European Stock Markets Shudder Following US Scandal | Business| Economy and finance news from a German perspective | DW | 26.06.2002
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European Stock Markets Shudder Following US Scandal

Fraudulent accounting to the tune of almost $4 billion at US telecommunications giant Worldcom sent tremors through European stock markets on Wednesday.


Europe's markets are hurting

European stock markets suffered in early trading Wednesday after one of the largest accounting scandals in history hit WorldCom Inc.

The company revealed earlier this week that it had inflated its books by $3.85 billion.

The company, the second-largest telecommunications firm in the United States, said it had fired its chief financial officer and accepted the resignation of the senior vice president and controller. WorldCom likely faces bankruptcy and shook a financial world already reeling from the Enron scandal and the conviction of global accounting firm Andersen for impeding the Enron investigation.

The Mississippi-based company said expenses recorded as capital expenditures had inflated its cash flow. Had the company reported properly, it would have actually reported a net loss for 2001 and for the first quarter of 2002.

"Our senior management team is shocked by these discoveries," said CEO John Sidgemore in a statement. Sidgemore came on board on April 29, 2002, after the resignation of co-founder Bernie Ebbers, who is part of an ongoing Securities and Exchange Commission inquiry into WorldCom accounting.

New statements

WorldCom announced on Tuesday it would restate its financial statements from 2001 and the first quarter of 2002.

"Certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principals," the company said in a statement.

The firm has already asked the consulting firm KPMG LLP to conduct a comprehensive audit. WorldCom’s previous auditors, the scandal-plagued Andersen, said it was not aware of any improper accounting.

In a statement Andersen, convicted earlier this month of trying to impede an SEC inquiry into Enron, said Worldcom CFO Scott Sullivan "withheld" information about line costs.

Trading at Frankfurt’s DAX fell 5.7 percent to 4016 points on Wednesday morning, its lowest point so far this year. The London-based FTSE Eurotop 100 index sank 4.4 percent.

Data and Internet giant

At the time of the scandal, WorldCom was profiling itself as a leader in web hosting and web centers, through which companies could communicate with their customers via the web. Data and internet services constituted more than 50 percent of the company’s revenue, according to their web site.

WorldCom grew quickly over the last decade, acquiring 60 companies on its way to becoming the second-largest telecommunications firm in the world.

CEO Sidgmore said the company would cut 17,000 jobs beginning this Friday. The move would save the company more than $900 million. It is currently burdened with around $30 billion in debt. But other financing lines could fall through following the revelations of accounting irregularities.

According to the Washington Post, the US Justice Department is planning to investigate and analysts say the company will almost surely face bankruptcy.

American Disease?

While European stock market traders voiced shock and even disgust at the WorldCom news, they said they doubted the same could happen in their home markets.

"I suspect it's primarily a US problem. From what I understand the EU accounting system is to be trusted a little bit better," David Thwaites, European equity strategist at BNP Paribas, told Reuters.

But Europe has not been without its own accounting scandals, particularly in the software and high-tech sectors, which have been found to have overstated revenues in the past.

"I don't see anything about European accounts that leads me to believe they are somehow more principled or insightful or more courageous than America's are," said a former US accounting rule-setter, who declined to give his name.

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