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The
WorldCom scandal may have made people sceptical about the ways of
corporate America, but Indians, especially those in high-tech industries
who regularly deal with American companies, have little cause for
worry, assures MOHAN BABU
One
of the most significant and profound developments in corporate America
in recent times is the revelation of WorldCom’s $3.8 billion
accounting fraud that outraged everyone, from employees and small
investors to president George W Bush. Investigations continue with
fresh stories appearing almost every hour. By the time this article
appears in print, the news may be passé but the havoc wrought
by this accounting scandal will take a long time to get ebb.
The
story so far: The US Securities and Exchange Commission (SEC) has
formally charged WorldCom with fraud. Questions are still being
asked and people are wondering how this was possible. Could such
an established company have hidden such huge expenses from the investing
public? As a Business Week article tries to explain it: “During
2001 and the first quarter of 2002, the company counted as capital
investments $3.8 billion that it spent on everyday expenses. This
makes a difference because capital investments are treated differently
from other expenses for accounting purposes. Capital spending is
money used to buy long-lasting assets, like fibre-optic cables or
switches that direct telephone calls, so the cost is spread out
over several years. For example, if WorldCom spent $10 million on
switches it expected to last 10 years, it would book a $1 million
expense for 10 years. In contrast, if it spent $10 million on office
space, it has to count all of that expense in the period in which
it occurred. The company says the expenses that were counted as
capital expenditure involve “line costs”, which is the
fee that WorldCom pays to other telecom players for the right to
access their networks.”
What
bothers people more than the how, why, when or who was involved
in this fraud, is the magnitude of the amount involved in the scandal.
Even in this day and age, four billion dollars is a lot of money,
actually more than the turnover of 80 percent of Fortune 500 companies!
Even by American standards, a billion dollars goes a long way and
in the global marketplace, this amount is huge. The crux of the
matter boils down to this question: “If a company could misappropriate
this amount by fraudulent accounting, why should anyone believe
in any financial statement put out by anyone?”
It
was pure greed along with the way the accounting system rewards
corporate managers that perhaps lead to this mess. Only time will
tell what measures are taken to prevent an occurrence of such a
scandal in the future, but there are some lessons to be learnt here:
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Never take anything—especially press releases issued by companies—at
face value. Double check all the “facts” provided by
companies.
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Independently corroborate information being provided by companies.
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If it is too good to be true, it probably isn’t.
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Just because a “large” organisation is releasing some
information, it need not be factual.
It
will be a while before people get over the cynicism about everything
corporate America says. Things are not really
as
bad as they sound. The American accounting and financial system
is working overtime to fill any loopholes in the system. Indians,
especially those in high-tech industries, who regularly deal with
American companies have little cause for worry. Most companies and
their leaders are honest in their dealings and fair to their business
partners. Just because a few bad apples acted unscrupulously (and
tried to get away with it), does not mean the total collapse of
the system. On the contrary, the renewed scrutiny will only make
the system more transparent and open.
Also,
on a human/personal note, not every employee working for beleaguered
companies like Worldcom, Anderson or Enron is necessarily a suspect.
One should not judge a book by its cover. As a matter of fact, there
are a number of employees (including techies), who just happened
to entrust their careers to these companies and found their future
tarnished by circumstances totally out of their control. They probably
lost a good part of their personal savings when the stock prices
tanked, in the process learning valuable lessons in corporate management.
Now, which company wouldn’t want to hire employees who have
been baptized by fire?
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PEOPLE
