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Worldcom engulfed in $3.8bn accounting scandal

CFO fired

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Worldcom, the US telco, has uncovered an huge accounting scandal at the firm, which overstated profits by an astonishing $3.8bn.

Yes that's right, $3.8bn in expenditure, booked as capital expenses over five quarters. When in actuality, the money should have been booked into the profit and loss account as running costs.

Worldcom has "terminated" Scott Sullivan as chief financial officer and secretary. Which sounds like taking the law into its own hands. Its also accepted the resignation of David Myers as senior vice president and controller.

Incidentally, Andersen was the auditor for the period in question, but it's not being blamed. Yet.
According to US reports, the Justice Department is beginning a criminal investigation, while the Securities and Exchange Commission is spitting blood. Another day, yet another US accounting scandal.

As with many accounting sleight of hands, the cash position of the business is unaffected. Cash is easy to hide, but very difficult to magick out of thin air.

However, this is still very, very serious for the company. An enormous hole has suddenly appeared in the balance sheet of a firm which owes $30bn. That means banking covenants are at risk, its standing with investors plummets even further, and questions over the company's future get louder.

Worldcom is very keen to emphasise that it's not another Global Crossing or KPNQWest. It's bigger, it's got more customers, and it's got good cashflow. But it needs to borrow maybe another $5 billion to see it safely through. Now it needs to prove to the world that it's not another Enron. ®

WorldCom press release

5 things you didn’t know about cloud backup

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