& cplSiteName &

Carrier Scandals: Who's Next?

Light Reading
News Analysis
Light Reading
7/1/2002

Things are going to get a lot worse before they get better. WorldCom Inc.’s (Nasdaq: WCOME) shocking revelations last Tuesday may have ruined investor confidence for a long time, and, observers warn, other scandals are looming on the horizon.

While they may not reach the scope and scale of the fraud WorldCom is accused of committing, there’s little doubt that new revelations of accounting scandals and insolvency issues in the telecom space are on their way. For WorldCom isn’t the only carrier that has seen its debt levels skyrocket out of control over the past year or that has struggled to come to terms with its tumbling stock prices from ridiculous highs to ridiculous lows. WorldCom executives weren’t the only ones worrying that their company’s poor performance would be reflected in lower executive compensation. And the soon bankrupt carrier was certainly not the only company to have been audited by Arthur Andersen LLP, now notorious for its willingness to allow companies to bend the rules in order to improve their images.

“Whether it is swaps (like Qwest Communications International Inc. [NYSE: Q] and Global Crossing Holdings Ltd.), or off-balance-sheet games (like Enron and Adelphia Communications Corp. [Nasdaq: ADLAC]), or balance sheet games (like WorldCom and Lucent Technologies Inc. [NYSE: LU]), the whole idea is to 'hide' what you are doing,” writes Craig Johnson, an independent analyst based in Portland, Ore., in an email to Light Reading.

While most companies don’t cross the line to the extent that WorldCom did, there are plenty of ways to artificially boost earnings that are within (or balancing along) the boundaries of what’s permissible.

“Even the best companies… play games,” Johnson says. “That’s what pro forma was all about.”

One of the easiest places to hide bad results is in pro forma numbers, which allow a company to basically leave out whatever losses they see fit from their earnings announcements. Of course, the real numbers have to go into earnings reports and Securities and Exchange Commission (SEC) filings, but, especially if there’s a problem, they don’t tend to be in bold.

“No accounting firm will put a big red flag on the front of an earnings statement,” Craig Goodman of the National Energy Marketers Association (NEM) says. Instead, he says, most of the interesting stuff is impossible to read since it’s hidden at the bottom in a 2-point font.

“There are plenty of techniques,” agrees Frank Dzubeck, president and CEO of Communications Network Architects, “and they’re all legal.”

Examples of such legal, but aggressive accounting can be seen in Qwest’s booking last year of approximately $1.3 billion in fiber optic and equipment sales as one-time revenue, instead of recognizing it over several years, observers say. Since the company reported what it had done to the SEC, however, it does not constitute fraudulent behavior along the lines of what WorldCom is accused of doing.

“With [the Qwest case], an accounting firm could stand up in court and defend it,” Dzubeck says. “As long as everyone understands the rules, it’s OK. The biggest problem in [the WorldCom] case is that no one knew they had done it. No one in their right minds would have done it. This one must be close to the end. It’s the peak of stench.”

Other observers, however, say they expect that the industry has at least a few more scandals in store before the storm blows over.

Back in March, Light Reading’s paid research service, Optical Oracle, predicted that a long line of carriers were facing very uncertain futures. Qwest and Level 3 Communications Inc. (Nasdaq: LVLT) topped the charts in that report -- and they still do. “Qwest and Level 3 remain the two most likely near-term candidates, in our view,” Optical Oracle analyst Chris Bulkey wrote in response to the WorldCom scandal. “Qwest’s use of reserves to obscure weakness at US West and Level 3’s persistent use of massive one-time charges are among the early warning signs.”

Other companies that are teetering on the edge are Allegiance Telecom Inc. (Nasdaq: ALGX), Broadwing Inc. (NYSE: BRW), and Time Warner Telecom Inc. (Nasdaq: TWTC), according to Bulkey. And if we let history serve as a guide, the most interesting ones to watch will certainly be Qwest, Level 3, and Allegiance, all of which, until quite recently, were being audited by [drum roll...] Arthur Andersen.

“If [Qwest’s] shares go to zero, people shouldn’t scream about it,” says F. Drake Johnstone, an analyst with Davenport & Co. LLC. “There’s been plenty of evidence of wrongdoing.”

American companies are not the only ones in jeopardy. With a more than $120 billion combined debt load, France Telecom SA, and Deutsche Telekom AG (NYSE: DT), for instance, have about the same level of debt as Argentina. While European telecoms are usually backed by their respective governments and are not required to adhere to the same levels of financial scrutiny as American companies, some observers think that troubling revelations may soon surface.

The gravity of the situation is reflected in reports that the French government is contemplating renationalizing France Telecom due to the company’s loss of investor confidence.

“There’ll be uglies,” Johnson says of the European telecoms, “but not like WorldCom.”

“The next one to hit the fan will be KPNQwest NV (Nasdaq/Amsterdam: KQIP),” says Frank Dzubeck, referring to the Dutch-based bankrupt service provider that once carried nearly half of all Internet traffic in Europe. Bondholders at that company are pushing for an investigation into how the company, which has been warning for the last month that it may soon have to shut down its entire network, could have fallen apart so quickly. Only two months before the carrier filed for bankruptcy it completed the acquisition of Ebone, which carried about 25 percent of all European Internet traffic.

With all the dirty laundry being aired in the industry, it’s no wonder investors are wary. To restore investor confidence, most observers agree that at least some of the executives responsible for the mess will have to do some hard jail time.

“We really haven’t seen anyone taste any medicine yet,” Johnson says. “We have to see some people go to jail.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

(4)  | 
Comment  | 
Print  | 
Related Stories
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
MP_UK
MP_UK
12/4/2012 | 10:10:52 PM
re: Carrier Scandals: Who's Next?
It seems a sad truth that this sort of behaviour crops up in nearly all areas of life, but I suppose after a while you just have to expect it. A few examples:

During the bubble years CEO's, CTO's etc seemed almost duty bound to run unrealistic network builds / product sales forecasts / acquisition strategies - otherwise they'd be replaced for not being agressive enough. What did that get us? a b/w glut, massive invetory write-offs and huge debts.

Sales folk trying to sell kit into carriers probably wouldn't get too many customers if they were 100 percent honest about what the kit does and when the new features will be ready. Result? Silly timescales get dropped on engineering, and rushed-out, poorly tested products get shipped. (I'm not giving sales bod's grief here by the way, they do what they have to.)

Politicians, prime bunch of bullshitters they are! But does Joe public stop buying into it election after election? Nope, rule number one is 99 percent of people are more interested in short term financial gain than anything else - and politicians know it. So round about election time they all start telling you how rich you can be if you vote them in (or if you're Parisian they even let you off parking tickets to curry favour with the public!) People are seldom interested in the truth if it's not what they want to hear.

So why be surprised when accounting firms start flexing the rules? If one does it and their client's balance sheet looks all the rosier for it, they'll all be doing it!

What's the solution? Not really sure, I guess either we rely on our governments to create and enforce rules to discourage dishonest behaviour, or as subjects of our countries and industries become less willing to accept the BS and be a bit more skeptical - even if the truth isn't that palatable. I'm inclined to go with the latter, but perhaps I'm just dreaming...
h
h
12/4/2012 | 10:10:51 PM
re: Carrier Scandals: Who's Next?

in addition to these worldy wisdom....

as the digital divide decrease between the east and
the western parts of the world, people will start
hunting for the lowest bargains, cheap labor in any part of the world...technology will not be a priced possion of the west alone and a lot of world balance
could slowly start changing in the emerging years...

a little disconnected, but anyways...

There was this program on NBC dataline which showed about exploiting child labor in India in the manafcature of silk and how our CEO's in america are so touchy about this that they try to always make sure that child labor is not used in any of their silk supplies.....again so much of BS...all that the CEO's are concerned is how much profit can I make and they'll do it in what ever way they can...they don't care if child labor is used or not....if they were so much concerned about doing the right thing, they would have imported the cuckoons and processed here with modern technology - no, they won't do it - why - when I can get it done dirt cheap else where why bother...

the point is everybody (businesses) in the world no matter where they are, are for profits at any cost - they'll push the limits to the verge of being barely legal or ethical....just like the accounting scandals that we are seeing now...but then there are surely a handful exceptions too perhaps which are hard to come by these days....
BobbyMax
BobbyMax
12/4/2012 | 10:10:42 PM
re: Carrier Scandals: Who's Next?
Many carriers, traditional carriers or IP data carriers are involved with cheating and stock manipulation. The stock value is raised when it comes to excersizing options. New services products and fundings are announced out of blue.

The overall system supports misrepresentation and there is no punishment for accounting irregularties and other forms of asset misappropriation.
willywilson
willywilson
12/4/2012 | 10:10:42 PM
re: Carrier Scandals: Who's Next?
in addition to these worldy wisdom....

as the digital divide decrease between the east and
the western parts of the world, people will start
hunting for the lowest bargains, cheap labor in any part of the world...technology will not be a priced possion of the west alone and a lot of world balance
could slowly start changing in the emerging years...

a little disconnected, but anyways...

There was this program on NBC dataline which showed about exploiting child labor in India in the manafcature of silk and how our CEO's in america are so touchy about this that they try to always make sure that child labor is not used in any of their silk supplies.....again so much of BS...all that the CEO's are concerned is how much profit can I make and they'll do it in what ever way they can...they don't care if child labor is used or not....if they were so much concerned about doing the right thing, they would have imported the cuckoons and processed here with modern technology - no, they won't do it - why - when I can get it done dirt cheap else where why bother...

the point is everybody (businesses) in the world no matter where they are, are for profits at any cost - they'll push the limits to the verge of being barely legal or ethical....just like the accounting scandals that we are seeing now...but then there are surely a handful exceptions too perhaps which are hard to come by these days....

------

I can say this much: If your posting reflects the educational standards in America, we are much closer to Third World status than I had believed. Why not try English? It's a great language when used correctly.
Featured Video
Upcoming Live Events
March 16-18, 2020, Embassy Suites, Denver, Colorado
May 18-20, 2020, Irving Convention Center, Dallas, TX
All Upcoming Live Events