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Appeals & Audits

Common Audit Findings: Contributors

In USAC's continuing efforts to ensure carriers are successful at following FCC rules, we have put together a list of some of the most common problem areas identified during audits.

For more information about the audit process, review the BCAP page of our website, which includes a checklist of documentation contributors should maintain for audit purposes. Using all of this information will help to expedite the audit process and should reduce or eliminate audit findings in the future.

Audit Findings

For specific areas of revenue reporting on the FCC Form 499-A, we have outlined a description of the revenue reported, some common audit findings, and ways to prevent a finding like this in the future.

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FINDING: Failure to Report Itemized State and Federal USF Surcharges as Revenue

Description of Finding

Filers often fail to report itemized state and federal universal service fund surcharges as revenue on Line 403 of FCC Form 499-A because they believe that by including it in the contribution base as revenues they are contributing on those revenues again. This is, however, incorrect. The circularity factor subtracts out the amount of universal service fund that would be paid on the universal service fund collected. In determining what a filer contributes to the universal service fund each quarter, both a contribution factor and a circularity factor are applied as percentages to the filer's revenue. The contribution factor is the percentage of end-user revenue that will be contributed to the universal service fund. The circularity factor adjusts the quarterly contribution base by approximating the filer's contribution for that quarter and subtracting it from the total, thus decreasing a filer's contribution base. This prevents the assessment of universal service fees on the pass-through universal service fund charges that filers bill to their customers and are reported as revenue on the FCC Form 499.

How to Address or Prevent this Finding

Be sure to report itemized state and federal universal service fund surcharges as revenue on Line 403. Many states (e.g., Texas, California, and New York) have state universal service programs of their own. You should report state universal service revenues on Line 403 in Column (a) only to the extent that actual payments to state universal service programs were recovered by pass-through charges itemized on customer bills. These line items might not explicitly state "universal service" on the bill, but if the underlying intent of the program is the same as the federal universal service fund, you should add those amounts to the total in Box 403a.

You can find a list of the most current contribution and circularity factors on the Contribution Factors web page.

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FINDING: Improper Assessment of USF on End-User Bill

Description of Finding

Contributors that choose to collect federal universal service fund fees from their customers collect in an amount that exceeds their contribution obligation for that customer. This occurs when a contributor assesses the universal service fee to an exempt reseller, on intrastate revenues, on a non-telecommunication product, or has not accurately calculated the interstate portion of the customer's bill. In some insistences a filer has failed to update the universal service contribution factor in its billing system which caused the customer to be incorrectly billed for the period.

How to Address or Prevent this Finding

Contributors that choose to collect universal service fund fees from their customers cannot collect an amount that exceeds their contribution obligation for that customer (47 CFR Section 54.712(a)). In most cases, this is the interstate and international portions of the customer's invoice times the corresponding contribution factor.

For de minimis companies that are indirectly contributing through their underlying carriers, they can pass these charges through to their customers but the charge cannot exceed what their underlying carrier is charging them. De minimis carriers should be prepared to produce their universal service fund invoices to the carriers they purchase service from and ensure that the amount passed to their customers complies with this amount.

Contributors also have the option of recovering the cost through a flat-rate line item on a customer's invoice; however, the fee collected cannot exceed the total amount associated with the contribution factor (2002 Contribution Methodology Order, FCC 02-329). If the contributor chooses this methodology, it should ensure that their customer service base is relatively analogous to guarantee that a fair assessment is achieved.

Filers who qualify for the Limited International Revenue Exemption (LIRE) should not include their customer's international traffic in the amount on which they charge universal service because their contribution base will not include international traffic. LIRE filers who charge a universal service fee on international traffic must refund those amounts to their customers.

The burden of proof rests solely on the company to demonstrate that the line item charge accurately reflects the specific fee it claims to recover (2005 Truth-in-Billing Order, FCC 05-55). Companies should save their end-user bills in the event of an audit. Companies should also be prepared to produce a report detailing the amounts that were collected for state and federal universal service represented as a line item on an end-user bill. In the case of a service bundle on a customer's invoice, the contributor must be able to break out and identify the universal service fund assessable charges associated with that bundle.

Read more in the January 2016 Newsletter.

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FINDING: USF Charge Liability Account vs. USF Charge Revenue Account

Description of Finding

Companies choose to record the pass-through state and federal universal service fund in a liability account rather than a revenue account in their general ledger, and then fail to report the pass-through amount as revenue.

How to Address or Prevent this Finding

The pass-through charges are considered revenue collected for the purpose of contributing to the universal service fund. You must report the amount on Line 403 on the FCC Form 499-A regardless if it is recorded as revenue or a liability on the entities corporate book of accounts.

Read more in the October 2015 Newsletter.

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FINDING: Error in Reporting Reseller Revenue

Description of Finding

Carrier does not meet the definition of "reseller."

How to Address or Prevent this Finding

The FCC has defined a "reseller" as a telecommunications carrier or telecommunications provider that:

    1. incorporates purchased telecommunications into its own offerings; and
    2. can reasonably be expected to contribute to federal universal service support mechanisms based on revenues from those offerings.

Specifically, to report your revenues as reseller revenue in Block 3 of the FCC Form 499-A, your customer must be:

    1. Purchasing service(s) for resale, at least in part, and that the company is incorporating the purchased services into its own offerings which are, at least in part, assessable U.S. telecommunications or interconnected VoIP service; and
    2. Either directly contributing or has a reasonable expectation that another entity in the downstream chain of resellers directly contributes to the federal universal service support mechanisms on the assessable portion of revenue from offerings that incorporate the purchased services.

Each of these conditions must be met if you intend to report your revenues from other carriers as reseller revenue in Block 3 of the FCC Form 499-A, excluding that revenue from your universal service contribution base.

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FINDING: Insufficient Reseller Information and Certificates

Description of Finding

One of our most common audit findings is that the carrier does not submit the required information about their resellers.

How to Address or Prevent this Finding

Since having a Filer ID is essential to filing an FCC Form 499, you cannot credibly establish that the customer is a direct universal service fund contributor if that customer is not filing the FCC Form 499.

In addition, you need the following information about your resellers:

  • 499 Filer ID
  • Legal name
  • Legal address
  • Name of contact person
  • Phone number of contact person
  • Annual certification by the reseller regarding its reseller status (see below)

Annual Certification
A filer may demonstrate that it had and has a reasonable expectation that a particular customer is a reseller with respect to purchased service(s) by providing a certificate signed each calendar year by the customer that:

  • Specifies which services the customer is or is not purchasing for resale pursuant to the certificate; and
  • Has wording consistent with the following language, which comes from the 2016 instructions, pages 37-38:

    I certify under penalty of perjury that the company is purchasing service(s) for resale, at least in part, and that the company is incorporating the purchased services into its own offerings which are, at least in part, assessable U.S telecommunications or interconnected Voice over Internet Protocol services. I also certify under penalty of perjury that the company either directly contributes or has a reasonable expectation that another entity in the downstream chain of resellers directly contributes to the federal universal service support mechanisms on the assessable portion of revenues from offerings that incorporate the purchased services.

If your company is audited, we will expect to see these certification documents. Be sure to keep them on file for at least 5 years. If you are missing certificates for companies you reported as resellers with revenue reported in Block 3, that revenue will be moved to Block 4, and the company will be reclassified as an end user.

Service Specific
Certificates must also be service specific. In the FCC Form 499-A instructions, there are examples of how to make certificates service-specific:

  • Entity-Level: that all services purchased by the customer are or will be purchased for resale pursuant to the certificate;
  • Account-Level: that all services associated with a particular billing account -- the account number for which the customer shall specify -- are or will be purchased for resale pursuant to the certificate;
  • Service-Specific: that individual services specified by the customer are or will be purchased for resale pursuant to certification; or
  • Exception-Specific: that all services except those specified either individually or as associated with a particular billing account, are or will be purchased for resale pursuant to the certificate. The certificate shall specify the account number(s) of specific customers included in the exception.

Specific Time Period
All certificates should be obtained on an annual basis. They must state the calendar year that the certificate covers and must be signed before the filer submits the FCC Form 499-A.

Read more in the April 2016 Newsletter.

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FINDING: Filer Ineligible to File a Consolidated Form 499-A

Description of Finding

The entity did not qualify to submit a consolidated FCC Form 499-A. The main reason that entities are not able to submit a consolidated form is because a single entity does not send bills to all of the customers of the consolidated companies.

How to Address or Prevent this Finding

Corporate entities may file a consolidated FCC Form 499-A instead of filing individual forms for each separate entity. Businesses filing on a consolidated basis must certify each year that they meet all of the following conditions:

  • A single entity oversees the management of all affiliated systems;
  • A single entity sends bills to customers identifying it (or a trade name) as the service provider, rather than identifying the individual legal entities;
  • All revenues are posted to a single general ledger;
  • If separate revenue and expense accounts exist, they are derived from one consolidated set of books and the consolidated filing must cover all revenues contained in the consolidated books;
  • Customers have a single point of contact;
  • The consolidated filer acknowledges that process served on it would represent process served on any or all of the affiliated legal entities;
  • The consolidated filer agrees to document and resolve all slamming complaints that might be served on either it or any of the affiliated legal entities;
  • The consolidated filer obtains a separate FCC Registration Number (FRN) from those assigned to its affiliated legal entities;
  • The consolidated filer acknowledges that its universal service, TRS, LNP, NANPA, and regulatory fee obligations will be based on data provided in the consolidated Worksheet filings, that it bears the responsibility of satisfying those obligations, and that all legal entities covered by the filing are jointly and severally liable for such obligations; and
  • The consolidated filer acknowledges that it: (1) was not insolvent on the date it undertook to make payments on a consolidated basis or on the date of actual payments to universal service, TRS, LNP, NANPA, and regulatory fees, and did not become insolvent as a result of such undertaking or payments; (2) was not left with unreasonably small capital as a result of such undertaking or payments; and (3) was not left unable to pay debts as they matured as a result of such undertaking or payments.

This annual certification should be filed with USAC and must also include:

  • A list of the legal names of all the legal entities covered by the filing,
  • The FCC Form 499 Filer IDs of all the legal entities covered by the filing,
  • The consolidated filer's FRN, and,
  • For wireless carriers, a list of all radio licenses (call signs) issued to each legal entity covered by the filing.
Report All Entities

It is common for filers to fail to report all of the entities included under their consolidated FCC Form 499-A filing on Line 112. The instructions for Line 112 state that, "Consolidated filers should provide all names used by all telecommunications affiliated [sic] covered by the filing."

It is important to remember that in addition to meeting and certifying that a filer meets the requirements to file on a consolidated basis, there is also a form reporting requirement to list the entities covered under the filing on Line 112 of the form.

Read more in the August 2016 Newsletter

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FINDING: Incomplete Consolidated Form 499-A Documentation

Description of Finding

Consolidated business filers failed to provide adequate documentation.

How to Address or Prevent this Finding

Corporate entities may file a consolidated FCC Form 499-A instead of filing individual forms for each separate entity. Businesses filing on a consolidated basis must certify each year that they meet all of the following conditions:

    • A single entity oversees the management of all affiliated systems;
    • A single entity sends bills to customers identifying it (or a trade name) as the service provider, rather than identifying the individual legal entities;
    • All revenues are posted to a single general ledger;
    • If separate revenue and expense accounts exist, they are derived from one consolidated set of books and the consolidated filing must cover all revenues contained in the consolidated books;
    • Customers have a single point of contact;
    • The consolidated filer acknowledges that process served on it would represent process served on any or all of the affiliated legal entities;
    • The consolidated filer agrees to document and resolve all slamming complaints that might be served on either it or any of the affiliated legal entities;
    • The consolidated filer obtains a separate FCC Registration Number (FRN) from those assigned to its affiliated legal entities;
    • The consolidated filer acknowledges that its universal service, TRS, LNP, NANPA, and regulatory fee obligations will be based on data provided in the consolidated Worksheet filings, that it bears the responsibility of satisfying those obligations, and that all legal entities covered by the filing are jointly and severally liable for such obligations; and
    • The consolidated filer acknowledges that it: (1) was not insolvent on the date it undertook to make payments on a consolidated basis or on the date of actual payments to universal service, TRS, LNP, NANPA, and regulatory fees, and did not become insolvent as a result of such undertaking or payments; (2) was not left with unreasonably small capital as a result of such undertaking or payments; and (3) was not left unable to pay debts as they matured as a result of such undertaking or payments.

This annual certification should be filed with USAC and must also include:

    • A list of the legal names of all the legal entities covered by the filing,
    • The FCC Form 499 Filer IDs of all the legal entities covered by the filing,
    • The consolidated filer's FRN, and,
    • For wireless carriers, a list of all radio licenses (call signs) issued to each legal entity covered by the filing.
Report All Entities

It is common for filers to fail to report all of the entities included under their consolidated FCC Form 499-A filing on Line 112. The instructions for Line 112 state that, "Consolidated filers should provide all names used by all telecommunications affiliated [sic] covered by the filing."

It is important to remember that in addition to meeting and certifying that a filer meets the requirements to file on a consolidated basis, there is also a form reporting requirement to list the entities covered under the filing on Line 112 of the form.

Read more in the August 2016 Newsletter.

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FINDING: Incorrectly Identifying Regional LNP Percentages

Description of Finding

A common finding in audits is that filers do not correctly identify their Local Number Portability (LNP) percentages for each region reported on Lines 503-509 of the FCC Form 499-A. This is usually due to: 1. including non-telecommunications revenue in the determination of the LNPA percentages, and/or 2. using old information to determine these percentages. LNPA percentages should only represent your telecommunications revenues, which excludes revenue from line 418.3.

How to Address or Prevent this Finding

Enter regional revenue percentages for LNP in Block 5 of the FCC Form 499-A. This section shows the distribution of your revenue over LNPA regions. These percentages are used to calculate your LNP contribution. The only filers who do not have to show this distribution are payphone service providers, private service providers, and shared-tenant service providers that have certified that they are exempt from contributing to LNP.

Block 5 is divided into seven (7) regions requiring filers to report percentages on each line:

  • Line 503: Southeast,
  • Line 504: Western,
  • Line 505: West Coast,
  • Line 506: Mid-Atlantic,
  • Line 507: Mid-West,
  • Line 508: Northeast, and
  • Line 509: Southwest.

If you have been in telecom for many years, you will notice the above breakdown's resemblance to the seven regions into which the country was split during the breakup of the Bell system in 1984. The totals of the percentages of all the regions (Lines 503-509) are calculated for you on Line 510, "Totals". In addition, you should revisit your calculation of LNPA percentages on a periodic basis to ensure the information is current.

The percentage of revenue in each area is based on percent of revenues billed in that location. For example, if you have total end-user revenues of $1000, and $750 is billed to a customer in Maryland and $250 is billed to a customer in North Carolina, then you would report 25% for the Southeast region on Line 503 and 75% for the Mid-Atlantic on Line 506.

On the Data Entry screen, the left column, "Carrier's Carrier Revenue Region", shows the percentage of revenue by region from the revenue reported in Block 3. The column next to it, "End-User Telecom", shows the percentage by revenue by region from the end-user telecommunication revenue reported in Block 4. Further, it's important to note that the revenue reported in this column should exclude non-telecommunications revenue reported on Line 418. For each column, if percentages were reported, then the total percentage must add up to 100%.

Further Information on Correct Reporting Methods for Excluding Revenue for TRS, NANPA, LNP, and ITSP

Resellers that do not contribute to universal service support mechanisms but contribute directly to the other funds, do not need to be included in the provider's TRS, NANPA, LNP, and FCC Interstate Telecommunications Service Provider (ITSP) contribution bases. The filer may accomplish this by placing this revenue on Line 511. Please note that you must have the Filer ID for each customer you list on Line 511.

Remember to report uncollectible revenue or bad debt expense associated with TRS contribution base amounts on Line 513. You can find this entry on the main revenue Data Entry screen. It is also listed out separately on the Revenue Information Summary screen. The revenue you enter here is subtracted from your TRS contribution base.

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