Schools and Libraries Corporation: Actions Needed to Strengthen Program
Integrity Operations Before Committing Funds (Testimony, 07/16/98,
GAO/T-RCED-98-243).
GAO discussed issues related to the Schools and Libraries Corporation's
operating procedures and internal controls, focusing on: (1) its
progress in reviewing applications; (2) the scope and timing of key
compliance tests; (3) the status of its efforts to finalize its
operating procedures; and (4) the status of the independent audit to
determine whether the Corporation has developed an appropriate set of
internal controls to mitigate against fraud, waste, and abuse.
GAO noted that: (1) the Corporation has made substantial progress in
establishing an operational framework for the program that is consistent
with relevant Federal Communications Commission (FCC) orders; (2) with
regard to processing applications, the Corporation has worked with
schools and libraries to inform them about the program and its
application procedures; (3) during the initial application period, which
began on January 30, 1998, and ended on April 15, 1998, schools and
libraries sent in over 32,600 applications for discounts; (4) however,
processing these applications has taken longer than either the
Corporation or FCC expected; (5) the Corporation relies on a combination
of applicants' self-certifications, third-party reviews, and its own
procedures to ensure compliance with FCC's rules and regulations; (6)
the Corporation tests applications for compliance with rules on the
eligibility of applicants and requested services, and on the amount of
requested discounts; (7) also, while the Corporation plans to conduct
additional tests and reviews to ensure that applications are consistent
with program rules, their scope and timing have not been finalized; (8)
while the Corporation has established procedures for initially reviewing
the applications, it has not yet finalized all necessary procedures and
related internal controls for the program; (9) GAO is particularly
concerned about this because the Corporation estimates that invoices for
payment could begin to arrive as soon as 15 days after commitment
letters are sent out; (10) the FCC Chairman has called for an
independent audit of the Corporation's internal controls to help
mitigate against fraud, waste, and abuse; (11) since applicants and
vendors could begin submitting forms and invoices for disbursement of
funds as soon as 15 days after they receive their commitment letters, it
is important that the Corporation have all of its disbursement
procedures, systems, and controls in place and reviewed by the
independent auditor before sending these letters; (12) the FCC has not
developed performance goals and measures for this program consistent
with the requirements of the Government Performance and Results Act of
1993; (13) FCC's Strategic Plan for Fiscal Year 1997-2002 and Annual
Performance Plan for Fiscal Year 1999 mentions the schools and libraries
program in the context of a large number of telecommunications
initiatives, but establishes no specific performance measures or target
levels of performance to be achieved by the program; and (14) the
Corporation is still developing and finalizing some of its procedures
and controls, and that they are subject to change.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-RCED-98-243
TITLE: Schools and Libraries Corporation: Actions Needed to
Strengthen Program Integrity Operations Before Committing
Funds
DATE: 07/16/98
SUBJECT: Internal controls
Libraries
Service contracts
Public schools
Funds management
Telecommunication industry
Telecommunication
Federal corporations
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Cover
================================================================ COVER
Before the Committee on Commerce, Science, and Transportation
U. S. Senate
For Release
on Delivery
Expected at
9:30 a.m. EDT
Thursday
July 16, 1998
SCHOOLS AND LIBRARIES CORPORATION
- ACTIONS NEEDED TO STRENGTHEN
PROGRAM INTEGRITY OPERATIONS
BEFORE COMMITTING FUNDS
Statement by Judy A. England-Joseph,
Director, Housing and Community Development Issues,
Resources, Community, and Economic
Development Division
GAO/T-RCED-98-243
GAO/RCED-98-243T
(385764)
Abbreviations
=============================================================== ABBREV
FCC -
NECA -
============================================================ Chapter 0
Mr. Chairman and Members of the Committee:
We are pleased to be here today to discuss the implementation of the
new universal service program for schools and libraries. As you
know, the Telecommunications Act of 1996 expanded universal support
to eligible schools and libraries. The general purpose of this
program is to improve the access of schools and libraries to modern
telecommunications services. To meet this goal, schools and
libraries would receive discounts on the costs of services provided
by vendors.
To administer the program, the Federal Communications Commission
(FCC) directed the creation of the Schools and Libraries Corporation
(Corporation). As a start-up operation, the Corporation has had to
develop operating procedures and internal controls to implement FCC's
orders guiding the program. This includes informing potential
applicants about the program, establishing application procedures,
processing and reviewing applications, and authorizing the
disbursement of funds to vendors providing eligible services to the
applicants.
At your request, Mr. Chairman, we reviewed the Corporation's
activities to date. Our testimony today will focus on issues related
to the Corporation's operating procedures and internal controls,
including:
�its progress in reviewing applications;
�the scope and timing of key compliance tests;
�the status of its efforts to finalize its operating procedures; and
�the status of the independent audit to determine whether the
Corporation has developed an appropriate set of internal controls to
mitigate against fraud, waste, and abuse.
Our testimony will also discuss FCC's efforts to establish strategic
goals and performance measures for the schools and libraries program,
as required by the Government Performance and Results Act of 1993.
Overall, we found that the Corporation has made substantial progress
in establishing an operational framework for the program that is
consistent with relevant FCC orders. However, we identified several
areas of concern, discussed below.
With regard to processing applications, the Corporation has worked
with schools and libraries to inform them about the program and its
application procedures. During the initial application period, which
began on January 30, 1998, and ended on April 15, 1998, schools and
libraries sent in over 32,600 applications for discounts. On the
basis of a sample of applications submitted, the Corporation
estimates that about $2 billion in discounts for telecommunications,
Internet services, and internal connections have been requested.
However, processing these applications has taken longer than either
the Corporation or FCC expected. They both hoped to have this
activity completed in time to make funding commitments to applicants
by the end of June 1998. As of last week, only about 62 percent of
the applications have been processed and entered into the
Corporation's database.
The Corporation relies on a combination of applicants'
self-certifications, third-party reviews, and its own procedures to
ensure compliance with FCC's rules and regulations. The Corporation
tests applications for compliance with rules on the eligibility of
applicants and requested services, and on the amount of requested
discounts. However, the same test criteria have not been applied to
all the applications because the criteria have changed over time.
Also, while the Corporation plans to conduct additional tests and
reviews to ensure that applications are consistent with program
rules, their scope and timing have not been finalized. Reviews of
high-risk applications are not scheduled to occur until sometime
after funding commitment letters have been sent to applicants.
Should the Corporation find major problems at this time with the
applications reviewed, it may have to reduce or withdraw funding
commitments from applicants. If such applicants have already begun
receiving services on the basis of their commitment letters, they
might find themselves responsible for paying a higher cost for those
services than they planned.
While the Corporation has established procedures for initially
reviewing the applications, it has not yet finalized all necessary
procedures and related internal controls for the program. In
particular, the Corporation is still developing the processes and
controls for notifying applicants of the amounts of their approved
discounts and for authorizing distribution of funds to vendors to
cover discounted services that they provide to schools and libraries.
We are particularly concerned about this because the Corporation
estimates that invoices for payment could begin to arrive as soon as
15 days after commitment letters are sent out. If disbursement
procedures and internal controls are not in place when commitment
letters are issued, the Corporation may find itself unable to process
vendor invoices in a timely manner.
The FCC Chairman has called for an independent audit of the
Corporation's internal controls to help mitigate against fraud,
waste, and abuse. The audit report is scheduled to be completed
before funds are disbursed, but not before funds are committed to
applicants and their vendors. Since applicants and vendors could
begin submitting forms and invoices for disbursement of funds as soon
as 15 days after they receive their commitment letters, it is
important that the Corporation have all of its disbursement
procedures, systems, and controls in place and reviewed by the
independent auditor before sending these letters. If the auditor's
final report is not received until after commitments are made and the
report identifies problems with disbursement procedures, it may be
difficult for the Corporation to resolve them in a timely manner so
that vendor invoices can be processed promptly and accurately.
Finally, FCC has not developed performance goals and measures for
this program consistent with the requirements of the Government
Performance and Results Act of 1993. FCC's "Strategic Plan for
Fiscal Years 1997-2002 and Annual Performance Plan for Fiscal Year
1999" mentions the schools and libraries program in the context of a
large number of telecommunications initiatives, but establishes no
specific performance measures or target levels of performance to be
achieved by the program.
We should note, Mr. Chairman, that the Corporation is still
developing and finalizing some of its procedures and controls, and
that they are subject to change. For example, the Corporation is
currently faced with the task of implementing procedural changes in
response to changes in the program made recently by FCC. In
addition, Corporation officials are currently considering changes to
procedures and internal controls aimed at addressing concerns that we
raised with them during our review.
We will now go into more detail about the results of our audit work
to date and present our recommendations for strengthening the
Corporation's internal controls.
BACKGROUND
---------------------------------------------------------- Chapter 0:1
Traditionally, "universal service" has meant providing residential
customers with affordable, nationwide access to basic telephone
service. The Telecommunications Act of 1996, among other things,
extended universal service support to eligible schools and libraries.
The Act also specified that every telecommunications carrier that
provides interstate telecommunications services, unless exempted by
FCC, must contribute to a universal service fund. Finally, the Act
directed FCC to convene a federal-state Joint Board to specify which
services should be supported by the federal universal service
mechanisms and recommend regulatory changes to provide such support.
In its May 1997 universal service order, FCC adopted the Joint
Board's recommendation that eligible schools and libraries could
receive discounts of between 20 to 90 percent on all
telecommunications services, Internet access, and internal
connections, subject to a $2.25 billion annual cap.\1 Changes have
been made to the program through a number of reconsideration orders,
the latest of which was released on June 22, 1998. These orders
define the size, time frame, and eligibility requirements for the
schools and libraries program, the type and level of funding support
available from universal service funds, and the administrative
structure of the program, among other things.
The general purpose of this program is to improve the access of
schools and libraries to modern telecommunications services.
Generally, any school that meets the Elementary and Secondary
Education Act of 1965's definition of schools is 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 In addition, the orders specifically define the
three classes of services that are eligible for universal service
support: telecommunications services, Internet access, and internal
connections.
FCC has defined the mechanism by which eligible schools and libraries
will receive support from the universal service program.
Specifically, schools and libraries do not receive direct funding
from the program. Instead, they receive discounts on the costs of
services provided by vendors. The amount of discount each school or
library can receive under the program ranges from 20 to 90 percent
and is determined using a matrix designed by FCC, with schools and
libraries located in rural and low-income areas receiving the highest
discounts from the fund.\4 The universal service fund compensates the
schools' and libraries' vendors for the amount of the discounts.
The act did not prescribe a structure for administering the program.
However, the FCC directed the establishment of the Schools and
Libraries Corporation. FCC's Chairman selects or approves the
Corporation's Board of Directors as well as the hiring and removing
of the Chief Executive Officer. Under FCC's orders, the Corporation
is responsible for administering certain functions of the program,
including processing and reviewing the applications and administering
an Internet site on the World Wide Web. FCC also specified that the
Corporation can only engage in activities that are consistent with
FCC orders and rules.
FCC's latest reconsideration order significantly changed the program.
Specifically, this order changed the funding year from a calendar
year cycle to a fiscal year cycle and extended the first funding
round period 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 and directed the Corporation to commit no more than
$1.925 billion for the schools and libraries support program during
this time frame. FCC also directed the Corporation to fund requests
for telecommunication and Internet services first and then fund
requests for internal connections. Those applicants eligible for the
highest levels of discounts would receive funding priority for
internal connections.
--------------------
\1 FCC's universal service order has been challenged in Federal
court. Texas Office of Public Utility Counsel v. FCC, No. 97-60421
(5th Cir. filed June 25, 1997).
\2 Examples of entities not eligible to receive universal service
support are home school programs, institutions of higher education,
and private vocational programs.
\3 Libraries whose budgets are part of a school's budget are not
eligible to receive universal service support.
\4 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. Urban and rural designations
are based on the Metropolitan Statistical Area (MSA) listing.
STRUCTURE OF THE SCHOOLS AND
LIBRARIES CORPORATION
-------------------------------------------------------- Chapter 0:1.1
The Corporation currently has 15 staff, all based in Washington, who
manage the application and disbursement process and conduct outreach
to potential applicants. To date, the Corporation has conducted over
130 outreach sessions informing schools and libraries about the
program. In addition, the Corporation has established a web site
that contains program applications, information, and updates. The
Corporation also has provided training to its contractors' staff in
answering applicants' questions and processing and reviewing
applications.
The Corporation has contracted out most of the
application-processing, client support, and review functions to the
National Exchange Carrier Association (NECA).\5 NECA has 66 staff,
the majority of whom are part of the program integrity assurance
operation, which reviews the applications for compliance with the
program's eligibility requirements.
NECA has also subcontracted with two organizations to provide
customer support, process and enter the applications into the
Corporation's database, and establish and maintain the Corporation's
web site. As of June 1998, these two subcontractors employed
approximately 390 staff dedicated to Corporation activities.
According to Corporation officials, however, the subcontractors'
staffing levels could decrease as the system designs are finalized
and the number of applications needing processing declines.
The Corporation was established in the Fall 1997. The Corporation
stated that its operating expenses for calendar year 1997 were
approximately $1.9 million. For calendar year 1998, the first full
year of program operations, the Corporation estimates its operating
expenses at $18.8 million. Most of this estimate covers the costs of
contracts, including the Corporation's contract with NECA and an
independent auditor. Corporation staff stated, however, that the
1998 estimate may increase as program procedures and systems need to
be redesigned in response to FCC's recent rule changes.
--------------------
\5 NECA was established at FCC's direction in 1983 to administer
interstate access tariffs and the revenue distribution process for
local telephone companies.
PROCESSING OF APPLICATIONS IS
TAKING LONGER THAN EXPECTED
---------------------------------------------------------- Chapter 0:2
To receive universal service support, schools and libraries must
complete a two-stage application process which, for the program's
first year of funding, began in January 1998. During the first
stage, applicants post requests for services on the Corporation's web
site so that vendors can provide the applicants with bids on the cost
of providing the requested services. The Corporation has received to
date nearly 48,000 of these initial applications (FCC Form 470).
The second stage of the process begins after the schools and
libraries have accepted a bid and entered into a contract with a
service vendor. The applicants then submit on paper a second
application (FCC Form 471) that details the types and costs of the
services being contracted for, and the amount of the discount being
requested. In its original order, FCC determined that applications
would be funded on a first-come, first-served basis. Subsequently,
FCC amended its rules and the Corporation established a 75-day window
within which these second applications would be considered as
arriving at the same time. This was done, in part, in order to
reduce disparities between applicants with substantial administrative
resources and applicants with fewer resources. As a result, the
applications received within this window are not funded on a
first-come, first-served basis. Approximately 32,600 applications
were received during this initial window. The Corporation estimates
that the applications contain approximately $2 billion in requests
for discounts.
The Corporation's contractors review the second applications for
compliance with what the Corporation considers to be "minimum
processing standards," which include a check for original signatures,
completeness, and legibility. If the minimum standards are not met,
the application is rejected. If the standards are met but other
problems with the application are found, the application is sent to a
problem resolution team that contacts the applicant to make
corrections. After these problems are corrected, information from
the application is entered into a database.
FCC and the Corporation anticipated that all of the first year's
applications would be processed by the end of June 1998. According
to the Corporation, however, as of July 7, 1998, information from
only about 20,400 of the 32,600 applications (about 62 percent)
received within the initial window had been entered into the
Corporation's database. Of the remaining applications, approximately
2,560 (8 percent) were rejected for not meeting minimum processing
standards, 1,600 (5 percent) are in problem resolution, and 7,900 (24
percent) applications are awaiting data entry.\6
According to Corporation officials, the delay occurred because the
contractors have had to spend more time than expected in working with
applicants to resolve problems. The officials stated that applicants
found some parts of the applications and instructions confusing. In
addition, the officials noted that the contractors made some mistakes
initially in applying the minimum processing standards. Therefore,
some rejected applicants are currently being contacted to resolve
their problems, enter their data, and place them back in the initial
application window.
--------------------
\6 Approximately 140 applications have been withdrawn.
CONCERNS OVER KEY COMPLIANCE
CHECKS
---------------------------------------------------------- Chapter 0:3
To ensure compliance with FCC rules and regulations, the Corporation
relies on a combination of applicants' self-certifications,
third-party reviews, and its own procedures. Applicants are required
to self-certify that they are following the program's rules, and
third parties, such as state-level education and library agencies,
certify that the schools and libraries have technology plans in place
that show how technology will be used to support their educational
goals. In addition, the Corporation's staff and contractors check
applications to ensure that applicants are eligible, services are
eligible, and discount levels are appropriate. The way the
Corporation is conducting key compliance tests, however, raises our
concern about how effective the tests will be in detecting deviations
from program rules.
We are also concerned about the timing of detailed reviews that the
Corporation plans to conduct on a set of applications judged to be
"high risk," to provide further assurance that program rules are
being followed. Currently, the Corporation is not planning to begin
these selective, detailed reviews until after it issues commitment
letters to applicants and their vendors informing them of the amount
of funding that will be set aside to cover discounts for the services
they are requesting. Should these subsequent reviews reveal systemic
problems with the Corporation's quality assurance procedures or
defects in the reviewed applications, the Corporation could find it
difficult to take corrective actions since the commitment letters
are, in essence, "green light" signals to the applicants and vendors
to go ahead with the contracted services. If the Corporation finds
major problems with some of the applications at this time, it may
have to reduce or withdraw funding commitments previously made.
These applicants might find themselves responsible for paying more of
the cost of services received than they planned for.
PROGRAM RELIES HEAVILY ON
SELF-CERTIFICATION
-------------------------------------------------------- Chapter 0:3.1
On the basis of the Joint Board's recommendations, FCC's orders
specified that the application process for schools and libraries
would be grounded on self-certification by applicants. This was done
in the belief that the administrative burden on applicants should be
limited, while still holding them accountable for the information
they provide.
Accordingly, a responsible official must sign the application,
certifying that the information presented is correct. FCC can impose
civil and criminal penalties for applicants making willfully false
statements. In addition to this general self-certification that all
of the information provided is accurate, each application requires
specific self-certifications about certain information provided. For
example, the "request for services" application (FCC Form 470)
requires applicants to self-certify that they or the entities they
represent are an eligible school or library and that all services for
which discounts are requested will be used for educational purposes
only. The "request for discounts" application (FCC Form 471)
includes additional self-certifications, such as assurances that all
applicable state or local laws or rules regarding procurement have
been followed. The applicants must also self-certify they have the
budgetary resources, not only to pay their share of the costs of
requested services, but also those resources necessary to use and
maintain the technology services for which discounts are requested.
In addition to the self-certifications on the Form 470 and Form 471
applications, FCC requires applicants to have a separate technology
plan that provides details on how they intend to integrate technology
into their educational goals and curricula, as well as how they will
pay for the costs of acquiring and maintaining the technology. FCC
requires that the plans be independently approved. To implement this
requirement, the Corporation designates third parties, such as state
education and library agencies or private school associations, to
review and approve the plans on the basis of criteria provided by the
Corporation. The schools and libraries do not routinely submit
copies of their technology plans for review by the Corporation.
These technology plans do not have to be approved when the
applications are submitted or even when the Corporation commits
funding support to the applicants. However, the applicants must
certify to the Corporation that their plans have been approved before
any funds are disbursed to cover the services requested.
As a result, most applicants' requests for discounted services are
not routinely reviewed by the third-party reviewers in order to
determine whether, in fact, the requested services are linked to the
educational goals described in the applicants' approved plans.
According to Corporation officials, the third-party reviewers approve
the plan but are not required to review the application. And, as
noted above, the Corporation receives the application but does not
routinely receive copies of the technology plan, although it may do
so if it selects the application for a detailed review, as discussed
below.
ISSUES CONCERNING PROGRAM
INTEGRITY TESTS
-------------------------------------------------------- Chapter 0:3.2
The Corporation recognizes that self-certification and third-party
approvals alone are not adequate controls to ensure compliance with
the program's rules. It has therefore established a program
integrity assurance operation that is designed to help ensure that
applications and invoices submitted to the Corporation are complete,
accurate, and in compliance with FCC's rules.
No program integrity tests are applied to the initial application for
services (Form 470). Instead, the Corporation focuses on reviewing
the information submitted by applicants in their subsequent
application for discounts (Form 471). The Corporation's review of
this application takes place in two stages. During the first stage,
when the Form 471 application is submitted to the Corporation's
contractor, it is reviewed to ensure that it has met minimum
processing standards. This review includes checking to see that the
application has been signed by an authorized official and that the
applicant is clearly identified. If the application does not meet
the minimum standards, it is rejected and returned to the applicant.
If the application meets minimum standards but is in some way
unclear, it undergoes a "problem resolution" process, during which
the Corporation's contractor contacts the applicant to ask for
clarification.
At the second stage of the review process, the Corporation
electronically compares information provided by the applicant against
information in databases that the Corporation has compiled or
purchased. Specifically, the Corporation runs three
computer-assisted tests on each application. The set of tests: (a)
compares the name of the applying school or library to a database of
eligible schools and libraries, (b) looks for indications of whether
any discounts are being requested for ineligible services, and (c)
compares the discount requested by the applicant to the appropriate
discount, as calculated from data maintained by the Corporation.
Should these tests indicate potential problems with the eligibility
of applicant, the eligibility of the services, or with the
appropriateness of the discount, the Corporation's contractor
contacts the applicant to resolve the issues identified. Depending
on the additional information provided by the applicant, the
application can be approved, revised, or rejected (in total or in
part). Of about 20,000 applications entered into the database and
tested as of July 7, 1998, roughly 14,000 were identified by at least
one of the three tests as needing further review.
As indicated above, the Corporation has already applied these three
tests to more than one-half of the 32,600 applications it has
received. However, the Corporation added new criteria on several
occasions to improve the particular test used to identify potentially
ineligible services. Specifically, it added several criteria related
to services prohibited under FCC's rules after a number of
applications had already been reviewed. As a result, different test
standards have been applied to the applications already processed,
depending on when they were reviewed. According to Corporation
officials, they do not plan to use the updated criteria to recheck
applications processed earlier to determine if any passed that should
have been flagged for problem resolution.
Another concern is the latitude of deviation allowed by the
Corporation's automated test that checks whether an applicant is
requesting an appropriate discount level. This automated test
compares an applicant's requested discount with the appropriate
discount as calculated from data in the Corporation's database. The
Corporation is not reviewing all the applications showing
discrepancies between the database calculation and the applicant's
requested discount. Instead, it is allowing for a degree of
deviation from the criteria established by FCC because, according to
Corporation officials, the database used to conduct the test has some
reliability problems. They are also concerned that reviewing all
applications with any amount of deviation would increase processing
time and costs without resulting in commensurate benefits.
We recognize that internal controls should provide reasonable, but
not absolute, assurance of deterring or detecting noncompliance with
laws, regulations, and management policies. However, part of
determining the reasonableness of controls involves assessing them in
relation to the associated risks, costs, and benefits. A key risk in
this instance is that allowing inappropriately high discount levels
to some applicants reduces the amount of discount support available
for others. To date, the Corporation has not performed a
benefit-cost analysis to justify that its approach is reasonable.
Specifically, the Corporation has not determined the total dollar
amount of potentially inappropriate discounts that is passing
unchallenged through its computer-based test.
In addition to the tests described above, the Corporation plans to
conduct other computer-assisted tests on the applications. For
example, it plans on testing for duplicate applications. However,
these tests have not been finalized.
DETAILED REVIEW OF
APPLICATIONS NOT PLANNED
UNTIL AFTER FUNDS ARE
COMMITTED
-------------------------------------------------------- Chapter 0:3.3
In addition to these computer-assisted tests, the Corporation plans
to conduct more detailed manual reviews of applications that it
considers to be "high risk." However, according to current plans,
these reviews will not be performed until after funds are committed
to applicants and vendors.
To carry out these detailed reviews, the Corporation will designate
applications as high risk if they (1) request a large total amount of
funds, (2) request a large amount of funds compared with other
applications on a per-unit basis (such as per-student or per-patron),
(3) are from wealthy private schools,\7 or (4) have been placed on an
"alert list" of applications that have been identified in some way as
potentially violating the program's rules. Although the procedures
for these detailed reviews have not been finalized, the Corporation
plans to require applicants to submit additional material to support
the information provided in their applications, such as technology
plans, budget information, requests for proposals, and bids. Using
this material, the Corporation staff will give these high-risk
applications a detailed review for compliance with the program's
rules, such as those regarding eligibility of services and
prohibitions against the improper consideration of "free services" in
awarding contracts.
Performing these reviews after commitment letters have been sent has
some disadvantages. First, the reviews would not help the
Corporation evaluate the effectiveness of its three automated
compliance tests before funds are committed. As a result, it may not
be able to identify and correct any systemic problems in its
application review process prior to commitment. In addition, if the
Corporation finds major problems at this time with the applications
reviewed, it may have to reduce or withdraw funding commitments from
applicants. This could cause problems for applicants that have begun
receiving services on the basis of their commitment letters. These
applicants might find themselves responsible for paying a higher cost
for those services than they planned.
--------------------
\7 Under the Telecommunications Act of 1996, private schools with
endowments of more than $50 million are not eligible to participate.
KEY PROGRAM PROCEDURES HAVE NOT
YET BEEN FINALIZED
---------------------------------------------------------- Chapter 0:4
The Corporation has not yet finalized all the procedures, systems,
and internal controls that it needs in order to make funding
commitments and approve vendor compensation for the discounted
services provided to applicants. Corporation officials stated that
some progress has been made in developing the procedures and controls
needed to conduct these processes and in developing the automated
systems needed to carry them out. However, the procedures are still
subject to change. In fact, key control documents in this
process--the commitment letters and the "Receipt of Service" form
(FCC Form 486) which triggers the funds disbursement process -- have
yet to be made final. Corporation officials could not estimate when
these procedures and forms would be finalized.
This situation is of concern because these procedures could be needed
very shortly after commitment letters are sent to applicants and
vendors. For example, applicants who are already receiving eligible
services under existing contracts could quickly send in their Form
486s for processing once they receive commitment letters. Similarly,
their vendors could quickly begin submitting invoices, and the
Corporation could begin processing them once the related Form 486s
have been accepted. The Corporation itself estimates that the
invoices for payment could begin as soon as 15 days after commitment
letters are sent. If the procedures and internal controls for this
phase of the program are not in place when commitment letters are
issued, the Corporation may find itself unable to process vendor
invoices in a timely manner.
According to Corporation officials, the delay in finalizing the
commitment letters and disbursement procedures is due to the priority
they have given to processing the backlog of applications as well as
to anticipated changes in the program's rules. As discussed earlier,
FCC made changes to the universal service program in June 1998.\8 As
described in the order, there were two primary changes to the schools
and libraries discount program. First, the funding year was changed
from a calendar year to a fiscal year, effective immediately. To
ease the transition, the 1998 funding year was extended 6 months to
end June 30, 1999. According to FCC, this change was made because
delays in starting the program made it difficult for some schools to
use the funds within the original time period and because a fiscal
year calendar is more convenient for applicants and for the companies
that pay for universal service.
Second, the order changed the funding priorities for schools and
libraries. Previously, FCC rules did not provide for any
differentiation among applications that were received during the
initial 75-day application window, except to specify that the last
$250 million would be distributed on a priority basis to the
applicants eligible for the highest discount levels. However, after
recognizing that the funds provided by its orders would probably not
cover all of the applicants' requests, FCC changed its priority rules
so that all applications for telecommunications and Internet services
would be funded first. The remaining funds would be distributed to
applicants asking for internal connections, and those with the
highest discount levels would be funded first. Corporation officials
stated that they are still developing procedures to implement these
changes, including procedures to allow applicants to amend their
applications.
--------------------
\8 Fifth Order on Reconsideration and Fourth Report and Order in FCC
Docket No. 96-45, FCC 98-120, released June 22, 1998.
VERIFICATION OF SOUNDNESS OF
INTERNAL CONTROLS NOT PLANNED
TO BE COMPLETED BEFORE FUNDS
ARE COMMITTED
---------------------------------------------------------- Chapter 0:5
In December 1997, FCC's Chairman requested the Corporation to
contract with an independent auditor to verify that the program's
processes and procedures provide the controls needed to mitigate
against fraud, waste, and abuse. The Corporation accordingly engaged
the services of an independent audit organization, which is currently
reviewing the Corporation's systems and procedures and providing
advice on improvements. According to current plans, the auditor's
report is due to be completed before the Corporation authorizes the
disbursement of funds.
The independent audit is to include a review of the design of the
program's integrity assurance operations. According to the
Corporation, the audit objectives are to determine if the Corporation
has designed the controls necessary to provide reasonable assurance
that (1) all applications are processed in the order received; (2)
only eligible schools and libraries receive discounts for eligible
services; (3) the discount percentages are calculated in accordance
with FCC's orders; (4) payments for reimbursements to vendors are
timely; and (5) funding commitments do not exceed the program's
limits. However, the Corporation stated that these control
objectives have not been finalized and are subject to change.
The auditor's scope of work, in this start-up phase, is focused on
the design of the controls and will not include a verification of how
effectively the controls have been applied. For example, the auditor
will not review a sample of applications to determine whether the
eligibility tests for applicants and services actually identified the
applications that could have compliance problems.
We believe that the independent audit can be useful in strengthening
the program's integrity, even with its limited scope of work. We are
concerned, however, about the timing of the auditor's final report,
which is not due until after funding commitment letters have been
issued to applicants and vendors. When we discussed our concern with
Corporation officials, they proposed having the auditor brief the
Corporation's Board of Directors on its preliminary results regarding
"pre-commitment" procedures before the Corporation sends out funding
commitment letters.
This approach, however, does not adequately address our concerns.
The briefing would not cover the procedures that the Corporation
would use for its post-commitment review of applications that it
designates as high risk. More important, the briefing would not
cover the procedures, systems, and internal controls associated with
disbursing funds. As noted earlier, applicants and vendors could
begin sending in forms and invoices for funds disbursement as soon as
15 days after commitment letters have been sent out. It is therefore
important that the Corporation have all of its disbursement
procedures, systems, and controls in place and reviewed by the
independent auditor before commitment letters are issued. If the
auditor's final report comes later and identifies problems with
disbursement procedures, it may be difficult for the Corporation to
resolve them in a timely manner so that vendor invoices can be
processed promptly and accurately. Currently, the Corporation does
not know when the auditor's formal report will be completed, partly
because it does not know when it will finalize the funds disbursement
procedures, systems, and controls for the auditor to review.
PROGRAM LACKS CLEAR AND
SPECIFIC PERFORMANCE GOALS AND
MEASURES
---------------------------------------------------------- Chapter 0:6
Performance measurement is critical to determining a program's
progress in meeting its intended outcomes. Accordingly, the
Congress, FCC, and the Corporation need clearly articulated goals and
reliable performance data to assess the effectiveness of the schools
and libraries program.
FCC's combined "Strategic Plan for Fiscal Years 1997-2002 and Annual
Performance Plan for Fiscal Year 1999," prepared in response to the
Results Act, mentions the schools and libraries program in the
context of a large number of telecommunications initiatives.
However, this document provides no specific strategic goals,
performance measures, or target levels of performance for the program
as required by the act.
The schools and libraries program is listed under the combined plan's
"Policy and Rulemaking Activity Objective 2," which states that FCC
"will encourage competition in the telecommunications industry
through pro-competitive, deregulatory rulemakings, reducing consumer
costs and increasing the telecommunications choices available to
consumers." However, this is a high-level, comprehensive goal that
includes a wide array of telecommunications initiatives, such as
radio spectrum management, the allocation of toll-free numbers, the
review of merger requests, and standard setting for global
communications services. Moreover, for all of the varied activities
under this goal, there is a single general performance indicator:
"Performance will be measured by an annual compilation of the number
of actions taken by the Commission to promote competition and an
analysis of the result of these activities on consumers." While
enhancing competition is part of FCC's mission, it is not clear how
this statement translates into a strategic goal for the schools and
libraries program.
Similarly, the annual performance goal for the schools and libraries
program in fiscal year 1999 is too general, stating simply that FCC
"will work to improve the connections of classrooms, libraries and
rural health care facilities to the Internet by the end of [fiscal
year] 1999 and to maintain affordable Telecommunications services to
rural America." FCC needs to make the performance goals and measures
for the program more specific to bring them in line with the Results
Act's requirements. The act defines an annual performance goal as
the target level of performance expressed as a tangible, measurable
objective against which actual achievement is to be compared. An
annual performance goal is to consist of two parts: (1) the
performance measure that represents the specific characteristic of
the program used to gauge performance and (2) the target level of
performance to be achieved during a given fiscal year for the
measure.
According to Corporation officials, they have begun exploring options
for performance measurement. For example, they have identified a
number of existing data sources that could be used to develop
baseline data and measure trends in areas such as Internet
connections. While this is encouraging, it is important that FCC
take the lead as part of its policy-making and oversight
responsibilities for the program. FCC can build on the Corporation's
preliminary work in revising its own annual performance plan to
define specific goals and measures for the program. GAO has issued
guidance on developing effective strategic plans which FCC should
find useful.\9
--------------------
\9 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).
CONCLUSIONS
---------------------------------------------------------- Chapter 0:7
We recognize that a program in its first year of operation faces many
challenges and difficulties. While the initial year cannot be
expected to unfold without any problems, it is important that the
program's managers identify the major risks facing the program and
address them at the time when corrective actions would be most
effective. This time is approaching for the Corporation as it
prepares to issue its first set of funding commitment letters to
successful applicants. Given our concerns over the program integrity
assurance operations, we believe that the Corporation needs to
complete additional actions before, rather than after, commitment
letters are issued to applicants. Waiting until after commitment
letters have been issued will make it difficult for the Corporation
to take effective actions to correct any systemic problems in the
application review procedures and could put the Corporation in the
position of having to withdraw funding commitments from applicants,
even those who have begun receiving services from vendors.
Similarly, issuing commitment letters before all of the program's
operating procedures, systems, and internal controls have been
finalized and verified (especially those dealing with authorizing the
disbursement of funds) would put the program's integrity at risk.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:8
To help strengthen the Corporation's program integrity assurance
operations and help ensure that funding is properly directed to
eligible applicants, for eligible and appropriate services, and at
appropriate discount levels, we recommend that the FCC Chairman
direct the Chief Executive Officer of the Schools and Libraries
Corporation to complete the following actions before issuing any
funding commitment letters to applicants:
�Conduct detailed reviews of a random sample of applications to
assess not only the soundness of these applications but also the
overall effectiveness of the Corporation's program integrity
procedures for detecting ineligible applicants, ineligible services,
and inappropriate discount levels as defined by FCC orders. Should
these reviews reveal systemic weaknesses in program integrity
procedures or their implementation, the Corporation should take
corrective actions before committing any funds.
�Finalize procedures, automated systems, and internal controls for
the post-commitment phase of the program's funding cycle, including
funds disbursement.
�Obtain a report from its independent auditor that finds that the
Corporation has developed an appropriate set of internal controls to
mitigate against waste, fraud, and abuse.
In addition, before issuing commitment letters for those applications
identified as "high risk," the Corporation should conduct detailed
reviews of the technology plans and related documents to determine
whether the applicants have the resources to effectively use the
services requested and whether the applications are in compliance
with FCC rules regarding eligibility.
Finally, we recommend that the FCC Chairman direct responsible FCC
staff to develop goals, measures, and performance targets for the
schools and libraries program that are consistent with the
requirements of the Results Act. These measures should be defined by
the end of this Federal fiscal year so that data collection and
analysis activities can begin during the program's first funding
cycle and goals can be communicated to future applicants.
SCOPE AND METHODOLOGY
---------------------------------------------------------- Chapter 0:9
We performed our review during June and July 1998 in accordance with
generally accepted government auditing standards. We met with
officials from FCC and the Corporation to review the progress being
made in starting up the schools and libraries program and
implementing the first year's funding cycle. We also met with the
Corporation's contractor in New Jersey, which has major
responsibilities for processing and reviewing the program's
applications. We reviewed guidance and procedures developed by FCC
and the Corporation, along with status reports on the program's
activities and cost data. We did not verify the accuracy of the
information in these reports or the cost data.
AGENCY COMMENTS
--------------------------------------------------------- Chapter 0:10
We discussed our findings and recommendations with FCC and
Corporation officials. The Corporation's Chief Executive Officer
agreed with our recommendations. In addition, in response to
Corporation comments, we made a few revisions including clarifying
the scope of the detailed compliance reviews. FCC's Common Carrier
Bureau Chief stated that the recommendations are reasonable.
------------------------------------------------------- Chapter 0:10.1
Mr. Chairman, this concludes our testimony. We would be happy to
answer any questions that you and members of the Committee may have
at this time.
*** End of document. ***