Ethical issues in income recognition. Qwest Communications International (Qwest), a telecommunications company, signed a $100 million contract with the Arizona Schools Facilities Board to supply high-speed Internet access to public schools in Arizona. The contract required that Qwest supply and install the computer equipment and do the necessary steps to link the computers to the Internet, a process scheduled to take over 18 months. Qwest initially intended to recognize revenue from the contract on a percentage-of-completion basis as it completed installation at each school and received payment from the State. Soon after delivery but before installation of the equipment. Qwest decided to separate the recognition of revenue for sale of the equipment from the recognition of revenue for installation services. It recognized S33 million in revenue at the time of shipment and planned to recognize S67 million as installation occurred. This change accelerated the recognition relative to the pattern initially anticipated. To allow this change in revenue recognition. Qwest's auditor required that the customer. Arizona Schools Facilities Board, formally request a separation of the hardware sales contract from the installation contract. Personnel from Qwest drafted such a request, printed it on stationery of the Arizona Schools Facilities Board, and presented to the head of the Board to sign. The head of the Board hastily signed the letter at an airport after receiving assurance that the State wouldn't actually have to pay Qwest until Qwest installed the equipment. The head of the board stated.

"There was a veiled threat that if we did not sign the letter, the equipment would not be available." Discuss any ethical issues that you see confronting managers at Qwest and its auditor.