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FCC Inspector General Updates Status of Audits and Investigations

The Federal Communications Commission's Office of Inspector General (OIG), in its semi-annual report released June 3, said that it "is encouraged about the many positive developments" that have occurred in its oversight of the Universal Service Fund programs since its last report. However, it said it continues to have numerous concerns about the level of waste, fraud and abuse associated with USF programs, including the E-rate program.

The OIG said that the results of audits performed "lead us to believe the [E-rate] program may be subject to [an] unacceptably high risk of fraud, waste and abuse through noncompliance and program weaknesses. In addition, we remain concerned with the pace at which identifiable program improvements-such as enhanced requirements for competitive procurement-are being addressed."

The report comes a week and a half after the E-rate program marked the first criminal conviction of a participating vendor on fraud charges. On May 23, John Angelides, a principal in Connect2 Internet Networks, of Staten Island, N.Y., pleaded guilty to participating in a scheme to defraud the program. Prosecutors said the company had advised schools that they did not have to pay their 10 percent share of their projects' costs, while misrepresenting to the government that the schools had, in fact, paid their share.

The Schools and Libraries Division recently convened a task force of program stakeholders to make recommendations on how to address problems associated with waste, fraud and abuse. The task force's recommendations are expected to be released in early summer.

The latest OIG report provides new details about the seriousness of the audits and investigations that are under way or have been completed:


  • In 2000, Arthur Andersen conducted audits of the first-year applications of 18 beneficiaries considered to be "potentially high-risk." The audit resulted in a major investigation involving the FBI that has now been referred to the Justice Department. The OIG said that "several fund recoveries are still in process more than a year after the report was issued."

  • In 2001, Andersen conducted audits of 25 beneficiaries, whose requests totaled $322 million in the second and third years of the program. USAC has determined that there were "monetary findings" at 14 of the beneficiaries, including $11.4 million in inappropriate disbursements and unsupported costs. USAC is awaiting policy guidance from the FCC before resolving this audit.

  • In 2002, the USAC Internal Audit Division conducted audits of six beneficiaries. Two of these led to recovery of commitments or disbursements and two more were referred to federal law enforcement for investigation. In addition, IAD conducted two more fraud investigations, which have also been referred to federal law enforcement.

  • Also, in 2002, the OIG started 29 audits of beneficiaries. The report said law enforcement authorities requested that some of these be focused on a particular service provider who had received more than $9 million in discounts in the first three funding years at 26 schools. The OIG said that it had identified monetary findings worth $584,605 related to missing equipment and overbillings for recurring services. Fourteen of the audits that were initiated last year are still in progress.

  • The OIG is providing audit support to 30 investigations currently being conducted by the FBI and Justice Department. Among the allegations it said are being investigated are: procurement irregularities (lack of a competitive process); false claims, or service providers billing for goods and services that were not delivered), ineligible items being funded; misappropriation of assets; and beneficiaries "not paying the local portion of the costs, resuting in inflated cost for goods and services to the program and potential kickback issues."


In addition, the Commission's fiscal 2004 budget request to Congress includes a request for $3 million, specifically to support oversight of the Universal Service Fund by the OIG. It said it intends to use this funding to support audits of a statistical sample of E-rate beneficiaries to assess overall program compliance, and plans to audit service providers as well as applicants.

The full text of the semiannual report is available at

Meanwhile, the Universal Service Administrative Company has completed and formally released six internal audits of E-rate beneficiaries, one of which demonstrated that applicants must ensure that they pay their appropriate share of their E-rate eligible purchases.

USAC internal auditors reviewed the funding year 2000 applications of the Ketchikan School District in Alaska; Crispus Attucks Youthbuild Charter School in York, PA; St. Martin De Porres School in Oakland, CA; Cathedral High School in Boston; and Elsie Whitlow Stokes Community Freedom Public Charter School in Washington, DC, and noted no exceptions to the schools' compliance with E-rate rules and regulations.

However, in an audit of Santa Maria Addolorata School in Chicago, IL, USAC auditors determined that the school was billed for only 1 percent of the cost of its contract with Educational Computing Solutions, rather than the 10 percent that was required for a school eligible for a 90 percent discount.

Upon further review, the Schools and Libraries Division determined that the 1 percent contribution had also been part of the vendor's original proposal, and that the vendor had submitted a Service Provider Invoice form that implied that a 10 percent contribution had been made.

Although the applicant offered to make restitution for the remaining portion of its required contribution, the SLD found that the selected bid was not in compliance with program rules because the applicant could not produce documentation demonstrating that the bid was its most cost-effective option. Thus the SLD said it will seek a commitment adjustment for the return of $62,205.57 in funding that was disbursed on behalf of the school.

Kermit Lattimore of Educational Computing Solutions (SPIN #143005210), the company involved, told Funds For Learning that the situation involved an error when its billing processes were automated, and ".01" was entered instead of ".10" for a 10 percent discount. He said the mistake was discovered before the auditors arrived and that the school and company had sought the auditors' guidance on how to correct it. (Funds For Learning had been unable to reach Lattimore for comment when the audit report was first released because information provided in the "BEAR/SPIN contact" section of the SLD's Web site did not provide a corrected phone number for the company.)

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