Verizon's Accounting And Governance Risk

| About: Verizon Communications (VZ)

Verizon Communications' (NYSE:VZ) financial statements continue to raise questions about the quality of the New York-based company's reported earnings, but the chance that unexpected events will impact the telecommunications firm has decreased in recent months.

Verizon's AGR score is a 52, indicating higher accounting and governance risk than 48% of comparable companies. The AGR has improved from a 17 in December.

Verizon entered into an agreement in December 2011 to pay $3.6 billion to a joint venture between the cable providers Comcast Corporation, Time Warner Cable, and Bright House Networks in exchange for 122 Advanced Wireless Services spectrum licenses. The Federal Communications Commission approved that deal Thursday.

Verizon's balance sheet had already teemed with more than $79 billion in intangible assets such as brands, patents or licenses as of March 31, 2012, or nearly 36% of its total assets versus the industry median of nearly 15%. Lacking physical substance, intangible assets can be difficult to value and thus expose investors to error-related risks.

Verizon's estimates don't always coincide with those of others. For example, the company has some discretion in setting the rate at which it thinks the value of money will change by the time it has to pay out pension benefits to its workers, and even a small increase in this discount rate can result in a large reduction of the company's net pension liability. Verizon assumed a discount rate of 5.75 as of March 31 versus the industry median of 5.305.

While Verizon's accounting continues to show red flags, it has made mistakes in the past. The Securities and Exchange Commission said on September 7, 2011 that Verizon's compensation of its then-chairman and CEO Ivan Seidenberg had been improperly reported. The company is now under new management since making Lowell C. McAdam its chairman and CEO at the close of business on December 31, 2011, but he does not represent any significant cultural shift as he has been with Verizon since 2000.

Verizon is rated "D" on its corporate governance overall.

That said, Verizon's AGR score has improved in recent months, in part due to its current pace of merger and acquisition activity versus the industry mean. Verizon's deals in 2011 included acquiring the Miami IT infrastructure services company Terremark Worldwide Inc. that April. An acquisitive nature in no way means that a company is fraudulent, but it can reflect an inherently risky approach to business strategy.

In another sign of lower risk than in the past, the negative impact of litigation on Verizon's AGR score subsided in the quarter ended this March, although the company continues to grapple with court battles. For example, the Federal Trade Commission is opposing Verizon's tentative settlement of a class action lawsuit alleging that it allowed the cramming of unauthorized charges onto its customers' phone bills, according to the regulator's press release August 20. The FTC noted issues such as the consumers likely not having any idea that they had been wrongfully billed and that they now have the right to a refund. This development did not impact Verizon's AGR during recent months.

What happens to the AGR score in the quarters ahead remains to be seen.

Region: North America

Country: United States

Sector: Telecommunications Services

Industry: Integrated Telecommunications Services

Market Cap: $ 126,708.6 mm (Large Cap)

ESG Rating: D

AGR Rating: Average (52)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I am receiving compensation from GMI Ratings to write articles about corporate governance.