TELETRUTH REQUESTS INVESTIGATION OF VERIZON'S INFLATED VALUATION OF ASSETS

See Letter to William O'Brien, Chairman Verizon Board of Directors Audit Committee - page 1 page 2 page 3

See summary of problems with Verizon property records - here

See excerpts of Verizon property records - page 1 page 2 page 3 page 4 page 5 page 6 page 7 page 8 page 9 page 10 page 11

WHISTLEBLOWER'S STORY REVEALS FCC WHITEWASHED BELL COMPANY (Verizon et al) ACCOUNTING SCANDAL

See FCC Website on RBOC Property Audits.

See Petition to FCC on reopening the record on the audits.

The Bell companies (Verizon, SBC, Bellsouth, Qwest) recovered over $2 trillion dollars from ratepayers over the last 20 years. It turns out their representations of costs justifying rates were based on an inflated assessment of equipment deployed for service provision. Equipment expenses represent half of the Bellco costs. Consider that an error of 5% in rates equates to excess customer charges of $100 billion. Worldcom's misdeeds did not even effect rates.

For more about the impact of overstated assets see FCC's NOI.

Read the FCC Report on NYNEX's (Verizon North's) broken cost accounting here.

Quoting FCC Press Release:
"5. The Commission's accounting rules define the costs to be included in the regulatory books and accounting records of the companies. Once defined, these costs become the basis for a variety of regulatory applications including jurisdictional separations, allocation of costs between regulated and nonregulated activities, earnings calculations, access charge allocations and, ultimately, ratemaking. Accordingly, the financial information recorded on the regulated books serves as the basis for many of the Commission's decision-making activities. "

The Communication Act of 1934 makes the FCC responsible for auditing the cost accounting records of the Bell companies. he FCC found ways to avoid auditing the Bell company cost accounting recordings for 60 years (if only the IRS were so trusting). The GAO investigated the issue in 1987 and found the FCC negligent for failing to conduct audits (See GAO/RCED-88-34).

The audits initiated in the 90’s started out as anecdotal reports of missing equipment and turned into informal audits that found missing equipment. The informal audits got increasingly formal, but each time the audit teams found the same thing - overstated assets.

The FCC finally made the findings public in 1999 over the objections of Billy Tauzin. The Bells got then Chairman of the Telecommunications Subcommittee to send a nasty-gram to FCC Chairman Kennard toward discouraging release of the report.

None of the Commissioners took a stand on the reports - hear no evil, see no evil, speak no evil. As far as the commission was concerned the audits were not considered "accurate" or "inaccurate", although Powell and Furchcott-Roth were explicitly against releasing the audits. See Commissioner statements.

The Bells came up with lots of smoke, but didn't manage to significantly challenge the results.

Even were the excuses about the $5 billion in missing equipment valid, it does not answer the biggest aspect of the accounting fraud. The Bells have $13 billion of equipment on their books listed as "undetailed investment" and "unallocated other costs." These items don't even have an audit trail. The laws (and commonsense) require the Bells to maintain a record that allows the FCC to physically verify the existence of equipment.

Let's not forget that the problems were discovered after completing audits on only 25% of the Bellco asset base. The FCC shut down the audits before anyone looked at outside plant, plug-ins, or portable equipment.

Unfortuantly, time ran short and with the prospect of President Bush’s appointee dropping the audits altogether, Chairman Kennard made the decision to spend leverage obtained from the audits in a deal to reduce access fees. The audits were closed see link for FCC Order 00-396 here.

The Supreme Court noted problems with Bellco cost accounting in the Verizon vs. FCC opinion - the TELRIC Case decide May 2002.

Key excerpt below. See page 54 or search for the word 'audit'.

"The incumbents. second reason for calling TELRIC an unreasonable exercise of the FCC.s regulatory discretion is the supposed incapacity of this methodology to provide enough depreciation and allowance for capital costs to induce rational competition on the theory.s own terms. This challenge must be assessed against the background of utilities. customary preference for extended depreciation schedules in ratemaking (so as to preserve high rate bases), see n. 8, supra; we have already noted the conse- quence of the utilities. approach, that the .book. value or embedded costs of capital presented to traditional rate- making bodies often bore little resemblance to the eco- nomic value of the capital. See FCC Releases Audit Re- ports on RBOCs. Property Records, Report No. CC 99.3, 1999 WL 95044 (FCC, Feb. 25, 1999) (.[B]ook costs may be overstated by approximately $5 billion.); Huber et al. 116 (We now know that .[b]y the early 1980s, the Bell System had accumulated a vast library of accounting books that belonged alongside dime-store novels and other works of fiction. . . . By 1987, it was widely estimated that the book value of telephone company investments exceeded market value by $25 billion dollars.). TELRIC seeks to avoid this problem by basing its valuation on the market price for most efficient elements; when rates are figured by refer- ence to a hypothetical element instead of an incumbent.s actual element, the incumbent gets no unfair advantage from favorable depreciation rates in the traditional sense.

See full opinion by searching for 'telric' at Supreme Court website

The property audit story moved from the realm of sloppy accounting to fraud when the FCC and the Bells suppressed rather than addressed the problem.

Incoming Chairman Powell closed down the Accounting Safeguards Division as one of his first acts.

The Bell CEO’s certified their accounting with their peers in the Fortune 25 even though the FCC’s audits make it clear they don’t know the value of their assets.

Teletruth submitted a complaint to the SEC noting this point.

Chairman Powell announced a plan to eliminate reporting on cost accounting and allow the Bells to shred the embarassing documents.

Enron, Worldcom, et al educate everyone about the importance of strict audits and the conflict of interest the big accounting firms suffer.

NARUC does not like the idea of removing accounting safeguards, see their Resolution.

Next - Petition to reopen the audits and a letter to Senator McCain requesting hearings

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