US telecom giant WorldCom to be charged with fraud

By JEREMY WARNER

World equity markets were dealt a further body blow yesterday when WorldCom, one of America's largest and fastest - growing telecoms companies, admitted to accounting improprieties involving US$3.8billion.

The Securities and Exchange Commission, the US financial watchdog, described the scale of the deception as unprecedented and announced last night it would charge WorldCom with fraud.

The group's chief financial officer, Scott Sullivan, was fired and the US Justice Department began a criminal investigation of the company's accounting practices. President George Bush said the deception was "outra-geous" and promised that those responsible would be punished.

The dollar was put under renewed pressure as the enormity of the latest accounting scandal to hit corporate America became apparent. Stock markets across Europe and Asia fell sharply, although the Dow Jones was down only six points at 9120.

While bankers scrambled to save the company from insolvency, WorldCom announced it would fire more than a quarter of its workforce, 17,000 people.

Like the collapsed energy company Enron, WorldCom was audited by Andersen, the firm of accountants already convicted for obstructing the course of justice by shredding evidence linked to Enron's demise. Andersen claimed WorldCom had kept it in the dark on the misreporting of its figures.

There is probably no more glaring an example than WorldCom of a company that in every respect came to epitomise the greed-inspired frenzy of the latest boom. Enron fell first, but from the moment the larger-than-life former basketball coach Bernie Ebbers stepped on to the global stage, his New Economy creation, WorldCom, looked the greater house of cards.

WorldCom's origins go back to the early 1980s as a telecommunications bucket shop based in Clinton, Mississippi, reselling capacity bought from others at rock-bottom prices. But not until the mid-1990s, when Mr Ebbers, now 60, was taken under the wing of one of Wall Street's biggest investment banks, Salomon Smith Barney, did WorldCom hit the big time.

There followed in rapid succession a mind-boggling 60 acquisitions, culminating in WorldCom outbidding British Telecom for one of the biggest long-distance carriers in America, MCI.

WorldCom was to become perhaps the most spectacular creation of the dot.com era. No one better personified the excitement and drama of the telecommunications boom than the 6ft 4in Mr Ebbers, with his cowboy boots and leather waistcoat.

Sir Peter Bonfield, former chief executive of BT, delights in recalling the three days of frantic negotiations with Mr Ebbers over BT's 20 per cent shareholding in MCI. Sir Peter wanted cash for the stake but Mr Ebbers was determined he should take WorldCom shares instead.

Mr Ebbers' final shot was to warn Sir Peter that he would certainly be sued by his own shareholders for failing to take stock in a company whose share price was heading for the stratosphere. Insisting on cash was probably the best business decision Sir Peter ever made.

WorldCom's collapse, coming so soon after Enron, Tyco, Global Crossing and a series of lesser fraudulent failures, has caused America's hitherto unchallenged claim to corporate and economic supremacy to be questioned as never before. As the investment guru Warren Buffett has remarked, only when the tide goes out do you get to see who has been swimming with their trunks off. What now seems clear is that an army of chancers was skinny dipping in the great sea of the American economy.

The only consolation in the latest scandal is that the firm of auditors meant to keep watch on behalf of investors and bankers, Andersen, was the same one that presided over the collapse of Enron and Global Crossing, which means the American regulators can lay at least part of the blame for the débâcle at the door of what has already been judged a corrupt firm of accountants. Even so, it is not much of a rope to cling to.

The enormity of what has happened was all too apparent in the wording of the statement issued yesterday by the Securities and Exchange Commission, America's main financial watchdog.

"The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets," the commission said.

Just how financial markets fell victim to one of the oldest accounting fiddles in the book ­that of bolstering profits by treating operating expenses as capital spending ­ will have to await the judgement of the flotilla of financial investigators.

The sheer scale of the fraud, US$3.8bn over 15 months, has raised a huge question mark over American standards of corporate probity and disclosure. Investors are losing their trust in stock markets. Companies once valued in hundreds of billions of dollars are now worth little or nothing.

WorldCom and Enron were the stars of the New Economy, to which the old rules of markets and economics seemed no longer to apply. Now they have become broken monuments to a period of excess unprecedented in the modern age.

As the good times roll, investors, bankers and managers become oblivious to risk and in what seasoned observers refer to as "reaching for yield", throw caution to the wind in their pursuit of easy money. As the boom reaches its zenith, some companies will in desperation resort to fraud and deception to maintain the pretence of ever-growing revenues and profits.

Eventually, the present crisis in corporate America will have a cathartic effect. Everyone in sight will be prosecuted and sued, the rules and standards will be tightened, the US economic model will be rebuilt and strengthened, and, once everyone has forgotten the wealth destruction of the technology bubble, there will be another boom, raising altogether different issues and concerns.

But in the meantime, there is plenty of scope for things to get a great deal worse before they get better. For most of the past decade, America has been the dynamo of growth in the world economy. US growth and consumption came to be supported by an apparently endless supply of foreign capital.

With the end of the technology boom, and the now growing crisis of confidence in corporate America, that process has gone into sharp reverse. As the life-enhancing supply of foreign capital is switched off, the dollar is coming under growing pressure in the foreign exchange markets and the economy is slowing. The WorldCom débâcle may mark the bottom of the present cycle, but the climb back out is going to be long and hard.

- INDEPENDENT