NEW YORK -- WorldCom's former finance chief testified yesterday that he warned CEO Bernard Ebbers at a 2001 dinner meeting that accountants would have to classify expenses as assets to meet Wall Street expectations.
Scott Sullivan told jurors at Ebbers' fraud trial that he informed Ebbers ''that it wasn't right, that it was a shortcut to earnings."
''Did Mr. Ebbers tell you not to make the shortcut adjustment that you had proposed?" federal prosecutor William Johnson asked. ''No, he did not," Sullivan answered. He said Ebbers responded by saying WorldCom had to get its revenue going again.
Soon after, WorldCom accountants covered up more than $700 million in expenses for first-quarter 2001 by classifying them as capital expenditures, treating regular operating expenses as long-term investments in the network. Such investments raise the value of a company's assets and the expense is deducted over time as the asset ages. The procedure was a shift from the previous two quarters, when the accountants had simply been hiding expenses by drawing on reserve accounts.
Sullivan, who has pleaded guilty in the $11 billion WorldCom scandal, was testifying for a third day as the star government witness against Ebbers, who is accused of orchestrating the fraud.
When Sullivan eventually showed Ebbers a revised income statement for the first quarter of 2001, he said Ebbers asked ''how we were doing it" and said: ''We have to hit our numbers for this quarter." The remark has become a familiar refrain in the trial. Prosecutors say Ebbers was bent on making sure WorldCom revenue and earnings figures met Wall Street estimates to keep its stock price high.
Sullivan also said Ebbers ordered disappointing language removed from a February 2001 news release that announced fraudulent earnings figures. An original draft of the release said WorldCom expected 2001 revenue growth of 12 percent to 15 percent, with first-quarter figures ''at or below" that range. He said Ebbers ordered the ''at or below" removed.