Wednesday, June 26, 2002
Beyond Value Investing Weblog
The Corporate Pyramid Scheme
How WorldCom Lost Billions in the Biggest Pyramid Scheme of All Time
by Bob Hiler
The headlines are starting to come out about how WorldCom cooked its books
to hide nearly four billion dollars from Wall Street:
The New York Times: WorldCom Says It Hid Expenses, Inflating Cash Flow $3.8
Billion
Wall Street Journal: WorldCom Internal Probe Uncovers Massive Fraud
The Financial Times: WorldCom fires CFO after $3.8bn fraud claim
What a story: WorldCom's CFO - working together with Enron accountant
Andersen - systematically hid billions of dollars of expenses by
reclassifying them as capital expenditures. The sheer magnitude of fraud by
WorldCom's accountants is breathtaking, further shaking our faith in what
should be our high priests of finance.
But accounting fraud is only half the story. Finding the rest of the story
means following that old journalism adage: Follow the Money.
You can't understand the fall of the WorldCom empire without understanding
its rise. At its height, WorldCom and its telecom peers generated billions
in revenues in the 1990's. After studying its financials, I now believe that
these revenues were generated by nothing less than a corporate pyramid
scheme. It is the collapse of this pyramid scheme that triggered the fall
of WorldCom - and the subsequent rejiggering of financials by desperate
management and their complicit accountants.
In other words, accounting fraud is often just the last act of desperation
by companies frantic to prop up a collapsing pyramid scheme. The core
problem is not generated or caused by accounting fraud - it's caused by
something entirely different, and entirely legal.
These days, Fraud is most often a symptom of a new disease on Wall Street:
Corporate Pyramid Schemes.
Corporate Scandals Taking Toll On Markets
By Steven Pearlstein
Washington Post Staff Writer
Wednesday, June 26, 2002; Page A01
A major accounting firm convicted of obstructing justice. A leading
brokerage caught misleading its clients. Imperious chief executives falling
like flies. Huge corporations tumbling into bankruptcy. Business pages that
read like the crime blotter.
Now, according to economists and market analysts, these still-unfolding
corporate and accounting scandals have begun to weigh heavily on the stock
market, the dollar and the U.S. economy. And the effects are likely to
linger at least through the end of the year.
Just last night, WorldCom Inc. fired two executives and announced that it
had mischaracterized expenses for more than a year, wiping out at least
$1.6 billion in reported profits. Its shares, already below $1, plunged as
low as 26 cents in after-hours trading.
"The economy and markets right now are in the midst of a full-blown
corporate governance shock," said Stephen Roach, chief economist and
resident pessimist at Morgan Stanley. "To presume somehow that it's over or
the worst is behind us is naive."
full: http://www.washingtonpost.com/wp-dyn/articles/A44973-2002Jun25.html
Louis Proyect
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