TOPICS > Economy

Fallen Giant

July 8, 2002 at 12:00 AM EDT


RAY SUAREZ: For more on today’s hearing and what went wrong at WorldCom, we’re joined by Blair Levin, a telecommunications analyst at Legg Mason, a financial services company. He is a former chief of staff at the Federal Communications commission. And Julia Grant, professor of accounting at the Weatherhead School of Management at Case Western Reserve University.

Well, Professor Grant, looking at today’s testimony, did we learn much more about how money moved around WorldCom and how things were recorded there?

JULIA GRANT: You know, unfortunately we didn’t learn a lot from that testimony. Nobody’s really talking. The auditors are assuring us that they didn’t know. And WorldCom hasn’t yet given us all the detail, as the auditor just indicated. So I certainly don’t feel like I know how Arthur Andersen got fooled on this one yet.

RAY SUAREZ: And Professor, when you heard Melvin Dick sort of define accounting for the Congressional panel, as basically taking the numbers that are generated by the responsible departments in the company and then sort of collating them, adding them, providing the report, was that accurate?

JULIA GRANT: Well, he was defining auditing, not accounting. And the Congressman interrupted him when he said it was their job to test. What auditors do is statistically pick some transactions to check. So in theory it’s certainly possible to miss all the fraudulent transactions and test only the good ones.

It’s also possible that if someone high up enough in the company wants to commit fraud, they can hide things from an auditor too, it’s possible to just blatantly lie in the records, and we don’t yet know whether that happened in WorldCom or whether Arthur Andersen simply missed some calls.

RAY SUAREZ: When you say possible, possible even at that scale, 3.8 billion dollars?

JULIA GRANT: The interesting thing about the WorldCom situation is their particular tack was probably to spread those things throughout a number of accounts. So I would doubt that there is one single $3 billion chunk that we would say, yeah, Andersen should have seen that $3 billion chunk. I imagine that is broken up into lots of smaller amounts, spread across lots of different assets that makes it harder for an auditor to find.

RAY SUAREZ: Blair Levin what did you see when you watched the hearings?

BLAIR LEVIN: I think we saw what we had seen before with the Enron hearings, which is when all the people come before Congress there’s an awful lot of this, everyone is pointing in other directions, the company is blaming the auditors, the auditors are blaming the company. The analyst is blaming the company, and the auditors. And the Congressmen are blaming the company, the analyst and the auditors. But I don’t think we’ve learned what it is that as a matter of public policy we need to do to make sure it doesn’t happen again.

RAY SUAREZ: Was there any aha moment for you where someone said something either intentionally or less so that provided some insight into the way this company was running?

BLAIR LEVIN: I think my favorite moment of the hearing was when Congressman Frank said at least we’ve established, and I’m not quoting him as wittily as he said it, but at least we’ve established a degree of humility on the part of analysts and accountants. In this hearing, I think everyone is a resident more humble about what their jobs and by what they do.

RAY SUAREZ: Well, you are an analyst.

BLAIR LEVIN: That’s correct.

RAY SUAREZ: Was that discipline on trial in a sense today, a man who created a lot of wealth historically by recommending companies in public was now under oath in front of Congress.

BLAIR LEVIN: I think all of Wall Street in some sense is on trial and really has been ever since the Enron scandal first broke. I think there are a couple of different issues here. One is the issue of how you pick stocks, which is a very difficult thing, and I think myself and everyone else who is in that business has to be humble about it.

We have to recognize what it is we can know, but also what it is we can’t know. But the second is the question of structurally, do we allow analysts to engage also in what you might think of as investment banking, and that was certainly a major issue today, because of Mr. Grubman’s involvement, and his firm’s involvement with a lot of investment banking for companies he was recommending.

RAY SUAREZ: Professor, is there a legislative answer? Here we are in front of a House committee talking about shortcomings in auditing and accounting. Is there a legislative answer to some of the problems we heard about today?

JULIA GRANT: Well, what we need to, do we know what public policy we want. I think that a legislative answer is one piece. I do not think there is a one-dimension answer, because we need to be clear. Corporate failures happen. Fraud occurs. And this has happened across time in our economy. This is not the first time. So we know these things occur. How do you keep people from being unethical? That’s really the issue. And I agree with the analyst.

The fact is all of Wall Street and all of the functions that lead to what is our capital markets are currently under fire in some sense. So what’s the public policy solution? It’s multiple, it’s multi-dimensional. We have to shore up all aspects of this so that we can rebuild our confidence, so that the average investor believes that he or she is playing a fair game.

They don’t believe they’re playing a fair game right now. That takes work by Congress for laws, it takes work by the SEC for regulations, by the stockbrokers, and their organizations, for ethical reform on their part if they need it. The auditing profession, absolutely, has some work to do. We can’t look at Congress passing one law and that will fix everything. We’ve got to be going at this on multiple fronts.

RAY SUAREZ: Well, maybe as an analyst now, you can give me a little bit of a ledger sheet on the up sides and down sides for the economy, for the company, for the sector, on either punishing WorldCom or trying to preserve its value based on what you saw today at the hearing.

BLAIR LEVIN: I think what we see or what we’re going to see is a very interesting case where you have several governmental agendas. If I were Harvey Pitt at the SEC and I was watching the hearing I would definitely say hey, we need to send a very clear message to the investing public, we’re going to protect you, we’re not going to allow conflicts of interest, we want our markets to be… or we want our accounting statements to represent accurately what the real financial state of the company is.

And you would probably say in order to do that we need to punish both individuals and the company. But from the communications perspective we have a different agenda. What we have to worry about is a company like WorldCom, which is very important to the sector, their ability to, a, continue to operate their networks, b, continue to invest in their networks so that we have good performance, good service, and c, you want WorldCom to survive as a competitor in the marketplace.

Over the history of WorldCom as such and the history of MCI, which they bought, they have played an enormous role in lowering long distance prices, for example, they’ve played an enormous role in making the Internet a very, a terrific economic vehicle for this country — a huge amount of economic growth, not just in the Internet sector but throughout the economy, in terms of productivity gains have been driven by the low cost transmission of data.

And WorldCom plays an important part in that. Whereas on the one hand you may want to punish them for certain of these accounting problems, on the other hand we don’t want to lose some of the benefits that they brought to the communication sector.

RAY SUAREZ: Professor Grant, go ahead.

JULIA GRANT: I was going to say, I think we do have to rely on the analysts who know that sector well to tell us whether WorldCom is in fact a viable business. Is there something there that is important to keep? You can contrast that to Enron, when the unraveling was done with Enron, there just wasn’t much there there.

But with WorldCom we need the analysts to know the industry to tell us, does this firm have an intrinsic value that should in fact be supported. If it does, investors will buy WorldCom stock. If it doesn’t, they won’t. That’s how those decisions will get made.


BLAIR LEVIN: It’s not quite that easy because a lot of the value of the stock depends on things which are, for example, in the government’s control. If the SEC is going to go after the company, it doesn’t matter whether there’s an intrinsic value of the customers and the Internet pipes and all the other hard assets they have.

Nobody is going to want to essentially buy that. There’s a lot of brand erosion now, there may be customer erosion. So it’s difficult to tell exactly right now what the ongoing value is. But there’s a lot of things that are outside the control of the CEO, which will determine what its long-term value is.

RAY SUAREZ: Well Bernie Ebbers doesn’t say much today, but he did say that WorldCom continues to be a valuable company.

BLAIR LEVIN: No question about it carries 70 percent of the e-mail traffic in the United States, it serves 50 percent of the Internet traffic, it serves tens of millions of Americans with long distance. It’s starting to serve a lot of, over a million Americans I believe now, local phone service. So it serves thousands of businesses.

This is a real company which provides a real service. Whether it is in the long term viable given their financial structure and given the damage to the brand that’s occurred, that’s the question.

RAY SUAREZ: Blair Levin, Professor Grant, thank you both.