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      July 23, 2002    
         
      NPR News: Accounting Scandals and Bankruptcies
   
      By Scott Horsley
   
         
      SAN DIEGO - Accounting Scandals and the Spate of bankruptcies have outraged investors. Many are asking whether WorldCom and Enron are isolated bad apples or somehow symptomatic of rotten corporate culture.

President Bush tried to reassure investors when he spoke on corporate responsibility earlier this month.

"Vast majority of business men and women are honest. They do right by their employees and their shareholders. They do not cut ethical corners"

Others warn that the recent scandals point to more widespread corporate corruption. NPR Scott Horsley reports.

Leaders of some of America's biggest corporations have expressed shock and anger at the recent business scandals, at the same time they've tried to corral investors outrage before they trample on their own companies. John J . Kasseloni is president of the Business Roundtable, an association of leading CEOs.

"We need to keep in mind that we're talking about a small number of more than 17,000 publicly traded U.S companies. We very much believe that it's a few bad apples but one is too many."

But Robert Borsage, who directs a Washington D.C research center called the Campaign for America's Future, says the bad apple theory is losing strength, each time another company is force to correct its financial reporting.

"This is a lot more than a few bad apples, and that's the thing all investors are worried about. Every time they turn around it seems to be another, you know, even established companies like Johnson and Johnson that's getting accused of things or the vice president company or Xerox or companies that used to be thought of sterling blue chip companies and so I think it is fairly widespread."

Just how widespread is important, not only to assess the extent of the problem but also to craft appropriate remedies. If the scandals are indeed the fault of a few bad apples, bobbing them out and punishing them should help. President Bush has proposed stiffer penalties against those who commit corporate fraud. He also called for a new ethic of personal responsibility.

"Ultimately the ethics of American Business depend on the conscience of America's Business leaders. We need men and women of character, who know the difference between ambition and destructive greed, between justified risk and irresponsibility."

But others argue even the most responsible executive might stray from the ethical path if the temptation is great enough. In testimony before the senate banking committee last week, Federal reserve chairman Alan Greenspan suggested the surging stock market of the late nineties provided that temptation, overwhelming the good judgment of too many corporate executives.

"It is not that humans have become more greedy than the generations past, but it is that the avenues to express greed have grown so enormously."

Greenspan said that poorly structured stock options gave many corporate executives a perverse incentive to inflate short-term profits artificially. Professor Craig Dunn, who teaches Business and Society at San Diego State University, says with so many stock options padding their paychecks its no wonder some executives got greedy.

"That's what happens, because our basic assumption is that the shareholders are only in it for the money. If we want to make CEOs like shareholders, then what we make them into is people who are just in it for the money. Should we be surprised then that they are not going to turn their back on fifty million dollar salaries."

You might call this the environmental theory. The idea that even a barrel of sweet cider goes bad if left in the sun too long. Supporters of this theory believe systemic reforms not just a few high profile prosecution is needed to mend the market. Lawmakers are already discussing some systemic reforms including new restrictions on auditors and more independent corporate directors. Robert Borsage complains that lawmakers are not yet talking about changing the way that companies account for stock options.

"It's going to take a lot more public pressure, pressure from institutional investors, and others to start to clean that up. But it is very imperative that we give executives an incentive to make the company grow over the long term, not an incentive just to keep the book straight for a quarter, so they can cash out.

Fed chairman Greenspan says just as the booming stock market spawned infectious greed a few years ago, today's slumping market leaves little room for profiteering. Even so he says, it's important that policies makers address the problems with corporate governance now so that they don't resurface when the market begins moving up again.

 

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