An Arthur Andersen audit of 18 recipients of first-year eRate funds has sparked an investigation of one of the beneficiaries for possible fraud, eSchool News has learned. The Federal Communications Commission (FCC) has confirmed that the suspected eRate violations are an “ongoing law enforcement matter” but has rejected an eSchool News Freedom of Information Act request to identify the recipient being investigated.

The Schools and Libraries Division (SLD) of the Universal Service Administrative Co. (USAC), the group that administers the eRate, had asked the New York-based accounting firm to examine whether the 18 recipients were making proper use of their eRate subsidies, which are given to help schools and libraries connect to the internet and install modern telecommunications technologies.

A report of the audits’ findings, delivered to USAC in October, indicates that one of the cases was referred to Andersen’s Business Fraud and Investigative Services for “additional intensive investigation.”

Requests by eSchool News for the identity of the recipient under investigation were directed to the Federal Communications Commission (FCC), which oversees USAC. But on Jan. 28, FCC officials rejected the Freedom of Information Act request.

The FCC’s letter of denial stated that “…in light of the nature of the requested information, as well as the fact that it pertains to an ongoing law enforcement matter, the information is exempt from disclosure.”

The Andersen audits, which targeted Year One eRate beneficiaries viewed as “high risk” (including those receiving very large funding commitments in the program’s first year), assessed each beneficiary for waste, fraud, noncompliance, or abuse of the program’s rules. Auditors then identified areas for improvement in administration of eRate funds and support for recipients.

Although only one of the 18 audited entities is suspected of fraud, the audits revealed numerous rules violations. The report’s appendices list the identities, assessments, and infractions of the 17 other entities not under investigation.

According to the report, “Overall, the … review of beneficiaries indicated that applicants were following program rules,” and all 18 beneficiaries had appropriate technology plans in place.

However, the report says “a small number” of beneficiaries were unable to provide evidence that they complied with the SLD’s competitive bidding rules, and “in several cases, documentation was not as complete as the Andersen team would have preferred to verify program compliance.” For instance, the New York City Board of Education and its service provider, Verizon, could not provide a specific allocation for the $2.6 million in eRate funding committed to each school.

In addition to these types of record-keeping infractions, some entities spent eRate dollars on ineligible services, and in the case of Los Angeles Unified School District’s Grant Van Nuys Cluster 7 schools, documentation was so poor that “it could not be demonstrated with certainty that program funds were used for eligible services.”

“In general, the findings prove that the program is being managed well,” said Scott Barash, general counsel for USAC. “There were issues that had to be addressed, but many of those issues were attributable to the fact that it was the program’s first year.”

Not everyone agrees with this assessment.

“My response … would be that if [several] of the audits conducted were found to include some form of program violation, and these violations are calculated in the millions [of dollars] by Andersen, then SLD may have a warped view of what constitutes success,” said Garnet Person, chief executive officer of eRate Elite Services, an eRate consulting firm based in Owings Mills, Md. Person’s company helps eRate applicants navigate the maze of program requirements.

Auditors noted a number of infractions when they examined the Milwaukee Public Schools, one of the 17 districts identified in the report. For example, the report said one of the district’s service providers had filed eRate forms based on estimated costs rather than actual costs.

“That was just an oversight, and it has been corrected,” said Bob Nelson, director of technology for Milwaukee Public Schools, who added that district officials had noted the error prior to the audit and had initiated a correction immediately.

Like Barash, Nelson attributed the infractions to the program’s adolescence.

“The record-keeping process the eRate required was not clear at the initial implementation, and so looking back three years later to answer questions of this nature is somewhat problematic,” he said. “Andersen was looking for very specific things that were not nearly as specific at the time the program was initiated.”

But Person doesn’t think the problems have been solved as the eRate enters its fifth funding year.

“It is clear … that many [applicants] are beyond their administrative wherewithal to cope with the eRate as the funding years run together and commitments are taking 14 months or more to be released,” he said.

Person cited a report by the General Accounting Office on Year Three of the eRate, titled “Applications and Invoice Review Procedures Need Strengthening,” which proves that “even in Year Three, many of these procedural issues … still exist.”

George McDonald, USAC vice president, said SLD recognizes that “in Year One, as you might expect with a new program, there were not detailed guidelines about the sorts of documents that should be retained. We have moved to rectify that.”

As a result of the audits, McDonald said his agency has posted a document called “Demonstrating Compliance with Program Rules” in the Reference area of its web site, as well as an associated “Compliance Documentation Checklist.”

An audit of Years Two and Three commissioned by SLD is under way, and auditors examining the Milwaukee schools are uncovering far fewer exceptions, Nelson said.

In a post-audit letter from USAC executives to Andersen, the agency listed a number of actions it would take to address the issues raised by the audits. These include:

  • Put all disbursements in question on hold, reduce funding commitments, and recover funds disbursed in violation of eRate regulations;
  • Use the lessons learned to generate a list of best practices for applicants;
  • Promulgate specific document retention guidelines for eRate recipients;
  • Refer violations to the FCC and other appropriate authorities;
  • Ensure sufficient detail on future funding requests;
  • Improve invoicing procedures and controls;
  • Provide up-to-date disbursement data to applicants;
  • Schedule follow-up audits for some entities; and
  • Continue and expand the scope and scale of the next review of beneficiaries.

According to McDonald, “In consultation with FCC staff and in accordance with FCC rules, reduction of commitments and recovery of disbursed funds are being pursued as appropriate. We have also referred matters to the Inspector General of the FCC for further investigation when necessary.”

McDonald said some funds paid out erroneously already have been returned, and procedures are in place and are being followed to refer other problems to the FCC and to federal law enforcement officials.

“The audit scope was expanded for Years Two and Three, and there will be significantly more beneficiaries reviewed during 2002,” he said.

USAC general counsel Barash said it is not clear when the ongoing fraud investigation will conclude.


Schools and Libraries Division of USAC

Arthur Andersen LLP

eRate Elite Services Inc.