How many more accounting scandals to go?
June 25, 2002 6:30 PM   Subscribe

How many more accounting scandals to go? A recent show "Bigger than Enron" on Frontline leads me to wonder, "How MUCH bigger than Enron?" Responses from viewers on that website include a number of accountants for big firms that insist that these practices are everyday business in accounting and that we have a lot more of this coming. Are we actually in the middle of the biggest market crash since 1929? What do you think? Just how bad could it get?
posted by muppetboy (34 comments total)
What's up with that graph on the zeal site? Don't you need to have proportionate scaling on both sides of a comparison chart in order to make it a legitimate comparison?

But I digress. How bad can it get? If I had that little nugget of information, I'd retire in the Bahamas right now. I'm keeping my money in the market, though. I'm diversified enough that I've got more than I started the year with. Not much more, but enough to be way ahead of the major indices, and since it's money I shouldn't have to touch for another 30 years, I think it's safe enough where it is.

Just remember, two years ago we were all asking "How high can it get?" AOL having the market cap to be able to buy Time/Warner seems pretty stupid now, doesn't it?
posted by mr_crash_davis at 6:41 PM on June 25, 2002

The Worldcom scandal is absolutely staggering. $4 billion in five quarters? The stock markets will go into freefall tomorrow. Muppetboy's questions aren't rhetorical. Investors don't have infinite patience, and they'll bail and the market will crash when one too many accounting scandals come to light.
Four billion dollars?
posted by Holden at 6:44 PM on June 25, 2002

sell short!
posted by delmoi at 6:50 PM on June 25, 2002

After-hours trading shows WCOM down to $0.35 a share. Ouch. Bet trading in WCOM shares is suspended tomorrow morning.
posted by mr_crash_davis at 6:59 PM on June 25, 2002

This is a long time coming. Anyone paying attention should have seen the signs Currently there is a mass exodus of "Rich People" leaving America to go cash in on their accumulated off-shore accounts while the empire burns. If you think that is bad take a look at the budget problems with the government (estimated in the underground press at a 15-20 trillion deficit) and the fact that congress just can't say no to Bush every time he wants a little more dough. Where does that money go? Considering the fact that the DoD can't account for 1/4 of all of the money they spend (yet of course they request more, and are granted it) I would imagine it goes straight to the pockets of those rats that are now abandoning ship. Who will save us from all of this? That's right, your president select, G. W. Bush Jr. All we have to look forward to is the mess that will be left over. How will they stop the mass rioting that would ensue? With a police state, dummy! That's why they've been secretly preparing the constitution for its final scrapping. You will have no jury of peers to give you a fair trial because due process will never get that far to begin with. I suggest learning Spanish and moving to South America where the locals are a little wiser to the ills of government and are waiting to fight it at a moments notice.
posted by velacroix at 7:12 PM on June 25, 2002

I wouldn't book that ticket to Brazil just yet, velacroix.
posted by mr_crash_davis at 7:31 PM on June 25, 2002

Meanwhile, some securities industry firms have been lobbying Congress to prevent states from prosecuting them if they violate security laws. On the last episode of NOW there was an interesting discussion about this with New York Attorney General Eliot Spitzer, who recently made Merrill Lynch pay a $100 million penalty for deceiving investors.
posted by homunculus at 7:36 PM on June 25, 2002

You're probably right mr_crash_davis. I guess I just have a hard on for their energy and will to fight, something that is entirely lacking in your average american boob tube blob. This whole crisis is going to stink to high heaven for many years to come though.
posted by velacroix at 7:44 PM on June 25, 2002

That's right, mcd, because to get along in Brazil you need Portuguese.
posted by i_am_joe's_spleen at 7:44 PM on June 25, 2002

posted by insomnia_lj at 7:56 PM on June 25, 2002

And here I read this today and wondered whether or not it were a tad shrill.

Between that and velacroix's post, I don't think I have much of an appetite tonight. Thanx.

Everyday, (if you're at all like me) one ponders whether we've "come through it" yet, asking incessantly, have we progressed enough that we needn't worry any longer at this dizzyingly worrying pace? Things seem calm enough. No new attacks. No new terrorizing from the government. . .today. I feel fine. The weather's beautiful. What possibly could further go wrong? Buck up, I say. This is America, where we've been taught, inculcated into simply knowing bad things are always extinguished with a dose of bravery, valor and honesty. Sometimes some of us may die in that process, but for christ's sake, we're Americans. We love this place. We'll die for it.

Yeah right.

All those stories of courage and honor were the product of so many years of state conceived propaganda. Whether there was true, raw and uncut heroism or not, it's safe to assume that at the time all our progenitors (and genetic dead ends for those who perished) actually experienced was fear and uncertainty. Well here we are now. Reduce it out of its agitprop broth and all you have today, is nothing more than fear and uncertainty. But today, it's also a safe bet to throw in that the rife apathy that so many years of rampant capitalist group-think created will also bear down on the worsening state of the human condition. (I know kids who've been laid off and in droves, it seems, are flocking to make a quick buck in real estate). This culture of ours has no fucking rudder.

In other words, we're pretty much fucked and I just had Chicken Little for dinner.
posted by crasspastor at 8:08 PM on June 25, 2002

Did anyone not see that Worldcom's finances were nothing but a scam two or three years ago, when Nina Brink offloaded a shitload of stock before the IPO? That it's taken this long for people to say 'oh, what a scandal!' is just a testament to how the dot-com boom was propelled by dodgy institutional tipsters, dodgy auditors, and executives who regarded investors as pliant pockets to pick.

Economic reality's finally breaking through, and it's not that pleasant. More fool everyone, apart from the executives: even if they end up in court, there's little chance that any sentences will spare them from a happy, wealthy retirement.
posted by riviera at 8:13 PM on June 25, 2002

Without reform it'll get even worse. So why I am not feeling pessimistic? The last issue of Corporate Reform Weekly was the most optimistic of it's short life.

Some highlights:

— Paul Sarbanes’ tuff-on-accountants bill passed out of committee despite Harvey Pitt's announcement of a private accounting oversight board that nobody, not accountants nor public rights advocates, outside the SEC likes. Just a couple weeks ago this bill looked dead.

— The IRS says corporate tax shelters will finally be considered as assets and be taxed accordingly. “[The IRS] will begin demanding that companies and accountants start turning over internal papers that describe questionable and abusive tax strategies that have exploded in recent years. This is something that the IRS has never done before even though it has the legal right to do so.”

— (My favorite) The California state senate passed a law that mandates corporate board members to report illegal activities of the corporation or face a $100,000 fine. This should be a law in every state of the Union.

— There is bad news. Rite Aid apparently overstated profits. Happens all the time right? Well, they overstated by $2.3b.

A recent Bloomberg poll asked those who had heard about the Enron bankruptcy (82% of Americans) the following question: "Do you think this is an isolated case or do you think most companies lie to or mislead investors?" Just 22% thought it was an isolated case, down from 35% in March. Now a solid majority (69%) think that most companies lie to or mislead investors. In March, just over half over Americans (51%) thought so.”

Glad nobody listened to Nader harp on and on about corporate fraud and abuse. What an out-of-touch relic that guy is!
posted by raaka at 8:16 PM on June 25, 2002

riviera, I may have missed something, but World Online and Worldcom aren't the same company, AFAIK.
posted by mr_crash_davis at 8:19 PM on June 25, 2002

Shit. Remind me not to post at the end of a long shift: Nina Brink's WorldOnline is very not WorldCom. I'm an idiot. Disregard me (if you hadn't already, by force of habit.) Though I like this headline: I'm not sure whether a $3.8bn discrepancy really comes under the category of 'error'.
posted by riviera at 8:20 PM on June 25, 2002

How bad is it gonna get, take a look:
The smart money is already long gone. (you'll have to manually select the "gold" chart in the left-hand frame to see live pricing

It'll be years before international capital believes in the dollar and US capital markets again. Bet Gore is real pleased right now....
posted by BentPenguin at 8:32 PM on June 25, 2002

On the other hand, I think this will definitely resolve those naggingly high p/e ratios
posted by BentPenguin at 8:33 PM on June 25, 2002

"Worldcom Finds $3.8 Billion Error, Fires CFO"

That was a damn good laugh, riviera.

The saddest thing is that this has been an extremely well organized strike by the ruling elite. This whole explosion (economic, civil, and terror induced) has been orchestrated for what has to be at least 10 years, IMO. Those god damned good old boys are sooooo good at this. They exploit the weakness, run till it's good and dry and then re-trench blathering on about how it was everyone elses fault (or in worst case scenarios they usually throw one of their own to the wolves.) The fact that our defenders (I guess that is supposed to be the democrats (which just makes me want to cry)) don't wise up to this just makes me think they're in on the score too. Playing good cop, bad cop on us. It's a sad state of affairs but what can we do?
posted by velacroix at 9:12 PM on June 25, 2002

There's an interesting article on Salon about Bush's latest nominees to the Commodity Futures Trading Commission:

"If there was one thing that could legitimately be hoped for after the biggest corporate bankruptcy of all time, it was that accounting rules would be tightened, and the rush to dismantle regulatory oversight over the kind of complicated financial games that Enron specialized in would be reversed. But instead, the people most responsible for loosening the rules are being put in charge.

"The CFTC is the government agency that is supposed to be the watchdog over such advanced "financial instruments" as derivatives trading. But Bush's nominees boast what critics call a laughable regulatory record. Walter Lukken is the drafter of a law passed in 2000 that gave Enron's online trading arm the right to act without a shred of oversight. Sharon Brown-Hruska is a free-market economist and protégé of Wendy Gramm, the former CFTC commissioner who, after shepherding through a regulatory exemption for Enron, resigned from the commission and joined the company's board of directors."

posted by homunculus at 9:22 PM on June 25, 2002

What I want to know is what so many people consider rampant criminal behaviour capitalism run amok? There are a number of things wrong (negligent boards, corrupt auditors, dishonest analysts, etc.) but that's hardly evidence that the concept itself is a failure - corruption is anathema to capitalism.

This wasn't some great conspiracy to defraud Joe Public, either. The fact is simply that most people got caught up in a get-rich-quick frenzy and dismissed anyone who disagreed. The people who said that would fail were lambasted while everyone went out and bought DOW 36,000 instead. Yes, there were opportunists who took advantage of it but there are always crooks and any adult should know not to unquestioningly accept advice from salesmen.

The truth was out there for anyone who cared to look - Enron was predicted well in advance by the few non-cheerleader analysts, most of the dot-coms were clearly doomed even before they IPOed and as far as Worldcom goes, it's not like people who were actually paying attention to the industry haven't been waiting for them to crash (and they made no small amount of money predicting the stampedes).

Nobody chose to look - most of them were busy pretending that the Greater Fool theory was a viable long-term strategy.

Irresponsible people repeatedly doing stupid things produces bad results - in case anyone was unclear about that, it's been proven again. Where does the condemnation of free-market capitalism come from? There aren't that many people who still think socialiam is viable - is it just that it allows people to avoid admitting that they should have been more careful with their money than a drunken marine on leave?
posted by adamsc at 10:06 PM on June 25, 2002

There aren't that many people who still think socialiam (socialism) is viable

Amen. RIP, socialism.

I mean, the whole concept of pooling resources for the common good - that swill had to go. For example, I do a lot of driving in my new SUV, and I hate it when I encounter the inevitable pothole on city streets (sure, my SUV's got four-wheel drive enough to take on any pothole, but like most SUV drivers, I'm not exactly sure how to work them little levers or shifter thingies that turn 4-WD on...). But like I was saying about potholes...since socialism died, now I just phone up this local pothole franchise called "A-One-Holes" (it's a national've probably seen their ad on TV featuring Britney Spears) and they come out, give me an estimate, and for usually just $200-300 they'll fill any hole. No need for "public works" or any such communistic claptrap.

'Course, everybody seems to want somebody else to fill the damned holes, but at least we're not suffering under socialism. Like I said, it just don't work. Same thing with the street lights - for a while we all shared the cost and benefits of street lights, but since socialism died off, most people just string a few extension cords and a 40-watt out to the street if neighborhood burglaries and traffic accidents get too bad.

And thank God the schools, libraries, police and fire departments, the post office, and the entire U.$. Marines finally all take MasterCard. After all, haven't we all noticed our lives are better...that we're better human beings... since we embraced greed over service, sacrifice, and, um, socialism?
posted by fold_and_mutilate at 11:44 PM on June 25, 2002

On the other hand, this could be a classic market double bottom.
posted by mrhappy at 1:34 AM on June 26, 2002

I just love your post fold_and_mutilate! I was getting pretty depressed reading about this and then you brightened my world. Thanks!
And remember kiddies, there are two important words in "Social Security" and Dubya would like to destroy both so his pals can take your money to the Caymans.
posted by nofundy at 5:15 AM on June 26, 2002

The condemnations I've seen have to do with lack of oversight, fraud, and goverment-industry collusion. Just fix that and put your socialist straw man back in your pocket.

Word. Also, what we're seeing is the (perhaps inevitable in retrospect) outcome of a ten-year bull market in which artificially cheap stock option grants gave corporate officers a much larger financial interest in dramatically manipulating short-term results. When the tide goes out, you start to see who's naked.

Would accounting for stock options as an expense have prevented some of this chicanery? I know the arguments against it from an accounting point of view (the other arguments seem more flimsy to me), but it seems like a fairly clean fix. Of course, this may just be the natural outcome of a protracted boom following a protracted bust; when a company's stock isn't going up every year, people start casting a gimlet eye at the behavior of corporate officers (the Rigas family's use of Adelphia Cable as a personal piggy bank, the growing criticism of the gigantically compensated Michael Eisner) and abuses that might have been ignored in better times start coming to light.
posted by snarkout at 5:44 AM on June 26, 2002

Actually, nofundy, Social Security strikes me as one of the best arguments against socialism. Here we have an unsustainable pyramid scheme that would land the promoters in jail if it were in the private sector; that foments intergenerational warfare by stealing from one generation to give unearned benefits to another; that provides a huge pot of money for politicians to use to conceal their deficit spending in other areas; and that is impossible to end or even reform because of political pressure from the entitled.

The way the Social Security program corrupts politicians, and drives money out of productive investment and into government pork barrel is entirely typical of socialism.

As a way to provide for the needs of retired workers, Social Security may better than nothing, but it is surely worse than almost any other system.
posted by Slithy_Tove at 6:40 AM on June 26, 2002

Slithy, when you use words and phrases such as "steal," "intergenerational warfare," "pyramid scheme," "unearned," "conceal," "corrupts," and "pork barrel," you're not going to convince anyone who doesn't already agree with you. Your post sounds like a tantrum more than an argument. Perhaps you have some valuable things to say, but when you use such emotional, loaded phraseology, many people will just ignore you.
posted by Holden at 7:32 AM on June 26, 2002

take a couple of these bastards out and shoot them i say. Then we will see who wants to gip a capitalist.

Metafilter: 20 cent ideas in a dollar world.
posted by clavdivs at 8:16 AM on June 26, 2002

You know, Slithy_Tove's right. We should just privatize Social Security. After all, what could go wrong?

P.S. Unearned benefits?
posted by hackly_fracture at 8:51 AM on June 26, 2002

After all, what could go wrong?

That would be an excellent question to ask former Enron employees who lost their "private sector" 401k retirements and will have to work at McDonalds when they're 80 years old.
posted by nofundy at 9:02 AM on June 26, 2002

Golly, sounds like I hit a nerve.

Holden, when everyone else is routinely calling each other 'fuckwit' and worse, I thought I was being the soul of tact.

Is there anyone out there who does not realize that Social Security is a pyramid scheme? Is there anyone who does not realize that it can't be reformed because of the power of the senior voting block? That it is an intergenerational transfer of wealth, which, like all such income redistribution, turns the ones who are taxed into the enemies of the ones who receive the taxes?

BTW, this isn't just a problem with Social Security in the US. Similarly structured programs in other countries, most notably Germany, are in just as bad shape.

Holden, if you disagree, don't just snipe at me, tell us why you disagree.

And if you want to beat on someone for using loaded language, go beat on foldy for a while.
posted by Slithy_Tove at 9:03 AM on June 26, 2002

hackly_fracture: For the first three years, retirees' SSI benefits can be accounted for by the wages they have paid into to the system, but after that, they're on welfare. Remember, the money was never invested. It was used up by the government as rapidly as it was paid in.

For the Cato Institute's take on Social Security privatization, see their site.
posted by Slithy_Tove at 9:21 AM on June 26, 2002

This just proves my brilliance in not having any investment in the stock market at all.

*Stares at nonexistent portfolio*

I'm a fucking genius!
posted by Skot at 9:27 AM on June 26, 2002

One thing that everyone must remember: equities markets != economy.

Other sectors are doing fine, yes this will be a drag on the overall picture but it is far from the doom and gloom that so many seem to be actually hoping for.

Wishing misery just so you can jump up and down and say "Told you so, told you so" is so sickening.
posted by Mick at 10:03 AM on June 26, 2002

Slithy_Tove: It seems to be common knowledge that Social Security is unsustainable, but I haven't seen any evidence of it. For example, it doesn't really matter that the costs are increasing as long as they don't outpace real wage growth.

I don't have anything against the Cato Institute, but, if you want to balance out your reading list a little, you might want to check out Social Security: The Phony Crisis, which is excerpted here.
posted by electro at 1:01 PM on June 26, 2002

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