[Federal Register Volume 63, Number 137 (Friday, July 17, 1998)]
[Rules and Regulations]
[Pages 38720-38735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18758]



[[Page 38719]]

_______________________________________________________________________

Part IV





Department of Agriculture





_______________________________________________________________________



Rural Utilities Service



_______________________________________________________________________



7 CFR Part 1773



Policy on Audits of RUS Borrowers; Final Rule

  Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Rules 
and Regulations  

[[Page 38720]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1773

RIN 0572-AA93


Policy on Audits of RUS Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Utilities Service (RUS) hereby amends its 
regulations on audits of RUS borrowers. This final rule incorporates 
changes to the audit regulations necessitated by the Single Audit Act 
Amendments of 1996 and by Office of Management and Budget (OMB) 
Circular A-133, Audits of States, Local Governments, and Non-Profit 
Organizations effective for audits of fiscal years beginning after June 
30, 1996. This rule also clarifies the peer review requirements in the 
interim final rule for certified public accountants (CPA) performing 
audits of RUS borrowers, adopts individual management letters for 
electric and telecommunications borrowers, and revises the language of 
the auditor's report and management letter to conform with technical 
guidance provided by the American Institute of Certified Public 
Accountants (AICPA).

EFFECTIVE DATE: July 17, 1998.

FOR FURTHER INFORMATION CONTACT: Mr. Richard C. Annan, Chief, Technical 
Accounting and Auditing Staff, Program Accounting Services Division, 
Rural Utilities Service, Stop 1523, room 2221, South Building, U.S. 
Department of Agriculture, 1400 Independence Avenue, SW, Washington, DC 
20250-1523, telephone number (202) 720-5227.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This final rule has been determined to be not significant for the 
purposes of Executive Order 12866 and therefore has not been reviewed 
by OMB.

Civil Justice Reform

    This final rule has been reviewed under Executive Order 12998, 
Civil Justice Reform. RUS has determined that this final rule meets the 
applicable standards provided in section 3 of the Executive Order.

Regulatory Flexibility Act Certification

    The Administrator of RUS has determined that this rule will not 
have significant impact on a substantial number of small entities 
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and 
therefore, the Regulatory Flexibility Act does not apply to this rule.

Information Collection and Recordkeeping Requirements

    The reporting and recordkeeping requirements contained in this 
final rule will be submitted for approval to the Office of Management 
and Budget (OMB) pursuant to the Paperwork Reduction Act of 1995 (44 
U.S.C. Chapter 34, as amended) under control number 0572-0095. The 
paperwork contained in this rule will not be effective until approved 
by OMB.
    Send questions or comments regarding this burden or any aspect of 
this collection, including suggestions for reducing the burden to Mr. 
F. Lamont Heppe, Jr., Director, Program Development and Regulatory 
Analysis, Rural Utilities Service, Stop 1522, 1400 Independence Avenue 
SW, Washington, DC 20250-1522.

National Environmental Policy Act Certification

    The RUS Administrator has determined that this final rule will not 
significantly affect the quality of the human environment as defined by 
the National Environmental Policy Act of 1969(42 U.S.C. 4321 et seq.). 
Therefore, this action does not require an environmental impact 
statement or assessment.

Catalog of Federal Domestic Assistance

    The program described by this final rule is listed in the Catalog 
of Federal Domestic Assistance Programs under numbers 10.850--Rural 
Electrification Loans and Loan Guarantees, 10.851--Rural Telephone 
Loans and Loan Guarantees, and 10.852--Rural Telephone Bank Loans. This 
catalog is available on a subscription basis from the Superintendent of 
Documents, the United States Government Printing Office, Washington, DC 
20402.

Executive Order 12372

    This final rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation. A notice of final rule entitled 
Department Programs and Activities Excluded from Executive Order 12372 
(50 FR. 47034) exempts RUS electric loans and loan guarantees from 
coverage under this order.

National Performance Review

    This regulatory action is being taken as part of the National 
Performance Review program to eliminate unnecessary regulations and 
improve those that remain in force.

Unfunded Mandates

    This rule contains no Federal Mandates (under the regulatory 
provision of Title II of the Unfunded Mandate Reform Act) for State, 
local, and tribal governments or the private sector. Thus this rule is 
not subject to the requirements of section 202 and 205 of the Unfunded 
Mandate Reform Act.

Background

    This final rule implements the changes required by the Single Audit 
Act Amendments of 1996 (31 U.S.C. 7501 et seq.) and the revised OMB 
Circular A-133, Audits of States, Local Governments, and Non-Profit 
Organizations (31 U.S.C. 7501 et seq.). The purposes of the Single 
Audit Act Amendments of 1996 were to promote sound financial management 
with respect to Federal awards administered by non-Federal entities, 
establish uniform requirements for audits of Federal awards, promote 
the efficient and effective use of audit resources, and reduce the 
burden on State and local governments, Indian tribes, and non-profit 
organizations. OMB Circular A-128, Audits of States and Local 
Governments, was merged with the former OMB Circular A-133, Audits of 
Institutions of Higher Education and Other Non-Profit Institutions, to 
form the revised OMB Circular A-133. The revised Circular implements 
the Single Audit Act Amendments of 1996 and raises the expenditure 
threshold. The Circular requires auditors to issue a report on 
compliance and on internal control over financial reporting and a 
report on compliance with requirements applicable to each major program 
and internal control over compliance in accordance with OMB Circular A-
133.
    Previously, separate reports were issued on compliance and internal 
controls. With the issuance of the revised Circular A-133, the AICPA 
developed illustrative report examples that merged the two reports into 
one report on compliance and on internal control over financial 
reporting.
    On January 3, 1996, RUS published 61 FR 104 an interim final rule 
with request for comments amending part 1773 to comply with the 1994 
revision of Generally Accepted Government Auditing Standards (GAGAS) 
and Statement on Auditing Standards (SAS) No. 74, Compliance Auditing 
Considerations in Audits of Governmental Entities and Recipients of 
Governmental Financial Assistance. The January 3, 1996, interim final 
rule also amended RUS' peer review requirements to reflect the merger 
of the Private Companies Practice Section of

[[Page 38721]]

the AICPA and the AICPA quality review program and to extend the time 
period for peer reviews to 42 months. This final rule amends part 1773 
in response to the comments filed on the interim final rule.
    Section 1773.34, Management Letter, specifies the minimum 
requirements for the CPA's management letter. Among these is the 
requirement for the CPA to state whether the information submitted to 
RUS in its most recent December 31 RUS Form 7, Financial and 
Statistical Report; Form 12, Operating Report--Financial; or Form 479, 
Financial and Statistical Report for Telephone Borrowers, is in 
agreement with the borrower's records. This final rule clarifies that 
section to require the CPA's statement to indicate whether the most 
recent December 31 RUS Form 7, 12, or 479, agrees with the borrower's 
``audited'' records if a borrower has a December 31 year end. For 
borrowers with a year end other than December 31, the CPA must state 
whether the information provided appears reasonable based upon the 
audit procedures performed.
    The management letter for electric borrowers was also modified to 
conform with changes in Sec. 1717.612, which states that funds are cash 
proceeds from loans made or guaranteed by RUS; Sec. 1717.618 to 
redefine ``substantially all'' in management, operation, or maintenance 
contracts covering the borrower's system as being 90 percent; and 
Sec. 1717.609 to delete the provision requiring the CPA to determine 
whether RUS approval was obtained for contracts between the borrower 
and its manager.
    The management letter for telecommunications borrowers was changed 
to include additional requirements for compliance with RUS 
telecommunications loan and security instrument provisions. The rule 
clarifies that section to require the CPA to determine whether the 
borrower is in compliance with the provisions pertaining to the funded 
reserve requirements and net plant to secured debt ratio requirements 
for RUS loans approved after June 10, 1991, and before October 7, 1997, 
and the funded reserve requirement for RTB loans approved after June 
10, 1991.
    Both the management letters for electric and telecommunications 
borrowers were modified to remove the negative assurance language 
pertaining to items not tested in conformance with GAGAS.
    The January 3, 1996, interim final rule also amended Sections 
1773.5, Qualifications of CPA, and 1773.6, Audit Agreement, to include 
changes necessitated by the 1994 revision of GAGAS. In that amendment, 
the abbreviation OIG (Office of Inspector General, United States 
Department of Agriculture) was inadvertently replaced by OGC (Office of 
General Counsel) in paragraph 1773.5(c)(6)(iii) and paragraph 
1773.6(a)(6). This final rule corrects that error.
    The renaming of the Borrower Accounting Division (BAD) to the 
Program Accounting Services Division (PASD) was not incorporated into 
the interim final rule. This final rule serves to incorporate the name 
change by deleting all references to BAD and replacing them with PASD.
    This final rule also adds a definition of the term ``borrower'' to 
mean all entities which receive financial assistance in the form of 
loans, loan guarantees, or grants from RUS.

Comments

    An interim final rule entitled ``Policy on Audits of RUS 
Borrowers,'' published January 3, 1996, at 61 FR 104, invited 
interested parties to submit comments on or before March 4, 1996. 
Comments were received from three accounting firms, the Assistant 
Administrator, Telecommunications Program, the Deputy Assistant 
Administrator, Electric Program, and from OIG. The following paragraphs 
address the topics that were discussed by the two commenters.
    Comment. The revisions to Secs. 1773.33 (e)(1)(iii) and 
1773.33(e)(2)(iii) require the CPA to state whether the information 
submitted by a borrower to RUS in its most recent December 31 RUS Form 
7, Financial and Statistical Report; Form 12, Operating Report-
Financial; or Form 479, Financial and Statistical Report for Telephone 
Borrowers, is in agreement with the borrower's ``audited'' records. 
Commenters expressed concern that this requirement did not properly 
consider borrowers with fiscal year ends other than December 31. One 
commenter asked if this requirement necessitated a calendar year audit 
or alternate audit procedures to comply.
    Response. The intent of this section was to require CPAs to state 
whether the information submitted by a borrower to RUS in its most 
recent December 31 RUS Form 7, 12, or 479 was in agreement with the 
borrower's audited records if the borrower has a December 31 year end. 
For borrowers with year ends other than December 31, the section was 
intended to require the CPA to state whether the information provided 
appeared reasonable based upon the procedures performed during the 
audit. The final rule has been amended to clarify this requirement.
    Comment. When 7 CFR part 1717 was revised by the electric program, 
certain modifications affected part 1773. In Sec. 1717.608, RUS 
approval of contracts between the borrower and its manager are no 
longer required. Additionally, the electric program determined that the 
quantification of ``substantial part'' was too low and raised it to 90 
percent. Section 1717.612 defined funds as cash proceeds from loans 
made or guaranteed by RUS. These changes should to be incorporated into 
part 1773.
    Response. This final rule has been amended to incorporate the 
changes necessitated by revisions made to part 1717.
    Comment. The revisions to Sec. 1773.33 (e)(2) excluded a 
requirement for compliance with RUS loan and security instrument 
provision for telecommunications borrowers. Under existing regulations, 
if the loan maturity period selected by the borrower exceeds the 
expected composite economic life of the facilities financed by a period 
of more than three years, the loan is conditioned upon the borrower 
electing to maintain a net plant to secured debt ratio of at least 1.2, 
or a funded reserve in such amount that the balance of the reserve plus 
the value of the facilities less depreciation be at least equal to the 
remaining principal payments on the loan.
    Response. It was not our intent to omit this requirement for 
compliance with the RUS loan and security instrument from the 
management letter. The final rule has been amended to include this 
requirement.
    Comment. One commenter noted that the management letter in part 
1773 included a sentence that was in conflict with GAGAS. It was his 
opinion that the sentence concerning negative assurance should be 
eliminated from the management letter.
    Response. We agree with the comment and we have deleted this 
sentence from the management letter.
    Comment. The revision to Sec. 1773.5 (c)(4)(C) set forth in the 
January 3, 1996, interim final rule extended the timeframe for 
submission of peer reviews to 42 months. Commenters expressed concern 
that the 42 months timeframe did not meet the requirements of GAGAS.
    Response. The intent of this section was to provide a 6-month 
period for CPAs to submit their peer review reports to RUS. Upon 
further review of the interim final rule, we have revised the language 
in the final rule to require completion of peer reviews within 36

[[Page 38722]]

months of the issuance of the prior review in accordance with GAGAS.

List of Subjects in 7 CFR Part 1773

    Accounting, Electric power, Loan programs--communications, Loan 
programs--energy, Reporting and recordkeeping requirements, Rural 
areas, Telecommunications.
    For reasons set forth in the preamble, RUS hereby amends 7 CFR part 
1773 chapter XVII as follows:

PART 1773--POLICY ON AUDITS OF RUS BORROWERS

    1. The authority citation for part 1773 continues to read as 
follows:

    Authority: 7 U.S.C. 901 et seq.; 7 U.S.C. 1921 et seq.; Pub. L. 
103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

    2. In part 1773 all references to items indicated in the left 
column are revised to read as stated in the right column:

------------------------------------------------------------------------
    Remove BAD--Borrower Accounting        Add PASD--Program Accounting 
                Division                        Services  Division      
------------------------------------------------------------------------
Director, BAD..........................  Assistant Administrator,       
                                          Program Accounting and        
                                          Regulatory Analysis.          
Telephone Program report on compliance.  Telecommunications Program     
                                          report on compliance and on   
                                          internal controls over        
                                          financial reporting.          
Report on internal controls............  Report on compliance and on    
                                          internal controls over        
                                          financial reporting.          
Report on compliance and internal        Report on compliance and on    
 controls.                                internal controls over        
                                          financial reporting.          
------------------------------------------------------------------------

    3. Section 1773.2 is amended by adding the definition for Borrower.


Sec. 1773.2  Definitions.

* * * * *
    Borrower means an entity that has an outstanding RUS, RTB, or FFB 
loan or loan guarantee, or that has received a grant for electric, 
telecommunications, distance learning, or telemedicine purposes under 
the act.
* * * * *
    4. Section 1773.3 is amended by removing paragraph (d)(2), 
redesignating paragraphs (d)(3) and (d)(4) to (d)(2) and (d)(3) and 
revising paragraphs (d) introductory text, (d)(1) through (d)(3) 
introductory text, (d)(3)(ii) and (e).


Sec. 1773.3  Annual audit.

* * * * *
    (d) A borrower that qualifies as a unit of state or local 
government or Indian tribe as such terms are defined in the Single 
Audit Act of 1984 (31 U.S.C. 7501 et seq.), the Single Audit Act 
Amendments of 1996 (31 U.S.C. 7505 et seq.) and OMB Circular A-133, 
Audits of States, Local Governments, and Non-Profit Organizations (copy 
available from the Executive Office of the President, Publication 
Services, 725 17th St., NW., Suite 2200, Washington, DC 20502; 202-395-
7332), must comply with this part as follows:
    (1) A borrower that expends $300,000 or more in a year in Federal 
awards must have an audit performed and submit an auditor's report 
meeting the requirements of the Single Audit Act of 1984 and the Single 
Audit Act Amendments of 1996.
    (2) A borrower that expends less than $300,000 in Federal awards 
during the year must have an audit performed in accordance with the 
requirements of this part.
    (3) A borrower must notify RUS, in writing, within 30 days of the 
as of audit date, of the total Federal awards expended during the year 
and must state whether it will have an audit performed in accordance 
with the Single Audit Act of 1984 and the Single Audit Act Amendments 
of 1996, or this part.
* * * * *
    (ii) If an audit is performed in accordance with the Single Audit 
Act of 1984 and the Single Audit Act Amendments of 1996, an auditor's 
report that meets the requirements of the Single Audit Act of 1984, and 
the Single Audit Act Amendments of 1996, will be sufficient to satisfy 
that borrower's obligations under this part.
    (e) OMB Circular A-133, Audits of States, Local Governments, and 
Non-Profit Organizations does not apply to audits of RUS electric and 
telecommunications cooperatives and commercial telecommunications 
borrowers.
* * * * *
    5. Section 1773.5 is amended by revising paragraphs (c) 
introductory text and (c)(6) (iii) to read as follows:


Sec. 1773.5  Qualifications of CPA.

* * * * *
    (c) Peer review requirement. The CPA must belong to and participate 
in a peer review program, and must have undergone a satisfactory peer 
review of the accounting and audit practice conducted by an approved 
peer review program under paragraph (c)(4) of this section, unless a 
waiver is granted under paragraph (c)(7) of this section. The reviewing 
organization must not be affiliated with or have had its most recent 
peer review conducted by the organization currently being reviewed 
(reciprocal reviews). After the initial peer review has been performed, 
the CPA must undergo a peer review of the accounting and audit practice 
within 36 months of the issuance of the previous peer review or at such 
additional times as designated by the peer review executive committee.
* * * * *
    (6) * * *
    (iii) A copy of the peer review report, accompanying letter of 
comment, and the partners' inspections must be made available to OIG, 
upon request.
* * * * *
    6. Section 1773.6 is amended by revising paragraph (a)(6) to read 
as follows:


Sec. 1773.6  Audit agreement.

    (a) * * *
    (6) The CPA will make all audit-related documents, including 
auditor's reports, workpapers, and management letters available to RUS 
or its representatives (OIG and GAO), upon request, and will permit the 
photocopying of all audit-related documents; and
* * * * *
    7. Section 1773.30 is amended by removing paragraph (a)(3), and 
redesignating paragraph (a)(4) to (a)(3) and revising paragraphs (a)(2) 
and (a)(3) to read as follows:


Sec. 1773.30  General.

    (a) * * *
    (2) A report on compliance and on internal control over financial 
reporting, examples of which are set forth in appendices A, exhibits 2 
and 3 (Electric) and B, exhibits 4 and 5 (Telecommunications) of this 
part 1773; and
    (3) A management letter, an example of which is set forth in 
appendix C of this part 1773.
* * * * *
    8a. Section 1773.31 is amended by revising the last sentence to 
read as follows:

[[Page 38723]]

Sec. 1773.31  Auditor's Report.

    * * * This report must be signed by the CPA, cover all statements 
presented, and refer to the separate report on compliance and on 
internal control over financial reporting issued in conjunction with 
the auditor's report.
    8b. Section 1773.32 is revised to read as follows:


Sec. 1773.32  Report on compliance and on internal control over 
financial reporting.

    As required by GAGAS, the CPA must prepare a written report on the 
tests performed for compliance with applicable laws, regulations, 
contracts, and grants, and on the borrower's internal control structure 
and on the assessment of control risk made as part of the financial 
statement audit. This report must be signed by the CPA and must 
include, as a minimum:
    (a) The scope of the CPA's work to obtain an understanding of the 
borrower's internal control structure and in assessing the control 
risk;
    (b) A description of the reportable conditions noted which include 
material weaknesses identified as a result of the CPA's work in 
understanding and assessing control risk;
    (c) If no reportable instances of noncompliance and no reportable 
conditions were found, the CPA must issue a report as illustrated in 
appendix A, exhibit 2 (Electric), and appendix B, exhibit 4 
(Telecommunications) of this part 1773;
    (d) If material instances of noncompliance and reportable 
conditions are identified, the CPA must issue a report as illustrated 
in appendix A, exhibit 3 (Electric), and appendix B, exhibit 5 
(Telecommunications) of this part 1773;
    (e) Other nonmaterial instances of noncompliance should not be 
disclosed in the report on compliance and on internal control over 
financial reporting, but should be reported in a separate communication 
to the board of directors, preferably in writing. All such 
communications must be documented in the workpapers and submitted to 
RUS in compliance with Sec. 1773.21.
    (f) If the CPA has issued a separate letter detailing immaterial 
instances of noncompliance, the report on compliance and on internal 
control over financial reporting must be modified to include a 
statement such as:

    We noted certain immaterial instances of noncompliance that we 
have reported to the management of (borrower's name) in a separate 
letter dated (month, day, year).

    (g) If the CPA has issued a separate letter to management to 
communicate other matters involving the design and operation of the 
internal control over financial reporting, the report on compliance and 
on internal control over financial reporting must be modified to 
include a statement such as:

    However, we noted other matters involving the internal control 
over financial reporting that we have reported to the management of 
(borrower's name) in a separate letter dated (month, day, year).

    (h) The report must contain the status of known but uncorrected 
significant or material findings and recommendations from prior audits 
that affect the current audit objective.
    9. Section 1773.33 is removed.
    10. Section 1773.34 is redesignated to Sec. 1773.33 and amended by 
removing paragraph (e)(1)(ii)(E), revising paragraphs (e)(1)(i), 
(e)(1)(ii) introductory text, (e)(1)(ii)(C) and (e)(1)(iii) and 
(e)(2)(iii) and adding (e)(2)(iv) to read as follows:


Sec. 1773.33  Management letter.

* * * * *
    (e) * * *
    (1) * * *
    (i) The requirement for funds to be deposited in banks or other 
depositories designated in the loan documents or approved by RUS. For 
purposes of this part, funds shall be defined as cash proceeds from 
loans made or guaranteed by RUS in accordance with 7 CFR 1717.612.
    (ii) The requirement for a borrower to obtain written approval of 
mortgagees to enter into any contract for the management, operation, or 
maintenance of the borrower's system if the contract covers all or 
substantially all (90 percent) of the electric system. For purposes of 
this part, the following contracts shall be deemed as requiring RUS 
approval:
* * * * *
    (C) Operations and maintenance contracts in which the borrower has 
contracted to have another borrower or other entity operate and/or 
maintain all or substantially all (90 percent) of the physical plant 
facilities of the plant.
* * * * *
    (iii) The requirement for a borrower to prepare and furnish 
mortgagees annual financial and statistical reports on the borrower's 
financial condition and operations. For borrowers with a December 31 
year end, the CPA must state whether the information represented by the 
borrower as having been submitted to RUS in its most recent December 31 
RUS Form 7 or Form 12 is in agreement with the borrower's audited 
records. For borrowers with a year end other than December 31, the CPA 
must state whether the information appears reasonable based upon the 
audit procedures performed. If the borrower represents that an amended 
report has been filed as of December 31, the comments must relate to 
the amended report.
    (2) * * *
    (iii) The requirement for a borrower to prepare and furnish 
mortgagees annual financial and statistical reports on the borrower's 
financial condition and operations. For borrowers with a December 31 
year end, the CPA must state whether the information represented by the 
borrower as having been submitted to RUS in its most recent December 31 
RUS Form 479 is in agreement with the borrower's audited records. For 
borrowers with a year end other than December 31, the CPA must state 
whether the information appears reasonable based upon the audit 
procedures performed. If the borrower represents that an amended report 
has been filed as of December 31, the comments must relate to the 
amended report.
    (iv) The requirement that a borrower maintain either a net plant to 
secured debt ratio or a funded reserve.
    (A) For loans approved after June 10, 1991, and before October 7, 
1997, if a borrower selected a loan maturity period in excess of the 
expected economic life of the facilities financed, the borrower must 
maintain a secured debt ratio of at least 1.2 or a funded reserve. If, 
during the audit period, the borrower has been issued refunding notes 
that match the remaining composite economic life of the facilities thus 
eliminating the requirement, the auditor should so state.
    (1) If the net plant to secured debt ratio option was selected, 
this ratio must be achieved one year following the first advance of 
funds.
    (2) If the funded reserve option was selected, the reserve must be 
of such amount that the balance of the reserve plus the value of the 
facilities less depreciation be at least equal to the remaining 
principal payments on the loan. Funding of the reserve must begin 
within one year of approval of release of funds and must continue 
regularly over the composite economic life of the facilities financed.
    (B) For loans approved after October 7, 1997, if a borrower 
selected a loan maturity period in excess of the expected economic life 
of the facilities financed, the borrower must maintain a funded reserve 
in such amount that the balance of the reserve plus the value of the 
facilities less depreciation be at least equal to the remaining 
principal

[[Page 38724]]

payments on the loan. Funding of the reserve must begin within one year 
of approval of release of funds and must continue regularly over the 
composite economic life of the facilities financed. If, during the 
audit period, the borrower has been issued refunding notes that match 
the remaining composite economic life of the facilities thus 
eliminating the requirement for maintaining the funded reserve 
requirement, the auditor should so state.
* * * * *
    11. Reserve Sec. 1773.34.
    12. Appendix A to Part 1773 is amended by revising exhibits 1, 2, 
and 3, removing exhibits 4, 5, and 6, and redesignating exhibit 7 as 
exhibit 4 and revising it to read as follows:

Appendix A to Part 1773--Sample Auditor's Report for an Electric 
Cooperative

* * * * *

Exhibit 1--Sample Auditor's Report

Certified Public Accountants, 1600 Main Street, City, State 24105
The Board of Directors, Center County Electric Cooperative: 
Independent Auditor's Report

    We have audited the accompanying balance sheets of Center County 
Electric Cooperative as of December 31, 1998 and 1997, and the 
related statements of revenue and patronage capital, and cash flows 
for the years then ended. These financial statements are the 
responsibility of Center County Electric Cooperative's management. 
Our responsibility is to express an opinion on these financial 
statements based on our audit.
    We conducted our audits in accordance with generally accepted 
auditing standards and the standards applicable to financial audits 
contained in Government Auditing Standards, issued by the 
Comptroller General of the United States. Those standards required 
that we plan and perform the audit to obtain reasonable assurance 
about whether the financial statements are free of material 
misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the 
overall financial statement presentation. We believe that our audit 
provides a reasonable basis for our opinion.
    In our opinion, the financial statements referred to above 
present fairly, in all material respects, the financial position of 
Center County Electric Cooperative as of December 31, 1998 and 1997, 
and the results of its operations and its cash flows for the years 
then ended in conformity with generally accepted accounting 
principles.
    In accordance with Government Auditing Standards, we have also 
issued a report dated March 2, 1999, on our consideration of Center 
County Electric Cooperative's internal control over financial 
reporting and our tests of its compliance with certain provisions of 
laws, regulations, contracts, and grants.

Certified Public Accountants

March 2, 1999

    Exhibit 2--Sample Report on Compliance and on Internal Control 
over Financial Reporting, the CPA found No Reportable Instances of 
Noncompliance and No Material Weaknesses (No Reportable Conditions 
Identified).

Certified Public Accountants, 1600 Main Street, City, State 24105

The Board of Directors

Center County Electric Cooperative:

    We have audited the financial statements of Center County 
Electric Cooperative as of and for the years ended December 31, 1998 
and 1997, and have issued our report thereon dated March 2, 1999. We 
conducted our audit in accordance with generally accepted auditing 
standards and the standards applicable to financial audits contained 
in Government Auditing Standards, issued by the Comptroller General 
of the United States.

Compliance

    As part of obtaining reasonable assurance about whether Center 
County Electric Cooperative's financial statements are free of 
material misstatement, we performed tests of its compliance with 
certain provisions of laws, regulations, contracts, and grants, 
noncompliance with which could have a direct and material effect on 
the determination of financial statement amounts. However, providing 
an opinion on compliance with those provisions was not an objective 
of our audit, and accordingly, we do not express such an opinion. 
The results of our tests disclosed no instances of noncompliance 
that are required to be reported under Government Auditing 
Standards. [If the CPA has issued a separate letter to the 
management detailing immaterial instances of noncompliance, modify 
this paragraph to include a statement such as the following: 
However, we noted certain immaterial instances of noncompliance 
which we have reported to the management of Center County Electric 
Cooperative in a separate letter dated March 2, 1999.]

Internal Control Over Financial Reporting

    In planning and performing our audit, we considered Center 
County Electric Cooperative's internal control over financial 
reporting in order to determine our auditing procedures for the 
purpose of expressing our opinion on the financial statements and 
not to provide assurance on the internal control over financial 
reporting. Our consideration of the internal control over financial 
reporting would not necessarily disclose all matters in the internal 
control over financial reporting that might be material weaknesses. 
A material weakness is a condition in which the design or operation 
of one or more of the internal control components does not reduce to 
a relatively low level the risk that misstatements in amounts that 
would be material in relation to the financial statements being 
audited may occur and not be detected within a timely period by 
employees in the normal course of performing their assigned 
functions. We noted no matters involving the internal control over 
financial reporting and its operation that we consider to be 
material weaknesses. [If the CPA has issued a separate letter to 
management to communicate other matters involving the design and 
operation of the internal control over financial reporting, modify 
this paragraph to include a statement such as the following: 
However, we noted other matters involving the internal control over 
financial reporting which we have reported to the management of 
Center County Electric Cooperative in a separate letter dated March 
2, 1999.]
    This report is intended for the information of the audit 
committee, management, the Rural Utilities Service, and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

March 2, 1999

    Exhibit 3--Sample Report on Compliance and on Internal Control 
over Financial Reporting, the CPA found Reportable Instances of 
noncompliance and Reportable Conditions Identified.

Certified Public Accountants, 1600 Main Street, City, State 24105

The Board of Directors

Center County Electric Cooperative:

    We have audited the financial statements of Center County 
Electric Cooperative as of and for the years ended December 31, 1998 
and 1997, and have issued our report thereon dated March 2, 1999. We 
conducted our audit in accordance with generally accepted auditing 
standards and the standards applicable to financial audits contained 
in Government Auditing Standards, issued by the Comptroller General 
of the United States.

Compliance

    As part of obtaining reasonable assurance about whether Center 
County Electric Cooperative's financial statements are free of 
material misstatement, we performed tests of its compliance with 
certain provisions of laws, regulations, contracts, and grants, 
noncompliance with which could have a direct and material effect on 
the determination of financial statement amounts. However, providing 
an opinion on compliance with those provisions was not an objective 
of our audit, and accordingly, we do not express such an opinion. 
The results of our tests disclosed instances of noncompliance that 
are required to be reported under Government Auditing Standards. [A 
description of the findings should be included in the report.][If 
the CPA has issued a separate letter to the management detailing 
immaterial instances of noncompliance, modify this paragraph to 
include a statement such as the following: We also noted certain 
immaterial instances of noncompliance which we have reported to the 
management of Center County Electric Cooperative in a separate 
letter dated March 2, 1999.]

[[Page 38725]]

Internal Control Over Financial Reporting

    In planning and performing our audit, we considered Center 
County Electric Cooperative's internal control over financial 
reporting in order to determine our auditing procedures for the 
purpose of expressing our opinion on the financial statements and 
not to provide assurance on the internal control over financial 
reporting. However, we noted certain matters involving the internal 
control over financial reporting and its operation that we consider 
to be reportable conditions. Reportable conditions involve matters 
coming to our attention relating to significant deficiencies in the 
design or operation of the internal control over financial reporting 
that, in our judgment, could adversely affect Center County Electric 
Cooperative's ability to record, process, summarize, and report 
financial data consistent with the assertions of management in the 
financial statements. [A description of the reportable conditions 
should be included in the report.]
    A material weakness is a condition in which the design or 
operation of one or more of the internal control components does not 
reduce to a relatively low level the risk that misstatements in 
amounts that would be material in relation to the financial 
statements being audited may occur and not be detected within a 
timely period by employees in the normal course of performing their 
assigned functions. Our consideration of the internal control over 
financial reporting would not necessarily disclose all matters in 
the internal control that might be reportable conditions and, 
accordingly, would not necessarily disclose all reportable 
conditions that are also considered to be material weaknesses. 
However, we believe none of the reportable conditions described 
above is a material weakness. [If conditions believed to be material 
weaknesses are disclosed, the last sentence should be deleted and 
instead the report should identify which of the reportable 
conditions described above are considered to be material 
weaknesses.][If the CPA has issued a separate letter to management 
to communicate other matters involving the design and operation of 
the internal control over financial reporting, modify this paragraph 
to include a statement such as the following: We also noted other 
matters involving the internal control over financial reporting 
which we have reported to the management of Center County Electric 
Cooperative in a separate letter dated March 2, 1999.]
    This report is intended for the information of the audit 
committee, management, the Rural Utilities Service, and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4--SAMPLE FINANCIAL STATEMENTS

   Center Telephone Company Balance Sheets--December 31, 19X9 and 19X8  
                         Assets (Notes 1 and 2)                         
------------------------------------------------------------------------
                                               19X9            19X8     
------------------------------------------------------------------------
CURRENT ASSETS:                                                         
    Cash--Construction Funds............         $21,000         $18,000
    Cash--General Funds.................         128,300         140,083
    Telecommunications Accounts.........                                
    Receivable (less accumulated                                        
     provision of $11,597 in 19X9 and                                   
     $1,490 in 19X8)....................         139,642         122,623
    Notes Receivable....................           2,500           3,000
    Materials and Supplies..............         103,713          73,964
    Prepayments (Note 3)................          49,185          62,201
    Other Current Assets................           1,357          10,131
                                         -------------------------------
                                                 445,697         430,002
                                         ===============================
NONCURRENT ASSETS:                                                      
    Nonregulated Investments: (Note 4)                                  
        Net CATV Plant..................         413,511         407,086
        Net Nonregulated Customer                                       
         Premises Equipment.............         103,618               0
    Deferred Maintenance and Retirements                                
     (Note 5)...........................          40,000          45,000
                                         -------------------------------
                                                 557,129         452,086
                                         ===============================
PROPERTY, PLANT, AND EQUIPMENT: (Note 6)                                
    Telecommunications Plant in Service.       7,401,300       6,650,553
    Telecommunications Plant Under                                      
     Construction.......................          67,626         199,092
    Telecommunications Plant Adjustment                                 
     (Note 7)...........................         176,380         176,380
                                         -------------------------------
                                               7,645,306       7,026,025
    Less: Accumulated Provision for                                     
     Depreciation.......................       1,760,587       1,504,255
                                         -------------------------------
                                               5,884,719       5,521,770
                                         -------------------------------
                                               6,887,545       6,403,858
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

   Center Telephone Company Balance Sheets--December 31, 19X9 and 19X8  
                        Liabilities and Equities                        
------------------------------------------------------------------------
                                               19X9            19X8     
------------------------------------------------------------------------
CURRENT LIABILITIES:                                                    
    Accounts Payable....................        $123,689        $290,484
    Notes Payable.......................          61,600          70,400
    Advance Billings and Payments.......           2,137           2,243
    Customers Deposits..................          11,878           4,940
    Current Maturities of Long-Term Debt                                
     (Note 8)...........................         146,646         145,998
    Accrued Taxes.......................         242,076         224,566

[[Page 38726]]

                                                                        
    Other Current Liabilities...........           8,500           9,079
                                         -------------------------------
                                                 596,526         747,710
                                         ===============================
LONG-TERM DEBT:                                                         
    RUS Mortgage Notes (Note 8).........       4,592,658       4,128,106
                                         ===============================
OTHER LIABILITIES AND DEFERRED CREDITS:                                 
    Unamortized Investment Tax Credits                                  
     (Note 10)..........................          53,078          61,377
    Deferred Income Taxes (Note 11).....          37,137          35,039
                                         -------------------------------
                                                  90,215          96,416
                                         ===============================
STOCKHOLDERS' EQUITY:                                                   
    Capital Stock--Common $2 par value--                                
     300,000 Shares Authorized; 102,600                                 
     Shares Outstanding 19X9 and 19X8...         205,200         205,200
    Additional Paid-in Capital..........         820,800         820,800
    Retained Earnings (Note 8)..........         582,146         405,626
                                         -------------------------------
                                               1,608,146       1,431,626
                                         -------------------------------
                                               6,887,545       6,403,858
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

 Center Telephone Company Statements of Income and Retained Earnings for
               the Years Ended December 31, 19X9 and 19X8               
------------------------------------------------------------------------
                                              19X9             19X8     
------------------------------------------------------------------------
OPERATING REVENUES:                                                     
    Basic Local Network Services......        $836,822         $862,205 
    Network Access Services...........         125,042              -0- 
    Long Distance Network Services....         897,300          775,073 
    Miscellaneous.....................         144,435          147,100 
    Less: Uncollectible Revenues......         (24,000)         (24,500)
                                       ---------------------------------
                                             1,979,599        1,759,878 
                                       =================================
OPERATING EXPENSES:                                                     
    Plant Specific Operations.........         564,486          480,509 
    Plant Nonspecific Operations......         187,162          393,143 
    Depreciation and Amortization.....         274,691                  
    Customer Operations...............          94,473           78,772 
    Corporate Operations..............         157,453          134,127 
                                       ---------------------------------
                                             1,278,265        1,086,551 
                                       =================================
OPERATING TAXES:                                                        
    Federal and State Income..........                                  
    Taxes--Operating (Notes 10 and 11)         159,845          170,687 
    Other Operating Taxes.............         225,013          204,230 
    Provision for Deferred Taxes (Note                                  
     10)..............................          31,566           29,468 
    Investment Credits--Net...........           6,201            1,640 
                                       ---------------------------------
                                               422,625          406,025 
                                       =================================
OPERATING INCOME......................         278,709          267,302 
                                       =================================
FIXED CHARGES:                                                          
    Interest on Long-Term Debt........          88,432           85,854 
    Interest Charged to Construction                                    
     Credit...........................          (2,251)          (1,516)
                                       ---------------------------------
                                                86,181           84,338 
                                       =================================
NONREGULATED INCOME--NET (Note 4).....          19,902           10,593 
                                       ---------------------------------
NET INCOME FOR PERIOD.................         212,430          193,557 
    Retained Earnings--January 1, 19X9                                  
     and 19X8.........................         405,626          235,153 
    Dividends Declared................         (35,910)         (23,084)
                                       ---------------------------------

[[Page 38727]]

                                                                        
    Retained Earnings--December 31,                                     
     19X9 and 19X8....................        $582,146         $405,626 
                                       =================================
    Earnings Per Share of Common                                        
     Stock--Average...................           $2.07            $1.89 
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

 Center County Telephone Company Statements of Cash Flows for the Years 
                    Ended December 31, 19X9 and 19X8                    
------------------------------------------------------------------------
                                              19X9             19X8     
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:                                   
    Cash Received from Consumers......      $1,962,580       $1,733,289 
    Cash Paid to Suppliers and                                          
     Employees........................      (1,159,158)        (960,459)
    Interest Paid.....................         (86,181)         (84,338)
    Taxes Paid........................        (401,316)        (376,643)
                                       ---------------------------------
    Net Cash Provided by Operating                                      
     Activities.......................         315,925          311,849 
                                       =================================
CASH FLOWS FROM INVESTING ACTIVITIES:                                   
    Construction and Acquisition of                                     
     Plant............................        (619,281)        (507,617)
    Investment in CATV Plant..........          (6,425)         (18,246)
    Investment in Nonregulated CPE....        (103,618)                 
    Plant Removal Costs...............         (18,359)         (27,216)
    (Increase)/Decrease In:                                             
    Materials Inventory...............         (29,749)         (19,478)
    Notes Receivable..................             500            1,000 
    Deferred Maintenance and                                            
     Retirements......................           5,000          (45,000)
    Nonregulated Income...............          19,902           10,593 
                                       ---------------------------------
    Net Cash Used in Investing                                          
     Activities.......................        (752,030)        (605,964)
                                       =================================
CASH FLOWS FROM FINANCING ACTIVITIES:                                   
    Dividends Paid....................         (35,910)         (23,084)
    Debt Proceeds.....................         465,200          386,000 
    Payments on Short-term Debt.......          (8,800)          (7,500)
    Increase/(Decrease) In:                                             
    Consumer Deposits and Advance                                       
     Payments.........................           6,832            4,200 
                                       ---------------------------------
    Net Cash Provided by Financing                                      
     Activities.......................         427,322          359,616 
                                       ---------------------------------
    Net Increase/(Decrease) in Cash...          (8,783)          65,501 
    Cash--Beginning of Year...........         158,083           92,582 
                                       ---------------------------------
    Cash--End of Year.................         149,300          158,083 
                                       =================================
    The accompanying notes are an                                       
 integral part of these statements.                                     
                                                                        
RECONCILIATION OF NET MARGINS TO NET                                    
 CASH PROVIDED BY OPERATING                                             
 ACTIVITIES:                                                            
    Net Margins.......................         212,430          193,557 
    Less: Nonregulated Income.........         (19,902)         (10,593)
                                       ---------------------------------
    Net Income from Regulated                                           
     Operations.......................         192,528          182,964 
    Adjustments to Reconcile Net                                        
     Margins to Net Cash Provided by                                    
     Operating Activities:                                              
        Depreciation and Amortization.         274,691          253,509 
        Provision for Uncollectible                                     
         Accounts Receivable..........          10,107           (3,610)
    (Increase)/Decrease In:                                             
        Customer and Other Accounts                                     
         Receivable...................         (27,126)         (22,979)
        Current and Accrued Assets--                                    
         Other........................           8,774            5,119 
        Prepaid Taxes.................          10,000          (10,000)
        Other Prepaid Expenses........           3,016           (5,426)
    Increase/(Decrease) In:                                             
        Accounts Payable..............        (166,795)        (126,472)
        Accrued Taxes.................          17,510           37,742 
        Other Current Liabilities.....            (579)            (638)
        Deferred Credits..............          (6,201)           1,640 
                                       ---------------------------------
        Total Adjustments.............         123,397          128,885 
                                       =================================
Net Cash Provided by Operating                                          
 Activities...........................         315,925          311,849 
------------------------------------------------------------------------


[[Page 38728]]

    The accompanying notes are an integral part of these statements.
    13. Appendix B to Part 1773 is amended by revising exhibits 1, 2, 
and 3, deleting exhibits 4, 5 and 6, and redesignating exhibit 7 as 
exhibit 4 and revising it to read as follows:

Appendix B to Part 1773-Sample Auditor's Report for A Class A or B 
Commercial Telecommunications Company

* * * * *

Exhibit 1--Same Auditor's Report

Certified Public Accountants, 1600 Main Street, City, State 24105
The Board of Directors, Center Telephone Company: Independent 
Auditor's Report

    We have audited the accompanying balance sheets of Center 
Telephone Company as of December 31, 1998 and 1997, and the related 
statements of revenue and patronage capital, and cash flows for the 
years then ended. These financial statements are the responsibility 
of Center Telephone Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audit.
    We conducted our audit in accordance with generally accepted 
auditing standards and the standards applicable to financial audits 
contained in Government Auditing Standards, issued by the 
Comptroller General of the United States. Those standards require 
that we plan and perform the audit to obtain reasonable assurance 
about whether the financial statements are free of material 
misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the 
overall financial statement presentation. We believe that our audits 
provide a reasonable basis for our audit.
    In our opinion, the financial statements referred to above 
present fairly, in all material respects, the financial position of 
Center Telephone Company as of December 31, 1998 and 1997, and the 
results of its operations and its cash flows for the years then 
ended in conformity with general accepted accounting principles.
    In accordance with Government Auditing Standards, we have also 
issued our report dated March 2, 1999, on our consideration of 
Center Telephone Company's internal control over financial reporting 
and our tests of its compliance with certain provisions of laws, 
regulations, contracts, and grants.

Certified Public Accountants

March 2, 1999

    Exhibit 2--Sample Report on Compliance and on Internal Control 
over Financial Reporting, the CPA found No Reportable Instances of 
Noncompliance and No Material Weaknesses(No Reportable Conditions 
Identified)

Certified Public Accountants, 1600 Main Street, City, State 24105

The Board of Directors

Center Telephone Company:

    We have audited the financial statements of Center Telephone 
Company as of and for the years ended December 31, 1998 and 1997, 
and have issued our report thereon dated March 2, 1999. We conducted 
our audit in accordance with generally accepted auditing standards 
and the standards applicable to financial audits contained in 
Government Auditing Standards, issued by the Comptroller General of 
the United States.

Compliance

    As part of obtaining reasonable assurance about whether Center 
Telephone Company's financial statements are free of material 
misstatement, we performed tests of its compliance with certain 
provisions of laws, regulations, contracts, and grants, 
noncompliance with which could have a direct and material effect on 
the determination of financial statement amounts. However, providing 
an opinion on compliance with those provisions was not an objective 
of our audit, and accordingly, we do not express such an opinion. 
The results of our tests disclosed no instances of noncompliance 
that are required to be reported under Government Auditing 
Standards. [If the CPA has issued a separate letter to the 
management detailing immaterial instances of noncompliance, modify 
this paragraph to include a statement such as the following: 
However, we noted certain immaterial instances of noncompliance 
which we have reported to the management of Center Telephone Company 
in a separate letter dated March 2, 1999.]

Internal Control Over Financial Reporting

    In planning and performing our audit, we considered Center 
Telephone Company's internal control over financial reporting in 
order to determine our auditing procedures for the purpose of 
expressing our opinion on the financial statements and not to 
provide assurance on the internal control over financial reporting. 
Our consideration of the internal control over financial reporting 
would not necessarily disclose all matters in the internal control 
over financial reporting that might be material weaknesses. A 
material weakness is a condition in which the design or operation of 
one or more of the internal control components does not reduce to a 
relatively low level the risk that misstatements in amounts that 
would be material in relation to the financial statements being 
audited may occur and not be detected within a timely period by 
employees in the normal course of performing their assigned 
functions. We noted no matters involving the internal control over 
financial reporting and its operation that we consider to be 
material weaknesses. [If the CPA has issued a separate letter to 
management to communicate other matters involving the design and 
operation of the internal control over financial reporting, modify 
this paragraph to include a statement such as the following: 
However, we noted other matters involving the internal control over 
financial reporting which we have reported to the management of 
Center Telephone Company in a separate letter dated March 2, 1999.]
    This report is intended for the information of the audit 
committee, management, the Rural Utilities Service, and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

March 2, 1999

    Exhibit 3--Sample Report on Compliance and on Internal Control 
over Financial Reporting, the CPA found Reportable Instances of 
Noncompliance and Reportable Conditions were Identified

Certified Public Accountants, 1600 Main Street, City, State 24105

The Board of Directors

Center Telephone Company

    We have audited the financial statements of Center Telephone 
Company as of and for the years ended December 31, 1998 and 1997, 
and have issued our report thereon dated March 2, 1999. We conducted 
our audit in accordance with generally accepted auditing standards 
and the standards applicable to financial audits contained in 
Government Auditing Standards, issued by the Comptroller General of 
the United States.

Compliance

    As part of obtaining reasonable assurance about whether Center 
County Telephone Company's financial statements are free of material 
misstatement, we performed tests of its compliance with certain 
provisions of laws, regulations, contracts, and grants, 
noncompliance with which could have a direct and material effect on 
the determination of financial statement amounts. However, providing 
an opinion on compliance with those provisions was not an objective 
of our audit, and accordingly, we do not express such an opinion. 
The results of our tests disclosed instances of noncompliance that 
are required to be reported under Government Auditing Standards. [A 
description of the findings should be included in the report.] [If 
the CPA has issued a separate letter to the management detailing 
immaterial instances of noncompliance, modify this paragraph to 
include a statement such as the following: We also noted certain 
immaterial instances of noncompliance which we have reported to the 
management of Center Telephone Company in a separate letter dated 
March 2, 1999.]

Internal Control Over Financial Reporting

    In planning and performing our audit, we considered Center 
Telephone Company's internal control over financial reporting in 
order to determine our auditing procedures for the purpose of 
expressing our opinion on the financial statements and not to 
provide assurance on the internal control over financial reporting. 
However, we noted certain matters involving the internal control 
over financial reporting and its operation that we consider to be 
reportable conditions. Reportable conditions involve matters coming 
to our attention relating to significant deficiencies in the design 
or operation of the

[[Page 38729]]

internal control over financial reporting that, in our judgment, 
could adversely affect Center Telephone Company's ability to record, 
process, summarize and report financial data consistent with the 
assertions of management in the financial statements. [A description 
of the findings pertaining to reportable conditions should be 
included in the report.]
    A material weakness is a condition in which the design or 
operation of one or more of the internal control components does not 
reduce to a relatively low level the risk that misstatements in 
amounts that would be material in relation to the financial 
statements being audited may occur and not be detected within a 
timely period by employees in the normal course of performing their 
assigned functions. Our consideration of the internal control over 
financial reporting would not necessarily disclose all matters in 
the internal control that might be reportable conditions and, 
accordingly, would not necessarily disclose all reportable 
conditions that are also considered to be material weaknesses. 
However, we believe none of the reportable conditions described 
above is a material weakness. [If conditions believed to be material 
weaknesses are disclosed, the last sentence should be deleted and 
instead the report should identify which of the reportable 
conditions described above are considered to be material 
weaknesses.][If the CPA has issued a separate letter to management 
to communicate other matters involving the design and operation of 
the internal control over financial reporting, modify this paragraph 
to include a statement such as the following: We also noted other 
matters involving the internal control over financial reporting 
which we have reported to the management of Center Telephone Company 
in a separate letter dated March 2, 1999.]
    This report is intended for the information of the audit 
committee, management, the Rural Utilities Service, and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4--SAMPLE FINANCIAL STATEMENTS

Center County Electric Cooperative Balance Sheets--December 31, 19X9 and
                       19X8 Assets (Notes 1 and 2)                      
------------------------------------------------------------------------
                                               19X9            19X8     
------------------------------------------------------------------------
ELECTRIC PLANT: (Note 3)                                                
    In Service--at cost.................      $9,524,646      $9,365,264
    Construction Work in Progress.......         407,943         317,166
                                         -------------------------------
                                               9,932,589       9,682,430
    Less: Accumulated Provisions for                                    
     Depreciation.......................       3,117,629       2,917,295
                                         -------------------------------
                                               6,814,960       6,765,135
                                         ===============================
OTHER ASSETS AND INVESTMENTS:                                           
    Nonutility Property.................          20,227          20,227
    Investments in Associated                                           
     Organizations (Note 4).............         391,258         292,798
                                         -------------------------------
                                                 411,485         313,025
                                         ===============================
CURRENT ASSETS:                                                         
    Cash--General Funds.................          37,350          51,544
    Cash--Construction Funds............          10,034          20,193
    Accounts Receivable (Less                                           
     accumulated provision for                                          
     uncollectible accounts of $2,207 in                                
     19X9 and $1,933 in 19X8)...........          36,527          35,255
    Materials and Supplies (at average                                  
     cost)..............................          83,652          80,882
    Other Current and Accrued Assets....           8,613           8,692
                                         -------------------------------
                                                 176,176         196,566
                                         ===============================
DEFERRED CHARGES (Note 5):..............           5,666           1,762
                                         -------------------------------
                                              $7,408,287      $7,276,488
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

Center County Electric Cooperative Balance Sheets--December 31, 19X9 and
                 19X8 Equities and Liabilities (Note 1)                 
------------------------------------------------------------------------
                                               19X9            19X8     
------------------------------------------------------------------------
EQUITIES:                                                               
    Memberships.........................         $60,145         $59,440
    Patronage Capital (Note 6)..........       1,761,798       1,526,833
    Other Equities (Note 7).............          53,647          35,900
                                         -------------------------------
                                               1,875,590       1,622,173
                                         ===============================
LONG-TERM DEBT:                                                         
    RUS Mortgage Notes less current                                     
     maturities (Note 8)................       5,249,115       5,396,385
CURRENT LIABILITIES:                                                    
    Current Maturities of Long-Term Debt         145,000         140,000
    Accounts Payable--Purchased Power...          48,916          52,117
    Accounts Payable--Other.............          21,859           6,556
    Consumer Deposits...................          32,660          33,085

[[Page 38730]]

                                                                        
    Accrued Taxes.......................          10,958           9,146
    Other Current and Accrued                                           
     Liabilities........................          12,285           6,461
                                         -------------------------------
                                                 271,678         247,365
                                         -------------------------------
DEFERRED CREDITS (Note 10)..............          11,904          10,565
                                         -------------------------------
                                              $7,408,287      $7,276,488
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

 Center County Electric Cooperative Statements of Revenue and Patronage 
         Capital for the Years Ended December 31, 19X9 and 19X8         
------------------------------------------------------------------------
                                               19X9            19X8     
------------------------------------------------------------------------
OPERATING REVENUES......................      $1,719,467      $1,605,690
OPERATING EXPENSES:                                                     
    Cost of Power.......................         587,729         625,411
    Distribution--Operation.............         111,058         121,682
    Distribution--Maintenance...........         158,622         182,740
    Consumer Accounts...................          76,675          72,927
    Sales...............................          38,378          40,755
    Administrative and General..........          94,682          87,058
    Depreciation and Amortization.......         288,389         279,776
    Taxes...............................          34,920          34,438
                                         -------------------------------
                                               1,390,453       1,444,787
                                         ===============================
OPERATING MARGINS BEFORE FIXED CHARGES           329,014         160,903
FIXED CHARGES:                                                          
  Interest on Long-Term Debt............         113,713         115,082
                                         ===============================
OPERATING MARGINS AFTER FIXED CHARGES...         215,301          45,821
G&T AND OTHER CAPITAL CREDITS...........          14,460          17,500
                                         ===============================
NET OPERATING MARGINS...................         229,761          63,321
                                         ===============================
NONOPERATING MARGINS:                                                   
Interest Income.........................          24,289          18,802
Other Nonoperating Income...............           1,200           1,200
                                         -------------------------------
                                                  25,489          20,002
                                         ===============================
NET MARGINS.............................         255,250          83,323
PATRONAGE CAPITAL--BEGINNING OF YEAR....       1,526,833       1,469,125
                                         ===============================
                                               1,782,083       1,552,448
RETIREMENT OF CAPITAL CREDITS...........          20,285          25,615
                                         -------------------------------
PATRONAGE CAPITAL--END OF YEAR..........      $1,761,798      $1,526,833
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

   Center County Electric Cooperative Statements of Cash Flows for the  
                 Years Ended December 31, 19X9 and 19X8                 
------------------------------------------------------------------------
                                             19 x 9           19 x 8    
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:                                   
    Cash Received from Consumers......      $1,721,496       $1,609,933 
    Cash Paid to Suppliers and                                          
     Employees........................      (1,049,139)      (1,126,367)
    Interest Received.................          24,289           18,802 
    Interest Paid.....................        (114,131)        (115,607)
    Taxes Paid........................         (33,108)         (32,132)
                                       ---------------------------------
    Net Cash Provided by Operating                                      
     Activities.......................         549,407          354,629 
                                       =================================
CASH FLOWS FROM INVESTING ACTIVITIES:                                   
    Construction and Acquisition of                                     
     Plant............................        (322,234)        (216,427)

[[Page 38731]]

                                                                        
    Plant Removal Costs...............         (25,994)         (19,268)
    Materials Salvaged from                                             
     Retirements......................          10,014            7,327 
    (Increase)/Decrease In:                                             
        Materials Inventory...........          (2,770)           1,916 
        Deferred Charges-Preliminary                                    
         Survey & Investigation.......          (3,486)          (2,617)
        Investments-CFC Capital Term                                    
         Certificates.................         (82,472)         (69,412)
    Inventory Adjustment-Deferred                                       
     Credit Decrease..................          (2,290)          (1,057)
                                       ---------------------------------
    Net Cash Used in Investing                                          
     Activities.......................        (429,232)        (299,538)
                                       =================================
CASH FLOWS FROM FINANCING ACTIVITIES:                                   
    Retirements of Patronage Capital                                    
     Credits..........................         (20,285)         (25,615)
    Retired Capital Credits--Gain.....           1,200            1,200 
    Donated Capital...................          16,547            6,178 
    RUS Loan Advances.................         174,976          197,450 
    Payments on RUS Debt..............        (317,246)        (279,575)
    Increase/(Decrease) In:                                             
        Consumer Deposits.............            (425)             575 
        Memberships Issued............             705              450 
                                       ---------------------------------
    Net Cash Used in Financing                                          
     Activities.......................        (144,528)         (99,337)
                                       ---------------------------------
    Net Increase/(Decrease) in Cash...         (24,353)         (44,246)
    Cash--Beginning of Year...........          71,737          115,983 
                                       ---------------------------------
    Cash--End of Year.................          47,384           71,737 
                                                                        
    The accompanying notes are an                                       
 integral part of these statements.                                     
                                                                        
RECONCILIATION OF NET MARGINS TO NET                                    
 CASH PROVIDED BY OPERATING                                             
 ACTIVITIES:                                                            
Net Margins...........................        $255,250          $83,323 
    Adjustments to Reconcile Net                                        
     Margins to Net Cash Provided by                                    
     Operating Activities:                                              
        Depreciation and Amortization.         288,389          279,776 
        G&T and Other Capital Credits                                   
         (Non-Cash)...................         (14,460)         (17,500)
        Patronage Capital Credits-                                      
         NRUCFC (Non-Cash)............          (1,528)          (1,200)
        Provision for Uncollectible                                     
         Accounts Receivable..........             274             (526)
    (Increase)/Decrease In:                                             
        Customer and Other Accounts                                     
         Receivable...................          (1,546)           2,523 
        Current and Accrued Assets-                                     
         Other........................              79              112 
    Increase/(Decrease) In:                                             
        Accounts Payable..............          12,102            5,117 
        Accrued Taxes.................           1,812            2,306 
        Deferred Energy Prepayments...           3,629            2,246 
        Current and Accrued                                             
         Liabilities-Other............           5,824           (1,023)
    Deferred Interest Expense.........            (418)            (525)
                                       ---------------------------------
      Total Adjustments...............         294,157          271,306 
                                       =================================
Net Cash Provided by Operating                                          
 Activities...........................         549,407          354,629 
------------------------------------------------------------------------

    The accompanying notes are an integral part of these statements.

    Center County Electric Cooperative Notes to Financial Statements    
                 December 31, 19X9 and December 31, 19X8                
------------------------------------------------------------------------
                                              19X9             19X8     
------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                          
    Include a brief description of the reporting entity's significant   
     accounting policies in accordance with Accounting Principles Board 
     Opinion No. 22, Disclosure of Accounting Policies.                 
    Disclosure of accounting policies should identify and describe the  
     accounting principles followed by the borrower and the methods of  
     applying those principles that materially affect the determination 
     of financial position, cash flow, and results of operations.       
    Disclosures of accounting policies do not have to be duplicated in  
     this section if presented elsewhere as an integral part of the     
     financial statements.                                              
2. ASSETS PLEDGED:                                                      
    Substantially all assets are pledged as security for long-term debt 
     to RUS.                                                            
3. ELECTRIC PLANT AND DEPRECIATION RATES AND PROCEDURES:                
    Listed below are the major classes of the electric plant as of      
     December 31, 19X9, and 19X8:                                       
Intangible Plant......................          $2,194           $2,194 
Distribution Plant....................       9,011,036        8,873,957 
General Plant.........................         511,416          489,113 
                                       ---------------------------------
Electric Plant in Service.............       9,524,646        9,365,264 

[[Page 38732]]

                                                                        
Construction Work in Progress.........         407,943          317,166 
                                             9,932,589        9,682,430 
                                       =================================
Provision has been made for depreciation of distribution plant at a     
 straight-line composite rate of 2.86 percent per annum.                
General Plant depreciation rates have been applied on a straight-line   
 basis as follows:                                                      
    Structures and Improvement........            2.5%                  
    Office Furniture..................            6.0%                  
    Transportation Equipment..........           14.0%                  
    Power Operated Equipment..........           12.0%                  
    Other General Plant...............            4.0%                  
    Communications Equipment..........            6.0%                  
4. INVESTMENTS IN ASSOCIATED ORGANIZATIONS:                             
    Investments in associated organizations consisted of the following  
     at December 31, 19X9 and 19X8:                                     
        Capital Term Certificates of                                    
         the National Rural Utilities                                   
         Cooperative Finance                                            
         Corporation (NRUCFC).........        $385,193         $288,261 
        NRUCFC Patronage Capital                                        
         Credits......................           5,065            3,537 
        Other.........................           1,000            1,000 
                                       ---------------------------------
                                               391,258          292,798 
                                       =================================
 5. DEFERRED CHARGES:                                                   
    Following is a summary of amounts recorded as deferred charges as of
     December 31, 19X9 and 19X8:                                        
    Preliminary Surveys 19X0--X1 Work                                   
     Plan.............................           5,666            1,762 
                                       =================================
 6. PATRONAGE CAPITAL:                                                  
    At December 31, 19X9 and 19X8, patronage capital consisted of:      
        Assignable                            $255,250          $83,323 
        Assigned to Date..............       1,952,448        1,869,125 
                                       ---------------------------------
                                             2,207,698        1,952,448 
        Less: Retirements to Date.....         445,900          425,615 
                                       ---------------------------------
                                             1,761,798        1,526,833 
                                       =================================
     Under the provisions of the Mortgage Agreement, until the equities 
     and margins equal or exceed forty percent of the total assets of   
     the cooperative, the return to patrons of contributed capital is   
     generally limited to twenty-five percent of the patronage capital  
     or margins received by the cooperative in the prior calendar year. 
     The equities and margins of the cooperative represent 25.3 percent 
     of the total assets at balance sheet date. Capital credit          
     retirements in the amount of $20,285 were paid in 19X9.            
7. OTHER EQUITIES:                                                      
    At December 31, 19X9 and 19X8,                                      
     other equities consisted of:                                       
        Retired Capital Credits--Gain.         $36,190          $34,990 
        Donated Capital...............          17,457              910 
                                       ---------------------------------
                                                53,647           35,900 
                                       =================================
 8. MORTGAGE NOTES--RUS:                                                
    Long-term debt is represented by mortgage notes payable to the      
     United States of America. Following is a summary of outstanding    
     long-term debt as of December 31, 19X9 and 19X8:                   
        2% Notes due March 31, 19X5...      $1,057,155       $1,098,700 
        2% Notes due December 31, 19X6       2,485,927        2,502,370 
        5% Notes due December 31, 19X6       1,851,033        1,935,315 
        Less: Current Maturities......        (145,000)        (140,000)
                                       ---------------------------------
                                             5,249,115        5,396,385 
                                       =================================
Unadvanced loan funds of $285,600 are available to the cooperative on   
 loan commitments from RUS.                                             
    Principal and interest installments on the above notes are due      
     quarterly in equal amounts of $99,600. As of December 31, 19X9,    
     annual maturities of long-term debt outstanding for the next five  
     years are as follows:                                              
        19X0..........................        $145,000                  
        19X1..........................         150,000                  
        19X2..........................         151,500                  
        19X3..........................         154,000                  
        19X4..........................         155,000                  
    Advance payments of $252,300 may be applied to the installments.    
9. PENSION PLAN:                                                        
    Substantially all of the employees of the Cooperative are covered by
     the ABC Retirement and Security Program, a multiemployer plan.     
     Pension expense for the years ended 19X9 and 19X8 was $22,400.00   
     and $20,400.00, respectively.                                      
10. DEFERRED CREDITS:                                                   
    Following is a summary of the amounts recorded as deferred credits  
     as of December 31, 19X9 and 19X8:                                  
        Customer Energy Payments......          $6,694           $3,065 
        Inventory Adjustment..........           5,210            7,500 
                                       ---------------------------------

[[Page 38733]]

                                                                        
                                                11,904           10,565 
                                       =================================
 11. LITIGATION:                                                        
    The cooperative is a defendant in an action in which the plaintiff  
     claims damages totaling $200,000 for personal injuries sustained.  
     The action has been dismissed by the District Court, but is on     
     appeal before the State Supreme Court. Management is of the opinion
     that no liability will be incurred by the cooperative as a result  
     of this action.                                                    
12. COMMITMENTS:                                                        
    Under its wholesale power agreement, the cooperative is committed to
     purchase its electric power and energy requirements from Central   
     Power Cooperative, Inc., until December 31, 19XX. The rates paid   
     for such purchases are subject to review annually.                 
------------------------------------------------------------------------

    14. Appendix C To Part 1773 is revised to read as follows:

Appendix C to Part 1773--Illustrative Independent Auditor's 
Management Letter for Electric Borrowers

    RUS requires that CPAs auditing RUS borrowers provide a 
management letter in accordance with Sec. 1773.33. This letter must 
be signed by the CPA, bear the same date as the auditor's report, 
and be addressed to the borrower's board of directors.
    Illustrative Independent Auditors' Management Letter for 
Electric Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]

[City, State]

    We have audited the financial statements of [Name of Borrower] 
for the year ended December 31, 1998, and have issued our report 
thereon dated March 2, 1999. We conducted our audit in accordance 
with generally accepted auditing standards, the standards applicable 
to financial audits contained in Government Auditing Standards 
issued by the Comptroller General of the United States, and 7 CFR 
part 1773, Policy on Audits of Rural Utilities Service (RUS) 
Borrowers. Those standards require that we plan and perform the 
audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement.
    In planning and performing our audit of the financial statements 
of [Name of Borrower] for the year ended December 31, 1998, we 
considered its internal control over financial reporting in order to 
determine our auditing procedures for the purpose of expressing an 
opinion on the financial statements and not to provide assurance on 
the internal control over financial reporting.
    A description of the responsibility of management for 
establishing and maintaining the internal control over financial 
reporting and the objectives of and inherent limitations in such 
control is set forth in our independent auditors' report on 
compliance and on internal control over financial reporting dated 
March 2, 1999, and should be read in conjunction with this report.
    Our consideration of the internal control over financial 
reporting would not necessarily disclose all matters in the internal 
control over financial reporting that might be material weaknesses. 
A material weakness is a condition in which the design or operation 
of one or more of the internal control components does not reduce to 
a relatively low level the risk that misstatements in amounts that 
would be material in relation to the financial statements being 
audited may occur and not be detected within a timely period by 
employees in the normal course of performing their assigned 
functions. We noted no matters involving the internal control over 
financial reporting that we consider to be material weaknesses. [If 
a material weakness was noted, refer the reader to the independent 
auditors' report on compliance and on internal control over 
financial reportingstructure.]
    7 CFR 1773.33 requires comments on specific aspects of the 
internal control over financial reporting, compliance with specific 
RUS loan and security instrument provisions, and other additional 
matters. We have grouped our comments accordingly. In addition to 
obtaining reasonable assurance about whether the financial 
statements are free from material misstatements, at your request, we 
performed tests of specific aspects of the internal control over 
financial reporting, of compliance with specific RUS loan and 
security instrument provisions, and of additional matters. The 
specific aspects of the internal control over financial reporting, 
compliance with specific RUS loan and security instrument 
provisions, and additional matters tested include, among other 
things, the accounting procedures and records, materials control, 
compliance with specific RUS loan and security instrument provisions 
set forth in 7 CFR 1773.33 (e)(1), related party transactions, 
depreciation rates, and a schedule of deferred debits and credits, 
upon which we express an opinion. In addition, our audit of the 
financial statements also included the procedures specified in 7 CFR 
1773.38--.45. Our objective was not to provide an opinion on these 
specific aspects of the internal control over financial reporting, 
compliance with specific RUS loan and security instrument 
provisions, or additional matters, and accordingly, we express no 
opinion thereon.
    No reports (other than our independent auditors' report and our 
independent auditors' report on compliance and on internal control 
over financial reporting, all dated March 2, 1999) or summary of 
recommendations related to our audit have been furnished to 
management.
    Our comments on specific aspects of the internal control over 
financial reporting, compliance with specific RUS loan and security 
instrument provisions, and other additional matters as required by 7 
CFR 1773.33 are presented below.

Comments on Certain Specific Aspects of the Internal Control Over 
Financial Reporting

    We noted no matters regarding [Name of Borrower]'s internal 
control over financial reporting and its operation that we consider 
to be a material weakness as previously defined with respect to:

--The accounting procedures and records [list other comments];
--The process for accumulating and recording labor, material, and 
overhead costs, and the distribution of these costs to construction, 
retirement, and maintenance or other expense accounts [list other 
comments]; and
--The materials control [list other comments].

Comments on Compliance With Specific RUS Loan and Security Instrument 
Provisions

    Management's responsibility for compliance with laws, 
regulations, contracts, and grants is set forth in our independent 
auditors' report on compliance and on internal control over 
financial reporting dated March 2, 1999, and should be read in 
conjunction with this report. At your request, we have performed the 
procedures enumerated below with respect to compliance with certain 
provisions of laws, regulations, contracts, and grants. The 
procedures we performed are summarized as follows:

--Procedure performed with respect to the requirement to maintain 
all funds from loans made or guaranteed by RUS in institutions whose 
accounts are insured by an Agency of the Federal government:

    1. Obtained information from financial institutions with which 
[Name of Borrower] maintains cash proceeds from loans that indicated 
that the institutions are insured by an Agency of the Federal 
government.

--Procedures performed with respect to the requirement for a 
borrower to obtain written approval of the mortgagee to enter into 
any contract for the operation or maintenance of property, or for 
the use of mortgaged property by others for the year ended December 
31, 19X5 of [Name of Borrower]:


[[Page 38734]]


    1. Obtained and read a borrower-prepared schedule of new written 
contracts entered into during the year for the operation or 
maintenance of its property, or for the use of its property by 
others as defined in Sec. 1773.334 (e)(1)(ii).
    2. Reviewed Board of Director minutes to ascertain whether 
board-approved written contracts are included in the borrower-
prepared schedule.
    3. Noted the existence of written RUS [and other mortgagee] 
approval of each contract listed by the borrower.

--Procedure performed with respect to the requirement to submit RUS 
Form 7 or Form 12 to the RUS:

    1. Agreed amounts reported in Form 7 or Form 12 to [Name of 
Borrower]'s records.
    The results of our tests indicate that, with respect to the 
items tested, [Name of Borrower] complied, except as noted below, in 
all material respects, with the specific RUS loan and security 
instrument provisions referred to below. The specific provisions 
tested, as well as any exceptions noted, include the requirements 
that:

--The borrower maintains all funds from loans made or guaranteed by 
RUS in institutions whose accounts are insured by an agency of the 
Federal government [list all exceptions];
--The borrower has obtained written approval of the RUS [and other 
mortgagees] to enter into any contract for the operation or 
maintenance of property, or for the use of mortgaged property by 
others as defined in Sec. 1773.334 (e)(1)(ii) [list all exceptions]; 
and
--The borrower has submitted its Form 7 or Form 12 to the RUS and 
the Form 7 or Form 12, Financial and Statistical Report, as of 
December 31, 1998, represented by the borrower as having been 
submitted to RUS is in agreement with the [Name of Borrower]'s 
audited records in all material respects [list all exceptions] [or 
if the audit year end is other than December 31], appears reasonable 
based upon the audit procedures performed [list all exceptions].

Comments on Other Additional Matters

    In connection with our audit of the financial statements of 
[Name of Borrower], nothing came to our attention that caused us to 
believe that [Name of Borrower] failed to comply with respect to:

--The reconciliation of subsidiary plant records to the controlling 
general ledger plant accounts addressed at 7 CFR 1773.334 (c)(1) 
[list all exceptions];
--The clearing of the construction accounts and the accrual of 
depreciation on completed construction addressed at 7 CFR 1773.334 
(c)(2) [list all exceptions];
--The retirement of plant addressed at 7 CFR 1773.33 (c)(3) and (4) 
[list all exceptions];
--Sales of plant material, or scrap addressed at 7 CFR 1773.33 
(c)(5) [list all exceptions];
--The disclosure of material related party transactions, in 
accordance with Statement of Financial Accounting Standards No. 57, 
Related Party Transactions, for the year ended December 31, 1998, in 
the financial statements referenced in the first paragraph of this 
report addressed at 7 CFR 1773.33 (f) [list all exceptions];
--The depreciation rates addressed at 7 CFR 1773.334 (g) [list all 
exceptions]; and
--The detailed schedule of deferred debits and deferred credits.

    Our audit was made for the purpose of forming an opinion on the 
basic financial statements taken as a whole. The detailed schedule 
of deferred debits and deferred credits required by 7 CFR 1773.33 
(h) and provided below is presented for purposes of additional 
analysis and is not a required part of the basic financial 
statements. This information has been subjected to the auditing 
procedures applied in our audit of the basic financial statements 
and, in our opinion, is fairly stated in all material respects in 
relation to the basic financial statements taken as a whole.
    [The detailed schedule of deferred debits and deferred credits 
would be included here. The total amount of deferred debits and 
deferred credits as reported in the schedule must agree with the 
totals reported on the Balance Sheet under the specific captions of 
``Deferred Debits'' and ``Deferred Credits''. Those items that have 
been approved, in writing, by RUS should be clearly indicated.]
    This report is intended solely for the information and use of 
the board of directors, management, and the RUS and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

    15. Appendix D To Part 1773 is added to read as follows:

Appendix D to Part 1773--Illustrative Independent Auditor's 
Management Letter for Telecommunications Borrowers

    RUS requires that CPAs auditing RUS borrowers provide a 
management letter in accordance with Sec. 1773.33. This letter must 
be signed by the CPA, bear the same date as the auditor's report, 
and be addressed to the borrower's board of directors.

Illustrative Independent Auditors' Management Letter for 
Telecommunications Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]
[City, State]

    We have audited the financial statements of [Name of Borrower] 
for the year ended December 31, 1998, and have issued our report 
thereon dated March 2, 1999. We conducted our audit in accordance 
with generally accepted auditing standards, the standards applicable 
to financial audits contained in Government Auditing Standards 
issued by the Comptroller General of the United States, and 7 CFR 
part 1773, Policy on Audits of Rural Utilities Service (RUS) 
Borrowers. Those standards require that we plan and perform the 
audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement.
    In planning and performing our audit of the financial statements 
of [Name of Borrower] for the year ended December 31, 1998, we 
considered its internal control over financial reporting in order to 
determine our auditing procedures for the purpose of expressing an 
opinion on the financial statements and not to provide assurance on 
the internal control over financial reporting.
    A description of the responsibility of management for 
establishing and maintaining the internal control over financial 
reporting and the objectives of and inherent limitations in such 
control is set forth in our independent auditors' report on 
compliance and on internal control over financial reporting dated 
March 2, 1999, and should be read in conjunction with this report.
    Our consideration of the internal control over financial 
reporting would not necessarily disclose all matters in the internal 
control over financial reporting that might be material weaknesses. 
A material weakness is a condition in which the design or operation 
of one or more of the internal control components does not reduce to 
a relatively low level the risk that misstatements in amounts that 
would be material in relation to the financial statements being 
audited may occur and not be detected within a timely period by 
employees in the normal course of performing their assigned 
functions. We noted no matters involving the internal control over 
financial reporting that we consider to be material weaknesses. [If 
a material weakness was noted, refer the reader to the independent 
auditors' report on compliance and on internal control over 
financial reporting.]
    7 CFR 1773.33 requires comments on specific aspects of the 
internal control over financial reporting, compliance with specific 
RUS loan and security instrument provisions, and other additional 
matters. We have grouped our comments accordingly. In addition to 
obtaining reasonable assurance about whether the financial 
statements are free from material misstatements, at your request, we 
performed tests of specific aspects of the internal control over 
financial reporting, of compliance with specific RUS loan and 
security instrument provisions, and of additional matters. The 
specific aspects of the internal control over financial reporting, 
compliance with specific RUS loan and security instrument 
provisions, and additional matters tested include, among other 
things, the accounting procedures and records, materials control, 
compliance with specific RUS loan and security instrument provisions 
set forth in 7 CFR 1773.33 (e)(2), and related party transactions. 
In addition, our audit of the financial statements also included the 
procedures specified in 7 CFR 1773.38-.45. Our objective was not to 
provide an opinion on these specific aspects of the internal control 
over financial reporting, compliance with specific RUS loan and 
security instrument provisions, or additional matters, and 
accordingly, we express no opinion thereon.
    No reports (other than our independent auditors' report, and our 
independent auditors' report on compliance and on internal control 
over financial reporting, all dated March 2, 1999) or summary of 
recommendations related to our audit have been furnished to 
management.

[[Page 38735]]

    Our comments on specific aspects of the internal control over 
financial reporting, compliance with specific RUS loan and security 
instrument provisions, and other additional matters as required by 7 
CFR 1773.33 are presented below.

Comments On Certain Specific Aspects of the Internal Control Over 
Financial Reporting

    We noted no matters regarding [Name of Borrower]'s internal 
control over financial reporting and its operation that we consider 
to be a material weakness as previously defined with respect to:

--The accounting procedures and records [list other comments];
--The process for accumulating and recording labor, material, and 
overhead costs, and the distribution of these costs to construction, 
retirement, and maintenance or other expense accounts [list other 
comments]; and
--The materials control [list other comments].

Comments On Compliance With Specific RUS Loan and Security Instrument 
Provisions

    Management's responsibility for compliance with laws, 
regulations, contracts, and grants is set forth in our independent 
auditors' report on compliance and on internal control over 
financial reporting dated March 2, 1999, and should be read in 
conjunction with this report. At your request, we have performed the 
procedures enumerated below with respect to compliance with certain 
provisions of laws, regulations, contracts, and grants. The 
procedures we performed are summarized as follows:

--Procedure performed with respect to the requirement to maintain 
all funds in institutions whose accounts are insured by an Agency of 
the Federal government:

    1. Obtained information from financial institutions with which 
[Name of Borrower] maintains funds that indicated that the 
institutions are insured by an agency of the Federal government.

--Procedures performed with respect to the requirement for a 
borrower to obtain written approval of the mortgagee to enter into 
any contract for the operation or maintenance of property, for the 
use of mortgaged property by others, or for services pertaining to 
toll traffic, operator assistance, or switching for the year ended 
December 31, 1998 of [Name of Borrower]:

    1. Obtained and read a borrower-prepared schedule of new written 
contracts entered into during the year for the operation or 
maintenance of its property, for the use of its property by others, 
or for services pertaining to toll traffic, operator assistance, or 
switching as defined in Sec. 1773.33 (e)(2)(i).
    2. Reviewed Board of Director minutes to ascertain whether 
board-approved written contracts are included in the borrower-
prepared schedule.
    3. Noted the existence of written RUS [and other mortgagee] 
approval of each contract listed by the borrower.

--Procedure performed with respect to the requirement to submit RUS 
Form 479 to the RUS:

    1. Agreed amounts reported in Form 479 to [Name of Borrower]'s 
records.

--Procedure performed with respect to funded reserve and net plant 
to secured debt ratio requirements:

    1. Reviewed loan security instrument to ascertain which 
condition was elected by the borrower.
    2. If the funded reserve option was selected, review financial 
institution records to verify the existence of a separate bank 
account for the reserve, and determine that it was funded within one 
year of approval of release of funds and that it remained funded 
over the composite economic life of the facilities financed.
    3. If the net plant to secured debt ratio option was selected, 
calculate the ratio and confirm that the 1.2 ratio was achieved one 
year following the first advance of loan funds.
    The results of our tests indicate that, with respect to the 
items tested, [Name of Borrower] complied, except as noted below, in 
all material respects, with the specific RUS loan and security 
instrument provisions referred to below. The specific provisions 
tested, as well as any exceptions noted, include the requirements 
that:

--The borrower maintains all funds in institutions whose accounts 
are insured by an agency of the Federal government [list all 
exceptions];
--The borrower has obtained written approval of the RUS [and other 
mortgagees] to enter into any contract for the operation or 
maintenance of property, for the use of mortgaged property by 
others, or for services pertaining to toll traffic, operator 
assistance, or switching as defined in Sec. 1773.33(e)(2)(i) [list 
all exceptions]; and
--The borrower has submitted its Form 479 to the RUS and the Form 
479, Financial and Statistical Report, as of December 31, 1999, 
represented by the borrower as having been submitted to RUS is in 
agreement with the [Name of Borrower]'s audited records in all 
material respects [list all exceptions] [or if the audit year end is 
other than December 31], appears reasonable based upon the audit 
procedures performed [list all exceptions].

Comments on Other Additional Matters

    In connection with our audit of the financial statements of 
[Name of Borrower], nothing came to our attention that caused us to 
believe that [Name of Borrower] failed to comply with respect to:

--The reconciliation of subsidiary plant records to the controlling 
general ledger plant accounts addressed at 7 CFR 1773.33(c)(1) [list 
all exceptions];
--The clearing of the construction accounts and the accrual of 
depreciation on completed construction addressed at 7 CFR 
1773.33(c)(2) [list all exceptions];
--The retirement of plant addressed at 7 CFR 1773.33(c)(3) and (4) 
[list all exceptions];
--Sales of plant material, or scrap addressed at 7 CFR 1773.33(c)(5) 
[list all exceptions]; and
--The disclosure of material related party transactions, in 
accordance with Statement of Financial Accounting Standards No. 57, 
Related Party Transactions, for the year ended December 31, 1999, in 
the financial statements referenced in the first paragraph of this 
report addressed at 7 CFR 1773.33(f) [list all exceptions].

    This report is intended solely for the information and use of 
the board of directors, management, and the RUS and supplemental 
lenders. However, this report is a matter of public record and its 
distribution is not limited.

Certified Public Accountants

    Dated: July 8, 1998.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 98-18758 Filed 7-16-98; 8:45 am]
BILLING CODE 3410-15-P