Fallout: distrust, uncertainty
By JEFF HARRINGTON, Times Staff Writer
WorldCom executives said they were shocked to discover the depth of fraud inside the telecom giant.
Charles Elson wasn't.
Not after the scandals at Enron, Arthur Andersen and ImClone Systems.
Not after WorldCom's board already appeared weak, approving nine-figure loans to ousted chief executive Bernard Ebbers.
And certainly not after corporate America's "anything goes" attitude during the stock market's roaring 1990s.
"We lived in a political climate for a while that said the ends justified the means," said Elson, director of the Center for Corporate Governance at the University of Delaware. "When that culture is okay, people who may be prone to do funny things but are bounded by the threat of law or threat of ethics are suddenly more aggressive.
WorldCom, the country's No. 2 long-distance company, is sliding toward bankruptcy after disclosing late Tuesday that it had hidden $3.8-billion in expenses. The disclosure prompted President Bush to vow to "hold people accountable." Late Wednesday, Harvey Pitt, chairman of the Securities and Exchange Commission, said the SEC has filed a fraud action against WorldCom in federal court in Manhattan.
Elson said WorldCom, like Enron, may be a harbinger of more bad news. "There are going to be other shoes that are going to drop -- unquestionably," he said.
In fact, just before the WorldCom shoe dropped, Elson was in St. Petersburg predicting more accounting casualties in a KPMG-sponsored gathering of financial executives.
The title of his Tuesday speech: "Corporate Governance Lessons from Enron."
The lessons coming out of WorldCom are equally instructive.
Even beyond the company's aggressive growth and mounting debt, there were clues that WorldCom had problems.
The company's board met four times last year, relatively few for such a troubled company. (Most boards meet six or seven times, one recent survey found.) Moreover, board members approved a series of loans and loan guarantees in 2000 and 2001 totaling $408.2-million for Ebbers, who resigned as CEO in April.
"This is your classic cheerleader board on cruise control," said Patrick McGurn, vice president at Institutional Shareholder Services in Rockville, Md., a corporate governance and proxy analyst for investors.
In an interview with the St. Petersburg Times, U.S. Commerce Secretary Don Evans said he was "as outraged as everyone else" about WorldCom.
"By far, the American people, American companies and American business leaders are doing it right," said Evans, who will hold a town hall meeting in Tampa today on international trade. "There are a few trying to cut corners. I don't think the system has failed us. There are a few that failed the system."
The basis of what may be one of the largest-ever accounting frauds was relatively simple. About $3.6-billion in expenses were improperly booked as capital expenditures. To some outside observers, that kind of wrongdoing should easily have been spotted by the corporate safeguards already in place: the company's outside auditor (the beleaguered Arthur Andersen, at the time), the board's audit committee and the final backstop, the Securities and Exchange Commission.
That the shenanigans were overlooked has renewed calls for reforming the accounting industry, beefing up SEC enforcement and filling public company boards with more independent directors. The ideal situation, corporate governance experts say, is to give independent directors an equity stake in the company and therefore a stronger incentive to be a watchdog.
A WorldCom spokesman could not be reached Wednesday to talk about board conduct.
President Bush, who deemed the WorldCom disclosures "outrageous," proposed in March creation of an independent board holding accountants to "the highest ethical standards." The Securities and Exchange Commission also has vowed renewed vigilance to uncover accounting trickery after Enron.
Post-Enron, shareholders are also taking a closer look at how companies dole out political contributions.
WorldCom ranks among the top five dozen givers in individual, corporate "soft money" and political action committee donations overall in the 2000 election and so far for the 2002 campaigns, figures compiled by the Center for Responsive Politics show. WorldCom and its top officers gave $520,810 in soft money contributions to Republicans and $202,833 to Democrats in the 2000 election.
Carolyn Brancato, director of the Global Corporate Governance Research Center at the Conference Board, earlier said Enron has created a sea change in how companies view their responsibility to govern themselves.
"The most important thing a board can ask itself today is whether it is professionally managed in the same way that the company itself is professionally managed,"' Brancato said in an April speech to the U.S. Senate Committee on Finance. "The collegial nature of boards must give way to a new emphasis on professionalism, and directors must ask management the hard questions."
Elson said some boards and accounting firms have already made changes this year and a new, improved system is emerging. After all, he points out, all the WorldCom problems coming to the fray were from 2001 and earlier.
"What you're seeing is the vestiges of an old system," he said. "The infection is working its way out of the wound."
-- Times staff writer Steve Huettel contributed to this report, which also used Times wires. Jeff Harrington can be reached at firstname.lastname@example.org or (813) 226-3407.
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