WorldCom Finds $3.8 Billion Error, Fires CFO

[Lincoln]

The sad thing is the people who lose their retirement funds over these jerks. Meanwhile they regroup and start another mega corporation while the faithful employees have to grovel before the courts to get back a few dimes on the dollar. Greed is destroying this nation.

[Sava]

Originally posted by Lincoln
The sad thing is the people who lose their retirement funds over these jerks. Meanwhile they regroup and start another mega corporation while the faithful employees have to grovel before the courts to get back a few dimes on the dollar. Greed is destroying this nation.

YUP!!!!!!!!!!!!!!

Unfortunately, the Elephant and the Ass are both doing their part to keep the rich, rich!

[Deathwalker]

The sad thing I used to work for them in England and I paid into there pension I wonder whats going to happen to it
The said thing is when I was there it was obviouse something was very worng. They never seemed to be able to do anything they set out to. E.G. setting up a 3G mobile network, buying Sprint and so on.
I my department we used to call worldcom the Titanic

[Lincoln]

The idea now seems to be to make money.

[DinoDoc]

1) Mississippi will show corporate America how to run a scandal.

2) Wonder what effect this will have on the local economy?

3) I bet the Jackson City Council is patting themselves on the back for chasing the company out of town awhile back now.

[TCO]

I just read the WSJ story on this.

Roland, actually I *think* that is what they did. (Slapped on a false label.) FYI the cable industry is very prone to these questionable capitalizations. Even when they are allowed by GAAP, they may be questionable in terms of true economics.

I think WC claimed that operating expenses were a capitol expense. This would make EBITDA (and EBIT and EPS)* go up falsely. The "cash flow from operations" which is not real cash flow would also show an improper value. The calculated (real) cash flow would not be affected since CAPEX and OPEX are subtracted in either case. Such calculated cash flows are normal parts of a (good) valuation model.

Obviously, there is still the issue of investors wanting to know which bucket an expense is in. CAPEX and OPEX have different implications in terms of the company outlook. But "real" cash flow during the time period would not be affected.**

*EPS is an accounting construct. This (OPEX/CAPEX issue) is a classic example of the problems with fixating on EPS. There is a classic WSJ editorial from the 70's, "Cash is King", which discussed why it's bad to fixate on EPS.

** There is a real cash effect in terms of the taxes. Capitalizing the expense is worse from a tax point of view. But since that is the case, the restatement will not raise tax costs.

[Lincoln]

Dow is down 180 in the first half hour. This does not look like a good day...

[Roland]

"Roland, actually I *think* that is what they did. (Slapped on a false label.)"

Yeah but there must have been a bit more to it. Capitalizing 4 billion $ of expenses in, if I understand correctly, a short timespan and not before that - wouldn't that take a bit more cooking ?

"This would make EBITDA (and EBIT and EPS) go up falsely."

Which was what I read today morning, close to 4 billion $ on EBITDA and/or earnings.

"The calculated (real) cash flow would not be affected since CAPEX and OPEX are subtracted in either case."

Your "real" cashflow = free cashflow, or are they different ?

[TCO]

Basically yes.

"Free cash flow" is actually an accounting construct (useful one) that does not list debt service payements as an expense. By using a WACC (discount rate that includes debt service) one can seperate financing from operational issues. But that is a subtlety not related to this issue. You could use a free cash flow or an equity based cash flow and my points would stand.

I'm just sensative to people using the term "cash flow" indiscriminately. "Cash flow from operations" is not really cash flow.

[Roland]

Journalists. Cash flow = EBITDA = earnings = pro forma eranings = Ebbers' ass on a plate.

[TCO]

LOL--yes! Where is fooker, so I can abuse him? Silly business journalists.

This is why I cringe when watching CNBC or the like. They could do a lot of good, but instead they often muddy the water. I often get the impression that they don't really know their basic finance. WSJ is usually a cut above what gets on the wire services or on TV. Especially if you read the entire story (not just the lead para) you can get a decent sense of what is going on.

[Roland]

CNBC is cheerleaders on parade. Little balance, little substance.

But the worst thing I've seen on CNBC was an extra interview with Jack Welch talking bollocks abundantly.

[TCO]

Was an interesting op ed piece in the Journal arguing for lowering the barriers to hostile take-overs.* I'm always in favor of this. But the author had the interesting claim that lower barriers to takeovers would limit the types of ENRON etc, scams. I'm not sure if he quite pulled off that argument but since I like a more fluid market for company control, I enjoyed the piece.

* The (somewhat misinformed) public reaction to "raiders" from the 1980's led to the creation of state laws which have severely limited raider operations.

[Adam Smith]

Not really that hard to do. Worldcom says, with a straight face, that GAAP tells us to capitalize this switching equipment, which GAAP says has a life of 10 years. Reality is that the equipment will be technically obsolete in two years, so it shoud either be expensed or have a 50% depreciation rate. Anderson says that Worldcom never told them about this. But thats exactly the kind of thing an auditor is supposed to check. A friend who works for a telecom told me this morning that this is one of the first things auditors check when they do high-tech companies. Anderson did not even come close to their auditing job. Anybody know if Anderson was earning big bucks in strategy consulting with Worldcom, hence a conflict a la Enron?

[TCO]

Originally posted by Roland
CNBC is cheerleaders on parade. Little balance, little substance.

But the worst thing I've seen on CNBC was an extra interview with Jack Welch talking bollocks abundantly.

What upset you? Do you think Jack is a complete fake? What was the specific issue?