GAO Report on Quality of Audits

On October 25th the General Accountability Office (GAO) released a report entitled Actions Needed to Address Persistent Audit Quality Problems in response to concerns over the quality of single audits. Single audits are annual audits entities that expend at least $500,000 in federal funds are required to obtain. The audits are conducted by independent non-federal auditors and are generally governed by OMB Circular A-133.

The GAO report analyzes a June 2007 study by the President’s Council on Integrity and Efficiency (PCIE) as part of the National Single Audit Sampling Project, coordinated by the U.S. Department of Education’s Office of Inspector General. Both the PCIE study and the GAO report indicate there are major problems with the quality of single audits and expressed concerns that audits are not being conducted in accordance with professional standards and requirements. In fact, 51% of the audit reports studied by the PCIE had deficiencies severe enough to be classified as having “limited reliability” or as being “unreliable.”

One of the most common deficiencies in single audits is the failure to adequately test for internal controls over federal compliance requirements. This report, together with recent changes to OMB Circular A-133 (reported in the June 29th Federal Update) that strengthen the requirement for single auditors to report internal control findings, is likely to lead to an even greater focus on grantee and subgrantee control over compliance with federal requirements.

The PCIE made three recommendations to address single audit quality: (1) revise and improve single audit standards, criteria, and guidance; (2) establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to conduct and continue to perform single audits; and (3) review and enhance disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. The GAO generally agreed with these recommendations, but recommended Congress study whether the recommendations are feasible (especially with regard to the CPE requirements) before making any changes to single audit standards. The GAO also recommended Congress consider strengthening the oversight by cognizant federal agencies, meaning grantees and subgrantees can expect even greater scrutiny of their audit reports by the U.S. Department of Education.

The GAO report is available at: http://www.gao.gov/new.items/d08213t.pdf, and the PCIE study is available at: http://www.ignet.gov/pande/audit/NatSamProjRptFINAL2.pdf.

Author: SLK

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OIG Issues Report on NCLB Reauthorization

The U.S. Department of Education’s Office of Inspector General (OIG) issued a report, entitled “An OIG Perspective on Improving Accountability and Integrity in ESEA [Elementary and Secondary Education Act] Programs.” Based on its audits of ESEA programs and topics related to the ESEA over the last seven years, OIG identified five main weaknesses or deficiencies that led to noncompliance:


1. Essential, Clear, and Consistent Requirements. The OIG’s report criticizes ESEA’s lack of specificity in stating how an LEA or SEA can demonstrate compliance. It notes that grantees are forced to rely on ED-issued non-regulatory guidance. In addition, OIG observes, certain requirements in NCLB are inconsistent between programs — for example, caps on administrative costs and carryover limitations vary between NCLB programs. The report points out that such inconsistent requirements cause confusion, make compliance more difficult, and may not be based on objective criteria.
2. Data Quality. Valid and reliable data are imperative because academic assessments and accountability data are critical to the implementation of the ESEA. OIG is concerned about the reliability and accuracy of data that SEAs and districts use to determine student achievement and program effectiveness as well as weak state controls over collecting and reporting performance data and scoring state assessments. OIG specifically pointed out that federal funds may have been spent improperly because of poor quality data related to counting migrant children.
3. Weak Monitoring and Oversight. OIG has identified deficiencies in ED’s monitor¬ing of SEAs and in the states’ monitoring of their districts. OIG posited that these weaknesses were particularly apparent in the school choice and SES programs as well as charter schools program.
4. Improprieties in State and Local Programs. The report points out several in¬stances of corruption, embezzlement and other misappropriation of federal funds by state and local officials. It also says conflicts of inter¬est often arise at the district and school levels and that such conflicts may lead to misuse of federal funds. OIG suggests that the ED and Congress consider taking specific actions to (1) enhance transparency in decisionmaking by deterring conflicts of interest at the State and local levels; (2) ensure States identify and provide additional oversight of high-risk subgrantees; (3) establish a reporting requirement for suspected fraud and other criminal misconduct, waste, and abuse; and (4) ensure whistleblower protection for State and local employees and contractors.
5. Program-Specific Issues. The report pointed out that OIG has identified provisions of the ESEA that have yet to be addressed. Therefore, OIG recommended that the Department and Congress consider incorporating the following: (1) Changes to the definition of “weapon” in the Safe and Drug-Free Schools and Communi¬ties Act; (2) More specificity regarding the criteria SEAs use to identify persistently dangerous schools; (3) Alternate approaches to defining SES eligibility; and (4) Clarification of whether Reading First pro¬grams must have scientific evidence of effective-ness to be eligible for funding.

OIG’s purpose in authoring the report was to inform the reauthorization process by providing its perspective on improving accountability and integrity in ESEA programs. OIG stated that it will continue to provide comments, when requested, on specific ED or Congressional legislative proposals.

You can view the report at http://www.ed.gov/about/offices/list/oig/auditreports/fy2008/s09h0007.pdf.

Author: CWP

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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

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House Passes Inspectors General Reform Bill

H.R. 928, the Improving Government Accountability Act, passed the House on Wednesday, October 3, by a vote of 404-11. The bill will give inspectors general (IGs) more autonomy with the agencies they oversee. The bill would set seven-year terms for the more than 60 IGs and would restrict the circumstances under which an inspector general could be fired. The legislation would give IGs greater budgetary independence and would create an independent council intended “to increase the professionalism and effectiveness” of those serving in the post.

A number of amendments were adopted on the House floor, including one that requires IGs to notify Congress if their budget requests are inadequate, balancing the need for IGs’ independence with the need for streamlined budget authority. Another amendment requires annual inspector general reports on program redundancy within federal agencies. Once again, the hope is that these provisions will help keep IGs independent, but will still require that Congress hold them accountable.

Although the bill passed by an overwhelming majority, the President has discussed a possible veto threat against the bill. The White House argued in a statement of administration policy that the bill would improperly diminish presidential control over budgets and interfere with presidents’ constitutional authority to remove inspectors general when warranted. However, the odds of holding to such a threat in the face of such overwhelming support for the bill is unlikely. When asked about the large amount of minority support, House Majority Leader Steny Hoyer (D-MD) speculated that Republicans were “hard-pressed to vote against an effort to prevent waste, fraud and abuse.”

Sen. Claire McCaskill (D-MO) plans to combine S. 1723, her own IG reform bill, with legislation from Sen. Susan Collins (R-ME) that seeks to increase oversight of federal contracting. The Senate hopes that the larger package will be up for markup sometime in November. However, as is the case with most pending legislation, the bill is subject to the frantic end of the year schedule that Congress works through.

Resources:
Kathleen Hunter, “House Passes Provisions for Enhanced Independence of Inspectors General,” CQ Today, October 3, 2007.
Author: SAS

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Audit Report Questioning Fiscal Flexibility in Schoolwide Programs

On June 20, 2007, the U.S. Department of Education’s Office of Inspector General (OIG) released a blockbuster audit report questioning long-standing guidance on the way states and school districts should document financial information in schoolwide programs. The audit is available on the U.S. Department of Education’s (ED) website at: http://www.ed.gov/about/offices/list/oig/auditreports/a05g0031.pdf

OIG audited a school district to determine if the district complied with financial accountability requirements under the No Child Left Behind Act (NCLB) programs. The objective of the audit was to determine if costs were allowable under the program, necessary, reasonable, allocable and spent in accordance with approved budgets. During the audit, OIG concluded the district did not provide appropriate time and effort records showing how much time employees spent on various cost objectives. Some of these employees worked on schoolwide activities in schoolwide programs.
The State (which is ultimately responsible for audit resolution in state-administered programs) objected, noting that funds lose their character as state or federal funds in schoolwide programs. Therefore, it would not make sense to require schoolwide employees to maintain documentation of their time and effort. The state pointed to ED’s Non-Regulatory Guidance on Designing Schoolwide Programs (March 2006), which states:
Schoolwide program schools use Title I funds to meet the needs of all students in the school, as determined through a comprehensive needs assessment. Individual students are not identified as eligible to participate. No distinctions are made between staff paid with Title I funds and staff who are not.
The State argued that if there is no distinction between staff supported with federal funds and staff that are not, it does not make sense to require employees to keep documentation of which programs they work on.
OIG rejected this argument, noting the schoolwide schools did not actually consolidate their funding in their accounting systems. The OIG states that “funds were accounted for in the same way whether or not the individual was employed by a schoolwide or non-schoolwide school.” Without evidence that the school district used an accounting method to consolidate schoolwide program funds at its schoolwide schools, OIG found no basis to distinguish between schoolwide and non-schoolwide costs.
OIG questioned $210,000, but estimated the total amount of unsupported costs might be as high as $2,360,000. OIG recommended that ED’s Office of Elementary and Secondary Education determine the full amount of unsupported costs and require the State to repay that amount.
This audit report highlights longstanding confusion over the extent of fiscal flexibility available in a schoolwide school. Although ED has encouraged schoolwide schools to “consolidate” their funding (and, in fact, NCLB requires states to lift all barriers to the consolidation of schoolwide funds and to encourage school districts to consolidate schoolwide funding), it has never provided clearly written guidance on what consolidation means. In May 2006, ED released Non-Regulatory Guidance on Title I Fiscal Issues attempting to clarify the consolidation requirement by introducing the notion of a “single account.” The guidance provides:
A school operating a schoolwide program that consolidates in a single account and uses, in a schoolwide program, funds from other Federal education programs administered by the Secretary (except Reading First) is not required to maintain separate fiscal accounting records, by program, that identify the specific activities supported by those program funds. The school must, however, maintain records that demonstrate that the schoolwide program, considered as a whole, addresses the intent and purposes of each of the Federal education programs whose funds were consolidated to support it.
From the start, however, this guidance raised more questions than it answered because it never explained what a “single account” is, or what steps a school must take in order to consolidate funds into a single account.
ED has been particularly inconsistent in how it treats time distribution in schoolwide programs. In guidance issued under the Improving America’s Schools Act of 1994, the predecessor to NCLB, ED stated that employees working exclusively on schoolwide activities do not need to maintain any time and effort records. This guidance was written by ED’s Office of Elementary and Secondary and Education. Yet, ED’s Office of the Chief Financial Officer (OCFO) later advised that a schoolwide program represents a single cost objective; accordingly, semi-annual certifications must be kept. The OCFO’s position was also reflected in the OMB Circular A-133 Compliance Supplement. This conflict was supposed to be clarified by ED’s May 2006 fiscal guidance, in which ED stated that schoolwide schools consolidating their funds into a single account are not required to maintain any time and effort records, while schools not consolidating their funds into a single account must follow the rules of time distribution set out in OMB Circular A-87. Without an explanation of what a “single account” is, it is difficult to understand the practical implications of this guidance. Further, it remains unclear whether a schoolwide program constitutes a “single cost objective” if a school does not consolidate its funds into a single account.
This audit finding may finally force a confrontation over what it means to consolidate funds in a schoolwide program and what practical implications that has for financial operations. Although the finding only specifically addresses time and effort certification, this issue impacts the documentation of any costs associated with a schoolwide program, as well as other financial management issues such as procurement, inventory management, cash management and record keeping. Ultimately, it is up to ED’s Office of Elementary and Secondary Education to determine whether to sustain the audit findings.
This audit also underscores ED’s overall focus on fiscal issues. It is our understanding that OIG is performing a number of financial accountability audits around the country.
Our firm has contacted the OIG and OCFO to get clarification on the policy interpretations underlying this audit report. We plan to address the issue of consolidated funding in a schoolwide program in great detail at trainings this fall, including AEFFA in October and our Forum in November. We will keep you posted on any additional information we receive from ED on this very important issue.
Author: SLK

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