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FCC Inspector General Highlights Continued Concerns About E-rate Program

The Federal Communications Commission's Office of Inspector General (OIG) has issued its semi-annual report covering the six months ending September 2003, and highlighted its continuing concerns about the potential for waste, fraud and abuse in the E-rate program.

"Despite the positive developments during this reporting period," and the likelihood of $3 million in additional funding to support its efforts, the OIG said "until such time as resources and funding are available to provide adequate oversight of the USF program, we are unable to give the [FCC] chairman, Congress and the public an appropriate level of assurance that the program is protected from fraud, waste and abuse."

The OIG recounted the status of various USAC audits and the agency's efforts to recover funds:

• It is actively supporting 22 investigations and monitoring an additional 13 investigations by the FBI and U.S. Department of Justice. It said the allegations include procurement fraud (lack of a competitive process and bid rigging); false claims (service providers billing for goods not delivered); false statements by applicants and service providers; ineligible items being funded and "beneficiaries not paying the local portion of the costs resulting in inflated costs for goods and services to the program and potential kickback issues."

• A 2000 external audit of 18 "high-risk" beneficiaries that received $134.6 million in the program's first year questioned approximately $8 million in disbursements. USAC has sought and recovered $280,362 of that amount, and is still seeking an additional $45,993. The OIG said that Justice Department is reviewing a potential civil false claims suit as a result of one audit. (The FCC waived the potential recovery of some of these funds when they did not involve violations of FCC rules.)

• In 2001, an outside auditor reviewed the funding year 1999 and 2000 requests of 25 beneficiaries who received $322 million in approved commitments for those years. Monetary findings were identified at 14 of the 26 beneficiaries, including $11.4 million in appropriate disbursements and unsupported costs. USAC has recovered $1.9 million of this, and initiated recovery actions for $1.35 million, of which $709,000 is under appeal. In October 2003, USA initiated recovery action for an additional $1.078 million and has indicated it will be seeking recovery for an additional $6.98 million.

• About half of a sample of funding year 2000 funding requests from 79 beneficiaries have been completed and are under review at USAC. The OIG highlighted some concerns that had grown out of these audits, but did not discuss the potential for monetary recoveries.

The OIG noted that its own efforts to perform auditing had been hindered because it was required to devote resources to supporting ongoing criminal investigations involving the E-rate program. It said it had begun reviews of 29 beneficiaries, but then was notified that four of them received services from a provider that was involved in an ongoing federal law enforcement investigation. As a result, the OIG said that it modified its review of those four, and did seven additional audits of applicants that had used that provider, which were referred to federal law enforcement authorities in February 2003. It said its own review found $584,605 related to missing equipment and over-billings for recurring services.

The OIG said it was also working with the U.S. Department of Education on an audit of federal education funding that had been used by a large recipient to purchase equipment "to make effective use of internal connections and Internet connectivity."

The OIG identified four key areas of concern and in some cases provided some new twists on the ongoing issues:

• Technology planning;

• Competitive Procurement-The OIG noted that "concerns related to the competitive process, or lack thereof, are frequently identified during support to investigations of E-rate fraud." It noted that one of the two E-rate fraud cases that have resulted in criminal indictments involved bid rigging.

• Discount Calculation and Payment of the Non-Discount Portion-A new concern that was identified was that applicants "did not follow program requirements for discount rate calculation" or were "unable to support discount rate calculated." It also noted that while applicants were required to pay the non-discount portion of their costs, the rules did not specify the time frame in which those payments would have to be made.

• Delivery of goods and services-The OIG flagged two new areas of concern. It found unauthorized substitution of goods and services. It said this was not an issue when substitutions were made with newer versions of products, "however, in many cases, products with significantly reduced functionality are substituted." It also found instances in which equipment was "not being installed or not operational," but noted that the FCC's rules "do not require that equipment be operational."

The OIG said that in its opinion, "fund management could be further strengthened by continuing to formalize the relationship between the Commission and [the Universal Service Administrative Company]. . . . Based on our knowledge of USF financial management matters, it is our opinion that fund management would benefit from the additional control it would be afforded if it were maintained in an account managed by the Department of the Treasury." Similar proposals have tended to be opposed by the private school community because of the perception that it would bring them under increased federal regulation.

The OIG said it would explore expanding its audit coverage "to include service providers." It also said, "We remain convinced that the best solution for ensuring that adequate resources for program oversight are available would be accomplished by using the [USF] to pay for OIG oversight," or in other words, reducing the available funding to make more dollars available for audits.

The full report can be accessed at

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