oversight

Virginia - Use of Funds and Data Quality for Selected ARRA Funds.

Published by the Department of Education, Office of Inspector General on 2011-06-09.

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

         U.S. Department of Education
         Office of the Inspector General

    American Recovery and
      Reinvestment Act
    Virginia: Use of Funds and Data Quality for Selected
    American Recovery and Reinvestment Act Programs

                    Final Audit Report




                      Virginia State Capitol

ED-OIG/A03K0008                                    June 2011
                                      UNITED STATES DEPARTMENT OF EDUCATION
                                                            OFFICE OF INSPECTOR GENERAL

                                                                                                          AUDIT SERVICES
                                                                                                     PHILADELPHIA REGION



                                                                   June 9, 2011


Dr. Patricia I. Wright
Superintendent of Public Instruction
Virginia Department of Education
P.O. Box 2120
Richmond, VA 23218


Dear Superintendent Wright:

This final audit report presents the results of our audit to determine whether (1) the
Commonwealth of Virginia (Virginia) and selected subrecipients used and accounted for
Recovery Act funds in accordance with Recovery Act recipient plans, approved applications, and
other applicable laws and regulations, and (2) data reported by Virginia were accurate, complete,
and in compliance with Recovery Act reporting requirements.

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

This report incorporates the comments you provided in response to our preliminary audit report.
If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Education Department
officials, who will consider them before taking final Departmental action on this audit:

                                                    Ann Whalen
                                             Deputy Director for Programs
                                           Implementation and Support Unit
                                            U.S. Department of Education
                                        400 Maryland Ave., S.W., Room 7W206
                                               Washington, DC 20202




 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                             Thelma Meléndez de Santa Ana, Ph.D.
                                       Assistant Secretary
                         Office of Elementary and Secondary Education
                                 U.S. Department of Education
                               400 Maryland Ave., S.W., 3W315
                                     Washington, DC 20202

                                     Alexa E. Posny, Ph.D.
                                      Assistant Secretary
                    Office of Special Education and Rehabilitative Services
                                U.S. Department of Education
                                   400 Maryland Ave, S.W.
                                    Washington, DC 20202

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

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.


                                             Sincerely,
                                             /s/
                                             Bernard E. Tadley
                                             Regional Inspector General for Audit


Enclosure
       Abbreviations, Acronyms, and Short Forms
                  Used in this Report
___________________________________________________
C.F.R.               Code of Federal Regulations

Department           U.S. Department of Education

Fairfax County       Fairfax County Public Schools

ESEA                 Elementary and Secondary Education Act of 1965

Handbook             Handbook of Procedures and Forms for Federal Program
                     Reimbursements and Amendments

Henrico County       Henrico County Public Schools

IDEA                 Individuals with Disabilities Education Act, Part B Grants to States

LEA                  Local Educational Agency

MOE                  Maintenance of Effort

Norfolk              Norfolk Public Schools

OMB                  Office of Management and Budget

OMEGA                Online Management of Education Grant Awards

Recovery Act         American Recovery and Reinvestment Act of 2009

SFSF                 State Fiscal Stabilization Fund

Title I              Title I, Part A of the Elementary and Secondary Education Act of 1965

Virginia Education   Virginia Department of Education
Final Report
ED-OIG/A03K0008                                                                      Page 1 of 16

           Virginia: Use of Funds and Data Quality for Selected
           American Recovery and Reinvestment Act Programs
                              Control Number ED-OIG/A03K0008


                                            PURPOSE

The American Recovery and Reinvestment Act of 2009 (Recovery Act) places a heavy emphasis
on accountability and transparency and, in doing so, increases the responsibilities of the agencies
that are impacted by the Act. The U.S. Department of Education (Department) is ultimately
responsible for ensuring that education-related Recovery Act funds reach intended recipients and
achieve intended results. This report provides the results of our audit to determine whether
(1) the Commonwealth of Virginia (Virginia) and selected subrecipients used and accounted for
Recovery Act funds in accordance with Recovery Act recipient plans, approved applications, and
other applicable laws and regulations, and (2) data reported by Virginia were accurate, complete,
and in compliance with Recovery Act reporting requirements.

We reviewed four education-related grants funded under the Recovery Act: State Fiscal
Stabilization Fund (SFSF) Education Stabilization; SFSF Government Services; Title I, Part A of
the Elementary and Secondary Education Act of 1965 (Title I); and the Individuals with
Disabilities Education Act, Part B Grants to States (IDEA). We reviewed selected costs charged
to these grants and quarterly data reported during the period February 17, 2009, through
June 30, 2010. Our review covered seven data elements that must be reported under Section
1512 of the Recovery Act—estimated number of jobs created or retained, vendor information,
project status, and the amount of funds awarded, subawarded, received, and spent. We
conducted our review at the Virginia Department of Education (Virginia Education), as well as
three local educational agencies (LEAs) within Virginia: Fairfax County Public Schools (Fairfax
County), Henrico County Public Schools (Henrico County), and Norfolk Public Schools
(Norfolk). We also reviewed two sheriffs’ offices—Prince William County and Fredericksburg
County—based on the appropriated uses of SFSF Government Services funds.


                                      RESULTS IN BRIEF

We concluded that Virginia’s Recovery Act expenditures were generally expended and
accounted for in accordance with recipient plans and applications, and applicable laws,
regulations, and guidance. However, we found that Virginia Education needs to improve its
fiscal monitoring to ensure LEAs comply with Federal fiscal requirements related to the use of
and accounting for Recovery Act funds. We noted fiscal issues at Norfolk and Fairfax County.
Virginia Education approved reimbursement requests submitted by the LEAs that included
unallowable and incorrectly coded expenditures. We did not identify any exceptions at Henrico
County or at the two sheriffs’ offices.
Final Report
ED-OIG/A03K0008                                                                        Page 2 of 16

For the quarterly Section 1512 reporting, we concluded that Virginia Education and the selected
LEAs’ reporting processes provided reasonable assurance that all of the reported data elements
we reviewed were generally accurate and complete. The Recovery Act data reported by Virginia
Education were accurate and complete and in compliance with Recovery Act reporting
requirements.

This report discusses the (1) instances of insufficient fiscal monitoring by Virginia Education of
its LEAs’ Recovery Act expenditure reimbursement requests, (2) specific actions taken or
planned to address our finding and recommendations; and (3) additional actions needed to
improve compliance with Federal requirements for subrecipient monitoring.

We provided a preliminary copy of this report to Virginia Education for review and comment on
April 26, 2011. Virginia Education did not concur with our finding and stated that the finding
and recommendations did not fully reflect the steps it had taken to monitor subrecipient fiscal
and compliance requirements with Recovery Act funds. Virginia Education’s comments
included an overview of its four-step monitoring process and clarifying information related to
statements or conclusions made in the preliminary report. Virginia Education did not indicate
whether it concurred with our recommendations. However, Virginia Education provided
additional information for Recommendations 1.1 and 1.2, and indicated corrective actions taken
or planned to be taken for Recommendations 1.3 and 1.4, respectively. Although we considered
Virginia Education’s comments, we did not modify our finding and recommendations. Virginia
Education’s comments are summarized at the end of the finding. The full text of Virginia
Education’s comments is included as an Enclosure to this report.


                                        BACKGROUND

The Recovery Act was signed into law on February 17, 2009, and had three immediate goals:
(1) create new jobs and retain existing ones, (2) spur economic activity while encouraging
investment in long-term growth, and (3) foster unprecedented levels of accountability and
transparency in government spending. To help achieve the third goal, recipients of Recovery Act
funds are required to submit quarterly reports on awards, spending, and job impacts under
Section 1512 of the Recovery Act. According to the Office of Management and Budget (OMB),
the reports should contain detailed information on the projects and activities funded by the
Recovery Act in order to provide the public with transparency into how Federal dollars are being
spent. The reports also help drive accountability for the timely, prudent, and effective spending
of Recovery Act funds.

Funding: Virginia was awarded a total of $1.6 billion in Recovery Act funds for the grants we
reviewed. This consisted of $1.2 billion for SFSF funds ($219 million for Government Services
and $984 million for Education Stabilization), $281 million for IDEA funds, and $164 million
for Title I funds (see Table 1 at the end of this report section). Virginia received 67 percent of its
SFSF Education Stabilization funds in May 2009. The initial award of $659.2 million was
allocated between LEAs and public higher education institutions based on budget restoration
calculations. The Virginia General Assembly approved specific allocations for the remaining
SFSF Education funds in December 2010 and required the funds to be expended by
Final Report
ED-OIG/A03K0008                                                                         Page 3 of 16

September 30, 2011. The Virginia General Assembly appropriated SFSF Government Services
funds of $109 million a year to partially offset payroll costs across 78 sheriffs’ offices and
regional jails for fiscal year 2009 and 19 sheriffs’ offices and regional jails for fiscal year 2010.

Administration and Reporting: Virginia Education oversaw the State’s education system and
was responsible for administering Recovery Act funds. It administered Recovery Act funds
through its Online Management of Education Grant Awards (OMEGA) system, an automated
grant application and reimbursement system through which LEAs were reimbursed for requested
grant expenditures. The OMEGA system enabled LEAs to review award balances for all open
awards, prepare and submit grant applications, submit grant reimbursement requests, and receive
bulletin board communications. All grants were administered on a reimbursement basis.
Expenditure data supporting reimbursement requests were entered by file upload or by online
forms. Expenditure data were reviewed and approved by Virginia Education through the
OMEGA system. Virginia Education fulfilled Section 1512 reporting requirements on behalf of
its LEAs, including the compilation of jobs data for submission to FederalReporting.gov.

During the audit period, Virginia Education expended more than $764.6 million in Recovery Act
funds. Virginia Education oversaw the State’s 132 LEAs, consisting of 1,881 elementary and
secondary schools, which served more than 1.2 million students during the 2009–2010 school
year. The following table summarizes the Recovery Act funds awarded and expended by
program as of June 30, 2010.

      Table 1: Virginia Recovery Act Awarded and Expended Amounts by Program Reviewed

                           Catalog of Federal
                                                      Total Amount             Total Expended
          Program              Domestic
                                                        Awarded             Through June 30, 2010
                            Assistance No.
 SFSF Education
                                  84.394               $983,865,903               $425,475,820
  Stabilization Fund
 IDEA Part B                      84.391               $281,415,033               $75,475,401
 SFSF Government
                                  84.397               $218,904,149               $218,904,149
  Services Fund
 Title I Part A                   84.389               $164,458,751               $44,794,283
    Total                                             $1,648,643,836              $764,649,653
Final Report
ED-OIG/A03K0008                                                                             Page 4 of 16

                              FINDINGS AND RECOMMENDATIONS

FINDING NO. 1 – Virginia Education Needs to Improve Its Fiscal Monitoring Over
                Recovery Act Funds

Virginia Education needs to improve its monitoring of expenditures to ensure LEAs comply with
Federal fiscal requirements related to the use of and accounting for Recovery Act IDEA and
Title I funds. Two of the three LEAs that we reviewed incorrectly received reimbursements for
Recovery Act expenditures that Virginia Education approved without adequate fiscal monitoring.

The Federal regulation at 34 Code of Federal Regulations (C.F.R.) Part 80.40(a) (revised as of
July 1, 2010) addresses the State Educational Agency role in monitoring subrecipients as
follows:

           Grantees are responsible for managing the day-to-day operations of grant and subgrant supported
           activities. Grantees must monitor grant and subgrant supported activities to assure compliance
           with applicable Federal requirements and that performance goals are being achieved. Grantee
           monitoring must cover each program, function or activity.

Fairfax County Improperly Spent Recovery Act IDEA Maintenance of Effort Flexibility
Option Funds

Fairfax County expended $4.75 million in Recovery Act IDEA funds for non-special education
programs from July 1, 2009, through March 31, 2010. During the implementation of the
Recovery Act, Virginia Education issued a letter on May 1, 2009, to LEAs informing them that
the IDEA maintenance of effort (MOE) flexibility option (34 C.F.R. § 300.205) was available.
However, the letter did not provide specific guidance to the LEAs on how to implement the
option. The Virginia Education letter referred LEAs only to the Department’s Web site for
guidance on meeting the MOE requirement.

The MOE provision of 34 C.F.R. § 300.205 allows an LEA certain flexibility in any fiscal year
in which the LEA’s IDEA allocation exceeds the amount the LEA received in the previous fiscal
year. The LEA may reduce its level of expenditures from local funds or a combination of State
and local funds for special education and related services by not more than 50 percent of the
amount by which the LEA’s allocation exceeds the previous year’s allocation. The LEA must
use those local funds or a combination of State and local funds that, under the MOE flexibility
option, were not used for special education and related services on activities authorized under the
Elementary and Secondary Education Act of 1965 (ESEA). 1 However, IDEA Part B Recovery
Act funds can be used only for special education and related services. The Department’s
guidance, “Funds for Part B of the Individuals with Disabilities Education Act Made Available
Under The American Recovery and Reinvestment Act of 2009,” dated April 2009, specifies that
“[a]n LEA must use IDEA Part B Recovery Act funds only for the excess costs of providing
special education and related services to children with disabilities, except where IDEA
specifically provides otherwise.”

1
    As amended by the No Child Left Behind Act of 2001.
Final Report
ED-OIG/A03K0008                                                                                Page 5 of 16


An official from Fairfax County’s Compliance and Strategic Planning Office indicated that
Fairfax County misunderstood the guidance. The official believed that the Recovery Act IDEA
funds could be used for any allowable expenditure under ESEA. Fairfax County used the
$4.75 million in Recovery Act IDEA funds to reinstate some of its non-special education
programs. The LEA did not become aware that it could not use the funds for non-special
education expenditures until a June 15, 2010, conference call about the MOE flexibility option
with Virginia Education and other LEAs. During the call, Fairfax County realized that non-
special education expenditures made as a result of using the MOE flexibility option could not be
claimed for reimbursement using Recovery Act IDEA funds. Fairfax County notified Virginia
Education of the issue and subsequently submitted adjustments to its April 2010 reimbursement
request 2 to offset the $4.75 million incorrectly expended.

According to Virginia Education, 32 other LEAs (nearly 25 percent of all LEAs) used the IDEA
MOE flexibility option. Therefore, Virginia Education needs to provide clear guidance to its
LEAs to ensure Recovery Act IDEA funds are being used appropriately.

Norfolk Incorrectly Included Capital Outlay Expenditures in Its Indirect Cost Calculations

Norfolk submitted a reimbursement request for Recovery Act Title I funds for $94,587 that
resulted in it being reimbursed $3,784 for indirect costs. 3 We found that Norfolk should have
sought reimbursement for only $21,983 in expenditures including $879 in indirect costs
(4 percent of $21,983). Norfolk incorrectly included $72,604 of capital outlay 4 expenditures in
its indirect cost calculations, resulting in an excess reimbursement of $2,905 ($3,784 minus
$879). When we brought this to the attention of Norfolk officials, they acknowledged the error
and indicated that the incorrectly claimed indirect costs would be returned within 10 business
days of the date we notified the officials of the error.

Federal regulation 2 C.F.R. Part 225, “Cost Principles for State, Local, and Indian Tribal
Governments (OMB Circular A-87),” Appendix B, 15. b.(5) states that equipment and other
capital expenditures are unallowable as indirect costs.

We asked Virginia Education about its process for reviewing indirect cost calculations submitted
by LEAs. Virginia Education’s Director of Grants Accounting and Reporting stated that her
office estimated the allowable direct costs from the OMEGA system reimbursement request, and
if the total was equal to or greater than the amount claimed by the LEA, her office approved the
indirect cost. The official also informed us that Virginia Education had denied multiple
reimbursement requests submitted by Norfolk for indirect costs that had been calculated
incorrectly.



2
  The April 2010 reimbursement requests submitted by Fairfax County had not been approved by Virginia Education
at the time of the June 15, 2010, conference call.
3
  Norfolk’s indirect cost rate was 4 percent (4 percent of $94,587 = $3,784).
4
  In Virginia Education’s, “Procedures and Forms for Federal Program Reimbursements and Amendments,” capital
outlay is defined as equipment for instruction, buildings, remodeling, and all other equipment.
Final Report
ED-OIG/A03K0008                                                                      Page 6 of 16

Only three indirect cost expenditures were contained within our sample. Although we found
only one example of unallowable expenditures being included in Norfolk’s indirect cost
calculations, additional unallowable expenditures may exist. Although Virginia Education does
review indirect cost calculations, it needs to improve its monitoring process because not all of the
calculation errors were detected. Virginia Education also needs to ensure that the process LEAs
use to calculate indirect costs does not permit unallowable costs to be included.

Norfolk Allocated Expenditures to Incorrect State Object Codes

Of the 15 Recovery Act IDEA expenditures we sampled, 6 expenditures for materials and
supplies were incorrectly allocated as equipment/capital outlay, including 3 office chairs and
miscellaneous office supplies. In addition, Norfolk incorrectly bundled the cost of multiple
items resulting in additional misallocated expenditures. Some of these misallocations affected
indirect cost calculations because expenditures allocated to equipment/capital outlay cannot be
claimed in the calculation of indirect costs.

Virginia Education’s “Handbook of Procedures and Forms for Federal Program Reimbursements
and Amendments” (Handbook) outlined criteria for its LEAs on the classification of materials
and supplies, as well as equipment/capital outlay. According to the Handbook, materials and
supplies should be coded to object code 6000, while equipment/capital outlay (meeting the
capitalization threshold of $500) should be coded to object code 8000. The Handbook
specifically defined materials and supplies as “articles and commodities which are consumed or
materially altered when used and minor equipment (less than $500) which is not capital outlay
(i.e., instructional materials, administrative supplies, etc.).”

Norfolk’s process of allocating expenditures to equipment/capital outlay was based partly on its
multiple capitalization thresholds. Norfolk generally used a $5,000 threshold for capitalization
expenditures; however, for highly pilferable items (e.g., computers) Norfolk used a $500
threshold. In addition, Norfolk stated that the effort of coding expenditures to the State object
codes was daunting, and as a result, expenditures were allocated to equipment/capital outlay to
facilitate its inventory processes. Norfolk further stated that by allocating expenditures to
equipment/capital outlay, purchases could be inventoried and, therefore, accounted for easily.
The six expenditures noted as incorrectly allocated to the State’s object codes are not
equipment/capital outlay or highly pilferable, and all cost less than $500. Therefore, these
expenditures are not required to be part of Norfolk’s inventory and should be allocated to
materials and supplies. Although the financial impact of these six incorrectly coded expenditures
totals only $2,032, these transactions represented 40 percent of the IDEA transactions sampled.
These incorrect allocations further exemplify the need for Virginia Education to improve fiscal
monitoring of its subrecipients.

During its review of reimbursement requests in the OMEGA system, Virginia Education officials
had the ability to review the object codes used by the LEAs. Although Virginia Education
reviewed expenditure data through the OMEGA system, the data were not sufficient to allow it
to monitor the reasonableness and allowability of the expenditures. LEAs were not required to
submit supporting documentation (e.g., invoices or purchase orders) with the reimbursement
requests. It is Virginia Education’s responsibility to perform risk-based monitoring of the
Final Report
ED-OIG/A03K0008                                                                       Page 7 of 16

expenditures included in the reimbursement requests submitted by the LEAs, including the
validity, accuracy, and allowability of the expenses.

Virginia Education primarily relied on single audits by independent public accountants to
monitor LEA expenditures. These single audits occurred well after payments were disbursed to
the LEAs and were performed too late to ensure early detection of the inappropriate use of funds.
In addition, Virginia Education’s Director of Grants Accounting and Reporting stated that her
office relied on the honesty and integrity of the LEA officials’ charged with the local approval of
expenditures in the OMEGA system as an internal control mechanism to show that the
expenditure was valid, accurate, and allowable. However, during the audit period, Virginia
Education did not review supporting documentation for the information entered into the
OMEGA system, nor did it perform testing of the validity, accuracy, and allowability of the
expenditures through fiscal monitoring activities.

As a result of Virginia Education’s insufficient fiscal monitoring, there may be an increased risk
that LEAs will charge unallowable, unsupported, or unreasonable expenditures to Recovery Act
grants. Without proper fiscal monitoring, inappropriate payments for LEA expenditures may go
unnoticed.

Subsequent to our fieldwork, Virginia Education implemented a plan to monitor the use of and
accounting for Recovery Act funds, as well as the data quality for its LEAs, for all Recovery Act
programs. In February 2011, Virginia Education provided us with its subrecipients’ monitoring
plan that included fiscal monitoring of Recovery Act funds. Virginia Education scheduled site
visits with all of its subrecipients, using a risk-based scoring system, through the last quarter of
2011. The first site visits occurred at the end of September 2010. We reviewed the monitoring
plan and concluded that it should improve Virginia Education’s monitoring of Recovery Act
funds by increasing its oversight of LEA compliance with fiscal requirements related to the
appropriate use of and accounting for these funds.

RECOMMENDATIONS

We recommend that the Assistant Secretary for Elementary and Secondary Education, in
conjunction with the Assistant Secretary for Special Education and Rehabilitative Services,
require Virginia Education to −

1.1    Continue to implement its risk-based fiscal monitoring procedures to ensure timely
       oversight of LEA compliance with fiscal requirements related to the appropriate use of
       and accounting for Recovery Act IDEA and Title I funds;

1.2    Verify that all LEAs that implemented the IDEA MOE flexibility option used
       Recovery Act IDEA funds only for special education and related services;

1.3    Ensure that the excess reimbursement of funds that were allocated for indirect costs are
       returned; and

1.4     Provide information on the finding contained in this report to all LEAs in Virginia.
Final Report
ED-OIG/A03K0008                                                                      Page 8 of 16


Virginia Education’s Comments and OIG Response

Virginia Education did not agree with the finding and stated that the finding and
recommendations did not fully reflect the steps it took to ensure fiscal monitoring and
compliance with selected Recovery Act funds. Virginia Education stated that it used a four-step
review process for monitoring fiscal compliance with the Recovery Act. The four steps included
the following:

   •   reviewing subrecipients planned use of Recovery Act funds through applications and
       budget requests;

   •   reviewing subrecipient reimbursement request details for allowability through its
       OMEGA system;

   •   reviewing single audits that help to assure the accuracy of Recovery Act data, the
       allowability of expenditures, and the validity of controls over Recovery Act funds; and

   •   reviewing data quality through on-site reviews of expenditure supporting documentation,
       fiscal controls, and the subrecipient’s most recent single audit.

Further, subrecipients are required to certify that expenditures were allowable and that
documentation of the expenditures is available.

OIG Response. We believe that we included the steps Virginia Education had taken to ensure
fiscal monitoring and compliance with the Recovery Act funds reviewed in the report. However,
we found that Virginia Education’s monitoring process could be improved. We did not discuss
the review of subrecipient applications and budgets because those are only the planned use of the
funds and could vary from the actual use of the funds, which was the focus of our review. In the
finding, we noted that Virginia Education implemented a plan to monitor the use of and
accounting for its LEAs’ Recovery Act funds and the quality of Recovery Act data.

Virginia Education provided us with clarifying information to statements made in the
preliminary report. We have numbered the clarifying statements below followed by the OIG
response to each statement.

   1. In response to the finding subsection “Fairfax County Improperly Spent Recovery Act
      IDEA Maintenance of Effort Flexibility Option Funds,” Virginia Education stated that
      Fairfax County made the error in submitting the $4.75 million reimbursement request
      because it misinterpreted the Department’s Recovery Act IDEA guidance. Fairfax
      County submitted a subsequent reimbursement request to Virginia Education to correct
      the error. Shortly after discovery of the error, Fairfax County incurred $4.75 million in
      allowable Recovery Act IDEA costs that were not reimbursed; therefore, there was a $0
      net impact on the Recovery Act funds.
Final Report
ED-OIG/A03K0008                                                                  Page 9 of 16

     Virginia Education’s response included a letter from Fairfax County in which it objected
     to the report stating that Fairfax County improperly expended the Recovery Act IDEA
     MOE flexibility funds. Fairfax County believed that the reader of the report might
     interpret the statement to mean that the funds were improperly expended. Fairfax County
     believed that the report should state that it improperly claimed reimbursement for the
     funds.

     OIG Response. We agree that Fairfax County misunderstood the MOE flexibility option
     guidance, and that because Fairfax submitted a reimbursement adjustment, the net impact
     was $0. However, as we stated in the report, the guidance provided by Virginia
     Education did not include specific information on how to implement the MOE flexibility
     option. Fairfax County improperly expended the MOE flexibility option funds between
     July 2009 and March 2010, and requested and received reimbursement for those funds. If
     the funds were not already expended, then a reimbursement request should not have been
     made. Although Fairfax County adjusted a later reimbursement request, the funds were
     originally expended on non-special education activities.
     .
  2. In response to our conclusion that Virginia Education needs to provide clear guidance to
     its LEAs to ensure Recovery Act funds were being used appropriately, Virginia
     Education stated that it has provided substantial guidance to LEAs regarding the use of
     Recovery Act IDEA funds, including direct links through its own Web site to written
     guidance provided by the Department’s Office of Special Education Programs. Virginia
     Education also stated that it provided guidance through phone conferences and in-person
     training sessions.

     OIG Response. We do not dispute that Virginia Education provided information to its
     subrecipients about the use of Recovery Act IDEA funds; however, the guidance
     provided did not include specific information about the use of the Recovery Act IDEA
     MOE flexibility option funds. We reviewed the information on the Web site Virginia
     Education provided in its response and found that while it did include references to
     various Recovery Act IDEA guidance documents, it did not include any clarifying
     explanations related to the MOE flexibility option.

  3. In response to the finding subsection “Norfolk Incorrectly Included Capital Outlay
     Expenditures in Its Indirect Cost Calculations,” Virginia Education stated that the funds
     for Norfolk’s reimbursement request that would have included the indirect cost recovery
     were not drawn down from the Department until July 2010. Virginia Education asserted
     that, as of June 30, 2010, in aggregate, Norfolk requested less reimbursement for indirect
     cost recovery than it could have, and that a reduction for the unallowable indirect costs
     discussed in the report has been included in a subsequent Norfolk reimbursement request.

     OIG Response. Although Norfolk might have been able to claim reimbursement for
     more funds than it did, the indirect costs noted in the report that were claimed for
     reimbursement were overstated because Norfolk included capital outlay expenditures in
     its indirect cost recovery calculations. We commend Norfolk for proactively reimbursing
     the unallowable indirect costs.
Final Report
ED-OIG/A03K0008                                                                   Page 10 of 16

  4. In response to the finding subsection “Norfolk Allocated Expenditures to Incorrect State
     Object Codes,” Norfolk stated (through Virginia Education) that it did not include any of
     the purchases in question in its capital assets for financial reporting purposes, and that
     these items are not capital assets and are eligible for indirect cost recovery. Virginia
     Education asserted that the OMEGA system does not replace subrecipient financial
     systems or their financial system reporting. Therefore, the object code categorization in
     the OMEGA system should not be the absolute control for allowing indirect cost
     recovery on a controlled noncapitalized item in the subrecipient’s financial system.

     OIG Response. Even though Norfolk did not include the miscoded expenditures in its
     financial reporting, it did include some of the miscoded expenditures in its indirect cost
     recovery calculations. We agree that some of the items, which were coded as capital
     assets, were not capital assets and were eligible for indirect cost recovery; however, some
     were capital assets and were included in an indirect cost recovery calculation. In Virginia
     Education’s comments, Norfolk acknowledged that the expenditure coding data reported
     to Virginia Education through the OMEGA system could differ from its financial
     reporting, based on an internal review performed by Norfolk’s Fixed Asset Accountant.
     Therefore, the expenditure coding data input into the OMEGA system did not accurately
     represent the data reflected in Norfolk’s financial reporting. Because Virginia
     Education’s expenditure review process (which includes the review of indirect costs)
     relies on the OMEGA system, we agree that the OMEGA system should not be the
     absolute control for allowing indirect cost recovery. Virginia Education needs to perform
     additional fiscal monitoring to ensure LEAs are properly coding expenditures and
     including only allowable costs in indirect cost calculations.

  5. In response to our statement that “Virginia Education primarily relied on single audits by
     independent public accountants to monitor LEA expenditures,” Virginia Education stated
     that it relied and continues to rely on the OMEGA system as its primary first line
     monitoring tool for reviewing subrecipient Recovery Act expenditure reimbursement
     requests.

     OIG Response. We were informed by Virginia Education’s Director of Grants
     Accounting and Reporting that it relied on the single audits to monitor LEA expenditures.
     We do not dispute that Virginia Education also relies on the OMEGA system to monitor
     subrecipient reimbursement requests. However, because Virginia Education did not
     require LEAs to submit detailed supporting documentation with the reimbursement
     requests, using the OMEGA system as the primary monitoring tool was not sufficient.

  6. In response to our conclusion that single audits occurred well after payments were
     disbursed to the LEAs and were performed too late to ensure early detection of the
     inappropriate use of funds, Virginia Education stated that the single audits are generally
     completed by the fall/winter of the year audited, ensuring a timely review of a significant
     portion of expenditures.

     OIG Response. Although the single audit fieldwork may be completed by the fall/winter
     of the year being audited, the audit reports are not normally issued until nine months after
Final Report
ED-OIG/A03K0008                                                                     Page 11 of 16

       the end of the fiscal year, well after the funds have been spent. We believe that this
       amount of time does not allow for early detection of the inappropriate use of Recovery
       Act funds.

   7. In response to our statement that “Virginia Education did not review supporting
      documentation for the information entered into the OMEGA system, nor did it perform
      testing of the validity, accuracy, and allowability of the expenditures through fiscal
      monitoring activities,” Virginia Education stated that it does review the allowability of
      subrecipient Recovery Act expenditures through the OMEGA system. This review
      included vendor payments; check or voucher number; expenditure date, amount, and
      description; and total salaries and benefits. Virginia Education also stated that it ensures
      that the subrecipient acknowledged the online certification statement. Virginia Education
      stated that it provided us documentation of its planned Recovery Act data quality reviews
      of Virginia’s subrecipients, and that by April 2011, 36 percent of the on-site reviews had
      been conducted.

       OIG Response. Although Virginia Education did perform a review of subrecipient
       reimbursement requests submitted through the OMEGA system, the data submitted did
       not include enough detailed information to fully show that the expenditures were
       reasonable and allowable Recovery Act program expenditures. A review of vendor paid,
       check or voucher number, date, and general description is not adequate to determine
       whether the expenditure was reasonable and allowable. Expenditure descriptions can be
       misleading, and having only a vendor name or check number does not mean that the
       expenditure was proper. Although we agree it is good to require subrecipients to certify
       the data they submitted, subrecipient self-certification does not ensure that the data
       submitted are reasonable, allowable, and adequately supported program expenditures.
       We acknowledged Virginia Education’s on-site monitoring reviews in the report and
       stated that this process should assist Virginia Education in improving its fiscal
       monitoring.

Virginia Education’s comments included responses to the report’s recommendations. In
response to Recommendation 1.1, Virginia Education stated that it has conducted data quality
reviews and technical assistance visits at 47 LEAs to date in its efforts to continue its fiscal
monitoring of LEAs. In response to Recommendation 1.2, Virginia Education restated that it
had provided substantial guidance to LEAs regarding Recovery Act IDEA funds. In response to
Recommendation 1.3, Virginia Education reported that Norfolk’s overstated indirect costs have
been deducted from a subsequent reimbursement request. In response to Recommendation 1.4,
Virginia Education stated that it will provide a link to the final report to its LEAs.

OIG Response. Virginia Education’s response to Recommendation 1.1 directly addresses the
recommendation and should contribute to its timely monitoring and oversight of subrecipient
fiscal requirements. Virginia Education’s response to Recommendation 1.2 does not adequately
address the recommendation. We reiterate that Virginia Education should verify that the LEAs
that implemented the IDEA MOE flexibility option used Recovery Act IDEA funds for only
special education and related services. Virginia Education’s response to Recommendation 1.3
directly addressed the recommendation and we commend Norfolk for proactively returning the
Final Report
ED-OIG/A03K0008                                                                      Page 12 of 16

unallowable indirect costs. Virginia Education’s response to Recommendation 1.4 does not
adequately address the recommendation. While providing a link to the final audit report is an
adequate first step, Virginia Education should also actively communicate the finding issues with
its LEAs.

We did not modify our finding or recommendations based on Virginia Education’s comments.


                             SCOPE AND METHODOLOGY

The purpose of our audit was to determine whether (1) Virginia and selected subrecipients used
and accounted for Recovery Act funds in accordance with Recovery Act recipient plans,
approved applications, and other applicable laws and regulations, and (2) data reported by
Virginia were accurate, complete, and in compliance with Recovery Act reporting requirements.
Our audit covered the use of funds and the quality of data submitted to FederalReporting.gov for
Recovery Act funds for the Title I, IDEA, and SFSF grants.

We obtained background information about the programs, activities, and organizations being
audited. To gain an understanding of the requirements applicable to use of funds and data
reporting requirements for Federal grant programs at State and local agencies receiving Recovery
Act funds, we reviewed Federal laws, regulations, OMB Circulars, and Recovery Act guidance
issued by OMB and the Department. We reviewed prior Virginia Comprehensive Annual
Financial Reports, prior independent audit reports, and applications for Recovery Act funds
submitted by the LEAs to Virginia Education and by Virginia Education to the Department.

To gain an understanding of the processes and systems pertaining to the scope of our review, we
interviewed the following officials at Virginia Education: Director of Grants Accounting and
Reporting; Director of Business and Risk Management; Coordinator of Compliance and
Strategic Planning; Senior Controller; Senior Director of Accounting; Senior Director of Special
Education; Human Resource Manager; and administrators for Title I and IDEA. At the LEAs,
we interviewed officials responsible for each Recovery Act program. In addition, for the SFSF
Government Services grant, we interviewed Virginia’s Assistant Director of Financial Reporting.

We performed audit steps to determine whether Virginia complied with Federal requirements in
the following areas:

Use of Funds: We performed limited assessments of the three selected LEAs’ policies and
procedures by selecting a judgmental sample of personnel and nonpersonnel expenditure
transactions at each LEA to determine whether expenditures charged to Recovery Act grants
complied with Recovery Act recipient plans, approved applications, laws, regulations, and
guidance. We selected 78 transactions totaling more than $29.5 million for the period
February 17, 2009, through June 30, 2010. The personnel transactions at two of the LEAs
reviewed were generally consistent, so we selected at least 25 percent of the total costs. At one
Final Report
ED-OIG/A03K0008                                                                               Page 13 of 16

LEA, we could review only three personnel transactions. 5 We also reviewed personnel files,
time and effort certifications, and personnel activity reports.

For nonpersonnel expenditures, we reviewed each LEA’s universe of transactions, including
dollar amounts and expenditure descriptions. We judgmentally selected expenditures for large
dollar purchases of goods and services and expenditures with descriptions that appeared to have
had questionable grant charges. We considered whether these expenditures were specifically
prohibited under the Recovery Act. The personnel and nonpersonnel costs and transactions
selected for testing are summarized in Table 2 at the end of this report section.

We reviewed Virginia Education’s procedures for approving and accounting for Recovery Act
expenditures and issuing expenditure reimbursements to LEAs. We also reviewed Virginia
Education’s ability to separately account for Recovery Act funds. We discussed the monitoring
of LEAs with Virginia Education officials and reviewed guidance provided by Virginia
Education to LEAs about compliance with Recovery Act requirements. We obtained
information regarding the internal control structure at the State and local level through interviews
with administrators and through reviews of policies, procedures, and related documentation.

We reviewed the use of and accounting for SFSF Government Services funds at two sheriffs’
offices, Prince William County and Fredericksburg County, that received $978,114 of the
$218 million6 awarded to the State. We judgmentally selected the sheriffs’ offices that received
the smallest SFSF Government Services awards. To conduct our review, we obtained supporting
documentation for the payroll transactions for the month of February 2010 for Prince William
County and the month of September 2009 for Fredericksburg County sheriffs’ offices. 7 We
reviewed all 35 transactions, totaling $797,388, from the Prince William County sheriff’s office
and all 11 transactions, totaling $180,726, from the Fredericksburg County sheriff’s office. To
test personnel costs, we reviewed computer-generated records and supporting documentation
provided by Virginia’s Compensation Board. We verified employment and confirmed that the
employees were paid with SFSF Government Services funds by comparing payment transactions
to the State’s salary report. We also reviewed the transactions for timeliness to verify that the
payroll expenditures occurred prior to the reimbursements.

Data Quality: We reviewed Virginia Education’s procedures to collect and report the required
data for Section 1512 reporting. We verified that LEA data submitted to Virginia Education
were supported by source documentation. Lastly, we used Virginia Education’s data as control
totals to verify the accuracy and completeness of the statewide LEA data and the aggregate
recipient data.

To achieve our audit objectives, we relied, in part, on computer-processed data provided by
Virginia Education and the three selected LEAs. We assessed the reliability of computer-
processed data by comparing the reimbursement data from OMEGA to amounts for “total federal

5
  Because Henrico County had only three personnel expenditures funded by the Recovery Act during our audit
period, we selected all three.
6
  All $218 million in SFSF Government Services funds were expended for payroll costs.
7
  We selected only one month per office because the same personnel were paid with SFSF Government Services
funds for the entire fiscal year.
Final Report
ED-OIG/A03K0008                                                                                          Page 14 of 16

Recovery Act expended” and “total federal Recovery Act received” in the quarterly reports. For
“jobs funded,” we reviewed supporting documentation and traced the data from origination to its
posting on FederalReporting.gov. To determine whether the data were accurate, complete, and
in compliance with Recovery Act reporting requirements, we reviewed supporting documents
provided by Virginia Education and LEAs. We then compared the data reported by Virginia
Education with data queries we extracted from FederalReporting.gov. Based on our testing, we
determined that the computer-processed data used were sufficiently reliable for the purposes of
this audit.

We conducted fieldwork at Virginia Education’s office in Richmond, Virginia, in July 2010. 8
We also conducted fieldwork at Fairfax County, Henrico County, and Norfolk from August 2010
through October 2010. We held an exit conference with Virginia Education officials to discuss
the results of the audit on March 15, 2011.

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




8
    During our fieldwork at Virginia Education, we obtained sheriffs’ offices expenditure information.
Final Report
ED-OIG/A03K0008                                                                         Page 15 of 16



Table 2: Universe and Sample Selection of Recovery Act Costs and Transactions by Grants and LEAs
                                                     Personnel Costs                           Nonpersonnel Costs
              LEA                                                                                                                   Total
                                      SFSF Education        Title I     IDEA        SFSF Education       Title I      IDEA
        Fairfax County
                        Total Costs     $21,926,638       $5,099,104   $9,435,078                       $145,590     $2,087,790   $38,694,200
     Total Transactions in Universe          20               66           14            N/A               74           268           442
    Expenditure Amounts Selected         $5,056,608       $2,031,335   $4,312,350                       $61,950       $420,231    $11,882,474
   Number of Transactions Selected            4               10           4                               9             13            40
        Henrico County
                        Total Costs     $8,964,763                      $3,326                             $0        $712,690     $9,680,779
     Total Transactions in Universe         1                N/A          2              N/A               0            54            57
    Expenditure Amounts Selected        $8,964,763                      $3,326                             $0        $214,418     $9,182,507
   Number of Transactions Selected          1                             2                                0            7             10
             Norfolk
                        Total Costs     $19,014,335       $2,930,882    $96,807                         $954,182     $1,905,422   $24,901,628
     Total Transactions in Universe         16               403          18             N/A              289           593           1319
    Expenditure Amounts Selected        $7,076,013         $92,151      $74,988                         $631,558      $589,911     $8,464,621
   Number of Transactions Selected           2                4            2                               7             13            28
              Total
                       Total Costs      $49,905,736       $8,029,986   $9,535,211                       $1,099,772   $4,705,902   $73,276,607
    Total Transactions in Universe          37               469           34            N/A               363          915          1,818
    Expenditure Amounts Selected        $21,097,384       $2,123,486   $4,390,664                        $693,508    $1,224,560   $29,529,602
   Number of Transactions Selected           7                14           8                                16           33            78
Final Report
ED-OIG/A03K0008                                                   Page 16 of 16




               Anyone knowing of fraud, waste, or abuse involving
                U.S. Department of Education funds or programs
            should call, write, or e-mail the Office of Inspector General.

                                      Call toll-free:
                    The Department of Education’s mission is to promote
                              The Inspector General Hotline
              student achievement and preparation for global competitiveness
                           1-800-MISUSED (1-800-647-8733)
               by fostering educational excellence and ensuring equal access.
                                       Or write:
                                      www.ed.gov
                               Inspector General Hotline
                             U.S. Department of Education
                              Office of Inspector General
                             400 Maryland Avenue, S.W.
                                Washington, DC 20202

                                       Or e-mail:
                                   oig.hotline@ed.gov

              Your report may be made anonymously or in confidence.


          For information on identity theft prevention for students and schools,
            visit the Office of Inspector General Identity Theft Web site at:
                                  www.ed.gov/misused




                    The Department of Education’s mission is to promote
              student achievement and preparation for global competitiveness
               by fostering educational excellence and ensuring equal access.

                                       www.ed.gov
                                                   Enclosure
                                                      Page 1 of 8




                                 COMMONWEALTH of VIRGINIA
    Patricia I. Wright, Ed.D.               DEPARTMENT OF EDUCATION                             Office: (804) 225-2023
Superintendent or Public Instruction                P.O. BOX 2120                                  Fax: (804) 371-2099
                                             Richmond.   Virginia 23218-21:!O


                                                  May 9. 2011



           Mr. Bernard TadJey
           Regional Inspector General Audit
           Region III
           U.S. Department of Education
           The Wanamaker Building
           100 Penn Square East, Suite 502
           Philadelphia, Pennsylvania 19107


           Dear Mr. Tadley:


                     Attached is the Virginia Department of Education's (VDOE) response to the preliminary
           copy of your audit report entitled Virginia: Use of Funds and Data Quality for Selected
           American Recovery and Reinvestment Act (ARRA) Programs, Audit Control Number ED­
           OIG/A03K0008. The preliminary audit report was sent to VDOE on Tuesday. April 26. 2011.
           under the expedited issuance process for audit reports related to ARRA In accordance with the
           expedited issuance process, we are providing our response in time for the May 10, 2011.
           deadline.


                     VDOE disagrees with the finding as stated in the preliminary audit report. Based on the
           clarification provided in the attachcd rcsponse document, we believe the finding should be
           withdrawn.


                     Thank you for the opponunity to respond to this preliminary audit report. We look
           forward to our continued collaborative relationship in the future.


                                                  Sincerely,




                                                  Patricia I. Wright


           PIWIKHLlcle


           Attachments
                                           Enclosure
                                               Page 2 of 8




  Virginia Response to U.S. Department of Education (USED) Office of Inspector General (OIG)
               Findings Related to Virginia Use of Funds & ))ata Quality for Selected
                     Americllll H.ccovcry & Reinvestment Act (ARRA) Programs




Preliminary Finding No. I: Virginia Needs to Improve its Fiscal Monitoring Over Recovery Act
Funds.


The Virginia Department of Education (VDOE) respectfully disagrees with the finding (and
accompanying narrative) as stated. Of the $29,529,602 expenditures selected (page I I ) for sample. 72%
were State Fiscal Stabilization funds. from which there were no audit findings.   Additionally, the Finding
and Recommendations section does not fully reneet the steps taken by Virginia to ensure fiscal
mon itoring and compliance with selected ARRA funds. Virginia has used a four-step review process for
monitoring fiscal compliance with the ARRA as follows:


    I.   Review of the planned used of funds


    Prior to VDOE making the ARRA funds available for reimbursement, each subrecipient submitted a
    plan (application/annual plan/budget request) for use of funds that had to be reviewed for al10wability
    and approved by program specialists at VDOE.


    2.   Review of ARRA reimbursement requests


    As per the Virginia Cash Management Agreement with the U.S. Treasury, VDOE is reimbursemerll
    based for the subrecipients of federal education grants, meaning federal funds are not
    drawn/expended from USED until requests for reimbursement are disbursed to the subrccipients.
    "Reimbursement" also means each subrecipient records federal expenditure throughout the grant
    period and receives ·'federal" funds in arrears once requests for reimbursement are submitted,
    approved, and disbursed.


    VOOE requires each subrecipient oflhe ARRA education grant awards to submit requests for
    reimbursement of funds through use of its Online Management of Education Grant Awards
    (OMEGA) system. The details of reimbursement requests are compared to the subrecipients'
    approved planned use of funds while being reviewed for allowability and validity by VDOE prior to
    disbursement of funds. Through OMEGA, the subrecipient also certifies allowable use of funds and
    availability of back-up documentation. VDOE's primary fiscal monitoring mechanism is the review
    that occurs through OMEGA.


    3.   OMB 133 Audits


    The new Catalog of Domestic Assistance Numbers created for each ARRA education award triggered
    new programs for auditing purposes. These Ilew programs/revenue streams represent "high risk" to
    auditors as per section .520 (e) of the A-I33 Compliance Supplement. As a result of the "high risk"
    of ARRA programs, the fiscal year 20 I 0 independent audits of Virginia localities included the ARRA
    grants. These audits are timely when the grants are processed on a reimbursement basis, especially
    when it is taken into account that less than one-third of the Title I ARRA (CFDA 84.389) and IDEA
    ARRA (CFDA 84.391) funds were drawn from USED as of the ARRA reporting quarter ended June



                                                     1
                                               Enclosure
                                                   Page 3 of 8




         30,2010. These audits have helped to assure the accuracy of ARRA reporting, validity and
         allowability of expenditures, and local controls on ARRA funding.

         4.   Recovery Data Quality Review Process

         VDOE planned an on-site ARRA data quality review process prior to the OIG audit and implemented
         the process during the audit by OIG. The process includes: sampling fiscal documentation of every
         ARRA grant reimbursed. collecting copies of the supporting documentation to ensure the accuracy
         and validity of OMEGA reimbursement requests as well as reviewing the most current OMB-133
         audit outcomes for the subrecipients under review. Included in this subrecipient review are
         discussions identifying both best practices and potential process improvements.

     The tables that follow list the statements made by the OIG in the Preliminary Audit Report and VDOE
     clarifying statements:



 Preliminary Audit OIG Audit Report                                VDOE Clarifying Statement
               Statcmcnt
Page 4 of 12: "Fairfax County c.xpcnded     As of June 30, 20 I O. Fairfax County incurred a total of$15.92
$4.75 million in Recovery Act IDEA          million in allowable Recovery Act IDEA expenditures.
funds for non-special education programs
from July I, 2009, through March 31,        During the audit period ending June 30, 20I 0, Fairfax County was
2010."                                      reimbursed for$J 1.52 million of Recovery Act IDEA funds for
                                            expenditures through March 31,20 I 0 (only$11.52 million was
                                            drawn from USED's GS system for Fairfax County as of June 30,
                                            20 I 0 - which is confirmed in the Recovery Act Reports as of June 30,
                                            2010).

                                            During the month of June 20 I 0 Fairfax identified an error in their
                                            interpretation of the USED ARRA IDEA guidance,which resulted in
                                            their recognition of $4.75 million requested for reimbursement in
                                            error. Shortly thereafter. Fairfax County recognized$4.75 million of
                                            allowable costs for IDEA Recovery Act funds that were incurred and
                                            not reimbursed as of June 30, 20 I O. The expenditure correction was
                                            recorded within a subsequent reimbursement request submitted to
                                            VOOE. The net impact of the error was $0 for federal ARRA funds.

                                            See attached Leiter dated May 6,2011 from Fairfax County.
Page 5 of 12: "Therefore, Virginia          Substantial guidance has been provided to LEAs regarding Recovery
Education nceds to provide clear            Act IDEA funds to be used only for special education and related
guidance to its LEAs to ensure Recovery     services. Much of this information is summarized at:
Act IDEA funds are being used
appropriately."                             h tt[!:llwww .II oc.v irci11ill.l:0v1stho o l finan('C/ll rnl/idcalin d ex.sh t m 1

                                            VOOE used direct links to written guidance provided by OSEP. This
                                            methodology ensures that LEAs are given the most accurate and
                                            timely guidance available. In addition, guidance on requirements
                                            related to Recovery Act IDEA funds was provided by VDOE to
                                            LEAs through phone conferences and in-person training sessions.



                                                           2
                                                    Enclosure
                                                       Page 4 of 8




     Preliminary Audit OIG Audit Report                                  VDOE Clarifying Statement
                     Statement
Page 5 of 12: "Norfolk incorrectly included             A review of the $3,885,064 total reimbursed and reported as
capital outlay expenditures in its indirect cost        of June 30, 20I 0, for ARRA Title I funds for Norfolk showed
calculations.                                           that, in the aggregate, Norfolk requested reimbursement for
Norfolk incorrectly included $7 2,60 4 of capital       less indirect cost recovery than they were allowed. The
outlay expenditures in its indirect cost                analysis of this data has been sent to OIG.
calculations that resulted in incorrectly charged
indirect costs of $2,904. Norfolk submitted a           The reimbursement related to this finding by OIG was neither
reimbursement request for Recovery Act Title I          expended at the state level nor drawn from USED until July
funds for $94,587 thaI resulted in reimbursed           of2010, and was not part of the June 30,2010, ARRA
indirect costs of $3,784. The reimbursement             reports.
request should have reflected $21,983 in eligible
expenditures for the calculation of indirect costs,     The over recovery in the July 20 I 0 expenditure
resulting in the reimbursement of $879 for              reimbursement has been included as a reduction to Norfolk in
indirect costs"                                         a subseQuent reQuest for reimbursement.
Page 5 of 12: "Of the IS Recovery Act IDEA              OMEGA is designed to allow subrecipients to request
expenditures sampled, six expenditures for              reimbursement for expenditures of federal funds. Use of
materials and supplies were incorrectly allocated       budgeting to the major federal object codes is required to
as equipment/capital outlay, including 3 office         allow reviewers of requests to locale programmatic approval
chairs and miscellaneous office supplies. In            of use of funds in the related application for funds and budget
addition, Norfolk incorrectly bundled the cost of       transfers. OMEGA does not replace local financial systems,
multiple items resulting in additional                  nor do the object code budgets in OMEGA supersede
misallocated expenditures. Some of these                subrecipient financial system reporting. Norfolk Public
misallocations had an impact on the indirect cost       Schools (NPS) provided additional information as follows:
calculations because expenditures allocated to          " ... It is NPS's practice to code all equipment andfurniture
equipment/capital outlay cannot be claimed in           purchases, 110 matter what the dollar value to objeci codes
the calculation of indirect costs ... As a result of    8100-8220. Our fixed asset accountant then reviews each
misallocated expenditures, VDOE cannot ensure           and every item lhal is purchased under these objeci codes 10
that the LEAs complied with Federal fiscal              make a delerminaJio11 of whether or 110t an item should be
requirements related to use of and accounting for       added to ollr inventory for cOnlrol purposes (which is the firsl
Recovery Act funds."                                    decision) alld whelher or 1101 il should be considered a
                                                        capilal asset and depreCiated (the second pari of Ihe
                                                        decision).   NPS only capitalizes ilems which are more than
                                                        S5,000 and in fact did 1101 include any ofthe fumiture or
                                                        equipmenl ill queslioll in our capilal assels for financial
                                                        reporting purposes. Therefore,for indirect cost purposes,
                                                        these items shoufd not be considered capi/al assets at all and
                                                        should be eligible for indirect COsl recovery.. ,


                                                        Consequently, the object code categorization in OMEGA
                                                        should not be the absolute control on allowing indirect cost
                                                        recovery on an item that is controlled but not capitalized in
                                                        the subrecioient's financial system.
Page 7 of 12: "Virginia Education relied on             VDOE used and continues to rely on OMEGA as the primary
single audits by independent public accountants         first line monitoring tool for reviewing expenditure
to monitor LEA expenditures."                           reimbursement requests from its subrecipients for the ARRA
                                                       I grants audited by OIG.
                                                             3
                                                   Enclosure
                                                        Page 5 of 8




     Preliminary Audit OIG Audit Report                                       YDOE Clarifying Statement
                   Statement
Page 7 of 12: "These single audits occurred well         The Virginia ARRA grants are available for reimbursemenl
after payments were disbursed to the LEAs and            over a time period of27+ months, encompassing three State
were performed   100   late to ensure early detection    fiscal years. As of 6/30/20 I 0, only28% of the Tille I Part A
of the inappropriate use of funds."                      ARRA funds, 27% of the IDEA 6 1 1 ARRA funds, and 44%
                                                         of State Fiscal Stabilization Funds (Education) had been
                                                         requested for reimbursement and drawn from USED's G5
                                                         system. For the ARRA reporting cycle ending June 30, 20 I 0,
                                                         88% of the funds drawn by VDOE for the selected ARRA
                                                         grants were reimbursed to LEAs in the latter half(January
                                                         through June) of the fiscal year, at a time when many of the
                                                         local audits were being planned. The local audits are
                                                         generally completed by the fall/winter of the year audited,
                                                         ensuring a timely review of the significant portion of
                                                         eXDenditures.
Page 7 of 12: " ... Virginia Education did nOI           VDOE reviewed the allowability of the ARRA expenditures
review supporting documentation for the                  via review of the detailed expenditure information collected
information entered into OMEGA, nor did it               in OMEGA (including: vendor paid, check/voucher number,
perform testing oflhe validity, accuracy, and            date of expense, amount of expense, description of expense,
allowability of the expenditures through fiscal          and totals of time period salaries and benefits expended) and
monitoring activities."                                  acknowledgement of the divisions' online certification
                                                         statement:

                                                         �NAME PBLC SCHS hereby claims reimbursement of disbursement made
                                                         duri ng the period MM/DD/YYYY to MM /DD/VYY under the provisions of the
                                                         program or grant indicated above. This Is to c erti fy that the expen ditures
                                                         listed In the reimbursement have been paid In accordance with the
                                                         federal/state polici es and/or regulations of Virginia Board of Education. It
                                                         further certifies that documentation has been retained in the office of the
                                                         educational agency/organization and Is available upon request to support
                                                                                                           j
                                                         the c lai m. It Is understood that this claim Is sub ect to federal andlor state
                                                         audits.W



                                                         Additionally, at the time of the audit, VOOE provided
                                                         documentation for planned Data Quality Reviews of
                                                         Virginia's subrecipients. These reviews began i n September
                                                         of20 I 0, as the amount of data available for review was
                                                         limited through June 30, 20 I 0, due to the close of the fiscal
                                                         year and the timing of local audits. Included in the reviews
                                                         are collections of back up documentation for a sample set of
                                                         every ARRA CFOA reimbursed                 10   the subrecipient to ensure
                                                         accuracy and validity.         By April26, 2011, the date of the
                                                         OIG Preliminary Audit Report, 36% of the ARRA on-site
                                                         visits of the LEAs had occurred.




                                                               4
                                                  Enclosure
                                                     Page 6 of 8




    Preliminary Audil DIG Audit Report:                                     VDOE Response
1.1. Continue to implement risk-based fiscal          VOOE is performing and will continue to perform ARRA
    monitoring procedures that provides timely        data quality reviews and technical assistance visits in the sub
    oversight of LEA compliance with fiscal           recipient LEAs receiving ARRA funds. As of the date of the
    requirements related to the appropriate usc of    Preliminary Audit Report, Data Quality site visits had
    and accounting for Recovery Act IDEA and          occurred at47 LEAs. Within the first sites visited, were
   Title I funds.                                     those LEAs with the highcst risk scores from the VOOE risk
                                                      assessment matrix.


1.2. Verify for all LEAs that implemented the         Substantial guidance has been provided to LEAs regarding
    IDEA MOE nexibility option, that the              Recovery Act IDEA funds to be used only for special
    Recovcry Act IDEA funds were used only            education and related services.
    for special education and related services:


1.3. Ensure that the funds that were over             The over allocated indirect cost recoveries have been
    allocated for indirect costs are returncd; and    deducted From a subsequent reimbursement.


104. Provide information on the Gildings              A link to the final audit report will be provided to the LEAs.
    contained in this report to all LEAs within
    Virginia.




                                                           5
                                      Enclosure
                                         Page 7 of 8




                                                                        Office of the Comptroller
FAIRFAX COUNTY                                                           8115 Gatehouse Road
PUBLIC SCHOOLS                                                Falls Church, Virginia 22042-1203




                                            May 6, 2011




Mr. Kent Dickey
Deputy Superintendent for Finance and Operations
Virginia Department of Education
P.O. Box 2120
Richmond, VA 23218-2120


RE: Preliminary Audil Report ED-OIG/A03KOO08

Dear Mr. Dickey:

Fairfax County Public Schools (FCPS) is in receipt of the Virginia: Use of Funds and Data
Quality for Selected American Recovery and Reinvestment Act Programs Preliminary Audit
Report conducted by the U.S. Department of Education, Office of the Inspector General.

The e-mail communication sent by Bernard Tadley, Regional Inspector General for Audit, on
April 26. 2011. to Patricia Wright at Virginia Department of Education. provides an opportunity
for the LEA's who were reviewed to comment on the report.

FCPS comments are as fonows:

       FCPS does not agree with the paragraph header stating "Fairfax County Improperly
       Spent Recovery Act IDEA Maintenance of Effort Flexibility Option Funds· or with the use
       of the word �expended" in the first sentence of the first paragraph of the Preliminary
       Audit report, both located on page 4. Readers of the report might interpret that FCPS
       improperly expended funds, which we believe Is Incorrect.

       FCPS misinterpreted the eligible expenditure reimbursement guidelines provided by the
       Virginia Department of Education under the Recovery Act and IDEA MOE option. The
       expenditures. originally claimed for reimbursement, were properly expended by the
       school division. However. upon further guidance from the Virginia Department of
       Education, it was determined the expenditures did not qualify for reimbursement.

FCPS wou ld like to propose the following revisions:

       In the paragraph header, page 4, change header to "Fairfax County Improperly Claimed
       for Reimbursement Recovery Act IDEA Maintenance of Effort Flexibility Option Funds·.
                                      Enclosure
                                         Page 8 of 8




Mr. Kent Dickey
Virginia Department of Education
Page 2
May 5, 2011


        In the first sentence of the first paragraph, under the above heading, page 4, change
        sentence to MFairfax County improperly claimed reimbursement of $4.75 million in
        Recovery Act IDEA funds,.,�,

Thank you for your consideration of the proposed revisions. If you have any questions, please
contact                 , grants compliance officer, at 571-423-3746.

                                             Sincerely,




                                             �eir Zupovitz
                                             Comptroller

MZ:bz

Enclosures

cc: D. A nglada
         '



    W. Jennings