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RBOC Accounting Mystery Resurfaces

Just as all the ruckus around the 2002 carrier accounting scandals had started to die down, a ghost from Christmas past has shown up, claiming that the Federal Communications Commission (FCC) helped hide fraudulent accounting by regional Bells when it prematurely closed an audit of the companies in 2000.

Daniel Berninger, the managing director and editor of Pulver.com, filed a petition with the FCC on December 23, 2002, asking that it reopen the RBOC Continuing Property Records (CPR) audits it closed in November 2000. The audits revealed that more than $18 billion in the RBOCs’ inventory reports could not be verified. This could cause significant over-charging of RBOC customers, according to Berninger.

Berninger, who also recently published a 233-page report outlining his charges against the FCC and the RBOCs, insists that there has never been any doubt that the audits showed large discrepancies between the hard-wired equipment the regional Bells claimed to have in their central offices and the equipment the 70-person strong audit team actually found there. “It’s all documented,” Berninger says. “It’s all [in the FCC-filings]. It’s all in black and white.”

According to FCC records, the auditors concluded that about $5 billion worth of equipment was unaccounted for. In addition, an estimated $13 billion of inventory had been categorized by the Bells as “undetailed investment” and “unallocated other costs,” making it impossible to figure out how the money had actually been spent.

“It is something of a mystery that they’re missing so much stuff,” says one source who asks to remain anonymous. However, he points out, “This is a very different kind of accounting fraud… I don’t think it’s a question of what the current value of the company is. These guys have always had two sets of books.”

In their responses to the audit results at the time, the RBOCs insisted that both the audit team’s methods and its conclusions were highly questionable. Director of marketing at BellSouth Corp. (NYSE: BLS) Bill McCloskey, who was involved in the auditing process, contends the whole thing made no sense. “What the FCC was attempting to do was to look for… pieces of our property exactly where they expected to find them,” he says. “Not unlike the way kitchen chairs at Thanksgiving sometimes find their way to the dining-room table, [some of the equipment] was somewhere else.”

Well before the auditors had completed their work, or discovered what had caused the discrepancies in the Bells’ records, the FCC decided that the audits should cease and that the auditing team should be dismantled. “While the Commission stated that it was not passing judgment on the accuracy of the reports, their findings or conclusions, the audit reports, as written, place a potentially high liability on the RBOCs,” the Commission stated in its order to close the audits. “…The RBOCs asserted, inter alia, that the Commission should take additional information into account that would demonstrate that, despite mistakes in their CPRs, the expenditures at issue were all properly made and that no harm to ratepayers had occurred.”

Berninger doesn’t agree. In his petition, he claims that BellSouth, Qwest Communications International Inc. (NYSE: Q), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) have raked in more than $2 trillion from customers over the past 20 years. If the 20 percent of the Bells’ assets that couldn’t be verified by the audit team were in fact overstated, he writes, it would have produced a 5 percent rating overcharge, or a $100 billion over-billing of customers.

McCloskey, however, insists that any discrepancies in the way equipment had been accounted for has not affected the rates charged for services. This is because of the price-caps imposed on the carriers, he says. If Berninger’s petition leads to a new round of audits, which McClosky doubts will happen, it will be as fruitless as it was the first time. “It would be as meaningless as it was then,” he says. “It has no impact on prices, and that’s what consumers should care about.”

“BellSouth is actually blowing smoke up the reporter's butt,” says analyst and director of TeleTruth Bruce Kushnick, pointing out that the rate-caps were set on the premise of what appeared to be the RBOCs' expenses at the time. “That’s just ridiculous… Every customer who reads this should realize that the price of their service has been inflated.”

Berninger is eager to get the word out about how the audits were closed, as well as about his petition to get the records reopened. Moving forward, he is hoping to get other organizations to file their own petitions with the FCC, and he says he is trying to get Senator John McCain (R- AZ) to open a Senate hearing on the matter. “[McCain] can only ignore it for so long."

But Berninger has no illusions that the FCC will follow his recommendations any time soon. “[FCC Chairman Michael Powell] is the one who dismantled the audit team."

“By releasing the audit information as we do today, I fear we will subject the Companies to premature and prejudicial criticism and adverse market impact,” Powell stated in his dissenting opinion on whether or not to publish the auditors' findings in February 1999.

Other powerful people were also clearly against publishing the results of the audits at the time. Powell’s statement came a few weeks after Congressman Billy Tauzin (R-LA), chairman of the House Committee on Energy and Commerce, sent a letter to then-FCC chairman William E. Kennard voicing his concern over the audits.

Even if the political tides were more favorable to pursuing the audits further, BellSouth’s McClosky insists it would be difficult, pointing out that FCC rules call for petitions to reconsider FCC orders to be filed within 30 days of the public notice of the order. “Obviously, that 30-day period has long since passed,” he says.

“The opportunity to address the issues raised by the CPR audits diminishes rapidly over time,” Berninger admits in his petition, but insists that it’s in the FCC’s best interest to reopen the record. “The fact that the last three Common Carrier Bureau Chiefs ended up as Senior Vice Presidents at Bell Operating Companies makes it all the more important to reopen the record and address the appearance of a whitewash that undermines public confidence in telecom regulation.”

— Eugénie Larson, Reporter, Light Reading
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gea 12/5/2012 | 12:55:15 AM
re: RBOC Accounting Mystery Resurfaces Bobby Max wrote...

"Most of the US companies are in violation of the compliance with the government's rules and regulations"

MOST? Care to qualify this? Large market companies? Middle market? Mom-and-pops? MOST are crooked? On what do you base this opinion? A feeling? Any chance you have some data to back up this claim?
BobbyMax 12/5/2012 | 12:55:15 AM
re: RBOC Accounting Mystery Resurfaces If RBOCs that are highly regulated can engage in a conduct like this, think other companies that are not regulated at all. It makes sense to audit all publicly held companies regarding theie taxes, stock options, payroll, employee benefits,CEO compensation, affirmative action,and charge accounts.

It is my contention that most of the companies would fail an objective audit. Most of the US companies are in violation of the compliance with the government's rules and regulations.These audits require a very highly trained and very well educated staff. I hope these audits are soon started to cleanse our government and the industries.
ThurstonHowell3rd 12/5/2012 | 12:55:09 AM
re: RBOC Accounting Mystery Resurfaces Probably not - unless you want to count all his worthless Enron and WCOM stock certificates ;-(
danb 12/5/2012 | 12:55:06 AM
re: RBOC Accounting Mystery Resurfaces The article quotes Bill McCloskey, BellSouth:

1. Audit team's methods and conclusions highly questionable.

Hmmm...in what way?

2. The whole thing made no sense.

Hmmm...?

3. ...looking for pieces of property exactly where they expected to find them.

Consider kicthen chairs at Thanksgiving. Hmm...?

4. Overstated assets doesn't effect rates.

Hmmm....?

5. FCC can't reopen audits because petition arrived more than 30 days after order closing audits.

Hmmm...?

(Answers - 1. Lie 2. Lie 3. Lie 4. Lie 5. Lie)

Dan
rslovick 12/5/2012 | 12:54:51 AM
re: RBOC Accounting Mystery Resurfaces I participated in a CPR verification before, and many things can happen:
Equipment is replaced with new stuff prior to the end of its depreciation, so it's still on the books. Often times it makes more sense to have new equipment that is higher capacity, takes less power, is more reliable, and puts out less heat, and decommission old generation equipment and scrap it, though it may still yet to be depreciated. In all fairness, the GAAP (Generally Accepted Accounting Practices) of the telecom industry may not have kept up with technology changes. The multi-decade depreciation of an ESS or DMS switch, or old analog mux equipment, or old 90 Mb FO equipment of the 80's that may have since been replaced by OC-X fiber optics, DACS's, and subscriber line cards that take a fraction of the power of the old generation stuff. What do you do? Have a CO twice the size, to include the latest generation stuff, AND the old stuff that hasn't been fully depreciated, but has been removed from service? The old stuff often has no realistic salvage/recapture value. Perhaps, revisit the accounting practices to allow for the shorter economic life of telecom technology, and not beat the RBOCs over the head with obsolete rules, because they try to stay ahead of the technology curve...
danb 12/5/2012 | 12:54:49 AM
re: RBOC Accounting Mystery Resurfaces Agreed. We can come up with lots of stories, but lets stick to the facts.

$13 billion of $47 billion considered in the audit were listed by the Bells as Unallocated Other Costs and Undetailed Investment. In other words, it had NO audit trial at all.

Do you think the IRS would overlook a tax return with 27% of the deductions listed as - unknown - ?

If you can't touch it, you can't claim it.

Dan
flanker 12/5/2012 | 12:54:48 AM
re: RBOC Accounting Mystery Resurfaces The old stuff often has no realistic salvage/ recapture value. Perhaps, revisit the accounting practices to allow for the shorter economic life of telecom technology, and not beat the RBOCs over the head with obsolete rules, because they try to stay ahead of the technology curve...

Uhh, err, ummm. I believe your story about these bozos taking the equipment out of commission before its depreciable life is up. But you can write the dang thing off as a loss IN ANY INDUSTRY.

Why would an RBOC *not* write off equipment taken out of commission? I might believe that they are too stupid to know otherwise, or better yet that the techs dont inform accounting when this stuff is taken off line.

But the auditors are supposed to verify that plant on the books actually exists. If it doesnt, you can't furnish an unqualified opinion.

OOPS

danb 12/5/2012 | 12:54:45 AM
re: RBOC Accounting Mystery Resurfaces The law says (and commonsense says) you can't leave stuff on the books not used for provision of service.

Dan
HeavyDuty 12/5/2012 | 12:53:50 AM
re: RBOC Accounting Mystery Resurfaces Any chance you've seen CNBC, CNNfn, etc... about WorldCom, Global Crossing, Qwest, Adelphia, ENRON, etc, etc, etc...
HeavyDuty 12/5/2012 | 12:53:50 AM
re: RBOC Accounting Mystery Resurfaces They went to a Marketing type to get the RBOC response!!!
Marketing folks are second only to politicians for the number of lies they've told corresponding directly to the number of times their mouth's have opened.
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