Telecom Is Vulnerable To Accounting Probes - Experts
12 Mar 15:13
By Peter Loftus
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- The disclosures of government investigations of Qwest
Communications International Inc. (Q) and Worldcom Inc. (WCOM) show that the
telecommunications industry is ripe with complex accounting issues.
They could signal that the Securities and Exchange Commission will probe
additional telecom firms, according to analysts and accounting experts.
Qwest and Worldcom separately disclosed Monday they had received inquiries
from the SEC regarding their accounting practices. The SEC had already launched
an investigation of telecom firm Global Crossing Ltd. (GX) for its accounting
methods.
One issue at the center of the SEC's probe is Qwest's practice of recording
revenue from swaps of telecom network capacity with other companies. Critics
have suggested the practice improperly inflates Qwest's revenue and income. The
company said Monday its practices comply with all applicable requirements.
The telecom industry is full of such complex transactions, which could
provide fodder for SEC investigators. That's especially so in light of the
heightened scrutiny of all corporate accounting practices following the Enron
Corp. (ENRNQ) scandal, according to Peter DeCaprio, telecom analyst with
Thomas Weisel Partners.
"You can find a relationship that's probably worthy of an SEC letter in every
single company in my group," DeCaprio said.
DeCaprio doesn't necessarily believe that such relationships and accounting
practices are improper. He suggested increased media attention to corporate
accounting practices was pressuring the SEC to further scrutinize companies
like Qwest and WorldCom.
An SEC spokesman declined to comment on any pending investigations of telecom
companies.
Still, DeCaprio said he found the news of the Qwest investigation
"disturbing" because it focused on the company's own practices. Previously, the
SEC had sought data from Qwest regarding its relationship with Global Crossing.
He was less disturbed by the WorldCom probe because the SEC's inquiry appeared
to be "pretty general in nature."
Complex accounting issues arise in the industry because telecom firms often
capitalize expenses, DeCaprio said. That means they spread out expenses over
several quarters or years, as opposed to taking a one-time hit to operating
expenses. DeCaprio thinks this practice is appropriate because much of telecom
spending improves company assets.
Telecom firms could be especially vulnerable to SEC accounting probes because
there are gray areas surrounding revenue-recognition practices, said Dana
Hermanson, an accounting professor with Kennesaw State University, in Kennesaw,
Ga., and director of research of the school's Corporate Governance Center.
Hermanson co-authored a study of 200 cases of corporate accounting fraud
between 1987 and 1997. The study found that revenue-recognition problems played
a role in half of these cases. Problems arise, Hermanson said, because some
companies have different answers to the question: When is it appropriate to
record revenue, and how much can be recorded as revenue?
"It's probably more of a revenue-recognition story than a telecom story,"
Hermanson said of the rash of SEC probes. "It just happens that the telecom
setting is one that's complicated in terms of some of the transactions
involved."
A few other industries apparently are even more prone to accounting gray
areas, judging by Hermanson's study. Computer hardware and software, financial
services and healthcare had the most cases of accounting fraud of the 200
cases he studied, he said.
J. Edward Ketz, accounting professor with Penn State University, said telecom
accounting of network capacity swaps is often aggressive and even
inappropriate.
Ketz believes capacity swaps should be viewed as exchanges of similar assets,
and no gains or losses should be recorded. He also said the process of valuing
these capacity assets is arbitrary and vulnerable to abuse.
Qwest disclosed in earlier regulatory filings it recognized $989 million in
revenue from capacity swaps in the first nine months of 2001. Total company
revenue in that period was $15 billion.
Qwest said Monday it doesn't expect to record any sales of optical capacity
assets in 2002 due to changes in market demand. -By Peter Loftus, Dow Jones
Newswires; 201-938-5267; peter.loftus@dowjones.com
(This story was originally published by Dow Jones Newswires)
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