oversight

Puerto Rico Department of Education's Administration of Contracts Awarded to Rock Solid Technologies.

Published by the Department of Education, Office of Inspector General on 2004-09-08.

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

                                   U.S. DEPARTMENT OF EDUCATION 

                                   OFFICE OF INSPECTOR GENERAL 

                                          75 Park Place, 12th Floor 

                                         New York, New York 10007



                                                     September 8, 2004

                                                                                                     Control Number
                                                                                                     ED-OIG/A02-E0007

Honorable César Rey-Hernández
Secretary of Education
Puerto Rico Department of Education
Calle Teniente González, Esq. Calle Calaf – 12th Floor
Urb. Tres Monjitas
Hato Rey, Puerto Rico 00919

Dear Secretary Rey-Hernández:

This is our Final Audit Report entitled Puerto Rico Department of Education’s (PRDE)
Administration of Contracts Awarded to Rock Solid Technologies (RST). The purpose of our
audit was to determine whether PRDE properly administered contracts awarded to RST. Our
specific objectives were to determine whether PRDE followed Federal and local laws in
procuring services through its contracts with RST and ensured that contract requirements were
met prior to payment of the contractor’s invoices.

We found PRDE did not properly administer contracts awarded to RST and did not adequately
manage its Title I and Technology Literacy Challenge programs. PRDE improperly charged
$3,354,545 to the U.S. Department of Education’s (ED) Title I and Technology Literacy
Challenge programs for two State-funded contracts unrelated to these programs that totaled
$7,354,545. These two contracts were awarded in 1999 and 2000 during PRDE’s prior
administration. The improper charges occurred because PRDE did not implement adequate
controls to oversee RST’s contract administration and to properly allocate contract charges. As a
result, Title I and Technology Literacy Challenge students did not fully benefit from ED funding.
None of the RST costs should have been charged directly to any ED grant because RST’s
services were related to maintaining PRDE’s payroll systems, its human resource systems, and
its school lunch program. We did not perform audit work to determine whether PRDE ensured
that contract requirements were met prior to payment of the contractor’s invoices because the
contracts were State-funded.

We provided a draft of this audit report to PRDE. In its response, dated August 12, 2004, PRDE
stated that its current administration was taking proactive steps to improve the weaknesses
inherited from the prior administration. PRDE also stated it was working in close cooperation
with ED to update its procedures. PRDE’s response did not cause us to change our finding and
recommendations. We have summarized PRDE’s comments after the finding and have included
PRDE’s entire response as an Attachment.



          Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
Audit of PRDE’s Administration of                                                           Final Audit Report 

Contracts Awarded to Rock Solid Technologies                                               ED-OIG/A02-E0007


                                                   BACKGROUND 


RST is a software solutions company with offices in Austin, Texas and San Juan, Puerto Rico.
RST began providing services to PRDE in April 1998, under the administration of the former
PRDE Secretary. PRDE contracted with RST to work on the reengineering of PRDE’s
Computer Center applications and implement a human resources operating system to manage
PRDE’s employee payroll accounts. During our audit period, PRDE awarded 10 contracts to
RST that totaled $13,451,859, including two contracts awarded by the prior PRDE
administration. All of the contracts awarded to RST were for State-funded services. The current
administration continued to contract with RST because of RST’s extensive knowledge of
PRDE’s human resources and payroll processing systems and because RST provided
maintenance and support for PRDE’s current operations.

In February 2002, the former Secretary and Associate Secretary of PRDE, as well as others, pled
guilty to various felony charges involving extortion, program fraud, and money laundering of
Federal funds. In August 2002, ED placed Special Conditions on PRDE’s grants because of
problems with PRDE’s fiscal and program accountability. Additionally, in August 2003,
PRDE’s Internal Audit Office reported a payroll fraud case that involved the illegal
appropriation of $104,161 in state funds. According to PRDE’s Internal Audit report, this
occurred due to a lack of supervision and controls over processing payroll payment transactions.
In September 2003, ED again placed Special Conditions on PRDE’s grants due, in part, to
unallowable payment of employees’ salaries using Title I and other Federal program accounts.

                                                  AUDIT RESULTS

Finding: 	 PRDE improperly charged $3,354,545 to ED programs for professional services
           provided by RST

PRDE did not properly administer contracts awarded to RST and did not adequately manage its
Title I and Technology Literacy Challenge programs. PRDE improperly charged $1,000,000 to
ED’s Title I program and $2,354,545 to the Technology Literacy Challenge program for two
State-funded contracts unrelated to these programs that totaled $7,354,545. This occurred
because PRDE did not implement adequate controls to oversee RST’s contract administration
and to properly allocate contract charges. As a result, Title I and Technology Literacy Challenge
students did not fully benefit from ED funding.

The regulations at 34 C.F.R. § 76.7021 state that, “A State and a subgrantee shall use fiscal
control and fund accounting procedures that insure proper disbursement of and accounting for
Federal funds.”

According to 34 C.F.R. § 80.20(a), “Fiscal control and accounting procedures of the State . . .
must be sufficient to: . . . (2) Permit the tracing of funds to a level of expenditures adequate to
establish that such funds have not been used in violation of the restrictions and prohibitions of
applicable statutes.” In addition, Office of Management and Budget (OMB) Circular No. A-87
1
    Unless otherwise specified, all regulatory citations are to the July 1, 2002 volume.


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Audit of PRDE’s Administration of                                             Final Audit Report 

Contracts Awarded to Rock Solid Technologies                                 ED-OIG/A02-E0007


(1997), Attachment A, paragraph C.1 provides that to be an allowable cost, the cost must be
allocable to a Federal award.

PRDE paid RST $14,496,446 for the 10 contracts reviewed. All costs associated with the 10
contracts should have been charged to PRDE’s State account codes or to indirect cost codes
because RST’s costs were primarily associated with PRDE’s computer systems for payroll,
human resources, and the school lunch program. However, under the prior administration,
PRDE improperly charged $3,354,545 as direct costs to ED’s Title I and Technology Literacy
Challenge programs. This occurred because PRDE’s Program Office identified on its
“Allocation of Funds” form that Federal funds could be charged for RST’s contracts. PRDE
justified the charges by claiming that a great portion of the payroll processed by PRDE was for
Federally funded employees. However, PRDE should not have charged any direct costs to ED’s
programs because the portion of payroll PRDE claimed it processed for Federally funded
employees was already charged through indirect costs. For the 10 contracts reviewed, PRDE
charged a total of $2,576,666 as indirect costs.

Recommendations:

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

1.1 	   Return to ED $3,354,545 in questioned costs; and

1.2 	   Establish controls to ensure contract related expenditures are properly allocated to
        Federal and State accounts.

PRDE’s response

In general, PRDE agreed with our finding and recommendations. PRDE stated that its current
administration was taking proactive steps to improve the weaknesses inherited from the prior
administration. PRDE also stated it was working in close cooperation with ED to improve
current procedures, and in some cases, institute new procedures that will ensure that Federal
funds are spent in accordance with Federal requirements, including assuring that contract
expenditures are properly allocated to Federal and State accounts. Finally, PRDE stated it had
been working diligently to design and implement changes to improve the contracting process
consistent with State law and Federal grants management requirements. This work included
extensive site visits and technical assistance by ED since September 2003, when PRDE and ED
formalized their collaborative efforts through the Cooperative Audit Resolution and Oversight
Initiative (CAROI), a collaborative method to provide alternative and creative approaches to
resolve audit findings, as well as their underlying causes.

OIG’s reply

We considered PRDE’s response, but did not change our finding and recommendations. PRDE’s
effort to improve current procedures through the CAROI process may be considered by ED’s
Assistant Secretary for the Office of Elementary and Secondary Education, as part of the audit


                                                 3

Audit of PRDE’s Administration of                                          Final Audit Report 

Contracts Awarded to Rock Solid Technologies                              ED-OIG/A02-E0007


resolution process. However, PRDE must return to ED the $3,354,545 PRDE improperly
charged to ED’s Title I and Technology Literacy Challenge programs.

                                     OTHER MATTERS

In our audit reports of PRDE’s administration of contracts awarded to National School Services
(ED-OIG/A01-A0004 and ED-OIG/A02-B0012) and R.V. Research and Management Group,
Inc. (ED-OIG/A02-B0025), we reported that PRDE did not competitively bid contracts. Puerto
Rico’s procurement regulations governing PRDE, require that any acquisition of goods, works
and services in excess of $25,000 must use formal competitive procedures.

Although the contracts PRDE awarded RST were State funded, PRDE could not provide
evidence that the contracts awarded to RST during PRDE’s prior administration were
competitively bid. PRDE also did not maintain in its procurement records evaluations conducted
prior to awarding the contracts. RST’s contracts executed during the current administration were
not competitively bid because RST had extensive knowledge of PRDE’s human resources and
payroll processing systems and because RST continued to provide maintenance and support for
PRDE’s current operations.

Lack of competition in its procurement transactions with RST prevented PRDE from assuring
that the highest quality of services and products were received at competitive prices or that
certain vendors were not given preferential treatment or were arbitrarily excluded.

PRDE’s response

PRDE recognized the importance of upgrading its procurement and contracting processes.
PRDE stated it had been working diligently, in cooperation with ED, to design and implement
changes to improve the inefficient and outdated contracting system inherited from the prior
administration. However, PRDE disputed the Draft Audit Report’s statement that “PRDE
overpaid RST $1,066,163 in State funds for two of the contracts reviewed.” PRDE provided
evidence that the payment vouchers were cancelled prior to the issuance of payment to RST.
Therefore, no improper overpayment in State funds took place.

OIG’s reply

PRDE provided documentation confirming its assertion that no improper overpayment in State
funds took place. As a result, we removed the Draft Audit Report’s statement that “PRDE
overpaid RST $1,066,163 in State funds for two of the contracts reviewed.”




                                               4

Audit of PRDE’s Administration of                                                Final Audit Report 

Contracts Awarded to Rock Solid Technologies                                    ED-OIG/A02-E0007


                       OBJECTIVES, SCOPE, AND METHODOLOGY 


The purpose of our audit was to determine whether PRDE properly administered contracts
awarded to RST. Our specific objectives were to determine whether PRDE followed Federal and
local laws in procuring services through its contracts with RST and ensured that contract
requirements were met prior to payment of the contractor’s invoices.

The period of our audit was from May 1, 1999 through June 30, 2003. To achieve the audit
objectives, we interviewed officials from PRDE’s Budget Division and Office of Information
Systems and Technological Support to Teachers. We also reviewed 10 contracts between PRDE
and RST for services rendered from May 1, 1999 through June 30, 2003, as well as payment
vouchers, invoices, and supporting documentation for the 10 contracts. We performed our
fieldwork at PRDE’s offices in Hato Rey, Puerto Rico from January 21, 2004 through April 29,
2004, the date of our exit conference.

We did not rely on any computer-processed data for any conclusions reached during this audit.

Our audit was performed in accordance with generally accepted government auditing standards
appropriate to the scope of the review described above.

                       STATEMENT ON MANAGEMENT CONTROLS

As part of this audit, we assessed the system of management controls applicable to PRDE’s
processing of invoices submitted by RST. Based on previous knowledge gained through our
prior audits (ED-OIG/A01-90006, ED-OIG/A01-90007, ED-OIG/A01-A0004, ED-OIG/A02­
B0012, ED-OIG/A02-B0025, ED-OIG/A02-C0017, ED-OIG/A02-D0014, and ED-OIG/A02­
D0020) and ED’s designation of PRDE as a “high-risk” grantee under 34 C.F.R. § 80.12, we
determined the level of control risk, that is the risk that material errors, irregularities, or illegal
actions may occur, to be high. We found that PRDE did not charge the RST costs to the proper
accounts. This weakness and its effects are fully disclosed in the AUDIT RESULTS section of
the report.

                                 ADMINISTRATIVE MATTERS

If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Education Department
official, who will consider them before taking final Departmental action on this audit:

                Raymond J. Simon 

                Assistant Secretary       

                Office of Elementary and Secondary Education 

                Federal Office Building 6      

                400 Maryland Avenue, SW, Room 3W315 

                Washington, DC 20202 





                                                   5
Audit of PRDE’s Administration of                                           Final Audit Report 

Contracts Awarded to Rock Solid Technologies                               ED-OIG/A02-E0007


It is the policy of the U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be greatly appreciated.

Statements that managerial practices need improvements, as well as other conclusions and
recommendations in this report represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate 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 to members of the press and general public to the extent
the information contained therein is not subject to exemptions in the Act.


                                             Sincerely,


                                                     /s/

                                             Daniel P. Schultz
                                             Regional Inspector General
                                               for Audit


Attachment




                                                6

Audit of PRDE’s Administration of                                                                                              Final Audit Report 

Contracts Awarded to Rock Solid Technologies                                                                                  ED-OIG/A02-E0007


                                                                        Attachment 





                                                  Estado Libre Asociado de Puerto Rico
                                                      DEPARTAMENTO DE EDUCACION

       OFICi\.'\    ,\,I'NT()~             I'     F·.'



              August 12, 2004


              Daniel P. Schultz
              Regional Inspector General for Audit
              U S Department of Education
              Office of Inspector General
              75 Park Place, Room 1207
              New York NY 10007


              Dear Mr. Schultz

                     On July 12, 2004, the United States Department of Education, Office of Inspector
              General, issued Draft Audit Report Control Number ED-OIG/A02-E0007. This Draft Audit
              Report presented the results of OIG's audit of Puerto Rico Department of Education's (PRDE)
              Administration of Contracts Awarded to Rock Solid Technologies (RST). PRDE appreciates the
              opportunity to respond to the Office of Inspector General's (OIG) July 12, 2004 draft audit
              report

                         PRDE has the following response to the finding contained in the draft audit report.

              Response

                      The draft audit finding states that PROE "improperly charged $1,000,000 to ED's Title I
              program and $2,354,545 to the Technology Literacy Challenge program.. ." The draft audit
              report recognizes that these "two contracts were awarded in 1999 and 2000 during PRDE's prior
              administration" (page 1 of the Draft Audit Report). The audit report states that "under the prior
              administration, PRDE improperly charged $3,354,545 as direct costs to ED's Title I and
              Technology Literacy Challenge programs" (page 3 of the Draft Audit Report). As ED is aware,
              PRDE's current administration is taking proactive steps to improve the weaknesses inherited
              from the prior administration, including the ones addressed in this draft audit report as discussed
              further below.

                      As PRDE ha~ stated in recent responses to Draft Audit reports, PRDE is working in close
              cooperation with the U.S. Department of Education (ED) to improve current procedures and in
              some cases institute new procedures that will ensure that federal funds are spent in accordance
              with federal requirements, including assuring that contract expenditures are properly allocated to
              Federal and State accounts. This work has included extensive site visits and technical assistance


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Audit of PRDE’s Administration of                                                              Final Audit Report 

Contracts Awarded to Rock Solid Technologies                                                  ED-OIG/A02-E0007


                                                   Attachment 





           by ED since September 2003, when PRDE and ED formalized their collaborative efforts through
           the Cooperative Audit Resolution and Oversight Initiative (CAROl) process.

                  PRDE's current administration inherited a burdensome, lengthy, and inefficient contract
           process; in cooperation with ED, including the ongoing receipt of valuable technical assistance
           from ED through CAROl, PRDE has been working diligently to design and implement changes
           to improve the contracting process consistent with state law and federal grants management
           requirements

                   in addition. PRDE has collaborated with ED to develop an action plan to continue to
           modernize and improve its procurement process in a manner that is consistent with federal
           program and grants management requirements. PRDE looks forward to continuing this process
           during the upcoming August 2004 CAROl meetings in Puerto Rico.

                    Finally, after research into the issue of the alleged overpayment of State funds, PRDE
            respectfully disputes the Draft Audit Report's conclusion that "PRDE overpaid RST $1,066,163
            in State funds for two of the ten contracts reviewed." Because OIG observed two payment
            voucher~ for these contracts, it incorrectly concluded that two disbursements took place for each
            contract In fact, investigation into this issue by PRDE's Finance Department yielded
            information and evidence establishing that these payment vouchers were cancelled prior to the
            issuance of payment to RST, and each contract was paid with State funds only once. Therefore,
            no improper overpayment in State funds took place. This issue was recently discussed over the
            phone and in person with OIG auditors in Puerto Rico and additional documentation was
          .,provided in order to confirm this conclusion.

           Conclusion

                  PRDE recognizes the important task before it in upgrading its procurement and
          contracting processes and has been working intensively toward this goa\. As mentioned
          previously, PRDE's current administration inherited an outdated contracting system and has'
          made the task of upgrading the system one of its top priorities. PRDE will continue to upgrade
          its contracting and procurement system with the assistance of the US. Department of Education
          and looks forward to continuing this work during the August 2004 CAROL meeting,

          If you have any questions, please feel free to contact me.

          Sincerely,            0
            ~
          Ileana 1. Fas Pacheco
          Director




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