£2.7bn fraud hits world shares

FINANCIAL markets were in turmoil today after telecoms firm WorldCom confessed to what could be the biggest-ever accounting scandal. The US giant's admission that it had misreported $4bn (£2.7bn) of spending sent share prices plummeting, dwarfing even the Enron accounting fraud which has rocked the American political and financial establishment.

In the City, the FTSE 100 index of blue-chip shares fell 100 points at 4531.0.

WorldCom's auditors were, like Enron's, Andersen. This latest scandal is bound to have a similar effect and could lead to bankruptcy for the former $200bn company. The fraud involved WorldCom inflating its profits on paper by improperly recording $3.8bn of operating expenses as capital spending. The effect was to increase its cashflow and profit margins.

British financial institutions are owed several hundred million pounds by WorldCom. Royal Bank of Scotland, which owns NatWest, is believed to be one of the largest lenders, with an exposure of about £100m. Other banks, including Lloyds TSB, HSBC and HBOS, described their exposure as 'minimal'.

WorldCom, which will now have to report much lower profits for the last two years, fired its chief financial officer Scott Sullivan late last night. Vice-president and controller David Myers resigned. American watchdog the Securities and Exchange Commission ordered WorldCom to file a detailed report. It said: 'The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets.'

Analysts believe that WorldCom could be forced into bankruptcy, with debts of more than £20bn. The firm once installed the hotline between the White House and the Kremlin but had recently come to symbolise all that has gone wrong with the telecoms sector as it grew by aggressive acquisitions, under the leadership of brash chief executive Bernie Ebbers. He was forced out two months ago. The SEC was already investigating loans made by WorldCom to Ebbers said to be worth about £251m.

The firm also said it would fire about 17,000 staff or 28% of its workforce, starting on Friday. It employs 4,000 across the UK but a spokeswoman was unavailable to say how the cutback would hurt British staff.

The news broke after Wall Street had closed for share trading. But the US dollar reacted by falling to a 28-month low against the euro. WorldCom shares were trading after hours at only 35 cents compared with 83 cents at the close of the US stock markets on Tuesday night. They have lost more than 95% of their value in a year.

WorldCom's chief executive John Sidgmore, who took over from Ebbers at the end of April, said: 'Our senior management is shocked by these discoveries.' Gordon Brown moved to ease the fears today, arguing that the foundations of the global economy were strong, despite the latest 'difficulties'.

The Chancellor, questioned on the BBC's Today programme, said world growth was strengthening and the problems of individual companies, however large, should be seen in that context. He also said that tighter regulations were being put in place in Britain and around the world to avoid a repeat of disasters like the Enron affair.

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