NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) The BellSouth Telephone ) AAD No. 93-148 Operating Companies ) ) CONSENT DECREE ORDER Adopted: October 15, 1996 Released: November 1, 1996 By the Commission: 1. At the direction of the Commission, the National Exchange Carrier Association, Inc. ("NECA") hired Ernst and Young to conduct an independent audit of carrier- reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. On December 9, 1991, NECA submitted to the Commission Ernst and Young's report ("Adjustments Report"). 2. The independent auditor reported numerous apparent violations of the Commission's rules committed by the Bell Operating Companies, including BellSouth Telecommunications, Inc. ("BellSouth"). These apparent violations generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 3. On March 3, 1995, the Commission released an Order to Show Cause directing BellSouth to show cause why the Commission should not: (1) issue a Notice of Apparent Liability for Forfeiture for apparent violation of Section 220(d) of the Communications Act of 1934, as amended; (2) require BellSouth to adjust its price cap indexes; and (3) require BellSouth to improve its internal processes to bring them into compliance with Commission rules and orders. 4. On May 2, 1995, BellSouth responded to the Commission's Order to Show Cause and contested and denied each of the NECA audit report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on BellSouth's response. Only MCI Telecommunications Corporation filed comments, and BellSouth replied on September 11, 1995. 5. This Commission and BellSouth have reached an agreement with respect to these audit findings. The terms and conditions of this agreement are contained in the attached Consent Decree. 6. We have reviewed the terms of the Consent Decree and evaluated the circumstances of the case. We believe the public interest would be served by approving the Consent Decree, the terms of which are incorporated herein by reference. 7. Accordingly, IT IS ORDERED, pursuant to Sections 4(i) and 4(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i) and (j), that the Consent Decree, incorporated by reference herein and attached to this Order, IS HEREBY ADOPTED, and the Secretary shall sign such Consent Decree on behalf of the Commission. 8. IT IS FURTHER ORDERED that this Order is effective upon execution of the Consent Decree by all parties to the Agreement. 9. IT IS FURTHER ORDERED that proceedings under the March 3, 1995 Order to Show Cause, 10 FCC Rcd 5637, ARE HEREBY TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) The BellSouth Telephone )AAD No. 93-148 Operating Companies) ) CONSENT DECREE 10. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and BellSouth Telecommunications, Inc. ("BellSouth") (collectively referred to herein as the "Parties"). 11. The common line revenue pool is administered by the National Exchange Carrier Association, Inc. ("NECA") and allows incumbent local exchange carriers ("LECs") to participate in a tariff filed by NECA that establishes uniform access rates on a nation-wide basis for all participants. Monthly distributions from the pool are computed using monthly revenue, expense and investment figures reported by the participating LECs. Initially the figures are only estimates, but in later months the incumbent LECs adjust them to actual monthly figures. At the direction of the Commission, NECA hired Ernst and Young to conduct an independent audit of carrier-reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. The Ernst and Young audit report ("Adjustments Report") included numerous audit findings against the Bell Operating Companies, including BellSouth, concerning apparent rule violations and misconduct. These findings generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 12. On March 3, 1995, the Commission released an Order to Show Cause directing BellSouth to respond to certain of the findings in the Adjustments Report. On May 2, 1995, BellSouth responded to the Commission's Order to Show Cause and contested and denied each of the Adjustments Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on BellSouth's response. Only MCI Communications Corporation filed comments, and BellSouth replied on September 11, 1995. The positions of the parties to this consent decree are as follows: (a) The Commission found that BellSouth's actions appear to be inconsistent with its statutory obligation to maintain its accounts, records, and memoranda as prescribed by the Commission. Generally, the Commission found that BellSouth had apparently misstated or miscalculated interstate costs and revenues from January 1988 through March 1989. The Commission's specific findings included: (i) The Commission found that BellSouth's calculation of Cash Working Capital apparently violated Commission rules, improperly using average daily cash balances instead of required minimum bank balances. (ii) The Commission found apparent violations of its rules because BellSouth failed to separate correctly its investment in information origination/termination equipment costs in apparent violation of Part 36 of the Commission's rules. (iii) The Commission found a number of other apparent violations of its rules, including BellSouth's failure to provide adequate documentation to support numerous revenue and cost adjustments, and its improper inclusion of presubscription revenues for the predesignation of interexchange carriers in Account 5081, End user revenue. The independent auditor also noted that a BellSouth operating company incorrectly reported an accrual adjustment to NECA resulting in overstatement of common line revenues which would apparently violate Section 69.605 of our rules. (b) BellSouth responded to the Order to Show Cause contesting liability on all counts, and asserting that no price cap index adjustment was appropriate or lawful. BellSouth contests all findings in the Adjustments Report and the Commission's Order to Show Cause, on the following grounds: (i) Due to its efficient cash management practices, its average daily cash balance was, in fact, the minimum bank balance that BellSouth could maintain and still operate its business. BellSouth also contends that its average daily cash balance represented investor supplied funds that were used and useful in the operation of its business, and that BellSouth was legally entitled to include such amounts in its rate base. BellSouth also argues that it had followed a uniform practice of including its average daily cash balance in its rate base since 1977. (ii) BellSouth used direct assignment in good faith and in reliance on the Commission's stated policy of favoring direct assignment whenever possible. BellSouth argues that the information origination/termination equipment in question was directly associated with the provision of special access service, and direct assignment represented a more cost-causative approach than allocation of a portion of these costs to common line. (iii) During the transition from Part 67 to Part 36 separations rules, an input error occurred that affected the separations factors for cable and wire facilities in the states of Alabama, Louisiana and Mississippi. As a result, the interstate revenue requirement was overstated by approximately $1 million and the intrastate revenue requirement was understated by the same amount. BellSouth contends that the impact of the error ceased with the introduction of a new basic factor for these three states on July 1, 1990 and that the error did not affect BellSouth's initial price cap indexes. (iv) The independent auditor identified 22 instances in which it concluded that BellSouth provided inadequate documentation and, based on this, the Order to Show Cause tentatively found that BellSouth failed to maintain adequate controls to comply with Part 32. BellSouth states that the independent auditor reviewed over 3,000 adjustments to the common line pool. BellSouth also states that there was no suggestion by the auditor that the entries in question were erroneous: these were documentation issues only and the items cited as documentation errors were extremely minor and in many cases BellSouth has no business reason to maintain formal documentation for the particular types of transactions in question. (v) A human error occurred in which a $169,000 accrual adjustment was reported with the wrong sign, resulting in BellSouth overstating common line revenue in September, 1988 by $338,000. BellSouth therefore under-recovered from the common line pool in this amount. The Order to Show Cause cites this error as an example of allegedly deficient internal controls. BellSouth asserts that this was a case of simple human error that did not recur and had no impact on BellSouth's initial price cap indexes. (vi) BellSouth states that the rules for the treatment of presubscription revenues for the predesignation of interexchange carriers were never clear. While BellSouth now agrees to accept the interpretation of Ernst and Young that these revenues were more properly associated with switching and therefore should be excluded from common line pool reporting, BellSouth could find no authoritative interpretation from the period under review that specified the proper treatment of these revenues. BellSouth asserts that the rules were ambiguous and that BellSouth made a good faith interpretation of the rules to determine the proper treatment of these revenues. In any event, presubscription revenues are excluded from price caps. 13. The Commission and BellSouth agree that the expeditious resolution of issues raised by the Adjustments Report and the Commission's Order to Show Cause in accordance with the terms of this Consent Decree is in the public interest. 14. Accordingly, and in consideration of the agreement of the Commission and BellSouth to conclude action on the Order to Show Cause on the terms set forth in this Consent Decree, BellSouth agrees to act as specified below: (a) BellSouth agrees to correct any past accounting and recordkeeping deficiencies that might have caused the apparent violations set forth in paragraph 3 of this Consent Decree; (b) BellSouth agrees to establish procedures to prevent the specific apparent deficiencies from recurring in the future; (c) BellSouth agrees not to include revenues from customers for the predesignation of their primary interexchange carrier in Account 5081, and shall instead include these revenues in Account 5082, in compliance with the Commission's rules; (d) BellSouth agrees to conduct an independent audit of its internal accounting controls as specified in Attachment A of this Consent Decree; 15. In the event BellSouth fails to comply with the requirements set forth in paragraph 5 and Attachment A of this Consent Decree, the Commission reserves the right to pursue legal action against BellSouth. If BellSouth complies with the terms set forth in paragraph 5 and Attachment A of this Consent Decree, then the accounting treatments, procedures and documentation adopted in compliance with paragraph 5 and Attachment A shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its rights under law to change accounting requirements prospectively and retroactively as long as no penalty attaches to such retroactive application. Likewise, BellSouth shall be authorized to make changes to its accounting treatments, procedures and documentation to implement or reflect changes in the law or rules or waivers of the Commission's rules, and shall not thereby be in violation of any part of this Consent Decree. 16. In light of BellSouth's covenants and representations contained in paragraph 5 and Attachment A of this Consent Decree, and in express reliance thereon, the Commission has issued a final order formally authorizing the Secretary to execute this Consent Decree ("Consent Decree Order") without change, addition or modification and without a finding of wrongdoing, violations or liability by BellSouth and further agrees not to begin, on the motion of the Commission or its staff, any proceeding formal or informal, concerning matters that were the subject of the Adjustments Report. Nothing herein, however, shall preclude the Commission from using the information underlying the findings and observations in the Adjustments Report for other lawful regulatory purposes provided that BellSouth shall have all opportunities afforded by law to contest that use and that information. 17. BellSouth admits the jurisdiction of the Commission to adopt this Consent Decree. 18. BellSouth waives any rights it may have to judicial review, appeal or rights otherwise to challenge or contest the validity of the Consent Decree Order, provided the Commission adopts this Consent Decree without change, addition or modification. 19. The Parties agree not to engage in conduct inconsistent with the terms of this Consent Decree. The Parties may comment publicly, however, on the nature of the Consent Decree, and the merits of their respective positions, after it has been adopted by the Commission. 20. It is understood that BellSouth's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by BellSouth of wrongdoing, violations or of any inconsistency between its position, on the one hand, and, on the other hand, (i) the Communications Act of 1934, as amended, and (ii) the rules and policies of the Commission. As a result, BellSouth shall not be precluded or estopped from litigating de novo any and all of the issues subject to this Consent Decree in any forum, except as provided herein. 21. The Parties agree that this Consent Decree and the Consent Decree Order may not be used in any fashion by either of the Parties to this Consent Decree in any legal proceeding except as set forth in this Consent Decree. 22. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 5637, and the Adjustments Report without a finding of wrongdoing, violations or liability on the part of BellSouth. The Parties agree that the effectiveness of this Consent Decree is expressly contingent upon issuance of the Consent Decree Order described herein, and compliance by BellSouth with the terms of this Consent Decree. If this Consent Decree is not signed by BellSouth and the Commission, or is otherwise rendered invalid by any court of competent jurisdiction, it shall become null and void and may not become part of the record in this proceeding. 23. If the Commission brings an action in any court of competent jurisdiction to enforce the terms of the Consent Decree order or the Consent Decree, BellSouth agrees that it will not contest the validity of either the Consent Decree Order or the Consent Decree, will waive any statutory right to contest the validity of the Consent Decree Order or this Consent Decree through a trial de novo, and will consent to a judgment incorporating the terms of this Consent Decree without change, addition or modification provided, however, that the Commission has complied with all of its obligations under the Consent Decree. 24. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of October, 1996 BELLSOUTH TELECOMMUNICATIONS, INC. By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of October, 1996 Attachment A Independent Review of BellSouth Internal Controls BellSouth will engage an independent auditing firm to review the adequacy of internal controls associated with the automated and manual input processes related to the company's Part 36 separations system. The scope of this independent review will be the following three areas: 1. Review of existing internal processes that enable detection and correction of accounting errors on a timely basis; 2. Review of automated systems that have served to eliminate or reduce the potential for clerical errors and that provide an appropriate trail for data verification; and 3. Review of controls and processes for appropriate implementation of the Commission's rules and related interpretations. The independent review will be completed within one year of the release of the Commission's Consent Decree Order. Upon completion of the review, BellSouth will submit to the Commission an implementation plan for each recommendation which the independent auditing firm determines has the potential for material impact on the results of the company's cost allocations. All aspects of the implementation plan will be instituted no later than 180 days after the independent review is completed.