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Article by Mohan Babu


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?





About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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