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New York City Comptroller William C. Thompson, Jr. today issued an audit finding that RCN Telecom Services of New York, Inc. failed to report more than $26 million in revenue to the City over a seven-year period, thereby owing the City $1.8 million.

“I am pleased that after our auditors identified the unreported revenue to the City and RCN, RCN quickly walked through the door with a check for most of the claimed amount,” Thompson said. “The City should continue to work with RCN to resolve any outstanding issues to make sure the City receives all that it is due.”

The audit – available at www.comptroller.nyc.gov – covered Calendar Years 1999 to 2005, and examined whether RCN accurately reported its total revenue and properly calculated all fee amounts owed the City.

RCN provides a variety of telecommunication services through its local high-capacity and microwave-satellite video system operations in the City. It offers multiple service options – including basic and premium TV services, telephone connection and high-speed Internet connections - to about 77,000 subscribers in Manhattan, Queens and Brooklyn.

RCN operates under two agreements with the City through the Department of Information Technology and Telecommunications (DoITT), which is responsible for monitoring RCN’s compliance with the terms of the agreements.

One, a 10-year agreement to operate an Open Video System (OVS), allows RCN to construct and operate OVS communications services, including the operation of its microwave-satellite system within the city. Under that agreement, RCN must pay the City an OVS operator fee equal to five percent of the gross revenue from or in connection with the distribution of any service on the system or the provisions of any service-related activity in connection with the system.

The second, a 15-year franchise agreement, grants RCN franchise rights for the occupation of City property in connection with the provision of its telecommunication services. Under that agreement, RCN must pay a franchise fee consisting of the greater of either $200,000 or five percent of its annual gross revenue from telecommunication services not covered under the OVS agreement.

Auditors determined that RCN complied with certain non-revenue-related requirements of its agreements with the City, such as maintaining the required $50 million property and liability insurance that named the City as an additional insured party, paying the $1 million in a security deposit, and remitting specifically required payments for education and government access and for subscriber services to government facilities.

However, auditors found that Thompson’s audit found that RCN did not follow its requirement to report any revenue it generated from its microwave-satellite operations and advertising sales commissions as well as other areas. Additionally, RCN could not provide sufficient documentation that would allow my office to determine whether its books and records accurately reflect all of its revenue activities. Specifically, auditors found:

• RCN failed to report $18,750,353 in microwave-satellite revenue from January 2001 to December 2005.

• RCN failed to report a total of $12,755,699 in revenue generated from various operating activities that are specifically identified in the gross revenue definition of the agreements with the City, including advertising and resale revenue and other revenue categories.

• RCN failed to report the value of the free services it provided in the amount of $2,378,015.

• RCN did not report its bad-debt write-offs to the City.

• DoITT did not exercise its responsibility to ensure that RCN reported its revenue in accordance with the agreements. Auditors found no evidence that DoITT required RCN to submit detailed financial records to support the revenue reported to the City.

Consequently, RCN owes the City $1,784,594 in additional fees and late interest payments.

Additionally, as a result of RCN’s inability to provide the Comptroller’s office with building activity reports for calendar years 1999 and 2000, auditors could not fully determine whether additional revenues should have been reported and therefore whether additional fees are owed to the City.

After the Comptroller’s Office completed its preliminary audit and identified the unreported revenue, RCN remitted a check for $1,286,637, representing a significant portion of the principal amount assessed by the audit. After adjusting for the amount paid, RCN still owes the City $497,957.

As a result of the audit’s findings, Thompson asked RCN to pay the remaining $497,957 in fees and late charges due the City and report all revenue to the City as required in its agreements, and asked DOITT to ensure that RCN pays the money, complies with the report’s other recommendations, and establishes proper guidelines to monitor RCN’s compliance in the future.