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Before the Office of the New York Attorney General New York, NY 10271
To Read The Executive Summary of the Complaint
REQUEST TO COMPLETE AUDITS OF VERIZON NEW YORK, BASED ON FCC'S CONTINUING PROPERTY RECORD AUDITS OF THE BELL COMPANIES & GTE.
Filed on behalf of:
Bruce Kushnick, Chairman 826 Broadway, suite 900 New York, NY 10003
Date August 22nd, 2002 TeleTruth's Board of Advisors
Table of Contents Statement of Interest Complaint Summary New York Background of Audits --- The Vaporware Scandals. The New York Public Service Commission Staff Report's Findings How Much Money Is Involved? "100% Verification" Says New York Telephone/Verizon And What About The Auditors? The Missing Equipment Effects New York Phone Rates. Conclusion TeleTruth is a national, independent, broad-based coalition of residential customers, business customers, small businesses, large corporations, industry experts, consultants, lawyers, Internet Providers and telecom competitors. The organization was created to defend the public interests in telecommunication and broadband issues, as well as educate and inform the public on how to combat monopoly control of critical telecommunications infrastructure. NOTE: Bruce Kushnick of New Networks Institute originally filed this Complaint with the New York Public Service Commission and the New York State Attorney General's Offices on March 8th, 2001. It has since been updated and resubmitted by the organization, Teletruth. New Networks Institute ("NNI") was founded in 1992. Its mission is to explore the impact of the break-up of AT&T and monitor the deployment of new and advanced telecommunication networks by the Regional Bells Operating Companies ("RBOCs"). Since that time, the NNI has conducted extensive research on these topics. The areas of discussion include "The Future of the Information Age," a seven-year analysis that consists of over 1,900 pages in 14 volumes, and data from more than 2,000 consumer interviews, (conducted independently through Fairfield Research). This information has been recently updated in the form of a new report, The Unauthorized Biography of the Baby Bells & Info-Scandal, published March 1999. NNI's research is solely funded from the sales of reports, books, and databases. With the current trend of related accounting misdeeds, such as those of MCI or Global Crossing, the country is now keenly aware that large corporations often have substantial accounting issues that hurt shareholders and the economy as a whole. It is clear that the government has ignored these problems in the past, however media attention and public outcry have demanded that these issues be dealt with. Teletruth has attempted to bring attention to this issue in the past, however much to our dismay, the state commission has chosen to ignore our original filing, forcing us to file a secondary complaint. Like any government agency that represents the interests of the people, the Commission has a responsibility to properly investigate claims brought to them, or that have been given to them by another government agency. As a result, when our grievances are ultimately verified and investigated, it will be known on record how the Commission responded (or did not respond) when the complaints were brought forth. This complaint makes the following claims: 1) In the year 1999, the FCC released the results of audits of the Bells' continuing property records that found that the Bell's accounting records contained $5 billion dollars in missing equipment and an additional $13.6 billion in "unverifiable" equipment. -- a total of $18.6 billion dollars. 2) This finding was only the first of four audit areas that needed to be examined. This audit area, Central Office Equipment, was the easiest to examine when compared to the other audit areas, such as "Plug-ins" (equipment that is movable.) 3) Because of political pressure from Congressmen Tauzin, Dingell, and other interested parties, the FCC did not endorse its own auditors and turned the audits over to the state commissions. To date, the Commissions have not fully investigated these audits. To read a letter sent by these Congressmen to the FCC see: http://www.house.gov/commerce_democrats/press/106ltr5.htm As of March 2002, the FCC closed the Accounting Safeguards Division that was responsbile for audits and examining other accounting areas. 4) To their credit, the New York Public Service Commission is the only commission known to have independently investigated the initial portion of the audits. They issued a report August 8th, 2001 that independently corroborates some the evidence found by the FCC auditors. See: http://newnetworks.com/NYplantdoc10309.pdf The Report found that $633 million of "non-specific" investment expenses are on the FCC's books but are now missing. 5) This Report found that there were both FCC as well as SEC violations based on incomplete and inaccurate accounting. The Commission did not investigate the rest of the audit areas, nor did they give customers refunds. 6) TeleTruth estimates that there could be over $2.5 billion dollars of missing or unverifiable equipment In New York. This information could be corroborated if the rest of these audits are completed. 7) Nationwide, TeleTruth estimates that some $10-20 billion dollars of equipment is missing from the other three unaudited areas, and the amount of total equipment missing or unverifiable could be as high as $20-$80 billion nationwide. 8) The price of all services from the "FCC Subscriber Line Charge" or other charges on local service to the prices to all competitors (including prices known as "TELRIC") need to be recalculated and the costs to customers and competitors reduced. On the state level, this could equate to hundreds of dollars of savings for customers. It is also ironic that as of this writing, both the FCC and the New York Commission have increased the phone rates customers pay in New York. The FCC raised its "FCC Subscriber Line Charge", from $3.50 to $6 dollars over the last two years. A 70%+ increase, while the state commission raised rates 11%. 10) The role of the company's hired auditors Price Waterhouse Coopers should also be investigated separately for their failure to bring to light all of the missing equipment issues as well as SEC and FCC violations, including the exclusion of certain categories of equipment from the audit and verification process. In Conclusion: Based on the aforementioned revelations, the state commission is obligated to investigate the continuing property records of the Bell companies because of known and documented accounting problems. The State should continue all parts of the audit and refund money to customers and competitors as well as lower current phone rates. We would also like to remind the New York State Attorney General's Office of their own previous comments about the FCC's Audits and how the findings effects phone rates. "The New York State Attorney General is an advocate on behalf of New York State's residential and small business utility ratepayers, before both the FCC and the New York State `Public Service Commission ("NYPSC"). The interest of New York consumers in the FCC's audit of NYNEX/Bell Atlantic North's continuing property records is manifest. Approximately half of NYNEX/Bell Atlantic North's reported costs represent capital investment recorded in the continuing property records. The FCC and the NYSPSC use these cost figures to set NYNEX/Bell Atlantic North's rates. The audit shows that NYNEX/Bell Atlantic North's costs are inflated. New York State telephone customers, both commercial and residential, are adversely affected if the various charges which comprise their rates are inflated because of overstated capital investment figures….Thus, the auditors' findings, if adopted by the FCC, could lead to significant adjustments in the intrastate and interstate rates paid by New York businesses and residents." (1) To read the original New Networks Institute Complaint see: http://www.newnetworks.com/fccaudittonyag.htm Background of the Audits --- The Vaporware Scandals. The history of the audits started in 1994 when the FCC conducted audits and found serious accounting problems. The reason for their non-release is speculated to be political pressure to not hold the local monopolies accountable. "The findings of this audit highlight the significance of our previous concern about the integrity of NYNEX/Bell Atlantic North's recordkeeping. In 1994, our audit of NYNEX's CPR relating to COE revealed numerous errors and instances of insufficient information. In addition, both in 1994 and 1997, we found that NYNEX's CPR recordkeeping procedures were not being followed or were ineffective. We found that these procedures, which have been in place for many years, do not ensure that all investment recorded in the carrier's COE accounts is associated with equipment in service."(2) In 1997, the Federal Communications Commission (FCC) conducted another series of audits of the Bell companies' (and GTE) continuing property records. (3) In 1999, after pressure from various press media and behind the scene negotiations, the FCC released the findings, which showed that the Bells couldn't account for some $5 billion in missing equipment. To read our summary of the audits or the FCC original documents, see: http://newnetworks.com/fccaudit.html As stated by the FCC: (4) "We note that audits of the continuing property records (CPR) of the Regional Bell Operating Companies (RBOCs) are before the Commission, as are the results of a joint State-Federal audit of GTE’s CPRs. The CPR audits found that, combined, these carriers could not account for approximately $5 billion of central office equipment." The reports indicated that an additional $13.6 billion dollars of equipment was categorized as "No Assets Found" or "Unverifiable Assets". Therefore, the audit had a total of $18.6 billion dollars of questionable charges. In short, 19% of the Bells’ total network surveyed was missing or couldn’t be verified. The exhibit below shows the amount of vaporware per original Bell Company. Currently, through mergers:
(Not Counting Penalties and Interest)
To put these statistics and terms in perspective, the FCC found ALL the Regional Bell Operating Companies (RBOCs) had severe problems with their records that were thought to be available, based on FCC rules. In the case of BellSouth, 29% of the information required was missing, couldn't be found or had serious errors. "252,700 of 859,800 records under review, or 29 percent of the reviewed records, contained serious errors." And what is a serious error? The FCC wrote of Bell Atlantic's audit, that 24% of items either couldn't be matched with the FCC records, or the equipment simply wasn't there: "Specifically, in our audit of a random sample of 1,152 line-items from Bell Atlantic's (CPR for Hard-wired) equipment, we found that 24.1 percent of the records that we sampled contained substantial deficiencies and did not comply with the Commission's rules. Of these deficient records, 12.5 percent described equipment that could not be found by the auditors or by company representatives ("not found" equipment). The remaining 11.6 percent could not be verified with certainty because the equipment shown to the auditors could not be matched to the record in some important respect such as location or description." It should be noted that these audits represented only 1/4 of the equipment and network components that should have been audited. These audits were the ‘easiest’ to do and the other areas, such as "Plug-ins" (movable equipment) and "outside plant" (the wiring in the streets) may have an even higher level of missing equipment. According to the General Services Administration (GSA): (5) "Audits were performed on what should be the easiest plant to keep track of: hard-wired central office equipment. Such equipment only represents about 1/4 of the ILEC gross plant investment. The overstatement of portable plug-ins and outside plant facilities may be even greater." Many commentors, including the GSA, felt that the FCC should continue these audits. (6) "Finally the Commission should proceed with the CPR audit proceeding… The CPR audits indicate that the ILEC gross plant investment is overstated on both their regulatory as well as financial books. The Commission must ensure that this situation is corrected." Due to political pressure, including a letter from Congressmen Tauzin and Dingell (see: http://www.house.gov/commerce_democrats/press/106ltr5.htm ) the FCC decided not to endorse their own auditors. And in 2000, after a number of Comment periods (of which NNI was one of the commentors, (See: http://www.newnetworks.com/Replu_Comments_of_New_Netwo.pdf ) the FCC issued a ruling that they would not pursue the findings of these audits, but would not stop the states from continuing to do so. (7) 12. "In light of these recent reform measures, which in large part are only beginning to get underway, and the fact that the CPR audits were conducted prior to our implementation of these various reforms, we now decide not to pursue further investigation into the CPR audits and close the proceeding with regard to whether the CPRs reflected assets that were not purchased or used by the RBOCs in accordance with our rules. Further, we note that although we have made no decision concerning the findings stated in the CPR audits, we recognize that further investigation into the CPR audit matter will require a great deal of time and effort, and could prove to be a lengthy and costly proceeding for all participants. We wish to make clear, however, that our decision in this order does not preclude the states from investigating relevant state issues raised by the CPR audits." (emphasis added) Therefore, we are calling on the New York Attorney General and the New York Public Service Commission to continue this work. We estimate that the total monies involved in New York state could exceed $2.5 billion dollars, not counting any penalties, fines or the lowering of phone service prices. The New York Public Service Commission Staff Report's Findings. To Read their Report See: http://newnetworks.com/NYplantdoc10309.pdf As far as we can ascertain, the New York Public Service Commission has been the only commission to examine the FCC's audit material and conduct its own preliminary investigation. The NYPSC released a staff position paper that clearly shows the Bell's poor record keeping and loose accounting procedures: (8) "Based on this review, we became aware of several long-standing deficiencies in the company’s record-keeping and accounting internal control procedures for a major class of its central office equipment (COE) investment. For the plant in question, NYT (New York Telephone) could neither identify nor locate the physical assets, and furthermore purposely excluded these assets from its routine physical verification process. In addition, NYT could not provide the cost support needed to verify the assets existence." The NYPSC agreed with the FCC that Verizon New York's accounting books were essentially flawed and they could not match the equipment. "We reviewed the FCC staff examination of the non-specific investment. We also submitted a number of discovery requests to the company and conducted informal meetings for the purpose of obtaining a better understanding of the non-specific category of TPIS. How Much Money Is Involved? The Audits and the NYPSC reports include a number of different categories of equipment being examined. Based on our reading of the New York report, Verizon was supposed to have had only $45 million dollars of equipment they had no way of tracking. The NYPSC found $633 million or 7% of the "non-specific" records were missing. "We disagree with NYT. First, the balance of the non-specific investment was $633 million or approximately 7.1% of the COE TPIS at March 31, 1997. In the company’s accounting instructions, it states that differences in excess of .05% of the detailed hardwired investment within a given subaccount is substantial and require a comprehensive investigation. NYT did not investigate the non-specific investment even though the balance of this TPIS category exceeded the company’s own materiality benchmark by over 14 times." Therefore, $588 million, over a half billion dollars could not be identified or found, representing over 86,000 items. Below is an exhibit which shows the specific items. ("Amount" is in millions)
There was also an additional problem of tracking the money and the records. The Commission discovered "an additional weakness" in the accounting and record keeping controls and that the company intentionally excluded undetailed investment items. The Commission found that this has been a long-standing problem that goes back to 1980! "During our review, we discovered an additional weakness in NYT’s accounting and record keeping controls for this plant category. Since at least 1980 until 1995, NYT’s accounting instructions required that non-specific investment be specifically excluded from the periodic physical verification procedures that the company otherwise required for TPIS assets. This is a significant amount of money --- approximately 28,000 items account for $275 million dollars.
Also, all of these items must be part of a "physical verification" and it is a violation of numerous laws not to do these procedures. "Excluding assets from physical verification is contrary to proper internal controls required for the protection of physical assets. As stated by NYT’s own accounting instructions, physical verification of assets is a regulatory requirement prescribed in Part 32 of the FCC’s USOA (and the NYSPSC’s USOA) and in the Securities and Exchange Commission’s (SEC) Foreign Corrupt Practices Act of 1977." These missing internal controls of inventory is also an SEC violation. "Among other things, the SEC requires every public company to devise and maintain a system of internal controls sufficient to provide reasonable assurance that the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Staff paper's conclusion on these records is that they are in agreement with the FCC findings. The company could not supply or locate the equipment and the internal controls did not work. "Our preliminary conclusion is to agree with the FCC staff’s findings on the non-specific investment. The company was unable to describe, locate or provide cost support for these plant items. Without this detail it is impossible to determine whether these assets are appropriately reflected in TPIS. In addition the company violated its own policy concerning the level of unallocated other costs and ignored a fundamental internal control by not physically verifying these plant items. Without a physical inspection, the asset’s existence cannot be verified." Secondly, the non-specific investment of missing equipment had 50% of the items valued over $100,000. "NYT’s contention that the non-specific category of plant consisted of only small items is incorrect. Over 50% of the non-specific investment were made of items that were valued at greater than $100,000. With the high percentage of items over $100,000, the company should have attempted to locate these items of plant. If the plant was not found within a reasonable time period, the company should have adjusted its accounting records since the plant’s existence could not be verified." How do you lose documentation for $100,000 dollar items???? "100% Verification" Says NYNEX According to the report, NYNEX supposedly did a full 100% verification of their "detailed hardwired plant" in 1995-1996. However, as the PSC points out, the FCC's audits came a year later in 1997 and found serious problems. "NYT performed a 100% asset verification for this plant during 1995 and 1996. The company claimed this inventory corrected the CPR. Although the FCC audit occurred one year later (1997) the FCC still found significant missing plant. This calls into question the reliability of the companies comprehensive asset verification." The NY PSC also found that while there was supposed to be 100% verification, the company still showed $317 million in equipment they could not find or show verifying documentation. However, we are concerned that NYT continued to reflect the non-specific investment of $317 million as an asset, after failing to find this investment at the conclusion of the1995/1996 central office physical verification. In addition, the company’s policy of retiring non-specific investment more than ten years old is questionable since the financial records could not be reconciled with physical records. And What About The Auditors? According to the Staff Report, Price Waterhouse Coopers, the Bell's accountants/auditors, the investigation into Verizon's books were "hampered in several respects". The company was unwilling to provide workpapers and the company destroyed/didn't keep work papers that were older than 6 years. "Staff attempted to better understand the underlying PWC support for these findings and evaluate their impact in conjunction with the internal control weaknesses and violations of NYT accounting requirements we described above. It is also clear that Price Waterhouse knew that the undetailed investment items were excluded from the periodic verification procedures. "By excluding these assets from periodic verification over many years, NYT may have weakened its controls in a manner at odds with the basic operating standards required of all businesses. The company’s independent accountant, PWC, was aware of this exclusion." The Missing Equipment Effects New
York Phone Rates. "New York Telephone is in the sixth year of the PRP (Price Caps Alternate Regulation plan). Although the PRP was a macro price plan that placed less emphasis on accounting records, the starting point of the PRP was the 1992 calendar year accounting records. As a result the inflated TPIS balances associated with the non-specific investment translates into a higher revenue requirement when rates were first set in the PRP." To translate, even though there is "price cap" alternative regulation, the basic rates were set by these accounts --- and if the books show more expenses (investments) than the revenue -- i.e., the phone rates -- are higher. ("Price Caps" is the deregulation of the older rate-of -return regulation which examined the Bell's profits to set rates. Price cap regulation freezes the price of a service for a few years followed by incremental increases. Since the cost of offering local phone service continues to decline through staff cuts and drops in network costs, Price cap regulation guarantees more profits. Therefore, the starting point is critical for the entire plan to be 'fair and reasonable for customers. And we would like to call attention to Comments made by the New York Attorney Generals' office, which clearly states that the costs of the network represent approximately half of the costs for calculating service. And these cost figures have been used to set rates. If the costs are inflated, then so are the phone rates. (11) "The New York State Attorney General is an advocate on behalf of New York State's residential and small business utility ratepayers, before both the FCC and the New York State `Public Service Commission ("NYPSC"). The interest of New York consumers in the FCC's audit of NYNEX/Bell Atlantic North's continuing property records is manifest. Approximately half of NYNEX/Bell Atlantic North's reported costs represent capital investment recorded in the continuing property records. The FCC and the NYSPSC use these cost figures to set NYNEX/Bell Atlantic North's rates. The audit shows that NYNEX/Bell Atlantic North's costs are inflated. New York State telephone customers, both commercial and residential, are adversely affected if the various charges which comprise their rates are inflated because of overstated capital investment figures….Thus, the auditors' findings, if adopted by the FCC, could lead to significant adjustments in the intrastate and interstate rates paid by New York businesses and residents." Conclusion TeleTruth believes it is time to fully protect the public's interests. 1) The New York Attorney General's Office and New York Public Service Commission should continue to complete all of the audit areas. Bruce Kushnick, Chairman, Teletruth TeleTruth Board of Advisors ENDNOTES 1) The New York State Attorney General's Office (CC Docket No. 99-l17 Comments in Response to April 6, 1999 Notice of Inquiry: ASD File No. 99-22, Audit of Continuing Property Records of the NYNEX Telephone Operating Companies Also Known As Bell Atlantic North. 2) "Audit of the Continuing Property Records of the NYNEX Telephone Operating Companies Also Known As Bell Atlantic North, As of March 31, 1997", published, Federal Communications Commission Common Carrier Bureau Accounting Safeguards Division, DECEMBER, 22, 1998, PAGE 3. 3) Ibid. 4) Further Notice Of Proposed Rulemaking, 99-117 et al, 4/3/2000, page 7 5) Comments April 17, 2000, CC docket 99-117 6) General Service Administrations' Comments April 17, 2000, CC docket 99-117 7) Second Report And Order In CC Docket No. 99-137 And Order In CC Docket No. 99-117 And AAD File No. 98-26, Adopted: November 1, 2000. Page 9 8) Staff Position Paper Review of the Federal Communications Commission's Staff Report of the Audit of the Continuing Property Records of New York Telephone Company * Redacted version * August 8, 2001 CASE 00-C-0788 - Proceeding on Motion of the Commission to Investigate the Accounting Practices of New York Telephone Company Concerning its Telephone Plant in Service. 9) Undetailed Investment: Originally, undetailed investment was created in the late 1970's when NYT established a computer-based CPR and details of existing plant items were not available. NYT's accounting immaterial level over time and would ultimately be retired from the company's plant records. It was anticipated that the undetailed investment would be replaced with detailed hardwired COE plant additions. However, as Appendix A demonstrates, NYT continued to record undetailed plant additions after its detailed CPR was installed. The undetailed investment amounted to $287 million or 3% of NYT's COE TPIS as of March 1997. 11) Unallocated Other Costs: Unallocated other cost items contain costs that are in excess of those reasonably includable in the costs of the hardwired items, and can not be related to any particular item of equipment. Examples of unallocated other cost items are the cost of aisle lighting and the expansion of ironwork at a central office. Dollars reflected in the CPR and TPIS balances that cannot be identified with a property unit, nor subject to physical verification of the underlying asset create an exposure of financial loss to the corporation. 12) The New York State Attorney General's Office (CC Docket No. 99-l17 Comments in Response to April 6, 1999 Notice of Inquiry: ASD File No. 99-22, Audit of Continuing Property Records of the NYNEX Telephone Operating Companies Also Known As Bell Atlantic North.
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