The Qwest Communication Corporate Scandal

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Qwest Communication Scandal A failure of Corporate Governance Presented by: Akash Jauhari (56), Varun Sehgal(92), Lokesh Chaudhary (75) A

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The failure of corporate governance : Qwest Communication

Transcript of The Qwest Communication Corporate Scandal

Page 1: The Qwest Communication Corporate Scandal

Qwest Communication Scandal A failure of Corporate Governance Presented by: Akash Jauhari (56), Varun Sehgal(92), Lokesh Chaudhary (75)

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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.

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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

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Shareholder Concern – Stock price

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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.

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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.

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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.

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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.

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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.

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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)

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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

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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.

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Role of Institutional Investor

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• 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.

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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.

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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 ?

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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.

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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”.

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Thank you.