In its 2001 annual report, Qwest Communications International Inc. (“Qwest”) stated that because of an SEC investigation, it couldn’t guarantee that it would not have to restate its earnings (to make them consistent with GAAP). A restatement could wipe out more than $500 million of earnings, bringing Qwest close to violating agreements with its creditors. The biggest problem with a restatement is that Qwest faces lawsuits alleging that company executives made misleading statements to prop up the stock price.

Required
A. What is the SEC? What is its mission?
B. If a company’s management believes they have reported earnings in a meaningful way, why can the SEC force them to restate earnings?
C. If management issued misleading financial information do the shareholders have a reason to be upset with the company? Explain.