Government Operations:

GSA Actions Leading to Proposed Debarment of WorldCom

GAO-04-741R: Published: May 26, 2004. Publicly Released: May 26, 2004.

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William T. Woods
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On June 25, 2002, WorldCom, Inc., announced its intention to restate its financial statements for 2001 and the first quarter of 2002, reducing previously reported earnings by nearly $4 billion. WorldCom's announcement sparked a series of investigations by the Securities and Exchange Commission (SEC), the Department of Justice, and WorldCom's Board of Directors, among others, and eventually resulted in criminal charges against six of its corporate officials. WorldCom filed for bankruptcy protection in July 2002, and, over the next several months, announced restatements for additional periods. On July 31, 2003--over a year after WorldCom first announced its intention to restate its earnings--the General Services Administration (GSA) formally proposed the company for debarment, making the company ineligible for future government contracts. When WorldCom consented to a 3-year administrative agreement allowing GSA to continue monitoring the company's conduct, GSA terminated the debarment proceedings on January 7, 2004. House Report 108-243, which accompanied the Transportation, Treasury, and Independent Agencies Appropriations Act, 2004, required us to review the actions GSA took between WorldCom's June 2002 announcement and GSA's July 2003 decision to propose the company for debarment. We agreed to (1) identify the GSA offices involved and the actions they took and (2) describe the sources of information on which GSA relied in considering WorldCom for debarment.

Two GSA offices gathered information related to the WorldCom case at different times during the year leading up to the July 31, 2003, decision to propose debarment. The Office of General Counsel monitored events related to WorldCom's financial irregularities for nearly a year, but General Counsel officials did not believe they had sufficient information to make a recommendation to GSA's suspension and debarment official. In May 2003, after WorldCom and the SEC proposed to settle the civil suit the SEC had filed concerning the company's financial irregularities, GSA's Office of Inspector General began an independent review. In June, the Inspector General recommended that the company be made ineligible to receive federal contracts. GSA's suspension and debarment official subsequently determined, based on additional information he received from WorldCom executives, external auditors, and a court-appointed official, that the company was not a responsible contractor as defined by the FAR. On July 31, 2003, he proposed WorldCom for debarment. GSA's General Counsel and Inspector General offices obtained publicly available information about WorldCom. GSA obtained limited access to nonpublic information collected by Justice and the SEC. GSA's access to information collected by Justice was limited due to constraints associated with an ongoing criminal investigation. GSA obtained limited information from the SEC, such as the extent to which WorldCom was cooperating with the SEC's investigation.

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