From: Harvey Newstrom (mail@HarveyNewstrom.com)
Date: Tue Jul 02 2002 - 07:01:15 MDT
On Tuesday, July 2, 2002, at 02:10 am, Max More wrote:
> It *is* fascinating, amusing, and frustrating that media voices are
> treating all these events as one the same level of dreadful depravity.
> The Enron case does seem despicable in places, though more a result of
> an excessive concentration of a particular personality type than of
> business pressures in general.
>
> But what did WorldCom do? I haven't looked into this one in detail.
> But, as I understand it, instead of booking some expenses fully in the
> year they occurred, WorldCom booked them as capital investments,
> reducing earnings by a smaller amount but over more years.
>
> Apparently at least some of these expenses were "line costs" -- fees
> the company pays to other telecom companies to use their networks. I
> don't know exactly how those contracts were structured, but this
> doesn't seem like an obviously terrible thing to do. Further, it
> doesn't affect overall cash flow (the real test of the health of a
> company), just EBITDA (which, unfortunately, is what analysts typically
> look at).
Max, they counted these "expenses" as capital "investment". Instead of
making it look like money had left the company, they made it look like
an investment into the company. They played Enron's shell game where
they traded capacity back and forth with other companies. They reported
all the accounts receivable with each swap, but forgot to mention the
accounts payable which made the net gain zero. They then posted $3.8
billion in earnings when it really was their own money they were
shuffling around and around. There was never really any money being
earned. This was a simple case of false a fraudulent misrepresentation
of earnings that never occurred to dupe investors into buying stock in a
company that wasn't making any profits.
What is even more disturbing is that this isn't just another scandal a
la Enron. This is literally thesame exact game that Enron played. Most
of these scandals show the same systematic scheme of asset laundering
which, just like money laundering, tries to hide the trail of activity
so nobody can figure out what is really going on. They all swapped
assets through deals that produced no net gain, and then reported the
debit side of the transaction without reporting the credit side. Almost
all of these companies are using the same accounting fraud methods. If
they were all different random crimes, it would merely be a crime wave.
However, this looks more like a conspiracy with the cooperation of big
business all over. The SEC is now not only investigating these
companies, their boards, and their auditors, but they are now looking at
the compliance factors of banks, regulators, and stock analysts. It
seems that all the checks and balances failed because all the various
agents involved were profiting from the fraud in different ways. Even
when various organizations knew something was wrong, they kept quiet to
allow their own profit from the schemes to continue. It is this
widespread cooperation in the fraud, and the fact that the same fraud
scheme was symbiotically replicated across multiple organizations that
makes this scandal so insidious and widespread.
-- Harvey Newstrom, CISSP <www.HarveyNewstrom.com> Principal Security Consultant <www.Newstaff.com>
This archive was generated by hypermail 2.1.5 : Sat Nov 02 2002 - 09:15:08 MST