WorldCom said Tuesday it will likely report another $1.8 billion in fraudulent accounting, an announcement that sparked an expansion of federal fraud charges against the Clinton-based telecommunications giant.
“(WorldCom) expects an additional restatement of earnings which, when added to WorldCom’s past restatements, could total in excess of $9 billion,” the company said in a statement.
“The company is continuing to finalize its review. Once the review is complete, it will make the final information public.”
In June, WorldCom announced it had hidden $3.85 billion in expenses from its financial reports in 2001 and the first quarter of 2002, a move that made the company appear profitable while it was losing money. The announcement forced the company to file for Chapter 11 bankruptcy protection in July.
The Securities and Exchange Commission filed civil fraud charges against the company as a result of the June announcement. On Tuesday, the commission expanded its charges against WorldCom. The original charges covered financial malfeasance between 2001 and the first quarter of 2002. The expansion filed Tuesday covers accounting fraud as far back as 1999.
Four company executives have pleaded guilty to federal securities fraud and conspiracy charges stemming from the June announcement. Fired Chief Financial Officer Scott Sullivan has pleaded innocent to securities fraud and conspiracy charges.
WorldCom said in its statement that it is in talks with the SEC to settle those charges. SEC officials would not confirm or deny settlement talks.
In August, the company announced another $3.3 billion in accounting fraud. That money came from boosting revenues using what accountants call reserve accounts.
Reserves are special bank accounts set up to pay for potential losses from a specific predictable event, such as a legal verdict. Between 1999 and 2001, WorldCom took money out of its reserve accounts and treated that money as if it was revenue from operations.
WorldCom did not detail where the additional fraudulent accounting took place, but a report filed Monday by bankruptcy monitor and former U.S. Attorney General Richard Thornburgh said additional restatements would be likely.
In his report, Thornburgh said WorldCom may have taken more out of reserve accounts than had been claimed in its earlier disclosures. The report also claimed WorldCom’s handling of currency exchange issues from its foreign subsidiaries could require restatements.
Thornburgh’s report claimed WorldCom executives began moving money from reserve accounts as early as 1999 to help the firm meet analysts’ expectations for its financial performance. The practice grew in 2000 and 2001, the report claimed.
By 2001, tampering with reserve accounts was not giving the company enough of a boost to meet expectations, so executives began hiding expenses from financial reports, Thornburgh claimed in the report.
WorldCom’s main method of hiding expenses was reclassifying them. For telecommunications firms, money spent to access other phone companies’ networks is considered a day-to-day operating expense. WorldCom classified $3.85 billion in connection fees as an investment expense in 2001 and the first quarter of 2002.
Because investment spending does not show up on some financial reports, WorldCom was able to hide those expenses from investors. Had it not made those switches, it would have shown large financial losses during 2001.
In its statement, WorldCom said the additional restatements would not impact the company’s ability to provide service to customers or operate its businesses.