Feature: Wednesday, May 16, 2002
Accounting for Anguish

By Gale Reaves

Kim Emigh didn’t particularly want to be the one to say no. His strict adherence to ethics had already brought him trouble at Worldcom. He’d had to change jobs within the giant telecommunications company to avoid bosses who didn’t appreciate his meticulous attention to their deals.

For years, he’d seen the limos provided by vendors arrive at the Worldcom’s Richardson offices to whisk a manager nicknamed Mr. Free Lunch away to dine at The Mansion or other exclusive restaurants, week after week. He’d witnessed first-hand the anger of executives when he questioned statements from their favorite subcontractors who were asking payment for, say, 10 workers who somehow had only five Social Security numbers among them. He’d had other managers ask him for advice on how to carry out corporate directives that he thought were unscrupulous.

But up until that day in December 2000, nobody had asked him to do anything that he believed would break the law. This time, he believed, what the company wanted him to do could be construed as tax fraud. He sent word of his concerns up the corporate chain, and the reply came back down: Do it anyway. Emigh, a budget and financial analyst with eight years experience in the telecom industry, and an excellent record at Worldcom, knew he couldn’t. And he feared he knew what would happen as a result.

Emigh (pronounced Amy) called a woman he knew near the top of the Worldcom pyramid, an assistant to Worldcom’s chief operating officer. Of course the directed actions were not Worldcom policy, she said — and indeed, the company did not put the changes into effect while Emigh worked there. She thanked him profusely for bringing the matter to her chief’s attention.

“I said, ‘Sue, I’ll get fired over this.’ She said, ‘Oh, nobody would do that.’ ”

No? Two months after Kim Emigh blew the whistle — internally — on the accounting impropriety, MCI Worldcom laid him off — the only full-time worker he knows of to be let go during that round of “reductions.”

When he came home that day and told his wife, Janet, the bad news, they both still held onto hope that MCI top brass would reverse the decision. Janet had a temporary secret from Kim — she was pregnant with their third child, but she wanted to tell him that news on a happier day. As it turned out, she couldn’t wait that long. Kim Emigh didn’t work again for 14 months — months during which he saw one job possibility after another disappear because, he believes, of what employers were told or not told when they called Worldcom for a reference. The couple nearly lost their house. They cashed in their children’s college funds to stay afloat, sold investments at rock-bottom prices, and scraped by with the help of family and friends. Emigh was weeks away from being vested in the Worldcom retirement program when the company let him go.

Emigh, now 44, fears he will never rebuild the financial security he was once able to offer his family. And he certainly will never forget the 14 months of fear in his kids’ eyes — especially the night he found his son crying in his bed, convinced that he and his sister would be taken away from Kim and Janet because he’d seen in a Disney movie that that’s what happened to poor kids.

When Emigh was let go, Worldcom was still a phenom, riding the wave of telecom growth that had crested in the late 1990s. Now he has a new job, but Worldcom is in a world of hurt. Its stock is selling at bargain basement prices; dealmaking CEO Bernard Ebbers, who has $366 million in unsecured loans from the company, has resigned. The company is under investigation by the Securities and Exchange Commission. Some analysts are predicting bankruptcy. Company officials deny the bankruptcy prediction but say they may have to sell assets or merge with another company.

Worldcom officials declined to comment on Emigh’s treatment or his allegations because he has filed suit against the company. His story of accounting improprieties — his judgment on that is backed up by several experts — may seem small potatoes compared to the company’s other woes. But it reaches close to the top of the Worldcom empire. Also, it seems to fit with a larger pattern of alleged questionable accounting that has resulted in the broad-ranging SEC investigation. His story sheds light on how, once again, the managers of a corporation with a giant presence in Texas may have put greed ahead of principles, leaving investors, customers, and straight-arrows like Kim Emigh on the losing end.

Worldcom, now one of the world’s largest telecommunications companies, was built as much by deals as by telephone switches and wireless signals. Formed as a long-distance phone service carrier in 1983 by a couple of Mississippi businessmen, the company over the years has merged with or acquired close to 70 other long-distance carriers, fiber optic networks, internet providers, and transmission companies. In 1997 it announced a merger with MCI Communications, in what was then the largest such transaction in history. Worldcom now serves customers in more than 65 countries, with local and long distance phone, internet, and wireless services. The company web site says it is the world’s largest provider of global data and internet services.

Emigh, who had built his telecommunications résumé with four years at Nortel and Ericsson, was originally hired in 1996 by MCI as a budget analyst in the company’s network systems deployment division, based in Richardson. He did business studies on multi-million-dollar switches and other equipment that the company engineers proposed, in order to decide whether they would be profitable investments, then oversaw procurement of the equipment. From the first year, he said, he saw things that troubled him, especially cozy relationships with vendors and loose controls over spending.

“Back then we had a ton of money. They used to say MCI was spending like a bunch of drunken sailors,” he said. “During the first year, the things I saw that troubled me were so commonplace, I thought, am I overreacting? They were so common it was like, ‘who cares?’ ”

After the merger with Worldcom, he said, policies became much stricter. But he still continued to see relationships and situations that troubled him.

In about 1998, Emigh was named team leader of a project to develop a new budget system. It landed him in the soup.

Emigh said the vendor that had the contract to develop the new system was one that several bosses were particularly chummy with — to the point that one Worldcom manager took vacations with a top official of the vendor company. “At first we were just getting exorbitant bills for not much product,” he said. “No one wanted to be involved with this. It looked to me like somebody was either getting kickbacks or we were pretty darned stupid.”

Worldcom was buying hardware as well as contract labor from the company; Emigh said the vendor would charge Worldcom for new equipment and provide used equipment, or deliver equipment without packing slips or in smaller amounts than invoiced. Many of the vendor’s employees involved in the contract worked off-site. That also raised red flags. Emigh said he learned that a bartender at a restaurant frequented by Worldcom and vendor employees was put on the project’s payroll as a contract worker, at a rate that amounted to $120,000 annually, for doing clerical work.

“I brought that up and I got reamed out,” Emigh said. Bosses agreed to correct the situation, but Emigh was told to keep his nose out.

Once, Emigh said, he was given a statement of work for the vendor’s contract employees that amounted to $250,000. “You’ve got 10 contract employees at about $25,000 each,” he said. “They listed them with Social Security numbers. It would say they were working off-site. However, several of the Social Security numbers were repeated on the list.” And of the 10, five were already registered with the company as on-site contract workers, being paid $10,000 a month. “They were getting paid twice,” Emigh said.

Again, he made no points with his bosses for questioning the expenditures. Shortly after that, Emigh found he had been left off a list of managers eligible for stock options. Even though a higher-level executive remedied that problem, Emigh saw the handwriting on the wall. “That was when I knew, I’ve got to get out of here,” he said. In July 1999, he was able to move to another section within Worldcom, where he was in charge of financial and business analysis for another part of the network systems division.

His old boss had a parting thought for him. “The last words he said to me were, ‘I’ll have your effing job.’ ”

By the fall of 2000, Emigh had been promoted five job grades at Worldcom. In four and a half years with the company, according to his performance evaluations, he had consistently exceeded his bosses’ expectations. He was making about $80,000 a year, not counting stock options that he’d been awarded.

Worldcom, on the other hand, once riding so high, was beginning to experience the same problems as other telecommunications companies. Their markets were leveling out; competition was growing increasingly fierce.

“What’s been happening on the technology side is that these companies had a massive party,” said telecommunications analyst Brian Modoff. “There was huge pressure to continue to meet” the zooming projections of earlier years. But rather than facing the fact that their business was slowing down, he said, some telecommunications companies began taking shortcuts — and using accounting practices to make themselves look better. In recent months, major players like Global Crossing, challenged on how they record their revenues, have also become the subject of SEC investigations.

In November 2000, Worldcom’s network systems engineering had already spent the money it had budgeted for capital expenditures for the year. Near the end of the month, a senior manager sent down word that the company should stop processing payments to network systems vendors and suppliers for the rest of the year. Emigh thought the order was wrong — that Worldcom was causing problems for companies that had already delivered merchandise — some of it worth hundreds of thousands of dollars — in good faith. When he heard of complaints from vendors, he sent them on to his bosses, with stiff comments about the company’s honoring “our legal and moral commitment.”

To Emigh, that was bad business. But it’s certainly not unheard of. The vice president of one computer company, whose salesman was among those pressing for payment on overdue bills at that time, said last week that Worldcom was not a bad customer — and that they’d had much worse problems getting paid by other giant companies.

Paying slowly also wasn’t illegal. But Emigh was convinced that the next request to come down from upper management was.

The directive came down on Dec. 12, 2000, from Frank Guckes, an accounting manager, but at the behest, his e-mail said, of Worldcom’s chief technical officer, Fred Briggs. The order, in essence, was for all labor associated with capital projects in the network systems division to no longer be charged to a capital project but to be booked as an expense. The e-mail also went to other divisions in the company.

Most non-accountants’ eyes glaze over at this point, but the distinction is one that can paint a false picture of a company’s financial situation. If money spent on labor is part of a capital project, it is part of an asset — not an expense. In the long run, if capital items are booked as expenses, it reduces a company’s net profit and, therefore, its taxes. It’s the opposite problem from one that investigators typically see — but still one that could have legal repercussions.

Emigh estimated that the directive could have affected $35 million in capital labor spending — and possibly much more, depending on what was done in divisions outside his own.

A forensic CPA, a former SEC investigator, and a securities lawyer all said that what Worldcom was asking Emigh and other managers to do was, at the very least, improper.

If the facts presented by Emigh are true, said CPA Scott Barnes of Dallas, “this was a very disturbing attempt to override internal controls” in Worldcom. “As a forensic accountant, these are definitely the indicia of intended fraud.” The criteria for fraud — that a company was going to make material false statements that it knew to be false, and which, if relied on by potential investors, could have damaged the investors — are present, he said.

Emigh’s position, Barnes said, “is the appropriate one. The last thing you want to do is mischaracterize capital expenses or to shield actual transactions from management. Depending on the dollar figure, this could have been material to [Worldcom’s] bottom line.” If the directive had been carried out, and the improper accounting not fixed, he said, Worldcom’s taxes could have been reduced. The high level from which the directive originated makes it even more serious, he said.

Carr Conway, a former SEC investigator now with the Dickerson Financial Investigation Group in Colorado, said the directive, if it had been carried out, could also have drawn interest from the SEC because the Foreign and Corrupt Practices Act requires American companies to keep accounts that accurately depict a company’s transactions. “What they were asking him to do was to misclassify entries into the books,” he said. “Certainly the SEC would be interested in that.”

Investors apparently have Emigh to thank for the policy not going into effect. He voiced his objections to it but, again, was told to implement it anyway. Not wanting to get his immediate bosses in trouble for questioning the orders of their superiors, Emigh went around them. He called Sue Dean, an assistant to Ron Beaumont, Worldcom’s chief operating officer, and told her of his concerns. The following day, another e-mail went out saying that the new policy would not be implemented “until we receive additional clarification.”

A few minutes later, Sue Dean sent Emigh an appreciative e-mail. “On behalf of myself and corporate accounting, I want to thank you for making us aware of this,” she wrote. “I checked with corporate accounting to be sure there was no corporate directive and that our ‘gut’ senses were correct.” She then set the ball rolling “to notify the field that it was totally unacceptable not to pay for items received, and that capital should be capitalized.”

“The only way we will succeed as a company is for the right corporate decisions to be made and I appreciate your knowing what they are and letting us know when it appears otherwise,” she said.

Apparently, not everyone appreciated it. The same day, Emigh got another e-mail from Mike Smith, the director who had once threatened to get Emigh fired. Smith asked if he knew who had told Sue Dean about the directive. Emigh — maybe as straight an arrow as Worldcom had ever seen — admitted that he had been the one.

“The next morning when I got to work I had had a page” from Bob Spry, one of his immediate superiors. Spry told him he had committed an infraction by not carrying out the directive on capital labor. He told Emigh that Joe Cook, a senior vice-president, was ordering that he be formally reprimanded and punished.

“I was told, ‘Joe Cook is going to get you.’ ”

He went home and told Janet, “This is going to be bad. But I have a responsibility to the shareholders and to myself.”

Emigh had assumed that, like the first time he had riled superiors by pointing out accounting problems, he could solve his problem by simply moving to another job within Worldcom. Near the end of January, he asked his immediate boss whether he thought the current anger against him would blow over. “He said, ‘Prepare for the worst.’ I said, ‘Oh, am I going to get fired?’ He just nodded.”

On March 2, 2001, 10 weeks after blowing the whistle, Emigh was notified that he was being laid off. He said that, as far as he has been able to find out, he was the only full-time worker and certainly the highest-level manager affected by the move — all the other laid-off employees he heard about were part-time, contract or clerical workers.

Worldcom said the 375 workers laid off at the Richardson office were part of a company-wide restructuring that affected about 3,700 workers, including employees at all organizational levels.

The layoff began the worst 14 months of their lives for Emigh and his family. On several occasions, Emigh was called back for repeat interviews on jobs and then — as soon as the prospective employer checked his references with Worldcom — was told the job had been given to someone else. Several times, recruiters told him that Worldcom simply would not return phone calls — an odd attitude for a company that allegedly let Emigh go for reasons unrelated to the quality of his work.

One possible job was with a company where a member of his church worked. Emigh went back for follow-up interviews. Then he got a phone message from the new company’s recruiter. “We’re having no luck” getting Emigh’s ex-boss at Worldcom to call back, the recruiter said. Another possible job down the tubes.

Janet was newly pregnant and hadn’t worked since their oldest child, Caitlyn, then about 8, had been born. With no employer to kick in a share, the costs for health insurance — even more important with Janet’s pregnancy — went through the roof. At one point, Emigh even applied for a job as a garbage collector, but the company wouldn’t hire him because he was overqualified. Money the couple had saved to buy a piece of land in Arkansas, where Janet’s family lives, went first. College funds for Caitlyn and her younger brother Luke had to be sacrificed to meet mortgage and utility payments and keep food on the table.

As the rejections piled up, the financial stress turned into personal stress. Neither of the adults could sleep: Kim would get up in the middle of the night to surf the employment sites on the internet looking for a job. He’d find Janet up before him, walking the floor.

“I’d find myself getting up in the middle of the night and just bawling,” Janet said. During the days, “I did a masterful job at hiding my feelings. Kim was here every day, all day. I had to keep up a façade. I couldn’t say anything to him or the kids.” She had no appetite, but with the baby on the way she forced herself to eat. “I had to take notes just to make sure I ate what I needed for the baby. I felt sometimes like I was just eating cardboard,” she said. At one point, late in her pregnancy, she actually started to lose weight.

The kids understood why they couldn’t go out to eat pizza with their friends after soccer games any more, and knew not to complain for fear of hurting their dad’s feelings. Luke, who was 6 when his father lost his job, began to have a series of allergic reactions so serious that at one point his throat swelled shut. “It’s been way too long, Daddy. You need to get a job,” he told Kim at one point.

Janet said she “ran a lot of interference” with the kids, letting them know with a look if something they were about to say would upset Kim. “You could make him feel bad so easily,” she said.

The terrorist attacks of Sept. 11 added another depth to their misery. Already having to sell investments, the Emighs found they had to sell at fire-sale prices in the recession that followed, because they had no other choice.

Then there was the night that Emigh walked into his son’s room and found him crying in bed. Luke told his dad that he was scared about being taken away from Caitlyn and his parents. He’d just watched a television show in which the kids from a poor family were farmed out to different foster homes.

“I hugged him and told him, ‘Son, nothing will ever separate us,’ ” Emigh said. He can barely tell the story without crying himself.

With help from both their families, and from friends, they kept the mortgage paid and the lights on. Janet’s mom told her she was putting a little something in Janet’s purse for gas money — but it turned out to be $1,000. After baby Mirana arrived in November, one of Janet’s sisters “single-handedly kept us in diapers,” Janet said.

“I tell you what, through this whole thing, if you didn’t believe in God at the beginning, you sure would by the end,” she said. A “secret Santa” bought gifts for their children at Christmas. At one point when they were close to losing the house, a $1,000 payment arrived unexpectedly in the mail — partial restitution, paid through the county, by a young man who had burglarized their house five years earlier. And then Janet’s brother, who had lived with the couple for a few years early in their marriage, told her that he would help them with the house payment, for as long as they needed. “It was just wild, the things that get you through,” she said. “You’re always on the very edge.”

A month ago, Emigh found a job as a comptroller of accounts for a company that provides facilities services such as building maintenance, uniforms, and food service. He had the same reference problems with Worldcom as he did in other interviews, but his new boss told him, “I’ve hired hundreds of people, and I think I can tell whether to hire you without references.”

Emigh rushed home to tell Janet the news. At 9 a.m., standing in their kitchen, they found a bottle of André champagne in the refrigerator and popped the cork to celebrate.

The new job pays about $60,000 — good money, but substantially less than his old salary, and it involves a lot of traveling. In a month’s time, he said, he’s spent more time away from his family than he did in the preceding 11 years combined. Still, he said of the job, “it’s a miracle that I got it.”

The Emighs are friendly, low-key people. But when they start talking about the price they believe they and their children have paid because Kim stood up for what he believed in, the bitterness tumbles out in a rush of words. They have a “mountain of credit card debt” — tens of thousands of dollars’ worth — to pay off, and feel as though, in their 40s, they are starting over again financially.

“Your kids have been through what you’ve been through. You can never go back and be the person you were prior to it happening,” Janet said. “The things that happened have changed you.

“I look at businesspeople now and wonder if they’re destroying people’s lives like these couple of men did ours. Am I the first person they destroyed the lives of? I’ve so badly wanted to walk up to them and put the pictures of my three children in front of them and say, do you feel good about destroying their lives, for nothing? For nothing.”

Talking about what the months of unemployment did to his kids reduces Emigh to tears. But most of the time, it’s not easy for outsiders to tell how overwrought he has been. Out of town during his first week on the new job, he threw up every night in his hotel room. “I’m like a duck sitting on a pond, but paddling furiously beneath the surface,” he said.

When Worldcom laid off Kim Emigh, they offered him a severance package that totaled about $7,000 in take-home pay. Emigh was outraged at his treatment and knew he wanted to sue. But it wasn’t easy, at first, to find a lawyer to represent him. Fearful he would end up with zilch if he didn’t find an attorney, Emigh signed the agreement not to sue, which was a requirement for receiving the severance check. When attorney Bob Goodman agreed to take the case, Emigh revoked the agreement — well within the 45-day period allowed by law, Goodman says, and perhaps, depending on who is counting, within the 21-day limit that Worldcom argues is the rule. Thus far, the company’s defense to the lawsuit has addressed only the question of whether Emigh gave up his right to sue. A hearing has been set in Dallas state district court for May 20.

Goodman and other attorneys say that, under some conditions, an ex-employee in Emigh’s shoes would be entitled to accept severance and sue anyway. But, despite his family’s at-times desperate need for money, the Worldcom check is still sitting on top of Emigh’s refrigerator, uncashed. “Someday when I step up in front of a judge, I want to be able to say, here’s the check,” he said.

Emigh is asking for $35 million in actual and punitive damages against Worldcom. If he gets a judgment, he said, he will keep enough to pay for the actual value of his lost wages and stock options. The rest, he said, he’d use to “start a nonprofit group that protects the rights of whistleblowers and decent working people.” (Whistleblower statutes protect only people who work for government agencies, not private employers.)

Even if Emigh won a judgment for every cent he’s seeking, Worldcom has much bigger worries these days — but springing perhaps from similar sources.

“The larger picture for Worldcom and MCI is that they are in a business that is in trouble and getting worse,” said Pat Brogan, a telecom analyst with the Precursor Group, an investor-side research firm. “The economics of the industry are miserable. The spotlight being shined on its accounting practices is putting a drag on the industry. A lot of the growth and hype that was surging the industry in the late ’90s may have been fueled by accounting practices.”

The SEC in March asked Worldcom for an unusually broad range of documents going back to January 1999, including documents having to do with the $366-plus million in loans to Ebbers. A New York Times story noted that the agency “appears to be looking into many of the business practices that helped Worldcom emerge from obscurity,” including deals that were completed using the value of Worldcom’s high-flying stock.

Scott Cleland, CEO of the Precursor Group said the SEC investigation of Worldcom appears to be quite serious. “Generally, when an SEC investigation goes to the subpoena stage, the SEC believes it has enough of a case that all it needs to do is collect the detailed evidence to back up that case. That’s what’s going on right now. They did the subpoena because they wanted to make sure there wouldn’t be destruction of documents or obstruction of justice. If you read the SEC letter, it is frighteningly specific. The agency obviously has informants that are saying, ‘Look right there.’ It is not going to go away any time soon.”

The company posted the SEC’s letter on its web site, along with a statement that the company believes all its policies and practices to be in compliance with accounting standards and laws and that it intends to cooperate with the inquiry.

Worldcom’s stock has lost close to 95 percent of its value since it peaked in 1999. Cleland said Worldcom’s longer-term bonds are currently trading “at a level that suggests the market believes that they are at risk of bankruptcy.

“The market is saying that, in 2003 or 2004, Worldcom is going to have a day of reckoning.”

That’s the same thing Kim Emigh wants.

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