The latest corporate scandal in the US, this time involving the No. 2 US long-distance phone company, WorldCom, confirms what none of us wanted to believe: that there is something profoundly rotten at the heart of American big business. Profits, it seems, can be what you want them to be, especially if your auditor is Arthur Andersen. Facing a loss? No problem. Just reclassify your current expenses as capital investment to spread them over ten years and — hey presto — $3.8 billion worth of gleaming profits that will impress investors from every corner of the globe.
It looks as if some US companies have started to practice the "virtual reality" that they market. Because that is what Enron and now WorldCom were up to: sleight of hand here, creative accountancy there. But in ordinary layman’s language, it comes down to one thing: criminal fraud.
Yet investors and the public generally imagined that the Enron debacle was a one-off, and that, in any case, the scandal there was as much about mistakes as it was about deliberate deceit. No one can believe that any more. Here is yet another major name on Wall Street, advised by the same accountants, doing exactly the same thing: inflating its profits and cheating investors — only this time the scale is even more massive.
Not that Enron was the only accountancy scandal. In its wake, other similar frauds emerged which began to denote a type: Alephia, the sixth largest US cable television operator, has just filed for bankruptcy and faces criminal investigations into its accounting; in the spring, Xerox was taken to court for inflating its profits by $3 billion over four years. There are others. Yet still there was a blind refusal to recognize the environment of deception and dishonesty that has blossomed in parts of corporate America — and for all we know, corporate Europe and the corporate Far East as well. And with some reason: companies like Enron and WorldCom were stock market icons a couple of years ago; they were held up as models of new thinking and chased after by investors. People find it difficult to accept that they were so massively duped.
No one can avert their eyes any longer. WorldCom is the daddy of them all — at least, so far: more crooked companies may now surface as accounts are put under the microscope. At the very least, there must be worries about every company audited by Arthur Andersen. Coming on top of the others, this latest fraud is going to hit America and the rest of the word hard. The big blow is to confidence in the US stock market. Investors will be asking themselves: Is this an honest company? Is it going to be bankrupt in a few months’ time? Are these real profits? The scandal has already hit the dollar. If the American market falters, as it will, it will hit others around the world. The US stock market drives the international market. There is no way that it can be isolated.
Corporate America must look to itself and change its ways. It must be seen to act with transparent integrity. Otherwise there can be no confidence in it, and without confidence, there will be chaos and crashes everywhere. The financial world look to the US to lead with new ideas and new ways of doing business. "Virtual reality" in accounts must not be one of them.
