Qwest Communications International Inc. , which has said it improperly accounted for at least $1.1 billion in revenue over several years, has begun efforts to reach a settlement agreement with the Securities and Exchange Commission over an investigation of the company’s accounting practices, people familiar with the situation told The Wall Street Journal.
Talks between the struggling telecommunications company and the SEC are in the earliest stages. The SEC declined to comment on the matter, but the agency has in the past been eager to settle such cases rather than take them through the costly process of going to trial.
Such a settlement would be another step by Qwest’s new management to put the company’s accounting questions behind it and ease its escalating financial and credit difficulties. The improper accounting, which Qwest disclosed Sunday, stemmed from sales of fiber-optic capacity the company sold on its network and equipment it sold to other parties.
The specter of Qwest settling with the SEC is a startling turnabout for a former highflying star of the telecom boom. Questions about how companies in the sector accounted for revenue and profits, including a giant misstatement of $3.8 billion in expenses by WorldCom Inc., have thrown the industry into a tailspin. Qwest’s former chief executive, Joseph Nacchio, who resigned at the request of the board in June, adamantly maintained when the SEC investigation first started that Qwest hadn’t violated any accounting rules, arguing that it followed the guidance of its previous auditor, Arthur Andersen LLP.
Qwest’s new chairman and CEO, Richard Notebaert, is apparently open to settling with the SEC if it “wipes the slate clean,” said a person familiar with the matter. Qwest would also consider settling potential fraud charges, but would likely do so only if it didn’t have to admit that it committed fraud, said people familiar with the situation.
Qwest’s new chief financial officer, Oren Shaffer, has said that there was no fraud involved in the accounting misstatements.
Already, the risk to Qwest has prompted some of its vendors to begin asking for upfront payments, according to analysts. That is a dangerous situation for Qwest because it could eventually lead to a cash crunch if the Denver company is forced to spend billions in capital on paying vendors, such as those that supply goods and services.
A similar situation happened to WorldCom, which under pressure from vendors to pay upfront because of alleged accounting fraud, quickly ran out of cash and was forced to file for Chapter 11 bankruptcy protection.
Qwest has $26 billion in debt and is trying to sell assets, including its profitable directories business, in order to raise cash and avoid violating critical bank covenants.
Qwest recently acknowledged it is under investigation by the Justice Department.
People close to the situation said the probe is looking at a broad range of issues, including Qwest’s accounting practices and secret deals it struck with competitors who agreed not to oppose the phone company’s efforts to expand its long-distance business.
Wall Street Journal Staff Reporters Susan Pulliam, Deborah Solomon and Shawn Young contributed to this report.