Not Another World Con


The
past several months have witnessed the sensational spectacle of
the implosion of World- Com, which is by far the largest accounting
fraud in history and appears destined to be the biggest ever corporate
bankruptcy.  

The
flotsam and jetsam of inveterate corporate fraud is now bobbing
to the surface in rapid succession, revealing its not-so- lovely
face: Enron, WorldCom, Global Crossing, Qwest, Adel- phia, Xerox,
and General Electric. Hot off the press we have Merck caught with
a quivering hand still in the cookie jar and Bristol-Myers Squibb
is being investigated. Who next? 

WorldCom
is the second largest telecommunications corporation in the U.S.
(after AT&T) and the world’s biggest carrier of Internet
traffic, providing Internet access for more than 100 countries,
with a client base of 20 million and 80,000 employees. At the crest
of the telecoms wave in 1999 it was valued at $180 billion (Enron
was worth $80 billion at its peak) and shares at $64. In the aftermath
of the initial scandalous revelations, the share price plummeted
to 9 cents. 

This
mind-boggling accounting swindle (6 times the size of Enron’s)
consisted of $3.8 billion of operating expenses being incorrectly
reflected as capital expenditure, which hugely inflated profits
to deceive investors and the markets. These expenses were deliberately
distributed across a host of accounts for capital expenses to escape
detection in a concerted effort at profit manipulation. The Securities
and Exchange Commission (SEC) has filed civil fraud charges and
subpoenas have been served by Congress and the House Financial Services
committee. Investor and market confidence has evaporated. 

Armed
with fortuitously detailed information from the ongoing investigation
into the Enron debacle, one is struck by the astonishing similarities
between it and the WorldCom saga. When one factors in the data from
the fraudulent activities at Global Crossing to Xerox, there is
overwhelming and irrefutable empirical evidence of a consistent
pattern of corporate fraud and government collusion. 

In
the interest of brevity, let us then investigate the parallels between
Enron and WorldCom: Both corporations fraudulently inflated profits,
Enron by shifting “billions of dollars of debt off its balance
sheets and into a plethora of offshore financial partnerships (one
third in the Cayman Islands) to hide its astronomical losses, duping
starry-eyed credit-rating agencies, bankers, regulators and politicians,”
while WorldCom “systematically sprinkled [billions of dollars]
across a series of accounts for capital expenditures” (New
Yor
k Times, June 27). 

The
rationale for the profit manipulation is identical: “Like Enron,
WorldCom’s decision to inflate its figures…comes down
to Wall Street expecting each quarter to be better than the last”
(The Observer, June 30). 

The
concealment of debt and inflation of profits was facilitated as
both corporations embarked on phenomenal acquisition sprees. In
the case of WorldCom, “Ebbers [founder and CEO] raced the business
through 70 deals in four years, buying up competitors and expanding
his reach” and “In addition, the parent presided over
an Enron-like structure of hundreds of smaller subsidiaries based
in places as diverse as Bermuda, the British Virgin Islands, Peru,
and the Cayman Islands” (The Observer, June 30). However,
with Enron’s acquisitions the corporation “diversified
into a huge range of products from pulp to petrochemicals and services
from transportation to electronic commerce, with astonishing global
reach.” 

As
a result of the frenetic pace of acquisitions it was difficult to
achieve cohesion, standardization, and centralized executive control
in the myriad subsidiaries. The highly fragmented structure of these
organizations made them easy targets for the accounting malpractices
(like off-balance-sheet transactions and derivatives for concealing
the rapidly escalating losses) that were largely responsible for
their demise. This mania for acquisitions may be a premeditated
technique of ensuring that these scams succeed. 

The
Bank for International Settlements attributed the collapse of Enron
to a “catastrophic failure of corporate governance…. The
company’s board of directors, the external auditor, stock analysts,
credit rating agencies, creditors and investors jointly failed to
critically assess how Enron’s management achieved ostensibly
superior earnings growth.” With reference to WorldCom, Sir
David Tweedie, chair of the International Accounting Standards Board,
agrees: “People are saying this couldn’t happen in Britain.
Oh yes it could. It’s corporate governance failures.” 

Another
common denominator is the identity of the accountant. Full marks
if you shout hysterically: “Arthur Andersen.” This accounting
firm is popping up with monotonous regularity in the domain of corporate
sleaze. No one appears surprised to learn that Andersen was also
Merck’s accountant. But the more the shit hits the fan, the
more crooked accounting firms are being exposed to the harsh halogen
spotlight of public derision. 

These
similarities between the two corporations do not address the far
more serious issue of money-for-political-influence, which is increasingly
becoming the Administration’s albatross. The Center for Responsive
Politics has found that WorldCom had lavished $7.5 million in campaign
finance over the past 12 years. Only a few days before the WorldCom
drama hit the headlines, the corporation donated $100,000 to the
Republicans at a gala attended by Bush. Julian Borger alleges that:
“WorldCom’s gala contribution was a routine part of its
$3m a year lobbying effort in Washington, aimed at influencing tax
policy and the planned deregulation of the long-distance telephone
market—legislation to which WorldCom is opposed.” It comes
as no surprise that even the judiciary is implicated: John Ashcroft,
the attorney general, received $10,000 campaign funding from the
company when he ran for senator. He is about to head the investigation
of the WorldCom fraud. In addition to the above, there is a long
list of high-profile government officials who have financial links
with WorldCom, Enron, and the like. 

Details
of the political favors exacted will be provided in the following
thrilling episodes: 

(1)
In 1986 Bush’s company was in deep financial trouble. “But
he was rescued from failure when Harken Energy bought his company
at an astonishingly high price. There is no question that Harken
was basically paying for Bush’s connections…. Despite
these connections, Harken did badly. For a time it concealed its
failure, sustaining its stock price, as it turned out, just long
enough for Bush to sell most of his stake at a large profit—with
an accounting trick identical to one of the main ploys used by Enron
a decade later” (Paul Krugman, New York Times). 

He
allegedly sold shares to the value of $850,000 just 2 months before
the price dropped, but failed to immediately report the sale as
an insider (he informed the SEC only 34 weeks later). Who was the
accountant involved? Yes, you’ve guessed it. The White House
admitted, grudgingly, that Bush profited only from low interest
loans (5 percent) from the company to buy Harken shares. George
W. is now addressing Wall Street in a desperate bid to affect damage
control and demand a “new era of integrity” from U.S.
Corporations. 

(2)
Every nuance of Dick Cheney’s expression is explored by the
telephoto lens. Our vice-president squirms subliminally as searching
questions are fired at him: Is it true that you were chair and CEO
of Halliburton, the oil services corporation, between 1995 and 2000;
that the company’s revenues were fraudulently overstated by
$445 million during that period with the express purpose of boosting
the share price; that Andersen was the accounting firm yet again;
that you took part in a promotional video for Andersen; is it true
that…? 

(3)
The roving camera picks out Harvey Pitt in the crowd. He’s
the current chair of the SEC and is promising rather unconvincingly,
“If anybody violates the law, we go after them.” Alexander
Cock- burn enlightens us, “In an earlier incarnation Pitt was
one of the guys who successfully lobbied the SEC to make it easier
for Arthur Andersen and the other big accounting firms to cook the
books on behalf of Enron, MCI/World- Com, and others. Bush, flush
with campaign contributions from Enron, MCI/WorldCom ($100,000 last
summer), duly signaled his gratitude by putting Pitt in charge of
the SEC, where he put the agency in snooze mode amid a ripening
cloud of scandal involving the biggest names in corporate America.” 

One
of the free market fundamentalist mantras has always been: deregulation
good; regulation bad. This has been exploited by droves of unscrupulous
corporate executives as gristle for their greed and corruption.
“The era has been marked by chief executive autonomy, widening
income inequality, and a challenge to the role of government so
strong that many were cowed from asserting the public interest over
markets in even the most modest way.” Polly Toynbee sees this
as a disease of insufficiently regulated markets and “only
strong government, strong regulators, heavy penalties, long prison
sentences and lashings of red tape” would adequately address
these iniquities. Who could quibble with the assertion that: “if
government is entitled to impose appropriate regulations on schools
and hospitals in pursuit of the public good, it is entitled to do
the same on business.” 

A
great proportion of the blame for corporate fraud goes to the share
option schemes that have become almost obligatory and are rarely
questioned. Company executives are allowed—nay, encouraged—to
award themselves phenomenally generous share options. So these executives
will obviously do everything in their power to inflate short-term
share prices to earn the greatest financial rewards for themselves.
A fail-safe method is to vastly overstate profits by massaging the
figures. This is the reason for the routine occurrence of accounting
scams, even in the supposedly most ethical companies. Yet investors
will continue to wring their hands in righteous disbelief when company
after company crashes in the aftermath of accounting chicanery.
They cannot see that their own greed and lack of integrity is actually
the main cause of the disasters. 

Another
serious loophole is that there is no mandatory requirement that
stock options be reflected on balance sheets. Profits would be reduced
by 8 percent if that were the case. Balance sheets would give a
truer indication of the corporation’s performance and would
tend to discourage the practice. 

A
corollary to this is, “the relationship between auditors and
companies has become too cozy.” The problem is that most accounting
firms have consulting divisions and they are concerned about substantial
loss of income if they act too ethically. The conflict of interest
between the auditing and consultancy functions is then swept under
the carpet where it festers and eventually erupts. But the U.S.
government is equally culpable in the problem of incentives. Stiglitz’s
analysis is, “the U.S. treasury had an incentive to urge the
continuation of the bad accounting practices: it responds to the
interests of Wall Street, and the financial community benefited
as much as did the corporate executives from the artificial boom
and bubble to which it contributed.” 

There
are solutions to this problem if the political will is there: The
first is to legislate that auditors must rotate every couple of
years; the second is to prohibit corporate executives from appointing
auditors. The fact that these interventions have never been implemented
testifies to the effective lobbying by powerful vested interests
and connivance from government and the judiciary. 

Besides
the ethical and legal issues raised by WorldCom is the profound
impact it is having on the lives of ordinary citizens and workers.
Many state pension funds are heavily invested in World- Com—New
York State lost $300 million, Michigan lost $116 million, and Florida
$85-90 million. Thousands of employees have lost their jobs. The
viability of many insurance companies has been threatened. The resultant
market chaos will decimate further the current meager social services
in the U.S. The knock-on effect on world markets could spell disaster
for many Third World countries, which are already in dire straits. 

Unfortunately
the market turmoil in the wake of the corporate accounting scandals
does not herald the death knell of capitalism or neo-liberal globalization.
It will probably continue to lurch from crisis to crisis, wreaking
havoc in every corner of the globe. For the moment the best that
can be hoped for is to ameliorate some of its most destructive excesses.
The best time for social justice movements to mount an offensive
is when the monster is temporarily belly-up, such as at the present
moment. So why are we so subdued?                                Z