Another blow for corporate America

The growing list of American corporations that have doctored their books or found other ways to cheat is quickly becoming a crisis for American capitalism.

By now, many of the names have become painfully familiar: Enron, Tyco, ImClone, Adelphia. Now add WorldCom, the nation's second-largest provider of long-distance service. The news that the Jackson, Miss.-based firm committed the largest accounting fraud ever could end up affecting millions of consumers and is already shaking Wall Street to its suspenders.

More broadly, it threatens to undermine the fragile economic recovery and is further eroding public confidence in corporate America. It is calling into question some of the most sacred principles of American capitalism. If last decade was the Roaring '90s, this one is starting out as the Odious OOs.

"This is a crisis of the moral fiber of American capitalism," says Mark Cooper of the Consumer Federation of America. "What's really at stake here is the willingness of Americans to invest in these companies.

If people's money goes into their mattresses, the whole system is going to slow down and choke."

Investors, for their part, are unsure what to believe anymore since Worldcom misreported its cash flow by $3.8 billion. Yesterday, the financial markets opened nervously, with the Dow Jones Industrial Average sinking early in the day below 9,000 for the first since September.

President Bush on Wednesday called reports that WorldCom Inc. disguised $3.8 billion in expenses outrageous and said the government "will fully investigate and hold people accountable."

The WorldCom collapse is likely to prompt new calls for Washington to act – quickly – to help bolster the markets. Earlier this month, the Securities and Exchange Commission (SEC) proposed that CEOs should have to personally vouch for the veracity, timeliness, and fairness of their financial statements. It called for a regulatory board for accountants.

Strong legislation to regulate accountants has passed the Senate Banking Committee. While no plans currently exist to bring it up before the full Senate before the July 4th recess – and the legislation has been stalled in the House – the WorldCom debacle events could spur quicker action.

"This latest accounting scandal only highlights the importance of Congress working together to pass tough new laws, which will prevent future abuses and restore investor confidence in the stock markets and corporate America," says Rep. Billy Tauzin (R) of Louisiana.

The collapse of WorldCom is likely to have a wide impact:

• For consumers, the news is not good. An estimated 1 in 5 Americans use WorldCom as their long-distance carrier. They can expect higher prices and poorer service, particularly if the company is forced into bankruptcy. "Bankruptcy judges run companies to squeeze blood from the turnip," says Mr. Cooper. "They slash expenses and increase cash flow."

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