WORLDCOM USED ACCOUNTING TO HIDE LINE COSTS, TAUZIN SAYS
High costs for line capacity pressured WorldCom executives to reclassify those expenses in effort to battle declining margins, House Commerce Committee Chmn. Tauzin (R- La.) said Mon. at Capitol Hill news conference. He released series of documents obtained by House Oversight & Investigations Subcommittee that he said showed several WorldCom employees were aware of, and concerned about, practices, but senior officials continued fraudulent actions. “This is the clearest and most definable violation of standard accounting practices we've seen,” said Tauzin, who said WorldCom employed more straight-forward efforts to fake expenses than did Enron, which used “all sorts of various techniques.” WorldCom may have employed faulty accounting techniques as far back as 1999, Tauzin said. What’s been uncovered so far will expand WorldCom investigation into “several other directions,” he said, and committee investigators had “a set of new inquiries.” Once committee’s investigation is completed, it will result in hearings or finding will be forwarded to Justice Dept. (DoJ), which also is investigating WorldCom, he said. Tauzin said criminal charges could apply and that govt. would try to reclaim “loot” he said had been taken by corporate executives.
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Capacity costs have forced several companies, including Enron, to falsify expenses, Tauzin said. Global Crossing and Qwest both probably purchased capacity they couldn’t then resell, he said, and even Enron had bought broadband capacity it couldn’t resell. He said he didn’t believe it was in FCC jurisdiction to monitor financial health of companies, but said agency had been too slow to implement changes to “jump- start the telecom market.” Oversight of financial practices should remain with SEC, he said. He touted his Tauzin- Dingell bill (HR-1052) as way to utilize unused broadband capacity.
WorldCom scandal has captured attention of members of Congress from its beginning late in June (CD June 27 p1). House Commerce Committee Chmn. Tauzin (R-La.), who directed Investigative Subcommittee to probe company’s financial past, told reporters recently that panel had found that former WorldCom CEO Bernard Ebbers was aware of accounting irregularities. Tauzin also has released documents that he said showed WorldCom officials ignored concerns raised by employees about financial accounting practices. House Financial Services Committee held hearing on WorldCom’s financial practices last week at which leading WorldCom officials claimed 5th Amendment protection, and representative of Arthur Andersen, WorldCom’s auditing firm, and Jack Grubman, Salomon Smith Barney telecom analyst, denied any wrongdoing (CD July 9 p1). Senate Commerce Committee is planning hearing on WorldCom and other troubled telecom companies, such as Global Crossing, for week of July 29.
Following WorldCom revelations of accounting irregularities, members also raised have concerns about FCC’s role in overseeing telecom industry. House Financial Services Chmn. Oxley (R-O.) wrote FCC Chmn. Powell last week questioning whether Commission was fulfilling its responsibilities for monitoring finances and health of telecom companies. Senate Commerce Committee Chmn. Hollings (D-S.C.) wrote Powell inquiring about contingency plans should WorldCom file for bankruptcy. Ranking House Telecom Subcommittee Democrat Markey (Mass.) had sent similar letter week earlier and was critical of Powell’s response, saying chmn. didn’t seem committed to ensuring continuity of broadband service (CD July 15 p1). WorldCom announced June 25 that it had accounted improperly for $3.9 billion in costs in 2001 and first quarter of 2002. News brought investigation by Justice Dept. (DoJ) and SEC. Industry experts believe WorldCom will be forced to file for Chapter 11 bankruptcy soon.
Meanwhile, Consumer Federal of America (CFA) lashed out at Powell Mon. after he, in interview with Wall St. Journal, said telecom industry was in “utter crisis” and his agency might consider allowing Bell company to take over WorldCom. CFA Research Dir. Mark Cooper said comments indicated Powell was more willing to help Bells than to solve real crisis that centered on CLECs. Comment “glosses over a fundamental point [that] it is the competitors and new entrants who are in crisis, while the incumbent monopolists are generally in good shape,” Cooper said. Powell “must bear some responsibility for this crisis among competitors,” Cooper said, charging that Powell’s policies had “tilted the scales in favor of large monopoly incumbents.” ALTS Gen. Counsel Jonathan Askin said “it’s great to see the consumer groups taking up the banner for competition.” He said it was “important for the FCC to realize there are about 20 million consumers served by CLECs and to emphasize that those consumers will be protected.” CompTel said it also agreed with CFA that “consumers will be harmed if the FCC adopts policies that deregulate the Bell monopolies.” CompTel said FCC should focus on opening markets, not “ill-conceived proposals” to lessen Bell regulation. “Widespread competition can happen but only if the FCC does not thwart its development,” CompTel said.