Q&A: The WorldCom debacle

What gave rise to this rash of bad bookkeeping?

In the atmosphere of the late 1990s when so many executives in the high-tech and telecommunications industry were getting rich on stock options, ethical standards slipped. Companies were able to easily sell new stock and were hyping that stock. Bad bookkeeping became contagious in the industry as executives figured rapid sales and rising stock prices would cover any sins. Accountants were also caught up in the excitement.

Do industry insiders believe these questionable accounting practices are widespread, or limited to a few bad actors?

A survey of top corporate ethics officers by The [N.Y.-based] Conference Board predicts at least a half dozen more "major" business ethics scandals will be revealed during the next 12 months. It seems likely bookkeeping standards have deteriorated. But not in every company, of course.

Has the accounting industry enacted the necessary reforms to prevent this in the future?

Many companies are scrambling to make sure their books are correctly stated. In addition, the Securities and Exchange Commission has proposed that chief executive officers should have to personally vouch for the veracity, timeliness, and fairness of their financial statements. It has also called for a regulartory board for accountants. And strong legislation is before Congress.

Is this yet another blow to the "new economy"? Will this slow the pace of investment, and therefore development, in high-tech fields?

Yes, it does raise new suspicions as to the value of the "new economy." But memories are often short on Wall Street and at some point capital and growth in the high-tech areas may well impress investors again.

What role, if any, did deregulation play in the meteoric rise and fall of WorldCom? Are telecommunications companies likely to return to more regulation now?

Deregulation opened the door for aggressive new companies like WorldCom to expand rapidly with acquisitions and mergers and borrow huge amounts of money. Talk of re-regulation of the industry has been rather scarce.

The savings and loan crisis eroded public trust in financial institutions. Could this year's bookkeeping crisis have a similar or greater impact?

The savings and loan crisis and a subsequent failure of numerous commercial banks hurt the recovery after the 1990-'91 recession. This current crisis isn't doing the present economy recovery any good. It may discourage some new investors in stocks and prompt some to leave the market. It is also damaging the reputation of capitalism, and thereby opens the door a little to Congress and regulatory agencies to impose some reforms on Wall Street and on corporations.

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