oversight

The Education Leaders Council's Drawdown and Expenditure of Federal Funds.

Published by the Department of Education, Office of Inspector General on 2006-01-31.

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

 The Education Leaders Council’s Drawdown and
         Expenditure of Federal Funds

                               FINAL AUDIT REPORT




                                       ED-OIG/A03F0010
                                         JANUARY 2006




Our mission is to promote the efficiency,                U.S. Department of Education
effectiveness, and integrity of the                      Office of Inspector General
Department’s programs and operations.                    Philadelphia, Pennsylvania
                                       NOTICE

Statements that managerial practices need improvements, as well as other conclusions
and recommendations in this report, represent the opinion of the Office of the Inspector
General. Determinations of corrective action to be taken will be made by the appropriate
Department of Education officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by
the Office of Inspector General are available to members of the press and general public
to the extent information contained therein is not subject to exemptions in the Act.
                         UNITED STATES DEPARTMENT OF EDUCATION
                              OFFICE OF INSPECTOR GENERAL
                                   100 PENN SQUARE EAST, SUITE 502
                                     THE WANAMAKER BUILDING
                                 PHILADELPHIA, PENNSYLVANIA 19107
                                PHONE (215) 656-6900' FAX (215) 656-6397

                                                                   January 31, 2006
Faye P. Taylor, CEO
Following the Leaders
1225 19th StreetNW, Suite 240
Washington, DC 20036

Dear Ms. Taylor:

Enclosed is our final audit report, Control Number ED-OIG/A03FOOI0, entitled "The Education Leaders
Council's Drawdown and Expenditure of Federal Funds." This report incorporates the comments that
Following The Leaders (formerly the Education Leaders Council) provided in response to the draft report.
If you have any additional comments or information that you believe may have a bearing on the
resolutlon of this audit, you should send them directly to the following Education Department officials,
who will consider them before taking final Departmental action on this audit:

                                 Danny A. Harris, PhD
                                 Deputy Chief Financial Officer
                                 U.S. Department of Education
                                 400 Maryland Ave
                                 Washington, D.C. 202024300

                                 Margo Anderson
                                 Associate Assistant Deputy Secretary
                                 Office of Innovation and Improvement
                                 U.S. Department of Education
                                 400 Maryland Ave
                                 Washington, D.C. 20202-5900

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 Informatlon 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 exemptlons in the Act.

                                                  Sincerely,




                                                  Regional Inspector General for AudIt

Enclosure
                     THE EDUCATION LEADERS COUNCIL’S
                 DRAWDOWN AND EXPENDITURE OF FEDERAL FUNDS

                               ED-OIG/A03F0010

                               TABLE OF CONTENTS
                                                                                Page
Executive Summary……………………………………………………………….…..                                     1

Background…………………………………………………………………………....                                        3

Audit Results……………………………………………………………………….….                                       4

Finding No. 1 – ELC Overdrew Following the Leaders Phase II Grant Funds……….       5
 Recommendations...………………………………………………………………….                                     7

Finding No. 2 – ELC Did Not Have an Approved Indirect Cost Plan........…………... 8
 Recommendations...…………………………………………………………….…… 10

Finding No. 3 – ELC Charged Questioned and Unsupported Costs to the Following
the Leaders Grants...……………………………………..…………….....…………...                           11
 Recommendations...……………………………………………………………….....                                 20

Other Matters..………………………………………………………………………...                                    23

Objective, Scope and Methodology….………………………………………….…….                           24

Appendix A – FTL Objectives and Measurable Outcomes……...……………………                  A

Appendix B – Finding No. 3 – Schedule of Questioned Costs..………………………              B

Appendix C – Finding No. 3 – Schedule of Unsupported Costs.………………….…              C

Appendix D – Summary of Selections and Questioned and Unsupported Costs….….       D

Appendix E– Following the Leaders’ Comments to the Report……………………...              E
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                    Control Number ED-OIG/A03F0010

                                   EXECUTIVE SUMMARY

The objectives of the audit were to determine if (1) federal funds drawn down by the
Education Leaders Council (ELC) for the Following the Leaders (FTL) program were
used for ELC’s operations, and (2) expenditures allocated to the federally funded FTL
program were reasonable, allocable, and allowable in accordance with regulations. The
audit covered the period January 1, 2004, through December 31, 2004. We found that
ELC: (1) drew down grant funds that could have been used to cover operating deficits in
ELC’s non-FTL activities, (2) charged indirect costs to the federal grants even though it
did not have an approved indirect cost plan, and (3) charged questioned and unsupported
costs to the federal grants.

The U.S. Department of Education’s (Department) Fund for the Improvement of
Education (FIE) supports nationally significant programs to improve the quality of
elementary and secondary education at the state and local levels. The FIE also supports
grants to entities that have been identified by the Congress in appropriations legislation.
During the period July 1, 2002, to December 31, 2004, ELC received three FIE grants
totaling $23,376,534 for the FTL project. In addition, for fiscal year 2005, Congress
directed six grants, totaling $9,594,623 in awards, to ELC for the FTL project in various
states.

Specifically, the audit disclosed that:

1. ELC did not comply with federal regulations concerning the drawdown of grant
funds. ELC drew down and expended federal funds it was not entitled to. ELC overdrew
the FTL Phase II (fiscal year 2003) grant by $495,326. The FTL Phase II grant overdraw
could have covered ELC's reported accounting deficits for non-FTL activities in calendar
year 2004. It appears that the grant overdraw occurred because of inadequate controls.
For example, ELC did not maintain supporting documentation and failed to reinforce and
follow established procedures.

2. ELC did not have an approved indirect cost plan. ELC's 2002 and 2005 cost policies
specified that indirect costs were charged to the FTL grants using the Office of
Management and Budget (OMB) Circular A-122's direct allocation method and that
monthly timesheet activity was used to establish the rate for allocating the indirect costs.
ELC believed that use of the OMB Circular A-122's direct allocation method to allocate
indirect costs did not require prior approval. Because ELC did not have an approved
indirect cost plan, $90,532 in indirect costs may not have been properly allocated to the
grants.

3. ELC did not comply with cost principles contained in OMB Circular A-122. We
found that 28.2 percent of the grant costs reviewed were either questioned or
unsupported. In total, ELC charged $90,721 in questioned costs and $140,922 in
unsupported costs to the FTL Phase II and III grants. It appears that the questioned and
unsupported costs were the result of weak or non-existent internal controls. The
questioned costs included $69,048 for ELC’s annual conferences that should have been


                                            Page 1
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                               Control Number ED-OIG/A03F0010

charged to ELC’s annual conference cost center, $4,821 for meals and entertainment
costs, and $4,501 for travel costs that do not appear to be FTL related. Also, included in
the questioned amounts were costs for alcoholic beverages, advertising, fundraising, and
interest that are specifically unallowable under applicable cost principles. In August
2005, after ELC had been apprised of the draft audit findings, ELC removed $74,990 of
the questioned costs and $2,596 of the unsupported costs from the FTL Phase II and III
grant expenses.

We recommend that the Department’s Chief Financial Officer and Assistant Deputy
Secretary for Innovation and Improvement require ELC to:

•   Return to the Department $495,326, and any other grant funds, drawndown and not
    actually disbursed by ELC for FTL Phase II grant costs. Submit documentation in
    support of each drawdown request for grant funds, along with proof that the grant
    funds were disbursed for the purpose(s) of the drawdown request. In addition,
    determine the interest earned on federal funds and the amount of such interest to be
    remitted to the Department.

•   Submit an indirect cost plan to the Department's Chief Financial Officer for
    negotiation and approval and refund the portion of the $90,532, and any other costs
    allocated to the FTL grants, on or after January 1, 2004, that are not in accordance
    with the indirect cost plan approved by the Department.

•   Refund to the Department $15,732 for the questioned costs that remain charged to the
    FTL grants and any additional amounts identified by the Department.

•   Provide adequate documentation to show that the unsupported expenditures of
    $138,327 that remain charged to the FTL grants are reasonable, allowable, and
    allocable to the grants, or refund the expenditures that the Department determines are
    not adequately supported. In addition, maintain adequate supporting documentation
    for all FTL grant expenditures.

•   Provide all ELC officials and employees copies of OMB Circular A-122 and ELC's
    internal policies and procedures for determining allowable costs, travel, use of charge
    cards, and payroll; require ELC to maintain documentation that each officer and
    employee have reviewed the Circular and internal policies and procedures; and
    develop a process to ensure that the policies and procedures are complied with.

In December 2005, ELC changed its name to Following the Leaders.1 A draft of this
report was provided to ELC for review and comment. In its comments on the draft
report, ELC did not disagree with our findings as a whole, however it did take issue with
certain aspects of the findings. In addition, ELC did not disagree with our
recommendations. We have incorporated ELC’s comments, where appropriate, into the
report and provide ELC’s full response in Appendix E.
1
 In order to differentiate the FTL organization from the program, the report refers to the organization as
ELC, its former name.


                                                   Page 2
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                   Control Number ED-OIG/A03F0010

                                        BACKGROUND

ELC is a non-profit organization, founded in 1995, that was located in Washington, DC.
According to its mission statement, ELC was a school-reform group committed to
leading educational change focused on improved academic achievement for all students.
ELC reported that its membership base included state boards of education, state and local
superintendents, governors, state and federal legislators, administrators, teachers, parents
and other community leaders.

Administered by the Department’s Office of Innovation and Improvement (OII), the
Department’s FIE supports nationally significant programs to improve the quality of
elementary and secondary education at the state and local levels. In addition, the FIE
supports grants to state and local education agencies, nonprofit organizations, for-profit
organizations and other public and private entities that have been identified by the
Congress in appropriations legislation. During the period July 1, 2002, to December 31,
2004, ELC received three FIE grants, totaling $23,376,534, for the FTL project. The first
was a $3,501,000 unsolicited grant, awarded on July 1, 2002, (Award Number
R215U020001) for FTL Phase I. The second was a $9,934,999 Congressionally directed
grant, awarded on May 1, 2003, (Award Number U215K030213) for FTL Phase II. The
third was a $9,940,535 Congressionally directed grant, awarded on June 25, 2004,
(Award Number U215K040252) for FTL Phase III. In addition, for fiscal year 2005,
Congress directed six grants, totaling $9,594,623 in awards, to ELC for the FTL project
in various states.

ELC described the FTL project as a package of tools to assist states and school districts in
meeting the requirements of the No Child Left Behind Act (NCLB). FTL provided
technology resources and support to approximately 600 schools in 12 states. According
to ELC, FTL helps teachers and administrators incorporate standards-based curriculum
into their classrooms, and assists with the analysis and reporting of student performance
data. FTL’s service providers included Accountability Works, Achievement
Technologies, The Princeton Review, and the Milken Family Foundation. Appendix A
details ELC’s objectives and measurable outcomes for FTL Phases II and III, as
described in ELC’s grant applications submitted to the Department.

Since 2003, major changes have occurred at ELC. Eight of ELC’s board of directors and
ELC’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and
President have resigned. On October 1, 2004, ELC announced a planned merger with
Accountability Works, one of its subcontractors, with the President of Accountability
Works serving as ELC’s Chief Executive Officer. In November 2005, ELC announced
that ELC and Accountability Works would remain independent organizations.
Additionally, in November 2005, ELC planned or implemented the following changes:(1)
ELC would focus exclusively on its school-based initiative, (2) ELC would change its
name to Following the Leaders to reflect the new focus, (3) a new Chief Executive
Officer would be appointed, and (4) the organization’s headquarters would move to
Tennessee. According to ELC, the new organization’s mission will be to serve as a
catalyst for the application of technology to core instructional processes in order to raise


                                            Page 3
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                   Control Number ED-OIG/A03F0010

student achievement and fulfill the goals of NCLB. To accomplish its mission, the new
organization stated that it will assist schools and districts in the selection and
implementation of technology-based resources and support services designed to help
students achieve academic proficiency in core subjects.

On June 9, 2005, the Department designated ELC as a high-risk grantee with special
conditions on its grants. The Department made this determination based upon the
following: (1) ELC was not timely in filing its single audit covering fiscal year 2003, and
there had been no significant single audit activity covering fiscal year 2004; (2) ELC had
agreed that its fiscal accountability practices in the past have been problematic and that
ELC is improving its practices to address these problems; and (3) ELC identified that it
misspent approximately $272,000 in fiscal year 2002 funds, and single audits for fiscal
years 2002 and 2003 have identified fiscal problems and questioned costs. The
Department placed special conditions on the grants to ELC, which include: (1) grant
funds must be deposited in and disbursed from a separate account and a clear and
effective audit trail is required; (2) ELC will enter into a repayment agreement with the
Department for the funds that it cannot account for properly; (3) ELC will be paid by the
Department on a reimbursement basis; (4) ELC will institute appropriate fiscal controls;
(5) ELC must make arrangements for the preparation of its fiscal year 2004 single audit
and the fiscal year 2005 single audit will be filed timely; (6) ELC must have an approved
indirect cost rate or direct cost allocation plan approved by the Department; and (7) ELC
must promptly provide the Department with any requested records and information.

                                       AUDIT RESULTS

The objectives of our audit were to determine if (1) federal funds drawn down by ELC
for the FTL program were used for ELC’s operations, and (2) expenditures allocated to
the federally funded FTL program were reasonable, allocable, and allowable in
accordance with regulations. We found that ELC drew down grant funds that could have
been used to cover operating deficits in ELC’s non-FTL activities, and that expenditures
allocated to the FTL program were not reasonable, allocable, and allowable in accordance
with regulations. Specifically, we found that ELC overdrew grant funds, did not have an
approved indirect cost plan, and charged questioned and unsupported costs to federal
grant funds.

ELC’s General Comments:

ELC believes that it is now in full compliance with all regulations governing the use of
federal funds. In addition, ELC noted that it was ELC’s reporting of financial
mismanagement and the overdraw of federal funds to the Department that resulted in our
review of ELC’s 2004 finances. ELC noted that throughout the period of our audit, ELC
had not closed its 2004 accounting records. ELC was also completing its 2003 audit and
reviewing and adjusting the 2004 and 2005 accounting records in order to make them
accurate and to comply with regulations. ELC believed that many of the shortcomings
identified by our audit would have been corrected as a result of its internal review
process. ELC concurred with the findings concerning financial protocols, and noted that


                                            Page 4
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                               Control Number ED-OIG/A03F0010

it had corrected many of the accounting entries. ELC believed its corrective actions were
given minimal attention in the audit report.

OIG’s Response:

The audit report noted that ELC had informed the Department that it had overdrawn grant
funds and that ELC’s accounting records for 2004 were not finalized. In response to
ELC’s statement that its 2004 accounting records were not finalized, the expenditures
that we reviewed had been charged to the federal grants at the time our audit work was
performed. Furthermore, we disagree with ELC’s statement that the report gave minimal
attention to the corrective actions taken by ELC. The report noted the corrective actions
taken by ELC regarding drawdowns and indirect costs. Additionally, the report noted, in
several places, the questioned and unsupported costs removed from the FTL Phase II and
III grants by ELC.

FINDING NO. 1 - ELC OVERDREW FOLLOWING THE LEADERS PHASE II GRANT FUNDS

ELC overdrew the FTL Phase II grant by $495,326. As a result, ELC did not comply
with regulations in 34 C.F.R. § 74.22 concerning the drawdown of grant funds.
Regulations specify that:

•   “Cash advances to a recipient organization are limited to the minimum amounts
    needed and be timed to be in accordance with the actual, immediate cash
    requirements of the recipient organization in carrying out the purpose of the approved
    program or project.” 34 C.F.R. § 74.22(b)(2).2

•   “The timing and amount of cash advances are as close as is administratively feasible
    to the actual disbursements by the recipient organization for direct program or project
    costs and the proportionate share of any allowable indirect costs.” 34 C.F.R. §
    74.22(b)(3).

In March 2005, ELC informed the Department that it had overdrawn FTL Phase II grant
funds by $272,674. ELC's calculated FTL Phase II overdraw amount was based on
accrued expenses, not cash basis expenditures, and included a March 18, 2005,
drawdown of $22,500. We initially calculated a cumulative FTL Phase II accrual basis
overdraw of $273,520 as follows:3

         Cumulative Drawdowns to March 18, 2005                                     $9,916,740
         Less: Initial Accrual Basis Expenses for Calendar Years
         2003 and 2004                                                             ($9,643,220)
         Cumulative Accrual Basis FTL Phase II Grant Overdraw                        $273,520

2
 Unless otherwise specified, all references to 34 C.F.R. Parts 74 and 75 are to the July 1, 2003, edition.
3
 The $846 difference between ELC’s and our calculations ($272,674 versus $273,520) was due to
expenses charged to the grant by ELC in calendar year 2002. The 2002 expenses were not allowable, as
ELC did not receive Department approval to use grant funds for expenses incurred prior to February 1,
2003.


                                                   Page 5
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                            Control Number ED-OIG/A03F0010



During the performance of our audit, ELC adjusted the FTL Phase II grant expenses,
resulting in the FTL Phase II grant overdraw increasing to $495,326. ELC's adjustments,
totaling $221,806, included removing from FTL Phase II grant expenses $74,170 for
unallowable and unsupported expenses identified during the audit and charging a
$148,000 expenditure initially posted to the FTL Phase II grant to the FTL Phase III
grant. We calculated a cumulative FTL Phase II accrual basis overdraw of $495,326 as
follows:

         Cumulative Drawdowns to March 18, 2005                                  $9,916,740
         Less: Revised Accrual Basis Expenses for Calendar
         Years 2003 and 2004 (as of September 2, 2005)                          ($9,421,414)
         Cumulative Accrual Basis FTL Phase II Grant Overdraw                     $495,326

Because ELC had not finalized its 2004 accounting records, the amount of FTL Phase II
grant expenditures was subject to revision. Any revisions to FTL Phase II grant
expenditures would affect the amount of the FTL Phase II grant overdraw.

The FTL Phase II grant overdraw could have covered ELC's operating deficits (i.e.,
expenses in excess of revenue) in 2004. ELC reported deficits of $501,595 for non-FTL
cost centers in calendar year 2004.4 As noted previously, ELC's accounting figures are
on an accrual basis, not on a cash basis.

These instances of non-compliance appear to be the result of inadequate controls. For
example, ELC did not maintain supporting documentation and failed to reinforce and
follow established procedures. Regulations in 34 C.F.R. § 74.21(b)(5) and §
74.22(b)(1)(i) require grantees to maintain written procedures that minimize the time
elapsing between the transfer of funds and disbursement by the recipient. ELC had a
written drawdown policy in place as of October 2002. The policy required (1) an
accounting statement to be prepared to show the funds needed to meet invoices and
payroll, (2) a drawdown for the expenses calculated, and (3) all funds from the draw to be
used within three working days. ELC's former Director of Federal Programs prepared the
policy, however, it appears that ELC’s former management did not inform ELC
employees of the policies and procedures regarding drawdowns. As a result, ELC
employees were not knowledgeable of and did not follow the policies and procedures
regarding drawdowns. In addition, ELC did not maintain supporting documentation for
grant drawdowns during the period January 2004 through June 2004. We reviewed
ELC's support for 24 drawdowns, totaling $1,543,470, of FTL Phase II grant funds
during the period December 2003 to March 2005. We found that ELC did not maintain
support for 11 of the drawdowns, totaling $1,298,924, made during the period January
2004 through June 2004.

4
  Amount reported by ELC as of September 2, 2005. A cost center is the segment of activity or area of
responsibility for which costs are accumulated. ELC’s non-FTL cost centers include general and
administrative, communications and marketing, fundraising and development, the American Board for
Certification of Teacher Excellence (ABCTE), Education Leaders Action Council, Charter School
Leadership Council, annual conference, and board and committee meetings.


                                                 Page 6
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                 Control Number ED-OIG/A03F0010



ELC's recent management has adopted a drawdown policy that requires (1) a weekly
review of invoices, (2) ELC’s finance department, along with the grant coordinator, to
prepare and sign the drawdown requests (3) the drawdown requests to be forwarded to
the Chief Executive Officer for final review, approval, and signature before the
drawdowns occur, and (4) the issuance of checks once funds are transferred to ELC's
checking account.

In addition to the overdrawn funds, ELC may have earned excess interest on the grant
funds. The funds drawndown by ELC were deposited into a bank account established for
federal funds. In general, the grant funds were transferred from this bank account into
ELC's Operating and Sweep bank accounts to cover disbursements. ELC’s Operating
and Sweep bank accounts earned $721 of interest in 2004 and $619 of interest during the
period January 2005 through June 2005. Regulations in 34 C.F.R. § 74.22(l) specify that
interest earned on federal advances deposited in interest bearing accounts shall be
remitted annually to the Department. However, recipients may retain interest amounts up
to $250 per year for administrative expenses.

RECOMMENDATIONS:

We recommend that the Department’s Chief Financial Officer and Assistant Deputy
Secretary for Innovation and Improvement require ELC to:

1.1     Return to the Department $495,326, and any other grant funds, drawndown and
        not actually disbursed by the grantee for FTL Phase II grant costs.

1.2     Submit documentation (such as vendor invoices and timesheets) in support of
        each drawdown request for grant funds, along with proof that the grant funds were
        disbursed (such as cancelled checks or payroll reports) for the purpose of the
        drawdown request.

1.3     Provide a schedule detailing the adjustments to FTL Phase II grant expenses made
        by ELC to determine any revised overdraw amount.

1.4     Work with the Department to determine the interest earned on the federal funds
        and the amount of such interest to be remitted to the Department.

ELC’s Comments:

ELC concurred that it did not comply at times with regulations concerning the drawdown
of grant funds and that it had overdrawn grant funds. In addition, ELC has taken
corrective actions, such as entering into a repayment plan with the Department to return
the overdrawn funds.

ELC noted that, we reviewed 24 of the 63 FTL Phase II grant drawdowns, and that 10
drawdowns did not have proper documentation. ELC also noted that, due to adjustments



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The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                   Control Number ED-OIG/A03F0010

and corrections to the 2004 accounting records, the overdraw amount had decreased from
the $495,326 contained in the audit report to $476,169 (subject to further adjustments).

OIG’s Response:

We acknowledge the corrective actions that ELC has taken. In response to ELC’s
comments concerning the number of FTL Phase II grant drawdowns, we note that
between May 2003 and March 2005, ELC had made a total of 64 drawdowns (not 63
drawdowns noted by ELC). In addition, as noted in the audit report, our review of the
FTL Phase II grant drawdowns was limited to the 24 drawdowns made during the period
December 2003 through March 2005, and we found ELC did not maintain support for 11
(not 10 noted by ELC) of the 13 drawdowns made during the period January 2004
through June 2004.

In response to ELC’s comments that the FTL Phase II overdraw had decreased from the
amount contained in Finding 1, we have added Recommendation 1.3. Furthermore,
based upon further review, we have added to this report information regarding ELC’s
interest earnings and Recommendation 1.4.

FINDING NO. 2 - ELC DID NOT HAVE AN APPROVED INDIRECT COST PLAN

ELC did not have an approved indirect cost plan. As a result, indirect costs may not have
been properly allocated based upon the benefits provided to each activity of the
organization. ELC believed that use of the OMB Circular A-122's direct allocation
method to allocate indirect costs did not require prior approval from the Department.
Thus, it did not submit a plan for approval. In January 2005, ELC contacted the OII
program officer to discuss the use of the direct allocation method. However, the
discussion did not cover ELC's actual methodology for applying the direct allocation
method or if the Department’s approval of a cost allocation plan was required.

Our review disclosed $90,532 in indirect costs that may not have been properly allocated
to the FTL Phase II and III grants.5 The indirect costs allocated to the FTL grants
included $68,953 in rent costs, $19,422 in other indirect costs, and $2,157 in charges
made with ELC’s corporate American Express credit cards.

ELC's 2002 Cost Policy Statement noted that indirect costs are allocated under a direct
allocation basis using salaries and wages as the allocation base. In addition, ELC's 2005
Finance Protocol Manual stated that joint costs are charged to the FTL grants using the
OMB Circular A-122's direct allocation method and that monthly timesheet activity is
used to establish the rate for allocating joint costs to the FTL grants. However, ELC used
several methods to allocate indirect costs. For example, ELC allocated American
Express charges to the FTL grants based upon one of the following allocations: 100
percent to FTL cost centers; 33 percent each to cost centers for FTL, ELC, and the
American Board for Certification of Teacher Excellence (ABCTE); and 60 percent to
ELC cost centers and 40 percent to FTL cost centers. The 40 percent allocation to the
5
    Questioned costs have been excluded from this amount.


                                                  Page 8
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                              Control Number ED-OIG/A03F0010

FTL program was based on an analysis of payroll allocations for the period August 1,
2003, to December 31, 2003, that showed 42 percent of ELC’s staff time being spent on
FTL activities.

Under OMB Circular A-122, Attachment A, Paragraph D, Allocation of Indirect Costs
and Determination of Indirect Cost Rates, there are three methods for calculating indirect
cost rates: the simplified allocation method, the multiple allocation base method, and the
direct allocation method.6 In addition, under OMB Circular A-122, a non-profit
organization which has not previously established an indirect cost rate with a federal
agency is required to submit its initial indirect cost proposal immediately after the
organization is advised that an award will be made and, in no event, later than three
months after the effective date of the award. Furthermore, regulations in 34 C.F.R. §
75.560(b) specify that grantees must have a current indirect cost rate agreement to charge
indirect costs to a grant. To obtain an indirect cost rate agreement, a grantee must submit
an indirect cost proposal to its cognizant agency and negotiate an indirect cost rate
agreement.7 The Department’s first grant award, for FTL Phase I, was made to ELC on
July 1, 2002.

The direct allocation method is used by some non-profit organizations that treat all costs
as direct costs except general administration and general expenses. These organizations
generally separate their costs into three basic categories: (1) general administration and
general expenses, (2) fundraising, and (3) other direct functions, including projects
performed under federal awards. Joint costs, such as depreciation, rental costs, operation
and maintenance of facilities, telephone expenses, and the like are prorated individually
as direct costs to each category and to each award or other activity using a base most
appropriate to the particular cost being prorated. This method is acceptable, provided
each joint cost is prorated using a base which accurately measures the benefits provided
to each award or other activity. The bases must be established in accordance with
reasonable criteria, and be supported by current data. Under the direct allocation method,
indirect costs consist of general administration and general expenses and the indirect cost
rates are computed using the simplified allocation method, which ELC did not use.

ELC’s 2002 Cost Policy Statement was based on a model cost policy statement issued by
the Department of Labor, Business Operation Center’s Indirect Cost Rate Determination
Guide. The Department’s Office of the Chief Financial Officer, Indirect Cost Group
provides a similar model cost policy statement to grantees requesting information on
indirect costs. The model cost policy statement suggests that office space costs should be
based on square footage, directly and indirectly as follows. The cost of office space
occupied by staff whose salaries are directly charged is charged directly; the cost of space
for staff whose salaries are charged on a mixed basis is allocated on a mixed basis in the
same ratio as their salaries are allocated; the cost of space occupied by staff whose
salaries are indirectly charged is charged indirectly; and the cost of space required for
common areas is accounted for as an indirect cost.

6
  Unless otherwise specified, all references to the OMB Circular A-122 are to the revision effective on June
1, 1998.
7
  The Department is ELC’s cognizant agency.


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ELC’s 2004 rent costs totaled $141,764, of this amount, $68,953 was allocated to the
FTL grants. The 2004 rent costs charged to the FTL grants may not have been properly
allocated for the following reasons: (1) ELC did not have an approved indirect cost plan,
(2) ELC allocated total rent costs based upon a weighted average of timesheet activity
allocated to the FTL grants, rather than on an individual employee basis, and (3) ELC did
not exclude the cost of common areas from the rent costs allocated to the FTL grants.

In addition to rental costs, our review of the disbursements allocated to the FTL Phase II
and III grants identified 20 disbursements for other indirect costs totaling $19,422. For
the most part, ELC allocated 40 percent of the total amount of the payments to the FTL
grants. For example, ELC allocated 40 percent of various payments for
telecommunications, information technology services, and financial and accounting
services to the FTL grants. Furthermore, our review of ELC's American Express credit
card charges allocated to the FTL Phase II and III grants identified 13 charges for various
indirect costs, totaling $2,157. For all of the American Express credit card charges, 40
percent of the total amount was allocated to the FTL grants.

ELC's lack of an approved indirect cost plan was also a finding in ELC's calendar year
2003 single audit report and was based upon the independent auditor's inquiries with the
Department's Indirect Cost Group and Office of Inspector General to determine if prior
approval of the cost allocation plan was necessary.

In July 2005, ELC notified us that they have begun working with the Department on the
treatment of indirect costs.

RECOMMENDATIONS:

We recommend that the Department’s Chief Financial Officer and Assistant Deputy
Secretary for Innovation and Improvement require ELC to:

2.1     Submit an indirect cost plan to the Department's Office of the Chief Financial
        Officer for negotiation and approval.

2.2     Refund the portion of the $90,532, and any other costs allocated to the FTL
        grants, on or after January 1, 2004, that are not in accordance with the indirect
        cost plan approved by the Department.

ELC’s Comments

ELC believed that prior approval was only required when applying for an indirect rate,
and that prior approval was not required to allocate joint costs on a direct basis. In
December 2005, ELC submitted an indirect rate proposal to the Department. ELC noted
that, if approved, it would be owed funds for indirect costs from 2003 to present, and that
these funds would reduce the amount of the overdraw of FTL Phase II grant funds.




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OIG’s Response:

We acknowledge the corrective action taken by ELC.

FINDING NO. 3 - ELC CHARGED QUESTIONED AND UNSUPPORTED COSTS TO THE
FOLLOWING THE LEADERS GRANTS

In administering the FTL grants, ELC did not comply with the cost principles contained
in OMB Circular A-122, Cost Principles for Non-Profit Organizations. Regulations in
34 C.F.R. § 74.27 specify that private non-profit organizations use the cost principles in
OMB Circular A-122 for determining allowable costs. ELC is a private non-profit
organization. We found that 28.2 percent of the costs we reviewed were either
questioned (11.1 percent) or unsupported (17.2 percent). In total, our audit found that
ELC charged $90,721 in questioned costs and $140,922 in unsupported costs to the FTL
Phase II and III grants. In August 2005, after ELC had been apprised of the draft audit
findings, ELC removed $74,990 in questioned costs and $2,596 in unsupported costs that
were identified during our audit from the FTL Phase II and III grant costs.

We did not determine the specific cause for each questioned and unsupported cost
charged to the grants because officials and employees responsible for incurring most of
the questioned and unsupported costs were no longer employed by ELC. The
management of ELC is responsible for establishing and maintaining effective internal
control over compliance with requirements applicable to federal grants. It appears that
the questioned and unsupported costs were the result of weak or non-existent internal
controls established and maintained by the management of ELC. For example, ELC had
weak or non-existent internal controls to ensure that ELC’s policies regarding the
reasonableness, allocability, and allowability of grant costs were followed and that grant
expenditures were supported with adequate documentation. Furthermore, in 2002, ELC’s
former Director of Federal Programs created a cost policy statement, the purpose of
which was to determine the reasonableness, allocability, and allowability of costs in
accordance with the provisions of the applicable federal cost principles and terms and
conditions of awards, however the policy does not describe the process for making these
determinations. These policies covered direct and indirect costs, travel costs, and
unallowable costs such as fundraising, entertainment, alcoholic beverages, advertising
costs, and fines and penalties. Recent ELC management did not locate these policies
until late April 2005, after the start of our audit and following our request for such
policies. In addition, the recent Director of Federal Programs noted that he was never
informed of these policies by former ELC management. ELC's recent management has
adopted policies that cover items such as allowable costs, use of company credit cards,
travel, and payroll.




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During the period January 1, 2004, to December 31, 2004, 382 disbursements, totaling
$5,212,117, were issued from ELC’s operating account.8 These disbursements were
allocated to both the FTL grants and ELC's other cost centers. We judgmentally selected
transactions, totaling $1,474,712, for review. Of the transactions we selected, $820,190
(55.6 percent) was allocated to the FTL Phase II and III grants. A table summarizing our
selections and the questioned and unsupported costs identified is provided in Appendix
D.

                    ELC Charged QuestionedCosts to the FTL Grants.

ELC charged $90,721 in questioned costs to the FTL Phase II and III grants. The
questioned amount consists of $80,455 charged to the FTL Phase II grant and $10,266
charged to the FTL Phase III grant. Of the total questioned amount, ELC removed
$74,990 from the FTL grant costs, consisting of $71,865 from the FTL Phase II grant and
$3,125 from the FTL Phase III grant. As a result, $15,732 of costs remained questioned.
A complete listing of the questioned costs is provided in Appendix B. The questioned
costs included amounts spent on the following:

Meals and Entertainment
ELC allocated 40 percent ($4,821) of $12,052 in charges for meals and entertainment.
The charges consisted of a December 2003 Holiday Party, a February 2004 breakfast
meeting for ten guests, a May 2004 reception and dinner, and a January 2004 dinner for
11 guests. Entertainment costs such as social activities, meals, rentals, and gratuities are
unallowable under OMB Circular A-122, Attachment B, paragraph 14, Entertainment
costs. The amount allocated to the FTL grants included $1,630 for alcoholic beverage
charges. Costs for alcoholic beverages are unallowable under OMB Circular A-122,
Attachment B, paragraph 2, Alcoholic beverages. Additionally, in 2002, ELC had
prepared a cost policy that stated that entertainment and alcoholic beverage costs are
unallowable charges to federal awards.

In August 2005, ELC removed from the FTL Phase II and III grant expenses the $2,640
for the December 2003 Holiday Party, $304 for the January 2004 restaurant charge, and
$1,643 for the May 2004 reception and dinner charge. ELC noted that the February 2004
breakfast meeting expense was for an ELC board meeting. The breakfast meeting cost
does not represent a reasonable expense because the $583 (of which, 40 percent, or $233,
was allocated to the FTL Phase II grant) was for ten people, resulting in a cost of $58 per
attendee. By comparison, the Government Services Administration’s (GSA) 2004 per
diem meals and incidental expenses (M&IE) rate for Washington, DC was $51, of which
$10 was for breakfast.



8
  From the $5,212,117, we excluded seven payments totaling $3,000,000. We included one $20,000
payment made in 2003, to arrive at a population of $2,232,117 from which we selected transactions for
review. The Objective, Scope and Methodology section contains addition information on the selection of
items for review.


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Travel Costs
ELC charged the FTL grants for $4,501 in travel costs not allocable to the FTL Phase II
or III grants. This amount consisted of $2,304 for costs to attend an Alliance for School
Choice retreat and $2,197 for airfare costs. Under OMB Circular A-122, Attachment A,
Subparagraph A.4, a cost is allocable to a grant award if it is incurred specifically for the
award, benefits both the award and other work and can be distributed in a reasonable
proportion to the benefits received, or is necessary for the overall operation of the
organization. In addition, OMB Circular A-122, Attachment B, paragraph 55, Travel
costs, states travel costs are allowable when they are directly attributable to specific work
under an award or are incurred in the normal course of administration of the organization.
The travel did not fit the definition of an allocable or allowable cost, as detailed below.

•   In August 2004, ELC's former Chief Executive Officer traveled to Teton Village,
    Wyoming to attend an Alliance for School Choice retreat. The Alliance for School
    Choice works to promote, implement, and enhance K-12 educational choice. School
    choice is not an FTL related activity. Registration, lodging, airfare and rental car
    costs totaled $5,761, of which $2,304 (40 percent) was allocated to the FTL Phase II
    and III grants. The travel costs were questioned because the trip does not appear FTL
    related or necessary for the administration of ELC. Additionally, in 2002, ELC had
    prepared a travel policy that stated that travel costs are limited to those allowable
    under Federal Travel Regulations. The lodging costs incurred were $269 per night
    plus tax and a resort fee of $11 per night, whereas the GSA lodging rate was $115 per
    night. The excess lodging allocated to the FTL grants was $282 for four nights.
    Furthermore, ELC allocated $347 in airfare costs to the FTL Phase III grant for the
    former Chief Executive Office’s husband to attend the retreat. In addition, $800 for
    the conference registration fee for the former Chief Executive Officer and her
    husband was allocated to the FTL Phase II grant. In August 2005, ELC removed
    from the FTL Phase II and III grant expenses the $2,304 of questioned charges related
    to the Alliance for School Choice retreat.

•   Six charges for airfare totaling $4,708, of which $2,197 was allocated to the FTL
    Phase II grant, do not appear FTL related or necessary for the operations of ELC.
    The airfare was for trips to Alberta, Canada for ELC's former Chief Executive Officer
    and former Director of Communications and roundtrip airfare from Hawaii to
    Washington, DC for ELC's former President. Alberta, Canada and Hawaii are not
    among the states participating in the FTL program. In August 2005, ELC noted that
    it intended to remove the $1,701 in charges for airfare to Canada and that the $496 in
    airfare from Hawaii was under review. ELC noted that one of its staff members
    resided in Hawaii and that the travel charge might therefore be FTL related.

2003 and 2004 Annual Conferences
The FTL grants were charged $61,696 for ELC's 2003 annual conference and $7,352 for
ELC's 2004 annual conference. The annual conference costs are questioned because they
contain charges specifically unallowable under OMB Circular A-122, Attachment B,
Selected Items of Cost and do not fully comply with the general cost principles contained
in OMB Circular A-122, Attachment A.


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Selected Items of Questioned Cost
The FTL Phase II grant was charged $61,696 for ELC's 2003 annual conference held in
Nashville, Tennessee in September 2003. These costs include $60,000 for the conference
center’s charges ($20,000 was paid in November 2003 and $40,000 was paid in February
2004), $508 for audio-visual services paid in April 2004, $1,063 for photography services
and $125 for ELC's "Rebel With a Cause" jacket presented as an award, both paid in
March 2004.9 Our review of the conference center expenses allocated to the FTL grants
for lodging, banquet, room service, and other charges disclosed unreasonable and
unallowable charges. For example:

•   ELC's total banquet charges were $73,567, of which $39,800 (54.1percent) was paid
    from the FTL Phase II grant. An undetermined amount of banquet charges incurred
    by ELC was unreasonable. ELC's banquet charges exceeded the GSA M&IE rate of
    $46 per day.10 For example, on one day, ELC charged 30 lunches at $26 per person,
    50 reception charges at $35 per person, and 80 deluxe hosted bar packages at $13 per
    person. On another day, ELC charged 340 dinners at $59 per person, 225 continental
    breakfasts at $16 per person, and 63 bottles of wine at $32 each. Included in the
    banquet charges was $2,415 (54.1 percent of total) for alcoholic beverage costs,
    including service charges and taxes, consisting of $822 for the reception and $1,593
    for the dinner. Alcohol is an unallowable cost under OMB Circular A-122
    Attachment B, paragraph 2, Alcoholic beverages, and ELC's own 2002 cost policy.

•   ELC's 2002 travel policy stated that travel costs are limited to those allowable under
    Federal Travel Regulations. ELC paid $159 per night plus tax for lodging when
    GSA’s maximum per diem rate for Nashville, Tennessee in 2003 was $103 per night,
    consisting of the GSA rate plus a 25 percent conference lodging allowance. ELC's
    total lodging cost was $19,076, whereas using the GSA rate with a 25 percent
    conference lodging allowance results in lodging costs of $12,269. The excess lodging
    amount is $6,807, of which $3,683 (54.1 percent) was paid from the FTL Phase II
    grant.

•   The conference center’s invoices included $3,977 in total interest charges due to late
    payments by ELC, of which $2,152 (54.1 percent) was paid from the FTL Phase II
    grant. Interest is unallowable under OMB Circular A-122, Attachment B, paragraph
    23, Interest, fundraising, and investment management costs.


9
  The conference center’s invoices totaled $110,985, consisting of banquet costs of $73,567, room costs of
$23,663, audio-visual costs of $10,819, a net credit of $1,040 for miscellaneous costs and credits, and
interest charges of $3,977. The $60,000 (54.1 percent of the conference center’s total costs) charged to the
FTL Phase II grant in ELC's general ledger was classified as lodging. As a result, for purposes of our
review, we treated 54.1 percent of all conference center costs as having been charged to the FTL Phase II
grant. In addition, we note that among the calendar year end 2003 adjusting entries was an adjustment for
$12,000. It is possible that all or a portion of the adjustment was a reduction in the conference center
expenses charged to the FTL Phase II grant.
10
   The $46 M&IE rate consists of $7 for breakfast, $12 for lunch, $18 for dinner, and $9 for incidental
expenses.


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The Education Leaders Council’s
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•   Excluding telecommunications, business center, and parking charges, ELC's total
    room service charges were $2,272, of which $1,229 (54.1 percent) was paid from the
    FTL Phase II grant. We were unable to determine if all the room service charges
    were reasonable and necessary based upon the invoices obtained, the length of stay,
    and the meals provided at conference. However, $261 of the room service charges
    paid from the FTL Phase II grant was unreasonable and questionable. These costs
    include $57 for meals where meals were already provided during ELC's conference;
    $106 in unnecessary laundry service charges given the length of stay; $6 for in-room
    movies because entertainment costs are unallowable under OMB Circular A-122,
    Attachment B, paragraph 14, Entertainment costs; $6 for golf shop purchases because
    goods or services for personal use are unallowable under OMB Circular A-122,
    Attachment B, paragraph 18, Goods or services for personal use; $67 for meals
    charged after the close of the conference; and $19 for purchases of bottled water from
    the guestrooms.

In August 2005, ELC removed the $61,696 of 2003 annual conference costs charged to
the FTL II grant.

The FTL Phase III grant was charged $7,352 for ELC's 2004 annual conference held in
Orlando, Florida in December 2004. These costs, which were paid in October and
November 2004, include $4,915 for advertising and $2,220 for the printing and mailing
of postcards. In addition, in September 2004, $217 was charged for "Rebel With a Cause"
jackets presented as awards. OMB Circular A-122 specifies that selected items of cost
are unallowable, for example:

•   ELC charged $4,915 to the FTL Phase III grant for the image, placement, and
    purchase of an advertisement for the annual conference. Advertising is unallowable
    under OMB Circular A-122, Attachment B, paragraph 1, Advertising and public
    relations costs. Additionally, ELC's 2002 cost policy stated that advertising costs
    (other than for recruitment of staff or for the disposal of property) are unallowable
    charges to federal awards.

•   ELC allocated $217 to the FTL Phase III grant for "Rebel With a Cause" jackets that
    were presented as awards. However, the cost of memorabilia, gifts and souvenirs is
    unallowable under OMB Circular A-122, Attachment B, paragraph 1, Advertising and
    public relations costs. In August 2005, ELC removed this cost from the FTL Phase
    III grant expenses.

Pursuant to the selected items of cost contained in OMB Circular A-122, Attachment B,
paragraph 29, Meetings and Conferences, to the extent that meetings and conference
costs are identifiable with a particular cost objective, they should be charged to that
objective. Therefore, the 2003 annual conference costs should have been charged to
ELC’s annual conference cost center, as ELC reported $90,455 of annual conference
income in excess of expenses in 2003. The annual conference revenue reported in 2003
was sufficient to cover ELC's 2003 annual conference costs charged to the FTL Phase II




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grant. In addition, the 2004 conference costs should have been charged to the annual
conference cost center, as ELC reported revenue in 2004 for the annual conference.

Compliance With General Cost Principles
ELC’s treatment of annual conference costs did not comply with general cost principles.
Under general cost principles, the annual conference costs should have been charged to
ELC's annual conference cost center. Under OMB Circular A-122, Attachment A,
Section B, paragraph 1, direct costs are those that can be identified specifically with a
particular final cost objective. Costs identified specifically with other cost objectives of
the organization are direct costs of those objectives and are not to be assigned to other
awards directly or indirectly. In addition, under paragraph 4, the costs of activities, such
as meetings and conferences (except those held to conduct the general administration of
the organization), performed primarily as a service to members, clients, or the general
public when significant and necessary to the organization's mission must be treated as
direct costs. Also, ELC's 2002 cost policy stated that the cost of activities performed as a
service to members, clients, or the general public are classified as direct costs, and that
such activities include meetings and conferences, except those held to conduct the
general administration of ELC.

Similarly, allocability is among the general criteria for determining the allowability of
costs. Under OMB Circular A-122, Attachment A, Section A, paragraph 4, a cost is
allocable to a grant award if it is incurred specifically for the award, benefits both the
award and other work and can be distributed in a reasonable proportion to the benefits
received, or is necessary for the overall operation of the organization. ELC did not
include the annual conference as being either a specific objective or measurable outcome
of the FTL project in the FTL Phase II and III grant applications submitted to the
Department. (Appendix A details ELC’s objectives and measurable outcomes for FTL
Phases II and III as detailed in ELC’s grant applications submitted to the Department.)
Given the amount of the conference programming devoted to FTL related matters, ELC's
charges to the FTL grants were not reasonable. ELC charged 54.1 percent of the 2003
conference center costs and 40 percent of the audio-visual and award costs to the FTL
Phase II grant. However, it appears that only 27 percent (approximately) of the 2003
conference's programming may have been devoted to FTL related matters.

In general, ELC intended to allocate 90 percent of 2004 conference costs to the FTL
Phase III grant when the costs were paid in 2004 and 2005. However, it appears that only
66 percent (approximately) of the 2004 conference's programming may have been
devoted to FTL related matters. ELC believes that approximately 90 percent of the 2004
conference was FTL related, because the overall purpose of the FTL program is to
support the implementation of NCLB and the FTL grant application noted ELC would
disseminate information through speeches and other methods. The difference in the
percentage (i.e., 66 percent versus 90 percent) of the 2004 annual conference that was
FTL related is mainly due to seven conference sessions, that while they appear to be
related to NCLB, do not appear to be FTL related. These conference sessions include (1)
General Session: No Child Left Behind: Real Progress So Far?, (2) Reading for All
Students: Research-Based Practices, (3) General Session: The President’s Next Term



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The Education Leaders Council’s
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Agenda, (4) Virtual Schools: A New Reality?, (5) Using Research-Based Practices to
Improve School Discipline: What Works in the Real World, (6) Charter Schools:
Promoting Growth and Trimming Chaff, and (7) lunch with the K12 Chancellor for the
Florida Department of Education. ELC did not maintain documents, such as presentation
materials or session handouts, to support its contention that the sessions were FTL
related.

Printing Costs
The FTL Phase II grant was charged $5,148 for two payments for printing costs. These
costs are questioned because they were not allocable to the FTL program. For one
payment made in March 2004, of which $2,575 was charged to the FTL Phase II grant,
the invoices were specifically for printing ELC and ABCTE related items, and should
have been charged directly to ELC's communications and marketing and ABCTE cost
centers, respectively. For the second payment, made in February 2004, of which $2,573
was charged to FTL Phase II grant, the invoices indicated that the services were for ELC,
ABCTE and annual conference matters. As such, these costs should have been directly
charged to ELC's cost centers for communications and marketing, ABCTE, and annual
conference, respectively. In August 2005, ELC removed the $2,573 in costs for the
February 2004 payment from FTL Phase II grant expenses.

Interest, Delinquency and Late Payment Fees
ELC charged $1,294 for interest, delinquency, and late payment fees to the FTL Phase II
and III grants. Interest costs are unallowable under OMB Circular A-122, Attachment B,
paragraph 23, Interest, fundraising, and investment management costs. In addition, when
grant funds are available for the payment of expenses, incurring interest, delinquency, or
late payment fees is not a prudent expenditure of federal grant funds. In August 2005,
ELC removed from FTL II grant expenditures $1,164 of American Express credit card
delinquency charges.

Professional Communication Services
Portions of three payments for professional communication services were questioned
because not all activities were fully allocable to the FTL program. The payments were
made in September, October, and December 2004, and $50,700 was charged to FTL
Phase III grant funds. We were unable to determine the allowable amount because the
invoices did not contain sufficient information to permit us to do so. While each invoice
contained FTL related activities, the questioned activities included:

•   The June 23, 2004, invoice for $16,200 indicated work performed on the message and
    mission of the new ELC, annual conference planning, soliciting additional business
    support, and ABCTE. The costs for these services should have been determined and
    charged to ELC's communications and marketing, annual conference, fundraising and
    development, and ABCTE cost centers, respectively. The consultant’s contract called
    for services in the following three areas: communicate with ELC/FTL target
    audiences, media relations, and long-term strategies. Under media relations activities,
    the consultant was to counsel ELC on how to handle inaccurate media eruptions,
    create a strategic media plan for building relationships and delivering news to



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The Education Leaders Council’s
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    education writers, and monitoring news coverage to respond immediately to any
    negative news and to see opportunities and trends in media reports. The initial
    contract covered the period May and June 2004 and was for $16,200, of which 60
    percent was for communications with target audiences and 40 percent was for media
    relations.

•   The July 31, 2004, and September 21, 2004 invoices, totaling $16,200, indicated
    work on the annual conference and daily scans of news coverage. The October 15,
    2004, invoice for $10,200 indicated work on the annual conference. In addition, the
    November 9, 2004, invoice for $8,100 indicated work on the annual conference and
    ELC's communications plan. The costs for these services should have been
    determined and charged to ELC's respective cost centers, such as the annual
    conference and communications and marketing cost centers.

In addition, portions of six payments, totaling $93,211, made in September 2003 through
March 2004 for professional communication services may have been over charged to the
FTL Phase II grant. Based upon our review of the information contained in seven of the
consultant's invoices, totaling $81,721, for the period June 2003 through December 2003,
$42,153 in costs were allocable to the FTL Phase II grant. However, based upon
information contained in ELC's accounting records, $62,806 in costs for these invoices
may have been charged to the FTL Phase II grant. As a result, up to $20,653 in costs for
the seven invoices may have been over charged to the FTL Phase II grant. We were
unable to determine the specific amount for each invoice that was charged to the FTL
Phase II grant because ELC's accounting records did not contain sufficient information to
permit us to do so. The amount that may have been over charged consists of the
following:

•   The June 2003 invoice indicated that approximately 45.3 percent ($5,753) of the total
    amount of $12,700 was attributable to FTL. It appears that ELC charged the full
    amount of the invoice to the FTL Phase II grant when it disbursed payments in
    September 2003 and February 2004. As a result, $6,947 may have been over charged
    to the FTL Phase II grant.

•   The November 2003 invoice indicated that approximately 65.9 percent ($6,408) of
    the total amount of $9,727 was attributable to FTL. It appears that ELC charged the
    full amount of the invoice to the FTL Phase II grant when it disbursed payments in
    December 2003 and February 2004. As a result, $3,319 may have been over charged
    to the FTL Phase II grant.

•   The December 2003 invoice indicated that approximately 70.9 percent ($5,488) of the
    total amount of $7,737 was attributable to FTL. It appears that ELC charged $6,447
    to the FTL Phase II grant when it paid the invoice in March 2004. As a result,
    $959may have been over charged to the FTL Phase II grant.

•   The four invoices for July 2003 through October 2003 indicated that $24,504, of the
    total amount of $51,557 was attributable to FTL. It appears that ELC charged


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The Education Leaders Council’s
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    $33,932 of the four invoices to the FTL Phase II grant when it disbursed payments in
    September 2003, November 2003, and March 2004. As a result, $9,428 may have
    been over charged to the FTL Phase II grant.

Under OMB Circular A-122, Attachment A, Section 4, a cost is allocable to a particular
cost objective in accordance with the relative benefits received. As a result, costs not
allocable to the FTL grants should have been charged to the respective cost centers or
treated as an indirect cost.

                 ELC Charged Unsupported Costs to the FTL Grants.

ELC charged $140,922 in unsupported costs to the FTL Phase II and III grants. The
unsupported amount consists of $40,010 charged to the FTL Phase II grant and $100,912
charged to the FTL Phase III grant. Of the total unsupported amount, ELC removed
$2,596 from the FTL grant costs, consisting of $1,182 from the FTL Phase II grant and
$1,413 from the FTL Phase III grant. As a result, $138,327 of unsupported costs
remained. Under OMB Circular A-122, Attachment A, Section A, Basic Considerations,
one of the factors affecting the allowability of costs is that the costs must be adequately
documented. Regulations in 34 C.F.R. § 75.730 specify that a grantee shall keep records
related to grant funds that fully show how the grantee uses the funds and maintain records
to facilitate an effective audit. In addition, regulations in 34 C.F.R. § 74.53(b) note that
financial records, supporting documents, statistical records, and all other records
pertinent to an award shall be retained for a period of three years from the date of
submission of the final expenditure report or annual financial report. In general, to be
allowable, both direct and indirect costs must be adequately supported by source
documentation that shows the purposes and circumstances of the cost’s incurrence. A
complete listing of the unsupported costs is provided in Appendix C. The unsupported
costs that ELC charged to the FTL Phase II and III grants include:

American Express Charges
The unsupported costs include $18,363 for 85 American Express credit card charges
allocated to the FTL Phase II and III grants. At the start of the audit, we requested
documentation supporting ELC's American Express charges. At that time, ELC’s
supporting documentation consisted mainly of the monthly American Express billing
statements. In April 2005, ELC requested documentation, such as receipts, directly from
American Express. In July 2005, ELC provided receipts for some of the selected
charges. However, most of the charges remain unsupported because ELC did not provide
documentation that indicated the purpose and circumstance for the cost incurrence. Of
the unsupported American Express credit card charges allocated to the FTL grants,
$1,487 (16 charges) was for restaurants in the Washington, DC area, $14,019 (56
charges) was for travel costs, and $2,857 (13 charges) was for other costs. Although
ELC's 2002 travel policy stated costs incurred for travel are to be supported by auditable
travel vouchers, travel vouchers were not prepared. In August 2005, ELC removed from
the FTL Phase II and III grants six restaurant charges totaling $1,322 and three charges
for other costs totaling $1,274. As a result, $15,767 of unsupported American Express
credit card charges remained allocated to the FTL Phase II and III grants.


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Payroll
Payroll costs of $60,685 allocated to the FTL Phase II and III grants were unsupported.
For the 45 timesheets with allocations to FTL that we reviewed, 18 were not signed by
the employee, 10 were signed but not dated, and 10 were signed and postdated in January
2005. OMB Circular A-122, Attachment B, paragraph 7, Compensation for personal
services, states that time reports must be signed by the individual employee, or by a
responsible supervisory official having first hand knowledge of the activities performed
by the employee.

Professional Services
In September through December 2004, ELC made three disbursements for professional
communication services, totaling $50,700, that were charged to FTL Phase III grant.
ELC provided invoices detailing the activities performed by the consultant, however, as
noted above under unallowable expenses, not all activities performed under the contract
and detailed in the invoices were fully allocable to FTL. We were unable to determine
the unallowable amount because the invoices did not contain sufficient information as to
the time expended on each activity to permit us to determine the allowable portion. As a
result, the payments were also deemed to be unsupported.

Miscellaneous Disbursements
The FTL Phase II and III grants were charged $11,175 for seven disbursements ($1,200
for accounting services, $5,890 for auditing services, $2,132 for technology services,
$1,245 for design/printing services, $40 for a board member’s travel costs, and $668 for
newswire services). These amounts were unsupported because no invoices or receipts
were provided supporting the payments.

RECOMMENDATIONS:

We recommend that the Department’s Chief Financial Officer and Assistant Deputy
Secretary for Innovation and Improvement require ELC to:

3.1     Refund to the Department $15,732 for the questioned costs that remain charged to
        the FTL grants ($8,590 for the FTL Phase II grant and $7,141 for the FTL Phase
        III grant).

3.2     Provide accounting records and other supporting documents showing how ELC
        charged each of the seven invoices, totaling $81,721, for professional
        communication services for the period June 2003 through December 2003, and
        require ELC to refund to the Department the portion of the $20,653 deemed over
        charged to the FTL Phase II grant by the Department.

3.3     Specify all of the 2003 and 2004 annual conference income and expenses credited
        and charged to the FTL Phase II and III grants and refund to the Department any
        amounts deemed unallowable by the Department.




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3.4     Provide adequate documentation to show that the unsupported expenditures of
        $138,327 that remain charged to the FTL grants ($38,828 for the FTL Phase II
        grant and $99,499 for the FTL Phase III grant) are reasonable, allowable, and
        allocable to the grant(s), or refund the expenditures that the Department
        determines are not adequately supported.

3.5     Maintain supporting documentation for all FTL grant expenditures; require
        consultants to provide invoices detailing the work performed, the time spent, and
        the associated costs of each activity performed; and ensure employees sign and
        date their timesheets.

3.6     Provide all officials and employees copies of OMB Circular A-122 and ELC's
        internal policies and procedures for determining allowable costs, travel, use of
        charge cards, and payroll; ensure that the officials and employees comply with the
        policies and procedures; and require ELC to maintain documentation that each
        officer and employee had reviewed such circular and internal policies and
        procedures.

ELC’s Comments:

In regards to the $15,732 of questioned costs, ELC noted that $192 in first class airfare
has been corrected; costs of $11,828 will be approved on the belief that Department
officials, who understand the programmatic nature of the FTL grant activities, will find
that these costs were allocable to the grants; travel costs of $2,718 will be approved on
the belief that ELC could not obtain GSA rates; and clarification from the Department is
needed regarding items totaling $993.

In response to the unsupported costs identified in the audit report, ELC noted that it had
undertaken the following actions and will provide the results to the Department:
• ELC contacted all former employees and requested that they certify the purpose of
    each trip taken and charged to ELC’s credit cards. The results of the effort were
    being reviewed and will be incorporated into the 2004 accounting adjustments.
• ELC noted that it was alerted to deficiencies in timesheet records in 2004, when the
    2003 audit was being completed. In response, ELC put in place timesheet
    requirements, but in some instances, only electronic copies of the timesheets were
    maintained. As a result, some dates and/or signatures were missing. ELC contacted
    all employees to request that they certify the timesheet records where they were
    missing. ELC will adjust its accounting records based on this exercise.
• ELC disagreed with our assessment of the reasonableness of certain vendor invoices.
    ELC took issue with the notion that only detailed activity reports showing how
    vendors spent their time could support the reasonableness of the charges.

In regards to the recommendations made in the draft report, ELC noted that they will
work with the Department to resolve the questioned and unsupported costs and will
provide documentation during the audit resolution process. ELC believes that it is now in
full compliance with requirements concerning supporting documentation of grant


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expenditures. In addition, ELC noted that it had provided officials and employees with
copies of OMB Circular A-122 and its operating protocols and that each employee had
reviewed the documents.

OIG’s Response:

We acknowledge the corrective actions taken by ELC in response to the audit
recommendations.

ELC commented on some, but not all, of the costs questioned in the audit report. ELC
believes that Department officials who understand the programmatic nature of the FTL
grant activities will approve questioned costs of $11,828. We disagree with ELC’s
assessment because these costs include items that are clearly not allowable and allocable
to the FTL grants. This amount includes $130 in interest and late payment charges that
are specifically unallowable under OMB Circular A-122; $2,575 in printing costs that
were for ELC and ABCTE related items and therefore not allocable to the FTL program;
and $1,988 for updates to ELC’s website that are not allocable to the FTL grant (other
invoices from the vendor were specifically for work on ELC’s FTL websites). The
remaining $7,135 consists of costs from ELC’s 2004 annual conference. While the
Department may conclude that the annual conference costs were allocable to the FTL
grants, we were unable to reach such a conclusion, because ELC did not maintain
documents, such as presentation materials or session handouts, to support its contention
that the conference sessions in question were FTL related.

ELC believes that the Department would approve the $2,718 in questioned travel costs
because ELC would have been unable to obtain government pricing. We note that only
the excess hotel charges of $288 were questioned because they exceeded the applicable
GSA rate by 94 percent. The remaining travel costs were questioned because they were
either not reasonable or not allocable to the FTL program. The questioned travel and
travel related costs include $233 for a breakfast meeting for ten people; the total cost of
the breakfast meeting was $583 or $58 per person. To offer a comparison, we noted in
the audit report that the GSA per diem rate allocated $10 for breakfast. As a result, the
$58 per person charge for breakfast exceeds that which would be incurred by a prudent
person and is therefore a questioned cost. Also included in questioned travel costs was
$2,197 in airfare charges that did not appear FTL related or necessary for the operations
of ELC. In August 2005, ELC informed us that they intended to remove the $1,701 of
airfare costs to Alberta, Canada and that $496 in airfare from Hawaii to Washington, DC
was under review. If ELC now contends that the trips to Alberta, Canada and from
Hawaii to Washington, DC were FTL related, ELC did not provide information to
support its revised position to us.

ELC noted that it needs clarification from the Department on $993of questioned costs.
These costs were questioned because they were either not reasonable or allocable to the
FTL program. These questioned costs include $600 for a forfeited deposit to a hotel for
ELC’s annual retreat; $60 for American Express credit card membership reward program
fees (this amount is in addition to the fees already removed from the grant charges by



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ELC); $26 for legal fees that are not FTL related (this amount is in addition to the legal
fees already removed from the grant charges by ELC); and $307 in payroll charges.

ELC commented on some, but not all, of the unsupported costs contained in the audit
report. We note that ELC’s actions to have employees certify their travel charges and
timesheets indicate that these costs were unsupported at the time of our audit. ELC noted
that it was alerted to deficiencies in its time sheet records in 2004, when the 2003 audit
was being completed. However, we note that a similar issue was raised in ELC’s 2002
single audit, issued in May 2003. In ELC’s 2002 single audit, the auditor recommended
that personnel activity reports supporting the actual amount of time spent for each cost
center be maintained. ELC concurred with the finding and recommendation and noted
that it had adopted a policy of completing timesheets.

In regards to ELC taking issue with the notion that only detailed activity reports showing
how vendors spent their time could support the reasonableness of the charges. ELC
provided no comments that address the issue raised in the audit report. The audit report
noted that the consultant’s invoices in question contained activities that were allowable,
questionable, or not fully allocable to the FTL program, and that we were unable to
determine the allowable amount because the invoices did not contain sufficient
information as to the time expended on each activity.

In order to facilitate the audit resolution process, we have revised the report’s appendices
to provide additional information on the questioned and unsupported costs discussed in
this finding.

                                            OTHER MATTERS

ELC’s Financial Position
ELC's current financial position is a cause for concern. As a result, we suggest that the
Department’s Chief Financial Officer regularly monitor ELC's financial condition. Our
concern is due to the following conditions:

•      ELC's net assets have steadily decreased during the period from calendar year end
       (CYE) 2001 to September 2, 2005. At CYE 2001, ELC's net assets were negative
       $25,033, and by September 2, 2005, ELC's net assets declined to negative $547,000.11
       ELC's increasing negative net assets were the result of recurring operating deficits
       during the intervening periods. Significantly decreasing net assets may indicate
       problems with a non-profit entity's financial solvency.

•      The current ratio (current assets divided by current liabilities) measures an entity's
       ability to cover its current obligations from current assets. ELC's current ratio was
       1:1.62 as of CYE 2003, 1:1.27 as of CYE 2004, and 1:15.07 as of September 2, 2005.
       ELC's current ratios indicate that its current assets are less than its current liabilities.
       Current ratios of less than 1:1 may raise concerns regarding an entity's liquidity. As

11
     Amounts as of September 2, 2005, are approximate amounts, reported by ELC that have not been audited.


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       of September 2, 2005, ELC reported current liabilities of $427,000 and current assets
       of $28,000, of which $23,000 was cash or cash equivalents.

•      The Department's grants constitute the majority of ELC's revenue. In calendar year
       2004, the federal grants constituted approximately 93 percent of ELC's total revenue.
       This percentage has increased from calendar 2002, when the federal grants
       constituted approximately 70 percent of ELC's total revenue. In 2004, the most
       recent calendar year, ELC reported $737,000 in revenue from sources other than
       federal grants. Of this amount, $200,000 was a non-cash contribution resulting from
       the forgiveness of a note payable. An organization that relies heavily on few sources
       of income is more at risk financially than an organization with multiple revenue
       sources.

•      ELC's current financial position does not reflect the resolution of findings with
       questioned costs for this audit or ELC's CYE 2002 and CYE 2003 single audit
       reports. These single audit reports contain findings with questioned costs totaling
       approximately $726,000. ELC will be liable for the portion of the questioned costs
       disallowed by the Department.

In its comments on the audit report, ELC noted that it has submitted a turnaround plan to
the Department to address the issues pertaining to ELC’s fiscal health

ELC’s 2004 Accounting Records
Under OMB Circular A-133, Audits of States, Local Governments, and Non-profit
Organizations, ELC’s calendar year 2004 single audit report was due on September 30,
2005. As of September 30, 2005, ELC’s accounting records for calendar year 2004 were
not finalized, and the 2004 single audit had not begun. In September 2005, ELC had
retained an independent public accounting firm to perform the 2004 single audit. In its
comments on the audit report, ELC noted that it was ready to schedule the 2004 single
audit.

                              OBJECTIVE, SCOPE AND METHODOLOGY

The objectives of our audit were to determine if (1) federal funds drawn down by ELC
for the FTL program were used for ELC’s operations and (2) expenditures allocated to
the federally funded FTL program were reasonable, allocable, and allowable in
accordance with regulations. The audit covered the period January 1, 2004, through
December 31, 2004.

To accomplish the audit objectives, we reviewed applicable criteria contained in the
Education Department General Administrative Regulations (34 C.F.R. Parts 74 and 75)
and OMB Circular A-122, Cost Principles for Non-Profit Organizations. 12 We reviewed
ELC’s grant applications for FTL Phase I, II, and III for the fiscal year 2002, 2003, and
2004 grant awards, respectively; single audit reports for CYE 2002 and 2003; and

12
     See footnotes 2 and 6.


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policies and procedures concerning the drawdown and expenditure of grant funds. We
obtained and reviewed accounting reports from ELC’s finance system, bank statements
and cancelled checks, payroll reports and timesheets, and vendor invoices and other
documents supporting expenditures. We interviewed ELC’s current Chief Executive
Officer, Chief Policy Officer, contract Chief Financial Officer, and Director of Federal
Programs.

To achieve the audit's objectives, we relied upon computer-processed data contained in
ELC's Fast Fund accounting system, ELC's accounting system of record, as of May 17,
2005. We assessed the completeness and accuracy of this data. As part of this
assessment, we compared bank statements and cancelled checks to transactions contained
in ELC's accounting system. We also compared judgmentally selected computer-
processed data to source records. Based upon this preliminary assessment, we concluded
that data used was sufficiently reliable for the assignment's objectives.

To determine if the federal funds drawn down by ELC for the FTL program were used
for ELC’s operations, we reviewed ELC’s audited financial statements for calendar years
2002 and 2003, accounting reports from ELC’s finance system for calendar year 2004,
and compared the grant expenditure amounts to grant drawdowns contained in the
Department’s Grants Administration and Payment System.

To determine if the costs charged to the federal grants were reasonable, allocable,
allowable and adequately supported in accordance with applicable regulations and OMB
Circular A-122, we selected expenditures for review. During the period January 1, 2004,
to December 31, 2004, ELC made 382 disbursements totaling $5,212,117, from its
Operating Account. These disbursements were allocated to both the FTL grants and
ELC's other cost centers. The disbursements consisted of nine payments to American
Express totaling $195,510, 48 disbursements for payroll and payroll taxes totaling
$721,078, 318 payments for other expenses totaling $1,295,529, and 7 payments to
Achievement Technologies, Incorporated totaling $3,000,000. The 2004 payments to
Achievement Technologies, Incorporated were excluded from our review as they will be
included in our audit of ELC's subcontracting activities (Control Number A03-F0003).

From the remaining population, totaling $2,212,117, of payments made in 2004, we
judgmentally selected transactions as follows:
• We reviewed the November 2003 through December 2004 American Express
   statements and judgmentally selected 129 charges, totaling $62,136. Of the total
   selected, 125 charges, totaling $32,237 (51.9 percent), were allocated to the FTL
   Phase II and III grants. Charges were selected based upon the type and location of
   the vendors, location of travel, charge type, and amount.
• We judgmentally selected six pay periods representing payroll charges of $157,162.
   Of the total payroll charges selected, $70,341 (44.8 percent), were allocated to the
   FTL Phase II and III grants.
• For the other expenses, we selected all payments of $1,000 or greater (excluding three
   payments for retirement plan contributions), that resulted in 143 payments totaling




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    $1,235,414 being selected. Of the total selected, 86 payments, totaling $697,612
    (56.5 percent), were allocated to the FTL Phase II and III grants.

In addition, we judgmentally selected one $20,000 payment that was made in 2003 and
allocated to the FTL Phase II grant, because it was for ELC’s 2003 annual conference.
Because portions of the selected expenditures were based upon the audit team’s
judgment, there is no assurance that the selections are representative of the entire
population and, therefore, should not be projected over the unselected expenditures. A
table summarizing our selections is provided in Appendix C. Due to concerns about
ELC’s charging of questioned expenditures, we have referred this matter to our Office of
Investigations for further review.

We assessed the system of internal control, policies, procedures and practices applicable
to ELC's drawdown and expenditure of federal funds. For purposes of the audit, we
assessed and classified the significant controls into the following categories: (1)
drawdown of federal funds and (2) expenditure of federal funds. Because of inherent
limitations, a study and evaluation made for the limited purposes described above would
not necessarily disclose all material weaknesses in internal controls. However, our
assessment disclosed significant internal control weaknesses that adversely affected
ELC's ability to administer the federal grant funds. These weaknesses resulted in ELC
overdrawing grant funds, charging questioned and unsupported costs to the grants, and
not having an approved indirect cost plan. These weaknesses and their effects are fully
discussed in the Audit Results section of the audit report.

We conducted on-site fieldwork at ELC’s offices in Washington, DC during the period
March 30, 2005, through April 28, 2005 . On August 16, 2005, we held an exit
conference with ELC’s management. We conducted the audit in accordance with
generally accepted government auditing standards appropriate to the scope of the review
described above.




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            APPENDIX A – FTL OBJECTIVES AND MEASURABLE OUTCOMES

                            FTL Phase II (FY 2003 Grant)
Objective 1 –
Help state education agencies (SEAs), local education agencies (LEAs), schools,
classrooms, and families achieve adequate yearly progress (AYP).

Measurable Outcomes –
• All teachers in FTL schools will be using a standards-based accountability system,
    including web-based applications to track student progress against the state’s
    academic standards.
• The SEA will have a usable database of instructional resources for use by every
    teacher in the state.
• States will begin to adopt reforms and other practices to professionalize the teaching
    profession.
• Parents in FTL schools will have access to a daily progress report detailing the
    progress of their child toward meeting state standards and achieving AYP.
• School and LEA leaders will have access to information on the progress of teachers,
    schools and LEAs in meeting standards and AYP.
• Schools and LEAs will identify the assistance the schools and teachers need to close
    achievement gaps and increase academic performance.
Objective 2 –
Help states determine the real costs of NCLB and optimize state, local and federal
resources to increase student academic success.

Measurable Outcomes –
• Participating states will undergo an analysis of the actual costs of implementing the
   requirements of NCLB in their state.
• States will receive technical assistance regarding NCLB that allow for more flexible
   administration and oversight of education programs.
• States will receive guidance regarding the effective use of existing resources to
   optimize educational opportunities for students.
• The Department will be provided with information needed to determine ongoing
   budgetary needs for successful implementation of NCLB.
Objective 3 –
Create state and local-based change agents.

Measurable Outcomes –
• Each participating states will have a project leader appointed within 60 days of
  notification that the state will participate.
• Each LEA added under FTL Phase II will host an event to generate awareness of the
  FTL program and the policies of NCLB.




                                      Appendix A - Page 1
The Education Leaders Council’s
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                              FTL Phase III FY 2004 Grant)
Objective 1 –
Improve student achievement through the use of FTL tools, project leaders, and practices
via student-teacher interaction.

Measurable Outcomes –
• Provide access and support for FTL tools to students.
• Provide professional development and support for FTL tools to teachers.
• Provide professional development and support on FTL practices to teachers.
• Analyze FTL’s progress in helping students achieve proficiency against state
    standards and implement recommendations for improving FTL.
• Analyze FTL’s progress in helping schools reach their state AYP goals.
Objective 2 –
Enhance educational network to support student achievement through use of FTL tools,
project leaders, and practices.

Measurable Outcomes –
• Provide school and LEA administrators guidance in analyzing student achievement
   and implementing improvements.
• Provide student achievement data and other information materials to parents.
• Engage the Supplemental Services Coalition to introduce services to LEAs and SEAs.
• Provide SEAs with FTL progress reports on FTL efforts in their LEAs and schools.
Objective 3 –
FTL will continue to evaluate and improve its tools, project leaders, and practices.

Measurable Outcome –
• Analyze cost of implementation of a sample of FTL school-based sites to determine
   the expected cost range for implementation.
• Develop a comparison of FTL school-based service providers with other potential
   service providers.
• Evaluate effectiveness of project leaders and implement recommendations for
   improvement.Develop a knowledge sharing capability to disseminate best practices
   across FTL.
• Disseminate best practices and lessons learned about NCLB implementation to the
   broader education community and public through publications and speeches.
Objective 4 –
To promote the policy and ideas of NCLB in schools and LEAs participating in FTL.

Measurable Outcome –
• Analyze school and LEA leader understanding of NCLB goals as reflected in their
  diagnostic, instructional and data analysis activities.




                                      Appendix A - Page 2
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                                                               APPENDIX B
                                             FINDING NO. 3 – SCHEDULE OF QUESTIONED COSTS

                          Amount      Amount
             Amount        to be        to be
Questioned
             Removed      Resolved    Resolved                               Description                                              Criteria
 Amount
             by ELC        FTL          FTL
                          Phase II    Phase III
                                                  ELC allocated 40 percent ($3,375) of a March 2004 payment (check
                                                  3611) for legal fees (Webster, Chamberlain and Bean, invoice 7640
                                                                                                                         Pursuant to OMB Circular A-
                                                  dated October 6, 2003, and invoice 8660 dated January 12, 2004) to
                                                                                                                         122, Attachment A, Section A,
  $2,370       $2,344       $26             --    the FTL Phase II grant. Of this amount, $2,370 was not allocable to
                                                                                                                         paragraph 4, a cost is allocable to
                                                  the FTL grants and should have been charged to ELC's general and
                                                                                                                         a grant award if it is incurred
                                                  administrative cost center. In August 2005, ELC removed $2,344 of
                                                                                                                         specifically for the award,
                                                  the questioned charges from the FTL Phase II grant.
                                                                                                                         benefits both the award and other
                                                  ELC allocated 100 percent of the June 2004 payment (check 3672)
                                                                                                                         work and can be distributed in a
                                                  for updates to ELC’s website (Summerhouse Studios, invoice 04-
                                                                                                                         reasonable proportion to the
                                                  000136 dated April 15, 2004) to the FTL Phase II grant. The
                                                                                                                         benefits received, or is necessary
  $1,988         --        $1,988           --    amount was questioned because it was not allocable to the FTL
                                                                                                                         for the overall operation of the
                                                  program. We noted that other invoices (invoice 04-000143 dated
                                                                                                                         organization.
                                                  April 15, 2004, and invoice 04-000121 dated February 4, 2004) were
                                                  specifically for work on ELC's FTL websites.
                                                                                                                         Pursuant to OMB Circular A-
                                                                                                                         122, Attachment A, Section A,
                                                  ELC charged the FTL Phase II grant $288 for excess lodging costs in
                                                                                                                         paragraph 3, a cost is reasonable
                                                  February 2004 (one night for $96 in excess lodging costs, charged on
                                                                                                                         if it does not exceed that which
                                                  February 11, 2004) and March 2004 (two nights for $192 in excess
                                                                                                                         would be incurred by a prudent
   $288          --         $288            --    lodging costs, charged on March 4, 2004). ELC charged $169 per
                                                                                                                         person. In addition, ELC’s 2002
                                                  night (excluding taxes) for lodging in Houston, Texas at the
                                                                                                                         travel policy stated that costs
                                                  Houstonian Hotel. This rate is 94 percent above the 2004 GSA rate
                                                                                                                         incurred for travel were limited
                                                  of $87 per night.
                                                                                                                         to those allowable under Federal
                                                                                                                         Travel Regulations.




                                                               Appendix B - Page 1
The Education Leaders Council’s
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Questioned                       Amount to      Amount to
 Amount            Amount            be             be
                   Removed        Resolved       Resolved                                 Description                                           Criteria
                   by ELC        FTL Phase      FTL Phase
                                     II            III
                                                               Our review disclosed payroll expenses that were not allocable to
                                                               the FTL grants because amounts in the payroll allocations did
                                                               not agree with employees' timesheets and amounts that were
                                                               charged to the FTL Phase II grant, that should have been
                                                               charged to FTL Phase III grant. The questioned payroll
                                                               expenses included:                                                  Pursuant to OMB Circular A-
                                                                                                                                   122, Attachment A, Section A,
                                                               • For the pay period ended April 2, 2004, 48.2 percent of the
                                                                                                                                   paragraph 4, a cost is allocable to
                                                                  gross pay for the Director of Communications should have
                                                                                                                                   a grant award if it is incurred
                                                                  been allocated to the FTL Phase II grant. However, 56.9
                                                                                                                                   specifically for the award,
                                                                  percent was allocated. As a result, $136 was over allocated to
      $307             --            $423          ($116)                                                                          benefits both the award and other
                                                                  the FTL Phase II grant.
                                                                                                                                   work and can be distributed in a
                                                               • For the pay period ended June 30, 2004, a total of $287 of
                                                                                                                                   reasonable proportion to the
                                                                  gross pay for the Member Services Coordinator and Chief
                                                                                                                                   benefits received, or is necessary
                                                                  Operating Officer was over charged to the FTL Phase II grant
                                                                                                                                   for the overall operation of the
                                                                  and under charged to the FTL Phase III grant.
                                                                                                                                   organization.
                                                               • For the pay period ended September 15, 2004, 39.2 percent of
                                                                  the gross pay for the Chief Executive Officer should have
                                                                  been allocated to the FTL Phase III grant. However, 43.5
                                                                  percent was allocated. As a result, $171 was over allocated to
                                                                  the FTL Phase III grant.
                                                               In January 2004, ELC reimbursed a board member for first-class
                                                               airfare costs to attend ELC's December 2003 board meeting.          Pursuant to OMB Circular A-
                                                               ELC allocated 40 percent of the payment (check 3513) to the         122, Attachment B, paragraph
                                                               FTL Phase II grant. We estimated the questioned amount of           55, the difference between first-
      $192            --13           $192            --
                                                               $192 based upon the average difference (57.5 percent) between       class air accommodations and
                                                               first-class airfare and coach airfare for two comparable trips on   less than first-class air
                                                               the same airline. In August 2005, ELC informed us that they         accommodations is unallowable.
                                                               intended to remove the charges for first class airfare.


13
     In the comments to the draft report, ELC noted that this questioned cost had been corrected.




                                                                         Appendix B - Page 2
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Drawdown and Expenditure of Federal Funds                                                                   Control Number ED-OIG/A03F0010




                          Amount to     Amount to be
              Amount
Questioned                be Resolved     Resolved
              Removed                                                           Description                                         Criteria
 Amount                   FTL Phase      FTL Phase
              by ELC
                              II            III

                                                                                                                        Pursuant to OMB Circular A-
                                                       ELC allocated to the FTL Phase II grant 40 percent ($600) of a   122, Attachment A, Section A,
                                                       November 4, 2003, hotel charge ($1,500 in total to Nemacolin     paragraph 3, a cost is reasonable
   $600           --         $600            --
                                                       Woodlands Resort and Spa) for a forfeited deposit for ELC’s      if it does not exceed the which
                                                       annual retreat.                                                  would be incurred by a prudent
                                                                                                                        person and whether the cost is of
                                                                                                                        a type generally recognized as
                                                       ELC allocated to the FTL Phase II grant 40 percent ($25) of a    ordinary and necessary for the
    $25          $25           --            --        January 2004 charge for flowers. In August 2005, ELC             operation of the organization or
                                                       removed the charge from the FTL Phase II grant expenses.         performance of the award. In
                                                                                                                        addition, pursuant to OMB
                                                       ELC charged the FTL Phase II grant $130 (100 percent) for        Circular A-122, Attachment A,
                                                       American Express credit card membership reward program           Section A, paragraph 4, a cost is
   $130          $70          $60            --        fees charged on January 1, 2004, ($70) and March 16, 2004,       allocable to a grant award if it is
                                                       ($60). In August 2005, ELC removed $70 of the charges from       incurred specifically for the
                                                       the FTL Phase II grant expenses.                                 award, benefits both the award
                                                                                                                        and other work and can be
                                                       ELC allocated to the FTL Phase II grant 40 percent ($9) of a     distributed in a reasonable
                                                       March 2004 charge for a Sports Illustrated magazine              proportion to the benefits
    $9            $9           --            --                                                                         received, or is necessary for the
                                                       subscription. In August 2005, ELC removed the charge from
                                                       the FTL Phase II grant expenses.                                 overall operation of the
                                                                                                                        organization.




                                                              Appendix B - Page 3
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                     Control Number ED-OIG/A03F0010




                            Amount to       Amount to
               Amount
Questioned                  be Resolved     be Resolved
               Removed                                                            Description                                    Criteria
 Amount                     FTL Phase       FTL Phase
               by ELC
                                II              III
                                                          See discussion of Meals and Entertainment. The questioned
                                                          cost to be resolved is a February 5, 2004, charge of $583 (40
  $4,821        $4,588         $233             --
                                                          percent or $233 was allocated to the FTL Phase II grant) from
                                                          the Jefferson Hotel for a breakfast meeting for ten guests.
                                                          See discussion of Travel Costs. The questioned costs to be
                                                          resolved include:
                                                          • A November 11, 2003, charge of $1,241 (40 percent or $496
                                                            was allocated to the FTL Phase II grant) from Expedia for
                                                            roundtrip airfare between Honolulu, Hawaii and
                                                            Washington, DC for ELC’s former President
                                                          • Airfare to Alberta, Canada for ELC’s former Director of
                                                            Communications, consisting of a January 14, 2004, charge        See criteria noted in
                                                            of $1,147 (40 percent or $459 was allocated to the FTL            Finding No. 3.
                                                            Phase II grant); a February 5, 2004, charge of $148 (100
  $4,501        $2,304        $2,197            --
                                                            percent was allocated to the FTL Phase II grant); and
                                                            February 8, 2004, charge of $375 (100 percent was allocated
                                                            to the FTL Phase II grant). All charges were from
                                                            Northwest Airlines.
                                                          • Airfare to Alberta, Canada for ELC’s former Chief
                                                            Executive Officer, consisting of a January 15, 2004, charge
                                                            of $1,011 (40 percent or $404 was allocated to the FTL
                                                            Phase II grant) from Northwest Airlines; and a February 5,
                                                            2004, charge of $786 (40 percent or $315 was allocated to
                                                            the FTL Phase II grant) from America West Airlines.




                                                                 Appendix B - Page 4
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                       Control Number ED-OIG/A03F0010




                            Amount to       Amount to
               Amount
Questioned                  be Resolved     be Resolved
               Removed                                                             Description                                     Criteria
 Amount                     FTL Phase       FTL Phase
               by ELC
                                II              III
  $61,696       $61,696          --              --       See discussion of 2003 Annual Conference.
                                                          See discussion of 2004 Annual Conference. The questioned
                                                          costs include:
                                                          • An October 2004 payment (check 3777) to KSA Plus
                                                             Communications (invoice 0502-26, dated September 21,
                                                             2004) for the purchase of an image ($234) and the
                                                             placement of an advertisement in Education Week ($2,593)
                                                             and the printing and mailing of postcards ($2,220) for the
  $7,352         $217            --           $7,135
                                                             annual conference (100 percent was allocated to the FTL
                                                             Phase III grant).
                                                          • A November 2004 payment (check 3827) of $2,320 (90
                                                             percent or $2,088 was allocated to the FTL Phase III grant)
                                                             to Editorial Projects in Education (invoice 17686, dated
                                                             August 30, 2004) for the purchase of an advertisement in
                                                             Education Week.                                                  See criteria noted in
                                                          See discussion of Printing Costs. The questioned costs to be          Finding No. 3.
                                                          resolved are from a March 2004 payment (check 3592) to
                                                          Kwik Kopy Printing for $6,437 (40 percent or $2,575 was
                                                          allocated to the FTL Phase II grant). The payment, for the
                                                          printing of ELC and/or ABCTE related items, was for the
                                                          following invoices:
                                                          • Invoice 36421, dated September 5, 2003, for $102.
  $5,148        $2,573        $2,575            --        • Invoice 36474, dated September 10, 2003, for $1,101.
                                                          • Invoice 36512, dated September 12, 2003, for $778.
                                                          • Invoice 36521, dated September 12, 2003, for $540.
                                                          • Invoice 36736, dated October 3, 2003, for $2,713.
                                                          • Invoice 36776, dated October 3, 2003, for $180.
                                                          • Invoice 37047, dated October 27, 2003, for $564.
                                                          • Invoice 37088, dated October 29, 2003, for $111.
                                                          • Invoice 37097, dated October 29, 2003, for $349.




                                                                 Appendix B - Page 5
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                        Control Number ED-OIG/A03F0010




                            Amount to       Amount to
               Amount
Questioned                  be Resolved     be Resolved
               Removed                                                              Description                                     Criteria
 Amount                     FTL Phase       FTL Phase
               by ELC
                                II              III
                                                          See discussion of Interest, Delinquency and Late Payment
                                                          Fees. The questioned costs to be resolved include:
                                                          • A January 2004 payment (check 3516) to Verizon that
                                                            included $17 (40 percent or $7 was allocated to the FTL
                                                            Phase II grant) for a late payment fee indicated on the bill
                                                            dated January 4, 2004.
                                                          • A June 5, 2004, American Express credit card delinquency
                                                            charge of $29 (40 percent or $12 was allocated to the FTL
                                                                                                                               See criteria noted in
  $1,294         $1,164          $7            $123         Phase III grant).
                                                                                                                                 Finding No. 3.
                                                          • A July 2004 payment (check 3681) to Verizon that included
                                                            $43 (40 percent or $17 was allocated to the FTL Phase III
                                                            grant) for a late payment fee indicated on the bill dated June
                                                            4, 2004.
                                                          • A July 2004 payment (check 3696) to K3 Communications
                                                            (invoice 1005, dated June 25, 2004) that included a late
                                                            payment fee of $94 (100 percent was allocated to the FTL
                                                            Phase III grant).
 $90,721        $74,990         $8,590        $7,141      Totals
Note: Amounts subject to rounding.




                                                                 Appendix B - Page 6
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                          Control Number ED-OIG/A03F0010




                   Amount       Amount
                     to be        to be
 Questioned
                   Resolved     Resolved                                        Description                                           Criteria
   Amount
                      FTL          FTL
                   Phase II     Phase III
The portions of the following costs were questioned as noted in the discussion of Professional Communication Services.
                                            We were unable to determine the questioned amount because the invoices did
                                            not contain sufficient information to permit us to do so. The following KSA
                                            Plus Communications’ invoices (paid in September, October, and December
                                            2004 with checks 3752, 3777, and 3840, respectively) contained activities not
                                            allocable to the FTL program:
                                            • Invoice 0411-29, dated June 23, 2004, for $16,200 (100 percent allocated to
                                               the FTL Phase III grant), indicated work performed on the message and
                                               mission of the new ELC, annual conference planning, soliciting additional
                                               business support, and ABCTE.
                                                                                                                                 See criteria noted in
   $50,700             --        $50,700    • Invoice 0501-3, dated July 31, 2004, for $8,100, and invoice 0502-26, dated
                                                                                                                                   Finding No. 3.
                                               September 21, 2004, for $8,100 in services (both 100 percent allocated to the
                                               FTL Phase III grant), indicated work on the annual conference and daily scans
                                               of news coverage.
                                            • Invoice 0503-13, dated October 15, 2004, for $11,100 (of which, $10,200 was
                                               allocated to the FTL Phase III grant), indicated work on the annual
                                               conference.
                                            • Invoice 0504-11, dated November 9, 2004, for $8,100 (100 percent allocated
                                               to the FTL Phase III grant), indicated work on the annual conference and
                                               ELC’s communications plan.




                                                                     Appendix B - Page 7
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                       Control Number ED-OIG/A03F0010




                 Amount      Amount
                  to be        to be
 Questioned
                 Resolved    Resolved                                      Description                                             Criteria
  Amount
                   FTL         FTL
                 Phase II    Phase III
                                         Up to $20,653 in costs for FitzGerald Communications may have been over
                                         charged to the FTL Phase II grant. We were unable to determine the specific
                                         amount because ELC's accounting records did not contain sufficient
                                         information. The questioned amount consisted of the following:
                                         • Invoice 130311, dated June 30, 2003, indicated that approximately
                                           45.3percent ($5,753) of the total amount of $12,700 was attributable to FTL.
                                           It appears that ELC charged the full amount of the invoice to the FTL Phase II
                                           grant when it disbursed payments in September 2003 (check 3343) and
                                           February 2004 (check 3536). As a result, $6,947 may have been over charged
                                           to the FTL Phase II grant.
                                         • Invoice 130723, dated November 30, 2003, indicated that approximately 65.9
                                           percent ($6,408) of the total amount of $9,727 was attributable to FTL. It
                                           appears that ELC charged the full amount of the invoice to the FTL Phase II
                                           grant when it disbursed payments in December 2003 (check 3486) and                 See criteria noted in
   $20,653        $20,653        --
                                           February 2004 (check 3536). As a result, $3,319 may have been over charged           Finding No. 3.
                                           to the FTL Phase II grant.
                                         • Invoice 130808, dated December 31, 2003, indicated that approximately 70.9
                                           percent ($5,488) of the total amount of $7,737 was attributable to FTL. It
                                           appears that ELC charged $6,447 to the FTL Phase II grant when it paid the
                                           invoice in March 2004 (3587). As a result, $959 may have been over charged
                                           to the FTL Phase II grant.
                                         • The four invoices (130392, 130476, 130558, and 130639) for July 2003
                                           through October 2003 indicated that $24,504, of the total amount of $51,557
                                           was attributable to FTL. It appears that ELC charged $33,932 of the four
                                           invoices to the FTL Phase II grant when it disbursed payments in September
                                           2003 (check 3343), November 2003 (check 3426), and March 2004 (check
                                           3587). As a result, $9,428may have been over charged to the FTL Phase II
                                           grant.
   $71,353       $20,653       $50,700   Totals
Note: Amounts subject to rounding.




                                                                  Appendix B - Page 8
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                              Control Number ED-OIG/A03F0010




                                                              APPENDIX C
                                            FINDING NO. 3 – SCHEDULE OF UNSUPPORTED COSTS

                                               Unsupported American Express Charges
                                                                                                                 Unsupported    Unsupported
                                                                                                       FTL
  Charge Date                Vendor                   Charge Type/Location           Total Amount                FTL Phase II   FTL Phase III
                                                                                                    Allocation
                                                                                                                    Grant          Grant
November 11, 2003       American Airlines               Airfare to Dallas, TX           $1,312        40%           $525
November 13, 2003        Hertz Car Rental                  San Diego, CA                 $179         100%          $179
November 13, 2003          Residence Inn                    La Jolla, CA                 $330         100%          $330
December 16, 2003       St. Gregory Hotel                 Washington, DC                 $714         40%           $285
December 6, 2003        St. Gregory Hotel                 Washington, DC                 $379         40%           $151
December 6, 2003        St. Gregory Hotel                 Washington, DC                 $182         40%            $73
 January 22, 2004     Action Without Borders         Membership Organization             $50          40%            $20
  January 8, 2004         Marriott Hotel                     Boston, MA                  $456         100%          $456
 January 13, 2004     MacNair Travel Mgmt                  Travel Services              $1,013        100%         $1,013
 January 27, 2004        Hertz Car Rental                   Phoenix, AZ                  $125         100%          $125
 January 27, 2004           Courtyard                       Phoenix, AZ                  $173         100%          $173
 February 3, 2004      Ricky's Taxi Services               Springfield, VA               $84          40%            $34
 February 4, 2004          Taxi Service                    Baltimore, MD                 $57          40%            $23
 January 18, 2004     America West Airlines          Airfare to Los Angeles, CA          $138         40%            $55
 February 6, 2004      Bertucci’s Restaurant              Washington, DC                 $69          40%            $28
   March 1, 2004        Nooshi Restaurant                 Washington, DC                 $66          40%            $26
February 11, 2004       Houstonian Hotel             (Restaurant) Houston, TX            $338         100%          $127
February 11, 2004       Houstonian Hotel                    Houston, TX                  $198         100%          $198
February 21, 2004     Desmond Great Valley             (Lodging) Malvern, PA             $288         40%           $115
   March 9, 2004       Bertucci’s Restaurant              Washington, DC                 $56          40%            $23
  March 19, 2004       Georgetown Seafood                 Washington, DC                 $45          40%            $18
  March 22, 2004              Sorriso           (Food and Beverage) Washington, DC       $81          40%            $32
  March 28, 2004         Hertz Car Rental                     Miami, FL                  $267         100%          $267
  March 22, 2004        American Airlines               Airfare to Miami, FL            $1,359        100%         $1,359
  March 26, 2004      Aqua Hotel and Lounge                   Miami, FL                  $19          100%           $19




                                                              Appendix C - Page 1
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                 Control Number ED-OIG/A03F0010




                                                                                                                    Unsupported    Unsupported
                                                                                                          FTL
  Charge Date                 Vendor                    Charge Type/Location            Total Amount                FTL Phase II   FTL Phase III
                                                                                                       Allocation
                                                                                                                       Grant          Grant
  April 6, 2004              Gentner                       Audio Conference                 $465         40%           $186
  April 6, 2004              Gentner                       Audio Conference                 $555         40%           $222
  April 6, 2004              Gentner                       Audio Conference                 $984         40%           $394
  April 12, 2004       Georgetown Seafood                   Washington, DC                  $50          40%            $20
  April 14, 2004        MWI Connections                       Membership                    $10          40%             $4
  April 29, 2004            Starbucks                       Washington, DC                  $11          40%             $4
                                                             (U.S. Airways)
   April 5, 2004          US Online.com                                                    $1,162        40%           $465
                                                    Airfare to Colorado Springs, CO
  April 20, 2004       America West Airlines            Airfare to San Jose, CA             $457         40%           $183
  April 25, 2004         Northwest Airlines           Airfare to Minneapolis, MN            $643         40%           $257
  May 14, 2004          Expedia E-Packages                       Travel                     $512         40%                           $205
  May 17, 2004         OU CCE Registration                 College/University               $150         40%                           $60
  May 21, 2004        California Pizza Kitchen              Washington, DC                  $68          40%                           $27
  May 25, 2004          Seattle’s Best Coffee                  Orlando, FL                   $8          40%                            $3
  May 25, 2004          Seattle’s Best Coffee                  Orlando, FL                   $9          40%                            $4
  May 27, 2004         Allied Telecom Group                    Electronics                  $575         40%                           $230
  May 27, 2004                 Staples             (Office Supplies) Washington, DC         $293         40%                           $117
   June 2, 2004         Trans National Com               Professional Services              $683         40%                           $273
  May 21, 2004         Houstonian Hotel FD                    Houston, TX                   $380         40%           $152
  May 21, 2004         Houstonian Hotel FD                    Houston, TX                   $198         40%           $79
   June 3, 2004          Harry's Tap Room                    Arlington, VA                  $63          40%           $25
   May 8, 2004                Courtyard                       Brighton, MI                  $89          40%                           $36
   June 8, 2004       Take Out Taxi Arlington    (Food and Beverage) Falls Church, VA       $158         40%            $63
  June 18, 2004           Avis Rent-A-Car                      Miami, FL                    $161         40%            $64
  June 29, 2004                Staples               (Office Supplies) Phoenix, AZ          $193         40%            $77
                                                             (U.S. Airways)
   July 30,2004             Orbitz LLC                                                      $298         40%                           $119
                                                        Airfare to Columbia, SC
  July 14, 2004              Ortanique           (Food and Beverages) Washington, DC        $292         100%                          $292
                                                          (American Airlines)
  July 20, 2004        MacNair Travel Mgmt                                                  $793         100%                          $793
                                                      Airfare to Los Angeles, CA
  July 23, 2004         Expedia ESR Hotel                    Travel/Lodging                 $288         100%                          $288




                                                                Appendix C - Page 2
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                   Control Number ED-OIG/A03F0010




                                                                                                                      Unsupported    Unsupported
                                                                                                            FTL
  Charge Date                 Vendor                   Charge Type/Location               Total Amount                FTL Phase II   FTL Phase III
                                                                                                         Allocation
                                                                                                                         Grant          Grant
                                                 (U.S. Airways)Airfare to New York,
  August 4, 2004       MacNair Travel Mgmt                                                    $257         100%                          $257
                                                                  NY
  July 19, 2004         American Airlines             Airfare to Los Angeles, CA              $462         100%                          $462
  July 23, 2004        America West Airlines          Airfare to Los Angeles, CA              $165         100%                          $165
  July 26, 2004            Holiday Inn                     Los Angeles, CA                    $47          100%                          $47
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $124         100%                          $124
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $124         100%                          $124
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $124         100%                          $124
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $124         100%                          $124
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $139         100%                          $139
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $124         100%                          $124
  July 27, 2004            Holiday Inn                     Los Angeles, CA                    $139         100%                          $139
  July 23, 2004         American Airlines             Airfare to Washington, DC               $841         100%                          $841
  July 23, 2004            Hotels.com                           Lodging                       $386         40%                           $154
                                                          (Frontier Airlines)
  August 6, 2004            Orbitz LLC                                                        $287         39%                           $111
                                                        Airfare to Denver, CO
 August 13, 2004          Hertz Car Rental                  Anchorage, AK                     $646         100%                          $646
 August 16, 2004         Expedia ESR Hotel                  Travel/Lodging                    $549         100%                          $549
 August 26, 2004           Hotel Lucerne                    New York, NY                      $161         100%                          $161
 August 20, 2004          Old Ebbitt Grill                 Washington, DC                     $54          40%                           $22
 August 27, 2004        Georgetown Seafood                 Washington, DC                     $51          40%                           $20
September 30, 2004            Marriott                       Jackson, MS                      $183         100%                          $183
September 28, 2004    Lincoln Suites Downtown              Washington, DC                     $500         100%                          $500
                                                         (Southwest Airlines)
November 2, 2004       MacNair Travel Mgmt                                                    $177         100%                          $177
                                                        Airfare to Orlando, FL
                                                (Northwest Airlines)Airfare to Orlando,
November 3, 2004       MacNair Travel Mgmt                                                    $310         90%                           $279
                                                                  FL
                                                                 Totals                     $23,496                      $7,847         $7,920
Note: Amounts subject to rounding




                                                                Appendix C - Page 3
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                  Control Number ED-OIG/A03F0010




                                                                Unsupported Payroll
                                                                            Timesheets with FTL Allocations              Unsupported     Unsupported
                          Total           Total         FTL
Pay Period Ending                                                                            Signed But Signed and        FTL Phase       FTL Phase
                         Payroll        Timesheets   Allocation       Total    Not Signed
                                                                                             Not Dated    Postdated        II Grant        III Grant
   March 24, 2004         $42,313           10        $14,086          9            5            2            1            $11,888
    April 2, 2004         $18,940           11        $6,744           9            5            --           3             $6,743
   June 30, 2004          $34,108           9         $13,483          9            5            2            2             $8,310         $5,171
 September 15, 2004       $29,900           10        $13,093          7            2            2            2                            $12,923
 September 30, 2004       $18,650           7         $11,498          6            1            2            2                            $10,639
 December 15, 2004        $13,250           5         $11,437          5           --            2            --                            $5,011
       Totals             $157,162          52        $70,341          45          18            10          10            $26,941         $33,744
Note: Amounts subject to rounding.


                                     Unsupported Professional Services and Miscellaneous Disbursements
                                                 Unsupported      Unsupported
                         Check         Total
        Date                                     FTL Phase II     FTL Phase III           Payee                        Description
                        Number        Payment
                                                    Grant            Grant
 September 16, 2004       3752         $16,200        --            $16,200                          See discussion of unsupported Professional
                                                                                     KSA Plus
  October 25, 2004        3777         $13,900        --             $8,100                          Services in Finding No. 3 and questioned costs
                                                                                   Communications
  December 7, 2004        3840         $27,300        --            $26,400                          detailed in Appendix B.
                                                                                        Draper and   Unsupported payment because of missing invoices
 November 12, 2004        3812         $7,015         --             $5,890
                                                                                        McGinley     (27043 and 27239).
                                                                                                     Unsupported payment because of missing invoices
                                                                                    Summerhouse      (04-000152, 04-000163, 04-000164, and 04-
 September 21, 2004       3759         $1,650         --             $1,245
                                                                                      Studios        000168). (75 percent of the payment was allocated
                                                                                                     to the FTL Phase III grant.)
    June 2, 2004          3650         $1,500        $600              --                            Unsupported payments because of missing
                                                                                    Financial and
                                                                                                     invoices for May and June 2004. (40 percent of
                                                                                     Accounting
   June 24, 2004          3671         $1,500        $600              --                            the each payment was allocated to the FTL Phase
                                                                                     Consultant
                                                                                                     II grant.)




                                                                  Appendix C - Page 4
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                               Control Number ED-OIG/A03F0010




                                               Unsupported    Unsupported
                         Check        Total
        Date                                   FTL Phase II   FTL Phase III         Payee                           Description
                        Number       Payment
                                                  Grant          Grant
                                                                                                  Unsupported payment because of missing invoices
                                                                                   Shared
                                                                                                  (136228, 142403, 146554, 147815, 147817,
   March 30, 2004         3601       $5,331       $2,132           --           Technologies
                                                                                                  148515, and 148975). (40 percent of the payment
                                                                              Fairchild Telecom
                                                                                                  was allocated to the FTL Phase II grant.)
                                                                                                  Unsupported payment because of missing receipt
  January 20, 2004        3513       $1,426        $40             --          Board Member       for a $100 airfare change fee. (40 percent of the
                                                                                                  payment was allocated to the FTL Phase II grant.)
                                                                                                  Unsupported payment because of missing invoices
                                                                                                  (116456, 116652, 117795, and 118732). (40
 February 25, 2004        3553       $1,670       $668             --          U.S. Newswire
                                                                                                  percent of the payment was allocated to the FTL
                                                                                                  Phase II grant.)
                          Totals     $77,492      $4,040         $57,835
Note: Amounts subject to rounding.




                                                              Appendix C - Page 5
The Education Leaders Council’s
Drawdown and Expenditure of Federal Funds                                                                        Control Number ED-OIG/A03F0010




                             APPENDIX D – SUMMARY OF SELECTIONS AND QUESTIONED AND UNSUPPORTED COSTS

Population        Amount and           Amount         FTL Amount             FTL                 FTL          FTL           FTL            Total FTL
                  Number of          Selected and      and Count           Questioned         Questioned   Unsupported   Unsupported     Questioned and
                   Payments             Count                              Amount and           Count      Amount and      Count          Unsupported
                                                                            Percent                          Percent                      Amount and
                                                                                                                                            Percent
 American           $195,510            $62,136          $32,237             $11,768          33 charges     $18,363      85 charges        $30,131
  Express         (9 payments)       (129 charges)    (125 charges)          (36.5%)                         (57.0%)                        (93.5%)

     Payroll        $721,078           $157,162          $70,341              $307        5 timesheets       $60,685     38 timesheets      $60,992
                  (48 payments)     (52 timesheets)   (45 timesheets)        (0.4%)                          (86.3%)                        (86.7%)

  Other            $1,315,529         $1,255,414        $717,612             $78,647      19 payments        $61,875     10 payments        $140,522
Expenses14       (319 payments)     (144 payments)    (87 payments)          (11.0%)                         (8.6%)                          (19.6%)

               $2,232,117          $1,474,712           $820,190             $90,721                        $140,922                        $231,644
             (376 payments)                                                  (11.1%)                        (17.2%)                         (28.2%)
Note: Amounts subject to rounding.




14
     Includes a payment of $20,000 paid in 2003.




                                                                        Appendix D – Page 1
Mr. Bernard Tadley
Office of the Inspector General
U.S. Department of Education
The Wannamaker Building
100 Penn Square East, Suite 502
Philadelphia, PA 19107

December 21, 2005

On behalf of Following the Leaders, Inc., we submit the following response to ED-OIG
audit number A03F0010, The Education Leaders Council’s Drawdown and Expenditure
of Federal Funds, dated November, 2005.

In December of 2005, The Education Leaders Council (ELC) re-framed its organizational
mission and changed its name to Following the Leaders (FTL). A new Chief Executive
Officer, Faye P. Taylor, assumed leadership of the organization. Ms. Taylor replaced Mr.
Theodor Rebarber who was the CEO from October, 2004 until December 2005. During
his tenure, Mr. Rebarber worked diligently to correct operational and financial difficulties
that ELC had encountered primarily during the first six months of 2004.

FTL is now re-organized and in full compliance with all federal regulations governing the
use of federal funds awarded by the United States Congress for the Following the Leaders
program. The comments provided herein address serious shortcomings that were
identified by ELC under Mr. Rebarber’s leadership and were reported to the U.S.
Department of Education (Department) immediately. It was ELC’s reporting of financial
mismanagement and the overdraw of federal funds which in turn resulted in the Inspector
General’s review of ELC’s 2004 finances.

It is important to note that throughout the entire period of the OIG’s audit, ELC had not
closed its 2004 accounting records. When Mr. Rebarber assumed leadership of ELC in
late 2004, the 2003 audit was underway but not yet complete. We set to work completing
the 2003 audit and reviewing and adjusting the 2004 (and 2005) accounting records as
needed to make them accurate and to comply with federal regulations. It is our position
that many of the shortcomings identified by the Department would have been and were
corrected as a result of this internal review process. Thus, while we concur with the
findings concerning financial protocols, we have long since corrected many of the
accounting entries, a fact which is given minimal attention in this report.

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The OIG’s report has identified three findings:

   1. ELC did not comply with federal regulations concerning the drawdown of grant
      funds. ELC overdrew Following the Leaders Phase II Grant Funds.

   Auditee response: We concur that ELC did not comply at times with federal
   regulations concerning the drawdown of grant funds and that, as a result, ELC
   overdrew federal funds. Specifically, weak internal controls resulted in a lapse of
   enforcement of both the “three day rule” (34 CFR section 74.22(b)(3) for expending
   federal funds and of ELC’s process for matching invoices to drawdowns it had
   submitted. The OIG reviewed 24 drawdowns. There were, in fact 63 total FTL II
   drawdown requests; of these 63, 10 did not have proper documentation. All ten of
   these draws were submitted to the Department between January and June of 2004.

   The OIG report concludes that ELC overdrew $495,326 in federal funds as a result of
   weak financial controls. At the time OIG completed its review, that number was
   accurate in our opinion. Based upon ongoing adjustments and corrections to our 2004
   records, the overdraw has actually dropped $476,169 (this amount might be adjusted
   further pending completion of the 2004 independent audit and could drop
   significantly pending review of our indirect cost proposal). We have completed
   negotiations with the Department about a repayment plan and timetable and continue
   to work closely with the Department to meet our obligations. It is also worth noting
   that we have prepared a repayment plan that would allow us to address additional re-
   payment amounts identified during audit resolution.

   The OIG report contains two corrective recommendations under finding 1:

       •   Return overdrawn funds to the Department: as noted, we have negotiated a
           repayment plan to return funds.
       •   Submit documentation in support of each drawdown request: we have
           assembled this information and will review it with the Department upon
           request.


   2. ELC did not have an approved indirect cost plan.

   ELC allocated indirect expenses using the direct allocation method permitted under
   OMB Circular A-122. ELC did not believe that prior approval was required to
   allocate allowable joint costs on a direct basis. ELC was of the opinion that prior
   approval was only required when applying an indirect rate (as stated in OMB A-122).

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ELC did not apply an indirect rate to general and administrative expenses and thus
believed no prior approval was required.

In December, 2005, ELC did submit an indirect rate proposal (as required under
Special Conditions put in place by the Department in June of 2005). That proposal
was based on the most recent audited financial statements. If approved, FTL will in
fact be owed substantial funds for the indirect portion of general and administrative
costs from 2003 to the present. These funds would significantly reduce the overdraw.

The OIG report contains two corrective recommendations under finding 2:

    •   Submit an indirect cost plan to the Department: this has been done.
    •   Refund any costs allocated to FTL grants not in accordance with the approved
        plan: as noted above, we expect that approval of the plan will actually result
        in a reduction of the overdraw of federal funds.

3. ELC did not comply with cost principles contained in OMB Circular A-122. ELC
   charged unallowable and unsupported costs to the Following the Leaders grants.

The audit concludes that ELC charged $15,732 in unallowable and $138,327 in
unsupported costs to Phase II and III of the Following the Leaders appropriations.

Unallowable Costs: Of the 12 items that comprise the $15,732:

•   1 item has since been corrected ($192)
•   4 items we believe will be approved by the Department staff who understand the
    programmatic nature of the grant activities ($11,828): these items pertain to
    activities charged to the grant that OIG did not believe could reasonably be
    allocated
•   3 items we disagree with and believe will be approved by Department personnel
    ($2,718): these items pertain to OIG’s assumption that ELC should have been
    able to obtain government pricing on travel and travel-related costs. ELC’s travel
    policy called for compliance with government regulations but did not specify
    compliance with GSA rates. It is our firm belief that it is not possible – and
    therefore not reasonable - for a non-profit organization of ELC’s size to expect to
    obtain rates available to the federal government through its large purchasing
    power.
•   4 items we need clarification on from the Department ($993)



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Unsupported Costs:

The OIG audit has questioned costs based on an assessment of appropriate
documentation that focuses on credit card charges for travel, timesheet records, and
vendor invoice detail. We look forward to reviewing and resolving these issues with
the Department and offer brief comments in response here.

•   Travel receipts and records: In response to concerns raised by OIG, ELC
    completed undertook to contact all former employees and ask them to certify the
    purpose of each trip taken and charged to the company credit card. The results of
    that effort are being reviewed and will be incorporated into our final 2004
    accounting adjustments.
•   Timesheets: ELC was alerted to deficiencies in timesheet records in 2004 when
    the 2003 audit was being completed. The organization put in place new
    timesheet requirements, but in some instances has maintained only an electronic
    copy of the timesheets which means that some dates and/or signatures are
    lacking. ELC undertook another exercise to contact all employees to get
    certification of timesheet records where they were missing. We adjusted our
    accounting records based on this exercise and look forward to reviewing the
    results with the Department.
•   Vendor invoice detail: we disagree with OIG’s assessment of the reasonableness
    of certain vendor invoices. We believe that the value of certain contracts can be
    demonstrated in a variety of means; however, OIG consistently relied on the
    notion that only detailed activity reports showing how time was spent by vendors
    could support the reasonableness of those charges. We will review these items
    with the Department to reach closure.

The OIG report contains six corrective recommendations under finding 3:

    •   Refund unresolved unallowable costs: As noted above, we have projected our
        finances assuming an overdraw amount that is greater than the $476,169
        currently booked and will work with the Department to resolve potentially
        unallowable items.
    •   Provide documentation on vendor services: We will provide this during audit
        resolution.
    •   Specify 2003 and 2004 annual conference income and expenses: We will
        provide this during audit resolution.
    •   Provide adequate documentation on unsupported costs: We will provide this
        during audit resolution.
    •   Maintain supporting documentation for all FTL grant expenditures and
        require consultants detail work performed: We believe that we are in full
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    JIr
, Following the Leaders
           compliance with documentation requirements and will re-confirm this with
           the Department during audit resolution.
       •   Provide all officials and employees copies ~fOMB Circular A-122 and
           require confirmation of receipt and review: completed: OMB Circular A-122
           has been provided to all employees; a form indicating receipt and review was
           also circulated, signed by each employee and returned; finally, our finance
           manual, which details operating protocols that conform with federal
           regulations, also has been provided to all employees.

Other Matters: The OIG report also refers to ELC's fiscal health and completion of the
2004 audit. We have submitted a turnaround plan to the Department that we believe will
allow FTL to continue operations and meet the re-payment agreement schedule. That
plan calls for repayment of overdrawn funds over a three year period. We are ready to
schedule the 2004 audit and will do so as soon as practicable.

The audit report also referred to Special Conditions imposed on ELC in June of 2005.
The OIG audit refers to seven items from these conditions (page 4 of the OIG audit).
These seven items and their status are as follows:

           1. deposit and disperse federalfundsfrom a separaie account and maintain
              a clear audit trail: completed
           2. enter into a repayment agreement with the Department: completed
           3. operate on a reimbursement basis: implemented'and ongoing
           4. institute appropriate/is-cal control')': completed
           5. make arrangements for the 2004 audit andfile 2005 timely: bids were
              solicited and a firm has been retained for the 2004 audit; we expect to
              complete 2005 on time
           6. submit an indirect rate "direct allocation proposal ": submitted and under
              reVIew
           7. promptly provide documents requested by the Department: has been done
              consistently




Meave G. O'Marah, consulting Chief Financial Officer on behalf of Following the
Leaders (formerly Education Leaders Council)



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                                     (202) 261-2600