California Advanced Services Fund Programs Financial Transactions

CALIFORNIA PUBLIC UTILITIES COMMISSION Audit Report CALIFORNIA ADVANCED SERVICES FUND PROGRAM January 1, 2016, through June 30, 2018 BETTY T. YEE California State Controller February 2021 BETTY T. YEE California State Controller February 17, 2021 Erika Contreras, Secretary of the Senate State Capitol, Room 3044 Sacramento, CA 95814 Dear Ms. Contreras: Pursuant to Public Utilities Code section 912.2(a), the State Controller’s Office performed the third interim audit of the California Advanced Services Fund Program’s financial transactions for the period of January 1, 2016, through June 30, 2018. We determined that program expenditures are in compliance with Public Utilities Code sections 281 and 282, other state laws, and California Public Utilities Commission directives; records are reliable; revenue is properly managed and correctly recorded; and the California Advanced Services Fund Program has proper oversight. However, our audit found that cumulative surcharge revenue was overstated by $12,879,243 and investment income was overstated by $1,688,415 as of June 30, 2018. Our audit also identified processes and procedures that could be implemented to improve the California Public Utilities Commission’s oversight of the program. Details are provided in the Findings and Recommendations section of this report. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, by telephone at (916) 324-6310, or by email at afinlayson@sco.ca.gov. Sincerely, Original signed by MICHAEL REEVES, CPA Acting Chief, Division of Audits MR/as Erika Contreras, Secretary of the Senate -2- February 17, 2021 cc: Rob Osborn, Director Communications Division California Public Utilities Commission Selena Huang, Program Manager Communications Division California Public Utilities Commission Lindsey Tong, Analyst Communications Division California Public Utilities Commission Cindy McReynolds, Analyst Communications Division California Public Utilities Commission Melanie Balfour, Analyst Communications Division California Public Utilities Commission Sue Parker, Chief Clerk California State Assembly Amy Leach, Minute Clerk California State Assembly Cara L. Jenkins, Legislative Counsel California Office of Legislative Counsel California Public Utilities Commission California Advanced Services Fund Program Contents Audit Report Summary ............................................................................................................................ 1 Audit Authority.................................................................................................................. 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 5 Conclusion .......................................................................................................................... 11 Follow-up on Prior Audit Findings .................................................................................. 11 Views of Responsible Officials .......................................................................................... 11 Restricted Use .................................................................................................................... 11 Schedule—CASF Program Revenues and Expenditures ................................................... 12 Findings and Recommendations ........................................................................................... 13 Attachment 1—California Public Utilities Commission’s Response to Draft Audit Report Attachment 2—2018 Annual Report – California Advanced Services Fund, Issued April 2019 California Public Utilities Commission California Advanced Services Fund Program Audit Report Summary Pursuant to Public Utilities Code (PUC) section 912.2(a), the State Controller’s Office (SCO) performed the third interim audit of the California Advanced Services Fund (CASF) Program’s financial transactions for the period of January 1, 2016, through June 30, 2018. We determined that program expenditures are in compliance with PUC sections 281 and 282, other state laws, and California Public Utilities Commission (CPUC) directives; records are reliable; revenue is properly managed and correctly recorded; and the CASF Program has proper oversight. However, our audit found that cumulative surcharge revenue was overstated by $12,879,243 and investment income was overstated by $1,688,415 as of June 30, 2018. Our audit also identified processes and procedures that could be implemented to improve the CPUC’s oversight of the program. Audit PUC section 912.2(a) requires the CPUC’s five-member board (Commission) to conduct interim financial audits and a final financial Authority audit, in addition to interim performance audits and a final performance audit. These audits of the implementation and effectiveness of the CASF are “to ensure that funds have been expended in accordance with the approved terms of the grant awards and loan agreements pursuant to Section 281.” The audit was performed by the SCO on behalf of the CPUC. The authority to conduct this audit given by Interagency Agreement No. 19NS1086, dated February 29, 2020, between the SCO and CPUC, which provides that the SCO conduct the third interim audit (Audit of CASF Program Financial Transactions – Revenue and Expenditures) and third interim performance audit(s) of the CASF Program. Further authority is provided by Government Code (GC) section 12410, which states, in part: The Controller shall superintend the fiscal concerns of the state. The Controller shall audit all claims against the state, and may audit the disbursement of any state money, for correctness, legality, and for sufficient provisions of law for payment. The CPUC implemented the CASF Program on December 20, 2007, when Background it adopted Decision (D.) 07-12-054, in accordance with PUC section 701. The CPUC allocated $100 million to the program, funded by a 0.25% surcharge on revenues collected from end-users for intrastate telecommunications services, effective January 1, 2008. The CASF Program provides grants to bridge the “digital divide” in unserved and underserved areas of California. -1- California Public Utilities Commission California Advanced Services Fund Program The CPUC adopted the CASF Program application requirements, timelines, and scoring criteria for parties to qualify for broadband project funding in Resolution T-17143, issued on June 12, 2008. The Legislature reaffirmed the CPUC’s creation of the CASF Program with a program sunset date of January 1, 2013, in Senate Bill 1193, which Governor Schwarzenegger signed on September 27, 2008. The CASF Program is codified in PUC section 281. The Legislature passed, and the Governor signed into Law, several bills to expand PUC section 281, including:  SB 1040 (Padilla, Chapter 317, Statutes of 2010) – extended the program indefinitely and increased CASF Program funding to $225 million; established the Broadband Infrastructure Grant Account (Infrastructure Grant Account), the Rural and Urban Consortia Grant Account (Consortia Account), and the Broadband Infrastructure Revolving Loan Account (Infrastructure Loan Account); and allocated $100 million to the Infrastructure Grant Account, $10 million to the Consortia Account, and $15 million to the Infrastructure Loan Account;  SB 740 (Padilla, Chapter 522, Statutes of 2013) – added an additional $90 million to the Infrastructure Account, increasing total CASF funding to $315 million;  Assembly Bill 1299 (Bradford, Chapter 507, Statutes of 2013) – established the Broadband Public Housing Account (Public Housing Account), which was funded by reallocating $20 million from the Infrastructure Grant Account and $5 million from the Infrastructure Loan Account. Pursuant to AB 1299, any remaining funds not awarded by the Public Housing Account by December 31, 2016 would be returned to the original funding accounts, proportionally;  AB 1262 (Wood, Chapter 242, Statutes of 2015) – reallocated $5 million from the Infrastructure Loan Account to the Consortia Account;  SB 745 (Hueso, Chapter 710, Statutes of 2016) – postponed the date for the return of unused funds from the Public Housing Account to the Infrastructure Grant Account and the Infrastructure Loan Account to December 31, 2020; and  AB 1665 (Garcia, Chapter 851, Statutes of 2017) – eliminated the Loan Account as of January 1, 2018, and directed that funds remaining in that account be transferred to the Infrastructure Grant Account; extended the Infrastructure Account to include funding to households for line-extension with the aggregate amount of grants awarded not to exceed $5 million (thus creating the Broadband Line Extension Program); created the Broadband Adoption Account (Adoption Account); and allocated $300 million to the Infrastructure Account, $10 million to the Consortia Account, and $20 million to the Adoption Account. The additional $330 million of funding is to be collected beginning January 1, 2018, and continuing through the 2022 calendar year. -2- California Public Utilities Commission California Advanced Services Fund Program PUC section 281(a) states, in part: The commission shall develop, implement, and administer the California Advanced Services Fund program to encourage deployment of high- quality advanced communications services to all Californians that will promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies… Pursuant to PUC section 281(b): The goal of the program is, no later than December 31, 2022, to approve funding for infrastructure projects that will provide broadband access to no less than 98 percent of California households in each consortia region.... Pursuant to PUC section 281(c), the CASF is allocated to four accounts within the fund, with the following purposes:  The Infrastructure Grant Account assists in financing the building and/or upgrading of broadband infrastructure in areas that are unserved by existing broadband providers.  The Consortia Account provides grants to eligible consortia “to facilitate deployment of broadband services by assisting infrastructure applicants in the project development or grant application process.”  The Public Housing Account provides grants and loans to eligible publicly supported communities, either to finance projects to connect a broadband network to that publicly supported community, or to support programs designed to increase adoption rates of broadband service by residents of that publicly supported community.  The Adoption Account provides grants to increase publicly available or after-school broadband access and digital inclusion. The Line Extension Program, which provides funding to households that would otherwise not be able to afford a line extension to the property, is funded through the Broadband Grant Account PUC section 912.2(a) requires the CPUC to conduct one interim financial audit and a final financial audit, and one interim performance audit and a final performance audit of the implementation and effectiveness of the CASF “to ensure that funds have been expended in accordance with the approved terms of the grant awards and loan agreements pursuant to Section 281.” PUC section 912.2(a) further requires the CPUC is to report its interim findings on the CASF Program to the Legislature by April 1, 2020, and to report its final findings to the Legislature by April 1, 2023. The reports must also include “an update to the maps in the final report of the California Broadband Task Force and data on the types and numbers of jobs created as a result of the program.” -3- California Public Utilities Commission California Advanced Services Fund Program The CPUC makes all CASF Program reports available on its website at the following URL: https://www.cpuc.ca.gov/General.aspx?id=9226 The first interim financial audit report, submitted in April 2011, is available at the following URL: https://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/Cont ent/Utilities_and_Industries/Communications_- _Telecommunications_and_Broadband/Reports_and_Presentations/ VolumeIIFinancialAudit.pdf The second interim financial audit report, submitted in April 2017, is available at the following URL: ftp://ftp.cpuc.ca.gov/Telco/CASF/Reports%20and%20Audits/S16CS F0001%20FINAL%20OSBLessAttachment2.pdf The CPUC’s 2018 Annual Report on the activities conducted by the CASF Program, published in April 2019, is available at the following URL: https://www.cpuc.ca.gov/uploadedFiles/CPUCWebsite/Content/Abo ut_Us/Organization/Divisions/Office_of_Governmental_Affairs/Leg islation/2019/CASF%202018%20Annual%20Report%20April%202 019.pdf The 2018 Annual Report is also included as Attachment 2 to this report. General Information about the Entity The CPUC’s Fiscal Office is responsible for receiving and accounting for surcharges that telecommunications entities remit. These surcharge revenues are accounted for in the universal service fund accounts according to California State Accounting and Reporting System (CALSTARS) Program Cost Account codes. The Fiscal Office is also responsible for processing CASF Program payment requests (after CASF Program staff review), encumbering CASF Program awards and submitting them to the SCO, maintaining CASF Program financial records, and presenting CASF Program financial data. General Information about CASF Program Reporting The State of California uses the modified accrual accounting methodology. The Government Accounting Standards Board, which is the official source of generally accepted accounting principles for state and local governments, establishes modified accrual accounting standards. However, there is no requirement that the CASF Program annual report be prepared using a specific accounting methodology. The CPUC prepares agency-wide financial statements on a fiscal-year basis; however, the CASF Program is reported to the Legislature on a calendar-year basis. The most recent CASF Program annual report applicable to the audit period, 2018 Annual Report–California Advanced -4- California Public Utilities Commission California Advanced Services Fund Program Services Fund (2018 Annual Report), was issued in April 2019. Although this report covers calendar year (CY) 2018, financial data was reported only through June 30, 2018. In addition, the report emphasizes the cumulative activity that has taken place since inception of the CASF Program, rather than activity between January 1, 2018, and December 31, 2018. On March 30, 2011, the CPUC’s Utility Audit, Finance, and Compliance Bureau (UAFCB) issued the first interim independent financial audit report of the CASF Program for the period of January 1, 2008, through June 30, 2010. The UAFCB’s report concluded that CASF Program funds were expended in compliance with PUC sections 281 and 282, other state laws, and CPUC directives. On March 30, 2017, the SCO issued the second interim independent financial audit report of the CASF Program, for the period of July 1, 2010, through December 31, 2015. Our report concluded that CASF Program funds were expended in compliance with PUC sections 281 and 282, other state laws, and CPUC directives. Objectives, Scope, We conducted this audit of financial transactions to determine whether the CASF: and Methodology  Expenditures were incurred pursuant to PUC sections 281 and 282, other state laws, and CPUC directives;  Records were reliable;  Revenue was properly managed and correctly recorded; and  Had proper oversight. The audit period is from January 1, 2016, through June 30, 2018. We used the modified accrual accounting methodology as a means of meeting our audit objectives. The 2018 Annual Report covers the scope period of this audit and contains the cumulative totals necessary to meet the objectives of this audit (see the Schedule). Therefore, we determined that the audit methodology should be applied only to the data contained in the 2018 Annual Report. As the 2018 Annual Report’s audit population includes transactions that were also included in UAFCB’s first-interim report, we accepted UAFCB’s conclusion that those balances meet the audit objective for the first iterim audit. We reviewed and accepted these amounts when we conducted the second interim audit. -5- California Public Utilities Commission California Advanced Services Fund Program Figure 1 summarizes the total revenues and expenditures audited in the first and second interim periods, reported by CPUC in the third interim period, and reported in the 2018 Annual Report. Figure 1 CASF Program Revenues and Expenditures: Interim Totals vs. Cumulative Totals CPUC 2011 Audit SCO 2017 Audit CASF Annual Reports 1st Interim 2nd Interim 3rd Interim January 1, 2008, July 1, 2010, January 1, 2016, Cumulative Total through through through 2018 CASF June 30, 2010 December 31, 2015 December 31, 2018 Annual Report* Revenues: Regulatory fees (Surcharge / MTS revenue) $ 115,140,932 $ 140,407,693 $ 76,838,036 $ 3 40,845,578 Delinquent fees 1 61,024 1 29,432 - 37,131 Loan repayment and interest - 15,595 2 1,536 - Investment income 1,008,965 1,707,578 5,193,107 8,349,915 Total revenues $ 116,310,921 $ 142,260,298 $ 82,052,679 $ 3 49,232,624 Expenditures: CASF projects (Infrastructure Grant Account) $ 7 8,007 $ 5 9,131,544 $ 41,603,902 $ 1 07,608,717 Infrastructure Loan Account - 40,977 429,910 1,187,916 Consortia Account - 7,907,376 2,792,323 11,260,727 Public Housing Account - 2 90,081 7,292,770 7,542,502 Administrative costs 2 74,432 5,440,225 - - Pro-rata costs 2 28,658 1,760,849 - - Infrastructure Loan Account service - 2 89,975 - - Total expenditures $ 581,097 $ 7 4,861,027 $ 52,118,905 $ 1 27,599,862 * The CPUC did not apply prior-period audit adjustments, as cumulative totals would have captured any prior-period adjustment. The sum of the three interim periods does not equal the total from the 2018 CASF Annual Report because no analysis of prior-period adjustments in the accounting records was performed (see Finding 2). -6- California Public Utilities Commission California Advanced Services Fund Program Figure 2 summarizes CASF Program revenues and expenditures reported in two annual reports issued by the CPUC during the third interim period California Advanced Services Fund Revenue & Expenditures - 3rd Interim Financial Period January 1, 2F0i1g6u trhreo u2g h June 30, 2018 CASF Revenues and Expenditures–Third Interim Period (A) (B) (C) = (A) + (B) 2016 CASF Annual Report 2018 CASF Annual Report 3nd Interim Period January 1, 2016, January 1, 2017, January 1, 2016, through through through December 31, 2016 June 30, 2018 June 30, 2018 Revenues: CASF surcharges collected $ 54,017,219 $ 22,820,817 $ 76,838,036 Delinquent fees - - - Loan repayments and interest 8 ,911 1 2,625 21,536 Investment income 1 ,002,082 4,191,025 5,193,107 Total revenues $ 55,028,212 $ 27,024,467 $ 82,052,679 Expenditures: CASF Projects (Infrastructure Grant Account) $ 10,524,194 $ 31,079,708 $ 41,603,902 Infrastructure Loan Account 266,811 163,099 429,910 Consortia Account 804,158 1,988,165 2,792,323 Public Housing Account 1 ,932,674 5,360,096 7,292,770 Administrative costs - - - Pro-rata costs - - - Infrastructure Loan Account service - - - Total expenditures $ 13,527,837 $ 38,591,068 $ 52,118,905 Column (A): Data from the 2016 CASF Annual Report (prepared by the CPUC, issued April 1, 2017); not audited by SCO. Column (B): Data from the 2018 CASF Annual Report (prepared by the CPUC, issued April 1, 2019); not audited by SCO. To accomplish our audit objectives, we: General Procedures  Determined the existence of procedural safeguards by reviewing CPUC’s Communications Division (CD), Fiscal Office, and CASF Program grant and loan recipients’ internal controls of program funds.  Determined process compliance by reviewing carriers’ transmittal forms filed with the CPUC and copies of their surcharge remittance checks, delinquent fees, and interest assessments; any letters from the CD or Fiscal Office requesting delinquencies or interest; invoices from CASF Program grant and loan recipients; bank statements pertaining to CASF Program deposits; all CPUC resolutions and decisions pertaining to the CASF Program; disbursement documentation; the CD’s formal communications to the carriers and the CD’s approval letters for payments from January 1, 2016, through June 30, 2018; and internal communications betwen the CD and Fiscal Office.  Determined the integrity of Reporting by reviewing the CALSTARS Procedure Manual; the State Administrative Manual; Fiscal Office reports on CASF Program revenues and expenditures; CASF-related CALSTARS reports; and Certifications of Year-End Financial Reports from the Fiscal Office to SCO (including SCO automated -7- California Public Utilities Commission California Advanced Services Fund Program year-end reports, Statement of Revenue, Final Budget Report, Trial Balance, Statement of Change in General Fixed Assets, Statement of General Fixed Assets and Statement of Contingent Liabilities) from January 1, 2016, through June 30, 2018.  Determined the adequacy of oversight by reviewing the CD’s management of processes for the CASF Program from January 1, 2016, through June 30, 2018; and of CASF Program grant and loan recipients’ management of CASF Program funds claimed and received. Internal Controls  Gained an understanding of the CPUC’s accounting system related to CASF Program grants, revenues, and expenditure processing by reviewing the CALSTARS Procedure Manual; the State Administrative Manual; Fiscal Office reports on CASF Program revenues and expenditures; CASF-related CALSTARS reports; and Certifications of Year-End Financial Reports from the Fiscal Office to SCO (including SCO automated year-end reports, Statement of Revenue, Final Budget Report, Trial Balance, Statement of Change in General Fixed Assets, Statement of General Fixed Assets and Statement of Contingent Liabilities) from January 1, 2016, through June 30, 2018;  Reviewed the following documents to gain an understanding of the internal control strengths and weaknesses: o Organization charts; o CPUC CASF procedural manual for the CASF Public Housing Account; o CPUC administrative manual for the CASF Public Housing Account; and o CPUC administrative manual for the CASF Rural and Urban Regional Broadband Consortia Grant Program.  Determined whether the Fiscal Office, the CD, and CASF Program grant and loan recipients’ internal controls were adequate to ensure the reliability of recorded and reported information;  Determined whether the CD and Fiscal Office maintained adequate oversight over CASF Program remittances;  Determined whether the Fiscal Office properly recorded and reported CASF Program expenditures;  Determined whether the Fiscal Office, the CD, and CASF Program grant and loan recipients’ internal controls were adequate to ensure the reliability of recorded and reported information;  Determined whether disbursements from the CASF, including payment requests to grantees receiving funding from each account, were in compliance with PUC sections 281 and 282, other state laws, and CPUC directives; -8- California Public Utilities Commission California Advanced Services Fund Program  Determined total CASF Program expenditures as of June 30, 2018, including disbursements to contractors, internal administrative expenses, and inter-departmental charges; and Revenue and Expenditure Transaction Testing  Determined whether the Fiscal Office properly recorded and reported CASF Program revenue by performing the following: o Judgmentally selected a non-statistical sample of revenues and expenditures reported in the CASF Program’s annual reports, and performed limited tests of controls to confirm and validate that documented processes and procedures were functioning as designed;  Tested CALSTARS to ensure that the system can identify Program Cost Account codes related to revenues and expenditures, as recorded in the CPUC’s written policies and procedures and internal control interviews; and  Tested the same targeted selection to determine whether the amounts claimed were adequately supported and in compliance with PUC sections 281 and 282, other state laws, and CPUC directives. During our testing of expenditure transaction we also:  Reviewed CASF Program grant and loan applications;  Reviewed CASF Program grantee progress reports and project completion reports;  Reviewed communications, both formal and via email, between CPUC staff and applicants/grantees; and  Verified CPUC contracts paid for using CASF Program funds. Figure 3, on the next page, displays the sample selections of revenues claimed in the annual reports, compared to the revenues recorded in CALSTARS for the same period. -9- California Public Utilities Commission California Advanced Services Fund Program Figure 3 Sample Selection for Revenues Annual Report Sample/Population Selection Population Current Year Program Cost Account Amount Amount January 1, 2016, through December 31, 2016 Regulatory fees $ 54,017,219 $ 54,017,219 January 1, 2016, through December 31, 2016 Investment income 328,263 1 ,002,082 January 1, 2017, through Decemeber 31, 2017 Regulatory fees 6 ,601,700 6 ,601,700 January 1, 2017, through Decemeber 31, 2017 Loan repayments and interest 2 ,228 5 ,941 January 1, 2017, through Decemeber 31, 2017 Investment income 606,768 1 ,950,161 January 1, 2018, through June 30, 2018 Regulatory fees 16,219,117 16,219,117 January 1, 2018, through June 30, 2018 Investment income 726,492 2 ,240,864 CALSTARS Sample/Population Selection Population Current Year Program Cost Account Amount Amount January 1, 2016, through December 31, 2016 Regulatory fees $ 46,941,888 $ 46,941,888 January 1, 2016, through December 31, 2016 Investment income 328,263 721,202 January 1, 2017, through Decemeber 31, 2017 Regulatory fees 6 ,572,788 6 ,572,788 January 1, 2017, through Decemeber 31, 2017 Loan repayments and interest 2 ,228 5 ,512 January 1, 2017, through Decemeber 31, 2017 Investment income 606,768 1 ,425,437 January 1, 2018, through June 30, 2018 Regulatory fees 10,444,117 10,444,117 January 1, 2018, through June 30, 2018 Investment income 726,492 1 ,358,054 Figure 4 displays the sample selections of expenditures claimed in the annual reports, compared to the expenditures recorded in CALSTARS for the same period. Figure 4 Sample Selection for Expenditures Annual Report Sample/Population Selection Population Current Year Program Cost Account Amount Amount January 1, 2016, through December 31, 2016 Infrastructure Grant Account $ 1,707,761 $ 10,524,194 January 1, 2016, through December 31, 2016 Infrastructure Loan Account 2 66,811 266,811 January 1, 2016, through December 31, 2016 Consortia Grant Account 11,631 804,158 January 1, 2017, through Decemeber 31, 2017 Infrastructure Grant Account 7,781,752 2 1,320,544 January 1, 2017, through Decemeber 31, 2017 Infrastructure Loan Account 1 12,952 112,952 January 1, 2017, through Decemeber 31, 2017 Consortia Grant Account 1 57,511 1,090,305 January 1, 2017, through Decemeber 31, 2017 Public Housing Grant Account 25,850 3,858,247 January 1, 2018, through June 30, 2018 Infrastructure Loan Account 50,147 5 0,147 January 1, 2018, through June 30, 2018 Consortia Grant Account 2 17,594 897,860 CALSTARS Sample/Population Selection Population Current Year Program Cost Account Amount Amount January 1, 2016, through December 31, 2016 Infrastructure Grant Account $ 1,707,761 $ 10,574,783 January 1, 2016, through December 31, 2016 Infrastructure Loan Account 2 62,737 262,737 January 1, 2016, through December 31, 2016 Consortia Grant Account 11,631 783,789 January 1, 2017, through Decemeber 31, 2017 Infrastructure Grant Account 7,781,752 2 1,312,596 January 1, 2017, through Decemeber 31, 2017 Infrastructure Loan Account 1 12,952 112,952 January 1, 2017, through Decemeber 31, 2017 Consortia Grant Account 1 57,511 1,090,305 January 1, 2017, through Decemeber 31, 2017 Public Housing Grant Account 25,850 3,858,247 January 1, 2018, through June 30, 2018 Infrastructure Loan Account 50,146 5 0,146 January 1, 2018, through June 30, 2018 Consortia Grant Account 2 17,594 897,538 -10- California Public Utilities Commission California Advanced Services Fund Program We conducted this performance audit of financial tranactions 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. We limited our review of the CPUC’s internal controls to gaining an understanding of the transaction flow and claim preparation process as necessary to develop appropriate auditing procedures. We determined that program expenditures are in compliance with PUC Conclusion sections 281 and 282, other state laws, and CPUC directives; records are reliable; revenue is properly managed and correctly recorded; and the CASF Program has proper oversight. However, our audit found that cumulative surcharge revenue was overstated by $12,879,243 and investment income was overstated by $1,688,415 as of June 30, 2018. Our audit also identified processes and procedures that could be implemented to improve CPUC oversight of the program. Our findings are quantified in the Schedule and described in the Findings and Recommendations section. Follow-up on The CPUC has satisfactorily resolved the findings noted in our prior audit report for the period of July 1, 2010, through December 31, 2015, issued Prior Audit on March 30, 2017. Findings Views of We issued a draft report on December 1, 2020. Robert Osborn, Director, Communications Division, responded by letter dated December 10, 2020 Responsible (Attachment 1). Mr. Osborn agreed with Finding 1, disagreed with Officials Finding 2, and indicated that CD has taken steps to correct the noted deficiency. CPUC’s next auditor should follow up on this during the next CASF audit to verify that these corrective actions were adequate and appropriate. Restricted Use This report is solely for the information and use of the CPUC, the Legislature, and the SCO; it is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of the final audit report, which is a matter of public record, and is available on the SCO website at www.sco.ca.gov. Original signed by MICHAEL REEVES, CPA Acting Chief, Division of Audits February 17, 2021 -11- California Public Utilities Commission California Advanced Services Fund Program Schedule— CASF Program Revenues and Expenditures January 1, 2008, through June 30, 2018 (A) (B) (C) 1st Interim 2nd Interim 3nd Interim Cumulative January 1, 2008, July 1, 2010, January 1, 2016, Reported in through through through 2018 CASF Audited Overstated/ June 30, 2010 December 31, 2015 June 30, 2018 Annual Report* Totals (Understated) Finding Revenues: Regulatory fees $ 115,140,932 $ 140,407,693 $ 76,838,036 $ 3 40,845,578 $ 327,966,335 $ 12,879,243 1 (surcharge/MTS revenue) Delinquent fees 161,024 1 29,432 - 37,131 37,131 - Loan repayments and interest - 15,595 21,536 - - - Investment income 1 ,008,965 1,707,578 5,193,107 8,349,915 6 ,661,500 1 ,688,415 1 Total revenues $ 116,310,921 $ 142,260,298 $ 82,052,679 $ 3 49,232,624 $ 334,664,966 $ 14,567,658 Expenditures: CASF Projects $ 78,007 $ 5 9,131,544 $ 41,603,902 $ 1 07,608,717 $ 107,608,717 $ - (Infrastructure Grant Account) Infrastructure Loan Account - 40,977 429,910 1,187,916.00 1 ,187,916 - Consortia Account - 7,907,376 2,792,323 1 1,260,727.00 11,260,727 - Public Housing Account - 2 90,081 7,292,770 7,542,502.00 7 ,542,502 - Administrative costs 274,432 5,440,225 - - - - Pro-rata costs 228,658 1,760,849 - - - - Infrastructure Loan Account service - 2 89,975 - - - - Total expenditures $ 581,097 $ 7 4,861,027 $ 52,118,905 $ 1 27,599,862 $ 127,599,862 $ - Column (A): Data from the first interim independent audit report (prepared the CPUC's Utility Audit, Finance and Compliance Branch, Report, issued March 30, 2011); not audited by the SCO. Column (B): Data from the 2015 CASF Annual Report (prepared by the CPUC, issued April 1, 2016); audited by SCO. Column (C): Data from the 2016 CASF Annual Report (prepared by the CPUC, issued April 1, 2017) and the 2018 CASF Annual Report (prepared by the CPUC, issued April 1, 2019). * The CPUC did not apply prior-period audit adjustments, as cumulative totals would have captured any prior-period adjustments. The sum of the three interim periods does not equal the total reported in the 2018 CASF Annual Report, because no analysis of prior-period adjustments in the accounting records was performed (see Finding 2). -12- California Public Utilities Commission California Advanced Services Fund Program Findings and Recommendations FINDING 1— We determined that cumulative surcharge revenue was overstated by $12,879,243 and investment income was overstated by $1,688,415 as of Overstated June 30, 2018. The overstatement appears to be the result of the cumulative methodology used by the CPUC to record the amount of revenue received. surcharge revenue and The CPUC did not use consistent methodology for recording revenue. In investment some reports, the cash methodology of accounting was used; in other income reports, the accrual methodologywas used. The CPUC was not required to use a specific accounting methodology in its CASF Program annual reports; therefore, the finding is not the result of errors or irregularities. The overstatement is a result of CPUC not adopting specific processes and procedures to standardize the compilation of the annual report (see Finding 2). This lack of processes and procedures results in a lack of consistency between annual reports. Moreover, CPUC does not reconcile its annual reports to cumulative reports that it has been capable of generating since the program’s inception. In past annual reports, the CPUC relied on data from the Telecommunications and User Fee Filing System (TUFFS), which determines surcharge amounts (program revenues) payable to the CPUC based on the intrastate revenue earned and reported by utilities in a given monthly period. The purpose of TUFFS is to assure regulatory compliance with surcharge remittance for the period in which utility revenues are earned. TUFFS will permit retroactive transaction adjustments to prior months through May 2010. In contrast, CALSTARS reports revenue in the monthly period in which it is received. Since 2012, CALSTARS has recorded adjustments at the end of each fiscal year to reflect reported revenue accruals. Additional payments received for any reporting period (including multiple years) prior to the current year are applied to the prior year as an adjustment to the prior years’ fourth-quarter cash revenue. In brief, CALSTARS reflects cash transactions received in a given period, while TUFFS reflects transactions recorded but not necessarily received in that period. Therefore, TUFFS and CALSTARS revenue reports for a given period will not agree with each other. Prior annual reports presented data through December, which is after the fiscal year-end. To generate data through the end of each calendar year, it appears that a CALSTARS report for July thorugh December was run after March of the following year. Generating data in this way would also include cumulative data from July through December. As a result, CASF Program end-of-year revenues were overstated. Furthermore, for reporting years 2013 and 2014, it appears that the CALSTARS report may have been generated prior to March of the following year. Revenue is often received 45 to 60 days after a reporting period; therefore the November and December revenue might not have been received by the CPUC at the time the report was generated. As a -13- California Public Utilities Commission California Advanced Services Fund Program result, CALSTARS may not have included all CASF Program revenue through December 31 of the prior years. To calculate CASF Program revenue for 2013 and 2014, the total revenue for the reporting period was added to the cumulative total of the prior annual report. As a result, the total was further understated when the modified accrual methodology was applied to the data. This most recent CASF Program Annual Report provides financial data as of June 30, 2018. As the annual report is based on actual finalized accounting data, we consider the revenues and expenditures recorded therein to be accurate. Using the same procedure as in the prior audit, we attempted to recreate CALSTARS reports and reconcile them to the cumulative total revenues reported in the CASF Annual Report.1 We determined that cumulative surcharge revenue was overstated by $12,879,243 as of June 30, 2018. It appears that understatements and overstatements in prior fiscal years added to the actual numbers reported for the period current annual report created the discrepancy. We determined that it would not be efficient or effective to pinpoint where the errors occurred because the cumulative totals appear to be the relevant purpose of the annual report. The figures within the period will always fluctuate until a documented and standardized process for developing these annual reports is developed (see Finding 2). We applied the same audit methodology that we applied to cumulative surcharge revenues to investment income. Using this methodology, we determined that investment income was overstated by $1,688,415 as of June 30, 2018. Recommendations We recommend that CD staff:  Continue to use FI$CAL (formerly CALSTARS) as the primary determinant of annual revenues and expenditures;  Develop processes and procedures for generating source data and preparing the annual reports; and  Develop policies for maintaining supporting documentation for the source data used to create the annual reports. To standardize the compilation of data for CASF annual reports, the CD should also:  Generate FI$CAL revenue reports for each reporting period and maintain those reports to support the CASF Program Annual Report;  Confirm prior revenue amounts when calculating the cumulative total by running accounting reports since the inception of the program; and  Develop tests to correlate and reconcile data between TUFFS and FI$CAL. 1 See Table 6 in the 2018 Annual Report, reproduced in Finding 2 of this report. -14- California Public Utilities Commission California Advanced Services Fund Program CPUC’s Response CD agrees with SCO’s determination that the cumulative surcharge revenue and investment income were overstated from prior annual reports due to inconsistent use of data sources and reporting period. CD has already corrected the overstatement in the 2018 CASF Annual Report in Table 6, CASF Revenue and Expenditures, as of June 30, 2018, which was consistent with revenues, expenditures, and the fund balance recorded in CALSTARS. In addition, a contributing factor that has allowed for inconsistent data sources is the current remittance amounts by the carriers are determined by the carriers and often yield volatile and declining revenue. The Commission is committed to reforming the current formulation in order to mitigate this inconsistency. FINDING 2— We determined that the CD did not maintain the original documentation that was used to create and support the 2018 Annual Report. This Lack of documentation was not maintained because formalized processes and supporting procedures have not been developed specifically for generating this report. documentation The CD has not established processes and procedures that require CPUC staff to retain and document the source data used for its annual reports. As discussed in prior audit reports and in Finding 1 of this report, prior annual reports used December 31 as the end of the reporting period. Unlike June 30, December 31 is not a cut-off date for the fiscal year; therefore, the accounting periods are not finalized. A report generated in December is a “snapshot” at that point in time, and additional revenues and expenditures may be recorded afterwards. For this reason, reports generated later will not match those generated in December and the data cannot be recreated. Copies of these financial reports were not maintained; as a result, auditors were unable to validate the authenticity of the source data. Without supporting documentation, the CD has not been able to create accurate annual reports. Moreover, the annual reports do not tie to each other, as the beginning and ending balances of the reports do not match. For example, revenues as of January 1, 2016, were $8,608,726 more than those recorded as of December 31, 2015; and expenditures as of January 1, 2016, were $567,704 more than those reported as of December 31, 2015. Figure 5, on the next page, shows the discrepancy between the ending balance of the prior year and the beginning balance of the subsequent year from December 2015 through January 2017. The ending and beginning balances shown in Figure 5 are taken directly from the last three CASF Program annual reports issued in 2015, 2016, and 2018. Figures 5a, 5b, and 5c, on the following pages, provide further information. -15- California Public Utilities Commission California Advanced Services Fund Program Figure 5 Summary of Annual Financial Report Balance Discrepancies December 2015 January 2016 Ending Balance 1 Beginning Balance 2 Difference Revenues: Regulatory fees (surcharge / MTS revenue) $ 255,548,625 $ 2 64,007,542 $ 8 ,458,917 Delinquent fees 2 90,456 - ( 290,456) Loan repayments and interest 15,595 15,595 - Investment income 2,716,543 3,156,808 440,265 Total revenues $ 258,571,219 $ 2 67,179,945 $ 8 ,608,726 Expenditures:4 CASF projects (Infrastructure Grant Account) $ 5 9,209,551 $ 66,165,526 $ 6 ,955,975 Infrastructure Loan Account 40,977 784,303 743,326 Consortia Account 7,907,376 8,599,890 692,514 Public Housing Account 2 90,081 460,109 170,028 Administrative costs 5,714,657 - (5,714,657) Pro-rata costs 1,989,507 - (1,989,507) Infrastructure Loan Account service 2 89,975 - ( 289,975) Total expenditures $ 7 5,442,124 $ 76,009,828 $ 567,704 December 2016 January 2017 Ending Balance 2 Beginning Balance 3 Difference Revenues: Regulatory fees (surcharge /MTS revenue) $ 318,024,761 $ 3 18,024,761 $ - Delinquent fees - - - Loan repayments and interest 24,506 24,506 - Investment income 4,158,890 4,158,890 - Total revenues $ 322,208,157 $ 3 22,208,157 $ - Expenditures:4 CASF projects (Infrastructure Grant Account) $ 7 6,689,720 $ 76,529,009 $ (160,711) Infrastructure Loan Account 1,051,114 1,024,817 (26,297) Consortia Account 9,404,048 9,272,562 ( 131,486) Public Housing Account 2,392,783 2,182,406 ( 210,377) Administrative costs - - - Pro-rata costs - - - Infrastructure Loan Account service - - - Total expenditures $ 8 9,537,665 $ 89,008,794 $ (528,871) 1. Data from 2015 CASF Annual Report. See Figure 4A: Table 3, CASF Actual Program Revenues and Expenditures as of December 31, 2015. 2. Data from the 2016 CASF Annual Report. See Figure 4b: Table 3(a), CASF Revenues and Expenditures. 3. Data from the 2018 CASF Annual Report. See Figure 4c: Table 6, CASF Revenues and Expenditures as of June 30, 2018. 4. Expenditures do not include encumbered amounts. -16- California Public Utilities Commission California Advanced Services Fund Program Figure 5a, from the 2015 annual report, shows the CASF 2015 ending balance. Figure 5a -17- California Public Utilities Commission California Advanced Services Fund Program Figure 5b, from the 2016 annual report, shows the CASF 2016 beginning and ending balances. Figure 5b -18- California Public Utilities Commission California Advanced Services Fund Program Figure 5c, from the 2018 annual report, shows the CASF 2017 beginning balance. Figure 5c The ending balances of the preceding annual report should match the beginning balances of the subsequent annual report. When there is a discrepancy, a reconciling explanation should be included in the report. The tables from the 2015, 2016, and 2018 annual reports do not include reconciling explanations, nor do they make note of the balance discrepancies. -19- California Public Utilities Commission California Advanced Services Fund Program If CD staff had maintained the source documentation used to create the tables in the annual reports, then we could have reconciled the differences and/or developed an opinion regarding the accuracy of the data provided in those figures. We concluded that the transactions recorded in these tables are materially accurate because the reports were generated during the period reported. However, due to accounting principles, this data would have represented only a “snapshot” in time. According to the principles of governmental fund accounting, the data would have been adjusted at the fiscal year end. Although the financial data within any given reporting period fluctuates due to the application of accounting principals, the cumulative totals could have been more reliable if sufficient accounting data was available. If CD staff members had generated and maintained accounting reports since the inception of the program, they would have been able to authenticate prior- year revenues and expenditures. Timing differences in prior periods could be appropriately adjusted into the current period and more accurately reported at fiscal year end. Using a consistent accounting methodology to record revenues and expenditures would allow the CD to generate consistent and reliable data for its annual reports. Documenting and maintaining source data would allow the CD to authenticate its data and support its annual reports. Such processes and procedures for preparing annual reports would have allowed the CD to ensure that the beginning balances in subsequent reports accurately tied to the ending balances in prior reports. We performed this audit procedure to ensure that the cumulative totals match the source data found in the accounting records, which show all transactions since inception of the program. Recommendations We recommend that the CD develop and document processes and procedures for preparing annual reports. These processes and procedures should ensure that:  Reports from FI$CAL (formerly CALSTARS) are retained and match the amounts reported in the annual reports;  Source data used to prepare the annual report is adequately documented, and the data is asserted to be valid (i.e. endorsed by CD staff that generated the report); and  Prior balances are authenticated by running cumulative reports that match prior-year reports, and prior-period adjustments are identified. CPUC’s Response CD disagrees with SCO’s determination. While CD may not have had all the documentation that the SCO requested, the CPUC Fiscal Office maintains documentation that supports the financial data in the CASF Annual Report. Going forward, CD will independently download and -20- California Public Utilities Commission California Advanced Services Fund Program maintain documentation that supports the financial data in the CASF Annual Reports. SCO Comment Our finding and recommendation remain unchanged. Although we do not disagree with CD’s assertions that the data was once available and was used to prepare the reports, the inability to recreate or produce this data during the audit represents a deficiency that we were required to report. Additionally, in future reports, CD must be able to demonstrate how the prior year’s annual report reconciles with the current year’s annual report. -21- California Public Utilities Commission California Advanced Services Fund Program Attachment 1— California Public Utilities Commission’s Response to Draft Audit Report -22- California Public Utilities Commission California Advanced Services Fund Program Attachment 2— 2018 Annual Report California Advanced Services Fund, Issued April 2019 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S20-CSF-0001