While I don't disagree that there is some amount of fraud in the program I believe that you may be foggy on how the process works. The applicants of the program file for services and state the costs up front (from provider). Funding is either approved or denied and the telecom is reimbursed up to approved dollar amounts, which is based on funding level, which is based on NSLP data. Discounts are passed on to school by either SPI or BEAR until approved amount is absorbed. Contracted services further enable the applicant to lock in prices with the provider and statements are provided to the applicant quarterly. Applicants are also required to keep paperwork for 5 years after the last date of service.
It sounds to me like the slush you refer to is at fault of the applicants for not keeping up with their statements and discounts. Edit: I firmly believe that unless you have personally dealt with the paperwork and the forms (470, 471, 486, 479, BEAR etc.) then you're going to have to really convince me that you know what you're talking about and provide factual information to back it.
And that's why I posted above that budgeting for audits has significantly increased this year. Again, I'm very familiar with the e-rate process and I feel your opinion may be different had you seen it from my perspective.