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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Federal Communications Commission Washington, D.C. 20554 In reply refer to: RAO Letter 12 Released: July 18, 1988 Responsible Accounting Officers Re: Attestation Audits pursuant to the Joint Cost Order and Joint Cost Reconsideration Order (CC Docket 86-111) As originally issued on April 11, 1988, RAO Letter No. 12 noted that in prescribing rules for the separation of costs of regulated telephone services from costs of nonregulated activities, the Federal Communications Commission had concluded independent audits would be an important aid in implementing its commitment to monitor compliance with cost allocation requirements. It also noted the Commission's conclusion that an appropriate level of assurance would be an examination leading to a positive opinion. Further, it noted the Commission's requirements that each operating company have an independent audit performed annually and that a positive opinion audit report be submitted each year attesting to the accuracy of the carrier's cost allocations as reported to the Commission. RAO Letter No. 12 responded to questions that had been raised regarding the Commission reports to which the auditors' attestation reports would apply, how and when they should be filed, and what the attestation would cover. On May 12, 1988, the United States Telephone Association (USTA) requested reconsideration of several phrases in one of the seven items we identified among the minimum requirements for acceptable attestation letters. The major issue raised in USTA's request was whether the independent auditors are responsible for (a) ascertaining that the accounting underlying the reports is consistent with the Commission's joint cost rules generally, or (b) consistent with the FCC approved cost manuals. USTA cited paragraph 253 of the Joint Cost Order as evidence of the Commission's intention to have the attestation apply to whether carrier accounting was consistent with the FCC approved manuals, as opposed to whether the manuals reflected the Commission's cost allocation rules. Further, USTA cited paragraph 186 of the Order on Reconsideration as evidence that the Commission did not want auditors to duplicate the manual review process the Commission would be performing. Specifically, USTA requests that we delete several phrases from the seventh requirement on page 2 of RAO Letter No. 12, as originally issued. We have enclosed these phrases in brackets and repeated the seventh requirement in its entirety below: 7. Provide an opinion whether or not the methodologies in place are in conformance with the cost allocation manual approved by the Federal Communications Commission, [are consistent with the Commission's rules for the assignment and allocation of cost between regulated and nonregulated activities and are consistent with the accounting for transactions with affiliates, including the valuation of assets and services in those transactions.] The opinion should also state whether or not the report results are an accurate application of those methodologies. It was always the intention in RAO Letter No. 12, to have the independent auditors verify compliance with cost manuals the Commission has approved. In RAO Letter No. 12, as originally issued, reference to the Commission's Docket 86-111 rules was intended to emphasize that we wanted independent auditors to be responsible for transactions with affiliates, as well as the assignment and allocation of costs between regulated and nonregulated activities conducted within the same corporate entity. Essentially the same results can be accomplished if, during the process of reviewing the cost manuals, we assure ourselves that affiliate transactions are adequately covered and the accounting methodology described is consistent with the Commission's rules for affiliate transactions. We believe our reviews of the cost manuals to date have accomplished this result and we plan to continue this process. As we see it, this leaves as the next logical step, verification that the actual practice matches the description of the accounting methodology in the cost manual. The auditors' reports should accompany the Report of Annual Revenue Requirement and Joint Cost Data, identified as Appendix C of the ARMIS Order (CC Docket 86-182, 2 FCC Rcd 5770 (1987), aggregated to the operating company level; and should attest to the accuracy of cost allocations reported therein, including the effects of transactions with affiliates. Both the auditors' reports and the Report of Annual Revenue Requirement and Joint Cost Data are to be filed April 1 of each year. In order to facilitate the submission of the attestations by the independent auditors, we have prepared a sample attestation letter designed to provide the assurances the FCC is seeking. The sample letter is intended as a guide and will encompass the requirements of the Joint Cost Order and the Joint Cost Reconsideration Order. The attestation letters will undoubtedly vary according to the circumstances, and independent auditors should not view themselves as bound by the literal format of the sample letter which we have amended pursuant to the discussion in this letter. At a minimum the letter should: 1. Identify the operating company entity; 2. Stipulate that the report is prepared for the Federal Communications Commission; 3. Identify the period covered by the report; 4. Stipulate that the report was prepared pursuant to Federal Communications Commission rules for the assignment and allocation of costs between regulated and nonregulated activities and for accounting for transactions with affiliates, including the valuation of assets and services in those transactions; 5. State that the examination was made in accordance with standards established by the American Institute of Certified Public Accountants and included such tests of the underlying records and such other procedures as were considered necessary under the circumstances; 6. Identify the scope and the extent of examination, including any limitations imposed on the scope of work or extent of the examination by the carrier, its affiliates, or any other circumstances (References should be made here to attached work plans); 7. Provide an opinion of whether the methodologies in place are in conformity with the cost manual approved by the Federal Communications Commission. The opinion should also state whether the reported results are an accurate application of those methodologies. This Responsible Accounting Officer letter supersedes RAO Letter No. 12, as issued April 11, 1988 and is issued under Section 0.291 of the Commission's rules. Applications for review under Section 1.115 of the Commission's rules must be filed within 30 days from the release date indicated above (See Section 1.4(b)(4) of the Commission's rules). Sincerely, Kenneth P. Moran Chief, Accounting and Audits Division Attachment ATTACHMENT To: Secretary Federal Communications Commission We have examined the accompanying Report of Annual Revenue Requirement and Joint Cost Data for (Carrier Name), which was prepared for the period ended (Date), pursuant to Federal Communications Commission rules for assignment and allocation of costs between regulated and nonregulated activities and for accounting for transactions with affiliates (47 CFR Sections 32.14, 32.23, and 32.27; and Section 64.901). Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and included such tests of the underlying records and such other procedures as we considered necessary under the circumstances [except for ...]. These tests and procedures included ... [statement of scope and the extent of examination and any limitations on either the scope or the extent of the examination]. [Reference should be made to attached work plans.] In our opinion, the methodologies in place are consistent with the cost manual approved by the Federal Communications Commission [except for ...]. The results contained in the accompanying report showing the separation of costs between regulated and nonregulated activities of (Carrier Name) are an accurate application of those methodologies. Signature