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FCC Releases Details of Wide-Ranging Audit and Compliance Order

The Federal Communications Commission August 13 released the full text of its 5th Report and Order for the E-rate program, detailing the circumstances under which participants will be required to repay the program and setting out much more specific requirements for the documents that applicants and service providers must retain, starting with the 2004 funding year.

The commission did not revise the program's discount matrix or address 'additional issues relating to competitive bidding," but said that it intended to deal with those issues in 'one or more forthcoming orders."

In the 5th order, the Commission updated its procedures for recovering funds that were found to have been issued in violation of the law or the program's formal regulations. It noted that the Universal Service Administrative Company and other entities have audited more than $1.1 billion worth of the $4.7 billion that was disbursed in the program's first three years, and that USAC has sought recovery of $18 million, based on audit findings. In another footnote, it was reported that there were '1,155 instances of where recovery of funding commitments and/or disbursements has been sought," but it was unclear precisely how many applicants or service providers that involved.

In the order, the Commission imposed a new procedure on E-rate beneficiaries and service providers, requiring them to obtain an FCC Registration Number (otherwise known as an FRN, the same acronym as 'funding request number."). Under the provisions of the Debt Collection Improvement Act, this will permit the FCC to dismiss any outstanding requests for funding commitments if an applicant or service provider has not paid monies that it owes the program or made other approved arrangements.

The FCC asserted 'it is clear that funds disbursed in violation of the statute or a rule that implements the statute or a substantive program goal must be recovered." However, the FCC agreed that in cases where the cost of recovery would exceed the dollar amount involved, it might not be reasonable to seek recovery. It asked USAC to provide information regarding the administrative costs of seeking recovery so that this threshold could be set.

Because the FCC also concluded that recovery might not be appropriate when only the Schools and Libraries Division's procedural rules were violated, it plans to review those rules to determine if they should be codified into the Commission's rules. USAC was instructed to provide the Commission with a list of its procedural rules within 45 days of publication of the 5th Order in the Federal Register, and annually thereafter. The Commission said it would review the list to determine which of the procedures should be formally adopted as FCC rules.

The FCC said it would seek the recovery of funds only when the rules were essential to 'the financial integrity of the program" or that 'circumstances suggest the possibility of waste, fraud or abuse, which will be evaluated on a case-by-case basis."

The FCC said that it would seek to recover funds in connection with these kinds of violations:

Competitive bidding requirements: It said it would seek to recover the full amount if a beneficiary was found to have signed a contract before the end of the 28-day posting period for the Form 470 application or when a beneficiary was found to have failed to consider price as the primary factor when evaluating competitive bids. The FCC based this on its position that 'the competitive bidding process is a key component" of the program. At the same time, the FCC acknowledged that its rules do not require applicants to seek quotes from multiple sources if no service provider responds.

Necessary resources certification: The Commission said that if beneficiaries were found not to have sufficient computer equipment, software, staff training, internal connections, maintenance and electrical capacity to make use of the supported services, full recovery of funds would be justified. USAC and the Commission have not provided guidance, however, on what their standards are for evaluating this.

Service substitution: In cases where a service substitution was made without pre-approval, USAC could recover the difference between what was approved and what would have been approved if the request had been submitted. If the substitution occurred and USAC found that it would not have met the criteria for service substitutions, USAC will be instructed to recover the full amount.

Failure to pay non-discounted share: The FCC concluded that applicants should be able to demonstrate that they had paid their share of the cost of a service or product within 90 days after delivery of the service, in keeping with standard business practices. If the applicant has not paid its share by that time, it will be presumed to be in violation of this rule. (In regard to pending audits, USAC was instructed to determine whether the applicant had paid its share of the cost by the time the audit report was finalized.)

Duplicative services: Commission rules prohibit the funding of services that provide 'the same functionality to the same population in the same location during the same period of time." The Commission said it would seek recovery of the amount associated with the more expensive of the duplicative services, except where fraud was indicated. In those cases, it said, it might seek recovery of the full amount.

Failure to complete service with the funding year: The Commission said failure to complete work by the relevant deadline would warrant recovery of all funds disbursed for services delivered after the deadline. The Commission noted that parties are always free to seek an extension of this deadline in advance if they need additional time.

Discount calculation violation: When applicants fail to calculate their appropriate discount rate, the Commission said it would seek recovery of the difference between the amount it received and the amount to which it was entitled. This would involve both clerical errors as well as cases in which an applicant used a methodology that had not been approved by the Commission. The Commission said if it found an applicant had manipulated its discount rate in a deliberate attempt to defraud the government, full recovery might be appropriate. In addition, if an applicant would not have qualified for internal connections when its discount rate was adjusted, the Commission said it would seek full recovery.

Service not provided for full funding year: If a service provider billed for a full year, but service was only provided for part of the year, the Commission said it would be appropriate to recover the excess amount.

While some stakeholders had urged the Commission to seek recovery only in cases where waste, fraud and abuse were involved, the Commission rejected those arguments. 'While we appreciate that it may impose some hardship to make repayment in some situations, a statutory or rule violation cannot be absolved merely because the nature of the violation does not implicate waste, fraud or abuse. Moreover, to limit recovery to situations involving waste, fraud or abuse would place us in the position of condoning violation of the program's rules. Further, it would provide no incentives to applicants or service providers to take the necessary steps to familiarize themselves with our rules and put controls in place to ensure rule compliance."

The Commission also said it did not believe it was appropriate for a beneficiary to retain the overpayment 'if, for some reason, USAC has mistakenly disbursed an amount in excess of that which the entity is allowed under our rules." But, it said, a beneficiary was always free to argue that recovery was inappropriate 'if there are unique reasons."

The Commission said that while it had not enunciated 'a bright line standard" for determining whether a funding request amounted to 'waste, fraud and abuse," it—along with USAC–retained the discretion to determine that. It said, for instance, that 'a funding request may not be bona fide in a situation in which a service provider has charged the beneficiary an inflated price. Thus it would be appropriate to recover amounts disbursed in excess of what similarly situated customers are normally charged in the marketplace."

Similarly, it said that in situations in which the beneficiary has requested 'a clearly excessive level of support," it would also be appropriate to recover the full amount of the funding.

The Commission said it would initiate and complete any inquiries 'within five years after final delivery of service for a specific funding year." Starting with the 2004 funding year, applicants and service providers will be required to retain all pertinent E-rate documents for a period of five years after the last day of service delivery. The Commission published a list of required documents, but said these were just for 'illustrative purposes." Among the new items that were detailed were copies of all written agreements with E-rate consultants, evidence of RFP publication date, all written correspondence between the applicant and prospective bidders, executed contracts signed and dated by both parties, purchase requisitions, purchase orders, packing slips, delivery and installation records. Service providers that did not win the bid were exempted from the documentation requirements for that bid.

The Commission also said that applicants that exhibit 'systematic noncompliance" or that had been found guilty of rule violations would be subjected to more rigorous scrutiny in subsequent funding years.

It delegated to the Wireline Competition Bureau the authority to resolve other funding recovery issues, but in case of an appeal to the full commission for a waiver of a recovery order, it said it would commit to resolving an appeal within six months. It also instructed USAC to submit a proposed plan for resolving audit findings within 45 days of the rule's publication in the Federal Register.

The Commission also emphasized that it expects applicants to develop their technology plans prior to requesting bids, and that the only thing that is deferred is the date by which the tech plan is approved by a state or other certifying body. It said applicants would be required to certify on the Form 486 application that their tech plan had been approved before they began receiving services.

The FCC said that tech plans should focus on 'research and planning for technology needs," rejecting several other proposals that tech plans serve as preliminary RFPs. It said that USAC would consider that tech plans approved in conjunction with the U.S. Department of Education's technology block grant would be considered acceptable, except that applicants would be expected to include budgetary information about their plans for providing the additional necessary non-eligible resources such as staff development and software.

The Commission said applicants should not fear that tech plan requirements will lock them into specific services; rather they can switch technologies 'as long as those services are designed to deliver the educational applications they have prepared to provide."

The Commission detailed several new certification statements that will appear on the Form 470 and Form 471 application, which should strengthen its ability to enforce its rules.

According to the order, 192 audits have been conducted to date of program beneficiaries, including a random sample of 79 beneficiaries. The bulk of the audit work was performed in 2003, with final audit reports issued last spring.

The bulk of the order takes effect 30 days after its publication in the Federal Register. The full text of the order can be viewed at

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