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WorldCom fires CFO over improper accounting

Peter Henderson / Jessica Hall in San Francisco / Philadelphia

WorldCom Inc., the No. 2 US long-distance telephone and data services company, on Tuesday said it had fired its chief financial officer after uncovering improper accounting for almost $4 billion in expenses, marking the latest financial scandal to rock corporate America.

WorldCom, already under investigation by the US Securities and Exchange Commission, said it would restate results for 2001 and the first quarter of 2002 to show net losses, in one of the largest such revisions ever.

The massive accounting problems also threatened to derail WorldCom's talks with its lenders to secure $5 billion in financing, without which it may face a cash-crunch next year, or even bankruptcy, analysts said.

The company said it planned to cut 17,000 jobs, or more than 20 per cent of its work force, starting on Friday, in a bid to save $900 million a year.

It also said it was reviewing its financial guidance and would slash another 40 per cent from already sharply lower capital spending plans, taking its annual investment budget to $2.1 billion.

The revelations and restructuring came just seven weeks after co-founder Bernie Ebbers, who built the company through more than 60 acquisitions over the past decade, resigned as chief executive officer.

"When you look at the history of WorldCom, and their acquisition trail, you have a classic wheeler-dealer. And now this is the age were wheeler-dealers get called for what they are," said Frank Dzubeck, president of consulting firm Communications Network Architects.

Shares of WorldCom plummeted in response to the news, losing almost three-quarters of their remaining value as they hit a low of 20 cents in after-hours trade from a close of 83 cents on Nasdaq.

The stock had traded as high as $15 at the start of the year and had touched a peak of more than $64 in June 1999.

News of its accounting problems touched off a global flight to safety by funds as the prospect of another headline-grabbing corporate scandal rocked investor confidence in US equities, and by extension the US dollar.

The dollar sank to its lowest level against the euro in 28 months and the price of gold, a traditional safe haven in times of turmoil, rose. Asian equity markets, including Singapore and Tokyo, also came under fire.

Andersen clients draw scrutiny

Clinton, Mississippi-based WorldCom is the latest company linked to auditing firm Andersen to face accounting problems. Andersen, whose role as the auditor of Enron helped lead to the energy trader's collapse, audited WorldCom's financial statements for 2001.

It also worked with Qwest Communications International Inc. which is under accounting investigation by US regulators, and Global Crossing Ltd., which filed for bankruptcy in January.

"All of these guys were cowboys and Andersen bent to their will. The scope of problems is narrowing down to some key individuals and associates -- and Andersen seems to be key," Dzubeck said.

In a statement, Andersen said that WorldCom had withheld key information and not consulted its auditors about the accounting treatment of the expenses. It advised WorldCom's new management that the financial statements for 2001 and the first quarter of 2002 should not be relied upon.

WorldCom's accounting woes

WorldCom said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.

The accounting irregularities, which did not conform to Generally Accepted Accounting Principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.

Those expenses should have been recorded on its income statement but were instead booked as capital expenditures, artificially boosting cash flow, the company said.

"Our senior management team is shocked by these discoveries," said John Sidgmore, WorldCom's CEO for less than two months. He previous served as the company's vice chairman.

WorldCom said it had notified the SEC and asked its new accounting firm, KPMG, to review of its financial statements for 2001 and 2002. The audit committee of WorldCom's board retained William R. McLucas, of the law firm of Wilmer, Cutler & Pickering, former Chief of the Enforcement Division of the SEC, to conduct an independent investigation of the matter.

"The CFO didn't do this alone. Bernie didn't do this alone. But when something like this is uncovered, you go for the throat," Dzubeck said.

In addition to firing Sullivan, WorldCom also accepted the resignation of David Myers as senior vice president and controller.

"They are going to take a hit on this one, but it won't be fatal," said Jeff Kagan, an independent telecommunications analyst, noting that the company has "real revenues and customers and networks and assets."

Restating the results was not expected to hurt WorldCom's cash position, the company said. WorldCom has $30 billion in total debt, but no debt payments due in the next two quarters.

The grim news would make it harder for WorldCom's new management to assert control and may put creditors in power since WorldCom has so much debt, said Blair Levin, an analyst at Legg Mason in Washington and a former FCC official.

"It does make it worse, the odds of ... the company being able to control the nature of that restructuring are going to be severely weakened," Levin said.

Markets see WorldCom eroding Fed rate hike chance

Investors in Asia are pricing down the chances of the US Federal Reserve raising interest rates this year after WorldCom's accounting debacle rocked investors' already shaky confidence in US assets.

Eurodollar futures traded in Singapore surged across the board on Wednesday, with the December contract up 23 basis points to 97.885. This prices in an overnight Fed funds rate of around 2.00 per cent versus 1.75 per cent now.

That means the market is now expecting just one small rate hike by year-end. Just weeks ago the market was pricing in Fed rates around 3.00 per cent by the end of the year.

The Federal Reserve is widely expected to keep its interest rate steady at four-decade lows at the end of its two-day meeting on Wednesday, and reiterate a mixed message on the economy -- the recovery is under way but the outlook is uncertain.

"People were just piling in to buy (eurodollars) and I believe the WorldCom's scandal has a lot to do with it," said trader at a US house in Singapore.

"With the US economy hit by corporate rumours and bad news, it hard to see the Fed raising interest rates. I think it's just a matter of time before the market completely prices out the rate hike," the trader said.

WorldCom, the US second largest long-distance telephone and data service company, is at the centre of the latest financial scandal to hit corporate America. It has fired its chief financial officer after uncovering improper accounting practice linked to $3.8 billion in expenses over the past five quarters.

The company had switched from Andersen to KPMG LLP as its auditor earlier this year, and asked the firm to conduct a comprehensive audit of the company's financial statements for 2001 and 2002.

The news sent Nasdaq stock index futures reeling almost 5 per cent lower in after-US-hours trading.

"I don't think they will move now. But looking at how things go in the US, I would not rule out possibility of the Fed cutting rates in the future," said another Singapore trader.

Traders also attributed the sharp rise in the eurodollar futures to news that the Treasury was suspending this week's two-year note auction. Congressional leaders were still debating raising the nation's debt ceiling, without which the Treasury cannot issue new debt.

Investors often buy eurodollars as a proxy for short-term notes like two-year Treasuries when the market is moving rapidly due to a market event such as the WorldCom shock.

Eurodollars futures are much more liquid and allow greater size to be executed. Postponing the auction led to more demand for the two-year note proxies.

Duncan Martell in San Francisco and Jeremy Pelofsky in Washington contributed to this report

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