oversight

Puerto Rico Department of Education Did Not Administer Properly a $9,700,000 Contract With National School Services of Puerto Rico.

Published by the Department of Education, Office of Inspector General on 2001-03-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    Puerto Rico Department of Education
              Did Not Administer Properly a $9,700,000 Contract
                 With National School Services of Puerto Rico




                                  FINAL AUDIT REPORT




                          Audit Control Number ED-OIG/A01-A0004
                                         March 2001




Our mission is to promote the efficient                     U.S. Department of Education
and effective use of taxpayer dollars                         Office of Inspector General
in support of American education.                                New York Audit Region
                                                                San Juan, PR Area Office
                                         Notice

        Statements that financial and/or managerial practices need improvement or
  recommendations that costs questioned be refunded or unsupported costs be adequately
 supported, as well as other conclusions and recommendations in this report, represent the
opinions of the Office of Inspector General. Determinations on these matters will be made
by appropriate U.S. Department of Education officials. In accordance with the Freedom of
   Information Act (5 U.S.C. §552), reports issued by the Office of Inspector General are
      available, if requested, to members of the press and general public to the extent
           information contained therein is not subject to exemptions in the Act.
                                            Table of Contents


Executive Summary .............................................................................................. 1

AUDIT RESULTS

Finding 1            PRDE awarded a $9,700,000 fixed-price contract without
                     full and open competition ............................................................. 3
                            Recommendations ............................................................... 4
                            PRDE’s response................................................................. 4
                            OIG’s reply.......................................................................... 4

Finding 2            PRDE failed to determine each line item of cost included in
                     the fixed-price contract to ensure the contractor’s proposed
                     price was fair and reasonable....................................................... 5
                             Recommendations ............................................................... 6
                             PRDE’s response................................................................. 6
                             OIG’s reply.......................................................................... 6

Finding 3            PRDE lacked controls to ensure compliance with the
                     contract and Federal regulations ................................................. 7
                            Recommendations ............................................................... 8
                            PRDE’s response................................................................. 8
                            OIG’s reply.......................................................................... 8

Other Matters ........................................................................................................ 9
                         Recommendations ............................................................... 9
                         PRDE’s response................................................................. 9
                         OIG’s reply........................................................................ 10

Background.......................................................................................................... 11

Scope and Methodology...................................................................................... 11

Qualification of Audit Results............................................................................ 12

Management Controls......................................................................................... 12

Exhibit A:          Summary of Questionable Costs and Unsupported Costs
Exhibit B:          Excerpt of PRDE’s response
                                         Executive Summary
Puerto Rico Department of Education (PRDE) failed to award properly a Title I1 fixed-price
contract totaling $9,700,000 for Elementary School Learning Centers in Puerto Rico for the
1998/1999 school year. PRDE awarded the contract to National School Services of Puerto Rico
(NSSPR) without full and open competition. PRDE also did not determine each line item of cost
included in the fixed-price contract. Because PRDE did not competitively bid the contract,
PRDE and the U.S. Department of Education (ED) could not be assured that the highest quality
services and products were received at competitive prices or that certain vendors were not given
preferential treatment or arbitrarily excluded. Moreover, resources used to pay unreasonable
amounts could have otherwise been used to attend to other projects or used for additional
learning centers at needy elementary schools, as provided for under the terms of the contract.
PRDE officials stated that the contract did not have to be competitively bid because the contract
was for professional services, and under Puerto Rico law, professional services’ contracts do not
need competitive bids. However, the services contracted for were primarily for acquisition of
equipment and furniture, rather than professional services.

PRDE also did not enforce the terms of the contract. For example, PRDE did not adequately
review NSSPR’s invoices for supporting documentation of costs claimed or for adherence to the
contract prior to payment. As a result, PRDE paid $1,193,993 in questionable costs and
$6,647,500 in unsupported costs to NSSPR for the contract. In addition, PRDE did not identify
that NSSPR substituted other computer equipment for that specified in the contract and did not
obtain a contract compliance audit from NSSPR. Moreover, PRDE did not inventory materials,
equipment, and property purchased by NSSPR with Federal funds and did not ensure that NSSPR
replaced equipment removed for repair, as stipulated in the contract.

We also found that PRDE did not ensure that the objectives of the project were achieved because
learning centers did not utilize materials and software provided under this contract and did not
teach all three subjects, English, Spanish, and Mathematics as the contract stipulated.

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PRDE to establish controls to ensure all procurement transactions involving Federal funds
provide for open and free competition and maintain records justifying lack of competition when
competitive bids are not obtained, as well as the basis for contractor selection. Furthermore,
PRDE should establish effective procurement procedures in order to ensure it obtains fair and
reasonable prices on contracts and should require a breakout of each element of cost, determining
each line item, and documenting in its procurement files the cost analysis performed, to
determine if prices obtained on contracts are fair and reasonable. PRDE should return to ED
$6,647,500 in unsupported costs and $1,193,993 in questionable costs. PRDE should also

1
    PRDE is awarded an allotment of Federal funds under Title I of Public Law 103-382, known as “Improving America’s School
    Act”, for improving the academic achievement of children with economic disadvantages and help them meet the standards of
    performance established by the State.
establish controls to ensure payments are made to contractors only after proper documentation is
obtained and when charges are determined to be in compliance with Office of Management and
Budget (OMB) Circular A-87. Additionally, PRDE should ensure that software purchased is
appropriate for elementary school learning centers and that contract objectives are met. PRDE
should review two additional 1998/99 Title I contracts awarded to NSSPR totaling $3,887,194 to
ensure that adequate supporting documentation has been provided; and return any questionable
amounts to ED. PRDE should also review all current contracts using Federal funds, to determine
whether sufficient competition and cost analysis were performed. Lastly, PRDE’s 1999 Single
Audit report has not been submitted. Prior Single Audit reports have contained repeated
findings, including similar findings disclosed in this report. PRDE should take pro-active steps
to assure that Single Audit reports are submitted within the required time frames.

PRDE stated it is not in a position to controvert the accuracy of the findings included in this
report and does not discard the possibility that irregularities might have taken place in the award
and enforcement of contracts during past years. PRDE explained that the new administration has
addressed aggressively the irregularities that have been identified in audit reports during recent
years. As a result, PRDE stated it has taken significant corrective actions to improve the
deficiencies detected in the process of awarding, executing, and enforcing contracts. However,
PRDE believes it is impossible to respond properly to the findings in this report without
receiving information and documents from the contractor. We reviewed PRDE’s response, but
our position and recommendations remain unchanged. PRDE should conduct an independent
assessment of its new corrective actions to ensure they are sufficient. An excerpt of PRDE’s
response is attached as Exhibit B.
PRDE did not administer properly a $9.7 million contract with
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AUDIT RESULTS

Finding 1

PRDE awarded a $9,700,000 fixed-price contract without full and open competition


PRDE awarded NSSPR a Title I fixed-price contract totaling $9,700,000 without full and open
competition. PRDE also did not maintain in its procurement records a justification for lack of
competition. ED generally permits States, including Puerto Rico, to utilize their procurement
policies and procedures for procuring property. Puerto Rico’s procurement regulations
governing PRDE require that any acquisition of goods, works, and services in excess of $25,000
must utilize formal competitive procedures. PRDE officials stated that the contract was not
competitively bid because the contract was for professional services, and under Puerto Rico law,
professional services’ contracts do not need competitive bids. However, the services contracted
for were primarily for acquisition of equipment and furniture rather than professional services.
Because PRDE did not competitively bid the contract, PRDE and ED could not be assured
products and services were received at competitive prices or that certain vendors were not given
preferential treatment or arbitrarily excluded.

Procurement standards are detailed in 34 Code of Federal Regulations (CFR) § 80.36 (a) as
follows: when procuring property and services under a grant, a State will follow the same
policies and procedures it uses for procurements from its non-Federal funds. The State will
ensure that every purchase order or other contract includes any clauses required by Federal
statutes and executive orders and their implementing regulations.

Puerto Rico’s procurement regulations governing PRDE, Reglamento de Compras, Ventas y
Subastas de Bienes, Obras y Servicios No Personales del Departamento de Educación, (PRDE
Purchasing Regulations) Article 37, requires that any acquisition of goods, works, and services
in excess of $25,000 must utilize formal competitive procedures.

PRDE’s Secretary maintained a percentage of Title I funds to develop “special projects.” These
projects were not advertised for competition. In July 1998, PRDE entered into a contractual
agreement totaling $9,700,000 with NSSPR for the establishment of at least 50 learning centers
in Puerto Rico between August 1998 and September 1999. The purpose of the learning centers
was to improve the academic achievement of children with economic disadvantages in the areas
of English, Spanish, and Mathematics and to help them meet the standards of performance
established by the State. According to the agreement, the services to be provided by NSSPR
included, but were not limited to the following:

!   Purchase, delivery, installation, and configuration of computers and printers;
!   Purchase and installation of software;
!   Purchase and installation of furniture for the computer centers;
!   Purchase and installation of audiovisual equipment;
!   Training and technical support to teachers and parents of eligible students and follow-up
    visits for training and technical support;
PRDE did not administer properly a $9.7 million contract with
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!     Dissemination of the project through orientation meetings with superintendents, school
      principals, and the private sector; and
!     Any other necessary activity to undertake the purposes of the proposal or requested by PRDE.

Our audit disclosed that PRDE issued the $9,700,000 contract without full and open competition.
As evidenced by the contract, the majority of the services contracted were for purchase and
installation of computers, printers, software, furniture, and audiovisual equipment for the
learning centers, not for professional services, as stated by PRDE officials. By not issuing the
contract with full and open competition, PRDE did not provide alternatives to determine the most
economical and practical procurement for the Federal government that maximized the services
provided to the students in Puerto Rico’s elementary schools.

Lack of competition in its procurement transaction with NSSPR prevented PRDE from assuring
that equipment, materials, and services were obtained in an effective manner, selecting the best
vendor for best price and quality of services. Furthermore, additional learning centers were to be
provided by the contractor if the total cost of the 50 learning centers was less than $9,700,000. In
providing the initial 50 learning centers, NSSPR invoiced PRDE for the total $9,700,000,
resulting in no excess funds remaining for additional learning centers.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PRDE to:

1.1      Establish controls to ensure all procurement transactions involving Federal funds provide
         for full and open competition;
1.2      Maintain records justifying lack of competition when competitive bids are not obtained,
         as well as the basis for contractor selection; and
1.3      Conduct an independent assessment of its new corrective actions to ensure they are
         sufficient.

PRDE’s response:

PRDE stated it is not in a position to controvert the accuracy of the findings included in this
report and does not discard the possibility that irregularities might have taken place in the award
and enforcement of contracts during past years. PRDE explained that the new administration has
addressed aggressively the irregularities that have been identified in audit reports during recent
years. As a result, PRDE stated it has taken significant corrective actions to improve the
deficiencies detected in the process of awarding, executing, and enforcing contracts.

OIG’s reply:

We reviewed PRDE’s response, but our position and recommendations remain unchanged. We
added recommendation 1.3 to address the corrective actions PRDE stated would be taken.
PRDE did not administer properly a $9.7 million contract with
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Finding 2

PRDE failed to determine each line item of cost included in the fixed-price contract to
ensure the contractor’s proposed price was fair and reasonable


In 1998, NSSPR submitted to PRDE an $11,579,964 proposal to implement learning centers at
elementary public schools for award year 1998/1999. The proposal included an itemized price
list. PRDE evaluated the proposal and requested modifications. In response, NSSPR submitted a
second proposal for $9,700,000, but the proposal did not include an itemized price list. PRDE
approved the second proposal without performing a cost analysis, and the $9,700,000 proposal
became the fixed price of the contract. By approving the proposal without determining each
element of cost and by not performing a cost analysis of the proposal, PRDE did not ensure it
received fair and reasonable prices in accordance with Federal and Puerto Rico laws and
regulations.

OMB Circular No. A-87, Attachment A, paragraphs C.1, 2 provide that costs may be charged to
a Federal grant only if the costs are, among other requirements, reasonable. In determining the
reasonableness of costs consideration must be given to, among other requirements, market prices
for comparable goods or services. PRDE’s Purchasing Regulations, Articles 6.2, 6.3, provide
that austerity is the guiding principle for the procurement process and that the process be
competitive, fair, reasonable and economical. Further, Article 59.2 states that if only one bid is
received, it is understood that if its price is unreasonable, the bid must be rejected. Further,
under PRDE procedures bids are broken down by line item, and Article 50.6 states that if a
global price is offered or discounted, that price or discount must be prorated among the various
line items.

As stated in Finding 1, PRDE awarded contracts for “special projects” to specialized companies
that could provide the proposed services. The Office of External Resources, as well as the
Secretary’s evaluation committee, evaluated the “special projects.” If a proposal was approved
with modifications, the revised proposal did not undergo a second evaluation. There was no
process to compare proposals to each other.

NSSPR’s fixed-price $9,700,000 contract was a “special project,” approved with modifications.
As a result, it did not undergo a second evaluation. In addition, a cost analysis was not
performed. According to PRDE officials, an item by item price list was not required because the
proposed services were viewed as a “concept” of innovative strategies.

Subsequent to invoicing PRDE, NSSPR’s parent company, National School Services, Inc.,
Wheeling, Illinois (NSS-Illinois), appointed a new Comptroller. The new Comptroller was
unaware of the basis for the cost of each item invoiced under the $9,700,000 fixed-price contract.
NSSPR’s Executive Director agreed that the $9,700,000 budget presented in the proposal,
prepared by NSS-Illinois, should not have been accepted by PRDE without a detailed price list.

PRDE officials stated that PRDE also did not obtain itemized price lists for other contracts with
PRDE did not administer properly a $9.7 million contract with
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companies that provided similar services and equipment. Rather, PRDE reviewed the overall
cost of the proposed services. Not performing cost analysis in its procurement procedures
prevented PRDE from ensuring that prices obtained on contracts were fair and reasonable.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PRDE to:

2.1     Establish effective procurement procedures in order to ensure it obtains fair and
        reasonable prices on future contracts;
2.2     Require from future contractors a breakout of each element of cost and determine each
        line item; and
2.3     Document in its procurement files the cost analysis performed to determine if prices
        obtained on future contracts are fair and reasonable.

PRDE’s response:

PRDE stated it is not in a position to controvert the accuracy of the findings included in this
report and does not discard the possibility that irregularities might have taken place in the award
and enforcement of contracts during past years. PRDE explained that the new administration has
addressed aggressively the irregularities that have been identified in audit reports during recent
years.

OIG’s reply:

We reviewed PRDE’s response, but our position and recommendations remain unchanged.
PRDE did not administer properly a $9.7 million contract with
National School Services of Puerto Rico - FINAL                 7          ACN: ED-OIG/A01-A0004

Finding 3

PRDE lacked controls to ensure compliance with the contract and Federal regulations


PRDE did not enforce the terms of the contract and therefore paid $1,193,993 in questionable
costs and $6,647,500 in unsupported costs to NSSPR for the $9,700,000 fixed-price contract.
(See Exhibit A). In addition, PRDE did not identify that NSSPR substituted other computer
equipment for that specified in the contract. This occurred because PRDE did not implement
controls to oversee contract administration, including compliance with the contract and Federal
regulations, and to properly review contractor’s invoices for adequate and reliable supporting
documentation prior to payment. As a result, PRDE failed to identify contractor’s overcharges
and deviations from the contract.

According to 34 CFR § 76.702, “A State and a subgrantee shall use fiscal control and fund
accounting procedures that insure proper disbursement of and accounting for Federal funds.”
Further 34 CFR § 80.20(b)(6) provides that “Accounting records must be supported by such
source documentation as cancelled checks, paid bills, payrolls, time and attendance records,
contract and subgrant awards documents, etc.”

In addition, OMB Circular No. A-87, Attachment B(2)(e)(3) and (18) provides that costs of
promotional items, memorabilia, gifts, entertainment, and social activities and any costs directly
associated with such costs are unallowable.

PRDE did not ensure compliance with contract requirements and Federal regulations because it
paid $9,700,000 to NSSPR, without ensuring that NSSPR met the delivery requirements of the
contract or that it submitted adequate and reliable supporting documentation of costs. For
example, NSSPR did not comply with contract clauses such as submitting a contract compliance
audit, replacing equipment removed for repair, inventory materials, equipment, and property
purchased by NSSPR with Federal funds, and submitting invoices accompanied by evidence that
supported the expenses claimed. In addition, NSSPR did not purchase specific brand name
equipment, as stipulated in the contract. PRDE’s Special Projects’ Fiscal Officer stated that once
the invoices reached PRDE’s Fiscal Division, NSSPR’s documentation was verified for delivery
of equipment and materials, as well as services provided, and the invoices were math verified,
before approving the invoices for payment. As a result, PRDE paid NSSPR $6,647,500 in
unsupported costs, representing costs billed without supporting documentation, and $1,193,993,
representing costs overcharged or based on questionable documentation.

We were unable to reconcile amounts claimed by NSSPR to adequate and reliable supporting
documentation because (1) PRDE did not require from NSSPR adequate supporting
documentation, and (2) NSS-Illinois submitted to us only narrative descriptions of the expenses
claimed instead of original receipts. As a result, the expenses claimed are considered
unsupported. For example, supporting documents for costs of materials, equipment costs, costs
of software, installation costs, and subscription costs, were not provided by NSSPR.

We also questioned claimed amounts for professional services, computer equipment, software,
PRDE did not administer properly a $9.7 million contract with
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warranties, teachers’ lunches provided during training sessions, costs related to follow-up
projects, and an end-of-year activity. For example, audit tests conducted on teacher attendance
rosters supporting four months of professional service charges revealed NSSPR double-billed
training provided to schools and over-billed follow-up visits made to the learning centers. In
addition, based on vendors’ invoices, NSSPR overcharged PRDE for computer equipment and
software purchases. For example, we obtained NSS-Illinois’s cost from a software vendor for
software purchases totaling $351,250. NSSPR billed PRDE a total of $465,950 for the same
software, resulting in an overcharge of $114,700 (33 percent). NSSPR also billed $100,000 for
3-year warranties when computers purchased already included a 3-year warranty from the
manufacturer. Although NSS-Illinois provided documentation to support NSSPR’s invoices for
the end-of-year activity, entertainment costs such as gifts, flowers, seminar participants’ supplies,
handouts, presentation folders, brochures, and audio visual equipment are not allowed under
OMB Circular No. A-87. A complete listing and explanation of the unsupported costs and
questionable costs can be found in Exhibit A.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PRDE to:

3.1     Return to ED $6,647,500 in unsupported costs and $1,193,993 in questioned costs;
3.2     Establish controls to ensure payments are made only after:
            • proper documentation (vendors’ invoices, when appropriate) is obtained from
                subrecipients/contractors;
            • supervisory review of payments and supporting documentation is conducted; and
            • charges are determined to be in compliance with OMB Circular A-87 and other
                regulations; and
3.3     Provide contract compliance and administrative training to Office of External Resources
        and Finance Division personnel to ensure they verify supporting documentation.

PRDE’s response:

PRDE stated it is not in a position to controvert the accuracy of the findings included in this
report and does not discard the possibility that irregularities might have taken place in the award
and enforcement of contracts during past years. PRDE explained that the new administration has
addressed aggressively the irregularities that have been identified in audit reports during recent
years.

OIG’s reply:

We reviewed PRDE’s response, but our position and recommendations remain unchanged.
PRDE did not administer properly a $9.7 million contract with
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                                                Other Matters

(1) PRDE failed to award properly two additional Title I contracts to NSSPR during the
    1998/1999 school year, one for $2,575,194 and the other for $1,312,000. Both contracts
    were also awarded as professional services contracts although they were primarily for the
    acquisition of equipment, software, and furniture. In addition, PRDE awarded the contracts
    without full and open competition and failed to negotiate each line item of cost included in
    the contracts to ensure the contractor’s proposed prices were fair and reasonable.

(2) PRDE did not ensure that the objectives of the 1998/1999 learning centers project were
    achieved. We found that learning centers did not utilize materials and software provided
    under this contract and did not teach all three subjects, English, Spanish, and Mathematics, as
    the contract stipulated. Teachers from various learning centers interviewed stated that some
    of the software was not utilized because it was too advanced for the students.

(3) As part of our audit, we examined the draft report of an independent Certified Public
    Accountant’s review, conducted to assist PRDE in monitoring NSSPR’s compliance with
    certain aspects of two contractual agreements executed during the 1995/1996 school year.
    The report disclosed findings similar to the findings discussed in this report, which have yet
    to be corrected.

(4) Because PRDE’s Single Audit reports have been historically late, ED lacks the appropriate
    information to monitor adequately PRDE’s administration of ED funds. The reports
    submitted have contained repeated findings, including similar findings disclosed in this
    report, which have yet to be corrected. As of January 19, 2001, the 1999 Single Audit report,
    which was due by March 2000, had not been submitted.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PRDE to:

4.1     Review two additional 1998/1999 Title I contracts awarded to NSSPR totaling
        $3,887,194 to ensure that adequate supporting documentation has been provided and
        return any questionable amounts to ED;
4.2     Review all current PRDE contracts using Federal funds, to determine whether sufficient
        competition and cost analysis were performed;
4.3     Ensure software is appropriate for elementary school learning centers and that contract
        objectives are met;
4.4     Determine why the independent Certified Public Accountant’s report was not finalized
        and why the findings were never corrected; and take appropriate action to correct the
        findings; and
4.5     Take pro-active steps to assure that Single Audit reports are submitted within the required
        time frames.

PRDE’s response:
PRDE did not administer properly a $9.7 million contract with
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PRDE stated it is not in a position to controvert the accuracy of the findings included in this
report and does not discard the possibility that irregularities might have taken place in the award
and enforcement of contracts during past years. PRDE explained that the new administration has
addressed aggressively the irregularities that have been identified in audit reports during recent
years.

OIG’s reply:

We reviewed PRDE’s response, but our position and recommendations remain unchanged.
PRDE did not administer properly a $9.7 million contract with
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                                                 Background

NSSPR is a subsidiary of NSS-Illinois, a private, for-profit corporation located in Wheeling,
Illinois. PRDE contracts with NSSPR to provide educational services to Puerto Rico’s schools.
PRDE’s major contracts with NSSPR for the 1998/1999 and 1999/2000 award years funded by
Title I Federal ED funds included the following:

       1998/1999
    1. Elementary School Learning Centers                                      $9,700,000
    2. High School Learning Centers                                             2,575,194
    3. School Improvement and Professional Development                          1,312,000
                                                                              $13,587,194
       1999/2000
    1. Strengthening the Learning Centers for Teachers
       of Students at Risk                                                     $9,500,000
    2. Elementary School Learning Centers (Continuation)                          500,000
    3. School Improvement and Professional Development                          1,312,151
                                                                              $11,312,151

The 1998/1999 Elementary School Learning Centers’ project represented a collaborative effort
between PRDE and NSSPR to provide educational services to Puerto Rico’s students, teachers,
parents, and the community. Its objectives were to maximize Title I students’ academic skills in
English, Spanish, and Mathematics through the use of computer technology and other
technological resources; to promote parents’ participation through the use and management of
computer software; and to contribute to the professional development of teachers by
strengthening and improving their technical skills.

NSSPR did not maintain any accounting records in its files for the 1998/1999 learning centers
contract. NSSPR sent copies of all training attendance rosters and other documentation
pertaining to the 1998/1999 learning centers contract to NSS-Illinois and NSS-Illinois then made
all billing calculations. As a result, supporting documentation of all expenses billed to PRDE for
the 1998/1999 learning centers contract was provided to the auditors by the NSS-Illinois’s office
through NSSPR’s offices.

                                          Scope and Methodology

The purpose of our audit was to determine whether PRDE followed Federal and local laws in
procuring services for its 1998/1999 learning centers contract with NSS and ensured that contract
requirements were met prior to payment of contractor invoices.

The period of our audit was from August 1, 1998 to September 30, 1999. We performed our
fieldwork at NSSPR’s offices and PRDE’s offices in Hato Rey, Puerto Rico from May 2, 1999
through December 11, 2000. We also made site visits to six learning centers, detailed in the
following page.

To achieve the audit objectives, we reviewed NSSPR’s financial statements as of December 31,
1999 and 1998. In addition, we examined the draft report of an independent Certified Public
PRDE did not administer properly a $9.7 million contract with
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Accountant’s review conducted to assist PRDE in monitoring NSSPR’s compliance with certain
aspects of two contractual agreements executed during the 1995/1996 school year.

We also interviewed officials from PRDE’s Office of External Resources and personnel from
NSSPR and NSS-Illinois. Furthermore, we made site visits to six learning centers: two learning
centers from the Bayamón School District on May 15, 2000; two learning centers, one from the
Toa Alta School District and another from the Vega Alta School District on May 17, 2000; and
two learning centers from the Corozal School District on May 18, 2000.

Lastly, we traced NSSPR’s supporting documentation of its expenses billed to PRDE for the
1998/1999 learning centers contract. To fully test NSSPR’s documentation, we obtained source
documentation from vendors from whom NSS-Illinois purchased software and equipment. To
meet our objectives, we did not use electronic data from PRDE, NSSPR, NSS-Illinois or the U.S.
Department of Education for this audit.

Our audit was conducted in accordance with government auditing standards appropriate to the
limited scope of the audit described above.

                                      Qualification of Audit Results

PRDE failed to provide us with a management representation letter. Such a letter acknowledges
that management has responsibility for the fair representation of records and reports, and asserts
that the auditors have been provided with complete and accurate records. It also states that, to
the best of management’s knowledge, there have been no irregularities or violations of law or
regulation in connection with issues covered in the audit scope.

The failure of PRDE to sign a management representation letter prevents us from completing a
required audit step and causes us to qualify any conclusions we have drawn on the basis of the
data made available to us.

In addition, we found duplicative attendance rosters submitted to PRDE by NSSPR to support
the billings for professional services. As a result, we are unable to render an objective opinion
and conclusion on the total amount billed for professional services.

                                           Management Controls

As part of our review, we assessed the system of management controls, policies, procedures, and
practices applicable to PRDE’s administration of noncompetitive contracts. Our assessment was
performed to determine the level of control risk for determining the nature, extent, and timing of
our substantive tests to accomplish our audit objectives.

For the purpose of this report, we identified and classified the significant management controls
into the following categories:

!   Contract administration
!   Payment of contractor’s invoices
!   Contract performance
PRDE did not administer properly a $9.7 million contract with
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Because of inherent limitations, a study and evaluation made for the limited purpose described
above would not necessarily disclose all material weaknesses in the management controls.
However, our assessment disclosed significant management control weaknesses, which adversely
affected PRDE’s ability to administer the noncompetitive contracts. These weaknesses included
inadequate monitoring of contract requirements and the improper payment of contractor invoices
due to inadequate and unreliable supporting documentation. These weaknesses and their effects
are fully discussed in the AUDIT RESULTS section of this report.
PRDE did not administer properly a $9.7 million contract
with National School Services of Puerto Rico - FINAL           Exhibit A          ACN: ED-OIG/A01-A0004



          Puerto Rico Department of Education/ National School Services of Puerto Rico
                     1998/1999 Community School Learning Centers Project
                     Summary of Questionable Costs and Unsupported Costs


                                            Amount
                    Cost                   Invoiced        Accepted        Questionable    Unsupported
Notes             Category                 to PRDE          Costs             Costs           Costs

1.        Administrative Staff             $    60,600                                       $     60,600
2.        Professional Services                655,600     $ 358,600         $    97,000
3.        Local Travel                          50,000                                              50,000
4.        Materials                            905,750                                             905,750
5.        Equipment                          1,569,790      1,117,487            261,863           190,440
6.        Software                           3,922,400        351,250            114,700         3,456,450
7.        Installation                       1,883,360                                           1,883,360
8.        Warranties                           100,000                           100,000
9.        Lunches for Teachers                  50,000         16,170             33,830
10.       Subscriptions                         75,000                                             75,000
11.       Insurance                             15,000        15,000
12.       Follow-up Projects                   338,400                           338,400
13.       End-of-Year Activity                  74,100                            48,200           25,900

         Total                             $9,700,000      $1,858,507        $1,193,993      $6,647,500


Notes:

1. NSS-Illinois submitted only a reconciliation of the administrative staff’s charges without
   evidence to support the costs.

2. Audit tests conducted on teachers’ attendance rosters supporting four months’ charges
   revealed NSSPR double-billed training provided to schools and over-billed follow-up visits
   made to the learning centers, resulting in questionable costs totaling $99,000 for the four
   months tested. Based on the four months reviewed, we projected total questionable costs for
   professional services during the contract period to be $297,000.

3. NSS-Illinois submitted a narrative description of the amount claimed for local travel with no
   receipts; NSS-Illinois simply amortized the described amount over the duration of the school
   year.

4. NSSPR did not provide to PRDE copies of vendors’ invoices. NSSPR submitted invoices on
   NSS-Illinois’s letterhead for the materials delivered. As a result, we could not reconcile the
   expenses claimed to actual vendors’ invoices.
PRDE did not administer properly a $9.7 million contract
with National School Services of Puerto Rico - FINAL       Exhibit A      ACN: ED-OIG/A01-A0004

5. NSSPR provided “AST” computers to the learning centers despite a stipulation that
   “Compaq” computers would be provided. In addition, the supporting documentation that
   NSSPR submitted to PRDE was invoices on NSS-Illinois’s letterhead, not the vendor’s
   invoices. The claimed amount for computer equipment totaled $1,569,790. Of this amount,
   we accepted costs totaling $1,117,487 because we were able to obtain the vendor’s invoices
   to NSS-Illinois. Of the remaining amount, $452,303, NSSPR overcharged PRDE $261,863,
   resulting from the difference between NSS-Illinois’s cost and the amount claimed to PRDE,
   and did not provide adequate and reliable supporting documentation for $190,440.

6. NSSPR submitted invoices to PRDE for software purchases totaling $3,922,400 on NSS-
   Illinois’s letterhead. We obtained NSS-Illinois’s cost from two vendors for various software
   purchases totaling $351,250. NSSPR billed PRDE a total of $465,950 for the same software,
   resulting in an overcharge of $114,700 (33 percent). In addition, NSSPR did not provide
   adequate and reliable supporting documentation for the remaining amount of software
   purchases billed during the contract period totaling $3,456,450.

7. NSS-Illinois provided only descriptive evidence of the amount claimed to PRDE with no
   receipts. Furthermore, NSSPR also charged for installation under professional services,
   resulting in double billings for installation charges.

8. NSSPR billed $100,000 for 3-year warranties when computers purchased included a 3-year
   warranty from the manufacturer.

9. NSSPR billed $50,000 for lunches provided to teachers during training. However, two
   schools, which hosted training sessions, reported NSSPR reimbursed the school $6 per
   teacher. NSSPR charged PRDE for lunches for seven months, December 1998 through June
   1999. Using questionable attendance rosters used to support professional services (see note
   2), we estimated that approximately 385 teachers attended training per month, resulting in an
   estimated overcharge of $33,830.

10. NSSPR billed $75,000 for subscriptions but did not provide receipts of the amount claimed.
    As a result, we could not reconcile claimed amounts to adequate and reliable supporting
    documentation.

11. NSS-Illinois provided reliable documentation for the amount of insurance claimed.

12. NSSPR billed $338,400 for “follow-up projects”, which represented a flat rate of $400 per
    computer per month for computer maintenance and repair of 846 computers installed over a
    three-year period. However, not all of the 846 computers in operation at the learning centers
    had to be repaired due to mechanical problems. As a result, we were unable to reconcile
    claimed amounts to adequate and reliable supporting documentation. Furthermore, NSSPR
    included additional charges for follow-up visits under the professional services and
    installation categories.

13. Although NSS-Illinois provided supporting documentation for the end-of-year activity,
    $48,200 represented costs for entertainment, which are not allowed under OMB Circular No.
    A-87. In addition, NSS-Illinois did not provide adequate and reliable supporting
PRDE did not administer properly a $9.7 million contract
with National School Services of Puerto Rico - FINAL       Exhibit A       ACN: ED-OIG/A01-A0004

    documentation for training offered during the activity totaling $25,900.
PRDE did not administer properly a $9.7 million contract
with National School Services of Puerto Rico - FINAL       Exhibit B   ACN: ED-OIG/A01-A0004
PRDE did not administer properly a $9.7 million contract
with National School Services of Puerto Rico - FINAL       Exhibit B   ACN: ED-OIG/A01-A0004
                                   REPORT DISTRIBUTION LIST
                                          AUDIT CONTROL NO. A01-A0004



Auditee
Honorable César Rey................................................................................................. 1
Secretary of Education
Estado Libre Asociado de Puerto Rico
Departamento de Educación
Calle Teniente González Esq. Calle Calaf – 12th Floor
Urb. Tres Monjitas
Hato Rey, Puerto Rico 00919


Action Official
Mr. Thomas Corwin .................................................................................................. 3
Office of Elementary and Secondary Education
U.S. Department of Education
400 Maryland Ave., SW Room 5C107
Washington, D.C. 20202



Other ED Offices
Chief of Staff, Office of the Secretary....................................................................... 1
Office of the Under Secretary ................................................................................... 1
Assistant Secretary for Intergovernmental and Interagency Affairs.......................... 1
Post Audit Group Supervisor, Office of Chief Financial Officer.............................. 1
Director, Office of Public Affairs.............................................................................. 1

IG Officials

Deputy Inspector General for Audit .......................................................................... 1
Assistant Inspector General for Audit ....................................................................... 1
Assistant Inspector General for Investigations.......................................................... 1
Counsel to Inspector General .................................................................................... 1
Area Manager, Planning, Analysis and Management Services................................. 1
Director, Advisory and Assistance, Elementary and Secondary Education .............. 1
Regional Inspectors General for Audit...................................................................... 1 Each