oversight

Delaware State University's Administration of the Title III Strengthening HBCU Program.

Published by the Department of Education, Office of Inspector General on 2002-07-11.

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

       AUDIT OF DELAWARE STATE UNIVERSITY’S
          ADMINISTRATION OF THE TITLE III
          STRENGTHENING HBCU PROGRAM




                             FINAL AUDIT REPORT
                        CONTROL NUMBER ED-OIG/A03-B0026
                                             JULY 2002




Our mission is to promo te the efficiency,               U.S. Department of Education
effectiveness, and integrity of the                      Office of Inspector General
Department’s programs and operations.                    Philadelphia, Pennsylvania
Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this audit 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), audit
reports issued by the Office of Inspector General are available, if requested, to
members of the press and general public to the extent information contained
therein is not subject to exemptions in the Act.
  AUDIT OF DELAWARE STATE UNIVERSITY’S ADMINISTRATION OF
        THE TITLE III STRENGTHENING HBCU P ROGRAM

                       CONTROL NUMBER ED-OIG/A03-B0026

                                TABLE OF CONTENTS

                                             Page
EXECUTIVE SUMMARY…….……………………………………………………….……. 1

BACKGROUND…………….……………………………………………………………... 3

AUDIT RESULTS…………………………………………………………………………. 4

FINDING NO. 1 –   DSU did not Handle Funds for the Endowment Challenge
                  Program Activity in a Timely Manner…...…...……………….…….            5

 Recommendation..…………………………………………………………………….. 6

FINDING NO. 2 –   DSU Reported Inaccurate Information on its Endowment Challenge
                  Program Activity...…………………………………………………..                         7

 Recommendations...…………………………………………………………………...                                    8

FINDING NO. 3 –   DSU did not Adequately Account for Title III-Funded
                  Endowment Funds...………………………………………………...                          9

 Recommendations...…………………………………………………………………...                                    12

FINDING NO. 4 –   DSU Charged Unallowable and Unsupported Costs to
                  HBCU Program Funds………………………..…………………….. 12

 Recommendation.....…………………………………………………………………...                                   13

OBJECTIVE, SCOPE AND METHODOLOGY………………………………………………...                              14

STATEMENT ON MANAGEMENT CONTROLS………………………………………...……. 16

APPENDIX A – DSU Activities Supported with HBCU Program Funds………………...             17

APPENDIX B – DSU’s Comments to the Audit Report..…………………………………                     18
A UDIT OF DELAWARE STATE UNIVERSITY’S A DMINISTRATION
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                                   EXECUTIVE SUMMARY

The objective of our audit was to determine if Delaware State University (DSU) administered
the Title III, Part B Strengthening Historically Black Colleges and Universities Program (the
HBCU Program) in accordance with applicable laws, regulations, and program requirements.
Our audit covered the period October 1, 1997, to September 30, 2001. As a result of
concerns identified during our fieldwork, the scope of the audit was expanded to include DSU’s
accounting for Title III-funded endowment funds, including those funded under the Part C
Endowment Challenge Grant Program, for the period July 1, 1992, to December 31, 2001.

Except for DSU’s administration of endowment funds established with funds from the HBCU
Program and Endowment Challenge Grant Program, our audit disclosed that during the period
October 1, 1997, to September 30, 2001, DSU generally administered the HBCU Program
funds in accordance with applicable laws, regulations, and requirements.

We found DSU drew down $200,000 of HBCU Program funds for their Endowment
Challenge Program activity 21 months prior to accounting for the funds in October 2001. The
funds were drawn down on February 9, 2000, and remained on deposit in DSU’s bank
account earning interest until December 2001. During this period, DSU reported to the U.S.
Department of Education (the Department) that $200,000 of matching funds had been raised
and that the endowment fund corpus, consisting of grant and matching funds, had been placed in
a separate investment account. For the quarter-ended December 31, 2001, DSU deposited
into an endowment fund $200,000 of grant funds, $150,000 of matching funds, and $18,140 of
interest earned, while the grant funds were on deposit in their bank account.

In addition, we found that DSU did not adequately account for endowment funds established
with HBCU Program and Endowment Challenge Grant Program funds. DSU’s accounting
records for their pooled endowment fund did not adequately account for the endowment funds’
additions, income, and withdrawals. In February 2002, DSU prepared revised endowment
fund accounting records for the period July 1, 1992, to December 31, 2001; the revised
accounting records address many of the inadequacies of DSU’s original endowment fund
accounting.

We also found that DSU charged $3,422 of unallowable costs and $2,289 of unsupported
costs to the HBCU Program funds. In February 2002, DSU returned the unallowable and
unsupported costs to the HBCU Program account.




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We recommend that the Assistant Secretary for Postsecondary Education require DSU to
establish controls that ensure: (1) Title III funds for endowment activities are accounted for,
matched, and invested in a timely manner; (2) Title III-funded endowment activities are properly
reported to the Department; (3) Title III-funded endowment funds are adequately accounted
for; and (4) expenditures made with HBCU Program funds are supported and reasonable.

A draft of this audit report was provided to DSU. DSU concurred with the findings and
recommendations presented in the audit report. In addition, DSU noted the corrective actions
they have implemented. A copy of DSU’s response is included as an attachment to this audit
report.




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                                           BACKGROUND

Established in 1891, Delaware State University (DSU) is a public institution that offers
baccalaureate and graduate programs. Located in Dover, Delaware, DSU is designated as a
historically black college and university and has an enrollment of approximately 3,100 students.

The Title III, Part B Strengthening Historically Black Colleges and Universities Program (the
HBCU Program) provides grants to historically black colleges and universities to assist these
institutions in establishing and strengthening their physical plants, academic resources, fiscal
management, and endowments so that they may continue to participate in fulfilling the goal of
equality of educational opportunity. To be eligible to receive a grant under the HBCU Program,
an institution must be designated by the U.S. Department of Education (the Department) as a
historically black college and university.

HBCU Program funds may be used for the following activities: (1) the purchase, rental or lease
of scientific or laboratory equipment for educational purposes; (2) construction, maintenance,
and renovation of instructional facilities; (3) faculty development and exchanges; (4) academic
instruction in disciplines where Black Americans are underrepresented; (5) the purchase of
educational material; (6) tutoring, counseling, and student service programs; (7) funds and
administrative management and acquisition of equipment for use in strengthening funds
management; (8) joint use of facilities; (9) establishing or improving a development office; (10)
establishing or improving a program of elementary and secondary school teacher education;
(11) establishing community outreach programs to encourage the pursuit of postsecondary
education; and (12) establishing or increasing an endowment fund. If an institution uses part of
its HBCU Program funds for establishing or increasing an endowment fund, it is subject to
certain Title III, Part C Endowment Challenge Grant Program provisions. HBCU Program
grants are for a period of up to five academic years, with authorizations made yearly.

During the audit period, October 1, 1997, to September 30, 2001, DSU was awarded HBCU
Program grants totaling $6,560,504. During the same period, DSU expended grant funds
totaling $3,772,749.1 Appendix A provides a description of the activities at DSU that are
supported with HBCU Program funds.

Congress appropriated funds for the Title III, Part C Endowment Challenge Grant Program
during fiscal years 1984 to 1995. The Endowment Challenge Grant Program provided
endowment challenge grants to eligible institutions to (1) establish or increase endowment
challenge funds, (2) provide additional incentives to promote fund-raising activities, and (3)
foster increased independence and self-sufficiency at eligible institutions. In general, institutions
eligible for the Endowment Challenge Grant Program included institutions eligible for the
1
  The amount awarded is for five award years (1997, 1998, 1999, 2000, and 2001), whereas
the amount expended is for a four-year period.


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Strengthening Institutions Program and the HBCU Program. The significant requirements of the
Endowment Challenge Grant Program include: (1) institutions must match the grant awards with
non-Federal funds; (2) endowment challenge grants must be invested for a duration of 20 years;
(3) the endowment fund corpus 2 may be invested in securities such as certificates of deposit,
mutual funds, stocks or bonds; (4) during the grant period, the institution may not withdraw any
part of the endowment fund corpus; and (5) during the grant period, the institution may
withdraw, for costs necessary to operate the institution or administer and manage the
endowment fund, up to 50 percent of the total aggregate endowment fund income earned prior
to the date of expenditure.

The Department awarded DSU two Endowment Challenge Grants. In 1986, DSU received an
Endowment Challenge Grant of $50,000; DSU matched the grant with $50,000 for a total
original endowment fund corpus of $100,000. In 1995, DSU received a second Endowment
Challenge Grant of $382,750; DSU matched the grant with $191,375 for a total original
endowment fund corpus of $574,125.

Unless otherwise specified, all regulatory citations are to the July 1, 1997, volume.

                                        AUDIT RESULTS

The objective of our audit was to determine if DSU administered the HBCU Program in
accordance with applicable laws, regulations, and program requirements. Our audit covered
the period October 1, 1997, to September 30, 2001. As a result of concerns identified during
our fieldwork, the scope of the audit was expanded to include DSU’s accounting for Title III-
funded endowment funds, including those funded under the Part C Endowment Challenge Grant
Program, for the period July 1, 1992, to December 31, 2001.

Except for DSU’s administration of endowment funds established with funds from the HBCU
Program and Endowment Challenge Grant Program, our audit disclosed that during the period
October 1, 1997, to September 30, 2001, DSU generally administered the HBCU Program
funds in accordance with applicable laws, regulations, and requirements.

A draft of this audit report was provided to DSU. DSU concurred with the findings and
recommendations presented in the audit report. In addition, DSU noted the corrective actions
they have implemented. A copy of DSU’s response is included as an attachment to this audit
report.




2
 The endowment fund corpus consists of the Federal grant funds and the institution's matching
funds. 34 C.F.R. § 628.6.


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FINDING NO. 1          DSU DID NOT HANDLE FUNDS FOR THE ENDOWMENT CHALLENGE
                       PROGRAM ACTIVITY IN A TIMELY M ANNER

DSU did not: (1) promptly account for HBCU Program funds drawn down for the Endowment
Challenge Program activity,3 (2) promptly provide matching funds for the HBCU Program
funds, and (3) deposit and invest the endowment fund corpus in a timely manner. The table
below presents the significant events for the Endowment Challenge Program activity.

         Date                                        Event/Transaction
                         DSU draws down $200,000 of HBCU Program funds from the
                         Department for their Endowment Challenge Program activity, and
    February 9, 2000     deposits the funds into their corporate bank account on March 3, 2000.4
                         While on deposit, the funds are invested in a money market account and
                         earn interest.
                         Approximately 21 months later, DSU accounts for the funds through
    October 26, 2001     journal entries transferring $200,000 from the Endowment Challenge
                         Program activity account to the Federal III endowment fund account.
                         DSU posts journal entries to transfer $150,000 of matching funds to the
November 7, 2001
                         Federal III endowment fund account.
                         We review DSU’s endowment fund accounting records (unitization
                         schedules). DSU establishes the Federal III endowment account in
                         DSU’s pooled endowment fund’s unitization schedule for the quarter-
                         ended December 31, 2001. The Federal III endowment account is
     February 2002
                         funded with $200,000 of grant funds, $18,140 of interest earned on the
                         funds while they were on deposit in DSU's bank account from March 3,
                         2000, through December 31, 2001,5 and $150,000 of matching funds
                         from DSU.

The delay in accounting for, matching, depositing, and investing the grant funds was due to
inadequate management controls pertaining to the drawdown and recording of Federal grant
funds. As a result, DSU did not comply with Federal regulations covering cash management
and Title III-funded endowments. Regulations at 34 C.F.R. § 74.22(b)(2) require cash

3
  The Endowment Challenge Program activity is one of DSU’s Title III, Part B HBCU Program
activities. While similar in name, it should not be confused with the Title III, Part C Endowment
Challenge Grant Program, discussed elsewhere in this report.
4
  The funds were held at the State of Delaware between February 9, 2000, and March 3,
2000.
5
  Interest was credited to December 31, 2001, because new endowment funds do not begin to
participate in the pooled endowment fund’s income and gains or losses until the following
quarter, in this case the quarter-ended March 31, 2002.


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advances to recipient organizations be limited to the minimum amounts needed and be timed in
accordance with the actual, immediate cash requirements of the recipient organization in carrying
out the program or project. Pursuant to 20 U.S.C. § 1062(b)(3), the Title III, Part C
Endowment Challenge Grant Program provisions regarding the establishment or increase of an
endowment fund, that are not inconsistent with the Title III, Part B HBCU Program provisions,
shall apply to Part B funds used for endowment activities. The Endowment Challenge Grant
Program’s implementing regulations establish the following requirements, among others, for
institutions that receive endowment challenge grants:

q     Establish an endowment fund independent of any other endowment fund established by or
      for the institution. 34 C.F.R. § 628.41(a)(2).
q     Deposit the matching funds in the endowment fund established under this part. 34 C.F.R. §
      628.41(a)(3).
q     Upon receipt, immediately deposit the grant funds into the endowment fund established
      under this part. 34 C.F.R. § 628.41(a)(4).
q     Within fifteen working days after receiving the grant funds, invest the endowment fund
      corpus. 34 C.F.R. § 628.41(a)(5).

Under regulations at 34 C.F.R. § 608.10(d)(3), which became effective January 18, 2001,
institutions are required to match the grant funds immediately with non-Federal funds when it
places those funds into its endowment fund.

In December 2001, we shared our preliminary finding with DSU officials. They noted that
when the $200,000 was drawn down, matching funds were available, but not properly allocated
to the Endowment Challenge Program activity.

RECOMMENDATION:

1.1      The Assistant Secretary for Postsecondary Education should ensure that DSU
         establishes management controls that result in the immediate match of the Title III grant
         funds for endowment activities and the immediate deposit of the grant and matching
         funds into an endowment fund.

AUDITEE’S COMMENTS:

DSU concurred with the finding and recommendation. DSU will ensure that all future
drawdowns will be matched with funds from appropriate sources in a timely manner.




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FINDING NO. 2      DSU REPORTED INACCURATE INFORMATION ON ITS ENDOWMENT
                   CHALLENGE PROGRAM ACTIVITY

DSU reported inaccurate information on the status of the Endowment Challenge Program
activity to the Department in the HBCU Program’s continuation grant applications and annual
performance reports. The information was inaccurate, because it did not reflect DSU’s actual
accomplishments or transactions. Specifically, in DSU’s May 1998 and May 1999 continuation
grant applications and annual performance reports, $100,000 was budgeted each year for the
Endowment Challenge Program activity. In both the May 1999 and March 2000 continuation
grant applications and annual performance reports, DSU stated that $100,000 was set aside in
the previous year for endowment purposes and that they raised the required match of 100
percent or $100,000. In addition, in both the March 2000 and April 2001 continuation grant
applications and annual performance reports, DSU stated that the endowment fund corpus was
placed in a separate investment account.

These statements indicate that DSU established an independent endowment fund for the
Endowment Challenge Program activity, deposited the grant and matching funds into the
endowment fund, and invested the endowment fund corpus. The Endowment Challenge Grant
Program’s implementing regulations establish the following requirements, among others, for
institutions that receive endowment challenge grants:

q   Establish an endowment fund independent of any other endowment fund established by or
    for the institution. 34 C.F.R. § 628.41(a)(2).
q   Deposit the matching funds in the endowment fund established under this part. 34 C.F.R. §
    628.41(a)(3).
q   Upon receipt, immediately deposit the grant funds into the endowment fund established
    under this part. 34 C.F.R. § 628.41(a)(4).
q   Within fifteen working days after receiving the grant funds, invest the endowment fund
    corpus. 34 C.F.R. § 628.41(a)(5).

We found that while DSU raised more than $200,000 of eligible matching funds, DSU did not
post journal entries to transfer the matching funds to the Federal III endowment account until
November 7, 2001, twenty-one months after DSU drew down the grant funds from the
Department. When DSU finally matched the $100,000 of fiscal year 1998 grant funds, it
transferred to the Federal III endowment account only $50,000 of the $100,000 of matching
funds that it reported in its May 1999 continuation grant application and annual performance
report. In addition, the $200,000 of federal funds drawn down by DSU on February 9, 2000,
remained on deposit in DSU's corporate bank account; the funds were not placed in a separate
investment account as reported by DSU in the March 2000 and April 2001 continuation grant
applications and annual performance reports. In preparing the performance reports, DSU's




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Title III Coordinator relied on information provided by DSU Business and Finance Office
employees; the information was not verified.

Regulations at 34 C.F.R. § 74.51(d) require that grantee’s performance reports must contain a
comparison of the actual accomplishments with the goals and objectives established for the
period, and reasons why established goals were not met. Annual performance reports that
contain inaccurate information prevent the Department’s program staff from assessing a
grantee's progress toward meeting the grant's goals and objectives, providing needed technical
assistance to the grantee, or imposing special award conditions on the grantee.

RECOMMENDATIONS:

The Assistant Secretary for Postsecondary Education should:

2.1    Require that DSU establish management controls to ensure the verification of
       information (i.e., actual accomplishments, reasons for deviations from established goals,
       and developments that have a significant impact on award funded activities) reported in
       DSU's annual performance reports.

2.2    Require that DSU submit a report on the current status of the HBCU Program-funded
       Endowment Challenge Program activity. Such a report should include the status of the
       endowment grant funds, information on the amounts and sources of the required
       matching funds, and a comparison of actual accomplishments of the activity to the
       previously reported accomplishments.

AUDITEE’S COMMENTS:

DSU concurred with the finding and recommendations. DSU stated that they implemented a
new procedure to ensure the verification of information provided in their annual performance
reports. In addition, DSU will submit a performance report on the current status of the
Endowment Challenge Program activity.




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FINDING NO. 3       DSU DID NOT ADEQUATELY ACCOUNT FOR TITLE III-FUNDED
                    ENDOWMENT FUNDS

DSU did not adequately account for the endowment funds established with Title III HBCU
Program and Endowment Challenge Grant Program funds. DSU invests most of its endowment
fund assets through the Common Fund, an investment company, in an account for DSU's
pooled endowment fund. The assets of DSU's various endowment funds were pooled and
invested among stock, bond, and international stock funds.6 Endowment fund assets that were
not transferred to the Common Fund remained on deposit in DSU's money market account.
DSU uses a quarterly unitization schedule to apportion the Common Fund account balances and
money market account balances among the participating endowment funds, and to allocate the
market value, income, gain or loss, and distributions attributable to each participating
endowment fund. We reviewed DSU's original unitization schedules for the period October 1,
1997, to September 30, 2001. We found that:

q   In preparing the quarterly unitization schedules, DSU did not include $610,098 of cash net
    income (e.g., net income not reinvested) from Common Fund investments during the period
    October 1, 1997, to September 30, 2001.

q   In preparing the quarterly unitization schedules, DSU did not include $136,046 of net
    income reinvested in Common Fund investments during the period October 1, 1997, to
    March 31, 1999.

q   In preparing the quarterly unitization schedules, DSU did not include the interest earned on
    the pooled endowment fund's money market account balances. The interest earnings are
    classified as general revenue for DSU. Using DSU's revised unitization schedules, we
    estimate that approximately $123,000 of interest income was earned on the pooled
    endowment fund's money market account balances during the period October 1, 1997, to
    December 31, 2001. In addition, we estimate that the pooled endowment fund's money
    market account balances represent approximately $1.4 million or 12 percent of the total
    market value reported on the pooled endowment fund unitization schedule for the quarter-
    ended December 31, 2001.

q   DSU did not maintain records detailing the amount and purpose of all expenditures of
    endowment fund income that were withdrawn from the various endowment funds (i.e.,
    endowed scholarships, endowed professorships, and the Federal and Federal II


6
  As of December 31, 2001, DSU’s pooled endowment fund was (approximately) allocated
among the following investments: money market accounts (12 percent), Multi-Strategy Bond
Fund (24 percent), Multi-Strategy Equity Fund (56 percent), and International Equity Fund
(eight percent).


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    endowment funds which were funded with Title III Endowment Challenge Grant Program
    funds).7

q   DSU did not record additions to the endowment funds, totaling $250,000, on the pooled
    endowment fund’s unitization schedule in the quarter in which the additions were received
    by DSU. The $250,000 consists of $200,000 of HBCU Program funds drawn down on
    February 9, 2000, and $50,000 of Luna Mishoe Scholarship Funds provided by the State
    of Delaware for fiscal year 1998.

Regulations applicable to Title III-funded endowment accounts at 34 C.F.R. § 628.47(a)
require grantees to keep records of (1) the source, kind, and amount of matching funds; (2) the
type and amounts of investments of the endowment fund; (3) the amount of endowment fund
income; and (4) the amount and purpose of expenditures of endowment fund income. In
addition, regulations at 34 C.F.R. § 628.43(b) require that, when investing the endowment fund,
grantees shall exercise the judgment and care that a person of prudence, discretion, and
intelligence would exercise in the management of their own financial affairs. Post-award
requirements for Federal grants awarded to institutions of higher education require that grantee's
financial management systems provide:

q   Records that identify adequately the source and application of funds for Federally-
    sponsored activities. These records shall contain information pertaining to the activities’
    assets, outlays, income, and interest. 34 C.F.R. § 74.21(b)(2).
q   Effective control over and accountability for all funds, property, and other assets. 34
    C.F.R. § 74.21(b)(3).

DSU did not adequately account for the endowment funds established with Title III Endowment
Challenge Grant Program and HBCU Program funds, because of staff turnover in the DSU
Business and Finance Office, unfamiliarity with applicable regulations and requirements, and
inadequate management controls. As a result, DSU's original unitization schedules did not
provide adequate information on the market values and income earned on the endowment funds
established with Title III Endowment Challenge Grant Program funds.




7
 We noted only one withdrawal made from Title III-funded endowment accounts during the
period July 1, 1992, to December 31, 2001. In the quarter-ended March 31, 2001, DSU
withdrew $5,000 from the Federal endowment account to provide matching funds for the
Nwosu Endowed Scholarship Fund.


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The Department provided DSU with Title III, Part C Endowment Challenge Grant Program and
Part B HBCU Program funds for endowment purposes, as follows:

                                                                                    Original
                Endowment        Date Funds            Federal        Matching
    Title III                                                                      Endowment
                 Account          Received             Amount         Amount
                                                                                     Corpus
     Part C      Federal       September 1986           $50,000        $50,000      $100,000
     Part C     Federal II      October 1995           $382,750       $191,375      $574,125
     Part B     Federal III     February 2000          $200,000       $150,000      $350,000
                                    Totals             $632,750       $391,375     $1,024,125

In December 2001, we shared our preliminary finding with DSU officials. In response, in
February 2002, DSU’s Business and Finance Office prepared revised unitization schedules for
the period July 1, 1992, to December 31, 2001. We reviewed the revised unitization
schedules, and found that DSU addressed most of our concerns, except for the crediting of
interest earned on the pooled endowment fund’s money market account balances. However,
DSU's Associate Vice President for Business and Finance indicated that DSU will transfer the
Title III-funded endowment accounts (i.e., Federal, Federal II, and Federal III) into separate
Common Fund accounts. This proposed action by DSU will address our issue concerning the
crediting of interest on money market account balances, because all future income attributable to
the Title III-funded accounts will be recorded on the respective Common Fund statements. In
addition, under regulations governing the withdrawal of endowment fund income, DSU could be
entitled to withdraw the money market account interest that was attributable to the Title III-
funded endowment accounts.8

As a result of DSU’s revising the unitization schedules, the market values for the Federal and
Federal II endowment funds increased.

                         Market Values as of September 30, 2001
                       Revised          Original
    Endowment                                                                     Percentage
                      Unitization     Unitization      Difference
     Account                                                                      Difference
                       Schedule        Schedule
Federal II             $831,346        $478,104         $353,242                 73.88 Percent
Federal                $398,965        $270,053         $128,912                 47.74 Percent

In addition, the June 30, 2001, market values for the Federal and Federal II endowment funds
that were reported to the Department in the Financial Report(s) for the Endowment Challenge


8
  Pursuant to 34 C.F.R. § 628.45(a)(1), a grantee may withdraw and spend up to 50 percent of
the total aggregate endowment fund income earned prior to the date of expenditure.


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Grant Program are lower than the market values for the Federal and Federal II accounts
contained in the revised unitization schedules.

RECOMMENDATIONS:

The Assistant Secretary for Postsecondary Education should:

3.1    Ensure that separate investment accounts are established by DSU with the correct fund
       balances for all Title III-funded endowment funds (i.e., Federal, Federal II, and Federal
       III).

3.2    Ensure that DSU's revised methodology of accounting for Title III-funded
       endowment funds meets the requirements set forth in regulations at 34 C.F.R. §
       628.47.

3.3    Determine if DSU should submit revised Financial Report(s) for the Endowment
       Challenge Grant Program.

AUDITEE’S COMMENTS:

DSU concurred with the finding and recommendations. DSU stated that they established
separate endowment investment accounts for all Title III-funded endowment funds with the
Common Fund. By establishing separate endowment investment accounts, DSU revised their
methodology of accounting for Title III-funded endowment funds to meet the requirements set
forth in 34 C.F.R. § 628.47. DSU will submit revised Financial Reports for the Endowment
Challenge Grant Program by July 15, 2002.


FINDING NO. 4      DSU CHARGED UNALLOWABLE AND UNSUPPORTED COSTS
                   TO HBCU PROGRAM FUNDS


Our review found that DSU charged $3,422 in unallowable costs and $2,289 in unsupported
costs to HBCU Program funds during the period October 1, 1997, to September 30, 2001.
During the same period, DSU expended grant funds totaling $3,772,749.

The unallowable costs included $1,833 for unnecessary, unrelated, or incorrectly reimbursed
travel expenses, $1,337 for water and water cooler rentals in DSU offices, and $253 for the
printing of Christmas cards. The unallowable costs were approved and paid for because certain
expenditures (i.e., for reprographics services) are charged to blanket purchase orders that are
approved for each activity. In addition, DSU’s Title III Coordinator approved expenditures
(i.e., for travel and water cooler charges) in error. The Office of Management and Budget
Circular Number A-21, "Cost Principals for Educational Institutions," Paragraph C.3 states that


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one of the major considerations involved in determining the reasonableness of a cost is whether
or not the cost is of a type generally recognized as necessary for the operation of the institution
or the performance of the sponsored agreement. In addition, DSU’s Title III Operational
Manual states, "Travel supported through the use of Title III funds must be directly related to
achieving the goals of the specific Activity."

Timesheets or time and effort reports supporting two payroll expenditures could not be located.
As a result, costs totaling $2,289 were unsupported. The unsupported costs occurred because
of a loss of payroll records or employees not submitting timesheets or time and effort reports.
Regulations at 34 C.F.R. § 74.21(b)(7) require that grantees' financial management systems
provide for accounting records, including cost accounting records that are supported by source
documentation.

In December 2001, we provided DSU officials with our preliminary findings. In February
2002, DSU returned to the HBCU Program account $3,422 for the unallowable costs, $2,289
for the unsupported payroll costs, and $643 in related benefit costs. As a result, DSU has
taken corrective action to address the unallowable and unsupported costs identified in our
review.

RECOMMENDATION:

4.1     The Assistant Secretary for Postsecondary Education should require that DSU ensures
        that staff involved in the expenditure approval process are familiar with what constitutes
        adequately supported and reasonable (i.e., necessary and related) HBCU Program
        expenditures.

AUDITEE’S COMMENTS:

DSU concurred with the finding and recommendation. DSU stated that they reviewed the
expenditure approval process with staff; this review will assist staff in identifying reasonable
expenditures of Title III grant funds.




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                          OBJECTIVE, SCOPE AND M ETHODOLOGY

The objective of our audit was to determine if DSU administered the Title III, Part B HBCU
Program in accordance with applicable laws, regulations, and program requirements. Our audit
covered the period October 1, 1997, to September 30, 2001. As a result of concerns
identified during our fieldwork, the scope of the audit was expanded to include DSU’s
accounting for Title III-funded endowment funds, including those funded under the Part C
Endowment Challenge Grant Program, for the period July 1, 1992, to December 31, 2001.

To accomplish our objective, we reviewed DSU’s policies and procedures pertaining to the
processing of expenditures and payroll, inventory of equipment, and administration of the
endowment funds. We reviewed the continuation grant applications and annual performance
reports submitted by DSU, accounting reports, payroll reports, bank statements, and
endowment fund reports. We reviewed DSU’s single audit reports for the years ended June
30, 1999, and 2000. We interviewed staff and officials from DSU’s Business and Finance
Office, DSU’s Title III Program Office, and the directors for the activities funded with HBCU
Program funds.

During the period October 1, 1997, to September 30, 2001, DSU charged $2,056,668 in
salary and wages to HBCU Program funds. From this universe, we selected a sample of 12
salary and wage transactions, totaling $21,931, for review to determine if the positions and
respective salary or wage rates charged were reasonable, allowable, and allocable to the
HBCU Program. Our sample consisted of four randomly selected salary and wage
transactions, totaling $7,415, and eight judgmentally selected transactions totaling $14,516.
The judgmentally selected transactions were selected from the Enhancing Distance Learning
Program activity. Depending on the activity selected, the payroll transaction may have consisted
of payments to multiple employees.

During the period October 1, 1997, to September 30, 2001, DSU charged 3,654 non-labor
expenditures, totaling $1,313,517, to HBCU Program funds. From this universe, we selected a
sample of 75 transactions, totaling $47,307, for review to determine if the expenditures were
reasonable, allowable, and allocable to the HBCU Program. Our sample consisted of 52
randomly selected transactions, totaling $21,206, and 23 judgmentally selected transactions,
totaling $26,282. The judgmentally selected transactions were selected based upon the nature
of the expense (i.e., the payee was a general merchandise retailer, recurring payments to a
payee, large airfare or lodging expenses), or the dollar amount of the transaction.

Because portions of the payroll and non-labor expenditure samples were based upon the audit
team’s judgment, there is no assurance that the samples were representative of the entire
population and, therefore, should not be projected over the unsampled expenditures.




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We compared lists of HBCU Program-funded equipment that were prepared by DSU’s
Business and Finance Office and DSU’s Title III Program Office. We performed a physical
inspection of eight pieces of equipment with a value of $5,000 of more.

We reviewed the pooled endowment fund’s original unitization schedules, covering the period
October 1, 1997, to September 30, 2001; the revised unitization schedules, covering the period
July 1, 1992, to December 31, 2001; and the respective Common Fund investment reports.
We analyzed the pooled endowment fund’s market values, income, and distributions. We
estimated the amount of interest earned on the grant’s and pooled endowment fund’s money
market account balances. We reviewed information on matching funds raised by DSU; and
reviewed the revised unitization schedules’ activity for the two endowment funds established
with Endowment Challenge Grant Program funds.

To achieve the assignment's objective, we relied upon computer-processed data contained in
DSU's Banner Accounting System. We assessed the reliability of this data. As part of this
assessment, we held discussions with DSU's Business and Finance Office officials to gain an
understanding of the expenditure and payroll processes. To assess the completeness of the
computer-processed data provided by DSU, we compared grant disbursement data from the
Department’s Grant Administration and Payment System to HBCU Program expenditure
information provided by DSU. We compared randomly and judgmentally selected computer-
processed data to source records. In addition, we compared judgmentally selected source
records to computer-processed data in DSU’s Banner Accounting System. Based upon these
tests and assessments, we concluded that the data used was sufficiently reliable to be used for
the assignment's objective.

We conducted on-site fieldwork at DSU’s campus in Dover, Delaware during the period
October 10, 2001, through November 20, 2001. On December 18, 2001, we held a briefing
to discuss our preliminary findings with staff and officials from DSU’s Business and Finance
Office and Title III Program Office. We performed additional on-site fieldwork on February 11
and 22, 2002. On April 4, 2002, we held an exit conference with staff and officials from
DSU’s Business and Finance Office and Title III Program Office. We conducted the audit in
accordance with government auditing standards appropriate to the scope described above.




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                          STATEMENT ON M ANAGEMENT CONTROLS

As part of our review we assessed the system of management controls, policies, procedures,
and practices applicable to DSU's administration of the HBCU Program. Our assessment was
performed to determine the level of control risk for determining the nature, extent, and timing of
our substantive tests to accomplish the audit objective.

For purposes of this audit, we assessed and classified the significant controls into the following
categories:

    q   Program operations.
    q   Compliance with laws and regulations.
    q   Safeguarding resources.

Because of inherent limitations, a study and evaluation made for the limited purpose described
above would not necessarily disclose all material weaknesses in the management controls.
However, our assessment disclosed significant management control weaknesses that adversely
affected DSU's ability to administer Title III-funded endowment funds. These weaknesses
included not handling funds for the Endowment Challenge Program activity in a timely manner;
reporting inaccurate information on the Endowment Challenge Program activity; and inadequate
accounting of Title III-funded endowment funds. These weaknesses and their effects are fully
discussed in the Audit Results section of the report.




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                                   APPENDIX A
               DSU ACTIVITIES SUPPORTED WITH HBCU PROGRAM FUNDS

 GRANT SUPPORTED ACTIVITY                            ACTIVITY OBJECTIVE
Orientation, Mentoring &        To retain students through student and academic support
Advising                        services.
                                To enhance DSU’s academic support services for all
Comprehensive Learning Center
                                undergraduates.
                                To implement effective strategies and initiatives to maintain a
Faculty Development &
                                caring, competent, and committed faculty; and enhance
Assessment
                                teaching and learning through assessments and testing.
                                To train and support faculty in providing Web-enhanced
Enhancing Distance Learning
                                courses.
                                To support and maintain DSU’s computer technology and
                                infrastructure, provide technical assistance and workshops to
Academic Computing Activities
                                faculty and students, and promote the use of computers and
                                the Internet in teaching and learning.
                                To support and maintain computer lab equipment and
Computer Literacy in Art
                                software for art students and faculty.
Hospitality & Tourism           To increase the number of students enrolled in the Hospitality
Management                      and Tourism Management Program.
                                To enhance the computer literacy of students and faculty in
Computer Literacy in Business
                                the School of Management.
                                To integrate technology into the Biology Department’s
BIOASSIST
                                instruction to emphasize student-centered learning.
                                To enhance the opportunity for underrepresented students to
                                pursue degrees and careers in the fields of Physical Sciences,
Careers Program
                                Engineering, Life Sciences, Mathematics, and Computer
                                Sciences.
Computerized Registration       To implement electronic student services systems.
                                To support fitness and wellness activities for students and
Wellness Mentoring Program
                                faculty.
                                To integrate technology into instruction of algebra and
MATHACHIEVE
                                calculus to enhance student achievement.
                                To retain students from culturally diverse and disadvantaged
Nursing Faculty and Student-    backgrounds in the Nursing Program, and to facilitate their
Teaching                        academic achievement to graduate and become Registered
                                Nurses.
Alumni Training and Strategic   To increase alumni advocacy, service, and financial
Planning Program                contributions to DSU.
Endowment Challenge Program     To build DSU’s endowment and improve financial stability.
                                To coordinate and monitor the activities designed to
Program Administration
                                strengthen and enhance DSU.




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                       OIG REPORT DISTRIBUTION LIST




Hard Copy

Dr. William DeLauder, President
Delaware State University

Sally Stroup, Assistant Secretary
Office of Postsecondary Education


Electronic Copy

David Bergeron, OPE, Audit Liaison Officer
Harold Jenkins, OGC, Audit Liaison Officer
William D. Hansen, Deputy Secretary
John Danielson, Chief of Staff
Eugene Hickok, Under Secretary
John Gibbons, Director, Communications
Jack Martin, Chief Financial Officer
Rodger Murphey (for Lindsey Kozberg, Director, Office of Public Affairs)
Becky Campoverde, AS, Legislation and Congressional Affairs
Laurie M. Rich, AS, Intergovernmental and Interagency Affairs
Philip Maestri, Director, Fin’l Improve. & Post Audit Opns, OCFO
Michelle Douglas and Carolyn Adams, OGC (Correspondence control)
L’Wanda Rosemond, ED OIG, General Operations Team
Charles Miller, Post Audit Group, OCFO
Headquarters and Regional Audit Managers, ED OIG