PUBLIC NOTICE
FEDERAL COMMUNICATIONS COMMISSION
445 12th Street, S.W.
Washington, D.C.  20554                                     DA 99-668

News media information 202/418-0500.
                                             Released:  April 7, 1999
                                             

      THE ACCOUNTING SAFEGUARDS DIVISION RELEASES INFORMATION
                            CONCERNING 
   AUDIT PROCEDURES FOR CONSIDERING REQUESTS BY THE REGIONAL BELL
OPERATING COMPANIES TO RECLASSIFY OR "RESCORE" FIELD AUDIT FINDINGS OF
                 THEIR CONTINUING PROPERTY RECORDS

         On March 12, 1999, the Commission released Continuing Property Record (CPR) Audits
of Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Bell, Southwestern Bell and US West
Telephone Companies ("CPR Audit Reports").  In an effort to provide additional information on
the auditors' process for verifying the accuracy of the CPRs, the Accounting Safeguards Division
of the Common Carrier Bureau is today releasing a summary of the procedures used by the
auditors to review requests of the companies to rescore specific items.  We note that, in releasing
the audit reports, the Commission stated that it was not passing judgment on the accuracy of the
reports, their findings or conclusions.  We note furthermore that, concurrently with this Public
Notice, the Commission will issue a Notice of Inquiry seeking comment on the procedures
described below, among other issues.

Background

         The CPR audits of the Regional Bell Operating Companies (companies) are based
primarily on information collected in the field.  During the field audits, Commission auditors,
together with representatives of the companies, inspected company premises to verify the
physical existence of specific items of equipment.  Items were "scored" or classified in the
following categories: (1) found as described; (2) found in another location; (3) not
found/missing; or (4) unverifiable.  In most cases, the equipment was scored in category (1)
found as described.  After the field audits were complete, the companies were provided an
opportunity to submit additional evidence to support their claims that certain scores for items
in categories (3) not found/missing or (4) unverifiable, were in error.

Verification Based on Physical Inspection

         The field audits were physical inspections conducted under generally accepted
government auditing standards.  Under these standards, "[e]vidence obtained through the
auditor's direct physical examination, observation, computation, and inspection is more
competent than evidence obtained indirectly."  Thus, consistent with this standard, the best
evidence that verified whether an item was accurately recorded in the CPRs was the auditors'
physical inspection during the field audits.

Re-Scoring Based on Additional Evidence

         After the field audits were complete, the auditors provided companies an opportunity
to request re-scoring of an item if the company believed the initial scoring by the auditors may
have been in error.  The basic standard that companies were required to meet in order to have
an item re-scored was to provide adequate and convincing evidence that the facts were different
than appeared at the time of the auditors' on-site inspection.  In order to warrant a change in
scoring, this additional evidence had to have strong probative value equal to the physical
inspection evidence.  Carriers were advised to provide adequate and convincing documentation
that would make clear that the actual condition was different from what appeared to the auditor
at the time of the physical inspection.  In response, the carriers provided a range of
documentation requesting scoring changes.  

         In preparing the final Audit Reports, the auditors fully considered all requests by carriers
for re-scoring an item.  The auditors consistently applied their standard for changing an initial
score in each review of every item subject to a re-scoring request.  The type and quality of
evidence submitted by the companies was not consistent, however, and often did not meet the
standards to warrant re-scoring.  Carriers primarily submitted additional evidence attempting
to show CPR recording errors (i.e., quantity errors), removal of equipment prior to the physical
inspection (i.e., interim removals or retirements), and "embedded items" (items hidden or
encased in other items).  Adequate and convincing evidence that the auditors found probative
of these claims consisted mainly of source documentation and engineering drawings. 

         a)   Source Documentation:  As a general rule, entries to the accounts and to the CPR
should be supported by accounting records, known as source documents, that provide the basis
for recording the accounting transactions; e.g., documents for plant assets are purchase orders,
invoices, time sheets and work orders.  The auditors found such documents containing cost
amounts, signatures, dates, and other such evidence to be the most convincing of the facts
relative to the installation and removal of equipment.  Internally generated computer lists, on
the other hand, were not considered adequate without additional support.  The auditors found
two common situations, described below, in which source documentation constituted probative
evidence sufficient to warrant a change in the original scoring.

              Quantity Recording Errors.  In the first situation, the companies provided source
documentation to demonstrate that the quantity of items stated in the CPRs was incorrect and
that items, considered to be missing, were not missing.  For example, the CPR may have listed
6 units of equipment in service while the auditors' physical inspection found only 4 units of
equipment in service.  If the company provided original invoices showing that only 4 units had
been installed and the equipment descriptions, dates of purchase, and costs stated on the
invoices matched the information on the CPR, the auditors determined that the evidence was
probative of a quantity error and that a re-scoring of the initial designation of "not found" was
warranted.  The auditors examined the invoices to be sure they represented the items in
question.  For instance, for each item, they looked to see if the information on the invoices (such
as vintage and office location) corresponded with the information listed on the CPR.  The
auditors considered the quantity listed on the invoice with the quantity recorded in the CPR,
and compared the material cost billed with the material cost recorded in the CPR.  When the
evidence showed that the recorded cost was the same, but the quantity appeared to be
overstated, the auditors found the evidence was probative that an error had likely been made
in the quantity listed on the CPR and re-scored the items accordingly in the companies' favor. 

         The auditors did not find source documentation sufficient where the information on the
invoices did not match the descriptions and/or the costs of the equipment listed in the CPRs. 
In these cases, the initial scoring derived from the physical inspections was not changed.  In
cases where the companies provided non-source documentation, e.g, internal documents that
were not contemporaneous with the equipment purchase or installation, the auditors generally
found the evidence was inadequate and not sufficient to warrant a re-scoring.  In both of these
cases, the auditors determined that the companies' additional evidence was not adequate and
convincing proof of a quantity error on the CPR related to the particular items under review. 

         Where a carrier provided some indication that the CPR contained errors concerning the
number of items on a CPR record, but presented no adequate or convincing source
documentation, the auditors used cost information in the CPR to determine whether quantity
errors existed in the CPR.   For each item where the quantity stated on the CPR was
questionable, the auditors determined, as accurately as possible, the cost of that item (on a per
unit basis) and evaluated whether the cost stated on the CPR (on a per unit basis) was accurate. 
To determine the per unit cost of the item in question, the auditors calculated the average cost
of the same model of equipment (i.e., equipment type, manufacturer, and vintage) for all such
items listed on the CPR.  If the cost recorded on the CPR for that item (on a per unit basis) was
substantially higher than the average cost of that item, it appeared that the quantity on the CPR
may have been incorrect.  Thus, in cases where the recorded cost fully appeared to support a
lesser quantity than recorded, the auditors generally re-scored the "not found" designation. 

              Interim Retirements.  Source documentation also led to changes in scoring where
there was adequate and convincing evidence of recent retirements.  In some cases, the
companies claimed that the items of equipment were retired between the date the CPR listing
was printed and the date of the on-site inspection.  In the cases where the company
demonstrated, through source documents, that the items had, in fact, been retired during the
interim period, theinitial "not found" designations were re-scored in the companies' favor. 
Generally, claims of equipment retirement during the interim period between the CPR printout
and the audit field work were found to be an adequate basis for re-scoring when the document
flow demonstrated the usual procedures for retirement.  For this purpose, the auditors found
probative evidence existed where carriers provided a telephone equipment order ("TEO") and
a confirmation of removal by technicians.  Generally, this documentation reflected dates of
removal authorization (usually, around the time of the audit) and authorizing signatures.

         Carrier-provided documentation for interim retirements was not always adequate to
warrant re-scoring.  In some cases, the carrier provided an invoice for an item categorized as
"not found."  Generally, such invoices demonstrate only that the item had been purchased, and
is not proof that an interim removal or retirement had occurred.  In some cases, carriers
provided documentation that showed a removal had taken place long before the audit work,
such that the item should not have been listed on the CPR.  The auditors found this
documentation supported a conclusion that the item was not found to be in service.  In some
cases, the carriers provided a document that indicated that a retirement or removal had
occurred, however, no further documentation or evidence was provided that reflected dates of
removal or authorizing signatures (i.e., the TEO).  In these cases, the auditors found that
documents that simply showed that a retirement was made at or around the time of the audit,
without more probative evidence, such as a TEO, were not probative evidence sufficient to
support a claim of interim retirement or removal.  Rather, this type of documentation indicated
possible discrepancies in the companies' retirement practices.  In these cases, without proof that
an interim retirement or removal had occurred, the auditors found no changes in scoring were
warranted.

         In all cases where a request to re-score an item was made based on a claim that the item
had been retired or removed between the time the CPR list for audit was printed and the
auditor's on-site physical inspection, the auditors required evidence demonstrating that the item
had been removed in the interim.  When the evidence was adequate and convincing, the
auditors made a change; when it was not, the auditors did not make a change.

         b)   Engineering Drawings:  There were instances during the field audit where the
company claimed a particular item could not be seen because it was inside another item
(embedded items).  If the company representative provided evidence (e.g., an engineering
drawing or a manufacturer schematic) demonstrating that this was true, the auditor classified
the item as "found."  If no such evidence was provided during the field audit, but a credible
claim was made that the equipment was embedded in other equipment present, the item was
scored as "unverified."  (Generally, a claim was considered credible if the other equipment listed
for the same frame was found to be in place as listed.)  After the field audit, companies
submitted evidence that items scored as "unverified" were embedded, and by design, functioned
within other equipment.  If the companies provided documentation (e.g., an engineering
drawing or manufacturer schematic) that showed that an item initially scored as "unverified,"
functioned by design within another item listed on the frame, the item was re-scored as "found." 
If the evidence was not conclusive, or if no evidence was provided, the item remained scored
as "unverified."  In no case where a credible claim was made that an item was embedded was
the item scored as "not found" or included in the evaluation of the cost of "not found" items.