Business Scandals in Corporate America

Business Scandals in Corporate America

Corporate executives in handcuffs. A declining stock market with losses of approximately $8 trillion in investor wealth over a two-year period. Reform legislation to overhaul accounting procedures. Resignations at the Security and Exchange Commission. $1 billion in fines for Wall Street brokerage firms. Corruption reaching throughout corporate America all the way to the White House's leading economic advisers. These are some of the top business stories as the new millennium dawned.

These incidents helped rewrite the history of United States business. A decade of unparalleled prosperity came to an end in the spring of 2000 although confidence in the stock market itself began to unravel in late 2001 and early 2002, when the largest accounting frauds in U.S. history were uncovered. Several major companies filed for bankruptcy after admitting that their financial statements had concealed losses and the scandals sent stocks into steeper declines, extending a bear market that had begun in 2000. The Enron Corporation, an energy trading firm that had become the country's sixth largest company, was the first to admit that it had issued fraudulent financial statements going back over a five-year period. Then WorldCom, Inc., a giant telecommunications company, set the record for accounting fraud. WorldCom first revealed that company financial officers had concealed more than $3 billion in business losses. Later revelations upped that figure to more than $9 billion.

As the scandals sent stocks plummeting, millions of Americans who were heavily invested through their 401(k) retirement plans in the stock market had to postpone retirement and rethink their investment strategies. According to one estimate, American workers lost $175 billion in retirement savings alone during this time. The losses came at a time when 401(k) plans had become increasingly popular with employers, replacing defined benefit pension plans that guaranteed a set amount of money during an employee's retirement.

Why did these business scandals occur and why on such a colossal scale? Was there anything unusual about this period in the history of American business that encouraged accounting fraud or that made it possible for the fraud to go undetected for so long? Economists, business historians, and business journalists proposed a number of explanations during 2002. One explanation proposed that the scandals were due to a wave of deregulation during the 1980s and 1990s that changed the playing field for American business and made it possible for Wall Street firms to branch into a variety of financial activities. Both Enron and WorldCom were in industries that had been recently deregulated, and thus freed from government oversight that might have uncovered some of their shady finances. An internal investigation of the Enron scandal by a specially appointed senate sub-committee revealed how the Enron Corporation hid its losses.

As a result, critics charged, banks made risky loans and their affiliated brokerage houses recommended risky stock and bond offerings, in an effort to cultivate lucrative investment banking deals. Investors in WorldCom ended up suing J. P. Morgan Chase & Co. and Citigroup Inc., charging that they had a conflict of interest in lending money to WorldCom and selling its bonds.

Another explanation for the scandals focused on changes in the way U.S. business executives were compensated, particularly the issuing of stock options. Stock options were conceived as a way to align the interests of a company's managers with the company's