Appropriations bill quashes FCC audit of incumbents' central-office records

Nov. 1, 1999

The FCC's finding that local telephone companies cannot account for $5 billion of assets brings retaliation from influential Congressmen.

Killing the bearer of bad news is a tradition dating back at least to the time of ancient Greece and the Athenian democracy. Last August, the House of Representatives reverted to its roots and set precedent, voting 217-210 to approve an appropriations bill containing a rider that suspends the bedrock accounting rules that governed the telecommunications industry for decades. The last few lines of H.R. 2670, the appropriations bill for the Commerce, Justice, and State Depts., the Judiciary, and related agencies, read: "None of the funds made available in this Act [for operations in the year 2000] may be used to administer or enforce the Uniform System of Accounts for Telecommunications Companies of the Federal Communications Commission...with respect to any common carrier." The principle beneficiaries are the large, well-established local carriers.

The House's action interferes with the development of competition in local markets. By freeing local telecommunications companies from the Uniform System of Accounts, the House has made local telecommunications investment more risky because competing local-exchange carriers are no longer assured the prices for interconnection and unbundled services are based on balance sheets that are substantially true.

Honesty in personal and business life was once given the highest accord, a sentiment succinctly written in the 18th century by Alexander Pope's epigram, "A wit's a feather, a chief's a rod, an honest man is the noblest work of god." But in modern capitalist economies, the moral task of assessing business honesty is financially complex, so long ago, the task was handed over to the accounting profession.

Normally, any company failing to pass muster on an independent accounting audit has to improve its performance quickly. But the House has made sure that the maxim does not apply to large incumbent local phone companies, if the audit is conducted by the FCC. Early this year, the FCC released the results of its Accounting Safeguard Div.'s audit of six large Bell companies. The audit concluded that more than $5 billion of central-office assets on the companies' books could not actually be found in the companies' physical plant.

Audits are a litmus test of business honesty, a point proven when the companies took umbrage and recriminated the FCC's auditors. Bell Atlantic's vice president of regulatory affairs, Frank Gumper, was quoted: "This is a sham audit-we violently disagree.'' Recrimination is the normal mode of discourse today in the making of telecommunications policy, and that sentiment prevailed when Congressmen W.J. Tauzin (R-LA) and John Dingell (D-MI) questioned the credentials of the FCC audit staff and teamed up with Rep. Thomas Bliley (R-VA) to hatch the restrictive language in the appropriations bill.

A Jan. 27 letter from Congressmen Tauzin and Dingell to the agency questioned the FCC's staff experience to carry out an audit of telephone companies' central offices. The Congressmen requested: "Please provide [an] indication of the experience of each FCC staff auditor and supervisor in the conduct of similar audits involving tech nical equipment such as hardwired" central office. On Feb. 24, FCC Chairman William Kennard

responded: "[The FCC] assembled an extremely experienced team...18 [CPAs], including those who have worked for...Arthur Andersen, Ernst & Young, Coopers & Lybrand, and Grant Thornton...and the Chief Engineer...26 years...spent with AT&T, New York Telephone, BellSouth, and Bell Labs involved in the engineering of COE hardwired equipment [and] maintenance of the COE hardwired equipment inventory."

The Congressmen also asked: "How do audits such as these benefit the public?" The response was: "The audits raise the question whether the companies have overstated their plant balances by including costs of missing plant in their books. It would be inappropriate, however, for the Commission to quantify the impact on the ratepayers before it hears public response to the audit reports...It is very important to release the audit reports [along] with the responses prepared by the companies."

On Feb. 25, one day after the agency's response was delivered to Tauzin and Dingell, both members of the House Commerce Committee and the FCC were ambushed by the committee's chairman, Bliley. The FCC's plan to publicize its audit and the companies' responses before taking action was portrayed by Bliley as "the FCC's failure to act," thus setting the stage to preempt the FCC's audit. He added: "The agency does nothing to protect consumers. This makes no sense. American consumers should not be forced to pay for plant and equipment that the Bells...cannot account for...The FCC's failure to act proves that competition is the most effective means by which we can protect consumers; the Commerce Committee will be closely following this issue in the coming months."

If the audit issues were followed by the committee, it must have done so sub rosa. No public hearings were held, no further requests were made of the agency, and no press releases were issued. Meanwhile, the FCC opened a notice of inquiry, CC 99-117, in April to determine how to deal with the issues raised in the audit. Final responses were due on Oct. 13. If the restrictive language of the appropriations bill becomes law, a continuation of docket 99-117 may lead to a contest of wills between the executive and legislative branches because there is no question the docket is aimed at administering and enforcing the Uniform System of Accounts, which is also followed by many state utility commissions. The National Association of Regulatory Utility Commissioners (NARUC) was given no advance warning of the House action and NARUC's executive staff spent the early part of September trying to establish a coordinated response. Thus, the ramifications of the appropriations bill extend well beyond the FCC.

Critics of the FCC's Uniform System are correct when they say it does not reflect how most businesses operate, because they follow GAAP (Generally Accepted Accounting Principles), a system enforced by the Securities and Exchange Commission. However, the FCC told Tauzin and Dingell: "The books required by the SEC differ from those required by the FCC...[Its] jurisdiction is limited to regulated services...the companies wrote off approximately 10 percent of the capital investment from their financial books in the 1990s...The regulated books are...$25 billion higher than the books reviewed by the SEC and audited by independent accounting firms." The FCC's audit of the regulated books is not redundant activity. Neither the SEC nor independent auditing firms have an interest in assessing the $25-billion difference. But this is exactly what the Bell's competitors worry about, that they are paying for plant that no longer exists.

This issue has been suppressed but not resolved by the House. It had the option of waiting because the FCC's ultimate conclusion was not predictable. The five FCC commissioners had divided opinions on the audit: Kennard, Susan Ness, and Gloria Tristani generally supported it but were chary, Michael Powell was skeptical, and Harold Furtchgott-Roth adamantly opposed it. Internal deliberations may have yielded a compromise, but the House action makes the public speculate that the FCC's auditors were on target.

Short-circuiting the audit comes at a time when the SEC Chairman Arthur Levitt has been reminding the accounting profession of its duty to be objective and forthright. Over a year ago, in a speech entitled "The Numbers Game," he told an audience: "Auditors...put something like the good housekeeping seal of approval on the information [that] investors receive...The integrity of...information must take priority over a desire for cost efficiencies or competitive advantage." But in a speech entitled "Values Add Value," he had a better insight: "Very few issues present a choice between absolute right and absolute wrong...It's a choice between ideas that are [each], to some degree, right [but]... right and wrong do exist in the financial markets...They achieve their clearest definition in matters of law enforcement." Levitt may be correct, but there will not be any clear definitions rising from the FCC audit because H.R. 2670 suspends such enforcement.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.