The Enron-Arthur Andersen episode was initially regarded as an exception to the much vaunted corporate governance system in the United States of America. Not anymore. Almost every week, new stories of corporate scandals are coming out. The latest in the series is WorldCom, the second largest long-distance carrier of internet data in the US, after AT&T. The company overstated its cash-flow by $ 3.8 billion. Remember Enron was the largest private sector energy company in the world. India is not immune to what is happening in the US either. Just as the collapse of Enron affected the financial position of some Indian financial institutions, the WorldCom debacle may cause a big hole of nearly Rs 5,000 crore in the balance sheet of Videsh Sanchar Nigam Limited. It has become doubtful whether Worldcom would be able to pay this amount due to VSNL. Interestingly, the auditing firm in charge of WorldCom was also Arthur Andersen, the same firm indicted in the Enron scandal. Predictably, the unfolding series of scandals has created varying reactions. Some see in it the vindication of the Marxian law of falling rate of profits in a capitalist system which has been kept under wraps by a false declaration of profits. It is only by chance that the cover has now been partially opened. Some others detect in it the widespread lack of morality in the corporate world, a nexus between greedy company officials, auditors and politicians. Yet others consider changed incentive structures to be primarily responsible. According to this theory, the nature of American business corporations (and in a globalized world, business in other countries also) has undergone a big change in recent times. Earlier, companies had multiple goals. They used to look after the interests of shareholders, as also of the employees and executives and even consumers. But from the late Eighties, share value became almost the sole concern of American corporations. The compensation package of top company executives came to have strong links with the price of company stocks. On top of bonuses being linked to stock prices, company executives were also given huge stock options in the company. The pay packets of executives who successfully pursued the exclusive goal of increasing the share price reached astronomical heights. The top 10 highly paid executives in the US, on an average, received $ 3.5 million in 1981, $ 19.3 million in 1988 and $ 154 million in 2000. While the wages of ordinary workers in the US doubled, the compensation of top executives multiplied 44 times over this 20 year period. Apart from leading to inequalities in income, this trend also created the incentive for some company bosses to inflate profit figures by 'innovative' (read fraudulent) accounting tricks. In this, they were helped by reputed accounting firms. The auditors often did not ask unpleasant questions or probe them properly because they got lucrative consultancy assignments in the company or related companies. As stock prices zoomed, so did the wealth of the company bosses. Many of these bosses sold the stocks when they were at the peak and pocketed the gains. Even if in a few cases, the truth eventually came out, the bosses had already increased their personal wealth enormously. At worst, they would have to resign. Their wealth would not be confiscated. Nor would they go to jail. They kept the political bosses in good humour by campaign contributions to political parties and even personal favours to men in the corridors of power. Thus, the company bosses have everything to gain and little to lose, except for their reputation. And since a lot of them used the same means, their estimation in the eyes of their peers would not be affected either. Ordinary shareholders and employees were usually kept in the dark about the questionable methods used to push up stock prices and the impending bankruptcy. The people with insider information - the company bosses, influential politicians and members of regulatory bodies who had prior information - got the time to sell off their stocks before the news broke. Ordinary shareholders and employees who had exercised their stock options were just left stranded with junk stocks. What are the fallouts? Though the recent revelations have not come as surprises to people familiar with the ways of the corporate world, the popular image of corporate America has taken a severe beating. Ordinary investors have become wary of investing in the US since they cannot trust the profit-and-loss figures of the companies. There is apprehension that the loss of investor confidence may adversely affect chances of an economic recovery in the US. International institutions like the International Monetary Fund and the World Bank and Western experts used to recommend that developing countries should adopt American institutions and accounting standards to get rid of corrupt business practices. Now the unending stories of a nexus between big business, auditors, banks and politicians, and the acknowledged role of industry lobbyists in influencing government policy-making in the US suggest a world not vastly different from the 'crony capitalism' of east Asia. Regulation by government agencies or bodies staffed with people chosen by the politicians has not checked such corrupt corporate practices. Laying down standards means little unless it is ensured that these will be followed scrupulously and that those who do not follow will be severely punished. The suggested reforms include curtailing the dual role of auditors as consultants, mandating that auditors of a company be selected by an independent agency like the New York stock exchange (which would be akin to letting a soccer team select its own referee), large corporations be made to rotate auditors every five years. There could also be guidelines imposing tighter conflict of interest restrictions on bankers, stock analysts and credit rating agencies, putting a limit on the amount of employee retirement funds that can be invested in stock options and so on. When a company goes bust, employees lose a large part of their retirement money which had been invested in stocks. However, industry associations and their lobbyists are working hard in Washington to dilute these proposed reforms. Some believe stringent regulations are not needed. The market will largely take care of the problem since investors will flee those companies whose accounting or governance standards are below the expected levels. This would, in turn, force the companies to improve. Dishonesty, in other words, wouldn't pay in the long run. The problem with this theory is that investors won't know better until the scandal comes out in the open, if at all it does. So long as the errant management doesn't suffer any serious penalty (like being put behind bars or confiscation of all ill-gotten personal wealth), the current practices would continue. Moreover, these corporate conmen have a variety of tricks in their kitty. WorldCom, for example, classified operating expenses (which must be charged in the same year) as capital expenditure (which is spread over several years), thereby artificially inflating current profits and stock prices. Enron entered into contracts with buyers of electricity by underestimating the cost of production and then entering all the projected overestimated profits on future sales as current profits. Other companies used other tricks. In fact, one management practitioner recently compiled a list of some 20 tricks that can be used to make the sales or profits look better than they were. So, it is not always easy even for experts to unravel the truth. The bottom line is: if somebody in the corporate world wants to be a crook, it is not difficult under the present system not only in the US but in the other countries as well. The existing system provides strong incentives for bending the rules and little penalty for the people caught in the act.