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AT&T addresses error, hits earnings mark

The long-distance carrier "takes action" against four employees who allegedly tried to cover up an accounting mistake. It also turns in on-target financial performance for the third quarter.

AT&T said Tuesday that an alleged accounting error and subsequent cover-up attempt forced it to understate its expenses in 2001 and 2002 by $125 million.

The nation's largest long-distance carrier "took action" against a lower-level employee, the employee's manager and two supervisors who played a role in the incident, according to AT&T Chief Financial Officer Thomas W. Horton. The company also on Tuesday reported third-quarter earnings that matched analysts' expectations.

"This was not done for personal gain, and there was no involvement beyond the four people I mentioned," Horton told financial analysts during a conference call to discuss the third-quarter financial results. "It appears to be an error, and someone worked around the controls to avoid its detection."

Horton stressed the company's commitment to accuracy. "Despite the apparent financial immateriality of this charge, absolute integrity of our financial statements is something we take very seriously," he continued. "Any compromise is not and will not be tolerated."

The incident the executive described is an embarrassing and ironic one for the long-distance carrier, which last month filed a lawsuit that accuses chief rival MCI of alleged improprieties, including routing calls through Canada to avoid paying connection fees. MCI has denied the lawsuit's allegations.

AT&T is also one of three telephone companies recently forced by accounting errors to restate some of its earnings. MCI filed bankruptcy last year due to an accounting scandal over an estimated $11 billion. Qwest Communications International last week all but erased $2.5 billion in revenue for 2000 and 2001 after restating its accounting-marred earnings for those years.

During the third quarter of 2003, AT&T said it experienced a 16 percent drop in phone service sales to residential customers. That led to reporting revenue of $8.6 billion for the quarter, which ended Sept. 30, compared with the $9.4 billion it reported during the year-ago period. But net income doubled, rising to $418 million, or 53 cents per share, from the $207 million (27 cents a share) it reported a year ago.

The third-quarter results equaled analysts' earnings estimates of 53 cents per share First Call published.

The company said its third-quarter earnings included a charge of $27 million, or 3 cents per share, related to the adoption of new accounting standards and a charge of $13 million, or 2 cents per share, on losses from discontinued operations.

Income from continuing operations reached $458 million, or 58 cents per share, for the September quarter, compared with income of $525 million, or 67 cents per share, a year earlier.

The long-distance company is experiencing increasing pressure in its business services unit, for which third-quarter revenue was $6.3 billion, representing a 6.2 percent falloff year over year. AT&T said the business division's revenue performance reflected continued , weakness in its retail long-distance business and a decrease in overall telecommunications spending.

One bright spot for the company is its local voice unit, for which quarterly revenue grew approximately 38 percent year over year. AT&T said local access lines totaled more than 4.3 million at the end of September, which represents a sequential increase of almost 97,000 lines from the second quarter of the year.

In its consumer business, AT&T reported revenue of $2.4 billion, a decline of 15.8 percent from the same period last year. The company said the disappointing performance was driven by reduced long-distance revenue as a result of increased competition, including growth in the adoption of wireless and Internet phone services.