**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | CC Docket No. 96-45          |
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| Application of Generally         | ** | CG Docket No. 03-123         |
| Accepted Accounting Principles   |    |                              |
| for Federal Agencies and         | *  |                              |
| Generally Accepted Government    | *) |                              |
| Auditing Standards               | ** |                              |
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| to the Universal Service Fund    | *  |                              |
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| Application of Generally         | ** |                              |
| Accepted Accounting Principles   |    |                              |
| for Federal Agencies and         | *  |                              |
| Generally Accepted Government    | *) |                              |
| Auditing Standards               | ** |                              |
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| to the Telecommunications Relay  | *  |                              |
| Services Fund                    | *) |                              |
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**ORDER**

**Adopted: September 26, 2003 Released: October 3, 2003**

By the Commission:

# Introduction

1.  By this Order, we amend our rules governing certain financial
    reporting and auditing requirements applicable to the Universal
    Service Fund and the Telecommunications Relay Services (TRS) Fund
    (collectively referred to as the Funds) to ensure that the
    Commission can maintain its obligations under federal financial
    management and reporting statutes and directives of the Office of
    Management and Budget (OMB). Specifically, we will require the
    administrators of the Funds to prepare financial statements for the
    Funds consistent with generally accepted accounting principles for
    federal agencies (Federal GAAP) and to keep the Funds in accordance
    with the United States Government Standard General Ledger (USGSGL).
    We will also require the administrators to conduct audits of the
    Funds pursuant to generally accepted government auditing standards.
    Further, because the Funds are agency programs included on the
    Commission's annual financial statement, the Funds may be subject to
    a number of federal financial and reporting statutes. We revise our
    rules to reflect this, and to note that, where appropriate under
    relevant law, the Funds may be subject to similar statutes that are
    enacted in the future. We also clarify our rules regarding
    compensation limitations for employees of the Universal Service
    Administrative Company (USAC).

# BACKGROUND

2.  Pursuant to statutory mandate, the Commission established four
    universal service support mechanisms and a mechanism for providing
    people with hearing and speech disabilities access to
    telecommunications services.[^1] The monies to support the universal
    service support mechanisms and the provision of TRS are collected
    from providers of interstate and international end-user
    telecommunications services and telecommunications, including
    payphone aggregators.[^2] The Universal Service Fund is administered
    by the Universal Service Administrative Company and the TRS Fund is
    administered by the National Exchange Carrier Association
    (collectively the "Administrators").

3.  Because the Funds are included as programs in the FCC portion of the
    United States Budget, the Commission is required to include the
    Funds as components of its financial statements.[^3] Pursuant to the
    Accountability of Tax Dollars Act of 2002, the Commission prepares
    organization-wide financial statements annually, and such statements
    must be audited by an external auditor.[^4] In accordance with the
    Federal Financial Management Improvement Act of 1996 (FFMIA) and OMB
    guidance, the Commission is required to follow Federal GAAP when
    preparing its financial statements and is required to maintain its
    accounts according to the USGSGL.[^5] OMB's guidance specifically
    provides that when agencies issue consolidated or consolidating
    financial statements that include components, GAAP for federal
    entities shall be applied to those components.[^6] The audits of the
    financial statements must be conducted pursuant to generally
    accepted government auditing standards (GAGAS).[^7] The Commission
    also must comply with various other statutes governing the
    management, accounting, and reporting of relevant financial,
    management and similar information.[^8]

# DISCUSSION

4.  As noted above, the Universal Service Fund and the TRS Fund are
    components of the Commission's annual financial statements. In
    preparing these financial statements, the Commission is required to
    follow Federal GAAP and maintain its accounts according to the
    USGSGL pursuant to the FFMIA.[^9] Because the OMB has concluded that
    all components included on agency financial statements must comply
    with Federal GAAP, we direct the Administrators of the Universal
    Service Fund and the TRS Fund to prepare financial statements for
    those funds consistent with Federal GAAP and to keep any related
    accounts in accordance with the USGSGL as of October 1, 2004.[^10]
    Similarly, as discussed more specifically below, because audits of
    the Commission's financial statements are conducted according to
    GAGAS, we direct the Administrators to conduct certain audits of the
    Universal Service Fund and the TRS Fund according to GAGAS.

5.  The modifications we make to our rules regarding audits are intended
    to reflect the distinction between audits of the Funds and audits of
    the Administrators of those funds. Any audit conducted by the
    Administrators, or by any independent auditor hired by the
    Administrators, of the beneficiaries of the Funds, contributors to
    those Funds, or any other providers of services under the universal
    service support mechanisms and the TRS program, must be done in
    accordance with GAGAS.[^11] For example, audits conducted of
    beneficiaries of the schools and libraries support mechanism
    pursuant to section 54.516 of the Commission's rules must follow
    GAGAS. In contrast, audits conducted of the Administrators may be
    conducted according to generally accepted auditing standards (GAAS).
    For example, the required audit of the Universal Service Fund
    Administrator pursuant to section 54.717 of the Commission's rules
    may continue to be conducted according to GAAS.[^12] Similarly, any
    audit of the TRS Fund Administrator may be conducted pursuant to
    GAAS. Because the TRS Fund will be audited as a component of the
    Commission's financial statements, we find that the yearly audit of
    the TRS Fund pursuant to section 64.604(c)(5)(iii)(D) is no longer
    necessary, and we delete 64.604(c)(5)(iii)(D) from the Commission's
    rules.

6.  Because the Funds are components of the Commission's financial
    statements, the Administrators, in their capacity as administrators
    of the Funds, may also need to comply with relevant provisions of
    certain federal financial management and reporting statutes and
    rules. We therefore amend our rules to reflect the fact that the
    Funds are also subject to certain existing legal requirements,
    *e.g.*, the Debt Collection Improvement Act of 1996 and relevant
    portions of the Federal Financial Management Improvement Act of
    1996.[^13] As appropriate under federal law, the Commission will
    also apply relevant provisions of similar federal laws that may be
    enacted in the future.

7.  Finally, we take this opportunity to clarify our rules by adding a
    note to section 54.715(b) of the Commission's rules. Section
    54.715(b) provides that the annual rate of pay for officers and
    employees of the Administrator of the universal service support
    mechanisms may not "exceed the annual rate of basic pay for level I
    of the Executive schedule." The note we add clarifies that the
    compensation to be included when calculating whether an employee\'s
    rate of pay exceeds Level I of the Executive Schedule does not
    include life insurance benefits, retirement benefits (including
    payments to 401(k) plans), health insurance benefits, or other
    similar benefits, provided that any such benefits are reasonably
    comparable to benefits that are provided to employees of the federal
    government. To the extent any of these clarifications require
    adjustments to benefits that are currently provided to employees of
    the Administrator, they shall be applied prospectively.

8.  We understand that the Administrators will need time to update
    accounting systems and train accountants, auditors and other
    relevant employees in order to comply with the rule changes adopted
    herein. To ensure adequate time for implementation of these new
    rules, the Administrators will have until October 1, 2004, to update
    their financial accounting and audit procedures for financial
    reporting for fiscal year 2005. These rules will go into effect 30
    days after publication in the Federal Register. We find for good
    cause that these rule changes may be adopted without affording prior
    notice and an opportunity for public comment because, for the most
    part, the rules merely reflect existing legal requirements.[^14]
    Other parts of the rule amendments are exempt from the notice and
    comment requirements of the Administrative Procedure Act because
    they concern interpretations of existing rules.[^15] The Commission
    will send a copy of this Order in a report to be sent to Congress
    pursuant to the Congressional Review Act.[^16] In addition, the
    Commission will send a copy of the Order to the Chief Counsel for
    Advocacy of the Small Business Administration. A copy of the Order
    will also be published in the Federal Register.[^17]

    **IV. ORDERING CLAUSES**

9.  IT IS ORDERED that, pursuant to sections 4(i), 225, 254, and 303(r)
    of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i),
    225, 254, and 303(r), Parts 54, and 64 of the Commission's rules are
    amended, as set forth in the Appendix, effective 30 days after
    publication of this Order in the Federal Register.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Marlene H. Dortch
>
> Secretary

**APPENDIX A - FINAL RULES**

\* \* \* \* \*

Part 54 of title 47 of the Code of Federal Regulations ("C.F.R.") is
amended as follows:

> **1. Section 54.702 is amended by adding new subparagraph (n)**

**\* \* \* \* \***

\(n\) The Administrator shall account for the financial transactions of
the Universal Service Fund in accordance with generally accepted
accounting principles for federal agencies and maintain the accounts of
the Universal Service Fund in accordance with the United States
Government Standard General Ledger. When the Administrator, or any
independent auditor hired by the Administrator, conducts audits of the
beneficiaries of the Universal Service Fund, contributors to the
Universal Service Fund, or any other providers of services under the
universal service support mechanisms, such audits shall be conducted in
accordance with generally accepted government auditing standards. In
administering the Universal Service Fund, the Administrator shall also
comply with all relevant and applicable federal financial management and
reporting statutes.

2.  **Section 54.715 is amended by adding a note to subparagraph (b)**

**\* \* \* \* \***

Note: The compensation to be included when calculating whether an
employee\'s rate of pay exceeds Level I of the Executive Schedule does
not include life insurance benefits, retirement benefits (including
payments to 401(k) plans), health insurance benefits, or other similar
benefits, provided that any such benefits are reasonably comparable to
benefits that are provided to employees of the federal government.

Part 64 of title 47 of the Code of Federal Regulations ("C.F.R.") is
amended as follows:

> **3. Section 64.604(c)(5)(iii)(D)** **is deleted.**
>
> **4. Section 64.604(c)(5)(iii)(H) is deleted and replaced as
> follows:**

**\* \* \* \* \***

\(H\) *Administrator reporting, monitoring, and filing requirements.*
The administrator shall perform all filing and reporting functions
required in paragraphs (c)(5)(iii)(A) through (J) of this section*.* TRS
payment formulas and revenue requirements shall be filed with the
Commission on May 1 of each year, to be effective the following July 1.
The administrator shall report annually to the Commission an itemization
of monthly administrative costs which shall consist of all expenses,
receipts, and payments associated with the administration of the TRS
Fund. The administrator is required to keep the TRS Fund separate from
all other funds administered by the administrator, shall file a cost
allocation manual (CAM) and shall provide the Commission full access to
all data collected pursuant to the administration of the TRS Fund. The
administrator shall account for the financial transactions of the TRS
Fund in accordance with generally accepted accounting principles for
federal agencies and maintain the accounts of the TRS Fund in accordance
with the United States Government Standard General Ledger. When the
administrator, or any independent auditor hired by the administrator,
conducts audits of providers of services under the TRS program or
contributors to the TRS Fund, such audits shall be conducted in
accordance with generally accepted government auditing standards. In
administering the TRS Fund, the administrator shall also comply with all
relevant and applicable federal financial management and reporting
statutes. The administrator shall establish a non-paid voluntary
advisory committee of persons from the hearing and speech disability
community, TRS users (voice and text telephone), interstate service
providers, state representatives, and TRS providers, which will meet at
reasonable intervals (at least semi-annually) in order to monitor TRS
cost recovery matters. Each group shall select its own representative to
the committee. The administrator's annual report shall include a
discussion of the advisory committee deliberations.

**\* \* \* \* \***

[^1]: *See* 47 U.S.C. §§ 254 and 225. Pursuant to section 254, there are
    four universal service support mechanisms \-- the high-cost program,
    the low-income program, the schools and libraries program, and the
    rural health care program.

[^2]: *See* 47 U.S.C. § 254(d) and 47 C.F.R. § 64.604(c)(5)(iii)(A).

[^3]: OMB specifies the form and content of agency financial statements
    through issuance of OMB Bulletins, pursuant to its authority under
    the Chief Financial Officers Act of 1990, as amended, 31 U.S.C. §§
    331(e) and 3512(d). Under that authority, OMB requires all agencies
    to follow the Federal Accounting Standards Advisory Board's
    Statement of Federal Financial Accounting Concepts No. 2 (SFFAC No.
    2), which contains criteria for determining whether programs should
    be included on an agency's financial statement. Under SFFAC No. 2's
    "conclusive criterion," programs and accounts listed on the United
    States Budget, such as the Universal Service Fund and the TRS Fund,
    must be included in an agency's financial statement.

[^4]: At the request of the Department of Treasury, the Commission
    prepared its first audited balance sheet in fiscal year 1999 and has
    prepared a complete set of audited financial statements since fiscal
    year 2000. Subsequently, the Commission was included among agencies
    that were required to prepare annual financial statements under
    provisions of the Accountability of Tax Dollars Act of 2002, Public
    Law No. 107-289. Since 1999, the Administrators' Fund accounts have
    been consolidated with the Commission's accounts through the use of
    accounting cross-walks.

[^5]: Section 803 of the FFMIA states that "\[e\]ach agency shall
    implement and maintain financial management systems that comply
    substantially with Federal financial management systems
    requirements, applicable Federal accounting standards, and the
    \[USGSGL\] at the transaction level." *See* Section 803 of the
    FFMIA, *reprinted at* 31 U.S.C. § 3512 note (1996) (Federal
    Financial Management Improvement). *See also* OMB Bulletin No.
    01-09, [Form and Content of Agency Financial
    Statements]{.underline}, Sept. 25, 2001 (OMB Bulletin).

[^6]: OMB Bulletin at 3.

[^7]: *See* Chief Financial Officer's Act of 1990, Public Law No.
    101-576, as expanded by the Government Management Reform Act of
    1994, Public Law No. 103-356. *See* *also* OMB Bulletin 01-02,
    [Audit Requirements for Federal Financial Statements]{.underline},
    Oct. 16, 2000.

[^8]: *See, e.g.,* Prompt Payment Act of 1982, Public Law No. 97-177;
    Federal Managers' Financial Integrity Act of 1982, Public Law No.
    97-255; Cash Management Improvement Act of 1990, Public Law No.
    101-453; Federal Credit Reform Act of 1990, Public Law No. 101-508,
    as amended; Chief Financial Officer's Act of 1990, Public Law No.
    101-576; Government Performance and Results Act of 1993, Public Law
    No. 103-62; Government Management Reform Act of 1994, Public Law No.
    103-356; Federal Financial Management Improvement Act of 1996,
    Public Law No. 104-208; Debt Collection Improvement Act of 1996,
    Public Law No. 104-134; Information Technology Management Reform Act
    of 1996, Public Law No. 104-106; Reports Consolidation Act of 2000,
    Public Law No. 106-531; Accountability of Tax Dollars Act of 2002,
    Public Law No. 107-289; and Improper Payments Information Act of
    2002, Public Law No. 107-300.

[^9]: *See* Section 803 of the FFMIA, *reprinted at* 31 U.S.C. § 3512
    note (1996) (Federal Financial Management Improvement).

[^10]: OMB Bulletin at 3.

[^11]: 47 C.F.R. §§ 54.516, 54.619, 54.705(c)(iv), 54.707 and
    64.604(c)(iii)(C).

[^12]: 47 C.F.R. § 54.717.

[^13]: *See* Debt Collection Improvement Act of 1996, Public Law No.
    104-134, and Federal Financial Management Improvement Act of 1996,
    Public Law No. 104-208.

[^14]: 5 U.S.C. § 553(b)(3)(B).

[^15]: 5 U.S.C. § 553(b)(3)(A).

[^16]: *See* 5 U.S.C. § 801(a)(1)(A).

[^17]: *See* 5 U.S.C. § 604(b).