There’s no rest for the bankrupt.
Indeed, MCI managers have been locking horns with regulators and creditors for months, endeavoring to emerge from beneath the largest bankruptcy in U.S. history. The telecom company also plans to shed its old WorldCom skin, hoping to distance itself from an $11 billion accounting-fraud scandal and reinvent itself as a role model for corporate governance and ethics.
By most accounts, MCI’s fate now rests in the U.S. bankruptcy court for the Southern District of New York, where the company will face a final vote on its reorganization plan. Bob Blakely, MCI’s chief financial officer, announced last month that it is “on track to emerge from Chapter 11″ following a settlement with two dissident creditor groups that opposed the plan.
One creditor group, originally slated to get nothing under the plan, will now reportedly be paid 44.5 cents on the dollar; the other group, originally scheduled for 36 cents on the dollar, will now receive about 52 cents. If all goes well with the bankruptcy judge, MCI’s debt load would undergo the equivalent of corporate liposuction, dropping from $32.5 billion in debt to just $5.5 billion.
Dennis Beresford, a member of MCI’s board of directors and chairman of its audit committee, is not celebrating just yet, however. “We still have a substantial amount of work to do,” says the former chairman of the Financial Accounting Standards Board, noting the massive restatements that still await. “We are still going through and making the appropriate changes as a result of the accounting fraud that took place.”
Ruin to Role Model
It’s been more than a year since WorldCom fired CFO Scott Sullivan after uncovering accounting irregularities of $3.8 billion in expenses that hid a net loss for 2001 and the first quarter of 2002. Additional re-audits looking as far back as 1999 have since ballooned WorldCom’s improper booking to $11 billion.
Shortly after the scandal broke, WorldCom filed for bankruptcy and hired former Hewlett-Packard president Michael Capellas to replace Bernard Ebbers, on whose watch Sullivan’s alleged illegal bookkeeping took place. MCI also agreed to a settlement with the Securities and Exchange Commission in which the company would make a $750 post-bankruptcy payout to shareholders.
MCI’s board, which was subsequently fitted with independent directors such as Beresford, adopted 78 new and somewhat radical corporate governance reforms intended to restore investor trust and institute internal controls where apparently there were none. “One cannot say that the checks and balances against excessive power within the old WorldCom didn’t work adequately,” noted Richard Breeden, MCI’s bankruptcy-court-appointed monitor, in his governance report. “Rather, the sad fact is that there were no checks and balances.”
The General Services Administration (GSA) came to a similar conclusion in June and suspended WorldCom’s eligibility to bid on government contracts, on the grounds that it lacked “the internal controls and business ethics necessary to be considered ‘presentably responsible.’”
MCI is working on it. In the coming months Beresford plans to wrap up the necessary restatements associated with the accounting scandal under former management, so that by the time the company exits bankruptcy protection, only accurate records remain. The trouble, he says, is picking through the company’s highly fragmented accounting system — the byproduct of years of poorly integrated acquisitions made by former finance chief Sullivan.