Billions in WorldCom contracts with agencies could be in danger

Just two months ago, the Defense Department awarded a key contract to telecommunications giant WorldCom after concluding that Global Crossing, the previous choice to win the contract, was "financially irresponsible." This week, after WorldCom announced it had improperly accounted for $3.9 billion in expenses this year-a potential fraud that President Bush denounced as "outrageous"-Defense officials said they would conduct a "detailed legal analysis" of the contract. WorldCom's accounting practices had come under scrutiny by the Securities and Exchange Commission in March, a month before it won the $450 million contract to operate a high-speed classified research network. A spokeswoman for the Defense Information Systems Agency, which awarded the contract, said Thursday that officials became aware of WorldCom's financial situation only after reading press accounts Monday. On Wednesday, the SEC charged WorldCom with defrauding investors. Analysts have said WorldCom will soon have no choice but to file for bankruptcy protection. WorldCom's contract, known as the Defense Research and Engineering Network (DREN), was originally awarded to Global Crossing in July 2001. However, the Defense Department nullified that award after the losing bidders protested that Global Crossing failed to meet security requirements specified in the agreement. Five months after the contract was canceled, Global Crossing filed the fourth-largest bankruptcy in U.S. history. Defense then opened a second round of competition, but disqualified Global Crossing. Asked why the department would make the award to WorldCom when its financial practices were in question, the spokeswoman said only, "Financial responsibility is a determination made by the contracting officer prior to award of a contract." WorldCom also holds one of the largest civilian contracts in the government, to provide long-distance telephone and data service. The contract, known as FTS 2001, is managed by the General Services Administration and is worth $11 billion. WorldCom shares the contract with rival firm Sprint. Asked whether GSA plans to reevaluate WorldCom's position on FTS 2001, a GSA spokeswoman said the agency "is confident that long-distance service provided by WorldCom to government customers will continue….GSA has been in contact with WorldCom and has received assurances that-despite recent events-it will continue to deliver service." GSA officials will continue to monitor the company, the spokeswoman added. The past year's tumult in the telecom industry has shown that the government has several contracts with companies that have engaged in suspicious accounting practices or had other financial difficulties. In addition to WorldCom and Global Crossing, the government holds contracts with Qwest Communications, which is being investigated by the SEC for how it accounted for $1.4 billion in sales of its fiber-optic network to rival companies. Telecom firm Winstar, which sued the federal government in 1998 for the right to sell local phone service to agencies, filed for bankruptcy in April 2001. The company still serves its federal clients. The government's involvement with unscrupulous contractors extends beyond the telecom industry. In 1999 the Army awarded a contract to Enron's Federal Solutions division to manage the utilities of a base in New York. The Army was in the process of handing over control of the utilities when Enron went bankrupt after revealing it had grossly inflated its revenue through various accounting schemes. Defense Department Comptroller Dov Zakheim said Thursday, "This is not the first time in the history of the Department of Defense that contractors of various kinds have gotten into difficulties." Zakheim said he was "reasonably confident" that WorldCom will be able to continue its services to the department. A White House spokeswoman traveling with President Bush in Canada said, "The government takes its responsibility very seriously to ensure that taxpayer dollars are spent wisely." She noted that in the wake of the Enron scandal, the Office of Management and Budget ordered a review of the government's contracts with both Enron and its accounting firm, Arthur Andersen, which was found guilty of obstruction of justice this month for shredding documents related to its work for Enron. WorldCom officials didn't respond to requests for comment.
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