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Effects of Corporate Corruption Far-Reaching


Enron and Worldcom often come to mind as prime examples of corporate corruption. But some analysts say corruption in the business world is more common and less sensational than most people think. Mil Arcega continues VOA's series on corruption with a look at the cost of corporate misdeeds in America and around the world.

U.S.-based energy trading firm Enron reported earnings of more than $100 billion in 2000. So when Enron collapsed a year later, the financial community was stunned.

Employees lost jobs and pensions. Some investors lost their entire life savings in what became the largest bankruptcy in American history. Top Enron officials were later found guilty of fraudulent accounting practices and of trying to hide hundreds of millions of dollars in debt.

Worldcom was next. The telecommunications company was once among the most powerful in the world. But a 2002 investigation by the U.S. Securities and Exchange Commission found company officials had inflated the value of the company's assets by 11 billion dollars.

A string of other cases followed, including revelations of executive excess at Tyco International - a multinational manufacturing conglomerate - and insider trading by television personality Martha Stewart.

The abuses led to new accounting standards , but Wendell Rawls, who heads the Center for Public Integrity in Washington DC, says corporate corruption is nothing new.

"This has been going on for 150 years," he said. "The Rockefellers, the JP Morgans of the world, the Vanderbilts of the world - they were all doing the same thing in the late 1800's, in the early 20th century. They made huge profits. That's the reason they were calling them the robber barons."

Kimberly Elliott wrote a book on corruption in the global economy. She says corporate misdeeds extend beyond America's shores.

"Some European countries used to allow their corporations to take tax deductions for bribes," she noted. "That was, in fact, a normal way for doing business. That is no longer allowed."

Banker Wang Xuebing, once regarded as a leader in efforts to modernize China, was convicted in 2003 for taking bribes and expensive gifts at the Bank of China's New York office. Wang was sentenced to 12 years in prison and ordered to pay $20 million in fines.

Earlier this year, Hyundai Motor Corporation chairman Chung Mong-koo was arrested by South Korean authorities for allegedly embezzling millions of dollars.

Analysts say there's no way to estimate the true cost of corruption. But author Kimberly Elliott says its impact on societies is clear.

"You really can see it very qualitatively in countries where sick people in poor countries don't get medicine because it's been shifted off to the black market and sold or you don't get teachers showing up in schools unless they're paid by parents to show up and teach their children," she added. "You see it in cement plants that are built and never operate, because they weren't really needed."

Corruption's effects are different, but just as pervasive, in developed countries. "Corporate corruption leads to higher prices," added Wendell Rawls. "Corporate corruption leads to less efficiency. Corporate corruption leads to a reduced share price. Corporate corruption reduces your pension benefits. Corporate corruption means there's less profit usually because they spend more money on legal fees to protect themselves against prosecutions."

And it can cause markets to decline as Peter Morici, an Economics Professor at the University of Maryland, explains.

"These corporate scandals - Enron, Tyco and the others - they together caused stock market values to come down as a group," he noted.

Despite the impact on stock markets, Morici described the reforms that followed as "overzealous." He points out that Enron officials were convicted on regulations that were already in place before U.S. lawmakers changed the law to make chief executives, board members and auditors more accountable.

"We don't need to micromanage America's accountants by putting a federal auditor over their shoulders through regulation every step of the way as we are doing now," he explained.

Wendell Rawls, who won a Pultizer Prize for investigative journalism, believes tougher laws are necessary, but he says the best way to reduce corruption is to expose it.

"You have to shine lights in the corners and expose those who are trying to cut corners and those who are trying to skirt the law and you have to make government accountable at every level," he said. "You have to make anybody who profits on the backs of the American people or the people of the world, accountable for how they're making their money and who they are abusing and how they are abusing them."

Analysts say the Enron case revealed that many of the nation's most successful companies during the stock market bubble of the 1990's were far less substantial than they seemed. A former federal prosecutor said it's important to expose and punish those responsible for corporate misdeeds in order to restore investor confidence.

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