AT&T Says It Overstated Profits In 2001 And 2002; 3Q 2003 Earnings RiseAT&T Says It Overstated Profits In 2001 And 2002; 3Q 2003 Earnings Rise

NEW YORK (AP) -- AT&T Corp. overstated profits by $125 million in 2001 and 2002 as employees covered up a mistake in estimated expenses, a disclosure executives quickly dismissed as a minor incident rather than a potential scandal.

Most of the improper accounting came before WorldCom's $11 billion fraud was exposed, when investors were still pressing AT&T and other frustrated rivals to mimic the remarkable profit margins made possible by that deception.

AT&T's disclosure on Tuesday, buried deep within another quarterly report detailing the telephone industry's worsening ills, said a review by outside counsel had determined that the costs initially were underestimated by accident, but that two employees had then hidden the error to protect themselves.

The two employees and two of their supervisors have been fired, and more stringent controls have been implemented, the company said, rejecting any suggestion that the incident involved more questionable motives.

"The investigation determined it was not done for personal gain. There was no intent around earnings management," Thomas Horton, AT&T's chief financial officer, said in a conference call after the report.

Still, the revelation may undermine AT&T's arguments that WorldCom, which is changing its name to MCI, has yet to clean up its act. AT&T, which often trumpets its scandal-free reputation, alleged this summer that MCI has been disguising its long-distance calls as local traffic to avoid paying steep access fees. MCI denies those charges, which federal officials are investigating.

The accounting disclosure came as AT&T reported that third-quarter profits nearly doubled compared with a weak showing a year ago, but that revenues fell 8.1 percent as Bell rivals and cell phones added to their growing share of the long-distance business.

Profits for the just-ended quarter totaled $418 million, or 53 cents a share. In the same period in 2002, AT&T earned $207 million, or 26 cents per share, which included a $318 million loss from operations that are no longer part of the company.

The results included a pre-tax charge of $125 million for the under-reported operating costs, which involved fees owed to other phone companies who connect AT&T calls on their networks. After taxes, those expenses would have reduced 2001's net profit by $32 million, or 4 cents per share, and 2002's net profit by $45 million, or 6 cents per share.

AT&T's share price slid 5 percent after the report, falling $1.07 to close at $20.00 on the New York Stock Exchange.

The latest quarterly results also include a charge of $27 million to reflect a change in accounting standards and $13 million from businesses that are being discontinued.

Revenues totaled $8.65 billion, down from $9.41 billion in the third quarter of 2002.

AT&T Business Services, which provides data and voice services to companies, generated $6.28 billion of the total, down 6.2 percent from $6.70 billion a year earlier.

AT&T Consumer Services, once a $25 billion a year business, posted revenues of $2.35 billion, down 15.8 percent from $2.79 billion in the third quarter of 2002, as the long-distance business remained under assault by the local Bell phone companies, cell phones and Internet-based calling.

The lost business in long distance was partially offset by AT&T's stepped-up expansion into the local phone business by selling service over leased Bell lines. Revenues from bundled local and long-distance services grew 77 percent and now represent over 22 percent of AT&T's consumer revenues, the company said.

Executives said most of the 6,000 or so jobs slated for elimination this year have been cut, leaving the total work force down around 65,000. However, more job cuts are expected next year.

"We are going to continue to grind away at costs," Horton said in an interview with The Associated Press. "We're in our third year of double-digit pricing declines in the long-distance sector, so I would expect to see more reductions in 2004."

For the first nine months of the year, AT&T earned $1.5 billion, or $1.94 a share, in contrast to a loss of $13.6 billion, or $17.92 a share, a year earlier. Revenue fell to $26.4 billion from $28.5 billion a year earlier.