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FCC’s Office of Inspector General Issues Tough Report on E-rate Enforcement

 The Federal Communications Commission’s Office of Inspector General June 8 issued a tough assessment of the potential for waste and abuse in the E-rate program and criticized program administrators for delays in addressing it.

In its semi-annual report, the Federal Communications Commission's Office of Inspector General June 8 issued a tough assessment of the potential for waste and abuse in the E-rate program and criticized program administrators for delays in addressing it.

During the reporting period, which ended March 31, 2004, the OIG said it was supporting 26 investigations and monitoring an additional 16. In addition, it noted that the U.S. Justice Department's Antitrust Division had created a task force of attorneys in the division's seven field offices and the National Criminal Office to conduct investigations involving the Universal Service Fund. (Since the end of the reporting period covered by the OIG report, the Antitrust Division announced that NEC-Business Network Solutions Inc., a subsidiary of NEC America Inc., had agreed to plead guilty and pay a total $20.6 million criminal fine, civil settlement and restitution relating to charges of collusion and wire fraud in the E-rate program.)

The latest report highlighted some recurring issues that auditors have uncovered as they have reviewed whether school and library beneficiaries have been following the program's rules. But it also expressed a new set of concerns about the program's administration by the FCC staff and the Universal Service Administrative Company.

Resolving Audit Findings: The OIG noted that findings from USAC audits "are not being resolved in a timely manner and that, as a result, timely action is not being taken to recover inappropriately disbursed funds. In some cases, it appears that the delay is caused by USAC. In other cases, findings are not being resolved because USAC is not receiving necessary guidance from the Commission in a timely manner."

The OIG observed that the USAC Board of Directors did not release its final report on audits conducted by Arthur Andersen in 2001 until April 23, 2003, 11 months after Andersen provided its draft report. As of September 30, 2003, USAC had received $1.9 million worth of "inappropriate disbursements and unsupported costs" and initiated recovery actions for another $1.3 million, of which $709,013 is under appeal. The OIG said that between September 2003 and March 2004, USAC had initiated recovery actions for another $8.059 million. The OIG pointed out that it was not until two years after the Andersen draft report that the FCC staff provided USAC with guidance on how to resolve 11 policy issues that had been raised by the report.

Beneficiary Compliance: The OIG observed that USAC has a number of implementing regulations that have not yet been codified into FCC regulations. (Under program rules, USAC is prohibited "from making policy, interpreting unclear provisions of the statute or rules, or interpreting the intent of Congress.") The OIG said that in March 2004, the FCC staff took the position that they could not use a beneficiary's failure to comply with the record retention requirements listed in FCC forums as the sole basis for recovering funds until the FCC adopted a formal rule related to record-retention.

The OIG said it was concerned about the distinction that Commission staff makes between program rules and USAC implementing procedures:


  • because "it represents a weakness of program design;"
  • because "it is critical that participants in the E-rate program have a clear understanding of the rules governing the program and of the consequences that exist if they fail to comply with those rules;" and
  • because "a clear understanding of the distinction between program rules and USAC implementing procedures is necessary for the design and implementation of effective oversight." It noted that in the guidance that USAC provides beneficiaries, it itself does not make a distinction between these two sets of rules.


The OIG also expressed concern about the FCC's staff position on fund recovery in instances involving technology plan violations, discount rate calculations or the expectations regarding payment of the non-discounted portion of the purchase price.

The OIG noted that the Commission, in its Second Further Notice of Proposed Rule-Making released on December 23, 2003, had taken steps to address some of these issues. But it concluded, "The results of audits that have been performed and the allegations under investigation lead us to believe the program may be subject to a high risk of fraud, waste and abuse through noncompliance and program weakness." The OIG also said that until its own resources are increased, it may be unable to provide assurances that the program is protected from waste, fraud and abuse.

The report also detailed the results of eight audits that the OIG's staff completed. It found that applicants were "compliant" with program rules in four audits, and "generally compliant" in two others, leading to a recommended fund recovery of $218,447. In two audits conducted with the Interior Department's OIG, one applicant was compliant, but the other was not, leading to a recommended fund recovery of more than $2 million in 2001 discounts from the Navajo Preparatory School in Farmington, NM.

The full text of the report is available at

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