NOTE: Teletruth has released excerpts from Verizon’s network equipment Inventory records, showing massive accounting errors. Teletruth has also filed a FOIA with the FCC to open the Bells’ books for public scrutiny, as well as SEC and IRS Complaints. To read these documents, go to: http://www.teletruth.org/auditupdate.html 

In 1984, AT&T, once the largest company in the world, was broken up. Known as "Divestiture", this company was split up because of its anti-competitive behavior, such as not letting other long distance companies (MCI, etc.) use the networks to serve customers. At the time, Ma Bell controlled almost all local and long distance calling, and even supplied the customers’ phones and network equipment.

To learn more about the history: http://www.teletruth.org/History/history.html

The 22 local phone monopolies were turned into seven large companies known as "Regional Bell Operating Companies", (RBOC) while the long distance portion remained AT&T. These new companies included SBC, (which now owns Southwestern Bell, Ameritech and Pac Bell,) Verizon, (which now owns NYNEX and Bell Atlantic and GTE (not a Bell company),) Qwest, which owns US West, and BellSouth.

In order to create these new concerns, the inventory that was controlled by AT&T was now going to be handled by seven separate companies. To help facilitate the change over, these records would be put into a database, known as TIRKS, which stands for Trunk Inventory Record Keeping System

Unfortunately, turning these old on-paper records into the TIRKS database revealed a serious problem. According to a former Bell staffer who was in charge of automating some of these records for Bell Atlantic, approximately 30% of the equipment that was on the books was missing.

Since the price of service is based on the equipment in the network, then missing equipment meant lower prices. Worst of all, if it could be shown that prices should have been lower all along, this meant giving money back to the customers.

And the one thing every Bell staffer learned from their very, very first day was that there were never to be refunds – not if you wanted to keep your job. The staff was forced to find work-arounds. These staffers were forced to come up with creative accounting solutions, and so, in many records, we find bogus entries --- hundreds of thousands of "Undetailed" investment -- for hundreds of millions of dollars. According to a FCC audit of NYNEX, over 48,000 entries of "Undetailed Investment" added up to $359 million dollars or 5% of the total and an additional 56.000 entries of "Unallocated Other Costs" constituted $414 million dollars.

Overall, the FCC’s audits of the Bell companies found $18.6 billion dollars of missing or unverifiable networks equipment.To read a summary or of the original FCC audits and other related materials see: http://www.newnetworks.com/fccauditsummary.htm

It turns out this is NOT a new problem because the same books that were created in 1984 were the starting point that were used to set your current residential and business phone rates.

Here's an exclusive look at the underbelly of the Bells’ accounting books.

TT: Tell me a little about your background in telecommunications and with the Bell accounting books.

Mr. Smith: I was new to the Bell System during Divestiture. I was in the Chesapeake & Potomac Headquarters Group through 1986. C&P represented Maryland, Virginia, West Virginia and DC. But during Divestiture, because it was all one big network, and because we were all scrambling like mad to comply with the Divestiture decree, all of us were helping out wherever we could.

TT: And what were your responsibilities related to the inventory/accounting books?

Mr. Smith: At C&P I was in the Cost and Economic Development Group. We were mostly responsible for the Division of Revenue Traffic and Investment studies that were used to allocate the cost associated with investment used in common by many companies to the individual corporate books. We’d come up with the relative usage for each company and apply that to the total capital cost and the result would be the investment used to calculate the rate base for each company.

Remember, they each had to get individual rates approved by the state commissions. So this is how they got the numbers they filed in those rate cases.

TT: Just to make this clear to the readers, you examined the equipment in the network, the inventory, and used formulas about how much traffic there was, and this was used in the creation of phone rates.

Mr. Smith: Yes. Rates were set through this process because after staff, the only real expense is the equipment you have and how it's being used. Remember, C&P was a utility and a monopoly and we were regulated for our profits by the state commissions --- This is called a rate-case.

TT: So tell me about the inventory.

Mr. Smith: At the time of Divestiture, we were required to split up a company which was attached like an octopus to all of its long distance and local phone service divisions. It was all one big happy family for almost 100 years and now it had to be parceled out.

Up to then it was only an accounting issue. If a call needed to be routed we didn’t ask who owned the equipment; we just sent it through.

However, starting in 1982, everything needed to be separated, so we started looking at our inventory records and literally splitting up the inventory. I remember counting cars in the car pool and deciding which ones would go to which state.

For network investment, people throughout the System were using the information in the TIRKS inventory system and splitting it up between companies. TIRKS was supposed to take the place of the old manual paper inventory everywhere in the Bell System.

New Jersey was behind in getting on TIRKS, which had been no big deal before, but now it was the only way to separate these assets in time, so everyone suddenly was worried about why NJ couldn’t move to TIRKS.

So I was asked to work with the NJ inventory team to see what was wrong. And it was obvious. The problem was that they couldn’t find about 30% of the inventory they had been listing manually, so they couldn’t get it loaded into the TIRKS system.

TT: Was this common and how do you know this was happening throughout the Bell System?

Mr. Smith: Well, I was new to all of this compared to the lifers who had been there for decades, so I was surprised, to say the least. But they weren’t. They had known there were problems and what they did was just make things up. In your recent materials you talk about "Undetailed investment" or "Unallocated Investment". These are all placeholders for items that couldn't be found. Now, I assume that sometime, somewhere some of this existed, but it certainly wasn't there when we had to transfer the records.

So they weren’t acting like there was anything strange at all about this, just they didn’t know how to keep anyone from finding out. When it was a manual inventory they had all sorts of tricks to bury it. And they told war stories about how it had been done before, and how it had gotten by the auditors. But now that there was this computerized system, they didn’t know what to do.

TT" And the equipment was important because…?

Mr. Smith: Well, if we admitted that we had 30% less inventory than we had said, we would have had to give a whopping refund. After all, the equipment was part of the 'rate-base'. The commission had been basing rates on those numbers for years. But we all knew that we couldn’t give a refund. If I wanted to keep my job, I couldn't go back to my boss and say we can't find the equipment, we need to give millions in refunds. That was not acceptable. We would all lose our jobs.

TT: Did the higher-ups know about this?

Mr. Smith: They were careful to maintain plausible deniability throughout the chain of command. For example, my boss knew there were problems that could trigger refunds - and he made it clear that if I wanted to keep my job that this must not be allowed to happen. However, he never wanted to know any specifics of how we "fixed" the problem. It was understood throughout the company since everyone in the management chain knew that refunds were never an acceptable option. With this model, nobody saw the whole picture, however, and it was easy to fool the internal auditors, who weren't set up to take on a conspiracy of this sort. It was a brilliant scheme, but obviously in a very twisted way.

TT: So what did you do?

Mr. Smith: As I said, I was still green, so I just wanted to see how to fix it. At one point, we decided that we should create fake "repeater-huts" -- meaning extensions of the network. But after doing the math --- how many repeater-huts equals 30% of the missing equipment ---- it was obvious we would be swimming in these things and it would be obvious that we had thousands more of these things than anyone else. In the end, we just made it fit with various items that didn't really exist anymore.

TT: Does this missing equipment come into play with the current inventory?

Mr. Smith: The current inventory is based on the same starting points, so it must have some relationship. As you pointed out, when the FCC did its audit it found, what, $19 billion in missing equipment from the Bell companies -- and that was only 1/4 of the potential audits. Why do you think there's so much "undetailed Investment". So that if anyone checked, there'd still be a line entry, still account as inventory, until someone actually checked. And no one has to date.

TT: And what do think about the missing equipment impact on phone rates?

Mr. Smith: Well, everyone knew that the rate-setting process was just a game, us against them. And they made up their own numbers as well. So everyone knew that none of the numbers were real, and it was just who could tell the best story who would win. However, since our job was to not give refunds, we were more motivated and we had the raw data.

Don't you think prices would have dropped if they ever really knew how much equipment was in the networks? With the costs of the networks going down, including staff cuts and aging technology, prices should continue to decline. Instead they keep going up.

TT: Mr. Smith, first, I thought you'd like to see this, which dovetails to your own "repeater huts". According to the New York Public Service Commission's Audit of New York Telephone, the company, from 1971-1980 went from having 9,500 "unallocated and undetailed" items, amounting to $16 million to 34,300 items, accounting for $305 million dollars during the 1981-1990 timeframe, the years you were working at Bell.

Mr. Smith: That certainly shows how the Bell staff was able to add items to the accounting records without any detail. A jump of approximately $290 million dollars and an additional 25,000 undetailed pieces of equipment in just one state during the time of Divestiture clearly shows that the staffers had to be creative in making this all fit, and they used the placeholders of undetailed and unallocated costs as the simplest way.

TT: And I would like to call your attention to the fact that in some of the FCC audits, such as the audit of BellSouth, the FCC found 29% of the items were missing or unverifiable.

"In the case of BellSouth, 29% of the information required was missing or couldn't be found or had serious errors."

Meanwhile, the Southwestern Bell Audit found 113,700 records containing $1.1 billion dollars in Undetailed or Unallocated costs.

"We found 46,900 such line-items representing $923.8 million in Undetailed Investment. Southwestern Bell has not shown any specific physical plant or provided sufficient or convincing cost support data relating to any of the line-items for Undetailed Investment. We also found more than 66,800 line-items representing $157.4 million in Unallocated Other Costs."

Mr. Smith: As I said, the Bell company was originally one big family and so we all used the same methods of record keeping.

TT: I would also like to call your attention to this quote that demonstrates that the equipment in the network in 1992 was the basis for the rates in New York even today, because the current prices used 1992 as a starting point.

"New York Telephone also states that the findings have no relevance to rate setting under the current Alternate Regulation (PRP). Under the PRP, cost precision contained in the company's accounting records became less important when determining a reasonable level of customer rates. Therefore, the company claims that even if it was found that New York Telephone overvalued its plant, customers are not harmed because customer's rates were not based on accounting costs. However, the PRP forecast was the 1992 calendar year accounting records. To the extent that the 1992 costs were overstated, customer rates that were based on those costs are overstated." Source: NY PSC Audit of New York Tel.)

Mr. Smith: You should remember that the depreciation rates of most equipment was 30 years, meaning that the company had this equipment on the books and active and was writing it off over a 30 year period. The copper wiring in the streets, for example, is still being used that was laid in the 1920's. Therefore, since the prices of ALL services was based on the equipment in the network, then equipment or missing equipment for that matter, from the 1970's, 1980s and 1990's are all relevant to today's pricing structure of rates. This material is starting point for every state’s price regime, whether it’s under ‘rate-of return’, which examined profits, or "Alternate Regulations", sometimes called "Price caps" or Incentive regulation, that examines the price of the service, but not the profits. The New York Commission staff got it right.

TT: Why are you telling us this now?

Mr. Smith: To clear my conscience a bit. I was just a kid and didn't really understand all of the dynamics. My take on the equipment was we inherited bad books and so we would just take the bad stuff off the books. I only later thought about how much these companies really got away with, And it makes me mad to think about what I was forced to do. Time to "Tell The Truth" I guess. I only wished some of my colleagues would step forward and tell their own tales. Believe me there's a lot more to tell.

FIN:

"Watergate was a gnat compared to the Bell System".

From suicide note, T.O. Gravitt, former president of Southwestern Bell Texas, 1977.