WorldCom, WorldCon
The New York Times
Editorial
WorldCom, WorldCon
No wonder George W. Bush looked frustrated when news of WorldCom's monster con game reached the hilltop in Canada
where heads of the world's biggest economies were gathering. Long gone are the days when a triumphal American leader
could attend these summit conferences and gloat about the superiority of our home-grown capitalism.
Even President Vladimir Putin of Russia was moved to express grave concern about American
accounting practices.
WorldCom, the telecommunications giant, reported late Tuesday that it had overstated its operating cash flow by $3.8 billion in
the last five quarters, by improperly booking ordinary expenses as capital expenditures to be depreciated over time. Even a
child can understand that painting your house is not the same as building a new one, but that basic concept seems to have
eluded the people who were paid to keep an eye on WorldCom's books. It's no wonder that Europeans are now beginning to
recoil from America's demand that the rest of the world adopt the accounting principles used in the United States.
Coming on the heels of Enron and a slew of other prominent financial scandals, WorldCom's apparent fraud left Washington
regulators reeling, as well it might. In a speech on Wednesday night, Harvey Pitt, chairman of the Securities and Exchange
Commission, quoted the line from the movie "Network": "I'm mad as hell, and I'm not going to take it anymore." Mr. Pitt said
chief executives of major corporations would now have to certify their companies' financial statements personally, which is a
good thing. Echoing the president's vow "to hold people accountable," Mr. Pitt said corporate crooks and charlatans would be
doing jail time, and that too is fine. Yet there is a lot more that Mr. Pitt, who has been accused of being much too cozy with the
accounting industry, could do as a policy maker. One obvious move is to issue a blanket rule that auditors cannot provide
companies whose books they police with any other services.
The simple nature yet breathtaking scale of WorldCom's deceit raises anew all the Enron questions about the failure of market
guardians to prevent it. Was anyone on the board of directors even remotely suspicious? Why didn't the auditing firm, Arthur
Andersen, realize that the company was booking false profits? Did high-profile WorldCom boosters on Wall Street give the
company's phony numbers a pass because they were eager to win WorldCom's banking business?
One positive byproduct of this seemingly endless parade of companies behaving badly could be a turnaround in Congress. If
our elected officials have any sense of embarrassment, Paul Sarbanes' sensible accounting reform bill ought to sail through the
Senate and prevail over a weaker House version in conference. Certainly if every lawmaker who benefited from campaign
contributions from now-discredited companies and financial institutions votes for it, it will be on President Bush's desk quicker
than you can say "market fundamentals."
In the meantime, anxious investors are left to wonder what other financial scandals lie around the corner. America's status as
the world's ultimate safe haven for investors is looking shaky. The huge inflow of foreign capital, $400 billion a year, has been a
key factor in the country's recent prosperity. Two-fifths of all Treasury bonds are in foreign hands. An erosion of confidence in
the United States could accelerate the dollar's recent decline and dry up needed credit. Capital flight is a danger we usually
associate with countries like Argentina, but a few more WorldComs and the comparison may seem apt.
We have been down this road before, but there is something about the sight of billions of dollars in potential profits that makes
investors forget the lessons of history. In the 1920's and 1980's, speculative run-ups were followed by a painful relearning of
certain basic truths. Breathless hype about the dawn of a new gravity-defying era and accounting gimmicks are no substitute
for real profits. It may come as little consolation to WorldCom shareholders, who have lost $150 billion since the stock reached
its all-time high in 1999, but the flushing out of the dishonest self-dealers is the first step toward a recovery.
nytimes.com
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