Cooking the books: an outbreak of corporate greed has shaken the economy, evaporated trillions in value from the market, and altered millions of American lives. (National).

The arrests have come with the regularity of a drumbeat. There's John Rigas, the 79-year-old founder of Adelphia Communications, the nation's sixth-largest cable TV company. Prosecutors say he and his sons turned the company into their "personal piggy bank," looting $1 billion from it to pay for such indispensable personal items as a $13 million private golf course and a lavish African safari vacation.

There's L. Dennis Kozlowski, chief executive officer of Tyco, a conglomerate with a quarter of a million workers worldwide. Prosecutors suspect he raided millions from his company to buy vacation homes and artwork; he's already been charged with trying to duck $1 million in sales taxes for some pricey European paintings, and destroying records to hide the scheme.

And there's David Myers and Scott Sullivan, senior executives at WorldCom, which owns MCI, the nation's second-largest long-distance company. Investigators say they manipulated company records to hide billions of dollars in losses, which inflated publicly reported profits. The company, now bankrupt, says the misstatements totaled a staggering $7.1 billion.

A WAVE OF BUSINESS FRAUD

In all, more than 20 large companies, from AOL Time Warner to Kmart, are under investigation for accounting irregularities--in other words, "cooking the books." CEOs and corporate leaders have been paraded in handcuffs into courthouses, accused of plundering their companies and lying to investors to cover up losses. Others have been accused of using insider information--secret advance knowledge that a stock's value is going to change--to unload their shares and avoid losses that were then passed on to average stockholders.

Today, more than half of all Americans own stock, either directly or through mutual funds. Thus, this wave of corporate fraud has left millions of people with financial losses, laying waste to retirement plans and college-tuition accounts that depended on stock market investments. Sensing a tide of national resentment, late-night TV hosts have been quick to pounce on corporations for breaking the rules. "How come all these companies are off billions in their accounting?" Jay Leno wondered one night on The Tonight Show. "If you bounce a $15 check at the Quickmart, the feds are at your door!"

Most corporate leaders aren't breaking the law, and most publicly traded companies have scrupulously reported their finances to stockholders. But the size and depth of the offenses have sent shock waves through the U.S. economy.

The timing of the scandals couldn't have been worse. Before the parade of arrests, the economy was already wobbly and the stock market was declining. Since the market's peak in 2000, a mind-boggling $7.1 trillion in wealth has evaporated (see chart, pages 14-15).

The nation's economic system relies on the integrity of companies and their executives. Ideally, corporations report their profits and losses honestly, and investors, armed with that information, decide whether to buy stock in a company. The corporate scandals undermined that system. Companies again and again were found to have lied about their profits or hidden losses. Auditors, hired by the companies to vouch for the numbers, drifted away from requiring accurate reports. Investors lost confidence and abandoned the market in droves, driving down stock prices (and the value of companies).

Thousands of workers lost their jobs while the CEOs partied. During the same period that Kozlowski, Tyco's chief executive, was dabbling in the art market and decorating his Manhattan apartment (including a $6,000 shower curtain, according to some reports), more than a quarter of the 400 workers at a South Carolina electrical components plant owned by Tyco were laid off, and then replaced with lower-paid temporary workers.

Says one longtime employee, who, like many at the plant, would speak only on the condition that her name not be used: "We don't even get a bonus at Christmas, and then he winds up with a million-dollar bonus."

GREED AND MISDEEDS

The stock market decline has been particularly hard on millions of retirees who were banking on the stocks they owned to see them through their retirement. In many cases, those people are facing substantially reduced income, and some must return to work.

How did American companies, once models for others around the world, go so wrong? In some ways the system itself invited greed. The strict standards that accountants used to apply to company financial statements--the yearly reports announcing how much the company made or lost--grew looser and looser. The federal government passed laws in the mid and late 1990s that relaxed federal oversight over company actions.

Conflicts of interest sprouted like dandelions. Accounting firm Arthur Andersen was paid to verify the books of Enron, the energy giant whose bankruptcy kicked off the corporate meltdown. Andersen also made millions from Enron by drumming up new business for the company--a direct conflict of interest. The firm has already been found guilty of shredding documents to hide Enron-related records and will no longer perform audits.

At WorldCom, corporate bosses received millions in stock options--grants of a company stock that can be redeemed for huge sums if stock prices go up. Critics say those options gave high officials at the company a motive to lie about the company's losses in order to keep its stock prices inflated.

Others, like Martha Stewart, the home-furnishings and lifestyle expert, are being investigated for insider trading. Stewart cashed in her shares in ImClone, a biotech firm, for $227,000--one day before the company announced that the Food and Drug Administration had rejected one of its drugs. News of the ruling sent the stock price plummeting. Stewart is close to ImClone's founder, Samuel Waksal, who is charged with illegally tipping family members to sell their stock before the announcement. Stewart has denied wrongdoing.

A CRISIS OF DISTRUST

"It is not that humans have become any more greedy than in generations past," says Alan Greenspan, chairman of the Federal Reserve Board, responsible for maintaining the stability of the U.S. financial system. "It is that the avenues to express greed [have] grown so enormously."

The abuse of trust and the flaunting of power have combined to create a crisis of distrust among average investors. "I cannot think of a time when business over all has been held in less repute," says Henry M. Paulson Jr., chairman and chief executive of Goldman Sachs, one of the oldest and largest securities firms.

With state and congressional elections coming up in November, anger over the corporate misdeeds has sent politicians from both parties scrambling to prove their toughness on corporate crime. With near-record speed, Congress passed a bill that President Bush instantly signed into law, increasing criminal penalties for corporate abuse, requiring corporate executives to vouch for their companies' financial statements, and setting up an independent board to monitor auditing firms.

What's next? Some executives are likely to end up in jail, and investigations continue. The hope in the business world is that the gravest problems are already in the open.

Even without new scandals, some people say the corporate misdeeds have changed the way people think about business wrongdoing. Says Jennifer H. Arlen, a professor at the New York University School of Law: "People have come to realize that fraud is a real crime that causes devastating losses."

How Business Executives Stole Millions, Destroying Savings and Jobs in the Process

DISCUSSION QUESTIONS

* Can ethical behavior be taught to a person who has acted unethically?

* "I cannot think of a time when business over all has been held in less repute," says investment executive Henry M. Paulson Jr. What is your view of American business? Has "Cooking the Books" altered your view?

* How would you define a conflict of interest in business, such as that referred to in the article?

* Can you cite examples of greed on a smaller scale than the business scandals discussed in this article?

TEACHING OBJECTIVES

To help students understand the massive fraud that has erupted in some American corporations and how this thievery affects the lives of ordinary Americans.

CLASSROOM STRATEGIES

BEFORE READING: Assure students that they will not have to memorize names, dates, and numbers. Rather, they should understand something about the ethical quagmire in which the criminal acts occurred and how the CEOs' unethical behavior has hurt ordinary Americans.

CRITICAL THINKING: After reading this article, students should come away with an awareness of at least three things: (1) the nation's economy relies on the integrity of companies and their executives; (2) the system offers numerous opportunities for dishonest executives to cheat; (3) the federal government eased the way for greedy executives when it passed laws relaxing its oversight over company actions.

Discuss the reliance on integrity and easing of oversight. Does the law rely on people's integrity in other areas--driving or paying taxes, for example? Does it have enforcement mechanisms in place to keep people from straying? Have business executives been given a free ride not available to others?

RESEARCH: Note that more than half of all Americans own stock either directly or through mutual funds. You might have students survey their parents and/or other adults to find out how many own stocks directly or through a mutual fund. Caution students not to ask about the size of people's investments.

You might also have students share this article with their parents and ask their parents' opinions of the CEOs who have engaged in business scandals. What punishment would they recommend for CEOs like those profiled in the article? Collect responses and use them as the basis for class discussion.