FryUp: Tricky business of telcos; judging the internet

The tricky business of telecommunications; Quis custodiet ipsos custodes?

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- The tricky business of telecommunications

- Quis custodiet ipsos custodes?

- The tricky business of telecommunications

It's a funny thing, this business of business. What should be a straightforward thing, counting the income and the outgoings and telling investors how much money was made or lost in a year, has become a tortuous round of "my accountant is craftier than yours".

Worse than that, companies that should know better are getting caught with their pants down by slow, cumbersome yet dogged government agencies.

First there was Enron with its "find the lady" approach to accounting. That scared the willies out of most American investors at a time when they were still hiding their money under the mattress (in this day and age that's war bonds) and were only starting to think about coming back to the stock exchange.

Now there's Global Crossing, which was set up to be a marketplace where companies with fibre-optic cables running all over the world could buy, sell and trade capacity on each others' lines.

I'm always a bit wary about companies that don't actually do anything themselves, but exist to allow other companies to do business. It smacks of something but I'm not sure what. Combine that kind of company with the dreaded word "portal" and I'm left with a bad taste in my mouth.

It seems I'm not alone. Global has filed for bankruptcy protection in the US and after a New York Times story about the death of the fibre dream, it became clear that Telecom New Zealand was involved somehow.

Quite how Telecom is involved is still to be decided, but the deals in question go something like this: Telecom owns a chunk of the Southern Cross Cable. Telecom goes to Global Crossing in search of other cable owners in other parts of the world, the Atlantic for example, to swap bandwidth with. Telecom trades bandwidth for another company's bandwidth, but this being business money has to change hands.

So Telecom and this other company both write out a cheque for the same amount. They swap cheques. They then have to account for the money and that's where the fun starts.

Firstly, there isn't any. That should make it easy, but Global Crossing is being investigated by the FBI and the Securities and Exchange Commission (SEC) for, ahem, "irregularities" in the way it accounted for this un-cash. Two words to strike fear into any small investor's heart: Arthur Andersen.

Telecom's problem is slightly different, as far as I can tell, because it often makes actual money on these deals. Perhaps it's all about currency fluctuation or book value of the fibre it sells versus that which it buys, I don't know. Telecom made four of these deals in the second half of last year and three of them earned $27.9 million. The fourth deal was a straight bandwidth swap and didn't earn any cash, according to Telecom.

Telecom counts the bandwidth it buys as an acquisition and puts it on the balance sheet to be depreciated over the lifespan of that asset, probably either the term of the contract or possibly the working life of the fibre itself.

This is where it gets tricky. Any money Telecom makes from such a deal is counted as a gain and is accounted for in the year Telecom "earns" it. That is, the year the contract is signed.

In the US the preferred method seems to be to account for that money in the same way you account for the asset – spread out over the term of the contract.

Telecom says its accounts are completely in step with New Zealand accounting practice, and I'm sure Telecom has had the lawyers and accountants working overtime to make sure that's so. It's being investigated by the Securities Commission in New Zealand and by its Australian equivalent and according to the Australian Financial Review it could "strip between $40 million and $60 million" from the Telecom half yearly accounts. That would mean Telecom would post a single-digit loss instead of a single digit gain for the six-month period.

There will be much more on this in the weeks ahead, I'm sure.

Far more detail is given in the various stories below - the New York Times story needs a user name and password to get in but access is free once you've signed up.

Telecom has limited exposure to Global Crossing fall out - IDGNet

Telecom rejects profit report criticism - Nzoom

Telecom's profit set for probe - NZ Herald

NZ stocks: Shares fall as Telecom investigated - NZ Herald

Telecom defends accounting methods - Stuff

Telecom caught in fallout - Stuff

Global Crossing dealt with exec's son - Straits Times

Global Crossing was major donor - Seattle PI

Fibre Optic fantasy slips away - NY Times (free registration required to read the story)

Data revenue up, call income down in Telecom's half-year report - IDGNet

- Quis custodiet ipsos custodes?

There you go, a bit of culture for you.

The above Latin quote, loosely translated as "who watches the watchers", is a question we can ask of our judiciary this week.

Apparently the answer is: quite a lot of people.

You see, there's this judge. And he had a PC. And his PC had an internet connection. And as he sat there looking at his PC and learning all about the internet for a case he was adjudicating, he must have done a wee bit of surfing. As you do.

Trouble is, he wandered into the heady and amusing world of pop-ups, con-artists, "no purchase required but enter your credit card details anyway for age verification" that is the online porn world in the 21st century.

Actually it's not much of a story at all because porn is all too easy to come across online. Type in just about any search on any search engine and you're bound to have a few erroneous hits.

So this judge, there he is, possibly thinking "my goodness, would you look at that?!" or "what interesting camera work!" or something similar, not realising that such things are eminently traceable when you're surfing from work. He was caught, told off, investigated and publicly humiliated. No law was broken, but you do have to wonder about acceptable use policies and the like. Surely the Justice Department has some of those?

He wasn't alone, either. A handful of district court judges were caught in the net, but they used that old standby, "in the line of duty", which is fair enough. One poor judge accidentally accessed a site, and who hasn't had that embarrassment, usually when there's a high ranking visitor to the office.

And that's really the point - no laws were broken and so long as the judges realise the difference between erotica and porn (what's the joke about a single feather versus a live chicken?) then surely everything's OK.

And if we're going to investigate judges for this kind of activity, shouldn't we all take a look at our surfing habits and wonder if we'd be happy having our logs displayed for all to see? Perhaps the quote at the start should be something about casting stones instead.

Porn inquiry clears judge - NZ Herald

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More about AndersenAndersenArthur AndersenAustralian Financial ReviewAustralian Financial ReviewEnronFBIGlobal CrossingSECSecurities and Exchange CommissionSouthern Cross CableTelecom New Zealand

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