A Case of Conflicts at Qwest

Audit committee members have questionable ties

Qwest Communications International Inc. (Q ) and Joseph P. Nacchio, its chief executive, have had it rough in recent months. On Mar. 11, the telecom company said that the Securities & Exchange Commission had launched an inquiry into certain accounting practices. On Apr. 1, Qwest said it would have to take a charge of $20 billion to $30 billion to write off goodwill and that the SEC had launched a second inquiry into its accounting. Then, in an Apr. 9 securities offering document, the Denver-based outfit said the probes could require it to make a "material" restatement to its earnings. All this has dropped Qwest's stock 55% this year, to $6.26.

The situation isn't going to get better soon. BusinessWeek has learned that the chairman of the company's audit committee, which is responsible for overseeing its accounting practices, has a potential conflict of interest that has never been disclosed in Qwest's financial documents. W. Thomas Stephens is the former chairman and now a director of Mail-Well Inc., an Englewood (Colo.) printing company that got a multimillion-dollar contract from Qwest last December. Such payment raises concerns that Stephens may not have been as critical of Qwest's accounting as a more independent director. "You don't want to see anybody on any of the key committees getting side payments from the company," says Nell Minow, a founder of the Corporate Library, a corporate governance think tank.

Stephens and Qwest deny there's any conflict. A spokesman for Qwest says the payments to Mail-Well do not need to be disclosed under SEC and New York Stock Exchange rules because Stephens is no longer an executive at Mail-Well and owns much less than 10% of its stock. But experts say such guidelines are not always clear. "Generally, the SEC reserves the right to define something as material," says Theodore Sonde, a former SEC enforcement attorney who is now a partner at Dechert. Stephens says he was unaware of the contract. He also pointed out he was Mail-Well's chairman only from February, 2001, until June of that year.

The chairman also contends that the audit board has been tough, pushing Qwest to make big changes. Last year, it asked the company to disclose more information about how much of its revenues came from sales of network capacity to other telcos. And in March, it banned troubled accountant Arthur Andersen from doing new nonaudit work. In 2001, Qwest paid Andersen $1.4 million for auditing services and $10.5 million for other services. "The record will reflect that we, the audit committee, did what audit committees are supposed to do," Stephens says.

The SEC investigation is focusing on whether Qwest used aggressive accounting practices in 2000 and 2001 to keep its stock flying high while Nacchio and Qwest founder Philip Anschutz sold stock. Qwest has denied that it did anything improper.

The importance of Qwest's payments to Mail-Well is unclear. The printing company reported revenues of $1.6 billion for 2001, while one insider at Qwest said its contract was worth about $3 million over three years. Still, those payments are a substantial part of the revenues of Mail-Well 1-2-1, the subsidiary that received the contract. "It's our biggest customer," says Bob Hicks, Mail-Well 1-2-1's general manager.

Stephens is not the only audit committee member with a possible conflict. Linda G. Alvarado, another member, is president of Alvarado Construction Inc., which received $1.3 million from Qwest for construction services in 2000, according to Qwest's proxy statement. The company says the contract was awarded by U S West Inc. before being acquired by Qwest in June, 2000, and that Alvarado wasn't named to the committee until July, 2000. Alvarado did not return calls seeking comment.

The trouble is, conflicts may not end when directors' companies stop getting cash. Alvarado's motivations could be compromised if she thinks Qwest may consider her company for future contracts, governance experts warn. "It's nice that Uncle Sam makes them tell us about these payments," says Minow. "But the conflicts don't end there." And the problems for Qwest don't seem to be anywhere close to over either.

By Peter Elstrom in New York

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