Essay Example on Qwest Corporation was a communications Company









Qwest Corporation was a communications company that was rapidly growing in the late 1990s It would consistently meet its aggressive revenue targets and was a great company for its investors After announcing that they would merge with US West their stock price dropped significantly from 34 to 26 per share In order to prevent any further drops in stock price Qwest s senior management exerted extraordinary pressure on subordinate managers and employees to meet or exceed the publicly announced revenue targets In addition Qwest paid bonuses to management and employees only for periods when they achieved targeted revenue Soon after Qwest s stock price had increased to dollars higher than its original price It was later discovered that Qwest had not been following the full disclosure principles and failed to disclose the impact of nonrecurring revenues In its earnings releases and the management's discussion and analysis portion of its SEC filings Qwest improperly characterized nonrecurring revenues as service revenue often within the data and internet service revenues line item on the financial statements Qwest s nonrecurring revenue was included primarily in the wholesale services segment and to a lesser extent the retail services segment 

This memo will discuss questions related to the ethics and importance of the full disclosure principle as its relates to this case According to the full disclosure principle a company should not withhold information that would be considered material to an investor or creditor of the company The information disclosed by a company should be enough to allow the users of financial statements to make evaluations and judgements about the company at a reasonable cost If a company complies with the full disclosure principles it is said to be transparent in its financial report Failure to disclose a material piece of information could lead investors to make a decision that would to have been made had all the information been properly presented and disclosed in accordance with GAAP In this situation Qwest s failure to disclose the extent of nonrecurring revenue misled investors into thinking that the company was making more money than it actually was Not only did Qwest not disclose that most of the revenue was nonrecurring it purposefully combined non recurring revenue with recurring service revenue and failed to separately disclose the impact of nonrecurring revenue on reported profitability Investors and creditors are clearly interested in this difference because nonrecurring revenue cannot be reasonably expected to continue on a go forward basis As a result non recurring revenue not properly disclosed in the financial statements would likely imply to users that they should expect revenue to recur from these components in the future Therefore by combining nonrecurring revenue and recurring service revenue

Qwest distorted their financial performance This information did not follow the full disclosure principle and contributed to investors making poor decisions on the company This sort of misrepresentation could have been avoided if Qwest had followed PCAOB Auditing Standards by establishing an effective system of internal control over financial reporting Paragraph 67 of PCAOB Auditing Standard No 12 states that The auditor's evaluation of fraud risk factors should include evaluation of how fraud could be perpetrated or concealed by presenting incomplete or inaccurate disclosures or by omitting disclosures that are necessary for the financial statements to be presented fairly in conformity with the applicable financial reporting framework Most likely Qwest did not have this system or was not using it Someone would have caught the mistake and corrected it in order to comply with accounting and auditing standards Conversely it is possible that the information was to fully disclosed in order to trick investors on purpose Paragraph A4 of PCAOB Auditing Standard No 5 states that The general standards are applicable to an audit of internal control over financial reporting Those standards require technical training and proficiency as an auditor independence and the exercise of due professional care including professional skepticism This standard establishes the fieldwork and reporting standards applicable to an audit of internal control over financial reporting The responsibility of an auditor is to provide the correct financial statements and notes in accordance with Generally Accepted Accounting Principles They do not have to prepare them for analysis or discussion by management I completely agree with this These two jobs have different functions and there is no need to overlap these functions However it should be expected that the auditor provides complete clear and comprehensible notes It is management's responsibility to learn how to read these statements on their own even if no one else in the company can It is their responsibility to ensure that the company has the best image It is not ethical for a CEO to act in a way that

Qwest s CEO Joseph Nacchio did He established a company's earnings expectation at an unreasonably high number and then required employees to meet or exceed these expectations This leads to numerous problems many of which Qwest ran into It can cause high work life imbalance for employees as well as place unnecessary pressure on employees This may have been the case with Qwest it can cause employees or management to resort to fraudulent or less than acceptable techniques in order to meet the expectations that the company holds The auditing standards were created for a reason to protect investors by making sure that they have the proper information to make investment decisions Qwest did not follow these principles and led investors to make false assumptions about the company's revenue It was absolutely unethical and Qwest executives definitely deserved the charges of fraudulent activity brought against them

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