WRONG NUMBERS: THE ACCOUNTING PROBLEMS AT WORLDCOM HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION JULY 8, 2002 Printed for the use of the Committee on Financial Services Serial No. 107–74 ( U.S. GOVERNMENT PRINTING OFFICE 83–079 PDF WASHINGTON : 2002 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 12:14 Jan 10, 2003 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\DOCS\83079.TXT HBANK1 PsN: HBANK1 HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa JOHN J. LAFALCE, New York MARGE ROUKEMA, New Jersey, Vice Chair BARNEY FRANK, Massachusetts DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania RICHARD H. BAKER, Louisiana MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELA´ ZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio KEN BENTSEN, Texas BOB BARR, Georgia JAMES H. MALONEY, Connecticut SUE W. KELLY, New York DARLENE HOOLEY, Oregon RON PAUL, Texas JULIA CARSON, Indiana PAUL E. GILLMOR, Ohio BRAD SHERMAN, California CHRISTOPHER COX, California MAX SANDLIN, Texas DAVE WELDON, Florida GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California BOB RILEY, Alabama FRANK MASCARA, Pennsylvania STEVEN C. LATOURETTE, Ohio JAY INSLEE, Washington DONALD A. MANZULLO, Illinois JANICE D. SCHAKOWSKY, Illinois WALTER B. JONES, North Carolina DENNIS MOORE, Kansas DOUG OSE, California CHARLES A. GONZALEZ, Texas JUDY BIGGERT, Illinois STEPHANIE TUBBS JONES, Ohio MARK GREEN, Wisconsin MICHAEL E. CAPUANO, Massachusetts PATRICK J. TOOMEY, Pennsylvania HAROLD E. FORD JR., Tennessee CHRISTOPHER SHAYS, Connecticut RUBE´ N HINOJOSA, Texas JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky VITO FOSSELLA, New York RONNIE SHOWS, Mississippi GARY G. MILLER, California JOSEPH CROWLEY, New York ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri FELIX J. GRUCCI, JR., New York STEVE ISRAEL, New York MELISSA A. HART, Pennsylvania MIKE ROSS, Arizona SHELLEY MOORE CAPITO, West Virginia MIKE FERGUSON, New Jersey BERNARD SANDERS, Vermont MIKE ROGERS, Michigan PATRICK J. TIBERI, Ohio Terry Haines, Chief Counsel and Staff Director (II) VerDate 11-MAY-2000 12:14 Jan 10, 2003 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 C:\DOCS\83079.TXT HBANK1 PsN: HBANK1 C O N T E N T S Page Hearing held on: July 8, 2002 ....................................................................................................... 1 Appendix: July 8, 2002 ....................................................................................................... 153 WITNESSES MONDAY, JULY 8, 2002 Dick, Melvin, former Senior Global Managing Partner, Technology, Media, and Communications Practice, Arthur Andersen .............................................. 22 Ebbers, Bernard J., former Chief Executive Officer, WorldCom ......................... 20 Grubman, Jack, Telecommunications Analyst, Salomon Smith Barney ............. 24 Roberts, Bert, Chairman of the Board, WorldCom ............................................... 104 Sidgmore, John, President and Chief Executive Officer, WorldCom ................... 102 Sullivan, Scott, former Chief Financial Officer, WorldCom ................................. 21 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... 154 Capito, Hon. Shelley Moore ............................................................................. 156 Clay, Hon. Wm. Lacy ....................................................................................... 157 Ferguson, Hon. Mike ........................................................................................ 159 Ford, Hon. Harold E. Jr., ................................................................................. 160 Gillmor, Hon. Paul E. ....................................................................................... 162 Jones, Stephanie T. .......................................................................................... 164 Israel, Hon. Steve J. ......................................................................................... 166 Kanjorski, Hon. Paul E. ................................................................................... 168 Moore, Hon. Dennis .......................................................................................... 170 Ney, Hon. Bob W. ............................................................................................. 172 Royce, Hon. Ed .................................................................................................. 174 Sandlin, Hon. Max ............................................................................................ 176 Sherman, Hon. Brad ........................................................................................ 178 Waters, Hon. Maxine ........................................................................................ 179 Dick, Melvin ...................................................................................................... 182 Grubman, Jack ................................................................................................. 186 Roberts, Bert ..................................................................................................... 195 Sidgmore, John ................................................................................................. 199 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Baker, Hon. Richard H.: E-mail from Jack Grubman regarding SSB Bond Research-WorldCom, Inc. June 24, 2002 ......................................................................................... 206 E-mail from Robert Waldman to Scott Sullivan, June 24, 2002 .................. 207 Salomon Smith Barney Clarification on WorldCom Report, June 24, 2002 208 Biggert, Hon. Judy: ICG letter (with attachments), July 2, 2002 .................................................. 210 The Telecom Manager’s Voice Report, May 20, 2002 .................................... 217 SEC letter to WorldCom, March 7, 2002 ........................................................ 225 Ford, Harold E. Jr.: Business Roundtable Statement on Restoring Investor Trust, July 8, 2002 ................................................................................................................ 235 ‘‘The Free Market Needs New Rules’’ New York Times, July 8, 2002 ......... 237 (III) VerDate 11-MAY-2000 12:14 Jan 10, 2003 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 C:\DOCS\83079.TXT HBANK1 PsN: HBANK1 IV Page Kanjorski, Hon. Paul E.: Citigroup letter, July 11, 2002 ........................................................................ 239 Congressman Kanjorski and Congressman Shays Press Release, Salomon Smith Barney’s Initial Response on IPO Allocations to WorldCom Ex- ecutives, July 12, 2002 ................................................................................. 241 Letter to Jack B. Grubman, Managing Director, Salomon Smith Barney, July 8, 2002 ................................................................................................... 243 Maloney, Hon. Carolyn B.: ‘‘Account-Ability: WorldCom may not turn Eyes from Ebitda,’’ Dow Jones Newswire, June 27, 2002 .............................................................................. 244 ‘‘Inflated Profits in Corporate Books is Half the Story,’’ Wall Street Jour- nal, July 2, 2002 ........................................................................................... 245 Sherman, Hon. Brad: SEC letter dated May 21, 2002 ....................................................................... 246 Sullivan, Scott: Arnold & Porter letter, July 8, 2002 ............................................................... 247 Arthur Andersen, 2001 Audit Plan and Proposed Fee Arrangements for WorldCom, June 6, 2001 ..................................................................................... 250 Arthur Andersen, Report to the Audit Committee of WorldCom Year Ended December 31, 2001 ............................................................................................... 268 Creative Accounting Chart ..................................................................................... 285 FCC Chairman Michael K. Powell, press release, June 26, 2002 ........................ 286 Salomon Smith Barney Research Report by Jack Grubman with clarification, June 21, and June 24, 2002 ................................................................................ 287 SEC press release of Sworn Statement of WorldCom pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934 ................................................ 292 State and Local Pension Plans (WorldCom Losses) Chart ................................... 297 WorldCom Insider Sales (1996 to Now) ................................................................. 298 WorlCom Minutes of the Regular Meeting of the Audit Committee of the Board of Directors, February 6, 2002 ................................................................. 299 WorldCom Minutes of the Regular Meeting of the Audit Committee of the Board of Directors, March 6, 2002 .....................................................................