RealTime IT News

SEC Stops Swapping Strategy

A practice used by many telecom carriers -- bandwidth swapping --has come under the Securities & Exchange Commission (SEC) gun, and any company that participated in the practice may be force to restate its revenues.

According to a report in the Washington Post, the SEC sent the American Institute of Certified Public Accountants a memo earlier this month warning them of the new policy.

Not all swapping transactions are banned, the memo said, but any carrier that stated the swapping as revenue could possibly be forced to restate its financial results. It warned executives they "should be advised to give consideration to this matter prior to certifying the financial statements previously filed with the SEC," the memo said.

The memo is due notice to chief executive officers and financial officers for a practice conducted by many carrier's in the industry. Executives have come increasingly under the microscope of federal regulators in the past month, starting with the Enron collapse, which rippled out into SEC probes of Global Crossing and Qwest Communications and brought to light financial "irregularities" at WorldCom.

The Sarbanes-Oxley Act of 2002 is the legislative muscle behind the SEC memo to the telecom industry. The Act requires CEOs and chief financial officers to sign off on every quarterly revenue report to certify the "appropriateness of the financial statements and disclosures contained in the periodic report," according to Section 302.

For years, companies like Global Crossing, Level 3 and Qwest sold bandwidth amongst themselves under a practice called indefeasible right of use (IRU) contracts. First started in the days of the AT&T monopoly in the 1980s, it let the owning network sell a particular amount of bandwidth over a period of time -- anywhere from one to 20 years.

Most IRU's are sold in five- and ten-year increments, to be paid out over the course of the contract. Some carriers, forced with lagging sales in network capacity, started treating IRU swaps with other carriers as revenue, and attribute the sale as revenue for the quarter.

That created a problem, especially since the sum total of the deal was never front-loaded, but paid out piecemeal over the length of the contract. In some cases, where capacity was swapped on a 1:1 basis, money never switched hands, but executives still counted the contract as revenue.

The thorny issue of IRUs is one the SEC wants to correct, and soon. Forced by Congress to beef up its investigative scrutiny of telecom companies and prodded by an Administration facing the largest recession in decades, the agency is looking for ways to "clean up" the accounting irregularities among companies.

The AICPA, an accounting industry lobbying and trade organization, said clear accounting practices are necessary, given the abuses of the past which are coming to light today.

"Investors must have information that is accurate, clear, timely and relevant," the organization announced in a statement July 15, after passage of the Sarbanes-Oxley Act.