Global stocks markets are reeling after WorldCom, the second largest U.S. long-distance carrier, disclosed $4 billion in accounting irregularities.
The telecommunications giant says it has fired its chief financial officer after uncovering accounting irregularities during an internal audit.
Beginning in 2001, the company recorded $3.8 billion in operating expenses as capital expenditures in order to boost profits. Howard Shilit, author of a book entitled Financial Shenanigans, says the fraudulent procedure was a simple one.
"This is as simple as your salary," he explained. "If your parent company wanted to show a higher profit, they would not record it as an expense; they [would] put it on the balance sheet and push it to future periods. That is precisely what WorldCom did but for $3.8 billion. Absolutely shocking that nobody at the company, the auditors, the internal people, the comptroller noticed that and spoke up."
WorldCom says it will restate the past five quarters. The company has announced plans to cut at least 17,000 jobs and reduce capital expenditures significantly. But on Wall Street, many analysts believe the company is headed toward bankruptcy.
Telecommunications analyst Scott Cleland, head of the Precursor Group, cautioned against WorldCom stock several months ago. He calls it a "momentum-growth" scam and predicts more problems ahead at WorldCom.
"They acquired 60 companies, and they took pro-forma accounting to a new level," he said. "What they did was they had so many mergers where you never had a real good baseline of what they were really doing. It finally caught up with them when they were not able to acquire Sprint. At that time, WorldCom was the fifth most widely-held stock in America, and since then, it has been downhill."
The WorldCom scandal is the latest in a series that have shocked markets, undermined consumer confidence, and called U.S. accounting practices into question. For author Howard Shilit, there is an easy and clear solution.
"People have to be sent to jail when those who have the responsibility to safeguard investors' money lie to investors," he said. "White collar criminals rarely are sent to jail. But I think it is a very important deterrent and I think it has to start now."
Arthur Andersen, the accounting firm convicted in the scandal surrounding the Enron corporation, was WorldCom's auditor. A new auditor found the discrepancies.