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Arkansas Public Service Commission General Staff
Federal Communications Commission
Missouri Public Service Commission General Staff
Nebraska Public Service Commission
Ohio Public Utility Commission
Pennsylvania Public Utility Commission

December 1997

Report Responsibility

This report is the product of a joint audit team comprised of auditors from regulatory commissions of the States of Arkansas, Missouri, Nebraska, Ohio, and Pennsylvania, and auditors from the FCC. The opinions, conclusions, and recommendations stated in this report are those of either the audit team or individuals who comprise the audit team. The statements contained herein are not necessarily the opinions, conclusions, and recommendations of the individual regulatory commissions whose auditors participated in the audit. This report has not been presented to the individual regulatory commissions for adoption of content. Authorization for the auditors to participate in the joint audit and authorization for publication of this report do not constitute an express or implied decision by the individual regulatory commissions on any of the matters or issues addressed by the audit or raised by this report. Among other things, this report does not constitute a regulatory commission ratemaking determination or a regulatory commission finding of non-compliance with statute or rules and regulations. However, a regulatory commission may choose to use this report to evaluate the GTOCs' compliance with the requirements of Part 32 and to identify areas where additional audit work and further action may be needed.

Introduction

In November 1994 the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution calling for joint Federal-State audits of the GTE Corporation's Telephone Operating Companies (GTOCs). The FCC invited the 28 state regulatory commissions in which the GTOCs operate to join its audit of the basic property records (BPR) of GTE California, GTE Hawaii and GTE Texas. Five state regulatory commissions agreed to join in the audit: Arkansas, Missouri, Nebraska, Ohio, and Pennsylvania.

The primary objective of this joint Federal-State audit was to determine whether the GTOCs maintained their BPR in compliance with Part 32.⁽¹⁾ To evaluate the GTOCs' conformity to the requirements of Part 32, the audit involved two phases: (1) physical verification of the plant investment recorded in the BPR, and (2) evaluation of the accuracy of the 1994 plant investment additions, retirements, and transfers.

The audit consisted of reviewing, documenting, and testing accounting information and procedures utilized by the GTOCs to maintain their BPR. The audit team limited its review to the three plant accounts that contained the largest investment in the GTOCs' telephone plant in 1994. They were Account 2212, Digital Switching Equipment; Account 2232, Circuit Equipment; and Account 2423, Buried Cable.⁽²⁾

The joint audit team performed a physical verification of selected telephone plant in eight states. The auditors also compared financial and property records to determine whether they were equal in the aggregate. Finally, the team reviewed the GTOCs' BPR procedures for recording additions, retirements, and transfers for accuracy and internal controls contained therein.

GTE is in the process of bar coding its central office assets. The process consists of two major steps. First, a physical inventory is performed, and a bar code is affixed to each asset. Second, the BPR are reconciled to the physical inventory, the bar codes are recorded on the BPR, and any necessary adjustments are made to the BPR. For example, according to GTE, the GTE California Inc. BPR were reduced by $289.5 million as a result of the bar coding process.

During the period the audit field work was performed, the bar coding project was in the early stages. Only twenty-two of the fifty-two central offices reviewed by the auditors had bar codes affixed to each asset. Moreover, only five of the fifty-two BPR listings provided by GTE for physical verification of the central office assets listed bar codes for the assets.

Verification of Physical Assets

The objective of the physical verification phase of the audit was to confirm the physical existence of selected assets listed in the GTOCs' BPR. To verify selected assets, the auditors chose assets listed in the BPR and reviewed all data concerning these assets to determine whether the BPR contained sufficient information to comply with Part 32 which requires a specific description and location for each asset, so it can be readily spot-checked for proof of physical existence.⁽³⁾ GTE recorded the location of its central office assets in its BPR by assigning each asset a bay, shelf and position address within each central office. GTE's method of identifying asset location was used by the auditors to evaluate GTE's BPR procedures. To be designated as verifiable, the BPR had to contain an accurate description, location, placement date, and cost of the asset. If any of these elements necessary to locate a specific asset were inaccurate or missing, the asset was designated as non-compliant and unverifiable. If the asset could not be located in the field, it was designated as missing.

The audit team could not verify assets that did not have an accurate description and location. For example, if a central office asset was located in the correct bay, shelf, and position but bore an incorrect part number, it was designated as non-compliant and unverifiable. This designation was given because the team did not have the ability to verify whether a former part had been retired and replaced with a new part or simply relocated within the central office. Likewise, if an asset was not located in the bay, shelf, and position designated in the BPR, it was noted as non-compliant and unverifiable because the asset could not be located with certainty.

The audit team defined "description" as (1) an accurate part number in the column headed "part number" and (2) a brief, accurate, and readily understandable description of the asset. For central office assets, the audit team's standard for location was an accurate bay, shelf, and position number for each selected asset within a specific central office. For outside plant (OSP) assets, the audit team defined location as an accurate map depicting the actual location and type of facilities within a specific exchange area. Details of construction were not tested in this sample. The year of placement and original cost could not be confirmed directly through physical inspection. Records with a placement year designation and accompanying cost were deemed to be compliant.

In the physical verification phase of the audit, 2,286 items were reviewed. Based upon book values, 21.7% of the sampled items was missing and another 14.6% was unverifiable. Thus, 36.3% of the book value was questionable. Of the 2,286 line items included in the physical verification phase of the audit, 693 (30.3%) of the line items were out of compliance with the requirements of Part 32.

Evaluation of BPR Procedures

The audit team performed a review of the GTOCs' BPR procedures, as well as a review of the internal controls embedded in those procedures, to determine whether they were adequate to ensure conformance with Part 32. We concluded that the procedures were written to adequately ensure conformance with Part 32. However, these procedures were not always followed. For instance, 43 of the sample items, valued at $363,637, that were designated as missing had been retired from service but were still listed in the BPR and, presumably, were still on the books of account.

Verification of Plant Additions, Retirements, and Transfers

The joint audit team sampled plant additions, retirements, and transfers reported in the GTOCs' December, 1994 ARMIS⁽⁴⁾ 43-02 Reports to determine whether the 1994 transactions were accurately booked. The audit team attempted to trace a sample of each type of transaction from open work orders to source documents that supported the costs reported in the BPR.

The auditors selected plant addition work order line items representing direct labor, labor overheads, direct materials issued from inventory, materials purchased from outside vendors, and material overheads. Audit team members also reviewed retirement work order line items and transfer work order line items. Supporting documents reviewed by the audit team included time sheets, hourly wage schedules, purchase orders, payment authorization forms, invoices, vouchers, canceled checks, retirement detail listings, and other accounting records.

The joint audit team reviewed 124 plant additions, 44 retirements, and 67 transfers valued at $2,765,554, $1,471,406, and $3,179,825, respectively.

Summary of Findings

The joint Federal-State audit of the GTOCs' BPR produced two major findings. First, the review of sample items from the three accounts showed that 21.7 percent of the investment was missing and another 14.6 percent of the investment was unverifiable. Second, the auditors were unable to trace the costs of retirements from the open work order detail to placing work order costs. If the problems identified in the sample persist throughout the GTOCs' BPR, significant action should be taken by GTE to bring its BPR into compliance with Part 32.

We acknowledge that GTE is taking steps that may lead to a more full compliance with the regulatory commissions' recordkeeping requirements.

Footnotes

1. ¹ 47 C.F.R. Part 32, Uniform System of Accounts for Telecommunications Companies

2. ² Account 2422, underground cable, was reviewed in California instead of Account 2423 because underground cable contained more investment in California than buried cable. All future references to Account 2423 will encompass this difference.

3. ³ 47 C.F.R. § 32.2000(f)(5)

4. Automated Reporting Management Information System (ARMIS)

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