oversight

Schools And Libraries Program: Actions Taken to Improve Operational Procedures Prior to Committing Funds

Published by the Government Accountability Office on 1999-03-05.

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

                 United States General Accounting Office

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


March 1999
                 SCHOOLS AND
                 LIBRARIES PROGRAM
                 Actions Taken to Improve
                 Operational Procedures
                 Prior to Committing
                 Funds




GAO/RCED-99-51
          United States
GAO       General Accounting Office
          Washington, D.C. 20548

          Resources, Community, and
          Economic Development Division

          B-281644

          March 5, 1999

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

          Dear Mr. Chairman:

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

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

      •   analyze a random sample of processed applications to determine if there
          are any systemic weaknesses in the application review procedures;
      •   complete the design of the program’s operational procedures, automated
          systems, and internal controls; and
      •   obtain a report from its independent accountants that finds that the
          Corporation has developed an appropriate set of internal controls to
          mitigate against waste, fraud, and abuse.

          In addition, we recommended that the Corporation conduct in-depth
          reviews of applications designated as “high risk” before, rather than after,
          issuing commitment letters to these applicants. We also recommended


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



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                   that FCC develop goals, measures, and performance targets for the program
                   that are consistent with the requirements of the Government Performance
                   and Results Act of 1993.

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


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

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


                   Universal service traditionally has meant providing residential customers
Background         with affordable, nationwide access to basic telephone service. The
                   Telecommunications Act of 1996, however, extended universal service
                   support to eligible schools and libraries. The new program (often referred
                   to as the “e-rate” program) is designed to improve schools’ and libraries’
                   access to modern telecommunications services. Generally, educational



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                         institutions that meet the definition of “schools” laid out in the
                         Elementary and Secondary Education Act of 1965 are eligible to
                         participate,2 as are libraries that can receive assistance from a state’s
                         library administrative agency under the Library Services and Technology
                         Act.3

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


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

                         The Corporation, with a 14-member staff based in Washington, D.C.,
                         contracted out most of its application-processing, client support, and
                         review functions to the National Exchange Carrier Association (NECA),
                         located in New Jersey.6 NECA’s key responsibilities include reviewing
                         applications to ensure compliance with the program’s requirements and
                         processing invoices from telecommunications vendors to reimburse them
                         for the cost of discounts they provide. NECA, in turn, has subcontracted

                         2
                          Most public and private schools teaching kindergarten to grade 12 are eligible for support. Examples
                         of entities not eligible for support are home school programs, private vocational programs, and
                         institutions of higher education. In addition, private schools with endowments of more than
                         $50 million are not eligible to participate.
                         3
                          Libraries whose budgets are part of a school’s budget are not eligible to receive universal service
                         support.
                         4
                          Eligible telecommunications and Internet services include basic phone service, T-1 lines, dial-up
                         Internet access, and direct Internet connections. Eligible internal connections include
                         telecommunications wiring, routers, switches, and network servers that are necessary to transport
                         information to individual classrooms.
                         5
                          The Commission also required certain other providers of telecommunications services to contribute
                         to the universal service fund.
                         6
                          NECA was established at FCC’s direction in 1983 to administer interstate access tariffs and the
                         revenue distribution process for local telephone companies.


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                      with two other organizations to help answer applicants’ questions, process
                      and enter applications into the Corporation’s database, and establish and
                      maintain the Corporation’s public web site, which contains important
                      information about program operations and application procedures.7

                      FCC changed this administrative structure in November 1998 in response to
                      the Congress’s directive that a single entity administer universal service
                      support for schools and libraries and rural health care providers. FCC
                      appointed the Universal Service Administrative Company (USAC) as the
                      permanent administrator of the universal service fund and directed the
                      Corporation to merge with USAC by January 1, 1999.8 Under this merger,
                      the Corporation’s staff will become part of USAC’s Schools and Libraries
                      Division, carrying out essentially the same functions as before. Since our
                      review ended prior to the reorganization, we continue to refer to “the
                      Corporation” in this report.


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




                      7
                       The Corporation’s Internet web site is at (http://www.slcfund.org).
                      8
                       USAC had been established as a subsidiary of NECA to administer the high-cost and low-income
                      universal service support mechanisms and performs billing, collection, and disbursement functions for
                      all the universal service support mechanisms. See Changes to the Board of Directors of the National
                      Exchange Carrier Association, Inc., Federal-State Joint Board on Universal Service, Third Report and
                      Order and Fourth Order on Reconsideration, and Eighth Order on Reconsideration, CC Docket Nos.
                      96-45, 97-21, FCC 98-306 (rel. Nov. 20, 1998).



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                                  We found that the Corporation has taken actions to implement the key
Actions Taken to                  recommendations we believed should be completed before issuing any
Implement Key                     funding commitment letters to applicants. Specifically, the Corporation
Operational                       has
Recommendations               •   sampled applications that were already processed to identify and correct
                                  any systemic weaknesses in its program integrity review procedures;
                              •   finalized the program’s procedures, automated systems, and internal
                                  controls; and
                              •   obtained a report from its independent accountants that the Corporation
                                  had suitably designed its internal controls to prevent or detect material
                                  departures from program objectives, as of November 4, 1998, in
                                  conformity with criteria set forth by the Corporation in its “Management’s
                                  Statement of Universal Service Discount Mechanism Program Objectives
                                  and Internal Control Objectives.”

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


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

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




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

Corporation Has Strengthened     As noted earlier, FCC provides discounts for telecommunications services,
Its Test for Eligible Services   Internet access, and internal connections. Checking on the eligibility of
                                 requested services is not easy, however, because of the variety and
                                 technical nature of many of these services—especially those related to
                                 internal connections.9

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

                                 The results of the Corporation’s review of a random sample showed that
                                 weaknesses indeed existed in its procedures for ensuring that only eligible
                                 services receive funding. At least 19 of the 100 applications in the sample
                                 contained requests for ineligible items as defined by FCC orders, totaling
                                 approximately $106,000 in inappropriately requested funding. Of these 19
                                 applications, 7 had been classified as “clean” (that is, containing no
                                 ineligible items) by the Corporation’s earlier review and contained
                                 approximately $6,000 in inappropriately requested funding. The

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



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                               Corporation’s independent accountants, PricewaterhouseCoopers,
                               subsequently requested the Corporation to conduct a further sample of
                               300 applications that had been classified as “clean.” This review found
                               that 4.6 percent, or approximately $314,000, of the discount funding
                               requested in these applications would have gone to ineligible items.

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

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

                               It is possible for the automated system to flag every application that shows
                               a variance from the Corporation’s own calculation. However, the
                               Corporation decided that such a stringent approach was not warranted

                               10
                                 The program measures how economically disadvantaged the schools and libraries are by the number
                               of students eligible to participate in the National School Lunch Program. Rural designations are based
                               on the Metropolitan Statistical Area listing and the Goldsmith modification covering rural pockets
                               located within these areas.
                               11
                                 The Corporation provides additional information and tools on its web site, and encourages applicants
                               to call, e-mail, or send a fax to get additional information and help on filling out their application
                               forms.



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

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

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

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



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

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


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

                       The Corporation needed until early November 1998 to finalize its operating
                       procedures, complete the testing of the automated systems supporting
                       these procedures, and secure the Office of Management and Budget’s
                       approval of the applicant and vendor forms needed for the reimbursement
                       process. This delay occurred in part because on June 22, 1998, FCC
                       released a reconsideration order that significantly altered the program.



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                           Specifically, the program’s funding year was changed from a calendar year
                           cycle to a fiscal year cycle, and the period for the first round of funding
                           was changed from 12 months to 18 months. The order also adjusted the
                           maximum amounts that could be collected and spent during 1998 and the
                           first 6 months of 1999, directing the Corporation to commit no more than
                           $1.925 billion for the schools and libraries program during this time frame.
                           Because this amount was not expected to cover all of the applicants’
                           requests, FCC directed the Corporation to give funding priority to
                           applicants’ requests for telecommunications services and Internet access.
                           Once these requests are satisfied, the remaining funds are to be used for
                           internal connections, with priority given to applicants eligible for higher
                           discounts. To implement these new priority rules, the Corporation had to
                           significantly revise its funding award process and automated support
                           systems.

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


Independent Accountants’   In December 1997, FCC’s Chairman directed the Corporation to contract
Report on the              with an independent accounting firm to assess—before any program
Corporation’s Internal     disbursements were made—whether the program’s processes and
                           procedures provided the controls needed to mitigate against fraud, waste,
Controls Has Been          and abuse. In December 1997, with the approval of the Corporation’s
Completed                  Board of Directors, the Corporation engaged the services of Coopers &
                           Lybrand, LLP (which became PricewaterhouseCoopers, LLP, on July 1,

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



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                               1998). The independent accountants were to examine the Corporation’s
                               assertions that internal controls over the processing of funding requests
                               from applicants were suitably designed to detect material departures from
                               the Program Objectives set forth in the Corporation’s document,
                               “Management’s Statement of Universal Service Discount Mechanism
                               Program Objectives and Internal Control Objectives.”

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

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

                           •   All applications are processed in accordance with FCC’s priority rules.
                           •   Only eligible schools and libraries receive discounts.
                           •   Only eligible services as defined by FCC’s orders are funded.
                           •   Discount percentages are approved in accordance with the criteria
                               specified under FCC’s orders and rules.
                           •   Payments to vendors are authorized in a timely manner.
                           •   Funding commitments do not exceed the program’s funding limits.

                               The independent accountants’ work included reviewing the Corporation’s
                               procedures and documentation related to its control environment,
                               application controls, computer controls, and monitoring controls. In
                               addition, the independent accountants discussed control issues with the
                               Corporation’s management and closed them out, as appropriate, when
                               satisfied with the documentation and the suitability of the design. Before
                               issuing a final report, the independent accountants briefed the
                               Corporation’s Board of Directors, the FCC’s Common Carrier Bureau, and



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                            the FCC Chairman. Because the Corporation was in a start-up phase during
                            1998, the independent accountants were not engaged to examine and
                            report on the actual operating effectiveness of these internal controls.

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


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

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




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

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


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

                             This recommendation still needs to be implemented. FCC’s February 1999
                             “Annual Performance Plan for Fiscal Year 2000” still fails to provide
                             well-defined goals, performance targets, and measures. For example, it is
                             unclear whether FCC intends to use “schools” or “classrooms” as the unit
                             of measurement in tracking access to advanced telecommunications
                             services—a point of major significance. In our subsequent discussions
                             with FCC and Corporation officials, we found that FCC did not coordinate
                             with program officials when developing its revised plan. As we noted in



                             Page 13                             GAO/RCED-99-51 Schools and Libraries Program
                           B-281644




                           our previous testimony, we have issued guidance on developing effective
                           strategic plans.13 One of the key practices in developing these plans is to
                           involve stakeholders—such as school and library officials—in the
                           goal-setting process. The involvement of the Congress is also
                           indispensable to defining goals, as are the agency’s customers—in this
                           case, the schools and libraries themselves.

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


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

                       •   implementing the newly revised review procedures, especially for
                           high-risk applications;
                       •   setting priorities for funding commitments in accordance with FCC’s orders
                           and rules;
                       •   dealing with applicants’ appeals on commitment decisions, including
                           establishing a funding reserve to cover those that are successful; and
                       •   reviewing and authorizing vendors’ requests for reimbursement.

                           These are challenging activities in themselves and will be even more
                           challenging because they can overlap in time. For example, the
                           reimbursement activity will involve processing tens of thousands of forms
                           submitted by successful applicants and their vendors. While this activity is
                           occurring, applications for the second funding cycle will be coming in.
                           This application period began on December 1, 1998, and was originally

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



                           Page 14                                       GAO/RCED-99-51 Schools and Libraries Program
                  B-281644




                  scheduled to close in mid-February. However, the Corporation extended
                  the deadline to mid-March 1999 because of the delay in getting out the first
                  year’s commitment letters. The closing date was extended again, to April 6,
                  1999, because commitment letters were still going out in February 1999.
                  This extension, together with the added workload of vendor
                  reimbursements, raises the question of whether the program staff and
                  contractors will have enough time to carefully review and process all the
                  new applications by July 1999—the start of the next funding period.

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


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


                  We provided a draft of this report to the Federal Communications
Agency Comments   Commission, the Schools and Libraries Corporation (now the Schools and
                  Libraries Division of the Universal Service Administrative Company), and
                  PricewaterhouseCoopers for their review and comment. We subsequently
                  met with officials from the Schools and Libraries Division, the Common
                  Carrier Bureau of the Federal Communications Commission, and
                  PricewaterhouseCoopers. All three concurred with our findings and
                  provided several points of clarification, which we incorporated into our
                  final report. Appendix I contains the Schools and Libraries Division’s letter
                  commenting on our draft report. The President of the Division stated that



                  Page 15                             GAO/RCED-99-51 Schools and Libraries Program
B-281644




our report captures fairly the work undertaken to provide for effective
internal controls. She added that using the experience gained in
processing the first year’s applications, the Division will implement new
and tighter procedures for evaluating discounts in response to direction
from the Chairman of the Federal Communications Commission.
Regarding the need to establish adequate performance goals and measures
for the program, Federal Communications Commission officials told us
that they recognize the importance of the recommendation in our
July 1998 testimony and intend to address it, but they did not indicate a
time frame for doing so.


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

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

Sincerely yours,




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




Page 16                              GAO/RCED-99-51 Schools and Libraries Program
Page 17   GAO/RCED-99-51 Schools and Libraries Program
Appendix I

Comments From the Schools and Libraries
Division, Universal Service Administrative
Company




               Page 18       GAO/RCED-99-51 Schools and Libraries Program
Appendix II

Major Contributors to This Report


                        John P. Finedore
Resources,              Teresa R. Russell
Community, and          James R. Sweetman, Jr.
Economic
Development
Division, Washington,
D.C.
                        Michael R. Volpe
Office of the General   Mindi Weisenbloom
Counsel




(385775)                Page 19                  GAO/RCED-99-51 Schools and Libraries Program
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