What began as an accounting scandal at a single U.S. company has turned into a series of investigations and revelations about poor corporate governance at some of America's best-known firms. Analysts say such practices are eroding the consumer and investor confidence that is necessary to restore vigor to the world economy.
Washington, 27 June 2002 (RFE/RL) -- Analysts say the latest case of accounting irregularities by a large U.S. corporation will have a profound effect on the confidence that American investors and consumers have in their economy.
One question that is as yet unanswered, however, is how this growing scandal will affect the American economy, and perhaps the European economy as well.
On 25 June, WorldCom announced that it had disguised operating expenses worth nearly $3.8 billion for all of 2001 and for the first three months of this year. This allowed the telecommunications company to claim earnings for the period of more than $1.5 billion. Now, the company says it actually lost money during that 15 months, although it has not said how great the loss was.
In the past 15 years, WorldCom -- based in the southern U.S. state of Mississippi -- used clever acquisitions of other companies to grow from a small company providing long-distance telephone service to the second largest provider of such services in America.
The company's fortunes began to fall at the beginning of this year as the cost of the acquisitions and other business practices left it with a debt of $32 billion. Its chief executive officer, Bernard Ebbers -- who once was praised for his acumen in acquiring other companies -- was forced to resign two months ago.
Last night, WorldCom fired its chief financial officer, Scott Sullivan. And because of the losses, it said it will have to dismiss about 17,000 of its 80,000 employees. Its stock, which last year was worth as much as $18 a share, is now worth only a few cents.
The WorldCom revelation is the latest in the growing scandal of bad corporate governance in America. It began in December with the collapse of Enron Corporation, the nation's largest energy-trading company, because of its own accounting practices. Arthur Andersen and Company, Enron's auditor, was convicted of obstructing justice earlier this month for its role in the Enron scandal.
Since Enron, other companies well known in America also succumbed to scandal, and their chief executives are being investigated on suspicion of using their status to illegally enrich themselves further.
U.S. President George W. Bush, however, says such practices are not part of a pervasive trend in corporate America. Speaking on 26 June in Nananaskis, Canada, where he is attending the G-8 summit, Bush said:
"There are some concerns about the validity of the balance sheets of corporate America, and I understand why. We have too many cases of people abusing their responsibilities. We will pursue, within our laws, those who are irresponsible. Having said that, I do believe the economy is strong."
Not everyone shares that view. One is Rosemary Radcliffe, an analyst with the auditing firm PricewaterhouseCoopers. In London, Radcliffe said yesterday:
"The WorldCom problem exacerbates the degree of doubt about the real economy by raising issues which may also impact on investor confidence. I think this is very much about confidence."
Radcliffe says that without the confidence of American investors, as well as consumers, the U.S. cannot properly recover from the recession that has gripped the economy for the past year.
Frederick Joutz, an associate professor of economics at George Washington University in Washington, agrees. But he told RFE/RL that the repeated revelations of poor financial governance of American companies is not likely to have a similar negative impact on Europe or other regions whose economies rely heavily on the United States.
According to Jouts, Europe, in particular, is not concerned as much with how American corporations conduct their business. Instead, he says, it is merely struggling to stimulate its sluggish economy.
"The European issue is their ability to recover [from the current economic slump]. I mean, the economies there are not projected to grow as fast as we are in the U.S."
Jouts notes that most economists forecast that the U.S. economy will grow by about 3 percent over the next year, while growth in Europe is expected to be more like 2 percent or 2.5 percent.
But some economists see the Enron and WorldCom collapses as omens of harder times for the world economy. This view is expressed by Margaret Blair, an economist with the Brookings Institution, an independent policy research center in Washington.
Blair told RFE/RL that she believes further bad news like the WorldCom admission could drive consumer and investor confidence so low that the U.S. could find itself in another recession before it fully recovers from the current economic slump.
"The fear -- and I think this is a legitimate concern -- is that concerns about the stock market and the integrity, if you will, of the financial markets in general and of the corporate sector in general that it does run the risk of putting us back into a recession by undermining not only investor confidence but also consumer confidence."
Blair says this leaves the economy of the rest of the world equally at risk.
"The European economy and the Asian economies have not been strong for the last five years, and they've been largely being pulled along by the strength in the U.S. economy. So unless there's some new source of growth that I don't know about elsewhere in the world, this'll have a ripple effect around the world."
According to Blair, there are probably more corporations that have followed accounting practices similar to those used by Enron or WorldCom. She says it is time for the Congress and the U.S. Securities and Exchange Commission, which oversees stock market activity, to tighten the laws and regulations to make such abuses harder to commit.
Without such action, Blair says, the United States cannot credibly use itself as an example to be followed by other nations, particularly developing countries and the former socialist-led nations of Easter Europe and Central Asia.
"We had been holding up the U.S. model as the model to be copied, and now I think there's considerable question about whether our corporate governance systems were as strong and as transparent as they'd been held out to be."
Both Blair and Joutz say corporate governance must be reformed. Now, they say, too many executives think only of ways to improve their companies' earnings in the immediate future solely in order to keep stock prices high.
Instead, they say, they should focus on how to make their companies increasingly profitable -- and their stockholder increasingly prosperous -- over the long term. According to Blair and Joutz, that is only path to a strong and stable American economy.