FCC Might Ask Telcos to Recertify Revenues

Former WorldCom Inc. executives were led to court in handcuffs last week charged with conspiring to commit securities fraud.

As former WorldCom Inc. executives were led to court in handcuffs last week charged with conspiring to commit securities fraud, the Federal Communications Commission was combing through its own records to determine whether it should ask some telecommunications carriers to recertify their accounting data.

According to FCC sources who asked not to be named, the agency plans to send recertification requests as early as this week to carriers that have already revealed questionable accounting practices. The most likely targets are Qwest Communications International Inc. and the bankrupt WorldCom, but commission officials would not confirm plans to contact those companies specifically.

Cable TV operator Adelphia Communications Corp., which saw three founders and two other executives arrested late last month for alleged securities fraud, may also be a target of the probe, an FCC source said.

Both Qwest and WorldCom have had to restate earnings recently because of accounting irregularities or errors, and both are under continued investigation by the Securities and Exchange Commission.

In a criminal complaint filed last week against Scott Sullivan, former WorldCom chief financial officer, and David Myers, former controller, the Department of Justice charged the two with falsifying financial records. Specifically, the complaint charges Sullivan with devising a scheme to hide increasing expenses by transferring line costs—primarily the costs of gaining access to portions of other carriers networks—to capital expenditures.

FCC Chairman Michael Powell, called to Capitol Hill last week to testify before a panel of senators charged with overseeing communications, said the widespread financial debacle in the industry resulted in part from pressure on carriers to show continued revenue growth despite the fundamental problems of "staggering amounts of debt" and capacity that outpaced demand.

"Traffic growth did not necessarily lead to concomitant growth in revenues," Powell said, adding that some carriers resorted to fraud and deception to mask core problems.

Powell told Congress that he remains concerned that the culture of deception fueled by earnings pressures might have "reproduced itself" at other companies, and he has initiated an effort to re-examine the data of the companies he regulates.

Telecom carriers file financial data with the FCC regularly for several purposes. Rate-regulated Incumbent Local Exchange Carriers—of which the Regional Bell Operating Companies are the largest—file revenue reports so the FCC can determine whether the rates charged for local telephone service are just and reasonable. Long-distance carriers also file revenue information, which is used to determine their obligations to support universal telephone service across the country.

Powells recertification initiative is widely seen as an effort to assuage lawmakers jitters that the telecommunications industry is at risk of collapse and to demonstrate that his agency is in control of the situation.

Asked what the government can do to prevent major networks from stranding users, the FCC chairman said that telephone carriers are prohibited from discontinuing service without 30 days notice to customers and regulators. However, Powell also told Congress that he would like carriers to notify the commission of difficulties earlier, which was widely interpreted as a plea to avoid being caught off-guard.

"If this [telecommunications meltdown] continues, particularly if there are service interruptions, [it will] radiate enormous damage to the American economy," said Sen. Ron Wyden, D-Ore., adding that recent difficulties call for a new regulatory approach at the FCC.

Powell asked the Senate to bolster his authority to prevent unanticipated service interruptions by clarifying that the authority extends unequivocally to include less conventional telecommunications providers, such as Internet backbone providers and cable companies, as well as voice service providers.