WHISTLE-BLOWER ZAPS REA MANAGEMENT

The former chief accountant for the Rural Electrification Administration has accused top officials of the agency of mismanagement, potential fraud and wasting millions of federal dollars.

William E. Davis, who now supervises a small REA support staff, alleges he was removed from his accounting position in June 1993 as retaliation for audits he directed that exposed possible fraud and "gross waste."

The allegations are contained in two whistle-blower complaints filed with the Office of Special Counsel -- the independent agency set up in 1989 to protect federal workers from improper disciplinary action. In the complaints, Davis asks Agriculture Secretary Mike Espy to investigate the allegations and reinstate him to his former post.

Steve Kinsella, a spokesman for Espy, said: "It appears in the initial review that the allegations are unfounded." Agriculture Department officials say that Davis was removed because of employee complaints about his management skills. The transfer was recommended by the REA personnel officer, Kinsella said.

Though the REA has long been a target of critics of government waste, Davis's accusations appear the most serious leveled by an official with detailed knowledge of the agency's financial records. Davis, an REA employee since 1965, had been director of the Borrower Accounting Division for the past eight years and says he was supervising 61 audit investigations at the time of his transfer.

"Our program is rotten from the top," Davis said of the REA in an interview. Top officials, he said, "like to be the guys in the white hats," giving borrowers "all the money they want" without sufficient scrutiny.

A former REA official familiar with the agency's accounting procedures said in an interview: "Oh sure, I was pressured not to come down hard on some borrowers. This is not new."

The REA was established in 1935 by President Franklin D. Roosevelt to bring electricity and telephone service to most of rural America. Federal support was needed because most established utilities refused to extend power lines to farms and ranches, saying there were not enough customers to make it unprofitable.

An agency of the Agriculture Department, the REA has approved more than $63 billion in low-interest loans and loan guarantees to rural electric and telephone cooperatives and other power entities since 1936.

With virtually all of the nation now wired for electricity, these federal subsidies have come under repeated attack, and the agency has been targeted for elimination by two presidents and various members of Congress. This year, the Clinton administration proposed restructuring REA loan programs, which Congress approved and the president recently signed into law.

Following are some of the allegations Davis made in his complaints and amplified on in a series of interviews:

* A March 1992 audit of the Commonwealth Telephone Company of Pennsylvania found the company had improperly exceeded REA contract limits in using more than $8.8 million in borrowed federal funds to extend telephone lines to consumers. REA's accounting division required Commonwealth to return the money. But Davis alleges that Commonwealth "pressured" Robert Peters, an assistant REA administrator in charge of telephone programs, into invalidating the findings.

It was the first time, Davis said, that an REA program head had changed an internal audit.

Peters said in an interview that he reviewed the audit and found that Commonwealth had received a waiver from REA regulations governing contract limits for the work in question. He suggested that Davis has exaggerated the significance of the audit finding. "It's not like the borrower was trying to abscond with some money," said Peters. "We're talking about a procedural thing." A Commonwealth spokesperson had no comment.

* Davis said the problem with Peters and Commonwealth is the result of a 1991 REA reorganization that has undermined the "independence and integrity" of the auditing process and violates a congressional mandate. In 1990, Congress amended the Rural Electrification Act of 1936 to promote rural economic development. Lawmakers directed the REA to hire a new assistant administrator and staff for rural development and to allocate a fixed percentage of its budget for rural development activities. Davis alleges that to circumvent this latter requirement, REA management put the accounting division under the umbrella of rural development.

Thus, "instead of reporting to the deputy administrator above the program level," Davis's complaint says, "the accounting function was subordinated to the programs that it audits. This opened the door to abuses of authority, gross waste and fraud in the program areas."

Kinsella said officials are reviewing the reorganization to see if it violated congressional intent.

* Last July, the General Accounting Office, the watchdog arm of Congress, released a report showing that some REA electric and telephone borrowers had invested extensively in cable and satellite television services. The report was requested by Rep. John Edward Porter (R-Ill.), who was concerned that government funds were being used to subsidize the private enterprises of REA borrowers.

Davis's complaint alleges that Peters and John H. Arnesen, assistant REA administrator for electric programs, "misrepresented the facts" about borrowers' activities to GAO representatives in order "to prevent GAO from investigating potential wrongdoing in their programs."

Peters denied the charge; Arnesen did not return a reporter's phone call. Peters said that he and Arnesen were "flabbergasted" at the possibility that REA borrowers were illegally using low-interest government loans for investments unrelated to electrical and telephone service.

But Ernie Hazera, the GAO evaluator in charge, said top REA officials -- with the exception of Davis -- were "absolutely negative" about expanding the agency's auditing procedures to ensure that borrowers' investments are adequately monitored. As a result, Hazera said, a GAO recommendation to allow REA auditors to examine the accounts of borrowers' business activities was not included in the report.

MISSION: Lends money and guarantees low-interest loans to promote economic development and to provide electric and telephone service in rural areas.

HISTORY: Established to help electrify rural areas in 1935 as part of a general unemployment program. The agency became independent a year later and became part of the Department of Agriculture in 1939. Congress authorized REA to extend telephone loans in 1949. In 1990, the agency's authority was expanded to include economic development.

PROGRAMS:

* The National Rural Utilities Cooperative Finance Corp. was formed in 1969 by the rural electric cooperatives. It obtains funds from private credit markets to lend to electric and telephone systems. As of Dec. 31, 1992, CFC had provided more than $5.1 billion in long-term loans.

* The Rural Telephone Bank was established in 1971 to provide additional sources of funding. At the end of fiscal 1992, the bank had approved $2.9 billion to 609 telephone systems.

* Three years ago, the REA began a low-interest loan and grant program to promote rural business incubators.

OFFICES: 14th and Independence Ave. SW

BUDGET AND STAFF: $137.6 million in fiscal 1994, which includes administrative costs and program subsidies; 517 employees as of Dec. 21.

SOURCES: Rural Electrification Administration, Department of Agriculture

-- Compiled by Barbara J. Saffir