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Europe sees WorldCom scandal as "American disease"
Reuters ^

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)


TOPICS: Business/Economy; Foreign Affairs; Front Page News
KEYWORDS:

1 posted on 06/26/2002 5:55:32 AM PDT by RCW2001
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To: RCW2001
Yeah, there's never been fraud in Europe. Right.
2 posted on 06/26/2002 6:02:11 AM PDT by Petronski
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To: RCW2001
You have to wonder what is being taught at business schools for the last 20 years.....surely not fraud and deception? Or maybe they are not putting enough emphasis on the techniques of how not to get caught......
3 posted on 06/26/2002 6:12:48 AM PDT by B.O. Plenty
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To: RCW2001
1) I've never even heard of World Com!

2) Let's not forget about the German disease, the French disease, the Russian disease, etc.

3) My mutual fund has dropped 50% in the last 9 months, and today I'm withdrawing the remains.

4 posted on 06/26/2002 6:20:13 AM PDT by crypt2k
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To: RCW2001
This is crap. Until recently, trying to figure out something simple, like, say, if a company listed on the Dax (and not listed on a US exchange)) was even profitable was an exercise in aggravation. The Euros have had some of the most obtuselyfuzzy accounting and disclosure requirements for publicly traded companies for decades now, but suddenly they're going to sieze the moral high ground? I think not.
5 posted on 06/26/2002 6:54:22 AM PDT by general_re
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To: crypt2k
Don't dump now. You don't take the loss til you sell. A year from now, we'll hve the terrorists stuffed in a can, Republicans running the senate and all will be well.
6 posted on 06/26/2002 7:10:10 AM PDT by Eric in the Ozarks
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To: general_re
Unfortunately, this is one case where the perceptions of the Euros about the relative merits of their accounting versus ours may matter more than the truth. Tons of money has been pumped into US financial markets from abroad because of the strong dollar and the perception that our companies were solid investments. With both of those premises weakening, that money is flowing out, which will be a drag on our markets for a long time.
7 posted on 06/26/2002 7:13:07 AM PDT by triplejake
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To: RCW2001; Petronski
Yeah, right. The accounting at Metallgesellschaft was just dandy.
8 posted on 06/26/2002 7:20:59 AM PDT by GovernmentShrinker
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To: GovernmentShrinker
Easy for you to say.
9 posted on 06/26/2002 7:22:38 AM PDT by Eric in the Ozarks
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To: triplejake
Yeah, as much as I hate to admit it, you've got a good point - perception is all that matters much of the time. I think it'll depend in large part upon what the response is among accounting firms and the SEC - they all need to move aggressively to nip this sort of thing in the bud. Gotta fight back to keep the perception from becoming that the US markets are no more transparent than some third-world banana republic...
10 posted on 06/26/2002 7:25:33 AM PDT by general_re
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To: RCW2001
OK. And Communism, socialism, Nazism, and genocide are European diseases.
11 posted on 06/26/2002 8:05:37 AM PDT by mondonico
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To: RCW2001
I guess the disease is that they actually get caught eventually here in the States...
12 posted on 06/26/2002 9:14:48 AM PDT by SunStar
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To: B.O. Plenty
"'You have to wonder what is being taught at business schools for the last 20 years.....""

Apparently what was taught in Law Schools to Bill and Hillary.

What a sad and disgusting subset of the boomer generation.

Peace and Love, but keep an eye on your wallet at all times.

13 posted on 06/26/2002 12:18:19 PM PDT by Helms
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To: RCW2001
"Complexity is the enemy of good accounting,"......

Greed and underhanded deals are the enemy of good accounting.

Does anyone have a list of all these companies that have had to fold under the weight of their own corruption lately? Is there a source on this subject?

14 posted on 06/26/2002 3:19:10 PM PDT by ChasingFletch
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To: RCW2001
Boy, are these absurd, arrogant asses about to be in for a RUDE surprise. It's only a matter of time until a European company gets caught doing the same thing. And then another. And then another. Finance these days is an internation business. If this crap was going on in the US, it's a virtual guarantee it's also going on in Europe, Asia, Australia, on and on. The only difference is that the securities regulators in all those countries are members of the same snooty, socialist chattering classes as the board members of the companies they claim to monitor. The powerful protecting the powerful, as O'Reilly likes to say. This will work for a while, but eventually all the accounting tricks in the world will be unable to stop the collapse of a company that truly doesn't have any money.
15 posted on 06/26/2002 3:26:20 PM PDT by Timesink
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To: RCW2001
Our bubble burst first. (While most of their economies were in recession). Their time will come.
16 posted on 06/26/2002 3:31:35 PM PDT by 1rudeboy
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To: Timesink
Yes, I suppose it's time to admit they all do it.

A virtual "Kings New Clothes" fashion show.

Who's next?

I suspect a certain oil company who's been also capitalizing with debt.

Anyone else?

17 posted on 06/26/2002 3:33:20 PM PDT by norraad
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To: RCW2001
And yet these euro-trashniks still love the 'toon.
18 posted on 06/26/2002 3:33:52 PM PDT by Tijeras_Slim
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To: RCW2001
Greed and Fraud are not prevalent only in the USA,it is all over the globe.But here we always have the RULE OF LAW to protect the rich and powerful.
19 posted on 06/26/2002 3:40:44 PM PDT by gunnedah
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To: crypt2k
Worldcom owns MCI. It carrys 1/4 of all long distnace calls in the US. It transmits 1/3 of all data...worldwide...

In other words, although I do not know what ISP you are on, nor do I know where you are from. However, there is a 33% chance that WorldCom is providing the backbone that enables you to post your messages on FR.
20 posted on 06/26/2002 3:43:39 PM PDT by College Repub
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To: RCW2001
Corruption is no more prevalent in the U.S. than in Europe. Getting caught at it is.
21 posted on 06/26/2002 3:44:02 PM PDT by Billthedrill
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