SEC formalizes inquiry into Qwest’s accounting practices

Qwest Communications said the Securities and Exchange Commission has issued a formal order of investigation concerning the carrier’s accounting practices.

According to a statement issued by Qwest, the formal order “covers the same subject matters as the SEC’s informal investigation,” which was launched by the commission about a month ago.

A spokesman for the SEC said commission staff, “are not authorized to confirm or deny the existence or non-existence of any kind of investigative activity.”

In a letter received by Qwest on March 8, the SEC informed the carrier it was investigating three areas of its accounting practices for fiscal 2000 and 2001. These include: the manner in which Qwest accounted for indefeasible rights of use sales; equipment sales made by the carrier to companies in which Qwest later invested or from which it later purchased services, and; changes in the production schedules and life cycles of some of its phone directories.

At the time Qwest said it believed its accounting practices for all periods, “comply with all applicable requirements.”

A Qwest spokesman today said changing the status of the investigation from informal to formal is a “normal part of the inquiry process.” However, the status change gives the SEC the ability to subpoena Qwest. While the spokesman wouldn’t speculate on whether the SEC might use that power in this investigation, he stressed that Qwest has been cooperating fully with the investigation. “We began submitting requested documents to the SEC on March 19 and will continue to do so,” said. “This isn’t going to change how we operate.”

Former SEC Commissioner Joseph Grundfest, who is advising Qwest on the investigation, said in a statement that the issuance of a formal order at this stage is very common and does not reflect on the likelihood of any finding of wrongdoing. “Such orders happen all the time following the commencement of an informal investigation," he said.

However, a former SEC head accountant who is now an accounting expert at Colorado State University told the Denver Post that changing the status from informal to formal over the course of just a month could be considered a red flag.

“Given the speed with which this turned from informal to formal, clearly the SEC views this as a serious matter that requires an in-depth investigation,” said Lynn Turner in a story published by the Post today.

A source familiar with SEC procedures said it would be impossible to assess the significance because of such a move.

Cases often are brought against alleged violators of securities law that are based totally on information that is gathered informally. However, there are investigations where sources of information aren’t willing to cooperate on an informal basis. Because the five commissioners have the authority to subpoena testimony and documents, the SEC staff has the recourse in such situations to request from the commission a formal order of investigation that would authorize the staff to issue subpoenas.

“They go to everybody they can think of to try to find out what might have happened. So a company might be involved, but there might be somebody’s brother-in-law as well, and he’s the guy who they have to subpoena. So you really can’t make any kind of judgment as to where the [Qwest] investigation is,” said the source.