Financial Daily from THE HINDU group of publications
Tuesday, Feb 05, 2002
Arthur Andersen in another mess
MUMBAI, Feb. 4
HAS Arthur Andersen, limping along with the Enron slug in one foot, shot itself in the other?
It may have, according to Mr Christopher Byron, a syndicated radio commentator who writes a weekly column for the New York Post and MSNBC, besides as also RedHerring.
In his The Contrarian column in RedHerring, Mr Byron has cited the case of the Denver-based Qwest Communications International, a client of Arthur Andersen.
"Qwest has apparently been pumping up its revenue and earnings in its directories business as part of a drive to prettify its financials in the face of the deepening mess in the telecommunication industry.''
He adds that Qwest, which commenced operations in the 80s as a fibre optics subsidiary of Southern Pacific Railroad, laying fibre along the railroad's right-of-way, went shopping when its stock was hot and, in 1999, wound up acquiring the Denver-based US West, the smallest of the regional Bell companies, in a hostile $36.5-billion bid.
However, in March the following year, the entire telecommunication sector tanked and the Qwest stock lost about 80 per cent of its value.
With the prices of broadband services collapsing, the US West division, with a steady cash flow from its telephone services and yellow pages operations, became the cornerstone of Qwest's business.
Mr Byron quotes "key sources from within the company'' as saying that as the 2000 fiscal drew to a close, enormous pressure was exerted on the company's yellow pages executives to meet "completely unattainable'' revenue and earnings. Specifically, the executives were instructed by management to engage in what the sources described as "manipulation of the directory publishing schedule.''
Quite simply, this meant that yellow pages directories that had previously been published in January every year were pulled forward and published a few weeks earlier. This, in turn, meant that the associated revenue could be declared in 2000, allowing the company to report a 10 per cent revenue growth target for its publishing segment.
Mr Byron points out: "This seems eerily similar to the so-called channel-stuffing ploy used by Sunbeam - another of Arthur Andersen's erstwhile clients - which met its revenue growth targets by shipping merchandise to distributors months before the distributors needed the goods.''
He adds: "Qwest's annual financial statement for 2000, audited by Arthur Andersen, explains the growth in year-over-year revenue for the publishing segment as being due, among other things, to `an increase in the number of directories published'. But the sources say that the `increase' derived simply from publishing some 2001 directories a few weeks earlier than normal and that is what is meant by the word `increase'...''
Other aspects of Qwest's financials have apparently drawn adverse comment from Morgan Stanley analysts, who have noted that the revenue gains for the company seem to be coming increasingly from one-time sales and the use of write-offs.
Meanwhile, Arthur Andersen is trying its best to salvage its reputation, even while conceding that it is losing business.
Speaking to newspersons recently, the Chief Executive Officer, Mr Joseph Berardino, said: "Yes. We've lost business. But we will survive. People know us. People respect us. Will we lose business? Absolutely.''
He also dismissed the Enron imbroglio as the fallout of a failed business model, not shoddy accounting.
Mr Berardino said: "The company tried to develop new markets that got investors very excited. It made big investments that did not pan out. And when it became apparent that that they wouldn't, Enron's share price fell. Few people realise that two-thirds of Enron's market value was gone before its accounting practices became an issue for the Securities & Exchange Commission (SEC). Accounting issues did not cause Enron's stock price to fall - its failed business model did.''
He also distanced himself from reports of document shredding at his firm, calling it an isolated event involving some "rogue employees".
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