**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 99-253         |
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| Comprehensive Review of the      | ) |                              |
| Accounting Requirements and      | * |                              |
| ARMIS Reporting Requirements for | * |                              |
| Incumbent Local Exchange         |   |                              |
| Carriers: Phase I                | * |                              |
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**ORDER**

**Adopted: March 23, 2006 Released: March 23, 2006**

By the Associate Chief, Wireline Competition Bureau:

**I. INTRODUCTION**

1.  In this Order, we adopt a limited, one-time waiver of section 64.904
    of the Commission's rules to permit all carriers that are subject to
    the independent audit requirement to file, on April 1, 2006,[^1] two
    annual audit reports covering each of the prior two years instead of
    one audit report covering both of the prior two years, as currently
    required.[^2] This limited waiver provides carriers with immediate
    and timely relief while the Commission considers a letter by AT&T
    Inc. (AT&T) and BellSouth Corporation (BellSouth) (jointly, the
    Companies) requesting that the Commission adopt a non-substantive
    amendment to section 64.904 to provide carriers with the same relief
    on a permanent basis.[^3]

**II. BACKGROUND**

2.  Section 64.904 of the Commission's rules directs each carrier that
    is required to file a cost allocation manual to submit, every two
    years, an audit report covering the prior two years.[^4] The
    Commission adopted the biennial audit requirement in the *Phase I
    Accounting Reform Order*.[^5] Previously, carriers were required to
    submit an audit report each year.[^6] The Commission determined that
    the biennial audit requirement would be less costly and burdensome
    to carriers and would not compromise the Commission's ability to
    meet its statutory and policymaking responsibilities.[^7]

3.  The Companies, however, inform the Commission that it can be more
    costly for carriers to file one audit report covering the prior two
    years than to file two annual audit reports covering each of the
    prior two years.[^8] For example, they note that section 64.904(c)
    requires auditors to provide a positive opinion on the carrier's
    "annual report required by section 43.21(e)(2)."[^9] They claim that
    this language effectively calls for two financial audits instead of
    one biennial financial audit because an auditor must separately
    audit each annual report in order to provide a positive opinion on
    each annual report.[^10] Moreover, although carriers' annual reports
    already are audited each year, the Companies claim that an auditor
    cannot simply rely on the prior year's audit when preparing the
    biennial audit report.[^11] Instead, under the applicable audit
    standards, the auditor must repeat some, if not all, of the tasks
    performed for the prior year's audit, as well as audit the second
    year's annual report.[^12]

4.  The Companies further assert that undergoing two financial audits at
    the same time \-- an audit of the second year's annual report and a
    re-audit of the first year's annual report \-- is particularly
    burdensome.[^13] They note that there are several tasks associated
    with an audit, such as making annual adjusting and closing entries
    to the books of account, performing multiple runs of the cost
    allocation system, making ARMIS adjustments, and filing ARMIS
    reports.[^14] They argue that performing these tasks twice, and
    around the same time, requires "an inordinate amount of
    administrative effort and resources."[^15]

5.  The Companies state that allowing carriers to file two annual audit
    reports in a single filing at the end of two years would eliminate
    the extra work that is currently performed in the second year to
    produce the biennial audit report.[^16] The Companies further argue
    that this approach "provides the Commission with a functionally
    equivalent audit."[^17] Accordingly, the Companies ask the
    Commission to adopt a non-substantive amendment to section 64.904 to
    give carriers the option of filing a biennial audit report that
    consists of two annual audit reports covering each of the prior two
    years instead of one audit report covering both of the prior two
    years.[^18]

**III. DISCUSSION**

6.  The Commission may waive any provision of its rules on its own
    motion for good cause shown.[^19] A rule may be waived where the
    particular facts make strict compliance inconsistent with the public
    interest.[^20] In addition, the Commission may take into account
    considerations of hardship, equity, or more effective implementation
    of overall policy on an individual basis.[^21] In sum, waiver is
    appropriate if special circumstances warrant a deviation from the
    general rule, and such deviation would better serve the public
    interest than strict adherence to the general rule.[^22]

7.  Based on the information provided by the Companies, we conclude that
    there is good cause to adopt a limited, one-time waiver of section
    64.904 to permit carriers to file, on April 1, 2006, two annual
    audit reports covering each of the prior two years instead of one
    audit report covering both of the prior two years. As noted above,
    the Commission adopted the biennial audit requirement in order to
    reduce the burdens on carriers.[^23] The Companies inform us,
    however, that the biennial audit requirement has had the unintended
    effect of increasing burdens on at least some carriers.[^24]
    Accordingly, we find that these special circumstances warrant a
    deviation from the general rule. Moreover, a limited waiver will
    reduce the burdens associated with the independent audit requirement
    while providing the Commission with a functionally equivalent audit.
    Consequently, we find that a limited waiver will better serve the
    public interest than strict adherence to section 64.904. Finally, we
    note that the limited waiver adopted herein will provide carriers
    with immediate and timely relief for their April 1, 2006 filing,
    while allowing the Commission to consider the Companies' request for
    a non-substantive amendment to section 64.904 on a less
    time-sensitive basis.

**IV. ORDERING CLAUSE**

8.  Accordingly, IT IS ORDERED, pursuant to pursuant to sections 1,
    4(i), 5(c), and 220 of the Communications Act of 1934, as amended,
    47 U.S.C. §§ 151, 154(i), 155(c), 220, and sections 0.91, 0.291, and
    1.3 of the Commission's rules, 47 C.F.R. §§ 0.91, 0.291, 1.3, that
    section 64.904 of the Commission's rules IS WAIVED to the extent
    provided herein.

    FEDERAL COMMUNICATIONS COMMISSION

    Donald K. Stockdale, Jr.

    Associate Chief, Wireline Competition Bureau

[^1]: We note that the April 1 deadline falls on a Saturday this year.
    Accordingly, carriers must file the biennial audit report on or
    before April 3, 2006. 47 C.F.R. § 1.4(j). In this Order, however, we
    will continue to refer to the filing deadline as April 1.

[^2]: Carriers that do not take advantage of this waiver must file one
    audit report covering both of the prior two years, as currently
    required by section 64.904. *See* 47 C.F.R. § 64.904.

[^3]: Letter from Michelle A. Thomas, AT&T Services, Inc., and Mary L.
    Henze, BellSouth Corporation, to Thomas J. Navin, Federal
    Communications Commission (dated Jan. 18, 2006) (Letter).

[^4]: *See* 47 C.F.R. § 64.904. To fulfill this requirement, a carrier
    may elect to have an attest engagement performed by an independent
    auditor every two years, covering the prior two-year period, or to
    have a financial audit performed by an independent auditor every two
    years, covering the prior two-year period. *Id*. § 64.904(a); *see
    also Comprehensive Review of the Accounting Requirements and ARMIS
    Reporting Requirements for Incumbent Local Exchange Carriers: Phase
    I*, CC Docket No. 99-253, Report and Order, 15 FCC Rcd 8690,
    8698-99, para. 15 (2000) (*Phase I Accounting Reform Order*).

[^5]: *Phase I Accounting Reform Order*, 15 FCC Rcd at 8698-99, para.
    15.

[^6]: *Id.*

[^7]: *Id.*

[^8]: *See* Letter at 2-3.

[^9]: *Id*. at 2 (citing 47 C.F.R. § 64.904(c)).

[^10]: *Id.*

[^11]: *See id.*

[^12]: *Id.* For example, the Companies note that the auditor must
    review the company's adjusting and closing entries to the books of
    account, as well as its ARMIS adjustments and reports. *Id.* at n.8.

[^13]: *Id.* at 2-3.

[^14]: *Id.*

[^15]: *Id.*

[^16]: *Id.*

[^17]: *Id.* at 1.

[^18]: *Id.*

[^19]: 47 C.F.R. § 1.3.

[^20]: *Northeast Cellular Telephone Co. v. FCC*, 897 F.2d 1164, 1166
    (D.C. Cir. 1990) (*Northeast Cellular*).

[^21]: *WAIT Radio v. FCC*, 418 F.2d 1153, 1157 (D.C. Cir. 1969),
    *affirmed by* *WAIT Radio v. FCC*, 459 F.2d 1203 (D.C. Cir. 1972).

[^22]: *Northeast Cellular*, 897 F.2d at 1166.

[^23]: *See supra* para. 2.

[^24]: Letter at 2.