Qwest's Amazing Shrinking Revenues
Placing the blame squarely on its former auditor Arthur Andersen LLP, the struggling carrier said that it will definitely eliminate $950 million in revenues related to Indefeasible Rights of Use (IRUs) sales, or capacity swaps, and that it is reviewing whether or not an additional $531 million in such revenues needs to be restated as well. While some of these sales were part of the $1.16 billion in overstated earnings the company admitted to in July, $894 million was not part of the previous announcement (see Qwest Backtracks Fast and Qwest Piles Up $1B in Losses ).
According to the company, $685 million of the revenues in question was booked in 2001 and $265 million was booked in 2000. In addition, Qwest admitted that in the 18 months preceding its merger with US West in 2000, it recognized $1.32 billion in capacity sales using the same accounting (see FCC Clears US West/Qwest Merger).
The Securities and Exchange Commission (SEC), the U.S. Department of Justice and Congress have been investigating whether Qwest and other service providers’ accounting for IRU-sales allowed them to artificially boost their revenues. Several current and former Qwest employees are expected to testify in hearings being held by the House Energy and Commerce Committee starting tomorrow (see Global Crossing: What, Us Worry? ).
"When we identify issues we’re going to disclose them,” says Qwest spokesman Steve Hammack. “We continue to review… every one of the transactions… and we’re going to do the right thing.” It is still too early to know what the effects of the final, complete restatement will be, he says.
Several industry observers say they think Qwest has a motive for announcing the restatement now. “They’re just being defensive,” says Davenport & Co. LLC analyst F. Drake Johnstone. “It’s not really new news.” The company hasn’t completed the restatement yet, and there will probably be more to come, he says. Announcing this part of the restatement now is to help shape public opinion leading up to the hearings this week.
The company is also trying to differentiate its own accounting problems from those of bankrupt competitor WorldCom Inc. (OTC: WCOEQ). Qwest’s announcement follows rumors last week that WorldCom would soon add another $2 billion to the more than $7 billion it has already admitted to overstating (see WorldCom to Restate $2 Billion More?).
Qwest’s chief lobbyist Gary Lytle reportedly told reporters in Washington that mistakes had been made, but the company had concluded there was no fraud involved. Hammack, however, admitted today that no such conclusion had been reached yet. "We are not in a position to say whether or not there was fraud. We have not reached any conclusion on that."
In yesterday’s announcement, Qwest emphasized that Arthur Andersen, which functioned as its auditor until May of this year, had approved its accounting methods for IRU sales. After analyzing the accounting with its new auditor, KPMG, the carrier said it had concluded that it could not justify the recognition of revenue for pure capacity swaps (see Qwest Gets New Auditor).
They are "dancing so fast you can't see their feet move,” Craig Johnson, an independent analyst based in Portland, Ore., writes in an email to Light Reading. “They really don't want to be Enron or [WorldCom] (you know, where there appears to be blatant fraud). If I was a betting man, I would bet they (the Feds) find Mr. N. [Joseph Nacchio, former Qwest CEO] and some of his cohorts actually did ‘play serious games.’ The real question is: will they settle before they get marched in front of the row of cameras (you know, the perp-walk).”
Qwest said that it is not yet sure when it will issue a complete restatement for 2000, 2001, and the first three months of 2002, but cautioned that its financial statements from that period could not be relied on. It said it will take a charge connected with the restatements in the third quarter this year, and that the writedowns will reduce operating income for the quarter, as well as future depreciation expenses.
"I think there's still a lot under the covers," Johnson says. "This was damage control... They're obviously trying to find the kitchen sink to throw in with all this." — Eugénie Larson, Reporter, Light Reading