WASHINGTON – President Bush said Thursday he was concerned about the potential economic impact from the WorldCom Inc. accounting scandal as his Treasury secretary suggested jail terms for corporate executives who falsely certify company finances.
A House committee, meanwhile, authorized subpoenas to compel testimony by three WorldCom officials and an influential Wall Street analyst who touted the company's stock. The four, including former Chief Executive Officer Bernard Ebbers and current CEO John Sidgmore, will be summoned to appear at a July 8 hearing by the House Financial Services Committee.
Bush, asked about Democrats' criticism that he is aligned too closely with corporate America and whether there will be political fallout from the WorldCom affair, said: "I'm concerned about the economic impact of the fact that there are some corporate leaders who have not upheld their responsibilities."
Bush made the remarks in a photo session with Russian President Vladimir Putin at the eight-nation economic summit in the Canadian Rockies. It was the second day he addressed the WorldCom affair at the leaders' meeting. Putin praised the president for raising concerns about the WorldCom case during the summit.
"It's a very good signal," that Bush is trying to shore up jittery U.S. markets and bring openness to corporate America, Putin said.
Treasury Secretary Paul O'Neill, appearing on a morning television show, said "I think we've got to prosecute people to the full extent of the law. In some cases we need to strengthen the law" so the government can prevent unscrupulous executives from looting their companies, O'Neill said.
Rep. Michael Oxley, R-Ohio, chairman of the Financial Services Committee, said after the panel voted to issue the subpoenas, "Sadly, the news brings us yet another incident of accounting overreach. These alleged short-term gains created by the executives are going to cause long-term pain for WorldCom families."
One summons is going to telecom stock analyst Jack Grubman of investment firm Salomon Smith Barney, a longtime booster of WorldCom stock who downgraded his recommendation for the company on Monday. He said the downgrade had nothing to do with WorldCom's troubles.
The government filed civil fraud charges against WorldCom on Wednesday and Bush denounced the company for disguising nearly $4 billion in expenses from the investing public. The president, citing concerns over a burgeoning crisis of confidence in corporate America, called the company's conduct outrageous.
O'Neill, a former chief executive of Alcoa Inc., said of WorldCom's accounting problem: "It's not possible for it to have been done by one individual. The scope of what they've done at WorldCom requires complicity of quite a few people, I think, because the numbers are so huge. The accounting technique they used is so fundamental -- it's just mind-boggling."
Interviewed on ABC's "Good Morning America," he noted Harvey Pitt, chairman of the Securities and Exchange Commission, has advocated criminal prosecution of executives who falsely certify corporate finances. "We think that's the right step," O'Neill said.
O'Neill added that Congress should make the law tough enough that in cases like WorldCom, the government can freeze assets "so that while these things are being litigated, the money doesn't run away and can be redistributed to the employees and shareholders."
Already-battered stocks plunged on the news that WorldCom, the nation's second-largest long-distance telephone carrier, had improperly booked expenses to help boost its cash flow and profits in one of the biggest accounting scandals ever. The market managed to close narrowly mixed Wednesday and was gaining again early Thursday.
A few hours after Bush spoke Wednesday, the SEC filed civil fraud charges against WorldCom in federal court in New York City.
"In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting" that made the company appear more profitable than it was, the SEC's lawsuit said.
"This improper accounting action was intended to manipulate WorldCom's earnings in the year ending 2001 and in the first quarter of 2002 to keep them in line with estimates by Wall Street analysts."
Pitt said the charges were aimed at preventing the destruction of documents by WorldCom and payouts to company executives while the SEC continued investigating.
WorldCom chief executive John Sidgmore called the accounting disclosure "a shock" and "an undeniable setback."
WorldCom could supplant the Enron collapse as the nation's biggest corporate scandal. The huge energy-trading company, which had been Bush's most generous corporate benefactor, collapsed in December.
Enron and WorldCom had the same auditor: Arthur Andersen LLP, convicted earlier this month on a felony charge of obstruction of justice for destroying and doctoring Enron audit documents last year.
Andersen blames the WorldCom debacle on the company, saying its auditing work was in compliance with accounting standards.
Bush called for more corporate accountability and said the recent string of accounting scandals has contributed to sagging stock prices.
"We will fully investigate and hold people accountable for misleading not only shareholders but employees as well," he said.