US President George W. Bush on Saturday vowed to prosecute law-breaking corporate executives and ban wrongdoers from executive positions in US firms, after a recent spate of financial and accounting fraud incidents.
"No violation of the public's trust will be tolerated," the president said in his weekly radio address, insisting that the government "will be vigilant in prosecuting wrongdoers to ensure that investors and workers maintain the highest confidence in American business."
The remarks signaled a toughening of the administration's position on financial scandals, which have been sweeping the US corporate world since last December, when energy titan Enron filed for bankruptcy amid revelations of double bookkeeping.
PHOTO: AFP
Since the Enron debacle, Americans have been fed a regular diet of disclosures implicating big corporate names in inflating their revenue, concealing their losses and using other accounting gimmicks designed to make them more attractive to investors.
In the latest accounting scandal, Xerox Corp on Friday revised its pretax profit downward by US$1.4 billion over a five-year period and wrote down its equity by US$1.3 billion.
In a statement, the copier and imaging firm said revenues for 1997-2001 have been reduced by two percent to US$91 billion.
Earlier this month, tax evasion charges were filed against Dennis Kozlowski, the former chairman and chief executive of embattled conglomerate Tyco International.
Even Martha Stewart
And another corporate icon, Martha Stewart, who sits on the board of the bellwether New York Stock Exchange, has been fighting allegations of insider trading since she unloaded shares of ImClone Systems right before the company was denied permission to market an anti-cancer drug.
But perhaps the biggest blow to the US corporate world's reputation came early this week, when it was disclosed that telecom giant WorldCom had concealed US$3.8 billion in current expenses to make its balance sheet show a profit when in fact the company was making a loss.
The result was a major erosion of public confidence in US companies, which are no longer seen by many Americans as trustworthy.
An opinion poll conducted by Bloomberg News earlier this month found that 69 percent of Americans believed companies lied in their financial documents. Just 51 percent shared that opinion in March.
Bush stressed confidence was the cornerstone of the US economic system, warning that "a few bad actors can tarnish our entire free enterprise system."
The government would fully investigate reports of corporate fraud and hold the guilty parties accountable for misleading shareholders and employees, the president said.
"Executives who commit fraud will face financial penalties, and when they are guilty of criminal wrongdoing, they will face jail time," he warned.
The radio address is seen as one of the first salvos in Bush's coordinated campaign for a clean-up in the US business world. It will culminate with his July 9 visit to Wall Street, where he will deliver a major address on corporate accountability.
The upcoming speech is largely viewed as an attempt to inject new life into the sagging US stock market, which has shrunk many Americans' retirement savings and threatens to hurt Republicans in this year's congressional and gubernatorial elections.
Greedy misdeeds
In his radio address, Bush said corporate executives should never be allowed to personally benefit from their accounting gimmicks.
"When bad accounting practices make the company appear to be more successful than it actually is, corporate executives should lose their phony profits gained at the expense of employees and stockholders," he stressed.
In related news, banks will refuse to provide WorldCom with a new US$5 billion credit agreement, people familiar with the matter said earlier this week, a signal the telecommunications company may not have the cash to survive.
"They're toast," said Leonard Goldberger, a partner in Philadelphia's White & Williams and vice president of the American Bankruptcy Institute.
"Who wants to extend credit to the mortally wounded?"
WorldCom officials have to comply with an order by the US Securities and Exchange Commission to provide today a detailed report to them, including the relevant circumstances that led to the restatement of earnings for the past five quarters. The SEC claims that WorldCom committed fraud when it concealed operating costs by recording them as capital expenses.
WorldCom has agreed to a SEC request that a judge name a monitor to oversee executive compensation and ensure that the company doesn't destroy documents.
Also, Chief Executive Officer John Sidgmore said in a statement yesterday he's committed to the company's "long-term viability" and that WorldCom is in talks with banks to secure lending to trim debt, which totaled US$30.2 billion as of March 31.
The company has said it will sell assets to raise cash.
"Time of the essence for this company," said Eileen Eastman, vice president of communications services at market researcher Yankee Group in Boston. "Whatever they're going to have to do, they have to do it very, very, very quickly, or they will not have customers and employees to continue as a going concern."
WorldCom spokeswoman Julie Moore declined to comment on the prospect of bankruptcy, calling it "speculation."
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