Former Bell Staffer Reveals Inventory
Scandal Extends To the Birth of the Baby Bells: Two Decades
NOTE: Teletruth has released excerpts from
Verizons 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
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
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
Overall, the FCCs 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
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
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.
Wed 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 didnt 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
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
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 couldnt 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 couldnt find about 30% of the inventory they
had been listing manually, so they couldnt 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 werent. 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 werent acting like there was
anything strange at all about this, just they didnt 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
didnt know what to do.
TT" And the equipment was important
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 couldnt 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
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
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
"In the case of BellSouth, 29% of
the information required was missing or couldn't be found or had
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 states price regime, whether its 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.
"Watergate was a gnat compared to the Bell System".
From suicide note, T.O. Gravitt, former president
of Southwestern Bell Texas, 1977.