By Nayana
Enron, WorldCom, Global Crossing, Xerox, Adelphia, Qwest — most of these may not be household names in Sri Lanka but they represent some of the biggest names in corporate America. They are all in big trouble as a result of their accounting practices.

The story of Enron has already been told. Some of its executives are thought likely face criminal charges.

WorldCom, the second largest US long-distance phone company, has admitted that its profits between January 2001 and March 2002 were inflated by US dollars 3.8 billion. This accounting scandal is bigger in monetary temms than that of Enron and is described by some commentators as the biggest in history.

This same company had already weathered one storm when its founder and chief executive had to leave after it was found that he had borrowed millions of dollars from the firm to underwrite the inflated prices he had paid for the company’s own shares.

Global Crossing, a hi-tech telecom network firm filed for Chapter 11 bankruptcy last January. It had been living on the dubious practice, apparently common in the band with business, of trading network access back and forth with other firms to create the impression of lively business. In many cases the transactions are said to have been mere book entries with no money actually changing hands. US regulators have now moved in on the case.

Last April, the US Securities and Exchange Commission (SEC) filed a civil suit against Xerox, the well-known manufacturer of photocopiers, for misstating four years’ worth of profits to the tune of US dollars 3 billion. Under a legal procedure allowed in respect of such actions, Xerox negotiated a settlement with the SEC whereby it agreed to pay a 10 million dollar fine and restate its financial statements without admiring any wrongdoing. The fine is described as the largest ever imposed by the SEC for accounting misdeeds.

Adelphia Communications, said to be America’s sixth largest cable television operator, filed for bankruptcy last month. The company has restated its profits for the past two years and admitted that it did not have as many cable television subscribers as it claimed. It is now facing investigations into its accounting.

Earlier this month, Qwest Communications, America’s fourth largest local telecom company admitted that it is the subject of a criminal investigation. It said that the US Attorney’s office in Denver had informed it of the investigation but had not disclosed the subject matter of the probe. Earlier, shareholder outrage had forced its chief executive to resign after paying himself a 1.5 million dollar bonus while the company ran up losses amounting to billions. A joint-venture with a Dutch company also ended in bankruptcy.

On a somewhat different plain, Merrill Lynch well-known investment bank is under scrutiny, on suspicion that it had advised investors to buy stocks which the bank itself secretly thought were worthless. The rationale for this false advice was apparently the hope that it might then have been able to secure investment banking business from the companies concerned.

Merrill Lynch is reported to have reached a settlement with New York’s Attorney-General to pay a 100 million dollar fine without admission of guilt and sever all links between its analysts’ pay and its investment banking revenues.

All this is not recounted with a view to being unduly critical of the USA. On the contrary, it is probably because of the vigour of its investigative agencies, both legal and political, and its tradition of public vigilance and citizen suits that all this has been exposed. The system was admittedly not effective enough to prevent the frauds, but once the bubble burst at Enron last year, the searchlight has been ruthlessly turned on corporate America and companies are falling like dominos. Heavy fines and jail terms are expected at the end of many of the proceedings now underway.

A general air of corporate sleaze hangs about the business world of many other countries, both rich and poor, but they have neither the political will nor the investigative skills to cause such a blood-letting in such a short time.

The relevance of the US example is this: We in the Third World, long accustomed to a tradition of corruption, inefficiency and indifference on the part of state agencies that handle large areas of the economy, tend to look to the private sector as redeemers. Events in America serve to remind us that free enterprise is driven by ambition and predatory instincts that can degenerate into plain greed and deception if not vigorously monitored.

The ongoing problems of Richard ("Dick") Cheney, Vice-President of the USA, serves to illustrate the egalitarian aspect of American society. As President Clinton found out before, there is no immunity for the holders of even the highest office in the land, either in respect of things done while in office or prior to election.

From 1995-2000, prior to assuming political office, Cheney had served as Chief Executive Officer of Halliburton, an energy and construction services company. That company’s stock has now significantly fallen in value after it was discovered that from 1998 it had changed the basis of its accounting, without disclosure to shareholders and investors, so as to reflect earnings that were never really there.

Its accountants, not surprisingly, were the firm of Arthur Andersen, who are being sued jointly with the company and its directors and senior executives in a civil suit brought by three investors. The case is sponsored by the public interest organization "Judicial Watch" whose motto and reason for existence is "Because no one is above the law".

Thus the Vice President now finds himself a defendant in the US District Court, Northern District of Texas, Dallas Division. According to the plaintiffs, their action arises "from a fraud perpetrated by directors, offficers and accountants" of the company against shareholders, potential investors and "the integrity of the securities market".

Cheney is sued as having been "a direct participant, aider and abettor, and co-conspirator in the fraudulent acts, omissions and scheme" set forth in the plaint. This scheme was the result of what Arthur Andersen accountants termed "value creation" and "inventiveness" which they introduced under an undisclosed "Change in Accounting Principles" at Halliburton around 1998.

This change involved classifying as "revenue" disputed unresolved cost overruns on Halliburton’s long term construction projects on the speculative assumption that its customers would pay the disputed amounts. Hence sums ranging for dollars 98 million to 234 million were reflected as unbilled receivables in the accounts from 1998 to 2001, considerably inflating the company’s earnings and pre-tax profits.

However, under US Generally Accepted Accounting Principles (GMP) with which all listed companies must comply, any such change in accounting principles and its full effect must be disclosed, which the company failed to do. In May this year the company reported that its accounts were under SEC investigation. Meanwhile the plaintiffs have asked for actual and punitive damages from the defendants jointly and severally.