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Id., page 4 (Emphasis added, bracketed material added). Sullivan admitted that
the Line Costs had been capitalized and provided his explanation for the
accounting treatment. Sullivan also stated that there may have been a “transfer of
line costs to capital accounts in the first quarter of 2001 as well.” Id., page 5. In
preparation for the meeting, Sullivan had prepared a White Paper setting forth his
justification for capitalizing the Line Costs.
120. On June 21, 2002, “Sullivan confirmed that the capitalization of lines
costs extended back into the first quarter of 2001.” Ibid. The company realized
that it would have to restate its financial statements for 2001 and the first quarter
of 2002.
B. The Internal Audit Discovers that WorldCom Executives
Intentionally Inflated the Revenues
121. Cooper and others continued the investigation and discovered further
information about the fraudulent scheme.
122. According to Internal Audit Correspondence dated June 24, 2002,
WorldCom accountant Troy Normand, “stated that he believed the reason line
costs began being capitalized in 2001 is that there was no more room to further
reduce the liability account. Troy stated that he believed the relief of the line cost
liability account was aggressive accounting and contemplated resigning in 2000.
He also stated that he believed the prepaid capacity entries were wrong and went
beyond aggressive accounting.”
123. The memo states that Normand went to his superiors at WorldCom
who told him that everything was proper. Specifically, in the third quarter of
2000, Normand went to Sullivan to express his concerns relating to the Line Cost
accruals and that Sullivan assured him that everything would be okay. He also
went to David Myers in 2001 about the prepaid capacity and also expressed these
concerns to Betty Vinson and Buddy Yates.
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COMPLAINT