WorldCom fraud sends markets tumbling

Published 12:00 am Thursday, June 27, 2002

BNI Newswire

A lack of consumer confidence in corporations and their financial standings continues to send icy chills down the backbone of the U.S. economy and caused world markets to tumble again on Wednesday.

This week’s revelations of alleged accounting fraud at WorldCom has shaken investors around the globe, sending the blue-chip Dow Jones industrial average, which had slid 2 percent in early trading, to close only a fraction lower at the close of business Wednesday.

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Meanwhile, the tech-heavy Nasdaq, where WorldCom was listed but failed to trade on Wednesday, ended up 3.5 percent as bargain hunters moved in and brought on a rally. Other markets in Europe and Japan were sharply lower on news of the international corporation’s situation.

Thomas A. Daniel, an investment representative with the Edward Jones financial services office in Alexander City, said that the crisis in confidence is justified, but should not be blown out of proportion.

"I would say it is well justified because there is another big business that has questions of dishonesty when it comes to their financial reporting," Daniel said. "But, as most people know, you don’t want to believe the whole apple cart is bad just because of a few bad apples."

Investors had feared that the WorldCom debacle, in which profits between January 2001 and March 2002 were allegedly inflated by $3.8 billion, would create new fears over the state of corporate accounting in the United States.

"At the close of trading on Tuesday, WorldCom stock had fallen to 83 cents," Daniel said. "It did not open on Wednesday, but if it had, it probably would have been down to around 20 cents."

Also on Wednesday, WorldCom announced it intended to restate its financial statements for 2001 and the first quarter of 2002.

In a company statement, WorldCom officials said that as a result of an internal audit of the company’s capital expenditure accounting, it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles.

The amount of these transfers was $3.055 billion for 2001 and $797 million for first quarter of 2002. Without these transfers, WorldCom would have reported a net loss for 2001 and for the first quarter of 2002.

The company has retained external auditors, KPMG LLP to develop an audit of the company’s financial statements for 2001 and 2002. The company also notified Andersen LLP, which had audited the company’s financial statements for 2001 and reviewed such statements for first quarter 2002, promptly upon discovering these transfers.

On June 24, Andersen reportedly advised WorldCom that in light of the inappropriate transfers of line costs, Andersen’s audit report on the company’s financial statements for 2001 and Andersen’s review of the company’s financial statements for the first quarter of 2002 could not be relied upon.

The announcement followed word that the company would likely cut more than 17,000 jobs as a result of its financial situation.

December’s collapse of energy giant Enron, where accounting concerns were also raised, has increased investor sensitivity to the issue, according to Daniel. But, he also sees the WorldCom news as another hurdle for the markets to overcome, and he believes they will.

"People stayed in the market through October, 1987," Daniel said of the infamous Black Friday when the Dow Jones Industrials fell more than 500 points, "and they stayed with the markets through Sept. 11. People will continue to invest, but right now their confidence has been shaken a bit."

The Dow has already fallen more than 10 percent since mid-May as market analysts say disappointing corporate profits – particularly with U.S. tech firms – a slide in the value of the dollar and concerns over the Middle East conflict have left investors leary.

Daniel said corporations in America will want to win back the trust of investors and will be working hard to be upfront about their earnings in the weeks and months to come.