The First Accounting Scandal
Everyone seems sure accounting fraud showed up only recently, but the FCC's Continuing Property Audits of Verizon, SBC, BellSouth, and Qwest published in 1999 suggests Enron and Worldcom suggest otherwise.
The FCC press release said at the time: "The audit reports found that the RBOCs' book costs may be overstated by approximately $5 billion" of a total $47 billion claimed in hard wired central office equipment.
http://www.fcc.gov/Bureaus/Common_Carrier/News_Releases/1999/nrcc9015.html
The audits failed to verify fully 20% of central office equipment assets as significant dollar line items categorized as "unallocated other costs" and "undetailed investment" left nothing to audit.
See: http//www.fcc.gov/wcb/asd/audits
The fact that it might be hard to keep track of the equipment for an enormous enterprise like a Bell company does not represent a surprise or a scandal. The fact the Bell companies have no process or willingness to reconcile the numbers it reports the SEC, IRS, and FCC with each other or reality on the ground does.
The reports generated a bit of a stir at the time, but a soaring stock market, faith in Anderson et al, and trust in Bell company CEO's like Ivan Seidenberg kept anyone from questioning the Bell company adamant assertions the discrepancies were the fault of the FCC's audit team. The world proceeded as if the audits did not exist.
The nasty-gram from Enron inquisitor and present Chairman of the House Commerce Committee Tauzin to the FCC on the issue may also explain the lack of follow-up.
See: http://www.house.gov/commerce_democrats/press/106ltr5.htm
We still don't know the truth. We may never know. Chairman Powell dissolved the audit teams and the entire Accounting Safeguards Division as one of his first acts. Ken Moran who managed the staff of 70 in the division now has a staff of exactly zero. Powell also seems inclined to acquiesce to Bell company demands the FCC eliminate most accounting reporting requirements.
Let's consider the implications of uncertainty about the Bell company assets. Assets effect rates paid by consumers. Do the customers deserve a refund? Assets effect depreciation and earnings reported the IRS. Maybe the Bells can help balance the budget. Assets effect company valuation. Do investors and creditors really know what *lies* behind the curtain?
Maybe exaggerating their equipment expenses explains how the monopoly Bell companies managed to raise rates every year in the last twenty. Competitive long distance and cell phone companies not to mention everyone else in the information technology sector managed to lower prices.
A 5% customer overcharge due to exaggerated assets amounts to $100 billion dollars over that last 20 years. Worldcom's accounting problems did not even effect customer rates.
The Bell company CEO's certified their accounting like their Fortune 25 peers in August of this year. They spend a lot of time complaining that regulators make them offer service to their competitors below cost, but do they really know what it costs to deliver telephone service?
It seems long overdue that someone call their bluff. Keep in mind Worldcom turned themselves in to regulators by reporting the findings on an internal audit. If the FCC's findings in 1999 were wrong, the Bell companies can readily prove it by showing they can reconcile the numbers given the SEC with those given the IRS with those given the telecom regulators, and, ultimately, with reconcile everything with reality.
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