Accessibility links

Will More Corporate Transparency Result from WorldCom Scandal? - 2002-06-27


What pushed the U.S. telecommunications giant, WorldCom, to the brink of bankruptcy and what ramifications will the WorldCom scandal have on national rules of corporate governance? Those are questions many want answered as the company faces civil fraud charges in the wake of admissions that it altered the books.

Bigger is not always better, despite the recent popularity of corporate mergers, said Kennesaw State University business professor John McAllister. He said WorldCom's financial problems stem in part from its acquisition of MCI five years ago.

"WorldCom paid something like $3 billion for what they call MCI's in-process research and development. In other words, they paid a lot of money for what they thought MCI's potential was. Their timing was terrible, their judgment was wrong, and they've been struggling ever since trying to make up for that," he said.

The timing was terrible, Mr. McAllister said, because competition in the communications industry was rising much faster than demand. "They ended up in the wrong business and paid too much and as things got more and more competitive and the prices were forced down, WorldCom simply wasn't making any money. So they said, what can we do to make it look like we're making a little money so we can hang on until this downturn is over with, and they fell into the temptation of falsifying the numbers," Mr. McAllister said.

Specifically, WorldCom disguised its operating costs as "capital investments," thereby making it appear the company's expenses were lower and its profits higher and that it was investing heavily in the future.

When the illegal accounting practices came to light, WorldCom grew from a financial disaster into an ethical disaster as well, joining a string of major U.S. companies and corporate executives recently charged with wrongdoing.

That has prompted outcries that corruption is rampant among U.S. businesses. But George Washington University corporate law professor Lawrence Mitchell said the furor is greater than the problem.

"One of the reasons we appear to be so corrupt right now is that we have the transparency mechanisms that allow it to be revealed. And we have better enforcement mechanisms and better regulatory mechanisms and better-developed markets than anybody else," Mr. Mitchell said.

However, Mr. Mitchell stresses, there is certainly room for improvement. "I'm hopeful the Securities and Exchange Commission and Congress will be more aggressive than they have been, more willing to accept some of the fundamental problems, like the fact that our accounting profession is a cartel that ought to be broken up, that we allow this cartel to write the rules by which it lives not only the ethical rules but the rules that it applies to auditing corporations," he said.

DePaul University Business Ethics professor Laura Hartman believes scandals like WorldCom's offer the best way to accomplish that.

"To be honest, I've been working in this area for 15 years, and I am thrilled people are talking about this. The media reports on WorldCom. The public is outraged and demands more information. And the media then focuses its lens, not only on WorldCom, but perhaps on all industries," Ms. Hartman said.

The result, Laura Hartman hopes, will be louder and louder calls for corporate accountability, followed by congressional action.

A bill to impose tighter oversight of the accounting industry is already making its way through the U.S. Senate.

XS
SM
MD
LG