Extreme Makeover

How Robert Blakely and an army of accountants turned fraud-ridden WorldCom into squeaky-clean MCI.

The Mother of All Audits

It was easy for Blakely to indulge his habit at WorldCom. Even with the majority of creditors on board, the most difficult tasks required to exit bankruptcy still lay ahead. Hardest of all was restating results for three years — 2000, 2001, and 2002 — and filing audited financial statements. Not only was $11 billion of fraud cooked into the books, but years of shoddy record-keeping and incompetent accounting clouded nearly every entry.

Blakely and his finance team hoped they could complete the audit by July 2003, three months after he was hired, but it took nearly that long just to size up the task. “It was more complex than anyone imagined,” he says. Eventually, the team realized they had to reconstruct the financial statements from scratch. “I went back to Michael [Capellas] and told him that it looked more like July 2004 than July 2003,” says Blakely. But it would have to be done faster: bankruptcy court judge Arthur Gonzalez had already set February 28, 2004, as the deadline for emerging from bankruptcy.

Reinforcements were needed. WorldCom already had 500 to 600 employees working full-time on the restatement, as well as 200 to 300 staffers from KPMG, the company’s auditor. WorldCom turned to Deloitte & Touche for more help, and the accounting firm responded with some 600 professionals, culled from offices across the country. At the peak of the audit work, in late 2003, WorldCom had about 1,500 people working on the restatement, under the combined management of Blakely and five controllers.

The finance team started with the billing systems and reran all the revenue, deciding on the proper accounting. Then it redid all the cash applications and rebuilt the income statements from there. It also reassessed every acquisition Ebbers had made since 1992 in the course of transforming an obscure long-distance start-up into a global communications powerhouse — 12 major deals and several smaller ones, worth $70 billion. “In some instances, we had to go back and reconstruct records to decide whether or not pooling of interest was the proper accounting at the time,” says Blakely. In all, they found, WorldCom had overvalued several acquisitions by a total of $5.8 billion.

The difficulty of the audit work was compounded by the sorry state of WorldCom’s records. In some instances, Post-it notes were attached to journal entries in lieu of proper documentation. The FBI had taken documents that had to be tracked down and retrieved. In the end, Blakely’s team made more than 3 million new or revised entries.

But even with Deloitte’s help, WorldCom couldn’t finish the audit before Judge Gonzalez’s February 2004 deadline. It was forced to request a 60-day extension. “To bring [the audit] to closure was devilishly hard, because it’s so complex. It just kept going on and on,” says Blakely.

Finally, on March 10, Blakely’s team finished a version of the 10-K restatement that would serve as a foundation for future financial statements. MCI executives planned a signing ceremony for March 11, at a previously scheduled meeting of the board. But later on the 10th, company personnel and KPMG discovered two significant errors in the deferred tax balances, which rippled through about 100 pages of the 192-page document. Dave Schneeman, vice president of general accounting, and Jim Renna, vice president of controls and remediation, led a small team that worked through the night to make the necessary fixes.

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