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Here's a link to a WSJ story on Qwest's disagreement with the SEC on accounting that caused their stock to lose 57% of its value today.

http://online.wsj.com/article/0,,SB1025120438670990240,00.html?mod=home_whats_news_us

<At issue in the SEC investigation is the difference between the way Qwest accounted for the sales and the method used by its competitors, such as Global Crossing, which is also under SEC investigation.
Like Global Crossing, Qwest sold capacity on its fiber-optic network to carriers and also purchased capacity from them. In some cases, the amount of the sale and purchase were almost identical. But unlike Global Crossing and most other players in the industry, Qwest booked the revenue from these sales all at one time instead of deferring part of it over many years.

Global Crossing, by contrast, only booked reported revenue over the life of the contract, which in some cases was as long as 20 years. (It did include the whole amount in something it called "cash revenue," its own term, separate from accepted accounting rules, for the revenue that came in for services that hadn't yet been delivered.)

While its sale was booked upfront, Qwest's purchase of fiber capacity was booked as a capital expense, meaning the company could record the purchase over time instead of all at once.>

Global Crossing swapped capacity in sham transactions to create phantom revenue. Qwest apparently figured, as long as the transactions are a sham to begin with and the revenue is phony, why not just recognize it all in one year? And then take the capacity you swapped for in the sham transaction and spread that expense over many years. That way, you create not just phantom revenues that are offset by phantom expenses, you create phantom profits. Of course, you'll have phantom losses in future years since you already booked the revenue but you can always do some more swaps (wink wink) in future years to take care of that problem. How about that, a company that makes Global Crossing's accounting look conservative.

I'm not an accountant, but one of the principles that I recall (probably covered in Accounting 101) is that it's usually desirable to match the timing of revenues with related expenses. Even if these transactions were legitimate, if Qwest was selling capacity to another company they would presumably have to incur expenses in future years to deliver the capacity and fulfill their contractual obligation. What if there is some problem and the other company cancels the contract in midstream or can't pay the bill or goes broke before Qwest? Can Qwest really be attempting to persuade the SEC that it is appropriate to recognize all the revenue from a long-term supply contract in one year and at the same time argue as a buyer of long-term capacity via the flip side of the same transaction it's appropriate to spread the expense over many years? If so, it ranks right up there with Bill Clinton telling a judge that Monica Lewinsky had sex with him but he didn't have sex with her.
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