Dishonesty, Greed and Hypocrisy in Corporate America
This is a tale of greed. And dishonesty. And hypocrisy.
These are hard times for Wall Street, the American economy, and President George W. Bush. As the conservative and pro-business major publication Fortune reports, ongoing revelations of corporate wrongdoing and accounting scandals have "created a crisis of investor confidence the likes of which hasn't been seen since the Great Depression."
The current spate of bad news began with Enron, the largest corporate bankruptcy in American history. Enron executives, propelled by greed, were not satisfied with immense salaries: they set up all sorts of spin-off partnerships to enrich themselves at the expense of stockholders and the corporation's bottom line. In a little more than a decade Enron soared from obscurity to become the nation's seventh largest company, with over 20,000 employees in forty countries. But its dishonesty about profits, and its off-the-books energy deals, abetted by fiscal accounting that was erroneous, misleading, and downright dishonest, eventually caused an implosion of gigantic proportions.
On December 28, 2000, Enron stock sold at over $84 a share. Eleven months later, to the day, Enron shares plummeted to less than a dollar in the heaviest trading volume in a corporation ever recorded by a major stock exchange. The investors in the company - many of them Enron employees - rushed to get out of the stock before it became totally worthless. Two months later Enron stock was delisted by the New York Stock Exchange, and today its stock is just that, worthless. The federal Justice Department is in the midst of a criminal investigation of the energy-trading company, but the damage to shareholders and pensioners is done.
Enron was just the beginning, as example after example of corporate greed and accounting malfeasance has come to light. Every one of the corporations I shall discuss is - or was - among America's largest companies.
The regional telephone company Qwest provides basic telephone service to fourteen states, has revenues of over $18 billion a year and handles 240 million phone calls and 600 million e-mails each day. The fourth largest U.S. telephone company, it is under investigation for criminal corporate practices. The Securities and Exchange Commission (SEC) is currently examining its accounting procedures. These indications of likely fiscal impropriety have caused its stock to crash from its high of $67 two years ago to just under $2, a drop of 97 percent.
Tyco International is one of the world's largest conglomerates, operating in over 80 countries with revenues of $36 billion. In recent months, huge questions surfaced about the way in which the corporation accounted for the multiple acquisitions that transformed it from a small company into a corporate behemoth. Its CEO, Dennis Kozlowski, was forced to resign, and shortly afterwards was arraigned on charges of tax evasion. Tyco, which sold at $60 a share six months ago, in the wake of the financial irregularities in its booking of acquisitions, is now worth just over $10 a share.
Compared to Adelphia Communications Corp., one of America's largest cable television providers, Tyco has performed well on the stock market. Six months ago the respected journal Business Week reported Adelphia's value at between $9.5 billion and $11.8 billion. Since then, Adelphia has entered bankruptcy following disclosures that its finances were in disarray, in large measure because it had made $2.3 billion in off-balance sheet loans to partnerships run by family of John Rigas, the CEO of Adelphia. Its bankruptcy is the fifth largest such filing since 1980. Adelphia's shares sold for $42 dollars a year ago, but had dropped to $.70 a month and a half ago, when all trading in its shares was halted.
Global Crossing, which had a major role in the development of fiber optic cable networks, is under investigation by the SEC for fraudulent accounting. The corporation, it appears, arranged 'deals' in which no goods or services were exchanged, but which nonetheless made it appear that profit was being generated. These purely paper transactions inflated the company's revenue substantially. Global Crossing also filed for bankruptcy. Its share price was over $60 two and a half years ago. Each share is worth $.06 today, a drop of 99.9 percent.
American stock markets - and world markets - have been shaken by the demise of WorldCom. Its balance sheet lists assets of $103 billion, and net income for the calendar year ending March 31 of over $1 billion. Yet it has been revealed that fraudulent accounting hid $3.8 billion in losses, and it is rumored that additional losses may be forthcoming. What this huge telecommunications company did was record daily costs as capital expenditures, a dishonest procedure which allowed it to erase an enormous operating loss and record a sizeable but illusory profit. Three years ago WorldCom stock traded at $64. Today it trades at $.20, a drop of well over 99 percent. It has defaulted on $4.25 billion of its debts to this point, and future defaults are certainly possible.
There are likely more revelations of corporate malfeasance and dishonesty to come. For instance, others in the energy business along with Enron -- Dynegy, El Paso Corp., CMS Energy, Williams, and Halliburton - are currently under scrutiny for the manner in which they have made trades and accounted for revenues and expenses.
Halliburton is particularly interesting, since it points to corporate corruption on a different level. Not that its accounting irregularities are larger than those of WorldCom or Enron, for they are not. But the scandal at Halliburton has a great deal, a great deal, to do with the capacity of the current political administration in Washington to clean up that sewer of greed and dishonesty which, it so unhappily appears, is characteristic of many corporate boardrooms.
Halliburton is a major provider of engineering services, particularly to the energy sector. A current SEC investigation is investigating Halliburton's accounting practices on cost overruns on construction jobs. The former CEO of Halliburton, who was in charge when those accounting practices were introduced, is Dick Cheney, currently Vice President of the United States. A recently filed suit alleges that Mr. Cheney conspired, along with others at Halliburton, to file false financial statements and thereby mislead investors. The suit claims Halliburton's deceptive accounting procedures led to overstatements of revenue amounting to as much as $445 million in a three-year period during Mr. Cheney's tenure as CEO.
On July 25, 2000, the day after Mr. Bush selected Mr. Cheney as his Vice Presidential running mate, Halliburton stock sold at $42. Today it sells at $13.
Arthur Anderson LLP, formerly one of the "Big Five" international accounting firms, is today in disarray and probable dissolution. It was convicted of obstruction of justice for destroying Enron-related documents. It was also the accounting firm for WorldCom, Qwest, and Halliburton. In 1996 Mr. Cheney made a promotional videotape for Anderson. "One of the things I like that they do for us is that, in effect, I get good advice, if you will, from their people based upon how we're doing business and how we're operating, over and above," Mr. Cheney said, "just sort of the normal by-the-books audit arrangement."
Arthur Anderson was also the accountant for a small corporation named for Harken Energy. Therein lies a tale. Fifteen years ago, when George W. Bush was a businessman faced with fiscal failure, Harken Energy bought Spectrum 7, a small company of which Bush was then CEO. Since Spectrum 7 was unprofitable and saddled with debt, the deal brought Harken little gain but the CEO's connections to his father - who happened to be the President of the United States.
Later, although not before our tale is concluded, Harken itself would turn into a company with troubles of its own. But while it appeared healthy, Harken extended generous stock options to the son of President George H. W. Bush. Then the fancy accounting began. Paul Krugman has reported in the New York Times that it involved creating a dummy entity to serve as paper front to then purchase "some of the firm's assets at unrealistically high prices, creating a phantom profit that inflates the stock price, allowing the executives to cash in their stock."
Here is Krugman's description of what happened at Harken Energy, a description which has subsequently been reported all over the nation. "A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989."
Once Harken's stock price was inflated by means of this maneuver - significantly, Arthur Anderson was the accounting firm, and Mr. Bush was on Harken's audit committee - Mr. Bush was able to sell his shares at a large profit shortly before the price of Harken stock dropped substantially. To be specific, on June 22, 1990, Mr. Bush, a director of Harken, sold 212,140 shares for $4 a share, for a total of $848,000. Two months later, on August 20, Harken announced a loss of $23.2 million; on that day its share price dropped 20 percent to $2.375. It closed the year at $1 a share.
There's more to the story. As Wall Street tries to cope with a crisis of confidence involving the fiscal probity of corporations, President Bush has in the past several days recommended that corporations eliminate loans to top executives and corporate insiders. Yet back in the days when he was involved with Harken Energy, the corporation allowed him to borrow heavily from the company's coffers, and then erased his personal liability for that loan. The Bush loan was the exact sort of corporate benefit that helped sink Adelphia and WorldCom, whose CEO, Bernard J. Ebbers, received a $408 million, low-interest loan from the company. But that was then, and this is now . . .
It might seem that things could not get dirtier, yet they can. To add to the chronicle of greed and dishonesty just cited, there is the matter of hypocrisy. The hypocrisy is of signal importance to the developing world, which serves as the major victim of that hypocrisy.
The International Monetary Fund (IMF) functions as a sort of global economic policeman, requiring of countries that seek loans that they get their fiscal house in order as a precondition to economic assistance. One of the chief demands of the IMF is transparency.
In 1999 the IMF formulated its 'Code of Good Practices on Transparency in Monetary and Financial Policies.' This code calls for "good transparency practices for the formulation and reporting of monetary and financial policies." Time and again the IMF has insisted that developing nations adhere to principles of transparency, largely at the behest of the United States and the European nations.
The United States, it appears, has felt itself under no such compunction to compel transparency in its own internal fiscal affairs. Recent revelations have revealed that dishonesty and obfuscation run rampant in many American boardrooms, including boardrooms in which the President and Vice President have played prominent roles.
This is in large part why the American stock market is in free fall. Nobel laureate Joseph Stiglitz, former chief economist of the World Bank and a major critic of the IMF, has built his reputation on explaining the importance of the economics of information. As he says, "For markets to work, for the appropriate signals for efficient resource allocation to be provided, investors must have as much information as possible. Investors need assurance that information received adequately reflects the economic situation of a firm."
But such assurance has not been forthcoming in the United States. Instead, corporations have cooked their books, hiding their debt and artificially inflating profit. They have even - as in the case of WorldCom - falsified EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), the major measure of earnings flow, previously deemed beyond manipulation. Individual investors, pension funds, mutual shares funds, all are demanding honesty and openness in corporate accounting. They want transparency.
But a great number of corporate executives do not want changes that would compel transparency and severely penalize those who circumvent the honest reporting of financial data. They want to be able to report profits, whether their corporation actually has generated them or not, so their tenure remains secure. They want their corporations to loan them money. They want huge bundles of stock options without accounting for those options as a corporate expense. They want to manipulate stock prices, so that they can reap windfall profits from these options.
The powerful accounting lobby does not want to see changes either, since the majority of their revenue comes from consulting, not accounting. They love doing what Vice President Cheney called, in terms cited earlier, giving advice "over and above the normal by-the-books audit arrangement." That, after all, is where their largest profits lie.
President Bush and Vice President Cheney, ever mindful of campaign contributions from rich and powerful corporate executives, ever mindful of their circle of friends the wheelers and dealers and "captains of industry," ever mindful of their own past practices, are themselves in no hurry to see significant changes made.
None of this will stop the President, or the accountants, or the CEOs of multinational corporations, from demanding that developing nations adhere rigidly to the highest standards of accountability and transparency. The IMF will continue to do their bidding.
One could call it greed. Or dishonesty. Or hypocrisy.
Whatever it is, it is the current condition of the executive suites of government and business in America.