I need help on this case

Qwest was one of many telecommunications companies in the late 1990s that

appeared to experienced phenomenal growth in revenues and profits. From 1999 to

2001, the company overstated revenues and profits. Qwest posted revenue from the

one-time sale of capacity of its fiber-optic network as recurring revenue.

Qwest changed auditors from Arthur Andersen to KPMG in the wake of the

Enron scandal. KPMG completed an audit that Arthur Andersen was unable to finish

because Andersen was caught up in the Enron scandal. The audit revealed accounting

irregularities.

In the summer of 2001, a Morgan Stanley telecom analyst, Simon Flannery,

pointed out that certain swap transactions among fiber-optic network operators or

rights of use distorted revenues. He estimated that Qwests revenues would have

grown by only 7.5 percent instead of the 12.2 percent rate if these one-time revenues

were excluded. Further, Flannery pointed out that there was a physical limit to

capacity that could be sold. Thus revenue growth from these swap agreements was

not likely to be sustainable.

Joseph P. Nacchio, Qwests CEO, earned $101.9 million in pay in 2001, which

included a long-term incentive plan payment of $24.4 million based on an increase

in the value of Qwest.

In June 2002, Nacchio was forced to resign as the SEC investigated the firm for

accounting irregularities that would soon lead to a charge of financial fraud. The

company later restated revenue $2.49 billion lower for 2000 and 2001, resulting in

losses for those years. Nacchio was also charged with insider trading on his sales of

Qwest stock.

Read Case Quest Communications International: Accounting Fraud and overstated revenues. Why do you feel the SEC did not follow up on the analysts earlier report? Do you think Nacchios compensation scheme played a role in the fraud?