Level 3 and KPNQwest defend the legitimacy of their business [...]

📅 February 14, 2002 - As multiple telecommunications companies face bankruptcies and allegations of improper accounting, high-speed network operators Level 3 Communications Inc. and KPNQwest defend their accounting practices.

Over the past two weeks, network operators and investors have been wading waist-deep in a shakedown of plunging market shares and fear of inflated revenue figures.
"In the aftermath of the bankruptcy of Enron, investors, the media and policymakers have all expressed concern about the accounting practices utilized by public corporations,? said James Q. Crowe, chief executive officer of Level 3 Communications, Inc.
"Since Level 3 sells IRUs to a variety of customers, and since IRU accounting has been at the apparent center of some of the concerns recently expressed in the media and by investors, I want to be clear about our own practices.
In an attempt to correct misconceptions and discussions of ?cashless transactions? of 2001 fourth quarter results, KPNQwest, which operates a high-speed communications network in Europe, said it sold capacity to other carriers for about 438 million euros in 2001 and all of those transactions were sound.
KPNQwest said on Wednesday, it does not engage, and has never engaged, in cashless transactions.
The Securities and Exchange Commission is investigating allegations of improper accounting at Global Crossing Ltd., which filed for bankruptcy protection on January 28. As part of that inquiry, the SEC requested the equivalent paperwork from rival Qwest Communications International Inc. for deals involving Global Crossing.
Under that deal, KMC Telecom Holdings Inc. purchased Internet infrastructure equipment from Qwest to take advantage of the larger company's buying power. Qwest then bought Internet services from KMC that were provided over the equipment it had sold. Qwest said the transaction was generally accepted by standard accounting principles.
Investors with a hand in the telecommunications industry are proceeding with caution. Currently, it is legal to record IRU sales upfront, even if the contract extends for 25 years. Analysts are now reporting that companies that account for revenue in advance appear healthier than they really are.
Investors also fear that companies may have swapped network capacity, for identical or unnecessary routes, in an effort to boost revenues. So books sales and costs of so-called indefeasible right of use -- the right to use capacity on high-speed networks--are under scrutiny.
?The vast majority of Level 3's IRU sales are to customers from whom we do not purchase IRUs or, for that matter, any other similar communications service. These are clearly legitimate business transactions for which the accounting is not in question,'' Level 3 said in a statement.
Level 3 said it had seven deals in the past year in which it sold IRUs, or other capacity or services, to a company from which it purchased similar kinds of items. It states that each of these transactions, representing 2 per cent of its 2001 revenue, was proper.