Date post: | 29-Nov-2014 |
Category: |
Business |
Upload: | akash-jauhari |
View: | 9,764 times |
Download: | 0 times |
Qwest Communication Scandal A failure of Corporate Governance Presented by: Akash Jauhari (56), Varun Sehgal(92), Lokesh Chaudhary (75)
A
Company Profile
• Founded in 1996 by Philip Anschutz• Based in Colorado in US• Industry : Telecommunication• Services : Telephony, Internet,
Television• Dominant player in 14 states of the
Western US.
• Total assets: $ 22.5 billion (2007)• Revenue: $ 13.7 billion• Employees: 27,000
• Was acquired by Century link in
April 2010, with 50.5 % share.
Accounting Scandal 1999-01• In 1999, Joseph Nacchio was appointed as
CEO and company thereby adopted “ aggressive accounting”.
• Falsely repeatedly booking revenue by one time sale of equipment and fiber optic swaps.
• Inflated revenue between April 1999 – March 2001 by $ 2.2 billion.
• Inflated earning by $ 358 million. • This facilitated their acquisition of US
West in 2000. • boosted stock price on manipulated
numbers
Shareholder Concern – Stock price
Violation of Law and Code of Conduct
• Excessive internal trading by board members and senior executives from 1999 to 2001.
• Purchase of share just before financial statements and selling after inflated revenue and profit figures were out.
• May 99 : Board made $1.5 billion by selling shares.
• Founder / Promoter Philip Anschutz sold shares
worth $ 2 billion in period of three years,
• From 1999-2001, Joseph Nacchio, CEO made $52million and Robert Woodruff, CFO made $29 million.
Founder
• American Entrepreneur Philip Anschutz
• Various business interest in Petroleum, Entertainment, Rail road and Soccer Leagues.
• Forbes rated as 34th richest American with total wealth above $ 7 billion in 2010.
• Charismatic personality
• Very close to Ex US president George W. Bush, big time Republican donor.
Role of Founder• “ ceremonial co-chairman, relying on
executives and accountants.”
• Insider Trading ?? Sold shares worth $ 2 billion between
1999 – 2001. ( 17 % change) • Fear factor ?? Resigned from post of co-chairman after
first allegation by Morgan Stanley in June 2001.
• In Investigation one of Ex Executive said “ Anschutz single handedly manipulated Qwest policies.. “
Example of rubber stamp board.
Role of Audit Committee• Audit committee member Jordan
Haines was long time family friend of Anschutz.
• Haines simply rejected to take responsibility, blaming External Auditor Arthur Andersen practices.
• Haines maintained that P. Anschutz was unaware of the accounting issues.
• Clear cut case of ineffective audit committee, with suspicious role in the scandal.
Remuneration Committee
• Suspicious decision making• Said to be working on Philip Anschutz
Instruction.
• Qwest was firing 4000 employees due to poor performance
• At the same time hired CEO Nacchio a five year contract
• Salary and bonus to CEO - $ 5.2 million a year• Qwest share worth $ 7 million.• This was after Nacchio was alleged with
“illegal” and “unethical” practices by experts.
External Auditors
• Qwest Official statement: Misapplied accounting practices resulted in overstated revenues and profits.
• All financial statements were duly approved and verified by External Auditor Arthur Andersen.
• After the Enron Scandal in
2001, Qwest fired Arthur Andersen and hired KPMG.
• In an agreement between with Qwest shareholder, Arthur Andersen agreed to pay $ 10 million. ( Nov 2005)
External Auditors
• In investigations Lead Auditor Mark Iwan said he reported the IRU irregularity to audit committee many a times.
• But the reply he got was “Management
and the board conceive, initiate, and structure business transactions and determine accounting policy, not the auditor,"
• Shows the authoritative attitude of aids of Anschutz.
• Since Quest was a major client of Andersen, he could not act
Shareholder Concern
• Minority shareholder opposed the acquisition of US West in 2000, which left Qwest in debt of $2 billion
• Qwest Stock fell the high of $ 60 in
Jan 2000 to low of $ 2 in Feb. 2002. • Investors lost over $ 576 million
between this period.
• In AGM held on June 3,2001, shareholder removed Nacchio, subsequently Richard C. Notebaert was appointed.
Role of Institutional Investor
.
• Major institutional investor initiated change in structure and working of BOD.
• Major public pension firm Cal. St. Teach., initiated the process before the May 2004 AGM.
Role of Govt. and Regulator
• SEC sued seven executives including CEO Nacchio, CFO and COO.
• Nacchio was convicted in 19 criminal insider trading instances and 23 other cases.
• In 2005, Company has settled SEC lawsuit for $ 200 million and shareholder lawsuit for $ 450 million.
• In 2007, Nacchio was sentenced to six year imprisonment and $ 71 million as fine.
Role of Govt. and Regulator ?
• Why action was not taken against Philip Anschutz ?
• Why statements of Ex executives of Qwest and Arthur Andersen were not presented against Anschutz ?
What could have been done to avoid the situation?
• Proactive role by NED and ID – inquisitive and probing attitude.
• Strong stand by Arthur Andersen – discontinue or threat to expose.
• Whistle blower – appropriate platform for information.
• Non compliance by COO or CFO.
• Concern for minority shareholder – BOD or Regulator role.
Ethical Principle that came out
• Over ambition of one individual results in loss to thousands of ordinary investors.
• Short term unprincipled benefits lead to long term disasters.
• Minority shareholder’s interest unprotected in a promoter dominated BOD.
• “Slow and Steady wins the race”.
Thank you.