New low for corporate America

AN accountant in Clinton, Mississippi, is caught fiddling the books and investors in Australia get hit directly in the wallet. That’s the global village for you. WorldCom, once capitalised at $US200 billion, operates in 65 countries, and bills itself as “the pre-eminent communications company for the digital generation”. Instead, it is almost certainly headed for the knacker’s yard.

Chief financial officer Scott Sullivan has been sacked for performing a conjuring trick to artificially inflate profits; he should have been hung by the unmentionables. More than 17,000 blameless WorldCom employees are to follow him out of the door.

What did the man think he was doing? This was not like borrowing $50 out of the petty cash to put on a horse. Even allowing for weak US accounting practices, he must have known someone would eventually discover $3.8 billion was in the wrong box. Bankers are furious. Not for the first time, they have been tricked into lending against fictitious profits. But you have to wonder why it came as a huge shock.

WorldCom shares had skidded from a high of $US64.50 in 1999 to $1.70 before the news broke. Former CEO Bernie Ebbers tiptoed away in late April, having borrowed $365 million from the company.

More wrath is descending on near defunct Arthur Anderson, which inevitably conducted the audit. The firm put out a statement saying: “Our work complied with SEC and professional standards at all times”. That seems to be precisely the problem.

The latest evidence of a paucity of integrity in corporate life was too much for a weary Wall Street. We have so far averted the cataclysmic crash cheerfully predicted by the short-sellers. New York traders seem to have shaken off the worst WorldCom effects like a dog after a bath. But the bear market is now a full-grown grizzly. Alan Greenspan has been presented with a long laundry list of worries. There is a belief that he will now leave interest rates at their 40-year lows until 2003.

The US economy is responding to cheap money. New home sales surged a record 8 per cent in May. Productivity and durable goods orders are up, and GDP growth is set to double to perhaps 3.5 per cent this year. But the $US10 trillion equities market is rudderless and leaking. Private investors are socking money into real estate. Big institutions, fearful of more scandals, are walking on eggshells.

Australia inevitably copped some of the fall-out.

Our market has now lost 8 per cent from its all-time high touched on March 7. The deepest dents in the index were caused by the terrible trio of NewsCorp, Telstra and AMP, but we have fared considerably better than the US, and virtually all foreign bourses.

The S&P 500 is down 13.8 per cent so far this year, the Nasdaq has dived 25 per cent, and there have been huge falls on European bourses. Local fund managers, who had up to 25 per cent of their assets overseas unhedged against the Australian dollar, look like galahs. They are about to confess ‘negative returns’ to irate super fund holders, some of whom will ask why they are paying professionals to lose them money.

Do not spit the dummy just yet. We have a healthy economy and a volatile but appreciating currency. There are many local companies with a long history of solid profits and fully franked dividend payments. Avoid the temptation to chop and change fund managers. The turkeys of this year could be the darlings of the next, and vice versa.

The Enron and WorldCom swindles might turn out to be beneficial. Australia has experienced its own HIH and other horror-shows. The Govern-ment was already planning moves to shake up the auditing profe-ssion and demand higher probity from custodians of public com-panies. George W Bush does not want to go down in history as the man who presided over the collapse of the capitalist system. Watch out for more congressional hearings and a war on corporate scallywags … we will smoke ‘em out etc.

In Australian boardrooms, directors have been asking CEOs if they are quite sure there is not a nasty smell in the basement. The six-year jail sentence just handed out to the former chief financial officer of Harris Scarfe, Alan Hodgson, should have concentrated minds wonderfully.

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