference to President Bush’s speech slated to delivered to Wall Street late morning Tuesday, that “I hope after a year and a half he (Bush) will finally join with us in trying to effectuate these reforms.”
In increasingly contentious questioning, members of the committee also grilled the company’s former audit manager for accounting firm Arthur Andersen LLP, Melvin Dick, who was the lead supervising partner for the firm’s audit of WorldCom, and Wall Street stock analyst Jack Grubman, a top telecom analyst with investment bank Salomon Smith Barney Inc.
While the company’s former CEO Ebbers, along with former CFO Scott Sullivan refused to testify before the congressional panel Monday, new management separated themselves from the company’s accounting malfeasance.
“Although I would like to testify more than you know, I have decided after careful consideration to take the advice of my counsel,” said Ebbers invoking the well-known Fifth Amendment right against self-incrimination.
Ebbers cited the range of investigations, which includes investigations by the U.S. Securities and Exchange Commission, the Justice Department, and so far at least two congressional panels, as the reason for not testifying.
Ebbers added that when the various investigations were concluded, I “believe that no one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom.”
Rep. Max Sandlin, D-Tex said that as Ebbers had made a “affirmative statements in his defense” prior to invoking his Fifth Amendment rights, the former CEO should submit to questioning, or be “held in contempt” of Congress.
Throughout the hours-long hearing, both Ebbers and Sullivan repeatedly invoked the Fifth Amendment in response to increasingly angry grilling from members of the House Financial Services Committee.
Rep. Gary Ackerman, D-N.Y., angrily chastised Ebbers, saying, “There are thousands of people in this country, who believed you have ruined their lives and the lives of their children … Mr. Ebbers, do you sleep well at night?”
The hearing comes as the Clinton, Miss.-based telecom giant is battling bankruptcy and several federal investigations.
“The announcement of this fraud turned WorldCom from a world-beater into a penny stock and forced it to lay off thousands of blameless employees,” Oxley said.
“If these charges are proven, WorldCom executives who participated in the fraud should have to return any profits from stock sales made during the five quarters of misreported earnings,” the Ohio congressman added.
Dick, the former Anderson lead auditor for WorldCom, defended Anderson and implicitly blamed WorldCom saying “The fundamental premise of financial reporting is that the financial statements of a company – in this case WorldCom – are the responsibility of the company’s management, not its outside auditors.”
“WorldCom management is responsible for managing its business,” he said.
Dick added, he “would be very interested to know how and when” WorldCom’s own auditors discovered the massive financial misstatement.
Dick, however, incurred frequent disbelief from committee members with Rep. Brad Sherman, D-Calif, himself a certified public accountant, saying he was “flabbergasted that they (Anderson) could miss something like this.”
Current WorldCom CEO John Sidgmore, who replaced Ebbers last April, separated himself from earlier management and noted in his prepared statement the “understandable outpouring of anger from every quarter of American society” over WorldCom’s earnings misstatement.
“While the misdeeds we uncovered occurred before I became CEO, I want to apologize on behalf of everyone at WorldCom and I want to underscore that WorldCom’s new management team and our more than 60,000 employees share the public’s outrage over these events,” Sidgmore said.
“One of the most important steps we can take is to make sure that past transgressions are fully investigated and that wrong-doers are punished, then we can move forward in an open and honest manner,” Sidgmore added. “We are therefore cooperating fully with the various official investigations … to ensure that those who are responsible are brought to justice.”
On June 25, WorldCom disclosed that it had improperly accounted for operating expenses as capital expenditures, thus overstating profits by over $3.8 billion in the past five financial quarters.
With news of the accounting scandal, the company’s stock now trades around 20 cents a share and the telecom giant is currently fighting to avoid bankruptcy.