This isn't another coming of WorldCom, when the company started counting things like the nearest highway overpass as assets in order to hide its true financial condition, but the Securities and Exchange Commission inquiry into how telecom and now cable companies account for their customer manifests is extremely noteworthy. Customer counts are at the center of some big, costly frauds in the past, including Adelphia.
Yesterday, Verizon (NYSE:VZ) was the first to fess up, disclosing to investors that it had overstated the number of phone lines it had in service by 8.5%. Previously, the company had confirmed that it, along with some 20 other companies, had received questions from the SEC asking it to provide information on how it counted subscribers.
What do you say to this kind of question? "Usually we start with the number 1 and work our way up from there," I guess. Verizon blamed its miscounting on a problem with an internal database creating a mistake that overreported 1.5 million phone lines to investors.
Makes you wonder what sort of internal controls are in place. Didn't they notice that there were 1.5 million phone lines upon which they were collecting no monthly revenues? Did they not notice what should have been a measurable drop in revenues per subscriber? Apparently not, and apparently Verizon's not alone. With so many companies receiving inquiries, you have to wonder about how many more internal databases have developed "problems."
We can joke about this, but counting customers is difficult and important for subscriber-based companies, and knowing an accurate customer count is crucial for investors. Customers come and go all the time, and carriers have some leeway in how they are counted. Does someone who has service for a single day in a quarter count as a whole customer? Perhaps the number is a weighted average, and perhaps customers whose bills are in default are not included. Since phone and cable companies generate revenue on a monthly recurring basis, a higher customer count would imply growth and a high likelihood of bigger revenue numbers for the future. And as we know, the appearance of growth is extraordinarily important to companies seeking to bolster their attractiveness to investors. Thus, the potential and impetus for abuse is high. One only needs to look at the pummeling that Sprint (NYSE:FON) took in late 2002 when it disclosed its first-ever net loss of customers at Sprint PCS.
The SEC has a new program it calls "wildcatting" in which it interviews companies about areas where abuse is possible. Though Verizon has in fact found a problem, the SEC has made it abundantly clear that no indication of any violations has taken place at the 20 companies, which now include Cox (NYSE:COX), BellSouth (NYSE:BLS), SBC (NYSE:SBC), Comcast (NASDAQ:CMCSA), AT&T (NYSE:T), Verizon, and others.
But the 1.5-million customer overcount at Verizon is still shocking, just because it seems impossible that the company would not find something to be amiss in its revenue-per-customer ratios. If they're low, that would suggest a problem, unless of course the entire industry has the same problem, so Verizon's comparable returns came out in the wash.
I guess we'll know soon.
Fool contributor Bill Mann does not own shares of any company mentioned in this article.
