Qwest: We're Redoing The Numbers

Qwest Communications International Inc., already under investigation for its accounting practices, expects to restate financial reports for 2000 and 2001 because an internal analysis found accounting errors.

In trading Monday, the company's stock was falling sharply on the New York Stock Exchange.

Officials said during a conference call with investors Monday that they could not discuss some information because of a federal investigation into some transactions and accounting practices.

Company officials declined to estimate how the errors would affect the books or when a restatement of revenue would be completed.

"We would rather it happen sooner than later, and we have a great sense of urgency," Qwest CEO Dick Notebaert said in an interview Sunday. "But we do want to do it with diligence. We do imagine it will take months and not days."

Company officials said the accounting errors were made under policies approved by its previous auditor and related to telephone services and sales of optical capacity and equipment.

Qwest hired auditor KPMG LLP in June to examine its books, after dismissing Arthur Andersen LLP.

"Most of these things are going to deal with timing," Qwest's chief financial officer, Oren Shaffer, said Sunday in an interview. "Should this have been in this period or in another period."

Qwest also said it would miss the Aug. 14 deadline set by the SEC for the nation's biggest companies to certify the accuracy of their financial statements.

Second-quarter results were expected to be reported Aug. 8 as previously scheduled, but restatements of financial results for 2000-2001 were not expected to be completed for months.

"If accounting errors were made, they will be corrected and they will be disclosed. The public will be fully informed," Notebaert said Monday. "If an individual violated company policy, appropriate action will be taken. Internal practices are being and will continue to be enhanced."

The regional phone company's announcement comes at a time when the federal government is pledging a thorough crackdown on corporate misdeeds after a series of scandals at major companies eroded investor confidence on Wall Street.

Qwest has suffered a myriad of problems in recent months, including a Securities and Exchange Commission investigation into its fiber-optic capacity swaps in 2000 and 2001. Longtime CEO Joseph P. Nacchio resigned last month, and Qwest has seen its stock fall to under $2 and its credit downgraded to junk status.

The Justice Department is also investigating Qwest, and the General Services Administration is reviewing government contracts with the Denver-based telecommunications company.

"It is our intent to fully cooperate with every government agency and be totally transparent and responsive," Notebaert said.

At issue in the SEC investigation is whether the fiber-optic capacity swaps were done for legitimate business reasons, were priced at fair market values and were properly accounted for.

Qwest bought telephonic capacity on another company's system and booked it as a capital expense, which is only recorded slowly over several years, while selling the same amount of capacity to the other firm, and booking that immediately as revenue.

The company reported Sunday that accounting policies were incorrectly applied to optical capacity sales in 1999, 2000 and 2001 totaling about $1.1 billion, or 18 percent of the optical capacity transactions during that time.

Qwest said the errors caused it to book approximately $874 million as revenue for 2000 and 2001. The company also said it understated its expenses in 2001 by $113 million, but overstated them by $15 million in 2000.

Notebaert said Qwest has made adjustments in its books to help account for the transactions.

"We plan to make further adjustments by either deferring revenue and profit that we'd originally recognized up front, or we'll adjust the correction for the improper recognition of profit to the appropriate quarter," he said.

Qwest, which was once part of the Bell System under AT&T Corp., is the local phone company for 14 states extending from Minnesota west to Washington and southwest to Arizona and New Mexico.