By Andrew F. Tully/Mark Baker
The decision by U.S. telecom giant WorldCom to file for bankruptcy after admitting it lied in its corporate accounts has heightened debate over whether the country needs more laws to regulate business or whether existing laws should be better enforced. WorldCom is the biggest company in U.S. history to seek protection from creditors, surpassing even Enron in size. The bankruptcy announcement has sent stock markets reeling and further bruised the U.S.'s reputation for having the world's most transparent and well-run financial markets.
Washington, 23 July 2002 (RFE/RL) -- This week's decision by the U.S. telecommunications giant WorldCom to file for bankruptcy has fueled the debate over whether the U.S. needs more laws to regulate corporate behavior or if existing laws should simply be better enforced.
On 21 July, WorldCom became the biggest company in U.S. history to file for bankruptcy, surpassing even Enron, which declared itself bankrupt seven months ago. In filing for protection, WorldCom said it could not afford to pay interest on more than $30 billion of debt it incurred over the past decade.
WorldCom also apparently broke the law. Company officials hid expenses worth nearly $3.8 billion for 2001 and the first three months of this year. The accounting deception allowed the company to claim earnings of more than $1.5 billion when it actually lost money.
Those revelations, following the Enron bankruptcy and a series of other scandals involving fraudulent corporate accounting, set off a wave of panic selling by investors in the U.S. and Europe. U.S stocks have lost more than one-quarter of their value since the start of the year.
More than half of all Americans own shares of one form or another, and stocks make up a relatively large percentage of retirement funds. As people see the value of their holdings fall day after day, government officials are coming under increasing pressure to make it harder for companies and accountants to deceive investors.
But the question remains open whether corporations and accountants need more laws or whether the laws that are already on the books should be better policed. The debate has taken on partisan dimensions, with U.S. President George W. Bush and his Republican Party generally favoring less regulation, and opposition Democrats calling for more.
Those differences are seen in two competing congressional bills, one from the Senate and the other from the House of Representatives. Both bills would set up a new oversight board to oversee the accounting profession, but the House version is weaker, giving that board less investigative and enforcement powers.
Members of the House and Senate are now working on a compromise bill. Bush has said he hopes a new bill can be passed by next month.
Robert Dunn, a professor of economics at George Washington University in Washington, D.C., said he prefers the Senate version. He told RFE/RL that the Senate bill calls on the expertise of accountants, not politicians, to tighten rules on how businesses report their financial dealings. "The [current] rules are awfully loose. What [are] called 'generally accepted accounting principles' are so soft, [corporations] can do anything they damn well please. I don't think the Congress has to get involved in the details of [reforming accounting practices] because they're not accountants. But that's why the bill that has passed the Senate will set up an independent board that I think would make more reasonable rules," Dunn said.
Pressure to regulate the accounting profession began in earnest earlier this year with the collapse of the Texas-based Enron corporation.
Enron, with the help of accounting firm Arthur Andersen, hid liabilities in separate partnerships that were left off the company's main accounts. The partnerships were not called into question since Arthur Andersen was the company's adviser, as well as its auditor.
When Enron collapsed, investors lost billions of dollars, and many of the company's employees lost their jobs, as well as their pensions.
Part of the proposed reforms would make it illegal for the same accounting firm to serve as both a company's independent auditor and its consultant. This reform has been resisted by the accounting industry, since consulting makes up such a large percentage of accounting firms' revenues.
Many experts, however, say more regulations are not needed. David John is a specialist in economic issues at the Heritage Foundation, an independent policy-research center in Washington, D.C. John said there are plenty of laws and regulations already. He said these laws and regulations merely need to be enforced.
According to John, Bush's recent call for longer prison terms for corporate law breaking are enough to foster good corporate governance. "The laws have been relatively loosely enforced. We're all familiar with cases where white-collar [corporate] criminals received essentially a slap on the wrist. Now we're going to see serious enforcement, and people are going to be punished for what they are, which [is] criminals. But it's not a matter that we need more laws. It's a matter that we need to apply those that we have," John said.
To be sure, whatever new accounting and transparency laws are passed, companies will always be under pressure to make their results look as good as possible.
In the United States, companies are required to publish their earnings every three months. These quarterly statements are scrutinized by investors and analysts. Companies that don't make their earnings projections often see their stock dumped by investors.
John said that in the past, investors were more patient with corporations. Investors today, he said, are more focused on the short term. "The emphasis is no longer on building a strong company for the future. The emphasis both in the market and for the career of a CEO was, 'What have you done within the last three months to keep our stock price at such and such a level, or to exceed expectations?'" John said.
This kind of pressure will always tempt company officials to think up new ways to hide bad news.