Companies Take Steps to Manage Accounting Rumors

WorldCom's plight sent the U.S. capital markets reeling in another wave of accounting shock. It was a jittery week on Wall Street when mere rumors of accounting irregularities were enough to send share prices plummeting. Clearly, the entire telecom sector is on investors' radar screens, but even industrial-era icon General Motors found itself victimized by the rumor mill on June 27, 2002.

According to an account published by the Wall Street Journal, rumors were flying that GM was planning to hold a conference call to discuss accounting issues at its financing unit, General Motors Acceptance Corporation. These rumors caused imbalances in the trading of both the company's stock and exchange-traded bonds, leading to a brief halt in the trading of GM's securities. ("GM Denies Accounting Problems, Seeking Source Of Rumor," June 27, 2002.)

A spokesperson for General Motors called the rumors "troubling" and said the company is investigating the source of the rumors. According to a report by AXF, the speculation began in the London market, where Global Partners Securities chief market strategist Peter Cardillo said: "Right now the rumor mill is running high. Lots of companies are being scrutinized (for accounting problems), especially those with histories of mergers and takeovers."

GM responded with an announcement that stopped short of a formal press release. The statement given to the media was simply: "GM is not subject to an accounting investigation and strongly believes that its accounting is appropriate. GM believes that rumors of irregularities in its accounting are unfounded." This seemed to satisfy investors. Trading resumed and the securities prices rallied off their lows for the day.

In contrast, WorldCom rival Sprint Corporation did issue a formal press release. The statement quoted Robert J. Dellinger, Sprint executive vice president and chief financial officer, as saying, "we do not have the issues that are affecting others in our industry. We have no SEC investigations or 'off-balance sheet' liabilities." Sprint's statement also included an expression of confidence in its internal and external audits. It said, "Sprint has a strong system of internal accounting controls and a segregation of duties to ensure that financial statements are presented in a complete and accurate manner. In addition to Sprint's internal audit function, Ernst & Young LLP audits Sprint's financial statements."

-Rosemary Schlank

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