Telecommunications: FCC Should Assess the Design of the E-rate Program's Internal Control Structure
Released: 2010-10-29T00:00:00

Letter

Background

The E-rate program provides eligible schools, school districts, libraries, and consortia with discounts on telecommunications services, Internet access, and data transmission wiring and components used for educational purposes. The program is funded through statutorily mandated payments into the Universal Service Fund by companies that provide interstate and international telecommunications services. Many ir of these companies, in turn, pass on their contribution costs to the subscribers through a line item on subscribers’ telephone bills. FCC capped funding for E-rate at $2.25 billion per year, and program funds are used to cover the program’s administrative costs, including the administrative services performed by USAC and Solix. Eligible schools and libraries may apply annually for program support and will qualify for a discount of 20 to 90 percent on the cost of eligible services, based on indicators of need. Based on the broad direction in the Telecommunications Act of 1996, FCC defined two general types of services that are eligible for E-rate discounts: Priority 1 services include telecommunications services, such as local, long-distance, and wireless (e.g., cellular) telephone services, as well as data links (e.g., T-1 lines) and Internet access services, such as Web hosting and e-mail services—all of which receive first priority for the available funds under FCC’s rules.

Priority 2 services include the cabling, components, routers, switches, and network servers that are necessary to transport information to individual classrooms, public rooms in a library, or eligible administrative areas, as well as basic maintenance of internal connections, such as the repair and upkeep of eligible hardware and basic technical support.

USAC annually updates a list of specific, eligible products and services and the conditions under which they are eligible. The list is finalized by FCC after a public comment period and posted on USAC’s Web site. Items ineligible for E-rate discounts include, among other things, end-user products and services, such as Internet content; Web-site content maintenance fees; end-user personal computers; and end-user software.

FCC delegated to USAC the day-to-day administration of the E-rate program, subject to FCC rules and under FCC oversight. USAC has, in turn, subcontracted certain key aspects of E-rate program operations to Solix. The primary responsibilities of Solix staff include reviewing applications and processing invoices for reimbursement. About 20,000 schools and libraries applied for E-rate support in 2009, although Solix processes about 40,000 applications per funding year because schools and libraries can submit multiple applications in a single funding year (e.g., an applicant can submit separate applications for Priority 1 and Priority 2 services). The process for participating in the E-rate program, which is lengthy and complicated, is summarized in the following four main steps: 1. The applicant submits to USAC a description of the services for which the applicant is requesting a discount so that service providers (i.e., telecommunications companies or equipment providers) can bid through open competition. The applicant must also confirm that it has developed an approved technology plan that provides details on how it intends to integrate technology into its educational goals and curricula, as well as how it will pay for the costs of acquiring and maintaining the technology. 2. Once the service description has been available to potential bidders for 28 days, the applicant selects the most cost-effective service provider from the bids received and submits a Form 471 (Description of Services Ordered and Certification) application for the discounted service, which is processed by Solix. The applicant then calculates its discount level, certifies that it is an eligible entity, and certifies that it will abide by applicable laws and regulations. 3. Solix reviews the application and issues a funding commitment decision letter to the applicant and selected service provider. The decision letter indicates whether the application has been approved or denied. 4. If approved, the applicant—now a beneficiary—must confirm that services have started or have been delivered. After the service provider has submitted a bill, either the beneficiary or the service provider submits a reimbursement request form for Solix to process. The beneficiary or service provider can then be compensated from the Universal Service Fund for the discounted portion of the services.

See appendix II for an overview of the E-rate program application, invoice, and reimbursement processes.

A memorandum of understanding (MOU) between FCC and USAC assigns USAC the responsibility for implementing effective internal controls over the operation of the E-rate program. Through the MOU, FCC directed USAC to implement an internal control structure for the E-rate program that is consistent with the standards and guidance contained in the Office of Management and Budget’s (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, including a methodology for assessing, documenting, and reporting on internal controls. In February 2008, USAC engaged an independent public accounting firm to assist in establishing a formal internal control review program. USAC placed responsibility for implementing this program under the direction of a senior manager of internal controls, a position it created in late 2008. USAC also created a Senior Management Council to support the implementation of the program. Under the MOU, USAC is also responsible for periodically reporting on its internal control activities to FCC’s Office of Managing Director and Office of Inspector General.

FCC also directed USAC to implement a comprehensive audit program to (1) ensure that Universal Service Fund monies are used for their intended purposes; (2) ensure that all Universal Service Fund contributors make the appropriate contributions in accordance with FCC rules; and (3) detect and deter potential waste, fraud, and abuse. To ensure compliance with FCC rules, USAC has periodically selected beneficiaries to audit. USAC also has conducted audits that were used to develop statistical estimates of error rates under the Improper Payments Information Act of 2002 (IPIA). From 2001 through 2006, USAC and other auditors conducted approximately 350 audits of E-rate program beneficiaries as part of the oversight of the E-rate program. Since 2006, USAC has conducted approximately 760 audits for both oversight and IPIA purposes. USAC is responsible for responding to the results of findings from audits of program beneficiaries, including recommendations to recover funds that may have been improperly disbursed to beneficiaries.

We have produced a number of E-rate reports since the program was implemented in 1998, some of which addressed internal controls. In 2000, we reported that the application and invoice review procedures needed strengthening and made recommendations to improve internal control processes. In response to our recommendations and the findings of other parties that have reviewed USAC’s processes, such as the FCC Inspector General, USAC has implemented a number of internal controls. In 2005, we reported that FCC had been slow to address problems raised by audit findings and had not made full use of the audit findings as a means to understand and resolve problems within the program. During the course of our work, in 2004, FCC concluded that a standardized, uniform process for resolving audit findings was necessary and directed USAC to submit to FCC a proposal for resolving all audit findings and recommendations. FCC also instructed USAC to specify deadlines in its proposals “to ensure audit findings are resolved in a timely manner.” USAC submitted its Proposed Audit Resolution Plan to FCC in October 2004. Although FCC has not formally approved the plan, since 2004 it has periodically issued directives and guidance to USAC to clarify aspects of the plan’s design and implementation. A number of our reports have also found that the E-rate program lacks performance goals and measures, and we have recommended that FCC define annual, outcome-oriented performance goals for the program that are linked to its overarching goal of providing services to schools and libraries. While FCC has undertaken various efforts to address this recommendation, it has not yet established meaningful goals and performance measures for the E-rate program.

In our 2009 E-rate report, we found that some nonparticipating schools and libraries elected not to apply to the program because they considered the process to be too burdensome (e.g., too complex, time-consuming, or resource-intensive). We also found that a substantial amount of funding was denied because applicants did not correctly carry out application procedures. In March 2010, an FCC task force released a National Broadband Plan that acknowledges the complexity inherent in the E-rate program and recommends, among other things, that FCC streamline the application process. For example, the National Broadband Plan notes that E-rate’s procedural complexities can sometimes result in applicant mistakes and unnecessary administrative costs as well as deter eligible entities from applying. In the National Broadband Plan, the task force suggests that FCC can ease the burden on applicants for Priority 1 services that enter into multiyear contracts, and that applications for small amounts could be streamlined with a simplified application similar to the “1040EZ” form the Internal Revenue Service makes available to qualifying taxpayers. In May 2010, as part of its efforts to begin implementing the vision of the National Broadband Plan, FCC released a Notice of Proposed Rulemaking (NPRM) to solicit comments about potential changes to the E-rate program. FCC stated in the NPRM that it is time to reexamine what is working well in the current program and what can be improved On September 23, 2010, FCC adopted an order (the order had not yet been released at the time our report was issued) in response to the May 2010 NPRM. According to FCC’s press release, the order improves the ability of schools and libraries to connect to the Internet in the most cost-effective way, allows schools to provide Internet access to the local community after school hours, indexes the E-rate funding cap to inflation, and streamlines the E-rate application process. .

FCC and USAC Have Put Many Internal Controls in Place for the E-rate Program

According to GAO’s standards for internal control, “control activities” are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives and help ensure that actions are taken to reasonably address program risks. For our review of the design of E-rate’s internal control structure, we classified the control activities into three broad areas: (1) processing applications for discounted service and making funding commitment decisions, (2) processing invoices requesting reimbursement, and (3) monitoring the effectiveness of internal controls through audits of schools and libraries. We found that FCC and USAC have established a number of internal controls in each of these three areas.

Processing Applications and Making Funding Commitment Decisions

E-rate’s internal control structure centers around USAC’s complex, multilayered, Program Integrity Assurance (PIA) application review process. This process entails the specific internal controls that are applied to applications as they undergo the initial review for eligibility as well as a layered review process to ensure that the initial review was conducted appropriately and that the correct funding decision was reached. As applicants submit their Form 471 applications for discounted service, Solix assigns each applicant to a PIA reviewer who examines the form. USAC’s funding year 2009 PIA Form 471 Review Procedures manual contains approximately 700 pages of detailed instructions and flowcharts for Solix’s PIA reviewers to follow in addressing the various parts of the Form 471. The procedures are meant to ensure that the applicant, service provider, and requested services are eligible under the program, and that the applicant is in compliance with all of the E-rate rules. For example: To verify that an applicant is eligible for the program, the manual directs the PIA reviewer through a potential 39-step process that involves confirming information about the applicant either through USAC- approved, third-party sources or by contacting the applicant directly for documentation to support eligibility. To verify that the service provider is eligible to provide telecommunications services for the program, the reviewer is to determine that FCC has registered the service provider as an approved telecommunications provider.

As a part of verifying that an applicant’s requested discount rate is accurate, the automated application system will trigger an “exception” if the discount rate on the application meets certain conditions. The manual provides instructions to the reviewer on what procedures to follow to verify that the discount rate is appropriate.

To verify that the requested services are eligible for E-rate funding, the reviewer is to determine whether products and services requested in an application for discount qualify for support. This determination can be based on the categorization and information in FCC’s annual Eligible Services List, a more detailed list of specific equipment that USAC maintains, or consultation with a team of Solix technical experts.

In addition to the specific internal control procedures that are part of the initial PIA review, USAC maintains a multilevel application review process as part of its internal control structure. Figure 1 illustrates the E-rate application review process.

Over time, USAC has expanded its application review process by adding more types of reviews—such as “cost-effectiveness” and “special compliance” reviews—to address specific risks. The PIA initial and final reviews, selective reviews, and quality assurance reviews were components of the original application review process and are still part of the current internal control structure. Solix staff perform these reviews. USAC staff then follow up with an independent quality assurance review process for each of the other types of reviews.

Regular PIA Review: As part of the multilevel process, all applications undergo an initial review and a separate final review. The PIA process is partially automated but involves a significant amount of manual review as well. Issues that are identified as potential errors or violations of program rules, either in the automated system or by manual review, trigger exceptions that are addressed by the Solix initial reviewer. The PIA process can trigger dozens of different types of exceptions, each representing a potential type of error or issue within an application that must be resolved before reaching a funding decision. After the initial review is completed, a final review is conducted by a more experienced reviewer. If the final reviewer finds an error by the initial reviewer, the application is returned to the initial reviewer for further work. As part of the regular PIA review process, after final reviews, a portion of the applications that are ready for commitment is then sampled by the Solix Quality Assurance Team. If the Solix quality assurance reviewer finds an error or issue during the review, the reviewer returns the application to the initial reviewer to address the issue. Finally, USAC conducts independent quality assurance reviews. For these reviews, USAC staff select a sample of applications for review, including some that were selected for Solix’s quality assurance review, to determine the accuracy of the application review process. Like the Solix quality assurance reviewer, USAC staff return the application back to the appropriate reviewer for further review if they discover an issue or error.

Selective Review: High-risk applications, identified through either automated aspects of the PIA system or by a PIA reviewer, undergo an additional, more detailed review from Solix’s selective review team. The selective review team obtains additional information from the applicant and uses that information to help determine eligibility for E-rate funding. Applications meeting certain criteria may also go through other reviews by the selective review team. For example, the selective review team reviews applications from consortia of schools and libraries to determine whether members of the consortia are aware of their financial obligations to participate in the program, or examines applications from private schools to ensure that they do not have endowments exceeding $50 million, which would make them ineligible for E-rate funding under the statute. Applications that undergo selective reviews are also subject to final reviews and may be selected for Solix and USAC quality assurance reviews.

Since the PIA review process was implemented, USAC has expanded the process in response to internal control concerns. In addition to selective reviews, USAC has implemented “special compliance” and “cost- effectiveness” reviews. Special compliance reviews, established in 1999, are tailored to address specific issues and allegations, many of which originate outside of the PIA application review process, such as from the Whistleblower Hotline, FCC Office of Inspector General audits, law enforcement investigations, and press reports. These reviews are performed by a separate team, similar to the selective review team, and constitute the additional heightened scrutiny review process that supplements the regular PIA review process. USAC created the cost- effectiveness review team in 2005 as a separate team within the PIA review team in response to an FCC order directing USAC to reduce fraud, waste, and abuse. In the order, FCC also sought comments on the benefits of establishing benchmarks to determine whether a service requested under the E-rate program is cost-effective, as defined by program requirements. In response, USAC developed cost benchmarks for eligible products and services. The cost-effectiveness team reviews applications that have been flagged by the PIA review process as exceeding these cost benchmarks. Some applications are reviewed by more than one of these teams. For example, the special compliance team may determine that a review by the cost-effectiveness team or the selective review team will best address specific issues of concern in an application.

Processing Invoices Requesting Reimbursement

Much of the E-rate invoice review process is automated and incorporates steps to help ensure accuracy. The invoice forms that beneficiaries and service providers file contain general information about the funding request, such as the application and funding request number for which they are seeking reimbursement, the billing frequency and billing date, the date of service delivery, and the discounted amount billed to USAC. Both the beneficiary and the service provider must certify on their forms that the information they are providing is accurate. When an invoice is filed, Solix runs nightly systemic checks of the individual lines on the invoice using an automated validation process that compares the information in the invoice line with the information in the system for the associated funding request. The automated process triggered an average of 166 edit checks from calendar years 2006 through 2009 that served to approve an invoice line for full or partial payment, reject the invoice line, or send the invoice line for a manual review. Similar to the PIA application review process, the manual review process for an invoice line includes an initial and final review from Solix staff, and can be selected for a Solix quality assurance review and a USAC quality check before a final payment decision. A completed invoice line—an invoice line for which Solix has either approved or denied payment—is forwarded to USAC for final approval. Once the line item is approved, USAC generates a payment to the service provider. Figure 2 illustrates the E-rate invoicing process.

See appendix IV for more information about the USAC and Solix staffing resources dedicated to E-rate application and invoice reviews.

Monitoring the Effectiveness of Internal Controls through Audits of Schools and Libraries

USAC contracted with independent public accountants from 2006 to 2009 to perform audits used to estimate, under IPIA, the amount of improper payments that are made to program beneficiaries. These audits also were used to test compliance with program eligibility requirements and program rules. The beneficiary audit process has four phases—audit performance, audit resolution, audit response, and audit follow-up (see fig. 3).

During the audit response and audit follow-up phases, USAC provides periodic reports to its Board of Directors, FCC, and the FCC Inspector General on the status of audit findings and corrective and recovery actions. For example, USAC prepares a monthly report on the status of all monetary and nonmonetary audit findings and a semiannual report on the status of all audit recoveries. According to USAC officials, USAC created a Performance Assessment and Reporting unit in January 2009 that has, among other things, developed an audit process that uses the results of beneficiary audits to evaluate and report on whether schools and libraries have complied with E-rate program requirements and to estimate the amount of improper payments.

Design of E-rate’s Internal Control Structure May Not Appropriately Consider Program Risks

The overall design of the E-rate program is complex, and FCC’s changes to the program over time through orders and guidance have made it more so. This increasing complexity, in turn, has led USAC to expand the E-rate program’s internal control structure over time to address program complexity and to address risks to the program as they became apparent. Although USAC has performed financial reporting and fraud risk assessments, USAC has not conducted a robust risk assessment of the E- rate program and, consequently, may not be efficiently using its resources to reasonably target program risks.

E-rate Program Lacks Meaningful Goals and a Robust Risk Assessment

In July 1998, we testified before the Senate Committee on Commerce, Science, and Transportation about the implementation of the E-rate program and recommended that FCC develop goals, measures, and performance targets for E-rate. We have continued to note FCC’s lack of goals and adequate performance measures for E-rate for more than a decade. Most recently, we recommended in our March 2009 report that FCC review the purpose and structure of the E-rate program and prepare a report to the appropriate congressional committees identifying FCC’s strategic vision for the program. As we have previously mentioned, FCC released an NPRM in May 2010 seeking comment on several proposed reforms of the E-rate program but has not addressed our recommendations regarding goals and performance measures or identifying a strategic vision for the program. FCC’s lack of goals and performance measures affects the internal control structure of the program because, as set forth in GAO’s Standards for Internal Control in the Federal Government, a precondition to risk assessment is the establishment of clear, consistent agency objectives. When clear program objectives are established up front, the internal control structure can then be designed around the fundamental risk that program objectives will not be met.

When we testified before the committee in 1998, we stated that USAC had not finalized all of the necessary procedures and related internal controls for E-rate, even though USAC was close to issuing the first funding commitment letters. FCC had worked to quickly establish the E-rate program so that schools and libraries could begin benefiting from the program. However, this effort resulted in FCC establishing the program without clear objectives and quickly designing an internal control structure to help prevent and detect fraud, waste, and abuse. This internal control structure, however, was not designed on the basis of a robust risk assessment of the E-rate program.

To date, FCC has not conducted a robust risk assessment of the E-rate program that is based on the program’s core processes and business practices. Although USAC has undertaken several efforts to assess risk, these efforts have been in relation to assessing risk for other purposes, such as Universal Service Fund financial reporting, and not to assess risk specifically in the E-rate program. Most recently, in February 2008, USAC hired an independent public accounting firm to conduct an assessment of USAC’s internal controls under OMB Circular No. A-123. However, the 2008 internal control review focused primarily on the Universal Service Fund and on USAC’s internal controls regarding financial reporting, not programmatic activities. The accounting firm that performed the review made recommendations to USAC that included overall changes to USAC’s administration of the Universal Service Fund and the other universal service programs. Some of the accounting firm’s recommendations specifically addressed the E-rate program. For example, the review discussed the challenge that USAC encounters in overseeing Solix from a remote location and made recommendations to enhance USAC’s oversight of Solix’s operations. Although USAC took actions to address the recommendations in the 2008 review, the review had not focused on the overall internal control structure of the E-rate program. USAC officials told us that its own internal controls team again assessed USAC’s controls beginning in the fourth quarter of 2009. However, USAC officials noted that the scope of the testing was similar to that conducted by the public accounting firm in 2008. Consequently, USAC’s assessment, like that of the public accounting firm, was performed in relation to Universal Service Fund financial reporting—not to the overall internal control structure of the E-rate program.

In addition to these activities, in 2009, USAC completed a fraud risk assessment for FCC. The purpose of this assessment was to help USAC managers and staff assess the adequacy of existing controls and determine whether additional fraud countermeasures were required. As with the 2008 internal control review, the fraud risk assessment focused on the Universal Service Fund as a whole, not on the E-rate program specifically, although part of the review did examine E-rate program administration. The review examined 24 control measures that were in place for the program. The review determined that 4 of those control measures addressed risks that were “moderate,” while 12 addressed risks that were “low” and 8 that were “very low.” In addition, USAC’s Internal Audit Division produced a risk register for the E-rate program that identified risks; applied a “gross risk analysis”; noted the mitigating controls; and then calculated the “residual risk,” given the mitigating controls. According to documentation, the risk register was based on Internal Audit Division interviews with USAC staff in 2008.

These various efforts to assess risk—that is, the 2008 review of internal controls, USAC’s update of that review, and the fraud risk assessment— illustrate that FCC and USAC management are conscientious about having an internal control structure in place that safeguards program funding and resources. However, these prior efforts have not risen to the level of the risk assessment that is intended under the GAO standards for internal control. Ideally, under those standards, FCC would first establish clear objectives for the E-rate program, and management would then comprehensively identify risks to meeting those objectives. The assessments undertaken to date, while important to proper stewardship of government funds, have focused primarily on financial reporting requirements and the specific internal controls that were already in place, which have developed and evolved over time around the rules that govern the program. To date, FCC has not directed USAC to undertake a robust risk assessment that would involve a critical examination of the entire E- rate program to determine whether modifications to business practices and internal controls are necessary to cost-effectively address programmatic risks.

Internal Controls Have Grown Over Time, and Multiple Layers of Application Reviews May Not Effectively Target Risk

Lacking a robust risk assessment, USAC has responded to risks largely by expanding the PIA process. The processes within these review levels have grown increasingly complex, and it is unclear whether these reviews appropriately target risk. For example, subjecting every application to multiple layers of review may not be the most efficient or effective method to address programmatic risks. As we have previously described, all applications are subject to at least two reviews, the initial and final PIA reviews. USAC implemented the final reviews, as well as the two levels of quality assurance reviews, to find potential errors in the initial reviews and assess the integrity of the PIA review process. However, we found large discrepancies in the number of returns triggered by the final reviewer’s evaluation of the initial reviewer’s actions in response to each exception. One type of exception triggered final reviewers to return 4,722 applications to the initial reviewer during funding years 2006 through 2009. This exception, which related to determining the eligibility of telecommunications service, comprised 62 percent of all final review returns during the period. At the same time, errors related to 13 other exceptions were the source of either zero or 1 return by a final reviewer. These data suggest that the design of the internal controls could be inefficiently using resources. It may be possible to target the internal controls toward applications that trigger exceptions that are more likely to be returned by final reviewers and those that are more likely to trigger an adjustment to an application’s eligibility or funding commitment.

The PIA review process has also become more complex in response to USAC’s efforts to ensure that the applicant has complied with FCC rules as they have changed and evolved. For example, each year, USAC or Solix may propose to eliminate exceptions targeting issues that are no longer of concern or add exceptions to the PIA review process to address new areas of concern. However, from funding years 2006 through 2009, the total number of exceptions in the PIA process grew from 67 to 84 (about a 25 percent increase). The increasing complexity of the review process is also illustrated by the procedures involved in determining service and equipment eligibility. USAC maintains a list of approved services and equipment that are eligible for an E-rate discount. This list is based on broader guidance that USAC posts annually for applicants. It has grown from approximately 6,000 to 8,000 eligible items—about a 32 percent increase from funding years 2006 through 2009. In addition, USAC has developed a complex process to determine whether the services and equipment requested in applications are eligible, conditionally eligible, or partially eligible. For example, if a school with a 75 percent discount rate applies for a piece of equipment that will only be used for eligible purposes 60 percent of the time, then, under FCC rules, only 60 percent of the cost of the equipment is eligible for a 75 percent discount. In determining service and equipment eligibility, PIA reviewers rely on a detailed list that includes guidance on the specific makes and models of thousands of products. Solix has hired a small number of staff with technical backgrounds to further assist PIA reviewers in resolving technical questions about the eligibility of services or equipment.

This approach of adding controls to address risks as they become apparent, or to address rule changes coming from FCC, leads to an accretion of internal controls that affects the overall internal control structure over time. While it is appropriate to respond to findings of risk and add internal controls as the program progresses, FCC and USAC have not done enough to proactively address internal controls or to step back and examine how the internal control structure has evolved. Without assessing risk and the internal control structure, USAC cannot be sure whether it is appropriately allocating resources to reasonably target risks.

Automated Invoice Review Process May Not Appropriately Target Risk

The internal control structure around the E-rate invoicing process is more limited than the structure around the application review process, but it is again not clear that the controls in place appropriately target risks. For example, there is no further review of the 91 percent of invoice lines—and almost 60 percent of dollars requested—that pass through the automated review process without further manual review (see table 1). According to GAO’s internal control standards, control activities should be regularly monitored to ensure that they are working as intended. However, there is no process or procedure for confirming that Solix’s automated validation process accurately reimburses providers and beneficiaries because USAC does not have a process for conducting random accuracy checks of completed invoice lines that have not been manually reviewed. These payments are not compared with an actual bill of service, unless such a comparison is done as part of a beneficiary audit. USAC officials indicated that on occasion, they pull some automated final payment determinations to verify their accuracy. However, USAC has no official procedure or process in place requiring it to verify these data or to track the results. Also, USAC officials could not determine how often or how many invoices they pull for verification. Neither USAC nor Solix regularly conducts random quality assurance checks of sample invoice lines that the automated validation process has approved or rejected to help verify the accuracy of the automated process. Therefore, there is no verification that the items or services for which service providers or beneficiaries are seeking reimbursement were actually included in the list of the items or services Solix approved and committed to fund.

The invoice review process provides another opportunity, in addition to the application review process, to identify whether the beneficiary has requested reimbursement for eligible equipment and services. However, the invoice review process closely examines only a limited number of invoices to determine what services are being funded. Specifically, about 9 percent of invoice lines undergo a manual review; although, to USAC’s credit, the manual reviews do appear to target risk by representing about 42 percent of dollars requested (see table 1). Invoice lines are generally chosen for a special manual review because they are considered to be “high risk.” A reviewer may determine that the manually reviewed invoice lines be fully paid, partially paid, denied, or placed “on hold.” An invoice is put on hold during a manual review either as a result of the procedures for a specific type of review or as a result of instructions by the USAC or Solix group requesting special review. Most of the edits that trigger an invoice for manual review require that the reviewer obtain a copy of the actual bill of service. All invoice lines that receive a manual review also receive a secondary, final review. In addition, Solix and USAC sample manually reviewed invoice lines for a quality assurance review prior to payment. In response to our work, USAC stated in its comments on our draft report that it has begun to develop a process to randomly sample invoices that are only reviewed through the automated process. USAC stated that it expects this process to supplement its new Payment Quality Assurance program that was put in place in August 2010, which will randomly test the accuracy of E-rate disbursements for the purpose of estimating rates of improper payments.

We also found that USAC does not have a single document or procedures manual that documents the invoice review process. Policies and procedures are forms of controls that help to ensure that management’s directives to mitigate risks are carried out. Control activities are essential for proper stewardship and accountability for government resources and for achieving effective and efficient program results. We requested an invoice review procedures manual from USAC. USAC officials provided a collection of stand-alone documents that each cover various parts of the process and procedures. The numerous individual documents that USAC officials provided in response to our request included descriptions of the procedures a reviewer would follow to manually review an invoice line as well as the procedures for a second or final review. We also obtained descriptions of the automatic validation process and the Solix and USAC quality assurance review procedures. USAC officials noted that the various documents are housed electronically in a central location. However, the documents being housed electronically in a central location differs from the lengthy and detailed PIA procedures manual, which provides, in a single document, an overview of the application review process as well as detailed descriptions of activities a reviewer must follow to address a specific exception. The procedures manual also goes on to explain the multiple layers of the application review process. In response to our work, USAC has stated that it plans to create a single manual that documents the entire invoice review process.

Audit Findings Are Not Effectively Considered in Assessing Internal Controls of the E-rate Program

Although FCC and USAC use the results of beneficiary audits to identify and report beneficiary noncompliance, they have not effectively used the information gained from audits to assess and modify the E-rate program’s internal controls. A systematic approach to considering the results of beneficiary audits could help identify opportunities for improving internal controls. Lessons learned from an analysis of audit results could, for example, lead to modifications of the application and invoice approval processes as well as modifications to the nature, extent, or scope of the beneficiary audits. Furthermore, the audit process that USAC currently uses is not governed by a set of documented and approved policies and procedures. The process used is a combination of the procedures contained in an audit resolution plan drafted in 2004 and other procedures developed and implemented since 2004. GAO’s standards for internal control provide that when identifying and assessing risks, management should consider the findings from audits, the history of improper payments, and the complexity of the program. These standards also state that management should consider audit findings when assessing the effectiveness of internal controls, including determining the extent to which internal controls are being monitored, assessing whether appropriate policies and procedures exist, and assessing whether they are properly maintained and periodically updated.

We obtained information from USAC management on audits that had been completed to identify how and to what extent the results of beneficiary audits were considered in assessing internal controls for the E-rate program. USAC officials provided us with management reports on the results of E-rate beneficiary audits completed in 2006, 2007, and 2008. These reports identified the nature and extent of beneficiary noncompliance with E-rate requirements. However, the information did not demonstrate whether USAC had identified and assessed the specific E- rate program risks and core causes of beneficiary noncompliance. USAC officials also provided us with a list of suggested actions that could be taken to prevent and reduce improper payments across all of the Universal Service Fund programs, along with estimates of the resources that would be required to implement these actions. The list, which USAC initially provided to FCC in response to its request, included a suggested action to perform assessments of USAC’s internal controls in accordance with applicable OMB guidance. However, the information provided to us did not explain how the suggested actions would address specific program risks. Moreover, assessment of internal controls with identification of risks and vulnerabilities should occur before specific, targeted actions can be identified. USAC officials told us that they performed assessments of internal controls for 2008 and 2009. However, as we describe in this report, these assessments primarily focused on USAC’s controls over financial reporting and were not designed to identify and address specific E-rate program risks and vulnerabilities.

We found that, although FCC and USAC have taken actions to address audit findings, the same rule violations, such as reimbursements for ineligible services or for services at higher rates than authorized, were repeated in each funding year for which beneficiary audits were completed. Furthermore, we found that FCC and USAC have not analyzed the findings from beneficiary audits to determine whether corrective actions implemented by beneficiaries in response to previous audits were effective. We analyzed the audit findings from 3 years’ worth of audits to identify the extent of repeat findings. Of the 655 beneficiaries that were audited from 2006 through February 2010, 64 were audited more than once. Of those 64 beneficiaries, 36 had repeat audit findings of the same program rule violation, such as those that we previously mentioned, in each of the audited years. Instances of repeat audit findings and the likelihood that they would be identified in successive audits are examples of the risks and vulnerabilities that, once identified and assessed, could inform the E-rate program’s internal controls, including providing data about where modifications to the nature, extent, or scope of beneficiary audits are most needed. Moreover, goals and metrics for reducing the rate of program rule violations by beneficiaries and service providers are important elements to provide incentives and focus on properly identifying and assessing the E-rate program’s internal controls and monitoring the effect that implemented control strategies have on beneficiary compliance.

However, according to FCC officials, they have not developed specific goals and do not have metrics to measure progress made.

Timely resolution of audit findings and approval of beneficiary audit reports are important components of a systematic process for assessing and continuously modifying internal controls for the E-rate program. We found that the beneficiary audit process did not result in the timely resolution of audit findings and approval of audit reports. For example, the average time between when USAC received a draft audit report and when the USAC board’s Schools & Libraries Committee approved the final audit report was approximately 224 days. As of April 2010, nearly 20 percent of these audits had not been approved by the committee. According to USAC officials, internal reviews of all audit findings, as well as quality assurance reviews and other internal processes, can take several months. However, this means that the results of 1 year’s audits are not available to be used in assessing internal controls until after the following year. According to USAC officials, the increases in the number and timing of IPIA beneficiary audits have adversely affected their ability to effectively complete audit follow-up work in a timely manner. To begin to address this issue, FCC and USAC officials met with OMB staff to discuss the approach used to develop estimates of improper payments and modifications to the methodology used that would also address workload issues. FCC and USAC officials stated that beginning in fiscal year 2011, the improper payments estimate for the program will be based on tests of a sample of monthly disbursements using the USAC-designed Payment Quality Assurance program. Also according to these officials, beginning in fiscal year 2011, beneficiary audits will be performed using a USAC-designed compliance audit program.

We also found that FCC and USAC do not have documented and approved policies and procedures for the beneficiary audit process. Without documented and approved policies and procedures, management may lack assurance that control activities are appropriate, actually applied, and applied properly. Policies and procedures could also contribute positively to a systematic process for considering audit results when assessing the program’s internal controls and in identifying opportunities for modifications to existing controls.

We determined that FCC and USAC’s audit process currently used for the E-rate program is essentially a combination of procedures contained in the 2004 draft audit resolution plan, periodic directives from FCC to USAC, and procedures that USAC management have implemented (either formally or informally) over the last 6 years. As of August 2010, FCC had not approved the draft audit resolution plan. According to USAC officials, USAC has implemented most aspects of the plan and refined and revised it over time. However, our work showed that the procedures set forth in the various documents are not consistent with one another or with USAC’s current practices for addressing audit findings. For example, the draft audit resolution plan states that a response to audit findings will be developed within 60 days of receipt of a final audit report, yet the deadline is 30 days according to the Schools & Libraries Division’s audit response procedures. Also, the audit resolution plan states that USAC’s Audit Committee will review and approve the final beneficiary audit reports and USAC’s proposed response. However, in April 2006 USAC’s Board of Directors approved modifications to the Audit Committee’s charter to remove this responsibility. Furthermore, two USAC divisions have overlapping responsibilities for maintaining the audit results database. It is unclear from these various procedures who, for example, is responsible for maintaining information on the status of audit findings (e.g., open or closed) and the recovery of improper payments. Other inconsistencies may exist between the processes used and the processes that management believes are in use to address audit findings.

Program officials have acknowledged the importance of documented and approved policies and procedures for the beneficiary audit process and are taking action to address this need. USAC officials stated that in September 2009, they began an initiative to update and streamline existing policies and procedures, including those related to the beneficiary audit process. According to these officials, procedures were updated and approved in July 2010 specific to the Schools & Libraries Division’s responsibilities for audit response and follow-up. USAC officials stated that all other existing audit process policies and procedures are scheduled to be completed and submitted to FCC for review and approval by December 2010.

Conclusions

Since the establishment of the E-rate program, FCC and USAC have taken steps to revise the program’s internal controls to address problems they have identified as well as concerns raised by external auditors, such as GAO, the FCC Inspector General, and others. However, FCC and USAC have generally been reactive, rather than proactive, regarding internal controls, and they have not conducted a robust risk assessment of the program’s design and core activities and functions. The continuing lack of performance goals and measures in the E-rate program limits FCC’s ability to efficiently identify and address problems with the program, indicates a lack of strategic vision for the program, and affects the program’s internal control structure. The E-rate program’s internal control structure is a product of accretion and is not clearly targeted to reasonably and effectively address programmatic risks. Because the administrative costs for the program (i.e., the costs to fund USAC and Solix operations) come out of the Universal Service Fund, an internal control structure that has not been well-designed could be using more resources than necessary and, thus, could be reducing the amount of program dollars available to beneficiaries. Without an overall assessment, FCC and USAC might not know how to appropriately balance their resources to better target risks and best ensure that the program fulfills its overall goal of providing technology funding to schools and libraries. Following that, periodic examinations of the design of the E-rate program’s internal control structure can help ensure that it is well-designed and -operated, is appropriately updated to meet changing conditions, and provides reasonable assurance that the internal controls appropriately address risk across the entire E-rate program.

In addition, although FCC uses beneficiary audits as an oversight tool to assist in assessing schools’ and libraries’ compliance with E-rate program requirements, these audit results could also help inform systematic assessments of the program’s internal control structure. Using this information as part of a continuous improvement effort could help strengthen internal controls by better targeting the nature, extent, or scope of the beneficiary audits. Maximizing the use of beneficiary audits as a core safeguard of Universal Service Fund monies would require a sustained FCC and USAC effort. Our work has shown that sustained efforts can best be supported by documented policies and procedures that address the timely and appropriate resolution of audit findings and consideration of the results of audits when assessing a program’s internal controls.

Finally, it is important to note that the overall design of E-rate’s internal control structure is complex because the E-rate program itself is complex. The National Broadband Plan’s recommendation to streamline aspects of the program opens the door for both an examination of the program as a whole and of its internal control structure. A broad evaluation of the E- rate program’s procedures and internal controls would present opportunities for FCC to improve the design of the program to ease the administrative burden on schools and libraries and to better address the risks of fraud, waste, and abuse.

Recommendations for Executive Action

To improve internal controls over the E-rate program, we recommend that the Federal Communications Commission take the following four actions: conduct a robust risk assessment of the E-rate program; based on the findings of the risk assessment, conduct a thorough examination of the overall design of E-rate’s internal control structure to ensure that the procedures and administrative resources related to internal controls are aligned to provide reasonable assurance that program risks are appropriately targeted and addressed; implement a systematic approach to assess internal controls that appropriately considers the results of beneficiary audits and that is supported by a documented and approved set of policies and procedures; and develop policies and procedures to periodically monitor the internal control structure of the E-rate program, including evaluating the costs and benefits of internal controls, to provide continued reasonable assurance that program risks are targeted and addressed.

Agency Comments and Our Evaluation

We provided a draft of this report to the Federal Communications Commission and the Universal Service Administrative Company for their review and comment.

In its written comments, FCC agreed with our recommendations. FCC stated that it intends to work closely with USAC and provide the appropriate directives concerning the implementation of a risk assessment. FCC’s full comments are reprinted in appendix V.

In its written comments, USAC noted that it was pleased that we had recognized that FCC and USAC have implemented many internal controls for processing E-rate applications and making E-rate funding commitments. However, USAC stated that it does not believe that the facts, viewed in their full context, support some of our conclusions. USAC does not agree with our conclusion that the E-rate program has not been subjected to a robust risk assessment. USAC believes that we too narrowly construed the review performed by an independent public accounting firm in 2008 when we determined that the review focused on the risks associated with financial reporting. USAC states that the 2008 review did assess and test specific internal controls for the E-rate program. We agree that some E-rate internal controls were in fact assessed and tested; nonetheless, the focus of the public accounting firm’s work was neither the E-rate program nor its programmatic aspects. No risk assessment that USAC has undertaken to date has been the type of risk assessment that we envision under the first recommendation we make in this report. Such an assessment would consider the existing design of the E-rate program as a whole, including the roles of FCC, USAC, beneficiaries, and service providers; whether the design and mix of preventive and detective controls already in place for the E-rate program are appropriate; and whether the program lacks internal controls that are needed.

USAC also does not agree with our findings regarding its analysis of audit findings, including repeat audit findings; the timeliness of its beneficiary audit process; and the division of responsibility within USAC for maintaining the audit results database. We continue to believe that USAC could analyze audit findings on a timely basis and use the information to address risks and reduce instances of repeat audit findings. USAC’s comments are reprinted in Appendix VI, followed by our full response to USAC. We made no changes to our recommendations based on USAC’s comments, although we did add material to the report to acknowledge some of the internal control changes that USAC discusses in its letter, including its new Payment Quality Assurance program and USAC’s plans to implement new internal controls in its invoicing process in response to our work.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Chairman of the Federal Communications Commission, the Acting Chief Executive Officer of the Universal Service Administrative Company, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

Our report addresses the following questions: (1) What actions have the Federal Communications Commission (FCC) and the Universal Service Administrative Company (USAC) taken to establish internal controls in the E-rate program? (2) Does the design of the E-rate program’s internal control structure appropriately consider program risks? This appendix describes the various procedures that we undertook to answer these questions.

We conducted the following background research that helped inform each of our reporting objectives: We reviewed prior GAO reports on the E-rate program; provisions of the Telecommunications Act of 1996; FCC regulations, orders, and other documents related to the administration of the E-rate program; the memorandum of understanding (MOU) between FCC and USAC; risk assessments conducted on the E-rate program; internal and external audits and reports concerning USAC and the E-rate program; and documents from FCC and USAC regarding the structure and operation of the program.

We interviewed officials from FCC’s Office of Managing Director, Wireline Competition Bureau, and Office of Inspector General to learn what efforts have been made to address internal controls and concerns about fraud, waste, and abuse within the program. We also interviewed officials from USAC’s Schools & Libraries Division to understand their roles and responsibilities in relation to FCC and USAC’s subcontractor, Solix, Inc., as well as the overall structure of the E-rate program. We interviewed staff at the independent public accounting firm that conducted the 2008 internal controls review for USAC to learn more about the 2008 review and the firm’s conclusions related to the E-rate program. We also spoke with a former USAC official to understand more fully the history of implementing internal controls for the program.

Analysis of the E-rate Application and Invoice Processes

To understand the internal control structure within the application and invoice review processes and understand the risks addressed by the internal control components, we reviewed internal USAC and Solix procedures and guidance, and interviewed USAC and Solix staff.

We reviewed documentation of the program’s key internal controls and risk assessments, and related policies and procedures. Specifically, we reviewed the design of the program’s key internal controls for (1) processing applications and making funding commitments, (2) processing invoices requesting reimbursement, and (3) monitoring the effectiveness of internal controls through audits of schools and libraries. We assessed the design of these internal controls against GAO’s Standards for Internal Control in the Federal Government.

We spoke with FCC, USAC, and Solix officials about program risks, the design and functioning of internal controls, and how internal controls are monitored and assessed.

To determine the results of various reviews within the overall application and invoice review process, we requested and reviewed the following data for funding years 2006 through 2009.

Record-level data of all applications, including the name and identification number of the applicant, the original requested amount, the amount committed, and the exceptions that were triggered by USAC’s Program Integrity Assurance (PIA) review process. These data were from the Streamlined Tracking and Application Review System (STARS), which is used to process applications for funding and to track information collected during the application review process.

Record-level and summary data from the Invoice Streamlined Tracking and Application Review System (ISTARS), including a summary of data for each type of edit that can be flagged during the automated validation process. These data included a description of the edit; the number of occurrences; the total dollar amount without the E-rate discount; the total dollar amounts requested, approved, and modified; the total percentage of the modification as part of the undiscounted amount; the total number of invoice lines with edits; and the total number of invoice lines without edits.

Summary data for the results of various reviews that make up the application review process, including the final review, quality assurance reviews, and the heightened scrutiny reviews. For the final and quality assurance reviews, we reviewed data on the number of returns that were triggered by the reviews and the exception(s) associated with each return. The heightened scrutiny review data included the total number of applications or applicants reviewed, categorized by funding determinations (i.e., modifications, withdrawals, denials, and full approvals), and the total dollar amount associated with each type of determination.

To provide these data, Solix performed queries on the system and provided the resulting reports to us between December 2009 and May 2010. Data from the STARS and ISTARS systems can change on a daily basis as USAC processes applications for funding and reimbursement, applicants request adjustments to requested or committed amounts, and other actions are taken. As a result, the data we obtained and reported on in this report reflect the amounts at the time that Solix produced the data and could be somewhat different if we were to perform the same analyses with data produced at a later date.

To assess the reliability of the data, we contacted experts at USAC and Solix to determine whether major changes in how data are processed have been made since GAO determined that the STARS system was reliable in 2007. We also clarified that ISTARS and STARS share the same platform and security, and that data can be accessed across both systems. For the summary data for the heightened scrutiny reviews, we also reviewed descriptions from USAC on how each team processes its data.

We did not include an analysis of some of the data that we requested. For example, we did not include an analysis of data from the application review process in this report, because limitations with the data process did not allow us to produce a relevant analysis within our available time frame. Similarly, we did not include an analysis of the invoice data that summarized the invoice edits by type of edit because limitations with the data process did not allow us to produce a relevant analysis within our available time frame. With these exceptions, we determined the data were sufficiently reliable for the purposes of our review.

Analysis of the E-rate Audit Process

We interviewed USAC and FCC officials and reviewed USAC’s policies and procedures governing its audit process, including the process for reporting audit results and the status of audit follow-up to USAC’s Board of Directors and FCC. We also reviewed applicable regulations, FCC orders and directives, as well as provisions of the MOU between FCC and USAC. Furthermore, we analyzed data in USAC’s audit tracking systems on beneficiary audits performed between 2006 and 2010. To do so, we obtained an understanding of how beneficiary audit data are processed and maintained for each phase of the audit process in USAC’s Improper Payment Audit Tracking System (IPATS) and Consolidated Post Audit Tracking System (CPATS). We interviewed USAC officials about the quality of the data maintained in these database systems. CPATS was implemented in 2009; thus, numerous CPATS data elements for prior years’ Improper Payments Information Act of 2002 (IPIA) beneficiary audits were blank. Therefore, we appropriately modified our analysis of the audit data and determined that these data were sufficiently reliable for our purposes. Specifically, we (1) calculated the average number of days between draft audit report and board approval of the final audit report, using data from audits performed in 2009 and 2010; (2) evaluated the frequency of reported audit findings from audits performed in 2006 through 2010; and (3) evaluated the frequency with which schools and libraries were audited in 2006 through 2010 to determine whether there were repeat audit findings in successive audits.

We conducted this performance audit from August 2009 to September 2010 in accordance with generally accepted government auditing standards. These standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: E-rate Program Application, Funding, and Reimbursement Processes

Appendix III: Analysis of Selected E-rate Program Beneficiaries

We did not conduct any transaction testing related to the E-rate application process; however, we did conduct follow-up to audit work performed for our March 2009 E-rate report. For that report, we determined the percentage of eligible entities participating in the E-rate program by performing a matching analysis using funding year 2005 data from USAC and school year 2005 or 2005-2006 data from the Department of Education’s National Center for Education Statistics (NCES). At the end of our matching analysis, we found that we could not match a number of schools and libraries from USAC’s database to schools and libraries from the NCES data. We found various reasons that could explain some of the nonmatching schools and libraries. For example, schools often submit multiple applications, some of which may only cover specific school buildings that would then not show up as a match to a particular school, even though the building is a subpart of an eligible school. We determined that the issue of the nonmatched schools was an issue of internal controls, which was not the subject of our 2009 E-rate report, and would best be handled during our internal controls work. Therefore, for this report, we selected the 1,208 private schools from our list of nonmatching schools for further examination because we determined that private schools present a greater risk of fraud for the E-rate program. We subsequently determined that we would focus our follow-up analysis on the 408 private schools from our funding year 2005 list that had also applied for E-rate support in funding year 2008. We sent USAC a list of 274 private schools that received funding year 2008 funding commitments and asked USAC to reverify the eligibility of each entity to participate in the E-rate program using USAC’s PIA Form 471 Review Procedures manual.

USAC was able to verify the eligibility of 265 of these private schools through their Form 471 review procedures manual, which includes matching the schools to the NCES database, other acceptable third-party documentation, or documentation provided by the school itself. We were able to determine the eligibility of an additional 5 private schools from the NCES database. We did not assess USAC’s procedures or make our own assessment of the adequacy of the documentation provided by the schools.

USAC determined that 4 private schools within the scope of our request could not be validated as eligible for the program, including 3 schools that were confirmed as being closed. USAC determined these schools to be ineligible for funding as a result of the revalidation process initiated by our request. USAC officials noted that they verify that a school has been closed by receiving confirmation from the applicant or a valid third party, such as a state E-rate coordinator. According to USAC officials, once USAC staff confirm that the school is closed, the staff will provide USAC’s invoicing team with the entity number and closed date. The invoicing team will place the entity on watch to prevent any invoices from being paid. Based on the closing date provided by the applicant or third party, USAC may also send a commitment adjustment (COMAD) referral to the COMAD team, which will adjust any previous commitments or recover funds in the cases where payments were made after the closed date.

Appendix IV: E-rate Program Full-Time- Equivalent Positions

During calendar years 2006 through 2009, Solix and USAC dedicated between 21.5 and 22.5 full-time-equivalent (FTE) positions annually for the invoice review process. In the same period, they dedicated 131.5 to 149.5 FTEs annually for the application review process (see table 2).

Appendix V: Comments from the Federal Communications Commission

Appendix VI: Comments from the Universal Service Administrative Company

Following are GAO’s comments on the Universal Service Administrative Company’s letter dated September 20, 2010.

GAO Comments

1. As stated in our report, USAC had not analyzed the findings from beneficiary audits to determine whether corrective actions implemented by beneficiaries in response to previous audits were effective. We also stated that, consistent with our standards for internal control in the federal government, repeat audit findings (information that would be available to USAC from analysis of the audits) are examples of the risks and vulnerabilities which, once identified and assessed, could provide information about where modifications to the nature, extent, or scope of beneficiary audits are most needed. This is consistent with the objectives of internal controls in the federal government and FCC’s and USAC’s responsibilities to establish and maintain internal controls that appropriately safeguard program funding and resources. We recognize that USAC cannot be held responsible for the conduct of beneficiaries; however, USAC is responsible for recognizing the risks that beneficiaries will not comply with program rules and for implementing controls that appropriately target those risks. Therefore, beneficiary conduct that affects such things as the commitment of funds and payments to beneficiaries must be part of USAC’s assessment of program controls and are not, as stated by USAC, unrelated to USAC’s internal controls for the E-rate program. 2. Our work included consideration of the 2008 internal control review consistent with our standards and audit objectives. As stated in our report, the 2008 internal control work the independent public accounting firm performed was a review of USAC’s controls for all four Universal Service Fund programs and was not specific to any single program, including E-rate. Further, the review did not address program risks associated with beneficiary self-certification of key information, nor did it consider the nature, extent, and scope of beneficiary audits or the results from those audits. A comprehensive assessment focused on the E-rate program would consider the existing design of the E-rate program as a whole, including the roles of FCC, USAC, beneficiaries, and service providers; whether the design and mix of preventive and detective controls already in place for the E-rate program are appropriate; and whether the program lacks internal controls that are needed. With respect to the 2009 internal control assessment performed by USAC’s own staff, as stated in our report, this assessment was also not designed to identify and address specific E-rate program risks and vulnerabilities. 3. We do not agree with USAC’s statements concerning the timeliness of its beneficiary audit process. The measurements USAC provides—239 days and 64 days—exclude weekends and holidays and therefore do not portray the entire processing time. In our report, we stated that the beneficiary audit process did not result in the timely resolution of audit findings and approval of audit reports and, to illustrate, we analyzed USAC data for a 3-year period and found that the average time between when USAC received draft audit reports and when final audit reports were approved was approximately 224 days. We focused on the amount of time after USAC receives draft audit reports because this is the period that is used to review the audit reports, have quality control procedures performed by others, and approve the reports. Also, as discussed in our report, we found that USAC was not effectively analyzing the audit findings although the findings could have been used to provide information about where modifications to the nature, extent, or scope of beneficiary audits were most needed. Therefore, this time period covers the time taken for the process steps that are relevant to identification of an issue that requires management attention to ensure that the results of audits are timely considered when assessing and modifying the program’s internal controls. 4. Our work did take into account the structure of the Universal Service Fund audit approach. Instances of repeat audit findings and the likelihood that they would be identified in successive audits are examples of the risks and vulnerabilities that, once identified and assessed, could inform the E-rate program’s internal controls. We recognize that the timing of some of the audits may have made it difficult for some audited beneficiaries to address and rectify non- compliant findings discovered in the first audit before a second audit was completed. However, we found beneficiaries with repeat audit findings from audits conducted in the first and third years of the 3-year period, which should have been sufficient time to avoid repeated findings. In any case, it is incumbent on USAC to analyze the results of beneficiary audits to identify instances of repeat audit findings and assess whether corrective actions were effective. 5. As we stated in our report, it is unclear from USAC’s procedures who is responsible for maintaining information on the status of audit findings. We also reported that we found other inconsistencies between activities in practice versus written procedures regarding the audit process. It will be important that these inconsistencies are addressed by the updated audit process policies and procedures that USAC told us it expects to complete by December 2010.

Appendix VII: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Faye Morrison and Robert Owens (Assistant Directors), Frederick Evans, John Finedore, Natasha Guerra, Christopher Howard, Bonnie Pignatiello Leer, Scott McNulty, Sara Ann Moessbauer, Joshua Ormond, Steven Putansu, Amy Rosewarne, Matt Shaffer, Betty Ward-Zukerman, and Mindi Weisenbloom made key contributions to this report.