By Maxine Shapiro, KERA 90.1 Commentator
Dallas, TX – Most of us were hoping that the Enron accounting scandal would be the worst we would ever have to deal with. Yes, there have been likes of Global Crossing, ImClone, and Tyco, to name just a few. But the accounting fraud announced by WorldCom will now be history's worst. I'm Maxine Shapiro with KERA Marketplace Middays.
The good news, relatively speaking, is that this revelation by WorldCom was exposed by an internal audit and resulted in the immediate firing of their chief financial officer and resignation of its senior vice president and controller.
So what exactly did WorldCom, the second largest long distance company in the country, do wrong? The following explanation is from both a discussion I had with senior equipment analyst at SWS Securities, David Mossberg, and the Wall Street Journal.
There are a couple of accounting procedures that a company uses and needs to use by law. One is the income statement. This summarizes the revenues and expenses for a specific period of time. These are the quarterly statements that are scrutinized most. This is the statement where the company reports its earnings. Then there's the balance sheet. That's a snapshot of the company. It reports the company's assets and liabilities - what it owes. Very simply, what WorldCom found was that for the last five quarters, they capitalized items that should have been an expense. In other words, money that should have been reported as an expense in their quarterly earnings (the income statement) was reported as assets in their balance sheet. So when their quarterly income statement showed a profit, it was incorrect because it didn't account for those expenses. There was no profit as they claimed. In fact, there was a loss for all of 2001 and the first quarter of 2002. This totally goes against accounting principles - to the tune of $3.8 billion. The exact details still remain unclear.
But this was the last thing an already depressed telecomm industry needed. It's the last thing any of us needed. For KERA Marketplace Middays, I'm Maxine Shapiro.
Marketplace Midday Reports air on KERA 90.1 Monday - Friday at 1:04 P.M.