oversight

Telecommunications: FCC Does Not Know if All Required Fees Are Collected

Published by the Government Accountability Office on 1999-08-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Permanent
                  Subcommittee on Investigations,
                  Committee on Governmental Affairs,
                  U.S. Senate

August 1999
                  TELECOMMUNICATIONS
                  FCC Does Not Know if All
                  Required Fees Are
                  Collected




GAO/RCED-99-216
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-281140

                   August 31, 1999

                   The Honorable Susan M. Collins
                   Chairman, Permanent Subcommittee
                     on Investigations
                   Committee on Governmental Affairs
                   United States Senate

                   Dear Madam Chairman:

                   In 1993, the Congress directed the Federal Communications Commission
                   (FCC) to begin recovering the cost of its regulatory activities by collecting
                   fees from the telecommunications industry. Since then, the collection of
                   regulatory fees has become an increasingly important activity for FCC. In
                   fiscal year 1998, over 70 percent of FCC’s new budget authority of
                   $222 million was offset through these regulatory fees, thereby greatly
                   reducing the need for appropriated funds to support FCC’s operations.1 FCC
                   also requires that companies and individuals submitting applications for
                   action by the Commission pay a fee before the application can be
                   considered. Since 1990, these fees have brought in from $28 million to
                   $51 million annually to the General Fund of the U.S. Treasury.

                   During an investigation into telephone services fraud done at your request,
                   our Office of Special Investigations tested FCC’s filing procedures for
                   telephone companies and found that it could file documents (tariffs)
                   describing long-distance rates without paying the required fee.2 Concerned
                   about the effectiveness of FCC’s fee collection activities, you asked us to
                   (1) review FCC’s controls for ensuring that required regulatory and
                   application fees are paid and (2) provide information on the extent to
                   which FCC is collecting the civil monetary penalties resulting from its
                   enforcement actions against entities that have violated its regulations.


                   FCC does not know if it is collecting all its required fees. In the case of
Results in Brief   regulatory fees, FCC relies heavily on the telecommunications industry to
                   comply voluntarily with its fee payment schedule because it does not have
                   a system in place to ensure that all appropriate fees are being paid.
                   Specifically, FCC does not have sufficient information to (1) identify all the


                   1
                    This figure includes regulatory fees credited to FCC’s salaries and expenses account. Other offsetting
                   funds, such as those related to spectrum auctions, are outside the scope of this report.
                   2
                     See Telecommunications: Telephone Slamming and Its Harmful Effects (GAO/OSI-98-10, Apr. 21,
                   1998).



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entities that should pay regulatory fees and (2) determine whether these
entities have paid the full amounts required. In addition, FCC’s fee
collection database is not linked to its licensing databases, making it
difficult for FCC to perform routine automated checks on whether all
licensees have paid their regulatory fees. Nevertheless, FCC has the
capability to undertake substantive oversight efforts using the information
it does have. In 1998, for example, it used available information to check
on regulatory fee collection for radio stations, identifying over 800 stations
that did not pay required fees and collecting nearly $600,000 in past-due
fees and late payment penalties. However, this type of special effort is not
routinely done by FCC. Regarding application fees, our examination of a
random sample of applications processed by five FCC bureaus found that
four of the bureaus did not have adequate documentation that fees were
paid in many cases. FCC’s Office of Inspector General also has evaluated
FCC’s fee collection database and reported that FCC could not provide
supporting documentation for almost half of the transactions selected for
review. Both FCC’s Office of Managing Director and Office of Inspector
General have initiatives under way aimed at improving the fee collection
processes. These actions are in early stages, however.

FCC reported to the Department of the Treasury that, at the end of fiscal
year 1998, it had an uncollected balance of about $15 million in civil
monetary penalties. However, we found that the FCC’s reports to the
Treasury contain errors and are therefore not reliable. As a result, we
cannot reach any conclusions about the effectiveness of FCC’s collection of
civil monetary penalties. Data problems aside, FCC officials maintain that it
is difficult to predict how much of the outstanding balance of proposed or
assessed penalties ultimately will be collected because most of the
penalties listed in the Treasury report are not yet legally enforceable debts.
On the basis of experience from prior years, these officials estimate that
about 75 percent of the outstanding proposed or assessed penalties will
remain uncollected.

This report recommends that FCC (1) take better advantage of available
information to improve its oversight of regulatory fee collection,
(2) establish procedures for ensuring that application fees are paid before
applications are processed, and (3) correct unreliable data on civil
monetary penalties and the internal control weaknesses that led to the
errors.




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             The Omnibus Budget Reconciliation Act of 1993 directed FCC to assess and
Background   collect annual regulatory fees in order to recover the costs incurred in
             carrying out its enforcement, policy and rulemaking, international, and
             user information activities. Under FCC’s rules, telecommunications entities
             are required to pay annual regulatory fees if they are subject to FCC
             regulations, regardless of whether they have direct dealings with FCC.3
             Ideally, FCC would need to know all the entities that are subject to its
             regulations to ensure proper fee collection. In practice, this is a difficult
             task, given the rapid pace of change in the makeup of the
             telecommunications industry.

             Separate sets of fees are associated with the various types of
             telecommunications services, such as radio and television stations, cable
             television systems, interstate telephone service providers, and satellite
             communications companies. The fees for each of these services are based
             on several factors, such as (1) the costs of performing regulatory activities,
             (2) an estimate of the number and size of the entities subject to each type
             of regulatory fee, and (3) the amount that the Congress directs FCC to
             recover annually through regulatory fees. Each year, FCC’s Office of
             Managing Director prepares and issues a new regulatory fee schedule that
             adjusts the fees on the basis of changes in these factors. For fiscal year
             1998, regulatory fees ranged from under $50 to more than $160,000,
             depending on the type of telecommunications service.

             Fees play an important role in FCC’s budget, since collections from
             regulatory fees and certain other sources are used to offset FCC’s
             appropriation on a dollar-for-dollar basis. As shown in table 1, FCC has
             become a fee-reliant agency in recent years mainly though its regulatory
             fees.4 For example, in both fiscal years 1997 and 1998, regulatory fees
             offset about 70 percent of FCC’s total budget authority. In fiscal year 1998,
             the $190 million that FCC collected from regulatory fees and other sources
             reduced the need for appropriated funding to about $32 million.




             3
              There are some exceptions. For instance, governmental and nonprofit entities are exempt from
             regulatory fees.
             4
              See Federal User Fees: Budgetary Treatment, Status, and Emerging Management Issues
             (GAO/AIMD-98-11, Dec. 19, 1997) for a discussion of other agencies that rely heavily on offsets from
             fees.



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Table 1: Historical Overview of FCC’s
Offsetting Collections Credited to Its   Dollars in millions
Salaries and Expenses Account                   Total new
                                         Fiscal    budget                 Funding from           Funding from offsetting collections
                                         year    authority               appropriations           Regulatory fees              Other sourcesa
                                         1993             $141                       $140                      None                    Under $1
                                         1994               168                       102                        $59                            7
                                         1995               210                         69                       116                           25
                                         1996               202b                        59                       124                           19
                                         1997               223                         35                       157                           31c
                                         1998               222                         32                       159                           31c
                                         a
                                          ”Other sources” includes interagency reimbursables and auctions receipts to fund the
                                         Spectrum Auctions Program.
                                         b
                                             Does not include about $8 million in available unobligated funds from various sources.
                                         c
                                          Offsetting collections for the administrative costs to support the Spectrum Auction Credit
                                         Program Account are reported separately in the President’s Budget Request and are paid from
                                         auction receipts.

                                         Source: Office of Managing Director, FCC.



                                         From fiscal years 1995 through 1997, FCC’s collection of regulatory fees
                                         exceeded the obligation limitations set by the Congress.5 For fiscal year
                                         1998, however, FCC’s collections fell about $7 million short of the target
                                         amount. For fiscal year 1999, the Congress raised the amount of regulatory
                                         fees that FCC is to collect to $172.5 million.

                                         In addition to annual regulatory fees, FCC collects application fees as
                                         authorized under section 8 of the Communications Act of 1934, as
                                         amended. An applicant is required to pay a fee whenever applying for
                                         certain types of actions by the Commission, such as the approval of an
                                         operating license, technical certification, a change in a station’s identifying
                                         call sign, a construction permit, or transfer of control. For fiscal year 1998,
                                         the fees ranged in size from under $50 for routine applications, to about
                                         $8,000 for certain types of hearings, to more than $250,000 to launch a
                                         communications satellite. Unlike regulatory fees, application fees are
                                         deposited into the General Fund of the U.S. Treasury and are not used to
                                         offset FCC’s appropriation. The amount of application fees collected is also
                                         much smaller than regulatory fees. In fiscal year 1998, application fees
                                         brought in about $32 million.

                                         5
                                          Each fiscal year, the Congress establishes an obligation limitation on how much FCC can spend from
                                         regulatory fees. Regulatory fees collected in excess of this amount remain available for use in
                                         subsequent fiscal years. For example, the $159 million in fiscal year 1998 regulatory fees is made up of
                                         $155 million in current year regulatory fees and $4 million in regulatory fees collected in prior years.



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                        One of FCC’s most important functions is to ensure compliance with its
                        rules. Violations can disrupt the orderly provision of telecommunications
                        services and compromise public safety. Section 503 of the
                        Communications Act of 1934, as amended, authorizes FCC to assess civil
                        monetary penalties (called “forfeitures”) against those who violate the
                        Communications Act or the Commission’s regulations. Some types of
                        actions that have resulted in penalties include operating an unlicensed
                        broadcast station, selling unauthorized radio equipment, and changing
                        consumers’ long-distance telephone carriers without permission.


                        FCC does not know if all required fees are being paid. In the area of
FCC Does Not Know       regulatory fees, FCC relies on members of the telecommunications industry
if All Fees Are Being   to comply voluntarily with its fee payment schedule, since it lacks the
Paid                    necessary information and systems to verify that every entity that should
                        pay a fee has done so. Nevertheless, FCC can use information it currently
                        has to undertake substantive oversight efforts. In 1998, for example, FCC
                        was able to identify over 800 radio stations that had not paid their required
                        regulatory fees. However, oversight efforts such as this have not been
                        routinely undertaken by FCC. As for application fees, our review of files at
                        five FCC bureaus showed that while one bureau was able to produce
                        documentation showing that fees were paid for all but a few cases, the
                        other four bureaus were unable to produce documentation showing that
                        the required fees were paid in 18 to 71 percent of cases. FCC’s Office of
                        Managing Director and Office of Inspector General are both aware of
                        problems with FCC’s fee collection, and actions are under way that could
                        strengthen the collection process. These actions are in the early stages,
                        however, and it is too early to assess their effectiveness.


Regulatory Fees         According to FCC officials, there are two reasons why FCC does not verify
                        whether all entitites that should pay regulatory fees are doing so. First,
                        while most FCC bureaus maintain databases of information on companies
                        that have asked for a license or have been subject to other regulatory
                        action, these databases do not contain information on entities that are
                        subject to regulatory fees but are not licensed by FCC. For example, the
                        databases do not include many telephone companies because while they
                        are required to report their rates to the Commission, they are not required
                        to have a license. Second, even when FCC has licensing information on an
                        entity, the information may not be current because of changes in the
                        company’s name, ownership, address, or identifying call sign. For
                        example, radio stations have recently seen a high annual turnover in



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ownership and many changes in the stations’ identifying call signs. Station
ownership may even change between the time the annual regulatory fee
notice is sent out and the time payment is due.

Additionally, FCC’s licensing databases do not always contain information
necessary to determine whether an entity has paid the full amount of
regulatory fees that it owes. Some regulatory fees are for fixed amounts,
such as those for communications satellites. However, many regulatory
fees are determined by the size of the entity as measured by the broadcast
market served (as with television and radio stations), the number of
subscribers served (as with cable services), or the amount of revenue
generated (as with telephone companies). Without information on an
entity’s size, it is difficult for FCC to check on the accuracy of payment. For
example, FCC’s fee schedule requires some commercial radio operators to
pay a fee that is based on the number of units (such as pagers or radio
sets) in service, but the Commission does not require the operators to
report the number of units they have in service during the licensing
process.

Even where information is available to FCC, several factors can limit FCC’s
ability to use it to determine if required fees were paid. For example, FCC’s
licensing databases are not linked electronically to the database that
stores information on who has paid fees. Any comparisons between them
must be done manually. In addition, FCC does not assign unique,
agencywide identifiers to the entities it deals with in order to track them in
its databases when their name, call sign, or ownership change. The lack of
unique identifiers makes it difficult for FCC to match the names of those
entities that paid fees with those that owed them.

To illustrate this point, we attempted to manually match the names of
more than 2,500 telephone companies operating in fiscal year 1998 with
the names of companies listed in FCC’s fee collection database as having
paid a regulatory fee that year. We were able to match only about
19 percent of the company names with those listed in the fee collection
database, even allowing for some variations in the names. (For example,
when we found companies with multiple similar names, such as Bell
Atlantic Mobile and Bell Atlantic Virginia, we counted all the fees as paid if
any of the names appeared in the fee database.) We also attempted to
match the names of nearly 800 telephone companies that notified FCC of
changes in their rates in fiscal year 1998 with those listed in the fee
collection database but could match only 38 percent. Our inability to find
matches does not necessarily mean that these entities did not pay their



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annual regulatory fees, since FCC and industry officials told us that it is
possible that fees were paid under a different company name. But without
an unambiguous means of identifying a company through a unique
identifier, we could not determine the extent to which these companies
complied with FCC’s fee payment rules.

While FCC does not attempt to verify that all entities subject to regulatory
fees have paid them, it has demonstrated that it can use its existing
information to identify some entities that may not have paid their fees. For
example, FCC mounted a special effort during 1998 to determine whether
all AM and FM radio stations paid their regulatory fees for fiscal year 1997.
FCC manually compared radio stations’ licensing information with the list
of stations that paid their regulatory fees and found nearly 1,000 stations
that did not appear in the fee database for fiscal year 1997. After
contacting these stations, FCC netted an additional $594,000 in past-due
fees and late penalties from nearly 800 stations. Another 79 stations were
able to prove that they had paid the fee or were exempt. FCC plans to
collect the remaining outstanding balance through additional actions
against roughly 100 stations.

In other areas, FCC suspects that some entities may not have paid the
appropriate fees but has not determined the extent of actual
noncompliance. In May 1999, FCC’s Common Carrier Bureau raised
concerns that some telephone companies may not have paid their
regulatory fees or may have paid an incorrect amount. For example, after
manually reviewing the fee database, the bureau could not confirm
whether 113 companies paid any regulatory fees in 1997, estimating that
the fees in question could amount to almost $10 million. Also, officials in
the Office of Managing Director stated that the office is planning to review
the fees paid by some broadcast stations in fiscal year 1998 because these
stations appear to have paid about $1.2 million less in fees than required.

FCC’s fee schedule includes a deadline by which regulatory fees must be
paid. Section 9 of the Communications Act of 1934, as amended,
authorizes the Commission to assess a penalty for the late payment of
regulatory fees, amounting to 25 percent of the fee that was not paid by
the deadline. However, FCC did not enforce this provision against late filers
until last year when, for the first time, it sent notices to all entities that
paid the regulatory fee after the closing date specified in the order,
informing them that they owed a 25-percent late fee. FCC estimates that
about 1,300 entities owed a total of about $760,000 in late fees. FCC
informed us that as of August 5, 1999, it had billed all late filers and had



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                   collected $247,721 in late fees. Officials in FCC’s Office of Managing
                   Director stated that they intend to continue to enforce the penalty for late
                   payments in coming years.


Application Fees   Five of FCC’s bureaus—Wireless Telecommunications, Mass Media,
                   Common Carrier, Cable Services, and International—process applications
                   related to the entities they regulate. In most cases, the applicant is
                   required to send to the Mellon Bank in Pittsburgh, Pennsylvania, an FCC
                   application form describing the type of transaction requested, along with
                   an FCC “Remittance Advice” form and payment of the appropriate
                   application fee as specified in FCC’s schedule of application fees.6 Mellon
                   Bank stamps the paperwork with a receipt date, assigns a fee control
                   number, deposits the payment with the U.S. Treasury, enters data from the
                   application into the fee collection database, and forwards the application
                   material and copies of proof of payment, such as a check or electronic
                   payment number, to the appropriate FCC bureau for processing.

                   According to Office of Management and Budget (OMB) Circular A-123,
                   federal agencies are required to promptly record financial transactions,
                   and documentation for transactions and related procedures must be clear
                   and readily available for examination. However, while FCC officials told us
                   that staff in each bureau are to check each application for proof that the
                   fee has been paid prior to taking action on the application, none of the
                   bureaus were able to provide us with written policies documenting the
                   procedures followed during this process. Additionally, we identified many
                   cases in which adequate documentation did not exist to show that
                   application fees were paid, as shown in table 2. Although FCC was able to
                   provide supplemental information from other sources to show that the fee
                   was paid in some of the cases, only one bureau had sufficient information
                   to show that the fees were paid in nearly all of the cases we selected.




                   6
                    Under an agreement with the Department of the Treasury, Mellon Bank manages post office boxes for
                   federal agencies, including FCC.



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Table 2: Results of Application File Review
                                      Percentage of
                             applications for which                Percentage of                                          Percentage of
                                the application and       applications for which                                 applications for which
                                           adequate          FCC staff provided                                  the application and/or
                                  documentation of                 supplemental                Percentage of                  adequate
                             payment were located       information adequate to         applications claiming        documentation of
                              in the application file      demonstrate that the            to be exempt from     payment could not be
Bureau                            reviewed by GAO       application fee was paid                  paying a fee                  located
Mass Media                                        17                              4                        20                        59
Cable Services                                    28                              0                         1                        71
Wireless
Telecommunications                                37                            31                         32                         1
International                                     45                            24                         14                        18
Common Carrier                                    62                            15                          3                        20
                                             Note: Percentages may not add to 100 because of rounding.

                                             Source: GAO’s analysis of FCC’s records.



                                             Specifically, we examined two types of evidence to reach our conclusions.
                                             First, we examined the documentation in the files associated with 150 to
                                             200 applications filed in the five bureaus during fiscal year 1998. We found
                                             that only 17 to 62 percent of the files contained both a copy of the
                                             application and proof of payment. For example, as shown in the first
                                             column of data in table 2, only 28 percent of the Cable Services files we
                                             reviewed contained copies of both documents. According to bureau
                                             officials, there are several explanations for why some files do not contain
                                             documentation showing that the fee was paid. Officials from the Cable
                                             Services and Mass Media bureaus stated that when an application that
                                             covers multiple stations is received, the original application is placed in
                                             one station’s file, and the other stations’ files may not get copies. Also,
                                             officials from the Common Carrier and International bureaus indicated
                                             that the application files are made available to the public, who could alter
                                             or remove some files.

                                             We provided FCC with a list of the applications for which we could not find
                                             adequate documentation in the files to show that an application fee was
                                             paid. The bureaus were able to provide supplemental documentation
                                             showing that an application fee was paid in up to 31 percent of the cases.
                                             For example, as shown in the second column of data in table 2, the
                                             International Bureau provided further documentation to show that the
                                             required fee was paid for an additional 24 percent of the applications we




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selected. In many other cases, however, the bureaus provided evidence
that a fee was paid, but the evidence was not sufficient to show that the
fee was related to the application we selected. For example, in about
one-third of the cases for which the bureaus provided additional
information, a fee control number was provided as proof of payment,
rather than a copy of the check. When the fee data generated by Mellon
Bank included a reference to the application in question, we considered
that data as adequate proof of payment. However, in many cases, the only
identifying information in the data file was the name of the applicant, the
date and amount of payment, and the fee type. Because it is not
uncommon for some applicants to submit several of the same types of
applications within a short period of time, it is not always possible to
determine which application a fee is associated with. For example, five of
the fee numbers provided by the Cable Services Bureau suggest that the
fees were paid nearly a year before the applications were filed, and one
suggests that the fee was paid more than a month after the application was
filed. It is possible, though, that the fees associated with the numbers
provided by the bureau were actually related to other applications filed by
the same licensee. Also, the Mass Media Bureau provided copies of
applications and FCC’s Remittance Advice forms as proof that the fee was
paid. However, these documents themselves are not adequate proof that
the fee was paid because they do not indicate that a payment was received
by Mellon Bank.

The bureaus also identified files that were exempt from the requirement to
pay an application fee. As shown in the third column of data in table 2,
from 1 to 32 percent of the files we examined in the bureaus were
identified by the applicant or the bureau as being exempt from paying the
fee. In most cases, the exemptions were based on the type of application
being filed, such as a change of address, which does not require a fee. In
about one-third of the cases, an exemption was claimed because the
applicant was identified as a government entity. FCC requires those
claiming an exemption from regulatory fees to provide documentation to
confirm that they are entitled to the exemption. However, FCC does not
require those entities claiming to be exempt from application fees to
provide any proof of their exempt status. Instead, FCC relies on applicants
to self-certify that they are entitled to an exemption by checking off a box
on their application forms.

After examining the application files and supplemental information, we
concluded that the Wireless Telecommunications Bureau was the only
bureau to provide an application and documentation showing that a fee



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                           was paid or not required for almost all of its files. The other bureaus could
                           not provide documentation to show that a fee was paid or not required for
                           18 to 71 percent of their files, as shown in the last column of table 2.


FCC’s Inspector General    Several recently published reports have revealed additional problems with
Has Identified Similar     FCC’s fee collection process. First, in September 1998, FCC’s Office of

Problems                   Inspector General reported that the computer system FCC uses to record
                           collections did not provide evidence for all transactions, did not provide
                           clear audit trails for changes made to transactions, and did not provide for
                           adequate internal controls.7 The Inspector General’s office made 128
                           observations and recommendations for improvement. For example, the
                           report found that FCC’s collections system did not allow for an audit trail
                           for changes to its database and did not record and track all related
                           transactions. FCC officials concurred with 126 of the report’s observations
                           and stated that efforts were under way to address many recommendations.
                           Also, as part of the Inspector General’s effort, FCC engaged an outside
                           accounting firm to assess the completeness, validity, and accuracy of the
                           data contained in the fee collection system. The firm found that for about
                           45 percent of the transactions it examined, FCC could not provide
                           documentation to support the transaction, or there were discrepancies
                           between the information in the system and the documentation provided.

                           In November 1998, FCC’s Office of Inspector General reported that FCC
                           lacked the ability to determine whether certain radio operators were
                           paying the appropriate regulatory fees.8 The Inspector General identified
                           frequent discrepancies between the database that recorded which
                           operators had licenses and the database that recorded which operators
                           paid regulatory fees. Concluding that neither database was reliable, the
                           Inspector General suspended further work on this issue until reliable data
                           become available.


Commission Has Efforts     In presenting the fiscal year 2000 goals in its most recent performance
Under Way to Improve Fee   plan, FCC states that it will “address and correct all management
Collection                 weaknesses in FCC collections and other financial management systems to
                           ensure that all licensees have paid the correct auction, application, or



                           7
                            See Special Review of Federal Communications Commission (FCC) Collection System, FCC Office of
                           Inspector General (Special Review Report No. 97-21, Sept. 25, 1998).
                           8
                            See Special Review of Federal Communications Commission (FCC) CMRS Regulatory Fee Payments,
                           FCC Office of Inspector General (Special Review Report No. 98-8, Nov. 24, 1998).



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                     regulatory fees and that all fiscal accounting standards are met.”9 The plan
                     does not describe the specific steps that FCC will take to achieve this broad
                     goal or the performance measures that it will use to gauge its progress.
                     FCC’s Office of Managing Director does, however, have important efforts
                     under way to improve fee collection. At the time the Inspector General’s
                     report was published in September 1998, the Managing Director had
                     already hired a project manager to begin to design and implement a new
                     financial information system. In July 1999, FCC awarded a contract to an
                     independent consulting firm to acquire a new financial system that will
                     provide FCC with a single internal source of information on collections,
                     receivables, and revenues and will maintain data concerning fees, fines,
                     civil monetary penalties, and auction proceeds. In addition, the Office has
                     begun efforts to assign a unique identifier code to each entity that
                     completes a financial transaction with FCC, so that the agency can track
                     payments and other transactions made by the entity even when its name or
                     ownership changes. The Office expects the new system and the unique
                     identifier code to be in operation by mid-2000. In addition, FCC’s Office of
                     Inspector General is continuing its efforts in this area by contracting with
                     an independent auditor to review FCC’s financial management practices
                     and recommend improvements. The auditor is expected to complete this
                     review by February 2000, and the Inspector General will use its findings in
                     its audit of the Commission’s financial statements in fiscal year 2000.


                     FCC can assess civil monetary penalties against those who violate its
FCC Does Not Have    regulations or related laws through either (1) an informal administrative
Reliable Data on     process or (2) a formal evidentiary hearing. In the more commonly used
Penalty Collection   administrative process, FCC issues a notice that specifies the amount of the
                     proposed penalty and its justifications. The alleged violator may either pay
                     the proposed penalty or respond by showing reasons why the penalty
                     should be reduced or dismissed. According to FCC officials, alleged
                     violators often try to negotiate a settlement with FCC that can involve
                     making a voluntary payment and taking some type of corrective action. If
                     the proposed penalty is not paid or settled, FCC will issue a final order in
                     which the penalty is reduced, canceled, or assessed. An administrative
                     review often follows at the request of an assessed violator. Those penalties
                     that are not paid, settled, or canceled are referred to the Department of
                     Justice for collection in district court. By statute, such an action shall be



                     9
                      FCC’s strategic plan and annual performance plan, prepared in response to the requirements of the
                     Government Performance and Results Act, is incorporated in its February 1999 report to the Congress,
                     Fiscal Year 2000 Budget Estimates.



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by trial de novo,10 and the existence of an informal FCC administrative
proceeding cannot be used to the prejudice of the person or entity
involved unless that person or entity had paid the penalty order or a
district court decision ordering payment has become final. FCC may also
assess a penalty after issuing a notice and conducting a full evidentiary
hearing before an administrative law judge. According to FCC officials, this
process is used infrequently—generally, for more serious offenses. FCC
refers the penalties assessed via this process to the Department of Justice
for collection after a final order has been obtained and affirmed in court, if
appealed. Unlike the nonhearing penalties, the statute provides that the
validity and appropriateness of any final hearing penalty shall not be
subject to review in the enforcement action. From October 1997 through
February 1999, FCC referred 11 cases totaling $119,500 and 1 totaling
$5.7 million to the Department of Justice for collection.

We asked FCC’s Office of Managing Director to provide us with data on the
amount of civil monetary penalties assessed and collected during fiscal
years 1997 and 1998. In response, FCC provided us with its annual reports
to the Treasury on the status of penalty assessment and collection. See
table 3.




10
  This is a trial on the merits of the case, in which the validity of the underlying FCC order would be at
issue.



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                                         B-281140




Table 3: Summary of FCC’s Civil
Monetary Penalty Assessments and                                                                                             Outstanding
Collections in Fiscal Years 1997 and     Status of penalties                               Number             Amount             balance
1998, as Reported to the Department of   Outstanding assessed penalties as
the Treasury                             of the end of fiscal year 1996                                                       $11,659,353
                                         Penalties assessed in fiscal year
                                         1997                                                    21a         $414,000a
                                         Penalties collected in fiscal year
                                         1997                                                   117          2,465,832
                                         Penalties for which collection was
                                         stopped in fiscal year 1997                             70            893,431
                                         Outstanding assessed penalties as
                                         of the end of fiscal year 1997                                                        10,500,951
                                         Penalties assessed in fiscal year
                                         1998                                                    59        10,613,437
                                         Penalties collected in fiscal year
                                         1998                                                   186          1,280,643
                                         Penalties for which collection was
                                         stopped in fiscal year 1998                            435          4,615,494
                                         Outstanding assessed penalties as
                                         of the end of fiscal year 1998                                                        15,212,251
                                         a
                                          According to officials in FCC’s Office of Managing Director who are engaged in correcting the
                                         data errors, in fiscal year 1997 there were actually 79 penalties assessed, totaling $2,056,000.
                                         The number and amount of collections for fiscal year 1997 were verified as accurate using source
                                         documents. The number and amount of adjustments (collections stopped) for fiscal year 1997
                                         were revised but not verified. Figures for fiscal year 1998 had not yet been verified to source
                                         documents.

                                         Source: FCC Civil Monetary Penalty Reports for Fiscal Years 1997 and 1998.



                                         In examining the data, however, we found an apparent error—$893,431 in
                                         penalties for which collection was stopped seemed to have been
                                         erroneously added to the outstanding balance, instead of being subtracted
                                         from it. When we raised this issue with FCC, officials in the Office of
                                         Managing Director explained that the Treasury report for fiscal year 1997
                                         was completed by a member of the clerical staff and had not received any
                                         substantive review. They also stated that the Managing Director had
                                         recently created and filled a position that will oversee the accuracy of all
                                         reports under the responsibility of the Associate Managing Director for
                                         Financial Operations.

                                         Subsequently, the Office of Managing Director began an effort to examine
                                         the source documents for fiscal year 1997 and found that about
                                         $1.6 million in new assessments was erroneously counted as adjustments
                                         (collections stopped). In addition, the number of penalty actions in all but



                                         Page 14                                     GAO/RCED-99-216 FCC’s Fees Collection Activities
              B-281140




              one category were found to be incorrect. Finally, the staff stated that the
              outstanding balance for assessed penalties for the end of fiscal year 1997
              was correct as reported to Treasury because the underlying dollar errors
              happened to cancel each other out. However, at the time we concluded
              our review in July 1999, the staff had not yet verified the amount of
              adjustments (collections stopped) for fiscal year 1997 or any of the figures
              for fiscal year 1998. Without complete and accurate data, we could not
              reach any conclusions about the effectiveness of FCC’s collection of civil
              monetary penalties.

              The data problem aside, FCC officials maintain that it is difficult to predict
              how much of the outstanding balance of proposed or assessed penalties
              ultimately will be collected because FCC has taken the position that most
              of the penalties listed in the Treasury report are not yet legally enforceable
              debts.11 The Commission’s view, after consultation with the Department of
              the Treasury, is that it is inappropriate to attempt collection efforts before
              there is a legal obligation for the suspected violator to pay. However, on
              the basis of historical data on the amount of penalties collected in past
              years, they estimate that about 75 percent of the outstanding balance will
              remain uncollected.


              FCC does not know if all entities have paid the fees they owe. This is
Conclusions   particularly a problem with the collection of regulatory fees. FCC has
              identified several hundred entities that have failed to pay appropriate fees
              and is aware of other possible cases of nonpayment. A shortfall in
              regulatory fee collection has budgetary ramifications, since FCC’s
              appropriation is reduced by its offsetting collections. There is also an issue
              of equity, since responsible members of the industry who pay their fees
              are, in essence, bearing the cost for those who do not pay.

              FCC is currently taking actions aimed at improving the financial
              information system used to support fee collections, linking its licensing
              and fee databases, and assigning unique identifiers to entities doing
              business with the Commission. Also, the independent review of FCC’s
              financial management practices by FCC’s Office of Inspector General is
              expected to provide a comprehensive look at FCC’s system of financial
              controls and recommend improvements. These are important first steps,

              11
                On the basis of sections 503(b) and 504 of the Communications Act, and after consultation with the
              Department of the Treasury, FCC has taken the position that penalties going through its administrative
              process are not legally enforceable debts until the Department of Justice obtains a judgment. FCC
              states that penalties going through its hearing process become legally enforceable debts after a final
              order has been obtained and affirmed in court if appealed.



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                      B-281140




                      but it is too early to evaluate their effectiveness. Nevertheless, FCC can
                      take action now to make better use of the information and systems
                      currently available to provide stronger oversight on fee collections. Recent
                      FCC actions have shown that proactive oversight efforts can uncover cases
                      in which regulatory fees were not paid and that pursuing these cases can
                      lead to additional fee collections. Such efforts, however, are not a routine
                      part of FCC’s approach to regulatory fee collection.

                      In addition, without adequate documentation of application fee
                      procedures and payments, FCC cannot ensure that all required application
                      fees are being collected. Although FCC collects much less in application
                      fees each year than in regulatory fees, the number of files for which proof
                      of payment could not be provided raises serious concerns about the extent
                      to which FCC is collecting these fees. The fact that the Wireless
                      Telecommunications Bureau (which processes far more applications than
                      the other bureaus) was able to document that a fee was paid or not
                      required for nearly all the application files we reviewed demonstrates that
                      compliance with the requirement for adequate documentation is not
                      unreasonable.

                      Finally, while FCC’s planned new system and the policy changes that FCC
                      has already made should help improve collection rates, the discovery of
                      errors in data previously reported to the Department of the Treasury
                      reinforces the need to ensure that the new system will not be handicapped
                      from the outset by erroneous data.


                      To better ensure that FCC collects appropriate regulatory and application
Recommendations       fees and accurately tracks the status of civil monetary penalty assessments
                      and collections, we recommend that the Chairman of the Federal
                      Communications Commission direct FCC’s Managing Director and Bureau
                      Chiefs to take the following actions:

                  •   Develop and implement a business plan and procedures for routinely using
                      the information available to FCC to identify, to the extent possible, entities
                      that have not paid required regulatory fees and to collect the amounts they
                      owe. This plan should include specific performance goals and measures
                      consistent with the requirements of the Government Performance and
                      Results Act.
                  •   Develop and implement written procedures adequate to ensure that the
                      required application fee has been paid before an application is approved.




                      Page 16                           GAO/RCED-99-216 FCC’s Fees Collection Activities
                      B-281140




                  •   Conduct an audit of FCC’s data on the status of civil monetary penalties to
                      correct any data errors and internal control weaknesses that may have led
                      to errors before incorporating these data into FCC’s planned new financial
                      system.


                      We provided FCC with a draft of this report for review and comment. In a
Agency Comments       letter dated July 30, 1999, FCC’s Managing Director wrote that the
                      Commission concurred with our three recommendations and will
                      incorporate them as part of a strategy to improve financial management
                      over fee collections, tracking and reporting of receivables, and collection
                      of enforcement actions. The Managing Director also emphasized that FCC
                      is aware of the need to improve the fee collection process and has been
                      active in addressing deficiencies as soon as identified. The full text of FCC’s
                      letter, along with our responses to several points raised in it, is included in
                      appendix II.


                      We performed our review from September 1998 through July 1999 in
                      accordance with generally accepted government auditing standards. We
                      did not evaluate the reliability of the computer-generated data provided by
                      FCC. Our review was based upon interviews with officials from various FCC
                      offices and bureaus, as well as upon examinations of FCC records. Our
                      scope and methodology are discussed further in appendix I.

                      As agreed with your office, unless you publicly announce the contents of
                      this report earlier, we plan no further distribution until 30 days after the
                      date of this letter. We will then send copies to interested congressional
                      committees; the Honorable William E. Kennard, Chairman, FCC; the other
                      FCC commissioners; Andrew S. Fishel, Managing Director, FCC; and the
                      Honorable Jacob J. Lew, Director, OMB. We will also make copies available
                      to others upon request.




                      Page 17                            GAO/RCED-99-216 FCC’s Fees Collection Activities
B-281140




If you or your staff have any questions about this report, please call me on
(202) 512-7631. Key contributors to this report are listed in appendix III.

Sincerely yours,




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




Page 18                           GAO/RCED-99-216 FCC’s Fees Collection Activities
Page 19   GAO/RCED-99-216 FCC’s Fees Collection Activities
Contents



Letter                                                                                                 1


Appendix I                                                                                            22

Scope and
Methodology
Appendix II                                                                                           26

Comments From the
Federal
Communications
Commission
Appendix III                                                                                          32

GAO Contact and Staff
Acknowledgements
Tables                  Table 1: Historical Overview of FCC’s Offsetting Collections                   4
                          Credited to Its Salaries and Expenses Account
                        Table 2: Results of Application File Review                                    9
                        Table 3: Summary of FCC’s Civil Monetary Penalty Assessments                  14
                          and Collections in Fiscal Years 1997 and 1998, as Reported to the
                          Department of the Treasury
                        Table I.1: Results of GAO’s Review of FCC Applications Files in               24
                          Fiscal Year 1998




                        Abbreviations

                        FCC        Federal Communications Commission
                        OMB        Office of Management and Budget


                        Page 20                          GAO/RCED-99-216 FCC’s Fees Collection Activities
Page 21   GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix I

Scope and Methodology


                 To determine how the Federal Communications Commission (FCC)
                 ensures that required regulatory and application fees are collected, we
                 interviewed officials in FCC’s Office of Managing Director, Office of
                 Inspector General, and the various bureaus and offices that review
                 applications. We also reviewed FCC’s regulations and related laws and
                 reports. To determine the extent to which common carrier regulatory fees
                 were paid, we obtained lists of carriers from FCC and from several carriers
                 that contract with other carriers to resell their services. We compared the
                 names of the carriers with the names of those who paid regulatory fees in
                 fiscal year 1998, as captured in FCC’s fee collection database.

                 To determine the extent to which application fees were paid, we reviewed
                 a random sample of application files from each of the five bureaus
                 (Wireless Telecommunications, Common Carrier, Cable Services, Mass
                 Media, and International) that process applications. We asked each bureau
                 to provide us with a comprehensive listing of file numbers for all
                 applications submitted in fiscal year 1998. Because of slight differences in
                 the way the information was provided, our methodology differed slightly
                 by bureau.

             •   Three bureaus–Mass Media, Common Carrier, and International–provided
                 a computer file with information on each of the applications filed in fiscal
                 year 1998. We drew a random sample of 150 applications from each of
                 these bureaus.
             •   The Cable Services Bureau provided us with the first and last file numbers
                 used in fiscal year 1998 and copies of notices from which we identified the
                 names of the applicants. We generated a random list of 150 file numbers
                 from the lists provided. We were also given access to the bureau’s
                 database to confirm the accuracy of the names of applicants for which
                 files could not be located.
             •   The Wireless Telecommunications Bureau uses several different
                 numbering systems, because of the variety of different services for which
                 they process applications. We were provided with the first and last
                 number of each of several sequential numbering schemes used in the
                 bureau, and drew a random sample of 100 from those provided. About half
                 of the bureau’s applications were assigned application numbers that were
                 based on the date. For those files, we first drew a random sample of 100
                 dates by type of application. We then requested the total number of
                 applications processed on each of the chosen dates and selected another
                 random number to identify a single application on each selected date.




                 Page 22                           GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix I
Scope and Methodology




After informing FCC of our preliminary findings, FCC asked for the
opportunity to provide additional information to demonstrate that
required application fees were paid. We reviewed the supplemental
information provided to evaluate its reliability and sufficiency and
included the results of this review in our report.

Since we used a sample (called a probability sample) of FCC applications to
develop our estimates, each estimate has a measurable precision, or
sampling error, that may be expressed as a plus/minus figure. A sampling
error indicates how closely we can reproduce from a sample the results
we would obtain if we were to take a complete count of the universe using
the same measurement methods. By adding the sampling error to and
subtracting it from the estimate, we can develop upper and lower bounds
for each estimate. This range is called a confidence interval. Sampling
errors and confidence intervals are stated at a certain confidence level—in
this case, 95 percent. For example, a confidence interval at the 95 percent
confidence level means that in 95 of 100 instances, the sampling procedure
we used would produce a confidence interval containing the universe
value we are estimating.

Table I.1 contains the universe sizes, sample sizes, estimates, and sampling
errors of the estimates.




Page 23                           GAO/RCED-99-216 FCC’s Fees Collection Activities
                                             Appendix I
                                             Scope and Methodology




Table I.1: Results of GAO’s Review of FCC Applications Files in Fiscal Year 1998
                                                                                          Bureau
Sample                                             Cable           Mass          Common                                           Wireless
and results                                      Services          Media           Carrier       International           Telecommunications
Universe                                           17,149           1,340            4,215                2,256                          124,394
                                                                                                                                                a
Sample size                                            150            150               149                 148
Applications claiming to be exempt from
                                                                                                                                                a
paying a fee                                             1              30                  4                 21
Percentage exempt                                      0.01%        20.00%             2.68%              14.19%                           22.73%
                                                          b
Sampling error for exempt files                                       6.05             2.56                 5.45                            6.79
Applications where the application and
adequate documentation of payment were
                                                                                                                                                a
located in the application file                         42              26               93                   66
Percentage complete in file                         28.00%          17.33%           62.42%               44.59%                           45.71%
Sampling error for complete files                      7.18           5.73             7.66                 7.77                            8.70
Applications where the application and
adequate documentation of payment were
                                                                                                                                                a
provided by FCC                                          0               6               22                   35
Percentage of files where payment
information was provided by FCC                        0.00%          4.00%          14.77%               23.65%                           30.52%
Sampling error for files where payment
information was provided by FCC                        0.00           2.97             5.61                 6.64                            8.04
Applications where application and/or
adequate documentation of payment could
                                                                                                                                                a
not be located                                         107              88               30                   26
Percentage of files where application
and/or adequate documentation of
payment could not be located                        71.33%          58.67%           20.13%               17.57%                            1.04%
Sampling error for cases where application
and/or adequate documentation of
payment could not be located                           7.23           7.45             6.35                 5.95                            1.44c
                                             a
                                             Because of the sampling methodology, the exact numbers for this category are not meaningful.
                                             b
                                              The sampling error cannot be computed exactly to the small finding. The exact 95-percent
                                             confidence interval is from 0.02 percent to 3.57 percent.
                                             c
                                             Because of the small findings in both strata, this sampling error is only approximate.

                                             Source: GAO’s analysis of FCC’s information.



                                             To determine the extent to which FCC collects civil monetary penalties, we
                                             interviewed officials with FCC’s Office of Managing Director and Office of
                                             General Counsel and reviewed related reports, documents, laws, and
                                             regulations.




                                             Page 24                                      GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix I
Scope and Methodology




We conducted our review from September 1998 through July 1999,
following generally accepted government auditing standards. We did not
evaluate the reliability of the computer-generated data provided by FCC.




Page 25                          GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix II

Comments From the Federal
Communications Commission

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




Now on p. 12.
See comment 1.




See comment 2.




                             Page 26   GAO/RCED-99-216 FCC’s Fees Collection Activities
                 Appendix II
                 Comments From the Federal
                 Communications Commission




See comment 3.




See comment 4.




                 Page 27                     GAO/RCED-99-216 FCC’s Fees Collection Activities
                 Appendix II
                 Comments From the Federal
                 Communications Commission




See comment 5.




                 Page 28                     GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix II
Comments From the Federal
Communications Commission




Page 29                     GAO/RCED-99-216 FCC’s Fees Collection Activities
                 Appendix II
                 Comments From the Federal
                 Communications Commission




                 The following are GAO’s comments on the Federal Communications
                 Commission’s letter dated July 30, 1999.


                 1. We have added a sentence to indicate that a project manager had
GAO’s Comments   already been hired by the time of the FCC Inspector General’s
                 September 1998 report.

                 2. We do not agree with FCC that there is a “high degree of confidence”
                 that the required application fees were paid. As shown in table 2 and in
                 appendix I of our report, only one of the five bureaus (Wireless
                 Telecommunications) provided documentation adequate to show that the
                 required fee was paid or not required for nearly all of the sampled
                 applications. The other four bureaus provided documentation to show that
                 the required fee was paid or not required for 82 percent to 29 percent of
                 the sampled files. Bureau officials stated that data conversion problems
                 and payments made for multiple applications contributed to their inability
                 to provide documentation for the remaining files. However, they did not
                 provide us with details to support these assertions. In any event, Office of
                 Management and Budget Circular A-123, which is largely based on our
                 Standards for Internal Controls in the Federal Government, requires that
                 the documentation for transactions, management controls, and other
                 significant events must be clear and readily available for examination. We
                 added a reference to this circular in our report to reinforce the need for
                 the Commission’s controls and transactions to be supported by written
                 procedures and adequate documentation.

                 3. After we notified five of FCC’s bureaus that we could not find adequate
                 documentation that application fees were paid for a number of the files we
                 reviewed, four of the bureaus responded with additional documentation,
                 as shown in table 2 of this report. The Cable Services Bureau did not
                 provide additional documentation but instead provided a spreadsheet
                 listing fee control numbers for the files in question. As we state in our
                 report, the data associated with these numbers are not sufficient to
                 positively identify for which applications the fees were paid. Despite
                 repeated requests, the Cable Services Bureau did not provide us with more
                 definitive documentation. Also, on the basis of the documents we were
                 provided, we concluded that the cable applications to which FCC refers
                 were filed about a year after the fees in question were paid, not at the time
                 the fee was paid—as FCC speculates. The report reflects this fact.




                 Page 30                           GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix II
Comments From the Federal
Communications Commission




4. The additional detail is not appropriate for our opening paragraph,
whose purpose is to provide a general characterization of the importance
of regulatory fees to FCC’s appropriations. A more detailed discussion of
regulatory fee collection is found in the background section of the report.

5. We no longer refer to fiscal year 1998 as being the first year that FCC
failed to meet its target amount (obligation limitation) in regulatory fee
collection. Also, we have added that FCC’s collection of regulatory fees for
fiscal years 1995-97 exceeded the target amounts set by the Congress.




Page 31                           GAO/RCED-99-216 FCC’s Fees Collection Activities
Appendix III

GAO Contact and Staff Acknowledgements


                   John P. Finedore, (202) 512-6248
GAO Contact
                   Other key contributors to this report are James R. Sweetman, Jr.,
Acknowledgements   Phillis Riley, David A. Rogers, Mindi Weisenbloom, Michael R. Volpe, and
                   Teresa R. Russell.




(385761)           Page 32                            GAO/RCED-99-216 FCC’s Fees Collection Activities
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