Scandal pushes public anger to boiling point


WorldCom collapse, coming on the heels of other frauds, represents the ultimate failure of American business model. Cynicism has replaced trust in business world, writes Conor O'Clery

The disclosure that WorldCom had falsely reported profits was, it turned out, much more than just another scandal in corporate America. It was the tipping point, the event that brought all the corporate frauds and deceits to a critical mass, so that, around the world, corporate America took a pounding and in the United States public anger reached a boiling point.

It is no longer a case of a few avaricious chief executives and crooked accountants being caught out. WorldCom's collapse, coming on the heels of fraud at Enron, Tyco, Kmart, Global Crossing, Dynegy, Adelphia and many others, represents the ultimate failure of the American business model. Cynicism has replaced trust in the business world.

WorldCom, the second-biggest telephone company in the United States, used an accounting technique called EBITDA, standing for "earnings before interest, tax, depreciation and amortisation", a book-keeping device that basically ignores awkward things like depreciation when calculating profits.

Cynics say it stands for "earnings before I trick dumb auditors". The sheer audacity of the trickery and the contempt for shareholders has turned cynicism to fury. "I'm mad as hell and I'm not going to take it any more," thundered Mr Harvey Pitt, the chairman of the Securities and Exchange Commission (SEC), at a function in New York on Wednesday evening.

"The bubble has burst," he warned corporate America. "Serious jail time awaits serious crime." The SEC has this year opened a record 128 investigations into possible accounting fraud among US firms. President Bush voiced the wrath of the Administration in a tone not heard before. "It was outrageous," he said. "We will fully investigate and hold people accountable for misleading not only shareholders but employees as well."

Mr Denis Kelleher, chief executive of investment company Wall Street Access, angrily blamed a lack of integrity at the top. "It is outrageous what is going on," he said. "It is greed of the highest order. If the system does not put these people in jail, we have failed. If this is the system we have, we'd better get it right in a hurry, otherwise we are in deep yoghurt, as they say.

"Domestic and foreign shareholders were always able to rely on the chief executive officer and the chief financial officer to come up with the right numbers," said Mr Kelleher. "And if there was anything wrong, the analysts would seek it out. But now we see the analysts were working for them."

The shock around the world on Wednesday was all the greater because WorldCom was no dotcom flame-out, or even an Enron: it is several times larger than the crooked Texas energy-trading company.

Foreign investors, who regarded the US as the best place to invest because of its system of public disclosure and accountability, and the strong dollar, have started reducing their holdings in US assets, and this is likely to accelerate. Foreign investment has ranged between $1.5 trillion (€1.52 trillion) and $1.8 trillion a year since 1998. More than $1 billion a day flowed in, propping up the US currency.

It is slowing because of the loss of confidence in Wall Street, where the stocks of apparently solid major corporations have collapsed and the rumour is that about six more shoes have yet to drop. (It is also partly due to a trend that foreign money has traditionally come in at the top of the market and gone out at the bottom.) The US needs a net inflow of $1.3 billion from abroad every day just to cover its ballooning trade deficit.

US investors are also looking for safer havens abroad. Americans traditionally did not invest much outside the United States because they were afraid foreign companies might not adhere to GAAP, the generally accepted accounting principles that apply in the US, Mr Kelleher said. Now there's a a lot of money flowing out".

Many Europeans believe the US system is too complex and too easy to manipulate, and that there is a moral cancer in America, where, as Italian business reformer Mr Guido Rossi put it in the New York Times, "there is no culture of shame".

The weapon of shame is, however, at last being brought into play with powerful effect. Chief executives and analysts are today being equated with crooks, just as Catholic priests are tarnished by the paedophiles among them. On a television business channel on Wednesday, a presenter caused great glee when he remarked about a survey showing that one-in-10 chief executives preferred golf to sex, "that might not be a bad thing - we don't want to see these people reproducing". A cartoon in Grant's Interest Rate Observer showed a boy explaining that he had fought with a friend because "he called me a CEO first".

Only a year ago, super-rich celebrity chief executives were the subject of social adulation and lucrative book deals. Today, the best and brightest in US business are shying away from offers of chief executive positions. A top recruiter, Mr Gerard Roch of Heidrick & Struggles International, told the Wall Street Journal that "top-tier stars are more nervous than they ever have been" to accept offers to run a big company. They are concerned their reputations will be destroyed at a company with hidden scandals, where executives with big stock options tried to keep up with the expectations of the late-1990s boom.

After WorldCom, the US regulatory authorities are under greater pressure than ever to reform the financial sector and restore foreign and domestic confidence in the system and those who run it. It took the Great Depression to bring about reforms that created the present system. With executives like Mr Kenneth Lay of Enron, Mr Dennis Kozlowski of Tyco and Mr Bernie Ebbers of WorldCom doing more financial damage to the United States than Osama bin Laden, the need for reform is now at the top of the US agenda, right up there alongside the fight against terrorism.