Schools and Libraries Program: Actions Taken to Improve Operational
Procedures Prior to Committing Funds (Letter Report, 03/05/99,
GAO/RCED-99-51).

Pursuant to a congressional request, GAO reviewed the Schools and
Libraries Corporation's progress in implementing GAO's July 16, 1998,
recommendations for improving its procedures and internal controls.

GAO noted that: (1) the Corporation has taken actions to implement the
key recommendations that GAO believed needed to be completed prior to
issuing any funding commitment letters to applicants; (2) these
included: (a) sampling processed applications to identify and correct
any systemic weaknesses in program integrity review procedures; (b)
finalizing the program's procedures, automated systems, and internal
controls; and (c) obtaining a report from its independent accountants on
the suitability of the Corporation's internal controls to prevent or
detect material departures from its program objectives; (3) the
Corporation is taking action on GAO's recommendation to complete special
reviews of high-risk applicants before issuing commitment letters to
these applicants; (4) the Federal Communications Commission (FCC) has
not yet implemented GAO's recommendation to develop adequate goals,
performance targets, and measures for the program; (5) with GAO's key
operational recommendations implemented, the Corporation began issuing
its funding commitments for the first year to applicants in late
November 1998; (6) the program still faces major challenges as it moves
into new operational areas, such as reviewing and authorizing
reimbursements to vendors; and (7) given the fact that the program is
still essentially in a start-up mode, close oversight by FCC will be
especially important in helping to identify and resolve operational
problems.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-51
     TITLE:  Schools and Libraries Program: Actions Taken to Improve 
             Operational Procedures Prior to Committing Funds
      DATE:  03/05/99
   SUBJECT:  Libraries
             Public schools
             Internal controls
             Funds management
             Telecommunication

             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Commerce, Science, and
Transportation, U.S.  Senate

March 1999

SCHOOLS AND LIBRARIES PROGRAM -
ACTIONS TAKEN TO IMPROVE
OPERATIONAL PROCEDURES PRIOR TO
COMMITTING FUNDS

GAO/RCED-99-51

Schools and Libraries Program

(385775)


Abbreviations
=============================================================== ABBREV

  FCC - Federal Communications Commission
  NECA - National Exchange Carrier Association
  USAC - Univeral Service Administrative Company

Letter
=============================================================== LETTER


B-281644

March 5, 1999

The Honorable John McCain
Chairman, Committee on Commerce
 Science, and Transportation
United States Senate

Dear Mr.  Chairman: 

As you know, the Telecommunications Act of 1996 expanded universal
service--affordable, nationwide telephone service--to eligible
schools and libraries and authorized the Federal Communications
Commission (FCC) to implement a program to assist these institutions
in acquiring modern telecommunications services.  As implemented by
FCC, schools and libraries eligible for this program could receive
discounts from vendors on the cost of approved telecommunications
services, Internet access, and internal connections.  To administer
the program, FCC directed the creation of the Schools and Libraries
Corporation (the Corporation), which was established in late 1997. 

Concerned about the Corporation's start-up activities, you asked us
to review its procedures and internal controls.  In our testimony
before your Committee on July 16, 1998, we noted that the Corporation
had made progress in establishing an operational framework for the
program that was consistent with relevant FCC Orders.\1 However, we
also found several areas of concern and recommended that the FCC
Chairman direct the Corporation to take the following actions to
strengthen its operations before issuing any funding commitment
letters to applicants: 

  -- analyze a random sample of processed applications to determine
     if there are any systemic weaknesses in the application review
     procedures;

  -- complete the design of the program's operational procedures,
     automated systems, and internal controls; and

  -- obtain a report from its independent accountants that finds that
     the Corporation has developed an appropriate set of internal
     controls to mitigate against waste, fraud, and abuse. 

In addition, we recommended that the Corporation conduct in-depth
reviews of applications designated as ï¿½high riskï¿½ before, rather than
after, issuing commitment letters to these applicants.  We also
recommended that FCC develop goals, measures, and performance targets
for the program that are consistent with the requirements of the
Government Performance and Results Act of 1993. 

Following our July testimony, both the FCC Chairman and the
Corporation agreed to implement these recommendations to strengthen
program operations.  This report responds to your subsequent request
that we assess the Corporation's progress in implementing our
recommendations.  You also asked us to highlight any additional
issues that need to be monitored as the program moves forward. 


--------------------
\1 Schools and Libraries Corporation:  Actions Needed to Strengthen
Program Integrity Operations Before Committing Funds
(GAO/T-RCED-98-243, July 16, 1998). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Corporation has taken actions to implement the key
recommendations that we believed needed to be completed prior to
issuing any funding commitment letters to applicants.  These included
(1) sampling processed applications to identify and correct any
systemic weaknesses in program integrity review procedures; (2)
finalizing the program's procedures, automated systems, and internal
controls; and (3) obtaining a report from its independent accountants
on the suitability of the Corporation's internal controls to prevent
or detect material departures from its Program Objectives.  In
addition, the Corporation is taking action on our recommendation to
complete special reviews of ï¿½high-riskï¿½ applicants before issuing
commitment letters to these applicants.  FCC, however, has not yet
implemented our recommendation to develop adequate goals, performance
targets, and measures for the program. 

With our key operational recommendations implemented, the Corporation
began issuing its funding commitments for the first year to
applicants in late November 1998.  The program, however, still faces
major challenges as it moves into new operational areas, such as
reviewing and authorizing reimbursements to vendors.  Given the fact
that the program is still essentially in a start-up mode, close
oversight by FCC will be especially important in helping to identify
and resolve operational problems. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Universal service traditionally has meant providing residential
customers with affordable, nationwide access to basic telephone
service.  The Telecommunications Act of 1996, however, extended
universal service support to eligible schools and libraries.  The new
program (often referred to as the ï¿½e-rateï¿½ program) is designed to
improve schools' and libraries' access to modern telecommunications
services.  Generally, educational institutions that meet the
definition of ï¿½schoolsï¿½ laid out in the Elementary and Secondary
Education Act of 1965 are eligible to participate,\2 as are libraries
that can receive assistance from a state's library administrative
agency under the Library Services and Technology Act.\3

Schools and libraries do not receive direct funding from the program. 
Instead, support comes in the form of discounts on the costs of
telecommunications services.  FCC's orders provided for discounts
ranging from 20 to 90 percent on all commercially available
telecommunications services, Internet access, and internal
connections.\4 The act specifies that every telecommunications
carrier providing interstate telecommunications services must
contribute to a universal service fund, unless exempted by FCC.\5
This fund is used to reimburse vendors for the discounted services
that they provide to program participants. 


--------------------
\2 Most public and private schools teaching kindergarten to grade 12
are eligible for support.  Examples of entities not eligible for
support are home school programs, private vocational programs, and
institutions of higher education.  In addition, private schools with
endowments of more than $50 million are not eligible to participate. 

\3 Libraries whose budgets are part of a school's budget are not
eligible to receive universal service support. 

\4 Eligible telecommunications and Internet services include basic
phone service, T-1 lines, dial-up Internet access, and direct
Internet connections.  Eligible internal connections include
telecommunications wiring, routers, switches, and network servers
that are necessary to transport information to individual classrooms. 

\5 The Commission also required certain other providers of
telecommunications services to contribute to the universal service
fund. 


      PROGRAM ADMINISTRATION
---------------------------------------------------------- Letter :2.1

The act did not prescribe a structure for administering the program. 
However, in 1997, FCC directed the establishment of the Schools and
Libraries Corporation to carry out this function.  The Corporation
works within the framework of the FCC's orders and rules to
administer certain program functions. 

The Corporation, with a 14-member staff based in Washington, D.C.,
contracted out most of its application-processing, client support,
and review functions to the National Exchange Carrier Association
(NECA), located in New Jersey.\6 NECA's key responsibilities include
reviewing applications to ensure compliance with the program's
requirements and processing invoices from telecommunications vendors
to reimburse them for the cost of discounts they provide.  NECA, in
turn, has subcontracted with two other organizations to help answer
applicants' questions, process and enter applications into the
Corporation's database, and establish and maintain the Corporation's
public web site, which contains important information about program
operations and application procedures.\7

FCC changed this administrative structure in November 1998 in
response to the Congress's directive that a single entity administer
universal service support for schools and libraries and rural health
care providers.  FCC appointed the Universal Service Administrative
Company (USAC) as the permanent administrator of the universal
service fund and directed the Corporation to merge with USAC by
January 1, 1999.\8 Under this merger, the Corporation's staff will
become part of USAC's Schools and Libraries Division, carrying out
essentially the same functions as before.  Since our review ended
prior to the reorganization, we continue to refer to ï¿½the
Corporationï¿½ in this report. 


--------------------
\6 NECA was established at FCC's direction in 1983 to administer
interstate access tariffs and the revenue distribution process for
local telephone companies. 

\7 The Corporation's Internet web site is at
(http://www.slcfund.org). 

\8 USAC had been established as a subsidiary of NECA to administer
the high-cost and low-income universal service support mechanisms and
performs billing, collection, and disbursement functions for all the
universal service support mechanisms.  See Changes to the Board of
Directors of the National Exchange Carrier Association, Inc.,
Federal-State Joint Board on Universal Service, Third Report and
Order and Fourth Order on Reconsideration, and Eighth Order on
Reconsideration, CC Docket Nos.  96-45, 97-21, FCC 98-306 (rel.  Nov. 
20, 1998). 


      APPLICATION PROCESS
---------------------------------------------------------- Letter :2.2

In order to receive universal service support, each applicant
completes a two-stage application process.  During the first stage,
the applicant submits a form that lists the services for which
discounts are being requested.  These forms are posted on the
Corporation's web site so that vendors can provide applicants with
competitive bids on requested services.  The second stage begins
after the applicant accepts a bid and enters into a contract with a
vendor.  The applicant submits a second form that details the types
and costs of the services being contracted for and the amount of the
discount being requested.  The Corporation checks these forms using
its application review procedures, which are designed to ensure that
support goes only to eligible entities, for eligible services, at
appropriate discount levels.  It then issues commitment letters to
successful applicants informing them of the amount of discount they
can expect to receive. 


   ACTIONS TAKEN TO IMPLEMENT KEY
   OPERATIONAL RECOMMENDATIONS
------------------------------------------------------------ Letter :3

We found that the Corporation has taken actions to implement the key
recommendations we believed should be completed before issuing any
funding commitment letters to applicants.  Specifically, the
Corporation has

  -- sampled applications that were already processed to identify and
     correct any systemic weaknesses in its program integrity review
     procedures;

  -- finalized the program's procedures, automated systems, and
     internal controls; and

  -- obtained a report from its independent accountants that the
     Corporation had suitably designed its internal controls to
     prevent or detect material departures from program objectives,
     as of November 4, 1998, in conformity with criteria set forth by
     the Corporation in its ï¿½Management's Statement of Universal
     Service Discount Mechanism Program Objectives and Internal
     Control Objectives.ï¿½

In addition, the Corporation is following our recommendation to
complete its special reviews of high-risk applications before issuing
funding commitment letters to these applicants.  One recommendation,
however, still needs to be implemented:  FCC needs to develop
adequate goals, performance targets, and measures for the program. 


      PROCEDURES REVISED FOR
      REVIEW OF SERVICES, BUT
      REVIEW OF DISCOUNTS REMAINS
      AN ISSUE
---------------------------------------------------------- Letter :3.1

One of the Corporation's primary responsibilities is to ensure that
funding goes only to eligible applicants, for eligible services, at
the appropriate levels of discount--as specified by FCC orders. 
During our initial review in June and July 1998, we found several
areas of potential weakness in the Corporation's program integrity
procedures that could result in funding being directed to applicants
for ineligible services or at inappropriately high levels of
discount.  FCC's Chairman accepted our recommendation to delay
issuing funding commitment letters until the Corporation randomly
selected applications to assess how well its review procedures were
actually working. 


         CORPORATION'S TEST FOR
         APPLICANTS' ELIGIBILITY
         WAS EFFECTIVE
-------------------------------------------------------- Letter :3.1.1

One of the Corporation's automated tests is designed to determine
whether an applicant is eligible for support under the program.  A
computer program compares the name of the applying school or library
against a database of eligible schools and libraries.  Although we
did not identify a weakness with this test approach during our
initial review, we recommended that the Corporation verify the
approach's effectiveness as part of its review of a random sample of
processed applications. 

The verification showed that only one application in a sample of 100
was from an ineligible applicant.  This application, however, had
already been flagged by the Corporation's automated test for eligible
applicants.  This result indicates that the Corporation's procedures
for preventing ineligible schools and libraries from participating in
the program appear to be working effectively. 


         CORPORATION HAS
         STRENGTHENED ITS TEST FOR
         ELIGIBLE SERVICES
-------------------------------------------------------- Letter :3.1.2

As noted earlier, FCC provides discounts for telecommunications
services, Internet access, and internal connections.  Checking on the
eligibility of requested services is not easy, however, because of
the variety and technical nature of many of these
services--especially those related to internal connections.\9

The Corporation's review procedures for eligible services use both
manual inspections and an automated system for flagging problem
applications.  An important internal control document in this review
process is a checklist of ineligible items, which is used during the
initial screening of applications.  If a clerical staff member using
this checklist finds an ineligible item on an application, the
application is flagged in the application processing system for a
second, more detailed review by a professional staff member who
checks the eligibility of each requested service.  We found, however,
that as the Corporation processed applications and gained experience
in the types of services being requested, it added items to its
checklist of ineligible services.  As a result, different criteria
were applied to applications, depending on when they were first
screened.  In our early discussions with Corporation officials, we
learned that they did not intend to recheck applications that had
been processed before the checklist was updated.  This raised our
concern that some early applications may have cleared the screening
process that should have been flagged for detailed review. 

The results of the Corporation's review of a random sample showed
that weaknesses indeed existed in its procedures for ensuring that
only eligible services receive funding.  At least 19 of the 100
applications in the sample contained requests for ineligible items as
defined by FCC orders, totaling approximately $106,000 in
inappropriately requested funding.  Of these 19 applications, 7 had
been classified as ï¿½cleanï¿½ (that is, containing no ineligible items)
by the Corporation's earlier review and contained approximately
$6,000 in inappropriately requested funding.  The Corporation's
independent accountants, PricewaterhouseCoopers, subsequently
requested the Corporation to conduct a further sample of 300
applications that had been classified as ï¿½clean.ï¿½ This review found
that 4.6 percent, or approximately $314,000, of the discount funding
requested in these applications would have gone to ineligible items. 

Given the error level revealed by these two samples, Corporation
officials concluded that their test had to be strengthened. 
Accordingly, they changed their review procedures to require staff to
perform a complete manual review of every requested service item in
all 32,000 applications, regardless of whether these applications had
been flagged during the initial screening.  To implement these new
procedures in a timely manner, the Corporation's contractor augmented
its permanent staff with temporary staff to perform the reviews. 
Training and supervising new staff is, of course, important in
ensuring that the new review procedures are carried out effectively. 


--------------------
\9 For example, the installation of power poles (metal or plastic
pipes used to carry wiring from the ceiling to the floor) may or may
not be eligible for support.  Under the program rules, power poles
used for the distribution of telecommunications wiring are considered
an eligible internal connection service.  Power poles used for the
distribution of electrical wiring are not eligible. 


         DISCOUNT ISSUE NEEDS
         FURTHER SCRUTINY
-------------------------------------------------------- Letter :3.1.3

FCC orders state that the level of discount that each school or
library can receive should be determined by the applicant's economic
need and location.  Discounts range from 20 to 90 percent of the
costs of the services to the applicants, with higher discounts going
to those in low-income and rural areas.\10 Applicants calculate the
discount level to which they are entitled by following instructions
and criteria on the application form and certify that their discount
calculations are correct.\11 When the Corporation processes an
application, it uses an automated test to check the requested
discount level.  This test compares the applicant's requested
discount with a discount level calculated from data on schools in the
Corporation's database.  If the applicant is requesting a higher
discount than indicated by the Corporation's database, the test can
flag the application for special review.  As part of this review, a
program official contacts the applicant and gathers information to
determine whether the requested discount level is in fact correct. 

It is possible for the automated system to flag every application
that shows a variance from the Corporation's own calculation. 
However, the Corporation decided that such a stringent approach was
not warranted because of limitations in the database it uses to make
its calculations.  For example, the database contains the number of
students actually participating in the National School Lunch Program,
rather than the number eligible to participate, which is the measure
adopted by FCC.  Moreover, the data are about a year old.  Mindful of
these limitations, the Corporation decided to establish some latitude
in its review procedures for eligible discounts.  Thus, the
Corporation allows applications to pass unchallenged through its
automated discount review if the requested discount level does not
exceed a certain threshold of variance from the Corporation's own
calculation.  Applications that cross this threshold are flagged for
manual review by a program official.  Corporation officials stated
that adopting this procedure was a reasonable business decision
because the cost of manually reviewing all applications that showed
any variance from the Corporation's own calculations would exceed the
benefits gained. 

We found in our initial review, however, that the Corporation had not
performed a sound benefit-cost analysis to justify this business
decision.  We were concerned about this situation not only because of
the need to enforce program rules for the sake of equity but also
because the total amount of funding available during the program's
first year was not enough to cover all of the applicants' requests
for support.  Providing funding for ineligible services or allowing
inappropriate discount levels could result in some applicants' proper
requests for support being denied. 

The Corporation's review of a sample of 100 processed applications
showed that 57 of them requested discount levels that varied from the
Corporation's own calculation.  After obtaining additional
information for these 57 applications, the Corporation determined
that at least 9 could not support their requested level of discounts. 
The dollar amount of these inappropriate discount requests totaled
about $14,000 out of the approximately $4.5 million in requested
funding. 

At the request of its independent accountants, the Corporation
conducted a review of an additional sample.  The Corporation selected
50 applications that requested $100,000 or more in support.  In this
second sample, 39 of the 50 processed applications contained discount
levels that varied from the Corporation's own calculation.  The
Corporation found that 6 of the 39 applications requested discounts
that could not be validated.  The funding that would have been
awarded for these inappropriate discount levels totaled about $35,000
out of approximately $28.5 million in requested funding. 

Having considered these results, Corporation officials decided that
they did not need to change their procedures for reviewing requested
discount rates for the first funding year.  As before, they
maintained that the amount of inappropriate funding in question was
not large enough to warrant the time and cost of performing
follow-ups on every application that showed any variation from the
discount level calculated by the Corporation's automated check. 

We remain concerned, however, that the amount of inappropriate
discounts passing unchallenged through the review process, though
relatively low now, could grow larger in subsequent funding years. 
We therefore believe that the Corporation needs to explore methods
for mitigating this risk in a cost-beneficial manner.  Aware of our
continuing concern, the FCC Chairman directed the Corporation in
November 1998 to work with FCC staff ï¿½to establish a method for
improving the procedures for ensuring that discounts are provided in
accordance with the discount levels set forth in the Commission's
rules.ï¿½


--------------------
\10 The program measures how economically disadvantaged the schools
and libraries are by the number of students eligible to participate
in the National School Lunch Program.  Rural designations are based
on the Metropolitan Statistical Area listing and the Goldsmith
modification covering rural pockets located within these areas. 

\11 The Corporation provides additional information and tools on its
web site, and encourages applicants to call, e-mail, or send a fax to
get additional information and help on filling out their application
forms. 


      FINAL OPERATING PROCEDURES
      HAVE BEEN ESTABLISHED
---------------------------------------------------------- Letter :3.2

At the time of our initial review in June and July 1998, the
Corporation had not yet finalized all the procedures, automated
systems, and internal controls needed to make funding commitments and
approve vendors' compensation for the discounted services provided to
applicants.  Nevertheless, the Corporation was planning to issue
funding commitment letters before the remaining procedures were
finalized.  We maintained, however, that this approach would have put
the Corporation at risk of being unable to process nearly $2 billion
in vendors' invoices in a timely manner.  Corporation officials
themselves estimated that in cases where services were already being
provided to applicants, invoices for payment could be sent in by
vendors as soon as 15 days after commitment letters were sent out,
thereby triggering the reimbursement process.  Therefore, we
recommended in our July 1998 testimony that the Corporation make no
funding commitments until it had finalized all of its operating
procedures and automated systems.  FCC and the Corporation accepted
this recommendation. 

The Corporation needed until early November 1998 to finalize its
operating procedures, complete the testing of the automated systems
supporting these procedures, and secure the Office of Management and
Budget's approval of the applicant and vendor forms needed for the
reimbursement process.  This delay occurred in part because on June
22, 1998, FCC released a reconsideration order that significantly
altered the program.  Specifically, the program's funding year was
changed from a calendar year cycle to a fiscal year cycle, and the
period for the first round of funding was changed from 12 months to
18 months.  The order also adjusted the maximum amounts that could be
collected and spent during 1998 and the first 6 months of 1999,
directing the Corporation to commit no more than $1.925 billion for
the schools and libraries program during this time frame.  Because
this amount was not expected to cover all of the applicants'
requests, FCC directed the Corporation to give funding priority to
applicants' requests for telecommunications services and Internet
access.  Once these requests are satisfied, the remaining funds are
to be used for internal connections, with priority given to
applicants eligible for higher discounts.  To implement these new
priority rules, the Corporation had to significantly revise its
funding award process and automated support systems. 

In addition, the Corporation found that some established procedures
needed to be modified as it learned lessons from reviewing the first
round of applications.  For example, the Corporation initially
cautioned schools and libraries that they would not receive discounts
on any items in their funding requests that had included ineligible
services mixed with eligible services.  However, when the Corporation
began reviewing applications, it found some cases in which applicants
included an ineligible service that accounted for only a small
percentage of the total cost of the service item being requested.\12
As a result, the Corporation, with FCC's concurrence, modified its
procedures so as to provide funding for items that were substantially
correct even though they contained some ineligible services. 
Specifically, if the ineligible services accounted for less than 50
percent of the total dollar amount of the item requested, the
Corporation would separate out the cost of the ineligible services
and provide discount funding for the remaining eligible services. 


--------------------
\12 A sample showed that 6 out of 100 applications had funding
requests that contained ineligible items.  Under the Corporation's
old procedures, approximately $482,000 of a total of $2.7 million in
requested discount funding for the 100 applications would have been
denied.  Under the new procedures, the Corporation approved
approximately $388,000 (80 percent) of this $482,000. 


      INDEPENDENT ACCOUNTANTS'
      REPORT ON THE CORPORATION'S
      INTERNAL CONTROLS HAS BEEN
      COMPLETED
---------------------------------------------------------- Letter :3.3

In December 1997, FCC's Chairman directed the Corporation to contract
with an independent accounting firm to assess--before any program
disbursements were made--whether the program's processes and
procedures provided the controls needed to mitigate against fraud,
waste, and abuse.  In December 1997, with the approval of the
Corporation's Board of Directors, the Corporation engaged the
services of Coopers & Lybrand, LLP (which became
PricewaterhouseCoopers, LLP, on July 1, 1998).  The independent
accountants were to examine the Corporation's assertions that
internal controls over the processing of funding requests from
applicants were suitably designed to detect material departures from
the Program Objectives set forth in the Corporation's document,
ï¿½Management's Statement of Universal Service Discount Mechanism
Program Objectives and Internal Control Objectives.ï¿½

At the time of our initial review during June and July 1998, the
Corporation planned to issue funding commitment letters to applicants
before the independent accountants had completed their review but not
disburse any funds until the review was complete.  We were concerned,
however, that setting the funding commitment process in motion before
the underlying control design has been fully reviewed would undercut
the purpose and value of the independent review.  Therefore, we
recommended that the Corporation refrain from making funding
commitments until it had obtained a report from its independent
accountants stating that an appropriate set of internal controls was
in place.  Both FCC and the Corporation accepted this recommendation. 
On November 4, 1998, the independent accountants' report was issued
stating that the Corporation had suitably designed internal controls
to prevent or detect material departures from its Program Objectives
as of November 4, 1998. 


         SCOPE OF THE INDEPENDENT
         REVIEW
-------------------------------------------------------- Letter :3.3.1

The Corporation engaged the independent accountants to determine
whether the internal controls over its processing of funding requests
from applicants were in accordance with these six Program Objectives: 

  -- All applications are processed in accordance with FCC's priority
     rules. 

  -- Only eligible schools and libraries receive discounts. 

  -- Only eligible services as defined by FCC's orders are funded. 

  -- Discount percentages are approved in accordance with the
     criteria specified under FCC's orders and rules. 

  -- Payments to vendors are authorized in a timely manner. 

  -- Funding commitments do not exceed the program's funding limits. 

The independent accountants' work included reviewing the
Corporation's procedures and documentation related to its control
environment, application controls, computer controls, and monitoring
controls.  In addition, the independent accountants discussed control
issues with the Corporation's management and closed them out, as
appropriate, when satisfied with the documentation and the
suitability of the design.  Before issuing a final report, the
independent accountants briefed the Corporation's Board of Directors,
the FCC's Common Carrier Bureau, and the FCC Chairman.  Because the
Corporation was in a start-up phase during 1998, the independent
accountants were not engaged to examine and report on the actual
operating effectiveness of these internal controls. 

During the course of its review, the independent accountants became
concerned, as we were, about the efficacy of the Corporation's review
procedures for ensuring that only eligible services receive support
at the appropriate level of discount.  The weakness in the service
review procedures, discussed earlier, was addressed to the
independent accountants' satisfaction when the Corporation changed
them to require a complete review of all requested services on all
applications before committing funds.  The independent accountants'
concern with the discount review focused on the Corporation's
decision to allow some applications to go through the review process
unchallenged even though they were requesting a higher discount than
calculated by the Corporation in its review process.  Near the end of
the independent accountants' review in November 1998, the Corporation
modified its written program objective for discounts to reflect its
practice of accepting and approving discounts that are higher than
its own discount calculation, provided that they are within a certain
threshold of variance.  The Corporation cited limitations in its
verification sources, discussed earlier, as the reason for adopting
this procedure.  With this modification, the independent accountants
concluded that the Corporation's internal controls were suitably
designed to prevent or detect material departures from the Program
Objectives, as amended by management. 


      CONCERNS RESOLVED OVER THE
      TIMING OF ï¿½HIGH-RISKï¿½
      REVIEWS
---------------------------------------------------------- Letter :3.4

As an extra quality control step, the Corporation planned to conduct
special reviews of applications that it considered to be high risk. 
The Corporation designates applications as high risk on the basis of
several criteria, including the size of the request, evidence from
external sources of possible program compliance issues, and
indications that a school has an endowment of more than $50 million. 

The Corporation estimated that about 1,600 of the approximately
32,600 applications were high risk.  These represent about $1.2
billion of the $2 billion requested by all applicants for the
program's first year.  As part of its high-risk reviews, the
Corporation plans to require these applicants to submit additional
material to support their funding requests.  This material is then to
be reviewed by program staff to check for conformity to program
rules. 

Because these high-risk reviews are an important internal control, we
were concerned about their timing.  The Corporation originally
planned to wait until after the applicants had received their funding
commitment letters before doing their high-risk reviews.  Under this
scenario, if the Corporation found a problem with a high-risk
application during its special review, it might have to reduce or
withdraw the funding commitment that it had already made.  In such
cases, applicants who decided to begin receiving contracted services
on the basis of their funding commitment letters could find
themselves responsible for paying more than they had planned. 

Accordingly, in our July 1998 testimony, we recommended that the
Corporation complete these special reviews before sending funding
commitment letters to high-risk applicants.  The Corporation agreed
to change its procedures and in October 1998 began conducting its
first special reviews of the high-risk applications.  In October
1998, Corporation officials stated that none of these approximately
1,600 applications would receive funding commitment letters until
their selective reviews were completed. 


      FCC STILL NEEDS TO DEVELOP
      GOALS AND MEASURES FOR THE
      PROGRAM
---------------------------------------------------------- Letter :3.5

Performance measurement is critical for determining a program's
progress in meeting its intended outcomes.  During our initial
review, we noted that FCC's combined ï¿½Strategic Plan for Fiscal Years
1997-2002 and Annual Performance Plan for Fiscal Year 1999ï¿½ provided
no specific strategic goals, performance measures, or target levels
of performance for the program.  Without clear goals and measures,
the Congress, FCC, and the Corporation would have a difficult time
assessing the effectiveness of the program and determining whether
operational changes are needed.  Accordingly, we recommended that the
FCC Chairman direct responsible FCC staff to develop goals and
measures for the program before the end of fiscal year 1998 so that
the Congress and others would be able to assess the results of the
program's first year of operations. 

This recommendation still needs to be implemented.  FCC's February
1999 ï¿½Annual Performance Plan for Fiscal Year 2000ï¿½ still fails to
provide well-defined goals, performance targets, and measures.  For
example, it is unclear whether FCC intends to use ï¿½schoolsï¿½ or
ï¿½classroomsï¿½ as the unit of measurement in tracking access to
advanced telecommunications services--a point of major significance. 
In our subsequent discussions with FCC and Corporation officials, we
found that FCC did not coordinate with program officials when
developing its revised plan.  As we noted in our previous testimony,
we have issued guidance on developing effective strategic plans.\13
One of the key practices in developing these plans is to involve
stakeholders--such as school and library officials--in the
goal-setting process.  The involvement of the Congress is also
indispensable to defining goals, as are the agency's customers--in
this case, the schools and libraries themselves. 

Corporation officials have already identified a number of data
sources that could be used to develop baseline data and measure
trends in areas such as Internet connections.  They are also posting
the results of their funding decisions on the Corporation's web site,
broken down by states, types of services funded, and the percentage
of funding going to rural/low-income areas.  In addition, Corporation
officials are currently exploring ways to measure the efficiency of
their work processes.  While these efforts are useful, it is
important that FCC take the lead as part of its policy-making and
oversight responsibilities to define specific goals and measures for
the program, particularly as they relate to the outcomes being
achieved by the expenditure of funds. 


--------------------
\13 See Executive Guide:  Effectively Implementing the Government
Performance and Results Act (GAO/GGD-96-118, June 1996) and Agencies'
Strategic Plans Under GPRA:  Key Questions to Facilitate
Congressional Review (Version 1, GAO/GGD-10.1.16, May 1997). 


   OTHER MANAGEMENT CHALLENGES
   WILL NEED CLOSE ATTENTION
------------------------------------------------------------ Letter :4

When we completed our audit in early December 1998, the Corporation
was finishing its review of applications and starting to make funding
decisions, a process that was going much more slowely than expected. 
As a result, our review did not include certain key activities that
the Corporation had not yet completed or begun.  These include

  -- implementing the newly revised review procedures, especially for
     high-risk applications;

  -- setting priorities for funding commitments in accordance with
     FCC's orders and rules;

  -- dealing with applicants' appeals on commitment decisions,
     including establishing a funding reserve to cover those that are
     successful; and

  -- reviewing and authorizing vendors' requests for reimbursement. 

These are challenging activities in themselves and will be even more
challenging because they can overlap in time.  For example, the
reimbursement activity will involve processing tens of thousands of
forms submitted by successful applicants and their vendors.  While
this activity is occurring, applications for the second funding cycle
will be coming in.  This application period began on December 1,
1998, and was originally scheduled to close in mid-February. 
However, the Corporation extended the deadline to mid-March 1999
because of the delay in getting out the first year's commitment
letters.  The closing date was extended again, to April 6, 1999,
because commitment letters were still going out in February 1999. 
This extension, together with the added workload of vendor
reimbursements, raises the question of whether the program staff and
contractors will have enough time to carefully review and process all
the new applications by July 1999--the start of the next funding
period. 

Given these issues, FCC's role in overseeing the program will be more
important than ever.  In many ways, the Corporation is still in a
start-up mode and continues to need help in resolving operational
problems.  FCC's oversight will also be important to ensure that the
program's transition from the Schools and Libraries Corporation to
USAC goes smoothly and that USAC management is appropriately engaged
in maintaining and improving the overall integrity of the program's
operations. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :5

To track the progress being made in implementing our recommendations,
we held ongoing discussions with FCC and Corporation officials.  We
reviewed draft and final operational procedures, documentation for
the automated systems, and other material related to internal
controls.  We also visited with the Corporation's contractor in New
Jersey, which has major responsibilities for developing and
implementing program procedures and automated information systems. 
In addition, we met with PricewaterhouseCoopers to discuss the scope
and results of its independent review of the suitability of the
design of the Corporation's internal controls.  We performed our
review from June 1998 through December 1998 in accordance with
generally accepted government auditing standards. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided a draft of this report to the Federal Communications
Commission, the Schools and Libraries Corporation (now the Schools
and Libraries Division of the Universal Service Administrative
Company), and PricewaterhouseCoopers for their review and comment. 
We subsequently met with officials from the Schools and Libraries
Division, the Common Carrier Bureau of the Federal Communications
Commission, and PricewaterhouseCoopers.  All three concurred with our
findings and provided several points of clarification, which we
incorporated into our final report.  Appendix I contains the Schools
and Libraries Division's letter commenting on our draft report.  The
President of the Division stated that our report captures fairly the
work undertaken to provide for effective internal controls.  She
added that using the experience gained in processing the first year's
applications, the Division will implement new and tighter procedures
for evaluating discounts in response to direction from the Chairman
of the Federal Communications Commission.  Regarding the need to
establish adequate performance goals and measures for the program,
Federal Communications Commission officials told us that they
recognize the importance of the recommendation in our July 1998
testimony and intend to address it, but they did not indicate a time
frame for doing so. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to interested congressional
committees, the Chairman and Commissioners of the Federal
Communications Commission, the Chief Executive Officer of the
Universal Service Administrative Company, and the President of the
Schools and Libraries Division of the Universal Service
Administrative Company.  Copies of this report will also be made
available to others upon request. 

If you have any questions about this report, please call me at (202)
512-7631.  Major contributors to this report are listed in appendix
II. 

Sincerely yours,

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE SCHOOLS AND
LIBRARIES DIVISION, UNIVERSAL
SERVICE ADMINISTRATIVE COMPANY
============================================================== Letter 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

John P.  Finedore
Teresa R.  Russell
James R.  Sweetman, Jr.

OFFICE OF THE GENERAL COUNSEL

Michael R.  Volpe
Mindi Weisenbloom


*** End of document. ***