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Worldcom's disconnect

$3.8 billion swept under the rug?

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"An undeniable setback." That was new Worldcom chief executive John Sidgmore's description of revelations that the company had lied to shareholders and the public, disguising $3.8 billion in expenses to make its cash flow and profits appear stronger.

Government authorities had a stronger description of one of the largest accounting scandals in history: criminal fraud. "I think we've got to prosecute people to the full extent of the law," said Treasury Secretary Paul O'Neill, warning that the deception was too big to have been carried out by only one individual.

Securities and Exchange Commission Chairman Harvey Pitt announced that the government was bringing civil fraud charges against Worldcom, the second-largest long-distance carrier and owner of MCI, while President Bush hinted at a Justice Department criminal investigation. Analysts predicted that the scope of Worldcom's fraud could end up overshadowing scandals at Global Crossing, Imclone, and even Enron.

Meanwhile, as the number of disgraced companies grows, economists are beginning to worry about the leaven of corporate dishonesty's effect on the nation's economic lump. The spate of corporate scandals has weakened an already bearish stock market, with the Dow dipping below 9,000 on June 26, the day after the Worldcom announcement.

Investors, who had bid the Dow as high as 11,723 in January 2000, are now clearly concerned about whether executives and accountants are dealing honestly with them. "You have a perception that corporate America is not being straight with investors, and that the point of accounting is to hide rather than divulge," said Richard A. Dickson, an analyst with Hilliard Lyons.

In an attempt to restore confidence in America's financial system, as well as to root out other wrongdoers, Mr. Pitt last week directed the CEOs and chief financial officers of the nation's largest 1,000 companies to vouch for the accuracy of their financial statements. Mr. Pitt called the move a first step: "No one is getting a pass."

Timothy Lamer

Tim is executive editor of WORLD Commentary. He previously worked for the Media Research Center in Alexandria, Va. His work has also appeared in The Wall Street Journal, The Washington Post, and The Weekly Standard.


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