- The Washington Times - Tuesday, July 2, 2002

With nearly 1,000 companies already having restated earnings since 1997, how much impact could two more conceivably have? Well, as it may turn out, an awful lot with the emphasis on awful.
The two latest earnings restatements, which involved WorldCom and Xerox, were blockbusters. Out of the blue last week, WorldCom announced that, since the beginning of 2001, it had "misclassified" nearly $4 billion in operating maintenance expenses as capital expenditures. The immediate effect was three-fold: It turned more than $1.5 billion in previously reported profits into losses of hundreds of millions of dollars (at least); it propelled the beleaguered WorldCom, whose market capitalization once exceeded $115 billion and whose stock was once the fifth-most widely held, toward almost-certain bankruptcy; and it intensified the loss of investor confidence that is currently a drag on the stock market. Then, on Friday, Xerox, which was already expected to reclassify $2 billion of revenue as a result of an earlier agreement with the Securities and Exchange Commission (SEC) to resolve questionable accounting methods, announced that it would be reclassifying a stunning $6.4 billion in revenues.
The WorldCom and Xerox announcements could hardly have come at a worse time, raising the prospects for a double-dip recession. Recent months already had witnessed a plethora of corporate scandals, whose cumulative effect reflected itself throughout all the stock-market indexes. These scandals began with Enron's spectacular bankruptcy in December. They continued through telecom accounting debacles involving Global Crossing (now bankrupt) and Qwest, which appears to be on life support. Other accounting scandals have involved cable company Adelphia Communications (which went bankrupt last week), energy trader and erstwhile Enron-bridegroom Dynegy, drug-store chain Rite Aid (four of whose former executives have been indicted for securities fraud), once-high-flying conglomerate Tyco International (whose former CEO has been indicted for evading $1 million in sales tax on paintings he purchased with part of the $300 million he paid himself in recent years) and an insider-trading scandal at biotech firm ImClone, in which Martha Stewart, the doyenne of domesticity, may be implicated. Toss in a $100 million civil penalty recently paid by Merrill Lynch, the nation's largest stock brokerage, because its analysts misled investors; throw in Arthur Andersen, the serial-offending accounting firm convicted of obstructing justice in the Enron fiasco and surprise the accountant for WorldCom, Global Crossing and Qwest; and there should be no surprise that a tally by the Wall Street Journal found that the scope and scale of the recent corporate scandals are the worst since before the Great Depression.
Now, while nobody expects the recent bear market to produce the economic carnage that the 1929 stock-market collapse generated, the crisis in investor confidence could force the economy into a double-dip recession. That might force unemployment which stood at 5.8 percent in May, or nearly 2 percentage points above its cyclical low higher than 7 percent.
Even though the spate of corporate scandals has involved only a small number of firms, the extent to which it adversely affects the confidence levels of consumers and investors will likely be a major factor determining whether the economy fully recovers from the recession that began in March 2001 or falters.


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