House subpoenas WorldCom executives

A committee of the U.S. House of Representatives has voted to subpoena current and former WorldCom executives for a July 8 hearing on the company’s alleged accounting fraud.

The House Financial Services Committee will issue subpoenas to Bernard Ebbers, former CEO of WorldCom, John Sidgemore, the company’s current president and CEO, Scott Sullivan, former chief financial officer, and Jack Grubman, a Solomon Smith Barney analyst who was among the company’s most vocal proponents.

The subpoena is just the latest development in this fast-moving scandal, which came to light after the markets closed on Tuesday. At that time it was reported that WorldCom had improperly recorded operating expenses as capital expenditures. The method in which these two costs are accounted for allowed the company to artificially inflate its revenue.

Shortly after the story broke, the company came out with an official announcement acknowledging accounting irregularities to the tune of $3.8 billion over the previous five quarters, all of which must now be restated.

According to WorldCom, the irregularity came to light during an internal audit. The Board of Directors’ audit committee was told and that committee reported the problem to the Securities and Exchange Commission. In the wake of these revelations, WorldCom dismissed Sullivan and accepted the resignation of David Myers, senior vice president and controller.

By the tone of statements coming out of Washington, the subpoenaed executives can expect a difficult line of questioning at the hearings. “These alleged short-term gains created by the executives are going to cause long-term pain for the WorldCom families,” said a statement from Committee Chairman Michael Oxley, a Republican from Ohio.

But a tongue-lashing may be the least of problems for some of those involved. President Bush has called the revelations “outrageous” and said those responsible would be held accountable. U.S. Treasury Secretary Paul O’Neil said executives who certify improper financial reports should go be incarcerated.

At least one analyst agrees that prison could be in the future for those involved. “This is criminal fraud,” said Scott Cleland, CEO of the Precursor Group. “People are likely to do jail time.”