By David Schepp BBC News Online's North America business reporter

The nascent global economic recovery begun earlier this year is threatened by the creeping number of corporate accounting scandals, the International Monetary Fund (IMF) has said.

IMF assessment

Corporate profitability threatens economic revival More consolidation likely among banks Inflows to emerging bond markets have fallen Insurance companies more vulnerable to financial shocks

The wrongdoings have cast doubt over the quality of financial statements, sending stock markets reeling as investors pulled money out of stocks in search of safer investments.

The torrent of accounting scandals, set in motion with the downfall of energy-trader Enron last autumn, also has imperilled future spending by corporations.

"The Enron failure highlighted a number of weaknesses in accounting rules and their implementation, corporate governance and lax market discipline," the IMF said in its latest Global Financial Stability Report.

Harsh discipline

Corporate spending has been noticeably absent amid the economic revival, which has been largely driven by consumers.

That lack of capital investment, as business outlays are known, may also jeopardise the recovery.

Nevertheless, the IMF said the resurging world economy had "brought improvements in financial-market conditions," and the near term appeared largely free of imminent threats to global financial stability.

In recent weeks, however, shares throughout the world have been punished over fears that a review of financial statements and accounting standards may result in lower corporate net worth.

"This prompt reaction by markets is proving harsh discipline for corporations and an incentive to enhance the transparency of their financial accounts, strengthen their balance sheets and refrain from undue risk taking," Wednesday's report said.

In addition, regulatory changes in process in the US and Europe should enhance the running and regulation of capital markets, where stocks and bonds are traded.

Defaults and losses

It has been only in recent weeks that shares overall have begun another tumble.

During the first three months of 2002, shares of firms within technology, media and telecoms continued to flag in the US and Europe.

Those areas are rife with overcapacity and slack demand. In Japan, however, tech stocks "significantly outperformed" all other stocks that are also subject to the whims of the business cycle.

In assessing stock performance overall, the IMF said that despite the improving economic picture, shares around the world are selling for more than they logically should.

The dubious corporate-profits picture also raises questions about the profitability of the global banking sector.

Amid declining revenues, banks are facing increased expenses related to bad loans defaulted on during the recent recession.

Their inability to control costs may result in further consolidation within the industry - especially in Europe.

Insurance companies also face trying times, the IMF said, having experienced large losses and below-market returns on some policies.

In addition, their expansion into other aspects of finance leave them more exposed to the inherent risks of the market.

Bond risks

The IMF also repeated its position that Argentina's financial crisis has largely been contained.

The fallout from the fall in the value of the Argentine peso has not greatly affected markets outside the country.

But the IMF warned that bond markets in countries such as Mexico and Malaysia remain "vulnerable to corrections", and noted that inflows to those markets was lower during the first months of 2002 than in the previous quarter.

Among other factors, the IMF said political turmoil and disappointment over the recovery of the global economy are reasons for the risk.

Wednesday's report is the second Global Financial Stability Report the IMF has issued, following the launch of the publication last March.

The quarterly report provides assessments of global financial markets and identifies potential weaknesses that could lead to crises.