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FCC Inspector General Highlights Concerns Over E-Rate Program

The Federal Communication Commission's Office of Inspector General (OIG), in its semi-annual report to Congress, says that "the size and scope" of the E-rate program, "coupled with the results of various oversight activities performed to date," gives the office "a great deal of concern about this program."

The report, dated April 26, 2002 and covering the six months that ended March 31, 2002, was formally released on June 11.

The report disclosed that it has referred a $3.8 million civil false claims matter, growing out of Arthur Andersen audits of 18 beneficiaries in the 1998 program year, to the Justice Department for possible prosecution. However, the report said, "Confusion and disagreement regarding the nature of the [Universal Service Fund] has profoundly affected program oversight."

The inspector general said that the FBI has repeatedly questioned whether it had jurisdiction over E-rate-related matters because the Universal Service Fund is supported by revenues from telecommunications companies.and managed by USAC, a not-for-profit corporation under the direction of the FCC. It noted: "It has been our impression that federal law enforcement is going to be reluctant to dedicate resources to this program until this issue is resolved."

The office added, "Although we have been recently assured that the Governmental Fraud Unit is satisfied that this program is within their jurisdiction," the final position taken by the Justice Department "will have far reaching consequences to other investigations and, in fact, may jeopardize our ability to work with federal law enforcement to investigate fraud in this program."

It said that 21 cases related broadly to the Universal Service Fund are still under investigation by the FBI or local law enforcement authorities.

In addition, the inspector general noted that the Universal Service Administrative Company had contracted for audits of 22 additional beneficiaries. Although the results of those audits are still under review, the OIG said, "preliminary results indicate there may be findings at nearly all locations including several millions of dollars in inappropriate disbursements and unsupported costs."

Also, in audits performed by the Wireline Competition Bureau of another 26 program beneficiaries, it said, "preliminary results indicate potential irregularities at many locations that may result in potential fund recoveries and further referrals for investigation."

The inspector general said that in its opinion, "conducting a very small number of audits in a program with in excess of 30,000 applications per year, does not provide the Commission with adequate insight on program-level compliance by program beneficiaries."

The office has solicited the help of the auditing arms of the Education Department and the Interior Department, which are also involved in audits of some beneficiaries. In the meantime, the office said, "our entire program audit staff, comprised of two full-time equivalent (FTE) positions, has been dedicated to this program." The office estimated that to perform the audit portion of the nationwide Schools and Libraries Program review that it believes is necessary would require approximately 15 FTE positions.

Complicating matters, the OIG said, is the fact that FCC's Office of General Counsel "is not sufficiently comfortable" with a proposal to support the auditing activities out of proceeds from the Universal Service Fund. Instead, the inspector general's office has proposed spending $2 million to $6 million of the Commission's appropriation to provide the appropriate oversight, a proposal, it acknowledged, would "require significant shifting of resources from other Commission programs and operations."

As part of its recent Notice of Proposed Rule-Making on the E-rate program, the FCC solicited comments on whether program beneficiaries who were suspected of abuse should be required to pay the cost of their audits. The proposal was generally opposed by most parties who commented, who expressed concern over how the subjects of the audits would be identified and the potential impact on small entities.

The full report is available at

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