AT&T REVEALS PAST ACCOUNTING ERRORS AS IT REPORTS EARNINGS

The company said that after taxes, the expense, properly recorded in the respective prior periods, would have decreased annual income from continuing operations by $32 million in 2001 and $45 million in 2002. “The impact to prior years’ annual financial statements was not material,” it said. An AT&T spokesman said the company spent $11 billion per year on access and connection fees.

An AT&T spokeswoman said the charge was related to the accrual of expenses for access, not the actual billing of incurred charges. She said a review conducted by outside legal counsel, under the direction of the company’s audit committee, found that 2 management employees “made underestimation of access and connection expenses” and after that “made a manual override to the normal accounting process to hide the error,” circumventing “internal controls that would normally have detected the error.”

The spokeswoman denied there were parallels between the improper accounting and the WorldCom financial fraud, saying “the amounts billed and collected were correct, but the accounting wasn’t correct.” She said the WorldCom fraud involved “a systematic effort to defraud its shareholders, [while] this was a one-time internal error. It had no impact whatsoever on the settlement of invoices between AT&T and other companies.” In a teleconference Tues., AT&T CFO Thomas Horton said the investigation had “determined it was not done for personal gain. There was no intent around earnings management or anything like that. So, it simply appears to be an error, and somebody tried to work around the controls to avoid its detection.”

AT&T said it recorded an additional expense of $125 million in the 3rd quarter to “reflect the proper estimate of the liability.” It said its 3rd-quarter net income jumped to $418 million from $207 million a year earlier, but its revenue fell 8.1% to $8.65 billion. It said the revenue was affected by continued declines in long distance voice revenue, partly offset by the success of AT&T Consumer Services’ bundled local and long distance offering and growth in several key markets of AT&T Business Services. It said the revenue included $6.3 billion from AT&T Business Services and $2.4 billion from AT&T Consumer Services, and the net income included a charge of $27 million related to the cumulative effect of the adoption of a new accounting standard and $13 million of losses from discontinued operations.

AT&T said its Business Services unit revenue declined 6.2% to $6.3 billion reflecting pricing pressure, weakness in retail long distance and data demand and overall telecom spending, partly offset by strong growth in wholesale volumes and local voice revenue. It said the unit’s long distance voice revenue declined 10.5% from the previous quarter, driven by continued pricing pressure, offset in part by 15% volume growth. AT&T said the unit’s local voice revenue grew 38% from the year-ago quarter, and local access lines totaled more than 4.3 million, an increase of 97,000 lines from the 2nd quarter.

AT&T said its 3rd-quarter 15.8% Consumer Services unit revenue drop resulted from lower long distance revenue as a result of the continued impact of competition, wireless and Internet substitution and customer migration to lower priced products and calling plans. It said those declines were partly offset by a 77% surge in bundled revenue and pricing actions. AT&T Consumer Services said it provided local service to more than 3.5 million customers, an 85% increase from the previous year, and planned to test or market its residential One Rate USA bundled service in 35 states by the end of the year.