Telecoms operators will have to clarify the way network capacity swaps are accounted for or face increased regulation, according to analysts.
Executives from Global Crossing, Qwest Communications, WorldCom and Cable & Wireless appeared before a congressional hearing in Washington yesterday to defend the capacity swapping.
Carriers sold network capacity to each other to gain bandwidth in areas where they did not have their own network.
But because the purchases were often tied to a similar sale to the same company, critics have argued that there was no real reason for the transactions.
The group told the hearing that, while they engaged in the swap of network capacity to fill gaps in the service, the contemporaneous sales were limited and represented a small part of their revenue.
"Carriers have been using capacity swapping for years. The practice is nothing new and is not restricted to a few players, but all of a sudden it's considered dubious," explained Kate Gerwig, principal analyst for network services at CurrentAnalysis.
Unless carriers take measures of their own to demonstrate how capacity swaps are reported and accounted for, regulators could well step in with new laws to ensure that changes take place.
"Either way there has to be a way to show that carriers are accounting for these deals properly," said Gerwig.
Global Crossing chief executive John Legere said in testimony to the panel: "These transactions were entirely lawful, were reported in a manner in accordance with applicable accounting principles and were fully disclosed."
The congressional hearing, held by the US House Financial Subcommittee on Investigations and Oversight, is the first such investigation into Global Crossing's filing for bankruptcy protection.
Made in January, the filing was the fourth-largest in US bankruptcy history. As part of the inquiry into the company's demise, the way it accounted for capacity swaps has become important.
The investigations are looking to establish whether the company used capacity swaps to inflate its earnings so as to appear more attractive to investors. Global Crossing's recent troubles have clearly thrown a spotlight on the procedure.
The questions have triggered probes by the FBI and the Securities and Exchange Commission, which has requested information from Qwest and WorldCom.
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