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Table of Contents

Part I: Management’s Discussion and Analysis

A Message from the Chairman ..................................... 3

About the Report ................................................ 5

About the FTC .................................................. 5

Strategic Goals and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Program Performance Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Ongoing and Future Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Significant Program Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Financial Performance Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Systems and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Part II: Program Performance

Goal 1: Protect Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Goal 2: Maintain Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Part III: Audited Financial Statements

Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Limitations of the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Audit of FTC’s 2004 Principal Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Financial Resources and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 59

Custodial Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Office of Inspector General Opinion Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Office of Inspector General Top Management Challenges of the FTC . . . . . . 67

FTC Financial Statements for Fiscal Year End 2004 . . . . . . . . . . . . . . . . . . . . 70

Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
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Part I: Management’s Discussion and Analysis

A Message From The Chairman

I am pleased to present the Federal Trade Commission’s

Performance and Accountability Report for Fiscal Year 2004.

I was sworn in as Chairman of the FTC in August 2004, and

have been impressed with the evident dedication of the staff to

the mission of the agency, as well as with their significant

accomplishments that have benefitted consumers across the

nation. This report provides an overview of the FTC’s mission,

accomplishments, performance, and financial management.

In FY 2004, the FTC celebrated its 90th anniversary and took

the opportunity to look back at the evolution of its mission,

including the integration of the consumer protection and

competition missions, and the advantages of having both

programs in one agency. As I have learned, the FTC works

For The Consumer, an apt summary of the agency’s consumer

protection and competition missions, both of which have the

shared goal of improving consumer welfare. 

One example of the FTC’s great work is the National Do Not Call Registry, which

commemorated its one year anniversary in June 2004, and now includes over 64 million

telephone numbers. Consumers are receiving far fewer telemarketing calls, and the

Registry has been hailed by Congress, the media, and consumers as a beneficial and costeffective government program. The FTC’s FY 2004 accomplishments in such areas as the

promotion of competition and innovation, competition advocacy, administrative litigation,

identity theft, Internet fraud, spam, and deceptive healthcare claims are highlighted in this

report. In the coming year, the FTC will continue to address these and other challenges

of high priority to consumers. For more information on the FTC’s activities and its wealth

of consumer and business education, I invite readers to visit our Web site at www.ftc.gov.

Another important goal of the FTC is to implement good financial management practices

to ensure that our resources are well-managed and wisely used. The FY 2004 independent

financial audit resulted in the FTC’s eighth consecutive unqualified opinion, the highest

audit opinion available. The audit of the FTC’s financial statements, which includes tests

of internal control and compliance with laws and regulations, is conducted in accordance

with Government Auditing Standards and the Office of Management and Budget (OMB)

Bulletin No. 01-02.

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About the Report

This Fiscal Year (FY) 2004 Performance and Accountability Report is the Federal Trade

Commission’s (FTC) second consolidated report prepared pursuant to the requirements

of the Accountability of Tax Dollars Act of FY 2002 (Public Law 107-289) and subject to

regulations issued by the Office of Management and Budget (OMB). Unless otherwise

noted, the examples and statistics used in the Report represent FY 2004 activities,

spanning the period of October 1, 2003, to September 30, 2004.

Part I, Management’s Discussion and Analysis, provides an overview of the FTC’s mission,

performance, and financial activities. Part II, Program Performance, presents the results

of the FTC’s 2004 performance in accordance with its Government Performance and

Results Act strategic plan. Part III, Audited Financial Statements, sets forth the FTC’s FY

2004 audited financial statements, and related audit and management information.

The FTC has worked to present information in a clear and understandable manner and will

continue to refine its process and format in future years to make this report a valuable tool

for FTC managers, stakeholders, and members of the public interested in the

accountability, performance, and activities of the agency. The report is available on the

Internet at www.ftc.gov/par, or copies can be obtained by emailing gpra@ftc.gov, calling

202-326-2222, faxing 202-326-2329, or mailing Federal Trade Commission, 600

Pennsylvania Avenue, NW, H-774, Attention PAR, Washington, DC 20580. Comments

from readers are encouraged and can be sent via the aforementioned email, fax, or mailing

address.

About the FTC

President Woodrow Wilson signed the FTC Act

into law ninety years ago on September 26, 1914.

Congress has charged the FTC with the broadest

legislative mandate of any federal consumer

protection agency. It is an independent federal

agency with a staff of approximately 1,100. Its

headquarters (pictured at right) is located in

Washington, D.C., with offices in seven regions

across the nation (for locations see

www.ftc.gov/ro/romap2.htm). The impact of the

FTC on the nation’s marketplace belies its small

size. The FTC’s activities affect the lives of consumers every day through, for example, the

receipt of fewer telemarketing calls, lower prescription drug prices due to the availability of

generic drugs, care labels in clothing, energy labels on appliances, health warnings on

cigarette packages, or competitive prices for goods as a result of a blocked merger.
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Top 10 Consumer Fraud Complaints

Calendar Year 2003

 1. Identity Theft - 42%

 2. Internet Auctions - 15%

 3. Shop-At-Home/Catalogue Sales - 9%

 4. Internet Services and Computer Complaints - 6%

 5. Prizes, Sweepstakes, and Lotteries - 5%

 6. Foreign Money Offers - 4%

 7. Advance Fee Loans and Credit Protection - 4%

 8. Telephone Services - 3%

 9. Business Opportunities/Work-At-Home Plans - 2%

10. Magazine Buyers Clubs - 1%

FTC Consumer Resources

www.ftc.gov

Consumers are encouraged to call the FTC’s Consumer Response Center (CRC) on its tollfree numbers – 1-877-FTC-HELP or 1-877-ID-Theft – with complaints, inquiries, or

requests for education materials. The FTC’s Web site, www.ftc.gov, also permits

consumers to file online complaints and access information and education materials on a

broad array of consumer issues, such as fraud, spam, identity theft, and credit practices.

The FTC also has a dedicated page of its Web site in Spanish, Proteccion para el

Consumidor, to mirror the English-language page, and has translated over 100 consumer

publications into Spanish. The consumer complaints are used to target the agency’s law

enforcement and education efforts.

Through the www.consumer.gov/sentinel link, consumers can view summary data collected

by the FTC, such as the scams that garner the most frequent consumer complaints; the

scams that cost consumers most; the number of identity theft complaints, by state; the

types of identity theft most frequently reported; and how to spot and avoid fraud and

deception online and off. The FTC Web site also has a direct link to the government-wide

public site, www.firstgov.gov, and to a site created and maintained by the FTC,

www.consumer.gov, a one-stop link to a broad range of federal consumer information

resources.
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Organization

The FTC is headed by a Commission comprised of five members who are nominated by

the President and confirmed by the Senate, and who serve staggered seven-year terms.

The President chooses one Commissioner to act as Chairman. No more than three

Commissioners can be of the same political party. At the end of FY 2004, the Chairman

was Deborah Platt Majoras, and the Commissioners were Orson Swindle, Thomas B.

Leary, Pamela Jones Harbour, and Jonathan Leibowitz.

The FTC has two major law enforcement bureaus, Consumer Protection and Competition,

supported by an economics bureau, regional offices, and mission support offices. The

agency enforces laws that prohibit business practices that are anticompetitive, deceptive,

or unfair to consumers. It also promotes informed consumer choice and public

understanding of the competitive process. The work of the FTC is critical in protecting and

strengthening free and open markets in the United States and, increasingly, the world.

FEDERAL TRADE COMMISSION ORGANIZATION CHART

Regulatory Responsibility

The FTC was established by Congress in 1914 to enforce the FTC Act. Section 5 of the

FTC Act prohibits “unfair methods of competition,” and was amended in 1938 also to

prohibit “unfair or deceptive acts or practices.” In addition, the FTC enforces a variety of

other consumer protection laws, such as the Fair Credit Reporting Act and Equal Credit

Opportunity Act, and antitrust laws, such as the Sherman Act and Clayton Act. For a

discussion of the agency’s regulatory authority, see the FTC FY 2003-2008 Strategic Plan,

at www.ftc.gov/opp/gpra/spfy03fy08.pdf, section entitled Laws Enforced by the FTC.
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Mission

At the start of the 21st century, global markets, high-technology innovation, and markets

in transition to new ways of competing dominate the economic landscape. The FTC

continues to adapt its mission strategies and workforce in response to these marketplace

forces.

Consumer protection and antitrust law enforcement have played an important role in maintaining the competitiveness of U.S. markets. The FTC ensures that free markets work –

that competition among producers and accurate information in the hands of consumers

create the incentives to generate the best products at the lowest prices, spur efficiency and

innovation, strengthen the economy, and produce benefits for consumers.

For competition to thrive, consumers must receive accurate information about products and

services. Through its consumer protection mandate, the FTC protects consumers from

fraud, deception, and unfair practices in the marketplace. It works to foster the exchange

of accurate, non-deceptive information, allowing consumers to make informed choices in

their purchasing decisions and to participate with confidence in the traditional and electronic

marketplaces. The FTC addresses current issues of importance to consumers, including

identity theft, consumer privacy, telemarketing fraud, Internet fraud, health care, and consumer credit.

At the same time, for consumers to have a choice of products and services at competitive

prices and quality, the marketplace must be free from unreasonable restrictions on

competition. Through its maintaining competition mandate, the agency enforces the laws

that prohibit anticompetitive mergers and business practices. It promotes free and open

competitive markets, which bring consumers lower prices, innovation, and choice among

products and services. A significant portion of the FTC’s resources are devoted to market

segments that matter most to consumers, including energy, health care, prescription drugs,

grocery retailing, and high tech. The FTC works to remove restrictions on competition so

that markets can function at their best.

The FTC’s legislative mandate to serve as a locus of professional expertise on competition

and consumer protection issues makes the FTC highly distinctive among antitrust and

consumer protection agencies worldwide. To position itself to make intelligent contributions

to consumer protection and competition policy through litigation or non-litigation

instruments, the FTC must make substantial investments in “policy research and

development.” Its capacity to enforce the antitrust and consumer protection laws, and its

credibility as a voice for sound public policy, requires a continuing commitment to conduct

research that increases its understanding of how markets and firms operate, the conditions

under which business conduct is likely to harm consumers, and the effects of its previous

enforcement efforts.
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History of the FTC

In recognition of the FTC’s 90th anniversary on September 26, 1914, the agency added

a page to its Web site on FTC’s history (see www.ftc.gov HISTORY OF THE FTC).

Readers can find articles on the origin of the agency, oral histories, annual reports, as well

as information on the 100th anniversary of the FTC’s predecessor, the Bureau of

Corporation.

President Woodrow Wilson signed the

FTC Act into law on September 26,

1914. 
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Strategic Goals and Objectives

The FTC provides annual performance plans to Congress that set forth its goals and

objectives, and its performance measures and targets as required by the Government

Performance and Results Act. The FTC has two strategic goals that link directly to its two

missions, Consumer Protection and Maintaining Competition. Each goal has three objectives

– identify, stop, and prevent illegal practices – and each objective has performance

measures. The FTC uses strategic planning to set the strategies, implementation plans,

performance measures, and targets for its goals. The FTC’s Performance Plans and FY

2003-2008 Strategic Plan are available on its Web site at www.ftc.gov/opp/gpra/index.htm.

The complete FY 2004 Performance Report with actual results is included in Part II, Program

Performance, of this report.

FTC’s Mission

To prevent business practices that are anticompetitive or deceptive or unfair

to consumers; to enhance informed consumer choice and public

understanding of the competitive process; and to accomplish these missions

without unduly burdening legitimate business activity

FTC’s Vision

A U.S. economy characterized by vigorous competition among producers and

consumer access to accurate information, yielding high-quality products at

low prices and encouraging efficiency, innovation, and consumer choice.
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Strategic Goal 1 Protect Consumers

Prevent fraud, deception, and unfair

business practices in the marketplace.

Objective 1.1 Identify fraud,

deception, and

unfair practices

that cause the

greatest consumer

injury.

Objective 1.2 Stop fraud,

deception, and

unfair practices

through law

enforcement.

Objective 1.3 Prevent consumer

injury through

education.

Strategic Goal 2 Maintain Competition

Prevent anticompetitive mergers and other

anticompetitive business practices in the

marketplace.

Objective 2.1 Identify

anticompetitive

mergers and practices

that cause the

greatest consumer

injury.

Objective 2.2 Stop anticompetitive

mergers and practices

through law

enforcement.

Objective 2.3 Prevent consumer

injury through

education.
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Program Performance Overview

The systems and methodologies for collecting performance data are reviewed by the FTC’s

Office of the Inspector General. Senior economists from the FTC’s Bureau of Economics 

review statistical data, as appropriate. Performance measure results are reviewed by senior

management and the Commission periodically throughout the fiscal year.

Goal 1: Protect Consumers

The goal of the Consumer Protection Mission is to prevent fraud, deception, and unfair

business practices in the marketplace. It works to accomplish this goal through three

objectives, which are to: (1) identify fraud, deception, and unfair practices that cause the

greatest consumer injury; (2) stop fraud, deception, and unfair practices through law

enforcement; and (3) prevent consumer injury through education.

Objective 1: Identify fraud, deception, and unfair practices that cause the greatest

consumer injury

To identify the most prevalent and serious forms of fraud and deception, the FTC relies on

its Consumer Information System (CIS) database, the largest database of consumer

complaints in the world. The FTC collects complaints via its toll-free help lines, postal mail,

and online. It also receives complaint data from a broad array of public and private partner

organizations in the United States and Canada.

Analysis of the complaints in its CIS database enables the FTC to detect and respond rapidly

to fraud, deception, and other illegal practices. This results in effective targeting of the

agency’s law enforcement and education resources. The continuous input of new complaints

into the database helps the FTC and its law enforcement partners determine where and how

the latest incidents of fraud may be occurring.

The FTC also shares complaints about fraud and deception with its law enforcement partners

through Consumer Sentinel, a secure Web site that provides access to more than 2.0 million

fraud and identity theft complaints. Consumer Sentinel is a unique and effective enforcement

tool that permits more than 1,150 law enforcers in the United States, Canada, and Australia

to determine whether a particular fraudulent scheme is local, national, or cross-border in

nature, and also to help spot larger trends for law enforcement action.

The FTC determines its success under this objective using two performance measures.

First, the agency measures the total number of consumer complaints and inquiries that are

added annually to the CIS database (see graph below for actual results for the last five

years). Second, it measures how many of these consumer complaints and inquiries relate

to identity theft. The target for FY 2004 was to add at least 700,000 entries into the

database, including 250,000 relating to identity theft. The FTC exceeded its target, adding

994,000 entries, including 314,000 relating to identity theft.
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435 430

680

944

994

0

250

500

750

1000

2000 2001 2002 2003 2004

Annual Number of Complaints and Inquiries Entered Into Database

(quantities in thousands)

The number of total annual entries has increased substantially in recent years. In response

to the success of the CIS database, the agency has raised its target in each of its strategic

plans. The graph below shows the upward trend of the annual actual results of this measure.

The FTC began tracking identity theft entries in FY 2003, setting a target of 155,000 entries

based on historical data. The actual result was 321,000 entries. 

Objective 2: Stop fraud, deception, and unfair practices through law enforcement

The FTC uses its law enforcement authority to stop fraud, deception, and unfair practices.

Consumers save money each time a fraudulent operator is stopped by successful litigation

or settlement with the agency. Savings to consumers are increased when the agency leads

joint law enforcement initiatives with federal, state, and international partners.

The FTC determines its success under this objective using three performance measures.

First, the agency measures the effectiveness of its law enforcement efforts to stop fraud by

estimating the amount of money it has saved consumers based on the annual fraudulent

sales of defendants. In FY 2004, the FTC saved consumers $348.8 million, which represents

87 percent of its $400 million target. The agency also set a target in its FY

2003-2008 Strategic Plan of saving consumers a total of $2 billion by FY 2008. Having

exceeded its annual target in FY 2003, and achieved 87 percent in FY 2004, the FTC is on

track to reach its $2 billion target. The amount of savings vary year-to-year based on the

number of cases and amounts of fraudulent sales of defendants. The following graph

demonstrates the amounts the FTC has saved consumers in recent years.
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$265.0

$487.0

$561.0

$606.3

$348.8

$-

$250.0

$500.0

$750.0

2000 2001 2002 2003 2004

Dollar Savings for Consumers from FTC Actions which Stop Fraud 

(dollars in millions)

Second, as an indicator of the usefulness of the FTC’s Consumer Sentinel complaints, the

agency measures the number of data searches by its staff and other law enforcement

personnel. This measure was added in FY 2003, with a target of 20,000 searches and an

actual result of 27,685. In FY 2004, the actual number of Consumer Sentinel searches was

more than 87,000, far exceeding the annual target of 24,000. However, Consumer Sentinel

made several major changes and improvements in late September 2003, and staff estimate

that almost half of the FTC and external law enforcement personnel usage may be related

to the testing of these changes.

Finally, the agency measures the number of data searches by law enforcement personnel

of the FTC’s identity theft complaints. This measure also was added in FY 2003, with a

target of 1,400 and actual results of 2,167. In FY 2004, the actual number of Identity Theft

Data Clearinghouse searches by law enforcement personnel was 2,120, or 125 percent of

the target of 1,700.

Objective 3: Prevent consumer injury through education

Consumer and business education represents the first line of defense against fraud,

deception, and unfair practices. Most FTC law enforcement initiatives include a consumer

and/or business education component aimed at preventing consumer injury and unlawful

business practices. Public education programs benefit consumers by alerting them to their

rights under various consumer protection laws and providing practical tips on how to

recognize and avoid scams and rip-offs. To reach the broadest possible audience, the FTC

makes maximum use of the national media and outreach to lead more consumers to the

FTC’s Web site (www.ftc.gov) and the one-stop government Web site for consumer

information (www.consumer.gov). Messages also reach the public through the FTC’s

Consumer Response Center (at 1-877-FTC-HELP) and hundreds of partners who distribute

FTC materials, link to its Web site, or post the FTC’s messages on their Web sites.
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11.0

15.0

19.3

28.0

26.5

0.0

10.0

20.0

30.0

2000 2001 2002 2003 2004

Number of Education Publications Distributed To or Accessed 

Electronically by Consumers 

(quantities in millions)

The FTC determines its success under this objective using three performance measures.

First, the agency measures the total number of education publications distributed to or

accessed electronically by consumers. Second, it measures the number of publications

related to identity theft distributed to or accessed electronically by consumers. Finally, it

measures the number of Spanish-language education publications distributed to or accessed

electronically by consumers. The latter two measures were added in FY 2003 to track the

FTC’s efforts to respond to high-priority consumer issues.

The target in FY 2004 was to reach a total audience of at least 15 million with FTC education

publications. The FTC exceeded this target by distributing 26.5 million publications. More

publications continue to be distributed online (nearly 20 million) than in print (6.6 million).

The 26.5 million includes 3.7 million publications related to identity theft, exceeding the target

of 2.5 million, and 737,000 Spanish-language publications, exceeding the target of 400,000.

In FY 2003, the FTC distributed 3 million publications related to identity theft and 458,000

Spanish-language publications. The FTC exceeded its targets in FY 2004 by such a wide

margin due to the continuing increase in Internet accesses, and the large number of

accesses of materials related to the Do Not Call Registry. The following graph shows the

trend in distribution of all Consumer Protection Mission education publications in recent

years.
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Goal 2: Maintain Competition 

The goal of Maintaining Competition Mission is to prevent anticompetitive mergers and other

anticompetitive business practices in the marketplace. It works to accomplish this goal

through three objectives, which are to: (1) identify anticompetitive mergers and practices

that cause the greatest consumer injury; (2) stop anticompetitive mergers and practices

through law enforcement; and (3) prevent consumer injury through education.

Objective 1: Identify anticompetitive mergers and practices that cause the greatest

consumer injury

The FTC’s Bureau of Competition and the Antitrust Division of the U.S. Department of Justice

(DOJ) share responsibility for enforcing laws that promote competition in the marketplace.

Competition benefits consumers by keeping prices low and the quality of goods and services

high. Most mergers actually benefit competition and consumers by allowing firms to operate

more efficiently. But some are likely to lessen competition. That, in turn, can lead to higher

prices, reduced availability of goods or services, lower quality of products, and less

innovation. Identifying and challenging anticompetitive mergers is a difficult task that can

take thousands of hours of investigative work and, often, litigation.

The Hart-Scott-Rodino (HSR) Act requires that companies planning a merger, in which the

size of the transaction and the parties exceeds thresholds prescribed by the Act, notify the

FTC and DOJ before proceeding with the transaction. The FTC uses these “premerger

notification reports” as its primary means for identifying potentially anticompetitive mergers,

screening each proposed transaction to determine which require further investigation. Over

the past two years, a less active economy and revised HSR thresholds have kept the number

of reported transactions at moderate levels. The modified reporting thresholds did not alter

the standard of legality for mergers, however, so the FTC has increased efforts to identify

mergers not reported under HSR that might harm competition. These efforts include

monitoring trade press and Internet resources, as well as following up on information from

congressional offices, other Executive Branch agencies, state and local governments,

consumers, businesses, and the antitrust bar about possibly anticompetitive mergers. The

FTC uses similar means to identify business practices that may harm consumers.

The FTC determined its success under this objective in FY 2004 using two performance

measures. First, the agency measured the percentage of significant HSR merger

investigations concluded during the year that resulted in enforcement action. Significant HSR

merger investigations are those in which the Commission issued a formal request for

additional information – called a “second request”– from the parties under the HSR Act,

typically representing no more than 2 to 3 percent of the premerger notification filings

received. Second, it measured the percentage of significant nonmerger investigations

concluded during the year that resulted in enforcement action. Significant nonmerger

investigations are those in which the Commission approved the use of its authority to compel

the submission of information. 
17

The FTC’s target for both measures was that the number of significant investigations

concluded during the year that result in enforcement action will generally fall in the range

from 60 to 80 percent. Results within this range show that the agency was successful in

targeting potentially anticompetitive conduct because if the conduct was found not to be

anticompetitive, no enforcement action would have been taken. 

In FY 2004, 12 of 22 or 55 percent of significant merger investigations concluded during the

year resulted in enforcement action. The reasons that this result fell outside the target range

likely include (1) the small number of cases involved in the calculation and (2) an unusual

number of difficult and close cases that ultimately were found not to require enforcement

action. The FTC’s performance on this measure over the past four years – 65 percent,

based on 64 of 98 investigations – further suggests that the FY 2004 result is a statistical

anomaly. The results on this measure in FY 2005 and beyond will help to answer this

question.

In FY 2004, 5 of 8 investigations or 63 percent of significant nonmerger investigations

concluded during the year resulted in enforcement action. This result is within the target

range, though the small numbers make if difficult to draw any definitive conclusions. This

measure is new for FY 2004, but in future years the FTC will report both annual and

aggregate results.

Objective 2: Stop anticompetitive mergers and practices through law enforcement

The FTC uses its law enforcement authority to stop anticompetitive mergers and practices

both directly and indirectly. Through federal court or administrative litigation or by negotiated

settlement, the agency saves consumers millions of dollars annually by preventing harmful

mergers from taking place, by arranging for the restructuring of transactions to eliminate

anticompetitive effects, or by stopping unlawful business practices. In addition to these direct

actions, an effective FTC enforcement presence indirectly serves its objective by

demonstrating to the business and legal communities that the agency can and will take

successful legal action to stop anticompetitive transactions and practices.

The FTC determined its success under this objective using three performance measures.

First, the agency measured the percentage of positive outcomes obtained in antitrust

enforcement actions. Second, the agency measured the volume of commerce in markets

in which the FTC took enforcement action to protect competition from the effects of unlawful

mergers. Finally, the agency measured the volume of commerce in markets in which the

FTC took enforcement action to protect competition from the effects of unlawful conduct.

The latter two measures indicate the scope of the FTC’s antitrust enforcement activities, and

are new in FY 2004.

A positive outcome for an enforcement action includes abandonment of an anticompetitive

transaction following an FTC challenge, a consent agreement to resolve antitrust concerns,

or a successful result in administrative or federal court litigation after all proceedings,

including appeals, have concluded. A negative outcome occurs when parties refuse to settle

antitrust concerns raised by the FTC and the agency is unsuccessful in obtaining relief
18

through the courts or an administrative challenge. The FTC significantly exceeded its target

of achieving positive outcomes in 80 percent of its enforcement actions by obtaining a

positive result in 100 percent of the administrative and federal court enforcement actions it

concluded during the year. In recent years, the FTC has achieved similar results on this

measure, 95 percent in 2000, 94 percent in 2001, 100 percent in 2002, and 100 percent in

2003. These results benefit consumers both directly and indirectly – because the agency’s

track record of success in obtaining the relief it deems necessary on consumers’ behalf helps

persuade more parties to settle FTC charges rather than resist, which could lead to higher

prices, reduced availability of goods or services, lower quality of products, and less

innovation.

As discussed in the FTC’s 2003-2008 Strategic Plan, external factors, such as level of

merger activity, may cause the results of the two volume of commerce measures to fluctuate

significantly from year to year. Thus, the FTC’s targets for these two new measures are

both expressed as aggregate totals over the five-year period. In FY 2004, the FTC took

merger enforcement actions that protected competition in markets with a total of $8.5 billion

in annual sales. The FTC’s nonmerger enforcement actions in FY 2004 protected commerce

in markets with a total of $2.6 billion in annual sales.

Though these results are less than the annual averages needed to attain the five-year goals

of $200 billion (annual average $40 billion) and $100 billion (annual average $20 billion), the

FTC does not view them as an indicator of ultimate results because (1) merger activity

appears to be increasing; (2) the Commission concluded no action was necessary in close

cases somewhat more often than is the norm in FY 2004; (3) the results do not include data

from several significant competition cases that are currently in litigation and are consuming

a significant portion of the FTC’s antitrust resources; (4) a small number of major cases

typically contribute a major portion of the final totals and no such cases were concluded in

FY 2004; and (5) overall, the Maintaining Competition Mission continued to be highly

productive in FY 2004, with no sign of slowing.

Objective 3: Prevent consumer injury through education

The FTC increases awareness of antitrust law and policy and promotes compliance with the

antitrust laws by educating the public about its activities and communicating its enforcement

intentions. The agency’s methods of informing the public include development and

publication of antitrust guidelines and policy statements; press releases and public

dissemination of documents describing its formal actions; and well-publicized testimony,

speeches, and publications.

The FTC strove to determine its success under this objective using two performance

measures. First, the agency measured the number of hits on antitrust pages on the FTC’s

Web site, of interest to the business and legal communities, and second, the number of hits

on the antitrust pages of interest to policymakers and the public at large.

In FY 2004, the FTC’s Web site recorded more than 11 million total hits on antitrust-related

pages, an increase of approximately 10 percent over FY 2003. The agency determined that
19

distinguishing between content more of interest to the business and legal communities, and

content more of interest to the general public, was more problematic than expected.

Generally, nearly all of the material holds interest for businesses and the bar. Much of that

material is also of significant interest to members of the public. Only a small number of

pages appear to be of interest to the public at large, but not to the business and legal

communities. Because it is difficult to distinguish between the FTC’s relative success in

educating the business and legal communities and the general public, the agency will

discontinue these two performance measures in FY 2005 and re-establish a combined

measure of the total volume of hits to the antitrust pages of the FTC’s Web site,
20

Ongoing and Future Challenges

Consumer Protection Mission

One of the greatest challenges the FTC faces is ensuring that consumer information is

safeguarded. The FTC enforces a number of statutes and regulations that address

consumer privacy. Consumers increasingly are concerned about the ways in which their

personal information is used; consequently, companies that make specific privacy promises

need to live up to them. Doing so will enhance the confidence that consumers have in the

marketplace. The FTC is concerned with the misuse of personal information and is

committed to both law enforcement and education of consumers and businesses in this area,

including telemarketing, spam, financial privacy, and identity theft.

Recent amendments to the Telemarketing Sales Rule (TSR) include initiatives designed to

afford consumers greater privacy protections. Most significantly, the National Do Not Call

Registry enables consumers to protect themselves from unwanted and often intrusive

telemarketing calls. A national survey shows that registered consumers are receiving

significantly fewer telemarketing calls and those who are registered can file a complaint when

a covered telemarketer calls. Although compliance with the Do Not Call Registry currently

is high, the FTC is pursuing investigations and taking enforcement action against violators

when warranted.

In December 2003, Congress enacted two measures that impose new responsibilities on the

FTC. The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003

(CAN-SPAM Act) addresses a wide range of practices relating to spam. The Fair and

Accurate Credit Transactions Act of 2003 (FACT Act) makes sweeping changes and

additions to the Fair Credit Reporting Act to enhance accuracy and consumer access to

credit information.

The FTC’s future efforts will include significant activity under these Acts to combat spam,

protect consumers’ privacy, and stop deceptive debt counseling. In the spam arena, the

agency works to protect consumers from fraudulent spam and to reduce the impact of

deceptive spam by bringing law enforcement actions to stop deceptive or unfair spam

practices. The FTC’s work on the policy side will continue – conducting rulemakings and

studies under the CAN-SPAM Act. The FTC also will continue its rulemaking and policy

efforts under the FACT Act and its enforcement efforts to stop deceptive subprime lending

practices, improper usage of pre-acquired account information, deceptive debt counseling,

and other misuse of personal information, and to ensure that consumers have access to their

credit information to confirm its accuracy. 

Ongoing globalization and new information technologies create potentially enormous benefits

for consumers, but can also raise new consumer protection concerns. Examples include

opportunities for online fraud, cross-border fraud, loss of privacy, and identity theft.
21

Attacking telemarketing and business opportunity fraud and deceptive and abusive lending

practices continues to be a challenge and a priority, as does protecting consumers from more

traditional scams that have found new life on the Internet, including pyramid schemes and

health-related fraud. The Internet has become an especially fertile ground for scam artists

who can reach vulnerable consumers easily and cheaply online and immediately access both

a national and an international marketplace. 

Given the rise in cross-border fraud complaints that has occurred over the last several years,

the FTC will continue to bring cases with international components. During FY 2004, the

FTC submitted recommendations to Congress to give the FTC additional tools to fight crossborder fraud. Legislation implementing these recommendations has been introduced in

Congress as the International Consumer Protection Act and, if enacted, will boost the

agency’s ability to pursue these important cases. 

The agency will continue to target its efforts based on the analysis of consumer complaint

data that it gathers. FTC databases – Consumer Sentinel, Identity Theft Data Clearinghouse,

Consumer Information System, and spam database – enable the agency and its law

enforcement partners to detect fraudulent trends and problems as they occur. The FTC’s

prospective challenges include maintaining a rich array of data, ensuring that its systems are

fully used by the agency and its law enforcement partners, and ensuring that the information

it collects is reliable. The FTC also continually strives to identify new methods of mining the

data and sharing the results in innovative ways to assist its law enforcement partners. These

efforts bear fruit in the cases brought by the FTC and other law enforcement agencies who

have access to this data. 

In addition to targeting the most serious problems for law enforcement action, the FTC also

encourages non-regulatory solutions, such as education and voluntary compliance, that are

effective but do not impede legitimate business activity. One particular area of focus in the

next several years will be fraud, deception, and unfair business practices affecting Hispanic

consumers and other minorities. 

Maintaining Competition Mission

An important part of the FTC’s antitrust agenda includes efforts to identify and investigate the

misuse of government processes. These types of anticompetitive practices, such as the

improper use of the Food and Drug Administration’s regulatory process to delay entry of

generic drugs, can exclude new competitors with little cost or risk to established firms, and

therefore pose a very significant danger to consumers. The FTC also will continue to focus

on the misuse of government processes involving intellectual property rights, such as when

a firm improperly obtains intellectual property rights or litigates to enforce them in bad faith.

Transparency in FTC decision-making serves the agency’s objectives. Public understanding

of the types of transactions or conduct the FTC is likely to challenge and the reasons for

agency action informs businesses, facilitates antitrust lawyers’ counseling of their clients, and

prevents harmful mergers or anticompetitive practices without need for government

intervention. The FTC will continue to expand public awareness and understanding of its
22

actions by seeking to make its published documents about enforcement actions clear and

understandable, explaining why it declined to take action in particular matters, and releasing

general policy statements outlining the conditions under which it will apply its different

powers.

The FTC also will continue to make full use of its uniquely broad array of policy instruments

to provide intellectual leadership on competition issues. A key part of its responsibilities is

to ensure that the agency remains at the leading edge of knowledge of both economic theory

and real-world developments in the economy. The agency does so in a variety of ways,

including sponsorship of public workshops, conferences, and hearings, and conducting its

own research.

Antitrust enforcement no longer stops at U.S. shorelines. Today, more than 65 governments

enforce various sets of competition laws, and that number is growing. Because of the

continuing growth of commerce beyond national boundaries, these different antitrust

enforcement authorities increasingly overlap and intersect. Inconsistencies and diverse

requirements increase the costs faced by firms seeking to combine assets or businesses,

establish distribution channels, or pursue other business arrangements. This includes both

the cost of complying with different regulatory mechanisms and the risk of differing outcomes.

Thus, the current growth and diversity in antitrust enforcement mechanisms can interfere with

the common goal of promoting a competitive economy. The FTC will continue to work with

various international groups to increase the procedural and substantive convergence of

merger oversight authorities throughout the world. The FTC also will broaden and deepen

its cooperation with international agencies on individual cases and antitrust policy issues. 
23

Significant Program Events

In FY 2004, the FTC focused on a variety of significant consumer protection and competition

issues. These issues included consumer privacy, deceptive or anticompetitive practices

affecting consumers’ health, and proposed changes to governmental procedures. These

accomplishments helped ensure that business and consumers alike reaped the full benefits

of market competition and product innovation. (Hyperlink to related material.)

• Do Not Call – Stopping Unwanted Telemarketing Calls.

The National Do Not Call Registry has helped make dinnertime

interruptions by telemarketers a thing of the past. Consumers

registered 64 million phone numbers as of September 2004.

A recent survey showed that 87 percent of registered

consumers reported that they received fewer telemarketing

calls. The study estimated that the decrease for each

registered consumer was 24 calls per month.

www.ftc.gov/bcp/conline/edcams/donotcall/index.html

• Identity Theft – Fair and Accurate Credit Transactions (FACT) Act. Identity theft

adversely impacted 27.3 million consumers in the last five years, and is the top

consumer complaint received by the FTC. The FACT Act, enacted in December

2003, provides the FTC important tools to help prevent identity theft and assist

victims, and to enhance the accuracy of credit information and consumer access to

such information. Within six months of the Act’s signing by the President, the FTC

issued a rule requiring that the three nationwide consumer reporting agencies

provide consumers, upon request, a free copy of

their credit report once every 12 months. The FTC

currently is working on a number of other rules,

including a rule to allow military personnel to place

 an alert on their credit reports to help protect them-

 www.consumer.goheft/ selves from identity theft while they are deployed

• Spam – CAN-SPAM Act. Experts have estimated that unsolicited commercial email

(spam) costs U.S. businesses between $10 billion and $87 billion annually.

Additionally, consumers spend countless hours each year dealing with spam. The

CAN-SPAM Act, also enacted in December 2003, provides the FTC with new tools

to address this issue. In its first cases under CAN-SPAM, the FTC sued two

spammers whose activities generated nearly one million consumer complaints to the

FTC. The defendants were charged with clogging the Internet with millions of

deceptive messages. Also, as directed by the Act, the FTC released a report to

Congress on the feasibility of a Do Not Email

Registry (“National Do Not Email Registry: A

Report to Congress”.) Domestically, the FTC

continued to work with its federal, state, and local

law enforcement partners on the Spam Task

Force. www.ftc.gov/bcp/conline/edcams/spam/index.html
24

• International Issues. In 2004, the FTC and its international law enforcement

partners identified tens of thousands of owners or operators of potentially open or

vulnerable servers around the world and sent letters urging them to protect

themselves from becoming unwitting sources of spam. In addition, through

recommendations introduced in Congress as the International Consumer Protection

Act, the FTC is working to obtain additional legislative authority to combat crossborder fraud. And, separately, the FTC is working with private competition entities

worldwide to address and minimize policy divergences to ease regulatory burdens

on firms that operate on a global basis.

• Increased Administrative Litigation. Throughout FY 2004, the FTC had up to a

dozen antitrust cases pending at some stage of administrative litigation, more than

at any time in the past two decades. The cases involved a variety of consumer

issues including physician and dental services, pharmaceuticals, hospital services,

transportation of household goods, computer software and hardware, and gasoline.

Besides bringing consumers the benefits of increased competition in these markets,

those cases that are fully litigated also provide opportunities for the FTC and the

courts to provide detailed analysis and guidance on key policy questions for

businesses and the bar. In addition, three consumer protection cases were also

in administrative litigation during FY 2004.

• Healthy Competition Equals Healthy Consumers. In July 2004, the FTC and

Department of Justice (DOJ) released a joint report (“Improving Health Care: A

Dose of Competition”) to provide guideposts for policymakers who want to ensure

access to quality care and help consumers make informed choices. Also, in FY

2004, the FTC required two pharmaceutical firms to disgorge $6.25 million in illegal

overcharges for children’s pain medication, took enforcement actions against

several groups of physicians for allegedly fixing prices for their services, issued an

adjudicative decision and opinion explaining how a patent settlement between two

pharmaceutical manufacturers raised the price of blood pressure medication, and

began administrative litigation challenging a consummated hospital merger.

www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf

• Attacking Deceptive Health Claims. The FTC increased its attacks on deceptive

health claims by bringing 23 enforcement actions involving dietary supplements and

other products that were deceptively marketed for their ability to treat or cure a wide

variety of health conditions. The FTC also encouraged the media to help in the

fight against deceptive weight-loss advertisements by publishing a guide

showing them how to identify and screen out bogus weight-loss claims.

 

www.ftc.gov/bcp/conline/edcams/redflag/index.html 
25

• Preventing Predatory Lending and Deceptive Debt Counseling. The FTC

published a consumer education brochure on predatory lending and brought

several cases against deceptive credit counseling, debt collection, and other

financial services companies. In one of these cases, one of the nation’s largest

debt-collection firms agreed to pay a $1.5 million civil penalty to settle charges it

violated the Fair Credit Reporting Act (FCRA) by reporting inaccurate information

about consumer accounts to credit bureaus. This is the largest FCRA civil penalty

ordered to date. In a case against a company that services home loans to high-risk

borrowers, the FTC and the Department of Housing and Urban Development

obtained three settlements requiring that a total of over

 $40 million be returned to consumers. 

 www.ftc.gov/bcp/conline/edcams/credit/index.html

• Looking at the Impact of New Technology on Consumers. The FTC hosted two

workshops to explore and discuss the impacts of new technology on consumers.

One workshop explored the uses, efficiencies, and implications for consumers

associated with radio frequency identification (RFID) technology. A second

workshop on spyware, adware, and other software explored issues associated with

software that is loaded on personal computers without users’ consent that gathers

and sends information about users to third parties or adversely affects the

computers’ functioning. 

• Promoting Innovation. The proper harmonization of competition policy and the

patent system can benefit consumers by fostering the invention and development

of new goods, services, and processes. To help achieve this goal, the FTC and

DOJ held extensive public hearings that resulted in the release of an FTC report,

“To Promote Innovation: The Proper Balance of Competition and Patent Law and

Policy,” that offers ten recommendations for reducing the number of questionable

patents, which can harm innovation. Also, to address intellectual property issues,

the FTC is conducting administrative litigation in two matters involving allegedly

anticompetitive behavior regarding patents and the standards-setting process.

www.ftc.gov/os/2003/10/innovationrpt.pdf

• Competition Advocacy. The FTC advises state and federal entities, as well as

the courts, regarding the potential competitive impact of pending governmental

actions. In FY 2004, the FTC issued a staff report on the Internet sales of contact

lenses, “Possible Anticompetitive Barriers to E-Commerce: Contact Lenses,” which

advocated procompetitive prescription release and verification procedures and

opposed restrictive private labeling practices. FTC staff opposed unauthorized

practice of law rules that would prohibit the participation of laypersons in real estate

closings in West Virginia and in workers compensation proceedings in Ohio. Staff

also commented on gasoline sales-below-cost laws that would deter procompetitive

price cutting in Alabama, Kansas, and Michigan.

www.ftc.gov/os/2004/03/040329clreportfinal.pdf
26

• Promoting Competition in the Petroleum Industry. In FY 2004, the FTC

released the landmark staff report “The Petroleum Industry: Mergers, Structural

Change, and Antitrust Enforcement,” which represents a careful study of the

structural changes and FTC involvement in the petroleum industry over the last 20

years. The report concluded that thorough FTC merger investigations and

enforcement have helped to avoid potentially anticompetitive problems and higher

gasoline prices for consumers. In addition, the Commission overturned an

Administrative Law Judge’s decision to dismiss antitrust charges brought against

Union Oil of California for allegedly defrauding the California Air Resources Board

in connection with regulatory proceedings regarding the development of

reformulated gasoline.

 

 www.ftc.gov/ftc/oilgas/index.html
27

$125

$147 $156

$177 $186

$-

$50

$100

$150

$200

2000 2001 2002 2003 2004

FTC Appropriated Budget Authority 

(dollars in millions)

Financial Performance Overview

As of September 30, 2004, the financial condition of the FTC was sound. The agency had

sufficient funds to meet program needs and adequate financial controls in place to ensure

obligations did not exceed available budget authority. The FTC prepared financial

statements in accordance with the accounting standards codified in the Statements of

Federal Financial Accounting Standards and Office of Management and Budget Bulletin

No. 01-09, Form and Content of Agency Financial Statements.

Sources of Funds

The FTC has an annual appropriation for Salaries and Expenses, and its appropriated

funds are available until expended. The FTC’s appropriated budget authority in FY 2004

was $186 million. This amount represents an overall appropriation increase of $9 million

over FY 2003. In addition, the FTC received $2 million for Reimbursable Activity, and

carried over $9 million in no-year funds from last fiscal year. The FTC’s total amount of FY

2004 budgetary resources was $197 million.

The FTC’s budgetary resources are offset by the collection of fees from two sources. The

Hart-Scott-Rodino (HSR) Antitrust Improvements Act, P. L. 101-162, requires parties to

mergers valued over a specified threshold amount to submit premerger review filings, and

to pay an appropriate filing fee, to the FTC. The FTC and the Antitrust Division,

Department of Justice, equally share each dollar collected. Separately, the Do Not Call

Implementation Act, P. L. 108-10, requires certain telemarketers to pay a fee to access

telephone numbers in the National Do Not Call Registry from consumers who no longer

wish to receive telemarketer calls. In FY 2004, the FTC’s share of collected fees was $84

million from HSR Premerger filing fees and $14 million from Do Not Call registry fees. The

total FY 2004 amount of the FTC’s share of offsetting fees was $98 million.
28

Cost of Strategic Goals

In FY 2004, the gross cost of the Consumer Protection Mission, which relates to the Protect

Consumers strategic goal, was $104 million, and the gross cost of the Maintaining

Competition Mission, which relates to the Maintain Competition strategic goal, was $82

million. The FTC’s total net cost of operations, i.e., gross cost less offsets, was $88

million. These amounts are shown in the Statement of Net Cost, which can be found in

Part III, Audited Financial Statements, of this report.

Audit Results

The FTC received an unqualified audit opinion on FY 2004 financial operations. No

material internal control weaknesses nor instances of substantial noncompliance with the

Federal Financial Management Improvement Act were found. This was the eighth

consecutive year the FTC received an unqualified opinion. 

Financial Statements

The FTC’s financial statements summarize the financial activity and financial position of the

agency in FY 2004. The financial statements, notes, and the balance of the required

supplementary information appear in Part III, Audited Financial Statements.

Systems and Control 

The FTC maintains a system of internal controls to provide reasonable assurance that its

assets are protected from fraud and abuse, transactions are properly executed and

recorded, and operations are conducted in accordance with established policies and

procedures. The FTC’s accounting system conforms in all material respects with the

principles, standards, and related requirements specified in the Federal Financial

Management Improvement Act of 1996. 

The FTC’s accounting, personnel, payroll, and accounts payable processing is performed

under contract by the Department of the Interior’s National Business Center in Denver,

Colorado. FTC has controls in place to ensure the integrity of both payment and payroll

processing.
29

C Identify fraud, deception, and

unfair practices that cause the

greatest consumer injury.

C Stop fraud, deception, and

unfair practices through law

enforcement.

C Prevent consumer injury

through education.

Part II: Program Performance

Goal 1: Protect Consumers

Prevent Fraud, Deception, and Unfair Business Practices in

the Marketplace

Congress has charged the FTC with the broadest legislative mandate of any federal

consumer protection agency. While most federal consumer protection agencies have

jurisdiction over a specific market sector, the FTC possesses broad law enforcement

authority that encompasses most segments of the economy, including business and

consumer transactions on the Internet. As the nation’s leading consumer protection

agency, its goal is to protect consumers by preventing fraud, deception, and unfair

business practices in the marketplace. It applies three related objectives to achieve this

broad-reaching goal:

First, the FTC identifies practices that cause consumer injury by analyzing the consumer

complaint data collected in its Consumer Information System database, holding public

discussions, and monitoring the marketplace, including the Internet. Next, the FTC uses

this information to target law enforcement efforts. Its law enforcement program aims to

stop and deter fraud and deception, protect consumers’ privacy, and increase compliance

with its consumer protection statutes to ensure that consumers have accurate information

for purchasing decisions. Finally, the FTC targets its education efforts to give consumers

the information they need to protect themselves from injury and to explain to businesses

how to comply with applicable laws.

A priority of the FTC is to ensure that consumer information is safeguarded in the electronic

marketplace so consumers will enjoy the same confidence in these commercial

transactions that they enjoy in the traditional marketplace. Online commerce has the

potential to deliver goods and services, often more conveniently, faster, and at lower prices

than traditional brick-and-mortar operations. Online commerce promises significant benefits to consumers and the economy. The Internet also is stimulating the development of
30

innovative products and services that were barely conceivable just a few years ago and is

enabling consumers to tap into rich sources of information that they can use to make better

informed purchasing decisions. 

There is real risk, however, that these benefits may not be realized if consumers associate

the Internet with fraudulent operators. The boom in e-commerce has opened up fertile

ground for fraud. In the FTC’s experience, fraudulent operators are always among the first

to appreciate the potential of a new technology and then use that potential to exploit and

deceive consumers. Of particular concern is that Internet health fraud continues to plague

consumers looking for solutions to serious illnesses. Traditional scams, such as pyramid

schemes, also have found new life on the Internet. The FTC is using all the tools at its

disposal – such as its consumer complaint database – to help target areas of consumer

problems and is fashioning law enforcement and educational efforts to respond quickly and

vigorously to these concerns.

Privacy of personal information is important, and companies that make specific promises

to consumers about privacy must honor those promises. Companies that honor their

promises add to consumer confidence in the marketplace. The FTC is concerned with the

misuse of personal information and is fully committed to both enforcement and education

in this area.

The FTC’s comprehensive, multi-year review of the Telemarketing Sales Rule (TSR)

revealed widespread consumer frustration over unwanted telephone solicitations, which

some see as a violation of privacy in their home. To address this concern, in December

2002, the FTC amended the Rule to establish the National Do Not Call Registry. The

Registry was launched in June 2003 and is being enforced. Covered telemarketers are

prohibited from calling consumers who place their telephone numbers in the Registry. By

the end of fiscal year 2004, more than 64 million telephone numbers had been registered.

The 2004 Service to America Medal, recognizing inspiring achievements in public service,

was awarded to the FTC Do Not Call Team.

The FTC also works on policy and enforcement efforts related to spam (unsolicited

commercial e-mail). The FTC has brought more than 60 cases to date challenging

deceptive spam. In addition, the CAN-SPAM Act, signed into law in December 2003,

addresses a wide range of practices relating to spam. The CAN-SPAM Act prohibits

falsifying either the content or the source of e-mail; prohibits abusive means of obtaining

e-mail addresses to send a high volume of unwanted messages; requires that commercial

e-mail be so identified; requires senders of commercial e-mail to allow recipients to “opt

out” of future e-mail messages; and requires a warning label for e-mail with sexually

oriented material. The FTC’s rule requiring the warning label became effective on May 19,

2004. The CAN-SPAM Act directs the FTC to report to Congress on the feasibility of a Do

Not Spam Registry. This report was presented to Congress in June 2004. In September

2004, the FTC released a report to Congress assessing whether and how a system that

rewards members of the public for tracking down spammers would or could help improve

enforcement of the CAN-SPAM Act. FTC staff continue to work on CAN-SPAM

enforcement, rulemaking, and studies. 
31

In the consumer credit arena, the FACT Act, also signed into law in December 2003, made

sweeping changes and additions to the Fair Credit Reporting Act. Notably, the FACT Act

makes existing preemption provisions permanent and adds several provisions to combat

identity theft and enhance accuracy and consumer access to credit information. The FACT

Act requires the FTC, among other things, to engage in a number of rulemakings. 

For most consumers, access to credit is essential to full participation in the nation’s

economy. Some unscrupulous lenders, however, deceive consumers about loan terms,

rates, or fees. Bogus organizations target consumers with bad credit or significant

consumer debt, promising to help them manage their debt or obtain credit otherwise

unavailable to them. Consumers may pay hundreds of dollars for these services, only to

receive nothing in return, or worse, to see their credit damaged even further. The FTC’s

enforcement actions target these deceptive lending schemes, especially in the subprime

mortgage market, and those that involve deceptive credit counseling services.

Objective 1.1: Identify Fraud, Deception, and Unfair Practices That Cause

Consumer Injury

The first step in preventing fraud, deception, and unfair business practices in the

marketplace is to identify the practices that cause the greatest consumer injury.

Strategies

To identify consumer protection problems, the FTC collects and analyzes data from many

sources. Its Consumer Response Center receives consumer complaints and inquiries via

a toll-free number (1-877-FTC-HELP), mail, and the Internet. Partners such as the National

Fraud Information Center of the National Consumers League, the Internet Fraud Complaint

Center (a partnership between the FBI and the National White Collar Crime Center), Better

Business Bureaus, and PhoneBusters (the Canadian fraud database), also share the consumer complaint data they collect with the FTC. 

All of this information is entered into the Consumer Information System database and then

analyzed by FTC staff to identify trends and target fraudulent, deceptive, and unfair

business practices. The agency shares the fraud complaints that it collects with more than

1,150 other law enforcement agencies across the United States, Canada, and Australia via

an encrypted Web site called Consumer Sentinel. Although the FTC is not empowered to

act on behalf of individual consumers, consumer complaint data obtained through

Consumer Sentinel enables the FTC and its law enforcement partners to coordinate their

enforcement efforts, and to spot trends and target the most serious consumer problems.

Summary and trend data are shared on the public Consumer Sentinel site

(http://www.consumer.gov/sentinel). The constant input and analysis of fresh complaint

data have allowed the FTC to move quickly to stop illegal practices before they cause more

harm to consumers.

Consumers can call the FTC’s second toll-free number, 1-877-ID-THEFT, or view its Web

site to obtain information about and report identity theft (http://www.consumer.gov/idtheft/).
32

When they call the FTC or visit its Web site, consumers also can receive guidance on the

steps they can take to resolve credit and other problems that may have resulted from

identity theft. In FY 2004, the agency received 314,000 identity theft complaints and

inquiries. The FTC uses this data to spot patterns that can help criminal law enforcement

agencies prosecute identity theft and help businesses avoid the financial consequences of

this crime. Criminal cases are identified by the joint FTC and U.S. Secret Service Case

Referral Program, and strong leads are referred to regional task forces, many led by the

Secret Service Financial Crimes Division.

The FTC also monitors advertising and marketing directed to youth, including violent

entertainment products, online gambling, pornography, and alcohol.

Finally, the FTC also hosts workshops and conferences at which interested parties discuss

practices that cause consumer injury, articulating concerns and identifying relevant

strategies to combat these problems. These

workshops enable the FTC to hear a variety of

views on timely topics and help all parties

understand the ramifications of these issues.

During FY 2004, the FTC hosted six workshops –

on marketing of entertainment violence to children,

weight-loss advertising guidelines, Hispanic

outreach and law enforcement, spyware, Radio

Frequency Identification (RFID) services, and

protecting consumers in class actions. 

Performance Measures and Results

To assess its effectiveness in identifying fraudulent

and deceptive practices, the FTC measured the

number of consumer complaints and inquiries

added to its Consumer Information System

database. Additional consumer data enables the

agency to more effectively spot trends, identify

emerging scams, and coordinate activities with

other law enforcers. In FY 2004, the FTC added

994,000 entries into its database, exceeding its

target of 700,000. Included in these 994,000

entries were 314,000 consumer complaints and

inquiries related to identity theft,

exceeding the target of 250,000. These results reflect the increasing interest of organizations in contributing complaint data and consumers’ growing awareness of the FTC’s

online complaint form and toll-free telephone numbers. They give the FTC a broader view

of what reporting consumers are experiencing. The database allows the FTC and its law

enforcement partners to identify and develop cases against fraudulent and deceptive

operators that cause the greatest consumer injury. By analyzing consumer complaints, the

FTC can identify and ultimately refine its enforcement and education efforts to target the

Performance Measure 1.1.1

Annual number of consumer

complaints and inquiries

entered into database.

FY 2001 Actual: 430,000

FY 2002 Actual: 680,000

FY 2003 Actual: 944,000

FY 2004 Target: 700,000

FY 2004 Actual: 994,000

Performance Measure 1.1.2

Annual number of consumer

complaints and inquiries

related to identity theft

entered into database.

FY 2003 Actual: 321,000

FY 2004 Target: 250,000

FY 2004 Actual: 314,000
33

most serious consumer problems, including deceptive subprime lending, deceptive debt

counseling, identity theft, Internet auctions, advance fee loan scams, fraudulent business

opportunities or work-at-home plans, deceptive health or weight-loss advertisements, and

magazine buyers clubs.

Performance Assessment and Future Trends

Not only does the FTC’s database help identify the most serious consumer protection

problems, it quickly informs the agency of emerging scams so that the agency can move

rapidly to stop consumer injury. In addition, by collecting data from consumers and other

sources and sharing it with other law enforcers, the FTC is able to coordinate and augment

the effectiveness of law enforcement agencies across the country and in Canada and

Australia. To make the database even more valuable, the FTC continues to pursue new

international partnerships to increase its collection of information from consumer agencies

in other countries. For example, through the econsumer.gov Web site, the agency partners

with other members of the International Consumer Protection Enforcement Network, an

international group that identifies and shares information about worldwide consumer protection issues. Through econsumer.gov, consumers in the 17 participating countries can

file complaints using an online form and obtain consumer education materials. Law

enforcement members can access a nonpublic site to obtain specific information about the

complaints that consumers have filed.

The FTC will continue to expand its complaint database and increase its use by recruiting

and training additional law enforcement partners. It also will make better use of its rich

store of data by identifying repeat offenders and sharing this information with other law

enforcers. In addition, the FTC will increase its capacity to analyze data quickly in order

to identify and respond to frauds, deception, and identity theft in their early stages and help

prevent consumer injury. The data will be used to provide more information to the public

– by giving consumers information to protect themselves from scams, deceptive practices,

and identity theft, and informing public policy discussions about consumer protection issues

in the marketplace. The FTC also will continue to collect data on consumers’ experiences

and general inquiries and upgrade its system to track and analyze privacy-related

complaints more effectively.

In addition, in September 2003, the FTC released the results of a survey showing that 27.3

million Americans have been victims of identity theft in the last five years, and that identity

theft losses to businesses, financial institutions, and consumer victims total in the billions

of dollars. In August 2004, FTC staff released a statistical survey of fraud in the United

States that shows that nearly 25 million adults – or 11.2 percent of the adult population –

were victims of fraud (not including identity theft) during the year studied (2002-2003). It

showed that certain racial and ethnic minorities were much more likely to be victims of fraud

then non-Hispanic whites. The group “American Indians and Alaska Natives” was the

ethnic group most likely to be victims – nearly 34 percent had experienced one or more

frauds in the preceding year. (Although the number of survey participants who described

themselves as American Indians and Alaska Natives was small, the difference between that

group and non-Hispanic whites was statistically significant.)
34

The FTC will evaluate how to use the results of these consumer fraud and identity theft

surveys to assess and improve performance. Appropriately crafted follow-up surveys may

be conducted.

Objective 1.2: Stop Fraud, Deception, and Unfair Practices Through Law

Enforcement

Once fraud, deception, and unfair business practices are identified in the marketplace, the

FTC focuses its law enforcement efforts on areas where it can have the greatest impact for

consumers.

Strategies

The FTC plays a vital role in protecting consumers’ privacy, emphasizing both enforcement

and education. It focuses on telemarketing, spam, identity theft, and financial privacy, as

well as enforcement of the CAN-SPAM Act, FACT Act, Gramm-Leach-Bliley Act and the

Safeguards Rule, the TSR as amended in December 2002, and Section 5 of the FTC Act.

Telemarketing fraud also continues to be a significant law enforcement priority. The FTC

will continue to pursue telemarketing cases and enforce the National Do Not Call Registry.

Other priorities include protecting consumers from more traditional scams and deceptive

practices that have moved to the Internet.

One of the most effective tools in the battle against fraud and deception has been the law

enforcement sweep – simultaneous law enforcement actions by federal, state, and/or local

partners against numerous defendants nationwide that focus on a particular, widespread

type of fraud and deception. Each sweep is supported by consumer education aimed at

preventing future losses to the public. Since its first sweep in 1995, the FTC and its

partners have brought more than 2,250 law enforcement actions in 80 sweeps against

fraudulent and deceptive operators. This total includes 532 actions brought by the FTC

alone. Thus, for every action that the FTC brings, its partners bring an average of three.

In FY 2004, the FTC led 2 sweeps resulting in a total of 39 actions, including 10 FTC

actions. In addition to leveraging agency resources, sweeps generate substantial local,

regional, and international interest, thus further raising consumer awareness.

The FTC continues to make progress in addressing the globalization of fraud. In the past

two years, the agency has brought more than 50 cases with international components and

investigated many more. During this past year, the FTC developed legislative

recommendations to give the FTC additional tools to fight cross-border fraud, which have

been introduced in Congress as the International Consumer Protection Act. The agency

also expanded its international partnerships – including a bilateral consumer protection

cooperation agreement with the regulator in Ireland and a trilateral agreement with the U.K.

and Australia to cooperate in combating fraudulent spam. The FTC also is raising

international awareness about the need for technological solutions to address the

proliferation of spam by participating in an Organization for Economic Coordination and
35

Development workshop on spam and announcing “Secure Your Server,” an international

initiative with 39 agencies from 27 countries to reduce the flow of unsolicited commercial

e-mail by urging organizations to close “open relay” and “open proxy” servers. As part of

the initiative, the participating agencies identified tens of thousands of owners or operators

of potentially open relay or open proxy servers around the world and sent letters urging

them to protect themselves from becoming unwitting sources of spam.

In the nonfraud area, the FTC works to en

sure compliance with the consumer protection statutes that it enforces. Given its

broad jurisdiction and limited resources, it

focuses on the most serious identified

problems, using varied enforcement tools and

encouraging self-regulation in appropriate

situations. Information obtained from its

Consumer Information System database and

from monitoring national advertising enables

the agency to focus its law enforcement

actions on areas that pose the greatest risks

to consumer health, safety, and economic

well-being. The FTC also works with industry

and interested groups to support private initiatives where appropriate.

Performance Measures and Results

The agency’s FY 2004 target was to save consumers more than $400 million by stopping

fraudulent practices in the marketplace. In FY

2004, the FTC saved consumers an estimated

$348.8 million, which represents 87 percent of

the annual target. Because the amount of

savings varies year-to-year, in its 2003 - 2008

Strategic Plan the FTC also set a target of

saving consumers at least $2 billion by FY

2008. Having exceeded its annual target in FY

2003 and having achieved 87 percent in FY

2004, the agency is on track to meet its $2

billion target. Consumer savings are measured

by estimating the annual fraudulent and

deceptive sales made by defendants in the 12

months prior to the FTC’s filing a complaint. 

The savings calculation actually may underestimate the FTC’s impact because it assumes

that the fraud and deception would have continued for only one additional year. However,

it provides a uniform method for calculating savings and minimizes speculation about the

Performance Measure 1.2.1

Dollar savings for consumers

from FTC actions that stop

fraud and deception.

FY 2001 Actual: $487 million

FY 2002 Actual: $561 million

FY 2003 Actual: $606 million

FY 2004 Target: $400 million

FY 2004 Actual: $349 million

Performance Measure 1.2.3

Number of data searches

conducted by FTC and law

enforcement personnel of the

FTC's Consumer Sentinel

database.

FY 2003 Actual: 27,685

FY 2004 Target: 24,000

FY 2004 Actual: 87,000

Performance Measure 1.2.4

Number of data searches by

law enforcement personnel of

the FTC's identity theft

database.

FY 2003 Actual: 2,167

FY 2004 Target: 1,700

FY 2004 Actual: 2,120
36

likely duration of the fraud and deception. The law enforcement actions included in this

measure were taken against individuals or companies, as well as scam artists operating

schemes on the Internet. The FTC’s experience in most cases is that once it files a

complaint in federal district court and obtains a court order, the defendants stop their

fraudulent practices. If they fail to comply, they are subject to contempt proceedings.

Thus, in stopping these frauds, the agency stops further consumer losses to these

defendants. By publicizing these law enforcement actions and distributing consumer

education materials, it seeks to alert consumers to fraudulent and deceptive practices,

educate them to avoid such practices in the future, and ultimately increase consumer

confidence in the marketplace, while deterring similar behavior by would-be violators.

In FY 2004, over 87,000 data searches of Consumer Sentinel complaints were conducted

by the FTC and other law enforcement personnel, far exceeding the target of 24,000.

However, Consumer Sentinel made several major changes and improvements in late

September 2003, and Consumer Sentinel staff project that almost half of the FTC and

external law enforcement personnel usage may be related to the testing of these changes.

The actual number of identity theft searches by law enforcement personnel in FY 2004 is

2,120, or 125 percent of the target of 1,700.

The FTC, along with the Secret Service and Department of Justice, initiated a training

program in March 2002 to provide local and state law enforcement officers with practical

tools to enhance combined efforts to combat identity theft, including information about

accessing Consumer Sentinel data. Through FY 2004, the FTC and its partners, which

now include the U.S. Postal Inspection Service and the American Association of Motor

Vehicle Administrators, held 14 seminars and trained more than 1,800 law enforcement

officers from more than 680 agencies.

Performance Assessment and Future Trends

Based on Consumer Sentinel data, Internet fraud is significant and continues growing. The

FTC is targeting the most pervasive online fraud and moving quickly to stop large, fastgrowing Internet scams. From 1994 to present, the total number of cases involving

fraudulent or deceptive marketing practices related to the Internet filed by the FTC has

grown to more than 340. This figure includes more than 60 spam-related cases, most of

which have been brought during the past two years. The FTC expects fraud to continue

to grow as the use of the Internet rises and spam increases and, in response, it will

increase its efforts to slow online fraud and prevent consumer injury. In particular, online

fraud has the potential to reach consumers worldwide and cause great economic injury.

As its technological expertise continues to develop, the agency will be better able to detect

and deter online fraud before these schemes take hold. This effort, combined with

strategies such as law enforcement sweeps, demonstrates the FTC’s effectiveness in

preventing consumer injury.

The FTC also continues to target deceptive and fraudulent advertising and other practices

aimed at Hispanic consumers. The FTC will target frauds on the basis of Consumer
37

Sentinel and other data that identify the top problems for Hispanic consumers, the products

and services aimed at the Hispanic community that are extensively advertised, particularly

in major media, and the practices causing significant economic or other harm to this

community. In FY 2004, the FTC hosted a workshop to further explore strategies for

effective and high-impact education and law enforcement to protect the Hispanic

community from fraud. The workshop offered an opportunity to discuss the nature and

extent of consumer fraud against Hispanics, law enforcement programs targeting these

frauds, and best practices for reaching the Spanish-speaking community with fraud

prevention messages.

The FTC also will build on its coordination with criminal law enforcers. In FY 2004, the FTC

created a dedicated section within the Bureau of Consumer Protection – the Criminal

Liaison Unit – to coordinate with the FTC’s criminal law enforcement partners (principally,

the Department of Justice and United States Attorneys’ Offices) and to spur an increase

in consumer fraud prosecutions. These goals will be accomplished by identifying interested

prosecutors and case agents, educating criminal authorities regarding the FTC’s mission

and areas of expertise, and coordinating training to better prepare cases for criminal

prosecution. By developing contacts with criminal prosecutors in a more systematic

manner, the agency hopes to increase the number of criminal prosecutions of consumer

fraud, including conduct that FTC staff have discovered, investigated, or prosecuted civilly.

The FTC also will continue its outreach to consumers and industry, and its collaboration

with other law enforcement agencies, as it monitors deceptive debt counseling and

subprime lending practices. 

In addition to fighting fraud, the FTC also focuses on compliance through traditional

advertising laws and the FTC’s Rules and Guides. It works cooperatively with its law enforcement partners, industry, and consumer groups to increase compliance. The scope of

the agency’s current and upcoming priorities spans its broad jurisdiction, and this broad

jurisdiction makes it difficult to measure the overall impact of its nonfraud activities. The

FTC is exploring using new performance measures that focus its impact in more narrowly

defined areas. Nonetheless, it will continue to use business and consumer education, as

well as selective enforcement, to ensure broad compliance with the rules and regulations

it enforces.

With respect to identity theft, although Congress established the FTC as the central

clearinghouse for identity theft complaints, the FTC – a civil law enforcement agency – has

no criminal authority to prosecute identity theft crimes. The information contained in its

database, however, directly supports such criminal prosecutions. The agency has learned

from experience that hands-on information and training provided to its customer law

enforcement agencies greatly enhances their abilities to mine the information in the

complaint database and ultimately prosecute identity theft crimes more successfully.

Consequently, the FTC and its partners have provided identity theft training for local, state,

and federal criminal enforcement groups.
38

Objective 1.3: Prevent Consumer Injury Through Education

Consumer and business education is a first line of defense against fraud and deception.

Strategies

The FTC is committed to using education and outreach as cost-effective methods of

preventing consumer injury, increasing business compliance, and adding an extra

dimension to its law enforcement program. Virtually every consumer protection effort

contains an educational component, from compliance surfs and law enforcement sweeps

to the announcement of new rules and regulations. Through reports, publications, Web

sites, media events, speeches, advocacies, and collaborative activities with other organizations, the FTC reaches tens of millions of consumers and businesses every year. In FY

2004, the agency issued 77 new or revised publications – covering traditional subjects such

as weight-loss claims and credit issues; high-tech subjects such as online shopping,

Internet auctions, and spam; and timely subjects such as identity theft, telemarketing, and

privacy. 

The Consumer Information System database helps the FTC tailor its education efforts to

topical areas where fraud, deception, unfair practices, and information gaps are causing

the greatest injury. Consumers are given the tools they need to spot potentially fraudulent

and other illegal promotions, and businesses are advised how they can comply with the

law. As with the agency’s law enforcement, more of its educational efforts now involve the

Internet. The FTC not only addresses consumer issues involving the Internet, such as

spam and shopping online, but it also uses the Internet as a tool to reach consumers, for

example, through its Web sites, online banner public service announcements, and online

distribution of informational pieces called “news consumers can use.”

The FTC coordinates with hundreds of private and public partners to provide information

about specific promotions, products, and services. It continues to manage the

consumer.gov Web site, which is linked with the interagency firstgov.gov Web site, which

offers one-stop access to federal consumer information. The FTC continues to increase

the federal agency partnership base for consumer.gov, with more than 180 agencies

participating. In FY 2004, the FTC took the lead for the sixth consecutive year in organizing

National Consumer Protection Week. This year’s campaign theme was financial literacy.

Its partner organizers were the National Association of Consumer Agency Administrators,

AARP, the National Consumers League, the Council of Better Business Bureaus, the

Consumer Federation of America, the U.S. Postal Service, the U.S. Postal Inspection

Service, the National Association of Attorneys General, and the Department of Justice.

To reach the expanding population of Hispanic consumers in the United States, the FTC

has furthered its Hispanic Outreach Program. The Spanish-language page on the FTC

Web site has been expanded and includes translations of more than 100 consumer

publications.
39

Performance Measures and Results

The FTC gauges the impact of its education efforts by tracking the number of consumer

and business education publications it distributes to the public in response to consumer

requests. Ideally, the agency would like to measure the extent to which its educational

materials improve consumer understanding and help them get better value for their money.

This effect would be extremely difficult to

measure, but tracking the distribution of publications provides a rough idea of how many

consumers believe the information will prove

useful. In FY 2004, the FTC exceeded its target

of 15 million publications by distributing 26.5

million publications. This includes 3.7 million

publications related to identity theft, exceeding

the target of 2.5 million and 737,000 Spanishlanguage publications, exceeding the target of

400,000. The FTC exceeded these targets in FY

2004 due to the continuing increase in Web hits,

and the large number of materials related to the

Do Not Call Registry.

Historically, FTC outreach projects have been

lauded for their excellence and FY 2004 proved

to be no exception. The FTC’s Southwest

Region’s “Consumer College” – a series of free

one-hour consumer classes for students of El

Centro Community College in Dallas – was

named one of three grand prize winners in the

College Planning & Management magazine’s first

Community College Innovation Awards Program.

The FTC’s Alaska Native Art campaign was

honored with an ACE award from the National

Association of Consumer Agency Administrators.

(This is the second award our Alaska Native Art

Campaign has received.) In addition, four FTC

projects – Do Not Call outreach, Getting Credit,

Spam Forum materials, and Operation Phoney

Philanthropy – received awards in the National

Association of Government Communicators

Annual Blue Pencil competition. The Do Not Call

Registry and Spam Forum won two top ClickZ

Marketing Excellence Awards. In addition, the

Do Not Call campaign received the 2004 Service

to America

Performance Measure 1.3.1

Total number of education

publications distributed to or

accessed electronically by

consumers.

FY 2001 Actual: 15.0 million

FY 2002 Actual: 19.3 million

FY 2003 Actual: 28.0 million

FY 2004 Target: 15.0 million

FY 2004 Actual: 26.5 million

Performance Measure 1.3.2

Number of education

publications related to identity

theft distributed to or accessed

electronically by consumers.

FY 2003 Actual: 3.0 million

FY 2004 Target: 2.5 million

FY 2004 Actual: 3.7 million

Performance Measure 1.3.3

Number of Spanish-language

education publications

distributed to or accessed

electronically by consumers

FY 2003 Actual: 458,000

FY 2004 Target: 400,000

FY 2004 Actual: 737,000
40

Medal, recognizing inspiring achievements in public service, and an American Marketing

Association award. 

Performance Assessment and Future Trends

The FTC seeks to alert as many consumers as possible to the telltale signs of fraud,

deception, and unfair business practices, and other critical consumer protection issues. Use

of the Internet to disseminate information about fraud and technology-related matters plays

an integral role in the FTC’s education, deterrence, and enforcement efforts, permitting the

agency to reach vast numbers of consumers and businesses quickly, simply, and at low

cost. 

The measure of the number of publications distributed by the FTC indicates its impact in

educating consumers, although it does not fully capture the millions of FTC publications that

are distributed to consumers by others. While the number of print publications the FTC

distributed remained relatively static, the number of publications accessed through the

Internet soared as more consumers and businesses go online. In 1996, the agency

distributed only 140,000 publications online. In FY 2004, nearly 20 million online

publications were distributed. These numbers illustrate the Internet’s coming of age as a

mainstream medium and highlight its usefulness in any large-scale educational campaign.

Consequently, the FTC will continue to increase its use of its Web site, www.ftc.gov, and the

multi-agency Web site, www.consumer.gov, to reach consumers, businesses, law

enforcement officials, and the media more efficiently and effectively.

In FY 2005, the FTC will continue to focus consumer and business education efforts on

subjects identified by its consumer complaint databases where information gaps cause the

greatest injury, such as financial literacy, spam, privacy, globalization, Internet scams,

fraudulent schemes, and identity theft. In the privacy area, it will use an approach that has

proven successful in the past by establishing an outreach program to increase consumer

awareness of and business compliance with the privacy information required by the GrammLeach-Bliley Act, including the Safeguard Rule, and FACT Act. The FACT Act also makes

the FTC a participant in the newly-created Financial Literacy and Education Commission.

The FTC will continue to creatively use technology, including new interactive media, to

extend the reach of consumer and business education. Also, as highlighted by its new

performance measures, the agency will continue to focus outreach in the identity theft arena

and its efforts to reach the nation’s growing Hispanic population. The FTC will continue to

work to identify and educate underserved consumer groups to help protect them from

becoming victims of fraud.
41

C Identify anticompetitive

mergers and practices that

cause the greatest consumer

injury.

C Stop anticompetitive mergers

and practices through law

enforcement.

C Prevent consumer injury

through education.

Goal 2: Maintain Competition

Prevent Anticompetitive Mergers and Other Anticompetitive

Business Practices in the Marketplace

The work of the FTC’s Maintaining Competition Mission is critical to protect and strengthen

the free and open markets that are the cornerstone of a vibrant economy. Aggressive

competition among sellers in an open marketplace gives consumers the benefit of lower

prices, higher quality products and services, maximum choice, and innovation leading to

beneficial new products and services. The FTC’s goal is to promote vigorous competition

by using the antitrust laws to prevent anticompetitive mergers and stop business practices

that diminish competition, such as agreements among competitors about prices or other

aspects of competition (referred to as nonmerger enforcement). The agency applies three

related objectives to achieve this broad-reaching goal:

First, the FTC staff identify mergers and business practices that have resulted in or are likely

to result in anticompetitive effects by conducting thorough factual investigations and

applying economic analysis to distinguish between actions that threaten the operation of free

markets and those that are benign or pro-competitive. This step is critical because a merger

or business practice may be either neutral, beneficial (by enabling sellers to be more

efficient and pass those savings along to consumers), or harmful (by enabling sellers to

reduce the output of their product and raise the price to consumers). Thus, indiscriminate

or ill-considered intervention in the marketplace may do more harm than good.

Second, once the FTC identifies a harmful or potentially harmful merger or business

practice, it takes enforcement action under the antitrust laws to stop it, either through an

administrative challenge or in federal court. In many instances, the agency is able to reach

an agreement with the parties that remedies its competitive concerns and avoids litigation.
42

Third, the FTC seeks to prevent anticompetitive activity by educating businesses and

consumers about the antitrust laws and its efforts to ensure competitive markets. Increased

knowledge and understanding facilitate businesses’ efforts to comply with the law and

enable consumers to identify anticompetitive activity more readily and bring it to the FTC’s

attention for possible enforcement action.

Objective 2.1: Identify Anticompetitive Mergers and Practices That Cause the

Greatest Consumer Injury

The first step in preventing anticompetitive mergers and anticompetitive business conduct

is determining which mergers and business practices are anticompetitive.

Strategies

The FTC seeks to identify anticompetitive mergers and practices with as much accuracy as

possible. While certain business conduct (such as price fixing among competitors) is clearly

antitcompetitive, mergers and many other forms of business conduct can benefit, harm, or

have no effect on consumers. Consequently, both under- and over-enforcement can harm

consumers’ interests. The agency seeks to take enforcement action against transactions

or conduct that harms consumers, but at the same time, avoids taking enforcement action

that prevents businesses from completing transactions or engaging in practices that

fundamentally benefit consumers, or would have no effect. The FTC also tries to

accomplish this task as efficiently as possible so that it can devote the bulk of its resources

to further investigation of, and possible challenge to, the most problematic mergers and

practices. A related, but important, consideration is to conduct the inquiry in a way that

minimizes the cost or inconvenience to businesses.

Identifying anticompetitive mergers is a top priority in the Maintaining Competition Mission.

The premerger notification requirements of the Hart-Scott-Rodino (HSR) Act provide the

FTC with an effective starting point for identifying anticompetitive mergers, acquisitions, and

joint ventures (collectively referred to as mergers) before they are consummated. The HSR

Act requires companies to report certain proposed mergers to the FTC and Department of

Justice (which jointly enforce the HSR Act) and wait for a specified period (usually 30 days)

to allow for antitrust review.

The FTC’s staff carefully examine each transaction reported under HSR to determine

whether it poses a threat to competition. The agency seeks to identify as many of the

competitively harmless transactions as possible within the initial waiting period, both to

conserve resources and to minimize the delay imposed on businesses. In most cases, the

staff can make a reasonable judgment about whether a merger has the potential to be anticompetitive or not after an initial screening based on materials filed with the HSR

notification. The agency may authorize a more extensive investigation of transactions that

raise more difficult questions. Under the HSR Act, the agency may issue a formal request

for additional information from the parties (a “second request”), which extends the initial

waiting period. Given the typical scope and complexity of the issues, and the fact that the
43

HSR statute permits only one request for additional information relating to a transaction, an

investigation extended by the issuance of a second request almost always requires a

significant investment of resources by both the agency and the parties.

Most HSR transactions raise no antitrust issues, and the antitrust agencies permit these to

proceed. Together, the FTC and the Department of Justice Antitrust Division issued second

requests in less than 3 percent of reported mergers in FY 2004. Moreover, the enforcement

agencies frequently complete the initial screening in less time than is allowed under the HSR

Act. In these instances, the government grants “early termination” of the HSR waiting

periods, allowing transactions to go forward more quickly. Approximately two of every three

filed transactions received early termination in FY 2004.

Amendments to the HSR Act, effective in 2001, changed the criteria governing which

mergers must be reported under the Act. Despite the revised filing thresholds and a general

decline in merger activity from the historic peak levels reached during the late 1990's and

2000, the FTC has continued to face a demanding merger review workload. The renewal

of economic growth, together with the increased pace of mergers in FY 2004, may

foreshadow the beginning of a more vigorous period of merger activity. The agency

received 1,377 HSR filings in FY 2004, a 42 percent increase over the FY 2003 total. In

addition, the dollar value of transactions is also on the rise; the value of transactions

reported during FY 2004 was about 55 percent higher than the total for FY 2003. The

number of mergers requiring investigation also increased. The FTC issued 20 second

requests, a 33 percent increase over FY 2003. 

While the HSR Act amendments reduced the number of mergers subject to the advance

reporting requirement, they did not change the standard of legality for mergers. While the

vast majority of potentially problematic mergers continue to be subject to the revised HSR

filing requirements, smaller merger transactions may still be anticompetitive. Consequently,

the FTC now devotes more attention to the identification of unreported, usually

consummated, mergers that could harm consumers. This effort involves monitoring the

trade press, industry sources, and the Internet to stay informed of industry developments;

following up on case leads from congressional offices, other Executive Branch agencies,

and state and local governments; and encouraging consumers, businesses, and the bar to

notify the FTC of possibly anticompetitive mergers. The agency also investigates

consummated mergers that appear to have had an adverse effect on consumers. In FY

2004, two of the agency’s merger enforcement actions involved transactions (one

consummated and one not) that were not subject to HSR reporting requirements.

In the nonmerger area, agency staff review complaints received from consumers,

businesses, congressional offices, and elsewhere to identify potentially anticompetitive

nonmerger business practices. In addition to responding to complaints from the public, the

FTC has pursued a “positive agenda” of planned initiatives; that is, it has taken a systematic

and proactive approach to identifying specific conduct likely to pose the greatest threat to

consumer welfare. Fundamentally, the focus continues to be on the types of practices, such

as agreements among competitors, that are most likely to harm consumers. Other
44

considerations include whether the relevant sector of the economy is one, such as health

care or energy, that has a significant impact on consumers' daily lives; the deterrent effects

of antitrust enforcement on businesses; whether the FTC has enforcement experience in

an area that will enable the agency to make an impact quickly and efficiently; and whether

the matter presents an opportunity to contribute positively to the development of antitrust

law.

Performance Measures and Results

The FTC used two performance measures to determine how well it identified anticompetitive

mergers and practices in FY 2004.

The first measure is the percentage of HSR second request investigations concluded during

the fiscal year that ultimately resulted in enforcement action (i.e., consent agreements,

administrative complaints, Commission authorizations to seek a preliminary injunction, and

merger transactions abandoned after the FTC initiated an antitrust investigation). The target

for this measure is for at least 60 percent, but no more than 80 percent, of second request

investigations to result in an enforcement action. The universe for this measure consists of

investigations completed during the fiscal year, regardless of when the second request was

issued, because second request investigations often extend beyond fiscal year boundaries.

Matters ultimately resulting in enforcement action typically involve more extensive

investigations than those that do not, so limiting the universe to those transactions in which

a second request was issued and the matter was concluded within the same fiscal year

could skew the results by disproportionately excluding enforcement outcomes.

Meeting the minimum percentage set for the measure (60 percent) signifies that the agency

effectively identified likely candidates for enforcement action during the initial HSR waiting

period. The upper percentage of the target range for this measure (80 percent) is also

important. Because the need for enforcement is apparent from the beginning in many

transactions, the agency could raise its percentage under this measure by setting overly

rigorous standards for the issuance of second requests. However, such an approach would

likely screen out some matters for which a fuller investigation would demonstrate the need

for enforcement. Therefore, a result approaching 90 or 100 percent on this measure would

suggest that the agency potentially may have failed to pursue some illegal mergers.

In FY 2004, the FTC took enforcement action in 12 of 22, or 55 percent, of the second

request merger investigations concluded during the fiscal year. This figure represents a

decrease from the 68 to 70 percent recorded for this measure in each of the years 2001 -

2003. The agency issued 20 second requests in FY 2004, an increase of 5 over FY 2003.

This increase is consistent with the higher number of reported mergers, and does not reflect

a change in the standards governing when a second request is warranted.
45

The FTC used a new measure of its success in

identifying possibly illegal conduct in FY 2004. This

measure is a ratio similar to that used to measure

the agency’s success in identifying anticompetitive

mergers: the percentage of significant nonmerger

investigations (i.e., those in which the Commission

has authorized the use of its compulsory process

authority) that ultimately result in enforcement

action.

The target for this measure is that between 60 and

80 percent of investigations result in enforcement

action, where the universe consists of nonmerger

investigations in which the Commission authorized

the use of compulsory process that were completed

during the fiscal year. A percentage below 60

percent may suggest that the FTC is targeting

enforcement resources ineffectively by investigating

too many competitively benign practices (and unduly

burdening businesses as a result). A percentage

higher than 80 percent may suggest that the agency

is focusing too narrowly and thus potentially allowing

problematic business practices to go forward without

sufficient review.

In FY 2004, the FTC took enforcement action in 5 of 8 or 63 percent of the completed

nonmerger investigations in which it used compulsory process, a result within the targeted

range. The agency initiated 26 nonmerger investigations and authorized the use of

compulsory process in 5 nonmerger investigations. These figures represent a decline from

FY 2003 levels, reflecting the shifting focus to matters in litigation, as discussed below.

Performance Assessment and Future Trends

The issuance of a second request is a significant step in a merger investigation. Because

the law permits only one second request, the FTC typically issues a very comprehensive

request that calls for all relevant information on all possible issues in the investigation.

Given the size of the parties involved and the necessarily broad scope of the inquiry, a

response may consist of hundreds (or even thousands) of boxes of documents. Gathering

and examining this material involves a major resource commitment by the parties and by

FTC attorneys and economists. The HSR Act prevents the parties from proceeding with

the merger while this process is taking place. Consequently, a second request can

sometimes result in significant delays in closing a transaction.

For all of these reasons, the FTC does not lightly issue a second request. In fact, it does

as much as possible within the initial 30 day waiting period to determine which transactions

Performance Measure 2.1.1

Percent of HSR requests resulting

in enforcement action.

FY 2001 Actual: 68%

FY 2002 Actual: 68%

FY 2003 Actual: 70%

FY 2004 Target: 60-80%

FY 2004 Actual: 55%

New

Performance Measure 2.1.3

Percent of nonmerger

investigations which resulted in

enforcement action.

FY 2004 Target: 60-80%

FY 2004 Actual: 63%
1 The Commission issued statements explaining its decision not to take

enforcement action in several merger cases during FY 2004. See, e.g., Federal Trade

Commission, Statement of the Commission, In the Matter of Sunoco Inc./Coastal Eagle Point

Oil Company, File No. 031 0139 (Dec. 29, 2003), available at

<http://www.ftc.gov/os/caselist/0310139/031229stmt0310139.pdf>; Federal Trade Commission,

Statement of the Commission, In the Matter of Caremark Rx, Inc./AdvancePCS, File No. 031

0239 (Feb. 11, 2004), available at < http://www.ftc.gov/os/caselist/0310239/040211f

tcstatement0310239.pdf>; Federal Trade Commission, Statement of the Commission, RJ

Reynolds Tobacco Holdings, Inc./British American Tobacco p.l.c.. File No. 041 0017 (June. 22,

2004) available at <http://www.ftc.gov/os/2004

/06/040622batrjrstmt.pdf.>

46

pose no competitive threat, so that the truly benign mergers may proceed without the delay

and expense of a second request. In FY 2004, for example, the FTC issued second

requests in less than 2 percent of the mergers reported under HSR. At the same time, it

is far easier to remedy an anticompetitive merger before it is consummated, so the agency

makes every effort to identify and give careful scrutiny to potentially harmful mergers during

the HSR waiting period.

The FTC’s first measure reflects the balance between these two considerations. If the staff

uses the initial HSR waiting period effectively, the agency should be able to “clear” the

great majority of reported transactions, permitting them to go forward without further delay

or burden. The FTC should also be able to isolate for more intensive investigation those

transactions that could be harmful. While the initial screening process should permit as

many benign transactions as possible to pass through, the focus should not be so narrow

that only those transactions in which an antitrust problem is relatively obvious are subject

to further investigation, while other transactions that may be similarly harmful, but in more

subtle ways, can proceed unchallenged.

The result for FY 2004, 55 percent, is below the target range of 60 to 80 percent. No

discernable change in standards for issuing a second request or for taking enforcement

action occurred during the relevant period. The agency believes that the change in results

is primarily a function of the small numbers involved (i.e., only 22 investigations are

included in the computation). 2004 also witnessed an unusual number of cases involving

difficult decisions to close investigations based on key facts that became available only as

a result of staff’s thorough investigation.1

 Over a more extended period (2001-2004)

involving a more representative group of merger investigations, 68 percent of the FTC's

completed merger investigations involving second requests resulted in enforcement action.

The number of merger enforcement actions undertaken in FY 2004 is somewhat lower than

the results from earlier fiscal years. The FTC took 15 merger enforcement actions,

compared with annual totals ranging from 21 to 24 enforcement actions in the years 2001-

2003. The decline is largely attributable to the unusual number of close cases being

closed, as well as the lower level of merger activity in late 2003, which may have resulted

in fewer enforcement actions in early 2004.
47

The result on the second measure – 63 percent of completed nonmerger investigations

involving compulsory process resulting in enforcement action – shows that the agency was

successful in targeting potentially anticompetitive conduct. The same caveat about small

numbers and the law of averages applies here as well, however. Because this measure

was based on only eight completed investigations involving compulsory process, a different

outcome in only one or two investigations would have had a significant impact on the result.

Objective 2.2: Stop Anticompetitive Mergers and Practices Through Law

Enforcement

Law enforcement represents the most direct method by which the FTC pursues its goal of

stopping mergers and business practices that significantly threaten competition and harm

consumers. In both merger and nonmerger enforcement, the FTC focuses primarily on

transactions or practices most likely to harm consumers, that is, mergers of firms

competing in the same market or markets, and agreements among direct competitors.

Other activities, such as unilateral action by a single firm, or a merger or agreement

involving a supplier and customers or between a firm and a potential competitor, also may

threaten competition and therefore are subject to FTC scrutiny.

Since the FTC and DOJ jointly enforce the HSR Act, the FTC directs much of its attention

and resources to certain segments of the economy that are particularly important to

consumers and in which it has particular expertise. These include energy and natural

resources, food, health care, consumer goods and services, pharmaceuticals, and

technology.

Strategies

To stop potentially anticompetitive mergers and practices through law enforcement, the

FTC seeks legal remedies under the antitrust laws, through federal court action,

administrative proceedings, or negotiated settlements. For mergers, the preferred – that

is, the most effective and cost-efficient – strategy is to prevent anticompetitive mergers

before they occur. The agency implements this strategy primarily through its authority to

seek a federal court injunction preventing the transaction. In many cases, the merging

parties elect not to defend a court challenge and instead agree to resolve competitive

concerns through a consent agreement. This approach is suitable when the competitive

problem relates to only a portion of the transaction, so a divestiture of assets sufficient to

preserve or restore competition will allow other competitively neutral or beneficial aspects

of the merger to go forward. In other instances, the parties may abandon a transaction

after assessing the likely outcome of an FTC court challenge. 

When a merger already has been consummated, the FTC generally relies on its internal

administrative remedial powers to restore competition lost as a result of the merger.

Administrative litigation seeking to restore competition following an alleged illegal merger

likely will become more frequent in light of the revisions to HSR premerger filing thresholds.
48

In nonmerger matters, the FTC seeks to stop ongoing activity that harms competition. The

Commission may initiate administrative proceedings before an Administrative Law Judge

to adjudicate the issues and establish a basis for an order that the parties to the proceeding

“cease and desist” the conduct. The FTC also has authority to seek relief in federal courts,

though it uses this option sparingly in nonmerger matters. Again, the agency is often able

to negotiate a consent agreement with the parties that remedies the problem without need

for litigation.

In both merger and nonmerger matters, thorough investigation, as well as sophisticated

legal and economic analysis, is of critical importance to ensuring accurate assessment of

the potential for competitive harm resulting from the transaction or conduct in question and,

if necessary, demonstrating the likelihood of harm before an adjudicative body. When the

FTC concludes that the likelihood of such harm indicates a law violation, and no settlement

is possible, the Commission authorizes its staff to litigate the matter.

As described above, the “life cycle” of an FTC enforcement matter includes identification

of potentially anticompetitive activity, investigation, and a decision to close the matter or to

take enforcement action (usually a settlement but sometimes litigation). Following the end

of the “merger wave” of the 1990's, the FTC has devoted significant attention in recent

years to restoring its nonmerger program. Beginning in 2001, the agency emphasized

identification of anticompetitive conduct, opening at least twice the number of nonmerger

investigations in each of the years 2001-2003 as it opened in 2000. As work was

completed on these investigations, the result was a significant number of nonmerger

enforcement actions.

Many of the FTC’s nonmerger inquiries of the past few years have involved complicated

policy questions or cutting-edge legal issues, and many of the investigations resulted in

issuance of an administrative complaint (though settlement remained a more frequent

outcome). At the same time, the 2001 change in HSR filing thresholds dictated more focus

on non-reportable mergers, which are normally contested through administrative

proceedings.

Together, these factors resulted in a significant increase in the number of administrative

complaints issued. In FY 2003, for example, the Commission issued more administrative

complaints than in any year since 1985, and it issued an additional three complaints in FY

2004. Accordingly, the focus in FY 2004 was more on litigating cases than on developing

new ones. During FY 2004, in addition to conducting pretrial preparations and defending

against various appeals, the staff fully litigated three administrative trials before

Administrative Law Judges, matching the number completed during all of the 1990's.
49

Performance Measures and Results

In FY 2004, the FTC used three measures of its success in stopping potentially

anticompetitive mergers and practices through law enforcement. These measures are (1)

the percentage of positive outcomes when the FTC challenges anticompetitive mergers and

practices, (2) the estimated dollar volume of commerce in markets in which the FTC took

successful action to protect competition from anticompetitive mergers, and (3) the

estimated dollar volume in markets in which the FTC took successful action to protect

competition from anticompetitive conduct. The latter two measures are new in FY 2004.

Economic theory and evidence demonstrate that competition results in lower prices, better

quality, and more innovation in markets. Because successful enforcement of the antitrust

laws protects competition and therefore promotes these consumer benefits, it is important

that the FTC succeed when it challenges anticompetitive mergers and practices. Even if

the agency successfully identifies an anticompetitive merger or practice, consumers derive

no benefit unless it obtains a positive outcome – that is, appropriate relief, through either

settlement or successful litigation.

The frequency with which the agency obtains positive outcomes is an important indicator

of its success in producing tangible benefits for consumers. In FY 2004, the FTC’s

target was to obtain a positive result in at least 80 percent of the matters in which it

determined that a merger or a course of conduct is anticompetitive. Positive results

include the parties’ abandonment of an anticompetitive transaction after antitrust

concerns are identified, an administrative consent agreement to resolve antitrust

concerns, or a successful challenge in court. A negative result occurs when parties

refuse to settle antitrust concerns raised by the agency, and court action fails to achieve

the agency’s objectives. This is not to say that the FTC, or any law enforcement agency,

should win every case. Some cases involve very close questions, on which reasonable

minds can and do differ. Other cases may be very difficult from a litigation standpoint,

but still worth pursuing, and all of the FTC’s antitrust challenges are defended by highly

competent and well-financed counsel. 

In addition, the FTC’s responsibilities include taking action to help shape the development

of the antitrust laws. Fulfillment of this duty requires occasionally litigating cases involving

more than the usual degree of risk, such as cases in which there is no clear precedent and

the FTC is seeking to establish a new legal principle. In other instances, the FTC brings

cases seeking to benefit consumers by clarifying, or perhaps improving upon, existing

precedent. The FTC now has several cases pending in administrative litigation that involve

legal issues that have not been resolved definitively by the courts. While the agency’s
50

complaints are grounded on sound policy

considerations and the Commission’s

“reason to believe” there is a law violation is

based on the staff’s investigation, the

ultimate outcomes depend on legal

determinations often made by courts

following appeal of Commission decisions,

as well as development of a full factual

record. The FTC’s mission includes

bringing cases that highlight difficult issues

and seeking to persuade the courts of the

merit of its views on what the law should

be. Bringing cases that test the boundaries

of the law is an important part of the FTC’s

responsibilities, even though the results are

far from certain. The target on this

measure reflects the reality that, even when

the agency brings a meritorious case and

litigates it well, success is not assured. In

addition, setting the standard too high could

be detrimental if the effect were to deter the

agency from bringing important, but risky,

cases.

The agency exceeded its target for this

measure in FY 2004, achieving relief

through litigation, reaching a successful

settlement agreement, or persuading

parties not to proceed with an anticompetitive acquisition in all 26 enforcement matters brought to conclusion during

the fiscal year.

Antitrust enforcement saves consumers money by preventing price increases that likely

would have occurred due to the loss of competition if an anticompetitive merger had gone

forward unchallenged, or that have occurred as a result of anticompetitive conduct. In past

years, the FTC estimated the dollar savings to consumers resulting from its enforcement

actions. Some stakeholders commented, however, that this methodology was flawed in

certain respects. Accordingly, the agency replaced the two “consumer savings” measures

beginning in FY 2004.

The new measures indicate the scope of the FTC’s antitrust enforcement activities, but

without attempting to quantify the specific benefit to consumers. For both merger and

nonmerger enforcement, the agency now measures the volume of commerce in markets

in which it takes successful enforcement action. The new measures should provide similar

Performance Measure 2.2.1

Percentage of positive outcomes when the

FTC challenges anticompetitive mergers

and practices.

FY 2001 Actual: 94%

FY 2002 Actual: 100%

FY 2003 Actual: 100%

FY 2004 Target: 80%

FY 2004 Actual: 100%

NEW

Performance Measure 2.2.3

Dollar volume of commerce in markets

in which the FTC took successful action

to protect competition from

anticompetitive mergers.

5-Year Target: $200 billion

FY 2004 Actual: $ 8.5 billion

NEW

Performance Measure 2.2.4

Dollar volume in markets in which the

FTC took successful action to protect

competition from anticompetitive

conduct. 

5-Year Target: $100 billion

FY 2004 Actual: $ 2.6 billion
51

indications of the scope of FTC antitrust enforcement activity, but will not include the

troublesome aspects of the previous consumer savings measures.

As noted in the FTC’s 2003-2008 Strategic Plan, external factors, such as level of merger

activity, may cause the results to fluctuate significantly from year to year. Consequently,

the two volume-of-commerce targets are each expressed in terms of an aggregate target

for the five-year strategic plan period, rather than as yearly targets. 

The five-year target for the volume of commerce in markets benefitting from FTC merger

enforcement action is $200 billion. In FY 2004, the FTC’s merger enforcement actions

affected markets in which the total volume of commerce was $8.5 billion. This figure is well

short of the annual average needed over the five-year Strategic Plan period to meet the

target.

The five-year target for the volume of commerce in markets benefitting from FTC

nonmerger enforcement action is $100 billion. In FY 2004, the FTC’s nonmerger

enforcement actions affected markets in which the total volume of commerce was $2.6

billion. This figure is also well short of the annual average needed over the five-year

Strategic Plan period to meet the target.

Performance Assessment and Future Trends

In FY 2004, the FTC achieved a positive outcome in 100 percent of the challenges initiated

by the agency, exceeding its target of an 80 percent success rate by a significant margin.

Although the agency currently has an unusually high number of antitrust cases in

administrative litigation, with several resulting in Commission decisions in FY 2004, none

has reached the point of finality. As the initiatives launched in 2001-2003 proceed through

the administrative process, with some ultimately being presented for review by the courts,

the agency will obtain a truer measure of the success of its recent efforts.

That some of its pending cases have not yet reached final resolution does not detract from

the FTC’s strong performance on this measure in FY 2004. Parties who agree to cease

and desist orders, or who abandon mergers about which the agency has expressed

concern, do so in recognition of both the FTC’s policy expertise and its ability to

successfully litigate contested matters. If the agency were perceived to be less successful

in obtaining the relief it deems necessary on behalf of consumers, more parties would resist

rather than settling FTC charges.

The results on the two volume-of-commerce measures illustrate why the agency expressed

its targets in terms of five-year amounts. Several factors indicate that future results should

be higher and the five-year targets attainable. First, merger activity, though increasing, is

still well short of the level it is likely to reach as the economy continues its recent pattern

of expansion. Second, even at a static level of merger activity, based on historical

information, the agency is likely to bring more merger cases in FY 2005 and beyond. Third,

the recent surge in administrative litigation means that much of the FTC’s current merger
52

and nonmerger enforcement efforts are being devoted to matters not yet included in any

measure. Fourth, the size of individual FTC cases varies widely, and a small number of

large matters can have a significant impact on these measures. For example, two

nonmerger cases currently in administrative litigation each involve markets with annual

sales of roughly $30 billion. If the FTC were to prevail in both cases, together they would

account for more than half the five-year nonmerger volume of commerce target. Even one

case of that magnitude would alone account for more than the annual average needed to

reach the target. Finally, the agency’s record over the past several years is consistent with

the targets, and viewed comprehensively, the FTC’s productivity over the past year has

been extremely high.

Objective 2.3: Prevent Consumer Injury Through Education

In addition to its law enforcement activity, the FTC provides substantial information to the

business community and consumers about the role of the antitrust laws and businesses’

obligations under those laws.

Strategies

The FTC uses education and outreach to help prevent consumer injury, increase business

compliance, and augment its law enforcement efforts. The agency pursues this strategy

through guidance to the business community; outreach efforts to federal, state, and local

agencies, business groups, and consumers; development and publication of antitrust

guidelines, policy statements, and reports; and speeches and testimony. By using these

mechanisms to signal its enforcement policies and priorities, the FTC deters would-be

violators of the antitrust laws.

FTC law enforcement efforts also are made more effective by public awareness of what

types of conduct are likely to be challenged as law violations. Through press releases

about FTC actions and publication of related materials on the agency Web site, the public

facts underlying FTC actions provide bases for companies to evaluate the likelihood that

other transactions likely would face challenge. 

At the close of the year, nine administrative proceedings were pending, far more than at

any time in the past two decades, signifying continuation of heavy litigation demands on

the agency. Each of these cases may provide (or has provided) an opportunity for the FTC

to set out in detail its analysis of important legal issues. Understanding fully the types of

transactions or conduct the FTC is likely to challenge, and the reasons for the agency’s

actions, greatly facilitates antitrust lawyers’ counseling of their clients and prevents many

anticompetitive mergers from being proposed or anticompetitive practices from being

implemented.

In addition, the FTC educates the public through guidelines; congressional testimony (such

as testimony on gasoline pricing and competition in the pharmaceutical industry);

conferences, hearings, and workshops (such as the series of hearings on the
2 Schering-Plough Corp., Dkt. No. 9297 (Dec. 18, 2003) (Opinion of the

Commission).

53

interrelationship between antitrust and intellectual property law and hearings on health care

and competition law and policy); advisory opinions (addressing issues such as the scope

of the Nonprofit Institutions Act); and reports (such as the FTC staff’s study on sale of wine

via the Internet).

As a complement to FTC enforcement activity, the agency also advises other federal and

state government officials about the possible effect that various regulatory proposals may

have on competition. By providing economic analysis and other informed guidance, the

FTC can help policymakers better understand the impact of their decisions in creating,

maintaining, or forestalling competitive markets. The FTC has a long and distinguished

history in this area. The FTC advocates market-based solutions through the publication

of studies and reports, as well as participation in state and federal legislative and regulatory

forums. The agency also participates as an amicus curiae in judicial proceedings when the

FTC's involvement can help remove protectionist regulations, when substantial questions

of antitrust law are involved, or when the FTC can add a different perspective to the deliberations because of special knowledge or experience.

The FTC also seeks to make its law enforcement presence visible and its enforcement

policies transparent in order to serve its objectives through deterrence. Each successful

enforcement action not only promotes competition in specific market(s), but also serves to

communicate to the business and legal communities that the FTC can and will move

successfully to challenge the type of merger transaction or conduct at issue. The agency

explains the relevant facts and issues of cases in which it obtains a consent agreement in

press releases and in published “Analyses To Aid Public Comment” so the nature of the

problem is clear. 

The FTC is seeking to provide greater transparency concerning its decision-making by

issuing statements explaining why it declined to take action in merger investigations of

significant public interest. More generally, the FTC issues policy statements describing the

criteria it will use in determining to take certain actions. In FY 2004, for example, the

agency released a statement explaining the factors it will use to determine whether to seek

monetary remedies, such as disgorgement or restitution, in antitrust cases. Also in FY

2004, the FTC released extensive data on horizontal merger investigations and challenges

to help the public evaluate the likelihood of an antitrust challenge to a particular merger.

Opinions issued by the Commission in adjudicative matters not only serve as legal

precedent, but also help to explain in depth the FTC’s policies and their underlying

rationale. For example, in adjudicative decisions issued during FY 2004, the Commission

illustrated the application of the analytical framework it employs to determine the legality

of collaboration between direct rivals,2

 clarified the “clear articulation” prong of the state
3 South Carolina Board of Dentistry, Dkt. No. 9311 (July 30, 2004) (Opinion of

the Commission).

4 Union Oil of California, Dkt. No. 9305 (July 6, 2004) (Opinion of the

Commission).

54

action doctrine,3

 and addressed several important aspects of the Noerr-Pennington

doctrine.4

Performance Measures and Results

In FY 2004, the FTC advised the public on its enforcement decisions by: (1) issuing press

releases and related documents describing enforcement actions and other significant nonenforcement activities; (2) issuing public explanations of its reasons not to take

enforcement action in appropriate instances to increase transparency in decision-making;

(3) studying and reporting, consistent with its historic role, on significant policy issues and

competitive conditions in particular markets; (4) responding to requests from other

government entities for advice on the implications for competition and consumers of

proposed regulatory actions; (5) appearing before business, bar, and consumer groups, as

well as before congressional committees, to address competition-related subjects; and (6)

maintaining effective coordination and liaison with foreign competition authorities.

The FTC previously used two performance measures to assess its public education efforts:

the number of initiatives, including speeches, testimony, reports, policy statements, etc.,

taken to educate the public during the fiscal year and the number of times that members

of the public visit antitrust-related content on the FTC’s Web site. The number of “hits” on

antitrust content is a good indicator of the quantity of information provided to the public, as

well as its quality (because visitors will stay longer and return more often if the information

is helpful).

In reviewing its performance measures while developing its 2003-2008 Strategic Plan, the

FTC determined that the first of these measures (the number of outreach initiatives) did not

effectively indicate the FTC's performance in education and outreach because the various

items counted are not of equal weight, and the measurement of activities, such as the

number of speeches given, may indicate the level of effort put toward an objective, but not

the FTC's effectiveness in accomplishing it. Consequently, this measure is no longer in

use.

The second measure under this objective – the volume of traffic on antitrust content on the

FTC's Web site – provides a much better indication of both the quantity and quality of

information provided to the public. The FTC publishes virtually all significant public

documents on its Web site, including press releases announcing its antitrust law

enforcement actions, with links to significant underlying documents, as well as all of its

guidelines, reports, speeches, competition advocacy filings, advisory opinions, and other

similar materials. 
55

Use of the Internet to disseminate information about antitrust and other competition-related

matters plays an integral role in the FTC’s education and deterrence efforts, permitting the

agency to convey a wealth of information quickly, simply, and inexpensively to the

business, legal, and regulatory communities, and to consumers. The second measure

more directly reflected the FTC’s effectiveness because it measured outcomes based on

the agency’s constituencies’ assessment of the usefulness of the agency’s published

materials. That is, the level of activity on the FTC Web site depends to a large degree on

the scope, utility, and reliability of the information made available there. People will revisit

the site to the extent that what they find there is of value. Matters that are of great

importance to the public – as determined by the public – will draw a large number of

visitors. But if the material presented is irrelevant, difficult to understand, or misleading,

then interest in the site inevitably will diminish.

In FY 2004, the FTC determined to expand on

the measure that was based on Web hits by

distinguishing between education of the business

and legal communities and education of the

public in general. Educating the legal and

business communities about the applicable legal

standards and enforcement policies helps to

facilitate their compliance with the law, while

educating the public in general, including

policymakers, about the benefits of competition

helps to ensure continued support for the

agency’s efforts.

The agency sought to distinguish these two

categories of visitors to its Web site, not by

identifying and classifying individuals, but by

identifying the content on the site that would be

primarily relevant to each group. In practice, this

plan proved more problematic than envisioned.

Very little of the published material could be said

to be relevant to the general public only, and

much of the information on the site holds

significant interest for both segments.

In FY 2004, the FTC’s Web site recorded more

than 11 million hits on antitrust-related content,

an increase of approximately 10 percent over the

level recorded in FY 2003. Although some of the

increase may reflect increased overall use of the

Internet as an information resource, this result still indicates significant continued public

interest in the FTC and its Maintaining Competition Mission. In addition, the broad and

NEW

Performance Measure 2.3.2

Measure and establish appropriate

target for the number of hits on the

FTC antitrust Web site relevant to

business and legal communities.

FY 2004 Target: TBD

FY 2004 Actual: 7.7 million

NEW

Performance Measure 2.3.3:

Measure and establish appropriate 

targets for the number of hits on the

FTC antitrust Web site relevant to

policy makers and the general public. 

FY 2004 Target: TBD

FY 2004 Actual: 0.3 million

Note: There were approximately 3

million Web hits that were deemed to

be relevant to both the general public

and the business/legal communities

(i.e., we cannot say the page is

“primarily” relevant to one or the

other.) Added to the actual results

above brings the total hits to

approximately 11 million.
5 American Bar Association Section of Antitrust Law, The State of Federal

Antitrust Enforcement - 2001, at 11 (Jan. 2001).

56

increasing distribution of FTC educational and policy materials through electronic channels

represents important leveraging of the FTC’s resources.

Of the 11 million total hits on antitrust-related content, approximately 70 percent were on

pages deemed to be primarily relevant to the business and legal communities,

approximately 3 percent were on pages deemed to be relevant primarily to the general

public, and the remaining 27 percent were on pages deemed to be of similar interest to

both groups. These distinctions proved to be very difficult to make with any great

assurance. Therefore, the agency will discontinue these two performance measures in FY

2005, and re-establish a combined measure of the total volume of hits to the antitrust

pages of the FTC’s Web site.

Performance Assessment and Future Trends

The FTC possesses a broad array of policy instruments that complement its enforcement

authority and help to educate the public. Through the use of hearings, workshops,

research projects, reports, studies, advocacy filings, and amicus briefs – all in coordination

with its enforcement initiatives – the agency provides intellectual leadership on competition

issues and offers valuable education to the public. From the beginning, the FTC was

conceived to be more than just an enforcement agency. President Woodrow Wilson saw

the FTC as "an indispensable instrument of information and publicity, as a clearing house

for the facts by which both the public mind and the managers of great business

undertakings shall be guided . . ."

Today's FTC has fully integrated all of the agency's various capabilities and applies them

in a strategic and sensible way to accomplish its goals directly, and indirectly, by facilitating

public understanding of policy and the agency's objectives. The FTC remains strongly

committed to the importance of education and outreach and will continue to place emphasis

on these efforts and expand its activities in this area in the future.

The FTC fills two educational roles in the Maintaining Competition Mission. First, education

serves to leverage the FTC’s enforcement resources by explaining the scope of the

antitrust laws, demonstrating that the FTC is active in bringing enforcement actions against

certain types of mergers and practices, and signaling future enforcement intentions – all

of which serve to deter harmful marketplace activity. Just as citizens benefit from the effect

of the local “cop on the beat” in deterring crime, consumers ultimately benefit when the FTC

makes its presence visible. As noted by the American Bar Association Section of Antitrust

Law, “private compliance efforts are a critical prophylactic against anticompetitive behavior,

and the effectiveness of private compliance efforts is directly affected by the nature and

clarity of the communication of enforcement priorities.”5
57

Second, the FTC can apply its expertise and advocacy skills to analyze important policy

issues over which the FTC has no direct authority and to advise and persuade relevant

policymakers about the virtues of competition. For example, in FY 2004, the FTC

addressed issues including proposed state laws to regulate pricing of gasoline (which

would likely have the unintended effect of harming consumers), the ongoing process of

opening electricity markets to competition, and the adverse effect of limitations on new

competition in markets for professional services.

With the growing importance of the Internet as a vital source of information in today’s

society, the volume of traffic on the FTC’s Web site will continue to be a meaningful

indicator of FTC success in educating the public at large, policy makers, and the business

and legal communities, and in stimulating public interest in the agency’s work. The agency

will continue to seek ways to refine this important information to gain better understanding

of its success in fulfilling this objective and to help assess how it might do so more

effectively.
58

Part III 

Audited Financial Statements

Message from the Chief Financial Officer 

The Federal Trade Commission recognizes the importance of public disclosure 

and accountability. This report is a demonstration of our commitment to fulfill the 

FTC’s fiduciary responsibilities to American taxpayers. 

I am pleased to present the Federal Trade Commission’s financial statements for 

FY 2004. For the eighth consecutive year, our inspector general, aided by an 

independent public accounting firm, issued an unqualified opinion on the FTC’s 

consolidated financial statements. This is the highest possible audit result. 

These financial statements fairly present the FTC’s financial position and were 

prepared in accordance with the hierarchy of accounting principles approved by 

the Federal Accounting Standards Advisory Board and the Office of Management 

and Budget Bulletin 01-09, “Form and Content of Agency Financial Statements.” 

The FTC is fully committed to the principles of the Chief Financial Officers Act of 

1990 and the Federal Financial Management Improvement Act of 1996. 

Our goals for FY 2005 include continuing the same high level of quality financial 

services that resulted in our unqualified opinion and improving those services. 

We also will focus on implementing our five-year financial management strategic 

plan. Our first step has been to document our current financial management 

processes and systems. We will use this information to develop our 

requirements for a new core financial management system that will improve our 

operations and permit us to better integrate financial, program, and performance 

data. Through these efforts, we will strive to continue to produce timely, reliable, 

and useful data. 

Henry Hoffman 

Chief Financial Officer 
59

Limitations of the Financial Statements

Responsibility for the integrity and objectivity of the financial information 

presented in the financial statements rests with FTC management. The 

accompanying financial statements have been prepared in conformity with the 

hierarchy of accounting principles approved by the Federal Accounting 

Standards Advisory Board (FASAB) and the Office of Management and Budget 

(OMB) Bulletin 01-09, Form and Content of Agency Financial Statements. FTC 

is fully committed to the principles and objectives of both the Chief Financial 

Officers (CFOs) Act of 1990 and the Federal Financial Management 

Improvement Act of 1996. Comparative data for the prior fiscal year is 

presented. The statements should be read with the realization that they are for a 

component of the U.S. Government, i.e., a sovereign entity. 

Audit of FTC’s 2004 Principal Statements 

The Office of Inspector General of the Federal Trade Commission has examined 

the Agency’s financial statements. The Inspector General’s report on the 

principal statements, internal controls, and compliance with certain laws and 

regulations accompanies the statements. 

Financial Resources and Results of Operations 

The accompanying statements summarize the FTC’s financial position, disclose 

the net cost of operations and changes in net position, provide information on 

budgetary resources and financing, and present the sources and disposition of 

custodial revenue for the years ended September 30, 2004 and 2003. The FTC 

had total assets of $252.9 million and $399.9 million as of September 30, 2004 

and 2003, respectively. Approximately $145.0 million and $304.6 million of the 

2004 and 2003 assets, respectively, were funds collected or to be collected and 

distributed through the consumer redress program, under the agency’s 

Consumer Protection mission. In addition, $41.4 million in fiscal year 2004 and 

$41.2 million in fiscal year 2003 was held in a divestiture fund and will be 

subsequently disbursed per the terms of the divestiture agreement under the 

agency’s Maintaining Competition mission. In addition, $66.5 million in fiscal 

year 2004 and $54.1 million in fiscal year 2003 in assets represent fund balances 

in appropriated accounts, account receivables, and net capital assets. 

Revenue and Financing Sources 

Revenue and financing sources received in fiscal years 2004 and 2003 totaled 

$193.4 and $184.4 million, respectively. Exchange revenue, classified as earned 

revenue on the financial statements, was received from three sources; the 

collection of premerger notification filing fees, Do Not Call (DNC) user fees, and 

reimbursements received for services provided to other government agencies. 
60

Financing was received through direct appropriations, appropriation transfers and 

imputed for costs absorbed by others. 

Exchange revenue totaled $98.4 million and $62.4 million for fiscal years 2004 

and 2003, respectively. The primary source of exchange revenue collected, 

$83.6 million in fiscal year 2004 and $56.0 million in fiscal year 2003, was 

premerger filing fees. The FTC collects a filing fee from each business entity that 

files a Notification and Report form transaction, as required by the Hart-ScottRodino (HSR) Anti-Trust Improvement Act. Qualifying mergers with a transaction 

amount over $50 million in total assets are charged a filing fee. The fee is based 

on a three-tiered structure: $45,000, $125,000, and $280,000, depending upon 

the combined total of assets of the merger transaction. The fee is divided equally 

between the FTC and the Antitrust Division of the Department of Justice (DOJ). 

The disposition of amounts collected for the DOJ is reported on the Statements 

of Custodial Activity. The number of filings increased by 380 over the previous 

year with 1,394 and 1,014 recorded in fiscal years 2004 and 2003, respectively. 

Premerger filing fees represented 43.2 percent and 30.4 percent of the total 

revenue sources to the agency in fiscal years 2004 and 2003, respectively. 

The second largest source of exchange revenue was Do Not Call fees. Fiscal 

year 2004 was the first full year in which DNC fees were collected. In September 

2003 the FTC began collecting fees associated with the implementation and 

enforcement of the national Do Not Call Registry sufficient to cover registry costs. 

The Registry operates under Section 5 of the FTC Act, which enforces the 

Telemarketing Sales Rule (TSR). Telemarketers under the FTC’s jurisdiction are 

required to pay a user fee and download from the DNC database a list of 

consumer’s telephone numbers who do not wish to receive calls. Fees are 

based on the number of area codes downloaded. $14.0 million in fees were 

collected in fiscal year 2004, and $5.2 million in fiscal year 2003. Fiscal years 

2004 and 2003 DNC fees represented 7.2 percent and 2.9 percent of the total 

financing sources. 

The third source of exchange revenue was earned through reimbursable 

agreements with other federal agencies. Total earnings were $0.8 million and 

$1.2 million, representing 0.4 percent and 0.6 percent for fiscal years 2004 and 

2003, respectively. 

In addition to exchange revenue, other financing sources were realized through a 

direct appropriation from the General Fund of the Treasury, and other nonexpenditure transfers, in the amount of $88.1 million in fiscal year 2004 and 

$115.6 million in fiscal year 2003. The budgetary authority appropriated from the 

General Fund was reduced by the amount of offsetting collections (HSR and 

DNC fees) received during the year to arrive at the final amount of resources 

appropriated from the General Fund, In fiscal years 2004, and 2003 the amount 

of direct appropriations and transfers represented 45.6 percent and 62.7 percent 

of total funding sources received. 
61

Financing Sources FY 2003 and FY 2004

FY 2003

FY 2003

FY 2003

FY 2004

FY 2004

FY 2004

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

General Fund

Appropriation

Exchange

Revenue

Imputed Financing

Dollars in thousands

An imputed revenue source, as described in Note 9 of the financial statements, 

was recognized, which matched the unfunded employee benefits cost, in the 

amount of $7.0 million for fiscal year 2004, and $6.4 million in fiscal year 2003. 

These represented 3.6 percent and 3.4 percent of total financing sources for 

fiscal years 2004 and 2003, respectively. Fiscal year 2004 revenue sources are 

presented in the following chart. 

 

 

FY 2004 Financing Sources

HSR Fees

43.2%

General Fund 

Appropriations 

45.6%

Interagency 

Agreements

0.4%

Imputed 

Financing

DNC Fees 3.6%

7.2%

 

Financing sources that are not needed to fund the cost of operations are added 

to Cumulative Results of Operations and Net Position. The accompanying chart 

compares major financing sources for fiscal years 2004 and 2003 
62

Cost of Operations 

The gross cost of operations for 2004 fiscal year was $185.9 million and 

represents an increase of 6.4 percent over the fiscal year 2003 gross cost of 

operations, which was $174.7 million. During 2004, expenses for salaries and 

related benefits totaled $121.0 million, or 65.1 percent of the gross cost of 

operations. Lease space rental expense was $17.1 million, or 9.2 percent, and 

the remaining $47.8 million, or 25.7 percent, included travel, facility maintenance 

and equipment rental, utilities, imputed benefit costs, depreciation, and other 

items. These costs staff years over the previous fiscal year. 

Custodial Activity 

The Statement of Custodial Activity (SCA) is a required financial statement under 

Statement of Federal Financial Accounting Concepts (SFFAC) No. 2 for those 

federal agencies that collect non-exchange revenues (e.g., taxes, duties, fines, 

and penalties) for the general fund of the Treasury, a trust fund, or other recipient 

entities. 

Fighting consumer fraud is one of the FTC’s highest priorities; consumers are 

bilked out of billions of dollars a year by perpetrators of traditional fraud and fraud 

on the Internet. In fraud cases, the FTC files actions in federal district court to 

bring an immediate halt to ongoing business activities and freeze defendants’ 

assets. The FTC then pursues court orders that permanently ban the fraudulent 

activities and provide redress to consumers. In non-fraud cases, usually 

involving advertising claims, redress may be obtained for consumers in 

settlement of administrative complaints. In addition, when a company or 

individual violates an FTC Trade Regulation Rule, a statute enforced by the 

agency, or a prior agency order, the FTC seeks federal district court orders 

permanently barring future violations and requiring payment of civil penalties. 

These agency enforcement activities often generate substantial funds that are 

used, to the extent possible, to provide redress to consumers who have been 

injured by the deceptive practices, or, as with civil penalties, are transferred to 

the Treasury Department as non-exchange revenue. These activities are 

reported on the SCA, which forms part of the FTC’s financial statement package. 

In addition, the SCA also identifies the portion of the premerger filing fees 

collected during the year in which they are transferred to DOJ.




67

Office of Inspector General Management Challenges 

Information Technology 

Management Challenge: To maintain a comprehensive information security 

program that safeguards Commission data from internal and external threats. 

Agency Progress in Addressing the Challenge: The President has placed a high 

priority on securing the Federal government=s operations and assets. Protecting 

the information and information systems on which the Federal government 

depends requires agencies to identify and resolve current security weaknesses 

and risks and to protect against future vulnerabilities and threats. 

The OIG has performed numerous IT security audits over the past several years, 

both in response to legislative mandates and to the OIG=s strategic plan. Each 

year, the agency has made steady improvements in its overall security posture, 

culminating in an FY 2004 Federal Information Security Management Act audit 

where no significant deficiencies were observed. Just within the last year, the 

FTC (i) certified and accredited one of its Major Applications and one General 

Support system; (ii) made significant improvements in the Plan of Action & 

Milestones tracking and reporting process; (iii) developed policies and 

procedures that addressed various security issues; and (iv) developed a 

scanning and remediation program for system vulnerabilities. 

In addition to these and other technical improvements, the FTC also made 

selected structural changes to enhance security. Within the last year, the IT 

Operations Section assumed responsibility for all production systems. Prior to 

this time and contrary to recommended industry practices, developers had 

substantial privileges on production applications and data. Software is now 

secured in a locked room and all new and revised hardware and software are 

authorized, tested, and approved prior to implementation. Finally, default system 

passwords have been changed and Change Management procedures are now in 

use to manage and track system changes. 

Overall, management has started to evolve its security approach to conform to 

procedures and guidance issued by the National Institute of Standards and 

Technology, the Federal government=s recognized IT security expert. 
68

The challenge ahead: While the agency has made many needed changes and 

improvements in the development of an overall IT security program, the agency 

must continue to strengthen itself against those threats posed by insiders, i.e., its 

employees and contractors. The timely removal of accounts belonging to 

individuals who have left the agency, including those belonging to IT contractors, 

has been a weakness, as often times those individuals bypass formal checkout 

processes. Of equal concern are the expansive roles and privileges the agency 

assigns to staff (to include IT staff) to access sensitive databases. Finally, the 

substantial progress made by the agency to implement a sound security program 

could quickly reverse itself if management should become complacent, believing 

that yesterday=s security improvements will protect it against tomorrow=s attacks. 
69

FINANCIAL MANAGEMENT 

Management Challenge: To integrate programmatic and financial accounting 

systems. 

Agency Progress in Addressing the Challenge: Virtually all Federal departments 

and agencies are required to prepare financial statements in a proscribed format 

that will help external readers gain a basic understanding of how the entity has 

used the resources provided to it by Congress. To further this effort, these same 

agencies are also required to develop strategic plans and performance 

measures, and to report agency progress in meeting their performance targets. 

Although not required by law, FTC management chose to prepare financial 

statements for audit beginning with fiscal year 1997. By preparing annual 

financial statements and by undergoing an annual audit the FTC has been able 

to successfully bring together all support and program-related financial activities. 

In fact, every year since 1997 the agency has produced a Statement of Custodial 

Activity that details all mission-related financial activities of the agency in 

accordance with government-wide accounting standards issued by the Federal 

Accounting Standards Advisory Board. In order to accomplish this outcome, new 

responsibilities were assigned to staff, organizations were created and systems 

were established. Yet, with all of this success, work remains to be performed. 

 

The Challenge Ahead: The FTC continues to rely on essentially the same 

financial accounting system it had in place in 1997 to meet all Treasury, OMB, 

management and financial statement preparation requirements. However, much 

has changed since this time. For example, performance-related information 

must now be accumulated and reported in the annual Performance and 

Accountability Report. Systems to record Hart-Scott-Rodino filing fees and DoNot-Call fees, or to accumulate year to date civil penalty and consumer redress 

amounts, currently necessitate some level of manual reconciliation at the close of 

each accounting period. In short the agency=s central accounting system is not 

fully integrated with the various program subsidiary systems that are in place to 

record and account for program-related financial activities. While the agency has 

been able to accurately accumulate this information in the past, new 

requirements will surely strain the systems now in use. In short, systems used 

by program staff should be integrated with the financial accounting system to 

allow management to begin to routinely tie cost information appearing in the 

Statement of Net Cost to its selected performance goals and objectives. 
FEDERAL TRADE COMMISSION

BALANCE SHEETS

As of September 30, 2004 and 2003

(Dollars in thousands)

2004 2003

Entity Assets:

Intragovernmental Assets:

Fund Balance with Treasury (Note 2) 44,627 $ 40,900 $ 

Accounts Receivable, Net (Note 4) 121 231 

Total Intragovernmental Assets 44,748 41,131 

Advances and Prepayments - 9 

Property, Plant, and Equipment, Net (Note 5) 14,270 9,138 

Total Entity Assets 59,018 50,278 

Non-Entity Assets:

Intragovernmental Assets:

Fund Balance with Treasury (Note 2) 19,531 6,355 

Cash and Other Monetary Assets (Note 3) 111,489 101,391 

Accounts Receivable, Net (Note 4) 62,879 241,895 

Total Non-Entity Assets 193,899 349,641 

Total Assets $ 399,919 252,917 $ 

FTC Financial Statements for Fiscal Year End 2004

The accompanying notes are an integral part of these statements.

 70
FEDERAL TRADE COMMISSION

BALANCE SHEETS

As of September 30, 2004 and 2003

(Dollars in thousands)

2004 2003

Liabilities:

Liabilities Covered by Budgetary Resources:

Intragovernmental Liabilities:

Accrued Benefits 645 $ 463 $ 

Accounts Payable 1,510 1,605 

Total Intragovernmental Liabilities 2,155 2,068 

With the Public:

Accounts Payable 7,867 7,726 

Accrued Salaries 3,625 2,727 

Total Liabilities Covered by Budgetary Resources 13,647 12,521 

Liabilities Not Covered by Budgetary Resources:

Intragovernmental Liabilities: 

Undisbursed Premerger Filing Fees 6,530 1,600 

Other Liabilities (Note 6) 1,380 2,538

Total Intragovernmental Liabilities 7,910 4,138 

Actuarial FECA Liabilities 1,948 2,089 

Accrued Annual Leave 7,496 7,183 

With the Public (Note 6) 186,384 345,936 

Total Liabilities Not Covered by Budgetary Resources 203,738 359,346 

Total Liabilities 217,385 371,867 

Net Position: (Note 7)

Balances:

Unexpended Appropriations 36 142 

Cumulative Results of Operations 35,496 27,910 

Total Net Position 35,532 28,052 

Total Liabilities and Net Position $ 399,919 252,917 $ 

The accompanying notes are an integral part of these statements.

 71
FEDERAL TRADE COMMISSION

STATEMENTS OF NET COST

For the Years Ended September 30, 2004 and 2003

2004 2003

Program Costs

Maintaining Competition Mission:

Intragovernmental gross costs 19,692 $ 20,443 $ 

Less: Intragovernmental earned revenue (722) (1,011) 

Intragovernmental net costs 18,970 19,432 

Gross costs with the public 62,083 61,688 

Less: Earned revenue with the public (Note 12) (83,598) (56,015) 

Net costs with the public (21,515) 5,673 

Net Cost Maintaining Competition Mission (2,545) 25,105 

Consumer Protection Mission:

Intragovernmental gross costs 25,063 23,052 

Less: Intragovernmental earned revenue (86) (148) 

Intragovernmental net costs 24,977 22,904 

Gross costs with the public 79,015 69,563 

Less: Earned revenue with the public (Note 12) (13,984) (5,239) 

Net costs with the public 65,031 64,324 

Net Cost Consumer Protection Mission 90,008 87,228 

Net Cost of Operations $ 112,333 87,463 $ 

(Dollars in thousands)

The accompanying notes are an integral part of these statements.

 72
FEDERAL TRADE COMMISSION

STATEMENTS OF CHANGES IN NET POSITION

For the Years Ended September 30, 2004 and 2003

(Dollars in thousands)

Cumulative Cumulative 

Results of Unexpended Results of Unexpended 

Operations Appropriations Operations Appropriations

Beginning Balances $ 142 27,910 $ 18,281 $ 350 $ 

Budgetary Financing Sources:

Appropriations Received - 88,435 - 115,299 

Appropriations Transferred-In/Out - 67 - 110 

Other Adjustments (Rescissions) - (536) - - 

Appropriations Used 88,072 (88,072) 115,617 (115,617) 

Other Financing Sources:

Imputed Financing (Note 9) 6,977 - 6,345 - 

Total Financing Sources 95,049 (106) 121,962 (208) 

Net Cost of Operations (87,463) - (112,333) - 

Ending Balances $ 36 35,496 $ $ 142 27,910 $ 

2004 2003

The accompanying notes are an integral part of these statements.

 73
FEDERAL TRADE COMMISSION

STATEMENTS OF BUDGETARY RESOURCES

For the Years Ended September 30, 2004 and 2003

2004 2003

Budgetary Resources:

Budget authority 

Appropriation 88,435 $ 115,299 $ 

Net Transfers - Current Year Authority 68 110 

Net Transfers - Prior Year Balances (1) - 

Unobligated Balance:

Beginning of Period 8,642 7,813 

Spending Authority from Offsetting Collections

Earned

Collected 98,500 62,336 

Receivable from Federal Sources (110) 77 

Change in Unfilled Customer Orders

Without Advance from Federal Sources 40 (362) 

Anticipated for rest of year, without advances

Recoveries of Prior Year Obligation 2,306 624 

Temporary Not Available pursuant to Public Law

Enacted Reductions

Rescissions - New Budget Authority (536) - 

Total Budgetary Resources $ 185,897 197,344 $ 

Status of Budgetary Resources:

Obligations incurred

Direct 89,213 106,257 

Reimbursable 99,704 70,998 

Subtotal 188,917 177,255 

Unobligated Balance 

Available 1,027 444 

Not Available 7,400 8,198 

Total Status of Budgetary Resources $ 185,897 197,344 $ 

Summary of Obligations and Outlays:

Obligated balance net beginning of period 21,786 32,257 

Obligated balance net end of period: 

Accounts receivable (121) (240) 

Unfilled customer orders from federal sources (55) (15) 

Undelivered orders 22,729 19,992 

Accounts payable 13,647 12,520 

Total obligated balance net end of period $ 32,257 36,200 $ 

Outlays:

Disbursements 182,739 166,444 

Collections (98,500) (62,336) 

Net Outlays $ 104,108 84,239 $ 

(Dollars in thousands)

The accompanying notes are an integral part of these statements.

 74
 FEDERAL TRADE COMMISSION

 STATEMENTS OF FINANCING

For the Years Ended September 30, 2004 and 2003

2004 2003

Resources Used to Finance Activities:

Budgetary Resources Obligated

Obligations incurred 188,917 $ 177,255 $ 

Less: Spending authority from offsetting collections and recoveries (100,736) (62,675) 

Obligations net of offsetting collections and recoveries 88,181 114,580 

Other Resources

Imputed financing from costs absorbed by others 6,977 6,345 

Total Resources Used to Finance Activities 95,158 120,925 

Resources Used to Finance Items not Part of the Cost of Operations:

Change in budgetary resources obligated for goods 

and services ordered but not yet received or provided (2,697) (6,991) 

Resources that finance the acquistion of assets (7,063) (4,217) 

Total resources used to finance items not part of the net cost of operations (9,760) (11,208) 

Total Resources Used to Finance the Net Cost of Operations 85,398 109,717 

Components of the Net Cost of Operations that will not Require or

Generate Resources in the Current Period:

Components Requiring or Generating Resources in Future Periods:

Increase in annual leave liability 313 516 

(Decrease) increase in FECA liability (179) (189) 

Total components of the net cost of operations that will not require or

generate resources in future periods 134 327 

Components not Requiring or Generating Resources:

Depreciation and amortization 1,931 1,421 

Change in accounting estimates (Note 15) - 758 

Loss on disposition of asset - 110 

Total components of the Net Cost of Operations that will not require or

generate resources 1,931 2,289 

Total Components of the Net Cost of Operations that will not Require or

Generate Resources in the Current Period 2,065 2,616 

Net Cost of Operations $ 112,333 87,463 $ 

(Dollars in thousands)

The accompanying notes are an integral part of these statements.

 75
FEDERAL TRADE COMMISSION

STATEMENTS OF CUSTODIAL ACTIVITY

For the Years Ended September 30, 2004 and 2003

(Refer to Note 11)

MC Mission CP Mission 2004 Total 2003 Total

Sources of Collections:

Premerger Filing Fees (Net of Refunds) (a) 82,190 $ - $ 82,190 $ 57,600 $ 

Civil Penalties and Fines (b) 756 5,786 6,542 8,506 

Redress (c) - 337,585 337,585 101,768 

Divestiture Fund (d) 184 - 184 216 

Funeral Rule Violations - 30 30 13 

 343,401 83,130 426,531 168,103 

 (179,016) - (179,016) 147,065 

Total Non-exchange Revenues $ 164,385 83,130 $ 247,515 $ 315,168 $ 

Disposition of Revenue Collected:

Treasury General Fund 756 20,176 20,932 22,573 

Department of Justice 77,259 - 77,259 57,683 

Receivers (f) - 161 161 112 

Redress to Claimants (g) - 294,058 294,058 69,566 

Contractor Fees Net of Interest Earned (h) - 7,638 7,638 4,932 

Attorney Fees (h) - 3,208 3,208 11,071 

 325,241 78,015 403,256 165,937 

 (160,856) 5,115 (155,741) 149,231 

Total Disposition of Revenues Collected $ 164,385 83,130 $ 247,515 $ 315,168 $ 

Net Custodial Collections $ - - $ - $ - $ 

(Dollars in thousands)

The accompanying notes are an integral part of these statements.

 76
FEDERAL TRADE COMMISSION

REQUIRED SUPPLEMENTARY INFORMATION

As of September 30, 2004 and 2003

(Dollars in thousands)

Intragovernmental Assets:

Fund Balance with Treasury Accounts Total Total

Trading Partner Agency: Entity Non-Entity Receivable 2004 2003

Treasury 44,627 $ 19,531 $ - $ 64,158 $ 47,255 $ 

Agency for International Development - - 59 59 86 

Other Government Agencies - - 62 62 145 

Total Intragovernmental Assets $ 19,531 44,627 $ 121 $ 64,27 $ 47,48 9 $ 6

Intragovernmental Liabilities:

Accrued Accounts Total Total

Trading Partner Agency: Benefits Payable NA 2004 2003

Covered by Budgetary Resources:

Department of Commerce - $ - $ - $ - $ 2 $ 

Department of Labor 18 - - 18 - 

U.S. Postal Inspection Service - 12 - 12 8 

Department of Justice - - - - 6 

Government Printing Ofice - 7 - 7 - 

General Services Administration - 1,370 - 1,370 1,411 

Office of Personnel Management 470 43 - 513 343 

Department of Treasury 157 78 - 235 298 

Total Covered by Budgetary Resources $ 1,510 645 $ - $ 2,15 $ 2,06 5 $ 8

Not Covered by Budgetary Resources:

Department of Justice - $ 6,530 $ - $ 6,530 $ 1,600 $ 

Department of Labor - 395 - 395 433

Department of Treasury - 985 - 985 2,105

Total Not Covered by Budgetary Resources $ 7,910 - $ - $ 7,910 $ 4,13 $ 8
Exchange Revenue from Reimbursable Agreements 

Trading Partner: 2004 2003

U.S. Agency for International Development 429 $ 563 $ 

U.S. Department of State 142 - 

Department of Justice 90 503 

Federal Mine Safety & Health Review Commission 41 52 

Department of the Treasury 39 - 

U.S. Trade and Development Agency 36 3 

Medicare Payment Advisory Commission/GSA 20 25 

U.S. Postal Inspection Service 8 7 

Department of Commerce 3 3 

U.S. Environmental Protection Agency - 1 

U.S. Patent and Trademark Office - 2 

Total Exchange Revenue from Reimbursable Agreements $ 1,159 808 $ 

Related Costs:

Budget Function Classification: 2004 2003

Other Advancement of Commerce 808 $ 1,159 $ 

Total Related Costs $ 1,159 808 $ 

FEDERAL TRADE COMMISSION

Required Supplementary Information

For the Years Ended September 30, 2004 and 2003

(Dollars in thousands)

 78
Intragovernmental Expenses:

Trading Partner: 2004 2003

General Services Administration 18,331 $ 17,121 $ 

Office of Personnel Management 18,117 18,479 

Social Security Administration 5,151 4,858 

Department of the Interior 864 770 

Department of Transportation 724 755 

Government Printing Office 646 853 

Department of Labor 258 183 

Department of Health and Human Services 218 (87) 

United States Postal Service 214 294 

Department of Justice 107 31 

National Archives and Records Administration 39 (6) 

Veterans Administration 37 - 

Department of State 33 28 

Department of the Treasury 15 186 

Other 1 30 

Total Intragovernmental Expenses $ 43,495 44,755 $ 

Mission:

Maintaining Competition 19,692 $ 20,443 $ 

Consumer Protection 25,063 23,052 

Total Intragovernmental Expenses $ 43,495 44,755 $ 

For the Years Ended September 30, 2004 and 2003

FEDERAL TRADE COMMISSION

Required Supplementary Information

(Dollars in thousands)

 79
80

Notes to the Financial Statements 

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

(a) Reporting Entity 

The Federal Trade Commission (FTC) was created by the Federal Trade 

Commission Act of 1914. The FTC enforces a variety of federal antitrust and 

consumer protection laws. The FTC seeks to ensure that the nation’s markets 

function competitively and are vigorous, efficient, and free of undue restrictions. 

The FTC also works to enhance the smooth operation of the marketplace by 

eliminating acts or practices that are unfair or deceptive. In general, the FTC’s 

efforts are directed toward stopping actions that threaten consumers’ 

opportunities to exercise informed choice. Finally, the FTC undertakes economic 

analysis to support its law enforcement efforts and to contribute to the policy 

deliberations of the Congress, the Executive Branch, other independent 

agencies, and state and local governments when requested. 

(b) Fund Accounting Structure 

The FTC‘s financial activities are accounted for by federal account symbol. They 

include the accounts for appropriated funds and other fund groups described 

below for which the FTC maintains financial records, and consumer redress 

accounts for which the agency has management oversight. 

General Funds Consist of salaries and expense appropriation accounts used to fund 

agency operations and capital expenditures.

Deposit Funds Consist of monies held temporarily by the FTC as an agent for 

others. 

Suspense Funds Represent receipts awaiting proper classification, or held in 

escrow, until ownership is established and proper distributions can be made. 

Receipt Accounts Reflect civil penalties and other miscellaneous receipts that are 

collected but not retained by the FTC. Cash balances are automatically transferred to 

the general fund of the Treasury at the end of each fiscal year. 

(c) Basis of Accounting and Presentation 

The financial statements present the financial position, net cost of operations, 

changes in net position, budgetary resources, financing, and custodial activities 

of the FTC, in accordance with accounting principles generally accepted in the 

United States of America and the form and content requirements of OMB Bulletin 

01-09. They have been prepared from the books and records of the FTC and 

include the accounts of all funds under the control of the FTC. Accounting 
81

principles generally accepted in the United States of America encompass both 

accrual and budgetary transactions. Under the accrual method, revenues are 

recognized when earned and expenses are recognized when a liability is 

incurred, without regard to receipt or payment of cash. Budgetary accounting 

facilitates compliance with legal constraints and controls over the use of federal 

funds. The accompanying financial statements are prepared on the accrual basis 

of accounting. 

In addition, the accompanying statements include information on the activities of 

the agency’s consumer redress program. Independent agents are contracted to 

administer the program under the oversight of FTC program offices, which 

maintain the financial records for consumer redress activity. 

(d) Budget Authority 

Congress annually passes appropriations that provide the FTC with authority to 

obligate funds for necessary expenses to carry out mandated program activities. 

These funds are available until expended. The funds appropriated are subject to 

OMB apportionment of funds in addition to Congressional restrictions on the 

expenditure of funds. Also, the FTC places internal restrictions to ensure the 

efficient and proper use of all funds. Appropriated funding is derived from various 

revenues and financing sources. 

(e) Fund Balances with the U.S. Treasury 

With the exception of cash held in consumer redress custodial accounts by 

FTC’s contracted agents, the FTC does not maintain cash in commercial bank 

accounts. Cash receipts and disbursements are processed by the U.S. Treasury. 

Fund balances with Treasury consist of appropriated funds that are available to 

pay current liabilities and to finance authorized purchase commitments, and 

restricted funds, which include deposit and suspense funds. The FTC’s fund 

balances with Treasury are carried forward until such time as goods or services 

are received and payment is made, or until the funds are returned to the U.S. 

Treasury. 

(f) Advances and Prepayments 

Payments in advance of the receipt of goods and services are recorded as 

advances and recognized as expenses when the related goods and services are 

received. Advances are principally advances to FTC employees for official travel. 

(g) Accounts Receivable 

Entity accounts receivable include amounts due from other federal entities and 

from current and former employees and vendors. Non-entity accounts receivable 

include civil monetary penalties imposed as a result of the FTC’s enforcement 

activities, uncollected redress judgments, and amounts due from receivers. Since 
82

the FTC does not retain these receipts, a corresponding liability is also recorded 

for non-entity accounts receivable. 

 

Opening judgment receivable balances reflect the Federal Accounting Standards 

Advisory Board (FASAB) standard for the recognition of losses using the 

collection criterion of “more likely than not.” This criterion results in receivable 

balances that are more conservatively stated than those valued by the private 

sector under generally accepted accounting principles. The Board states that it is 

appropriate to recognize the nature of federal receivables, which, unlike trade 

accounts of private firms or loans made by banks, are not created through credit 

screening procedures. Rather, these receivables arise because of the 

assessment of fines from regulatory violations. In these circumstances, historical 

experience and economic factors indicate that these types of claims are 

frequently not fully collectible. 

The FTC recognizes an allowance for uncollectible non-entity accounts 

receivable by individual account analysis based on the debtor’s ability and 

willingness to pay, and the probable recovery of amounts from secondary 

sources, including liens, garnishments, and other applicable collection tools. 

Entity accounts receivable are considered fully collectible, and therefore no 

allowance is recorded. 

(h) Property and Equipment 

Commercial vendors and the General Services Administration, which charges the 

FTC a Standard Level Users Charge (SLUC) that approximates the commercial 

rental rates for similar properties, provide the land and buildings in which the FTC 

operates. 

Property and equipment consist of equipment, leasehold improvements, and 

software. All items with an acquisition value greater than $100,000 and a useful 

life over two years are capitalized using the straight-line method. Service lives 

range from three to twenty years. 

Internal use software development and acquisition costs of $100,000 are 

capitalized as software development in progress until the development stage has 

been completed and the software successfully tested. Upon completion and 

testing, software development-in-progress costs are reclassified as internal use 

software costs and amortized using the straight-line method over the estimated 

useful life of three years. Purchased commercial software that does not meet the 

capitalization criteria is expensed. 

(i) Liabilities 

 

Liabilities represent the amount of monies or other resources that are likely to be 

paid as the result of a transaction or event that has already occurred. Liabilities 

classified as not covered by budgetary resources are liabilities for which 
83

appropriations have not been enacted and liabilities resulting from the agency’s 

custodial activities. See Note 11. Also, the Government, acting in its sovereign 

capacity, can abrogate FTC liabilities (other than contracts). 

(j) Undisbursed Premerger Filing Fees 

A liability is recorded for undisbursed filing fees collected under the Hart-ScottRodino (HSR) Antitrust Improvements Act of 1976, which are due to the 

Department of Justice in a subsequent period. 

(k) Federal Employees’ Compensation Act (FECA) Actuarial Liability and 

Accrued FECA Claims 

The FTC records an estimated liability for future workers’ compensation claims 

based on data provided from the Department of Labor (DOL). The FTC also 

records a liability for actual claims paid on its behalf by the DOL. 

(l) Accrued Leave 

A liability for annual leave is accrued as leave is earned and reduced when leave 

is taken. At year end, the balance in the accrued annual leave account is 

adjusted to reflect the liability at current pay rates and leave balances. Accrued 

annual leave is paid from future funding sources and, accordingly, is reflected as 

a liability not covered by budgetary resources. Sick and other leave is expensed 

as taken. 

(m) Employee Health Benefits and Life Insurance 

FTC employees are eligible to participate in the contributory Federal Employees 

Health Benefit Program (FEHBP) and the Federal Employees Group Life 

Insurance Program (FEGLIP). The FTC matches the employee contributions to 

each program to pay for current benefits. 

(n) Post-Retirement Health Benefits and Life Insurance 

FTC employees eligible to participate in the FEHBP and the FEGLIP may 

continue to participate in these programs after their retirement. The Office of 

Personnel Management (OPM) has provided the FTC with certain cost factors 

that estimate the true cost of providing the post-retirement benefit to current 

employees. The FTC recognizes a current cost for these and other retirement 

benefits (ORB) at the time the employee’s services are rendered. The ORB 

expense is financed by OPM, and offset by the FTC through the recognition of an 

imputed financing source on the Statement of Financing. During fiscal years 

2004 and 2003, the cost factors relating to FEHBP were $4,420 and $3,766, 

respectively, per employee enrolled. During fiscal years 2004 and 2003, the 

cost factor relating to FEGLIP was 0.02 percent of basic pay per employee 

enrolled. See Note 9, Imputed Financing. 
84

(o) Employee Retirement Benefits 

FTC employees participate in either the Civil Service Retirement System (CSRS) 

or the Federal Employees Retirement System (FERS). Employees hired after 

December 31, 1983, are covered by FERS and Social Security, while employees 

hired prior to January 1, 1984, may elect to either join FERS or remain in CSRS. 

Approximately 27 percent of FTC employees participate in CSRS. For 

employees participating in CSRS, the FTC contributes 7 percent of the 

employee’s gross earnings to the CSRS Retirement and Disability Fund. For 

employees participating in FERS, the FTC contributes 10.7 percent to the 

Federal Employees’ Retirement Fund. Employees participating in FERS are 

covered under the Federal Insurance Contributions Act (FICA) for which the FTC 

contributes a matching amount to the Social Security Administration. FTC 

contributions are recognized as current operating expenses. 

The Thrift Savings Plan (TSP) is a defined contribution retirement savings and 

investment plan for employees covered by either CSRS or FERS. CSRS 

participating employees may contribute up to 9 percent of earnings for 2004, 8 

percent for 2003, to TSP, but do not receive a matching contribution from the 

FTC. FERS participating employees may contribute up to 14 percent and 13 

percent of earnings for the years 2004 and 2003, respectively, to the TSP plan. 

For FERS employees, the FTC contributes 1 percent of the employee’s gross 

pay to the TSP. The FTC also matches 100 percent of the first 3 percent 

contributed and 50 percent of the next 2 percent contributed. FTC contributions 

are recognized as current operating expenses. Although the FTC contributes a 

portion for pension benefits and makes the necessary payroll withholdings, it is 

not responsible for contribution refunds, employee’s retirement benefits, or the 

retirement plan assets. Therefore, the FTC financial statements do not report 

CSRS and FERS assets, accumulated plan benefits, or unfunded liabilities, if 

any, which may be applicable to employees. Such reporting is the responsibility 

of OPM. 

However, the FTC recognizes the full cost of providing future pension benefits to 

covered employees at the time the employees’ services are rendered. OPM has 

provided the FTC with certain cost factors that estimate the true service cost of 

providing the pension benefits to covered employees. The cost factors used to 

arrive at the service cost are 25 percent of basic pay for CSRS-covered 

employees and 12 percent of basic pay for FERS-covered employees during 

fiscal years 2004 and 2003. The pension expense recognized in the financial 

statements equals this service cost to covered employees less amounts 

contributed by these employees. If the pension expense exceeds the amount 

contributed by the FTC as employer, the excess is recognized as an imputed 

financing cost. The excess total pension expense over the amount contributed by 

the agency must be financed by OPM and is recognized as an imputed financing 

source, non-exchange revenue. 
85

(p) Net Position 

The FTC’s net position is composed of the following: 

Unexpended appropriations include the amount of unobligated balances and 

undelivered orders. Unobligated balances are the amount of appropriations or 

other authority remaining after deducting the cumulative obligations from the 

amount available for obligation. 

Cumulative results of operations represent the net results of operations since 

inception, the cumulative amount of prior period adjustments, the remaining book 

value of capitalized assets, and future funding requirements. 

(q) Exchange Revenues 

The Federal Accounting Standards Advisory Board defines exchange revenue as 

inflows of resources to a governmental entity that the entity has earned. They 

arise from exchange transactions that occur when each party to the transaction 

sacrifices value and receives value in return. 

Exchange revenues are earned through the collection of fees under the HartScott-Rodino Act. This Act, in part, requires the filing of premerger notifications 

with the FTC and the Antitrust Division of the Department of Justice (DOJ) and 

establishes a waiting period before certain acquisitions may be consummated. 

Mergers with transaction amounts over $50 million require the acquiring party to 

pay a filing fee. The filing fees are based on the transaction amount and follow a 

three-tiered structure: $45,000, $125,000, and $280,000. The FTC retains onehalf of the HSR premerger filing fees collected. Revenue is recognized when all 

required documentation under the HSR Act has been received by the agency. 

Fees not retained by the FTC are maintained in a suspense fund until transferred 

to the DOJ and not reported as revenue to the FTC. 

Exchange revenues are also earned through the collection of fees for the 

national Do Not Call Registry. This registry operates under Section 5 of the FTC 

Act, which enforces the Telemarketing Sales Rule (TSR). The Do Not Call 

Implementation Act, P.L. 108-010, gives the FTC authority to establish fees for 

fiscal years 2003 through 2007 sufficient to offset the implementation and 

enforcement of the provisions relating to the Do Not Call Registry. Fees 

collected over expenses are retained for use in other FTC missions. Authority to 

create the registry was ratified in Public Law 108-082. Consumers may register 

a preference not to receive telemarketing calls. Telemarketers are required to 

pay an annual subscription fee and download from the Do Not Call database a 

list of telephone numbers of consumers who do not wish to receive calls. Fees 

are based on the number of area codes downloaded. The minimum charge was 

$25 for downloading one area code. The maximum charge was $7,375 for all 

area codes within the United States. Effective September 1, 2004, the new 

minimum charge is $40 and the maximum charge is $11,000. 
86

Exchange revenue is also earned for services provided to other Government 

agencies through reimbursable agreements. The FTC recovers the full cost of 

services, primarily salaries and related expenses. Revenue is earned at the time 

the expenditures are incurred against the reimbursable order. All exchange 

revenues are deducted from the full cost of the FTC’s programs to arrive at net 

program cost. 

(r) Appropriations Used 

In addition to exchange revenue, the FTC receives financing sources through 

direct appropriation from the general fund of the Treasury to support its 

operations. A financing source, appropriations used, is recognized to the extent 

these appropriated funds have been consumed. In fiscal years 2004 and 2003, 

the FTC received a financing source in the form of a direct appropriation that 

represented approximately 46 percent and 63 percent of total revenues and 

financing sources realized. 

(s) Methodology for Assigning Cost 

Total costs were allocated to each mission based on two components: a) direct 

costs to each mission and b) indirect costs based on the percentage of direct 

FTE used by each mission. 

(t) Comparative Data 

 

Certain 2003 line items on the Statements of Net Cost have been reclassified to 

conform with the current year’s presentation. 

NOTE 2 – FUND BALANCES WITH TREASURY 

 

Fund balances with Treasury consisted of the following at September 30, 2004 

and 2003: 

(Dollars in thousands) Unobligated Unobligated 2004 2003

Obligated Available Not available Total Total

General Funds Entity 36,200 $ 1,027 $ 7,400 $ 44,627 $ 40,900 $ 

General Funds Non-Entity:

 Undisbursed Premerger Filing Fees - - - 6,530 1,600 

 Deposit Funds - Redress - - - 13,001 4,755 

 Total Non-Entity - - - 19,531 6,355 

Total $ 1,027 36,200 $ 7,400 $ 64,158 $ 47,255 $ 
87

The obligated balance includes accounts payable and undelivered orders that 

have reduced unexpended appropriations but have not yet decreased the cash 

balance on hand. 

Other Information Deposit and suspense funds stated above are not available to 

finance FTC activities and are classified as non-entity assets, and a 

corresponding liability is recorded. 

NOTE 3 -- CASH AND OTHER MONETARY ASSETS 

Cash and other monetary assets held as non-entity assets consist of redress 

judgment amounts on deposit with the FTC’s distribution agents, receivers and 

divestiture fund deposits. A corresponding liability is recorded for these assets. 

Cash and other monetary assets consisted of the following as of September 30, 

2004 and 2003: 

(Dollars in thousands) 2004 2003

Non-Entity:

 Redress Contractors 70,113 $ 60,199 $ 

 Divestiture Fund (Note 11(d)) 41,376 41,192 

Total Non-Entity $ 101,391 111,489 $ 

NOTE 4 -- ACCOUNTS RECEIVABLE 

Accounts receivable consisted of the following as of September 30, 2004 and 

2003: 

(Dollars in thousands) 2004 2003

Currently Due Allowance Net Net

Entity Assets:

Intragovernmental-

 Accounts Receivable $ - 121 $ 121 $ 231 $ 

Non-Entity Assets:

Consumer Redress 501,187 $ 439,293 $ 61,894 $ 239,790 $ 

Civil Penalties 985 - 985 2,105 

Total Non-Entity Assets $ 439,293 502,172 $ 62,879 $ 241,895 $ 

 

For more detailed information on non-entity receivables, see Exhibit A. 
88

NOTE 5 -- PROPERTY, PLANT, AND EQUIPMENT, NET 

Capitalized property and equipment, net of accumulated depreciation, consisted 

of the following as of September 30, 2004 and 2003: 

(Dollars in thousands) 2004 2003

Service Acquisition Accumulated Net Net

Asset Class Life Value Depreciation Book Value Book Value

Equipment & Furniture 5-20 yrs 5,433 $ 2,592 $ 2,841 $ 3,329 $ 

Leasehold Improvements 10-15 yrs 4,683 715 3,968 3,116 

Software 3 years 2,542 1,591 951 1,404 

Software-in-Development 6,510 - 6,510 1,289 

Total $ 4,898 19,168 $ 14,270 $ 9,138 $ 

Property and equipment are depreciated using the straight-line method. 

Depreciation expense was $1.9 million and $1.4 million for fiscal years ending 

September 30, 2004 and 2003, respectively and is contained in the accumulated 

depreciation. 

NOTE 6 -- LIABILITIES NOT COVERED BY BUDGETARY RESOURCES 

Liabilities not covered by budgetary resources consisted of the following as of 

September 30, 2004 and 2003: 

(a) Intragovernmental and With the Public 

 

(Dollars in thousands) 2004 2003

Intragovernmental

 Other Liabilities:

 Civil Penalty Collections Due 985 $ 2,105 $ 

 Accrued FECA Claims 395 433 

Total $ 2,538 1,380 $ 

With the Public 

 Undisbursed Redress 83,114 $ 64,954 $ 

 Divestiture Fund Due 41,376 41,192 

 Redress Net Collections Due 61,894 239,790 

Total $ 345,936 186,384 $ 
89

(b) Other Information 

Civil Penalty Collections Due represents the contra account for accounts 

receivable due for civil monetary penalties, which will be transferred to the 

general fund of the Treasury upon receipt. 

Accrued FECA Claims consists of workers compensation claims payable to the 

Department of Labor (DOL), which will be funded in a future period. 

Undisbursed Redress includes redress in FTC’s Treasury deposit account, or 

with FTC redress contractors. 

Divestiture Fund Due represents the contra account for the divestiture fund held 

by one of FTC’s contractors until distribution of the funds is ordered per terms of 

the agreement. 

Redress Net Collections Due represents the contra account for accounts 

receivable due from judgments obtained as a result of the agency’s consumer 

redress litigation. 

NOTE 7 -- NET POSITION 

Net position consisted of the following as of September 30, 2004 and 2003: 

 

(Dollars in thousands) 2004 2003

Unexpended Appropriations:

 Unobligated - Available 20 $ 113 $ 

 Undelivered Orders 16 29 

Total Unexpended Appropriations 36 142 

Cumulative Results of Operations:

 Invested Capital 14,270 9,138 

 Retained Fees:

 Unobligated - Available 1,027 444 

 Unobligated - Unavailable 7,380 8,085 

 Undelivered Orders 22,658 19,948 

 Future Funding Requirements (9,839) (9,705) 

Total Cumulative Results of Operations 35,496 27,910 

Total Net Position $ 28,052 35,532 $ 

 
90

NOTE 8 -- COMMITMENTS AND CONTINGENCIES 

Commitments The FTC is committed under obligations for goods and services 

that have been ordered but not yet received (undelivered orders) at fiscal year 

end. Undelivered orders were $22.7 million and $20.0 million as of September 

30, 2004 and 2003, respectively. 

Contingencies The FTC is a party in various administrative proceedings, legal 

actions, and claims brought by or against it. In the opinion of FTC management 

and legal counsel, the ultimate resolution of these proceedings, actions, and 

claims will not materially affect the financial position or the results of operation of 

the FTC. 

On November 14, 2002, the Court of Federal Claims granted the plaintiffs’ motion 

for a summary judgment in a case brought by Department of Justice (DOJ) trial 

attorneys seeking overtime pay. The ruling indicated the attorneys were entitled 

to additional overtime pay, but did not establish either an amount of damages or 

methodology for calculating such an amount. On January 17, 2003, the court 

granted the DOJ’s motion to stay the proceedings and allow an interlocutory 

appeal under 28 U.S.C. Sec. 1292 to the United States Court of Appeals for the 

Federal Circuit. A three-judge panel at the Federal Circuit found that the DOJ 

attorneys were not entitled to overtime pay. The DOJ attorneys have filed a 

petition for a rehearing of the case by the full Federal Circuit. 

According to the FTC’s General Counsel, the circumstances underlying the DOJ 

case differ significantly from the circumstances for attorneys and other FLSAexempt employees at the FTC, and the FTC’s ultimate potential exposure in such 

a case would be limited and in any event would turn on individual, not class 

action, claims. 

Leases The FTC rents approximately 568,000 square feet of space in both 

commercial and government-owned properties for use as offices, storage and 

parking. Space leases for government-owned property are made with the 

General Services Administration (GSA). 

Leases of commercial property are made through and managed by GSA. The 

Commission has leases on 4 government-owned properties and 10 commercial 

properties. The FTC’s current leases expire at various dates through 2012. Two 

leases provide for tenant improvement allowances totaling $7.1 million, and 

provide that these costs be amortized over the length of the leases. Under the 

terms of the leases, the FTC agrees to reimburse the landlord for the principal 

balance of the unamortized portion of the tenant improvement allowance in the 

event the agency vacates the space before lease expiration. The leases expire 

in 2005 and 2012. 

Rent expenditures for the years ended September 30, 2004 and 2003, were 

approximately $17.1 million and $16.8, respectively. The $16.8 million of rent 
91

expenditures is net of a GSA credit of approximately $1.9 million for fiscal year 

2003, relating to the main headquarters building. In fiscal year 2004 GSA 

discontinued the rent discount program that it provided to federal agencies. 

Future minimum lease payments due under leases of government-owned 

property as of September 30, 2004, are as follows: 

(Dollars in thousands)

Fiscal Year

2005 6,275 $ 

2006 1,618 

2007 1,193 

2008 1,133 

2009 589 

Total Future Minimum Lease Payments $ 10,808

Future minimum lease payments under leases of commercial property due as of 

September 30, 2004 are as follows: 

(Dollars in thousands)

Fiscal Year

2005 11,226 $ 

2006 10,678 

2007 10,825 

2008 11,025 

2009 11,032 

Thereafter 22,095 

Total Future Minimum Lease Payments $ 76,881

NOTE 9 -- IMPUTED FINANCING 

Imputed financing recognizes actual costs of future benefits, which include the 

FEHBP, FEGLI, and pension benefits that are paid by other federal entities. 

Imputed financing was composed of the following: 
92

(Dollars in thousands) 2004 2003

FEHBP 4,049 $ 3,439 $ 

FEGLIP 13 13 

Pension Benefits 2,915 2,893 

Total Imputed Costs $ 6,345 6,977 $ 

NOTE 10 -- PENSION EXPENSE 

Pension expenses in 2004 and 2003 consisted of the following: 

(Dollars in thousands) 2004 2003

Employer Total Pension Total Pension

Contributions Imputed Costs Expense Expense

Civil Service Retirement System 1,906 $ 2,785 $ 4,691 $ 4,697 $ 

Federal Employee Retirement System 7,217 130 7,347 6,771 

Thrift Savings Plan 2,998 - 2,998 2,761 

 Total $ 2,915 12,121 $ 15,036 $ 14,229 $ 

NOTE 11 -- CUSTODIAL ACTIVITIES

The FTC functions in a custodial capacity with respect to revenue transferred or 

transferable to recipient government entities or the public. These amounts are 

not reported as revenue to the FTC. The major components of the FTC’s 

custodial activities are discussed below. 

(a) Premerger Filing Fees

All Hart-Scott-Rodino (HSR) premerger filing fees are collected by the FTC 

pursuant to section 605 of P.L. 101-162, as amended, and are divided evenly 

between the FTC and the Department of Justice (DOJ). The collected amounts 

are then credited to the appropriations accounts of the two agencies (FTC’s 

"Salaries and Expenses" and DOJ’s "Salaries and Expenses, Antitrust Division"). 

During fiscal years 2004 and 2003, respectively, FTC collected $167.4 million 

and $113.4 million in HSR fees. Total collections in the amount of $83.6 million 

were retained for distribution, of which $77.3 million was transferred to DOJ in 

2004 and $56.0 million in 2003. As of September 30, 2004 the undistributed 

collections remaining in the amount of $6.5 million represent amounts to be 

transferred to DOJ in a future period. 
93

(b) Civil Penalties and Fines

Civil penalties collected in connection with the settlement or litigation of the 

FTC’s administrative or federal court cases are collected by either the FTC or 

DOJ as provided for by law. DOJ assesses a fee equivalent to 3 percent of 

amounts collected before remitting them to the FTC. The FTC then deposits 

these collections into the U.S. Treasury. Civil penalties collected also include 

amounts collected for undecided civil penalty cases held in suspense until final 

disposition of the case. 

(c) Redress 

The FTC obtains consumer redress in connection with the settlement or litigation 

of both its administrative and its federal court cases. The FTC attempts to 

distribute funds thus obtained to consumers whenever possible. If consumer 

redress is not practical, the funds are paid (disgorged) to the U. S. Treasury, or 

on occasion, other alternatives, such as consumer education, are explored. 

Major components of the program include eligibility determination, disbursing 

redress to claimants, and accounting for the disposition of these funds. 

Collections made against court-ordered judgments totaled $337.6 million and 

$101.8 million during fiscal years 2004 and 2003, respectively. 

The sources of these collections are as follows: 

(Dollars in thousands)

2004 2003

Contractors 259,031 $ 71,428 $ 

Receivers 1,085 6,291 

FTC 77,469 24,049 

Total $ 101,768 337,585 $ 

 (d) Divestiture Fund 

One judgment obtained by the FTC on behalf of its Maintaining Competition 

mission stipulates the divestiture of assets by the defendants into an interestbearing account to be monitored by the agency. The balance of the account 

represents principal and related interest held in one of the FTC’s contractor 

accounts as stipulated in the judgment. A corresponding liability is recorded. 
94

Divestiture Fund activity in fiscal years 2004 and 2003 consisted of the following: 

(Dollars in thousands) 2004 2003

Beginning Balance $ 40,975 41,192 $ 

Interest 261 341 

Expense (77) (124) 

Ending Balance $ 41,192 41,376 $ 

(e) Accrual Adjustments 

These adjustments represent the difference between the agency’s opening and 

closing accounts receivable balances. Accounts receivable are the funds owed to 

the agency (as a custodian) and ultimately to consumers or other entities. See 

Exhibit A for computation of accrual adjustments to the Statement of Custodial 

Activity.

(f) Receivers 

This amount represents the funds forwarded to receivers during the year for 

distribution to consumers. The agency recorded an asset, Due from Receivers, 

and a corresponding liability, Receivers Distributions Due, for the amount of 

funds forwarded. These balances are reduced as the distributions to consumers 

are confirmed. 

(g) Redress to Claimants 

Redress to claimants consists of amounts distributed to consumers by the FTC, 

one of its contracted agents, the court appointed receiver, or the defendant. In 

fiscal year 2004 a total of $294.1 million was distributed to consumers: $293.0 

million was paid by the FTC and its contracted agents, and $1.1 million was paid 

by receivers. In fiscal year 2003, a total of $69.6 million was distributed to 

consumers: $63.3 million was paid by the FTC and its contracted agents, and 

$6.3 million was distributed by receivers. 

(h) Contractor Fees Net of Interest Earned

Collections against monetary judgments are often deposited with one of the 

agency’s two redress contractors until distributions to consumers occur. Funds 

are deposited in interest-bearing accounts, and the interest earnings are used to 

fund administrative expenses. Contractor expenses for the administration of 

redress activities and funds management amounted to $8.0 million and $5.3 

million during the years ended September 30, 2004 and 2003, respectively. The 

significant increase in expense is due to one case in which approximately 2 
95

million claims notifications were sent and 846,000 consumer checks were issued. 

Expense also includes costs for a consumer education campaign in lieu of 

distributions to consumers for one redress case. Interest earned was $367,000 

and $354,000 during fiscal years 2004 and 2003, respectively, with the difference 

of $7.6 million and $4.9 million representing net expense. 

Attorney fees of $3.2 million related to three cases during fiscal year 2004 and 

$11.1 million related to one case during fiscal year 2003. 

(i) Change in Liability Accounts 

Liability accounts contain funds that are in the custody of the agency or its 

agents, and are owed to others (consumers, receivers for fees, and/or the 

Department of Justice). See Exhibit B for the computation of liability account 

changes. 

 (j) Current Year Judgments 

A judgment is a formal decision handed down by a court. Redress judgments 

include amounts that defendants have agreed, or are ordered, to pay for the 

purpose of making restitution to consumers deemed to have been harmed by the 

actions of the defendant(s) in the case. For purposes of presentation in Exhibit A, 

redress judgments include cases in which the FTC, or one of its agents, is 

directly involved in the collection or distribution of consumer redress. In fiscal 

years 2004 and 2003, the agency obtained and reported in Exhibit A monetary 

redress judgments against defendants totaling $445.5 million and $379.8 million, 

respectively. 

The FTC does not include in the presentation of Exhibit A current redress 

judgment cases in which the FTC, or one of its agents, is not directly involved 

with the collection or distribution of consumer redress. These are cases in which 

the defendant, or other third party, has been ordered to pay redress directly to 

the consumers. There were five such cases in fiscal year 2004, of which 

judgments totaled $626,000. In most of these cases, the judgment has ordered 

redress in the form of refunds or credits. 

The agency also obtained civil penalty judgments of $6.0 million and $9.3 million 

in fiscal years 2004 and 2003, respectively. 

(k) Treasury Referrals and Prior Year Recoveries 

Monetary judgments six months or more past due are referred to the Department 

of Treasury for follow-up collection efforts in keeping with the Debt Collection 

Improvement Act of 1996 (DCIA). Treasury’s Debt Management Services (DMS) 

administers the program, and deducts 18 percent from amounts ultimately 

collected for its fee. Collections, net of fees, are returned to the FTC for 

distribution to either consumers, in the form of redress, or to the general fund of 
Total 

HSR premerger filing fees earned represent one-half of fees collected under the 

provisions of the Hart-Scott-Rodino Act. See Note I (q), Exchange Revenues. 

Revenue is recognized when earned; i.e., all required documentation under the 

HSR Act has been received by the agency. 

Do Not Call Registry fees represent collections of subscription fees paid by 

telemarketers under the Do Not Call Implementation Act, P. L. 108-010. See 

Note I (q), Exchange Revenues. Revenue is recognized when collected and the 

Telemarketer is given access to download data from the Do Not Call database. 

The Do Not Call Registry was implemented during fiscal year 2003 and began 

operations in September 2003. 

NOTE 15 - CHANGE IN ACCOUNTING ESTIMATES 

In fiscal year 2003, the FTC changed the percentages estimated for development 

costs for software expenditures. Accounting standards require that the effects of 

a change in estimate should be reported in the period of change and subsequent 

periods. The net effect of this change in estimate for fiscal year 2003 was a 

$758,403 charge to expense. This was the result of the reclassification from 

capitalized software to software maintenance expense. The depreciation 

expense recognized had this change in estimate not been recorded would have 

been $252,801 in each of fiscal years 2003, 2004 and 2005. See Note 5 - 

Property and Equipment, Net. 
Part I 

Judgments Receivable - N

Add: 

Current Year Judgments 

Prior Year Recoveries (N

Less: 

Collections by FTClCont

Collections by DOJ for L

Less: 

Adjustments to Allowanc

Judgments Receivable - 

Part 2 

Judgments Receivable - N

Judgments Receivable - N

Accrual Adjustment 
t-' 

0 

Liabilities @ 09130104 

Liabilities @ 09130103 

Change In Liability Accounts 

0 

Liabilities @ 09130103 Liabililies @ 09130/02 Change in Liability Accounts