(FORTUNE Magazine) – Sniping! Backbiting! Bitter accusations! Forget the latest episode of The Restaurant, we're talking about the drama unfolding in the telecom world. Following months of whining that MCI (formerly WorldCom) was getting unfairly preferential treatment from the government, in late July rivals AT&T, Verizon, and SBC came out swinging, claiming MCI engaged in a variety of schemes to avoid paying access charges, including dumping calls onto AT&T's network by routing them through Canada and masking long-distance calls as local traffic. MCI denied any wrongdoing, calling Ma Bell's charges "cynical" and "baseless." Telefonos de Mexico also jumped into the fray and said AT&T has used some of the same call-routing measures MCI allegedly employs. Did we mention Telmex is controlled by Carlos Slim, a big buyer of WorldCom bonds earlier this year?

Yup, it's ugly--and getting uglier. The stakes are high, after all: For all the talk about cellular and Wi-Fi services, the $100-billion-a-year long-distance business still represents a huge swath of the telecom sector. All the interested parties are continuing to dig for dirt, and analysts say it could be months before regulators and the courts sort out what, if anything, MCI did wrong.

But what's most unsavory about the phone fight is what it has unintentionally revealed about the inner workings of the industry and the shortcomings of recent corporate reforms. Here are three biggies.

--Access charges are a mess: The allegations by AT&T, Verizon, and SBC showed the world just how much money, time, and energy is spent on payments among phone companies--and the lengths companies will go to reduce those payments. These access charges, which can range from less than a penny a minute to more than 15 cents a minute, are part of a system of subsidies the government put in place in 1984 to even out the costs of providing phone services among all the players. (Ever wonder why Internet phone companies offer such cheap rates? Part of the reason is that their systems bypass some long-distance access fees.)

Bob Atkinson, policy research director of the Columbia Institute for Tele-Information and a former regulator, says the latest MCI scuffle could serve as a catalyst for eliminating access charges altogether. "All these carriers are using their innovative capability and resources on gaming the system," he says. "Get rid of the gaming opportunities, and they'll have no choice but to focus their energies on innovating for their customers."

--The fight is getting dirtier: The ferocity of the current battle between the phone companies mirrors the competitive landscape in telecom today. The Bells, which face falling revenue in their core local phone operations, desperately want to sell local and long-distance services to MCI's big business customers. AT&T, whose residential long-distance business remains in decline, also would love to lure away MCI's plum accounts.

But MCI's emergence from bankruptcy with relatively little debt only makes such a land grab harder. Rivals fear MCI will use its bolstered balance sheet--on top of its aggressive efforts to reduce access fees--to cut prices further. The General Services Administration's decision to suspend MCI from winning future government contracts reduces competition, but analysts say the sector is long overdue for consolidation. Conspiracy theorists wonder if the latest charges against MCI aren't part of an effort by rivals to force the phone company to sell itself off in parts. Perhaps to a Bell company?

--Sarbanes-Oxley can't fix everything: If the charges against MCI are true--and few analysts are willing to say MCI behaved illegally--shareholders now have something else to worry about. "It is hard to make a case that Sarbanes-Oxley or other changes by themselves would have caught these things," says James Cicconi, AT&T's general counsel (referring to the sweeping corporate governance act passed by Congress last year). Indeed, most reforms of the past year focus on eradicating accounting scams and making directors and officers more accountable. But the laws do little to guard against fraud in the bowels of an operation. Tech companies would need forensic engineers working alongside internal auditors to detect potential problems in complex networks and computer systems. The good news? Investors in most other sectors don't have to worry about similar accusations popping up. "This is unique to telecom," says Blair Levin, a policy analyst with Legg Mason. "You can't look at this and say, 'I wonder if we have the same problem in the cereal industry.'"

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