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Capitol Comment

    Capitol Comment 262 - Old Regulations for the New Economy

    11/29/1999

    Generally speaking, organizations that keep two sets of accounting records have something to hide. Organized crime is such an example. Congress is perhaps another, given all the spending that exists "off budget." However, many local phone companies also keep two sets of books, but not because they are doing anything wrong – the Federal Communications Commission (FCC) forces them to comply with two different sets of accounting standards.

    There is enough waste in Washington’s budget process to go around; it is time to end wasteful accounting practices in the telecommunications marketplace.

    Since the 1970s, the Internal Revenue Service (IRS) and virtually every other American institution has followed, and required others to follow, the Generally Accepted Accounting Principles (GAAP) accounting standards. However, the FCC continues to require local phone companies to maintain a second set of books using the complicated Unified System of Accounts (USOA) accounting standards.

    Complicated accounting standards are a relic of the industry’s regulated history. The Federal Communications Commission (FCC) was charged with regulating interstate and international communications and to ensure the market remained fair and honest. The agency’s main goal was to bring order and accountability to a monopoly market. However, they took radically different approaches toward fulfilling those obligations.

    To ensure regulatory accountability from a government-protected monopoly, the FCC chose an interventionist approach. The agency has attempted to micromanage the various telecommunications industries, often at the expense of a broad, consistent policy. The accounting standard adopted by the FCC reflects this heavy-handed approach. The Uniform System of Accounts (USOA) collects a wealth of information about every aspect of the business practices of a regulated firm. Adopting this standard suggests the agency was far more interested in regulation than promoting competition.

    When AT&T was a rate-of-return regulated monopoly there might have been a justification for the USOA standards. The standards were designed to monitor and control monopolies that were restricted to a regulated rate of return on their assets. For example, companies regulated in this fashion would tend to overstate their investments or spend more money on infrastructure in order to generate higher profits. Unfortunately, the higher costs associated with such a backward way of running a business were passed on to consumers in the form of higher telephone bills. In 1991, the FCC abandoned rate-of-return regulation in favor of price caps, thereby removing any incentive to overstate costs. The Telecommunications Act of 1996 forced local phone companies to open their networks, eliminating any legitimate need for the USOA standard.

    Since the mid-1980s, the FCC has recognized the benefits of adopting GAAP. However, fifteen years after the FCC first recognized the need to move toward GAAP, and three years after the 1996 Telecommunications Act removed any rationalization for the USOA standard, local phone companies are still required to maintain a dual set of books. The cost of adhering to two different sets of accounting standards, in the hundreds of millions of dollars by even the most conservative estimates, is passed onto consumers in the form of higher local phone bills.

    A recent measure supported by certified public accountant (CPA) Senator Mike Enzi (R-Wyo.) and House telecommunications subcommittee chairman Representative Tauzin (R-La.) attempted to put an end to these outdated accounting standards. It was brought up as Congress debated appropriations for the FCC and other regulatory agencies in the Commerce Judiciary, State and Judiciary Appropriations bill. This would have allowed the FCC to pursue the accounting reform that, by its own admission, is long overdue.

    Unfortunately, the proposal was met with skepticism and opposition from both sides of the aisle and ultimately was taken out of the bill and included as report language only. This virtually guarantees that local telephone customers must now wait until 2002 before there will be another chance to correct this problem. The issue facing Congress was no more complicated than seizing an opportunity to remove hundreds of millions of dollars in unnecessary accounting costs incurred by local phone companies.

    Next time, Congress should examine the purposes served by the two different sets of standards. Hopefully, they will realize such outdated regulations only hurt consumers in the new economy. There is enough waste in Washington’s budget process to go around; it is time to end wasteful accounting practices in the telecommunications marketplace.