Fourteen days ago this page assessed the deep erosion of public confidence in U.S. business markets in these terms: “Is there a way out of this forest of mistrust? Yes–if disclosures of corporate accounting and Wall Street conflicts of interest don’t escalate. If they do, all bets are off.”
The startling disclosure late Tuesday that WorldCom Inc. is involved in one of the biggest accounting frauds ever uncovered is the blow that a slowly recovering economy didn’t need.
The story is complex but the theme is familiar: A telecommunications company whose high-flying stock helped drive the irrationally exuberant Wall Street climate of the late 1990s now admits that it improperly recorded expenditures in ways that artificially hyped its profits.
For many Americans, the reaction will be the same as it is to all dramatic business or economic news: Spare me the mind-numbing details. What’s it all mean to my 401(k)?
The answer isn’t likely to be cheery, at least in the short run. WorldCom’s debacle came the same day that another troubled telecom, Adelphia Communications, was seeking bankruptcy protection, and that a key measure of consumer confidence dropped to its lowest level in four months. WorldCom’s assertion that Andersen had audited its books during the time in which the fraud was being perpetrated will only intensify the anger that stock market investors have felt toward the accounting industry since the Chicago-based company was implicated in serious irregularities at Enron.
Those furious investors call many countries home. Among the immediate concerns for well-run U.S. companies is whether foreign investors let WorldCom be the disaster that drives them away from American markets.
The answer to that question will be days or weeks in the telling. Similarly, the who, what, when, where and how of WorldCom’s fiasco have only begun to play out.
But one well-deserved reaction is abundantly clear. If, as it appeared Tuesday night, this case merits criminal prosecution, federal authorities should pursue the probably well-tailored perpetrators and seek to introduce them to the not- so-delectable bouquet of prison chow. What WorldCom says occurred in its financial statements was an especially sleazy misleading of people who invested not only their money with company management, but their faith as well.
With Andersen, the government shot from the hip: The brief and slipshod March indictment of the entire firm wasn’t backed by sufficient investigation to finger any executives who may have played roles in the Enron scandal. There will be similar pressure in the wake of WorldCom for the feds to do something, anything, that might reassure investors.
But with the list of egregious corporate offenses growing longer, investors won’t respond to quickie public relations ploys from Washington. Nor should they. Better for the government to conduct the kind of methodical, unflinching investigation that roots out individual criminals–and forces each of them, not some faceless corporation, to pay a price.
For now, though, it is the U.S. economy that will pay a price. The first of many forthcoming lessons from WorldCom is one that shouldn’t have to be taught: Trust is an asset far easier for a company to squander than it is to acquire.
