WORLDCOM COLLAPSE COULD HAVE BEEN FORESEEN, STUDY SAYS

A research report released today suggests that billions of dollars of losses incurred by WorldComs employees and investors might have been avoided. By applying statistical tools of Six Sigma-a quality discipline adopted by corporate giants such as GE, Motorola and IBM-The Faltin Group, an upstate NY research and consulting firm, found that a new approach to financial monitoring could have detected WorldComs declining fortunes. The results suggest a new paradigm for financial reporting that could be adopted as the basis for future corporate oversight procedures by both internal auditors, and by outside analysts or regulators.

For Immediate Release

Contact:

Frederick W. Faltin, Managing Partner
The Faltin Group
Phone: 518-885-7071
info@FaltinGroup.com

WORLDCOM COLLAPSE COULD HAVE BEEN FORESEEN, STUDY SAYS
BALLSTON SPA, NY, Dec. 19, 2002 -- A research report released today suggests that billions of dollars of losses incurred by WorldComs employees and investors might have been avoided. By applying statistical tools of Six Sigma-a quality discipline adopted by corporate giants such as GE, Motorola and IBM-The Faltin Group, an upstate NY research and consulting firm, found that a new approach to financial monitoring could have detected WorldComs declining fortunes. The results suggest a new paradigm for financial reporting that could be adopted as the basis for future corporate oversight procedures. The implications are significant from Washington to Wall Street: corporate malfeasance need not go undetected. Incompetence and fraud manifest themselves if the right oversight methods are applied.

As we continue to work with the financial community", noted Frederick Faltin, Managing Partner of The Faltin Group, we see that the statistical tools that fall under the umbrella of Six Sigma Quality are ideal for detecting abnormalities in financial systems, as well as in manufacturing and service processes. In each case the tools are used to understand normal operations, and then to raise questions when unusual behavior is observed."

Whats new is the way the authors apply techniques from economics and finance in conjunction with the tools of Six Sigma. Over the last two decades, Faltin and his associates helped corporations apply statistical methods first to manufacturing and engineering businesses, and later, in service and financial companies. The synergies we observed between economics and statistics in service and financial applications," said Faltin, were the spark that led us to develop a new approach to monitoring financial reporting." The result is applicable by both internal auditors, and by outside analysts or regulators.

The techniques Faltin talks about are the type that the study shows may have foretold WorldComs collapse. Using publicly available data, the authors found that, starting in April of 2001, WorldCom management began to dramatically restructure its debt. In parallel, as early as 2000, the volume of new debt the company incurred skyrocketed. Investors enjoyed stock prices around $15 per share in mid-2001, when research indicates the companys financial mismanagement might have been detected. After WorldComs internal auditors finally surfaced problems in June, 2002, share prices fell to just 6 cents. The largest bankruptcy filing in US history followed, and government allegations of fraud have led to numerous civil and criminal charges.

Analysis of WorldComs debt could have signaled the companys failing financial health, and prompted an inquiry into its causes. Whats important for tracking any companys performance, according to Faltin, is that a rigorous system be in place for analyzing a comprehensive group of key financial measures, and for asking questions when unusual patterns arise. In WorldComs case, intervention might have led to management changes in time to save the firm from collapse, sparing shareholders the huge losses that ensued.
Copies of the full report are available upon request at info@FaltinGroup.com .

About The Faltin Group

The Faltin Group offers research, consulting, and implementation services in the application of quantitative solutions to a wide range of issues in business management. TFG collaborates with senior corporate leaders to identify and resolve strategic issues in quality management, transactional Six Sigma, and financial process optimization. Prior to founding The Faltin Group, Frederick Faltin was GEs Manager of Strategic Enterprise Technologies. He has published extensively, is a winner of the Shewell Prize of the American Society for Quality, is a Fellow of the American Statistical Association, and is Chair of ASAs Quality & Productivity Section.