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Telecommunications Act changes certain audit requirements.

President Bill Clinton has signed into law a bill that completely rewrites the 62-year-old Communications Act and is intended to promote competition rather than monopolies for a wide range of communications services including local and long-distance telephone services, cable television, broadcasting and wireless information services.

The Telecommunications Reform Act of 1996 also includes new comprehensive requirements for independent auditors who are a key component of the regulatory safeguards to prevent the subsidy of competitive services by regulated services. However, some of the legislative requirements in earlier drafts of the bill that would have been objectionable to the profession were cut.

"There had been concerns as the bill was being drafted that some companies would be able to take advantage of their regulated monopoly positions as they expanded into new competitive service lines," said James E. Farmer, partner of Arthur Andersen in Chicago. "The independent audit provisions in the new law provide additional assurances that this will not happen during the transition period to full competition."

Audit requirements were expanded for the new services the Bell operating companies are able to offer under the new law, including long-distance telephone and electronic publishing services. One safeguard, an auditor rotation provision that gave regulators complete discretion as to the frequency of rotation, was dropped as Senate Democrats and Republicans met to draft a bipartisan bill. The American Institute of CPAs and representatives of the large accounting firms urged the Senate to drop this provision in light of existing professional standards designed to promote auditor independence.

Also deleted from the act's language during the final conference were requirements that the Federal Communications Commission select Bell company auditors and that audits be conducted under the direction of the FCC and the state public utility commissions. Also, subsidiary audits that would have been required in each state in which a Bell company provides service are now required only at the parent company level. "These changes show how the AICPA and the profession can work with the legislative community to craft audit requirements that are both effective and appropriate," said Farmer.

Under the act, Bell companies no longer will be tile only regulated entities providing phone services. Public utility companies also can provide telecommunications services, but they will be required to do so through separate corporate entities. These entities may be subject to annual audits at the state public utility commissions' discretion. These audits will be conducted by independent auditors selected jointly by the utility companies and the state regulators and paid for by the utilities. "This process could be as simple as the utility submitting the name of the firm to the state commission for approval; however, some state commissions could be more proactive and actually get involved in the selection process itself," said Farmer.

Details of the legislation will be fleshed out in formal rulemakings by the FCC and state regulators. The FCC specifically is charged with establishing audit-based safeguards for universal services, telemessaging services, equipment sales and manufacturing, electronic publishing and pay phone services. The FCC announced it will promulgate interim rules for Bell company subsidiary audits this month, with final rules to be adopted in August 1996 and March 1997. Audit provisions for other services will be adopted within the next 12 to 18 months.

Opportunities for new business

The new legislation is expected to provide many new business opportunities for independent auditors and consultants. Compliance audits, asset valuation and management consulting will be in demand from regulated companies. Also, the act gives the FCC the authority to outsource some of its own auditing functions as part of the move to downsize federal agencies.

In the short term, numerous independent audits will be required as regulated entities move rapidly into new service areas. "Although many of these audit requirements are transitional and will be phased out over time, the legislation is certain to result in an explosion in the number and types of companies in the communications business," said Farmer. "These new start-up companies will enter into a wide array of joint ventures and alliances increasing the demand for auditors and consultants."
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:1996 reform act
Publication:Journal of Accountancy
Date:Apr 1, 1996
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