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SEC Opens Informal Inquiry into Qwest

The U.S. Securities and Exchange Commission (SEC) has locked its eyes on another voice and data carrier.

Qwest Communications International Inc. Monday confirmed that on Friday it received an informal inquiry from the Denver regional office of the SEC, requesting voluntary production of documents related to Qwest's accounting policies, practices and procedures in 2000 and 2001. Qwest said the SEC told it the inquiry is not an indication that the SEC or its staff believes any violation of law has occurred.

"Qwest has stated, and continues to believe, that its accounting policies, practices and procedures for all periods, including 2000 and 2001, comply with all applicable requirements," the company said Monday. "There can be no assurance that the SEC will agree."

Specifically, the SEC is looking into three areas in regard to Qwest's revenue recognition and accounting treatment of:

  • Sales of optical capacity assets (usually referred to as Indefeasible Rights of Use or IRUs)
  • The sale of equipment by Qwest to customers from which Qwest bought Internet services or to which it contributed equity financing, including equipment sales to KMC and Calpoint
  • Qwest Dex, particularly changes in the production schedules and lives of some directories.

Qwest is not alone when it comes to SEC scrutiny of telecoms. It began when the SEC opened a probe into Global Crossing in February. That probe, like the SEC's inquiry into Qwest, was sparked by Global Crossing's use of IRUs, which can be used to inflate revenue when two carriers swap them. As part of the Global Crossing probe, the SEC even subpoenaed documents from Qwest.

However, Qwest said Monday that revenues attributable to all sales of optical capacity in 2000 and 2001, including sales to customers from which Qwest also bought capacity, were about 2.8 percent and 5.1 percent of total reported revenues in those periods, respectively. The company also said that the revenues attributable to all sales of Internet equipment to customers from which it bought Internet services were about 0.1 percent and 0.9 percent of total reported revenues in those period. Additionally, the company said the revenues attributable to changes in the production schedules and lives of directories of Qwest Dex in those period were 0.2 percent of total reported revenues in both periods.

"For 2002 and thereafter, Qwest does not expect sales of optical capacity (IRUs), the sale of Internet equipment or changes in the production schedule or lives of directories to have a material effect on Qwest's financial condition or results of operations," the company said. "As Qwest previously announced, it does not anticipate making any optical capacity asset sales in 2002 due to changes in market demand. Qwest has also previously announced it has no plans to sell equipment in 2002 in any exchange transaction or otherwise, other than routine sales of customer premises equipment in the ordinary course of business."

Qwest said it intends to fully respond to the SEC's request.