What to expect from your USAC USF audit

Rural Telecommunications, Sept-Oct, 2008 by Karlen Reed

All rural telcos should take an active interest in the ongoing Universal Service Fund (USF) audits conducted by the Universal Service Administrative Co. (USAC). The FCC's Office of Inspector General (OIG), which detects and deters mistakes and fraud in administration of the USF programs, reviews the USAC audit findings to determine whether corrective action, including fines, forfeitures and criminal proceedings, should be taken for improper payments. How should rural telcos respond to a USAC USF audit notice and minimize the likelihood of improper payments?

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The OIG, in its "October 2007 Semiannual Report to Congress," said it had completed its first round of USAC audits of 459 randomly selected beneficiaries and contributors to the four USF programs: schools and libraries, low-income, rural health care and high-cost. The OIG stated in its "April 2008 Semiannual Report" that its second round of audits would cover 800 USF companies using outside contractor audit firms, and that it had received $21.5 million from USF funds in January 2008 to support the audits.

One NTCA member that just completed a second-round audit said of the USAC audit team, "[They] spent the better part of two weeks on-site ... fueling numerous requests for documentation." Two other NTCA members, waiting more than five months for their final audit reports, complained that they spent more than $30,000 each in costs associated with the audit. "This is frustrating and confusing," one said. Another NTCA member said his company spent more than $50,000 in audit costs. Still another NTCA member reported that this was apparently the audit team's first telecommunications audit, and it appeared to be "pretty overwhelming to them."

These are expensive audits for small rural incumbent local exchange carriers (ILECs), and USAC's actual findings are far less than their expected findings. Based on select 2006 USAC audits and risk-assessment assumptions, the OIG estimated in an October 2007 analysis that it would find in the 2007 audits about $1.293 billion in potentially improper USF payments, and that roughly 16.6% of those improper payments would be attributable to the High-Cost Program. The actual results of the 2007 audits, however, show that the OIG's estimates were way too high and that the program may not be "at risk," as the OIG earlier concluded. The OIG identified $6.17 million as potentially improper payments in the 2007 round. Of this $6.17 million, a mere $78,599 (1.27%) stemmed from the High-Cost Program. The vast bulk of the 2007 identified potentially improper payments came from the USF Schools and Libraries Program (87.67%) and the Low-Income Program (11.0%).

What Is an Improper Payment?

The OIG reviews the USAC audits to detect potentially improper payments, which include overpayments and underpayments. The OIG is conducting these audits also in response to the Improper Payments Information Act (IPIA) of 2002, Public Law 107-300 (IPIA) (31 U.S.C. [section] 3122).

Under Section 2(d) of the IPIA, an "improper payment" is "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." An improper payment, under the IPIA, also 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."

While these definitions may provide some guidance, some NTCA members have learned another hard lesson: When the USAC contractor auditor was unable to discern whether the payment was proper as a result of insufficient documentation, the payment was considered potentially erroneous or improper. One consequence of insufficient documentation is repeated requests for more information; another is increased suspicion that the telco is "hiding something." The obvious but time-consuming and resource-intensive solution is to document everything, retain the supporting documents and develop an efficient document retrieval system.

USAC, the FCC-appointed administrator of the universal service support mechanisms, is authorized to audit carriers reporting USF data. Under the FCC's rules, carriers must retain and provide for review to USAC information sufficient to demonstrate compliance with the USF support mechanism regulations.

Tracking Your USAC Audit Progress

Several NTCA members have reported their progress with USAC high-cost support audits, and a fairly clear picture emerges of the audit process. First, the contractor audit team leader may call the company manager. Then the audit team will send a packet containing at least six documents: 1) notification letter; 2) USAC announcement letter; 3) FCC OIG announcement letter; 4) initial document request list; 5) internal control questionnaire; and 6) sample assertion letter.

The notification letter serves as a cover letter and specifies the audited time period (such as "disbursement from the Universal Service Fund during the period July 1, 2006, through June 30, 2007"), and the types and amounts of funds to be audited.