RBOC Accounting Mystery Resurfaces
JANUARY 06, 2003
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 - message board) 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 - message board), SBC Communications Inc. (NYSE: SBC - message board), and Verizon Communications Inc. (NYSE: VZ - message board) 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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