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WorldCom scandal: Lessons
for corporate America
The WorldCom
scandal may have made people sceptical about the ways of corporate America,
but Indians, especially those in high-tech industries who regularly deal
with American companies, have little cause for worry, assures MOHAN BABU
One of the
most significant and profound developments in corporate America in recent
times is the revelation of WorldCom’s $3.8 billion accounting fraud that
outraged everyone, from employees and small investors to president George W
Bush. Investigations continue with fresh stories appearing almost every
hour. By the time this article appears in print, the news may be passé but
the havoc wrought by this accounting scandal will take a long time to get
ebb.
The story so
far: The US Securities and Exchange Commission (SEC) has formally charged
WorldCom with fraud. Questions are still being asked and people are
wondering how this was possible. Could such an established company have
hidden such huge expenses from the investing public? As a Business Week
article tries to explain it: “During 2001 and the first quarter of 2002, the
company counted as capital investments $3.8 billion that it spent on
everyday expenses. This makes a difference because capital investments are
treated differently from other expenses for accounting purposes. Capital
spending is money used to buy long-lasting assets, like fibre-optic cables
or switches that direct telephone calls, so the cost is spread out over
several years. For example, if WorldCom spent $10 million on switches it
expected to last 10 years, it would book a $1 million expense for 10 years.
In contrast, if it spent $10 million on office space, it has to count all of
that expense in the period in which it occurred. The company says the
expenses that were counted as capital expenditure involve “line costs”,
which is the fee that WorldCom pays to other telecom players for the right
to access their networks.”
What bothers
people more than the how, why, when or who was involved in this fraud, is
the magnitude of the amount involved in the scandal. Even in this day and
age, four billion dollars is a lot of money, actually more than the turnover
of 80 percent of Fortune 500 companies! Even by American standards, a
billion dollars goes a long way and in the global marketplace, this amount
is huge. The crux of the matter boils down to this question: “If a company
could misappropriate this amount by fraudulent accounting, why should anyone
believe in any financial statement put out by anyone?”
It was pure
greed along with the way the accounting system rewards corporate managers
that perhaps lead to this mess. Only time will tell what measures are taken
to prevent an occurrence of such a scandal in the future, but there are some
lessons to be learnt here:
- Never take
anything—especially press releases issued by companies—at face value.
Double check all the “facts” provided by companies.
-
Independently corroborate information being provided by companies.
- If it is
too good to be true, it probably isn’t.
- Just
because a “large” organisation is releasing some information, it need not
be factual.
It will be a
while before people get over the cynicism about everything corporate America
says. Things are not really
as bad as
they sound. The American accounting and financial system is working overtime
to fill any loopholes in the system. Indians, especially those in high-tech
industries, who regularly deal with American companies have little cause for
worry. Most companies and their leaders are honest in their dealings and
fair to their business partners. Just because a few bad apples acted
unscrupulously (and tried to get away with it), does not mean the total
collapse of the system. On the contrary, the renewed scrutiny will only make
the system more transparent and open.
Also, on a
human/personal note, not every employee working for beleaguered companies
like Worldcom, Anderson or Enron is necessarily a suspect. One should not
judge a book by its cover. As a matter of fact, there are a number of
employees (including techies), who just happened to entrust their careers to
these companies and found their future tarnished by circumstances totally
out of their control. They probably lost a good part of their personal
savings when the stock prices tanked, in the process learning valuable
lessons in corporate management. Now, which company wouldn’t want to hire
employees who have been baptized by fire?
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