Why telecoms shouldn't account its chickens

Worries about accounting practices are knocking confidence out of the telecoms industry in the wake of Enron, writes Brian Burke.

The financial world is in the grips of Enronitis and looks likely to remain so for some time, with little doubt that its aftermath will have a profound effect on accounting practices and auditor relationships in the future.

In its wake, investor reaction has affected a large number of key technology companies.

Issues relating to accounting for past acquisitions and sales, recording of costs and revenue and even the hoarding of cash have been voiced recently.

Some of these issues are now being investigated by the US Securities and Exchange Commission (SEC).

Personally, I have little doubt that many of these allegations will be unfounded and that the organisations involved have followed and employed accepted practices. Whether or not these practices need to be reviewed will be an issue for the powers that be to address.

However, further concern stems from the SEC and FBI's probe into the accounting practices of Global Crossing, given that the telecoms sector has been hit hard in recent times by the economic downturn, massive over-capacity and shrinking demand. In addition, many organisations are labouring under significant debt burdens, which puts telecoms very much under the spotlight.

The main issue unearthed by the inquiry surrounds the sale of capacity on fibre-optic networks. When capacity is sold to a competing carrier and transactions are recorded as deferred revenue but reported as cash, this increases revenue.

If, at the same time, capacity is purchased from the competing carrier and treated as capital expenditure and not a normal operating expense, both revenue and income become inflated.

Although it must be said that these transactions appear to have been reported as required, and they are normal industry practice, some organisations have been more transparent regarding their impact than others. Ultimately, 'telesclerosis' appears to be rife, and whether there is any wrongdoing is not as relevant as the further dent the issue has made in confidence.

Considering the large volume of jobs, capital expenditure and new technology in question, many businesses in the channel and beyond will be affected.

Further reductions in investment and spending, which have already been depressed over the past couple of years, will continue to affect the sector as a whole.

More importantly, however, the telecoms arena has long been seen as a driver for growth. Without it, resurgence may be a drawn-out affair.