Investors in the United States will breathe a sigh of relief as 2002 draws to a close. But can the markets clamber out from under the corporate scandals and collapses? Will next year be any better?
In the past year it was difficult to predict when and where the next scandal would emerge. A range of companies was damaged, from the conglomerate Tyco to drug store chain Rite-Aid, from biotech ImClone Systems to Martha Stewart Living Omnimedia.
It was companies riding the new-economy wave that attracted allegations of fraud committed on the grandest scale and which had the highest incidence of bankruptcies.
Enron, the disgraced energy group, Global Crossing, WorldCom and cable firm Adelphia; what linked them was massive over-expansion in deregulated energy, telecoms and media markets, and a reckless pioneering culture that encouraged a sense of invincibility. For each company that went under there was another handful of near misses.
Without the prospect of a pick-up in telecoms spend, the markets could be in for more big name shocks. Even without any accounting improprieties, indebted firms such as Qwest Communications, Sprint PCS and equipment makers Lucent and Nortel are on the danger list.
The airline industry will also remain under pressure this year and a war in Iraq could be the catalyst for more companies to join US Airways and United Airlines in the bankruptcy court. American Airlines, the biggest carrier in the world, is of most immediate concern. As United was preparing its Chapter 11 filing, American Airlines chief executive Donald Carty began meeting workers to seek a wage freeze and further cuts aimed at saving $4-billion a year.
At least there is unlikely to be the political will to hound any more accounting firms out of existence after the Arthur Andersen affair.
Ongoing investigations into others in relation to, for instance, the Tyco scandal, are more likely to focus on individual partners instead of indicting entire firms. PricewaterhouseCoopers was the Tyco auditor, its hand was on the tiller while Dennis Kozlowski and his coterie were allegedly looting the company of more than $600-million. But the mood among prosecutors is now very different.
The US government and financial regulators struggled to restore confidence in corporate America and introduced a rash of regulations designed to ensure that it could never happen again.
President George W Bush signed the Sarbanes-Oxley corporate reform bill which created an accountancy oversight board and increased the maximum prison time for corporate fraud from five to 20 years.
The New York stock exchange introduced its own proposals to tighten corporate governance.
Chief executives and chief financial officers of the top 1 000 companies in America filed copies of their recent accounts, signed to vouch for their accuracy.
Companies are bowing to pressure from anxious investors. Firms including General Electric are making their books less opaque and are beginning to include the stock options they lavish on senior executives as costs.
For all the reform and tightening of regulations, the only way of really restoring confidence in the markets will be a year without scandal or big bankruptcies.
That will not be easy. The legal actions by shareholders who feel they were robbed of trillions of dollars will drag on and could force further companies to go bust. The welter of investigations by the justice department and the securities and exchange commission into big companies continue.
There is also the fear that the economy could slide back into recession. Some of the Wall Street banks could be forced to sell to a rival if their reputations are too sullied by involvement with the likes of Enron and WorldCom.
It will not be as easy to consign the year of scandal and bankruptcies to history. — Â