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Editorial: Qwest's Journey From Bad To Worse

Jul 30, 2002 | The Rocky Mountain News Local talk radio is buzzing over the fiasco known as Qwest, and we have to admit that we're impressed. We had no idea that Americans' understanding of difficult accounting concepts and corporate governance had come so far.

Why, virtually every caller we heard professed no trouble at all in pinpointing what's at the bottom of Qwest's troubles. It's fraud and manipulation, they agreed. And many seemed equally sure who knew about the problems and yet failed to sound the alarm, such as certain members of Qwest's board of directors.

In other words, an awful lot of people seem to be leaping to the worst possible conclusions regarding Qwest, and yet we can't say we entirely blame them. The latest developments - an admission of serious accounting errors, the need to revise the company's books for the past three years, and the refusal or inability to offer revised earnings expectations - foster anything but confidence. And it may be months before new CEO Richard Notebaert feels he can certify the company's financial statements, as now required by the Security and Exchange Commission.

Add that to an SEC investigation hanging over Qwest, and it's no wonder so many people are ready to forgo a trial and move right to the sentencing of Qwest officials that they blame for the company's woes.

The only trouble with this approach, of course, is that some of the financial practices in question really are complicated, and the entire financial picture is not yet in view. Given the turmoil of the telecom sector, moreover, Qwest would be in trouble even without skullduggery at the top.

Still, you don't have to be a radio vigilante to reach unflattering conclusions regarding Qwest. For what it's worth, here are ours:

1) Was Qwest mismanaged? Unquestionably.

2) Was its business plan wildly optimistic regarding the future of Internet traffic? Absolutely (although Qwest was hardly alone in that regard).

3) Did Qwest management resort to accounting gimmicks to inflate its earnings? It sure looks as if they did, although the final verdict is pending.

4) Were some Qwest executives overpaid? Yes. Grotesquely so.

5) Did some Qwest executives put their own welfare ahead of shareholders'? See answer No. 3.

6) Was the board of directors asleep at the switch? Obviously. Indeed, the board's performance and that of other corporate boards in recent years raises the question of whether they serve any purpose at all - other of course than to devise the most extravagant compensation packages yet known to mankind for a few top executives.

As we noted last month, the Qwest board was so complacent, ignorant or supinely trusting that it granted 7.25 million options to former CEO Joseph Nacchio as late as Oct. 24 of last year - nine months before he was forced out. Those options are worthless at the moment, but when the board granted them, they were a resounding vote of confidence in Nacchio and his strategy at a time when the good ship Qwest was already gushing water into its hold.

Now, ironically, Qwest's main hope to avert bankruptcy is to unload its QwestDex directories. Which means, as Forbes wryly points out, that Qwest's "hottest technology is from Gutenberg."

If you knew nothing but that single fact about Qwest, you'd know enough to guess the depth of its crisis.

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