End of the Worldcom as we know it

Corporate America is in trouble. In the latest of a wave of corporate scandals to sweep the US, America’s second largest telecoms firm, Worldcom, has just owned up to the biggest accountancy fraud in history. Companies have been criticised for undermining public trust, and calls for transparency and accountability are getting louder. Taking the hint, nearly 1000 companies have restated their previous earnings. Meanwhile, the US Securities and Exchange Commission is continuing to open new accounting investigations at a record rate.

The Worldcom fraud, which may yet result in bankruptcy for the ailing telecoms giant, was first discovered by an internal auditor. She noticed that the expenses that the company had incurred in 2001 for its telecommunications network did not appear where they should have in its internal books. Instead the costs, which amounted to billions of dollars, had been liberally sprinkled across a series of accounts for capital expenditure. The significance of this shift lies in the fact that accountants treat capital expenses (such as new property or heavy machinery) differently to expenses that are incurred every year, such as salaries and materials. Rather than forcing companies to recognise large capital expenses all in one year, accountancy rules allow them to spread the cost over the many years in which the items will be used. Obviously, shifting certain everyday operating costs to these accounts therefore wiped billions of dollars in costs off Worldcom’s books. The company estimates that about $3.7 billion in expenses were improperly accounted for in this way, although the figure may prove to be much higher.

Unlike the case of Enron, the fraud is a simple one, and one that should have been picked up by the company’s auditor (you guessed it!) - Arthur Andersen. Andersen, which has just recently been convicted for obstruction of justice in the investigation of Enron, has denied all knowledge of the shifts in expenses. Andersen claims to have asked, at the end of the year, to review the journal entries for all non-recurring expenses. These documents detailed the expense shifts in question, however Andersen claims that they were never handed over.
The scandal is just the latest in a wave that has swept America recently. Of course there was Enron, but since then Tyco (CEO charged with cheating on sales tax and tampering with evidence), Merrill Lynch & Co (had to pay $100 million in fines for misleading investors), Stanley Works (tried to evade taxes by setting up a fake headquarters in Bermuda), Merck & Co (have booked questionable revenues), and Adelphia (made off balance-sheet loans of more than $3.1bn to the founding Rigas family and overstated cable subscriber numbers) are just a few of the companies that have been in trouble lately for ‘cooking the books.’ A fuller list can be found in the ‘Corporate America in Crisis’ section of the FT website (http://news.ft.com/business/specials). Perhaps the most frightening aspect of these frauds is that they occurred in the most highly regulated and monitored area of corporate activity. Other aspects of corporate activity simply aren’t subject to such scrutiny and control. If corporations can show such a blatant disregard for the law, even in areas where they are being watched intently, what are they getting away with in other areas, such as worker safety and pollution? Despite inadequate law enforcement and monitoring in these areas, all the evidence suggests that the epidemic of corporate crime is just as severe outside the financial arena as within.

George Dubya is said to be ‘outraged’ by Worldcom’s conduct - pretty rich from a man who violated security laws four times himself, while he was on the board of Harken Energy. Strangely, no charges were ever filed for these violations, although everyone insists this had nothing to do with the fact that his father was president at the time. Given this history, and Dick Cheney’s equally interesting history as CEO of Halliburton, it could be argued that the two are uniquely well qualified to chase after corporate evil-doers. After all, they both have firsthand experience of the subject.

And should some cynic dare suggest that George Dubya’s new anger over corporate fraud is less than sincere, I know how the president will react - he’ll be outraged.