NEW YORK, Sept. 15 -- WorldCom Inc.'s internal and external auditors testified in U.S. Bankruptcy Court today that the company's books remain a tangled mess and that it may be impossible to properly apportion close to $1 trillion in transactions between more than 200 subsidiaries.
WorldCom has argued that its books are so confused that it has little choice but to scrap much of the past three years of accounting records and begin anew on a consolidated basis.
The testimony came on the first full day of a hearing here on Ashburn-based WorldCom's plan for emerging from bankruptcy protection. Under the proposed plan, the company will combine the assets of WorldCom with MCI and other subsidiaries that have previously been held as 222 legally separate entities. It was unclear from the testimony whether the chaotic internal accounting had any impact on the $11 billion in fraudulent bookkeeping already reported by the company; witnesses did not address the subject.
Some creditors have objected to the consolidation, saying it unfairly benefits WorldCom creditors at the expense of others who own debt in subsidiaries such as MCI. U.S. Bankruptcy Court Judge Arthur J. Gonzalez is holding a hearing on the company's reorganization plan, one of the last stages in the bankruptcy process. If Gonzalez approves the plan, which among other things, establishes how much each creditor will get paid, the company could exit bankruptcy later this fall.
At the time that the company filed for protection from its creditors, WorldCom held most of the corporation's $41 billion in debt and MCI had 90 percent of the assets.
"I have significant doubts the company could ever prepare accurate accounting statements" for its various subsidiaries, testified Joseph L. D'Amico, senior managing director of FTI Consulting Inc., an Annapolis-based forensic accounting firm. FTI was hired by the company's creditors to review its books.
D'Amico testified that WorldCom's own accountants failed to keep accurate records of a blizzard of transactions between the company's various entities. As an example, D'Amico noted that in November 2002, there were more than 600,000 intercompany transactions between more than 1,000 company accounts. Straightening the company's books became even more difficult in the months after July 2002, when WorldCom filed for bankruptcy. The company began laying off employees and in some cases firing others for their involvement in the massive accounting scandal, D'Amico testified.
"We would be working with someone one day and find out they were gone two or three weeks later," D'Amico said. "It made it difficult to do the work if people were not there to explain their actions."
Also testifying today was WorldCom's interim corporate controller, Robert L. Pierson, who confirmed D'Amico's assessment of the company's financial recordkeeping.
"We have never balanced our internal accounts," Pierson said.
Pierson put much of the blame on WorldCom accountants based at its Clinton, Miss., headquarters. Pierson testified that there are about 800 people combing through WorldCom's books in an effort to straighten them out.
But Pierson said it is an almost impossible task since many of the people responsible for the original account entries are no longer with the company. In addition, in many cases, the original accountants failed to provide the appropriate documentation that would make it possible to clear up the accounts, Pierson said.
WorldCom hopes to wrap up its case for consolidating its books in less than two days of testimony. The company was able to avoid what was expected to be a lengthy courtroom battle over the matter after reaching a settlement with two dissident creditor groups last week. The creditors agreed to drop their opposition after winning a larger payout in a revised reorganization plan.
Under the new plan, one group, which would have been paid nothing under the former plan, will now receive $330 million. Another group, which would have received $85 million, will now receive approximately $125 million.
The group that would have been paid nothing under the former plan owned subordinated MCI bonds. The other group owned debt related to MCI's unpaid bills.
Frank A. Savage, a Lazard Freres executive currently advising the company in bankruptcy, told the court that the settlements ultimately benefit the company. "I think it is always in the best interest of the debtor to settle disputes," Savage testified. "No company thrives in bankruptcy."
