WorldCom: Oops, We Did It Again

Report: WorldCom to lower earnings once more; rejiggering would bring total restatements to around $10 billion. Plus: HealthSouth under the microscope, employees don't trust employers, and guess who helped Dennis Kozlowski post bail?


It’s starting to play out like a scene from Groundhog Day.

Today management at WorldCom is reportedly preparing to tell regulators it found another couple of billion dollars in accounting mistakes. The Wall Street Journal put the new discovery at $2 billion, while Reuters indicates it’s closer to $3 billion.

In case you’re keeping a running score, the latest announcement would put the telecom giant’s accounting error somewhere around $10 billion.

WorldCom’s management first admitted that its financial statements were inaccurate back on June 26. The telco’s management reported that two of the company’s internal auditors had uncovered a $3.8 billion error in the way WorldCom treated some of its capital expenses (“A Really Big Phone Bill”). Then, last month, WorldCom management said it had discovered another $3.83 billion in accounting errors.

At the time of the second announcement (“WorldCom: Missed It By That Much”), the telco’s management warned that there might be more “discoveries” as its investigation continued. The company also indicated it would take a $50 billion charge for goodwill and other charges to write down the value of its property and equipment.

The latest restatement partly relates to the company’s accounting for the results of a foreign subsidiary. Apparently WorldCom’s finance department improperly deconsolidated the subsidiary after it became unprofitable, according to the Journal, citing people close to the situation.

The company also will reevaluate the carrying value of existing property, plants, and equipment as to possible impairment of historic values previously reported, said the paper.

In June, the Securities and Exchange Commission filed civil fraud charges against WorldCom.

Last month, a New York grand jury indicted two former WorldCom finance execs—former chief financial officer Scott Sullivan and former director of general accounting Buford Yates. Former controller David Myers is reportedly negotiating a plea bargain with government prosecutors.

In April, former WorldCom founder and CEO Bernie Ebbers resigned.

Sick Feeling: SEC Investigating HealthSouth

Now it’s HealthSouth’s turn.

Yesterday, the embattled hospital management company indicated that it is being investigated by the SEC.

The company’s stock price plunged 28 percent, to a 10-year low, on the news. Meanwhile Standard & Poor’s cut its credit rating on HealthSouth’s $3.3 billion in debt to junk status.

HealthSouth has been under fire since late August when it warned its earnings before interest, taxes, depreciation, and amortization would be lower than previously projected by approximately $175 million. The reason for the grated expectations? Changes in the way the government reimburses rehabilitation procedures under Medicare.

“Because of the uncertainties surrounding the full impact of these developments at this time, this initial assessment may prove incorrect, and the company is accordingly discontinuing earnings guidance for the remainder of 2002 and 2003 at this time,” noted HealthSouth management at the time.

The stock price of HealthSouth fell by about half on that day as well.

Since the company’s August warning, HealthSouth’s market capitalization has shrunk by 75 percent

Of note: in June—just months before these problems came to light—HealthSouth chairman Richard Scrushy sold about $2.5 million in company stock. That was one month after he netted about $54 million from exercising and selling stock options.

Scrushy claims he conducted those transactions because he had to repay a $25 million loan from HealthSouth that was due in 2006. And on Thursday, he reiterated that he had no knowledge of the Medicare changes before he sold the stock.

A number of class-action suits that have been filed in recent weeks, however, claim knew of HealthSouth’s problems with its billing practices before the sale.

HealthSouth management yesterday said it contacted the SEC earlier in the week and volunteered to provide the commission with information to help it investigate recent events. “The company has since received notice of an investigation by the SEC,” it noted, “and is cooperating fully with the investigation.”

Meanwhile, busy SEC investigators are also planning to probe Switchboard Inc., stemming from its July restatements of financials, according to the company’s amended annual report filed Thursday with the commission.

The company said it intends to cooperate with the investigation.

In July, Switchboard management said it will reduce the company’s 2001 revenue by $2.7 million, reduce 2001 sales and marketing expenses by $1.5 million, and reduce the 2001 special charges by $1.2 million. This all stems from the sale of banner advertising to a customer that subsequently failed to pay up.

Kozlowski Avoids Jail

Talk about a comeuppance.

On Thursday, former Tyco International chairman L. Dennis Kozlowski avoided a visit to New York City’s notorious Riker’s Island prison only because his former wife helped him meet his bail requirements.

Kozlowski, charged with stealing $600 million from the conglomerate, needed $10 million in cold cash that was not related to any of the money he allegedly took from his former company. His own assets have been frozen.

At the deadline, Kozlowski’s ex-wife came up with the money and a statement from a brokerage firm backing up the source of the money, according to reports, citing Kozlowski’s attorney.

Kozlowski is still not totally out of jail free, however. Reportedly, lead prosecutor John Moscow said the Manhattan District Attorney’s office is now going to determine whether the $10 million bail money was obtained illegally or from the stolen stash.

Former Tyco CFO Mark Swartz was able to post his $5 million bail in the form of 500,000 shares of Tyco stock. Ironically, Swartz probably benefited from the recent rise in the price of Tyco stock. That run-up occurred right after company management announced it was bringing in former United Technologies finance chief David FitzPatrick to replace—that’s right—Swartz.

Employees Less Trustful of Employers

The recent parade of corporate scandals is having a demonstrable impact on the stock market. Now it appears it may also be affecting the way employees view their bosses.

According to Aon’s seventh annual United States Work study, employees are now less trusting of their corporate leadership. Moreover, workers say they’re less involved in organizational change and less confident of the HR practices in place. “The results show a need for soul-searching among corporate executives and a desire among employees to ‘restore the trust’ in their employer,” noted Aon in the study.

“By looking more closely at what employees are experiencing in their work environment, we can begin to see why the bonds of trust between employer and employee are now a high risk factor in corporate life,” said David L. Stum, president of Aon Consulting’s Loyalty Institute. “By knowing why the trust is eroding, employers can formulate action plans that will make a difference.”

The Workforce Commitment Index, which measures just how much commitment exists in employees based on responses to questions in the areas of productivity, pride, and retention, has fallen to near the lowest level since the annual measurement began in 1997.

Also according to Aon:

  • Almost one out of five respondents (17 percent) feel that their organization is below expectations in creating a work environment free from fear, intimidation, and harassment.
  • 36 percent feel their organization does not help them manage stress.
  • Pay and performance don’t link up well enough to meet the expectations of 28 percent of respondents.
  • 37 percent don’t feel that they get to adequately participate in planning changes.

Top IT Specialty? Networking

Chief information officers rated networking the nation’s hottest technology specialty for the second straight year. This, according to the semiannual Robert Half Technology Hot Jobs Report.

Help desk/end-user support came in second, followed by Internet/intranet development.

“As companies develop wireless networks to support a mobile workforce, and implement new security measures to safeguard corporate data, demand for skilled networking specialists will remain strong,” says Katherine Spencer Lee, executive director of Robert Half Technology. “Those with skills in wireless LAN and firewall administration are highly marketable in the current environment.”

Job titles most requested within the networking category include network administrator, security analyst, and network engineer.

CIOs in the Mid-Atlantic region expressed the greatest need for networking professionals. The West South Central region is experiencing strong demand for help desk and networking professionals.

Help desk specialists are also highly sought after in the Mountain region, while technology executives in the East North Central region are experiencing stronger demand than any other region for Internet/intranet development professionals.

Here’s the full list, ranked by the percentage of requests by employers for tech job titles:

Networking, 23%
Help desk/end-user support, 15%
Internet/intranet development, 13%
Applications development, 11%
Data/database management, 10%
Project management, 5%
Systems analysis, 4%
No growth, 7%
Other/don’t know, 12%

Short Takes: BofA Borrows, Volcker Demures

  • Bank of America Corp. issued $1 billion of 10-year global senior notes, priced to yield 4.923 percent, 112.5 basis above comparable Treasuries. The paper was rated Aa2 by Moody’s and A-plus by Standard & Poor’s.
  • Former Federal Reserve chairman Paul Volcker told Reuters on Thursday he will not head an accounting oversight board being set up by the government, ending what little uncertainty remained about his decision. “There are better qualified people who are on top of this and know more about auditing than I do, and have more professional interest and will stay with it,” the 75-year-old said in an interview.

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