Quotes of the Day

To many europeans, revelations of false accounting tricks and bogus stock tips are proof that there's something rotten at the heart of the American way — and that the gentler brand of capitalism practiced in Europe is somehow better. "It may sound complacent, but there is no chance of a scandal like Enron or WorldCom happening here," argues George Cox, director general of Britain's Institute of Directors, a leading business association. "I'm not saying we won't have problems, but we have a different corporate culture and we don't have the same gung-ho mentality."

Cox is at least half-right; his remarks do sound complacent. But are European businesses really more virtuous than their U.S. counterparts? The Sabena story and others suggest not. Governance methods differ, but Europe has its own corporate cowboys.

Misstated earnings? Last week, Britain's largest holiday operator issued its third profit warning in five months, sending its shares down 62% in one day. About $90 million in reported MyTravel profits has evaporated, partly because of a switch to generally accepted accounting principles (GAAP), but also because auditors misstated the firm's cash position. Small wonder the chief executive, Tim Byrne, resigned under pressure from shareholders.

The publicly traded German technology firm ComROAD, which specializes in mobile Internet applications, couldn't fall back on GAAP as an excuse. It disclosed earlier this year that a whopping 96% of its reported 2001 sales were "fictitious," billed through a nonexistent Hong Kong company, landing the former CEO with a disputed charge of share manipulation. Such dodgy practices contributed to the decision in late September to shut down Germany's Neuer Markt, the once highflying technology exchange.

Dubious deals for insiders? Just as the century-old German engineering giant Babcock Borsig was going under this summer, its chairman Klaus Lederer announced a surprise deal to sell the firm's share in profitable submarine division HDW to U.S.-based One Equity Partners. Shareholders cried foul, arguing that they weren't consulted, and that the sale, for an estimated $325 million, would deprive the rest of troubled Babcock of one of its main cash-generating divisions, thus making bankruptcy inevitable.

Lederer promptly resigned from Babcock, and in July the company filed for insolvency. But Lederer went on to become head of HDW. The sale of HDW to OEP, at one point blocked by a court, is still tied up in legal tangles. Lederer resigned from HDW at the end of last month. But Guy Wyser-Pratte, an American investor who owns about 8% of Babcock, is suing the firm, claiming shareholders' interests were violated. "In America," he says, "they'd have the whole bunch put behind bars if they ignored a court's injunctions."

Stock-price manipulation? In late May, the German Internet entrepreneur Kim Schmitz got a 20-month suspended sentence and a €100,000 fine after he was found guilty of propping up shares of the Internet collective buying site Letsbuyit.com. Schmitz announced that he intended to save the troubled company last year, but he didn't have the money to buy it outright. Instead, according to prosecutors, he talked up his plans to boost the price of the shares he already owned, which he then quickly unloaded for an illegal €1.2 million gain — a classic case of 'pump and dump.'

While it's true that no single European scandal rivals Enron or WorldCom in scope or audacity, the number of investigations currently under way suggests corruption in Europe is on the rise. There is no Continent-wide regulatory agency, but investigations opened by German financial authorities are running well above their 2001 pace: in the first half of this year there were 71 cases, as opposed to 61 cases in all last year.

Britain's Serious Fraud Office notes that in the first six months of 2002, the total amount of fraudulent funds — money made illegally — it detected was $385 million, more than double last year's figure. The truth is that it's practically impossible to gauge how widespread corporate malfeasance is since government watchdogs regulating businesses are woefully understaffed — if they even exist at all.

Germany's securities regulator, the BAFIN, for example, opened a mere 39 investigations into insider trading last year; only two cases resulted in sanctions. In contrast, the sec, also considered understaffed, last year got 62 convictions from 64 investigations. Even following a consolidation of power earlier this year intended to increase its authority, the BAFIN remains a largely toothless agency. It still lacks the ability to independently verify company balance sheets. And its proceedings are secret, meaning that market manipulation may be uncovered but investors, the media and the public may never hear about it.

One explanation of Europe's supposed probity is that companies face less pressure to ratchet up earnings every quarter because a smaller percentage of them are publicly traded — and that means executive pay is less likely to be linked to stock-market performance.

Yet Europe is hardly a beacon of transparency. In Germany, publicly traded companies are not required to report compensation packages for the highest-paid executives. Of the 30 companies that comprise the blue-chip dax index, only three bother to do so. In the U.S., all public companies must file the salaries, bonuses and other remuneration for top managers.

Indeed, in European business culture, disclosure is not that highly valued. Full disclosure "is a very American approach, stemming from having a written Constitution and a lot of lawyers," sniffs one British shareholder activist. As a result, many European companies lack the internal controls necessary to unearth potential fraud. A study in July by the nonprofit Work Foundation, a think tank based in Birmingham, found that nearly half of British businesses surveyed had no policy for employees to report signs of wrongdoing.

What are the chances of European business becoming more shareholder-sensitive and — perish the thought — more "American?" Not high. In Germany, for example, both major parties have recently been tied to business scandals involving municipal contracts given to companies or individuals who just happened to make secret political donations too. So neither party has much incentive to make an issue of greater transparency.

Things may change in 2005, when the E.U. is scheduled to adopt a new set of International Accounting Standards, which require directors to aver that company figures are "true and fair," and thus are touted as Enron-proof. But tough rules are only as good as the means and the will to enforce them. Europe's business leaders may decry the American zeal for profit, but European markets could stand a bit of American zeal to crack down on scofflaws.

• JAMES LEDBETTER