Common Audit Findings: High Cost Program

Who does this finding apply to?

All recipients of High Cost program support.

Description of Finding

The FCC has released Orders that have specifically addressed this common cause of audit findings. In 2007, the FCC released the 2007 Comprehensive Review Order (FCC 07-150) which included guidelines for acceptable documentation and retention. In 2011, as part of the USF/ICC Transformation Order (FCC 11-161), the length of time carriers are required to maintain documentation was extended from five to ten years. This is codified in 47 CFR 54.320(b). Record retention is also covered in 47 CFR 32.12.

Rate of Return Carrier Examples

• Lack of or inadequate Continuing Property Records (CPRs). CPRs are required to be updated and maintained in accordance with 47 CFR 32.2000(e). Without CPRs, auditors are unable to conclude upon the accuracy and existence of the fixed asset amounts reported for HC program purposes.

Documentation, such as invoices, work orders and other documentation related to assets, should be maintained to verify the asset transactions were recorded in the proper amount and in the proper ledger accounts of the beneficiary’s general ledger. CPRs should be kept current and maintained in such a fashion that the auditors may tie them to the general ledger for the time period under audit.

USAC urges carriers receiving support based on their actual costs to familiarize themselves with Section 32.2000 which details instructions for telecommunications plant accounts. Of particular relevance to the common asset audit findings are the following:

• Section 47 CFR 32.2000(e)(1)(i) – Basic property records must provide the identity, vintage, location and original cost of units of property.
• Section 47 CFR 32.2000(e)(6)(iii) – Basic property records shall be promptly updated to reflect all property changes affecting periods subsequent to theinitial establishment of the basic property record.
• Section 47 CFR 32.2000(f)(2)(iii) – Details what location, date of placement and other details of construction information should be included on the basic property records.
• Section 47 CFR 32.2000(f)(5) – Property records should contain a complete description of the property records units in such detail as to identify such units. This rule covers what identification should be included in the property record.
• Section 47 CFR 32.2000(f)(8) – Source references for all entries shall be retained as a part of or in support of the continuing property records.

• Lack of work orders or invoices to support fixed assets reported for High Cost program purposes. Copies of invoices and other relevant documentation are required to substantiate that the beneficiary purchased and recorded the fixed assets at the original cost and reported the fixed assets correctly.
• Lack of documentation to support depreciation rates reported for High Cost program purposes. Documentation must be retained to properly support the depreciation rates used to calculate depreciation expense.
• Lack of documentation to support related-party/affiliated transactions were properly recorded. Documentation must be maintained to demonstrate that the affiliate transaction is properly valued, calculated, recorded, and in compliance with 47 CFR 32.27.
• Lack of documentation to support cost study balances and cost study adjustments (specifically regulated and non-regulated allocations). Documentation should be maintained to provide sufficient evidence to substantiate the cost study balances and adjustments.
• Lack of documentation to support line counts reported for High Cost program purposes. Beneficiaries should maintain adequate documentation such as subscriber listings and bills that reconcile to the line counts reported to USAC. The subscriber listing should include the following fields: (1) subscriber name; (2) subscriber address; (3) subscriber connection date; (3) billing status (e.g., active, inactive); (4) subscriber disconnection date; and (5) line type (classification of lines, single line, single line business or multi-business lines).
• Lack of documentation to support expenses reported for High Cost program purposes. Documentation, such as invoices, should be maintained to substantiate the expenses, to support the numbers recorded in the general ledger, and should be reconcilable to the cost study used to calculate High Cost program support.

Connect America Fund Phase I Recipient Examples

• Lack of supporting documentation to support geocoded locations. Beneficiaries should be prepared to provide supporting documentation to demonstrate that the geocoded locations submitted to USAC as part of their milestone reporting are in fact offering broadband that satisfies public service obligations. USAC will assess compliance with milestone requirements; thus Phase I recipients should ensure that, “their underlying books and records support the assertion that assets necessary to offer broadband service have been placed in service in the requisite number of locations.” (FCC 11-161). This applies to Round 1 and Round 2 recipients.
• Lack of documentation indicating and supporting capital funding expended, in total and by census block, in the previous year in meeting Connect America Phase I deployment obligations 47 C.F.R. 54.313(b)(2)(ii). This applies to Round 2 recipients only.

Connect America Fund Phase II Recipient Examples

• Lack of supporting documentation to support geocoded locations. Beneficiaries should be prepared to provide supporting documentation to demonstrate that the geocoded locations submitted to USAC as part of their milestone reporting are in fact offering broadband that satisfies public service obligations. Support may include, but is not limited to, customer subscription records as specified in recent FCC orders (FCC 14-190).
• Lack of documentation indicating and supporting capital expenditures accumulated in the prior calendar year as specified in 47 C.F.R. 54.313(e)(1-2).

FCC Form 481 Reporting Examples

This excludes Mobility Fund filers who do not file the FCC Form 481.

• Lack of supporting documentation to explain deviations from comparable pricing obligations. Beneficiaries are required to provide additional explanation to USAC in the event they fail to provide the reasonably comparable certification for voice (47 C.F.R. 54.313(a)(10)) and/or broadband (47 C.F.R. 54.313(a)(12)). Beneficiaries should be prepared to provide this information upon request from USAC (FCC 14-90, paragraph 157).
• Lack of supporting documentation for unfulfilled requests. Rate of return beneficiaries should be able to provide evidence to USAC, upon request, that any unfulfilled requests were in fact unreasonable (FCC 14-90, paragraph 153).
• Lack of supporting documentation for any other data item reported on the FCC Form 481. All beneficiaries filing an FCC Form 481 should be able to provide evidence to USAC, upon request, that demonstrates the accuracy of the information reported on the FCC Form 481 (47 CFR 54.320(b)).

FCC Form 690 (Mobility Fund) Reporting Examples

• Lack of supporting documentation to support discussions, or the lack thereof, addressing tribal engagement requirements such as compliance with tribal business and licensing requirements and compliance with cultural preservation review processes.

Cause

Lack of effective procedures; employee turnover; company acquisitions

How to Address or Prevent this Finding

Beneficiaries should maintain proper documentation that would enable the auditors to conclude that the documentation accurately supports the amounts reported for High Cost program purposes. Record retention policies should be drafted and updated to accommodate the ten year requirement established within the rules. Carriers should also maintain Business Continuity and/or Disaster Recovery Plans.

Who does this finding apply to?

Rate of return cost companies.

Description of Finding

Regulated and non-regulated activities must be separated for universal service reporting purposes for those companies that receive support based on their individual cost studies. Many audit findings occur when these activities are inappropriately separated between regulated and non-regulated classifications. Details of proper separation can be found in 47 C.F.R. 64.901. The NECA Universal Service Fund Data Collection Instructions also provides assistance.

In addition, the FCC released a Public Notice, FCC 15-133, which explains in detail the type of expenses that should and should not be recovered through the High Cost program to ensure that support is used for its intended purposes.

Examples

• Non-regulated assets and expenses were improperly recorded to regulated accounts and classified as regulated activities.
• Costs of an asset in support of regulated and non-regulated activity were solely classified as regulated. At least a portion of the cost should’ve been allocated as non-regulated.
• Allocations of expenses (such as materials and supplies) were improperly allocated evenly across regulated and non-regulated accounts. The methodology of using an even allocation of expenses is not based on the allocation hierarchy as required by the FCC rules (47 C.F.R. 64.901(a)&(b)(3)).

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules

How to Address or Prevent this Finding

Adequate documentation such as cost studies, cost study reconciliations, and invoices should be maintained to support the beneficiary’s allocation factors (e.g., general allocator) used to determine the allocation between regulated and non-regulated activities in cost studies that determine High Cost program support. Using the documentation provided, the auditors should be able to recalculate the allocations and determine the accuracy and methodology of the beneficiary’s allocation factors.

Additionally, allocation factors/percentages should be updated to reflect industry changes. Expenses must be allocated based on the allocation hierarchy identified in the rules. Section 47 C.F.R. 64.901(a) states that carriers required to separate regulated costs from non-regulated costs shall use the attributable cost method of cost allocations. Section 47 C.F.R. 64.901(b)(3) outlines how costs that cannot be directly assigned to either regulated or non-regulated activities, also known as common costs, shall be grouped and reported.

Who does this finding apply to?

Rate of return cost companies.

Description of Finding

Fixed assets, revenues, and expense transactions must be properly classified to the appropriate account. In addition, lines should be properly classified as residential, single-line business (SLB), or multi-line business (MLB) as appropriate. Further, the beneficiary must assess the appropriate subscriber line count (SLC) amount to its subscribers based on proper classification of lines for ICLS reporting purposes.

In general, 47 C.F.R. 32.2 addresses the basis of accounts and Part 32 as a whole addresses account classifications in detail. 47 C.F.R 54.903 covers line count descriptions and the method with which they should be reported for ICLS purposes.

Examples

• The beneficiary charged engineering costs to account 2423 (buried cable) that should have been charged to account 2003 (telecommunications plant under construction) until the plant was ready for service. As noted in 47 C.F.R. 32.2003, because the project lasted more than one year and its cost exceeded $100,000, the cost should not have been charged to account 2423.
• The account codes used by employees as a reference for time entry were outdated; the commercial representative account codes were dated March 1994, the controller account codes were dated April 1992, the technician account codes were dated January 1999, and the central office manager account codes were dated February 2005. Given changes in personnel and in the telecommunications industry, allocation percentages and time entry codes should be updated to reflect industry changes for High Cost program purposes.
• Multi-line business lines were misclassified as residential/single line business lines, which resulted in the beneficiary not collecting the proper amount from subscribers and reporting incorrect revenue amounts to USAC for ICLS purposes. See 47 C.F.R. 54.903 and 47 C.F.R. 69.104 for guidance relating to line count classification and SLC charges.

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules

How to Address or Prevent this Finding

Beneficiaries should ensure that accounts are correctly established and that controls are in place to classify transactions in accordance with Part 32 requirements. In addition, lines should be correctly classified based on descriptions provided in Part 54 rules.

Who does this finding apply to?

Rate of return cost companies.

Description of Finding

For cost companies, assets and the corresponding depreciation and amortization expenses should be calculated and recorded properly in the carrier’s general ledger. Reconciliations such as depreciation and amortization schedules should show the method used in calculating the expenses.

Examples

• Upon review of the beneficiary’s depreciation schedules, we observed that the beneficiary calculated depreciation expense based on the ending monthly asset balance. For High Cost program purposes, the beneficiary must calculate depreciation expense using the average monthly asset balance which is computed using the asset balance as of the first and last days of the current month.
• In reviewing the beneficiary’s 2009 depreciation records to determine whether the assets and corresponding depreciation amounts were properly recorded in the general ledger and reconciled to the cost studies used to calculate High Cost program support, we observed that the asset amounts per the depreciation schedule were $510,000 less than the general ledger. The accumulated depreciation amounts per the depreciation schedule were $272,000 more than the general ledger.

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules

How to Address or Prevent this Finding

As indicated in 47 C.F.R. 32.2000(g)(2)(iii), for High Cost program purposes, cost companies must calculate depreciation expense using the average monthly asset balance, which is computed using the asset balance as of the first and last days of the current month. These amounts should tie to depreciation amounts recorded in the general ledger and be reconcilable to the Part 64 cost study used to calculate High Cost program support. Also, be sure the correct depreciation rates are used as outlined in 47 CFR 32.2000(g)(2)(iii).

Additionally, beneficiaries should be sure that amortization expense is recorded to the general ledger in proper accounting periods. Amortization charges shall be made monthly (47 CFR 32.2000(h)(3)) and computed on a straight-line method (47 CFR 32.2000(h)(1)). USAC urges cost companies to familiarize themselves with Section 32.2000 which details instructions for telecommunications plant accounts.

Who does this finding apply to?

Rate of return cost companies and average schedule companies.

Description of Finding: Line Counts

The subscriber listing should support the line counts submitted to USAC. Section 47 C.F.R. 54.1305(i) outlines when and how loop counts should be reported and defines “working loops” for universal service support purposes.

Line counts reported to USAC should agree to documentation as of the date set forth by the rules. Many line count findings are the result of line counts being reported as of the end of a billing cycle rather than the schedule set by the FCC. The as-of dates used to report line counts must follow those set out in the Rules.

Line Count Example

• The audit team examined the beneficiary’s process for compiling line count data submitted for High Cost program purposes. While the beneficiary filed its line count data timely, the cut-off date by which it reported its line counts, December 24, was not as of the end of the month or year, as required by the rules.

Description of Finding: Minutes of Use

Minutes of use (MOU) reported to USAC should agree to the beneficiary’s billing reports. Beneficiaries of ICLS and average schedule companies must report MOU data on a calendar year basis which ends on December 31. See 47 CFR 54.903(a)(4) for details.

Minutes of Use Example

• The audit team examined the beneficiary’s process for compiling its MOU for High Cost program purposes. For 2009, the beneficiary reported MOU data that corresponded to the MOU that occurred from January 21, 2009 through January 20, 2010. The beneficiary must report MOU data on a calendar year basis.

Description of Finding: Revenues

For rate of return carriers, subscribers must be assessed line port charges and recipients of ICLS must report these charges as line port revenues on the ICLS Forms 508 and 509. In addition, subscriber line count (SLC) revenue reported to USAC should agree to the general ledger and be adjusted to reflect uncollectable revenue related solely to SLC revenue. Section 47 C.F.R. 54.903(a)(4) indicates carriers shall submit data including common line cost and revenue data for the prior calendar year to USAC on December 31 of each year for ICLS purposes.

Revenue Example

• The audit team examined the beneficiary’s process for compiling ICLS revenue data submitted for High Cost program purposes. While the beneficiary filed its ICLS revenue data timely, the cut-off date by which it reported its revenue data, December 22, was not as of the end of the year as required by the rules.

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules

How to Address or Prevent this Finding

As indicated in FCC rules cited above, beneficiaries are required to report their data in accordance to the dates specified in the rules. Beneficiaries should implement a reconciliation process to report data to USAC in accordance with the FCC rules if their billing cycles do not coincide with the Rules.

Who does this finding apply to?

Rate of return cost companies.

Description of Finding

Affiliate transactions can lead to a finding if they’re not recorded correctly. Issues associated with affiliate transaction pricing include observing a price ceiling when services are purchased from an affiliate and observing a price floor when services are provided to an affiliate. Beneficiaries should also ensure rates reflect the rates in effect during the period the transaction occurred.

Example

• The beneficiary did not charge the higher of cost or fair market value for billing and collections services provided to a non-regulated affiliate.

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules

How to Address or Prevent this Finding

Documentation should include support that these transactions were properly recorded in the general ledger and reconcilable to the Part 64 cost study used to calculate High Cost program support for cost companies. The documentation should provide support for the pricing of the affiliate transaction based on market values and rates at the time the transaction took place [see 47 CFR 32.27].

Who does this finding apply to?

Rate of return cost companies.

Description of Finding

Support recipients must not use USF funds for inappropriate expenses and/or improperly report costs for High Cost program support expenses, that are not necessary for the provision, maintenance, or upgrading of facilities and services for which the support is intended, as required by FCC rules. Specifically, in Title 47 Code of Federal Regulations (CFR) section §54.7, titled “Intended use of federal universal service support”, the FCC prohibits the use of universal service funds for purposes other than providing, maintaining, or upgrading facilities and services.

The FCC released a Public Notice, FCC 15-133, which explains in detail the type of expenses that should and should not be recovered through the High Cost program to ensure that support is used for its intended purposes.

Additionally, in March 2018, the FCC later released FCC 18-29 providing further detail regarding eligible expenses. The Commission clarified rules related to High Cost support recovery regarding personal expenses, expenses unrelated to operations, and corporate luxury goods, as well as identified categories of expenses subject to a presumption against recovery through interstate ratemaking.

Example

• The Beneficiary did not exclude plant-specific and non-plant-specific expense transactions that were related to sponsorships, donations, contributions, scholarships, personal expenses, entertainment or parties or other activities, gifts, membership fees/dues, penalties for late payments on debt, loans or other payments, promotional items/events related to public relations (non-product related), and non-regulated activities for a non-regulated affiliated entity.
• Auditors identified expenses related to family trips to Disney World, annual golf outings, ice machines, company clothing (not considered as uniforms), holiday gifts and other gifts, entertainment, and donations were included as regulated expenses in the Beneficiary’s HCP filings. These expenses are deemed ineligible for cost recovery and should not have been included in the HCP filings as they are not for the provision, maintenance, or upgrading of facilities or services for which the support is intended.

Cause

Inadequate policies/procedures or weak internal controls; inadequate systems for collecting, reporting, and/or monitoring data; lack of understanding of FCC rules.

How to Address or Prevent this Finding

Reference the categories listed in both the Public Notice, FCC 15-133, and order FCC 18-29, and take steps to ensure all expenses are reported in accordance with FCC Rules. Ensure regulated and non-regulated activities are flowing to the appropriate accounts and ensure cost allocation to remove unallowable items from data submitted in their HCP filings. Beneficiaries should maintain adequate documentation to support allocation factors that are used to determine the allocation between regulated and non-regulated activities in the cost studies that are used to determine High Cost Program support.