Climate Change: Opportunities to Reduce Federal Fiscal Exposure

Since 2005, federal funding for disaster assistance is at least $450 billion, including approximately $19.1 billion in supplemental appropriations signed into law on June 6, 2019. In 2018 alone, there were 14 separate billion-dollar weather and climate disaster events across the United States, with a total cost of at least $91 billion, according to the National Oceanic and Atmospheric Administration. The U.S. Global Change Research Program projects that disaster costs will likely increase as certain extreme weather events become more frequent and intense due to climate change.

The costs of recent weather disasters have illustrated the need for planning for climate change risks and investing in resilience. Resilience is the ability to prepare and plan for, absorb, recover from, and more successfully adapt to adverse events, according to the National Academies of Science, Engineering, and Medicine. Investing in resilience can reduce the need for far more costly steps in the decades to come.

Since February 2013, GAO has included Limiting the Federal Government's Fiscal Exposure by Better Managing Climate Change Risks on its list of federal program areas at high risk of vulnerabilities to fraud, waste, abuse, and mismanagement or most in need of transformation. GAO updates this list every 2 years. In March 2019, GAO reported that the federal government had not made measurable progress since 2017 to reduce fiscal exposure to climate change.

This testimony—based on reports GAO issued from October 2009 to March 2019—discusses (1) what is known about the potential economic effects of climate change in the United States and the extent to which this information could help federal decision makers manage climate risks across the federal government, (2) the potential impacts of climate change on the federal budget, (3) the extent to which the federal government has invested in resilience, and (4) how the federal government could reduce fiscal exposure to the effects of climate change.

GAO has made 62 recommendations related to the Limiting the Federal Government’s Fiscal Exposure by Better Managing Climate Change Risks high-risk area. As of December 2018, 25 of those recommendations remained open.

The estimated economic effects of climate change, while imprecise, can convey useful insight about potential damages in the United States. In September 2017, GAO reported that the potential economic effects of climate change could be significant and unevenly distributed across sectors and regions (see figure). This is consistent with the recent findings of the U.S. Global Change Research Program's Fourth National Climate Assessment, which concluded, among other things, that the continued increase in the frequency and extent of high-tide flooding due to sea level rise threatens America's trillion-dollar coastal infrastructure.

Information about the potential economic effects of climate change could inform decision makers about significant potential damages in different U.S. sectors or regions. According to prior GAO work, this information could help decision makers identify significant climate risks as an initial step toward managing them.

The federal government faces fiscal exposure from climate change risks in several areas, including:

Disaster aid: due to the rising number of natural disasters and increasing reliance on federal assistance. GAO has previously reported that the federal government does not adequately plan for disaster resilience. GAO has also reported that, due to an artifically low indicator for determining a jursidiction's ability to respond to disasters that was set in 1986, the Federal Emergency Management Agency risks recommending federal assistance for juridisctions that could recover on their own.

Federal insurance for property and crops: due, in part, to the vulnerability of insured property and crops to climate change impacts. Federal flood and crop insurance programs were not designed to generate sufficient funds to fully cover all losses and expenses. The flood insurance program, for example, was about $21 billion in debt to the Treasury as of April 2019. Further, the Congressional Budget Office estimated in May 2019 that federal crop insurance would cost the federal government an average of about $8 billion annually from 2019 through 2029.

Operation and management of federal property and lands: due to the hundreds of thousands of federal facilities and millions of acres of land that could be affected by a changing climate and more frequent extreme events. For example, in 2018, Hurricane Michael devastated Tyndall Air Force Base in Florida, with a preliminary repair estimate of $3 billion.

The federal budget, however, does not generally account for disaster assistance provided by Congress or the long-term impacts of climate change on existing federal infrastructure and programs. GAO has reported that more complete information about fiscal exposure could help policymakers better understand the trade-offs when making spending decisions.

Further, federal investments in resilience to reduce fiscal exposures have been limited. As GAO has reported, enhancing resilience can reduce fiscal exposure by reducing or eliminating long-term risk to people and property from natural hazards. For example, a 2018 interim report by the National Institute of Building Sciences estimated approximate benefits to society in excess of costs for several types of resilience projects. While precise benefits are uncertain, the report estimated that for every dollar invested in designing new buildings to particular design standards, society could accrue benefits amounting to about $11 on average.

The federal government has invested in individual agency efforts that could help build resilience within existing programs or projects. For example, the National Climate Assessment reported that the U.S. military integrates climate risks into its analysis, plans, and programs. In additon, as GAO reported in March 2019, the Disaster Recovery Reform Act of 2018 could improve resilience by allowing the President to set aside a portion of certain grants for pre-disaster mitigation. However, the federal government has not undertaken strategic government-wide planning to manage climate risks.

GAO's March 2019 High-Risk report identified a number of recommendations GAO has made related to fiscal exposure to climate change. The federal government could reduce its fiscal exposure by implementing these recommendations. Among GAO's key government-wide recommendations are:

Entities within the Executive Office of the President (EOP) should work with partners to establish federal strategic climate change priorities that reflect the full range of climate-related federal activities;

Entities within EOP should use information on potential economic effects from climate change to help identify significant climate risks and craft appropriate federal responses;

Entities within EOP should designate a federal entity to develop and update a set of authoritative climate observations and projections for use in federal decision making, and create a national climate information system with defined roles for federal agencies and certain nonfederal entities; and

The Department of Commerce should convene federal agencies to provide the best-available forward-looking climate information to organizations that develop design standards and building codes to enhance infrastructure resilience.

Thank you for the opportunity to discuss our work on how to limit the  federal government’s fiscal exposure by better managing climate change  risks, an area that has been on our High-Risk List since February 2013.  Addressing climate change risks requires advanced planning and  investment to reduce the need for far more costly steps in the decades to  come, which, as we have previously reported, the federal government is  not well organized to do. The costs associated with recent disasters have  illustrated the need for such planning and investment. In 2018 alone,  there were 14 separate billion-dollar weather and climate disaster events  across the United States, with a total cost of at least $91 billion, according  to the National Oceanic and Atmospheric Administration (NOAA).  Further, on June 6, 2019, a supplemental appropriation of approximately  $19.1 billion was signed into law for recent disasters.

The U.S. Global Change Research Program (USGCRP), which  coordinates and integrates the activities of 13 federal agencies that  research changes in the global environment and their implications for  society, reported in its November 2018 Fourth National Climate  Assessment that climate change is playing a role in the increasing  frequency of some types of extreme weather that lead to the billion-dollar  disasters. These changes include the rise in vulnerability to drought,  lengthening wildfire seasons, and the potential for extremely heavy  rainfall becoming more common in some regions. USGCRP reported in  the prior assessment that the costs of many of these disasters will likely  increase as extreme weather events become more frequent and intense  with climate change.

In my testimony today, I will discuss (1) what is known about the potential  economic effects of climate change in the United States and the extent to  which this information could help federal decision makers manage climate  risks across the federal government, (2) the potential impacts of climate  change on the federal budget, (3) the extent to which the federal  government has invested in resilience to climate change impacts, and (4)  how the federal government could reduce fiscal exposure to the effects of  climate change. My testimony is based on reports we issued from  October 2009 to March 2019. More detailed information on our objectives,  scope, and methodology can be found in those reports.

The work upon which this statement is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Information on the Potential Economic Effects of Climate Change in the United States Could Help Federal Decision Makers Better Manage Climate Risks

We reported in September 2017 that, while estimates of the economic  effects of climate change are imprecise due to modeling and information  limitations, they can convey useful insight into broad themes about  potential damages in the United States. We reported that, according to  the two national-scale studies available at the time that examined the  economic effects of climate change across U.S. sectors, potential  economic effects could be significant and these effects will likely increase  over time for most of the sectors analyzed. For example, for 2020  through 2039, one of the studies estimated from $4 billion to $6 billion in  annual coastal property damages from sea level rise and more frequent  and intense storms. In addition, the national-scale studies we reviewed  and several experts we interviewed for the September 2017 report  suggested that potential economic effects could be unevenly distributed  across sectors and regions. For example, one of the studies estimated  that the Southeast, Midwest, and Great Plains regions will likely  experience greater combined economic effects than other regions, largely  because of coastal property damage in the Southeast and changes in  crop yields in the Midwest and Great Plains (see figure 1). This is consistent with the findings of the Fourth National Climate Assessment.  For example, according to that assessment, the continued increase in the  frequency and extent of high-tide flooding due to sea level rise threatens  America’s trillion-dollar coastal property market and public infrastructure  sector.

As we reported in September 2017, information on the potential economic  effects of climate change could help federal decision makers better  manage climate risks, according to leading practices for climate risk  management, economic analysis we reviewed, and the views of several  experts we interviewed. For example, such information could inform  decision makers about significant potential damages in different U.S.  sectors or regions. According to several experts and our prior work, this  information could help federal decision makers identify significant climate  priorities as an initial step toward managing climate risks. Such a first  step is consistent with leading practices for climate risk management and  federal standards for internal control. For example, leading practices  from the National Academies call for climate change risk management  efforts that focus on where immediate attention is needed. As noted in  our September 2017 report, according to a 2010 National Academies  report, other literature we reviewed, and several experts we interviewed,  to make informed choices, decision makers need more comprehensive  information on economic effects to better understand the potential costs  of climate change to society and begin to develop an understanding of the  benefits and costs of different options for managing climate risks.

The Federal Government Faces Fiscal Exposure from Climate Change Risks, but Does Not Have Certain Information Needed to Help Make Budget Decisions

The federal government faces fiscal exposure from climate change risks  in a number of areas, and this exposure will likely increase over time, as  we concluded in September 2017. In the March 2019 update to our  High-Risk List, we summarized our previous work that identified several  of these areas across the federal government, including programs related  to the following:

Disaster aid. The rising number of natural disasters and increasing  reliance on federal assistance are a key source of federal fiscal  exposure, and this exposure will likely continue to rise. Since 2005,  federal funding for disaster assistance is at least $450 billion. In  September 2018, we reported that four hurricane and wildfire  disasters in 2017 created an unprecedented demand for federal  disaster resources and that hurricanes Harvey, Irma, and Maria  ranked among the top five costliest hurricanes on record.  Subsequently, the fall of 2018 brought additional catastrophic  disasters such as Hurricanes Florence and Michael and devastating  California wildfires, with further needs for federal disaster assistance.  Disaster costs are projected to increase as certain extreme weather  events become more frequent and intense due to climate change—as  observed and projected by USGCRP. In July 2015, we reported that  the federal government does not adequately plan for disaster  resilience and that most federal funding for hazard mitigation is  available after a disaster. In addition, our prior work found that the  Federal Emergency Management Agency’s (FEMA) indicator for  determining whether to recommend that a jurisdiction receive disaster  assistance—which was set in 1986—is artificially low because it does  not accurately reflect the ability of state and local governments to  respond to disasters. Without an accurate assessment of a  jurisdiction’s capability to respond to a disaster without federal  assistance, we found that FEMA runs the risk of recommending that  the President award federal assistance to jurisdictions that have the  capability to respond and recover on their own.

Federal insurance for property and crops. The National Flood  Insurance Program (NFIP) and the Federal Crop Insurance  Corporation are sources of federal fiscal exposure due, in part, to the  vulnerability of the insured property and crops to climate change.  These programs provide coverage where private markets for  insurance do not exist, typically because the risk associated with the  property or crops is too great to privately insure at a cost that buyers  are willing to accept. From 2013 to 2017, losses paid under NFIP and  the federal crop insurance program totaled $51.3 billion. Federal  flood and crop insurance programs were not designed to generate  sufficient funds to fully cover all losses and expenses, which means  the programs need budget authority from Congress to operate. The  NFIP, for example, was about $21 billion in debt to the Treasury as of  April 2019. Further, the Congressional Budget Office estimated in  May 2019 that federal crop insurance would cost the federal  government an average of about $8 billion annually from 2019  through 2029.

Operation and management of federal property and lands. The  federal government owns and operates hundreds of thousands of  facilities and manages millions of acres of land that could be affected  by a changing climate and represent a significant federal fiscal  exposure. For example, the Department of Defense (DOD) owns and  operates domestic and overseas infrastructure with an estimated  replacement value of about $1 trillion. In September 2018, Hurricane  Florence damaged Camp Lejeune and other Marine Corps facilities in  North Carolina, resulting in a preliminary Marine Corps repair estimate  of $3.6 billion. One month later, Hurricane Michael devastated Tyndall  Air Force Base in Florida, resulting in a preliminary Air Force repair  estimate of $3 billion and upwards of 5 years to complete the work. In  addition, we recently reported that the federal government manages  about 650 million acres of land in the United States that could be  vulnerable to climate change, including the possibility of more  frequent and severe droughts and wildfires. Appropriations for  federal wildland fire management activities have increased  considerably since the 1990s, as we and the Congressional Research  Service have reported.

Although the federal government faces fiscal exposure from climate  change across the nation, it does not have certain information needed by  policymakers to help understand the budgetary impacts of such  exposure. We have previously reported that the federal budget  generally does not account for disaster assistance provided by  Congress—which can reach tens of billions of dollars for some  disasters—or the long-term impacts of climate change on existing federal  infrastructure and programs. For Example, as we reported in April 2018,  the Office of Management and Budget’s (OMB) climate change funding  reports we reviewed did not include funding information on federal  programs with significant fiscal exposures to climate change identified by  OMB and others—such as domestic disaster assistance, flood insurance,  and crop insurance. A more complete understanding of climate change  fiscal exposures can help policymakers anticipate changes in future  spending and enhance control and oversight over federal resources, as  we reported in October 2013. For budget decisions for federal programs  with fiscal exposure to climate change, we found in the April 2018 report  that information that could help provide a more complete understanding  would include: (1) costs to repair, replace, and improve the weather- related resilience of federally-funded property and resources; (2) costs for  federal flood and crop insurance programs; and (3) costs for disaster  assistance programs, among other identified areas of fiscal exposure to  climate change. To help policymakers better understand the trade-offs  when making spending decisions, we recommended in the April 2018  report that OMB provide information on fiscal exposures related to climate  change in conjunction with future reports on climate change funding.

Federal Investments in Resilience to Climate Change Impacts Have Been Limited

Although the federal government faces fiscal exposure to climate change,  its investments in resilience to climate change impacts have been limited.  One way to reduce federal fiscal exposure is to enhance resilience by  reducing or eliminating long-term risk to people and property from natural  hazards. For example, in September 2018 we reported that elevating  homes and strengthened building codes in Texas and Florida prevented  greater damages during the 2017 hurricane season. In addition, one  company participating in a 2014 forum we held on preparing for climate- related risks noted that for every dollar it invested in resilience efforts, the  company could prevent $5 in potential losses. Finally, a 2018 interim  report by the National Institute of Building Sciences examined a sample of  federal grants for hazard mitigation. The report estimated approximate  benefits to society (i.e., homeowners, communities, etc.) in excess of  costs for several types of resilience projects through the protection of  lives and property, and prevention of other losses. For example, while  precise benefits are uncertain, the report estimated that for every grant  dollar the federal government spent on resilience projects, over time,  society could accrue benefits amounting to the following:

About $3 on average from projects addressing fire at the wildland  urban interface, with most benefits (69 percent) coming from the  protection of property (i.e., avoiding property losses).

About $5 on average from projects to address hurricane and tornado  force winds, with most benefits (89 percent) coming from the  protection of lives. This includes avoiding deaths, nonfatal injuries,  and causes of post-traumatic stress.

About $7 on average from projects that buy out buildings prone to  riverine flooding, with most benefits (65 percent) coming from the  protection of property.

The interim report also estimated that society could accrue benefits  amounting to about $11 on average for every dollar invested in designing  new buildings to meet the 2018 International Building Code and the 2018  International Residential Code—the model building codes developed by  the International Code Council—with most benefits (46 percent) coming  from the protection of property.

We reported in October 2009 that the federal government’s activities to  build resilience to climate change were carried out in an ad hoc manner  and were not well coordinated across federal agencies. Federal  agencies have included some of these activities within existing programs  and operations—a concept known as mainstreaming. For example, the  Fourth National Climate Assessment reported that the U.S. military  integrates climate risks into its analysis, plans and programs, with  particular attention paid to climate effects on force readiness, military  bases, and training ranges. However, according to the Fourth National  Climate Assessment, while a significant portion of climate risk can be  addressed by mainstreaming, the practice may reduce the visibility of  climate resilience relative to dedicated, stand-alone approaches and may  prove insufficient to address the full range of climate risks.

In addition, as we reported in March 2019, the Disaster Recovery Reform  Act of 2018 (DRRA) was enacted in October 2018, which could improve  state and local resilience to disasters. DRRA, among other things, allows  the President to set aside, with respect to each major disaster, a  percentage of the estimated aggregate amount of certain grants to use for  pre-disaster hazard mitigation and makes federal assistance available to  state and local governments for building code administration and  enforcement. However, it is too early to tell what impact the  implementation of the act will have on state and local resilience.

The federal government has made some limited investments in resilience  and DRRA could enable additional improvements at the state and local  level. However, we reported in September 2017 that the federal  government had not undertaken strategic government-wide planning to  manage significant climate risks before they become fiscal exposures.  We also reported in July 2015 that the federal government had no  comprehensive strategic approach for identifying, prioritizing, and  implementing investments for disaster resilience. As an initial step in  managing climate risks, most of the experts we interviewed for the  September 2017 report told us that federal decision makers should  prioritize risk management efforts on significant climate risks that create  the greatest fiscal exposure. However, as we reported in our March  2019 High-Risk List, the federal government had not made measurable  progress since 2017 to reduce fiscal exposure in several key areas that  we have identified. The High-Risk List identified Limiting the Federal  Government’s Fiscal Exposure by Better Managing Climate Change  Risks as an area needing significant attention because the federal  government has regressed in progress toward one of our criterion for  removal from the list.

The Federal Government Could Reduce Its Fiscal Exposure by Focusing and Coordinating Federal Efforts

As we reported in March 2019, the federal government could reduce its  fiscal exposure to climate change by focusing and coordinating federal  efforts. However, the federal government is currently not well organized  to address the fiscal exposure presented by climate change, partly  because of the inherently complicated and crosscutting nature of the  issue. We have made a total of 62 recommendations related to limiting  the federal government’s fiscal exposure to climate change over the  years, 12 of which have been made since February 2017. As of  December 2018, 25 of these recommendations remained open. In  describing what needs to be done to reduce federal fiscal exposure to  climate change, our March 2019 High-Risk report discusses many of the  open recommendations. Implementing these recommendations could  help reduce federal fiscal exposure. Several of them, including those  highlighted below, identify key government-wide efforts needed to help  plan for and manage climate risks and direct federal efforts toward  common goals, such as improving resilience:

Develop a national strategic plan: In May 2011, we recommended  that appropriate entities within the Executive Office of the President  (EOP), including OMB, work with agencies and interagency  coordinating bodies to establish federal strategic climate change  priorities that reflect the full range of climate-related federal activities,  including roles and responsibilities of key federal entities.

Use economic information to identify and respond to significant  climate risks: In September 2017, we recommended that the  appropriate entities within EOP use information on the potential  economic effects of climate change to help identify significant climate  risks facing the federal government and craft appropriate federal  responses. Such federal responses could include establishing a  strategy to identify, prioritize, and guide federal investments to  enhance resilience against future disasters.

Provide decision makers with the best available climate  information: In November 2015, we reported that federal efforts to  provide information about climate change impacts did not fully meet  the climate information needs of federal, state, local, and private  sector decision makers, which hindered their efforts to plan for climate  change risks. We reported that these decision makers would benefit  from a national climate information system that would develop and  update authoritative climate observations and projections specifically  for use in decision-making. As a result, we recommended that EOP  (1) designate a federal entity to develop and periodically update a set  of authoritative climate observations and projections for use in federal  decision-making, which other decision makers could also access; and  (2) designate a federal entity to create a national climate information  system with defined roles for federal agencies and nonfederal entities  with existing statutory authority.

Consider climate information in design standards: In November  2016, we reported that design standards, building codes, and  voluntary certifications established by standards-developing  organizations play a role in ensuring the resilience of infrastructure to  the effects of natural disasters. However, we reported that these  organizations faced challenges to using forward-looking climate  information that could help enhance the resilience of infrastructure. As  a result, we recommended in the November 2016 report that the  Department of Commerce, acting through the National Institute of  Standards and Technology—which is responsible for coordinating  federal participation in standards organizations—convene federal  agencies for an ongoing government-wide effort to provide the best  available forward-looking climate information to standards-developing  organizations for their consideration in the development of design  standards, building codes, and voluntary certifications.

In conclusion, the effects of climate change have already and will  continue to pose risks that can create fiscal exposure across the federal  government and this exposure will continue to increase. The federal government does not generally account for such fiscal exposure to  programs in the budget process nor has it undertaken strategic efforts to  manage significant climate risks that could reduce the need for far more  costly steps in the decades to come. To reduce its fiscal exposure, the  federal government needs a cohesive strategic approach with strong  leadership and the authority to manage risks across the entire range of  related federal activities. The federal government could make further  progress toward reducing fiscal exposure by implementing the  recommendations we have made.

Chairman Yarmuth, Ranking Member Womack, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.

If you or your staff have any questions about this testimony, please  contact me at (202) 512-3841or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony are J. Alfredo Gómez (Director), Joseph Dean Thompson  (Assistant Director), Anne Hobson (Analyst in Charge), Celia Mendive,  Kiki Theodoropoulos, Reed Van Beveren, and Michelle R. Wong.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

There were 14 separate billion-dollar weather and climate disaster events in the U.S. in 2018—with a total cost of at least $91 billion. These costs will likely rise as the climate changes, researchers say. The federal government’s fiscal exposure from climate change is on our High Risk List.

We testified about potential budget impacts from climate change and how the government can reduce fiscal exposure, among other things. Climate change could damage federal property and increase the cost of disaster aid and some property and crop insurance. One way to reduce fiscal exposure is to establish federal strategic climate change priorities.


Telecommunications: FCC Should Take Additional Action to Manage Fraud Risks in Its Program to Support Broadband Service in High-Cost Areas

The Universal Service Fund's high-cost program provides financial support to telecommunications carriers in areas where the cost to provide broadband is high. Through this program, FCC provides about $2.5 billion in annual support payments to rate-of-return carriers. The manner in which FCC currently provides the support payments to some of these carriers is prone to fraud risks. A prior case involved a rate-of-return carrier that received at least $27 million in improper payments from the program.

GAO was asked to review funding reforms and fraud controls FCC has implemented for rate-of-return carriers. This report examines the extent to which FCC: (1) has implemented funding reforms specific to rate-of-return carriers, and (2) is managing fraud risks for the high-cost program in accordance with leading practices. GAO reviewed FCC's and USAC's procedures, relevant regulations, and guidance, and assessed these documents against applicable criteria, including federal internal-control standards, FCC's strategic plan, and GAO's fraud risk framework. GAO interviewed FCC and USAC officials, in addition to industry and other stakeholders representing a variety of non-generalizable viewpoints.

The Federal Communications Commission (FCC) has implemented several funding reforms for small, rural telecommunications carriers—referred to as “rate-of-return carriers”—receiving high-cost program support. These reforms are aimed at controlling the program's expenditures and incentivizing efficient broadband deployment. According to FCC's strategic plan, FCC must ensure the high-cost program is well managed, efficient, and fiscally responsible. One of the reforms that GAO reviewed established a funding mechanism for the carriers whereby FCC determines the level of financial support to provide the carriers based on cost and revenue estimates produced by a model. Stakeholders told GAO that this model-based funding mechanism is less prone to fraud risks than the traditional cost-accounting funding mechanism, which reimburses carriers for their reported costs. However, FCC did not make use of this reform mandatory and a substantial number of rate-of-return carriers continue to receive support from the traditional funding mechanism. FCC officials said they developed the model-based funding mechanism in consultation with industry stakeholders. However, FCC officials said they did not have plans to assess the accuracy of cost estimates from the model, which has been in use for several years, or require carriers to receive model-based support as a way to reduce fraud risks. By assessing the model, FCC would have greater assurance that it is producing reliable cost estimates and be better positioned to determine whether to make its use mandatory.

FCC has some policies and processes in place to manage fraud risks for the high-cost program. For example, the Universal Service Administrative Company (USAC)—the not-for-profit corporation that administers the program—reviews and audits rate-of-return support payments and forwards potential fraud cases to FCC's Office of Inspector General and Enforcement Bureau for further investigation. FCC is also developing a data-analytics tool to help detect fraud, and in August 2019 launched a new Fraud Division to focus on investigating fraud in the Universal Service Fund's programs. However, FCC's efforts do not fully align with some elements of GAO's fraud risk framework, including:

designing and implementing an antifraud strategy for the program.

Without regular fraud-risk assessments of the high-cost program, FCC has no assurance that it has fully considered important fraud risks, determined its tolerance for risks that could be lower priorities, or made sound decisions on how to allocate resources to respond to fraud risks. Not doing so could result in FCC compensating carriers for improper, ineligible, or inflated costs. Furthermore, in the absence of an antifraud strategy, FCC has little assurance that it can prevent or detect the types of documented rate-of-return carrier misconduct that have previously occurred. Designing and implementing an antifraud strategy that conforms to leading practices would help FCC effectively manage and respond to the fraud risks identified during the fraud-risk assessments.

GAO is making five recommendations, including that FCC should assess the model-based support mechanism and consider making its use mandatory, and implement an antifraud strategy for the high-cost program. FCC stated it would take steps to implement these recommendations.

Broadband service is a critical component of the nation’s infrastructure  and a key driver of economic growth, yet not all areas of the country have  service. To help ensure that consumers in rural, insular, and high-cost  areas have access to modern communications networks capable of  providing broadband service, the Federal Communications Commission  (FCC) has a program that provides approximately $4.5 billion annually to  eligible telecommunications carriers that offer services in these areas.  This program is referred to as the Universal Service Fund (USF) high-cost  program, and the program funding that the carriers receive is referred to  as “support.”

One type of carrier that receives support for providing broadband in high- cost areas is a “rate-of-return carrier”—small, rural carriers that serve 5  percent or less of U.S. households. There have been cases involving  rate-of-return carriers receiving millions of dollars in improper payments  from the high-cost program. For example, from 2002 to 2015, one such  carrier received reimbursement for deploying infrastructure to areas  where no consumers existed and, at the same time, received at least $27  million in reimbursement f or ineligible costs, including a $1.3 million  personal residence and a $43,000 sport utility vehicle. Additionally, in  August 2018, FCC’s Office of Inspector General (OIG) reported that a  rate-of-return carrier had reported approximately $80,000 in ineligible  expenses from 2012 to 2015 for reimbursement, even though according  to FCC, the expenses were defined as unnecessary and, thus,  prohibited. Those expenses included family travel, gifts, donations,  tuition reimbursement, and special events; costs that were not necessary  for maintaining and extending telecommunications services. These cases  came to FCC’s attention only after the carriers had already been  improperly receiving high-cost support for years, and FCC’s OIG staff  said that skilled bad actors may remain undetected. FCC has adopted  reforms in recent years intended to improve the accountability of rate-of- return carriers’ funding.

You asked us to review FCC’s oversight of rate-of-return carriers  participating in the high-cost program. This report examines the extent to  which FCC has implemented reforms intended to improve the accountability of  rate-of-return carriers’ funding, and  is managing fraud risks for the USF high-cost program in accordance  with leading practices.

To evaluate the extent to which FCC has implemented reforms intended  to improve the accountability of rate-of-return carriers’ funding, we  reviewed FCC orders and policies, prior GAO and FCC OIG reports, and  other relevant documents related to high-cost support reforms. We  reviewed four FCC orders that FCC confirmed contained the significant  rate-of-return reforms related to funding accountability and compliance.  We categorized the reforms based on their purpose and determined  whether the reforms had been implemented. As appropriate, we  assessed FCC’s efforts implementing the reforms against federal internal- control standards and FCC’s strategic plan. In addition, we interviewed  FCC officials responsible for setting overall policy and the regulations that  govern the USF program. Because of their high-cost program roles and  responsibilities, we interviewed officials from the Universal Service  Administrative Company (USAC) and a representative from the National  Exchange Carrier Association (NECA).

We also interviewed officials from FCC’s OIG who had conducted  previous audit work related to rate-of-return carriers. We interviewed 19  other stakeholders representing a variety of perspectives. We  judgmentally selected officials from five industry associations and four  accounting firms that assist rate-of-return carriers in their filings based on  their involvement with these issues, which we determined through such  factors as their level of activity in commenting on relevant FCC orders  and recommendations by others we interviewed. To obtain a variety of  carrier perspectives, we used carrier telecommunications data across the  four U.S. Census Bureau’s regions provided by NECA to judgmentally  select six rate-of-return carriers of different sizes and from different  regions of the country, including those that had either accepted traditional  cost-accounting support or support based on an FCC cost-estimating  model. Because states administer state-level programs similar to the  USF, we selected four state utility commissions from across each of the  four U.S. Census Bureau regions to provide us with a variety of state  perspectives. These interviews represent a variety of non-generalizable  viewpoints.

To evaluate the extent to which FCC is managing fraud risks for the USF  high-cost program in accordance with leading practices, we reviewed  FCC, USAC, and NECA orders, policies, and procedures related to the  processes each entity had in place to manage fraud risks associated with  support disbursements to rate-of-return carriers. These included two  USAC risk assessment documents FCC uses to collect information on  risks, including fraud risks, to meet federal improper-payment  requirements. In addition, we interviewed FCC officials responsible for  setting policy for fraud risk management for rate-of-return carriers as well  as those responsible for working with USAC to develop audit plans. We  also interviewed high-cost program and audit officials, FCC’s OIG  officials, a NECA representative, and the same 19 stakeholders noted  above from the industry, rate-of-return carriers, state utility commissions,  and accounting firms to gain their perspectives on rate-of-return carrier  fraud risks and FCC’s approaches for managing fraud risk in the high-cost  program. We assessed the information gathered to determine the extent  to which FCC had implemented leading practices contained in GAO’s  fraud risk framework. The framework contains four components: (1)  commit, (2) assess, (3) design and implement, and (4) evaluate and  adapt. Within the four components, there are overarching concepts and  leading practices. Our assessment focused on the overarching concepts  and leading practices contained in the first three components. We did not  review the fourth component of the framework, which focuses on  evaluating outcomes using a risk-based approach and then adapting  activities to improve fraud risk management. Because we determined that  FCC had not fully adopted fraud risk management activities from the first  three components, it was premature for us to assess whether or not FCC  was evaluating and adapting its use of leading fraud-risk-management  practices.

We conducted this performance audit from September 2018 to October  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

In the Telecommunications Act of 1996 (the 1996 Act), Congress  specified that consumers in “rural, insular, and high-cost areas” should  have access to telecommunication rates and services that are  “reasonably comparable” to consumers in urban areas. The 1996 Act  altered the federal mechanism for funding universal service by requiring  telecommunications carriers and other entities providing interstate  telecommunications service to contribute to the USF, unless exempted by  FCC. The carriers generally pass these costs on to customers,  sometimes in the form of a line item on customers’ telephone bills.

USF provides financial support to carriers through four different programs,  each targeting a particular group of telecommunications carriers or  consumers. The high-cost program provides support to both wireline and  wireless carriers that provide telecommunications services in areas that  carriers would otherwise not serve and where there is no competition  from other providers. These are typically rural or remote areas where the  customer base is relatively small and the cost of installing infrastructure is  high. The high-cost program has been the largest USF program based on  disbursements and has been particularly important to rural areas. High- cost support is intended to offset the carriers’ higher costs, thereby  allowing them to provide services and rates that are reasonably  comparable to those that consumers in lower-cost—generally urban— areas receive.

In 2009, Congress required FCC to develop a broadband plan to ensure  that every American has access to broadband capability, including a  detailed plan for providing this service at affordable rates. In response,  an FCC task force issued the National Broadband Plan in 2010, which  recommended reforming USF so it could support both telephone and  broadband service. FCC’s USF Transformation Order of 2011 emerged  in response to this recommendation and provided USF support to carriers  for broadband capable networks. The order required carriers that  receive support to meet broadband-speed and quality-deployment  requirements.

Through the USF Transformation Order, FCC adopted a framework to  transition high-cost carriers from traditional cost-accounting support to  incentive-based support mechanisms, using forward-looking broadband  cost models and competitive bidding. FCC’s forward-looking cost  models use historical data to project the future financial needs of carriers  providing telecommunications services. According to FCC, rate-of-return  carriers receive about $2.5 billion in annual support from the high-cost  program to support service deployments in these carriers’ 1,078 rate-of- return service areas, which FCC refers to as “study areas.” FCC has  allowed rate-of-return carriers to choose, on a voluntarily basis, one the  following mechanisms to receive USF support:

Traditional cost-accounting support mechanism. This method  retroactively provides support to carriers for costs already incurred,  based on cost studies, including financial statements these  companies provide each year. At the time of our review, according to  FCC officials, FCC guaranteed these companies recovery of eligible  deployment costs, plus a return of 10.25 percent on regulated  investment costs. According to FCC’s OIG officials we interviewed,  many carriers contract with telecommunications accountants to  navigate the complicated process of determining which costs are  reimbursable by the high-cost program and file the associated  documentation with USAC. According to FCC, as of September  2019, there were approximately 437 study areas served by rate-of- return carriers receiving support through this mechanism.

Model-based support mechanism. This method is aimed at  providing a level of support to carriers based on modeled forward- looking costs and revenues of an efficient carrier to serve an area with  voice and broadband Internet. According to FCC officials, in  developing the model, FCC: had experts peer-review the model’s methodology; demonstrated how different inputs affect model support and  sought stakeholder feedback on the reasonableness of how these  inputs affected support levels; publicly released the model’s methodology; and used historical deployment cost and revenue data to develop the  model’s inputs and assumptions.

As of September 2019, FCC officials told us that rate-of-return  companies serving 641 study areas were receiving support through  this mechanism (or almost 60 percent of all 1,078 rate-of-return  carriers’ study areas).

FCC determines overall policy and issues the regulations that govern the  high-cost program, while FCC’s Wireline Competition Bureau in particular  implements FCC’s policies and programs regarding rate-of-return  carriers. State governments play a role in implementing the federal high- cost program, as do a not-for-profit corporation (USAC) and an  association (NECA). As shown in table 1, FCC, USAC, and NECA have  responsibilities for the high-cost program to ensure payments to rate-of- return carriers are made properly.

FCC has the following audit and oversight procedures for the high-cost  program:

Carrier self-certification. Carriers submit cost and line count data  directly to NECA. Carrier self-certification is the primary tool for  ensuring that carriers use high-cost program support consistent with  program rules. USAC uses these data to qualify carriers for the  program and also to calculate the amount of support carriers are  eligible to receive.

Carrier audits. Audits of carriers receiving high-cost program support  are the primary tool used to oversee carrier activities, and audits may  be conducted by USAC, state regulators, or FCC’s OIG. USAC  primarily relies on assessments from the Payment Quality Assurance  Program and Beneficiary and Contributor Audit Program that occur  after disbursements have been made to detect improper payments,  which may include fraud.

Carrier data validation process. All cost data that the carriers  submit to NECA for purposes of high-cost support are subject to  several electronic validations, which focus on ensuring that all  required data are reported and that the data ranges are consistent  with information reported in previous years. In addition, NECA  compares the reported cost data with financial records supporting  carriers’ audited financial statements to identify any discrepancies and  to require corrections when discrepancies are discovered.

Carriers’ broadband deployment verification. Since 2018, USAC  has performed carrier broadband deployment verifications by  obtaining broadband location data to monitor whether a carrier’s  broadband deployment meets FCC requirements. Carriers receive  verification reports from USAC that reflect the results of the  verification process.

Whistleblower process. USAC maintains a whistleblower log that is  shared with FCC. Through whistleblower complaints, USAC may  identify instances of potentially fraudulent activity.

FCC has identified three rate-of-return carriers that received at least $34  million in improper payments from the high-cost program in prior years.  Two such cases were described above. In the third case, a rate-of-return  carrier self-reported to NECA and USAC what it represented to be the  costs and revenues of providing its telecommunications service; as  discussed previously, NECA and USAC rely upon the accuracy and  completeness of the carrier’s reporting to calculate the carrier’s support.  An FCC OIG investigation later revealed that the carrier had manipulated  FCC’s accounting rules by including the costs of a nonregulated,  commercial mobile radio service in the information it submitted to NECA,  thus inflating the amount of high-cost program support the carrier  received. FCC eventually determined that the carrier owed the federal  government almost $7 million in support overpayments received between  2005 and 2010. A petition for reconsideration is pending. As there is a  finite amount of funding for the high-cost program, compensating carriers  for improper, ineligible, and inflated costs they claim means less program  funds are available for deploying service to the areas the program was  designed to serve.

Federal internal control standards, along with GAO’s fraud risk  framework, OMB guidance, and the Fraud Reduction and Data  Analytics Act of 2015 have placed an increased focus on the need for  federal program managers to take a strategic approach to managing  improper payments and risks, including the risk of fraud. GAO’s fraud risk  framework provides comprehensive guidance for conducting fraud-risk  assessments and using the results to develop a robust fraud risk  management strategy. This framework also describes overarching  concepts and leading practices for establishing an organizational  structure and culture that are conducive to fraud risk management,  designing and implementing controls to prevent and detect potential  fraud, and monitoring and evaluating fraud risk management activities.  The leading practices in the fraud risk framework are organized into four  components—commit, assess, design and implement, and evaluate and  adapt—as depicted in figure 1.

FCC Adopted Several Funding Reforms to Enhance Carriers’ Accountability, but Not All Reforms Are Mandatory

FCC Reforms Are Intended to Improve the Accountability of Rate-of- Return Funding

FCC, in various orders, has adopted several funding and other reforms  specific to rate-of-return carriers. As described below, the reforms we  reviewed were designed to (1) control the carrier and high-cost program  expenditures, (2) incentivize efficient broadband deployment, and (3)  ensure carriers’ compliance with the high-cost program.

Control Carrier and High-Cost Program Expenditures

Prior to the 2011 USF Transformation Order, rate-of-return carriers  primarily received high-cost support based on their actual costs. Under  the old rules, carriers faced no FCC-imposed limits and, according to  FCC, had no incentive to be more efficient. FCC adopted the reforms  described in figure 2 to control the program’s expenditures.

As shown in figure 2 above, FCC’s reform effort related to eliminating  support to areas with competition has been ongoing since 2011.

According to FCC officials, FCC relied on its broadband deployment data  to identify competitively served areas, but we have previously reported  that FCC’s broadband deployment data are not always accurate. In  August 2017, FCC initiated a proceeding to review the Form 477—the  principal tool FCC uses to gather data on communications services,  including broadband services—to help inform its policy making.  According to FCC, a goal of this proceeding was to enable FCC to collect  better and more accurate information on the Form 477. In August 2019,  FCC adopted an order based on the proceeding that, among other things,  established requirements for collecting geospatial broadband-coverage  maps from internet service providers. According to the order, FCC will  require the service providers to submit granular maps of the areas where  they have broadband-capable networks; FCC intends that these  broadband-deployment maps will enable FCC to precisely target scarce  universal service dollars to where broadband service is lacking.

Incentivize Efficient Broadband Deployment

According to FCC, one of the USF’s core principles since 2011 has been  to ensure that support is provided in the most efficient manner possible,  recognizing that ultimately American consumers contribute to programs  like the high-cost program. FCC adopted the reforms described in figure  3 to advance its long-standing objective of adopting incentive-based  policies to spur additional broadband deployment, while preserving  additional funding in the high-cost program for other reforms.

According to FCC, the prior cases of carriers’ abuses of USF support for  unrelated purposes prompted FCC to issue more specific rules for  compliance and reporting obligations. Accordingly, FCC adopted reforms  described in figure 4 to improve accountability and transparency of the  high-cost program.

FCC’s Model-Based Support Reform May Reduce Fraud Risks, but It Is Voluntary and Not All Carriers Received Model- Based Support

Of the reforms we reviewed, one reform in particular—the development of  a model-based support mechanism—shows promise in reducing fraud  risk, according to stakeholders from federal and state government,  industry, and accounting firms we contacted. Stakeholders said the  model-based support mechanism is less prone to fraud risks and is a  more efficient support mechanism than traditional cost-accounting  support. In particular, unlike the traditional cost-accounting-support  mechanism, model-based support does not rely on carrier-submitted data  to determine support amounts. Instead, the model uses, among other  things, a combination of historical cost data and other data, such as  expected customer revenue, to determine support amounts. Since there  are no data provided by carriers in the process of determining support  amounts, there is no means by which carriers can provide falsified  information to fraudulently receive excess support. The carriers involved  in the previously described improper payments cases were receiving  support from the traditional cost-accounting support mechanism.

On the other hand, stakeholders told us FCC’s traditional cost-accounting  support mechanism is complex and difficult to audit, and that such  weaknesses make it prone to fraud risks. For example, USAC officials  told us it is time consuming to detect inflated costs associated with  carriers’ affiliate company transactions. The traditional cost-accounting  support mechanism also requires that carriers separate costs based upon  the type of service with which the cost was associated. According to  FCC’s OIG officials and representatives from accounting firms we  contacted, determining whether a carrier has overly attributed costs to  eligible services is difficult. For instance, determining if labor costs are  properly being allocated between eligible and ineligible services requires  looking at each employee’s timesheet. According to USAC, it also faces  challenges auditing traditional cost-accounting support payments due to  limited expertise and capacity to address the complexity of the audits.  USAC officials noted that this issue has been exacerbated by audit staff  turnover. According to USAC officials and some stakeholders we  contacted, auditing carriers receiving traditional cost-accounting support  is also difficult due to the extensive documentation requirements for this  type of support, requirements that often entails hundreds of pages of  financial information per carrier. USAC officials told us that a single audit  can take over 1,000 hours to complete, and USAC officials told us they  only completed 10 audits of carriers that received support on a traditional  cost-accounting basis in fiscal year 2018.

As previously noted, FCC allows carriers to choose which funding  mechanism is best suited for their company. FCC officials told us they  developed the model-based funding mechanism in consultation with  carriers and industry stakeholders. However, according to FCC officials,  the model’s use is not mandatory because some carriers do not believe  that the model would accurately reflect their specific costs. FCC officials  said the agency does not have plans to assess the accuracy of the  model’s cost estimates or require carriers to receive model-based  support. FCC officials told us they did not have plans to assess the  model. FCC officials told us they had not  planned to do so because in  May 2019 FCC had just made available model-based support to the  remaining legacy carriers, and FCC was still in the process of evaluating  next steps. Planning for and conducting such an assessment would  enable FCC to demonstrate the validity of the model and its reliability in  accounting for the costs of broadband deployment. Federal internal- control standards state that management should use quality information  to make informed decisions and evaluate program performance in  achieving key objectives. Furthermore, according to FCC’s strategic  plan, FCC must ensure its USF programs, including those for the high- cost program, are well managed, efficient, and fiscally responsible, and  the National Broadband Plan says that FCC should move rate-of-return  carriers to incentive-based regulation mechanisms, such as model-based  support. Yet because a substantial number of rate-of-return study areas— 437—continue to receive traditional cost-accounting support, and the  carriers that provide service in these areas cannot be effectively audited,  significant fraud risks remain for the high-cost program. By assessing the  model, FCC would have greater assurance that it is producing reliable  cost estimates and be better positioned to determine whether to make its  use mandatory.

FCC Has Taken Steps to Manage Fraud Risks, but Its Efforts Do Not Fully Align with Leading Practices

Managers of federal programs are responsible for managing fraud risks.  Implementing effective fraud risk-management processes is important to  help ensure that federal programs fulfill their intended purpose and funds  are spent effectively. GAO’s fraud risk framework is aligned with federal  internal-control standards related to assessing fraud risk. It focuses on  preventive activities, which generally offer the most cost-efficient use of  resources since they enable managers to avoid a costly and inefficient  “pay-and-chase” model, which refers to the practice of detecting  fraudulent transactions and recovering funds after fraudulent payments  have been made. As discussed previously, our fraud risk framework  consists of four components—commit, assess, design and implement,  and evaluate and adapt—each of which includes overarching concepts  and leading practices for carrying them out.

We found that FCC has implemented some policies and procedures  related to managing fraud risk for the high-cost program. For example,  according to a memorandum of understanding between FCC and USAC,  FCC requires USAC to alert, as appropriate, FCC’s OIG and Enforcement  Bureau about potential instances of fraud. However, as detailed in  appendix II, FCC’s efforts do not fully align with some elements of the  fraud risk framework. In particular, we found deficiencies in FCC’s efforts  related to the following three overarching concepts and one high-level  component:  creating a structure with a dedicated entity to manage fraud risk  activities (overarching concept within the commit component); planning regular fraud-risk assessments tailored to the program and  assessing these risks to determine the program’s fraud risk profile  (two overarching concepts within the assess component); and designing and implementing an antifraud strategy for the program (the  design and implement component).

Creating a structure with a dedicated entity to lead fraud risk- management activities. Leading practices for managing fraud risk  include demonstrating management’s commitment to combating fraud  and designating an entity to design and oversee fraud risk-management  activities. According to GAO’s fraud risk framework, an entity should lead  these activities by serving as the repository of knowledge on fraud risks  and controls, managing the fraud-risk assessment process, leading fraud- awareness activities, and coordinating antifraud initiatives. According to  FCC officials, FCC has steering committees for each of the four USF  programs, including the high-cost program. According to FCC officials,  the steering committees allow in-depth discussions about each program,  including on operational issues such as current spending levels and  information technology systems, as well as improper payments and other  issues. However, fraud risk is but one of many responsibilities of these  steering committees, and they do not fill the role of a dedicated fraud risk- management entity, as called for by the fraud risk framework. In August  2019, FCC officially launched a Fraud Division—comprising existing FCC  staff who investigate and prosecute fraud—within its Enforcement  Bureau. However, FCC told us the scope of the new division’s operations  is limited to investigations, so the Fraud Division does not fill the role of a  dedicated fraud risk-management entity.

Planning regular fraud-risk assessments tailored to the program and  determining the fraud risk profile. An effective antifraud entity tailors  the approach for carrying out regular fraud-risk assessments of its  programs. According to GAO’s fraud risk framework, the approach  should, among other things:  fully consider the specific fraud risks the agency or program faces, analyze the potential likelihood and effects of fraud schemes, and document prioritized fraud risks.

According to FCC officials, FCC has annually worked with USAC high- cost program staff to identify and assess some risks facing the high-cost  program, some of which are fraud risks, but has not planned regular  fraud-risk assessments that are tailored to the high-cost program in  accordance with GAO’s fraud risk framework. FCC officials also told us  that they adopted a tool originally developed by another agency that was  used to evaluate risks facing that agency’s loan and grant programs, not  just fraud risks. Using that tool as a model, FCC created a risk  assessment document that included fraud risk as one of nine categories  of risks across the high-cost program. Based on our discussions with  FCC officials, however, the document does not constitute a fraud-risk  assessment that takes into account changes to the program or operating  environment. Furthermore, the risk assessment document does not  constitute a fully tailored risk assessment because it does not identify and  assess the fraud risks stakeholders we interviewed described as inherent  to the high-cost program, detailed below.

Risk caused by the complexity of the high-cost program’s cost- allocation rules. Officials from three out of four accounting firms,  FCC’s OIG, and a state utility commission we contacted singled out  the specific fraud risk caused by what they described as confusing  and subjective rules governing the process carriers use to separate  eligible and ineligible costs.

Risks related to oversight challenges. Stakeholders identified  several oversight challenges as significant in that they could  contribute to fraud risks for the program, such as:  financial mismanagement within carriers that allowed companies  to submit potentially fraudulent information to USAC and NECA,  and that a telecommunications accountant told us contributed to  previous instances of alleged fraud;

USAC’s audit personnel challenges that were due to attrition and  limited resources and expertise and that were identified by officials  from FCC, USAC, FCC’s OIG, and an accounting firm; and deficiencies identified by FCC’s OIG in NECA’s internal controls  over payments to carriers, data validation, and the  appropriateness of NECA’s role validating carriers’ cost  information. In addition, FCC’s OIG officials told us of oversight  challenges related to carriers’ reporting, including that it is difficult  for USAC to detect when carriers improperly report rates billed for  services provided by an affiliate of the company or report incorrect  labor rates.

Furthermore, we found FCC had not identified and assessed risks to  determine the fraud risk profile for the high-cost program, as called for in  the fraud risk framework. A fraud risk profile is the summation of key  findings and conclusions from a fraud-risk assessment, including the  analysis of the types of internal and external fraud risks, their perceived  likelihood and effects, managers’ risk tolerance, and the prioritization of  risks. FCC officials said they consider the risk of fraud to be low in the  high-cost program, and FCC includes fraud risk in its current risk  assessment process. Since FCC believes the fraud risk is low for the  high-cost program, FCC has not deemed it necessary to conduct a  separate fraud-risk assessment of the program. For example, FCC  provided us with documentation related to its Enterprise Risk  Management activities that identifies risks USAC faces to achieving its  corporate objectives. However, while FCC considers fraud risks as part of  these activities, the document does not specify the fraud risk tolerance for  the program or constitute a fraud risk profile.

Without conducting regular fraud-risk assessments to gauge the  likelihood and effects of the inherent fraud risks described above, and  potentially others, FCC cannot determine or document the program’s  fraud risk profile. Furthermore, FCC has no assurance that it has fully  considered important fraud risks, determined its tolerance for risks that  could be lower priorities, or made sound decisions on how to allocate  resources to respond to fraud risks. Not doing so could result in FCC  compensating carriers for improper, ineligible, and inflated costs, such as  in the previously discussed cases of identified fraud. By regularly  assessing fraud risks to determine a fraud risk profile, FCC could better  determine the extent to which it has designed and implemented adequate  fraud-prevention controls.

Designing and implementing an antifraud strategy for the program.  Managers who effectively manage fraud risk develop and document an  antifraud strategy that describes the program’s activities for preventing,  detecting, and responding to the fraud risks identified during the fraud-risk  assessment. FCC and USAC have established mechanisms to enhance  the oversight of USF programs, mechanisms that can also help mitigate  fraud risks for the high-cost program, including:  In fiscal year 2016, USAC implemented a risk-based selection method  for conducting audits to identify the entities with the greatest risk.

USAC forwards potential fraud, waste, and abuse cases to FCC.

FCC’s OIG established a hotline that can be used to report potential  fraud, and USAC established a Whistleblower Alert mechanism to  inform USAC of possible instances of universal service support being  misapplied or mismanaged, or when carriers are potentially violating  laws, rules, or regulations. USAC shares this information with FCC.

FCC and USAC formed a working group tasked with developing a  data-analytics tool designed to share USAC high-cost program data  with FCC. FCC’s documentation of the tool states that once  developed, the tool will help FCC’s Enforcement Bureau in its fraud  detection activities across all USF programs. FCC officials described  the development of the tool as technically challenging and said there  is no established timeline for implementing the tool.

FCC officials said that FCC has regular, informal interactions  concerning fraud risk with USAC and, to a lesser degree, with NECA  and that FCC has confidence that USAC’s improved audit processes  are identifying issues appropriately.

However, FCC has not specifically designed or implemented an overall  strategy to mitigate fraud risks across the high-cost program. An FCC  official said FCC believes its existing antifraud activities are adequate.  The FCC official said FCC considers the risk of fraud in the high-cost  program to be low because USAC audits have revealed that carriers’  financial reporting errors occur at a low rate and therefore do not indicate  that a large amount of fraud is occurring. The official said FCC’s fraud  risk-management practices are based on federal internal-control  standards and are woven into existing FCC mechanisms.

Given that FCC has not conducted a fraud-risk assessment that is  tailored to the high-cost program and that the deceptive nature of fraud  makes it difficult to measure in a reliable way, it is unclear how FCC  officials reached the conclusion that the program’s risk of fraud is low.  Also, in the absence of an antifraud strategy, FCC has little assurance  that it has the specific control activities to prevent and detect high-cost  program fraud and that the types of misconduct that previously occurred  are not widespread. The improper payment activity discussed previously  was caught after USAC provided support to these carriers, and it was not  prevented or detected through any strategic fraud risk-management effort  on FCC’s part. Furthermore, the FCC’s OIG has expressed significant  concerns about such abuses by rate-of-return carriers and about the  effectiveness of USAC’s auditing processes in helping prevent improper  payments to these carriers. As noted above, USAC’s high-cost program  audits can take over 1,000 hours and USAC faces human capital  challenges that have diminished its audit capacity. In addition, while  NECA’s data validations and reviews of high-cost support provide  opportunities to identify input and data-reporting errors, they do not  specifically address whether or not the data provided by carriers are  reasonable or if the money carriers spent addresses the intended  purposes of the high-cost program. Designing and implementing an  antifraud strategy that conforms to leading practices would help FCC  effectively manage and respond to the fraud risks identified during the  fraud-risk assessments.

Given the continuing importance of deploying telecommunications  services in difficult-to-serve areas, effective oversight for rate-of-return  carriers is an important component for helping ensure that the high-cost  program’s finite funds are used properly to meet the intent of the program.  Overall, the traditional cost-accounting mechanism that FCC uses to  provide support to a substantial number of rate-of-return carriers is  complex, prone to fraud risks, and presents auditing challenges that FCC  has not fully addressed. By following leading practices from GAO’s fraud  risk framework, FCC could better ensure that it is addressing and  strategically targeting the most significant fraud risks facing the high-cost  program. Furthermore, FCC’s model-based support mechanism has now  been in use by some rate-of-return carriers for several years and  stakeholders agree that it is less prone to fraud risks. However, FCC has  not assessed the extent to which the model is producing reliable cost  estimates. By conducting such an assessment, FCC would have greater  assurance that it is producing reliable cost estimates and be better  positioned to determine whether to make its use mandatory.

We are making the following five recommendations to FCC:

The Chairman of FCC should ensure that FCC’s Office of Managing  Director follows the leading practices in GAO’s fraud risk framework  related to a dedicated entity’s management of its antifraud activities,  such as serving as the repository of knowledge on fraud risks and  coordinating antifraud initiatives. (Recommendation 1)

The Chairman of FCC should plan regular fraud-risk assessments  tailored to the high-cost program and assess these risks to determine  the program’s fraud risk profile, as provided in GAO’s fraud risk  framework. (Recommendation 2)

The Chairman of FCC should design and implement an antifraud  strategy for the high-cost program with specific control activities,  based upon the results of fraud-risk assessments and a  corresponding fraud risk profile, as provided in GAO’s fraud risk  framework. (Recommendation 3)

The Chairman of FCC should assess the model-based support  mechanism to determine the extent to which it produces reliable cost  estimates. (Recommendation 4)

The Chairman of FCC should consider whether to make use of the  model-based support mechanism mandatory depending on the results  of the assessment. (Recommendation 5)

We provided a draft of this report to FCC for review and comment. In  FCC’s written comments, reprinted in appendix III, FCC described actions  it would take to implement our recommendations. FCC also provided  technical comments, which we incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Chairman of the FCC, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or vonaha@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix IV.

Appendix I: Key Elements of the Fraud-Risk Assessment Process for Creating a Fraud Risk Profile

To help managers combat fraud and preserve integrity in government  agencies and programs, we identified leading practices for managing  fraud risks and organized them into a conceptual framework called the  Fraud Risk Management Framework (the framework). As described in the  background section of this report and depicted visually in figure 1, the  framework encompasses control activities to prevent, detect, and respond  to fraud, with an emphasis on prevention, to help managers achieve the  objective of mitigating fraud risks. The second of four framework  components—Assess—calls for specific actions managers should take to  achieve the objective of mitigating fraud risks. Specifically, managers  should plan regular fraud-risk assessments and assess these risks to  determine a fraud risk profile. Figure 5 illustrates the key elements of the  fraud-risk assessment process that lead to the creation of a program’s  fraud risk profile.

Appendix II: Assessment of the Federal Communications Commission’s Antifraud Efforts for the Universal Service Fund High- Cost Program

We developed a data collection instrument to structure our assessment of  the Federal Communications Commission’s (FCC) antifraud efforts for the  high-cost program related to the commit, assess, and design and  implement components of GAO’s fraud risk framework. For our  assessment, we determined the extent to which FCC had implemented  the leading practices within each component, as summarized in table 2.  We did not assess FCC’s approach against leading practices in the  “evaluate and adapt” component of the framework because we  determined that FCC had not adopted fraud risk management leading  practices within the first three components, and therefore it was  premature for us to assess whether FCC was evaluating and adapting its  use of these practices.

Appendix III: Comments from the Federal Communications Commission

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Sally Moino (Assistant  Director); Sean Standley (Analyst in Charge); Philip Farah; Camilo Flores;  Mark Goldstein; Gary Guggolz; Hannah Hubbard; Josh Ormond; Ben  Licht; Rebecca Shea; Andrew Stavisky; and Michelle Weathers made key  contributions to this report.

The Federal Communications Commission seeks to ensure that people in rural and other hard-to-serve areas can access modern communications. To that end, it reimburses small telecommunications companies for eligible expenses to deploy services in these areas.

In the past, FCC has reimbursed companies for ineligible expenses, such as personal vehicles or travel, that were not necessary for maintaining and extending telecommunications services.

FCC has improved the way it reimburses companies to prevent similar cases and reduce fraud risks, but it could better target its efforts. We made 5 recommendations to help FCC do this.