North South University

Semester-Summer 2021
Final Project

“Qwest Communication Inc.”

SUBMITTED TO
MUIN UDDIN AHMED (AHU),
SENIOR LECTURER,
DEPARTMENT OF ACCOUNTING AND FINANCE
NORTH SOUTH UNIVERSTY (NSU)

SUBMITTED BY
Name ID
MD. Sargil Islam 1512204030
Syeda Raisa Hasnat 1620942030
Tashmiah Nowshin Mamata 1621496030
Md Rifat Motaleb 1731063630
Aisha Akter Shemu 1722410630

Submission Date: 9/9/2021

1|Page
Table of Contents
Tittle Page Number

Introduction 3-4

Scandal 4-6

Fraudulent for Non-Recurring Revenue and IRU 4-5

Fraudulent for Directories 5-6

Inquiry about the accounting principles of Qwest 6

Accounting Principles Violation of Qwest Communication 7

Auditing Principle Violation 8-9

Disclosure and fairness 8

Independence 8

Audit Procedures for Specific Aspects of the Audit 9

Failure to perform audit in accordance with Generally Accepted 9

Auditing Standards (GAAS)

Recommendation 10

Conclusion 10

Reference 11

2|Page
Introduction
Qwest Communications International, Inc. was a major telecommunications corporation in the
United States. Phillip Anschutz founded Qwest in the mid-1990s, during the start of the
website Bubble. Mr. Anschutz purchased the company in 1996 and pushed for aggressive
expansion by obtaining various network access suppliers and easing substantial distance call
carriers. Qwest sought to capitalize not just on the corporate sector that its competitors were
focused on, but also on houses and private habitations, which were a far faster growing area. But
upon more than years of dealing with stock controls, SEC investigations, insider trading, and
misleading investors, the company succumbed and was bought by Century Link in 2011.

Qwest Communications was created to use the Southern Pacific Railroad, which was also owned
by its founder, Philip Anschutz. His intention was to implement all advanced fiber optic link
frameworks across the length of his railroad networking system. He linked them to important
customer-centric areas in order to supply companies and localities with quick information and T1
internet providers. By combining more and obtaining permits from the federal association to
construct a nationwide infrastructure of fiber optic connections.

In 1997, Qwest Communications began its period of aggressive expansion by purchasing Super
Net, a web access provider, followed by the acquisition of LCI, a carrier service provider. With
that, the firm bought Icon CMT, a web hosting service. Prior to searching for a foreign purchase
in Europe, Qwest worked with KPN, a Dutch telecom specialized co-op. Their goal was to create
a dish national system in Europe similar to what they had done in the United States. Towards that
end, the organization was shaped as KPN Qwest by the company. Following its arrangement, it
was launched as an IPO on the NASDAQ in the fourth quarter of 1999. Following that, in 2000,
Qwest completed a hostile acquisition of US West, combining all of its perks and bringing all of
its backup organization properly under Qwest.

Qwest was spending all of its money, and due to the dotcom Bubble, its European venture, KPN
Qwest, collapsed in 2002. So that it can combat its incredible money consumption and resolve its
gigantic obligation problem. Qwest agreed to sell its registration activities administration, Qwest
Dex, to two private equity companies, The Carlyle Group and Welsh, Carson, Anderson and
Stowe, for $7 billion USD. This transaction provided the organization with enough funds to
avoid the danger of a liquidation recording. It was then discovered that Qwest's personnel had
made false and deceptive claims about profits from the INS catalog administrative section.
Between that role, the executives were suspected of having controlled Dex's income between
2000 and 2001. A number of problems have been plaguing Qwest in the past. The company had
to pay a $1.5 million fines to the Federal Communications Commission for exchanging services
without the approval of its clients. They were criticized for switching from a long-distance only
organization to Qwest's long-distance service without their consent, which is an illegal activity
and violates the IRU, which is the unalterable option to use explicit fiber-optic connection or
fiber limit for certain duration. The SEC identified them in violation of many counts. Within a

3|Page
year, they were slapped with a $350,000 punishment by the Pennsylvania Bureau of Consumer
Protection for false advertising and other wrongdoings. Qwest was also embroiled in accounting
scandal and was fined a whopping $250 million by the Securities and Exchange Commission.
Furthermore, the Securities and Exchange Commission charged its CEO, Joseph Nacchio, and
eight others with extortion in 2005. Aside from that, Nacchio was found guilty of 19 counts of
insider trading. Later, Century Link purchased Qwest in 2011.

Scandal
The Securities and Exchange Commission has charged Qwest Communications International
Corporation, one of the country's leading telecommunications companies in USA, with securities
fraud and other federal securities laws breaches. The allegations are given.

Fraudulent for Non-Recurring Revenue and IRU:

Qwest is one of the country's largest telecommunications companies. IRUs were
primarily sold by Qwest for specified capacity. These were utilized for their own
communication system. IRUs are allowed to use fiber-optic cable for a set length of
time. Other equipment that Qwest was usually sold has acquired from third parties.
They sold those for earning money. The profits they receive from IRUs and other
equipment are not guaranteed. They don't guarantee anything in the future. They
reported some non-recurring earnings as service earnings from 1999 to 2001. But
that was completely unjust. On the financial statements, they included revenue from
data and internet services. That was a wrong practice, according to GAAP.
Executives at Qwest used to misrepresent about their dates, such as putting a
previous date. The $3.8 billion in revenue from those sales was recorded as revenue.
However, because it was part of non-recurring revenues, they committed fraud.
These leases are mostly asset sales that require the conclusion of the earning process,
a fixed, fair market value for the sold asset, and the transfer of full ownership. They
didn't mention anything about the sale of IRU. Instead, they exploited it to generate
cash from data and internet services. They usually functioned as middlemen,
purchasing goods from third parties and reselling them. They didn't have the legal

4|Page
authority to sublease, yet they did so anyhow. Qwest didn't bother to move the IRUs
to alternative routes and wavelengths, and they did so without its customers'
approval. Some IRU swap transactions: in the third quarter of 2001, they purchased
$67.2 million capacity from Global Crossing, $39.2 million capacity from Enron in
December 1999, and $85.5 million capacity from Enron in the third quarter of 2001.
They used to go out and get more. They didn't require so much fiber. Their buy was
larger, even though they didn't require the two-thirds of the sum. Only a third of it
was required. The Network Planning Department advised them that they didn't
require this much fiber because Qwest didn't require it. In 2001, Qwest allegedly
conducted a transparent swap with Enron in this manner.

Fraudulent for Directories:

Directory incomes were recognized by Qwest for the course of the directory's life,
which is 12 months. Those directories were found in 300 markets throughout 14
states. They used to make the majority of their money from advertisements. They
used to change and recognize such advertisement revenues over the lifespan of the
directories, including Qwest in 2000 and 2001, when they first began to distribute.
They issued Dex's Colorado Spring Directory earlier than expected, but income was
received in 2000 rather than 2001. They also failed to inform investors about the
adjustments they made, as well as the fact that they released spring directories twice
in 2000. As a result of these adjustments, revenue fell in the first quarter of 2001.
Qwest senior management also changed the targets since Dex management refused
to adjust Dex's targets, which were higher than Dex's expectations. Then they
performed the same thing to realize the money sooner, and they also expanded the
lifespan of directories from 12 to 13 months to increase revenue, resulting in $42
million in advertising revenues. The allegations were proven in August of 2004.
They bought shares and then sold them after selling the inflated revenue and profit
figures. They made $1.5 million in this way. The principal perpetrators of the fraud
were two Joseph Nacchio and Robert Wooddruff. In the year 2000, Qwest has a $2
billion debt in the west. Investors lost $576 million from January 2000 to February

5|Page
2002. From 1999 to 2001, the CEO earned $52 million. The guy was sentenced to
six years in prison and had to pay a $19 million fine as well as $52 million in
restitution for deceptive stock transactions.

Inquiry about the accounting principles of Qwest:

Qwest's major issue began in April 2002. The company's accounting methods have
being investigated by the Securities and Exchange Commission. In June of that year,
Joseph Nacchio resigned. Qwest had to correct $531 million in revenue that had been
incorrectly recognized, erase $358 million in profitability, and take nearly $1 billion
in charges for reduced value. SEC civil lawsuits and criminal accusations have been
filed against more than a dozen former Qwest executives and managers, alleging that
they used fraud to meet revenue estimates.

Recognizing non-recurring revenues as service revenue, inflating revenue worth $2.2

billion from April 1999 to March 2001, recognizing revenue from the lives of
directories and earlier publications, and boosting stock price by manipulating
numbers were the main allegations leveled against Qwest, all of which were proven
and punished.

6|Page
Accounting Principles Violation of Qwest Communication
Qwest Communication International Inc. has many charges of inappropriate internal control and
accounting standards violations, according to the outside auditor. Qwest primarily attempted to
commit fraud by manipulating their bookkeeping records and classifying non-recurring revenue
as regular revenue. Between 2000 and 2002, they improperly recorded USD112 million in
revenue from its Wireless division. (SEC Charges Qwest Communications International Inc.
with Multi-Faceted Accounting and Financial Reporting Fraud, 2004). All activities that violate
the “Generally Accepted Accounting Principles,” as well as some of the activities described
below:

 Qwest was accused of manipulating financial statements in 2003 by swapping equipment

with other telecommunications companies and representing the transactions as revenue
(Sarah & Peter, 2009). Qwest would sell fiber optic cables to another telecommunications
operator and then purchase the same cables at the same price from the supplier. The
“swapping” of equipment left Qwest and the other companies with a net zero balance, but
Qwest “booked” the swaps as revenue (Sarah & Peter, 2009).

 Qwest Communication International Inc. attempted to tamper with their expense records
in order to boost profits. They eliminated roughly $71.3 million in costs for the 1999-
2000 fiscal year (Schrijver, 2013). The primary motivation behind this deception is to
inflate the value of a company's stock on the stock market.

 In their financial statement, Qwest Communication said that they received $10 million in
sales in December 2000, although they actually earned it in January 2001.

 Qwest, which is the nation's fourth-largest local-telephone company, previously admitted

to overstating revenue by $2.29 billion in 2000 and 2001 (Qwest Restatement Cuts Three
Years' Revenue, 2003). Qwest has a large customer base, and the firm reported earning
$2.29 billion from selling internet service to them. Following the examination, it was
discovered that Qwest Communication created this fraudulent transaction on its own, but
that no transaction occurred in 2001.

7|Page
Auditing principal violation
Qwest is also known as Qwest Communication International Inc. and it is a major
telecommunications operator in America. The company not only provides telecommunication
services but also provides voice, internet data and digital televisions services in many areas.
They sell their products and services in various small businesses, public offices and many
educational institutions. Qwest is the biggest accounting and audit fraud case which has gone
down in history due to its innumerable errors. Arthur Andersen LLP was its external observer in
1991-2002. Mark M. Iwan, a certified public accountant, he was Arthur Andersen’s global
managing partner at the time and Iwan’s primary responsibility was to oversee Arthur
Andersen’s audit activities. The audit firm was issued an unqualified audit report to Qwest for
1999,2000 and 2001. As a partner in audit engagement, Iwan signed ineligible audit report.
(AAE,2005). Qwest earned about 4 billion between 1999 and 2001, according to the Department
of Accounting and Audit. (AAE,2005). Fraud did not arise at Qwest because Anderson’s
controlling partner lacked professional attention and professional skepticism. On March 29,2005
Mark M. Iwan was charged with violating professional standards under rule 102.

Auditing violations done by the Qwest

1. Disclosure and fairness
The general audit rules indicate that auditors should be fair and ethical in their understanding and
analysis of financial statements and his opinion should be substantiated by sufficient evidence
and evidence in the supporting documents. Mark Iwan was Arthur Andersen’s global managing
partner, external auditor of Qwest. Iwan relied entirely on management representation and he did
not use his own judgement. Although Iwan knew feel obligated to report higher authorities. The
most profitable executives play with numbers on their balance sheets. It is clearly indicated that
veracity of the source of evidence and the documents that were provided as opinion evidence for
the audit of the financial statements.
2. Independence
Arthur Andersen was Qwest’s controlling partner. He was responsible for Qwest’s financial
statements. The independence of the auditor is considered very important for the
shareholders and is considered very important for the shareholders and is considered as an
important factor to help ensure the quality of the audit. Andersen needs to be aware of the
threat of the objectivity and apply adequate protection when needed, when it comes to
independence and objectivity. The independence of the auditors is an important factor that
shareholders want. Auditor has a significant incentive to maintain their reputation and
independence and thus help maintain and win their audit.

8|Page
 3. Audit procedures for specific aspects of the audit

The audit criteria refers to the forgery if financial statements, illegal work by the client
and consideration of work entity. Qwest violated all of these functions of the audit
standard that Andersen helped cover them. Because they were also partners in this crime.
Andersen doubted the success of Qwest’s little transfer, but did not disclose it. These
illegal activities, misrepresentation and fraud of financial statements are not mentioned
anywhere in the published report.

4. Failure to perform audit in accordance with Generally Accepted Accounting

Principles (GAAP)

Under GAAS, if an organization does not adequately disclose financial information, the
auditor must provide an adverse or competent audit opinion. According to GAAP, the
Qwest management committee did not disclose information about IRU. Iwan asked
Qwest management to include additional developers related to IRU. But he has not been
able to confirm whether he did what the authorities said(AAE,2005).

Immediate recognition of IRU revenue was not sufficient. Because Qwest has given its
customers the opportunity to return IRU in exchange for assets. This is called portability.
Under GAAP’s rules, it is not recognized as income because the risk and premium sales
were in the custody of the company. In mid 2001,Iwan told Qwest that about 10% of the
company’s total sales power. Management stated that it was not involved in portability
and that Mark M. Iwan believed them without any investigation. (AAE,2005).

The auditor must obtain sufficient evidence to comment on the financial statements
according to the paragraph 4-6 of the auditing standard. Mark Iwan did not gather enough
evidence to disclose the company’s fraud because of lacking internal control over the
financial statement. Andersen could have found the false tax return that IRU generated
from the sale if he had conducted an audit according to GAAS.
According to AAE(2005) in 2001, Andersen’s global managing partner asked Qwest
communications to seek legal opinion from outside legal advisers regarding their title
transfer. There was a lot of limitation and speculation about the transfer of ownership title
to a vague report that they provided to Iwan.

9|Page
Recommendation
After hearing the company's outrage story about all accounting and moral violation, we realized
several major workouts and depicted them in our report's recommendation. The proactive role of
NED and ID in controlling the organization was insufficient. The examining firms should have
been morally strong in the face of any type of theft since it would ruin the organization and the
firm too. In terms of any accounting cost or standardized income calculation system, GAAP
should have been followed.

Conclusion
Qwest, one of the major telecommunications companies, has lost its credibility. In a summary,
the firm incorrectly recorded over $3 billion in income while failing to recognize 71.3 million
dollars of expenses. The organization deceptively influenced the market share price, causing the
share price to rise. The organization enlisted the help of audit companies to conceal its
misappropriation. Qwest's strategy focused on the short profit that led to its inescapable failure.

10 | P a g e
Reference
1) SEC Charges Qwest Communications International Inc. with Multi-Faceted Accounting
and Financial Reporting Fraud. (2004, October 21). Retrieved May 2, 2020, from
Sec.gov: https://www.sec.gov/news/press/2004-148.htm

2) Sarah, D., & Peter, A. (2009). Qwest Communications: A Case Study Of Fraud And
Greed. Journal of Business Case Studies, 5, 01.

3) Schrijver, L. (2013, June 18). Qwest Communications International Inc. Retrieved May
2, 2020, from prezi.com: https://prezi.com/llbszi6wxmpz/qwest-communications-
international-inc/

4) Qwest Restatement Cuts 3 Years' Revenue. (2003, September 04). Retrieved May 2,
2020, from Nytimes.com: https://www.nytimes.com/2003/09/04/business/qwest-
restatement-cuts-3- years-revenue.html

11 | P a g e