How the wheels came off at WorldCom

Analysis
By Jeff Randall BBC business editor

Just when you thought it was safe to go back into the water... snap! Another US accounting scandal rips into the stock market, eating away at fragile shareholder confidence, further destroying belief in corporate integrity.

News that WorldCom, the telecoms operator, has overstated its profits by as much as £2.5bn confirms the worst fears of millions of investors, not just in America but throughout the world.

Those who challenged implausible assumptions were dismissed as brainless dinosaurs

The great stock market boom of the late 1990s, it seems, was a hoax, the product of smoke-and-mirrors. Many big companies deliberately failed to convey their real numbers.

The catchphrase of those bubble years, when share prices de-linked from economic reality, was "new paradigm".

Collective madness

We were told by share-ramping analysts on Wall Street and in the City that the TMT sector (technology, media and telecoms companies) would deliver unprecedented growth, giving us an everlasting financial summer.

It was a period of collective madness.

Out went old-fashioned business virtues, such as profits and assets. In came the blind faith of dot.com corporations and their PR puff merchants.

When the numbers didn't add up, some desperate folk took to making them up

Somehow, the internet and whizz-bang technology would square the circle. Never mind that many sales forecasts were based on assumptions that even Pangloss might have balked at, investors jumped in like lemmings off a cliff.

Those who challenged implausible TMT assumptions were dismissed as brainless dinosaurs.

Money out of the door

There was, of course, no business miracle. Financial gravity could not be defied. And when the numbers didn't add up, some desperate folk took to making them up.

Enron, we know, was a scandal. The company cheated investors by revealing the full extent of its assets while hiding much of its liabilities.

Directors sold their Enron shares, yet urged the public to buy them.

This was not faulty maths, it was malfeasance

Now we have WorldCom. Its accounts masked £2.5bn of expenses by treating them as capital expenditure.

The latter is intended to boost the value of the business, the former is simply money out of the door.

The company got away with it largely as a result of a spending spree that saw it take over 60 rivals in 15 years. Its accounts became impenetrably complex.

But when WorldCom's proposed $129bn purchase of Sprint Corp in 2000 was blocked by competition authorities, the wheels fell off the bandwagon.

It could no longer bamboozle investors with acquisition accounting.

Suffocated by fraud?

US stock exchange officials are already investigating WorldCom and the federal authorities are bound to join them. While not prejudging the guilt of any individual, it's impossible to see how such a vast sum can go missing by mistake.

This was not faulty maths, it was malfeasance.

Investors are gripped by a crisis of confidence and will remain that way until they sense a return to honesty and probity

Corporate USA needs to look at itself and ask: have we become a society of cheats? Has the culture of greed become so widespread that ordinary people can no longer trust what giant corporations are saying?

If the answer is yes, there must be a wholesale clear-out before America's unique spirit of enterprise is suffocated by fraud.

Blind eye

Investors are gripped by a crisis of confidence and will remain that way until they sense a return to honesty and probity.

No wonder the gold price has shot up to more than $320 an ounce.

Governments can debauch currencies. Companies can invent figures. Fat cats can rip off shareholders, and auditors can turn a blind eye if the fees are big enough.

But the supply of gold is finite; it has been a store of value for 10,000 years, is accepted around the globe and it doesn't lie.