June 28, 2002


Experts rush to consider implications

REACTIONS to the WorldCom scandal have been nothing if not forceful - and brought out a range of not unexpected views from commentators and academics in the United States.

Revelations that WorldCom overstated its financial results and fired two of its senior financial executives are just the latest in a wave of corporate mismanagement stories undermining investor confidence and public trust in American business, said Sidney Friedman, author of How to Make Money Tomorrow Morning.

Management adviser Mark Nelson, a professor at Cornell University’s Johnson School said: "The WorldCom case seems to be a case of costs that should have been expensed and instead were capitalized.

"It's the sort of thing that a strong internal control system, coupled with an internal audit function, which reports to the audit committee of the board, should be able to prevent."

Nelson also said he thought the high growth rate implicit in the valuations of companies such as WorldCom were hard to sustain organically, and had driven some executives to make acquisitions that had been poorly disclosed and to "play with numbers".

Gregory J Halpern, chairman and CEO of the Circle Group, a funding and consulting source for emerging technology companies, said: "Government regulators have focused recently on events surrounding Merrill Lynch analysts, the Enron debacle and Arthur Andersen accounting practices in order to improve consumer confidence by cleaning up corruption. I believe the opposite is happening.

"By continually magnifying the concerns about white collar crimes, we are destroying consumer confidence and thus the economy. In the past three months, regulators have focused heavily on the negative issues facing publicly traded corporations," Halpern said.

Pennsylvania State University telecommunications professor Robert M Frieden said: "In regard to impact on the telecommunications industry, cash is king for investors and we're now in a show-me mode: real earnings and no paper profits, revenues as opposed to acquiring market share."

University of Pennsylvania law professor David Skeel said: "WorldCom will likely need to line up financing and at the same time file for bankruptcy to protect the company.

"The downside to filing for bankruptcy is that they may lose even more customers, since bankruptcy will raise even more doubts about the firm's future. But it does look like bankruptcy is inevitable. The echoes of Enron are eerie."

As an Arthur Andersen client, WorldCom joins the ranks of other Andersen clients such as Global Crossing and Enron. Was Andersen the only bad apple in the barrel? That is doubtful, said Harlan Platt, professor of finance and insurance at Northeastern University. WorldCom capitalized expenses that should have been expensed, he added,

"The ultimate responsibility for corporate governance rests on the board of directors. But boards have been captured by executives who fill them with friends, relatives and untrained persons. The situation is like having the inmates in a jail selecting who their guards should be. It just doesn't work," said Platt.

The media were not blameless either, said Quinnipiac University communications professor Richard Hanley.

"The press generally served as a cheerleader for companies such as WorldCom during the 1990s and failed to ask the right questions," he said. "This is a sharp example of how the ignorance of the press in sophisticated technological and financial matters can allow publicly traded companies to get away with cooking the books and/or overstating technological developments."

And psychologists have had a say too. Robert R Butterworth PhD, psychologist for the International Trauma Associates, said: "With volatile markets, political uncertainty and now WorldCom's restatement of earnings leading to a possible scandal, investor's faith in the market and psychological sense of financial security has been impacted.

"While the WorldCom news dwarfs everything else, another Street scandal deepened today. The insider trading probe of Martha Stewart is widening to an obstruction of justice investigation. This, on top of Enron, can inhibit investing and make the average investor afraid and frightened to get back in the market," he added.

Moving forward was important for Kevin Pianko, audit partner at Eisner LLP. "This news is just the latest knife in the corpse of corporate earnings statements' credibility," he said.

"We need to avoid a rush to judgment, but there's a perceived investor lack of confidence. To get over that hurdle, we've got to get unethical management out of the picture and make sure that auditors do their jobs," he added.

Beyond these steps, Pianko said he believes that boards and audit committees must be held accountable, and more serious penalties must await management who commit financial fraud. "The punishment should fit the crime," he said.

Some were not surprised. "The WorldCom case is a classic case of cooking the books," said Jonathan Lipson, professor of law at the University of Baltimore, and an expert in commercial law matters.