Universal Service Administrative Company

Final Report and Statistical Analysis of the 2006-07

Federal Communications Commission
Office of Inspector General
High Cost Program Beneficiary Audits

September 10, 2009

 EXECUTIVE SUMMARY

 In 2006-07, the Universal Service Administrative Company (USAC) conducted 65 audits

of High Cost Program beneficiaries at the direction of the Federal Communications
Commission (FCC or Commission) Office of Inspector General (OIG). One purpose of
the audits was to estimate an “error rate” under the Improper Payments Information Act
of 2002 (IPIA).

 In October 2007, the FCC OIG issued an “initial statistical analysis” of these High Cost
Program beneficiary audits. The FCC OIG’s initial statistical analysis reported an
estimated improper payment rate of 16.6% with a margin of error of +/- 10.0%.

 Follow-up audit work conducted by independent audit firms after the FCC OIG issued its
initial statistical analysis demonstrates that the estimated improper payment rate is
actually 2.74% with a margin of error of +/- 2.8% – not 16.6% as initially reported by
the FCC OIG. Many payments that were initially deemed “improper” for IPIA reporting
purposes were in fact made in compliance with program rules.

 This subsequent audit work has demonstrated further:

o Estimated improper payment amounts for the 65 audited companies declined from
over $21 million to less than $4 million of the approximately $140 million in
disbursements audited.

o Most of the remaining $4 million is associated with three beneficiaries whose

support is still being deemed 100% “improper.” Experience has shown, however,
that when detailed further review is conducted, typically only a portion, if any, of
the total amount initially deemed “improper” for IPIA reporting purposes was
actually disbursed in violation of program rules.

o Extrapolating the correct estimated error rate to the entire High Cost Program
reduces the estimated “improper” amount from over $560 million (out of $3.7
billion disbursed) to less than $103 million during the period in question.

 The FCC OIG’s October 2007 initial statistical analysis thus reported a substantially
inflated estimate of High Cost Program improper payments.

o This occurred because 100% of support received by 13 of the 65 beneficiaries

audited was deemed “erroneous” prior to properly completing full audits of those
beneficiaries.

o For example:

 In several cases, the independent audit firms were required by FCC OIG
deadlines to stop work before the beneficiary had time to retrieve old records
and demonstrate that payments were made in accordance with program rules.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 2
 When records were provided after the FCC OIG issued its initial statistical
analysis in October 2007, the independent audit firms found that the payments
were properly made.

 In one instance, over $800,000 was deemed “improper” because the auditee
provided paper, rather than electronic, records that could not be fully
evaluated before the FCC OIG issued its October 2007 initial statistical
analysis. Subsequently, the independent audit firm analyzed a small sample
of the data and found no significant errors.

 In another case, $2.3 million in support was deemed “improper” because the
audit firm was unable to obtain support for publicly-filed tariffed rates. After
further review, the audit firm concluded the information was unnecessary and
determined that the payment was properly made.

 Based on its October 2007 initial statistical analysis, the FCC OIG speculated that
“[g]iven the large number of disclaimed audits and the lack of appropriate documentation
in the sample study, non-compliance may be more widespread than the results suggest.”

 The facts, as revealed through the extensive follow-up work performed by independent
auditors, demonstrate the opposite – the 2006-07 High Cost Program beneficiary audit
program estimated “error rate” is actually less than 3%, far below the 16% initially
reported.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 3
 FINAL REPORT AND STATISTICAL ANALYSIS OF THE
2006-07 FCC OIG HIGH COST PROGRAM BENEFICIARY AUDITS

Background

In 2006, under the direction of the FCC OIG, USAC initiated a wide-ranging effort to conduct an
audit program of beneficiaries of the four universal service support programs (the High Cost,
Low Income, Rural Health Care, and Schools and Libraries Programs) and contributors to the
Universal Service Fund (USF). In accordance with FCC OIG direction, this comprehensive
audit program was designed primarily to assess levels of compliance with Commission
regulations and estimate rates of “erroneous” payments pursuant to the Improper Payments
Information Act of 2002 (IPIA). The FCC OIG intended to extrapolate results for the sample of
beneficiaries selected for audit to all funding recipients.1

The 2006-07 FCC OIG USF audit program came to be known as “Round 1” of the audit
program, as USAC has conducted two subsequent rounds of audits in the High Cost Program and
Schools and Libraries Program in 2007-08 (Round 2) and 2008-09 (Round 3). During the
summer and fall of 2006, USAC competitively procured and trained four audit firms to perform
attestation examinations of 65 recipients of High Cost Program support. Under the close
oversight of FCC OIG staff, USAC also coordinated development of the assertions of
compliance to be made by auditee management, coordinated development of materiality
guidelines, and reviewed proposed audit programs. Round 1 was conducted under strict
deadlines mandated by the FCC OIG. Audits were announced beginning in January 2007, and
the FCC OIG required estimates of “improper” payments to be provided for each audit on or
before July 31, 2007.

On October 3, 2007, the FCC OIG released its initial statistical analysis of Round 1 of the audit
program. The OIG noted no reported instances of fraud in any USF program area. The OIG
recognized that in general, the audits indicated compliance with Commission rules. With respect
to the High Cost Program beneficiary audits, the FCC OIG reported an erroneous payment rate
of 16.6%.2 The FCC OIG analysis was substantially based on the work of Dr. A. Richard
Bolstein, an expert statistician under contract to USAC. FCC OIG reported “general compliance
with FCC rules and regulations” and a 16.6% estimated rate of improper payments with a margin
of error of +/- 10% at the 90% confidence level. In late October 2007, Dr. Bolstein revised his
statistical analysis based on corrected information supplied by USAC3 and reported a revised
estimated improper payment rate of 15.07%.4

1
FCC OIG intended extrapolation of estimated “improper payments” to fulfill the requirements of the IPIA. See 31
U.S.C. § 3122; Public Law 107-300, Stat. 2350, November 26, 2002.
2
See Office of the Inspector General, Federal Communications Commission: Initial Statistical Analysis of Data
from the 2006/2007 Compliance Audits (October 3, 2007).
3
The corrected information concerned identifying which 12 of the 65 examinations had not resulted in an opinion
being issued by the firms. The effect on the improper payments analysis of failing to issue an opinion is explained
below.
4
Dr. Bolstein revised the margin of error to 9.68% at the 90% confidence level. Although USAC notified FCC OIG
of the revised improper payment rate at this time, the FCC OIG did not correct its initial Round 1 statistical analysis.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 4
Follow-up Audit Work and Final Statistical Analysis of High Cost Program Audits

USAC prepared a detailed response to the FCC OIG October 2007 report.5 USAC’s report
covered all aspects of the Round 1 audit program and addressed the FCC OIG’s findings in all
program areas, including USF contributors. Among other things, USAC noted that the FCC
OIG’s October 2007 report risked significantly overstating the erroneous payment rate due to
structural and methodological constraints mandated by the FCC OIG.6

The FCC OIG established the objectives and scope of the Round 1 audits by defining the scope
of work reflected in the request for proposals (RFP) for audit services and in the engagement
letters between USAC and the firms selected to perform the work. The FCC OIG specifically
required:

(1) Performance of compliance attestation examinations (requiring an opinion from the

firms based on assertions made by auditee management).7
(2) Delivery of examination results by July 31, 2007.

As explained below, these two requirements effectively drove a substantial overstatement in the
initial estimated rate of “improper” payments for the High Cost Program.

During Round 1, firms were unable to issue opinions on compliance in almost 20% of the High
Cost Program examinations. In numerous cases, this was due to insufficient time to obtain
auditable information from the beneficiaries. In cases where an opinion could not be rendered by
the FCC OIG’s July 31, 2007 deadline and the audit firms disclaimed, the FCC OIG required the
firms to report 100% of the High Cost Program support received by that beneficiary as
“improper.” In other cases where an opinion was rendered but where the monetary impact for
certain findings could not be quantified, the FCC OIG also required 100% of the support
associated with that finding to be reported as “improper.”

Consequently, the timing and methodological constraints of the FCC OIG USF audit program
resulted in High Cost Program support for 13 of the 65 audits being considered 100% improper
(12 disclaimers and one adverse opinion). These 13 audits, along with one other adverse opinion
where the estimated improper payment rate was over 80%, were the primary cause of the 16.6%
error rate reported by the FCC OIG in its October 2007 initial statistical analysis. Specifically,

5
Universal Service Administrative Company Report on the Federal Communications Commission Office of
Inspector General 2006–07 Universal Service Fund Audit Program (December 31, 2007) (USAC Round 1
Response).
6
See USAC Round 1 Response at 16.
7
Although there are several types of approaches to audits that comply with government auditing standards, the FCC
OIG directed that these audits be conducted as “compliance attestation” examinations. Attestation examinations are
based on a set of statements by auditee management asserting compliance with program rules and procedures.
Auditors test the validity of management’s assertions of compliance, provide a cause for the failure of any assertion
by management, and issue an opinion. Audit opinions can take any of the following forms: (1) Unqualified, with no
material findings; (2) Qualified, with a limited number of findings associated with certain assertions; (3) Adverse, or
material noncompliance with program rules or requirements; (4) Disclaimer, or inability of the auditor to validate or
invalidate compliance assertions; or (5) Withdrawal, or inability of the auditor to complete an audit typically
because of concerns about the integrity of records or because of a noncooperative auditee.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 5
$20.9 million of the $21.2 million (over 98%) of the initially estimated “improper” amount in
Round 1 was associated with these 14 audits.

It is important to recognize that program payments that may be deemed “improper” for IPIA
reporting purposes, or estimates of improper payments, are not necessarily recoverable by
USAC. USAC must do additional work in order to determine what, if any, disbursements should
actually be recovered. For example, USAC is unable to recover funds in cases where audit firms
did not issue an opinion or in cases where the audit firms could not quantify the monetary effect
of a finding but where the finding nevertheless triggered reporting of a large estimated improper
payment in the FCC OIG’s initial statistical analysis.

In such cases, USAC is required, consistent with best practices and pursuant to FCC direction, to
conduct further follow-up work to determine whether the payments in question were recoverable
under the rules and thus in fact “improper.” With FCC OIG approval, USAC re-engaged the
independent audit firms to conduct the necessary follow-up work. This work came at
considerable expense to the USF and took significant time to complete. USAC directed the firms
to perform follow-up work on 10 of these 14 examinations. That work is now complete. With
respect to the other four examinations, one is on appeal to the FCC, one has been referred to the
FCC OIG for follow-up, one company is defunct, and in one case USAC’s Internal Audit
Division performed the follow-up work. The objective for all follow-up activity was to
determine a specific dollar amount recoverable to the USF and to re-calculate where appropriate
the initially reported estimated improper payment amount.

The follow-up audit activity has revealed that only a small percentage of disbursements for
audits initially deemed “100% improper” were in fact erroneous. In August 2009, based upon
the completed follow-up work, Dr. Bolstein further revised his statistical analysis. Dr. Bolstein
determined that the improper payment rate based on a data set of completed audits is 2.74% with
a margin of error of 2.8% at the 90% confidence level.8 Extrapolating these results to the entire
universe of High Cost Program disbursements for the same period, estimated improper payments
were reduced from $565 million to about $103 million out of a total $3.7 billion in program
disbursements. Thus, the follow-up audit work illustrates flaws in the initial IPIA approach
mandated by the FCC OIG, which combined the attestation examination methodology with
unreasonably tight deadlines.

The two tables included with this report summarize the details behind the initial and revised IPIA
estimates and the outcomes or status of each of the 14 examinations referred to above. Notably,
the remaining $4 million in estimated improper payments substantially derives from three audits
that continue to be classified as 100% improper: one audit had more than $800,000 reported as
100% “improper” due to un-auditable hardcopy documentation supporting line counts and is
currently on appeal to the FCC; another had approximately $800,000 reported as 100%
“improper” due to inadequate electronic documentation supporting line counts (reflecting
underreporting of lines); and the third had $1.7 million reported as 100% “improper” due to
several material findings of unquantifiable monetary effect. However, based on the results of the

8
A. Richard Bolstein, LLC, Revised Report on FY 2005 High Cost Program (August 2009) at 1 (attached hereto).

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 6
follow-up work completed in the other cases, it is doubtful that 100% of the support received by
these three carriers was in fact improper.

USAC views any level of improper payments as unacceptable and is committed to reducing or
preventing erroneous payments. As reported extensively elsewhere, USAC, working closely
with Commission staff, has taken and will continue to take numerous steps to prevent, detect,
and recover any USF support found to be disbursed in error.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 7
Round 1 High Cost Follow-up Activity – Summary of Impact on Improper Payment Calculations
TOTAL INITIAL REVISED INITIAL
SAC BENEFICIARY PAYMENT IMPROPER IMPROPER CHANGE STATUS REVISED STATUS
Hayneville Fiber Transport,
1 259008 inc. 15,037 15,037 6,636 8,401 Disclaimer Generally Compliant
2 405211 Southwestern Bell-AR 5,349,117 5,349,117 - 5,349,117 Disclaimer Generally Compliant
3 415214 Southwestern Bell-KS 535,638 535,638 - 535,638 Disclaimer Generally Compliant
Thumb Cellular Limited
4 319005 Partnership 834,545 834,545 834,545 - Disclaimer Under FCC Appeal
5 359020 Goldfield Access Network 3,462 3,462 19 3,443 Disclaimer Generally Compliant
6 250300 Hopper Telecomm. Co. 2,785,674 2,786,274 13,631 2,772,643 Disclaimer Generally Compliant
7 532385 Monroe Telephone Co. 1,013,081 1,024,081 - 1,024,081 Disclaimer Generally Compliant
8 341025 Shawnee Telephone Co. 1,658,445 1,658,445 1,658,445 - Withdrawal Adverse
9 140064 Shoreham Tel Co Inc. 963,377 964,427 2,961 961,466 Disclaimer Compliant
10 150129 Township Tel Co. 551,672 552,272 - 552,272 Disclaimer Compliant
Cellular Mobile Systems of
11 369911 St. Cloud 63,708 63,708 63,708 - Disclaimer Defunct
12 175000 Verizon Pennsylvania 2,283,390 2,283,390 - 2,283,390 Disclaimer Unqualified
Generally Compliant
13 474427 Citizens-Frontier-ID 4,911,882 4,100,952 219,705 3,881,247 Adverse (Limited Scope)
Referred To FCC OIG
14 279006 NPCR, Inc. 778,502 778,502 778,502 - Adverse For Follow-Up
TOTAL ASSOCIATED WITH “100% IMPROPER”
EXAMS9 20,949,850 3,578,152 17,371,698
TOTAL FROM THE REMAINING 51 EXAMS 279,650 279,650 -
ROUND 1 TOTAL ESTIMATED IMPROPER 21,229,500 3,857,802 17,371,698
ROUND 1 % ESTIMATED IMPROPER 15.07% 2.74%
TOTAL HIGH COST PROGRAM DISBURSEMENTS $3,748,156,930
REVISED PROGRAM ESTIMATED IMPROPER 564,860,939 102,645,934 462,215,006

9
Including Citizens-Frontier-ID which was deemed over 80% “improper.”

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 8
Round 1 High Cost Follow-up Activity – Detail (disbursements made October 1, 2004 through September 30, 2005)
BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION FOLLOW-UP PROCEDURES FINAL OUTCOME

1 Hayneville Fiber CETC receiving $15,037 Disclaimer due to carrier’s Carrier able to provide customer Generally
Transport, Inc. High Cost Model failure to timely provide detailed invoices which were reconciled Compliant
(HCM) and documentation supporting line against line count data submitted
Interstate Access counts. to USAC. USAC recovery = $627
Support (IAS).
USAC recovery = $0 Testing identified over-reporting Extrapolated improper
of lines: HCM by 57 (274 had payment = $6636
Support reported as 100% been reported); IAS lines by 87
improper. (1,365 had been reported).
2 Southwestern Price cap ILEC $5,349,117 Disclaimer due to carrier’s Carrier able to recover historical Generally
Bell-AR receiving IAS. failure to timely provide subscriber listings from backup Compliant
historical subscriber listings tapes.
supporting line counts. USAC recovery = $0
Testing identified under-
USAC recovery = $0 reporting of lines by 1,679 Improper payment = $0
(318,968 had been reported to
Support reported as 100% USAC).
improper.
3 Southwestern Price cap ILEC $535,638 Disclaimer due to carrier’s Carrier able to recover historical Generally
Bell-KS receiving IAS. failure to timely provide subscriber listings from backup Compliant
historical subscriber listings tapes.
supporting line counts. USAC recovery = $0
Testing identified under-
USAC recovery = $0 reporting of lines by 5,958 Improper payment = $0
(337,240 had been reported to
Support reported as 100% USAC).
improper.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 9
 BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION FOLLOW-UP PROCEDURES FINAL OUTCOME

4 Thumb Cellular CETC High Cost $834,545 Carrier provided hardcopy/PDF None pending outcome of FCC FCC decision on carrier
Limited Loop (HCL), line count/subscriber listings appeal filed by carrier. appeal pending.
Partnership Local Switching (reflecting under-reporting of
Support (LSS), lines). Disclaimer due to audit Improper payment =
and Interstate firm’s inability to apply $834,545 (no change
Common Line computer-assisted auditing pending resolution of
Support (ICLS). techniques to hardcopy/PDF appeal and follow-up
subscriber listings to detect, work, if necessary)
among other things, duplicate
lines.10

USAC recovery = $0

Support reported as 100%

improper.
5 Goldfield Access CETC receiving $3,462 Disclaimer due to carrier’s
Network IAS. failure to timely provide
historical subscriber listings
supporting line counts.
USAC recovery = $0
Support reported as 100%
improper.
Carrier able to provide historical Generally
subscriber listings in Compliant
hardcopy/PDF format.
USAC recovery = $0
USAC Internal Audit Division (immaterial monetary
compiled the hardcopy/PDF effect)
information into electronic
format to enable testing. Improper payment = $19
(not extrapolated as
Testing identified over-reporting USAC Internal Audit
of lines by 123 (831 had been Division tested 100% of
reported to USAC). the lines).

10
The independent accounting firm that performed the original examination has subsequently estimated that it would take 600 hours to enter the
hardcopy/PDF line count/subscriber listings into a database so that computer-assisted auditing techniques could be applied. The cost of such an effort
would likely greatly exceed any potential USF recovery amount.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 10
 BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION
6 Hopper Rural ILEC $2,785,674 Disclaimer due to carrier’s
Telecomm. Co. receiving HCL, failure to maintain continuing
LSS, ICLS. property records for cable &
wire facilities (C&WF) and
central office equipment (COE)
for property acquired before
1999 acquisition. Carrier also
could not provide detailed
documentation supporting line
counts.
USAC recovery = $0
Support reported as 100%
improper. (Original improper
payment also reflected an
underpayment of $600.)
7 Monroe Rural ILEC $1,013,081 Disclaimer due to carrier’s
Telephone Co. receiving HCL, failure to maintain continuing
LSS, ICLS. property records.
USAC recovery = $0
Support reported as 100%
improper. (Original improper
payment also reflected an
underpayment of $11K.)
USAC FINAL REPORT ON FCC OIG 2006–07
HIGH COST PROGRAM BENEFICIARY AUDITS
FOLLOW-UP PROCEDURES FINAL OUTCOME
Alternative asset testing focused Generally
on those pre-1999 assets still Compliant
contributing to rate base. For
selected assets, obtained USAC recovery =
supporting documentation for $13,631
purchase accounting entries and
physically observed assets. Improper payment =
$13,631 (firm did not
Testing identified $30K of provided extrapolated
C&WF assets that should have value)
been retired resulting in $14K
net monetary effect.
Alternative line count testing
utilized a current period and
rolled back data to the original
period under examination
(December 2003) by reviewing
monthly line count information.
No line count exceptions were
noted.
Selected C&WF and COE Generally
transactions from the general Compliant
ledger details for the period 2000
through 2003. USAC recovery = $0
Exceptions noted related to Improper payment = $0
understatement of plant costs.
Had certain plant costs been
accrued in year in which they
were incurred, carrier could have
obtained additional High Cost
support.
SEPTEMBER 10, 2009
Page 11
 BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION FOLLOW-UP PROCEDURES FINAL OUTCOME

8 Shawnee Rural ILEC $1,658,445 Withdrawal due to carrier’s
Telephone Co receiving HCL, refusal to provide management
LSS, ICLS. representation letter.
USAC recovery = $0
Support reported as 100%
improper.
9 Shoreham Tel Co Average $963,377 Disclaimer due to carrier’s
Inc. Schedule inability to timely provide
receiving HCL, monthly access minutes of use
LSS, ICLS. (MOU) reports or otherwise
retrieve relevant information
from its billing system.
USAC recovery = $0
Support reported as 100%
improper. (Original improper
payment also reflected an
underpayment of $1K.)
Carrier provided management Adverse
representation after USAC
notified carrier that recovery of USAC recovery =
USF support was next step. $116,375
Audit firm was then able to Improper payment =
complete an attestation $1,658,44511
examination. The examination
resulted in nine material
findings, four management
comments.
Carrier able to provide access to Generally
MOU information. Compliant
Testing identified MOU USAC recovery = $0
reporting errors that resulted in
LSS underpayments of about Improper payment =
$3K. $2,961 (firm did not
provided extrapolated
value)

11
The “improper payment” amount remained as 100% of the support because of the presence of material audit findings with no quantifiable monetary
effect, particularly as they related to the pricing of transactions with affiliated entities and Part 64 allocations between regulated and non-regulated
operations. A performance audit may have permitted quantification but that was not undertaken in this case.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 12
 BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION FOLLOW-UP PROCEDURES FINAL OUTCOME

10 Township Tel Co Rural ILEC $551,672 Disclaimer due to carrier’s Obtained unit level detail Compliant
receiving HCL, failure to maintain continuing developed by the carrier and
LSS, ICLS. property records for C&WF and reconciled pre-acquisition USAC recovery = $0
COE for property acquired investment costs to the
before 1998 acquisition. continuing property records; for Improper payment = $0
pre-acquisition assets, identified
USAC recovery = $0 assets still contributing to the
rate base; reviewed the
Support reported as 100% methodology used by carrier to
improper. develop unit level detail;
reconciled total pre-acquisition
investment costs to acquisition
records, agreements, etc.

No exceptions noted.
11 Cellular Mobile CETC receiving $63,708 Disclaimer due to carrier’s Carrier no longer in business; no Carrier defunct.
Systems of St. ICLS. failure to provide documentation follow-up possible.
Cloud supporting line count filings. USAC recovery = $0

USAC recovery = $0 Improper payment =

$63,708 (no change)
Support reported as 100%
improper.
12 Verizon Price cap ILEC $2,283,390 Disclaimer due to auditor’s Auditor ultimately recognized Unqualified
Pennsylvania receiving IAS. failure to obtain support for that tariffs associated with any
CMT revenue submitted to CMT revenue related USAC recovery = $0
USAC on June 30, 2000 calculations were “deemed
(pursuant to 47 CFR § 61.3(d)). lawful” pursuant to Section Improper payment = $0
204(a)(3) of the Telecom Act
USAC recovery = $0 and thus was able to complete an
attestation examination.
Support reported as 100%
improper. No material findings or
monetary effects noted.

USAC FINAL REPORT ON FCC OIG 2006–07 SEPTEMBER 10, 2009

HIGH COST PROGRAM BENEFICIARY AUDITS Page 13
 BENEFICIARY CARRIER TYPE PAYMENT INITIAL DISPOSITION
13 Citizens-Frontier- CETC receiving $4,911,882 Adverse opinion; one material
ID HCL, IAS and finding had unquantifiable
LSS. monetary effect associated with
failure to provide adequate
historical data supporting line
count filings.
USAC recovery:
Finding #1 = $129K
Finding #2 = $53K
Finding #3 = $0
$4,100,952 in support (about
83%) reported as improper.
14 NPCR CETC receiving $778,502 Adverse opinion due to carrier’s
HCL, IAS, ICLS, inability to provide auditable
and LSS (electronic) subscriber listings
that reconciled to line count
filings. (Testing identified
substantial underreporting of
lines.) Monetary impact not
quantified.
USAC recovery = $0
Support reported as 100%
improper.
USAC FINAL REPORT ON FCC OIG 2006–07
HIGH COST PROGRAM BENEFICIARY AUDITS
FOLLOW-UP PROCEDURES FINAL OUTCOME
Follow-up procedures were Generally
limited to quantifying the impact Compliant (scope limited
of Finding #3. to issues associated with
Finding #3)
Alternative procedures involved
testing detailed supporting USAC recovery =
documentation available from $38,028
the subsequent quarter.
Extrapolated improper
Testing identified total exception payment = $219,705
of $3.4K in monthly support.
Referred to FCC OIG in for Pending with FCC OIG
follow-up procedures due to
carrier’s stated need to obtain Improper payment =
“friendly” subpoena in order to $778,502 (no change
provide certain audit-related pending FCC OIG
information. FCC OIG assumed direction and follow-up
operational responsibility for this work, if necessary)
audit in January 2009.
SEPTEMBER 10, 2009
Page 14
  
 

Universal Service Administrative Company

Final Report and Statistical Analysis of the 2006-07
Federal Communications Commission
Office of Inspector General
High Cost Program Beneficiary Audits

ATTACHMENT
 
 
 
Revised Report on FY 2005 High Cost Program
August 2009

A. Richard Bolstein, LLC

 
 
Universal Service Administrative Company

Revised Report on FY 2005 High Cost Program

A. Richard Bolstein, LLC

August 2009
Summary
Based on the revised audit data received on July 16, 2009, the conclusions regarding
improper payments in the High Cost Program for Round 1 (FY 2005) are:
 The point estimate of the improper payment rate is 2.7%.
 The margin of error of the point estimate is ± 2.8% with 90% confidence.
 A 90% confidence interval for the true improper payment rate in the
population is 0.1% to 5.6%.1
 The point estimate of the total dollar amount of improper payments is
$102,645,934.
 The margin of error of the point estimate is ± $106,595,391 with 90%
confidence.
 A 90% confidence interval for the true improper payment amount in the
population is $3,857,802 to $209,241,324.
Details
1. The total and average gross disbursements for the SRS of 65 SAPS were
$140,869,183 and $2,167,218, respectively.
2. The total and average gross disbursements in the population of 1896 SAPS were
$3,748,156,930 and $1,976,876, respectively.
3. As the sample average is within 10% of the population average, the sample
represented the population satisfactorily with respect to disbursements.
4. Total amount of improper payments in the sample was determined by the auditors
to be $3,857,802.
5. Total improper payment amount in the sample divided by the sample total
disbursements (from bullet 1.) is the estimated improper payment rate, 2.74%.
6. The residual of each element of the sample is the quantity:
r = (improper payment amount) – (improper payment rate) · (amount disbursed)
7. The standard deviation of the residuals is SD(r) = $280,392.
8. The margin of error of the estimated improper payment rate is calculated as
SD(r )
Margin of Error = (1.645) · (1/ 65)  (1/1896) = 2.84%
X
where X = average population disbursement (bullet 2.)

1
Point estimate and margin of error are combined using multiple decimal places, and then rounded to a
single decimal place. The lower limit cannot be negative and must be at least as large as the total improper
payment found in the sample divided by the population total disbursement amount.