The Qwest Communication Corporate Scandal


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The failure of corporate governance : Qwest Communication

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The Qwest Communication Corporate Scandal

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