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Wednesday, June 26, 2002


The latest crisis at WorlCom - one of the world's largest telecom operators - highlights just how prcarious the US corporate situation actually is. Apart from the now customary tinge of scandal in high places, rapid managerial exists, and flawed 'creative accounting', there is also another detail which increasingly appears to be par for the course: the accountants were Arthur Andersen.

WorldComthe nation's second-largest long-distance carrier, said last night that it had overstated its cash flow by more than $3.8 billion during the last five quarters in what appears to be one of the largest cases of false corporate bookkeeping yet.

The problem, discovered during an internal audit, throws into doubt the survival of WorldCom and MCI, the long-distance company it acquired in 1998. The company, which was already the subject of a federal investigation into its accounting practices, has been struggling to refinance $30 billion in debt. Its credit was relegated to junk-bond status last month, and even before last night's announcement, the stock price was down more than 94 percent so far this year..........Instead of the profit of $1.4 billion the company reported in 2001 and $130 million in this year's first quarter, WorldCom now says it lost money during those periods, although it did not say how much.In disclosing the bookkeeping problem, WorldCom said it had fired its chief financial officer, Scott D. Sullivan, the executive widely credited with helping orchestrate the financial strategy during the mid-to-late 1990's that enabled WorldCom to rise from a second-tier telecommunications company to a world giant through a series of acquisitions that included the $30 billion purchase of MCI in 1998...........WorldCom's board said it had fired Mr. Sullivan after discovering a strategy in which operating costs like basic network maintenance had been booked as capital investments, an accounting gimmick that enabled WorldCom to hide expenses, inflate its cash flow and report profits instead of losses. Until last month, WorldCom's auditor had been Arthur Andersen, the accounting firm that also audited the books of Enron and Global Crossing.
Source: New York Times LINK

Obviously with this environment it's very difficult to see a strong economic recovery as a credible possibility in the US in the near future.
The more pertinent question would appear to be, just how near to the edge are we right now? Not as near as we might be I hope.

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