Global Crossing, the bankrupt US telecommunications group, on Tuesday said the Securities and Exchange Commission was forcing it to restate results for the first nine months of 2001 and that the regulator’s investigation into the group was continuing.
The SEC said the company’s use of “capacity swaps”, deals in which Global Crossing traded telecoms capacity with other telecoms groups to boost sales, were not in compliance with accepted accounting principles.
The news marks the first time the SEC has explicitly acknowledged that use of capacity swaps was illegitimate.
Congressional investigators probing accounting practices at Global Crossing and Qwest Communications, another US telecoms operator, accused senior executives at both companies in September of booking “fictitious revenues” by swapping unneeded fibre-optic capacity with each other.
Global Crossing engaged in the swaps in order to meet aggressive sales targets, according to employees who testified at congressional hearings on the matter. Those sales targets became increasingly difficult to achieve in the first half of 2001, as the telecoms sector began to collapse. Qwest has already restated $950m in sales it generated through the use of swaps from June 2000 to 2001 following scrutiny of the accounting practice.
Global Crossing’s new restatement would affect results for the first nine months ended September, 2001. The group said sales of $2.44bn would be reduced by about $19m, increasing its net loss of $4.77bn by about $13m. Total assets and liabilities and shareholders’ equity of $25.5bn would each be reduced by approximately $1.2bn.
The Bermuda-based group blamed its use of swap accounting in part on Arthur Andersen, its former accountant, claiming it had relied on guidance from the now-collapsed firm during the periods that were being restated.
Global Crossing said Andersen had notified the company and claimed it did not think Global Crossing required a restatement of results, based on the firm’s own interpretation of accounting principles.
Global Crossing said the restatement would be subject to the review of a new independent accounting firm which it expected to appoint shortly.
The company said a review of its accounting in 2000 had no impact on the group’s net cash flow, and that the revised accounting treatment had only “immaterial” effects on the group’s balance sheet and income statements.
Global Crossing said it intended to work with new accountants to develop detailed restatements for 2000.
More than 70 legal actions are pending in various US courts against the group’s current and former executives and directors.
Global Crossing filed for Chapter 11 bankruptcy protection in January after amassing $12.4bn in debt. Its plan to emerge from bankruptcy, announced in September, relies on a $250m cash injection from Hong Kong-based Hutchison Whampoa and Singapore Technologies Telemedia, in return for a 61.5 per cent share of the business.