by Steve Meltzer

(Reprinted from the Summer 2009 OPASTCO Roundtable magazine)

With selections for Round 3 of the USAC-OIG audits complete, you may be breathing a sigh of relief if you once again dodged the audit bullet.  For now, you can read your emails, review your phone messages, and go through your mail with a little less anxiety and less fear of the dreaded USAC Audit Notification Letter.   But how long will your stress-free moment last?  Are you prepared if you are selected for Round 4?  No one knows when, or if, Round 4 will start or how many companies will be selected.  And if you've already been through a USAC-OIG audit, you know that you won't be immune to another one - 44 percent of those audited in Round 3 were also chosen in Round 2.  And seven "lucky" companies have been audited in all three rounds. 

JSI has assisted clients through several rounds of audits, and we've found that the more companies know about the audit process, the less stressful their experiences have been.  Educating yourself on the process and doing your homework before you get a notification letter is key to making the audit run as smoothly as it can.  The audits also vary greatly by audit team, and an increased level of knowledge doesn't necessarily mean that you will have an easier time with the auditors, just hopefully less stressful.

Improper Payments Information Act

The Improper Payments Information Act (IPIA) of 2002 granted the FCC's Office of Inspector General (OIG) the authority to conduct audits of companies that receive money from the federal Universal Service Fund.  The IPIA requires federal agencies to review the programs they administer and identify areas that may be susceptible to significant improper payments.  In addition, the federal agencies are required to report on the causes of improper payments as well as the actions being taken to address those causes.  Some have argued that the FCC's OIG used "selective interpretation" in adhering to the Act and have pursued the most stringent type of audit, the attestation standard, and has largely ignored identifying the weaknesses or needed changes to the program's design and/or administration.

The Act defines an improper payment as "any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative or other legally applicable requirements." It includes "any payment to an ineligible recipient, any payment for an ineligible service, any duplicate payment, payments for services not received, and any payment that does not account for credit for applicable discounts."  Quite simply, the FCC and USAC are looking for waste, fraud, and abuse of federal universal service funds.  Using the attestation standard type of audit, more often than not, they are finding improper payments are due to procedural misunderstanding and are not actually incorrect payments.  To date, no instances of fraud have been reported in Rounds 1 or 2, although the final results for Round 2 are not completed.  It is important to understand that just because a payment is categorized as "improper" does not mean that it was an overpayment or an incorrect payment. 

The leading issue causing reported improper payments for Round 2 was inadequate documentation.  Some companies were missing invoices, unable to support retirement unit values, could not support allocations between accounts and/or affiliates, or lacked the supporting documentation for line counts.  USAC estimates that nearly half of all payments listed in the FCC's preliminary report of the Round 2 audits were listed as "improper" because of inadequate documentation.  (See sidebar on Top 10 Reasons for an Improper Payment.) 

Calculating Your Odds

If there is indeed a Round 4 of audits, what are your chances of being selected?  When the FCC selected companies for Round 2, its goal was to pick a sample size large enough to provide a result in an estimated erroneous payment rate with a margin of error of 2.5 percent at a 90 percent confidence level.  Companies receiving High Cost Universal Service Funding were placed into four groups, stratified by the amount of disbursements they received from the High Cost USF.  Bottom line --   the more High Cost USF you received, the greater your chance of being audited.  Your selection odds were as follows:

High Cost USF Receipts                 Chance of Selection

$ 10m or Greater                                          100%

$ 5m to $ 10m                                                52%

$ 1m to $ 5m                                                  29%

Less than $ 1m                                                  7%

The FCC likely used similar selection criteria for companies selected in Round 3 and will use a similar selection criteria for selecting companies in future rounds.

What to Expect

If your company is selected, chances are you'll receive a "heads-up" call from the contracted audit firm, followed up by an announcement letter with the "official notification" of your audit selection.  The announcement package will include a data request letter asking for a considerable amount of information to be returned within 15 working days.  The 15 days will be on the auditors' schedule, not yours.  You must comply with the request as a recipient of federal funds.  It is in your best interest to cooperate with the audit firm, USAC, and the FCC because they certainly have the ability to make your life miserable. 

Because 15 days isn't much time, it is important to understand before you get the letter what data will be initially requested and where to find it.  First, the auditors will request a copy of the "Disaggregation Election" your company made in 2002.  In addition, you'll need a copy of your Eligible Telecommunications Carrier (ETC) Certification from your state commission.  Also, as required by Part 54 of the FCC's Code of Federal Regulations, all ETCs must advertise, using media of general distribution, the availability of the services they are required to offer in order to be eligible to receive USF.  The auditors will want to see a copy of the advertisements for the period being audited. 

The audit examination period covers USF disbursements from July 1 to June 30.  This has necessitated providing information for the two previous calendar years that support those disbursements.  The auditors will be asking at a minimum for copies of your financial statements, cost studies, general ledgers, continuing property records (CPRs), cost allocation manual (CAM), billing registers, line counts, and annual USF submissions for that two-year period.  The information in each of the documents provided needs to be consistent.

You can expect a thorough review of your CPRs.  The auditors will randomly select 25-45 items to sample in order to verify that the information in your CPRs is accurate.  The review will include:

• Verification that the invoice provided ties back to the selection's material cost in the CPR.
• Verification of the calculation of labor and other overheads for the retirement costs.
• Review all other supporting documents (e.g., timecards, cancelled checks) for accuracy and reasonableness.
• Physical observation to verify the existence of the selections made.

The auditors also will review your general ledger and will want to sample your expense entries.  Most likely, the auditors will select 25-45 expense entries made during each of the audit years.  They will ask you to supply a copy of the invoice and cancelled check(s) supporting each entry.  In addition, you'll be asked to show copies of the timesheets and loaded billed hourly wage rates if the expense is a payroll item.

Cost allocations and affiliate transactions have gotten a considerable amount of attention during the audits.  The auditors will inquire how the percentage for non-regulated assignments was developed.  Expect a request for the underlying studies.  Auditors have been scrutinizing transactions between affiliates, particularly management fees, leases, services, and asset transfers to ensure compliance with the affiliate transaction rules documented in FCC Part 32.27.

Your process of assessing subscriber line charges (SLCs) will be reviewed, including how you reconcile your billing register to Revenue Account 5081 and to NECA's 24-month latest-view report detailing reported SLCs.  If your billing cycle does not end on the last day of the month, the period from the end of the billing cycle to the end of the year should be reconciled.  It may seem ludicrous that you need to make an adjustment to the end of the month when your billing cycle ends mid-month, but a strict interpretation of the rules indicates that revenues must be reported for a full calendar year.

It is important to understand that the record retention rules articulated in Part 54.202(e) of the FCC's rules stipulates that all records and documents supporting USF funding must be maintained for at least five years from the receipt of the funding.  For capitalized items contributing to the rate base, the five-year period does not start until after you retire the asset and remove it from your rate base.  Therefore, if the asset is in your rate base, you must show documentation to support its existence regardless of the age of the asset.

The Audit Report

The audits are conducted in conjunction with the U.S. Government Accountability Office's Government Auditing Standards manual, also known as the Yellow Book.  When the auditors find an item that they feel violates the rules (deficiencies in internal control, fraud, abuse, illegal acts, violations of contracts, etc.) they report the finding following a set of standards outlined in the Yellow Book.  The standards include:

• Criteria - Expected benchmark for performance;
• Condition - The situation that exists;
• Cause - Identifies the reason or explanation of the factors responsible; and
• Effect or potential effect - Impact of the finding (can include monetary effect).

These standards are generally followed with a Recommendation of an action which should be undertaken to rectify the Condition, and a Management Response, essentially your reaction to the standards expressed above.  The audit firm, once it has had the opportunity to reply to your Management Response, packages up all of its findings in an audit report and sends it off to USAC for its review.

After USAC reviews and endorses the audit report, your company will receive the final audit report, USAC's Management Response to the audit report, a schedule of any refund obligations, and a request of the progress made on specific corrective actions committed to during the audit.  The final report will conclude in either an Opinion or No Opinion.  The Opinion can be as follows:

Unqualified Opinion

• No material findings
•  Highest level of Assurance

Qualified Opinion

• Limited number of findings associated with certain assertions
• May address material deficiencies or scope limitations

Adverse Opinion

• Auditee is not in compliance with certain program rules or requirements

If the audit firm does not believe that it can render an opinion, it may issue a disclaimer or completely withdraw from the audit.  A disclaimer generally indicates the auditors' inability to validate or invalidate compliance assertions.  A withdrawal is much more serious and indicates the inability of the auditor to complete an audit, usually because of concerns about the integrity of records or because of a non-cooperative auditee.   If you receive either a withdrawal or disclaimer, you can expect further investigative action by USAC or the FCC. 

Future Audits

The uncertainty of if and/or when Round 4 begins should not influence your preparation for an audit.  While we have seen conflicting reports from the FCC and USAC regarding the cost/effectiveness of the audits, there has not been an adequate number of finalized audits from the first two rounds to endorse either position.  In the meantime, update your procedures, review your files, investment in a new copy machine/printer, practice patience, and stretch out your stress-free moments as long as you can.

_______________

Steve Meltzer, JSI's senior vice president, assisted more than 70 companies with their USAC-OIG audits in Rounds 1-3.  He can be reached at smeltzer@jsitel.com or 301/459-7590.

Top 10 Reasons for an Improper Payment

1. Inadequate documentation
2. Inadequate processes and/or procedures
3. Weak internal controls
4. Disregarded FCC rules
5. Failure to review/monitor work submitted by consultant/agent
6. Inadequate systems for collecting, reporting, and/or monitoring data
7. Data entry error
8. Other
9. Imprecise FCC rule(s)
10. NECA error

Source:  USAC