KPNQwest--time for an Enron-style probe?

" Jack (McMaster, KPNQwest chief executive) must have lied to the banks in March to get a credit facility," said Bert Siebrand, senior analyst, of technology and telecommunications at SNS Securities. He said the U.S. Securities and Exchange Commission and its Dutch equivalent, the AFM--or the Ondernemmingskamer, a court that investigates business malpractice in the Netherlands--should investigate the company. "I can't imagine they will get away with this," he said.

" It looks very much as if KPNQwest pumped up its EBITDA (earnings before interest depreciation and amortization) by booking income as revenue that should not have been booked as revenue," Siebrand said.

KPNQwest appeared to be profitable in February, gave a profit warning in April, and went bankrupt in May..

Deals between KPNQwest and its main shareholders must have exploited accounting rules so that both parties could report revenue from a single deal, said Siebrand. These so-called "hollow capacity swaps" have been criticized at other failed service providers such as Global Crossing.

"It was a fantastic opportunity to exploit the U.S. accounting rules," said Siebrand. "These people found a money machine, which would translate shareholder loans into revenues. No one could detect if these were real revenues."

The U.S. carrier Qwest and the Dutch telcommunications company KPN both took long-term capacity, in the form of 20-year licenses, from their joint venture, KPNQwest, which booked all this money as revenue for 2001. "I believe that KPNQwest lied in January, and tried to assure us that these swaps were real revenue," said Siebrand.

KPN has kept quiet about its dealings with KPNQwest, but since the crisis began, Qwest has stated that it is only spending $3 million a month for actual service from the KPNQwest network, implying an annual spend of $36 million with KPNQwest. Meanwhile KPNQwest's own accounts imply it was paid $225 million (240 million Euros) for "international services" from Qwest last year, said Siebrand. This implies that Qwest spent $187 million in exchange for bandwidth it did not need, to boost KPNQwest's EBITDA.

January's good figures were enough to convince banks to finance the purchase of bankrupt service provider Ebone. The management may not have believed in that business plan at all, suggests Siebrand, only taking over Ebone to get a credit facility and "last a bit longer."

At this stage, "most analysts bought the pitch" from KPNQwest, according to Richard Webb, European analyst at Infonetics Research. Like most analysts, he is now dubious about the good figures he was given earlier this year.

The timing of the failure suggests that the accountant Arthur Andersen may have been involved in sinking KPNQwest, whether or not it helped to artificially inflate previous years' figures, said Siebrand: "I assume that the shareholders in KPNQwest expected to get away with it again, but Arthur Andersen got different instructions this year."