oversight

Puerto Rico Department of Education Award and Administration of Personal Services Contracts

Published by the Department of Education, Office of Inspector General on 2011-01-24.

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

        Puerto Rico Department of Education’s Award and
          Administration of Personal Services Contracts


                                 FINAL AUDIT REPORT




                                    ED-OIG/A04J0005
                                      January 2011


Our mission is to promote the                         U.S Department of Education
efficiency, effectiveness, and                        Office of Inspector General
integrity of the Department's                         Atlanta, Georgia
programs and operations.
                               NOTICE
Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions of the
Office of Inspector General. Determinations of corrective action to be taken,
including the recovery of funds, will be made by the appropriate Department of
Education officials in accordance with the General Education Provisions Act.

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

                                                                                                                           Audit Services
                                                                                                                              Region IV

                                                                 January 24, 2011

                                                                                                                 Control Number
                                                                                                               ED-OIG/A04J0005

Honorable Jesús Rivera Sánchez
Secretary of Education
Puerto Rico Department of Education
Post Office Box 190759
San Juan, Puerto Rico 00919-1759

Dear Secretary Rivera:

Enclosed is our final audit report, Control Number ED-OIG/A04J0005, entitled Puerto
Department of Education’s Award and Administration of Personal Services Contracts. This
report incorporates the comments you provided in response to the draft 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:

                                           Thelma Meléndez de Santa Ana
                                           Assistant Secretary
                                           Office of Elementary and Secondary Education
                                           U.S. Department of Education
                                           400 Maryland Avenue, S.W.
                                           Washington, DC 20202

                                           Brenda Dann-Messier
                                           Assistant Secretary
                                           Office of Vocational and Adult Education
                                           U.S. Department of Education
                                           400 Maryland Avenue, S.W.
                                           Washington, DC 20202

                                           Kevin Jennings
                                           Assistant Deputy Secretary
                                           Office of Safe and Drug-Free Schools
                                           U.S. Department of Education
                                           550 12th Street, S.W., 10th Floor
                                           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.
                                           Phillip Maestri
                                           Director
                                           Risk Management Service
                                           U.S. Department of Education
                                           400 Maryland Avenue, SW
                                           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.

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

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/
                                                                 Denise M. Wempe
                                                                 Regional Inspector General for Audit

Enclosures




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



                                                                                                                                 Page


EXECUTIVE SUMMARY ...........................................................................................................1

BACKGROUND ............................................................................................................................3

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

          FINDING NO. 1 – PRDE Lacked Adequate Internal Controls to
                          Ensure Compliance with State and Federal Laws .........................4

          FINDING NO. 2 – PRDE Lacked Sufficient Controls to Ensure that
                          Contract Services Were Allowable and Adequately
                          Supported.........................................................................................12

          FINDING NO. 3 – PRDE Did Not Maintain Adequate Information to
                          Reconcile Data in its Financial Accounting and
                          Payment Systems .............................................................................20

OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................................22

ENCLOSURE 1 - Details of Errors in Contract Compensation Rates Paid ..........................26

ENCLOSURE 2 - PRDE Comments.………………………………………………………… 29
                   Acronyms/Abbreviations/Short Forms Used in this Report

ASF                          Auxiliary Secretariat of Finances

ASHR                         Auxiliary Secretariat of Human Resources

ASUME                        Administración para el Sustento de Menores
                             (Commonwealth of Puerto Rico Child Support Administration)

C.F.R.                       Code of Federal Regulations

Comptroller’s Office         Commonwealth of Puerto Rico Office of the Comptroller

Department                   U.S. Department of Education

ED-OIG                       U.S. Department of Education / Office of Inspector General

FLSA                         Fair Labor Standards Act

Hacienda                     Departamento de Hacienda del Estado Libre Asociado de Puerto Rico
                             (Treasury Department of the Commonwealth of Puerto Rico)

IP                           Irregular Personnel

OESE                         United States Department of Education, Office of Elementary and
                             Secondary Education

OFA                          Office of Federal Affairs

OSDFS                        United States Department of Education, Office of Safe and Drug-Free
                             Schools

OSIATD                       Oficina de Sistemas de Información y Apoyo Tecnológico a la Docencia
                             (Office of Information Systems and Technological Support to the Teaching
                             Personnel)

OVAE                         United States Department of Education, Office of Vocational and Adult
                             Education

PRDE                         Puerto Rico Department of Education

PRIFAS                       Puerto Rico Integrated Financial Accounting System

PSCs                         Personal Services Contracts

SEPI                         Sistema de Empleados Parciales e Irregulares
                             (System for Part-Time and Irregular Employees)

SES                          Supplemental Educational Services

SIFDE                        Sistema de Información Financiera del Departamento de Educación
                             (Financial Information System of the Department of Education)

TAL                          Time, Attendance and Licenses system
Final Report
ED-OIG / A04J0005                                                                                      Page 1 of 29


                                         EXECUTIVE SUMMARY


The objectives of the audit were to determine whether the Puerto Rico Department of Education (PRDE)
followed State and Federal laws in awarding personal services contracts and in ensuring that those
services were allowable and adequately supported. Our review covered 61 personal services contracts
(PSCs) and payments for services provided during the period of August 29, 2005, through June 30, 2009.

PRDE lacked sufficient controls to ensure compliance with State and Federal laws in awarding PSCs and
in ensuring that those services were allowable and adequately supported. Further, PRDE did not provide
the contracts and supporting documentation for 8 of the 61 PSCs selected for review and one contract
amendment. As a result, we could not determine compliance with State and Federal laws for those eight
contracts nor could we determine whether the services were for allowable purposes.

PRDE did not maintain sufficient documentation supporting compliance with the award process. Based
on our review of PSCs, we found that PRDE did not—

    •   provide all requested contracts for review;
    •   sufficiently document compliance with the award process; and
    •   adequately safeguard contract documentation.

In addition, we found deficiencies in PRDE’s contracts and amendments.

We identified a total of $164,914 in questioned costs related to—

    •   inadequate support for $147,652 of $459,609 paid for services provided;
    •   payments totaling $9,109 for services provided prior to contract approval;
    •   payments totaling $3,650 for hours in excess of contracted hours; and
    •   payments totaling $4,503 for errors in contract compensation rates paid.

Without adequate and reliable documentation in support of payments, PRDE cannot ensure that the
services were allowable.

PRDE also did not maintain adequate information to reconcile data in its financial accounting and
payment systems. Specifically, the total expenditures recorded in PRDE’s financial accounting system 1
for PSCs paid with U.S. Department of Education (Department) funds were about $15 million less than
the total payments recorded in PRDE’s paper-based payment system and the Part-Time and Irregular
Employees System (SEPI). 2 PRDE failed to provide reliable expenditure data that reconciled with
payment data for $161,527,366 in payments made during calendar years 2006 through 2008, and did not

1
  PRDE’s financial accounting system includes Puerto Rico Integrated Financial Accounting System (PRIFAS) and PRDE’s
Financial Information System (SIFDE). SIFDE is the acronym for the name of the system that replaced PRIFAS in August 20,
2007, “Sistema de Información Financiera del Departamento de Educación.”
2
  SEPI is the acronym for the name of a system implemented by PRDE to manage PSCs “Sistema de Empleados Parciales e
Irregulares.”
Final Report
ED-OIG / A04J0005                                                                                       Page 2 of 29

maintain a registry of PSCs corresponding to $159,474,554 in payments made through its paper-based
payment system. As a result, we could not validate the number of awarded PSCs associated with the total
payments to reconcile the expenditure data.

Based on the results of our review, we consider PSCs a high-risk contracting vehicle. We recommend
that the Assistant Secretary for the Office of Elementary and Secondary Education (OESE), in
collaboration with the Assistant Secretary for the Office of Vocational and Adult Education (OVAE) and
the Assistant Deputy Secretary for the Office of Safe and Drug-Free Schools (OSDFS), require PRDE
to—

       •   Develop and implement internal controls over PSC records and related documentation that support
           compliance with regulations and payments.
       •   Either provide adequate and reliable documentation of unsupported payments and contracts or
           refund the unsupported amount to the Department.
       •   Return to the Department questioned costs related to services provided before the contract was
           approved, payment for hours in excess of contracted hours, and payment for errors in contract
           compensation rates.

We also recommend that the Director of the Department’s Risk Management Service require PRDE to—

       •   Reconcile the $15 million discrepancy between PSC expenditures paid with Department funds,
           recorded in PRDE’s financial accounting system with payment data from its payments system and
           SEPI; have an independent audit office or CPA firm assess PRDE’s reconciliation and issue an
           opinion on its accuracy; and return to the Department all of the amounts that cannot be reconciled.
       •   Record all PSCs awarded in a centralized registry of PSCs.

In response to our draft audit report, PRDE disagreed with Findings No. 1 and 2 and the related
recommendations but concurred with Finding No. 3 and the related recommendations. PRDE contended
that it has an adequate archiving system for PSCs and supporting documentation. According to PRDE, it
recently implemented a new policy and process for the award of PSCs that strengthen internal controls
over PSCs and ensures that PSCs are awarded in compliance with Federal and State laws. PRDE
requested that the audit report’s findings be reconsidered and revised and that the recommendations for
repayment be withdrawn. We considered PRDE’s response but did not significantly change our findings
and recommendations. We maintain that without the proper implementation and enforcement of
sufficient internal controls, PSCs are a high-risk contracting vehicle.

We summarized and responded to specific PRDE comments at the end of each finding. PRDE’s written
comments included two attachments − Attachment A and Attachment B. Except for Attachment B, which
included personally identifiable information, 3 the entire narrative of PRDE’s comments is included as
Enclosure 2 to this report.




3
    Personally identifiable information is protected under the Privacy Act of 1974 (5 U.S.C. § 552a).
Final Report
ED-OIG / A04J0005                                                                                       Page 3 of 29



                                                BACKGROUND


Under various Puerto Rican laws, the Puerto Rico Department of Education (PRDE) is authorized to
award personal services contracts (PSCs) to any individual including its employees, former employees,
and employees from other agencies and from public corporations of the government of Puerto Rico.
PRDE enacted Regulation Number 6820 4 to establish the criteria for awarding PSCs that provide certain
services either not provided through regular work programs or required for exceptional situations. PSCs
awarded for services that cannot be provided during regular work programs include those needed to carry
out special projects such as after-school and summer school programs. PSCs awarded under exceptional
situations include those needed to process backlogs of invoices from third-party contractors or to manage
the relocation of administrative offices to another site.

On July 1, 2008, PRDE integrated a newly developed system known as the Part-Time and Irregular
Employees System (SEPI), 5 to its existing Time, Attendance, and Licenses system (TAL) 6 to (1) store
information on PSCs awarded and (2) calculate payments for services rendered based on time and
attendance information recorded and approved electronically through TAL. To process the payments
through SEPI, individuals with PSCs record their time and attendance in TAL by scanning their
fingerprints in biometrical terminals located at their worksites. SEPI then calculated the payment
information, which PRDE transferred electronically to the Puerto Rico Department of Treasury
(Hacienda). 7 Hacienda then issued the corresponding payments to the contractors concurrently with the
payments it made to PRDE’s regular employees.

Before implementing SEPI, PRDE relied on paper-based processes to award PSCs and issue payments for
services provided. Hard copy contracts were approved by officials with delegated responsibility from
PRDE’s Secretary. Upon approval, the contract information was recorded in a payment system developed
by PRDE’s Information Systems Division’s Computer Center. 8 Individuals with PSCs were required to
sign hard copy time and attendance sheets that were approved by assigned supervisors who certified that
the services were rendered.

According to payment data provided by PRDE, during the period of January 1, 2006, through December
31, 2008, PRDE paid about $161,527,366 in PSCs funded with U.S. Department of Education
(Department) funds— $159,474,554 9 paid through its paper-based payment system and $2,052,812 paid
through SEPI.


4
  Regulation 6820, “Regulation for the Contracting of Personal Services of the Department of Education” as amended on June
3, 2004.
5
  SEPI is the acronym for the name of a system implemented by PRDE to manage PSCs “Sistema de Empleados Parciales e
Irregulares.”
6
  PRDE implemented TAL on September 1, 2007, to track the time and attendance of its employees, and on July 1, 2008, began
to use it to track the time and attendance of contractors with PSCs with the implementation of SEPI.
7
  Hacienda is the abbreviation for the agency’s name, “Departamento de Hacienda.”
8
  The Computer Center was a service unit ascribed to PRDE’s information systems office known as OSIATD; which is the
acronym for the office’s name, “Oficina de Sistemas de Información y Apoyo Tecnológico a la Docencia,” (Office of
Information Systems and Technological Support to the Teaching Personnel).
9
  This amount could be slightly understated because the payment data obtained from PRDE’s paper-based payments system
lacked gross payment data for 139 payments. To achieve a more accurate estimate of the actual payments made during the
Final Report
ED-OIG / A04J0005                                                                                            Page 4 of 29


                                                 AUDIT RESULTS


PRDE lacked sufficient controls in ensuring compliance with State and Federal laws in awarding PSCs
and in ensuring that those services were allowable and adequately supported. PRDE did not provide the
contracts and supporting documentation for 8 PSCs and for $147,652 of the $459,609 paid for services
provided under the 61 PSCs selected for review. As such, we could not determine whether PRDE
complied with State and Federal laws in awarding those contracts nor could we determine that the
unsupported services were allowable. In our review of the remaining 53 PSC contracts, we identified an
additional $17,262 10 in questioned costs.

In addition, PRDE failed to provide reliable expenditure data that reconciled with payment data for
$161,527,366 in payments made during calendar years 2006 through 2008, resulting in a discrepancy of
$15 million. PRDE also did not maintain a registry of PSCs corresponding to $159,474,554 paid through
its paper-based payments system. As a result, we could not validate the number of awarded PSCs
associated with the total payments to reconcile the expenditure data.

Based on the results of our review, we consider PSCs a high-risk contracting vehicle. The number and
the significance of the deficiencies noted in our review of 61 PSCs are of considerable concern and result
from a substantial lack of controls and accountability. As such, we have no assurance that the PSCs not
reviewed, amounting to more than $161 million, were in compliance with State and Federal laws nor that
they were allowable and adequately supported.

FINDING NO. 1 – PRDE Lacked Adequate Internal Controls to Ensure Compliance with State and
                Federal Laws

PRDE lacked sufficient controls to ensure compliance with State and Federal laws in awarding PSCs.
Specifically, PRDE did not maintain sufficient documentation to be able to support compliance with the
award process. Based on our review of PSCs, PRDE did not —
    •   provide all requested contracts for review;
    •   sufficiently document compliance with the award process; and
    •   adequately safeguard contract documentation.
In addition, we found deficiencies in PRDE’s contracts and amendments.




period, we included the total net payment amount of $69,058 related to the 139 payments with missing gross payment data in
our estimate of the PSC total payments of $159,474,554.
10
   The $17,262 in questioned costs include payments totaling $9,109 for services provided prior to contract approval, payments
totaling $3,650 for hours in excess of contracted hours, and payments totaling $ 4,503for errors in contract compensation rates
paid, as detailed in Finding No. 2.
Final Report
ED-OIG / A04J0005                                                                                              Page 5 of 29

Contracts Not Provided for Review

Despite OIG requests for audit documentation and follow-up, PRDE did not provide the final, approved
contracts and documentation supporting the awarding process for 8 of the 61 PSCs selected, 4 of which
were awarded after the implementation of SEPI. 11 In addition, PRDE did not provide the approved copy
for 1 of the 16 amendments made to 13 of the 61 PSCs selected. As a result, we could not determine
whether PRDE complied with State and Federal laws in awarding those contracts nor whether the services
were allowable. 12

We judgmentally selected 61 PSCs awarded with Department funds and 16 amendments made to 13 of
the contracts 13–10 of the selected PSCs were awarded after PRDE implemented SEPI. Although the
scope of the audit was PSCs, we reviewed an additional five Irregular Personnel (IP) 14 contracts to
determine the effect of awarding multiple contracts to the same individuals, at the same time, on the level
of services provided. The contract periods of the five IP contracts reviewed overlapped with the contract
periods of four of the PSCs selected. We found that the overlapping IP and PSC contracts were for
different times in the day and different purposes. As a result, the five IP contracts did not conflict with
the level of services provided under the four overlapping PSCs.

PRDE ultimately provided 53 PSCs and supporting documentation. However, PRDE delayed the
documentation for 30 of the 53 PSCs, providing them more than 50 days after the initial request. 15

For discretionary grants, 34 Code of Federal Regulations (C.F.R.) § 75.730 states that
         A grantee shall keep records that fully show... (b) How the grantee uses the funds; (c) The total
         cost of the project... (e) Other records to facilitate an effective audit.

For formula grants, 34 C.F.R. § 76.730 states that
         A state and a subgrantee shall keep records that fully show... (a) The amount of funds under the
         grant or subgrant; (b) How the State or subgrantee uses the funds; (c) The total cost of the
         project; (d) The share of that cost provided from other sources; and (e) Other records to facilitate
         an effective audit.”

In addition, 34 C.F.R. § 80.20(a) states that
         ... Fiscal control... must be sufficient to: (2) Permit the tracing of funds to a level of expenditures
         adequate to establish that such funds have not been used in violation of the restrictions and
         prohibitions of applicable statutes.


11
   PRDE provided unapproved copies of two of the PSCs awarded before SEPI, and two PSCs were not provided. PRDE
provided electronic documents of the contractual information stored within SEPI of the four PSCs awarded after SEPI, but not
the actual approved copies of the contracts.
12
   As detailed in the Finding No. 2, we questioned as unsupported $27,716 paid for services provided under the eight PSCs and
the amendment not provided for our review.
13
   Three of the contracts had 2 amendments for a total of 16 amendments selected.
14
   IP contracts are similar to PSCs but they are governed by the Puerto Rico Law 110 of June 26, 1958, as amended, with the
main difference being individuals contracted under IP contracts receive certain fringe benefits, such as the accumulation of sick
and annual leave.
15
   We made requests of information on different dates. We used 50 days as the benchmark for determining whether PRDE
submitted the PSCs timely. The time elapsed ranged from 9 to 285 days from the dates when we requested the PSCs and
supporting documentation to the dates when PRDE made them available for our review.
Final Report
ED-OIG / A04J0005                                                                                    Page 6 of 29

According to 34 C.F.R. § 80.36(a),
           When procuring property and services under a grant, a State will follow the same policies and
           procedures it uses for procurements from its non-Federal funds.

PRDE could not provide a reasonable explanation for why it could not submit the eight missing contracts,
the missing contract amendment, and supporting documentation. Part of the reason for PRDE’s not being
able to provide the requested documentation is that it did not maintain an adequate archiving system to
retrieve requested documents and did not record the PSCs in a registry 16 of contracts. The lack of an
adequate archiving system and registry of contracts may also have contributed to the substantial delays in
providing 30 of the contracts.

Insufficient Documentation Supporting Compliance with the Award Process

PRDE did not maintain sufficient documentation supporting compliance with its regulations in awarding
personal services contracts. Specifically,
       •   for 40 of the 61 PSCs, PRDE did not provide sufficient information regarding the qualification
           requirements for the positions contracted. As a result, we were unable to determine whether the
           individuals were qualified to perform the tasks for which they were contracted. PRDE did provide
           evidence of the qualification requirements for the remaining 21 PSCs, but of those, PRDE did not
           provide documentation to show that the individuals contracted met the qualification requirements
           for 14 PSCs.
       •   for 42 of the 61 PSCs, PRDE did not provide the required certification issued by the Puerto Rico
           Child Support Administration (ASUME) 17 to show that the individuals contracted were current on
           any child support payments before they were awarded the contracts. The ASUME certifications
           provided for 9 of the remaining 19 PSCs were issued after the contract period established in the
           contracts.
       •   for 43 of the 61 PSCs, PRDE did not provide documentation indicating that the contracted
           individuals submitted a certification of filing an income tax return for the most recent 4 years at
           Hacienda before they were awarded the contracts. The Hacienda certifications provided for 11 of
           the remaining 18 PSCs were issued after the contract period established in the contracts.

Article 6 of Regulation 6820 states that the people contracted should–
       •   have the qualifications necessary for the tasks that they are contracted to perform. The
           qualifications should be accredited through official documentation issued by the applicable
           educational institutions and governmental entities.
       •   be current on child support payments, accredited through a certification issued by ASUME.
       •   submit a certification of filing an income tax return for the last 4 years at Hacienda, or a
           certification that they were not required to file an income tax return, or in case of having a debt,
           provide evidence of a payment plan.

Of the 61 PSCs, PRDE awarded 47 for special projects, 10 for extraordinary needs, and 4 for developing
proposals. In our review of the 10 PSCs awarded for extraordinary needs, we found that PRDE did not–
16
     As detailed in Finding No. 3.
17
     ASUME is an acronym for the agency’s name, “Administración para el Sustento de Menores.”
Final Report
ED-OIG / A04J0005                                                                                    Page 7 of 29

     •   appropriately document the justification for an extraordinary and temporary need for one 18 PSC
         nor that the efforts needed to fulfill the services could not be met with existing resources;
     •   provide an analysis of the costs of four PSCs including the compensation and the corresponding
         employer’s contributions; and
     •   provide a certification from PRDE’s Budget Office certifying that funds were available in the
         budget of the program or office requesting the award of nine PSCs and that the services were
         allowable for the use of the funds.

According to item number 3 of an administrative memorandum issued by PRDE’s Undersecretary of
Administration, 19 in those cases when the contracting of personal services is inevitable because an
educational program could be affected or because there could be a loss of public funds if the activity is
not carried out, the contracting or program offices should submit a written request for authorization to the
Undersecretary of Administration containing the following elements:
     •   Criteria justifying that the needs are extraordinary and temporary in character, taking into
         consideration the efforts carried out to fulfill the need for the services with existing resources;
     •   A cost analysis that includes compensation and the corresponding employer’s contributions; and
     •   A corresponding certification from the Budget Office about the availability of funds in the budget
         assigned to the area requesting the contracts and the eligibility of such funds to pay for the
         services to be rendered.

PRDE awarded 33 of the 61 PSCs to its own employees, 11 of which were contracted to provide services
during the employee’s regular working schedule under authorized vacation time. Another 19 of the 61
PSCs were awarded to retired PRDE employees. 20 We found that –
     •   PRDE did not provide documentation to show that 2 of the 11 contracted employees were
         scheduled to be on authorized vacation time during the contract period before they were awarded
         the contracts. PRDE provide documentation to show that the remaining nine contracted
         employees were scheduled to be on authorized vacation time during the contract period.
     •   PRDE awarded 2 of the 19 PSCs to retired employees within 2 years of the employees’ retirement
         from public service; however, PRDE did not provide evidence that the 2 retired employees
         obtained dispensation from the Ethics Office before being awarded the PSCs.

Article 6 of Regulation 6820 states that PRDE can only contract with its employees outside their regular
working schedule or while they are on authorized vacation.

According to Article 3.7 (e) of the Ethics in Government Act of the Commonwealth of Puerto Rico of
July 24, 1985, as amended, no executive agency shall contract with or for the benefit of persons who have
been public officials or employees of said executive agency, within 2 years following the termination of


18
   We were provided sufficient information on the remaining 9 that provided a reasonable justification for the PSCs.
19
   PRDE’s Undersecretary of Administration issued an administrative memorandum on September 27, 2006, to amend item
number 7 of the memorandum issued on February 5, 2003. According to the September 27, 2006 amendment, the remaining
control measures, established in the administrative memorandum of February 5, 2003, are currently in effect.
20
   The remaining 9 of the 61 were awarded to either non-PRDE employees or to PRDE irregular or transitory employees
contracted to work outside their working schedule.
Final Report
ED-OIG / A04J0005                                                                                            Page 8 of 29

their employment. The Governor may issue a dispensation from this provision provided the dispensation
is in the benefit of the public service. 21

Insufficient Controls to Adequately Safeguard Contract Documentation

PRDE did not have an official policy on safeguarding PSC documentation while transferring it between
offices during the awarding process and did not safeguard PSC documentation. As a result, unauthorized
changes were made to two contracts. Had the changes not been identified before the payments were
made, the Department’s funds would have been improperly disbursed.

Two PSCs awarded to two individuals were changed without authorization. The identity of the person
making the change could not be determined. The change to the contracts increased the rate per hour
established in the contracts and changed the contracted positions to correspond to the increase in the
hourly rates. 22 The unauthorized changes occurred at some point when the contracts were transferred
from the Office of Federal Affair’s (OFA) Supplemental Educational Services (SES) Program office to
the Auxiliary Secretariat of Human Resources (ASHR) for approval and then to the Payments Division of
the Auxiliary Secretariat of Finances (ASF) for payment. 23 According to the Coordinator of the SES
Program, an individual that received one of the changed PSCs personally delivered the PSCs to the
ASHR. However, none of the officials involved in the process of awarding the contracts acknowledged
having changed the contracts. 24

The OFA noted the unauthorized changes in the two contracts when it received a copy of the contracts
after they were approved by the ASHR. According to the Coordinator of the OFA’s Human Resources
Unit, the ASHR did not consistently provide OFA with copies of the PSCs after they were approved, and
only did so at the request of OFA shortly before the unauthorized changes to the PSCs occurred. 25
Though OFA identified the changes, PRDE did not have adequate safeguards to prevent unauthorized
changes. PRDE withheld two payments that were processed at the unauthorized rates and amended the
two contracts to reflect the correct contract rates. No payments were made at the unauthorized rates.

For one of the contracts, PRDE paid $2,249 for 175 hours in services provided as an Administrative
Auxiliary III at a rate of $12.85 per hour. The unauthorized changes increased the rate to $17.16 and
changed the position to Auxiliary Director. Had OFA not noticed the unauthorized changes, PRDE could
have paid a total of $3,003, or $754 more than the original amount contracted. For the second contract,
PRDE paid $1,393 for 137 hours in services provided as an Administrative Auxiliary I at a rate of $10.17
per hour. The unauthorized changes increased the rate to $17.16 and changed the position to Auxiliary
Director. Had OFA not noticed the unauthorized changes, PRDE could have paid a total of $2,351, or
$958 more than the correct amount.


21
   The Governor of Puerto Rico delegated to the Executive Director of the Government Ethics Office the authority to grant the
dispensations through Executive Order of March 1, 1998, Administrative Bulletin No. OE-1998-06.
22
   The positions and hourly rates established originally in the contracts were covered with whiteout and the changes were hand
written on top of the whiteout.
23
   Were unable to determine at which office the unauthorized changes were made to the PSCs.
24
   The officials involved in the process of awarding the contracts included the Coordinator of the SES program, the Coordinator
of the OFA’s Human Resources Unit, the Director of the OFA, a Human Resources Specialist who reviewed the contracts at
the ASHR, and the Auxiliary Secretary of Human Resources who approved the contracts.
25
   The Director of the Classification and Retribution Division of the ASHR acknowledged during an exit meeting held with
PRDE officials on May 28, 2010, that as of the date of the meeting, the ASHR had not implemented the practice to routinely
provide the contracting or program offices copies of the approved PSCs.
Final Report
ED-OIG / A04J0005                                                                                             Page 9 of 29

Table 1 – Summary of Unauthorized Changes Made on Two PSCs
                                                               A                                          B
                                                Original               Changed             Original               Changed
                                                Contract               Contract           Contract 26             Contract
                                              Administrative           Auxiliary         Administrative           Auxiliary
Position
                                               Auxiliary III           Director           Auxiliary I             Director
Hourly Rate                                      $12.85                 $17.16              $10.17                 $17.16
Actual Number of Hours
                                                    175                   175                  137                  137
in Services Provided
Total Payments                                    $2,249                $3,003               $1,393                $2,351
Amount that Could Have Been
                                                   N/A                   $754                  N/A                  $958
Improperly Disbursed:

Contract and Amendment Deficiencies

In our review of the 53 PSCs for which contract information was provided, we found deficiencies in
PRDE’s contracts and amendments. Specifically, we found that–
     •     PRDE did not identify a control number on 30 PSCs despite the fact that the contracts provided a
           section for that purpose;
     •     the contracts did not indicate the date when the contracts were approved on 38 PSCs although the
           contracts provided a section for that purpose; and

     •     the contracts were missing information such as contract clauses detailing the tasks to be performed
           under the PSC, the contract schedule, and the employment status of the contractor for 13 PSCs.

Further, an administrative memorandum issued by PRDE’s Secretary on April 17, 2007, states that the
PSCs and their amendments cannot have cross-outs or erasures. If the contracts have any errors, a new
contract must be prepared. However, 17 PSCs contained erasures, cross-outs, and hand-written changes, 27
and of those 17 PSCs, 12 included initials next to the changes, but none included a date indicating when
the changes were made. According to the Director of the Payments Division of the ASF, if the changes
were initialed, the personnel of the Payments Division would process payments, presuming that the
changes were made by an authorized official with initials provided indicating responsibility for the
changes. Three of the 17 PSCs with manual changes were awarded after PRDE’s Secretary prohibited the
practice of manually changing the contracts with erasures or cross-outs.

None of the 15 contract amendments reviewed were identified with a unique control number or included
the control number of the PSCs amended, 6 indicated amendments to professional services contracts
instead of PSCs, and 2 did not include the approval date.

In summary, PRDE lacked sufficient controls including standardized written policies and procedures
governing the awarding process and requirements for maintaining sufficient documentation supporting
compliance with its regulations. PRDE also lacked an adequate archiving system to retrieve requested
documents. As a result, PRDE could not provide sufficient documentation supporting compliance with


26
   The position established in the original contract was Administration Technician I and the hourly rate was $12.12. However,
the position established in the amendment made to the PSC after it was changed without authorization was Administrative
Auxiliary I and the hourly rate was $10.17. All payments were made in accordance with the amendment.
27
   Including the two PSCs that were changed without authorization.
Final Report
ED-OIG / A04J0005                                                                                       Page 10 of 29

the award process. Without such documentation, PRDE could not establish that it complied with State
and Federal laws in awarding those contracts.

The lack of sufficient documentation supporting compliance with applicable regulations in awarding
personal services contracts, along with the deficiencies noted in the contracts, amendments, and
supporting documentation, reduced the level of assurance that Department funds were used for their
intended purposes and increased the risk of misuse and abuse of the funds. For these reasons, we consider
PSCs to be a high-risk contracting vehicle. Specifically, the number and the significance of the
deficiencies noted are of considerable concern and result from a substantial lack of controls and
accountability. As such, we have no assurance that the PSCs not reviewed, amounting to more than $161
million, were in compliance with State and Federal laws, nor that they were allowable and adequately
supported.

RECOMMENDATIONS

We recommend that the Assistant Secretary for the Office of Elementary and Secondary Education
(OESE), in collaboration with the Assistant Secretary for the Office of Vocational and Adult Education
(OVAE) and the Assistant Deputy Secretary for the Office of Safe and Drug-Free Schools (OSDFS),
require PRDE to develop and implement—

1.1     An adequate archiving system for approved copies of PSCs and supporting documentation to
        facilitate document retrieval.

1.2     Controls to safeguard contract documents throughout the contracting process, including a policy to
        routinely provide to the contracting or program offices copies of the approved PSCs.

1.3     Standardized policies and procedures governing the award process and the requirements for
        maintaining sufficient documentation supporting compliance with regulations.

PRDE Comments

PRDE did not concur with our finding and stated that our recommendations are unnecessary because
PRDE has taken corrective action. The following summarizes PRDE’s comments related to each
recommendation.

Recommendation 1.1: According to PRDE, the SEPI system is adequate for filing PSCs and supporting
documentation and has improved PSC archives. PRDE acknowledged that, in addition to the PSC
information stored in SEPI, it uses a paper-based archiving system to file the PSCs and supporting
documentation. In its response, PRDE stated that it is committed to developing a system that will allow it
to store scanned PSCs and supporting documents within SEPI or another electronic system. PRDE re-
submitted electronic documents with contractual information of the four missing PSCs that it awarded
after the implementation of SEPI. 28 It also stated that by December 15, 2010, it will submit alternative
documentation for missing contracts as a supplement to its response. 29


28
  PRDE included the documents in Attachment B to its written comments.
29
  Since PRDE did not provide any additional documentation as of January 11, 2011, we communicated to PRDE that any
additional documentation that it is able to compile should be provided to the Department to be considered during audit
resolution.
Final Report
ED-OIG / A04J0005                                                                         Page 11 of 29

Recommendation 1.2: PRDE contended that at the time of the audit period it had sufficient controls in
place to safeguard PSCs throughout the contracting process. According to PRDE, the controls allowed a
PRDE Coordinator to identify the unauthorized changes made to two PSCs and withhold the payments.
PRDE added that on June 12, 2010, it established a five-step process for awarding PSCs that further
strengthen its internal controls to safeguard contract documentation. PRDE maintained that the new
policy addresses Recommendation 1.2.

Recommendation 1.3: PRDE stated that the implementation of SEPI has improved its PSC archiving
system, though it continues to use a paper-based system for filing PSCs and supporting documentation.
PRDE also stated that it is committed to implementing an electronic system that will allow it to store
scanned copies of PSCs and supporting documents within the system. PRDE added that the process
enacted on June 12, 2010, also governs the PSC award process and includes the requirement for
maintaining sufficient documentation in compliance with regulations. PRDE maintained that its
corrective actions address Recommendation 1.3.

OIG Response

We considered PRDE’s response but did not make significant changes to our finding; we did, however,
modify Recommendation 1.1 as discussed below in our response to PRDE’s comments to specific
recommendations.

Recommendation 1.1: Although PRDE asserted that the SEPI system is an adequate archiving system
that facilitates PSC and supporting documentation retrieval, it acknowledged its continued use of a paper-
based system to file the PSCs. PRDE’s paper-based filing system is inadequate as evidenced by PRDE’s
inability to locate the eight missing PSCs, including four PSCs awarded after the implementation of SEPI.

PRDE re-submitted electronic documents with its comments but not the actual signed and approved
contracts for the four missing PSCs awarded after SEPI. Without evidence of the approved PSCs and
supporting documentation, PRDE has not provided support that legitimate PSCs were awarded in
compliance with Federal and State laws nor that the services were allowable. As such, PRDE needs to
improve its archiving system to facilitate its retrieval of PSCs and the supporting documentation.
However, we modified Recommendation 1.1 to clarify that PRDE should develop an adequate archiving
system for approved copies of PSCs and supporting documentation. PRDE’s plans for storing scanned
copies of approved PSCs and supporting documentation within SEPI or an alternative electronic system
should improve PRDE’s archiving system.

Recommendation 1.2: We acknowledge in the finding that PRDE’s Coordinator identified the
unauthorized changes made to two PSCs and we commend the Coordinator for exercising due diligence
by requesting the ASHR to provide copies of the approved PSCs. However, as we noted in the finding,
ASHR did not consistently provide OFA with copies of the approved PSCs and did so only at the request
of OFA shortly before the unauthorized changes to the PSCs occurred. PRDE’s internal controls were
insufficient to prevent (1) an individual who was awarded a PSC from personally transporting the PSC
and related documentation from the OFA to the ASHR; and (2) payments for PSCs with erasures, cross-
outs, and hand-written changes. As a result, two PSCs were changed without authorization.

The five-step award process for PSCs described in PRDE’s response, if fully and adequately
implemented, could reduce the risk for unauthorized changes to PSCs. However, we did not modify
Recommendation 1.2 because PRDE also should ensure that the ASHR consistently provides copies of
Final Report
ED-OIG / A04J0005                                                                                         Page 12 of 29

the approved PSCs to the contracting or program offices to further reduce the risk that unauthorized
changes are made to PSCs during the award process.

Recommendation 1.3: PRDE did not provide sufficient evidence with its response for us to ascertain that
the new award process for PSCs was officially enacted and approved. As a result, we did not change
Recommendation 1.3. Without the proper implementation and enforcement of sufficient internal controls,
PSCs are a high-risk contracting vehicle.

FINDING NO. 2 – PRDE Lacked Sufficient Controls to Ensure that Contract Services Were
                Allowable and Adequately Supported

PRDE did not implement adequate controls to properly account for Department funds used for PSCs and
maintain adequate and reliable documentation in support of PSC payments. In our review of 61 PSCs
with a total value of $459,609 in payments, we identified a total of $164,914 in questioned costs related to
the following—
     •   no supporting documentation provided for $147,652 paid for services provided;
     •   payments totaling $9,109 for services provided prior to contract approval;
     •   payments totaling $3,650 for hours in excess of contracted hours; and
     •   payments totaling $4,503 30 for errors in contract compensation rates paid.

Further, we found deficiencies in the attendance sheets and other documentation used by PRDE in support
of payments made. Without adequate and reliable documentation in support of payments, PRDE could
not sufficiently demonstrate that the PSC services were allowable.

Inadequately Supported Payments

We reviewed a total of $459,609 in PRDE payments made with Department funds for services provided
under the 61 PSCs selected for review − $401,920 in payments processed through its paper-based
payments system and $57,689 processed through SEPI. PRDE could not support $147,652 of the
payments made− $139,935 in payments processed through its paper-based payments system and $7,717
processed through SEPI. As shown in Table 2, of the total $147,652 without adequate support, $27,716
was related to eight PSCs that PRDE did not provide for our review, $119,880 was not supported with
contractor’s attendance sheets, and $56 was for services not recorded in SEPI as being provided.




30
  The $4,503 in questioned costs include $277 paid to a contractor more than what it should have paid had the compensation
been established in accordance with PRDE regulations and $4,226 paid to two contractors in excess of the contracts based on
increased hourly rates without amending the contracts to reflect the increases.
Final Report
ED-OIG / A04J0005                                                                                       Page 13 of 29

Table 2 – Detail of Unsupported Payments
                                                                                                            Total
     Unsupported               Missing          No Attendance          Services Not Recorded in
                                                                                                         Unsupported
      Payments                Contracts            Sheets                   SEPI but Paid
Paper- based Payments
                               $20,055              $119,880                       N /A                     $139,935
        System
         SEPI                   $7,661                N/A                          $56                       $7,717
        Total:                 $27,716              $119,880                       $56                      $147,652

In addition, we found deficiencies in the attendance sheets and other documentation used by PRDE to
support $311,957 of the $459,609 in payments made. Specifically, PRDE did not properly identify the
attendance sheets used to support the payments processed through its paper-based payments system with
an identification number that referred to the specific contract or amendment under which the services
were provided. With the implementation of SEPI, PRDE was able to partially correct the problem by
eliminating the practice of making payments based on hard copy attendance sheets. However, when
contractors were unable to use the biometric terminals at the worksite for recording time and attendance,
contractors used an official form – “Request for Licenses and Adjustments in TAL System” (also known
as form DE-14) – to document the number of hours in services provided. 31 PRDE provided evidence of
DE-14s prepared for payments made for two of the contracts reviewed, but the forms did not refer to the
control number of the PSC under which the services were provided.

For discretionary grants, 34 C.F.R. § 75.730states that
        A grantee shall keep records that fully show... (b) How the grantee uses the funds; (c) The total
        cost of the project... (e) Other records to facilitate an effective audit.

For formula grants, 34 C.F.R. § 76.730 states that
        A state and a subgrantee shall keep records that fully show... (a) The amount of funds under the
        grant or subgrant; (b) How the State or subgrantee uses the funds; (c) The total cost of the
        project; (d) The share of that cost provided from other sources; and (e) Other records to facilitate
        an effective audit.

Further, 34 C.F.R. § 80.20(a) states that
        ... Fiscal control... must be sufficient to: (2) Permit the tracing of funds to a level of expenditures
        adequate to establish that such funds have not been used in violation of the restrictions and
        prohibitions of applicable statutes.

PRDE did not maintain an adequate archiving system to retrieve requested documents. The lack of an
important control element such as this clearly contributed to its inability to provide contracts and
supporting documents. PRDE also lacked sufficient controls including standardized written policies and
procedures requiring that attendance sheets, DE-14s, and other documentation supporting payments made
were properly identified to the contract or amendment under which the services were provided. Without
adequate and reliable documentation supporting the payments made, we could not confirm that the
services were actually provided and that Department funds were used for their intended purposes. The
lack of sufficient controls contributed to the unsupported payments and increased the risk of misuse and
abuse of the funds.
31
  Based on the hours worked included in the form, PRDE made adjustments in TAL to input the number of hours worked that
could not be registered biometrically.
Final Report
ED-OIG / A04J0005                                                                                          Page 14 of 29

Payments Made for Services Provided Before Contract Approval

PRDE paid at least $9,109 in services provided under 10 PSCs and 1 amendment that had not been
approved by all required officials. The contractors provided the services inside the contract periods
established in the contracts and the amendment, but the contracts were authorized by the final approver
after some of the services were provided. The correct contract periods should have begun on or after the
dates the contracts were approved by all required officials. Had the contracts not received final approval,
PRDE could have been held liable for any unauthorized services provided, and the contractors may not
have received full payment for services rendered. In addition, we could not determine whether PRDE
made payments for services provided before the approval date for 46 additional PSCs of the 61 selected
because, as discussed in Finding No. 1, PRDE did not give us 8 of the contracts to review and an
additional 38 did not have the approval date. The remaining 5 PSCs had the approval date, and the
contractors provided services after the contracts were approved.

Item number 6 of an administrative memorandum issued by PRDE’s Undersecretary of Administration on
February 5, 2003, states that under no circumstance will contracted personnel be authorized to work until
the awarding process has been completed and the contracts have been signed by the Auxiliary Secretary
of Human Resources.

PRDE lacked standardized written policies and procedures requiring that programs or offices in need of
services submit PSCs to the final approver with enough time to allow for approval of the contracts prior to
the contract period. In addition, PRDE did not prohibit authorization of payments for dates that occurred
before the contract’s approval date and did not require that final approvers include the approval date in the
PSCs. As a result, PRDE paid at least $9,109 in Department funds for services provided before contract
approval.

Payments for Hours in Excess of Contracted Hours

PRDE paid $3,650 for 73 hours in services provided by a contractor in excess of the total number of hours
contracted for one PSC reviewed. PRDE contracted with an individual to provide a total of 489 hours in
services as a Project Coordinator for a project named “A New Mathematics Vision” to be carried out from
September 2, 2008, 32 through June 30, 2009, at a rate of $50 per hour. Based on the 489 hours contracted
at $50 per hour, the total cost of the contract was $24,450. However, we noted that the budget approved
to contract a Project Coordinator was $21,762, an amount that was sufficient to pay for about 435 hours at
a rate of $50 per hour. PRDE ultimately paid the individual the amount of $28,100 for services provided
from September 4, 2008, through June 29, 2009, corresponding to about 73 hours in excess of the number
of hours established in the contract. As a result, PRDE’s contract included a higher dollar amount than
the approved budget allowed, and PRDE paid $3,650 in Department funds for services provided in excess
of the actual contracted hours.

The PSC with the excess hours was awarded after the implementation of SEPI, and all payments were
calculated through SEPI, using time and attendance information recorded through TAL. PRDE lacked
sufficient controls, including standardized written policies and procedures, to ensure that contract hours
are established in the PSCs in accordance with approved budgets. As a result, PRDE paid $3,650 in

32
  The contract period began on September 2, 2008, but it was signed as approved on September 4, 2008. We questioned 3
hours or $150 paid to the contractor for services provided on September 3, 2008, before the contract was approved as part of
the $9,109 paid for services provided prior to contract approval.
Final Report
ED-OIG / A04J0005                                                                                        Page 15 of 29

excess of contracted hours. According to PRDE, it had previously identified the error and implemented
controls in SEPI to prevent the system from calculating payments on other PSCs for any hours registered
in TAL in excess of the contract hours.

Errors in Contract Compensation Rates Paid

PRDE did not follow its regulations in establishing PSC compensation and as a result paid—
     •   two contractors a total of $2,389 33 more than what it could have paid had the compensation been
         established in accordance with PRDE regulations.
     •   three contractors a total of $1,190 less than what it was required to pay based on a compensation
         policy for PSCs and changes in Federal minimum wage laws.
     •   two contractors a total of $4,226 in excess of the contracts based on increased hourly rates without
         amending the contracts to reflect the increases. 34

In addition, PRDE did not provide sufficient information to determine the criteria or methodology it used
to establish the compensation paid to the contractors in 13 of the 61 PSCs selected for review and 4 of the
16 contract amendments. As a result, we could not determine whether PRDE paid the correct
compensation for the 13 PSCs and the 4 amendments.

Article 8 a. and b. of Regulation 6820 states that the teaching and non-teaching personnel that are
contracted outside of their regular working schedule or during authorized vacations can be paid either an
hourly rate calculated based on 1 percent of the base monthly salary of the position that corresponds to the
tasks contracted, or a fixed compensation according to the complexity of the tasks and subject to the
availability of funds. The overpayment of $2,389 resulted from PRDE paying two contractors an hourly
rate in excess of 1 percent of the base salary per month for the position corresponding to the contracted
tasks. As a result, PRDE paid $2,389 in Department funds that could have been used for other allowable
purposes.

According to a compensation policy that PRDE established through an administrative memorandum
issued by PRDE’s Undersecretary of Administration on September 27, 2006, PSCs awarded to School
Directors to provide services in after-school programs were required to be paid at a rate of $35 per hour
and PSCs awarded to teachers were required to be paid at a rate of $25 per hour. In addition, under
Section 206 (a)(1)(A) of the Fair Labor Standards Act of 1938, as amended (FLSA), covered nonexempt
workers are entitled to a minimum wage of not less than $5.85 per hour effective July 24, 2007. The
underpayment of $1,190 to three contractors resulted from PRDE paying two contractors at lower hourly
rates than the rate required by the new compensation policy, and to another contractor, at an hourly rate
lower than the rate required by the FLSA. As a result, PRDE paid to the contractors $1,190 less than
what it should have paid.

The overpayment of $4,226 resulted from increased hourly rates paid to two contractors in response to the
compensation policy that PRDE established on September 27, 2006, without amending the contracts to
reflect the increases. As a result, PRDE paid $4,226 to the two contractors, which was more than agreed
to and unallowable under the contract agreements.
33
   Of the $2,389 overpaid, we are questioning $2,112 as unsupported in this Finding because PRDE did not provide the
approved PSC. Refer to Enclosure 1for more details.
34
   See Enclosure 1 for details on the errors.
Final Report
ED-OIG / A04J0005                                                                          Page 16 of 29

PRDE had not implemented controls, including standardized policies and procedures that clearly indicate
when to establish PSC compensation based on an hourly rate of 1 percent of the base monthly salary of a
position or a fixed hourly rate based on the complexity of the tasks. Also PRDE had not established a
process for amending PSCs when needed, including the effective implementation of new compensation
policies and laws applicable to the hourly rates established in PSCs. In addition, PRDE had not required
that the program or office that awarded the PSCs adequately document the methodology or criteria it used
to establish the hourly rates included in the contracts. As a result, we identified the errors in
compensation rates detailed in Enclosure 1.

RECOMMENDATIONS

We recommend that the Assistant Secretary for OESE, in collaboration with the Assistant Secretary for
OVAE and the Assistant Deputy Secretary for OSDFS, require PRDE to—

2.1    Provide adequate and reliable documentation supporting $147,652 in unsupported payments made,
       including the eight missing contracts related to the $27,716 paid or refund the unsupported amount
       to the Department.
2.2    Return to the Department $17,262 in questioned costs related to $9,109 for services provided prior
       to contract approval; $3,650 in payment for hours in excess of contracted hours; and $4,503 in
       payment for errors in contract compensation rates paid.
2.3    Consistently follow its regulations and processes in establishing the hourly rates in the PSCs
       awarded to ensure the most efficient use of Department funds.
2.4    Develop and implement internal controls, including standardized policies and procedures that—
          a. Require documentation supporting payments made be properly identified with the contract
             or amendment under which the services were provided;
          b. Require programs or offices in need of services to submit PSCs to the final approver with
             enough time to allow for approval of the contracts prior to the contract period and that the
             contract periods established in PSCs and recorded in SEPI and TAL begin on or after the
             dates that the contracts were approved by all required officials;
          c. Prohibit authorization of payments for services recorded in TAL for dates that occurred
             before the contract’s approval date;
          d. Require final contract approvers include the approval date in the PSCs;
          e. Require contract hours established in PSCs to be in accordance with approved budgets;
          f. Require only the correct number of hours charged by contractors to be approved for
             payment;
          g. Establish a process for amending PSCs when amendments are needed to change hourly
             rates contracted based on changes in policies and applicable laws;
          h. Clearly indicate when to establish PSC compensation based on an hourly rate of 1 percent
             of the base monthly salary of a position or a fixed hourly rate based on the complexity of
             the tasks and require that the methodology or criteria used to establish the compensation
             rates included in the contracts be properly documented.
Final Report
ED-OIG / A04J0005                                                                          Page 17 of 29

PRDE Comments

PRDE did not concur with our finding and recommendations and requested that the finding be revised and
that the recommendations for repayment be withdrawn. Summarized below are PRDE’s comments to
specific recommendations.

Recommendation 2.1: PRDE stated that it was able to reconstruct alternative documentation for missing
contracts and attendance sheets supporting the $147,652 in unsupported payments. PRDE re-submitted
with its response electronic documents with contractual information on the four missing PSCs that it
awarded after the implementation of SEPI and requested that we revise our finding and Recommendation
2.1 to account for $7,661 paid related to the four PSCs.

According to PRDE, our audit coincided with the lay-off of a significant number of employees, including
personnel in charge of maintaining PSCs and supporting documentation and with the relocation of those
files to other offices. Without the knowledgeable personnel, it was difficult for PRDE to retrieve PSC
documents archived prior to the implementation of SEPI. PRDE stated that it currently has an electronic
archiving system that can more effectively overcome such challenges in the future.

Recommendation 2.2: PRDE stated that the questioned costs related to payments for services provided
prior to contract approval; hours in excess of contracted hours; and for errors in contract compensation
rates were allowable and allocable to the grants and that these practices did not cause any harm to the
Federal interest. As such, PRDE requested that we eliminate Recommendation 2.2 from the report.

Recommendation 2.3: According to PRDE, it has adequate controls in place to ensure compliance with
applicable regulations in establishing the hourly rates for PSCs. PRDE stated that it recently established a
process for awarding PSCs; this process includes a review of salary information during the PSC approval
process and assures that the compensation established in PSCs is in accordance with the applicable salary
scales.

Recommendation 2.4: PRDE’s comments stated that –

   1. PRDE is able to track payments to specific PSCs through the use of SEPI.
   2. PSCs are required to be approved and in effect before contractors can provide services, and the
      recently enacted process for the award of PSCs reflects this requirement. The new process also
      provides sufficient time for the approval of PSCs before the contract period.
   3. The new process for awarding PSCs requires that the PSCs be complete, including the approval
      date.
   4. The new process for awarding PSCs ensures that PRDE officials verify that the PSCs awarded
      match the employment period budgeted in the contract. Also, PRDE officials verify that program
      budgets match the PSCs to help ensure that PSCs rendered match the amount budgeted in the program
      budget.
   5.    PRDE requires a new PSC when the original is in error and/or requires an amendment. This
        process ensures that new PSCs are prepared when PSCs have salary information outdated by newly
        enacted policies and applicable laws.
   6. The new process for awarding PSCs ensures that the compensation rates awarded to PRDE
      employees are accurate and in accordance with PRDE’s pay scales.
Final Report
ED-OIG / A04J0005                                                                       Page 18 of 29

OIG Response

We considered PRDE’s response but did not change our finding or make significant changes to our
recommendations. We modified Recommendations 2.3 and 2.4, as discussed below in our response to
PRDE’s comments to specific recommendations.

Recommendation 2.1: PRDE did not submit adequate and reliable documentation with its response
supporting the $147,652 in unsupported payments made, nor the eight missing contracts related to the
$27,716 paid. The electronic documents that PRDE re-submitted with its comments in lieu of the four
missing PSCs with a value of $7,661 awarded after PRDE implemented SEPI do not adequately and
reliably support the services paid.

Recommendation 2.2: In response to PRDE’s contention that it did not harm the Federal interest when it
paid for services provided prior to contract approval; in excess of contracted hours; and based on
erroneous contract compensation rates, we believe that such practices could put Department funds at risk
of abuse and misuse. The payments that PRDE made for services provided prior to contract approval and
in excess of contracted hours were unallowable under the contract agreements. The overpayments that
resulted from the errors in contract compensation rates are unallowable and as such constitute a debt to
the Federal government. When a grantee uses Federal funds for unallowable costs, those funds are not
available to pay for items and services that could help advance the program. Ultimately, the Department
is responsible for determining whether PRDE harmed the Federal interest and whether it will recover any
funds from PRDE as part of the resolution process of this audit. We revised the recommendation to
include as questioned costs the $277 that PRDE paid to a contractor more than what it should have paid
had the compensation been established in accordance with PRDE regulations, as noted on Finding No. 2
and on Enclosure 1 of this report.

Recommendation 2.3: PRDE should ensure that it consistently follows its regulations, including any
newly implemented processes for awarding PSCs and in establishing the hourly rates in the PSCs
awarded. We revised Recommendation 2.3 to clarify that PRDE must not only follow its regulations but
also the processes in place for establishing compensation rates for PSCs.

Recommendation 2.4: We considered PRDE’s response, but we did not change our finding or make
significant revisions to the recommendation. The following is our response to PRDE’s specific
comments.

   1. Although we agree that PRDE can use SEPI to track payments to specific PSCs, PRDE must
      ensure that the supporting documentation properly identifies the PSC or amendment under which
      services were provided. As discussed in the finding, the contractors are required to document the
      number of hours provided on DE-14 forms when they are unable to use TAL for recording their
      time and attendance. In those instances, the DE-14s submitted by contractors provide support for
      the payments made through SEPI but did not provide reference to the PSC or amendment under
      which the services were provided.
   2. We acknowledge that the requirement that prohibits contractors from providing services before the
      PSCs have been approved was noted in PRDE memoranda on February 5, 2003, and we cite it as
      criteria in our finding. However, we found that PRDE did not comply with the requirement and
      paid at least $9,109 in services provided under 10 PSCs and 1 amendment that had not been
      approved by all required officials. Regarding PRDE’s new process for awarding PSCs, PRDE did
Final Report
ED-OIG / A04J0005                                                                         Page 19 of 29

      not provide sufficient evidence with its response to ascertain that the process was officially
      adopted and approved and that it fully addresses our recommendation. PRDE should clearly
      require programs or offices in need of services to submit PSCs to the final approver with sufficient
      time for approval prior to the contract period. We revised the recommendation to include that
      standardized policies and procedures also should require that the contract periods established in
      PSCs and recorded in SEPI and TAL begin on or after the dates that the contracts were approved
      by all required officials. We also clarified that PRDE should not authorize, in TAL, services
      provided before the PSC’s approval date to prevent erroneous payments.
   3. PRDE did not provide sufficient evidence with its response to ascertain that the new PSC
      awarding process was officially adopted and approved and that it fully addresses our
      recommendation. PRDE should require that final contract approvers include the approval date in
      PSCs and enforce compliance with the requirement.
   4. The verification process described by PRDE for matching the PSC awarded to the employment
      period budgeted in the contract requires that the approved budget for the PSC be included in the
      PSC documentation. As discussed in Finding No. 1, we found that PRDE did not provide a
      certification from PRDE’s Budget Office certifying that funds were available in the budget of the
      program or office requesting the award of nine PSCs nor that the services were allowable for the
      use of the funds. The new PRDE awarding process described by PRDE in its response did not
      indicate whether the approved PSC budget was required to be attached to the PSC documentation.
      PRDE should require that contract hours established in PSCs be in accordance with approved
      budgets.
   5. The results discussed in the finding show that the requirement for the creation of new PSCs in the
      case of errors and/or amendments was insufficient to ensure that PSCs were properly amended or
      new contracts were prepared to reflect needed changes in the contract compensation rates.
      PRDE’s requirement did not clearly indicate that the requirement for preparing new PSCs must be
      followed not only when errors are found in PSCs but also when any amendments need to be made
      to approved PSCs. PRDE should establish a clear process for amending PSCs when needed.
   6. As discussed in the finding, PRDE did not sufficiently document the criteria or methodology it
      used to establish the compensation paid to contractors. In addition, at the time of our review
      PRDE had not implemented standardized policies and procedures that clearly indicate when to
      establish PSC compensation based on an hourly rate of one percent of the base monthly salary of a
      position or a fixed hourly rate. PRDE did not provide sufficient evidence for us to validate that its
      new process for awarding PSCs was officially adopted and approved. Nor did PRDE provide
      sufficient evidence to validate that its new award process requires the proper documentation of the
      methodology or criteria used to establish the contract compensation rates. We revised the last
      bullet of Recommendation 2.4 to indicate that PRDEs policies and procedures should clearly
      indicate when to establish PSC compensation based on an hourly rate of one percent of the base
      monthly salary of a position or a fixed hourly rate. Accordingly, PRDE should consistently follow
      its regulations and processes in establishing the hourly rates in PSCs.
Final Report
ED-OIG / A04J0005                                                                                       Page 20 of 29

FINDING NO. 3 – PRDE Did Not Maintain Adequate Information to Reconcile Data in its Financial
                Accounting and Payment Systems

PRDE did not maintain adequate information to reconcile data in its financial accounting and payment
systems. Specifically, PRDE failed to provide reliable expenditure data that reconciled with payment data
for $161,527,366 in payments made during calendar years 2006 through 2008, resulting in a discrepancy
of $15 million. Also, PRDE did not maintain a registry of PSCs corresponding to $159,474,554 recorded
in its paper-based system. As a result, we could not validate the number of awarded PSCs associated with
the total payments to reconcile the expenditure data.

Discrepancy Between Expenditures and Payment Data

We found a $15 million discrepancy between data for PSC expenditures paid with Department funds
during calendar years 2006 through 2008 and the data for payments made during the same period. The
total expenditures accounted for in PRDE’s financial accounting system 35 are about $15 million less than
the total payments recorded in PRDE’s paper-based payment system and SEPI. 36 As a result,
expenditures reported for Department funded PSCs could be understated. Table 3 provides details of the
amounts in each system and the corresponding discrepancy between the expenditure and payment
systems.

Table 3 – Discrepancy Between Expenditures and Payment Data
2006-2008
Calendar        Expenditures        Payments Recorded in        Payments Recorded in
  Years         Recorded in             Paper-based                      SEPI                  Total
                                                                                                              Difference
  Period       PRIFAS/SIFDE           Payments System             (Oct. – Dec. 2008)         Payments



     Total:     $146,497,812             $159,474,554                 $2,052,812           $161,527,366     $(15,029,554)


PRDE officials stated that a possible cause for the $15 million discrepancy could be related to timing,
specifically, the difference between the dates when PRDE accounted for the expenditures in PRIFAS and
SIFDE versus the payment dates recorded in its paper-based payment system and SEPI. Although we
requested data or information to explain the $15 million discrepancy, PRDE did not provide any.

Lack of a Registry of PSCs Corresponding to Payments

PRDE could not provide a list of all the PSCs that it awarded during the period of January 1, 2006,
through January 31, 2008, which was needed to develop a sampling methodology and select a sample of
PSCs for review during the audit. PRDE could not provide the list for PSCs awarded before the
implementation of SEPI because it did not maintain a registry of PSCs as required by Regulation Number
33 “On the Registry of Contracts, Deeds, and Related Documents and the Sending of Copies to the Office

35
   PRDE’s financial accounting system includes the Puerto Rico Integrated Financial Accounting System (PRIFAS) and
PRDE’s Financial Information System (SIFDE). SIFDE is the acronym for the name of the system that replaced PRIFAS in
August 20, 2007, “Sistema de Información Financiera del Departamento de Educación.”
36
   After Hacienda issued payments calculated by SEPI, it provided PRDE with an Irregular GL-200 Report with information of
the payments made, that PRDE used to account for the payments in SIFDE. The payment data provided by PRDE were
extracted from the Irregular GL-200 Report for payments made during the period of October 15, through December 30, 2008.
Final Report
ED-OIG / A04J0005                                                                                            Page 21 of 29

of the Comptroller,” as amended (Regulation 33). 37 As a result, we could not determine the number of
PSCs awarded corresponding to $159,474,554 of the $161,527,366 paid with Department funds during
calendar years 2006 through 2008.

The lack of a registry of PSCs corresponding to the number of PSCs associated with the payments made
on those contracts demonstrates a lack of accountability. In addition, the lack of a registry of contracts
likely contributed to PRDE’s inability to provide the 8 missing contracts, the substantial delays in
providing 30 of the contracts, and the identified contract deficiencies detailed in Finding No. 1. Without
appropriate checks and balances over PSCs, Department funds are at increased risk of misuse.

PRDE’s Auxiliary Secretary of Human Resources stated that PRDE did not maintain a registry of PSCs
because it was understood that Regulation 33 did not apply to PSCs but rather to professional services
contracts and consulting services contracts. Accordingly, PRDE approved Regulation 6820, which states
in Article 7 that PRDE is exempt from the Regulation 33 requirement to submit copies of awarded PSCs
to the Comptroller’s Office. However, Regulation 6820 did not exclude PSCs from Article 8.b of
Regulation 33, which states that contracts that are exempted from being submitted to the Comptroller’s
Office shall always be noted in the registry of contracts of the awarding government entity. 38 The
Comptroller’s Office notified us that it had not granted PRDE an exemption from compliance with
Regulation 33.

According to 34 C.F.R. § 76.702,
         A State and a subgrantee shall use fiscal control and fund accounting procedures that insure
         proper disbursement of and accounting for Federal funds.

In addition, 34 C.F.R. § 80.20(a) states
         ... Fiscal control... must be sufficient to: (2) Permit the tracing of funds to a level of expenditures
         adequate to establish that such funds have not been used in violation of the restrictions and
         prohibitions of applicable statutes.

Puerto Rico Law Number 18 of October 30, 1975, as amended, requires that all departments of the
Commonwealth of Puerto Rico keep a registry of all contracts, deeds, and related documents that they
execute, including amendments to the same. According to Article 8.b of Regulation 33, contracts
exempted from the requirement of being filed to the Comptroller’s Office shall always be noted in the
Registry of Contracts of the awarding government entity, and a copy of the registry sheet must be
submitted to the Comptroller’s Office under the same terms established for submitting the contracts in
accordance with Article 5 of Regulation 33. 39



37
   The Commonwealth of Puerto Rico Office of the Comptroller (Comptroller’s Office) issued Regulation 33 to establish the
general rules and procedures to be followed by all government entities in preparing the registry of contracts required by Puerto
Rico Law Number 18 of October 30, 1975, as amended, and in filing copies of contracts, deeds, and related documents in the
Comptroller’s Office.
38
   Regulation 33 has been amended several times since it was first adopted. The two amendments that are applicable to our
audit scope are the October 5, 2004, amendment, and the June 20, 2008, amendment, which repealed and superseded the 2004
amendment. The excerpt of Article 8.b of Regulation 33 cited corresponds to the amendment approved on
October 5, 2004. The same requirement is found in Article 10.b. of the amendment approved on June, 20, 2008.
39
   Article 5 of Regulation 33 cited corresponds to the amendment approved on October 5, 2004. The same requirement is
found in Article 7 of the amendment approved on June 20, 2008.
Final Report
ED-OIG / A04J0005                                                                            Page 22 of 29

RECOMMENDATIONS

We recommend that the Director of the Department’s Risk Management Service, require PRDE to—

3.1       Reconcile the $15 million discrepancy between the PSC expenditures paid with Department funds
          during the period of January 1, 2006, through December 31, 2008, and the payment data from its
          paper-based payments system and SEPI; have an independent audit office or CPA firm assess
          PRDE’s reconciliation and issue an opinion on its accuracy; and return to the Department all of the
          amounts that cannot be reconciled.
3.2       Establish a policy for periodic reconciliation of expenditure data to payment data and ensure that
          systems contain accurate information.
3.3       Establish and implement internal controls, including standardized policies and procedures, to
          record all PSCs awarded in a centralized registry of PSCs that complies with Regulation 33
          requirements. The registry should include sufficient information to properly identify the PSCs and
          amendments awarded that correspond to payments made for the services provided.

PRDE Comments

PRDE stated that it recognizes and shares the concerns raised in this finding. PRDE added that it is
currently exploring options to reconcile the $15 million discrepancy found, including the option of
contracting with a CPA firm that specializes in forensic accounting to make the reconciliation, as we
suggested in Recommendation 3.1 of our draft audit report. PRDE also concurred with
Recommendations 3.2 and 3.3.

OIG Response

We revised Recommendation 3.1 to provide additional approaches for reconciling the $15 million
discrepancy. We also designated the Director of the Department’s Risk Management Service as the
official in charge of taking final Departmental action on Finding No. 3 and its recommendations because
Finding No. 3 involves Department funds overseen by different program offices within the Department.



                     OBJECTIVE, SCOPE, AND METHODOLOGY


The objectives of the audit were to determine whether PRDE followed State and Federal laws in awarding
personal services contracts and in ensuring that those services were allowable and adequately supported.
The scope of our review was PSCs awarded from January 1, 2006, through December 31, 2008.
However, based on the lack of a registry of PSCs awarded during the period of January 1, 2006, through
December 31, 2008, as discussed in Finding No. 3, we changed our sampling methodology and reviewed
a judgmental sample of 61 PSCs and related payments for services provided during the period of August
29, 2005, through June 30, 2009.

To accomplish our objectives, we –
      •   Reviewed 53 PSCs, 5 IP contracts, and documentation supporting the contract’s awarding process.
Final Report
ED-OIG / A04J0005                                                                        Page 23 of 29

   •   Reviewed payments for services provided under the contracts reviewed and supporting
       documentation for the payments such as attendance sheets, electronic reports of hours worked
       produced from SEPI, DE-14 forms, and cancelled checks corresponding to the payments made.
   •   Reviewed laws, regulations, written procedures, PRDE’s administrative memorandums, and
       circular letters that apply to the award, administration, and payment of PSCs.
   •   Interviewed personnel involved in the process of awarding PSCs and approving payments from
       OFA, the ASHR, and the ASF, and officials at the school and district levels involved in the
       awarding process for PSCs selected for review. We also interviewed four contractors who
       received five of the PSCs selected for review.
   •   Performed site visits to PRDE’s seven Educational regions to review contract documentation and
       to interview personnel involved in the process of awarding PSCs and approving payments at the
       regional level.
   •   Obtained and analyzed computer-processed data for expenditures, payments, and contracts.
   •   Performed limited testing of system controls implemented in SEPI.
   •   Examined a prior audit report of a review conducted by PRDE’s Internal Audit Office on personal
       services contracts.

Sampling Methodology

As stated in Finding No. 3, PRDE could not provide a list of the PSCs awarded during the period of
January 1, 2006, through December 31, 2008, that we could use to select a sample of PSCs for review.
As a result, we adjusted our sampling methodology to use data mining techniques to identify potentially
high-risk factors in the payment data provided by PRDE. We selected a judgmental sample of 61 PSCs
with payments totaling $459,609 for our review.

To select the sample, we analyzed the payment data and judgmentally selected PSCs related to payments
that contained the following factors identified through data mining techniques as potentially high-risk
factors in a PSC.
   •   Payments to individuals with overlapping IP contracts and PSCs.
   •   Payments that had missing information in the database such as the dates when the services were
       provided and the gross payment amounts.
   •   Payments that showed that the payment date was prior to the period of services.
   •   Payments of more than $5,000 each.
   •   Group of payments made to individuals who received $25,000 or more in payments for services provided
       during the 2006-2008 calendar-years period.

Because the payment data did not identify the contracts or contract periods related to the payments
selected for review, we were unable to determine the actual number of contracts selected until PRDE
provided the copies of the contracts and/or additional information.

PRDE also provided an electronic database that listed PSCs and IP contracts with contract periods that
covered from January 10, 2008, through September 30, 2009, and were funded with either Federal or
Final Report
ED-OIG / A04J0005                                                                                          Page 24 of 29

State funds. 40 We analyzed the data provided and judgmentally selected PSCs that had a contract period
begin date before December 31, 2008, and contained the following factors identified through data mining
techniques as potentially high-risk factors in a PSC.
     •   PSCs that appeared to have duplicate PSCs in the database.
     •   PSCs that had the highest hourly rates identified in the database (contracts with a rate of $50.00
         and $39.95 per hour).
     •   Overlapping contracts.

We also included in our sample two contracts that were selected based on information that came to our
attention indicating they were changed without authorization by an unknown person and two additional
contracts awarded to the two individuals that received the contracts changed without authorization. One
more contract that we did not originally select for review based on data analysis was mistakenly provided
by PRDE along with its supporting documentation, so we reviewed it.

The judgmental sample selected resulted in 61 PSCs covering payments for services provided from
August 29, 2005, through June 30, 2009. Although the sample was judgmentally selected based on
potentially high-risk factors identified through data mining techniques, it resulted in a diverse set of PSCs
selected for review. The sample selected represented PSCs awarded at both the central level and the
seven Educational regions for special projects, extraordinary needs, and for developing proposals. The
sampled PSCs were awarded to PRDE employees, non-PRDE employees, and retired PRDE employees
and were funded with 15 different Department programs.

Data Reliability Assessment
We obtained computer-processed data from PRIFAS and SIFDE to identify the expenditures incurred by
PRDE with Department funds during the period of January 1, 2006, through December 31, 2008. We also
obtained payment data from PRDE’s paper-based payments system and from SEPI for the same period.
We compared the total expenditures accounted for in PRIFAS and SIFDE during the 3-year period with
the total gross payments issued to contractors during the same period according to PRDE’s payments
system and SEPI. As stated in Finding No. 3, we could not reconcile the differences in the expenditure
and payment data in the two systems and, as such, we could not fully assess the reliability of the
computer-processed expenditure data.

We further verified the accuracy of the payment data by comparing the data related to the $311,957 in
payments reviewed to source documents such as cancelled checks and hard-copy attendance sheets. We
recalculated the payment amounts based on hours of services provided according to the hard-copy
attendance sheets and electronic reports of hours worked produced by SEPI and the hourly rate
established in the PSCs reviewed. We also selected a random sample of 24 payments and traced them to
the corresponding transactions in the accounting system PRIFAS and SIFDE. Based on our testing, we
concluded that the computer-processed payment data were sufficiently reliable for the purpose of
selecting a sample of PSCs to test. However, based on the results of our testing, we are not confident that



40
  The data were obtained from SEPI and included the names of the individuals contracted, Social Security Numbers, contract
periods, number of hours contracted, rate per hour, positions contracted, an employee identification number assigned by the system,
and the Educational Region and Program that contracted the services. It also identified whether the contracts were funded with
Federal or State funds but did not include payment information.
Final Report
ED-OIG / A04J0005                                                                                         Page 25 of 29

PRDE’s expenditure and payment systems contain accurate and reliable 41 information – see
Recommendation 3.1.

We performed our fieldwork at PRDE’s main offices located in Hato Rey, Puerto Rico, and we performed
site visits to PRDE’s seven Educational region offices. We held an exit meeting with PRDE on
May 28, 2010.

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.




41
  The terms “accurate” and “reliable” mean that the systems accurately reflected the actual amounts paid and spent for PSCs
during our audit period and that the information could be relied on for official reporting and decision-making purposes.
Final Report
ED-OIG / A04J0005                                                                                   Page 26 of 29

                                                                                                       Enclosure 1

Detail of Errors in Compensation Rates
         Overpaid – Questioned Costs                                Underpaid           Overpaid – Questioned Costs

        Compensation Paid Not Established in              Paid Compensation Less than    Contracts Not Amended for
           Accordance with Regulations                            Required                    Increased Rates

                                                                        $760
                         $2,112                                         $420                      $2,980
                          $277                                         $10.95                     $1,246
                         $2,389                                        $1,190                     $4,226

Compensation Paid Not Established in Accordance with Regulations
PRDE paid two contractors a total of $2,389 more than what it should have paid had the compensation
been established in accordance with PRDE regulations.

       •   PRDE contracted with the Director of PRDE’s Property Division to provide services as Executive
           Director I outside regular working hours. Although PRDE did not provide the signed copy of the
           contract, PRDE provided an electronic copy 42 of the PSC generated by SEPI, which showed the
           contracted position, contract schedule, and hourly rate established in the PSC. PRDE paid the
           employee $4,231 for 106 hours in services provided from November 1, 2008, through November
           29, 2008, at a rate of $39.95 per hour, which corresponded to 1 percent of the actual monthly
           salary of the individual as an Executive Director I. The employee’s actual salary corresponded to
           the base monthly salary for his position with additional step increases. According to Regulation
           6820, PRDE could have paid the employee a total of $2,119 for the services provided, based on an
           hourly rate of $20.01, which was 1 percent of the base monthly salary for an Executive Director
           I. 43 As a result, PRDE paid $2,112 in Department funds that could have been used for other
           allowable purposes; however, we are questioning the total of $4,231 paid for services provided
           during the entire contract period as unsupported since PRDE did not provide the approved PSC.

       •   PRDE contracted with another employee to provide Administrative Technician services outside
           regular working hours as a Statistician. PRDE paid the individual the amount of $1,489 for 100
           hours in services provided from June 8, 2006, through August 29, 2006, at a rate of $14.89 per
           hour. However, PRDE’s OFA authorized payment of an hourly rate of 1 percent of the basic
           salary of the position contracted, not exceeding the amount of $1,489 which included fringe
           benefits. PRDE could have paid $1,212 for the services provided, based on an hourly rate of
           $12.12, which was 1 percent of the base monthly salary for an Administrative Technician. As a
           result, PRDE paid $277 in Department funds that could have been used for other allowable
           purposes.




42
     The electronic copy did not show evidence of approval.
43
     The base monthly salaries for positions at PRDE do not include step increases.
Final Report
ED-OIG / A04J0005                                                                         Page 27 of 29

Paid Compensation Less than Required
PRDE paid three contractors a total of $1,190 less than what it was required to pay based on a
compensation policy for PSCs and changes in Federal minimum wage laws.

   •   PRDE contracted with one of its School Directors to provide services as a School Director outside
       regular working hours at a school under PRDE’s Open School Program. PRDE paid the
       individual $1,900 for 76 hours in services provided from December 1, 2008, through
       May 14, 2009, at a rate of $25 per hour. However, according to a new compensation policy that
       PRDE established through an administrative memorandum issued by PRDE’s Undersecretary of
       Administration on September 27, 2006, PSCs awarded to School Directors to provide services in
       after-school programs were required to be paid at a rate of $35 per hour. PRDE should have paid
       to the contractor a total of $2,660 for the services provided, based on an hourly rate of $35. As a
       result, PRDE paid to the contractor $760 less than what it was required to pay for the services
       provided.

   •   PRDE contracted with a retired employee to serve as a Facilitator for PRDE’s Education for
       Homeless Children and Youths Program. The hourly rate established in the PSC was $20 per hour.
       However, on October 2, 2006, PRDE amended the PSC twice in the same day. One of the
       amendments extended the contract period to December 22, 2006, leaving the hourly rate at $20.
       The additional amendment increased the hourly rate to $25 per hour, as mandated by the Education
       for Homeless Children and Youths Program officials based on the new compensation policy that
       PRDE established through the administrative memorandum on September 27, 2006. Despite the
       amendment increasing the hourly rate, PRDE paid the individual a total of $1,680 for 84 hours in
       services provided during the amendment period from October 2, 2006, through October 31, 2006,
       at a rate of $20. PRDE should have paid to the contractor a total of $2,100 for the services
       provided, based on the hourly rate of $25. As a result, PRDE paid to the contractor $420 less than
       what it agreed to pay in the amendment that corrected the hourly rate.

   •   PRDE contracted with an individual to provide services as an Office Clerk at a school. The hourly
       rate established in the PSC was $5.80 per hour. However, the Federal minimum wage applicable
       during the contract period from September 4, 2007, through May 23, 2008, was $5.85 per hour,
       which came into effect on July 24, 2007. PRDE paid the individual $1,270 for 219 hours worked
       from September 4, 2007, through December 30, 2007, at the incorrect hourly rate of $5.80, which
       represented $10.95 less than what PRDE was required to pay to the individual. Without amending
       the contract, PRDE paid the individual the services provided from January 8, 2008, through
       February 15, 2008, at the correct rate of $5.85. PRDE amended the PSC effective on February 15,
       2008, and paid the remaining services at the correct hourly rate of $5.85. However, the exact
       number of hours paid during the period from January 8, 2008, through February 15, 2008, could
       not be determined because PRDE did not provide the attendance sheets supporting the payment.
       As such, we are questioning a total of $2,527 paid for services provided during the entire contract
       period as unsupported based on the lack of attendance sheets supporting the payments.
Final Report
ED-OIG / A04J0005                                                                         Page 28 of 29

Contracts Not Amended for Increased Rates
PRDE paid two contractors a total of $4,226 in excess of the contracts based on increased hourly rates
without amending the contracts to reflect the increases.

   •   PRDE contracted with a retired employee to provide services as a Facilitator for PRDE’s
       Education for Homeless Children and Youths Program during the period of August 15, 2006,
       through May 30, 2007. The hourly rate established in the PSC was $20 per hour. However,
       PRDE paid the individual a total of $14,900 for 596 hours in services provided from
       October 2, 2006, through May 30, 2007, at an increased rate of $25 per hour. The increase in rate
       to $25 per hour was mandated by the Education for Homeless Children and Youths Program
       officials based on the new compensation policy that PRDE established through the administrative
       memorandum on September 27, 2006. However, PRDE did not amend the PSC to approve the
       increase in the hourly rate paid. As a result, PRDE paid $2,980 more than what it agreed to in the
       contract and, therefore, unallowable under the contract agreement.

   •   PRDE awarded a PSC to a teacher to provide services as a Teacher of Supervised Studies outside
       regular working hours at a school under PRDE’s Open School Program during the period of
       October 2, 2006, through May 30, 2007. The hourly rate established in the PSC was $15.70 per
       hour. However, PRDE paid the individual $3,350 for 134 hours in services provided from January
       9, 2007, through May 17, 2007, at an increased rate of $25 per hour. The increase in rate was
       based on the new compensation policy that PRDE established through the administrative
       memorandum on September 27, 2006, that stated that PSCs awarded to teachers to provide
       services in after-school programs were required to be paid at a rate of $25 per hour. However,
       PRDE did not amend the PSC to approve the increase in the hourly rate paid. As a result, PRDE
       paid $1,246 more than what was allowable under the contract agreement.
Final Report
ED-OIG / A04J0005                   Page 29 of 29

                                       Enclosure 2




                    PRDE Comments
PRDE Comments
                                       PRDE Comments


                          Puerto Rico Department of Education
                    Response to Draft Audit Report: ED-OIG/A04J0005

                                         Submitted to:
                                    Ms. Denise M. Wempe
                                 U.S. Department of Education
                                  Office of Inspector General
                                        61 Forsyth SW
                                         Room 18T71
                                      Atlanta, GA 30303


The Puerto Rico Department of Education (“PRDE”) submits its response to the United States
Department of Education’s Office of the Inspector General (“OIG”) Draft Audit Report Control
Number A04J0005 (“the Audit Report”) entitled Puerto Rico Department of Education Award
and Administration of Personal Services Contracts. The Audit Report concludes that (1) PRDE
lacked adequate internal controls to ensure compliance with State and Federal laws; (2) PRDE
lacked sufficient controls to ensure contract services were allowable and adequately supported;
and, (3) PRDE did not maintain adequate information to reconcile data in its financial accounting
and payment systems.

PRDE has reviewed the Audit Report’s allegations and has carefully reviewed the specific
documentation, policies, and procedures at issue. While PRDE concurs with certain aspects of
the Audit Report’s recommendations, PRDE disagrees with several of the recommendations.
Each finding and its corresponding recommendations is addressed in turn.

Finding No. 1 – PRDE Lacked Adequate Internal Controls to Ensure Compliance with
State and Federal Laws

Finding One of the Audit Report alleges that “PRDE lacked sufficient controls to ensure
compliance with State and Federal laws in awarding Personal Service Contracts (PSCs).”
Specifically, the Audit Report found that PRDE did not provide all requested contracts for
review, did not sufficiently document compliance with the award process, and failed to
adequately safeguard contract documentation. These alleged deficiencies in PRDE’s internal
controls led the Audit Report to recommend that PRDE be required to (1) develop an adequate
archiving system for PSCs and supporting documentation to facilitate document retrieval; (2)
develop controls to safeguard contract documents throughout the contracting process, including a
policy to routinely provide to the contracting or program offices copies of the approved PSCs;
and, (3) develop standardized policies and procedures governing the award process and the
requirements for maintaining sufficient documentation supporting compliance with regulations.
                                       PRDE Comments

PRDE believes these recommendations are unnecessary. While PRDE recognizes internal
controls can always be improved, PRDE will demonstrate that the specific recommendations are
already in place. First, PRDE has an adequate archiving system that facilitates the easy retrieval
of PSCs and supporting documentation. Second, PRDE has implemented standardized policies
and procedures that govern the award process and the requirements for maintaining sufficient
documentation supporting compliance with regulations. These standardized policies, in turn,
safeguard PSCs and contract documentation during the award process.

      1. PRDE’s Archiving System

The audit covered the period from August 29, 2005, through June 30, 2009. During most of the
audit period, prior to the implementation of the “Sistema de Empleados Irregular y Jornada
Parcial” (“SEPI”), PRDE used a paper-based process to award PSCs and issue payments for
services rendered. Hard copy contracts were approved by officials with delegated responsibility
from PRDE’s Secretary. Upon approval, the contract information was recorded in a payment
system developed by PRDE’s Information System’s Computer Center. Individuals with PSCs
were required to sign hard copy time and attendance sheets that were approved by assigned
supervisors who certified that the services were rendered.

Since 2008, PRDE has made numerous improvements in the manner in which it archives PSCs,
chiefly, through the July 1, 2008 implementation of SEPI. SEPI is an online system that creates
electronic copies of the information found within the PSCs. SEPI allows for the quick and simple
retrieval of PSCs through a query option whereby one can enter either the name or the social
security number of the contracted employee to retrieve information found in PSCs.

In addition to contractual information, SEPI also calculates payment for services rendered based
on time and attendance information recorded, archived and approved electronically through the
Time, Attendance, and Licenses System (“TAL”). TAL works in conjunction with SEPI by
requiring that in order for payments to be processed through SEPI, individuals with PSCs record
their time and attendance in TAL by scanning their fingerprints in biometrical terminals located at
their worksites. SEPI then calculates the payment information, which PRDE transfers
electronically to the Treasury Department of Puerto Rico (“Hacienda”). Hacienda does not issue
the corresponding payments to the contractors until the process is complete. The issuance of the
payments is similar to its process for issuing paychecks to its regular employees.

While SEPI is the source for storing information found within the PSCs, PRDE currently
continues to use a paper-based system to file the PSCs and the supporting documentation required
for an award of a PSC. The supporting documents PRDE files include, for example, certificates
issued by the Administracion para el Sustento de Menores (“ASUME”), evidencing that the
individual is current on child support payments, and by Hacienda showing that the contracted
employee has submitted a certification of filing an income tax return for the most recent 4 years
before they were awarded the PSC. Generally, these documents are attached to the hard copy of
the original PSC and held in a file room in the Office of Human Resources at the central level and
the respective region issuing the PSC.
                                       PRDE Comments

The implementation of SEPI and TAL has created a superior archiving system for PRDE, which
allows for the quick and easy retrieval of key contractual and payment information within the
respective systems. PRDE, nonetheless, continues to work towards improving its archiving
system and internal controls. Specifically, PRDE is looking to expand SEPI – or another
electronic system – to allow PRDE to scan PSCs – and supporting documents like Hacienda and
ASUME certificates into an online system that would store such documentation and similarly
allow for the simple and fast retrieval of contractual documentation. PRDE will incorporate these
changes as a requirement into its process for awarding PSCs, which is described in more detail
below. PRDE believes these expansions to its archiving system will further improve its internal
controls and allow PRDE officials to easily verify and review the accuracy and completeness of
PSCs issued. Further, these intended mechanisms would equip PRDE with the enhanced ability
to safeguard contracts through the award process by being able to verify the original hard copy of
the PSC with the final approved PSC uploaded electronically.

The implementation of SEPI and TAL have created a viable infrastructure for PRDE to monitor
its internal controls and provide a convenient and safe way to store contractual documentation.
PRDE appreciates that these improvements help ensure the accuracy and completeness of
contractual documentation and give PRDE better control over its PSCs. As a result of this
steadfast progress PRDE has made to its archiving system, PRDE has adequate controls to ensure
that PSCs awarded are in compliance with State and Federal laws. As such, PRDE disagrees with
Recommendation 1.1’s suggestion that PRDE does not have an adequate archiving system.

      2. PRDE’s controls to safeguard contract documents throughout the contracting
      process

PRDE disagrees with Recommendation 1.2, because PRDE already has sufficient controls in
place to safeguard contract documents throughout the contracting process. First, PRDE disagrees
with the Audit Report’s suggestion that it did not have sufficient controls for safeguarding
contract documents in place at the time of the audit. Second, PRDE has recently implemented a
new policy regarding the management and processing of PSCs that further strengthened the
controls for safeguarding contract documents.

          a. PRDE Internal Controls Safeguarding Contract Documents Identified
          Unauthorized Change to PSC during Audit Period

At the time of the audit period, PRDE had internal controls in place for the safeguarding of
contract documents, which allowed PRDE to identify unauthorized changes to two (2) PSCs. As
a result, and as recognized by the Audit Report, no payments were made in accordance with the
unauthorized changes. PRDE’s contract review and payment approval processes included
multiples layers of review of PSCs for accuracy and completeness. In the case of the
identification of unauthorized changes to the two (2) PSCs cited in the Audit Report, these
unauthorized changes were identified by a Coordinator who habitually reviewed PSCs for
accuracy and completeness as a routine part of her responsibilities. Upon discovery, these
unauthorized changes were directed to the PRDE Legal Division for corrective action. Indeed,
this demonstrates the efficacy of PRDE’s internal controls.
                                        PRDE Comments


          b. PRDE’s Process for Awarding PSC

While PRDE already had internal controls in place for the safeguarding of contract documents at
the time of the audit, PRDE recently took action to strengthen its internal controls in place for
safeguarding contract documents. On June 12, 2010, PRDE issued a memoranda entitled
“Instrucciones Para el Manejo y Tramite de los Contratos de Servicios Personales (Jornada
Parcial y Personal Irregular)”, roughly translated as “Instructions for the Management and
Processing of Personal Service Contracts (Part Time and Contracted Employees)” hereinafter
referred to as “Process for awarding PSCs”, which enacted a policy establishing a five-step
process for the review of PSCs and the information contained. This multitier system creates a
process for awarding PSCs that charges officials in PRDE’s Office of Human Resources with the
task of verifying the accuracy and completeness of data gathered for PSCs, thereby providing
PRDE with an infrastructure that ensures that PSCs are rendered in compliance with State and
Federal laws.

In the first stage of the enacted process for awarding PSCs, the regional offices or central office
preparing the PSCs are required to ensure that funds have been authorized for the respective PSC,
the dates in which the contractor will work matches the dates for which the PSC has been
awarded, the job responsibilities and duties that the contractor will engage in match their awarded
position, and to document the total number of hours that will be covered in the PSC. Further, in
the first stage, it is mandated that the office preparing the PSC verify that the contractor has
submitted all of the documents.

At the second stage, an administrative assistant in the Office of Human Resources is in charge of
evaluating the PSCs and ensuring that the PSC has been filled out in its entirety, contains all
required information, that the PSC has been signed, that the PSC includes the required attached
documents, and that the salary assigned to the contractor is in accordance with the pay scale
established by PRDE. This step ensures that at the first stage in the process, all of requisite data
has been gathered and that the contractor will be paid the correct salary over the approved time
period.

Third, an administrative assistant or a human resource technician in the Office of Human
Resources is responsible for entering key data from the PSC into SEPI, and is required to verify
that all the required information is found in the PSC. This verification process includes ensuring
the PSC contains the correct salary scale and that the employment period granted for the PSC is
accurately noted in SEPI, and that the PSC has been signed by all parties. In this stage of the
process, PRDE seeks not only to continue to ensure that the information contained in the PSC is
accurate and correct but also to verify the accuracy of the salary information.
                                        PRDE Comments

Fourth, a human resource specialist in the Office of Human Resource verifies that the information
in the PSC entered into SEPI is complete and correct, the PSC has been assigned the correct level
of funds, the PSC is signed, and that the PSC does not have smudges, alterations, or corrections.
This stage continues to verify the accuracy of the PSC and corresponding salary information, and
also ensures that improper changes have not been made to the PSC.

Finally, a human resource technician in the Office of Human Resources is in charge of entering
the PSC into KRONOS, the time tracking software used by PRDE to monitor the time and
attendance of its contractors. This step ensures that the contractor is able to record their time and
attendance using the biometric scanning system, and that the PSC granted matches the
employment period budgeted for in the contract. Finally, it ensures that the employee will not
work more hours than provided for within the terms of their PSC.

The implementation of the multitier system creates several layers of controls to safeguard
contractual documentation during the award process. For example, in the fourth stage of the
multitier system, the person in charge of approving the PSC is required to verify that the PSC
does not have any unauthorized changes, including any improper smudges or corrections.
Additionally, in the second and third stage of the process, PRDE requires the charged employee
to verify the accuracy and completeness of the PSC and corresponding documentation. This five
step process guarantees that at least four PRDE employees will independently review the contract
documentation.

The implementation of the multitier process has been covered in trainings to PRDE employees.
During the months of April and May, PRDE held trainings in all of its regions regarding the five
step process for awarding PSCs. These trainings were facilitated through the use of a PowerPoint
covering the newly enacted policy and attendance sheets were collected to ensure that key
personnel attending the trainings. See Attachment A, PowerPoint Slides, at 4-6.

PRDE’s commitment to improve its electronic archiving infrastructure through the
implementation of a scanning mechanism to allow for the uploading of PSCs into an electronic
system will further strengthen PRDE’s controls for safeguarding contract documents.
Nonetheless, in its current state, the newly enacted process for issuing PSCs requires significant
verification and review for the accuracy and completeness of PSCs, establishing sufficient
controls to safeguard contractual documentation.

Accordingly, PRDE is already in compliance with the Audit Report’s Recommendations 1.2 and
1.3 and requests, in turn, that these recommendations be eliminated from the Audit Report.
                                       PRDE Comments


Finding No. 2 – PRDE Lacked sufficient controls to ensure that Contract Services were
Allowable and Adequately Supported

Under Finding Number Two, the Audit Report found that “PRDE did not implement adequate
controls to properly account for Department funds used for PSCs and maintain adequate and
reliable documentation in support of PSC payments.” This finding led the auditors to make four
recommendations. Each recommendation is addressed in turn.

      1. Questioned Costs Related to Supporting Documentation

Recommendation 2.1 would require PRDE to return funds based on the lack of supporting
documentation provided to the auditors during the audit. As detailed below, PRDE has and is
providing supporting documentation to address costs questioned under this recommendation.
Accordingly, PRDE requests that the Audit Report be revised to account for this information.

The Audit Report recommended that PRDE return $27,716 related to PSCs the auditors did not
receive, and therefore were unable to review, during the audit. PRDE herein provides 4 of the 9
PSCs the auditors did not receive. See Attachment B, PSC Chart and PSCs 7-10, for the missing
PSCs and the actual PSCs for PSCs 37, 38, 46, and 53. These PSCs account for $7,660.73 at
issue, and the questioned costs under this recommendation should be adjusted accordingly.

Even prior to the implementation of the improvements made to its archiving system and internal
controls including SEPI and the newly enacted process for awarding PSCs, PRDE had archives in
place to retrieve PSCs and supporting documentation. See page 2. This process required the filing
of PSCs and supporting documentation in the Human Resources offices within the respective
regions. The former archiving system PRDE operated faced certain challenges in the face of the
economic recession and an extreme deficit, which forced PRDE to lay off significant numbers of
employees. Some of the employees laid off held responsibilities tied to the maintenance of PSCs
and supporting contractual documentation. As a result, PRDE experienced great levels of
transition that coincided with the period this audit was conducted. Other staff slowly replaced or
took on the responsibilities of laid off workers, and offices were moved and files were disturbed
creating challenges in the quick retrieval of documents during this period. PRDE is overcoming
the challenges of this transition and is proud to now have an electronic archiving system that can
more effectively weather challenges such as staff turnover and office changes.

PRDE is able to reconstruct alternative documentation for missing contracts and attendance sheets
that are implicated under Recommendation 2.1. PRDE expects to have this alternative
documentation by December 15, 2010 and will submit such documentation as a supplement to
this response.
                                       PRDE Comments

      2. Questioned Costs related to services provided prior to contract approval, payment
      for hours in excess of contracted hours, and payment for errors in contract
      compensation rates paid.

Recommendation 2.2 asserts that PRDE (1) allowed for services to be provided before the
contract was approved, (2) allowed for contractors to work in excess of their maximum hours
granted in their PSC, and (3) did not properly amend PSCs to reflect changes in laws that required
certain contracted employees to be paid a different wage than the hourly rate they were initially
contracted to work. We address each portion of this recommendation below.

First, the Audit Report’s allegation that PRDE allowed contractors to perform work prior to the
approval of their respective PSC does not establish any harm to the federal interest. Because the
expenditures under the PSCs at issue were allowable and allocable to the grant, no harm to the
federal interest was suffered. Significantly, the Audit Report does not aver that wages paid for
services under the PSCs at issue raised any allowability or allocability issues. Thus,
Recommendation 2.2 should be eliminated from the Audit Report. Had the Audit Report raised
any such concerns about the allowability and allocability of these services rendered, PRDE could
have easily demonstrated that these expenses were proper under the grant.

PRDE, nonetheless, strives to ensure that PSCs are approved prior to the employee commencing
working under their respective PSCs. Specifically, PRDE’s implementation of the Process for
Awarding PSCs ensures that contractors will not commence working before their contract is
approved. In the Process for Awarding PSCs memoranda, PRDE requires that no person
commence working until the PSC has been finally approved and in effect. Final approval will not
occur until such person has satisfied all requirements to be awarded a PSC, the PSC is filled out
accurately and completely, supporting documentation is filed appropriately, and the contract is
signed and the information is entered into SEPI. This process requires PRDE employees to
secure adequate time to allow for the approval of the contracts prior to the contract period. While
we recognize that formal contract approval is an important internal control which is now ensured
by PRDE’s current system, we also note that the lack of formal approval does not in itself render
the expenditures as unallowable.

Second, the Audit Report’s charge that PRDE allowed for contractors to work in excess of their
maximum hours granted in their PSC is not relevant here because the Audit Report has not
demonstrated that a federal interest was harmed. Expenditures paid to PRDE contractors working
under PSCs were allowable and allocable to the grants charged, which the Audit Report does not
challenge. Again, had the Audit Report raised any concerns about the allowability and
allocability of these services rendered, PRDE could have easily demonstrated that these expenses
were proper under the grant.
                                       PRDE Comments


Even so, PRDE takes the extra steps of ensuring that contracted employees do not work more
hours than the hours that they have been granted to work under their respective PSC. PRDE
monitors to ensure contracted employees do not work more hours than what they are contracted to
work by requiring that at the first, second, third and fourth stages of the Process for Awarding
PSCs, charged PRDE officials verify that the dates that the PSC lists as that of what the
contractor will work matches that what they have been budgeted to work for. See page 3-4. The
final date that the contractor can work is reflected in SEPI, thereby strengthening PRDE’s
monitoring of the hours worked by its contractors. Further, as discussed above, see page 3,
PRDE hopes to create better integration and communication between SEPI – or another electronic
archiving system – and TAL, to allow for strengthened alert mechanisms to be triggered when
contracted employees may attempt to punch-in in deviation of the hours they have been assigned
to work.

Third, the Audit Report suggests that PRDE needs a formal policy for amending contracts to
ensure compliance with changes in State or Federal laws. It is PRDE’s contention that these
practices have not caused any harm to the federal interest. The enactment of State or Federal laws
governing the payment of personnel working under PSCs trumps the plain language found in a
PSC, including the hourly wage found in a PSC. PRDE must comply with such changes in State
and Federal Laws, and PRDE’s obligations to follow such laws need not be memorialized in
PRDE policy procedures. Nevertheless, PRDE has a process in place to ensure that PSCs are
properly amended when, for example, changes in laws require a contracted employee to be paid a
different hourly sum. In a memoranda issued by then-Acting Secretary Edward Moreno dated
November 3, 2009, entitled Contratos de Servicos Personales (“Personal Service Contract
Memo”), PRDE enacted a requirement that if an error is found in a contractual document, then a
new PSC must be drafted. The creation of the new PSC should be in accordance with the Process
for Awarding PSCs. This process ensures that when PSCs have salary information outdated by
newly enacted policies and applicable laws, new PSCs are crafted in accordance with the Process
for Awarding PSCs.

      3. Consistently follow its regulations in establishing the hourly rates in the PSCs
      awarded to ensure the most efficient use of Department funds

Regarding Recommendation 2.3, PRDE has adequate controls in place to ensure that it will
adhere to applicable regulations in establishing the hourly rates and monitoring salary information
during the award process of PSCs. Under PRDE’s Instructions for Awarding PSCs, under the
second stage of the award process, the person in charge of evaluating the PSCs in the Office of
Human Resources must ensure, inter alia, that the salary assigned to the contractor is in
accordance with the applicable pay scale for the approved time period. The Instructions for
Awarding PSCs requires that in the third stage of the award process, the Office of Human
Resources similarly verify, amongst other things, that the contractor has been granted the correct
salary scale and that the total number of hours reflects the hours that have been approved for the
implicated PSC. The fourth stage also requires that the salary information be verified, further
requiring that the Office of Human Resources verify that no improper or fraudulent changes have
been made to the PSC. The second, third, and fourth stages of the award process implemented by
                                       PRDE Comments

PRDE are sufficient to ensure that the salary information awarded is accurate. PRDE believes
that its newly enacted Process for Awarding PSCs will only continue to hone PRDE’s
commitment to fairly and accurately awarding salary information under PSCs.

      4. Develop and implement internal controls, including standardized policies and
      procedures

Recommendation 2.4 suggests PRDE be required to develop and implement internal controls,
including standardized policies and procedures addressing a variety of items. The recommended
elements are addressed below.

          i. Documentation supporting payments made be properly identified with the
          contract or amendment under which the services were provided

Under SEPI, PRDE is able to track payments rendered to specific PSCs. See page 3-4 for the
steps entailed in PRDE’s Process for Awarding PSCs.

          ii. Require programs and offices to submit PSCs to the final approver with
          enough time to allow for approval of the contracts prior to the contract period and
          prohibit contractors from working before their contract period

PRDE recognizes the importance of ensuring that there is adequate time to attain the final
approval on a PSC prior to the commencement of the contract period, and this is reflected in
PRDE’s enacted Process for Awarding PSCs. In the Process for Awarding PSCs memoranda,
PRDE requires that no person can commence working until the PSC has been finally approved
and in effect. Final approval will not occur until such person has satisfied all requirements to be
awarded a PSC, that the PSC is filled out accurately and completely, attached document is filed
appropriately, and the contract is signed and the information is imputed into SEPI. This process
requires PRDE employees to secure adequate time to allow for the approval of the contracts prior
to the contract period.

          iii. PRDE requires final PSCs to include the approval date in the PSCs

PRDE’s implemented Process for Awarding PSCs aims to ensure that PSC information entered
into SEPI is complete and accurate. As detailed in the section on PRDE’s Process for Awarding
PSCs, the second, third, and fourth stages of the process requires the Office of Human Resources
to ensure that all required information has been filled out, and the third and fourth stages of the
process ensure that the required information has been accurately entered into SEPI. Because
requiring that the final approval date is listed on the PSC is a requirement, PRDE has a process in
place to ensure that it is required that the final contract includes the approval date of the PSC
properly noted in SEPI.
                                        PRDE Comments


          iv. Require contract hours to be in accordance with approved budgets and only
          the correct number of hours charged by contractors to be approved for payment

PRDE officials have discussed that program budgets match the PSCs to help ensure that PSCs
rendered match the amount budgeted for in the program budget. PRDE believes that this will
help PRDE assess its budgeting needs, such that as PSCs may need to be revised, budgets will
have to be accordingly fixed. This will require PRDE to be in further consultation with an
approved budget as it may deem it necessary to alter the number of hours a contractor may work
under a PSC.

           v. Establish a process for amending PSCs when amendments are needed to
          change hourly rates based on changes in policies and applicable laws

PRDE already has in place a process for amending PSCs when amendments are needed. In a
memoranda issued by the Acting Secretary Edward Moreno dated November 3, 2009 entitled
Contratos de Servicos Personales (“Personal Service Contract Memo”), PRDE enacted a
requirement that if an error is found in a contractual document, then a new PSC must be drafted.
The creation on the new PSC should be in accordance with the Process for Awarding PSCs. This
process ensures that when PSCs have salary information outdated by newly enacted policies and
applicable laws, new PSCs are crafted in accordance with the Process for Awarding PSCs.

          vi. Require that the methodology and criteria used to establish the compensation
          rates included in the contracts be properly documented

PRDE has a policy in place to ensure that the compensation rates awarded to PRDE employees
are accurate and in accordance with PRDE’s pay scales. See page 3-4 (describing PRDE’s
controls in place to ensure that it will adhere to applicable regulations in establishing the hourly
rates and monitoring salary information during the award process of PSCs).

Finding No. Three – PRDE’s Financial Accounting and Payment Systems

Finding Number Three found a $15 million discrepancy between data for PSC expenditures paid
with Department funds during calendar years 2006 through 2008 and the data for payments made
during the same period. Specifically, the Audit Report averred that the total expenditures
accounted for in PRIFAS/SIFDE are about $15 million less than the total payments recorded in
PRDE’s paper-based payment system and SEPI. This finding led the Audit Report to recommend
that PRDE be required to (1) contract with a CPA firm that specializes in forensic accounting to
reconcile the $15 million discrepancy between the PSC expenditures paid with Department funds
during the period of January 1, 2006, through December 31, 2008; (2) establish a policy for
periodic reconciliation of expenditure data to payment data and ensure that systems contain
accurate information; and, (3) establish and implement internal controls, including standardized
policies and procedures, to record all PSCs awarded in a centralized registry of PSCs that
complies with Regulation 33 requirements.
                                       PRDE Comments


PRDE is currently exploring options to reconcile the alleged $15 million discrepancy between the
PSC expenditures paid with Department funds during the period at issue, including contracting
with a CPA firm that specializes in forensic accounting. PRDE accepts the Audit Report’s
recommendations 3.2 and 3.3, which regard the establishment and implementation of a policy for
periodic reconciliation and internal controls to record all PSCs awarded in a centralized registry
that complies with the requirements of Regulation 33.

Conclusion

In closing, PRDE respectfully requests the Audit Report’s findings and recommendations be
reconsidered. PRDE respectfully disagrees with the Audit Report ED-OIG/A04J0005, and
requests that these findings be reconsidered, revised, and that the recommendations for repayment
be withdrawn before the issuance of a Final Audit Report. PRDE has demonstrated the presence
of a strong internal control system now in place, and thus its archiving system and internal
controls should not be classified as a high risk vehicle. PRDE recognizes and shares the concerns
that the auditors raised in Audit Report Finding three. PRDE staff appreciates the opportunity to
comment and will continue to work to ensure compliance with State and Federal laws in awarding
PSCs and in ensuring that PSC services are allowable and adequately supported.
PRDE Comments – Attachment A
PRDE Comments – Attachment A
PRDE Comments – Attachment A