By the time Mr. Sullivan stopped talking, Ms. Vinson’s resolve to quit her job was wavering, according to the person close to her. That night, she told her husband about the meeting and her worries over the accounting. Mr. Vinson, who is a printing-equipment salesman, didn’t fully understand his wife’s accounting concerns, but he urged her to quit. He already was unhappy about the long hours she was putting in at WorldCom.
But after further thought, Ms. Vinson decided against quitting, says the person close to her. She was the family’s chief breadwinner, earning more than her husband’s roughly $40,000 a year compensation. The Vinsons depended on her insurance. She was anxious about entering the job market as a middle-age worker.
Though Ms. Vinson still worried about the accounting issues, she began to rationalize her decision to comply with her bosses’ request, according to the person close to her. After all, Mr. Sullivan had been heralded as one of the top chief financial officers in the country. If he thought the transfer was all right, who was she to question it?
Back in the office, Ms. Vinson told Mr. Yates that she had changed her mind about quitting. They commiserated about how hard it would be to leave their jobs and probably Jackson, where it wasn’t easy to find well-paying work, according to a person familiar with the conversation. Mr. Normand also changed his mind about leaving WorldCom.
By the end of the first quarter of 2001, it was clear Ms. Vinson would have to prepare another bad financial report. As the company’s revenue fell, its line costs, as a percentage of revenue, were well above the company’s 42% goal. Again, Ms. Vinson and her colleagues searched for costs they could reduce. But this time they could find no large pools of reserves to transfer to solve the profit shortfall. The gap was a whopping $771 million.
As the situation grew dire, a troubling solution was ordered up by Mr. Sullivan, according to a former WorldCom employee. Rather than count line costs as part of operating expenses in the quarterly report, they would shift $771 million in line costs to capital-expenditure accounts, according to SEC filings. The shift would boost the company’s bottom line. That’s because operating expenses, such as salaries and benefits, are subtracted from income as they occur, reducing a company’s current profit. Capital expenses are subtracted from income over long periods of time.
When Mr. Yates told Ms. Vinson about the $771 million transfer, she was shocked, according to the person close to her. While the accounting maneuver in October had been questionable, she believed this transfer was even less defensible. Accounting rules make clear that line costs are to be counted as operating leases, which can’t be delayed by calling them capital expenses.
In fact, Mr. Yates initially had refused to execute the plan when Mr. Myers told him about it, according to a person close to Mr. Yates. And in turn Mr. Myers, the controller, had argued to Mr. Sullivan that the transfer could not be justified, says a former employee. But Mr. Myers eventually passed the order down the line to Mr. Yates after he was persuaded by Mr. Sullivan that the transfer was WorldCom’s only way out of its troubles, according to the former employee.