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What was he thinking?

Scott Sullivan, the now-former chief financial officer of WorldCom, seems to be almost solely responsible for the mis-accounting of the telecommunications giant's finances. But it's far from clear why he did what he did. Here are some of the facts, as reported by the New York Times:

One: WorldCom announced that it had overstated its cash flow over the course of its last five quarters, by a total of just under $3.8 billion. "Our senior management team is shocked by these discoveries," WorldCom CEO John Sidgemore said.

Two: The overstatements were the result of Sullivan's having shifted expenses for telecommunications systems into a number of different "property accounts," which, for accounting purposes, are considered capital expenditures (and are accounted for differently than operating expenses). Sullivan defended the shift in an internal written statement last week, but his defense was inconsistent with today's generally accepted accounting principles (though not inconsistent with earlier principles); he was dismissed, and the overstatements announced to the public.

The faulty accounting, moreover, seems to be considered rather blatant. One certified public accountant, John Fahy, told the Times: "The magnitude of this is just mind-boggling. Auditors cannot miss something like this. It is just inexcusable." WorldCom's auditor during the financial periods in question, Arthur Andersen, said that it had requested the relevant data that would have revealed the accounting shift from WorldCom, but never received it.

Three: On the other hand, Sullivan hasn't sold a single one of his 3.3 million shares (as of last April) of WorldCom stock since August 1, 2000. (Other WorldCom execs have also held onto their stock, which is perhaps an indication that they truly didn't have any idea about the dubious accounting.) He was also very highly regarded; analyst Richard Klugman told the Times that he "was the most credible CFO in the entire industry."

I don't know what to think. It's almost as if Sullivan really believed this accounting shift was above-board. I mean, was he actually so self-deluded that he thought he could get away with hiding $3.8 billion in expenses? But if he didn't think he could get away with it, why did he hold on to his stock?

One question seems to be, did Andersen really not get the data on WorldCom's expenses that it had requested. If not, it still might be the result of simple negligence, but maybe there is some evidence of a deliberate deceit by someone at WorldCom; if it did, well, no one will be surprised to learn that someone at Andersen might have been negligent, or worse. But in any case, given the facts we know now, who knows exactly who did what, or why? There's no way to tell.

Update: The Times reports today (6/28) that the investigation into WorldCom's accounts has (so far) found no records to support the shift in how the expenses were booked. This fact, the Times states, "increases the likelihood that the transactions involved criminal fraud."

Another article today examines just how the accountants at Andersen might have missed the shift; its sources are divided with regard to just how embarrassing (or incompetent) an oversight it was.

June 27, 2002 2:41 PM

Comments (and TrackBacks)

I love all these articles and discussions searching (i mean, really, really searching, for some atom of integrity in this and other (e.g., Enron) like situations.

As the head of the SEC said yesterday: "criminal."

Rich, white, charismatic... None of these traits exclude an ability to steal and cheat. If anything, recent anacdotal evidence strongly suggest that being Rich, White, and Charismatic makes one highly likely to cheat and steal.

Beware affable people, they're pathalogically insincere and, if they're white too, they'll probably also steal you blind.

Know of any of these ?

.rob

Posted by rob adams on June 28, 2002 1:03 PM

If anything, recent anacdotal evidence strongly suggest that being Rich, White, and Charismatic makes one highly likely to cheat and steal.

I don't know if all that many corporate leaders are actually crooks, though. Very few people can resist the pressures created by the risk of losing large sums of money (or even just losing the opportunity to get more), however -- and people who've dedicated so much of their lives to making money least of all.

Posted by M on June 29, 2002 4:47 PM


Martha, Lay, et al, all sinned cause...
All the other times they sinned, all of them, they got away with it.

.rob

Posted by rob adams on July 1, 2002 2:22 PM


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