U.S. corporate scandals depress world markets
By Paul Geitner
BRUSSELS, Belgium Under the headline "American capitalism takes a beating," a stunned superhero in red-white-and-blue Spandex reels from a giant "KAPOW!"
The cartoon on the cover of Britain's Economist captures the sense of surrealism that many outside the United States feel as they watch one U.S. corporate giant after another ensnared in scandal.
But there's little gloating as financial shock waves reverberate worldwide, depressing stock prices from London to Tokyo and threatening to undercut the global economic recovery.
Instead, the fear is that no country is immune. "Only the very foolish would pretend that recent events in America could not or will not happen here," European Union Internal Market Commissioner Frits Bolkestein told a financial forum in Paris this week.
"The issues raised by Enron, WorldCom, Xerox and others are issues for us all, and issues that we must address urgently."
Europe already has seen its own accounting scandals: Belgian high-tech darling Lernout & Hauspie collapsed last year after it was found to have overstated income; Comroad AG, a German provider of traffic-navigation technology, admitted this spring it invented almost all of its 2001 revenue.
France's market watchdog announced Tuesday that it is examining financial documents provided by Vivendi Universal since January 2001, amid charges the French media giant sought to embellish its 2001 accounts by nearly $1.5 billion.
Europeans, relative newcomers to playing the stock market, have been quick to pull back, seeking security in money market or savings accounts.
"It's better to make 2 percent for sure than to lose 20 percent," said Frederic Lebrum, a trader at Bank Degroof SCS in Brussels, who has seen his business dry up.
Prices of homes and condos in Italy have been soaring as Italians turn back to their tried and true investment: real estate.
Seeking to restore confidence, French Finance Minister Francis Mer said Thursday that he was planning to merge France's market regulators into a single body.
A day earlier, Swedish Prime Minister Goeran Persson announced measures to increase cooperation among financial supervisors, make tax auditors more effective and possibly introduce higher sentences for corporate offenders.
In September, the EU will be asked to consider broader action, including making European companies disclose how much they pay chief executives and board members, and giving shareholders more power at annual meetings.
Corporate governance expert Jaap Winter, who heads a committee preparing the report for EU ministers, also expressed concern about the lack of a pan-European equivalent of the U.S. Securities and Exchange Commission.
"The SEC is chasing the U.S. companies, but who will chase the European companies?" he asked yesterday at a conference in Milan.
In Asia, too, the revelations of unethical practices in the United States have raised eyebrows.
"Asians can hardly gloat, but should cast a skeptical eye when next lectured to adopt U.S. market standards lock, stock and barrel," the English-language South China Morning Post said in an editorial.
Yet when questioned about the scandals, Honda Motor Co. chief executive Hiroyuki Yoshino said he didn't see them as a failure of the U.S. global standard. "Bad things exist everywhere. Nothing is perfect," he said this week.
U.S. accounting standards have been held up as a model for Japan, where rules are widely believed to lag behind U.S. companies'.
Things are worse in mainland China, where regulators are still struggling to establish any accounting standards and rein in insider trading, dodgy bookkeeping and stock price manipulation.
State-run Chinese media have reported on the U.S. scandals with little editorial comment. Still, on Web sites the popular reaction seems one of shock.
"It does seem like it is common practice to be financially irresponsible in many different areas,"
one man wrote on the popular
chat room of the Communist Party newspaper, the People's Daily.
Europeans hope the scandal will give a boost to their efforts to promote new International Accounting Standards, which almost all listed EU companies will be required to use by 2005.
Backers of the International Accounting Standards argue its broader, principle-based approach would have exposed the problems at Enron earlier than the rules-based, "tick-the-box" U.S. standard, known as Generally Accepted Accounting Principles.
The EU recently won Australia as a convert. As for the United States, Bolkestein, the EU commissioner, said he was hopeful that talks would start in September "to bring about convergence, or at the very least, mutual acceptance."
Still, observers say it will take some time to win back investor confidence.
"If another company comes with fraud, you are back to zero," Belgian trader Lebrum said. "This is a global economy so every company in the world is doing the same."