Ex-WorldCom execs silent as lawmakers talk of jail

Former top executives of WorldCom refused to testify to Congress yesterday about the company`s $3.85 billion accounting debacle as lawmakers called for tough penalties, including prison, for those responsible.

Former chief executive Bernard Ebbers and former chief financial officer Scott Sullivan, who were in charge when the company mishandled its accounts, invoked their constitutional right against self-incrimination.

Members of the US House Financial Services Committee were left to ask how Andersen failed to uncover the problem as WorldCom`s auditor, whether current management can rescue the company, and why Salomon Smith Barney analyst Jack Grubman promoted WorldCom almost to the bitter end.

Near the end of an almost nine-hour hearing, new CEO John Sidgmore said WorldCom was fighting hard for its survival, and turnaround plans could involve filing for bankruptcy protection from creditors.

Rep Michael Oxley, the Financial Services Committee chairman, said it appeared that senior executives at the nation`s number two long-distance carrier had hidden expenses of almost $4 billion, disguising its true performance to keep earnings in line with analysts` estimates.

"And make no mistake, the consequences to this sort of criminal activity, should it be proved, should be severe, and that may mean time in federal prison," the Ohio Republican said in opening the hearing into WorldCom`s decline.

The Securities and Exchange Commission has already sued the Clinton, Mississippi-based company, alleging that it improperly booked the expenses as capital spending for five quarters starting in 2001, hiding losses of $1.22 billion.

The scandal engulfing WorldCom, carrier of half of the world`s Internet traffic, has overshadowed the collapse of Enron last year and joins problems found at other former high-fliers like Global Crossing and Tyco International.

President Bush will present a plan today aimed at reassuring investors rocked by the wave of corporate scandals that threatens to turn his pro-business reputation into a liability.

The Senate began debating an accounting reform bill on Monday that even critics predict will pass, but must still be married with a more business-friendly version authored by Oxley that has already passed the US House of Representatives.

Sidgmore questioned why Andersen did not spot the problems, and he promised to try to save the company.

WorldCom is trying to negotiate new credit lines as it also combs financial statements from 1999 and 2000 for further possible accounting problems, examining seven to eight transactions brought to the attention of management.

Sidgmore said turnaround plans were coming together -- some of which involved reorganising operations under bankruptcy protection, holding creditors at bay. He also said WorldCom would ask for help reassuring various government agencies worried about contracts they have with WorldCom.

"We are fighting for our lives," Sidgmore said, after waiting six hours to testify. WorldCom is a "key component of our nation`s economy and communications infrastructure".

Sidgmore also said he would put on hold for now his bonus package, which includes a $7.5 million retention bonus and a performance bonus that ranges from $1 million to $10 million. He presently receives a $1 million annual salary.

WorldCom provided the SEC on Monday with new details about the discovery of the accounting mess, asserting that Sullivan tried to delay an investigation into the financial statements.

Internal auditor Cynthia Cooper began uncovering the accounting problems in May. The committee has cancelled her appearance to avoid disrupting the Justice Department`s probe of WorldCom.

The company told the SEC that Cooper began a review of the company`s capital expenditures and capital accounts in May. That audit had been scheduled for the third quarter of 2002, but she advanced it and rebuffed efforts by Sullivan to delay it.

Ebbers made a statement professing his innocence, provoking outrage from some lawmakers who charged he had waived his protection against answering questions.

"I believe that no one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom," Ebbers said.

In the end, Ebbers failed to be excused from the hearing and had to repeatedly invoke his right to remain silent, even when asked if he slept well at night.

Ebbers was ousted in April, bowing to pressure over the company`s huge debts and big personal loans. Sullivan was fired for his handling of WorldCom`s books on 25 June, the day the company went public with the scandal.

Lawmakers appeared resigned to discovering further corporate wrongdoing. "Earnings manipulation has become all too common a practice among our publicly traded companies," said New York Rep John LaFalce, the ranking Democrat on the panel.

Andersen, which was recently convicted of obstructing a federal probe into customer Enron, drew the ire of lawmakers.

Melvin Dick, who oversaw Andersen`s audit of WorldCom`s books, said he and his team did not have "any inkling" about maintenance costs moved to capital spending accounts in violation of accounting practices.

"It appears very clearly that Arthur Andersen failed in their audit of WorldCom, you failed in the audit of Enron," said Rep Bernie Sanders, a Vermont independent. "It is incomprehensible to me that a major accounting firm can have such a dismal record."

Dick said Andersen asked WorldCom if there were any significant, unusual book entries and also used software to study WorldCom`s financial statements.

"We did perform our work, and we did the appropriate test under generally accepted auditing standards, including looking at the various financial ratios," said Dick, who now is CFO at clothing retailer Coldwater Creek.

Salomon Smith Barney`s Grubman, who downgraded WorldCom`s stock just before the accounting debacle became public, said he had no inside information about WorldCom`s woes.

Grubman, who championed WorldCom stock for years and enjoyed access to occasional board meetings, downgraded WorldCom from "neutral" to "underperform" just before the company`s accounting woes became public.

"I have certainly made mistakes. I clearly did not call the collapse of the telecom space in over the last two years," Grubman testified.

Related Reuters stories:
WorldCom faces March trial for securities fraud