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. Last Updated: 07/27/2016

WorldCom Follows Enron Path

JACKSON, Mississippi -- WorldCom Inc. spiraled toward the brink of bankruptcy after the long-distance giant reported that it disguised $3.8 billion in expenses in what appears to be one of the largest cases of accounting fraud ever.

With the stunning revelation, WorldCom became the latest in a line of companies to be struck by accounting scandals that have shaken public faith in corporate America.

WorldCom, the No. 2 U.S. long-distance carrier, said Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, thus not reflected in its earnings results.

That means the company may have actually lost millions of dollars when it reported profits. The Clinton, Mississippi-based company said it will restate earnings for all of 2001 and the first quarter of 2002.

"Our senior management team is shocked by these discoveries," said CEO John Sidgmore, who was appointed in April to replace Bernard Ebbers amid questions about the company's growth and finances.

WorldCom also announced Tuesday that its chief financial officer, Scott Sullivan, has been fired. In addition, the company said it would lay off 17,000 workers beginning Friday.

The news could be the final blow to WorldCom, which is reeling from a low stock price, a crumbling telecommunications market and a Securities and Exchange Commission investigation.

The accounting firm that audited WorldCom's financial statements during 2001 and the first quarter of 2002 was Arthur Andersen LLP.

Andersen said its work for WorldCom was in compliance with SEC standards.

The SEC said in a statement late Tuesday that WorldCom's disclosures "confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets."

The Washington Post, citing unnamed sources, reported Wednesday that the U.S. Justice Department had begun a criminal investigation.