AT&T discloses overstatement

Profits inflated by $125m in '01, '02 after mistake

By Associated Press, 10/22/2003

NEW YORK -- AT&T Corp. overstated profits by $125 million in 2001 and 2002 as employees covered up a mistake in estimated expenses, a disclosure executives 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 yesterday, 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.

The accounting disclosure came as AT&T reported third-quarter profits nearly doubled compared with a weak showing a year ago, but that revenues fell 8.1 percent as rivals and cellphones 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. AT&T's share price slid 5 percent after the report, falling $1.07 to close at $20 on the New York Stock Exchange.