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Monday
Oct252004

SEC Complaint Against Quest Describes Rampant Accounting Violations

When it gets ugly, it gets ugly. Years from now people will deny that corporate executives do this stuff, as summarized in this artlce below. Have fun and check out the SEC Litigation Release. Quest is paying only $250 million for causing billions of dollars of pain to investors.Someone ought to serve time behind bars.


Rocky Mountain News: Business

Complaint describes rampant accounting violations
SEC: Telco inflated figures with booking tricks, side deals, questionable swaps
By David Milstead, Rocky Mountain News
October 22, 2004
The 56-page Securities and Exchange Commission complaint against Qwest paints a picture of a company out of control, with a "fraudulent scheme . . . orchestrated to meet the company's outrageously optimistic revenue projections."
Sometimes, Qwest's accounting may have been right, but the company's failure to disclose its heavy reliance on one-time deals was a violation of generally accepted accounting principles, the SEC said.

Other times, the accounting was flat-out wrong. Qwest didn't meet accounting rules to book revenue, but added to its top line anyway, the SEC says.
In other cases, salespeople made verbal agreements or created "side letters," then hid the evidence from accountants and Qwest's outside auditor, Arthur Andersen, to protect the sales numbers, the SEC says.
In one instance, Qwest employees "backdated" contracts to allow the company to fraudulently book revenue. In the first quarter of 2001, ended March 31, Qwest booked $69.8 million in revenue even though the contract was completed April 12.

The chief operating officer and chief financial officer - Afshin Mohebbi and Robert Wood-ruff - knew the contract closed late but booked the revenue anyway, the SEC said.



The bulk of the fraud, the SEC says, came from accounting for sales and swaps of network capacity - indefeasible rights of use, or "IRUs."



To book sales and profits on a "swap," Qwest needed to demonstrate that its network capacity was "held for sale" rather than part of the company's property, plant and equipment. To book upfront all the revenue from a lengthy contract, Qwest needed to show it had transferred title to the network fiber.



In fact, the SEC alleges, the company consistently failed to do either, invalidating Qwest's IRU accounting.



While Qwest had to have a business need for network fiber it acquired, the company's sales staff often made quarter-ending deals without consulting Qwest's network planners, the SEC alleges.



As early as 1999, Qwest swapped network capacity with Enron, acquiring a Denver-to-Dallas route, even though Qwest already had built fiber between the two cities that had excess capacity at the time.



From 2000 to April 2001, Qwest bought $70 million of network capacity in Japan in five transactions with Cable & Wireless PLC. Qwest's network engineers, unaware of the deals, were building a Japanese network at the same time. It was then abandoned.



By late 2001, Cable & Wireless and another swap partner, Flag Telecom, were threatening to sue Qwest for failing to follow through on its side promises, the SEC says.



An internal Qwest legal document warned that litigation with Cable & Wireless could "bleed into other transactions" and "unwind" all IRU revenue, the SEC says, quoting from the Qwest document.



"Some members of Qwest senior management withheld from Qwest's auditors and others the litigation and accounting risks," the SEC said, and Qwest settled with Cable & Wireless "on the eve of filing the 2001 Form 10-K (annual report)," the SEC says.



The complaint also covers allegations about transactions with the Arizona school system and Genuity - deals that were the basis for SEC suits against eight former midlevel executives.



Also, the SEC includes allegations about previously known, controversial equipment sales to Calpoint and KMC, as well as problems with its phone-book and wireless divisions.

References (6)

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    SEC Complaint Against Quest Describes Rampant Accounting Violations - Investor Fraud Blog - Reed R. Kathrein
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    SEC Complaint Against Quest Describes Rampant Accounting Violations - Investor Fraud Blog - Reed R. Kathrein
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    SEC Complaint Against Quest Describes Rampant Accounting Violations - Investor Fraud Blog - Reed R. Kathrein
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    SEC Complaint Against Quest Describes Rampant Accounting
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    SEC Complaint Against Quest Describes Rampant Accounting
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    SEC Complaint Against Quest Describes Rampant Accounting

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