Independent Auditor Arthur Andersen and the SEC
The SEC brought charges against Mark Iwan, the global managing partner at Arthur Andersen- the outside auditor for Qwest from 1999 to 2002-alleging that Iwan “unreasonably relied on management’s false representations that certain revenue recognition crated for immediate false representations that certain revenue recognition criteria for immediate revenue recognition on IRUs were met.” On account of these charges and others, the SEC ordered that Iwan be denied the privilege of appearing or practicing before the SEC as an accountant for a minimum of five years.
Specifically, the SEC found that Iwan learned that Qwest’s porting of capacity had risen to approximately 10 percent of the capacity sold by mid-2001. Although Iwan requited Qwest to stop the practice of porting, he allegedly did not go back and ensure that the prior revenue recognition was in conformity with GAAP. Rather, Iwan relied exclusively on management’s representations that “Qwest had made no commitments to allow its customers to port capacity, that it was never Qwest’s intention to allow customers to port capacity, and that Qwest would not honor any future request to port capacity.”
The SEC aiso found that Iwan reled on representations from Qwesst’ s management and legal counsel that title did actually transfer on IRUs. IN fact; Iwan allegedly knew by carly 2000 that Qwest senior tex personnel believed there were “ significant uncertainties as to whether title transfer would occur,” and thus Qwest would treat IRU s as operating leases for tax purposes. Surprisingly, Iwan failed to reconcile Qwest’s position on title transfer for IRUs for income tax reporting purposes with its position for financial reporting purposes under GAAP (WHICH WAS DIFFERENT).37
In 2001 Iwan required Qwest to obtain an outside legal opinion that Qwest had the ability to transfer title to the IRUs it had sold over the past three years. Qwest provided to Iwan abridged summary of the legal opinion that contained significant assumptions, ambiguities, and limitations that were critical to evaluating whether Qwest met the ownership transfer requirements. Yes Iwan continued to rely on the representations of management and legal counsel in this regard.38