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. Last Updated: 07/27/2016

Qwest Admits $1.1Bln Mistake

NEW YORK -- Qwest Communications International, the dominant provider of local telephone service in 14 U.S. states, said late Sunday that it had incorrectly accounted for more than $1.1 billion of transactions from 1999 to 2001 in the latest revelation of accounting irregularities at a telecommunications company.

Qwest also said its accounting problems might extend to areas beyond the sale of fiber optic capacity, where most scrutiny had been focused until recently.

The company said in a statement that it might have improperly accounted for services acquired from other telecommunications carriers and for communications equipment that it sold. Qwest withdrew its financial forecasts for 2002 as a result of weakness in its telecommunications business. It said it still expected to report its financial results for the second quarter and revised outlook for the year on Aug. 8.

Richard Notebaert, Qwest's chief executive, said he expected the company to restate its financial results for 1999 to 2001 upon completion of an extensive review of accounting practices. He said Qwest, based in Denver, had informed the Securities and Exchange Commission of the discovery.

The announcement of a restatement is the latest accounting issue to hit the telecommunications industry, coming after problems at Adelphia Communications, Global Crossing and WorldCom, which have been forced to file for bankruptcy protection. The wave of turmoil has dimmed prospects for even the industry's largest companies.

Qwest's business practices were under investigation by the SEC and the Department of Justice. Notebaert, who became chief executive last month after the ouster of Joseph Nacchio, said Qwest had not discussed the matter with Justice Department officials. Qwest had already been weighing a restatement of about $1 billion.

Notebaert insisted Sunday night that Qwest would not be forced into filing for bankruptcy protection as a result of the accounting irregularities.

"We will not be the next shoe to drop," he said. "We believe we're doing the right thing by discussing this issue in a very transparent way."

Still, questions remain over how extensive Qwest's restatement will be and how its lenders will react to the possibility that the company may have violated lending agreements because of questionable accounting practices. Qwest's ability to evade a bankruptcy filing depends to some degree on its ability to secure additional financing from its banks, a group of more than 20 financial institutions.

"The banks know there is never just one cockroach in the kitchen," said Susan Kalla, a telecommunications analyst at the Friedman, Billings, Ramsey Group. "The chance of a major restatement creates huge problems for the banks because they've become hyper aware of their exposure to potential losses from the highest tier of the telecommunications industry."

Qwest's shares fell 7 percent on Friday to close at $1.50. Shares have declined more than 94 percent in the last year as Qwest's strategy of trying to provide advanced but sometimes unprofitable services in addition to stodgy but revenue-generating local telephone service came into doubt.

Qwest became one of the United States' largest telecommunications companies after its $50 billion acquisition of U.S. West in 1999. It was considered one of the strongest telecommunications companies until scrutiny of its accounting practices increased in the last year.

Much of that scrutiny involved how Qwest accounted for swaps of communications capacity with other companies, a practice that became widespread in 2000 and 2001 as a glut of fiber optic capacity forced carriers to devise more creative ways to convince investors that their businesses were healthy despite plunging prices for many of their services.

Notebaert said an internal review had identified 220 transactions involving the sale of communications capacity that might have been incorrectly accounted for by its executives and approved by its auditor at the time, Arthur Andersen.