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CNN Live Today
WorldCom Caught in Accounting Scandal
Aired June 26, 2002 - 11:11 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LEON HARRIS, CNN ANCHOR: Now to one of the nation's major companies whose fortunes seem to have gone up in smoke right in front of our very eyes.
An internal audit has revealed that long distance giant WorldCom, erroneously reported almost $4 billion in profit. And now the company plans to slash thousands of jobs.
We're covering this story on two fronts. CNN's Allan Chernoff has the details of WorldCom's woes, and Joya Dass is going to take a look at how the stock market is reacting this morning. And news there has not been very pretty.
We're going to start, first of all, with Allan in New York -- Allan.
ALLAN CHERNOFF, CNN CORRESPONDENT: Good morning, Leon.
Let's explain this in simple terms. Let's say that I'm running a phone company and I need to maintain my phone lines, so I spend money for that. Those are operating expenses and I should simply subtract that from our revenue to get my profit.
What WorldCom did with those operating expenses is that it actually treated it like a capital investment, building an asset, as if it were creating new phone lines, and it didn't subtract those right away from revenues, thereby inflating profits. So that's what's behind this accounting scandal. Did all this to the tune of more than $3.8 billion.
And the company is saying its profits for last year, and for the first quarter of this year, will now all disappear, become losses. The company also saying it is firing the chief financial officer, Scott Sullivan, accepting the resignation of the controller, David Meyers, and also plans to lay off 17,000 workers in an effort to save about $900 million a year.
The company, clearly in some serious financial straits, has debt of about $30 billion, and that's the reason that today people on Wall Street are talking about the real possibility down the road for WorldCom to possibly declare bankruptcy -- Leon.
HARRIS: Before we get on with this story, how far down the road do you think there be any impact on the phone service that people actually care most about?
CHERNOFF: Well, certainly the phone service still going on and no reason to expect that that would end anytime soon. The company plans to strive ahead, and hopefully there won't be any impact there. But, obviously, financially investors are very concerned.
HARRIS: All right. Good deal. Allan Chernoff. Thanks much. We'll see you in a bit.
WorldCom's just the latest in a string of scandals that has shaken the public's faith in the stock market. The last thing the stock market needs is another story like this.
Our Joya Dass takes a look how the market is reacting this morning to WorldCom's woes. She's standing by at the New York Stock Exchange.
All right, good morning. Or, I should ask you, how good is this morning?
JOYA DASS, CNN CORRESPONDENT: News like this is a real shot in the arm as far as confidence is concerned. It's bad but, you know, the way things are looking before the opening bell, it could have been a lot worse.
I mean, WorldCom still has not opened for trading this morning. The Nasdaq halted it before the market opened. But in pre-market action, which is usually a pretty good indicator as to where the stock is headed, WorldCom is trading as low as 23 cents a share. It closed yesterday at 83 cents. And that certainly is a far cry from where WorldCom peaked three years ago, at 63 bucks a share.
Now back then, the company had a market value of around $120 billion. And today WorldCom's market cap just under $1 billion. And the wrath over the WorldCom scandal is being felt far and wide. The Dow industrials have dipped below the 9,000 mark for the first time since October. In fact, the Dow right now, we have it down 116 points. All but four of the Dow 30 are in the minus column.
And the Nasdaq composite growth chart is down about 1 1/2 percent and it's below the worst closing level hit in the immediate aftermath of 9/11 attacks.
Now a number of phone companies are struggling; that's no surprise. Verizon is down nearly $2; AT&T and Sprint are also lower today. So are some of the financials like Citigroup and J.P. Morgan, which could have exposure to WorldCom's massive debt.
But there could be one saving grace today: Alan Greenspan and the Federal Reserve are releasing their decision on interest rates later on this afternoon. And while no change in rates is expected, there could be some market moving commentary. You can bet that the Fed is keeping a close eye on the WorldCom situation and its impact on investor confidence -- Leon.
HARRIS: Yes, you have to wonder if Mr. Greenspan is even right now thinking of changing some of those words to be more encouraging before he does deliver -- deliver those remarks.
DASS: Yes. I mean, there's no change in rates expected, but really we're going to be paying attention to that additional commentary that comes at the end, to see what he has to say.
HARRIS: All right. Good deal. Thanks, Joya Dass standing by at the New York Stock Exchange.
As always, folks, you can always find the information. Look down here in the lower corner of the screen. You'll find the latest market information right there, as you can see. S&P numbers here: Nine (ph) down 13, Dow down 129. Keep an eye on that bug all day.
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