WorldCom shocks felt north of border

Canadian customers of troubled telecommunications service provider WorldCom Inc. don’t have to unplug their networks, but they would do well to have a contingency plan, according to one telecom analyst.

WorldCom Inc. announced June 24 that it will restate its financial results for 2001 and the first quarter of 2002 as a result of accounting irregularities and has terminated its chief financial officer (CFO), Scott Sullivan. It will also continue with its previously announced plans to save US$900 million by reducing its workforce by 17,000, beginning June 28.

“There’s a number of ways this could go, so quite frankly a lot more dominoes have to fall before we really know what is going to transpire. But when you lay off 20 per cent of your staff will your quality of service decline? It will to some degree – that’s without question,” said Elroy Jopling, Toronto-based principal analyst with Gartner Dataquest.

Deborah Brown, a Toronto-based spokesperson for WorldCom Canada Ltd., said on June 26 that it was too early to say how this announcement would affect the company’s 300 Canadian employees.

“At this point we can’t make any comment. For us it’s business as usual,” Brown said.

According to WorldCom’s statement, certain transfers from line cost expenses to capital accounts during 2001 and the first quarter of 2002 were not made in accordance with U.S. generally accepted accounting principles (GAAP). The transfers totalled US$3.05 billion in 2001 and US$797 million in the first quarter of 2002, essentially inflating a common measure of its earnings by nearly US$4 billion over the last five quarters.

In late April, WorldCom President and CEO Bernard Ebbers resigned in the face of mounting debts, a U.S. Securities and Exchange Commission (SEC) investigation and layoffs.

“The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets,” the SEC said in a statement released Wednesday.

In the Canadian telecom sector, Jopling said, “The only people that might win in an environment like this are Bell (Canada) and Telus (Corp.)…, but I don’t think any of them want to see the market continually bombarded with bad news.”

And all customers, even those dealing with the apparently “rock-solid” Bell or Telus, have to become a little more short-sighted in their plans, Jopling said. For example, buyers may decide to ink one-year contracts instead of five-year ones, he added.

“This [WorldCom announcement] is definitely a negative sign. It’s just a case where, to put it mildly, you don’t want to see it happen to the industry.”

Jeff Kagan, a telecommunication industry analyst based in Marietta, Ga., said that since the networks are already in place, WorldCom customers are likely to be untouched by this announcement.

More than a service issue, Kagan said this announcement “is an issue about trust (and) a big blow to the public perception.…They’re not going to be able to brush it off.”

The disclosure is “huge,” but “the event itself is not fatal,” Kagan said. “The question is, what chain of events will it trigger?” he asked.

“Whether they go into bankruptcy or not, the network isn’t going to turn off,” said Jeff Phillips, director of consulting at market analysis firm TeleChoice Inc. “I don’t think it’s going to have any impact in terms of service disruption.”

What may be disrupted, however, is the rollout of new services and network expansion, he added.