Posted on 06/26/2002 5:55:32 AM PDT by RCW2001
Europe sees WorldCom scandal as "American disease"
By Mark Bendeich and Camila Reed
LONDON, June 26 (Reuters) - European stock market traders and investors voiced shock and disgust on Wednesday at a $4 billion accounting scandal at U.S. telecoms group WorldCom Inc, but they doubted the same could happen in their home markets.
"If you can't trust the accountants or the companies then the whole thing falls down like a pack of cards," said Henk Potts, an investment analyst with Britain's Barclays Private Clients, which manages money for wealthy clients.
European stock markets took a dive on the revelations from WorldCom (NasdaqNM:WCOM - News), which said after the close of New York trading that it had overstated its accounts by $3.85 billion. The news follows the collapse of energy trading giant Enron in another massive U.S. accounting scandal.
"As investors we've got to have something to base our bets on, and if we can't use the accounts all bets are off -- you're almost paralysed," said Stephen Ford, investment manager at Brewin Dolphin, one of UK's largest private client stockbrokers.
"You mean the World bomb story," one Brussels-based analyst said after being asked of the impact on the market there.
"The problem is more than WorldCom; it's which companies, which people can you trust?" he said. "We all knew about Enron and we had hoped it would stop the scandals."
The improper accounting at WorldCom has further hit investor confidence at a time of deep distrust of accounting. Enron and WorldCom had the same disgraced auditor, Andersen, which has been convicted of obstructing justice during Enron's collapse.
ANY WORLDCOMS IN EUROPE?
Despite the slide in European stocks -- the French and German markets were both down over four percent in morning trade -- corporate analysts doubted that accounting scandals on a similarly huge scale could also unfold closer to home.
"I suspect it's primarily a U.S. problem. From what I understand the EU accounting system is to be trusted a little bit better but the markets are in a 'who's next?' kind of mood right now," said David Thwaites, European equity strategist at French investment bank BNP Paribas.
Dan Bunting, equity strategist at Prudential-Bache, agreed.
"Generally things are more convincing on this side of the Atlantic. Things became so emotional on Wall Street in the late part of the (high tech) boom that the pressure on analysts and companies was much greater."
Europe has not been without its own accounting scandals: the software and high-tech sectors in particular have been found at times to have overstated revenues in an eagerness to show sales growth.
The accounting policies of some major companies like Irish drugs group Elan (NYSE:ELN - News) and British telecoms firm Cable & Wireless (London:CW.L - News) have also come under question.
A former U.S. accounting rule-setter, who declined to be named, said he doubted that European companies were any more principled than those in the United States.
"I don't see anything about British and European accounts as a class that leads me to believe that they are somehow more principled or insightful or more courageous than America's are," the expert said.
NO ACCOUNTING FOR FRAUD
But there has yet to be any accounting or auditing scare on the scale of Enron or WorldCom.
Since Enron filed for bankruptcy in December, market analysts in Europe have become critical of what they see as a heavily prescriptive, rule-based approach to accounting in the United States, turning the tables on the previously accepted wisdom that U.S. rules were the toughest in the world.
Accounting rules in Europe, which are based more on broad principles rather than detailed rules, are often seen as too vague and less onerous on companies. But there is now a growing mood that the principles-based approach is simpler and better.
In the UK, for example, an auditor must ultimately declare whether a company's accounts give a "true and fair" picture -- not whether or not they meet narrowly drafted rules.
Britain's market watchdog the Financial Services Authority declined to comment on whether the UK was vulnerable to a similar scandal.
Neil Darke of London brokerage Collins Stewart said it was impossible to stop people trying to fix company accounts, no matter how accounting rules are framed.
"The one thing that no analyst can overcome is fraud," said Darke, whose firm is so sceptical of company profit statements that it bases its analysis on cash flows instead.
He said that, too often, companies avoided booking major expenses right away and instead opted to spread the cost over a number of years, flattering their profits.
"You can put all of America's problems down to the fact that, given their very prescriptive and litigious accounting, the notion of prudence has been ignored," Darke said.
The International Accounting Standards Board, whose rules are set to be the international benchmark in 2005, said it was striving to avoid adopting too many detailed rules in the run-up to the harmonisation of European and U.S. accounting regimes.
"Complexity is the enemy of good accounting," said Wayne Upton, research director for the board. "The IASB is going to try and resist creating a whole bunch of exceptions." (Additional reporting by Steve Slater and Friedel Rother in London and Jennifer Laidlaw in Brussels)
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