Thanks for the replies. Accounting standards in the news again.
news.ft.com
A ringing endorsement of fraud
By James Glassman
Published: July 29 2003 5:00 | Last Updated: July 29 2003 5:00
At a time when members of Congress and the Bush administration declaim passionately about disillusioned investors being driven from the securities markets by corporate scandals, how much more damage does the worst of the perpetrators, WorldCom, have to do for federal authorities to get serious about its punishment?
WorldCom, which changed its name recently to MCI, committed the greatest fraud in US financial history, reporting what now appears to be $11bn (£6.8bn) in profits it never made. Now, less than three weeks after a judge approved a slap-on-the-wrist settlement with the Securities and Exchange Commission, the company is co-operating with a Justice Department investigation into claims that it cheated local telephone companies out of hundreds of millions of dollars in access fees. If these charges, which come from former WorldCom executives and three phone companies, are true, MCI has been committing an additional grave fraud.
The WorldCom story should have been a simple one: as corporate scandals shatter the faith of small investors, a company that commits massive fraud receives a massive punishment that fits its crime. Instead, WorldCom prospers, nurtured by regulators and politicians who appear to worry that, if it is hobbled, disruptions to service will occur and jobs will be lost at a critical time for the economy. This is nonsense. Other telecommunications companies are in a position to take over parts of the business. The fact is that MCI is a disruptive and dispiriting force.
When a federal judge on July 8 approved a settlement that required the company to pay $500m in cash and $250m in stock, the penalty might, at first glance, have appeared onerous. But MCI's revenues are about $500m a week. The company will not have to stretch to pay the fine. For one thing, under Chapter 11 of the bankruptcy laws, it is eliminating practically all of its $41bn in outstanding debt. For another, MCI is in the process of collecting tax refunds or credits from the Internal Revenue Service because previous payments - on billions of dollars that WorldCom falsely claimed it had earned - should not have been made. The chutzpah is breathtaking. And the contracts keep rolling in - from, incredibly, the US government. Indeed, some observers believe federal agencies are favouring MCI for contracts to make sure it survives.
For years, WorldCom falsified its financial statements - allowing the company to increase its debt and acquire assets and customers. That success, in turn, reduced the profits of its competitors and caused capital to be seriously misallocated: it went to the wrong companies and the wrong uses. Indeed, much of the overinvestment in telecoms infrastructure - crucial in the technology market crash - can be attributed to the MCI fraud. Chapter 11 reorganisation of WorldCom will perpetuate the resulting distortion of competition in telecoms. The case for investigation by the Federal Communications Commission is overwhelming.
So why is the FCC not acting? Why has the SEC given MCI such a mild fine? Why is the General Services Administration allowing MCI to receive government contracts? Where is Congress, which professes to care about investor confidence?
And where are commentators who, in other cases, proclaim their belief in law and order and the redemptive power of markets? Last week, Deroy Murdock, a conservative columnist on The National Review, vigorously defended MCI. He argued that the real criminals were being prosecuted and that to punish MCI further would be analogous to barring an entire family from federal employment just because the father had robbed a bank.
But that is not a good analogy. Clearly, family members (innocent employees) can work wherever they want. The question is whether MCI has been punished adequately. Here is a better comparison: imagine that mobsters set up a corrupt haulage company that steals trucks and engages in criminal activity. Would simply turning the company, with its stolen assets, over to a new manager satisfy justice? Of course not. The real answer is to remove the effects of the crime and to rectify it in the marketplace.
Instead, MCI is double-dipping. First, the fraud allowed it to borrow and grow and grind down its rivals. Now, the company, in Chapter 11, can renounce the debt but keep the fruits of it - and get tax breaks as well.
Congress is moving, but slowly. The Senate has started hearings on whether to curtail WorldCom's contracts with the government; and the GSA is investigating. But, meanwhile, MCI is doing deals: a wireless system for Iraq, $10m-plus for the Coast Guard, $50m for the US Postal Service.
MCI is likely to wither eventually, as private customers move elsewhere, properly worried about doing business with a company with such a record of corruption. But, for now, MCI - with the perverse encouragement of politicians and bureaucrats - is doing great damage. No wonder investors round the world are sceptical of the US government's commitment to cleaning up the securities markets. What is needed is not a laundry list of new, nit-picking accounting rules but a simple dedication to powerful, swift punishment of the miscreants, both individual and corporate. And on that list of wrongdoers, MCI is at the top.
The writer is a fellow at the American Enterprise |
