Summer of scandal: accounting tricks, software scams, price fixing make 2002 a tech summer to forget - Business of Technology - Industry Overview

Computer Technology Review, August, 2002 by Joshua Piven

WorldCom's customers should keep in mind, however, that the company is likely to delay indefinitely the rollout of any new data services. In addition, the telecom sector overall is in the midst of an unprecedented slump, and a schedule for recovery is still unknown. According to a report from Challenger, Gray & Christmas Inc., an executive placement firm, one-third of all job cuts in the nation announced since January came from technology companies, led by the telecommunications sector: fully one-quarter of jobs eliminated were in the telecom market. This year is looking just as bad or even worse than 2001, the report indicates.

Incredibly, WorldCom is not the only major telecom carrier facing serious legal scrutiny. Qwest Communications' accounting practices are being examined by the Securities and Exchange Commission, and published reports indicate that the Department of Justice and FBI are also investigating the company. As this issue went to press, Qwest confirmed that it has been notified that the U.S. Attorney's office in Denver has begun a criminal investigation of the company.

Qwest is the No. 4 long distance carrier in the nation and the dominant local carrier in more than a dozen states, from Minnesota to Arizona. In April, the SEC recommended action against Qwest for inaccurately reporting revenue in 2001, including directory publication revenue and sales of equipment. It also indicated irregularities relating to the company's purchase of U.S. West and the company's involvement with the purchase of assets from the bankrupt Global Crossing. Qwest's credit rating has been lowered to junk status by ratings firms and its stock hovers in the single digits, down from about $30 a year ago. On news of the Denver investigation, Qwest's shares lost about 35% of their remaining value, falling to $1.70. Qwest recently ousted its CEO Joseph Nacchio and replaced him with former Tellabs head Dick Notebaert.

While the nation watches the Qwest and WorldCom woes, regulators in California are now targeting other telecom companies. The California Public Utilities Commission has undertaken an investigation of Pac Bell Wireless (Cingular) in response to numerous customer complaints.

California, Scandal Central

According to the CPUC, the commission is seeking to determine whether Cingular has violated the state's rules in its collection of termination fees from customers, and whether its network is oversubscribed, preventing customers from using the service. While the use of early termination fees is fairly standard for wireless carriers that require annual commitments, this is the first time that California has indicated that such fees may not be legal if the carrier's network does not meet the customer's reasonable service expectations. According to the regulatory filing:

"Cingular makes the implied promise that adequate system coverage and capacity will exist in the subscriber's area of use. This promise is then taken back--in some of Cingular's marketing materials-by a fine-print [disclaimer of warranty."