Business Analysis: The Qwest Fraud Case

Qwest Corporation was a communications company that was rapidly growing in the late 1990s. It would consistently meet its aggressive revenue targets and was a great company for its investors. After announcing that they would merge with US West, their stock price dropped significantly (from $34 to $26 per share.) In order to prevent any further drops in stock price, Qwest 's senior management exerted extraordinary pressure on subordinate managers and employees to meet or exceed the publically announced revenue targets. In addition, Qwest paid bonuses to management and employees only for periods when they achieved targeted revenue. Soon after, Qwest 's stock price had increased to dollars higher than its original price. It was later discovered that Qwest had not been following the full disclosure principles and failed to disclose the impact of nonrecurring revenues. In its earnings releases and the management 's discussion and analysis portion of its SEC filings, Qwest improperly characterized nonrecurring revenues as service revenue, often within the "data and internet service revenues" line item on

Paragraph 67 of PCAOB Auditing Standard No. 12 states that: The auditor 's evaluation of fraud risk factors should include evaluation of how fraud could be perpetrated or concealed by presenting incomplete or inaccurate disclosures or by omitting disclosures that are necessary for the financial statements to be presented fairly in conformity with the applicable financial reporting framework. Most likely, Qwest did not have this system or was not using it. Someone would have caught the mistake and corrected it in order to comply with accounting and auditing standards. Conversely, it is possible that the information was to fully disclosed in order to trick investors on