News Analysis: Corporate Scandals Hit Corporate America

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Last updated at: (Beijing Time) Tuesday, July 09, 2002

News Analysis: Corporate Scandals Hit Corporate America

Corporate America, long portrayed as the most efficient and credible business model in the world, is facing an unprecedented faith crisis after a wave of accounting scandals in recent months.

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Corporate America, long portrayed as the most efficient and credible business model in the world, is facing an unprecedented faith crisis after a wave of accounting scandals in recent months.

American stock markets have touched their lowest levels for months as investors were frightened by a series of revelations of corporate malpractice and number fiddling. Investors inside and outside of America are asking the same question: will the scandalsnever end?

Endless Scandals

What started with an admission of false profits by Enron has rapidly triggered off a rout of some of the best-known names on Wall Street.

In just a little over 15 years, Enron grew into one of the largest companies in the U.S.. It embraced new technologies, established new methods of trading in energy and seemed to be a shining example of successful corporate America.

But the company's success was based on artificially inflated profits, and dubious accounting practices. Last December, Enron collapsed and became the biggest company bankruptcy in U.S. corporate history.

A few months later, WorldCom Inc, America's second biggest long-distance service provider, appeared as one of the largest accounting frauds in history. Enron overstated its profits by 600 million U.S. dollars, WorldCom's fiddled figures are six times as big.

Compared with Enron's complicated off-balance-sheet trick, WorldCom's dodge was relatively simple. In 2001 and 2002, the company pretended that 3.8 billion U.S. dollars in normal operating expenses - in fact routine maintenance - qualified as investment.

That allowed the company to spread the cost over a number of years, instead of having to account for it all at once. In this way, WorldCom not only made its profits look much better than theywere but also artificially inflated the company's value.

Who should be responsible?

It is easy enough to place the blame on one or two bad apples, but most major frauds are carefully planned and executed.

In each case, the company accounts were massaged, roasted and cooked. And not surprisingly, company executives made a fortune whilst accountancy firms collected their hefty auditing and consulting fees.

The revelations of corporate misdeeds of Enron, WorldCom confirm that there is an urgent need to rein in greedy and overpower chief executives and to curb rampant abuse of stock options.

But in the same way, the dramatic collapse of Enron and WorldCom has called into question the validity of auditors. Ironically, just months after Andersen signed off on Enron's last annual report in the traditional manner, the firm admitted that its accounts for that year, and for the three previous years, had been more or less fictional.

At best, Andersen's critics say, the auditors were incompetent;at worst, they deliberately overlooked irregularities at Enron in order not to lose the lucrative stream of consulting and other work it provided.

Not coincidentally, the company scandals came to light after the bursting of stock market bubble. During the great stock marketboom of the 1990s, many big companies took advantage of the flyingshare prices and rushed to invest in Internet and other so-called new industries.

Investors were told that the technology, media and telecoms companies would hug unprecedented growth, giving them an everlasting financial summer.

There was, of course, no business miracle. Financial gravity could not be defied. And when the numbers didn't add up, some desperate folk took to making them up. It was a period of collective madness.

Will it ever end?

Since Enron, Congress and the administration have been talking about reforms to the regulation of auditing and the setting of accounting standards. With more and more companies becoming involved with the accounting frauds, reforms seem to be inevitable.

A Senate committee chaired by Paul Sarbanes approved draft legislation that will create an independent oversight board to setaudit standards, punish miscreant auditors, and sharply limit the consulting and other non-audit work that accounting firms can undertake.

The Securities and Exchange Commission (SEC), the watchdog of the financial market, also planned to set up a so-called Public Accountability Board. The board could punish accountants with fines and public censure, remove them from audits or forbid them to work again on public companies.

Meanwhile, U.S. President Bush is expected to propose stricter regulation of businesses in his planned address on Wall Street on Tuesday, including longer jail terms for executives who commit fraud.

Will investor's confidence be boosted in corporate America? Thestock markets will be providing the answers.

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