OIG Title I Audit

The U.S. Department of Education’s (ED) Office of Inspector General (OIG) released a final audit report questioning the way a local education agency (LEA) spent Title I funds. The audit was issued on October 9, 2007 and is available on the OIG’s website at: http://www.ed.gov/about/offices/list/oig/auditreports/fy2008/a02g0020.pdf.

The purpose of the audit was to determine if the LEA spent Title I funds on allowable costs. The OIG cited multiple concerns, including the failure to maintain time and effort records documenting the time employees spent on Title I programs, a failure to properly allocate salary charges, a failure to adequately track property purchased with Title I funds and to ensure such property was used only for Title I purposes, and violations of Title I’s supplement not supplant restrictions. Not surprisingly, the OIG determined the LEA lacked sufficient internal controls to ensure federal funds were spent appropriately.

Based on the OIG’s findings it would be easy to conclude the LEA had serious and systemic problems in its management of federal funds. However, on closer inspection the issues raised by the OIG, while certainly signs of non-compliance, are not all that unusual. The most interesting aspects of the audit report are: (1) the OIG’s comments regarding internal control systems; and (2) the legal authority the OIG relied on to justify its conclusions.

Internal Controls

One of the OIG’s primary concerns was the LEA’s failure to ensure transactions were properly approved. For example, the LEA authorized work to commence under contracts that had not been approved by the School Board. All of the questioned contracts were ultimately approved; however, approval was sometimes granted two or three months after work began.

Most people can agree that failure to obtain required Board approval is a significant lapse in internal control; however, some of the other “internal control” violations cited by the OIG are not as obvious. In some cases the LEA could not produce original documentation supporting procurement transactions because several boxes stored at a warehouse were damaged. The LEA could provide electronic versions; however, since those versions did not show the approval signatures the OIG could not verify whether the transactions were properly approved. Similarly, the OIG criticized the LEA’s practice of retaining invoices to prove items were received as opposed to maintaining “receiving reports.” The invoices had been signed by the school principals as certification that the items were received but because district policy required particular “receiving reports” the OIG rejected the invoices. This focus on the importance of approvals is consistent with monitoring findings issued by the Office of the Chief Financial Officer’s (OCFO) Internal Control and Evaluation Group when it participated in recent Title I monitoring visits. Both the OIG and the OCFO have identified the requirement to have transactions reviewed and approved by an independent and appropriate official as a key factor in ensuring federal funds are spent on allowable costs.

One other interesting concern the OIG raised was the LEA’s failure to update its operational policies and procedures. The LEA maintained a governance manual, but the manual had not been updated since 1991. Because the manual was out of date it was not effective in providing standards for the control of LEA operations.

These “internal control” findings are extremely important. As we have previously reported, ED has begun to assess “risk” levels in the states. One of the factors ED uses to assess risk is audit and monitoring findings that reveal internal control deficiencies. Findings such as the ones detailed in the audit report have the potential of increasing ED’s perception of risk levels in the state.

Legal Authority

To support its conclusions the OIG primarily relied on Office of Management and Budget (OMB) Circular A-87 and the OMB Circular A-133 Compliance Supplement. OMB Circular A-87 sets out the federal cost principles that apply to all costs charged to federal grants. In particular, A-87 requires costs to be adequately documented; thus, the OIG concluded that, “to be allowable under Federal awards, costs must be adequately documented.”

The OMB Circular A-133 Compliance Supplement sets out guidance to auditors in conducting the required annual audit for entities that spend more than $500,000 in federal funds in a year (also known as the “single audit”). Part 6 of the Compliance Supplement provides a description of the components of an internal control system and provides examples of good controls over federal funds. Part 6 of the Compliance Supplement is available at: http://www.whitehouse.gov/omb/circulars/a133_compliance/07/pt6.pdf.

What is interesting about the OIG’s reliance on these documents is not that they are inapplicable, but that the OIG did not rely on the Education Department General Administrative Regulations (EDGAR). Regulations typically have higher precedential value than OMB Circulars, and EDGAR requires both proper documentation and sufficient internal controls over federal funds as part of a sound financial management system. In recent months there has become increasing confusion about what grants management standards ED is applying to LEAs in state-administered programs such as Title I.

Rather than relying on EDGAR some ED offices are relying on state and local policies and procedures, as well as the general statements in the OMB Circulars, to evaluate LEA compliance with grants management requirements. This appears to be based on a 1988 policy statement that federal agencies should defer to states in state-administered programs when it comes to setting the standards that apply to LEA-level financial management, procurement and inventory management systems. Whether the OIG is intentionally deferring to this policy statement is unclear, but the failure to cite to EDGAR is a departure from the OIG’s normal practice when auditing fiscal issues.

The good news is that Brustein & Manasevit plans to cover all of the issues raised in this audit report in more detail at its Fall Forum in Clark County Nevada. We will have sessions on EDGAR, OMB Circular A-87, time distribution, internal controls, risk management, and preparing for audits. We will also have representatives from ED and the OIG in attendance. Hopefully, some of the lingering questions raised by this audit will be addressed then. More information about our Forum is available at: http://www.bruman.com.

Author: SLK