Jackson, Miss. ? WorldCom Inc., the nation’s No. 2 long-distance company, slid toward bankruptcy Wednesday after disclosing what could be the biggest case of crooked accounting in U.S. history. President Bush vowed to “hold people accountable” and federal regulators filed fraud charges against the company.

The faulty accounting, disclosed late Tuesday, is the latest in a series of corporate bookkeeping scandals that have shaken investors’ faith. The news sent telecommunications stocks and other shares plunging before a late rally on Wall Street.

Bush said he was “deeply concerned” about some of the accounting practices in corporate America and called “outrageous” the disclosure that WorldCom which is $32 billion in debt had hidden $3.8 billion in expenses.

“We will fully investigate and hold people accountable for misleading not only shareholders but also employees,” Bush said at an economic summit in Alberta, Canada.

Bush said the Securities and Exchange Commission would investigate, and the Justice Department could step in. The SEC had already been looking into lending and accounting practices at the Mississippi-based company, which owns the MCI telephone company.

SEC Chairman Harvey Pitt said the agency had filed fraud charges against WorldCom in federal district court in New York. He said the filing was intended to prevent both the destruction of documents by WorldCom and payouts to WorldCom executives past or present.

‘Undeniable setback’

In a taped Webcast on Wednesday, WorldCom chief executive John Sidgmore called the accounting disclosure “a shock” and “an undeniable setback.”

“This has been a very tough week for WorldCom, there’s no doubt about it,” said Sidgmore, who replaced ousted WorldCom founder Bernie Ebbers in April.

Sidgmore said he had met Tuesday with WorldCom’s key lenders in New York and that the company would continue cost cutting. He did not mention a possible bankruptcy filing.

Analysts said WorldCom could declare bankruptcy within the week as lenders call in millions in loans. WorldCom said it will start laying off 17,000 people about 20 percent of its global work force on Friday in hopes of saving $900 million per year.

“If loans are called, in order to avoid an immediate shutdown, leaving lots of customers in the lurch, they’d have to file for bankruptcy,” said Alec Ostrow, a partner in the bankruptcy law firm of Salomon, Green & Ostrow in New York.

Assigning blame

In a statement Tuesday, WorldCom said its board of directors had found $3.8 billion was wrongly listed on its books as capital expenses in 2001 and 2002. That means WorldCom may have actually lost millions of dollars when it reported profits.

The company has fired Scott Sullivan, its chief financial officer. Sullivan could not be reached for comment; his telephone number in Boca Raton, Fla., was not published. The company also said it has accepted the resignation of David Myers as senior vice president and controller.

Arthur Andersen, which was WorldCom’s accountant during the five quarters in question, said its work was in compliance with SEC standards. It suggested Sullivan was to blame and said important information was withheld from auditors.

Andersen was convicted in early June of obstructing justice in a case involving former oil giant Enron Corp.

WorldCom’s fall comes amid a rash of corporate scandals, from Enron to Tyco International, Global Crossing and Adelphia Communications, which filed for bankruptcy Tuesday.

The SEC said WorldCom’s disclosures confirm the existence of “accounting improprieties of unprecedented magnitude.”

Mississippi Atty. Gen. Mike Moore said his office had directed WorldCom to preserve all documents related to the audits and advise its auditor to do so as well. KPMG is WorldCom’s internal accounting firm.

Mounting debt

WorldCom, second only to AT&T in the long-distance market, started as a small long-distance company but grew through acquisitions over the past 15 years. Two years ago, that growth stopped when regulators blocked WorldCom’s proposed $129 billion merger with Sprint Corp.

In April, chief executive Bernard Ebbers resigned amid mounting debt at WorldCom and questions about $408 million in loans the company gave him.

Rick Black, analyst for Blaylock & Partners in New York, said the latest disclosures raise further suspicions about Ebbers.

“The people who were running the company prior to this should know what’s going on,” he said. “If the CFO knows, the next question people are going to ask is what did Bernie Ebbers know, and of course they’re going to ask what did the board know.”

Ebbers could not be reached at home and did not immediately return calls to his office.

In an interview after his ouster, Ebbers told a TV station: “Our accounting, to the best of my knowledge, is absolutely clean.”