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Financial Disaster at WorldCom at Least Twice as Bad as Previously Reported

Aired August 09, 2002 - 10:13   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


LEON HARRIS, CNN ANCHOR: The financial disaster at WorldCom is at least twice as bad as previously reported. New auditors at the company now say that the books are off by at least $7 billion, and they say it could be even worse. It's not over yet.
CNN's Bruce Francis is here to explain what all this means.

Good morning.

BRUCE FRANCIS, CNN CORRESPONDENT: Good morning, Leon.

And those are the operative words. It isn't over yet. Because WorldCom says that from 1999 through 2001 and the first quarter of 2002, it's found an additional $3.3 billion in reported earnings before interest depreciation, taxation and amortization. That's a fancy term we use here on Wall Street, but special kind of earnings; $3.3 billion worth of it was misstated.

Now, how did they do this? Well, when companies anticipate they are not going to get paid for certain things or they think they will have to pay out on a big amount of money for a lawsuit, for example, they set aside reserves.

Now when it turns out that they don't actually have to pay out for that lawsuit or if they do get paid for those accounts, you put that money back in. You can reverse those reserves. Now, of course, there are conservative rules that govern exactly how do you this, and in the opinion of WorldCom's auditor, they did not do this correctly, the company did not do this correctly, for the period that I just mentioned. As a result, they will restate the results for 2000, this will wipe out all of their profit for that year. They have already done that for 2001.

Leon, as you said earlier, they are going to say that additional amounts may be discovered and reported. So this could, in fact, get worse. The worst restatement ever in accounting history, could get much worse here.

Now, what does this do to the case against WorldCom officials? Of course we saw that famous perp walk a couple weeks ago, where Scott Sullivan, the chief financial officer, and David Myers, the controller, they were led away in handcuffs. Now securities law experts are saying this morning, that this gives much more ammunition to a case being built against these two executives, and everyone is wondering, will Bernie Ebbers, the former CEO of WorldCom, eventually be implicated. On wire services this morning, Mr. Ebbers' lawyer saying that he is certain when the investigation is done, not a shred of credible evidence will be found to connect Mr. Ebbers to this case. Nevertheless, a lot of folks are saying, how can a misstatement of earnings be so large and not be made aware to this CEO.

Leon, this is a case that looks like it has gone from bad to worse, and there's another stop from here, and we don't know how much.

HARRIS: Incredible. Absolutely incredible. Quickly, Bruce, let me ask you this, if I'm paying an MCI bill now, what does this mean for me? I heard a spokesman say, oh, this means nothing to you getting MCI service, the company is fine in that regard. But it is hard it believe, isn't it?

FRANCIS: It is hard it believe. But for the time being, WorldCom is an operating company. Even though they are in chapter 11 bankruptcy protection, that company does continue everyday to still provide long distance and other services to consumers and services across the country. That will continue, although this new binding may make it more difficult for the company to get additional financing, which it desperately needs to keep operating. Another hearing is set for the beginning of September. Let's see if the creditors stop balking even more, as news of this gets into them, and they find out just what this means -- Leon.

HARRIS: It's hard to believe it can get worse.

Bruce Francis, thanks for the report. Pleasure. See you.

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