Swapping: It's not just for energy companies and swingers anymore. Now that Qwest Communications
One of the country's leading long-distance and local phone providers, Qwest apparently sold capacity on its optical networks to other carriers, such as Global Crossing; recorded revenue for these transactions; and then purchased similar amounts of capacity back from the carriers. The artificially inflated revenue figures gave the appearance that the businesses were growing faster than they actually were. This is exactly what happened with companies like Reliant Resources
In an effort to make things right, Qwest says it will now wipe $950 million in revenue off the books from 2000 and 2001. The trouble is probably not over, however. The SEC and the Department of Justice are investigating the swapping arrangements, and the company admits it may have to restate more revenue in the near future.
Interestingly, Qwest is attempting to lay some blame at the feet of Arthur Andersen. The press release announcing the restatement twice refers to "policies approved by its previous auditor Arthur Andersen." Investors shouldn't be mollified by such scapegoating attempts, however; those involved in the swaps knew very well what a sham they were.
Unfortunately, this is but one more example of overaggressive management propping up a company's short-term prospects while business is crumbling. As a result, investors who trusted the executives to look out for their best interests have seen the value of their holdings collapse 95% from their all-time high.