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FCC FY 2012 Agency Financial Report

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Released: February 27, 2013



















FEDERAL COMMUNICATIONS COMMISSION







Fiscal Year 2012

Agency Financial Report


(October 1, 2011 – September 30, 2012)












Table of Contents

Section Title

Page



Table of Contents
i

Message from the Chairman
iii

1. Management’s Discussion and Analysis
1


Overview of the FCC
1


Introduction
1


About the FCC
1


Mission and Organizational Structure
2


Organizational Chart
6


Map of Field Offices
7


FCC Strategic Goals
8


Strategies & Resources to Achieve Goals
9


Components of the FCC for Financial Statement Purposes
9


Eliminating and Recovering Improper Payments
11

Performance Highlights
12

Management Assurances
22

Financial Discussion and Analysis
26

2. Financial Statements and Auditors’ Report
33


Message from the Chief Financial Officer
33

Transmittal from Office of Inspector General
34

Independent Auditors’ Report
36

Independent Auditors’ Report on Internal Control over Financial Reporting
38

Independent Auditors’ Report on Compliance and Other Matters
51

Commission’s Response to Independent Auditors’ Reports
56

Principal Statements
58


Consolidated Balance Sheet
58


Consolidated Statement of Net Cost
59


Consolidated Statement of Changes in Net Position
60


Combined Statement of Budgetary Resources
61


Consolidated Statement of Custodial Activity
62

Notes to the Principal Financial Statements
63

Required Supplementary Information
81


3. Other Accompanying Information
83


Summary of Financial Statement Audit and Management Assurances
83

Improper Payments Elimination and Recovery Act Reporting Details
85

Office of the Inspector General’s Summary of Management Challenges
101

Commission’s Response to Inspector General’s Management Challenges
104
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

i




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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

ii




Message from the Chairman



I am pleased to present the Federal Communications Commission’s (FCC or
Commission) Financial Report for Fiscal Year (FY) 2012. The Financial
Report provides key financial and performance information to Congress and
the American people. As continuing evidence of the FCC’s strong
commitment to maintaining a culture of accountability for the funds it
manages, I am pleased to report that for the seventh consecutive year, the
FCC has obtained an unqualified or “clean” audit opinion on its financial
statements. In addition, the FCC’s independent auditors, KPMG, did not
identify any material weaknesses in the FCC’s operations. The independent
auditors’ opinion addresses more than $450 million in FCC operating
expenses and more than $9 billion in outlays for the Universal Service Fund
and Telecommunications Relay Service Fund. Despite the positive audit
opinion, the independent auditors’ report shows that work remains at the
FCC to continue to improve the agency’s operations so it can deliver on its
mission for the American people.

The FCC’s mission centers on maximizing the opportunities of broadband and other communications
networks and technologies. These have the potential to unleash new waves of innovation and massive
private innovation, thereby increasing opportunity and prosperity, driving American competitiveness and
leadership, connecting our country, strengthening our democracy – and transforming lives for the better. I
welcome the opportunity to highlight how the FCC has fulfilled its important role in pursuing these goals
on behalf of all Americans throughout FY 2012.

Some of the Commission’s key accomplishments over the past year include:

Unleashing Spectrum for Broadband


• We opened a proceeding to implement incentive auctions, making the U.S. the first country in the
world to launch this new paradigm in spectrum policy. The incentive auction will use market
forces to repurpose valuable spectrum in the broadcast television bands for licensed and
unlicensed wireless broadband.
• We continued to remove outdated rules and restrictions on spectrum that prevented its use for
broadband, including 30 megahertz in the long-troubled Wireless Communications band.

Connect America and Lifeline Reform

• We continued implementing our landmark reforms to the Universal Service Fund, including
launching the Connect America Fund and the Mobility Fund to extend wired and wireless
broadband throughout the country. Through the Mobility Fund, we conducted the country’s first-
ever reverse auction for universal service support, efficiently using $300 million to extend high-
speed mobile broadband coverage to up to 83,000 road miles across 31 states.
• We overhauled the Lifeline program that assists low-income families in maintaining phone
service. Building on recommendations from the Federal-State Joint Board on Universal Service,
the Commission substantially strengthened protections against waste, fraud, and abuse. We are
on track to save over $200 million this year alone from these reforms.

FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

iii




Promoting Competition

• We rigorously and expeditiously reviewed a number of proposed transactions to protect
competition and the public interest, and approved over 250 wireless applications involving nearly
2,000 spectrum licenses, involving licenses valued at billions of dollars.

Empowering Consumers and Protecting Public Safety

• We continued implementation of the Twenty-First Century Communications and Video
Accessibility Act of 2010 to ensure that the 54 million Americans with disabilities are able to
fully utilize and benefit from advanced communications services, including adoption of rules that
require closed captioning of broadcast television video content posted on the Internet.
• We enhanced the ability of Tribal Nations to increase their ownership of broadcast facilities in
their communities to provide radio services.
• The Commission’s Communications Security, Reliability and Interoperability Council (CSRIC)
approved voluntary, industry-based recommendations to secure the Domain Name System
(DNS), to improve the security of Internet routing protocols and to defeat botnets.
• Through the Commission’s Enforcement Bureau, we have issued forfeitures against crammers
($11.5 million) and prepaid calling card companies using deceptive marketing practices ($25
million), making clear that we will crack down on those who seek to prey on communications
consumers through deceptive practices.

Agency and Regulatory Reform

• We worked to improve regulatory processes consistent with President Obama’s Executive Orders,
including integration of more rigorous cost-benefit analysis into rulemaking proceedings;
reduction of agency backlogs; and retrospective analysis and elimination of regulations that were
overly burdensome, out of date, or otherwise impeded economic growth and development.
• We continued to expand the use of new technologies to improve the operations of the
Commission and communicate more effectively with the public. We moved certain reporting
requirements relating to television broadcasters online and made additional data available to
empower app developers and consumers to use information in innovative ways.
• From January 1, 2010 through the end of FY 2012, we eliminated over 260 rules and regulations.

In closing, please note that a more comprehensive report about the FCC’s FY 2012 accomplishments will
be included in the FCC’s FY 2012 Annual Performance Report, which will be released in February 2013
with the FCC’s annual budget submission. The Agency Financial Report that follows contains the FCC’s
FY 2012 financial statements and other management highlights; the information contained therein is
reliable and complete.




Julius Genachowski
Chairman
November 14, 2012


FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

iv


1. Management’s Discussion and Analysis

Overview of the FCC

INTRODUCTION

The revised OMB Circular No. A-136, released on August 3, 2012, states that agencies may choose either
to produce a consolidated Performance and Accountability Report, or a separate Agency Financial Report
(AFR) and an Annual Performance Report (APR). The Federal Communications Commission
(Commission or FCC) has chosen to produce the AFR as an alternative to the consolidated Performance
and Accountability Report. The Commission will include its FY 2012 APR with its Congressional
Budget
Justification and will post it on the Commission website at
http://transition.fcc.gov/omd/strategicplan/">http://transition.fcc.gov/omd/strategicplan/ by February 4, 2013.

The AFR includes three sections. AFR Section 1 contains Management’s Discussion and Analysis
(MD&A) which presents an overview of the Commission, including the agency’s organizational chart,
map of the field offices, strategic goals and objectives, strategies and resources to achieve goals,
components of the Commission for financial statement purposes, work on eliminating and recovering
improper payments, performance highlights, management assurances, and a financial discussion and
analysis.

AFR Section 2 contains the agency’s financial information. This section contains the letter from the chief
financial officer (CFO) summarizing planned timeframes for correcting audit weaknesses and non-
compliances, major impediments to correcting audit weaknesses and non-compliances, and progress made
in correcting previously reported problems. Additionally, this section contains the independent auditors’
report, the Commission’s response to the independent auditors’ report, the financial statements, the notes
to the financial statements, and required supplementary information.

AFR Section 3 presents other accompanying information such as a summary of financial statement audit
results, a summary of management assurances, details on reporting improper payments pursuant to the
Improper Payments Information Act (as amended by the Improper Payments Elimination and Recovery
Act of 2010 (IPERA)), management and performance challenges from the Office of Inspector General,
and management’s response to such challenges.

ABOUT THE FCC

The FCC is an independent regulatory agency of the United States (U.S.) Government. The Commission
was established by the Communications Act of 1934 and is charged with regulating interstate and
international communications by radio, television, wire, satellite, and cable. The Commission also
regulates telecommunications services for hearing-impaired and speech-impaired individuals, as set forth
in Title IV of the Americans with Disabilities Act (ADA). The Commission’s headquarters is located in
Washington, D.C., with three regional offices, sixteen district offices, and eight resident agent offices
throughout the nation.

Five Commissioners direct the work of the FCC. All five Commissioners are appointed by the President
and confirmed by the Senate for five-year terms, except when filling the unexpired term of a previous
Commissioner. Only three Commissioners can be of the same political party at any given time and none
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

1


can have a financial interest in any company or entity that has a significant interest in activities regulated
by the Commission. The President designates one of the Commissioners to serve as Chairman.

The Chairman and the Commissioners at the end of FY 2012 were:

• Chairman Julius Genachowski
• Commissioner Robert M. McDowell
• Commissioner Mignon Clyburn
• Commissioner Jessica Rosenworcel
• Commissioner Ajit Pai


Pictured from left to right are Commissioner Rosenworcel, Commissioner McDowell, Chairman Genachowski,
Commissioner Clyburn, and Commissioner Pai.



MISSION AND ORGANIZATIONAL STRUCTURE

As specified in section 1 of the Communications Act, the Commission’s mission is to “…make available,
so far as possible, to all the people of the United States, without discrimination on the basis of race, color,
religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio
communication service with adequate facilities at reasonable charges.” 1 In addition, section 1 provides
that the Commission was created “for the purpose of the national defense” and “for the purpose of
promoting safety of life and property through the use of wire and radio communication.”2



1 47 U.S.C. § 151.
2 Id.
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

2



The FCC Chairman leads the Commission as head of the agency. In order to accomplish its strategic
plan, the FCC is organized by function. There are seven Bureaus and ten Offices. The seven Bureaus and
the Office of Engineering and Technology process applications for licenses to operate facilities and
provide communication services (in specific locations and on specific radio frequencies), analyze
complaints from citizens and other licensees, conduct investigations, develop and implement regulatory
programs, and participate in hearings. Generally, the nine other Offices provide specialized support
services. Bureaus and Offices regularly join forces and share expertise in addressing FCC-related issues.

The Bureaus


• The Consumer and Governmental Affairs Bureau develops and implements the FCC’s consumer
policies, including disability access, and serves as the agency’s connection to the American
consumer. The Bureau serves as the public face of the Commission through outreach and education,
as well as through the Consumer Center, which is responsible for responding to consumer inquiries
and complaints. The Bureau also maintains collaborative partnerships with state, local, and tribal
governments in such critical areas as emergency preparedness and implementation of new
technologies.

• The Enforcement Bureau is the primary FCC unit for enforcing the provisions of the Communications
Act, the Commission’s rules, orders, and various licensing terms and conditions. The Bureau’s
mission is to investigate and respond quickly to potential unlawful conduct to ensure: (1) consumer
protection in an era of complex communications; (2) a level playing field to promote robust
competition; (3) efficient and responsible use of the public airwaves, and (4) strict compliance with
public safety-related rules.

• The International Bureau administers the FCC’s international telecommunications and satellite
programs and policies, including licensing and regulatory functions. The Bureau also has a unique
role in promoting pro-competitive policies abroad, coordinating the Commission’s global spectrum
activities, and advocating U.S. interests in international communications and competition. The
Bureau works to promote a high quality, reliable, globally interconnected, and interoperable
communications infrastructure.

• The Media Bureau oversees broadcast radio and television, as well as cable and satellite services, on
behalf of consumers. It also administers licensing and policy matters for broadcast services and
cable, and handles post-licensing matters for satellite services.

• The Public Safety and Homeland Security Bureau ensures public safety and homeland security by
advancing state-of-the-art communications that are accessible, reliable, resilient, and secure, in
coordination with public and private partners.

• The Wireless Telecommunications Bureau develops and executes policies and procedures for fast,
fair licensing of all wireless service, from fixed microwave links to amateur radio to mobile
broadband services. The Bureau oversees nearly two million licenses, conducts auctions to award
services licenses, and manages the tower registration process. It also produces an annual assessment
of the wireless industry – the Mobile Wireless Competition Report – and manages interactive web
tools, such as the Spectrum Dashboard, which deliver to the public key information on wireless
services in a simple, transparent fashion.


FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

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• The Wireline Competition Bureau works to ensure that all Americans have access to robust,
affordable broadband and voice services. Its programs help ensure access to affordable
communications for schools, libraries, health care providers, and rural and low-income consumers. It
works to protect consumers and foster competition, especially for the services that small businesses
need, and to ensure a sustainable policy framework for competitors that rely on the facilities of others.
It reviews communications industry transactions, and conducts rulemakings and proceedings to
ensure the availability of key inputs for communications providers, such as access to utility poles and
rights of way. Also, it provides the public with accurate and comprehensive data about
communications services, including broadband.


The Offices


• The Office of Administrative Law Judges presides over hearings and issues decisions on matters
referred to the Office by the Commission. The hearing function includes acting on interlocutory
requests filed in the proceedings such as petitions to intervene, petitions to enlarge issues, and
contested discovery requests.

• The Office of Communications Business Opportunities serves as the principal advisor to the
Chairman and the Commissioners on issues, rulemakings, and policies affecting small, women, and
minority-owned communications businesses. The Office also represents the FCC in various matters
coordinated with the U.S. Small Business Administration, including those involving the Regulatory
Flexibility and Small Business Acts.

• The Office of Engineering and Technology manages the spectrum and provides leadership to create
new opportunities for competitive technologies and services for the American public.

• The Office of General Counsel serves as the Commission’s chief legal advisor, and also advises its
various bureaus and offices. The Office of General Counsel also represents the Commission in
litigation, recommends decisions in adjudicatory matters before the Commission in litigation,
recommends decisions in adjudicatory matters before the Commission, assists the Commission in its
decision-making capacity, and performs a variety of legal functions regarding internal and other
administrative matters.

• The Office of Inspector General provides independent investigations, audits, and reviews of the FCC
programs and operations. The Office provides recommendations to detect and prevent fraud, waste,
and abuse in FCC programs and operations. The Inspector General reports the results of the
investigations, audits, and reviews semi-annually to the Chairman and to the Congress. These reports,
in turn, assist the Chairman, Commissioners, and the United States Congress in becoming fully
informed of all programmatic and operational deficiencies at the FCC. The Inspector General reports
to, and is under the general supervision of, the FCC Chairman.

• The Office of Legislative Affairs serves as the liaison between the FCC and Congress, as well as
other federal agencies. This Office provides lawmakers with the information regarding FCC
regulatory decisions, answers to policy questions, and assistance with constituent concerns. The
Office also prepares FCC witnesses for Congressional hearings, and helps create FCC responses to
legislative proposals and Congressional inquiries.

FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

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• The Office of Managing Director is responsible for the administration and management of the
Commission. Specifically, the Office manages: the Commission’s budget and financial programs;
human resources, contracts, and purchasing; communications and computer services; physical space;
security; the Commission meeting schedule; and distribution of official FCC documents.

• The Office of Media Relations is responsible for disseminating information on Commission issues. It
coordinates news media requests for information and interviews on FCC proceedings or activities.
The Office also facilitates the release of all Commission announcements, orders, and other
information. It manages the FCC Daily Digest, the FCC webpage, and the FCC Audio Visual Center.

• The Office of Strategic Planning and Policy Analysis works with the Chairman, Commissioners,
Bureaus, and Offices to develop strategic plans and to identify the agency’s policy objectives. It also
provides research, advice, and analysis of advanced, novel, and non-traditional communications
issues.

• The Office of Workplace Diversity ensures that the FCC provides employment opportunities for all
persons regardless of race, color, sex, national origin, religion, age, disability, or sexual preference.

Detailed information on specific bureau and office responsibilities can be found in Title 47 of the Code of
Federal Regulations and on the Commission’s web site at: http://www.fcc.gov.




























FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

5


FCC ORGANIZATIONAL CHART



FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

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MAP OF FIELD OFFICES

The Commission’s headquarters is located in Washington, D.C., with three regional offices, sixteen

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district offices, and eight resident agent offices throughout the Nation. The regional and district offices
and resident agents are responsible for carrying out on-scene investi

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services, surveys for compliance or feedback to the rulemaking process, local assistance to other agencies

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international contacts at a local level, and other matters as may

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012

7


FCC STRATEGIC GOALS



As specified in section 1 of the Communications Act of 1934, as amended, the FCC’s mission is to “make
available, so far as possible, to all the people of the United States, without discrimination on the basis of
race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio
communication service with adequate facilities at reasonable charges.” 3 In addition, section 1 provides
that the Commission was created “for the purpose of the national defense” and “for the purpose of
promoting safety of life and property through the use of wire and radio communications.”4 The FCC’s
strategic and performance goals for FY 2012 are shown below.


BROADBAND


Broadband is the major communications infrastructure priority of our time.
Through our policies, rulemaking activities, citizen outreach, and education
initiatives, we will seek to ensure that all Americans have access to reliable
and affordable high-speed fixed and mobile broadband capability.

CONSUMERS


Among the Commission’s most important responsibilities is protecting and
empowering consumers. Regulatory policies must take account of
consumer interests; consumer protection and empowerment policies must
apply consistently and reasonably across technologies; and information
provided to consumers must be timely, accurate, and available on a variety
of platforms.

COMPETITION AND

Competition in the provision of communications services, both

INNOVATION


domestically and overseas, supports the Nation’s economy. The
Commission should promote a healthy competitive dynamic for
communications services that fosters research and innovation and presents
consumers with reliable, meaningful choice in affordable services.

CONTINUAL

The FCC is striving to become a model for excellence in government. We

IMPROVEMENT


will be data-driven in our decision making and are committed to
transparent and participatory processes that encourage public involvement
and feedback. We will maintain an organizational culture that promotes
innovation and accountability.

PUBLIC SAFETY AND

Communications during emergencies and crises are essential lifelines for

HOMELAND SECURITY

public safety, health, defense, and emergency personnel, as well as all
consumers in need. The Nation’s critical communications infrastructure
must be reliable, interoperable, redundant, supportive of all needed
services, and rapidly restorable.

INTERNATIONAL


We are committed to greater international engagement and cooperation in
an interconnected world. The FCC will promote sound
telecommunications policies globally and will strongly represent U.S.
interests internationally.




3 47 U.S.C. § 151.
4 Id.
8
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


STRATEGIES & RESOURCES TO ACHIEVE GOALS


The Commission has identified strategies and resources to achieve its performance goals for each
strategic goal. Details on the Commission’s strategies and resources for achieving its strategic goals are
included in the Commission’s strategic plan ahttp://www.fcc.gov/omd/strategicplan">t: http://www.fcc.gov/omd/strategicplan.


COMPONENTS OF THE FCC FOR FINANCIAL STATEMENT PURPOSES


In addition to the activities directly undertaken by the above bureaus and offices, the Commission
components for financial statement purposes include:

Universal Service Fund (USF)
- The Telecommunications Act of 1996 further amended the
Communications Act of 1934 to codify and modify the Commission’s longstanding policy of promoting
universal telecommunications service throughout the nation. Pursuant to section 254, the Commission
established rules and regulations governing how certain telecommunications service providers contribute
to the USF and how those monies are disbursed.5

For budgetary purposes, the USF comprises five elements that consist of four universal service support
mechanisms and the Telecommunications Relay Service (TRS) Fund. The TRS Fund represents a
program established under section 225 of the Act. This statute provides for a mechanism to support relay
services necessary for telecommunications access by speech or hearing impaired populations.6

The Universal Service Administrative Company (USAC) administers the four universal service support
mechanisms of the USF under the Commission’s direction. These support mechanisms are funded
through mandatory contributions from U.S. telecommunications service providers, including local and
long distance phone companies, wireless and paging companies, payphone providers, and providers of
interconnected Voice over Internet Protocol (VoIP) services. The four universal service support
mechanisms are: High Cost, Lifeline, Rural Health Care, and Schools and Libraries. These support
mechanisms provide money directly to service providers to defray the cost of serving customers in high
cost and rural areas, and to defray the costs of serving low income consumers as well. In addition, these
mechanisms provide support for discounts to schools and libraries and rural health care providers. In FY
2012, the USF accounted for approximately $9.3 billion in new available funds on the Commission's
Combined Statement of Budgetary Resources. Additional information on USAC and the USF,
respectively, can be found athttp://www.usac.org/"> http://www.usac.org
and
http://www.fcc.gov/wcb/tapd/universal_service/welcome.html">http://www.fcc.gov/wcb/tapd/universal_service/welcome.html.

Rolka Loube Saltzer Associates, LLC (RLSA) was selected to be the administrator for the TRS fund
during FY 2011. The TRS Fund compensates TRS providers for the reasonable costs of providing
interstate telephone transmission services that enable a person with a hearing or speech disability to
communicate with a person without hearing or speech disabilities. The costs of providing interstate TRS
are recovered from subscribers of interstate telecommunications services. In FY 2012, TRS accounted for
approximately $712.5 million in new available funds on the Commission's Combined Statement of
Budgetary Resources. Additional information on RLSA and TRS can be found athttp://www.rlsa.com/"> http://www.rlsa.com/
andhttp://www.fcc.gov/cgb/dro/trs.html"> http://www.fcc.gov/cgb/dro/trs.html.


5 47 U.S.C. § 254.
6 47 U.S.C. § 225.
9
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


North American Numbering Plan (NANP) - The NANP is the basic numbering scheme permitting
interoperable telecommunications service within the U.S., Canada, Bermuda, and most of the Caribbean.
Section 251(e)(1) of the Act requires the Commission to create or designate one or more impartial entities
to administer telecommunications numbering and to make such numbers available on an equitable basis.
Section 251(e)(2) of the Act requires that the costs of number administration and number portability be
borne by all telecommunications carriers on a competitively neutral basis, as determined by the
Commission. In implementing section 251, the Commission appointed a NANP Administrator
(NANPA), a national Pooling Administrator (PA) to administer thousands block number pooling, and a
Billing and Collection Agent. The Commission selected Welch LLP to be the Billing and Collection
Agent for the NANP effective October 1, 2004. In FY 2012, the NANP accounted for approximately
$4.9 million on the Commission’s Consolidated Statement of Net Cost. Additional information on the
NANPA and the Billing and Collection Agent can be found athttp://www.fcc.gov/wcb/cpd/numbering/"> http://www.fcc.gov/wcb/cpd/numbering/
ahttp://www.nanpa.com/">nd http://www.nanpa.com.

For further clarification on the financial relationships between the Commission and these components, see
Note 1 of the financial statements in Section 2. Also, see the chart below which shows the relative size of
the component funds in comparison to the major sources of funds for the Commission.

FY 2012 Source of New Available Funds

(Dollars in Millions)
FCC - Auctions
FCC - Appropriations
$85.0
$339.8
Telecommunications
1%
3%
Relay Service Fund
$712.5
NANP $4.9
7%
<1%
Universal Service
Fund $9,330.0

Total Source of Funds

89%
$10,472.2



The Appropriations figure of $339.8 million in the chart above reflects the authority for the Commission
to collect regulatory fees. (For additional information, see Note 1 of the financial statements in Section
2.)



10
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



ELIMINATING AND RECOVERING IMPROPER PAYMENTS


In accordance with the Improper Payments Elimination and Recovery Act of 2010 (IPERA), the
Commission has performed risk assessments of its programs, formulated corrective action plans, and
made significant efforts to reduce improper payments. In addition, the Commission initiated a payment
recapture program, completing audits involving overpayments and testing transactions for overpayments.
Section 3 provides further details on these efforts.




















11
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


Performance Highlights

Consistent with the objectives of the Communications Act as amended, as well as the Government
Performance and Results Act, the Federal Communications Commission (FCC) identified six strategic
goals. The strategic goals serve as guidance directing the actions and performance of the FCC. The
Commission assesses the achievement of its performance through the accomplishment of its performance
goals. Progress toward accomplishing these goals is measured by the progress and completion of various
programs and initiatives during the fiscal year. There are external influences, including economic, legal,
and organizational factors, beyond the Commission’s programs and initiatives that may influence whether
the Commission fully meets every performance goal.

During the past fiscal year, the Commission made significant progress toward accomplishing its
performance goals. Greater detail on these accomplishments will be discussed in the FCC Annual
Performance Report (APR) for FY 2012. The Commission will include the FY 2012 APR with its
Congressional Budget Justification and will post it on the Commission web site athttp://www.fcc.gov/"> http://www.fcc.gov/ in
February 2013. In the discussion below, we identify achievements in the Commission’s major initiatives
during the past fiscal year, organized by Strategic Goal.


BROADBAND


Broadband is the major communications infrastructure priority of our time. Through our
policies, rulemaking activities, citizen outreach, and education initiatives, we will seek to ensure
that all Americans have access to reliable and affordable high-speed fixed and mobile
broadband capability.

Infrastructure, innovation and economic success have always been tied together in the United States.
Railroads and highways connected people to each other, facilitating commerce, unleashing ingenuity, and
fueling economic growth. Telephones did the same. In their time, those elements of infrastructure formed
the connective tissue of a modernizing economy. Today it’s broadband Internet. Our broadband
infrastructure consists of the fiber, cables, cell towers, and airwaves that enable digital Internet traffic to
travel anywhere in the world in a fraction of a second. The U.S. broadband economy that’s being built
around that infrastructure is a bright light in our struggling economy. Private investment in Internet
infrastructure and applications is on the rise. Broadband providers invested tens of billions of dollars in
wired and wireless networks in the first half of 2011, a double-digit increase from 2010. Capital
investment at large tech companies is also robust, in the tens of billions of dollars, and experiencing very
healthy increases.

The U.S. leads in broadband innovation overall, and has regained the lead in mobile, a fast-growing and
critically important sector. Our nation has the world’s largest number of 3G subscribers, and thanks to
successful FCC auctions and a digital TV transition completed successfully in 2009, we’re ahead of the
world in deploying next-generation 4G networks that will offer the high speeds and low latency we’re
accustomed to on wireline networks. America’s “apps economy” is the envy of the world. With U.S.
software developers leading the way, there are now more than 500,000 mobile applications available, and
apps sales are projected to approach $38 billion by 2015.

Several challenges remain to maintaining U.S. leadership in broadband. One-third of all Americans – 100
million people – have not adopted broadband at home. To address this issue, the FCC began several
initiatives.
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



As the fiscal year came to a close, on September 28, 2012, the FCC voted to officially launch the
incentive auction process, making the United States the first nation in the world to implement this major
policy innovation, which aims to repurpose excess broadcast television spectrum for mobile broadband
use. With the FCC's vote to approve the Incentive Auction Notice of Proposed Rulemaking (formally
called “Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions),
the FCC asked for public comment from all stakeholders as well as the public on the incentive auction
process. The concept was first introduced in the National Broadband Plan as part of the FCC’s multi-
pronged strategy to meet skyrocketing demand for mobile Internet in the United States, and became the
foundation for legislation that was signed into law in February 2012. As mobile device adoption
continues to grow around the world, this incentive auction will be a model for many countries facing
similar spectrum challenges.

Furthermore, in one of the most significant policy steps ever taken to connect all Americans to high-speed
Internet, wherever they live, the FCC voted unanimously to comprehensively reform its Universal Service
Fund (USF) and intercarrier compensation systems. Those systems were widely viewed as broken and
long overdue for reform.

The USF reforms create a new Connect America Fund (CAF) with an annual budget of no more than $4.5
billion, which will extend broadband infrastructure to the millions of Americans who currently have no
access to broadband. The FCC estimates that approximately 500,000 jobs will be created over the next six
years by expanding high-speed Internet access to over seven million Americans living in rural areas, as
well as increasing economic growth by $50 billion over that period. The CAF will put America on the
path to universal broadband and advanced mobile coverage without increasing costs to consumers. By
eliminating waste and targeting support where it is most needed, these reforms put universal service
funding on a firm budget, and they will impose strict new accountability on fund recipients.

The USF reforms cut waste and imposed strict fiscal responsibility standards on the CAF, preventing it
from growing beyond its current size. Up to $300 million in savings from these and prior reforms will be
targeted to quickly extend high-speed Internet to up to 400,000 previously unserved homes, businesses,
and anchor institutions in rural America. This is the first phase of funding from the CAF. Carriers have
90 days to accept the funding, as well as the aggressive buildout requirements that must begin in the
coming months. In addition, the FCC implemented additional reforms that will make more effective use
of existing funding to increase support for broadband for over two million rural lines across the country.
As part of the CAF, the Commission created the Mobility Fund, a universal service support mechanism
dedicated exclusively to mobile services. Phase I of the Mobility Fund will provide one-time support to
accelerate our nation's ongoing efforts to close gaps in mobile wireless service. The Mobility Fund helps
improve coverage in these areas for mobile voice and broadband services. To help illustrate areas in the
U.S. that currently lack access to advanced mobile networks, the FCC developed an interactive visual
representation of the areas preliminarily identified as potentially eligible for Mobility Fund Phase I
support and large pockets of our nation that lack access to 3G mobile service or better.

The FCC held the first auction to award high-cost universal service support through reverse competitive
bidding. This auction will result in one-time support to carriers that commit to provide 3G or better
mobile voice and broadband services in areas where such services are unavailable. This will accelerate
delivery of advanced mobile services to tens of thousands of road miles that currently lack 3G or 4G
service. Winning bidders must deploy either 3G service within two years or 4G service within three years
of the award. The Mobility Fund will award up to $300 million that was reserved out of savings from the
Commission’s USF reforms.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


During FY 2012, the FCC continued to champion “Connect to Compete,” an initiative involving dozens
of partners from the private sector and nonprofit groups. This is a first-of-its-kind national effort to
address the barriers to broadband adoption, digital literacy, and the employment skills gap. In addition,
FCC Chairman Julius Genachowski announced an FCC proposal to launch a Digital Literacy Corps,
enabling thousands of additional libraries and schools to host in-person, basic digital literacy training
programs.

The FCC advanced its wireless health care agenda by adopting rules that will enable Medical Body Area
Networks (MBANs). MBAN devices free patients from cumbersome cables that tether them to their
hospital beds. MBANs provide a cost effective way to monitor every patient in a healthcare institution, so
clinicians can receive real-time and accurate data, allowing them to intervene and save lives. Wireless
devices that operate on MBAN spectrum can be used to actively monitor a patient’s health, including
blood glucose and pressure monitoring, delivery of electrocardiogram readings, and even neonatal
monitoring systems. MBAN devices will be designed to be deployed widely within a hospital setting and
will make use of inexpensive disposable body-worn sensors. MBAN technology will also make it easier
to move patients to different parts of a health care facility for treatment and can dramatically improve the
quality of patient care by giving health care providers the chance to identify life-threatening problems or
events before they reach critical levels.

The FCC also advanced its mobile broadband agenda by adopting rules that will enable a new generation
of wireless medical devices that could be used to restore functions to paralyzed limbs. Medical
Micropower Networks (MMNs) are ultra-low power wideband networks consisting of multiple
transmitters implanted in the body that use electric currents to activate and monitor nerves and muscles.
Each year, millions of Americans suffer from spinal cord injuries, traumatic brain injuries, strokes, and
various neuromusculoskeletal disorders. MMNs can provide effective therapy for these debilitating
conditions by taking the place of damaged nerves to restore sensation, mobility, and other functions to
limbs and other parts of the body.

Unused spectrum between television stations, known as “white spaces,” represents a valuable opportunity
for provision of broadband data services in the changing wireless landscape. This unused TV spectrum
provides a major new platform for innovation and delivery of service, with potential for both research and
commercial applications. Development of unlicensed radio transmitting devices has already led to a wave
of new consumer technologies, including Wi-Fi and other innovations like digital cordless phones and in-
home video distribution systems. The FCC’s Office of Engineering and Technology approved Spectrum
Bridge Inc.’s television white spaces database system, and also approved a device by Koos Technical
Services Inc. as the first product allowed to operate on an unlicensed basis on unused frequencies in the
TV bands. Commission rules require that unlicensed TV band devices contact an authorized database
system to obtain a list of channels that are available for their operation (i.e., channels not occupied by
authorized radio services) at their individual locations and must operate only on those channels.

At the first-ever Digital Learning Day Town Hall in Washington, D.C., the Digital Textbook
Collaborative presented the “Digital Textbook Playbook,” a plan to help K-12 schools transition to digital
textbooks. The Digital Textbook Collaborative, convened by the FCC and the U.S. Department of
Education, is an effort by education technology leaders across private industry, school districts, and
nonprofits to accelerate the deployment of digital textbooks and improve the quality and penetration of
digital learning in K-12 education. While the United States spends more than $7 billion a year on
textbooks, too many students are using books that are 7-10 years old with outdated material. The
Playbook will help educators tackle the major barriers to the adoption of digital textbooks, including the
challenge of connectivity, at school, in the community, and at home; the challenge of device procurement;
and the challenge of making the transition from paper to digital textbooks.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



The FCC took steps to increase the nation’s supply of spectrum for mobile broadband by removing
unnecessary barriers to flexible use of 40 megahertz of additional spectrum assigned to the Mobile
Satellite Service in the 2 GHz band. This proposal would carry out a recommendation in the National
Broadband Plan
that the Commission enable the provision of stand-alone terrestrial services in this
spectrum. The proposed rules are designed to provide for flexible use of this spectrum, to encourage
innovation and investment in mobile broadband, and to provide a stable regulatory environment in which
broadband deployment can develop in the 2 GHz band.

The FCC launched a competition to discover the best ways to increase broadband adoption rates among
low-income Americans. The competition builds on the Connect to Compete initiative. This competition
uses $25 million in savings from major reforms of the Lifeline program to launch pilot projects across the
country to test best practices around issues of cost, digital literacy, and relevancy. The competition will
gather high-quality data that will guide long-term efforts to increase broadband adoption among low-
income Americans.
The FCC revised burdensome legacy regulation that unnecessarily constrained 800 MHz Specialized
Mobile Radio licensees. This action amends the Commission’s rules to allow geographically-based SMR
licensees to operate across contiguous channels without a rigid channel spacing requirement or bandwidth
limitation. Lifting the unduly restrictive limitations currently in place will enable licensees to fully and
more efficiently utilize their licensed spectrum and transition their networks from legacy 2G technologies
to 3G as well as other advanced technologies such as LTE. This action balances these benefits with the
continuing need to protect 800 MHz public safety operations from interference and to maintain the
significant strides made in the ongoing 800 MHz reconfiguration process, whereby 800 MHz operations
are being relocated to protect public safety licensees against interference.


CONSUMERS



Among the Commission’s most important responsibilities is protecting and empowering
consumers. Regulatory policies must take account of consumer interests; consumer protection
and empowerment policies must apply consistently and reasonably across technologies; and
information provided to consumers must be timely, accurate, and available on a variety of
platforms.

Communications technologies are essential to our economic recovery and long-term competitiveness.
Communications technologies are also at the core of consumer products used every day by hundreds of
millions of Americans, and every one of those consumers deserves to be treated fairly. Empowering
consumers with the tools and information they need to navigate the rapidly changing technology
landscape is one of the FCC's top priorities.

The FCC launched a new ‘bill shock’ website http://fcc.us/billshocks">(http://fcc.us/billshocks), an online tool to help consumers
track implementation of recent commitments by wireless carriers to provide usage alerts before and after
consumers exceed their plan limits. Bill shock is a sudden and unexpected increase in monthly wireless
bills that happens when consumers’ unknowingly exceed plan limits for voice, data and text. Bill shock
can also happen when consumers travel abroad and get hit with unexpected international roaming
charges. A recent FCC survey found that 30 million Americans – or one in six wireless users – have
experienced bill shock.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


The Commission took steps to protect Americans from difficult-to-detect fraudulent charges on their
landline phone bills. The new rules combat “cramming,” the illegal placement of unauthorized charges
on a consumer’s monthly phone bill. Specifically, the new rules require telephone companies to notify
subscribers at the point of sale, on each bill, and on their websites of the option to block third-party
charges from their landline telephone bills, if the carrier offers that option, and the new rules strengthen
the Commission’s requirement that third-party charges be separated from the landline telephone
company’s charges on phone bills.

Acting to reform and modernize a program vital to ensuring affordable communications for low-income
consumers, the FCC approved a comprehensive overhaul of its Lifeline program. As a universal service
program that fulfills Congress’ mandate to ensure the availability of communications to all Americans,
Lifeline for the past 25 years has helped tens of millions of low-income Americans afford basic phone
service. The percentage of low-income households with phone service increased from 80% in 1985,
when Lifeline began, to nearly 92% last year.

But the program faces real challenges, including rules that have failed to keep pace as consumers
increasingly choose wireless phone service, and that create perverse incentives for some carriers. The
FCC’s Lifeline reforms address these and other challenges, including through changes to eliminate waste,
fraud, and abuse, saving up to $2 billion over 3 years; modernizing lifeline by adopting an express goal
for the program of ensuring availability of broadband for all low-income Americans; and allowing
Lifeline support for bundled services plans combining voice and broadband or packages including
optional calling features.

As a result of comprehensive reforms of the Lifeline program over the last year, the FCC has begun to
eliminate hundreds of thousands of duplicate subscriptions and save tens of millions of dollars. Further
reforms are helping ensure that only eligible consumers are enrolled, and will step up audits of Lifeline
providers. The FCC is also developing a comprehensive subscriber database that, when launched in 2013,
will safeguard against duplicate subscriptions.
In addition, the FCC largely eliminated the “Link Up” program, which the Commission concluded had
become wasteful and unnecessary. Link Up paid companies up to $30 for initial phone connections even
though other companies are now enrolling new subscribers for free. Elimination of Link Up on non-
Tribal lands is expected to save $100 million annually.
The FCC’s Enforcement Bureau issued 20 enforcement actions against online retailers in 12 states for
illegally marketing more than 200 models of cell phone jammers, GPS jammers, Wi-Fi jammers, and
similar signal jamming devices. These devices have the capacity to prevent, block, or otherwise interfere
with authorized radio communications. The use of a jamming device could prevent someone in the
vicinity of the jammer from making an emergency call to 9-1-1, the police, a fire department, or a family
member in trouble. The Enforcement Bureau’s actions are intended to warn retailers and potential
purchasers that marketing, selling, or using signal jamming devices in the U.S. is illegal and that the FCC
will vigorously prosecute these violations.

The Commission adopted a Report and Order implementing provisions of the Twenty-First Century
Communications and Video Accessibility Act of 2010 (CVAA). The CVAA was enacted to ensure that
people with disabilities have access to the modern and innovative communications technologies of the
21st-century and represents the most significant accessibility legislation since the passage of the
Americans with Disabilities Act in 1990. These rules are necessary steps towards ensuring that the 54
million Americans with disabilities are able to fully use and benefit from advanced communications
services. The CVAA requires that providers of advanced communications services and manufacturers of
equipment used for advanced communications services make their services and products accessible to
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


people with disabilities, unless it is not achievable to do so. Where it is not achievable to do so, these
covered entities must make their services and equipment compatible with commonly used assistive
technologies.
The FCC took a major step toward eliminating one of the most persistent problems of the television age –
loud commercials. The Commission adopted a Report and Order that implements the 2010 Commercial
Advertisement Loudness Mitigation Act (the CALM Act), in which Congress gave the Commission, for
the first time, authority to address the problem of excessive commercial loudness. The new rules require
that commercials have the same average volume as the programs they accompany. The rules also
establish simple, practical ways for television providers to demonstrate their compliance with the rules.

Chairman Genachowski, with the support of major city police chiefs and the wireless industry, announced
new initiatives by wireless carriers to deter theft of wireless devices and secure customer data. When
Americans call their participating wireless provider and report their wireless devices stolen, their provider
will block that device from being used again. This system will be rolled out using common databases
across carriers over the next 18 months. Smartphone makers will notify and educate users in the most
highly visible ways—through messages on the smartphone itself and through “Quick Start” user guides—
about how to use passwords to deter theft and protect their data. Wireless providers will directly inform
their customers about how to find and use applications that enable customers to lock/locate/and wipe
smartphones remotely. The wireless industry will also launch a campaign, with media buys, to educate
consumers on how to protect their smartphones and themselves from crime.


COMPETITION AND INNOVATION


Competition in the provision of communications services, both domestically and overseas,
supports the Nation’s economy. The Commission should promote a healthy competitive dynamic
for communications services that fosters research and innovation and presents consumers with
reliable, meaningful choice in affordable services.

The FCC took a major step toward modernizing the way television broadcasters inform the public about
how they serve their communities. The Commission adopted a new approach that would require
commercial and noncommercial television stations to submit documents to an online public file hosted by
the Commission. Broadcasters have kept what are now known as “public files” on paper since 1965 as
part of their longstanding obligation to disclose community-relevant information for public review. The
public has been able to exercise its right to this information only by visiting a broadcast station and asking
to see the public file. A Further Notice of Proposed Rulemaking seeks comment on proposals that would
reduce burdens on the broadcast industry. The Further Notice proposes to streamline the information
broadcasters will need to provide by requiring the Commission to import information already filed with
the FCC, and exempts certain items from being posted online such as letters and emails from the public.

Consistent with the FCC’s regulatory reform agenda and its efforts to examine regulations that may have
become ineffective, the Commission issued a Notice of Proposed Rulemaking (NPRM) initiating a review
of the exclusive contract prohibition of the program access rules. Adopted approximately twenty years
ago to promote competition in the video distribution market, this prohibition generally bans cable
operators from entering into exclusive contracts with cable-affiliated programming vendors that deliver
their programming to cable operators via satellite. The NPRM asks for input on various options,
including retaining the prohibition, allowing the prohibition to sunset and relying instead on
protections provided by the program access rules that do not sunset, or relaxing the prohibition
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


such as by considering petitions to remove the prohibition on a market-by-market basis or
retaining the prohibition only for certain “must have” programming.

The Commission issued a NPRM to promote interoperability and encourage the efficient use of spectrum
in the commercial Lower 700 MHz band (698-746 MHz). The rulemaking is designed primarily to
examine the interference concerns should the Lower 700 MHz band utilize a single band class for devices
operating across the Lower 700 MHz A, B, and C Blocks. The NPRM focuses on two interference
concerns that can result with use of a single band class: (1) interference from adjacent DTV Channel 51
operations; and (2) blocking interference from neighboring high-powered operations in the Lower 700
MHz E Block. The NPRM also explores possible next steps that the FCC should take to promote
interoperability in the Lower 700 MHz band should it find that there is limited or no harmful interference,
or such interference can be reasonably mitigated through industry and/or regulatory measures.

The FCC invited comment on whether to allow public broadcasters to spend a modest amount of their
total annual broadcast time, up to one percent or about 88 hours per year, to conduct on-air fundraising
activities for charities and other nonprofits. The proposal gives viewers of public broadcasting the
opportunity to raise funds for non-profit organizations in their communities and around the world. Under
longstanding FCC policy, noncommercial educational (NCE) public broadcast stations can only conduct
fundraising activities for the benefit of the station itself.
In anticipation of a future incentive auction to address the nation’s growing demand for wireless
broadband, the Commission took steps toward making a significant portion of spectrum currently used by
the broadcast television service available for new uses. The new rules allow multiple broadcast stations
to elect to stream individual programming while sharing a single channel.
While stations will need to retain at least one standard definition programming stream to meet the FCC’s
requirement of providing an over-the-air video broadcast at no direct charge to viewers, they will have the
flexibility of tailoring their channel sharing agreements to meet their individual programming and
economic needs.


CONTINUAL IMPROVEMENT


The FCC is striving to become a model for excellence in government. We will be data-driven in
our decision making and are committed to transparent and participatory processes that
encourage public involvement and feedback. We will maintain an organizational culture that
promotes innovation and accountability.

The FCC worked to strengthen its procurement office by hiring a new senior procurement executive, a
compliance officer, and additional contracting officers to facilitate FCC work efforts and to provide
effective administration of Federal contracting requirements. Furthermore, the contracting team
developed and implemented the FCC Federal Acquisition Certification for Contracting Officer’s
Representatives (FAC-COR) Program, including providing new guidance for FCC CORs who oversee the
FCC’s contractors and review contractor invoices. The contracting team also worked to implement an
improved contract management system that is better integrated with the FCC's financial management
system.

The FCC took significant steps in moving the agency to digital solutions from existing paper processes,
and continued to track these efforts. A web site was launched to provide information online about
licensed television broadcast stations and access to each station’s “public inspection file.” A web form is
now available on the web page for each rulemaking that allows users to comment without having to
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


navigate to the FCC’s electronic comment filing system or to manually file written comments. The FCC
began using RSS feed (instead of paper sent by mail) to provide service of copies of orders, pleadings,
and other documents to parties in docketed proceedings. An Electronic Tariff Filing System was
implemented by which Competitive Local Exchange Carriers are now required to submit official tariffs
and associated documents electronically over a web based system.

The FCC planned, participated in, and developed an after action report on the annual government-wide
continuity of operation planning exercise (Eagle Horizon). The agency conducted more frequent testing
of its emergency procedures, implemented a new Emergency Notification System for its employees, and
developed and implemented Occupant Emergency Plans and Procedures for FCC Headquarters and all 27
Field Offices.

The Commission issued the FY 2012 Regulatory Fee Notice of Proposed Rulemaking (NPRM) and FY
2012 Regulatory Fee Order, and the agency successfully collected regulatory fees for FY 2012. The FCC
is self-funded through regulatory fees. The Commission also released a NPRM for regulatory fee reform
for public comment on the regulatory fee regime.

In the fall of 2011, the FCC obtained a clean opinion on its FY 2011 financial statements for the sixth
consecutive year. Through responses provided to an audit performed by the agency’s Inspector General,
the FCC was able to demonstrate that it is in compliance with the requirements of the Improper Payments
Elimination and Recovery Act. The agency also completed and filed with Congress its first report under
the Improper Payments Elimination and Recovery Act.

The FCC’s Office of Managing Director conducted 17 risk assessments which were provided to the
Commission’s financial auditors. Through remediation efforts, the agency closed 57 recommendations
from audits performed by the FCC Inspector General, and seven recommendations from audits performed
by the Government Accountability Office.

The FCC completed the relocation of contractor personnel into its main headquarters building. This will
result in a total rent savings of $547,000 annually.

The Commission completed an annual report to the Office of Personnel Management (OPM) on the
FCC’s strategic human capital accomplishments and future direction. It established an agreement with
OPM for the new Pathways Program for recruiting interns and developed draft FCC Pathways Program
guidance. The agency also made efforts to improve its processes for making outside hires.

Throughout FY 2012, the FCC enhanced its information technology capabilities. Projects included the
deployment of bidding software for the Mobility Fund Auction, the creation of several maps and other
visualizations of FCC data, completion of FM Engineering software, launching the Accessibility
Clearinghouse as required by the 21st Century Communications and Video Programming Accessibility
Act, and completing a virtual desktop pilot program as well as a pilot of mobile computing devices
integrating secure email service. The agency strengthened its IT security operations center efforts,
moving from situational awareness to incident detection and response, and deploying integral
cybersecurity detection technology.

The FCC continued to improve the tracking and completion of pending items in the FCC’s Bureaus and
Offices by working to standardize tracking of pending items using a single system. The FCC also
improved the reporting capabilities of its tracking system to allow for better work load analysis of
pending items.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


The FCC issued its Strategic Plan for FY 2012 – 2016, defining the agency’s mission and vision. The
Commission successfully issued several other performance plans and reports to meet the requirements of
the Government Performance and Results Modernization Act of 2010.


PUBLIC SAFETY AND HOMELAND SECURITY



Communications during emergencies and crises are essential lifelines for public safety, health,
defense, and emergency personnel, as well as all consumers in need. The Nation’s critical
communications infrastructure must be reliable, interoperable, redundant, supportive of all
needed services, and rapidly restorable.

The FCC took action to make the nation’s 9-1-1 systems more reliable and resilient by requiring
interconnected Voice over Internet Protocol (VoIP) service providers to report significant network
outages that meet specific criteria and thresholds. Interconnected VoIP services have become
increasingly popular in recent years, and the number of consumers using these services in lieu of
traditional telephone service is growing steadily. The new rules will help ensure that the country’s critical
communications infrastructure remains available in times of crisis. The FCC will use outage reports to
track and analyze information on interconnected VoIP outages affecting 9-1-1 service and determine if
action is needed to prevent future outages. Public safety is a core mission of the FCC and this effort
furthers the agency’s obligation to ensure the public is able to make emergency calls to summon help,
particularly when facing life-threatening situations. With this action, all 9-1-1 voice calls will be covered.

Although the Emergency Alert System is decades old and often tested and used at the local level, it had
never before been tested on a nationwide scale. This first-ever test was successfully held on November 9,
2011. The test occurred simultaneously across the U.S. and its territories and lasted approximately 30
seconds, after which regular programming resumed.

As part of an unprecedented collaboration with government experts and private IT and security
companies, the FCC released the Small Biz Cyber Planner, a new easy-to-use online tool to help small
businesses customize their own cybersecurity plans. The online tool is available at
http://www.fcc.gov/cyberplanner">www.fcc.gov/cyberplanner. The Small Biz Cyber Planner online resource enables any small business to
create a customized guide tailored to its cybersecurity needs by answering a few basic questions. By using
this tool and implementing the planning guide, businesses can protect themselves, their information, and
their customers from cyber threats. An updated 2.0 version of the Small Biz Cyber Planner was unveiled
in October 2012.

An industry advisory group for the FCC, the Communications, Security, Reliability, and Interoperability
Council (CSRIC), unanimously adopted recommendations for voluntary action by Internet service
providers to combat three major cyber security threats, including botnets, attacks on the Domain Name
System, and Internet route hijacking. CSRIC is a federal advisory committee established at the direction
of the FCC Chairman to provide recommendations regarding the security, reliability, and interoperability
of the nation’s communications system. Currently, CSRIC is composed of more than 50 communications
experts from the private sector, public safety, consumer organizations and tribal, local, state, and federal
governments.

The FCC adopted a Notice of Inquiry to explore the use of Deployable Aerial Communications
Architecture (DACA) technologies. DACA technologies are aerial technologies such as unmanned aerial
vehicles, weather balloons, or existing aircraft that could provide emergency communications during or
immediately after a major disaster when terrestrial communications infrastructures may be damaged or
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


disrupted. Federal, state, and local governments are constantly working to improve their emergency
communications capabilities when a disaster strikes. Yet there remains a gap during the first 72 hours
after a catastrophic event when communications may be disrupted or completely disabled due to damaged
facilities, widespread power outages, and lack of access by restoration crews into the affected area.
DACA could provide temporary emergency communications to emergency management officials, first
responders, critical infrastructure industry personnel, and the public to use their day-to-day
communications devices seamlessly during and immediately after an emergency.

The Commission proposed rules on a number of issues involved in improving spectrum efficiency and
encouraging greater use of the 4940-4990 MHz (4.9 GHz) band for public safety broadband
communications. Improved use of the 4.9 GHz band will facilitate wireless local area networks for
incident scene management, fixed point-point surveillance, and support for dispatch operations and
vehicular or personal communications.



INTERNATIONAL



We are committed to greater international engagement and cooperation in an interconnected
world. The FCC will promote sound telecommunications policies globally and will strongly
represent U.S. interests internationally.

For the first time since 1996, the FCC initiated a wholesale review of its Part 25 rules governing licensing
and operation of space stations and earth stations which transmit radio frequency signals between the
ground and satellites. This Notice of Proposed Rulemaking (NPRM) proposes to eliminate unnecessary
technical and information filing requirements, update rules to better accommodate evolving technology,
and simplify existing requirements. In proposing extensive changes to over 100 rule sections and
subsections in Part 25, the Commission aims to give satellite licensees the flexibility to provide
innovative services while ensuring an operating environment free from harmful interference.

FCC Chairman Julius Genachowski participated in high-level discussions with U.S. and Mexican
telecommunications officials at the State Department where the United States signed two Protocols with
Mexico for sharing spectrum in the 800 MHz and 1.9 GHz bands along the U.S.-Mexican border. The
signing of these documents marks the beginning of the final phase for rebanding in the 800 MHz band
across the country. These actions will help support commercial broadband services and public safety
mission-critical voice communications along the U.S.-Mexico border and throughout the United States.
The United States and Mexico also signed a high-level expression of support for continued coordination
of spectrum along the border and cooperation on telecommunications policy issues as well as an
ambitious work plan for 2012-2014.

On December 5 and 6, 2011, the FCC and Global Initiative for Inclusive Information and
Communications Technology co-hosted the International M-Enabling Summit and Showcase. This event
was designed to explore ways to promote and implement accessible mobile communications and services
for senior citizens and persons with disabilities. FCC Chairman Julius Genachowski, International
Telecommunication Union’s Secretary General Hamadoun Touré, Mohammed Al-Tarawneh, Inaugural
Chairperson of the United Nations Committee on the Rights of Persons with Disabilities, and Kareem
Dale, Special Assistant to the President for Disability Policy, were among the speakers at the Summit.
There were attendees from at least 30 countries at the Summit.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



Management Assurances

In accordance with Office of Management and Budget (OMB) Circular No. A-123, the Commission
maintains internal control for financial and management reporting that provides reasonable assurance that
the financial statements fairly present information related to assets, liabilities, and net position and do not
contain material misstatements. Transactions are executed in accordance with budgetary and financial
laws, consistent with the Commission’s statutory requirements, and are recorded in accordance with
Federal accounting standards.

Additionally, assets are properly acquired, used, and safeguarded to deter theft, accidental loss or
unauthorized disposition, and fraud. Further, the Commission’s internal controls provide for the
existence and completeness of its performance measures, as required by OMB Circular No. A-136.

The Commission received an unqualified opinion on its financial statements in FY 2010 and FY 2011. In
conjunction with both of these opinions, the independent auditors provided the Commission with reports
on internal control and compliance with laws and regulations. The independent auditors’ report identified
no material weakness in internal controls in FY 2010 and FY 2011.

The FY 2011 report identified no material weaknesses in internal controls but included significant
deficiencies in the following areas: 1) the financial reporting process, and 2) information technology
control deficiencies. During FY 2012, the FCC worked to remediate risks associated with these findings
and to take corrective action to close them. First, with regard to addressing the significant deficiency for
the financial reporting process related to the Commission and its reporting components, the Commission
took additional steps in FY 2012 to resolve the auditors’ findings and improve the performance of its
financial reporting process through the implementation of a new acquisition system and improvements to
its core financial system. The Commission’s new core financial system was launched in October 2010
and the Commission in FY 2012 continued working to efficiently deploy the functionality of that system.
Also in FY 2012, the Commission continued to work closely with its reporting components in their efforts
to modernize their financial systems. Second, with respect to the significant deficiency related to
information technology control weaknesses, the Commission formed a team to fully assess the auditors’
recommendations, develop corrective action plans, and remediate these findings. Some findings have
already been corrected and the Commission will make every effort in FY 2013 to complete corrective
actions for each of the recommendations associated with these findings so as to avoid any repeat findings
in this area.

In both fiscal years the Commission also received findings of non-compliance with the Federal Managers’
Financial Integrity Act (FMFIA). With respect to the instances of noncompliance with FMFIA, the
Commission and its reporting components are committed to implementing financial systems that are fully
integrated, and that provide efficient and effective processing and reporting of accounting transactions
and financial information. As noted above, the Commission’s new core financial system was launched in
October 2010 and the Commission in FY 2012 continued working to efficiently deploy the functionality
of that system. Also in FY 2012, the Commission continued to work closely with its reporting
components in their efforts to modernize their financial systems. The Commission continues to work
diligently on closing all findings from prior year audits and has made significant progress on resolving
most recommendations presented.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


During FY 2012, the Commission has continued its efforts to assess and improve internal controls as it
works within the requirements of OMB Circular No. A-123. The Commission’s Senior Management
Council continues to meet regularly to strengthen its efforts and efficiencies overseeing Commission
operations. During the current fiscal year, the Commission also continued to work with the
administrators of its three reporting components, USF, TRS, and NANP, to implement an OMB Circular
No. A-123 framework and take the appropriate steps to strengthen their internal control frameworks. The
Commission continues to receive unqualified opinions over its financial statements; however, the
Commission will continue to focus its efforts to make its internal controls over operations more effective
and efficient as it moves forward.






































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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


MANAGEMENT ASSURANCES – FEDERAL MANAGERS’ FINANCIAL INTEGRITY
ACT OF 1982 (FMFIA)


The Federal Managers’ Financial Integrity Act of 1982 (FMFIA) establishes overall requirements with
regard to internal control. FMFIA requires agencies to establish controls that reasonably ensure that: (i)
obligations and costs are in compliance with applicable laws; (ii) funds, property, and other assets are
safeguarded against waste, loss, unauthorized use or misappropriation; and (iii) revenues and expenditures
applicable to agency operations are properly recorded and accounted for to permit the preparation of
accounts and reliable financial and statistical reports and to maintain accountability over assets. Pursuant
to FMFIA’s requirements, agencies must annually evaluate their system of internal controls and report on
the results of those evaluations through management assurance statements.

Statement of Assurance

The Commission’s management is responsible for establishing and maintaining effective internal control
and financial management systems that meet the objectives of FMFIA. The Commission conducted its
assessment of the effectiveness of internal control over the effectiveness and efficiency of operations and
compliance with applicable laws and regulations in accordance with OMB Circular No. A-123,
Management’s Responsibility for Internal Control. Based on the results of this evaluation, the
Commission can provide reasonable assurance that its internal controls over the effectiveness and
efficiency of operations and compliance with applicable laws and regulations as of September 30, 2012
were operating effectively and no material weaknesses were found in the design or operation of internal
controls. In addition, with the exception of the instances of non-conformances with government-wide
financial systems requirements discussed below, the Commission can provide reasonable assurance that
its financial management systems meet the objectives of FMFIA.





Julius Genachowski
Chairman
November 14, 2012













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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


Status of Internal Controls – Section 2 of FMFIA

During FY 2012, the Commission continued its efforts to improve and strengthen its internal controls
over operations and financial reporting. In addition to its own risk assessments over its operations, the
Commission worked with USAC and RLSA to strengthen their frameworks on internal controls to
comply with OMB Circular No. A-123. Throughout FY 2012, the Commission continued to work
diligently to close out audit findings from previous audits. The Commission was able to close out 85
audit findings in FY 2012. The Commission continues to tighten its controls over operations and improve
its policies and procedures where necessary.

Despite recent success, the Commission needs to finish the work at hand. The FY 2012 audit report
identified significant deficiencies that still need to be resolved. The primary areas of concern relate to the
financial system functionality and integration at the Commission and its reporting components, and
information technology controls.

Financial Management Systems – Section 4 of FMFIA

Section 4 of FMFIA requires agencies to annually evaluate whether the agency’s financial management
systems conform to government-wide requirements. These financial systems requirements are included
in OMB Circular No. A-127, Financial Management Systems. If the agency’s systems do not
substantially conform to financial systems requirements, agencies must report the non-conformances and
discuss the agency’s plan to bring the systems into substantial compliance.

As previously noted by the Commission’s auditors, the Commission’s financial systems did not
substantially conform to government-wide requirements. Specifically, the Commission lacked a fully
integrated financial system. In October, 2010, the Commission launched a new core financial system and
in FY 2012 the Commission continued working through the process to fully launch all functionality of its
new system. The Commission continues to work with its reporting components to launch their new
financial systems and to improve the Commission’s financial systems.




















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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



Financial Discussion and Analysis

UNDERSTANDING THE FINANCIAL STATEMENTS


The Commission is committed to excellence and accuracy in financial reporting, transparency, and
financial management. Preparing the Commission financial statements is part of the goal to improve
financial management and provide accurate and reliable financial information that is useful for assessing
performance and allocating resources. The Commission’s management is responsible for the integrity
and objectivity of the information presented in the financial statements. For seven consecutive years, the
financial statements have received an unqualified audit opinion from the external auditors.

The principal financial statements have been prepared to report the financial position and results of
operations of the Commission. The statements have been prepared from the books and records of the
Commission, in accordance with U.S. generally accepted accounting principles (GAAP) for Federal
entities. The financial statements and notes are presented in accordance with OMB Circular No. A-136,
Financial Reporting Requirements,
dated August 3, 2012.

This section presents a summary analysis of key financial statement core business activities. The
principal financial statements include the Consolidated Balance Sheet, Consolidated Statement of Net
Cost, Consolidated Statement of Changes in Net Position, Combined Statement of Budgetary Resources
and Consolidated Statement of Custodial Activity. This section also summarizes the financial activity
and net position of the Commission. The complete set of principal financial statements is included in
section 2 of this report.

A summary of the Commission’s major financial activities in FY 2012 and FY 2011 is presented in the
table on the next page. This table represents the resources available for use (assets) against the amount
owed (liabilities) and the amount that comprises the difference (net position). The net cost represents the
gross cost of operating the Commission’s lines of business less earned revenue. Budgetary resources
represent funds made available to the Commission.










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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



CHANGES IN FINANCIAL POSITION IN FY 2012

Consolidated









(Dollars in Thousands)

Increase

Percentage Change in

Net Financial Condition


2012
2011
(Decrease)

Financial Position

Intragovernmental







Fund Balance with Treasury

$ 361,739 $ 494,340 $ (132,601)
(27)%
Investments


6,548,090
5,822,843
725,247
12%
Accounts Receivable


1,574 1,097
477
43%

Other



- 2,436 (2,436)
(100)%

Total Intragovernmental


$ 6,911,403
$ 6,320,716 $ 590,687
9%








Cash and Other Monetary Assets

139,322
213,944 $ (74,622)
(35)%
Accounts Receivable, net

875,088
831,072
44,016
5%

Loans Receivable, net

335
4
331
8275%
General Property & Equipment, net

56,832 60,461 (3,629)
(6)%

Other



13,024 13,053
(29)
<1%

Total Assets



$ 7,996,004
$ 7,439,250 $ 556,754
7%

Intragovernmental







Debt



$ -
$ 50,300 $ (50,300)
(100)%
Other



168,897
220,249 (51,352)
(23)%

Total Intragovernmental


$ 168,897
$ 270,549 $ (101,652)
(38)%








Accounts Payable


110,523 92,976
17,547
19%
Deferred Revenue


62,971 93,053 (30,082)
(32)%
Prepaid Contributions

85,849 77,362
8,487
11%
Accrued Liabilities for Universal Service
752,423
633,967
118,456
19%
Other



39,578 35,804
3,774
11%

Total Liabilities



$ 1,220,241 $ 1,203,711 $ 16,530
1%
Unexpended Appropriations

$ 4,251
$ 15,105 $ (10,854)
(72)%
Cumulative Results of Operations

6,771,512
6,220,434
551,078
9%

Total Net Position



$ 6,775,763
$ 6,235,539
$ 540,224
9%

Net Cost of Operations


$ 9,536,699
$ 8,820,764 $ 715,935
8%

Total Budgetary Resources


$ 14,297,518
$ 12,904,395 $ 1,393,123
11%

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


The following is a brief description of the nature of each required financial statement and its relevance,
including a description of certain significant balances on Commission operations.

Consolidated Balance Sheet: The Consolidated Balance Sheet presents the total amounts available for
use by the Commission (total assets) and the amounts owed by the Commission (total liabilities).
Investments and Accounts Receivable represent over 93% of total assets as of September 30, 2012.

The graph below presents the total assets of the Commission as of September 30, 2012. The large
Investments balance of $6,548.1 million results from carryover in the USF Schools and Libraries and
Rural Healthcare programs that has grown since the programs’ inception as a result of annual
contributions that have exceeded annual distributions.

The Accounts Receivable balance of $875.1 million is primarily composed of USF receivables totaling
$791.9 million.


FY 2012 Total Assets by Category

(Dollars in Thousands)
Cash and Other
Loans Receivable,
Other Assets
Monetary Assets
net
$13,024
$139,322
$335
<1%
2%
<1%
General PP&E
Remaining
$56,832
Intragovernmental
<1%
Assets
$363,313
5%
Accounts
Receivable, net
$875,088
11%
Intragovernmental
Investments

Total Assets

$6,548,090
$7,996,004
82%







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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



The graph below presents the total liabilities of the Commission as of September 30, 2012. The
Commission’s most significant liabilities are Intragovernmental of $168.9 million and Accrued Liabilities
for Universal Service of $752.4 million, which accounted for over 75% of total liabilities as of September
30, 2012.

Total Intragovernmental is primarily composed of custodial collections earned on Spectrum auctions and
miscellaneous receipts.

The Accrued Liabilities for Universal Service represent the expected October (FY 2013) payments for the
Telecommunications Relay Service Program and the Universal Service Fund High Cost and Low Income
Programs.

FY 2012 Total Liabilities by Category

(Dollars in Thousands)
Accounts Payable
Deferred Revenue
$110,523
$62,971
9%
5%
Prepaid
Contributions
$85,849
7%
Accrued Liabilities
Total
for Universal
Intragovernmental
Service
$168,897
$752,423
14%
Other
62%
$39,578

Total

Liabilities

3%
1,220,241





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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



Consolidated Statement of Net Cost
: This statement presents the annual cost of operating Commission
programs. The Consolidated Statement of Net Cost is aligned with the six strategic goals of the
Commission: Broadband, Competition and Innovation, International, Consumers, Public Safety and
Homeland Security, and Continual Improvement. Gross costs for each goal are presented individually
while revenue is presented in total rather than by goal. The program costs for the USF, TRS, and NANP
are included within the Competition and Innovation strategic goal. The Commission’s subsidy costs for
the Spectrum Auction Loan Program are included with the Competition and Innovation strategic goal. As
a result of the accounting for these activities, the cost for these goals may be significantly higher than the
cost of the five other goals. Contributions received for the USF and TRS programs are shown on the
Statement of Changes in Net Position and do not directly offset the costs of these programs on the
Statement of Net Cost.

The graph below presents the total gross costs of each Commission program.



FY 2012 Total Gross Costs

(Dollars in Thousands)
Continual
Improvement
Public Safety and
Broadband
Consumers
$98,582
Homeland Security
$48,428
$52,200
1%
$48,123
1%
1%
<1%
Other
-$5
<1%
International
$10,126
<1%

Total Gross Cost

Competition &
$9,996,945

Innovation

$9,739,491
97%



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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



Consolidated Statement of Changes in Net Position: This statement presents the cumulative net
results of operations and total unexpended appropriations in order to understand the nature of changes to
the net position as a whole. The Commission’s Net Position increased to $6,776 compared to net position
of $6,236 for FY 2011, an increase of $540 million or an 8.7% net increase in FY 2012.

Combined Statement of Budgetary Resources: This statement provides information on how
budgetary resources were made available to the Commission for the year and the status of those budgetary
resources at the end of the year. The Commission receives most of its budgetary authority from
appropriations. Budgetary resources consist of the resources available to the Commission at the
beginning of the year, plus appropriations, spending authority from offsetting collections, and other
budgetary resources received during the year. The Commission had $14.3 billion in budgetary resources
of which $11.1 billion was obligations incurred and $3.2 billion remained unobligated.

The chart below presents the status of budgetary resources comparatively between FY 2012 and FY 2011.


Status of Budgetary Resources - FY 2012 and 2011

(Dollars in Thousands)

Total Budgetary

$11,090,551

Resources

$10,139,788
$12,000,000

FY 2012 - $14,297,518

$10,000,000

FY 2011 - $12,904,395


$8,000,000

2012
$6,000,000
$3,206,967
$2,764,607
2011
$4,000,000
$2,000,000
$-
Obligations Incurred
Unobligated Balance





Consolidated Statement of Custodial Activity: The Commission recognized $51.5 million of
custodial revenue during FY 2012. From this balance, $10.4 million was transferred to Treasury. The
$43.9 decrease in amounts yet to be transferred is a result of the FCC not holding as much in Auction
Custodial Collections for future years at September 30, 2012. The remaining Auctions revenues were
retained by the Commission.

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012



OTHER KEY FINANCIAL STATEMENT HIGHLIGHTS

The Commission must annually adjust its allowance for losses on the credit portfolio. In accordance with
OMB guidance, the Commission calculates its subsidy reestimate based on the most recent economic and
technical assumptions of current portfolio performance.

The Commission’s FY 2012 subsidy reestimate was completed to reflect the actual loan performance
through September 30, 2012. The reestimate resulted in a net downward adjustment, including interest
on the reestimate, of $1.5 million in the Spectrum Auction program.

This reestimate is reported in the Commission’s FY 2012 financial statements, but will not be reported in
the budget until FY 2013. For more details, see financial statement Footnote 7.

Regulatory Fee Collections


Section 6003(a) of the Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, added a new section 9
to the Communications Act. The law requires that the Commission annually collect fees and retain them
to offset certain costs incurred by the Commission. The fees collected are intended to recover the non-
licensing costs attributable to the Commission’s competition, enforcement, consumer information, and
spectrum management activities. The amount the Commission is required to recover is included in the
Commission’s annual appropriations.


Regulatory fees are collected and warranted back to the Treasury to offset the Commission’s
appropriations for the current fiscal year. In FY 2012, the Commission was required to collect $339.8
million in regulatory fees. Actual collections were slightly over $344.7 million.

Possible Future Effects of Existing Events and Conditions


The last active loans in the Commission’s spectrum auction loan program matured during FY 2007. In
compliance with OMB requirements, the Commission calculated a subsidy reestimate for FY 2012. The
generation of the remaining cash flows is dependent upon the outcome of bankruptcy proceedings,
settlement efforts, and Treasury collection efforts on remaining loans, which are all either in a bankruptcy
or default status.

In addition to the discussion of the loan program above, the Commission addresses the possible future
effects of existing claims, commitments, and major unfunded liabilities in the notes to the financial
statements as well as required supplementary information.

Limitations on the Financial Statements

The principal financial statements have been prepared to report the financial position and results of
operations of the Federal Communications Commission, pursuant to the requirements of 31 U.S.C. §
3515(b). While the principal financial statements have been prepared from the books and records of the
Commission in accordance with U.S. generally accepted accounting principles (GAAP) for Federal
entities and the formats prescribed by OMB, the statements are in addition to the financial reports used to
monitor and control budgetary resources which are prepared from the same books and records.

The statements should be read with the realization that they are for a component of the United States
Government, a sovereign entity.
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


2. Financial Statements and Auditors’ Reports

Message from the Chief Financial Officer

I am pleased to present the Commission’s financial statements for fiscal year (FY) 2012 and to report that
the Commission’s auditors issued an unqualified opinion on each of the Commission’s financial
statements for FY 2012. Furthermore, I am proud to say that this is the seventh straight fiscal year the
Commission has received an unqualified opinion. The Commission is proud of the work of its staff to
obtain and maintain an unqualified opinion.

During FY 2012, the Commission launched a new Office of Management and Budget Circular No. A-123
internal controls process that distributes responsibility down to each Bureau and Office. This new process
enables Commission managers to be more involved in and responsible for the internal controls
established throughout the Commission, and requires the Bureau and Office chiefs to provide attestations
to the Managing Director and the Chairman.

Throughout FY 2012, the Commission worked diligently on closing audit findings from previous audits.
As a part of this effort, the Commission made progress on resolving matters raised by its auditors in their
FY 2011 audit report. The Commission closed findings relating to its information technology control
deficiencies and made progress in resolving findings related to its financial management systems;
however, there is still work to be done. In addition, the Commission successfully launched a new
mechanized Acquisitions process that is incorporated into its core financial system. The new
Acquisitions process will assist the Commission by providing more timely procurements and better
tracking of obligations.

Significantly, for FY 2012 the Commission’s independent auditor did not report any material weaknesses
for the Commission or its reporting components. Despite these successes, work remains here at the
Commission. The FY 2012 audit reports point out two significant deficiencies related to internal controls
and note two instances of non-compliance that still need to be resolved. The primary areas of concern
relate to financial system functionality and integration, information technology controls, and compliance
with the Federal Managers’ Financial Integrity Act and the Debt Collection Improvement Act.

The Commission is committed to improving its financial processes, fiscal integrity, minimizing the risk of
improper payments, and to reducing improper payments to the customers and beneficiaries of its reporting
components. The Commission continues to make improvements to the fiscal management,
administration, and oversight of funds reported by the Commission.

I look forward to FY 2013 and to making every effort to continue to strengthen the Commission’s and its
reporting components’ internal control environments, and to improve the effectiveness of the
Commission’s and its reporting components’ financial operations.

Mark Stephens
Chief Financial Officer
November 14, 2012
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012




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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012




Office of the Managing Director



M E M O R A N D U M








DATE:


November 15, 2012

TO:

David L. Hunt, Inspector General

FROM:

David B. Robbins, Managing Director and Mark Stephens, Chief Financial Officer

SUBJECT:

Management’s Response to Independent Auditors’ Reports on Internal Control Over
Financial Reporting and Compliance and Other Matters for Fiscal Year 2012


Thank you for the opportunity to review and comment on the draft reports entitled Independent Auditors’
Report on Internal Control Over Financial Reporting
and Independent Auditors’ Report on Compliance
and Other Matters
. We appreciate the efforts of your team and the independent auditor, KPMG LLP, to
work with the Federal Communications Commission (Commission) throughout the fiscal year (FY) 2012
audit process. This year’s audit opinion was the result of the commitment and professionalism that both
of our offices as well as the independent auditors demonstrated during the FY 2012 audit process. During
the entire audit process, the Commission worked closely with your office and the independent auditors’
team to provide necessary and timely information to facilitate an efficient audit process.

We are pleased that, for the seventh straight year, the independent auditor provided an unqualified
opinion and found that the Commission’s consolidated financial statements for FY 2012 present fairly, in
all material respects, the financial position of the Commission as of September 30, 2012. Seven straight
years of clean audit opinions is an unprecedented accomplishment for the Commission. We are also
pleased that the independent auditor did not identify any material weaknesses in the Commission’s
financial reporting. We have worked very hard to continue strengthening the Commission’s internal
controls and improving its financial management.

Despite these successes, work remains here at the Commission. The FY 2012 audit reports point out two
significant deficiencies related to internal controls, note two instances of non-compliance that still need to
be resolved, and mention one matter that is currently under review. The primary areas of concern relate
to financial system functionality and integration, information technology control weaknesses, and
noncompliance with the Federal Managers’ Financial Integrity Act and the Debt Collection Improvement
Act. We concur with the recommendations made by the independent auditors in their reports.

First, with regard to addressing the significant deficiency for financial system functionality and
integration related to the Commission and its reporting components, the Commission has taken significant
steps throughout FY 2012 to resolve the auditors’ findings and improve the performance of its financial
reporting process. The Commission’s new core financial system was launched in October 2010, and
during FY 2012 the Commission worked to further deploy all the functionality of that system. Also in FY
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


2012, the Commission continued to work closely with its reporting components in their efforts to
modernize their financial systems.

Second, with respect to the significant deficiency related to information technology control weaknesses,
the Commission is already working to fully assess the auditors’ recommendations and to develop
corrective action plans. Some findings are already in the process of being addressed. During FY 2013,
the Commission will make every effort to complete corrective action for each of the recommendations
associated with these findings to avoid any repeat findings in this area.

Third, with respect to the instance of noncompliance with the Federal Managers’ Financial Integrity Act,
the Commission and its reporting components are committed to implementing financial systems that are
fully integrated, and that provide efficient and effective processing and reporting of accounting
transactions and financial information.

Fourth, with respect to the instance of noncompliance with the Debt Collection and Improvement Act, the
Commission is committed to resolving this issue in FY 2013.

Fifth, the Other Matters reported under review as a possible violation of the Anti-Deficiency Act will be
fully investigated in FY 2013. If any violations of the Anti-Deficiency Act are identified after the
investigation, they will be reported to the President and Congress as required by statute and implementing
guidance.

Finally, we are committed to continually strengthening the internal controls of the Commission and its
reporting components. This commitment includes developing timely, accurate, and useful performance
and financial information to ensure the most effective stewardship of both the funds that the Commission
oversees and the funds that the Commission uses to finance its operations. We look forward to working
in FY 2013 to resolve the FY 2012 audit findings and to enhance the culture of integrity, accountability,
and excellence that exists here at the Commission.


David B. Robbins, Managing Director
Office of Managing Director


Mark Stephens, Chief Financial Officer
Office of Managing Director





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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


PRINCIPAL STATEMENTS

FEDERAL COMMUNICATIONS COMMISSION
CONSOLIDATED BALANCE SHEET

As of September 30, 2012 and 2011
(Dollars in thousands)

FY 2012

FY 2011

ASSETS

(Note 2):

Intragovernmental

:
Fund balance with Treasury (Note 3)
$ 361,739

$ 494,340

Investments (Note 5)
6,548,090

5,822,843

Accounts receivable (Note 6)
1,574

1,097

Other
-
2,436

Total intragovernmental

6,911,403

6,320,716

Cash and other monetary assets (Note 4)
139,322

213,944

Accounts receivable, net (Note 6)
875,088

831,072

Loans receivable, net (Note 7)
335

4

General property, plant, and equipment, net
56,832

60,461

Other
13,024

13,053

Total assets

$ 7,996,004

$ 7,439,250

LIABILITIES

(Note 8):

Intragovernmental

:
Debt (Note 9)
$ -
$ 50,300

Other (Note 10)
Custodial
162,657

206,524

Other
6,240

13,725

Total other
168,897

220,249

Total intragovernmental

168,897

270,549

Accounts payable
110,523

92,976

Other (Note 10)
Deferred revenue
62,971

93,053

Prepaid contributions
85,849

77,362

Accrued liabilities for Universal Service
752,423

633,967

Other
39,578

35,804

Total other
940,821

840,186

Total liabilities

$ 1,220,241

$ 1,203,711

Commitments and Contingencies (Note 11)

NET POSITION

Unexpended appropriations - other funds
$ 4,251

$ 15,105

Cumulative results of operations - earmarked funds (Note 17)
6,622,985

6,089,350

Cumulative results of operations - other funds
148,527

131,084

Total net position

$ 6,775,763

$ 6,235,539

Total liabilities and net position

$ 7,996,004

$ 7,439,250


The accompanying notes are an integral part of these statements.
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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


FEDERAL COMMUNICATIONS COMMISSION
CONSOLIDATED STATEMENT OF NET COST

For the Periods Ended September 30, 2012 and 2011
(Dollars in thousands)

FY 2012

FY 2011

Program costs

(Note 12):

Broadband:

Total Gross Cost
$ 48,428

$ 54,536

Competition and Innovation:


Total Gross Cost
9,739,491

9,099,922

International:

Total Gross Cost
10,126

6,753

Consumers:


Total Gross Cost
52,200

46,156

Public Safety and Homeland Security:

Total Gross Cost
48,123

35,576

Continual Improvement:

Total Gross Cost
98,582

50,626

Total Program Costs

$ 9,996,950

$ 9,293,569

Cost not assigned to programs:

Other expenses
( 5)
25

Less: earned revenues not attributed to programs

( 460,246)
( 472,830)

Net cost of operations

$ 9,536,699

$ 8,820,764


The accompanying notes are an integral part of these statements.














59
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


FEDERAL COMMUNICATIONS COMMISSION
CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION

For the Periods Ended September 30, 2012 and 2011
(Dollars in thousands)

FY 2012

FY 2011

Earmarked

All Other

Earmarked

All Other

Funds

Funds

Total

Funds

Funds

Total

Cumulative Results of Operations:

Beginning Balances
$ 6,089,350

$ 131,084

$ 6,220,434

$ 6,135,941

$ 93,773

$ 6,229,714

Budgetary Financing Sources:

Other adjustments
-
-
-
-
1,041

1,041

Appropriations used
-
20,301

20,301

-
45,266

45,266

Non-exchange revenue (Note 17)
10,078,791

-
10,078,791

8,771,949

-
8,771,949

Other Financing Sources (Non Exchange):

Imputed financing
-
15,487

15,487

-
17,457

17,457

Other
-
( 26,802) ( 26,802)
-
( 24,229) ( 24,229)
Total Financing Sources
10,078,791

8,986

10,087,777

8,771,949

39,535

8,811,484

Net Cost of Operations
9,545,156

( 8,457) 9,536,699

8,818,540

2,224

8,820,764

Net Change
533,635

17,443

551,078

( 46,591) 37,311

( 9,280)

Cumulative Results of Operations

6,622,985

148,527

6,771,512

6,089,350

131,084

6,220,434

Unexpended Appropriations:

Beginning Balances
-
15,105

15,105

-
21,183

21,183

Budgetary Financing Sources:

Appropriations received
-
18,432

18,432

-
40,267

40,267

Other adjustments
-
( 8,985) ( 8,985)
-
( 1,079) ( 1,079)
Appropriations used
-
( 20,301) ( 20,301)
-
( 45,266) ( 45,266)
Total Budgetary Financing Sources
-
( 10,854) ( 10,854)
-
( 6,078) ( 6,078)

Total Unexpended Appropriations

-
4,251

4,251

-
15,105

15,105

Net Position

$ 6,622,985

$ 152,778

$ 6,775,763

$ 6,089,350

$ 146,189

$ 6,235,539


The accompanying notes are an integral part of these statements.














60
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


FEDERAL COMMUNICATIONS COMMISSION
COMBINED STATEMENT OF BUDGETARY RESOURCES

For the Periods Ended September 30, 2012 and 2011
(Dollars in thousands)

FY 2012

FY 2011

Non-Budgetary

Non-Budgetary

Credit Reform

Credit Reform

Financing

Financing

Budgetary

Account

Budgetary

Account

Budgetary Resources:

Unobligated balance brought forward, Oct 1
$ 2,727,599

$ 37,008

$ 2,567,572

$ 4,387

Recoveries of prior year unpaid obligations
1,065,292

-

1,062,160

-

Other changes in unobligated balance (+ or -)
(
8,987)
(
32,724)
(
38)
-

Unobligated balance from prior year budget authority, net
3,783,904

4,284

3,629,694

4,387

Appropriations (discretionary and mandatory)
10,060,594

-

8,785,026

-

Borrowing authority (discretionary and mandatory) (Note 14)
-
856

-
2,843

Spending authority from offsetting collections (discretionary and mandatory)
445,864

2,016

444,602

37,843

Total budgetary resources
$ 14,290,362

$ 7,156

$ 12,859,322

$ 45,073

Status of Budgetary Resources:

Obligations incurred (Note 13)
$ 11,087,752

$ 2,799

$ 10,131,723

$ 8,065

Unobligated balance, end of year:
Apportioned
14,537

1,005

21,134

1

Exempt from apportionment
3,055,396

-

2,550,957

-

Unapportioned
132,677

3,352

155,508

37,007

Total unobligated balance, end of year
3,202,610

4,357

2,727,599

37,008

Total budgetary resources
$ 14,290,362

$ 7,156

$ 12,859,322

$ 45,073

Change in Obligated Balance:

Unpaid obligations, brought forward, Oct 1
$ 3,416,789

-
$
$ 3,736,251

-
$
Uncollected customer payments from Federal sources, brought forward, Oct 1 (-)
(
382)
-

-
-

Obligated balance, start of year (net), as adjusted
3,416,407

-

3,736,251

-

Obligations incurred
11,087,752

2,799

10,131,723

8,065

Outlays (gross) (-)
(
9,857,564)
(
2,799)
(
9,389,025)
(
8,065)
Change in uncollected customer payments from Federal sources (+ or -)
(
5,234)
-

(
382)
-

Recoveries of prior year unpaid obligations (-)
(
1,065,292)
-

(
1,062,160)
-

Obligated balance, end of year
Unpaid obligations, end of year (gross)
3,581,685

-

3,416,789

-

Uncollected customer payments from Federal sources, end of year (-)
(
5,616)
-

(
382)
-

Obligated balance, end of year (net)
$ 3,576,069

-
$
$ 3,416,407

-
$

Budget Authority and Outlays, Net:

Budgetary authority, gross (discretionary and mandatory)
$ 10,506,458

$ 2,872

$ 9,229,628

$ 40,686

Actual offsetting collections (discretionary and mandatory) (-)
(
445,504)
(
20,448)
(
450,467)
(
78,111)
Change in uncollected customer payments from Federal sources
(
5,234)
-

(
382)
-

(discretionary and mandatory) (+ or -)
Budgetary authority, net (discretionary and mandatory)
$ 10,055,720

(
$ 17,576)
$ 8,778,779

(
$ 37,425)
Outlays, gross (discretionary and mandatory)
$ 9,857,564

$ 2,799

$ 9,389,025

$ 8,065

Actual offsetting collections (discretionary and mandatory) (-)
(
445,504)
(
20,448)
(
450,467)
(
78,111)
Outlays, net (discretionary and mandatory)
9,412,060

(
17,649)
8,938,558

(
70,046)
Distributed offsetting receipts (-)
(
54,772)
-

(
59,041)
-

Agency outlays, net (discretionary and mandatory)
$ 9,357,288

(
$ 17,649)
$ 8,879,517

(
$ 70,046)


The accompanying notes are an integral part of these statements.







61
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


FEDERAL COMMUNICATIONS COMMISSION
CONSOLIDATED STATEMENT OF CUSTODIAL ACTIVITY

For the Periods Ended September 30, 2012 and 2011
(Dollars in thousands)

FY 2012

FY 2011

Revenue Activity:

Sources of Cash Collections:
Spectrum Auctions
$ 38,477

$ 66,871

Fines and Penalties
8,656

43,061

Credit Reform
1,761

7,831

Total Cash Collections
48,894

117,763

Accrual Adjustments (+/-)
Spectrum Auctions
1,560

4

Fines and Penalties
1,096

(
1,751)
Total Accrual Adjustments
2,656

(
1,747)

Total Custodial Revenue

51,550

116,016

Disposition of Collections:

Transferred to Others:
U.S. Treasury
(
10,417)
(
50,892)
(Increase)/Decrease in Amounts Yet to be Transferred (+/-) 43,867

19,876

Retained by the Reporting Entity
(
85,000)
(
85,000)

Total Disposition of Collections

(
51,550)
(
116,016)

Net Custodial Activity

$ -
$ -



The accompanying notes are an integral part of these statements.

62
FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012


NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011

(DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED)

Note 1 - Summary of Significant Accounting Policies

A. Reporting Entity


The Federal Communications Commission (Commission) is an independent United States Government
agency, established by the Communications Act (Act) of 1934, as amended. The Commission is charged
with regulating interstate and international communications by radio, television, wire, satellite, and cable.
The Commission’s jurisdiction spans the 50 states, the District of Columbia, and the U.S. possessions.
Five commissioners direct the Commission; they are appointed by the President of the United States and
confirmed by the Senate for five-year terms, except when filling an unexpired term or serving in holdover
status.

The Commission is comprised of three reporting components. The primary component consists of
Commission headquarters and field offices. The two additional components are the Universal Service
Fund (USF) and the North American Numbering Plan (NANP). The USF reports the results of the four
Universal Service support mechanisms (established pursuant to section 254 of the Act, as amended) and
the results of the Telecommunications Relay Service (TRS) Fund (established by the Americans with
Disabilities Act of 1990, Title IV). The NANP reports the results of billing and collection activities
conducted to support the NANP (47 U.S.C. § 251(e); 47 C.F.R. § 52.16, 52.17, 52.32, and 52.33).

B. Basis of Accounting and Presentation


The consolidated financial statements (financial statements) have been prepared from the accounting
records of the Commission in conformity with U.S. generally accepted accounting principles (GAAP) and
the form and content for Federal entity financial statements specified by the Office of Management and
Budget (OMB) Circular No. A-136, Financial Reporting Requirements.

The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements. Actual results may
differ from those estimates.

C. Fund Balance with Treasury



Funds with the U.S. Department of the Treasury (Treasury) primarily represent appropriated, revolving,
and deposit funds. The Commission may use the appropriated and revolving funds to finance
expenditures, depending on budgetary availability. The deposit accounts are used to hold funds
temporarily until they can be properly disbursed or distributed.

D. Cash and Other Monetary Assets

Cash and Other Monetary Assets represent cash on deposit and money market funds at several
commercial banks. Accounts are maintained by the Universal Service Administrative Company
(USAC), Rolka Loube Saltzer Associates, LLC (RLSA), and Welch LLP, serving as administrators
and/or billing and collection agents for their respective programs. The accounts bear the names of those
entities, as well as the Commission or the fund for which they serve as administrator and/or billing and
collection agent. Cash on deposit is collateralized by the Federal Reserve.
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Note 1 - Summary of Significant Accounting Policies (continued)



D. Cash and Other Monetary Assets (continued)


As of July 1, 2011, RLSA became the new administrator for the TRS fund. Prior to July 1, 2011, the TRS
fund was administered by the National Exchange Carrier Association (NECA).

E. Investments

Investments are reported net of the unamortized premium or discount. All investments are in Treasury
securities.

F. Accounts Receivable, Net


Accounts Receivable consists of claims made for payment from the public and other Federal entities.
Gross receivables are reduced to net realizable value by an allowance for doubtful accounts.

G. Loans Receivable, Net

The Federal Credit Reform Act (FCRA) of 1990, as amended, governs the reporting requirements for
direct loan obligations made after FY 1991. The FCRA requires that the present value of the subsidy
costs associated with direct loans be recognized as a cost in the year that the loan is obligated. The
present value is calculated as the estimated cash outflows over the life of the loans, less the present value
of the estimated cash inflows, discounted at the interest rate of marketable Treasury securities with a
similar maturity term. Direct loans are reported net of an allowance for subsidy at the present value.

H. Property, Plant and Equipment

The basis for recording purchased general Property, Plant, and Equipment (PP&E) is full cost, including
all costs incurred to bring the PP&E to and from a location suitable for its intended use. All PP&E with
an initial acquisition cost of $25 or more and all internally developed software with a development cost of
$50 or more, and with an estimated useful life of two years or greater, are capitalized. Bulk purchases of
similar items, individually worth less than $25 but collectively worth more than $250, are also capitalized
using the same equipment categories and useful lives as capital acquisitions. PP&E are depreciated on a
straight-line basis over the estimated useful lives of the items. The useful lives used are: forty years for
buildings, seven years for non-computer equipment, five years for computers and vehicles, and three
years for software. Neither land, including permanent improvements, nor software in development is
depreciated. Normal maintenance and repair costs are expensed as incurred.

Leasehold improvements include all costs incurred during the design and construction phase of the
improvement. These costs are amortized over the remaining life of the lease, or the useful life of the
improvements, whichever is shorter.

I. Other Assets


Other Assets – Intragovernmental represent funds related to Auction #73 licenses that have not been
granted. These funds were transferred to the National Telecommunications and Information
Administration (NTIA) in FY 2008 as required by the Digital Television Transition and Public Safety Act
of 2005.


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Note 1 - Summary of Significant Accounting Policies (continued)



I. Other Assets (continued)


Other Assets with the public represent the balance of transfers less expenses made by the USF to the
USAC to fund administrative costs in advance. Advances are drawn down as expenses are incurred.

J. Accounts Payable and Accrued Liabilities



Accounts Payable and Accrued Liabilities represent a probable future outflow or other sacrifice of
resources as a result of past transactions or events. Liabilities are recognized when they are incurred,
regardless of whether they are covered by available budgetary resources. Liabilities cannot be liquidated
without legislation that provides resources to do so. As a component of the U.S. Government, a sovereign
entity, payments of all liabilities other than contracts can be abrogated by the sovereign entity.

K. Deferred Revenue


The Commission collects proceeds from the sale of communications spectrum on behalf of the U.S.
Government. All proceeds collected up to the amount of the net winning bid are recognized as deferred
revenue until a “prepared to grant” or “grant” public notice is issued. In addition, the Commission
collects multi-year regulatory fees for five and ten-year periods that are recorded as deferred revenue and
amortized over the period of the fee.

The USF and NANP collect contributions from U.S., Canadian, and Caribbean carriers to cover the costs
of the programs. Some carriers have the option of paying monthly or annually. The unearned portion of
annual contributions is recognized as deferred revenue.

L. Debt

This account represents amounts due to the U.S. Treasury’s Bureau of Public Debt (BPD) to support the
spectrum auction loans program. Borrowings from BPD are determined based on subsidy estimates and
reestimates in accordance with the FCRA of 1990, as amended, and OMB guidance. Interest payments
on debt are calculated annually and remitted to BPD at the end of the fiscal year. These payments are
recorded in a receipt account maintained by the Commission.

M. Retirement Plans and Other Benefits

Federal employee benefits consist of the actuarial portions of future benefits earned by Federal
employees, including pensions, other retirement benefits, and other post-employment benefits. The
Office of Personnel Management (OPM) administers these benefits. The Commission does not recognize
any liability on the Balance Sheet for pensions, other retirement benefits, and other post-employment
benefits. The Commission recognizes and allocates the imputed costs on the Statement of Net Cost and
recognizes imputed financing related to these costs on the Statement of Changes in Net Position.

Pensions provide benefits upon retirement and may also provide benefits for death, disability, or other
termination of employment before retirement. Pension plans may also include benefits to survivors and
dependents, and they may contain early retirement or other special features. Most Commission
employees participate in the Civil Service Retirement System (CSRS) or the Federal Employee
Retirement System (FERS). Under CSRS, the Commission makes matching contributions equal to seven
percent of basic pay. For FERS employees, the Commission contributes the employer’s matching share
for Social Security, contributes an amount equal to one percent of employee pay to a savings plan, and
FCC AGENCY FINANCIAL REPORT – FISCAL Y
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Note 1 - Summary of Significant Accounting Policies (continued)

M. Retirement Plans and Other Benefits (continued)


matches up to an additional four percent of pay. Most employees hired after December 31, 1983, are
covered by FERS.

The OPM reports on CSRS and FERS assets, accumulated plan benefits, and unfunded liabilities, if any,
applicable to Federal employees.

The actuarial liability for future workers’ compensation benefits includes the expected liability for death,
disability, medical, and miscellaneous costs for approved compensation cases, plus a component for
incurred but not reported claims. The liability is determined by using historical benefit payment patterns
related to a specific incurred period to predict the ultimate payment related to that period. The
Department of Labor (DOL) determines no actuarial liability for the Commission due to the immateriality
to the Federal Government as a whole.

The unfunded Federal Employees’ Compensation Act (FECA) liability covers unemployment
compensation and medical benefits. The calculation takes the amount of benefit payments over the last
nine to twelve quarters and then calculates the annual average of payments. The compensation and
medical payments can be found in the chargeback reports that are issued by DOL.

N. Leave

Annual leave is accrued as earned, and the accrual is reduced as leave is taken. Each year, the balance in
the accrued annual leave account is adjusted to reflect current leave balances and pay rates. Annual leave
is reflected as a liability not covered by current budgetary resources. Sick leave and other types of non-
vested leave are expensed as taken.

O. Revenue and Other Financing Sources



Regulatory Fee Offsetting Collections (Exchange) – The Omnibus Budget Reconciliation Act of 1993
directed the Commission to assess and collect regulatory fees to recover the costs incurred in carrying out
certain provisions of its mission. Section 9(a) of the Act, as amended, authorizes the Commission to
assess and collect annual regulatory fees to recover the costs, as determined annually by Congress,
incurred in carrying out its strategic goals of Broadband, Competition and Innovation, International,
Consumers, Public Safety and Homeland Security, and Continual Improvement. These fees were
established by congressional authority, and consistent with OMB Circular No. A-25 revised, User
Charges
, the Commission did not determine the full costs associated with its regulatory activity in
establishing regulatory fees. Since 1993, Congress has annually reviewed the regulatory fee collection
requirements of the Commission and established the total fee levels to be collected. Fees collected up to
the level established by Congress are applied against the Commission’s annual appropriation at the close
of each fiscal year. The regulatory fee levels of $339,844 for FY 2012 and $335,794 for FY 2011 were
achieved. The Commission collected $4,874 above the required regulatory level in FY 2012 and $6,247
in FY 2011. The total cumulative amount collected above the required regulatory level since 1997 was
$71,044 at September 30, 2012, which is temporarily precluded from obligation.





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Note 1 - Summary of Significant Accounting Policies (continued)

O. Revenues and Other Financing Sources (continued)



Competitive Bidding System Offsetting Collections (Exchange) – One of the Commission’s primary
functions is managing the spectrum auction program. Proceeds from the auctions are initially remitted to
the Commission and are later transferred to the U.S. Treasury, net of anticipated auction related costs
(under 47 U.S.C. § 309, the Commission may retain a portion of the spectrum auction proceeds to offset
the cost of performing the auction function). Collections used to offset the cost of performing auctions-
related activity are capped at $85,000 in FY 2012 and FY 2011.

Radio Spectrum Auction Proceeds (Exchange) – In accordance with the provisions of Statement of
Federal Financial Accounting Standards (SFFAS) 7, Accounting for Revenue and Other Financing
Sources
, the Commission accounts for this exchange revenue as a custodial activity. Revenue from
spectrum auctions is recognized when a “prepared to grant” or “grant” public notice is issued. The value
of available spectrum is determined in the market place at the time of auction. The Commission
recognized total custodial revenue related to spectrum auctions net of accrual adjustments of $40,036 in
FY 2012 and $66,875 in FY 2011.

Application Fees (Exchange) – Congress authorized the Commission (47 U.S.C. § 8) to impose and
collect application processing fees and directed the Commission to prescribe charges for certain types of
application processing or authorization services it provides to communications entities over which the
Commission has jurisdiction. The Commission amends its Schedule of Application Fees (47 C.F.R. §
1.1102 et seq.) to adjust the fees for processing applications and other filings. Section 8(b) of the Act, as
amended, requires the Commission to review and adjust its application fees every two years. The
adjusted or increased fees reflect the net change in the Consumer Price Index for all Urban Consumers,
calculated over a specific period of time. Application fees are deposited in the Treasury and are not
available for the Commission’s use. Application fee revenue totaled $24,804 in FY 2012 and $23,892 in
FY 2011.

Reimbursable Work Agreements (Exchange) – The Commission recognizes reimbursable work
agreement revenue when earned, i.e., goods that have been delivered or services rendered. In FY 2012,
the Commission executed agreements totaling $661. The Commission also returned $3,621 in
unobligated funds from the American Recovery and Reinvestment Act for Broadband Technology
Opportunities Program, which ended in FY 2010, to the appropriate Federal agencies. In FY 2011, the
Commission executed agreements totaling $3,893 and no unobligated funds were returned in FY 2011.

Annual Appropriations (Financing Source) – The Commission receives an annual Salaries and Expense
appropriation from Congress. These funds are used to pay for operations during the fiscal year and are
repaid to the Treasury once regulatory fees are collected. The annual appropriation of $339,844 for FY
2012 and $335,794 for FY 2011 is fully funded by regulatory fee collections.

Subsidy Estimates and Reestimates (Financing Source) – The Commission receives permanent-indefinite
authority for its credit reform program account in accordance with the FCRA of 1990, as amended, to
fund its subsidy estimates and reestimates, unless otherwise prescribed by OMB. This account records
the subsidy costs associated with the direct loans after FY 1991, as well as administrative expenses of the
loan program. The Commission received an appropriation for an upward subsidy of $18,432 in FY 2012
and $40,267 in FY 2011. These appropriations are available until used.



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Note 1 - Summary of Significant Accounting Policies (continued)

O. Revenues and Other Financing Sources (continued)



USF (Nonexchange) – Carriers conducting interstate telecommunications are required to contribute a
portion of their revenues to fund the cost of providing universal service. These contributions represent
appropriated and earmarked receipts and are accounted for as a budgetary financing source.

Allocation of Exchange Revenues
The Commission reports the entire balance of exchange revenue on line "Less: earned revenues not
attributed to programs” since there is no direct relationship between earned revenues and specific
programs.

Reprogramming
In FY 2012, the Commission received approval to reprogram $12,100 of prior year obligations that were
deobligated to enable the Commission to implement certain initiatives. The initiatives included $10,000
for cyber security and $2,100 to implement the incentive spectrum auctions provisions included in the
Middle Class Tax Relief and Job Creation Act of 2012. In FY 2011, the Commission did not submit any
requests for reprogramming.

P. Transactions with Related Parties


The Commission has a direct oversight relationship with the administrators and Billing and Collection
agents (B&C agents) of funds that are components under the overall Commission entity. These
organizations are the Universal Service Administrative Company (USAC), which is both the
administrator and B&C agent for the four Universal Service Fund (USF) support mechanisms; Rolka
Loube Saltzer Associates (RLSA), which is both the administrator and B&C agent for the
Telecommunications Relay Service (TRS) Fund; Neustar, which is the administrator for the North
American Numbering Plan (NANP) Fund; and Welch LLP, which is the B&C agent for the NANP Fund.
As of July 1, 2011, RLSA became the new administrator for the TRS Fund. Prior to July 1, 2011, the
TRS Fund was administered by the National Exchange Carrier Association (NECA).

The Commission approves the administrative costs paid to these entities from the respective funds that
they manage. The administrative costs cover expenses such as the salaries and benefits for the employees
dedicated to managing the funds; rent and utilities for office space used; accounting and other financial
reporting related services; and other management activities. All related party balances for the years ended
September 30, 2012 and 2011 are listed below:

Administrative Fees:
USF
TRS
NANP
Total
FY 2012
$ 105,

358
$ 1,
094
$ 5,
409
$ 111,

861
FY 2011
$ 102,

118
$ 2,
082
$ 4,
587
$ 108,

787







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Note 1 - Summary of Significant Accounting Policies (continued)

Q. Net Position

Net Position is the residual difference between assets and liabilities, and is comprised of Unexpended
Appropriations and Cumulative Results of Operations. Unexpended Appropriations represents the
amount of unobligated and unexpended budget authority. Unobligated Balance is the amount of
appropriations or other authority remaining after deducting the cumulative obligations from the amount
available for obligation. Cumulative Results of Operations is the net difference since the inception of the
Commission of (1) expenses and losses and (2) financing sources including appropriations, revenues, and
gains.

R. Mobility Fund Phase I Auction


On September 27, 2012, the Commission completed the Mobility Fund Phase I Auction. In this auction,
designated as Auction 901, there were a total of 33 winning bidders. The winning bidders have a binding
obligation to file a post-auction long-form application by the applicable deadline and consistent with other
requirements of the long-form application process. After the deadline, the Commission will issue a public
notice identifying the winning bids that are authorized to receive support. The Mobility Fund Phase I
Auction did not have any financial impact in FY 2012.

Note 2 - Non-entity Assets



The following summarizes Non-entity Assets as of September 30, 2012 and 2011:


FY 2012
FY 2011
Intragovernmental:
Fund Balance with Treasury
$ 179,007

$ 266,981

Accounts Receivable, Net
439

1,081
Other
-
2,436
Total Intragovernmental
179,446
270,498
Accounts Receivable, Net
21,565

19,304
Total Non-entity Assets
201,011
289,802
Total Entity Assets
7,794,993

7,149,448
Total Assets
$ 7,996,004

$ 7,439,250




Non-entity Fund Balance with Treasury primarily represents deposits made towards spectrum auction
winning bids. These deposits accounted for $166,489 in FY 2012 and $238,425 in FY 2011. Non-entity
Cash and Other Monetary Assets also consist of deposits made by spectrum auction bidders that are held
outside of Treasury. Receivables considered non-entity are for regulatory fees, application fees, fines and
forfeitures, spectrum auction receivables, and International Telecommunications Settlement (ITS)
charges.





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Note 3 - Fund Balance

with Treasury

The following summarizes Fund Balance with Treasury (FBWT) as of September 30, 2012 and 2011:


Appropriated
Revolving
FY 2012
Funds
Funds
Deposit Funds
Total
Unobligated Balance
Available
$ 15,814

$ 4,357

-
$
$ 20,171

Unavailable
78,777

-

-

78,777

Obligated Balance not yet Disbursed
83,784

-

-

83,784

Non-Budgetary FBWT
-
-

179,007

179,007

Total
$ 178,375

$ 4,357

$ 179,007

$ 361,739

FY 2011
Unobligated Balance
Available
$ 28,782

$ 37,008

-
$
$ 65,790

Unavailable
80,990

-

-

80,990

Obligated Balance not yet Disbursed
80,579

-

-

80,579

Non-Budgetary FBWT
-
-

266,981

266,981

Total
$ 190,351

$ 37,008

$ 266,981

$ 494,340


Appropriated Funds – Includes the salaries and expense appropriation used to fund agency operations, the
auction and reimbursable accounts, the credit reform program account, and the no-year accounts used to
carry over spectrum auction funds, offsetting collections, excess regulatory fees, and the Office of
Inspector General USF funds.

Revolving Funds – Includes the credit reform financing account used to record cash flows associated with
the Commission’s spectrum auction loan program.

Deposit Funds – Includes monies being held for spectrum auctions, ITS, and regulatory fees. Deposit
funds are not available for use by the Commission unless they are properly identified or reclassified as
Commission funds. Otherwise, these funds are returned to the depositor or transferred to the U.S.
Treasury.

Note 4 – Cash and Other Monetary Assets



The following summarizes Cash and Other Monetary Assets as of September 30, 2012 and 2011:


FY 2012
FY 2011
Cash and Other Monetary Assets
$ 139,322
$ 213,944

USF and NANP contributions and third party deposits made pursuant to spectrum auction activities are
the source of funds for these balances. Third-party deposits, unless refunded, are held until 45 days after
the close of a given auction and then transferred to the Commission’s Treasury account. Interest earned
on cash and other monetary assets is reinvested.

Effective February 17, 2012, interest earned on third-party deposits is transferred to the Treasury’s
General Fund. Prior to February 17, 2012, interest earned on third-party deposits was transferred to the
Telecommunications Development Fund.
FCC AGENCY FINANCIAL REPORT – FISCAL Y
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70




Note 4 – Cash and Other Monetary Assets (continued)


In FY 2012, Cash and Other Monetary Assets included $136,475 in USF contributions and related
accrued interest being held for distribution, and $2,847 in NANP deposits and related accrued interest. In
FY 2011, Cash and Other Monetary Assets included $210,948 in USF contributions and related accrued
interest being held for distribution, and $2,996 in NANP deposits and related accrued interest.

Note 5 - Investments

The following summarizes Investments as of September 30, 2012 and 2011:


Amortized
Market
Purchase
Amortization
(Premium)
Interest
Investments,
Value
FY 2012
Cost
Method
Discount
Receivable
Net
Disclosures
Intragovernmental Securities:
Marketable Securities
Treasury Bills
$ 2,269,876

EI
$ 233

-
$
$ 2,270,109

$ 2,270,170

Treasury Notes
4,274,042

EI
(
4,086) 8,025

4,277,981

4,277,414

Total
$ 6,543,918

(
$ 3,853) $ 8,025

$ 6,548,090

$ 6,547,584

FY 2011
Intragovernmental Securities:
Marketable Securities
Treasury Bills
$ 1,462,490

EI
$ 36

-
$
$ 1,462,526

$ 1,462,532

Treasury Notes
4,358,452

EI
(
4,735) 6,600

4,360,317

4,371,790

Total
$ 5,820,942

(
$ 4,699) $ 6,600

$ 5,822,843

$ 5,834,322

EI - Effective Interest Method


All Treasury securities, regardless of the maturity date, are reported as investments. The Commission
expects to hold all investments to maturity; therefore, no adjustments have been made to present market
values. All investments are held by USF and are also recognized as part of earmarked funds in Note 17.

The cash receipts collected from the public for the USF are used to purchase federal securities. U.S.
Treasury securities are an asset to the USF and a liability to the U.S. Treasury. Because the USF and the
U.S. Treasury are both parts of the Government, these assets and liabilities offset each other from the
standpoint of the Government as a whole. For this reason, they do not represent an asset or a liability in
the U.S. Government-wide financial statements.

Treasury securities provide the USF with authority to draw upon the U.S. Treasury to make future benefit
payments or other expenditures. When the USF requires redemption of these securities to make
expenditures, the Government finances those expenditures out of accumulated cash balances, by raising
taxes or other receipts, by borrowing from the public or repaying less debt, or by curtailing other
expenditures. This is the same way that the Government finances all other expenditures.







FCC AGENCY FINANCIAL REPORT – FISCAL Y
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Note 6 - Accounts Receivable, Net

The following summarizes Accounts Receivable, Net as of September 30, 2012 and 2011:


Intragovernmental
Public
Total
FY 2012
Gross Accounts Receivable
$ 1,574

$ 1,617,826

$ 1,619,400

Allowance for Doubtful Accounts
-
(
742,738)
(
742,738)
Net Accounts Receivable
$ 1,574

$ 875,088

$ 876,662

FY 2011
Gross Accounts Receivable
$ 1,097

$ 1,431,499

$ 1,432,596

Allowance for Doubtful Accounts
-

(
600,427)
(
600,427)
Net Accounts Receivable
$ 1,097

$ 831,072

$ 832,169



Accounts receivable are recorded net of any related allowance for doubtful accounts. The Commission’s
portion is determined by applying predetermined percentages against the respective date the receivable
was established. The current formula for the Commission’s allowance is 25% for receivables 91-180
days outstanding, 75% for those 181-365 days outstanding, and 100% for anything greater than 365 days
outstanding. An additional analysis of higher dollar value receivables is also performed on individual
account balances. The USF portion is determined by calculating an estimated general allowance for
doubtful accounts receivable. The general allowance is calculated by multiplying the receivable amounts
by the percentage of the estimated uncollectible amount as determined by a review of historical collection
rates by type of receivable.

The Notice of Apparent Liabilities (NAL) receivables represent notifications of forfeiture, subject to final
determination. The NAL receivables are included under the Forfeitures category in the table below.
While these receivables are included on the Treasury Report on Receivables at the request of Treasury,
the ability to collect these receivables is not determined until a final judgment is issued. A 100%
allowance is made for all NAL receivables. Similarly, the Commitment Adjustment (COMAD) for
Schools and Libraries audit receivables are subject to appeal and are not considered final until the appeals
period has lapsed or a final determination has been issued. The COMAD audit receivables for Schools
and Libraries have a 96% allowance in FY 2012 and 93% allowance in FY 2011.

FY 2012
FY 2011
Accounts
Accounts
Receivable
Allowance
Net
Receivable
Allowance
Net
USF
$ 1,289,562

(
$ 442,926)
$ 846,636

$ 1,065,218

(
$ 268,724)
$ 796,494

COMAD - Schools and Libraries
148,896

(
142,345)
6,551

200,342
(185,717)
14,625

Regulatory Fees
38,369

(
28,147)
10,222

35,740
(24,194)
11,546

Spectrum Auction
24,194

(
22,630)
1,564

21,258
(21,254)
4

Forfeitures
100,549

(
97,849)
2,700

95,102
(88,399)
6,703

Other
17,830

(
8,841)
8,989

14,936
(12,139)
2,797

Total
$ 1,619,400

(
$ 742,738)
$ 876,662

$ 1,432,596

(
$ 600,427)
$ 832,169







FCC AGENCY FINANCIAL REPORT – FISCAL Y
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72





Note 7 – Loans Receivable, Net


Under section 309(j)(3) of the Act, as amended, Congress directed the Commission to implement a
competitive bidding (auctions) system for licensing spectrum to expand economic opportunity, promote
competition, and facilitate the development and delivery of new and improved telecommunications
services to the public. Section 309(j)(4) of the Act gave the Commission certain instructions for
implementing regulations for this system, including a directive to ensure that small businesses, rural
telephone companies, and women and minority-owned businesses have an opportunity to participate in
providing spectrum-based services. The Commission can use various means to facilitate expanded
participation, including alternative payment schedules, tax certificates, bidding preferences, and other
procedures.

To address the mandate, the Commission provided installment financing in connection with its spectrum
auction events, including the C Block Broadband Personal Communications Services (PCS), F Block
PCS, Narrowband PCS, Interactive Video and Data Service (IVDS), Multichannel Distribution Service
(MDS), and 900MHz Specialized Mobile Radio (SMR). Under the installment financing program,
winning bidders were generally given five or ten years to repay their net winning bid amount (less the
down payment), with up to five-year, interest-only initial payment periods. Interest rates varied by the
type of borrower. Retention of licenses granted at auction was strictly conditioned on making full and
timely payment of amounts as they became due. The return or repossession of auctioned licenses, which
may have previously been associated with installment payment plans, does not directly or immediately
affect the amount of the outstanding debt recorded in the agency’s financial records. Outstanding debt
adjustments are subject to a separate process.

The Commission’s first auction was conducted in 1994, and starting in 1995 installment payment
mechanisms were used to finance portions of some winning bids. The Commission’s installment loan
portfolio is tracked under ten cohorts. The last active loan matured in April 2007.

As required under the FCRA of 1990, as amended, the Commission coordinates with OMB in developing
estimation guidelines, regulations, and the criteria used in calculating the subsidy estimates and
reestimates. The most recent subsidy reestimate was completed as of September 30, 2012. The
reestimate resulted in a net downward adjustment, including interest on the reestimate, of $1,473.

Direct Loans

Loans


Allowance for
Value of

Receivable
Interest
Other
Subsidy Cost
Assets Related
Loan Program
Gross
Receivable
Receivable
(Present Value)
to Direct Loans
Spectrum Auctions:




FY 2012
$ 111,074 $ 7,883
$ 857
$ (119,479)
$ 335
FY 2011
$ 130,533 $ 8,932
$ 1,195
$ (140,656)
$ 4

Interest accrued on bankrupt and defaulted loans totaled $7,883 in FY 2012 and $8,932 in FY 2011.

Other Receivables is composed of outstanding late fees on the loans receivable.

Total Amount of Direct Loans Disbursed


No new loans were issued in FY 2012 and FY 2011.

FCC AGENCY FINANCIAL REPORT – FISCAL Y
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73





Note 7 – Loans Receivable, Net (continued)


Subsidy Expense for Direct Loans by Program and Component


Direct Loan Modifications and Reestimates:



Interest Rate
Technical
Total
Loan Program
Modifications
Reestimates
Reestimates
Reestimates
Spectrum Auctions:




FY 2012 (Net)
$ -
$ -
$ (1,473) $ (1,473)
FY 2011 (Net)
$ -
$ -
$ 17,629
$ 17,629

Schedule for Reconciling Subsidy Cost Allowance Balances



FY 2012

FY 2011
Beginning Balance of the Subsidy Cost Allowance
$ 140,656
$ 166,260


Adjustments:

Loans written off
(20,599) (42,711)
Other
810
-
Subsidy allowance amortization
85
(522)
Ending balance before reestimates
120,952
123,027
Subsidy reestimates:


Technical/default reestimate
(1,473)
17,629
Ending balance of the subsidy cost allowance
$ 119,479
$ 140,656


Administrative Expense – Spectrum Auctions
$ 1,837
$ 4,884

Note 8 - Liabilities Not Covered by Budgetary Resources


The following summarizes Liabilities Not Covered by Budgetary Resources as of September 30, 2012
and 2011:



Intragovernmental:

FY 2012

FY 2011
Other:



FECA Liability

$ 342

$ 482
GSA Real Estate Taxes

1,922

2,357
Other:




Unfunded Leave

20,452

20,108
Accrued Liabilities for Universal Service

752,423

633,967
Total liabilities not covered by budgetary resources

775,139

656,914
Total liabilities covered by budgetary resources

445,102

546,797
Total Liabilities

$ 1,220,241

$ 1,203,711





FCC AGENCY FINANCIAL REPORT – FISCAL Y
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74






Note 9 - Debt


FY 2011

FY 2011

FY 2012
Beginning
Net
Ending
Net
Ending
Balance
Borrowing
Balance
Borrowing
Balance
Debt to the Treasury
$ 87,726
$ (37,426) $ 50,300
$ (50,300)
$ -



The Commission borrows from the Treasury for costs associated with its spectrum auction loan program.
Borrowings, pertaining to all loan cohorts, are determined by calculating the subsidy estimates and
reestimates in accordance with the FCRA of 1990, as amended.

Note 10 - Other Liabilities

The following summarizes Other Liabilities as of September 30, 2012 and 2011:

FY 2012
Non-Current
Current
Total
Intragovernmental
Custodial Liability
$ -
$ 162,657

$ 162,657

Other
-
6,240

6,240

Total Intragovernmental
$ -
$ 168,897

$ 168,897

Deferred Revenue
$ 33,392

$ 29,579

$ 62,971

Prepaid Contributions
-
85,849

85,849

Accrued Liabilities for Universal Service
-
752,423

752,423

Other
-
39,578

39,578

Total Other Public
$ 33,392

$ 907,429

$ 940,821

FY 2011
Non-Current
Current
Total
Intragovernmental
Custodial Liability
$ -
$ 206,524

$ 206,524

Other
-
13,725

13,725

Total Intragovernmental
$ -
$ 220,249

$ 220,249

Deferred Revenue
$ 30,144

$ 62,909

$ 93,053

Prepaid Contributions
-
77,362

77,362

Accrued Liabilities for Universal Service
-
633,967

633,967

Other
-
35,804

35,804

Total Other Public
$ 30,144

$ 810,042

$ 840,186



The Custodial Liability includes both cash collected and receivables being held for transfer to the
Treasury’s General Fund. The Commission collects the following types of custodial revenue: spectrum
auction revenue, fines and forfeitures revenue, penalty revenue on regulatory fees, ITS processing fees,
and interest revenue on auction deposits. Deferred revenue represents regulatory fees, spectrum auction
revenue, or contributor payments that have been received but not earned by the Commission.


FCC AGENCY FINANCIAL REPORT – FISCAL Y
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75







Note 10 - Other Liabilities (continued)


Prepaid Contributions include USF and NANP contribution overpayments that may be refunded or used
to offset future payments. Accrued Liabilities for Universal Service represent liabilities recorded by the
USF for anticipated subsidies in the High Cost, Low Income, and TRS programs. The obligation for
these subsidies is not recognized until payment files are approved in the subsequent month. Remaining
Other Liabilities primarily represent anticipated payments for services received but not billed, and
Deposit/Unapplied Liability which represents upfront deposits made by auction bidders as well as funds
received that are being held until proper application is determined.

Note 11 - Commitments and Contingencies

The Commission, USAC, and the Department of Justice are investigating several cases and prosecuting
others related to disbursements of USF funds from the Schools and Libraries, High Cost, and Low
Income programs which might result in future proceedings or actions. Similarly the Commission, RLSA,
and the Department of Justice are investigating several cases related to the TRS funds. The complexity of
these future actions precludes management from estimating the total amount of recovery that may result.

The Commission is a party in various administrative proceedings, legal actions, and claims brought by or
against the agency. In addition, there is one bankruptcy proceeding related to the loan portfolio. In the
opinion of Commission management, the ultimate resolution of proceedings, actions, and claims will not
materially affect the Commission’s financial position or results of operations.

The Commission has examined its obligations related to cancelled authority and believes it has no
outstanding commitments requiring future resources other than those as disclosed in Note 8. In addition,
there are certain operating leases that may contain provisions regarding contract termination costs upon
early contract termination.

In September 2007, a grievance was filed with the Commission under the Federal Labor Standards Act
alleging that certain Commission bargaining unit employees were not sufficiently compensated for
overtime work. Management in consultation with legal counsel has determined that it is "probable" that
some issues presented by this pending grievance will result in payments to some employees, but an
estimate of the range of the payments cannot be reasonably measured at this time.














FCC AGENCY FINANCIAL REPORT – FISCAL Y
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76



Note 12 – Intragovernmental Costs and Exchange Revenue


Intragovernmental costs primarily represent goods and services purchased by the Commission from other
Federal agencies.

FY 2012

Program Costs

Intragovernmental

Public

Total

Broadband
$ 12,

417
$ 36,

011
$ 48,

428
Competition and Innovation
48,

435
9,
691,056
9,
739,491
International
2,
597
7,
529
10,

126
Consumers
13,

385
38,

815
52,

200
Public Safety and Homeland Security
12,

339
35,

784
48,

123
Continual Improvement
25,

277
73,

305
98,

582
Total
$ 114,

450
$ 9,
882,500
$ 9,
996,950
Total Earned Revenue
$ 6,
065
$ 454,

181
$ 460,

246
FY 2011

Program Costs

Intragovernmental

Public

Total

Broadband
$ 14,

595
$ 39,

941
$ 54,

536
Competition and Innovation
74,

057
9,
025,865
9,
099,922
International
1,
807
4,
946
6,
753
Consumers
12,

353
33,

803
46,

156
Public Safety and Homeland Security
9,
521
26,

055
35,

576
Continual Improvement
13,

549
37,

077
50,

626
Total
$ 125,

882
$ 9,
167,687
$ 9,
293,569
Total Earned Revenue
$ 18,

624
$ 454,

206
$ 472,

830

Note 13 - Apportionment Categories of Obligations Incurred: Direct vs. Reimbursable Obligations

The following summarizes Apportionment Categories of Obligations Incurred for the years ended
September 30, 2012 and 2011:


FY 2012

FY 2011



Non-



Non-
Budgetary
Budgetary
Budgetary
Budgetary
Direct:





Category A
$ 1,148,054
$ -
$ 1,098,682
$ -
Category B
33,934
2,799

49,304
8,065
Exempt from Apportionment
9,896,697
-

8,979,531
-
Total Direct
$11,078,685
$ 2,799
$10,127,517
$ 8,065






Reimbursable:





Category A
$ 9,067
$ -
$ 4,206
$ -

Category A – Apportioned by Quarter
Category B – Apportioned by Purpose



FCC AGENCY FINANCIAL REPORT – FISCAL Y
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77




Note 14 - Terms of Borrowing Authority Used






Borrowing Authority Used





Maturity Dates:
FY 2012

FY 2011
September 30, 2012
$ 856

$ -
September 30, 2013
-

50,449
Total Borrowing Authority Used
$ 856

$ 50,449

In FY 2012, the Commission used $856 in borrowing authority to fund the FY 2011 Credit Reform
Downward Subsidy. The Commission used $50,449 in FY 2011 borrowing authority to extend the
maturity dates of the debt owed to BPD. In FY 2012, the entire debt was repaid.

Note 15 – Legal Arrangements Affecting Use of Unobligated Balances

Pursuant to Public Law 111-8, offsetting collections received in excess of $339,844 in FY 2012 shall not
be available for obligation. Also, any offsetting collections received in prior years that otherwise become
available on or after October 1, 2011, are not available for obligation.

Note 16 - Explanation of Differences Between the Statement of Budgetary Resources (SBR) and the
Budget of the U.S. Government

The only material difference between the Combined Statement of Budgetary Resources (SBR) for FY
2011 and the amounts presented in the 2013 President’s Budget was the presentation of the unapportioned
balance of $176,000. OMB Circular No. A-136, Financial Reporting Requirements, requires all
unapportioned balances to be reflected as “Unobligated balance – Exempt from Apportionment” and
“Unapportioned” on the SBR. The President’s Budget determines availability based on the fund type and
legislation, and places the unapportioned balance for the Commission, including USF, on line “Unexpired
unobligated balance, end of the year.”

The FY 2014 Budget of the United States Government (President’s Budget) with actual numbers for FY
2012 has not been published. Pursuant to 31 USC § 1105, the Budget of the United States Government
will be released the first Monday in February, and will be available at the following website:
http:/www.whitehouse.gov/omb.

Note 17 – Earmarked Funds

U.S. telecommunications companies are obligated to make contributions to the USF and the TRS. These
contributions are accounted for in the Budget of the U.S. Government as the “Universal Service Fund.”
The Commission currently recognizes the contributions collected under the USF Program as non-
exchange revenue on its Statement of Changes in Net Position, and the related disbursements as program
expenses on the Statement of Net Cost.









FCC AGENCY FINANCIAL REPORT – FISCAL Y
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78



Note 17 – Earmarked Funds (continued)


The following summarizes the significant assets, liabilities, and related costs incurred with managing the
USF Program as of September 30, 2012 and 2011:

Balance Sheet

FY 2012

FY 2011

ASSETS
Investments
$ 6,548,090

$ 5,822,843

Cash and other monetary assets
136,475
210,948
Accounts receivable, net
866,813
842,768
General property, plant, and equipment, net
2,678
6,330
Other assets
13,024
13,024
Total assets
$ 7,567,080

$ 6,895,913

LIABILITIES
Accounts payable
$ 98,743

$ 82,113

Deferred revenue
7,149

13,161
Prepaid contributions
85,780
77,322
Accrued liabilities
752,423
633,967
Total liabilities
$ 944,095

$ 806,563

Cumulative results of operations
$ 6,622,985

$ 6,089,350

Total liabilities and net position
$ 7,567,080

$ 6,895,913

Statement of Net Cost

Net cost of operations
$ 9,545,156

$ 8,818,540

Statement of Changes in Net Position

Net position beginning of period
$ 6,089,350

$ 6,135,941

Non-exchange revenue
10,078,791
8,771,949
Net cost of operations
9,545,156
8,818,540
Change in net position
533,635
(46,591)
Net position end of period
$ 6,622,985

$ 6,089,350



Note 18 – Undelivered Orders at the End of the Period

The amount of budgetary resources obligated for undelivered orders totaled $3,463,190 as of September
30, 2012 and $3,314,084 as of September 30, 2011.






FCC AGENCY FINANCIAL REPORT – FISCAL Y
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79



Note 19 – Reconciliation of Net Cost of Operations (Proprietary) to Budget (Formerly the
Statement of Financing)

As of September 30, 2012 and 2011:

FY 2012

FY 2011

Budgetary Resources Obligated:
Obligations incurred
11,090,551
$
$ 10,139,788

Less: spending authority from offsetting collections and recoveries
1,536,478

1,591,120

Obligations net of offsetting collections and recoveries
9,554,073

8,548,668

Less: offsetting receipts
54,772

59,041

Net obligations
9,499,301

8,489,627

Other Resources
(
11,315)
(
6,772)
Resources Used to Finance Items not Part of the Net Cost of Operations:
Change in Undelivered Orders
(
149,106)
271,372

Resources that fund expenses recognized in prior periods
-

(
691)
Budgetary offsetting collections and receipts that do not affect net cost of operations
75,220

137,152

Resources that finance the acquisition of assets
( 16,182)
(
13,089)
Other
37,200

145,253

Components of the Net Cost of Operations That Will Not Require or Generate
Resources in the Current Period:
Increase in annual leave liability
344

(
583)
Upward/Downward reestimates of credit subsidy (+/-)
( 1,473)
17,629

Increase in exchange revenue receivable from the public
5,277

3,872

Depreciation and amortization
19,810

17,797

Other (+/-)
77,623

(
240,803)
Net Cost of Operations
$ 9,536,699

$ 8,820,764



Note 20 – Comparability of the Financial Statements

Statement of Budgetary Resources
The presentation used for the Statement of Budgetary Resources (SBR) prior to FY 2012 has been revised
to reflect a new format required pursuant to the OMB Circular No. A-136, Financial Reporting
Requirements
. OMB Circular No. A-136 requires agencies to present both the FY 2012 and 2011 SBR in
the same format. Accordingly, certain reclassifications were made to the previously issued FY 2011 SBR
to conform to the new format.
















FCC AGENCY FINANCIAL REPORT – FISCAL Y
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REQUIRED SUPPLEMENTARY INFORMATION


REQUIRED SUPPLEMENTARY INFORMATION – STATEMENT OF BUDGETARY
RESOURCES

For the Year Ended September 30, 2012
(Dollars in thousands)

OMB Circular No. A-136, Financial Reporting Requirements, requires additional disclosure of an entity's
budgetary information by major budgetary accounts if the information was aggregated for presentation
purposes on the Statement of Budgetary Resources. Major budgetary accounts of the Commission
include Salaries and Expenses (S&E), Credit, Auctions, and USF. S&E represents general salaries and
expenses of the Commission. Credit reflects the program and financing accounts related to the direct loan
program. Auctions include salaries and expenses of the spectrum auction program. USF includes
Universal Service and Telecommunications Relay Service Funds.

Reflected in the chart below are the major budgetary accounts of the Commission that are aggregated and
presented in the September 30, 2012 Combined Statement of Budgetary Resources.

STATEMENT OF BUDGETARY RESOURCES

FY 2012

S&E

Credit

Auctions

USF

Total

Budgetary Resources:

Unobligated balance brought forward, Oct 1
37,051
$
41,497
$
1,603
$
2,684,456
$
2,764,607
$
Recoveries of prior year unpaid obligations
5,411

411

979

1,058,491

1,065,292

Other changes in unobligated balance (+ or -)
(
6,824) (
32,724) (
2,163) -

(
41,711)
Unobligated balance from prior year budget authority, net
35,638

9,184

419

3,742,947

3,788,188

Appropriations (discretionary and mandatory)
-

18,432

-

10,042,162

10,060,594

Borrowing authority (discretionary and mandatory) (Note 14)
-

856

-

-

856

Spending authority from offsetting collections (discretionary and mandatory)
345,933

2,016

85,246

14,685

447,880

Total budgetary resources
381,571
$
30,488
$
85,665
$
13,799,794
$
14,297,518
$

Status of Budgetary Resources:

Obligations incurred
363,153
$
22,207
$
85,186
$
10,620,005
$
11,090,551
$
Unobligated balance, end of year:
Apportioned
11,039

4,501

2

-

15,542

Exempt from apportionment
-

-

-

3,055,396

3,055,396

Unapportioned
7,379

3,780

477

124,393

136,029

Total unobligated balance, end of year
18,418

8,281

479

3,179,789

3,206,967

Total budgetary resources
381,571
$
30,488
$
85,665
$
13,799,794
$
14,297,518
$

Change in Obligated Balance:

Unpaid obligations, brought forward, Oct 1
55,594
$
1,572
$
24,255
$
3,335,368
$
3,416,789
$
Uncollected customer payments from Federal sources, brought forward, Oct 1 (-)
(
382) -

-

-

(
382)
Obligated balance, start of year (net), as adjusted
55,212

1,572

24,255

3,335,368

3,416,407

Obligations incurred
363,154

22,206

85,186

10,620,005

11,090,551

Outlays (gross) (-)
(
346,753) (
23,099) (
85,188) (
9,405,323) (
9,860,363)
Change in uncollected customer payments from Federal sources (+ or -)
(
5,234) -

-

-

(
5,234)
Recoveries of prior year unpaid obligations (-)
(
5,411) (
411) (
979) (
1,058,491) (
1,065,292)
Obligated balance, end of year
Unpaid obligations, end of year (gross)
66,584

268

23,274

3,491,559

3,581,685

Uncollected customer payments from Federal sources, end of year (-)
(
5,616) -

-

-

(
5,616)
Obligated balance, end of year (net)
60,968
$
268
$
23,274
$
3,491,559
$
3,576,069
$

Budget Authority and Outlays, Net:

Budgetary authority, gross (discretionary and mandatory)
345,934
$
21,304
$
85,245
$
10,056,847
$
10,509,330
$
Actual offsetting collections (discretionary and mandatory) (-)
(
345,574) (
20,448) (
85,245) (
14,685) (
465,952)
Change in uncollected customer payments from Federal sources
(
5,234) -

-

-

(
5,234)
(discretionary and mandatory) (+ or -)
Budgetary authority, net (discretionary and mandatory)
$ (
4,874)
856
$
$ -

10,042,162
$
10,038,144
$
Outlays, gross (discretionary and mandatory)
346,753

23,099

85,188

9,405,323

9,860,363

Actual offsetting collections (discretionary and mandatory) (-)
(
345,574) (
20,448) (
85,245) (
14,685) (
465,952)
Outlays, net (discretionary and mandatory)
1,179

2,651

(
57)
9,390,638

9,394,411

Distributed offsetting receipts (-)
(
26,900) -

-

(
27,872) (
54,772)
Agency outlays, net (discretionary and mandatory)
$ (
25,721)
2,651
$
$ (
57)
9,362,766
$
9,339,639
$



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3. Other Accompanying Information

Summary of Financial Statement Audit


Audit Opinion
Unqualified
Restatement
No

Material Weaknesses
Beginning
New
Resolved
Consolidated
Ending
Balance
Balance

0
0
0
0
0












Total Material Weaknesses
0
0
0
0
0



Summary of Management Assurances


Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Statement of Assurance
Unqualified

Material Weaknesses
Beginning
New
Resolved Consolidated
Reassessed
Ending
Balance
Balance

0
0
0
0
0
0














Total Material Weaknesses
0
0
0
0
0
0







Effectiveness of Internal Control over Operations (FMFIA § 2)

Statement of Assurance
Unqualified

Material Weaknesses
Beginning
New
Resolved Consolidated
Reassessed
Ending
Balance
Balance

0
0
0
0
0
0














Total Material Weaknesses
0
0
0
0
0
0

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Conformance with financial management system requirements (FMFIA § 4)

Statement of Assurance
Systems do not conform to financial management system requirements

Non-Conformances
Beginning
New
Resolved Consolidated
Reassessed
Ending
Balance
Balance
System is not fully






integrated
Perform functional






requirement reviews
Total Non-Conformances
1
0
0
0
0
1

































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Improper Payments Elimination and Recovery Act
Reporting Details

As required by the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and the Improper
Payments Information Act ((IPIA) (henceforth referred to collectively as IPERA), the Commission
reports the following information.


I. RISK ASSESSMENTS

The Commission has eight components with funding disbursements that are under the direction of the
Commission and its Administrators. Of these programs listed below, the Commission had previously
identified the three programs highlighted in bold as susceptible to significant improper payments.

Universal Service Fund High Cost Program (USF-HC)

Universal Service Fund Schools and Libraries Program (USF-S&L)

• Universal Service Fund Lifeline Program (USF-Lifeline) or (USF-LI)
• Universal Service Fund Rural Health Care Program (USF-RHC)
• Universal Service Fund Administrative Costs (USF-Admin)

Interstate Telecommunications Relay Services Fund (TRS)

• North American Numbering Plan (NANP)
• FCC Operating Expenses (FCC)

In FY 2011, pursuant to Office of Management and Budget (OMB) Circular No. A-123, Appendix C,
which requires a risk assessment once every three years for these programs, the Commission conducted a
risk assessment of the five programs above that were not previously identified as susceptible to significant
improper payments. In FY 2012 the FCC implemented a number of additional steps to monitor risk
factors and strengthen processes for identification of improper payments in these programs, including
assessment of audit findings, site visits to examine program compliance, and investigations of
whistleblower complaints. The Commission will continue to monitor risk through these and other
measures until another risk assessment is performed consistent with OMB Circular No. A-123.


II. STATISTICAL SAMPLING PROCESS


Universal Service Fund

In FY 2012, the Commission used a statistical sampling process to obtain a
statistically valid estimate of the annual amount of improper payments in the USF-HC fund and the USF-
S&L fund using an alternative sampling method approved by OMB. This process, called the Payment
Quality Assurance (PQA) assessment plan, tested disbursements made in calendar year 2011 and tested
compliance with those Commission rules that had the highest error rates from previous years’ audits.
This plan was not designed to extrapolate an improper payment error rate for these programs as a whole.
Rather, the goal was to only estimate an improper payment error rate for the Commission rules that were
previously identified in these programs as subject to the highest improper payments. In accordance with
OMB guidance, a brief description of the sampling processes follows below.

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USF-HC

In FY 2012, the Commission used stratified simple random sampling based on calendar year
2011 disbursements. Samples from USF-HC disbursements were randomly selected simultaneously from
all twelve months to ensure that no study area would be assessed more than once during the year.
Assessments of calendar year 2011 transactions were conducted monthly and included: 1) steps to
measure the accuracy of payments; 2) evaluation of program applicants’ eligibility; 3) testing of high
level information obtained from program participants; and, 4) testing for line count duplicates and
summary schedule variances.

The sampling units for USF-HC were study area codes that were divided into three strata according to
disbursement amounts. The strata were defined based on total disbursement amount to the beneficiary for
all of calendar year 2011. The disbursement strata based on annual disbursements were: less than $1.0
million; $1.0 million to $4.99 million; and $5 million or more. Using stratified simple random sampling,
the Commission determined the total number of study area codes to be tested each month was 24 and the
total number for fiscal year 2012 was 288 or $94 million in disbursements. Improper payments of
$179,322 were identified in the sample. Weights were used to extrapolate estimates of total improper
payments and total disbursements from the sample to the population, commonly referred to as simple
expansion estimators. The combined ratio estimator was used to estimate the improper payment rate by
dividing the extrapolated total improper payments by the total extrapolated disbursements. Using this
methodology, the estimated improper payment rate for USF-HC was .3% for fiscal year 2012. The total
extrapolated amount of improper payments for fiscal year 2012 is $12.6 million out of disbursements of
$4.1 billion.

USF-S&L

The Commission used stratified simple random sampling in FY 2012 based on calendar year
2011 disbursements. Samples from USF-S&L disbursements were randomly selected on a monthly basis.
Assessments of calendar year 2011 transactions were conducted monthly and included: 1) steps to
measure the accuracy of payments; 2) evaluation of program applicants’ eligibility; 3) testing of high-
level information obtained from program participants; 4) review of technology plans for certified
approval and timing of approval; and 5) verification of service eligibility.

The sampling units for USF-S&L were invoice lines that were divided into five strata according to
disbursement amounts. The strata were defined based on the amounts disbursed for beneficiaries each
month. After the exclusion of a de minimis category in which the disbursement amount was less than
$35, the disbursement strata were based on four invoice payment categories: $35 to $999; $1,000 to
$9,999; $10,000 to $99,999; and $100,000 or more. Using stratified simple random sampling, the
Commission determined the total number of invoice lines to be tested for fiscal year 2012 was 738 or
$35.6 million in disbursements. Improper payments of $648,710 were identified in the sample. Weights
were used to extrapolate estimates of total improper payments and total disbursements from the sample to
the population, commonly referred to as simple expansion estimators. The combined ratio estimator was
used to estimate the improper payment rate by dividing the extrapolated total improper payments by the
total extrapolated disbursements. Using this methodology, the estimated improper payment rate for USF-
S&L is 1.91% for fiscal year 2012. The total extrapolated amount of improper payments for fiscal year
2012 was $43.4 million out of approximately $2.2 billion in disbursements.

TRS

The Commission also worked closely with OMB in FY 2012 to strengthen the process to identify
improper payments in the TRS fund. In response to these efforts, Rolka Loube Saltzer Associates, LLC
(RLSA), the TRS Fund Administrator, has calculated a baseline error rate for improper payments under
an alternative statistical sampling methodology in coordination with OMB and consistent with OMB
Circular No. A-123. This plan was not designed to test recipient compliance with Commission rules or to
extrapolate an improper payment error rate for the TRS program as a whole; rather, the goal was to
estimate an improper payment error rate for the internal controls administered by RLSA. This is the first
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year that a baseline error rate was required for the TRS Fund. Therefore, the plan included a robust
testing of internal controls. Attributes were tested for 100% of distributions for the period of July 1, 2011
through June 30, 2012, which included 148 distributions to service providers totaling $606,856,572.86.
The resulting error rate for improper payments is 0%. A root cause analysis was not performed because
no errors were found in the testing attributes.


III. CORRECTIVE ACTION PLANS

The following discussion describes the corrective action plans for USF-HC and USF-S&L, and includes,
where available, root cause information (error amount) and ongoing corrective actions to reduce improper
payments. Also included below is an update on the implementation of the TRS corrective action plan.

USAC has examined the results of the audits and assessment programs conducted for FY 2012, and has
implemented a corrective action plan in response to any findings, consistent with OMB Circular No. A-
123 and OMB Circular No. A-50 (provides policies and procedures for use by executive agencies when
considering reports issued by the Inspectors General, other executive branch audit organizations, the
General Accounting Office, and non-Federal auditors where follow up is necessary).

USF-HC

In FY 2012, the PQA process identified the following improper payment issues and amounts.
The Commission is currently working with USAC to recover these funds and to make additional
improvements to the USF-HC program.

High-Cost PQA issues by Improper Payment

Improper Payment

Number of

Amount

Amount Totals

Instances

Line Counts
$169,596.23
44
Subscriber line count revenue
$5,825.91
29
Part 36 reporting exception
$3,453.57
6
Average schedule line count
$269.84
1
Line count duplicates
$176.77
6
Total
$179,322.32
86


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USF S&L

In FY 2012, the PQA process identified the following improper payment issues and amounts.
The Commission is currently working with USAC to recover these funds and to make improvements to
the USF-S&L program.


Schools and Libraries PQA issues and

Improper

Number of

Improper Payment Amount

Payment Amounts

Instances

Payment for recurring services delivered outside of the

funding year
$235,983.28
1
Technology plan approved after service start date
$143,981.62
11
No approved technology plan
$129,068.22
3
Services received by ineligible entity
$84,331.62
10
Incomplete documentation
$52,579.38
18
Failure to utilize the services funded
$2,724.25
1
Invoicing error
$42.11
1
Total
$648,710.48
45

Efforts to Reduce Future Improper Payments in USF programs
The Commission has taken several
actions to further strengthen oversight of the USF and reduce improper payments. At the direction of the
FCC, USAC has developed a comprehensive set of measures to reduce improper payments arising from
the errors identified in the tables above which include outreach, oversight and management, audits, and
information technology resources. USAC has expanded outreach designed to prevent the errors identified
above from reoccurring, enhanced internal controls and data collection to gain greater visibility into
payment operations, calibrated audit and audit follow-up activities to gain greater certainty about
beneficiary support, and modernized information technology systems to achieve greater efficiencies and
improve reporting capabilities. Key actions undertaken by the FCC and USAC to reduce future improper
payments in the High Cost and Schools and Libraries programs include:

• The FCC directed USAC to separate the USF IPERA efforts into two distinct programs with two
objectives – one focused on improper payment assessment and the second on auditing compliance
with the rules for all four USF programs. In the previous FCC USF audit program, an audit
approach was utilized which tested beneficiary compliance with FCC rules and simultaneously
addressed the requirements of IPERA.

• The FCC directed USAC, in response to a recommendation from the Government Accountability
Office (GAO), to conduct a robust risk assessment of the S&L program. The assessment must
consider, among other things, the top five findings from the last five rounds of S&L audits and
their impact on meeting program objectives. The RFP for the risk assessment has been released
to the public.

• On October 27, 2011, the Commission adopted an Order and Further Notice of Proposed
Rulemaking (USF/ICC Transformation Order) that comprehensively reforms and modernizes the
High Cost universal service program. The order adopts fiscally responsible, accountable,
incentive-based policies to transition an outdated and inefficient High Cost program into the
Connect America Fund. One specific action the Commission took was to establish a uniform
national framework for information that eligible telecommunications carriers (ETCs) must report
to their respective states and to the Commission to improve accountability from companies
receiving High Cost support to ensure that public investments are used wisely to deliver intended
results.
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• In June 2011, the Commission directed USAC to initiate in-depth data validations (IDVs) to
eliminate duplicative Lifeline support. As of September 30, 2012, USAC has completed
duplicate IDVs in 19 states. Overall, USAC analyzed more than 7 million Lifeline subscriber
records. Among these, approximately 630,000 or 8% were duplicates, i.e., subscribers who
received Lifeline service from more than one eligible telecommunications carrier. These
subscribers were notified and were asked to select a single Lifeline provider. The carrier that was
not selected as the consumer’s Lifeline service provider was required to de-enroll that consumer
from Lifeline-discounted service. In total, USAC has directed carriers to de-enroll more than
700,000 accounts. This action will result in a savings to the federal Universal Service Fund of
$6.8 million per month, or $82 million annually.
• In response in part to recommendations from the GAO and the Federal-State Joint Board
Recommended Decision, the Commission adopted several specific measures to improve program
integrity and ensure that the Lifeline program is meeting its objectives, including performance
goals and measures, revised certification and verification rules, and revised audit requirements.
• In the Lifeline Reform Order, the Commission directed USAC to transition the Lifeline program
from projected disbursements to actual disbursements. The transition to actual disbursements
was completed in October 2012.

• The USAC internal controls team continued the required internal control related documentation
and testing to ensure the company’s internal controls program and internal controls framework
are in compliance with best practices consistent with the internal controls process defined in
OMB Circular No. A-123. Corrective action plans have been developed by the Commission and
USAC, and are currently being implemented to remediate all identified control deficiencies.

• USAC increased the number of employees and resources dedicated to review audit findings and
seek recovery of improper payments.

• Under the Commission’s oversight and review, USAC has conducted extensive and multiple
training sessions and webinars to educate program beneficiaries about program rules and other
requirements.

Efforts to Reduce Future Improper Payments in TRS program

During the past fiscal year, the
Commission has increased efforts to improve the TRS program and has taken the following steps to
strengthen the TRS program administration:

• The TRS Fund administrator has calculated a baseline error rate for improper payments under an
alternative statistical sampling methodology consistent with OMB Circular No. A-123, and in
coordination with OMB. This is the first year that the TRS Fund must calculate a baseline error
rate. Therefore, the plan includes a robust testing of internal controls. The following attributes
were tested for 100% of distributions for the period of July 1, 2011 through June 30, 2012. This
included 148 distributions to service providers, totaling $606,856,572.86. The resulting error rate
for improper payments is 0%.

• In addition, the TRS Fund Administrator is currently conducting compliance audits of all service
providers eligible to receive reimbursement from the TRS Fund. Each audit will be a risk-based
performance audit driven by the inherent risks for the service provider and service category. The
Commission will follow up on all findings and recommendations to improve the TRS program in
order to reduce improper payments to providers due to issues of waste, fraud, and abuse, rather
than issues with the internal controls of the administrator.

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• For FY 2012, OIG issued ten audit reports of TRS Fund Program Video Relay Service (VRS)
providers conducted by an independent audit firm. The objective of these audits was to determine
whether the cost data submitted by VRS providers to the TRS Fund Administrator for calendar
years 2008, 2009, and 2010 were in compliance with the Commission’s rules and supported by
adequate documentation. The audits found that the VRS providers did not fully comply with the
applicable rules and regulations, however, no monetary recovery was recommended because the
amount was determined to be de minimus. Corrective actions have been taken by the VRS
providers to report true and accurate data, and the Commission staff continues to implement
structural reforms in the TRS Fund Program. Moreover, OIG has completed five more audits of
VRS providers that focus on the use of VRS revenue received by providers to determine whether
funds were spent on activities and cost objectives that were related to the VRS program. The
Commission intends to follow up on these audits as well.

• On October 17, 2011, the Commission released a Memorandum Opinion and Order, Order, and
Further Notice of Proposed Rulemaking clarifying and further strengthening the certification
process for VRS provider applicants (FCC 11-155).

• On June 29, 2012, the Commission released a Report and Order to curb the misuse of Internet
Protocol Relay Service (IP Relay). Specifically, the Commission now prohibits IP Relay
providers from handling non-emergency calls made by new IP Relay registrants prior to taking
reasonable measures to verify their registration information (FCC 12-71).

• In addition, the U.S. Department of Justice has successfully prosecuted multiple individuals for
fraudulent submissions to the TRS Fund for payment. As of September 4, 2012, 13 individuals
and one corporation have been sentenced to penalties including jail, probation, and $80.5 million
dollars in restitution to be paid to the U.S. government. Several other defendants have been
similarly convicted and are awaiting sentencing.


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IV. IMPROPER PAYMENT REPORTING


Table 1 below reports the initial baseline improper payment rate for USF-HC, USF-S&L and TRS
programs. As required by OMB reporting and reported in Table 1 below, the Commission provided the
fiscal year outlays (CY Outlays) by each of the programs deemed to be susceptible to significant improper
payments.

Table 1 Improper Payment Reduction Outlook

(Dollars in thousands)

Program or Activity

USF-HC

USF-S&L

TRS

PY Outlays
n/a
n/a
n/a
PY IP%
n/a
n/a
n/a
PY IPS
n/a
n/a
n/a
CY Outlays
$4,087,770
$2,224,878
$713,000
CY IP%
.30%
1.91%
0.0%
CY IP$
$12,611
$43,354
-
CY Overpayment $
$11,722
$43,354
-
CY Underpayment $
$889
-
-
CY+1 Est. Outlays
$4,226,400
$2,247,600
n/a
CY+1 IP%
.30%
1.91%
n/a
CY+1 IP$
$12,679
$42,929
n/a
CY+2 Est. Outlays
$4,873,400
$2,324,900
n/a
CY+2 IP%
.30%
1.91%
n/a
CY+2 IPS
$14,620
$44,406
n/a
CY+3 Est. Outlays
$4,808,400
$2,249,600
n/a
CY+3 IP%
.30%
1.91%
n/a
CY+3 IPS
$14,425
$42,967
n/a

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V. RECAPTURE OF IMPROPER PAYMENTS REPORTING



The following discussion is a summary of the Commission’s payment recapture audits for FY 2012 for
programs with over $1 million in annual outlays.

USF
In the previous FCC USF audit program, a dual-objective audit approach was utilized which tested
beneficiary compliance with FCC rules and simultaneously addressed the requirements of the IPIA. The
FCC has since directed USAC to separate the two objectives into distinct programs – one focused on
improper payment assessment (known as the Payment Quality Assurance program, or PQA, and
described further below under “Other Efforts”) and the second on auditing compliance with all four USF
programs. The program summarized below outlines the payment recapture audit program (called the
Beneficiary and Contributor Audit Program, or BCAP) designed to evaluate USF beneficiary and
contributor compliance with FCC rules. The FY2012 BCAP was developed with the following
objectives:


Covering all four USF programs and contributors;

Tailoring audit type and scope to program risk elements, size of disbursement, audit
timing, and other specific factors (i.e., recognizing that the programs and beneficiary
types are different; the audits do not adopt a “one size fits all” approach);

Keeping costs of the program reasonable in relation to overall program disbursements, to
the amounts disbursed to beneficiary being audited, and as a part of USF administrative
costs;

Spreading audits throughout the year to balance workload, improve efficiencies, control
costs, reduce unnecessary burdens on beneficiaries, and maintain a pool of trained
auditors; and

Retaining capability and capacity for targeted and risk-based audits to be conducted as
recommended by USAC management, the FCC, and/or law enforcement entities.

USAC has examined the results of the audits and assessment programs conducted for FY 2012 and has
implemented a corrective action plan in response to any findings and consistent with OMB Circular No.
A-123 and OMB Circular No. A-50 (provides policies and procedures for use by executive agencies when
considering reports issued by the Inspectors General, other executive branch audit organizations, the
General Accounting Office, and non-Federal auditors where follow up is necessary). In addition, USAC
has incorporated the lessons learned from each recommendation into future audit and assessment efforts.
USAC also is ensuring that auditors receive proper training on the telecommunications industry and the
USF rules and requirements.

Completed FY 2012 Payment Recapture Audits
The FCC and USAC continued to examine audits and
provided recommendations on how to mitigate conditions giving rise to overpayments in the USF for FY
2012. The USAC Internal Audit group continued to perform targeted and randomly selected independent
audits. Specifically, USAC has completed 83 audits in FY 2012, of which 34 involved overpayments. Of
these, the auditor has identified $3,352,607 to be recovered. USAC has completed recoveries from 13 of
the 34 audits, and is in the process of recovering the remainder.

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Below are the number of audits performed and the estimated recovery amounts, by program:


Program / Area

# Audits
# Audits with

Estimated Recovery

Overpayments

High Cost
19
11
$286,235
Schools and Libraries
29
15
$3,062,835
Lifeline
25
8
$3,537
Rural Health Care
10
0
$0

Total

83
34
$3,352,607


FY 2012 USF Admin Outlays
USAC is an independent, not-for-profit corporation designated as the
administrator of the USF by the FCC. Each year, an independent audit of USAC is conducted to
determine, among other things, whether USAC is properly administering the Universal Service Fund to
prevent waste, fraud, and abuse. Included in this examination is whether any overpayments have been
made concerning fund administration. Examination of the 2011 calendar year audit continues to
demonstrate that USAC Administrative (Admin) outlays are low-risk and there were no findings of
improper payments. In addition, the Commission closely follows the USAC Admin outlays through
review of USAC’s quarterly program demand filings and monthly administrative expense statements. In
response to these findings and other reviews performed by the Commission, the Commission continues to
examine whether it is cost effective pursuant to OMB Circular No. A-123 to conduct a payment recapture
audit of USAC Admin outlays. Finally, as required by law, the Commission reviews each of its programs
to identify whether they are susceptible to significant improper payments, to determine whether there has
been any significant change in legislation, and whether there has been any significant increase in the
funding levels. If any of these situations occurs next fiscal year, the Commission will perform the
required risk assessment prior to the FY 2014 three year cycle. USAC Admin outlays for FY 2012
totaled approximately $106 million compared to $101 million for FY 2011.

TRS

The TRS Fund compensates telecommunications relay service providers for the reasonable costs of
offering services, in compliance with Commission rules, that enable individuals who are deaf, blind, or
have a hearing or speech disability to communicate in a manner that is functionally equivalent to voice
telephone users. RLSA, the TRS Fund Administrator, appointed by the FCC and under its oversight, is
responsible for the collections and disbursements from the TRS Fund.

For FY 2012, the FCC Office of Inspector General (OIG) issued ten audit reports of TRS Fund Program
Video Relay Service (VRS) providers conducted by an independent audit firm. The objective of these
audits was to determine whether the cost data submitted by VRS providers to the TRS Fund
Administrator for calendar years 2008, 2009, and 2010 were in compliance with Commission’s rules and
supported by adequate documentation. The audits found that the VRS providers did not fully comply
with the applicable rules and regulations, however, no monetary recovery was recommended because the
amount was determined to be de minimus. In general, corrective actions have been taken by the VRS
providers to report true and accurate data, and the Commission staff continues to implement structural
reforms in the TRS Fund Program. Moreover, OIG has completed five more audits of VRS providers that
focus on the use of VRS revenue received by providers to determine whether funds were spent on
activities and cost objectives that were related to the VRS program.

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In addition, RLSA is currently conducting compliance audits of all service providers eligible to receive
reimbursement from the TRS Fund. These audits plan to test compliance with Commission rules
concerning the TRS program. In addition, each audit will be a risk-based performance audit driven by the
inherent risks for the service provider and service category. The Commission will follow up on all
findings and recommendations to improve the TRS program in order to reduce improper payments to
providers due to issues of waste, fraud, and abuse.

The TRS Fund administrator successfully recovered $1,711,339.07 (deposited in the TRS Fund June 26,
2012) from a settlement in a bankruptcy proceeding of one of the service providers. In addition, as of
September 2012 the administrator has withheld $24,728,468.92 in payments to providers pending
additional documentation supporting claims for payment.

TRS outlays for FY 2012 totaled approximately $713 million.

NANP

NANP is the basic numbering scheme permitting interoperable telecommunications services
within the U.S., Canada, Bermuda, and most of the Caribbean. Neustar administers NANP and Welch
LLP is the billing and collection agent. In FY 2012, an independent auditor conducted a financial
statement audit which examined transactions incurred by the NANP Fund. Specifically, this audit tested
about $1.1 million or 23 percent of the approximately $4.6 million in expenditures made from the NANP
Fund in FY 2011. Also, an annual Agreed Upon Procedures (AUP) engagement is conducted to assess
internal controls and compliance with the Fund’s requirements and FCC rules. Welch, the billing and
collection agent of the NANP Fund, oversees disbursements for the NANP program, and submits the
NANP Fund audited annual financial statements and AUP reports to the FCC. As a further safeguard, as
part of its internal control measures, each transaction is reviewed by the paying agent for completeness
and ensures compliance with FCC requirements and relevant regulations. Moreover, disbursements to
Neustar and other service providers require approval by the FCC contracting officer. Welch tested 64%
of the transactions for improper payments for FY 2012 and found no improper payments made during the
period. Inasmuch as the disbursements are based on fixed price contract awards by the Commission, and
based on the above audit, AUP, additional safeguards and assessments, the NANP fund was determined
to be a low risk program with no identified overpayments for FY 2011 and FY 2012. At present, it is not
cost effective to conduct a payment recapture audit pursuant to OMB Circular No. A-123; however, the
Commission staff continues to monitor the situation. NANP Fund outlays for FY 2012 totaled
approximately $5.4 million.

FCC Operating Expenses

Overseen by the Office of Managing Director (OMD), the FCC’s operating
expenses are separated into two categories, Compensation and Benefits, and Non-salary or Operating
Expenses. Each year an independent audit is performed for the FCC’s financial statements. For FY 2012,
FCC operating expenses continue to be low risk with no identified overpayments. Based on these
findings, the Commission will continue to examine whether it is cost effective pursuant to OMB Circular
No. A-123 to conduct payment recapture audits. As required by law, the Commission conducted a risk
assessment in FY 2011 in accordance with OMB Circular No. A-123 guidance. It was determined that
this program is not susceptible to significant improper payments. In addition, there were no significant
changes in legislation and no significant increase in the funding level for this program. If either of the
two situations occurs next fiscal year, the Commission will perform the required risk assessment prior to
the FY 2014 three year cycle. FCC Non-salary Operating Expenses for FY 2012 totaled approximately
$179.7 million compared to last year’s expenses of $111 million.
In FY 2012, FCC staff conducted a quality control examination to ensure that operating expenses
continue to be a low risk program. Under this examination, FCC staff selected 50 transactions for review
through a random sample generated program. The sample that the staff used came from a universe of
35,525 non-salaries or operating expenses that were recorded on the FCC’s books in FY 2012. This
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review was conducted to determine if segregation of duties were followed according to FCC policy, if the
prompt payment rules were followed, if purchase orders were approved and matched the transactions
selected, if the service was rendered for the service paid, if payments were made that should not have
been made, and if payment was made in error to a duplicate vender.

As part of this review, the FCC staff used the formula included in OMB Circular No. A-123, Appendix C,
to determine if compliance was met in its review of its operating expenses. The results of this quality
control examination concluded that the improper payment rate for the FCC’s Non-salary Operating
Expenses is less than 2.5%, that the FCC’s Disbursement Program should remain low risk, and that it is in
compliance with all applicable laws and the Office of Management and Budget’s (OMB) guidance,
including the President’s Executive Order. Further, the FCC is considering contracting with an auditing
firm that specializes in payment recapture audits. These audits would be based on a contingency
arrangement in which a portion of the recovered amount compensates the auditing firm.

Payment Recapture Audit Reporting

The Commission reports in Table 2 the results of FY 2012
payment recapture audits, and also reports prior year payment recapture audits for FY 2004 through FY
2011 as prior year results. Also, Table 2 provides for the dollar amounts for the High Cost (HC), Lifeline
(LI), Rural Health Care (RHC), and Schools and Libraries (S&L) programs in terms of calendar year
while the dollar amounts for USF Admin, TRS, NANP, and FCC Operating are reported as fiscal year
amounts. For the High Cost program, the current year recovery rate is low primarily due to amounts on
appeal. Estimates for future recoveries are based upon historical rates and the fact that some findings will
be overturned on appeal. For the S&L program, low current year recovery rates are due to the high
percentage of audit findings on appeal or undergoing the commitment adjustment process.




























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Table 2 Payment Recapture Audit Reporting

(Dollars in thousands)

Program or

USF-HC

USF-

USF-

USF-S&L

USF-

TRS

NANP

FCC

Activity

Lifeline

RHC

Admin

Type of Payment
Benefit
Benefit
Benefit
Benefit
Other
Benefit
Contract
Other
(contract, grant,
benefit, loan, or other)
Amount Subject to
$4,087,770
$2,072,570
$159,812
$2,224,878
$106,000 $713,000
$5,400 $179,711
Review for CY
Reporting
Actual Amount
$28,031
$2,651
$2,483
$2,486
-
-
-
-
Reviewed and
Reported (CY)
Amount Identified for
$286
$3
-
$3,063
-
-
-
-
Recovery (CY)
Amount Recovered
$8
$.552
-
$50
-
-
-
-
(CY)
% of Amount
2.91%
15.61%
0.0%
1.62%
0.0%
0.0%
0.0%
0.0%
Recovered out of
Amount Identified
(CY)
Amount Outstanding
$278
$3
-
$3,013
-
-
-
-
(CY)
% of Amount
97.09%
84.39%
-
98.38%
0.0%
0.0%
0.0%
0.0%
Outstanding out of
Amount Identified
(CY)
Amount Determined
-
-
-
-
-
-
-
-
Not to be Collectable
(CY)
% of Amount
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Determined Not to be
Collectable out of
Amount Identified
(CY)
Amounts Identified
$113,664
$10,059
$149
$65,022
-
-
-
-
for Recovery (PYs)
Amounts Recovered
$78,597
$934
$147
$22,003
-
-
-
-
(PYs)
Cumulative Amounts
$113,950
$10,063
$149
$68,085
-
-
-
-
Identified for
Recovery (CY + PYs)
Cumulative Amounts
$78,605
$935
$147
$22,053
-
-
-
-
Recovered (CY + PYs)
Cumulative Amounts
$35,345
$9,128
$2
$46,032
-
-
-
-
Outstanding (CY+PYs)
Cumulative Amounts
-
-
-
-
-
-
-
-
Determined Not to be
Collectable (CY+PYs)
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The Commission is currently establishing targets for the payment recapture audit program. Listed below
in Table 3 are the preliminary targets for the program using historical results.

Table 3 Payment Recapture Audit Targets

(Dollars in thousands)

Program or
Type of
CY
CY
CY
CY+1
CY + 2
CY + 3
Activity
Payment
Amount
Amount
Recovery
Recovery Recovery Recovery
(contract, Identified Recovered
Rate
Rate
Rate
Rate
grant,
(Amount
Target
Target
Target
benefit,
Recovered/
loan, or
Amount
other)
Identified)
USF-HC
Benefit
$286
$8
3%
50%
60%
70%
USF-LI
Benefit
$4
$.552
15.61%
30%
40%
50%
USF-RHC
Benefit
$0
N/A
N/A
N/A%
N/A
N/A
USF-S&L
Benefit
$3,063
$50
1.62%
30%
40%
50%

The Commission reports in Table 4 the aging of its outstanding overpayments from the payment recapture
audits performed in FY 2012.

Table 4 Aging of Outstanding Overpayments

(Dollars in thousands)

Program or
Type of
CY Amount
CY Amount
CY Amount
Activity
Payment
Outstanding
Outstanding
Outstanding
(contract,
(0-6 months)
(6 months to
(over 1 year)
grant, benefit,
1 year)
loan, or other)
USF-HC
Benefit
$21
$257
-
USF-LI
Benefit
$3
-
-
USF-RHC
Benefit
-
-
-
USF-S&L
Benefit
$3,012
-
-








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The Commission reports in Table 5 the disposition of recaptured funds from FY 2012 payment recapture
audits.

Table 5 Disposition of Recaptured Funds

(Dollars in thousands)

Program or
Type of
Agency
Payment
Financial
Original
Office of
Returned
Activity
Payment
Expenses to
Recapture
Management
Purpose
Inspector
to
(contract,
Administer
Auditor
Improvement
General
Treasury
grant,
the Program
Fees
Activities
benefit,
loan, or
other)
USF-HC
Benefit
$553
$4
-
$8
-
-
USF-LI
Benefit
$696
-
-
$.552
-
-
USF-RHC
Benefit
$276
-
-
-
-
-
USF-S&L
Benefit
$801
-
-
$50
-
-















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The Commission reports in Table 6 those improper payments identified through and recovered through
sources other than payment recapture audits. Note, the entry for USF-RHC Non Audits includes dollars
associated with potential overpayments in the Rural Health Care Pilot Program during FY 2010 and 2011.
Although the final determination concerning whether these payments constitute overpayments is pending,
out of an abundance of caution the FCC has included these amounts in Table 6. Following final
determination on this issue, this table may be adjusted in the FY 2013 AFR submission.

Table 6 Overpayments Recaptured Outside of Payment Recapture Audits

(Dollars in thousands)

Source of
Amount
Amount
Amount
Amount
Cumulative
Cumulative
Recovery
Identified
Recovered
Identified
Recovered
Amount
Amount
(CY)
(CY)
(PY)
(PY)
Identified
Recovered
(CY+PYs)
(CY+PYs)
USF-HC IDV
$7
7
-
-
$7
$7
USF-HC PQA
$552
-
$99
$40
$651
$40
USF-LI IDV
-
-
$53
$53
$1,749
$1,749
USF-LI PQA
$62
-
$64
$40
$126
$40
USF-RHC PQA
$46
$7
-
-
$46
$7
USF-RHC Non-
$170
$146
$4,027
$195
$12,234
$1,098
Audits
USF-S&L PQA
$580
$236
$31
$23
$612
$259
USF-S&L Non-
$95,293
$6,325
$37,606
$3,813
$213,622
$19,144
Audits




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VI. ACCOUNTABILITY


The Commission continues to work with USAC’s management to assess the effectiveness of program
management necessary to ensure accountability over USAC’s operations and senior leadership. In prior
years, efforts to implement a performance-based compensation program that links executive
compensation and bonuses to efforts to reduce and prevent improper payments resulted in extensive
discussion and review of the performance criteria used for determination of executive compensation. The
Commission is actively working with USAC’s management to review and assess the effectiveness of
current financial reporting requirements and to further efforts to reduce and prevent improper payments.

VII. AGENCY INFORMATION SYSTEMS AND INFRASTRUCTURE


USF

Under the Commission’s oversight, USAC has expanded outreach designed to prevent the errors
identified in the PQA process from reoccurring, enhanced internal controls and data collection to gain
greater visibility into payment operations, calibrated audit and audit follow-up activities to gain greater
certainty about beneficiary support, and modernized information technology systems to achieve greater
efficiencies and improve reporting capabilities. As discussed above, USAC has also increased the
number of employees and resources to perform reviews of audit findings and recovery of funds.

TRS

As the new TRS administrator, RLSA implemented a payment recapture audit program as part of
its overall program of effective internal control over disbursements. The payment recapture audit
program includes preventive and detective controls to ensure payments are legal, accurate, and consistent
with IPERA. The Commission is working with the TRS administrator to ensure sufficient information
systems and infrastructure is in place to effectively carry out the program.

VIII. BARRIERS


No barriers to be reported at this time.









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Office of the Managing Director



M E M O R A N D U M








DATE:


November 14, 2012

TO:

David L. Hunt, Inspector General

FROM:

David B. Robbins, Managing Director and Mark Stephens, Chief Financial Officer

SUBJECT:

Management’s Response to Inspector General’s Management and Performance
Challenges


Management appreciates the Office of the Inspector General’s (OIG) assessment of the most serious
management challenges facing the Federal Communications Commission (Commission or FCC) for fiscal
year (FY) 2012 and beyond. In its October 12, 2012 memorandum, the OIG identifies several
management challenges facing the Commission. First, OIG states that establishing direction and policy,
managing transition, and ensuring all Universal Serviced Fund (USF) program rules and regulations
contribute to effective and efficient programs is a significant mangament challenge. Second, OIG states
that oversight of the Telecommunications Relay Services (TRS) program remains a significant
management and performance challenge. Third, OIG states that proper implementation, management, and
oversight of new technologies are major challenges at the Commission. Finally, OIG reports that,
although that the FCC’s new core financial management system – GENESIS – has significantly improved
the Commission’s financial reporting structure, the new system did not remedy internal control
weaknesses and non-compliance issues regarding the lack of integration with FCC reporting components
(e.g, universal service fund, TRS, and North American Numbering Plan).

While, as described below, strides have been made in a number of these very important areas,
management concurs with the OIG’s conclusion that these areas remain significant challenges, and will
continue its efforts in the upcoming year to address and resolve these challenges.

First, the Commission continues to work closely in its role as overseer of the Universal Service
Administrative Company (USAC) to monitor its implementation of these and other initiatives. The
Commission also coordinates with state commissions, consumer groups, tribal governments, and
telecommunications providers to provide feedback to better implement its directives. Below is a list of
actions taken by the Commission throughout FY 2012 to address the challenges identified by OIG of
establishing direction and policy, managing transition, and ensuring all USF program rules and
regulations contribute to effective and efficient programs.


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• Completion of 99 audits by USAC, which is indicative of the heavy emphasis that is placed on
resolving management and performance challenges.
• Expansion and intensification of efforts to recapture improper payments. Specifically, the FCC is
implementing a plan which separates improper payment assessment from the USF compliance audit
program, and which both improves and streamlines the audit review process. The revised recapture
plan is consistent with the Improper Payments Elimination and Recovery Act, the Improper Payments
Information Act, and Office of Management and Budget (OMB) guidance. The Commission’s Office
of the Managing Director (OMD) oversees these efforts.
• Examination by USAC, per Commission direction, of the results of the audits and assessment
programs conducted for FY 2012 and implementation of a corrective action plan in response to any
findings, consistent with OMB Circular A-123 and OMB Circular A-50 (provides policies and
procedures for use by executive agencies when considering reports issued by the Inspectors General,
other executive branch audit organizations, the General Accounting Office, and non-Federal auditors
where follow up is necessary).
• Pursuit of wrongdoers who sought to defraud the USF in coordination with USAC and the
Department of Justice (DOJ). In FY 2011, these efforts yielded cash recoveries of approximately
$215,000 and the relinquishing of $400,000 in commitments that had not yet been paid out. The
Commission continues to support DOJ in seeking criminal convictions and civil judgments against
defendants charged with E-rate and other USF fraud. The FY 2012 caseload consisted of several
active cases. In addition, the Commission monitored five parties participating in USF programs
under compliance agreements.

High-Cost
• Adoption of an Order and Further Notice of Proposed Rulemaking (USF/ICC Transformation Order)
that comprehensively reforms and modernizes the high-cost universal service system. The order
adopts fiscally responsible, accountable, incentive-based polices to transition an outdated and
inefficient high-cost program into the Connect America Fund. Among other matters, in the USF/ICC
Transformation Order the Commission took the following action:
o Adoption of the following performance goals in the Commission’s efforts to preserve and
advance service in high cost, rural, and insular areas: (1) preservation and advancement of
universal availability of voice service; (2) ensuring universal availability of modern networks
capable of providing voice and broadband service to homes, businesses, and community
anchor institutions; (3) ensuring universal availability of modern networks capable of
providing mobile voice and broadband service where Americans live, work, and travel; (4)
ensuring that rates are reasonably comparable in all regions of the nation, for voice as well as
broadband services; and (5) minimization of the universal service contribution burden on
consumers and businesses. The Commission also adopted performance measures for the first,
second, and fifth of these goals, and sought comment on measures for the other goals.
o Establishment of a uniform national framework for information that eligible
telecommunications carriers (ETCs) must report to their respective states and to the
Commission, to improve accountability from companies receiving high-cost support to ensure
that public investments are used wisely to deliver intended results. The Commission
modified and extended its existing federal reporting requirements to all ETCs, whether
designated by a state or this Commission, to reflect the new public interest obligations
adopted in the order. The Commission also simplified and consolidated its existing

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certification requirements and adopted new certifications relating to the public interest
obligations adopted in the order
• Adoption of four orders on reconsideration and four orders by the Wireline Competition Bureau
(WCB), subsequent to the USF/ICC Transformation Order, which, among other things, clarified,
amended, and eliminated several high-cost rules. These orders have ensured that the high-cost rules
contribute to an effective and efficient program.
• Completion of the Mobility Fund Phase I auction, in which carriers became eligible to receive nearly
$300 million in one-time support to provide 3G or better mobile voice and broadband services in 31
states.
• Establishment of regularly scheduled coordination meetings with USAC to discuss implementation of
high-cost reforms.
• Increasing the number of staff and managers working on implementing reform of the high-cost
program.

Low Income
• Adoption of the Lifeline Reform Order in January, 2012 to reform and modernize the Lifeline
program. The Order is in response to a November 2010 Federal-State Joint Board Recommended
Decision and subsequent March 2011 Notice of Proposed Rulemaking. The Bureau estimates that the
reforms adopted in the Lifeline Reform Order will save the Universal Service Fund $200 million in
2012.
• Direction to USAC to initiate in-depth data validations (IDVs) to eliminate duplicative Lifeline
support. As of September 30, 2012, USAC has completed duplicate IDVs in 19 states. Overall,
USAC analyzed more than 7 million Lifeline subscriber records. Among these, approximately
630,000 or 8% were duplicates, i.e., subscribers who received Lifeline service from more than one
eligible telecommunications carrier. These subscribers were notified and were asked to select a single
Lifeline provider. The carrier that was not selected as the consumer’s Lifeline service provider was
required to de-enroll that consumer from Lifeline-discounted service. In total, USAC has directed
carriers to de-enroll more than 700,000 consumers. This action will result in a savings to the federal
universal service fund of $6.8 million per month, or $82 million annually.
• Instruction to USAC to continue the IDV process until USAC put in place the National Lifeline
Accountability Database to eliminate duplicative support and prevent incidences of duplicative
support in the future. The database will prevent multiple carriers from receiving support for the same
subscriber and streamline the process of verifying consumers’ initial and ongoing eligibility for the
program, significantly reducing burdens on carriers and improving protections against waste and
fraud. It will also reduce burdens on consumers participating in the program. It is expected that this
database will be operational in FY 2013.
• Adoption, in response to recommendations from the Government Accountability Office (GAO) and
the Federal State Joint Board Recommended Decision, of several specific measures to improve
program integrity and ensuring that the Lifeline program is meeting its objectives including
performance goals and measures, revised certification and verification rules and revised audit
requirements.

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• Direction to USAC, pursuant the Lifeline Reform Order, to transition the Low Income Fund from
projected disbursements to actual disbursements. The transition to actual disbursements was
completed in October 2012.
• Direction to USAC, pursuant to the Lifeline Reform Order, to review and revise the Beneficiary
Contributor Compliance Audit Program (BCAP) and Payment Quality Assurance Program (PQA) to
take into account changes made in the Order.
• Establishment of regularly scheduled coordination meetings with USAC to discuss implementation of
low income reforms.

Schools and Libraries
• Expansion and intensification efforts to resolve outstanding E-rate appeals, resulting in the release of
more than 80 orders addressing almost 700 outstanding appeals.
• Provision of guidance to USAC and E-rate applicants on how schools that are piloting the new
Community Eligibility Option in the National School Lunch Program will qualify for E-rate funding.
• Release of a public notice seeking comment on the bundling of non-eligible products or services with
products or services eligible for E-rate discounts.
• Release of an order in December 2011 clarifying that the Commission’s competitive bidding rules
prohibit applicants from including a particular manufacturer’s name, brand, product or service in an
FCC Form 470 or request for proposals (RFPs) unless they also use the words “or equivalent” in such
a description.
• Release of an order in September 2012, simplifying and clarifying the Eligible Services List for the E-
rate program.
• Issuance by the Commission of five suspension orders and six debarment orders against seven
individuals regarding the E-rate program after they were convicted of engaging in fraud or similar
criminal acts related to the schools and libraries support mechanism.

• Attendance by Commission staff at all eight of the USAC E-rate trainings for applicants and service
providers to ensure that guidance given during the training sessions was consistent with Commission
rules and orders.

• Instruction to USAC, in response to a recommendation from the GAO, to conduct a robust risk
assessment of the E-rate program. The assessment must consider, among other things, the top five
findings from the last five rounds of E-rate audits and their impact on meeting program objectives.
The RFP for the risk assessment is now pending.
• Analyzed the operational support contract for schools and libraries and rural health care programs,
and directed USAC to implement changes to save $4.1 million in administrative costs (about 10% of
the total contract).






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Rural Health Care
• Issuance of a Staff Report evaluating the Rural Health Care Pilot Program in August 2012. The
Commission stated publicly that it expects to issue a Report and Order in the Rural Health Care
reform rulemaking by the end of 2012.

Contributions
• Issuance of a Further Notice of Proposed Rulemaking (FNPRM) seeking comment on various
proposals for reforming the universal service contribution system. The FNPRM included potential
rule changes that would reduce the costs associated with complying with contribution obligations and
promote the transparency and clarity of the contribution system. The FNPRM also sought comment
on ways to improve administration of the contribution system, such as setting performance goals for
timely reporting by contributors and prompt payment of contributions.
• The FNPRM also tees up resolution of various USAC requests for guidance on how to treat certain
service offerings for USF contributions purposes.
• Resolution of several contributor appeals clarifying contribution requirements, including issues
involving revenue reporting for universal service assessment purposes.
• Issuance of five enforcement actions against companies that failed to comply with universal service
filing and contribution payment rules. These actions included issuing a Notice of Apparent Liability
that imposed a monetary forfeiture in excess of $960,000 against Kajeet Inc. and Airlink, LLC. In
addition, the Commission issued a Notice of Apparent Liability imposing a monetary forfeiture in
excess of $1.7 million against Telseven.

• Implementation of two consent decrees with USF contributors Bay Springs, Inc. and Telrite. These
two agreements resulted in $541,000 in voluntary contributions to the U.S. Treasury.

Second, with regard to the significant challenge of oversight of the TRS program, during the past fiscal
year, the Commission has further strengthened its efforts to improve oversight the TRS program, which
include

• Calculation by the TRS Fund administrator of a baseline error rate for improper payments under
an alternative statistical sampling methodology consistent with Circular A-123, and in
coordination with OMB. This is the first year that the TRS Fund must calculate a baseline error
rate. Therefore, the plan includes a robust testing of internal controls. The following attributes
were tested for 100% of distributions for the period of July 1, 2011 through June 30, 2012. This
included 148 distributions to service providers, totaling $606,856,572.86. The resulting error rate
for improper payments is 0%.

• Initiation by the TRS Fund Administrator of compliance audits of all service providers eligible to
receive reimbursement from the TRS Fund. Each audit will be a risk-based performance audit
driven by the inherent risks for the service provider and service category. The Commission will
follow-up on all findings and recommendations to improve the TRS program in order to reduce
improper payments to providers due to issues of waste, fraud, and abuse, rather than issues with
the internal controls of the administrator.


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• Issuance by the OIG for FY 2012 of ten audits reports of TRS Fund Program Video Relay
Service (VRS) providers conducted by an independent audit firm. The objective of these audits
was to determine whether the cost data submitted by VRS providers to the TRS Fund
Administrator for calendar years 2008, 2009, and 2010 were in compliance with Commission’s
rules and supported by adequate documentation. The audits found that the VRS providers did not
fully comply with the applicable rules and regulations, however, no monetary recovery was
recommended because the amount was determined to be de minimus. Corrective actions have
been taken by the VRS providers to report true and accurate data, as well as the Commission staff
continues to implement structural reforms in the TRS Fund Program. Moreover, OIG has
completed five more audits of VRS providers that focus on the use of VRS revenue received by
provider to determine whether funds were spent on activities and cost objectives that were related
to the VRS program. The Commission intends to follow up on these audits as well.

• Release of a Memorandum Opinion and Order, Order, and Further Notice of Proposed
Rulemaking in October 2011, clarifying and further strengthening the certification process for
VRS provider applicants (FCC 11-155).

• Adoption of a Report and Order in June 2012, which curbs the misuse of Internet Protocol Relay
Service (IP Relay). Specifically, the Commission now prohibits IP Relay providers from
handling non-emergency calls made by new IP Relay registrants prior to taking reasonable
measures to verify their registration information (FCC 12-71).

• Prosecution of multiple individuals for fraudulent submissions to the TRS Fund for payment. As
of September 4, 2012, 13 individuals and one corporation have been sentenced to penalties
including jail, probation, and $80.5 million dollars in restitution to be paid to the U.S.
government. Several other defendants have been similarly convicted and are awaiting sentencing.

Third, in addressing the challenges of proper implementation, management, and oversight of new
technologies the Commission continues its efforts to transition to new technologies with proper
implementation, management, and oversight. For example, to effectively and efficiently transition to
Web 2.0, the Commission has, among other things, formed a multi-bureau team to review and assess the
new and developing Web 2.0 technologies, implemented Web 2.0 tools such as blogs, Facebook, Twitter,
and Uservoice to encourage public involvement and feedback, and implemented the use of cloud
computing to help manage costs.

As noted by the OIG, new technologies are not without information security risks. The FCC’s Cyber
Security program must, therefore, keep pace with the adversary’s technological advances or face
egregious harm to its network and reputation. To keep pace, the FCC has developed a comprehensive,
risk-based approach to protect and support our missions, including protections against information
technology (IT) risks associated with cyber security, IT culture change, and technology roll out. Efforts
under this initiative include implementation of an IT audit tracking and accountability system designed to
examine, identify, and correct information security risks. To support this audit tracking and
accountability system, the FCC has also assembled a new IT audit team, including a program manager
with extensive cyber security experience. The FCC has further increased its investment in IT
infrastructure security, programming services security, and cyber security tools, such as data leak
detection and blocking, web surfing blocking, and real time virus protection. Moreover, the FCC has
added to its IT staffing, creating 8 new IT positions and hiring an experienced chief information security
officer to assist with implementing the FCC’s comprehensive cyber security initiatives. In addition, the

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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012





FCC has conducted rigorous cyber security instruction to its employees throughout the year, including
agency-wide training and participation in training events with other agencies, such as the Department of
Homeland Security.

Although, as OIG found, the FCC’s new core financial management system, GENESIS, has significantly
improved the Commission’s financial reporting structure, internal control weaknesses and non-
compliance issues remain concerning the lack of integration with FCC reporting components (e.g.,
Universal Service Fund, Telecommunications Relay Service Fund, and the North American Numbering
Plan) and accounts receivable functionality. Concerning integration with other FCC components, OMD
has made progress in implementing a standard format that each reporting component uses to submit
financial data to the FCC. These files are integrated into Genesis for use in financial reporting. In FY
2013, OMD will increase efforts to develop a reporting solution that will automate the compilation of
financial data in an efficient and effective manner that is compliant with both OMB and GAO standards.
OMD has also continued to make progress in resolving accounts receivable functionality issues related to
Debt Collection Improvement Act (DCIA) compliance. Genesis is now able to create the proper dunning
letters and we are successfully printing and mailing letters that were in our backlog, and will resolve all
outstanding letters by calendar year end. Further, upon completion of testing the Genesis FedDebt file
with the Department of Treasury (Treasury Department), debt referral compliance will be finalized.
Lastly, OMD established a new Agency Location Code solely for the use of FCC reporting components
so their debts can be referred to the Treasury Department in a timely and efficient manner as well.

Management looks forward to working with OIG to continue to address challenges to the Commission’s
operations and to further strengthen the culture of integrity, accountability, and excellence that exists at
the Commission.


David B. Robbins, Managing Director


Mark Stephens, Chief Financial Officer
Office of Managing Director




Office of Managing Director









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FCC AGENCY FINANCIAL REPORT – FISCAL YEAR 2012




Document Outline

  • BROADBAND
  • Infrastructure, innovation and economic success have always been tied together in the United States. Railroads and highways connected people to each other, facilitating commerce, unleashing ingenuity, and fueling economic growth. Telephones did the sa...
  • The U.S. leads in broadband innovation overall, and has regained the lead in mobile, a fast-growing and critically important sector. Our nation has the worlds largest number of 3G subscribers, and thanks to successful FCC auctions and a digital TV tr...
  • CONSUMERS
  • Communications technologies are essential to our economic recovery and long-term competitiveness. Communications technologies are also at the core of consumer products used every day by hundreds of millions of Americans, and every one of those consume...
  • COMPETITION AND INNOVATION
  • CONTINUAL IMPROVEMENT
  • PUBLIC SAFETY AND HOMELAND SECURITY
  • INTERNATIONAL
    • Principal Statements
      • The accompanying notes are an integral part of these statements.
      • The accompanying notes are an integral part of these statements.
      • The accompanying notes are an integral part of these statements.
    • The accompanying notes are an integral part of these statements.
      • REQUIRED SUPPLEMENTARY INFORMATION STATEMENT OF BUDGETARY RESOURCES

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