At the beginning of the week, WorldCom Inc. stunned an already fragile Wall Street with the announcement it had overstated earnings by $3.8 billion, which prompted the Securities and Exchange Commission to file fraud charges against the telecom giant.
The SEC’s legal maneuver was followed by the Justice Department launching its own investigation and plans by two congressional committees to hold hearings after the Fourth of July holiday recess.
At issue is WorldCom’s booking of operational expenses on the capital accounts side of the company balance sheet for 2001 and the first quarter of 2002, which had the effect of artificially increasing cash flow and inflating earnings.
SEC Chairman Harvey Pitt and Treasury Secretary Paul O’Neill both indicated that what occurred at WorldCom should be met with jail terms, while an angry President Bush told reporters at the Group of Eight summit in Canada that any investigation would hold the company accountable.
The White House, meanwhile, announced Friday that Bush would use his national radio address Saturday to call for changes in the laws governing corporate responsibility and for reform in the nation’s executive suites and boardrooms.
“We will fully investigate and hold people accountable for misleading not only shareholders but employees as well,” Bush said at the G8 summit. “When we find egregious practices, such as the one revealed, we go after them and need to.”
On Capitol Hill, the House Financial Services Committee, which issued subpoenas Thursday to both current and former top WorldCom Inc. officials and the House Energy and Commerce Committee, which has called on WorldCom to turn over various financial records dating back to 1997, scheduled hearings to be held after the recess.
Among those subpoenaed to appear July 8 were Bernard J. Ebbers, the former chief executive officer of WorldCom, who was asked by the company’s board to step down this spring, and John W. Sidgmore, the current chief executive officer.
“Sadly, the news brings us yet another incident of accounting overreach,” said Rep. Michael G. Oxley, R-Ohio, chairman of the House Financial Services Committee. “These alleged short-term gains created by the executives are going to cause long-term pain for the WorldCom families.”
The SEC filed fraud charges Wednesday against the Clinton, Miss., -based firm. Pitt told reporters the action filed in federal court in New York was aimed at preventing the destruction of documents by WorldCom while the agency continues its investigation.
O’Neill said chief executive officers and other company officials complicit in fraudulent accounting should go to jail.
“As the president recommended last March, the president said CEOs and CFOs should certify what is true so that shareholders and employees can’t be dumped on their head the way they are now being done at WorldCom,” O’Neill said Thursday on ABC’s “Good Morning America” program. “And Harvey (Pitt) said people are going to certify, and if they falsely certify, it’s going to be fraud and they’re going to go to jail — and we think that’s the right step.”
Congressional subpoenas were also issued to Scott Sullivan, former chief financial officer of WorldCom; and Jack Grubman, a telecommunications analyst at Salomon Smith Barney who highly touted WorldCom shares.
“The WorldCom news dramatically underscores the need for legislative and regulatory reform,” Oxley said. “Problems with accounting in telecommunications are, unfortunately, damaging a key growth sector of the economy that is already facing other, steep challenges.”
Rep. John J. LaFalce, D-N.Y., the committee’s ranking Democrat, said that due to the rapid erosion of investor confidence it was necessary for Congress to “move as expeditiously as possible to get to the bottom of WorldCom and understand how corporate officers improperly manipulated the company’s financial condition to the tune of $3.8 billion, misleading investors and jeopardizing the viability of the company.”