oversight

Audit of NAEP Contract, ETS Incurred Costs under Contract No. ED-02-CO-0023

Published by the Department of Education, Office of Inspector General on 2009-05-28.

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

                       UNITED STATES DEPARTMENT OF EDUCATION
                            OFFICE OF INSPECTOR GENERAL

                                                                                                    Audit Services
                                                                                            New York Audit Region


                                                     May 28, 2009
                                                                                                  Control Number
                                                                                                  ED-OIG/A02I0024

Jack Hayon
Vice President - Finance
Educational Testing Service
Rosedale Road
Mailstop 01-C
Princeton, NJ 08541


Dear Mr. Hayon:

This Final Audit Report, entitled Audit of NAEP Contract, ETS Incurred Costs under
Contract No. ED-02-CO-0023, presents the results of our audit. The purpose of the audit
was to determine whether the direct labor costs (excluding employee benefits) and other
direct costs incurred under the Educational Testing Service (ETS) National Assessment
of Educational Progress (NAEP) contract No. ED-02-CO-0023 were reasonable,
allowable, and allocable in accordance with the terms and conditions of the contract and
applicable acquisition regulations. Our audit period was January 1, 2006, through
December 31, 2006.



                                               BACKGROUND


The NAEP, often referred to as “The Nation’s Report Card,” was authorized under The
National Assessment of Educational Progress Improvement Act to provide, in a timely
manner, a fair and accurate measurement of educational achievement in reading,
mathematics, and other content areas. The NAEP reports directly to the Commissioner of
Education Statistics at the National Center for Education Statistics (NCES) located in the
Institute of Education Sciences, U.S. Department of Education (ED). There were six core
components in the NAEP operations: (1) Alliance Coordination; (2) Design, Analysis,
and Reporting; (3) Item Development; (4) Materials Preparation, Distribution, and
Scoring; (5) Sampling and Data Collection; and (6) Web Operations and Maintenance.

NCES contracted with ETS and other organizations, referred to as the NAEP Alliance, to
perform the core components of the NAEP operations. ETS was awarded the Alliance
Coordination and Design, Analysis, and Reporting components under ED contract No.
ED-02-CO-0023 (NAEP 2002-2007) on September 16, 2002. This NAEP 2002-2007


  The Department of Education's mission is to promote student achievement and preparation for global competitiveness by
                               fostering educational excellence and ensuring equal access.
Final Report
ED-OIG/A02I0024                                                                  Page 2 of 37

contract with ETS was a 5-year, cost-plus-fixed-fee contract with value estimated at more
than $90 million as of June 2007. This contract was extended on
September 29, 2006, for a revised end date of April 2008.1

Under the NAEP 2002-2007 contract, it was the responsibility of ETS to: (1) ensure
coordination among the contractors in the team and to maintain data for tracking the
program progress; (2) design all pilot and field tests, operational assessments, and special
studies; (3) analyze data to ensure the reporting of valid results; (4) propose and study
psychometric and statistical analyses compatible with previous NAEP methodologies;
(5) determine the data needed to meet the goals for reporting; (6) prepare reports; and
(7) develop items in mathematics, reading, science, and writing.

During our audit period, ETS submitted 12 monthly invoices for costs incurred totaling
$17,197,521, excluding the fixed fee. Direct labor costs (permanent and temporary staff
salaries) accounted for 34 percent of the total costs, and other direct costs (ODC)
accounted for 7 percent. The remaining 59 percent of the costs were for overhead and
benefits.



                                  AUDIT RESULTS


We sampled $1,086,864 from a total of $7,083,231 in ODC and labor costs. We found
ETS charged $57,747 of unallowable costs and $46,772 of unsupported costs to the
NAEP contract. In addition, we found that ETS did not always properly report incurred
costs in appropriate cost categories on its invoices. In other matters, we noted that ETS
improperly billed ED $2,715,917 of unallowable post-retirement medical benefits
expenses and imputed interest.

In its comments to the draft report, ETS partially agreed with findings 1 and 2 but did not
specifically comment on finding 3. ETS concurred with all recommendations, including
the recommendations for finding 3, except recommendations 1.1 and 2.1 where it
partially agreed. ETS’ comments are summarized at the end of each finding.

Except for personally identifiable information (that is, information protected under the
Privacy Act of 1974 (5 U.S.C. § 552a)), the entire narrative of ETS’ comments is
included as Attachment C to this report. All personally identifiable information
mentioned in ETS’ comments was either replaced with bracketed text or redacted.



1
 ETS was also awarded three components under the NAEP 2008-2012 operations. On
September 27, 2007, ETS was awarded contracts ED-07-CO-0078, ED-07-CO-0082, and ED-07-CO-0107.
The estimated value of the three new contracts totaled more than $94 million.
Final Report
ED-OIG/A02I0024                                                                   Page 3 of 37

FINDING 1 – ETS Charged $57,747 of Unallowable Costs to the
            Contract
From our sample of $1,086,864, ETS charged $57,747 of unallowable costs to the
contract. The unallowable costs consisted of $29,450 for unreasonable meals, alcoholic
beverages, and a birthday cake; $15,298 in improperly calculated labor charges; $4,669
for ED employees’ meals; $2,572 for unreasonable lodging charges; $2,179 for meeting
commitment fee incurred from “no-show” attendees; $1,706 for “no-show” and double
billed lodging charges; $1,291 in overcharged mainframe costs; $300 in unallocable
freight charges; and $282 for pet sitting service charges. For details of the unallowable
costs, see Attachment A.

According to the NAEP contract, ETS was to (a) provide space, equipment, and lunch, if
necessary, for the meetings between contractors; (b) provide meeting space and
accommodations, if required, for the Standing Committees meetings; and (c) pay
associated costs for meeting space, refreshments during the meeting day, and travel
expenses (including lodging and meals outside the meeting day) for Design and Analysis
Committees (DAC) members, ETS staff, and its design, analysis, and reporting (DAR)
subcontractors who attended the DAC meetings.

Per the NAEP Contract, Section H.7, entitled Payment of Travel Expenses and Fees for
ED Employees, ETS shall not use any contract funds to pay travel expenses for ED
employees for lectures, attending program functions, or any activities in connection with
this contract.

Office of Management and Budget (OMB) Circular A-122, Cost Principles for Non-
Profit Organizations, states:
   • Costs of alcoholic beverages are unallowable;
   • To be allowable under a contract, costs must be (1) accorded consistent treatment,
        (2) adequately documented, (3) consistent with policies and procedures that apply
        uniformly to both federally-financed and other activities of the organization and
        accorded consistent treatment, and (4) reasonable for the performance of the
        contract, and in determining the reasonableness of a given cost, consideration
        shall be given to whether the cost is generally recognized as ordinary and
        necessary for the performance of the contract;
   • A cost is allocable to a particular cost objective, such as a contract, in accordance
        with the relative benefits received or if it is incurred specifically for the contract;
        and
   • In the absence of an acceptable, written non-profit organization policy regarding
        travel costs, the rates and amounts established under subchapter I of Chapter 57,
        Title 5 United State Code, or by the Administrator of General Services, shall
        apply to travel under Federal award.

ETS charged unallowable costs totaling $57,747 to the NAEP contract because (1) ETS
lacked controls to ensure it consistently complied with the contractual terms and its own
Final Report
ED-OIG/A02I0024                                                               Page 4 of 37

policies, procedures, and practices; (2) ETS did not effectively communicate with ED
Contract and Acquisitions Management (CAM) staff in determining the reasonableness
of costs; and (3) ETS’ Travel Policy did not exclude items that were unallowable under
the Federal regulations.

Recommendation
We recommend that the Chief Financial Officer (CFO), in collaboration with the Director
of the Institute of Education Sciences (IES), require ETS to:

1.1      Return the $57,747 of unallowable costs, with applicable interest, to ED.
1.2      Review all costs charged to the contract that were not in our sample and return
         any additional unallowable costs, and determine the effect on the indirect cost
         rates, if any.
1.3      Establish and implement a process and controls to ensure that costs charged to the
         contract are reasonable and allowable according to the terms of the contract and
         treated consistently with ETS’ policies, procedures, and practices.
1.4      Update its Travel Policy to remove reimbursement provisions for unallowable
         costs to Federal contracts per Federal regulations.

ETS Comments

ETS partially agreed with the finding and recommendation 1.1, and agreed with
recommendations 1.2 through 1.4. Of the $57,747 identified as unallowable, ETS
contended that only $18,355 was unallowable. ETS disputed the remaining $39,392 of
the questioned costs and provided the following comments:
    1. The $28,638 in meal charges for breakfasts and dinners should be allowable
       because these meals related to DAC and Standing Committees meetings, which
       required overnight accommodations. ETS cited OMB Circular A-122 which
       defines travel costs as “expenses for transportation, lodging, subsistence, and
       related items” and that ETS was responsible for paying the travel expenses related
       to the DAC meetings. Therefore, ETS stated it was responsible for paying
       subsistence related to the DAC meetings. Further, it believed that it should
       include breakfast and dinner for the Standing Committees meetings because it
       was responsible for providing accommodations for those meetings.
    2. The $4,669 for ED employees’ meals should be allowable because meetings that
       these ED employees attended were not lectures or simple program functions but
       were instead part of ongoing operational work on the project. ETS stated that it
       provided food during the meetings to accommodate working meetings throughout
       the working day. The meetings in question represented an important opportunity
       to meet face-to-face with NCES (ED) and gain critical guidance or reach
       decisions regarding the direction of the program. Also, at no point were
       government funds used to pay directly for government employees travel expenses.

      3. The $2,572 in lodging charges were considered reasonable and consistent with
         other lodging costs normally reimbursed under the ETS travel policy relating to
Final Report
ED-OIG/A02I0024                                                                 Page 5 of 37

      other non-federally funded activities. ETS stated it followed its own written
      travel policy for the meetings in question and that OMB Circular A-122 indicates
      that such costs [travel costs] may be charged on an actual basis provided that the
      method used results in charges consistent with those normally allowed by the
      organization in its regular operations.
   4. The $2,179 in questioned meeting commitment fee and the $1,334 for no-show
      ($962) and doubled billed lodging charges ($372) pertained to group meetings.
      ETS contended that these meetings were convened at the request of ED and paid
      out of a contractual obligation. Further, ETS contended its travel policy section
      on no-show charges applied only to individual travelers and not to group
      meetings.

OIG Response

We considered ETS’ response to the finding and recommendation 1.1; however, our
position remains unchanged. Our response to each of ETS comments are presented
below:
    1. The OMB Circular A-122 section on travel expenses refers to individual
        employees of the non-profit organization who travel for official business. It does
        not refer to group meetings or conferences where extra fees and expenses are
        usually added. OMB Circular A-122 further states that costs must be reasonable,
        and one of the factors in determining reasonableness is the restraints or
        requirements imposed by the terms and conditions of the contract. In this case,
        the NAEP contract did not specify that breakfasts and dinners were to be provided
        in meetings. Therefore, charges for breakfast and dinner provided during these
        meetings were not allowable.
    2. The fact that the meetings in question were important opportunities to meet face-
        to-face with NCES does not present an exception to the NAEP contract’s terms
        and conditions. The contract stated that ETS shall not use any contract funds to
        pay travel expenses (i.e., subsistence and related items) for ED employees related
        to lectures, attending program functions, or any activities in connection with this
        contract. Also, ETS’ statement that at no point were government funds used to
        pay directly for government employee travel expenses is not supported because
        ETS did use the contract funds to directly pay for ED employees’ meals.
    3. Although OMB Circular A-122 states that travel costs may be charged on an
        actual cost basis, it further states that travel costs shall be considered reasonable
        and allowable only to the extent such costs do not exceed charges normally
        allowed by the non-profit organization in its regular operations as the result of its
        written travel policy. However, ETS’ travel policy is not an acceptable written
        policy for determining the reasonableness of lodging costs because ETS’ travel
        policy only provided a guideline and it was not consistently being followed. We
        found 8 out of 11 meetings reviewed had lodging rates that exceeded the
        guideline stated in ETS’ travel policy. According to OMB Circular A-122, in the
        absence of an acceptable written non-profit organization policy, the GSA rate
        should be used. As a result, we used GSA’s Federal Travel Regulations.
Final Report
ED-OIG/A02I0024                                                                 Page 6 of 37

   4. ETS’ treatment of the no-show costs was not consistent because ETS stated that
      its travel policy on no-show charges only applied to individual travelers and not to
      meeting participants. As stated in the finding, to be allowable under a contract,
      costs must be accorded consistent treatment. ETS should have treated the no-
      show costs consistently to minimize the Federal government’s loss. For the
      double billed hotel charges, ETS agreed that double-booked room charges were
      unallowable but only agreed that half of the total $744 doubled billed charges, or
      $372, was unallowable. However, ETS did not provide additional information to
      support its position that only half of the $744 should be unallowable, therefore,
      the entire amount, $744, remains unallowable.

In addition, we modified the table in Attachment A to include the amounts ETS agreed
with or disputed.

FINDING 2 – ETS Charged $46,772 of Unsupported Costs to the
            Contract
From our sample of $1,086,864, we found that ETS could not provide adequate support
for $46,772 it charged to the contract. The unsupported costs included $21,687 for
meeting meal charges; $6,681 for meals provided to unverified attendees, $6,318 for
charges from the hotel meeting package; $3,807 in labor charges; $3,800 in consultant
charges; $2,749 for “business conferences” and dinners with alcoholic beverages; $1,610
in parking charges; and $120 in gratuities. For details of the unsupported costs, see
Attachment B.

According to the NAEP contract, ETS was to (a) provide space, equipment, and lunch, if
necessary, for the meetings between contractors; (b) provide meeting space and
accommodations, if required, for the Standing Committees meetings; and (c) pay
associated costs for meeting space, refreshments during the meeting day, and travel
expenses (including lodging and meals outside the meeting day) for DAC members, ETS
staff, and its DAR subcontractors who attended the DAC meetings.

OMB Circular A-122, Attachment A, A.2 states that for costs to be allowable under a
contract, the costs must be adequately documented.

Further, FAR 52.215-2 states that the contractor shall make records for all costs claimed
to have been incurred directly or indirectly in performance of the contract available at its
office at all reasonable times for 3 years from the time of the final payment under the
contract.

The NAEP contract was charged unsupported costs totaling $46,772 because ETS did not
have policies and procedures in place to ensure that costs charged to the NAEP contract
were properly supported and documented. Also, ETS did not follow its record retention
policy in maintaining records for the labor charges.
Final Report
ED-OIG/A02I0024                                                             Page 7 of 37

Recommendation
We recommend that the CFO, in collaboration with the Director of IES, require ETS to:

2.1    Return the $46,772 of unsupported costs, with applicable interest to ED, or
       provide support.
2.2    Review all costs charged to the contract that were not in our sample and return
       any additional unsupported costs and determine the effect on the indirect cost
       rates, if any.
2.3    Establish and implement policies and procedures to ensure that costs charged to
       the NAEP contract are properly supported and documented.
2.4    Establish controls to ensure its record retention policy is enforced.

ETS Comments

ETS mostly disagreed with the finding and recommendation 2.1 and agreed with
recommendations 2.2 through 2.4. Of the $46,772 in question, ETS agreed that $1,757
was unsupported. ETS disputed the remaining $45,015 and provided additional
documents for $2,267 in questioned labor charges. ETS’ comments on the disputed
$45,015 are summarized below:
    1. For the questioned meal charges of $21,687, although the charges did not include
       a breakdown by meal, any breakfast and dinners in question were related to DAC
       and Standing Committees meetings because most participants’ travel distance
       required overnight accommodations. ETS reiterated that OMB Circular A-122’s
       definition for travel costs includes subsistence and related items. Since ETS was
       responsible for paying the travel expenses, it was responsible for paying
       subsistence related to the meetings.
    2. For the $6,681 in lunch charges for unverified meeting attendees, ETS stated that
       the Puerto Rico Department of Education (PRDE) maintained the list of invitees
       to this meeting. ETS requested the list of meeting attendees from PRDE but had
       not yet received any documentation.
    3. For the $6,318 in meeting costs for a Standing Committees meeting, ETS stated
       that these meal charges were allowable because most participants’ travel distance
       required overnight accommodations. ETS reiterated that it believed it should
       include breakfast and dinner for the Standing Committees meetings because it
       was responsible for providing accommodations for those meetings.
    4. Of the $3,807 questioned labor charges, ETS stated that it obtained supporting
       invoices for $2,267, but it had not been able to locate payment information. It
       provided (a) a copy of an invoice prepared by the temporary employee,
       [Individual A]; (b) two invoices from the temporary employment agency (Adecco
       Employment Services) showing the hours billed to ETS in December 2005 and
       January 2006; and (c) data from ETS’ time and labor (T&L) system. ETS further
       explained that the $2,267 was for [Individual A]’s hours incurred in May 2005,
       but this was not processed through the Adecco Employment Services until 7 or 8
       months later.
Final Report
ED-OIG/A02I0024                                                                            Page 8 of 37

    5. For the $3,800 in consultant fees, ETS indicated that on November 26, 2008, a
       meeting attendee list was provided confirming the attendance of [Individual B]
       who received $800. The remaining $3,000 was paid to [Individual C] and it was
       made into a finding because the purchase order had lapsed at the end of the
       previous month. ETS further stated that [Individual B]’s and [Individual C]’s
       attendance was not in question.
    6. For the $2,749 in question, ETS stated it verified that $1,897 of “business
       conferences” meals costs had a meeting purpose and attendees and that no alcohol
       costs were charged to the NAEP contract. For the amounts that it could not verify
       that the charges excluded alcohol, ETS assumed unallowable alcohol charges of
       20 percent, or $159.2
    7. For $1,610 in parking charges, ETS has requested the meeting attendees list from
       PRDE but has not yet received any documentation.
    8. ETS “checked” with the hotel and was told that the $120 for gratuity was for
       bellman gratuity for 24 bags because the hotel had a routine charge of $5 per bag.

OIG Response

We considered ETS’ response to the finding and recommendation 2.1; however, our
position remains unchanged. For ETS comments 1, 2, 3, 7, and 8, because ETS did not
provide additional documentation or support to sustain its position, the charges in
question remain unsupported.

For comment 4, ETS provided certain documents, but it did not include the weekly
timesheet. Based on our review of the other Adecco Employment Services charges in our
sample, the timesheet was required and used by Adecco Employment Services for billing
ETS. Without the timesheet, we could not verify that the hours were correct or that the
work was authorized and signed off by an ETS employee. Without the payment
information, we could not verify that these charges were actually paid and that ETS
should have been reimbursed for these charges.

For comment 5, the meeting attendee list ETS provided on November 26, 2008, for
[Individual B] who received $800 was not consistent with the names recorded in the
meeting summary provided on May 20, 2008. The validity of the documents ETS
provided is questionable because they contained conflicting information. As for
[Individual C] who received $3,000, ETS officials informed us that there should have
been a new contract letter for [Individual C]’s services rendered in October 2006 because
the existing letter expired in September 2006. However, ETS never provided a copy of
the new contract. Without the new contract, it was not possible to determine whether the
service and/or payment were approved and authorized.




2
 In addition to the $159 that ETS assumed unallowable, it agreed that $58 of the honor bar charge was
unallowable. In total, ETS agreed that $217 was unallowable.
Final Report
ED-OIG/A02I0024                                                                            Page 9 of 37

For comment 6, ETS did not provide adequate documentation that detailed the validity of
these dinners ($1,897) as business related conferences. Further, ETS did not provide any
basis to support its assumption of 20 percent unallowable alcohol costs.

In addition, we modified the table in Attachment B to include the amounts ETS agreed
with or disputed.

FINDING 3 – ETS Improperly Reported Certain Cost Categories on Its
            Invoices
ETS did not always report incurred costs in the appropriate invoice cost categories to
reflect where the funds were actually spent. From the 12 monthly invoices reviewed, we
found ETS reported adjustments for permanent staff labor charges as temporary staff
charges in 5 of the invoices.3 These permanent staff labor adjustments represented
manual accruals, year-end “true-ups”4 for benefits and division overhead, and the labor
dilution adjustment applied to permanent staff charges. However, ETS reported these
adjustments improperly under the line item “Adjustments” in the temporary staff
category on the invoices without any explanation.

ETS also improperly reported the Test Creation System (TCS) costs. According to ETS,
TCS costs were indirect costs, but were reported as a direct cost line item under the ODC
category on the invoices. These TCS costs were calculated using a fixed percentage that
was based on the items (test questions) developed and the TCS pool that was used to
accumulate expenses incurred to support the systems and operations of ETS’ Assessment
Development group. ETS officials stated that these TCS costs were clearly indirect costs,
and that they were instructed by ED’s Contracting Officer’s Representative to report
these costs under the ODC line item. Starting January 2007, ETS changed the
methodology for calculating the TCS costs and created a new line item for reporting these
costs under the permanent staff category. Since 2007 was not in our scope, we did not
review the appropriateness of the TCS charges reported under the new line item.

According to Attachment C of the NAEP contract, the contractor was required to submit
proper invoices for payment. A proper invoice process includes the contractor providing
information on where the funds were spent.

Attachment C of the NAEP contract also states that ED has the responsibility to pay the
invoice after it determines that the costs are reasonable, allocable, and allowable. To
make that determination, ED must receive a detailed invoice with the costs broken out.
ETS did not communicate with CAM staff for clarification on how the detailed costs
should be reported on its invoices. As a result, ETS did not provide sufficient and
3
  ETS’ invoices contained the following major cost categories: (1) Permanent Staff, (2) Temporary Staff,
(3) Other Direct Costs, and (4) Overhead. These four cost categories were further broken down into line
item cost categories.
4
    ETS performed adjustments called “true-ups” to reflect the actual costs incurred.
Final Report
ED-OIG/A02I0024                                                                          Page 10 of 37

accurate invoice information for ED to adequately determine whether the costs were
reasonable, allocable, and allowable. Consequently, ED made payments to ETS based on
cost information that was inaccurately reported on the invoices.

Recommendation
We recommend that the CFO, in collaboration with the Director of IES, require ETS to:

3.1     Implement procedures, with approval from ED CAM, to accurately report detailed
        costs on its future invoices.
3.2     Review and determine if the TCS costs incurred from 2007 and forward were
        reported under the proper cost category.

ETS Comments

ETS did not comment on this finding but agreed with the recommendations. It indicated
that it has implemented reporting procedures and reviewed the TCS costs.



                                     OTHER MATTERS


During the second week of our audit, ETS informed us that it had improperly billed ED
$1,981,715 of post-retirement medical benefits expenses under the NAEP 2002-2007
contract. ETS improperly billed ED from the inception of the contract in September
2002 through December 2007. The estimated $1,981,715 of improper billing was a result
of ETS’ inclusion of the “fully funded” post-retirement medical benefits in the total
benefits expense charged to ED.5

ETS maintained a post-retirement medical benefits plan for retired employees and last
funded the plan in 1999. According to OMB Circular A-122, Attachment B, the costs of
the organization’s pension plan are allowable if the costs assigned to a given fiscal year
are funded within 6 months after the end of that year. Since ETS did not fund the plan
during the contract period, the post-retirement medical benefits expenses were
unallowable charges to the contract. ETS excluded these post-retirement medical
benefits expenses when calculating the Federal overhead expense but included them
when calculating the total benefits expense charged to the contract.

Approximately 3 months subsequent to ETS’ disclosure of the improper billings to OIG,
ETS revised the total improper billing amount to $2,307,327. The revised amount
included (1) the unallowable post-retirement medical benefits expenses billed to ED
under the “NAEP 1996-1998 National and State SAR and Development Cooperative
Agreement” and the “NAEP 2000 Development, Analysis and Reporting Cooperative

5
 ETS last funded the post-retirement benefit plan in September 1999 because the plan’s return was
sufficient to fund the plan itself.
Final Report
ED-OIG/A02I0024                                                               Page 11 of 37

Agreement;” and (2) the actual unallowable amount billed to ED under the NAEP
2002-2007 contract.

ETS contracted with Amper, Politziner & Mattia, P.C. (APM) to verify the improper
billing amount through agreed upon procedures. In APM’s report dated May 30, 2008,
APM indicated that it recomputed the $2,336,842 improper billing amount and found no
exceptions. APM also calculated the imputed interest through April 2008 on the
improper billings to be $379,075. In total, ETS’ liability amounted to $2,715,917,
including interest. The $2,715,917 improper billing amount was based solely upon
APM’s report which was furnished to OIG. OIG did not review the work of APM in
verifying this amount.

This matter has been referred to the appropriate authorities for further review.

Subsequent to the issuance of the draft report, ETS entered into an agreement with ED to
facilitate the repayment of the improper billings. On April 22, 2009, ETS remitted
$2,715,917 to ED by wire transfer.




               OBJECTIVE, SCOPE, AND METHODOLOGY


The audit objective was to determine whether the direct labor costs (excluding employee
benefits) and ODC incurred under the ETS NAEP 2002-2007 contract were reasonable,
allowable, and allocable in accordance with the terms and conditions of the contract, and
applicable acquisition regulations during the period, January 1, 2006 through
December 31, 2006. The original survey objective was to determine whether the costs
incurred under the ETS NAEP 2002-2007 contract were reasonable, allowable, and
allocable in accordance with the terms and conditions of the contract and applicable
acquisition regulations during the period from August 1, 2006 through
September 30, 2007. Due to ETS’ improper billings to ED for post-retirement medical
benefit expenses under the NAEP 2002-2007 contract, we revised the objective and the
scope.

To accomplish our audit objective, we:

   •   Reviewed ED contract No. ED-02-CO-0023, related modifications, tasks orders,
       the deliverable order, and applicable acquisition regulations;
   •   Reviewed ETS accounting policies and procedures relevant to our audit objective;
       Obtained an understanding of ETS’ practices pertaining to T&L and ODC
       through interviews with ETS staff and review of ETS’ policies and procedures;
   •   Analyzed and verified the accuracy of the 12 monthly invoices for the audit period;
Final Report
ED-OIG/A02I0024                                                                        Page 12 of 37

      •   Reviewed ETS’ consolidated financial statements and OMB A-133 reports for the
          year ended December 31, 2006;
      •   Reviewed supporting accounting data from ETS’ PeopleSoft system for charges on
          the 12 monthly invoices for the audit period;6
      •   Judgmentally sampled June 2006, the month with the highest dollar amount, totaling
          $717,650, from permanent staff labor charges totaling $5,516,218;
      •   Judgmentally sampled June 2006, the month with the highest dollar amount, totaling
          $44,079, from temporary staff labor charges totaling $392,472;
      •   Randomly selected $227,376 and judgmentally selected $2,445 of travel costs,7 and
          randomly selected $95,314 of non-travel costs, from a total of $1,174,541 in ODC;
      •   Verified the sampled June 2006 permanent staff salaries charged to the contract by
          (1) validating the total hours, (2) recomputing the hourly rates, and (3) applying the
          applicable hourly rates to the hours to determine the total charges;
      •   Verified the total hours charged and the hourly rates to the vendor invoices for the
          sampled June 2006 temporary staff salaries;
      •   Traced the amount charged to the contract to the invoices and reviewed them for
          allowability for the sampled non-travel costs;
      •   Reviewed supporting travel vouchers and meeting invoices, attendee lists, and
          meeting summaries to determine the allowability of sampled travel costs; and
      •   Reviewed cancelled checks and bank payment confirmations for sampled ODC.

To achieve our audit objective, we relied, in part, on computer-processed data obtained
from ETS’ PeopleSoft system. We verified the accuracy and completeness of the data by
comparing the data to the costs claimed on the monthly invoices submitted to ED. We
randomly and judgmentally selected samples from the labor costs and ODC for testing.
Based on our testing, we concluded that the computer-processed data were sufficiently
reliable for the purpose of our audit.

We conducted this audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objective. We believe that the evidence obtained provides
a reasonable basis for our findings and conclusions based on our audit objective.




6
    PeopleSoft was ETS’ main financial accounting system.
7
  We judgmentally sampled the $2,445 unselected remaining balances of the invoices in the random
sample.
Final Report
ED-OIG/A02I0024                                                               Page 13 of 37



                        ADMINISTRATIVE MATTERS


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, including the recovery of
funds, will be made by the appropriate Department of Education officials in accordance
with the General Education Provisions Act.

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 Department
of Education officials, who will consider them before taking final Departmental action on
this audit:

                              Thomas P. Skelly
                              Acting Chief Financial Officer
                              Office of the Chief Financial Officer
                              U.S. Department of Education
                              400 Maryland Avenue, SW, Room 5W313
                              Washington, DC 20202

                              Sue Betka
                              Acting Director
                              Institute of Education Sciences
                              U.S. Department of Education
                              555 New Jersey Avenue, NW, Room 600-G
                              Washington, DC 20208

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 appreciated.

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 information contained therein is not subject to exemptions in the Act.


                                              Sincerely,


                                              /s/
                                              Daniel P. Schultz
                                              Regional Inspector General
                                                  for Audit
Attachments
Final Report
ED-OIG/A02I0024                                                                          Page 14 of 37

                                           Attachment A


                          DETAILS FOR FINDING 1
             ETS Charged $57,747 of Unallowable Costs to the Contract
                                                                                Amount Amount
                                                             Unallowable           ETS       ETS
    Cost Type                                                   Amount           Agreed Disagreed
    Meals                                       $28,638                                       $28,638
                                                                  $29,450                                (1)
    Alcoholic Beverages & Birthday Cake             812                             $812
    Labor Charges                                                   15,298        15,298                 (2)
    ED Employees' Meals                                              4,669                      4,669    (3)
    Unreasonable Lodging Charges                                     2,572                      2,572    (4)
    Meeting Commitment Fee                                           2,179                      2,179    (5)
    "No-show" and Double-Billed Lodging Charges                      1,706           372        1,334    (6)
    Mainframe Usage Charges                                          1,291         1,291                 (7)
    Freight Charges                                                    300           300                 (8)
    Pet Sitting Service                                                282           282                 (9)
    Total Unallowable Charges                                     $57,747
    Amount ETS Agreed/Disagreed                                                  $18,355      $39,392

    (1)   The $29,450 represents meal charges for the unallowable breakfasts and dinners
          ($28,638) provided to ETS employees,8 other NAEP contractors’ employees,
          NCES staff, and others during various types of meetings; alcoholic beverage
          charges ($739); and a birthday cake ($73). OMB Circular A-122 states that for
          costs to be allowable under a contract, costs must be reasonable; and in
          determining the reasonableness of a cost, consideration shall be given to the
          restraints or requirements imposed by the terms and conditions of the contract.
          According to the contract, ETS was to (a) provide space, equipment, and lunch, if
          necessary, for the meetings between contractors; (b) provide meeting space and
          accommodations, if required, for the Standing Committees meetings; and (c) pay
          associated costs for meeting space, refreshments during the meeting day, and
          travel expenses (including lodging and meals outside the meeting day) for DAC
          members, ETS staff, and its DAR subcontractors who attended the DAC
          meetings. Since the contract did not specify breakfast and dinner be provided
          during meetings, charges for breakfasts and dinners for meetings are unallowable.
          Further, per OMB Circular A-122, costs of alcoholic beverages in meetings are
          unallowable.



8
  The invoices for the $28,638 of unallowable meal charges contained the cost breakdown for individual
dinners, breakfasts, lunches, and/or breaks.
Final Report
ED-OIG/A02I0024                                                                           Page 15 of 37

                                            Attachment A

    (2)   The $15,298 represents the unallowable labor charges resulting from improperly
          calculated hourly rates. ETS subtracted the hours from seven employees’
          regularly scheduled hours but not the dollar amounts associated with these hours
          when it calculated the diluted hourly rates.9 This caused the employees’ hourly
          rates to increase improperly, and as a result, the contract was overcharged. Per
          OMB Circular A-122, Attachment A, A.2, to be allowable under a contract, costs
          must be accorded consistent treatment and adequately documented.

    (3)   The $4,669 represents the portion of meal charges paid, under travel expenses, for
          ED employees who attended various meetings. Per the contract, Section H.7,
          Payment of Travel Expenses and Fees for ED Employees, ETS shall not use any
          contract funds to pay the travel expenses for ED employees related to lectures,
          attending program functions, or any activities in connection with this contract.
          Therefore, these meal charges are unallowable.

    (4)   The $2,572 represents the unreasonable lodging costs that exceeded 125 percent
          of the lodging per diem rates established by the General Services Administration
          (GSA). OMB Circular A-122 states that in the absence of an acceptable written
          policy regarding travel costs, the rates and amounts established by the GSA shall
          apply. We concluded that ETS’ guideline was not an equitable basis for
          determining the reasonableness of lodging costs because 8 out of 11 meetings in
          our sample had lodging rates greater than the $125 guideline stated in ETS’
          Travel Policy. We conservatively used 125 percent of GSA lodging per diem
          rates as a basis for determining the reasonableness of lodging charges, because
          according to GSA’s Federal Travel Regulations § 301-74.8, Federal agencies are
          allowed to exceed the GSA lodging per diem rates by up to 25 percent for
          conferences. Therefore, lodging costs that exceeded 125 percent of the GSA per
          diem rates are unreasonable, and thus, unallowable.

    (5)   The $2,179 represents the meeting package (including lodging and three meals)
          commitment fee that ETS was charged when meeting attendees failed to show up.
          According to ETS’ Travel Policy, hotel no-show (cancellation) charges are non-
          reimbursable expenses. ETS should not have paid these charges under its Travel
          Policy, and therefore, ETS should not have charged the NAEP contract. Also, per
          OMB Circular A-122, to be allowable under a contract, costs must be
          (1) consistent with policies and procedures that apply uniformly to both federally-
          financed and other activities of the organization and (2) accorded consistent
          treatment.


9
  ETS performed a year-end T&L journal entry adjustment (“dilution”) to ensure all labor charges incurred
in the fiscal year were properly accounted for. The “dilution” adjustment was necessary to capture (by
either subtracting or adding) all the hours not previously reported by the employees, hours not previously
approved by their supervisors within the appropriate month, or hours removed that were not allocable to the
specific project.
Final Report
ED-OIG/A02I0024                                                               Page 16 of 37

                                      Attachment A

 (6)   The $1,706 represents lodging charges incurred from meeting attendees who did
       not show up ($962) and hotels’ double billed lodging costs ($744). According to
       ETS’ Travel Policy, hotel no-show (cancellation) charges are non-reimbursable
       expenses. Therefore, ETS should not have paid the $962 of lodging charges and
       ETS should not have charged it to the contract. Also, per OMB Circular A-122,
       to be allowable under a contract, costs must be allocable to a contract in
       accordance with the relative benefits received. Double billed lodging costs are
       not allocable to the contract because the contract did not receive benefits from it;
       hence, the $744 is not allowable.

 (7)   The $1,291 represents the mainframe usage costs that ETS overcharged the NAEP
       contract. According to OMB Circular A-122, to be allowable under a contract,
       costs must be allocable to the contract in accordance with the relative benefits
       received. The overcharged mainframe costs are not allocable to the contract
       because the actual rates charged to the contract were higher than the rates charged
       by the vendor; hence, these charges are not allowable.

 (8)   The $300 represents the freight charges incurred for a package sent to Korea for a
       non-NAEP contract, SAT program. According to OMB Circular A-122, to be
       allowable under a contract, costs must be allocable under [OMB Circular A-122]
       principles. A cost is allocable to a particular cost objective, such as a contract, in
       accordance with the relative benefits received or if it is incurred specifically for
       the contract. The freight charges were not incurred for the NAEP contract and are
       therefore unallowable.

 (9)   The $282 represents pet sitting service charges that ETS reimbursed to its
       employees. Per OMB Circular A-122, Attachment A, to be allowable under a
       contract, costs must be reasonable for the performance of the contract; and in
       determining the reasonableness of a given cost, consideration shall be given to
       whether the cost is generally recognized as ordinary and necessary for the
       performance of the contract. Pet care was a reimbursable item in ETS’ Travel
       Policy; however, these charges were not a type of cost that is generally recognized
       as ordinary and necessary for the performance of a contract. Therefore, these
       charges were not a reasonable cost to the contract.
Final Report
ED-OIG/A02I0024                                                                          Page 17 of 37

                                           Attachment B


                         DETAILS FOR FINDING 2
            ETS Charged $46,772 of Unsupported Costs to the Contract

                                                                              Amount Amount
                                                            Unsupported          ETS       ETS
      Cost Type                                                 Amount         Agreed Disagreed
      Meeting Meal Charges                                        $21,687                    21,687      (1)
      Meals to Unverified Attendees                                  6,681                    6,681      (2)
      Hotel Meeting Package                                          6,318                    6,318      (3)
      Labor Charges                                                  3,807       1,540        2,267      (4)
      Consultant Charges                                             3,800                    3,800      (5)
      "Business Conferences" and Dinners with Alcohol                2,749         217        2,532      (6)
      Parking Charges                                                1,610                    1,610      (7)
      Gratuities                                                       120                      120      (8)
      Total Unsupported Charges                                   $46,772
      Amount ETS Agreed/Disagreed                                               $1,757     $45,015

     (1)   The $21,687 represents meal charges for breakfasts, lunches, and breaks provided
           during meetings where we could not determine the applicable allowable and
           unallowable amounts due to the lack of cost breakdown information.10 These
           breakfasts and lunches were for ETS employees, other NAEP contractors’
           employees, NCES staff, and others who attended various types of meetings.
           These meal charges were based on per-person meeting package rates that included
           breakfasts, lunches, and continuous breaks. According to the contract, ETS was
           to (a) provide space, equipment, and lunch, if necessary, for the meetings between
           contractors; (b) provide meeting space and accommodations, if required, for the
           Standing Committees meetings; and (c) pay associated costs for meeting space,
           refreshments during the meeting day, and travel expenses (including lodging and
           meals outside the meeting day) for DAC members, ETS staff, and its DAR
           subcontractors who attended the DAC meetings. Since the contract did not
           specify breakfast and dinner be provided during meetings, charges for breakfasts
           and dinners for meetings are unallowable. Because there was no cost breakdown
           for the charges for breakfasts, lunches, or breaks, we could not determine the
           applicable allowable and unallowable amount for these meeting meals. Per OMB
           Circular A-122, Attachment A, A.2, to be allowable under a contract, costs must
           be adequately documented.


10
   The invoices for the $21,687 of unsupported meeting meal charges did not contain the cost breakdown
for individual breakfasts, lunches, and/or breaks.
Final Report
ED-OIG/A02I0024                                                               Page 18 of 37

                                      Attachment B

 (2)   The $6,681 represents lunch charges for unverified meeting attendees. The lunch
       charges were for 140 individuals for whom ETS could not provide adequate
       support, such as names, to verify their attendance at a meeting. Per OMB
       Circular A-122, Attachment A, A.2, to be allowable under a contract, costs must
       be adequately documented.

 (3)   The $6,318 represents meeting costs for a Standing Committees meeting that ETS
       could not provide detailed breakdowns to determine the allowable lodging amount
       or the unallowable amounts for meeting meals. These charges were based on the
       hotel’s per-person meeting package rate that included lodging, three-meal
       (breakfast, lunch, and dinner), and meeting space costs. According to the
       contract, ETS was to provide meeting space and accommodations, if required, for
       the Standing Committees meetings. Since the contract did not specify meals to be
       provided during these meetings, these meals were unallowable. Because there
       was no cost breakdown for the charges for lodging or meals, we could not
       determine the allowable amounts for lodging or the unallowable amounts for
       meeting meals.

 (4)   The $3,807 represents labor charges for which ETS could not provide support.
       ETS’ officials informed us that the temporary staff time sheets and invoices were
       stored at ETS’ record retention facility, and these had to be retrieved. Although
       requested, ETS did not provide us with the invoice and payment information for
       the $3,807 in temporary staff charges. As a result, we could not determine that
       these charges were actually incurred and paid. Per OMB Circular A-122,
       Attachment A, A.2, to be allowable under a contract, costs must be adequately
       documented. Further, FAR 52.215-2 states that the contractor shall make records
       for all costs claimed to have been incurred directly or indirectly in performance of
       the contract available at its office at all reasonable times for 3 years from the time
       of the final payment under the contract.

 (5)   The $3,800 represents consultant fees paid to two NAEP committee members for
       an October 2006 meeting ($3,000) and a March 2006 meeting ($800). ETS
       provided an email stating that it had a purchase order for January 1, 2006, through
       September 30, 2006, for the individual who attended an October 2006 meeting,
       but it could not locate the new contract for October 2006 to support the $3,000
       charges. For the March 2006 meeting, ETS could not provide valid
       documentation to show that the individual who received the $800 actually
       attended the meeting. According to OMB Circular A-122, Attachment A, A.2, to
       be allowable under a contract, costs must be adequately documented.

 (6)   The $2,749 represents the dinner costs claimed by ETS employees. ETS
       employees claimed $2,511 as “business conference” expenses on their travel
       vouchers. However, for these “business conferences,” ETS did not provide
       documentation that detailed (a) the purpose of these dinners or who attended them
Final Report
ED-OIG/A02I0024                                                           Page 19 of 37

                                    Attachment B

       since the vouchers we reviewed did not provide this information, or (b) the
       validity of the dinners as business related conferences because alcoholic
       beverages were served during these dinners. ETS employees also claimed $180
       in dinner costs that included alcoholic beverages without segregating the
       unallowable alcoholic beverages or specifying who and how many actually
       attended the dinners. In addition, we could not determine the allowability of a
       $58 “honor bar” charge from a hotel bill because there was no documentation
       showing whether it included alcoholic beverages. According to OMB Circular
       A-122, Attachment A, A.2, to be allowable under a contract, costs must be
       adequately documented.

 (7)   The $1,610 represents parking charges incurred during meetings. ETS did not
       provide documentation to show who incurred these charges. As a result, we could
       not determine the validity of these charges. According to OMB Circular A-122,
       Attachment A, A.2, to be allowable under a contract, costs must be adequately
       documented.

 (8)   The $120 represents a gratuity amount on a hotel’s invoice for one meeting. This
       charge showed up on the hotel invoice with a date that was 3 days after the
       meeting. There was no explanation or information on who incurred the charge,
       when it was incurred, or what was it for. As a result, we could not determine the
       validity of this charge. According to OMB Circular A-122, Attachment A, A.2, to
       be allowable under a contract, costs must be adequately documented.
Final Report
ED-OIG/A02I0024                  Page 20 of 37

                  Attachment C
Final Report
ED-OIG/A02I0024                                                                     Page 21 of 37

                                         Attachment C

                  2006 NAEP New Millennium OIG Audit Draft – ETS Reply

RECOMMENDATION 1 (page 5 of DRAFT Audit Report)
We recommend that the Chief Financial Officer (CFO), in collaboration with the Director
of the Institute of Education Sciences (IES), require ETS to:
1.1 Return the $57,747 of unallowable costs, with applicable interest, to ED.
1.2 Review all costs charged to the contract that were not in our sample to determine and return
     any additional unallowable costs, and determine the effect on the indirect cost rates, if any.
1.3 Establish and implement a process and controls to ensure that costs charged to the contract
     are reasonable and allowable according to the terms of the contract and treated consistently
     with ETS’ policies, procedures, and practices.
1.4 Update its Travel Policy to remove reimbursement provisions for unallowable costs to
     Federal contracts per Federal regulations.

ETS RESPONSE
1.1 Of the $57,747 identified as unallowable costs, ETS believes that only $18,355 was
     unallowable. Our position is detailed in response to the specific components of the
     $57,747 outlined in Attachment A of the audit report.
1.2 ETS agrees with the recommendation to review the unselected Labor Charges and
     Mainframe Charges to determine the effect on the indirect cost rates, if any. Given our
     substantial compliance in the other cost categories, ETS proposes to extrapolate the
     findings to determine the appropriate amount to be reimbursed.
1.3 ETS will be implementing a separate NAEP travel policy and additional review procedures
     by April 30 to ensure that only allowable costs are charged on government contracts,
     including the design and use of a separate travel voucher form for federal contracts.
1.4 We have reinforced existing travel voucher approval procedures with an additional review
     for unallowable charges.

RECOMMENDATION 2 (page 6 of DRAFT Audit Report)
We recommend that the CFO, in collaboration with the Director of IES, require ETS to:
2.1 Return the $46,772 of unsupported costs, with applicable interest to ED, or provide support.
2.2 Review all costs charged to the contract that were not in our sample to determine and return
     any additional unsupported costs, and determine the effect on the indirect cost rates, if any.
2.3 Establish and implement policies and procedures to ensure that costs charged to the NAEP
     contract are properly supported and documented.
2.4 Establish controls to ensure its record retention policy is enforced.

ETS RESPONSE
2.1 Of the $46,772 identified as unsupported costs, ETS believes that only $1,757 was
     unsupported. Our position is detailed in response to the specific components of the
     $46,772 outlined in Attachment B of the audit report.
2.2 Same as 1.2
2.3 Same as 1.3
2.4 We will be implementing a tracking and storage tool for meeting documentation and will
     also investigate whether additional controls are needed for records retention.



                                         1                                        3/27/2009
Final Report
ED-OIG/A02I0024                                                                  Page 22 of 37

                                        Attachment C
                 2006 NAEP New Millennium OIG Audit Draft – ETS Reply


RECOMMENDATION 3 (page 7 of DRAFT Audit Report)
We recommend that the CFO, in collaboration with the Director of IES, require ETS to:
3.1 Implement procedures, with approval from ED CAM, to accurately report detailed costs on
     its future invoices.
3.2 Review and determine if the TCS costs incurred from 2007 and forward were reported
     under the proper cost category.

ETS RESPONSE
3.1 Effective October 2007, ETS has implemented reporting procedures to accurately report
     detailed costs on its invoices. Adjustments for permanent staff labor charges are no longer
     included as temporary staff charges in the reports. We will confirm that this is approved
     by and meets the requirements of ED CAM.
3.2 ETS has reviewed the TCS costs incurred from 2007 and forward and has determined that
     the costs are reported under the proper cost category.




The following pages contain ETS’s responses to the specific findings included in Attachments A
and B of the DRAFT Audit Report.




                                        2                                       3/27/2009
Final Report
ED-OIG/A02I0024                                                                     Page 23 of 37

                                        Attachment C

         2006 NAEP New Millennium OIG Audit Draft – ETS Reply

                                         Attachment A




Unallowable Cost Type Amount

Meals                                            $28,638
                                                                  $29,450 (1)
Alcoholic Beverages & Birthday Cake              812
Labor Charges                                                      15,298    (2)
ED Employees' Meals                                                 4,669    (3)
Unreasonable Lodging Charges                                        2,572    (4)
Meeting Commitment Fee                                              2,179    (5)
"No-show" and Double-Billed Lodging                                 1,706    (6)
Charges
Mainframe Usage Charges                                              1,291 (7)
Freight Charges                                                        300 (8)
Pet Sitting Service                                                    282 (9)

        Total Unallowable Charges                                $57,747

         (1)      The $29,450 represents meal charges for the unallowable breakfasts and dinners
($28,638) provided to ETS employees, other NAEP contractors’ employees, NCES staff, and
others during various types of meetings; alcoholic beverage charges ($739); and a birthday cake
($73). OMB Circular A-122 states that for costs to be allowable under a contract, costs must be
reasonable; and in determining the reasonableness of a cost, consideration shall be given to the
restraints or requirements imposed by the terms and conditions of the contract. According to the
contract, ETS was to (a) provide space, equipment, and lunch, if necessary, for the meetings
between contractors; (b) provide meeting space and accommodations, if required, for the
Standing Committees meetings; and (c) pay associated costs for meeting space, refreshments
during the meeting day, and travel expenses (including lodging and meals outside the meeting
day) for DAC members, ETS staff, and its DAR subcontractors who attended the DAC meetings.
Since the contract did not specify breakfast and dinner be provided during meetings, charges for
breakfasts and dinners for meetings are unallowable. Further, per OMB Circular A-122, costs of
alcoholic beverages in meetings are unallowable.

        (1 – ETS Reply) We agree that an alcoholic beverage charge for $739 and birthday cake
for $73 were incorrectly charged to the NAEP contract. However, we do not agree that the
$28,638 for meals was unallowable. The breakfasts and dinners in question relate to DAC
meetings and Standing Committee meetings, for which most participants’ travel distance required
overnight accommodations.
        As clarification, both types of meetings were critical to the operational success of the
NAEP program. DAC meetings involved discussions with external technical experts that led to
implementation decisions regarding assessment design, analysis procedures, and methodologies.

                                        3                                          3/27/2009
Final Report
ED-OIG/A02I0024                                                                     Page 24 of 37

                                         Attachment C

         2006 NAEP New Millennium OIG Audit Draft – ETS Reply

In the case of Standing Committee meetings, external subject-area and assessment experts
reviewed and revised test questions to ensure they were valid, fair, and grade-appropriate.
         The DAR Technical Proposal (Part 1) Task 2.5.1.1, The Design and Analysis Committee
(DAC) states that “ETS will be responsible for paying travel expenses…for DAC members and
staff of ETS and its DAR subcontractors.” Per OMB Circular No. A-122, Cost Principles for
Non-Profit Organizations, “Travel costs are the expenses for transportation, lodging,
subsistence, and related items….” Thus, since ETS was responsible for paying the travel
expenses related to DAC meetings, it was responsible for paying for subsistence related to those
meetings. In addition, the RFP Solicitation No. ED-02-R-0015, Section 2.5.1.2, Subject-Related
Standing Committees states that “The contractor shall provide for meeting space and
accommodations, if required.” Since ETS was responsible for providing for accommodations for
the Standing Committee meetings, we believe that should include meals, including breakfast and
dinner. These Committee members were not also reimbursed a per diem for those same meals.

         (2)     The $15,298 represents the unallowable labor charges resulting from improperly
calculated hourly rates. ETS subtracted the hours from seven employees regularly scheduled
hours, but not the dollar amounts associated with these hours when it calculated the diluted hourly
rates. This caused the employees’ hourly rates to increase improperly, and as a result, the contract
was overcharged. Per OMB Circular A-122, Attachment A, A.2, to be allowable under a
contract, costs must be accorded consistent treatment and adequately documented.

        (2 – ETS Reply) We agree with the finding. On June 11, 2008, ETS shared a handout
with the auditors, which outlined the corrective steps that have been taken. These include:

        #1 Absence without Pay (NPO) time excluded from T&L calculation -- Corporate
Accounting group to include "NPO" Time Reporting Code in its Year-End Time & Labor
Adjustment Journal Entry, effective January 2008.
        #2 Missing Time never corrected -- Enhancements made to the Peoplesoft Time & Labor
System in CY2007 will prevent this type of error from recurring.
        #3 Part-Time Staff not entering HOL Holiday Time -- It is the supervisor / primary
approver’s responsibility to assure that Holiday time entered is accurate.
        #4 Missing Time due to Short-Term Disability -- Corporate Accounting group to include
"STD" Time Reporting Code in its Year-End T&L Adjustment Journal Entry, effective January
2008.

        (3)     The $4,669 represents the portion of meal charges paid, under travel expenses,
for
ED employees who attended various meetings. Per the contract, Section H.7, Payment of Travel
Expenses and Fees for ED Employees, ETS shall not use any contract funds to pay the travel
expenses for ED employees related to lectures, attending program functions, or any activities in
connection with this contract. Therefore, these meal charges are unallowable.

        (3 – ETS Reply) We disagree that these charges should be unallowable. ETS provided
food during these DAC and Standing Committee meetings to accommodate working meetings
throughout the working day. We believe that providing food during meetings was allowable
under the contract. At no point were government funds used to pay directly for government
employee travel expenses. The meetings in question were not lectures or simple program

                                         4                                         3/27/2009
Final Report
ED-OIG/A02I0024                                                                    Page 25 of 37

                                         Attachment C

                 2006 NAEP New Millennium OIG Audit Draft – ETS Reply

functions, but were instead part of ongoing operational work on the project.
         As clarification, both types of meetings were critical to the operational success of the
NAEP program. DAC meetings involved discussions with external technical experts that led to
implementation decisions regarding assessment design, analysis procedures, and methodologies.
In the case of Standing Committee meetings, external subject-area and assessment experts
reviewed and revised test questions to ensure they were valid, fair, and grade-appropriate.
         Each of the meetings in question represented an important opportunity to meet face-to-
face with NCES and gain critical guidance or reach decisions regarding the direction of the
program.

         (4)     The $2,572 represents the unreasonable lodging costs that exceeded 125 percent
of the lodging per diem rates established by the General Services Administration (GSA). OMB
Circular A-122 states that in the absence of an acceptable written policy regarding travel costs,
the rates and amounts established by the GSA shall apply. We concluded that ETS’ guideline was
not an equitable basis for determining the reasonableness of lodging costs because 8 out of 11
meetings in our sample had lodging rates greater than the $125 guideline stated in ETS’
Travel Policy. We conservatively used 125 percent of GSA lodging per diem rates as a basis for
determining the reasonableness of lodging charges, because according to GSA’s Federal Travel
Regulations § 301-74.8, Federal agencies are allowed to exceed the GSA lodging per diem rates
by up to 25 percent for conferences. Therefore, lodging costs that exceeded 125 percent of the
GSA per diem rates are unreasonable, and thus, unallowable.

        (4 – ETS Reply) We disagree. Per OMB Circular A-122 (see subparagraph 55.b: “Such
costs may be charged on an actual basis….provided the method used results in charges consistent
with those normally allowed by the organization in its regular operations.”), ETS followed its
own written travel policy for the meetings in question. The amounts reimbursed were considered
reasonable and consistent with other lodging costs normally reimbursed pursuant to the ETS
travel policy relating to other activities not financed with federal funding.

        (5)     The $2,179 represents the meeting package (including lodging and three meals)
commitment fee that ETS was charged when meeting attendees failed to show up. According to
ETS’ Travel Policy, hotel no-show (cancellation) charges are non reimbursable expenses. ETS
should not have paid these charges under its Travel Policy and therefore, ETS should not have
charged the NAEP contract. Also, per OMB Circular A-122, to be allowable under a contract,
costs must be (1) consistent with policies and procedures that apply uniformly to both federally-
financed and other activities of the organization and (2) accorded consistent treatment.

         (5 – ETS Reply) We disagree. The ETS travel policy section on no-show charges applies
only to individual travelers. The fees in question pertained to a group meeting – convened at the
request of ED, and attended predominantly by committee members – which does not apply to the
policy referenced since the fee was paid directly to the meeting location and not to individual
employees.

        (6)      The $1,706 represents lodging charges incurred from meeting attendees who did
not show up ($962) and hotels’ double billed lodging costs ($744). According to ETS’ Travel
Policy, hotel no-show (cancellation) charges are non-reimbursable expenses. Therefore, ETS


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                 2006 NAEP New Millennium OIG Audit Draft – ETS Reply

should not have paid the $962 of lodging charges and ETS should not have charged it to the
contract. Also, per OMB Circular A-122, to be allowable under a contract, costs must be
allocable to a contract in accordance with the relative benefits received. Double billed lodging
costs are not allocable to the contract because the contract did not receive benefits from it; hence,
the $744 is not allowable.

        (6 – ETS Reply) We agree that hotel rooms were double-booked on two occasions in the
amount of $372 ($744/2). With regard to the remaining $1,334, the ETS travel policy section on
no-show charges applies only to individual travelers. The fee was paid out of a contracted
obligation. See also our reply to (5) above.

        (7)      The $1,291 represents the mainframe usage costs that ETS overcharged the
NAEP contract. According to OMB Circular A-122, to be allowable under a contract, costs must
be allocable to the contract in accordance with the relative benefits received. The overcharged
mainframe costs are not allocable to the contract because the actual rates charged to the contract
were higher than the rates charged by the vendor; hence, these charges are not allowable.

        (7 – ETS Reply) ETS agrees with the audit finding. A unit rate table that resides in the
ETS Peoplesoft accounting system is used to calculate Mainframe project charges. Starting in
2008, these unit rates were established to reflect auditable Computer Sciences
Corporation (CSC) base billing rates. These billing rates change annually.

          (8)     The $300 represents the freight charges incurred for a package sent to Korea for a
non-NAEP contract, SAT program. According to OMB Circular A-122, to be allowable under a
contract, costs must be allocable under [OMB Circular A-122] principles. A cost is allocable to a
particular cost objective, such as a contract, in accordance with the relative benefits received or if
it is incurred specifically for the contract. The freight charges were not incurred for the NAEP
contract and are therefore unallowable.

      (8 – ETS Reply) We agree that $300 in freight charges were incorrectly charged to the
NAEP contract.

        (9)      The $282 represents pet sitting service charges that ETS reimbursed to its
employees. Per OMB Circular A-122, Attachment A, to be allowable under a contract, costs
must be reasonable for the performance of the contract; and in determining the reasonableness of
a given cost, consideration shall be given to whether the cost is generally recognized as ordinary
and necessary for the performance of the contract. Pet care was a reimbursable item in ETS’
Travel Policy; however, these charges were not a type of cost that is generally recognized as
ordinary and necessary for the performance of a contract. Therefore, these charges were not a
reasonable cost to the contract.

        (9 – ETS Reply) We agree. Although these charges were permissible under ETS travel
policy when incurred, we are not objecting to the finding. ETS’s policy has since been revised.




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              2006 NAEP New Millennium OIG Audit Draft – ETS Reply

                                         Attachment B




Unsupported
Cost Type                                                             Amount
Meeting Meal Charges                                             $21,687 (1)
Meals to Unverified Attendees                                      6,681   (2)
Hotel Meeting Package                                              6,318   (3)
Labor Charges                                                      3,807   (4)
Consultant Charges                                                 3,800   (5)
"Business Conferences" and Dinners with Alcohol                    2,749   (6)
Parking Charges                                                    1,610   (7)
Gratuities                                                           120   (8)

        Total Unsupported Charges                                $46,772

         (1)     The $21,687 represents meal charges for breakfasts, lunches, and breaks
provided during meetings where we could not determine the applicable allowable and
unallowable amounts due to the lack of cost breakdown information. These breakfasts and
lunches were for ETS employees, other NAEP contractors’ employees, NCES staff, and others
who attended various types of meetings. These meal charges were based on per-person meeting
package rates that included breakfasts, lunches, and continuous breaks. According to the
contract, ETS was to (a) provide space, equipment, and lunch, if necessary, for the meetings
between contractors; (b) provide meeting space and accommodations, if required, for the
Standing Committees meetings; and (c) pay associated costs for meeting space, refreshments
during the meeting day, and travel expenses (including lodging and meals outside the meeting
day) for DAC members, ETS staff, and its DAR subcontractors who attended the DAC meetings.
Since the contract did not specify breakfast and dinner be provided during meetings, charges for
breakfasts and dinners for meetings are unallowable. Because there was no cost breakdown for
the charges for breakfasts, lunches, or breaks, we could not determine the applicable allowable
and unallowable amount for these meeting meals. Per OMB Circular A-122, Attachment A, A.2,
to be allowable under a contract, costs must be adequately documented.

         (1 – ETS Reply) We disagree that there were $21,687 of unsupported meals charged to
the contract. Although the charge in question did not include a breakdown by meal, any
breakfasts and dinners in question relate to DAC meetings and Standing Committee meetings, for
which most participants’ travel distance required overnight accommodations.
         As clarification, both types of meetings were critical to the operational success of the
NAEP program. DAC meetings involved discussions with external technical experts that led to
implementation decisions regarding assessment design, analysis procedures, and methodologies.
In the case of Standing Committee meetings, external subject-area and assessment experts
reviewed and revised test questions to ensure they were valid, fair, and grade-appropriate.

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                 2006 NAEP New Millennium OIG Audit Draft – ETS Reply

         The DAR Technical Proposal (Part 1) Task 2.5.1.1, The Design and Analysis Committee
(DAC) states that “ETS will be responsible for paying travel expenses…for DAC members and
staff of ETS and its DAR subcontractors.” Per OMB Circular No. A-122, Cost Principles for
Non-Profit Organizations, “Travel costs are the expenses for transportation, lodging,
subsistence, and related items….” Thus, since ETS was responsible for paying the travel
expenses related to DAC meetings, it was responsible for paying for subsistence related to those
meetings. In addition, the RFP Solicitation No. ED-02-R-0015, Section 2.5.1.2, Subject-Related
Standing Committees states that “The contractor shall provide for meeting space and
accommodations, if required.” Since ETS was responsible for providing for accommodations for
the Standing Committee meetings, it is our understanding that should include meals, including
breakfast and dinner. These Committee members were not also reimbursed a per diem for those
same meals.

        (2)     The $6,681 represents lunch charges for unverified meeting attendees. The lunch
charges were for 140 individuals for whom ETS could not provide adequate support, such as
names, to verify their attendance at a meeting. Per OMB Circular A-122, Attachment A, A.2, to
be allowable under a contract, costs must be adequately documented.

          (2 – ETS Reply) We disagree. The Puerto Rico Department of Education maintained the
list of invitees to this invitational conference. The conference report documented that the purpose
of the meeting was to educate a large group of teachers from the region about the development
and aims on the NAEP 2007 Mathematics Pilot Assessment. ETS requested the list of meeting
attendees from the Puerto Rico Department of Education, but has not yet received any
documentation.

        (3)     The $6,318 represents meeting costs for a Standing Committees meeting that
ETS could not provide detailed breakdowns to determine the allowable lodging amount or the
unallowable amounts for meeting meals. These charges were based on the hotel’s per-person
meeting package rate that included lodging, three-meal (breakfast, lunch, and dinner), and
meeting space costs. According to the contract, ETS was to provide meeting space and
accommodations, if required, for the Standing Committees meetings. Since the contract did not
specify meals to be provided during these meetings, these meals were unallowable . Because
there was no cost breakdown for the charges for lodging or meals, we could not determine the
allowable amounts for lodging or the unallowable amounts for meeting meals.

         (3 – ETS Reply) We disagree that charges for meals at Standing Committee meetings, for
which most participants’ travel distance required overnight accommodations, are unallowable.
         As clarification, these meetings were critical to the operational success of the NAEP
program. The Standing Committee members, who are external subject-area and assessment
experts, reviewed and revised test questions to ensure they were valid, fair, and grade-
appropriate.
         The RFP Solicitation No. ED-02-R-0015, Section 2.5.1.2, Subject-Related Standing
Committees states that “The contractor shall provide for meeting space and accommodations, if
required.” We believe that should include meals, including breakfast and dinner. These
Committee members were not also reimbursed a per diem for those same meals.



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                                          Attachment C

                 2006 NAEP New Millennium OIG Audit Draft – ETS Reply

         (4)      The $3,807 represents labor charges for which ETS could not provide support.
ETS’ officials informed us that the temporary staff time sheets and invoices were stored at ETS’
record retention facility, and these had to be retrieved. Although requested, ETS did not provide
us with the invoice and payment information for the $3,807 in temporary staff charges. As a
result, we could not determine that these charges were actually incurred and paid. Per OMB
Circular A-122, Attachment A, A.2, to be allowable under a contract, costs must be adequately
documented. Further, FAR 52.215-2 states that the contractor shall make records for all costs
claimed to have been incurred directly or indirectly in performance of the contract available at its
office at all reasonable times for three years from the time of the final payment under the contract.

        (4 – ETS Reply) We have obtained supporting invoices for [Individual A]’s time charges
for $2,267 (see Schedule C). We agree with the finding for the remaining $1,540. Although we
have timesheets showing that the individuals logged their time, we have not been able to locate
documents indicating proof of payment for the temporary labor charges.

         (5)      The $3,800 represents consultant fees paid to two NAEP committee members for
an October 2006 meeting ($3,000) and a March 2006 meeting ($800). ETS provided an email
stating that it had a purchase order for January 1, 2006 through September 30, 2006 for the
individual who attended an October 2006 meeting, but it could not locate the new contract for
October 2006 to support the $3,000 charges. For the March 2006 meeting, ETS could not provide
valid documentation to show that the individual who received the $800 actually
attended the meeting. According to OMB Circular A-122, Attachment A, A.2, to be allowable
under a contract, costs must be adequately documented.

        (5 – ETS Reply) We disagree with the findings. The $800 pertained to [Individual B]’s
participation at the March 2006 NAEP Reading Standing Committee Meeting. On 11/26/08,
subsequent to fieldwork, we submitted a meeting attendee list confirming [Individual B]’s
attendance at the meeting. The $3,000 was paid to [Individual C] for his participation at the
October 2006 NAEP Math Bilingual Meeting in Ponce, Puerto Rico. The finding was made
because the purchase order had lapsed at the end of the previous month. [Individual B]’s and
[Individual C]’s attendance is not in question. Neither is the obligation to pay for services
rendered in support of the contract.

         (6)     The $2,749 represents the dinner costs claimed by ETS employees. ETS
employees claimed $2,511 as “business conference” expenses on their travel vouchers. However,
for these “business conferences”, ETS did not provide documentation that detailed (a) the purpose
of these dinners or who attended them since the vouchers we reviewed did not provide this
information, or (b) the validity of the dinners as business related conferences because alcoholic
beverages were served during these dinners. ETS employees also claimed $180 in dinner costs
that included alcoholic beverages without segregating the unallowable alcoholic beverages or
specifying who and how many actually attended the dinners. In addition, we could not determine
the allowability of a $58 “honor bar” charge from a hotel bill because there was no
documentation showing whether it included alcoholic beverages. According to OMB Circular A-
122, Attachment A, A.2, to be allowable under a contract, costs must be adequately documented.




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                                         Attachment C

                 006 NAEP New Millennium OIG Audit Draft – ETS Reply

         (6 – ETS Reply) We partially disagree. For the Business Conference meals of $2,511,
there is a Section F “Business Conferences Expenses” on Page 2 of the ETS Employee Expense
Report, where employees are asked to provide the meeting purpose and attendees. This
documentation was supplied with the original submission to the auditors, and there is $1,897 of
the vouchers that we could verify attendees/meeting purpose/no alcohol charged (see Schedule
B). For the remaining Business Conference meals, the meeting purpose and participants were
documented, but we could not verify that the charges did not include alcohol. In those cases we
are assuming a 20% alcohol charge that is unallowable, or $123.
         With respect to the $180 in dinner costs for ETS employees which did not specifically
segregate alcoholic beverages, if any, we are assuming 20% for alcohol, or $36. We agree that
the $58 honor bar charge is not allowable since we could not document that it did not include
alcoholic beverages.

         (7)      The $1,610 represents parking charges incurred during meetings. ETS did not
provide documentation to show who incurred these charges. As a result, we could not determine
the validity of these charges. According to OMB Circular A-122, Attachment A, A.2, to be
allowable under a contract, costs must be adequately documented.

        (7 – ETS Reply) We disagree. The conference report documented that the purpose of the
meeting was to educate a large group of teachers from the region about the development and
aims on the NAEP 2007 Mathematics Pilot Assessment. The Puerto Rico Department of
Education maintained the list of invitees to this meeting. ETS has requested the list of meeting
attendees from the Puerto Rico Department of Education, but has not yet received any
documentation.

         (8)      The $120 represents a gratuity amount on a hotel’s invoice for one meeting. This
charge showed up on the hotel invoice with a date that was three days after the meeting. There
was no explanation or information on who incurred the charge, when it was incurred, or what was
it for. As a result, we could not determine the validity of this charge. According to OMB Circular
A-122, Attachment A, A.2, to be allowable under a contract, costs must be adequately
documented.

        (8 – ETS Reply) We disagree. ETS checked with the hotel (Hilton Alexandria Mark
Center, 703-845-1010) and spoke with [Individual D] at x6373; he indicated that the bellman
gratuity is a $5 per bag charge, and is a routine charge added to a conference bill based on the
number of bags handled (in this case for 24 bags).




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                  Attachment C