Former top WorldCom Inc. officials caught up in the still-unfolding accounting scandal refused to testify today before a U.S. House Committee, and in doing so left unanswered questions of why the telecommunications giant misled investors and customers about its financial health.
Financial Services Committee chairman Michael G. Oxley (R-Ohio) called WorldCom’s nearly US$4 billion in inflated earnings a “betrayal” the public trust.
Facing former WorldCom CEO Bernard Ebbers and former chief financial officer Scott Sullivan, among others who were called to testify, Oxley made clear what he thought the penalty should be for the company’s alleged deception.
“The consequences to this sort of criminal activity, should it be proved, should be severe and that may mean time in federal prison,” said Oxley.
“This improper accounting is no error, no mistake,” said Rep. Maxine Waters (D-Calif.), who said she expects the U.S. Department of Justice to determine “whether there was a conspiracy to commit fraud.”
Ebbers cited his constitutional right not to testify on the advice of counsel. Nonetheless, he said, “I do not believe I have anything to hide.”
He went on to say that when he gets the opportunity to explain his actions, “I believe no one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom.”
Others testifying today – including a former official at WorldCom’s auditing firm, Arthur Andersen LLP, and a telecommunications analyst at Salomon Smith Barney Inc. — said any blame for WorldCom’s financial disaster belongs with the company’s managers.
Other than declining to testify, Sullivan made no other statement.
With Ebbers and Sullivan keeping quiet, the other witnesses – Melvin Dick, a former managing partner at Arthur Andersen, and Jack Grubman, a telecommunications analyst at Smith Barney – had to absorb the committee’s fury.
Dick said his accounting firm had no inkling that billions in expenses were improperly booked as capital expenditures, and he said WorldCom’s managers specifically denied to auditors that the books included “top side entries,” a term describing unauthorized or questionable accounting.
“The fundamental premise of financial reporting is that the financial statements of a company are the responsibility of the company’s management, not its outside auditors,” said Dick.
But Dick’s explanation of auditor’s circumspect role in reviewing WorldCom’s books, particularly after its role in the Enron debacle, was met with incredulity by committee members.
“There may be less to accounting then meets the eye,” said Rep. Barney Frank (D-Mass.) “Do you really mean to say that the financial statements are not the responsibility of the auditing firm?” said Frank.
Dick began to tell Frank that auditors are responsible for ensuring that books meet auditing standards. Frank cut him off.
“What are you going to do — check their arithmetic? Give them a gold star if they if they add it right?” said Frank, who accused Andersen of “underestimating” its role. “Auditing firms don’t give themselves such a small role.”
Grubman, who has covered WorldCom for many years, denied that he had any advance knowledge about WorldCom’s earnings misstatements, and had been downgrading WorldCom’s stock before last month’s disclosure that the company had issued misleading financial disclosures (see story).
Grubman, however, did disclose at the hearing that he had attended WorldCom board meetings and had received “nonpublic” information a day or two in advance of its release. He denied any special relationship with the company’s senior managers.
“I think I had a good working relationship with Mr. Ebbers. I don’t think I had a special relationship with the board,” said Grubman.
While committee member after committee member raked WorldCom for its actions, there were also concerns about the broader trend of troubled firms, including Enron.
“What is going on in our country today that allows for the kind of corporate thievery and deception that we are seeing?” said Bernard Sanders, a Vermont Independent.
Also scheduled to testify was John Sidgmore, the newly appointed president and CEO of WorldCom, who said last week that bankruptcy was possible for the company, as are more layoffs.
