[Federal Register Volume 66, Number 98 (Monday, May 21, 2001)]
[Rules and Regulations]
[Pages 27829-27833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12129]



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 Rules and Regulations
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  Federal Register / Vol. 66, No. 98 / Monday, May 21, 2001 / Rules and 
Regulations  

[[Page 27829]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1773

RIN 0572-AB66


Policy on Audits of RUS Borrowers; Management Letter

AGENCY: Rural Utilities Service, USDA.

ACTION: Direct final rule.

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

SUMMARY: The Rural Utilities Service (RUS) is amending its regulations 
by revising certain requirements regarding the management letter to be 
provided to RUS by certified public accountants (CPAs) as part of 
audits of RUS borrowers.

DATES: This rule will become effective July 5, 2001, unless we receive 
written adverse comments or written notice of intent to submit adverse 
comments on or before June 20, 2001. If we receive such comments or 
notice, we will publish a timely document in the Federal Register 
withdrawing the rule. A second public comment period will not be held. 
Parties interested in commenting on this action should do so at this 
time.

ADDRESSES: Submit adverse comments or notice of intent to submit 
adverse comments to F. Lamont Heppe, Jr., Director, Program Development 
and Regulatory Analysis, Staff, Rural Utilities Service, U.S. 
Department of Agriculture, 1400 Independence Ave., SW., STOP 1522, 
Washington, DC 20250-1522. RUS requests a signed original and three 
copies of all comments (7 CFR 1700.4). All comments received will be 
made available for public inspection at room 4030, South Building, 
Washington, DC, between the 8 a.m. and 4 p.m. (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Richard Annan, Chief, Technical 
Accounting and Auditing Staff, Program Accounting Services Division, 
Rural Utilities Service, U.S. Department of Agriculture, 1400 
Independence Ave., SW., STOP 1523, Washington, DC 20250-1523. 
Telephone: 202-720-5227.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for the 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by the Office of Management and Budget (OMB).

Executive Order 12372

    This rule is excluded from the scope of Executive Order 12372, 
Intergovernmental Consultation, which may require consultation with 
state and local offices. See the final rule related notice entitled 
``Department Programs and Activities Excluded from Executive Order 
12372,'' (50 FR 47034).

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. RUS has determined that this rule meets the applicable 
standards provided in section 3 of the Executive Order. In addition, 
all State and local laws and regulations that are in conflict with this 
rule will be preempted; no retroactive effect will be given to this 
rule; and, in accordance with section 212(e) of the Department of 
Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(e)) 
administrative appeal procedures, if any are required, must be 
exhausted before an action against the Department or its agencies.

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.). The 
RUS loan programs provide borrowers with loans at interest rates and 
terms that are more favorable than those generally available from the 
private sector. Borrowers, as a result of obtaining federal financing, 
receive economic benefits that exceed any direct cost associated with 
RUS regulations and requirements.

National Environmental Policy Act Certification

    The Administrator of RUS has determined that this 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 rule is listed in the Catalog of 
Federal Domestic Assistance programs under Nos. 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 
20402-9325, telephone number (202) 512-1800.

Information Collection and Recordkeeping Requirements

    The reporting and recordkeeping requirements contained in this rule 
have been approved by the Office of Management and Budget (OMB) under 
OMB Control Number 0572-0095, pursuant to the Paperwork Reduction Act 
of 1995 (44 U.S.C. Chapter 35).
    Send questions or comments regarding this burden or any other 
aspect of these collections of information, including suggestions for 
reducing the burden, to F. Lamont Heppe, Jr., Director, Program 
Development and Regulatory Analysis, Rural Utilities Service, USDA, 
1400 Independence Ave., SW., Stop 1522, Washington, DC 20250-1522.

Unfunded Mandates

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

Background

    Title 7 part 1773 implements the standard RUS security instrument 
provision requiring RUS electric and telecommunications borrowers to 
prepare and furnish to RUS, at least once during each 12-month period, 
a full and complete report of its financial condition, operations, and 
cash flows,

[[Page 27830]]

in form and substance satisfactory to RUS; audited and certified by an 
independent Certified Public Accountant (CPA), satisfactory to RUS, and 
accompanied by a report of such audit, in form and substance 
satisfactory to RUS.
    This rule revises requirements for the management letter. Section 
1773.33(c) is revised to address continuing property records (CPRs) 
rather than the term plant records. In addition, the requirement that 
the CPA state whether the CPRs have been established, is expanded 
wherein the CPA must state that the CPRs are established, maintained on 
a current basis, and are reconciled to the general ledger plant 
accounts. The requirements for the CPA to determine that the borrower 
secured RUS approval for the sale of plant in Sec. 1773(c)(5) is 
expanded to include the sale, lease, or transfer of assets secured 
under the mortgage and to state whether the proceeds were handled in 
conformance with RUS requirements.
    The following requirements under Sec. 1773.33 are eliminated: (1) 
The requirement for the CPA to determine that loan funds were deposited 
in banks designated in the loan documents; (2) a corresponding 
requirement in the telecommunications management letter; (3) the 
requirement for the CPA to determine that the borrower has complied 
with the RUS requirement for approval of any lease of a building or 
land, standard traffic settlement agreement, billing and collecting 
agreements, toll pooling arrangements, directory service agreements, 
and joint-use agreement; and (4) the requirement for the CPA to 
determine borrower compliance with the requirement to maintain a net 
plant to secured debt ratio or a funded reserve for certain loans 
wherein the maturity period exceeds the economic life of the plant 
facilities being financed.
    Section 1773.33, Management Letter, specifies the minimum 
requirements for the CPA's management letter. RUS borrowers have 
increasingly diversified into other utility and nonutility related 
activities through the formation of subsidiary and affiliated 
companies. RUS has need of information on investments in these 
subsidiary and affiliated companies to assist in its efforts to monitor 
loan security issues and respond to claims of cross subsidization. A 
new requirement for the CPA to provide a detailed analysis of 
borrowers' investments is therefore being added to the management 
letter requirements. The CPA is required to disclose certain general 
and financial information regarding each of a borrower's investments in 
subsidiary and affiliated companies accounted for on the cost or equity 
basis. This information is readily available in the investment 
subsidiary records.
    In previous versions of part 1773 the sample reports, financial 
statements, and management letters were contained in four appendices, 
two for electric borrowers and two for telecommunications borrowers. 
Beginning with this revision of part 1773, the appendices will no 
longer be codified in the Code of Federal Regulations. The appendices 
will be available in new RUS Bulletin 1773-1, which will contain all of 
7 CFR part 1773 and the appendices. Appendix A will contain the sample 
reports, financial statements and management letter for electric 
borrowers while Appendix B will contain similar sample for 
telecommunications borrowers. The exhibits of the management letters, 
which are included in the appendices, are attached to this notice for 
information only. Publishing part 1773 in bulletin form will provide 
the RUS audit policy in a user-friendly format. A single copy of this 
publication will be provided to all RUS borrowers and certified public 
accounts approved to perform audits of RUS borrowers and will be 
available at http://www.usda.gov/rus/ruswide.htm.

List of Subjects in 7 CFR Part 1773

    Accounting, Electric power, Loan programs--communications, Loan 
programs--energy, Reporting and recordkeeping requirements, Rural 
areas, Telephone.

    For the reasons set forth in the preamble, RUS amends 7 CFR Chapter 
XVII as follows:

PART 1773--POLICY ON AUDITS OF RUS BORROWERS

    1. The authority citation for Part 1773 is revised to read as 
follows:

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.


Sec. 1773.33  [Amended]

    2. Amend Sec. 1773.33 by:
    A. Removing paragraphs (e)(1)(i), (e)(2)(i), (e)(2)(i)(B) through 
(e)(2)(ii), and (e)(2)(iv);
    B. Redesignate paragraphs as listed in the table below:

------------------------------------------------------------------------
                   From                                  To
------------------------------------------------------------------------
(e)(1)(ii)................................  (e)(1)(i)
(e)(1)(iii)...............................  (e)(1)(ii)
(e)(2)(i)(A)..............................  (e)(2)(i)
(e)(2)(iii)...............................  (e)(2)(ii)
------------------------------------------------------------------------

    C. Revising paragraphs (c)(1), (c)(5), (e) introductory text, 
(e)(1) introductory text, and (e)(2) introductory text and redesignated 
paragraphs (e)(1)(i) and (e)(2)(i); and
    D. Adding a new paragraph (i).
    The revisions and additions read as follows:


Sec. 1773.33  Management letter.

* * * * *
    (c) * * *
    (1) Whether continuing property records (CPRs) have been 
established, are updated on a current basis, at least annually, and are 
reconciled with the controlling general ledger plant accounts;
* * * * *
    (5) Whether RUS approval was obtained for the sale, lease or 
transfer of capital assets secured under the mortgage when approval is 
required, and whether proceeds from the sale or lease of plant, 
material or scrap were handled in conformance with RUS requirements.
* * * * *
    (e) Compliance with RUS loan and security instrument provisions. 
State whether the following provisions of RUS' loan and security 
instruments have been complied with:
    (1) For electric borrowers, provisions related to:
    (i) The requirements 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:
* * * * *
    (2) For telecommunications borrowers, provisions relating to the 
requirement for a borrower to obtain written approval of the mortgagees 
to enter into:
    (i) Any contract, agreement or lease between the borrower and an 
affiliate other than as allowed under 7 CFR part 1744, subpart E;
* * * * *
    (i) Investments. For electric and telecommunications borrowers, 
provide a detailed schedule of all investments in subsidiary and 
affiliated companies accounted for on either the cost or equity basis. 
This requirement includes investments in corporations, limited 
liability corporations and partnerships, joint ventures, etc. For all 
investments list the name of the entity, ownership percentage, and the 
principal business in which the entity is engaged. For investments 
recorded on the cost basis include the original investment,

[[Page 27831]]

advances, dividends declared or paid in the current and prior years and 
the net investment. For investments recorded on the equity basis 
include the ownership percentage, original investment, advances, and 
current and prior years' earnings and losses, including accumulated 
losses in excess of the original investment.

    Dated: May 8, 2001.
Blaine D. Stockton,
Acting Administrator, Rural Utilities Service.

The Following Appendixes Will Not Appear in the Code of Federal 
Regulations

Exhibit 5--Illustrative Independent Auditor's Management Letter for 
Electric Borrowers to Appendix A to RUS Bulletin 1773-1, Sample 
Auditor's Report for an Electric Cooperative

Exhibit 5--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, 20X2
Board of Directors
Center County Electric Energy Association, Inc.
[City, State]
    We have audited the financial statements of Center County 
Electric Energy Association, Inc. for the year ended December 31, 
20X1, and have issued our report thereon dated March 2, 20X2. 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 Center County Electric Energy Association, Inc. for the year 
ended December 31, 20X1, 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.
    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.]
    Section 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 Sec. 1773.33(e)(1), related party transactions, 
depreciation rates, a schedule of deferred debits and credits, and a 
schedule of investments upon which we express an opinion. In 
addition, our audit of the financial statements also included the 
procedures specified in Sec. 1773.38 through 1773.45. 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, 2002 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 
Sec. 1773.33 are presented below.

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

    We noted no matters regarding Center County Electric Energy 
Association, Inc.'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

    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:

--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, 20X1:

    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. 1773.33(e)(1)(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 7 or Form 12 to the RUS:

    1. Agreed amounts reported in Form 7 or Form 12 to Center County 
Electric Energy Association, Inc.'s records.
    The results of our tests indicate that, with respect to the 
items tested, Center County Electric Energy Association, Inc. 
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 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. 1773.33(e)(1)(i) [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, 20X1, represented by the borrower as having been 
submitted to RUS is in agreement with the Center County Electric 
Energy Association, Inc.'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 
Center County Electric Energy Association, Inc., nothing came to our 
attention that caused us to believe that Center County Electric 
Energy Association, Inc. failed to comply with respect to:

--The reconciliation of continuing property records to the 
controlling general ledger

[[Page 27832]]

plant accounts addressed at Sec. 1773.33(c)(1) [list all 
exceptions];
--The clearing of the construction accounts and the accrual of 
depreciation on completed construction addressed at 
Sec. 1773.33(c)(2) [list all exceptions];
--The retirement of plant addressed at Sec. 1773.33(c)(3) and (4) 
[list all exceptions];
--Approval of the sale, lease, or transfer of capital assets and 
disposition of proceeds for the sale or lease of plant, material, or 
scrap addressed at Sec. 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, 2001, in 
the financial statements referenced in the first paragraph of this 
report addressed at Sec. 1773.33(f) [list all exceptions];
--The depreciation rates addressed at Sec. 1773.33(g) [list all 
exceptions];
--The detailed schedule of deferred debits and deferred credits; and
--The detailed schedule of investments.

    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 Sec. 1773.33(h) 
and the detailed schedule of investments required by 
Sec. 1773.33(i), and provided below, are presented for purposes of 
additional analysis and are 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.]
    [The detailed schedule of investments would be included here. 
The total of the investment in each company reported must agree with 
the investment subsidiary accounts.]
    This report is intended solely for the information and use of 
the board of directors, management, and the RUS and supplemental 
lenders and is not intended to be and should not be used by anyone 
other than these specified parties. However, this report is a matter 
of public record and its distribution is not limited.

Certified Public Accountants

Exhibit 5--Illustrative Independent Auditor's Management Letter for 
Telecommunications Borrowers to Appendix B to RUS bulletin 1773-1, 
sample auditor's report for a telecommunications Cooperative

Exhibit 5--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, 2002
Board of Directors
Center County
Telecommunications Systems, Inc.
(City, State)
    We have audited the financial statements of Center County 
Telecommunications Systems, Inc. for the year ended December 31, 
20X1, and have issued our report thereon dated March 2, 20X2. 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 Center County Telecommunications Systems, Inc. for the year ended 
December 31, 20X1, 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.
    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.]
    Section 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 Sec. 1773.33(e)(2), and related party transactions and 
investments. In addition, our audit of the financial statements also 
included the procedures specified in Sec. 1773.38 through 1773.45. 
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, 2002 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 
Sec. 1773.33 are presented below.

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

    We noted no matters regarding Center County Telecommunications 
Systems, Inc.'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

    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:
--Procedures performed with respect to the requirement for a 
borrower to obtain written approval of the mortgagee to enter into 
any contract, agreement or lease between the borrower and an 
affiliate for the year ended December 31, 2001:

    1. Obtained and read a borrower-prepared schedule of new written 
contracts, agreements or leases entered into during the year between 
the borrower and an affiliate 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.


[[Page 27833]]


    --Procedure performed with respect to the requirement to submit 
RUS Form 479 to the RUS:
    1. Agreed amounts reported in Form 479 to Center County 
Telecommunications Systems, Inc.'s records.
    The results of our tests indicate that, with respect to the 
items tested, Center County Telecommunications Systems, Inc. 
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 has obtained written approval of the RUS [and other 
mortgagees] to enter into any contract agreement or lease with an 
affiliate 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, 2001, 
represented by the borrower as having been submitted to RUS is in 
agreement with the Center County Telecommunications Systems, Inc.'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 
Center County Telecommunications Systems, Inc., nothing came to our 
attention that caused us to believe that Center County 
Telecommunications Systems, Inc. failed to comply with respect to:

--The reconciliation of continuing property records to the 
controlling general ledger plant accounts addressed at 
Sec. 1773.33(c)(1) [list all exceptions];
--The clearing of the construction accounts and the accrual of 
depreciation on completed construction addressed at 
Sec. 1773.33(c)(2) [list all exceptions];
--The retirement of plant addressed at Sec. 1773.33(c)(3) and (4) 
[list all exceptions];
--The approval of the sale, lease, or transfer of capital assets and 
disposition of proceeds for the sale of lease of plant, material, or 
scrap addressed at Sec. 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, 2001, in the 
financial statements referenced in the first paragraph of this 
report addressed at Sec. 1773.33(f) [list all exceptions]; and
--The detailed schedule of investments.

    Our audit was made for the purpose of forming an opinion on the 
basic financial statements taken as a whole. The detailed schedule 
of investments required by Sec. 1773.33(i) 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 investments would be included here. 
The total of the investment in each company reported must agree with 
the detail investment subsidiary accounts.]
    This report is intended solely for the information and use of 
the board of directors, management, and the RUS and supplemental 
lenders and is not intended to be and should not be used by anyone 
other than these specified parties. However, this report is a matter 
of public record and its distribution is not limited.

Certified Public Accountants

[FR Doc. 01-12129 Filed 5-18-01; 8:45 am]
BILLING CODE 3410-15-P