Quest was a communications company that was rapidly growing in 1999 and 2000. It would consistently meet its aggressive revenue targets and was a great company for its investors. After announcing that they would be merging with US West, their stock price dropped significantly. In order to prevent any further drops in stock price, high pressure was placed on Qwest’s employees to meet their high revenue targets. Soon afterwards, Qwest’s stock price had increased significantly, to higher than its original price. It was later discovered that Qwest had not been following the full disclosure principle and were misrepresenting nonrecurring revenue from things such as the sale of capital equipment as “data and internet service revenues”. They also failed to disclose the impact of these nonrecurring revenues. This memo will discuss questions related to the ethics and importance of the full disclosure principle as it relates to this case.
1. The full disclosure ...view middle of the document...
This information did not follow the full disclosure principle and contributed to investors making poor decisions on the company.
3. This sort of misrepresentation could have been avoided if Qwest had followed PCAOB Auditing Standards by establishing an effective system of internal control over financial reporting. Qwest probably did not have this system or someone would have caught the mistake and corrected it in order to comply with accounting ethics. However, it is also possible that the information wasn’t fully disclosed in order to fool investors on purpose.
4. The responsibility of an auditor is simply to provide the correct financial statements and notes in accordance with generally accepted accounting principles (GAAP). They do not have to prepare them for analysis or discussion by management. I agree with this, as the two jobs have different functions and there is no need to overlap the functions. However, it should be expected that auditors provide complete, clear, and easy to understand notes. It is also management’s responsibility to learn how to read these statements on their own, even if no one else in the company can, because it is their responsibility to ensure that the company has the best image.
5. It is not ethical for a CEO to act in the way that Quest’s CEO did, by establishing a company’s earnings expectation at an unreasonably high number and then require employees to meet or exceed that expectation. This leads to numerous problems, many of which of Qwest also ran into. It can cause huge work-life imbalance for employees, as well as place unnecessary pressure on employees. As may have been the case with Qwest, it can cause employees or management to resort to fraudulent or less-than-acceptable techniques in order to meet the expectations.
The auditing standards were created for a reason: to protect investors by making sure that they have the proper information to make investment decisions. Qwest did not follow these principles and led investors to making false assumptions about the company’s revenue. It was absolutely unethical and Qwest executives did deserve the charges of fraudulent activity brought against them.