Congress Now Likely to Be Forced to Act
WASHINGTON -- Until WorldCom Inc.’s admission that it improperly accounted for $3.9 billion in expenses, the revelations of business misdeeds beginning with Enron’s collapse in early December looked as if they would produce little more than some arcane accounting changes and a few prosecutions.
Washington’s lack of appetite for stiff action was especially striking because among its most ardent advocates were heads of some of the most powerful business institutions in America, the New York Stock Exchange and investment bank Goldman Sachs. The lack of fallout was a gigantic relief to Republicans.
But the latest scandal may finally do what its predecessors have not done so far--set off a chain reaction that results in considerable economic damage and substantial political change. And it raises the question of how much of the booms of the last two decades were real, and how much were financial gimmickry.
“It’s raised the decibel level of the crisis high enough the politicians are going to have to act,” said Arthur Levitt, former chairman of the Securities and Exchange Commission.
Most immediately, WorldCom could make corporate scandal a fall election issue. The accumulated weight of accounting misstatements and executive self-dealing already have helped drive down the stock market in recent weeks, and pollsters now detect signs its effects are showing up in the political arena.
“It’s now possible a loss of confidence in the market will spill over into the economy and therefore into the November election,” said Bill McInturff, a prominent Republican pollster. McInturff and others have begun warning Republican candidates to prepare for Democratic attacks on the GOP as too close to business.
A new CNN/USAToday/Gallup poll finds that public confidence in business, which remained high until recently, has slipped to levels not seen in the early 1990s when a shallow but damaging recession helped force President Bush’s father from the White House.
“The steady drip of scandal is beginning to have an effect on the economy and politics,” said Karlyn K. Bowman, a polling expert with the generally conservative American Enterprise Institute.
More broadly, the new revelations could help force a reassessment of the preeminence business achieved during the economic booms of the last two decades, opening the way for substantially stronger legislation and regulations than have been proposed so far.
On Wednesday, President Bush himself appeared to move slightly beyond the administration’s stock position that the problems are confined to a few bad apples. He labeled WorldCom’s accounting practices “outrageous,” and warned executives that “when we find egregious practices ... we’ll go after them, and need to.” Democrats picked up on the change quickly.
“Once you stop talking about bad apples and start talking about corporate responsibility, you’re on the road to broader reform,” said Democratic pollster Stanley Greenberg.
At root, what must be answered in the debate over the recent scandals is how much of corporate America’s accomplishments in the last decades were real, and how much was the illusory product of financial manipulation.
Virtually all of America’s economic expansions have ended with stock tumbles and scandal. The 1960s were followed by the collapse of the “Nifty 50” stocks and the indictment of Robert Vesco for looting a mutual fund. In the late 1980s came revelations about massive stock and bond manipulations by Ivan Boesky and Michael Milken.
What’s striking this time, according to observers, is how widespread the problems are and how enriching for the executives involved. Some explain the problem in strictly moral terms. “Basically, what we’ve had in the last two decades is an erosion of the ethical values of corporations,” said Levitt, the former SEC chairman.
But at least four other factors appear to have been at work. First, big companies came to rely more heavily than ever before on the stock market, rather than banks or the traditional bond market, for funds. As they did, they were able to buy and sell whole companies, rather than engage in the considerably less glamorous task of building plants or developing new businesses from scratch.
As corporate reliance on stocks grew, so did the need to meet investors’ increasingly exuberant demands for higher profits and share prices.
“It became necessary to account for everything in the most favorable light,” said Edward Lawler, a USC management professor. If a company failed to do so, he said “then everybody was unhappy--stockholders, directors, the television programs that grilled chief executives.”
Second, top executives were given generous stock options that, while intended to align their interests with those of other shareholders, ended up acting as an incentives for them to cook the books of their firms to send share prices ever higher.
Third, as new technologies emerged, companies that sought to commercialize them may legitimately have needed to keep different kinds of accounting records than those of traditional firms. “That their accounting innovations also made profits look better than they were,” and therefore fed spiraling stock prices, may only have been incidental, said Patricia Hughes, who teaches accounting at UCLA.
Finally, the pace of deal-making and the changes in accounting practices outstripped the ability of discouraged and increasingly underfunded regulators to keep up.
“It’s noteworthy that for all the recrimination today, the [SEC] never once challenged any of the hundreds of filings Enron made in the 1990s,” said Avedick Poladian, a Los Angeles-based senior partner with Arthur Andersen, whose roles in the Enron Corp. and WorldCom scandals are all but certain to result in the accounting firm’s demise.
Congress took a first, tentative step Wednesday to boost SEC funding when the House passed a measure pledging to double the agency’s budget to $776 million. But lawmakers must still find the funds to pay for the promise.
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Scandal Overload
WorldCom is just the latest in a series of corporate crises. A rundown:
ImClone
Chief Executive Samuel D. Waksal resigned in May and was arrested June 12 on insider trading charges for allegedly tipping off family members after learning that the FDA would not consider the company’s experimental cancer drug Erbitux. In a related development, Martha Stewart, a friend of Waksal’s, also is under scrutiny related to her sale of ImClone stock.
WorldCom
MCI’s parent company reported that it had inflated profit by improperly accounting for $3.9 billion in routine expenses. On Wednesday, President Bush vowed there would be a full investigation, and SEC Chairman Harvey Pitt said the company faced federal fraud charges.
Enron
The energy giant filed for bankruptcy protection in December. Its tangled finances, including off-balance-sheet deals to keep billions of dollars in debt off the books, are the focus of numerous investigations.
Arthur Andersen
The accounting firm, whose clients included Enron and WorldCom, was convicted on obstruction-of-justice charges this month in connection with the Enron case.
Tyco International
Ex-CEO L. Dennis Kozlowski was charged with evading more than $1 million in New York state and city sales taxes on purchases of artwork. Kozlowski resigned June 3, the day before the indictment. On Wednesday, he pleaded not guilty to additional charges of tampering with evidence.
Adelphia Communications
The cable television company filed for bankruptcy protection Tuesday. The SEC and two federal grand juries are investigating questionable financial transactions, including $3 billion in off-the-books loans to the founding Rigas family. Adelphia also revealed that cash-flow figures and subscriber numbers had been overstated for the last two years.
Rite Aid
Three former executives and a current employee of the drugstore chain were charged with securities and accounting fraud in a federal criminal indictment filed Friday. The alleged fraud resulted in a $1.6-billion restatement of earnings.
Global Crossing
The telecommunications company, which filed for bankruptcy protection in January under the weight of more than $12 billion in debt, is being investigated by two congressional committees, the SEC and the Justice Department to determine if the company used fraudulent transactions to inflate revenue and mislead investors.
Researched by NONA YATES/Los Angeles Times
