Welcome to the Vital Integrities Blog

MCI/WorldCom's Interpretation of "Management Foresight"

MCI, formerly known as WorldCom before its infamous $11 billion accounting , announced this week payments totaling $331 million to sixteen states and the District of Columbia to settle tax fraud lawsuits. These settlements follow the company's similar agreement with Mississippi for $118.2 million, and precede a likely resolution with South Carolina. The states accused MCI of operating a four-year sham intended to avoid paying state taxes.

Here's how the scheme worked: Designed by MCI's accounting firm KPMG, the plan's objective was to shift income received from MCI's subsidiaries in various states to its subsidiaries in states with more favorable tax rates. From 1999 to 2002, MCI reduced some subsidiaries' taxable income by charging them royalties, which it cleverly called "management foresight" fees. The subsidiaries deducted those royalties from state taxes as business expenses, greatly reducing their tax liability in their states. Then, MCI illegally allocated income from the fees to subsidiaries in states that exempt royalties from taxation. In all, MCI hid over $20 billion in taxable income.

Under the settlements, MCI avoids admitting any wrongdoing. Instead, the company would like us to believe it's doing everyone a favor. "These agreements benefit MCI and the states alike by enabling us to put this issue behind us in a fair and equitable manner," said MCI's Carol Ann Petren. MCI seems to have a strange perception of fair and equitable. "Early on the company only offered us $1.5 million," said Georgia revenue commissioner Bart Graham. Georgia's portion of the final settlement is $39.7 million.

MCI settled the lawsuits just in time. Verizon has offered to acquire MCI for $8.46 billion--with a catch: MCI must resolve the state litigations before the merger. With that hurdle removed, MCI shareholders can now approve the acquisition when they vote October 6.

But there was perhaps a bigger motivation behind the settlements. Verizon's offer price was contingent on the amount it cost MCI to resolve the state litigations. Not surprisingly, state investigators say the settlements allow MCI to pay less than eighty cents for every dollar of avoided tax liability.

The best definition of foresight is prudent care in providing for the future. MCI confused foresight with deception, and substituted prudence with recklessness. When its shareholders vote this week to turn the scandal-plagued company over to Verizon, ethical business people--and tax collectors--everywhere will say, "Good riddance!"
Bookmark this post on del.icio.us

Vital Integrities Blog - Blogged