oversight

Puerto Rico Recovery Act Audit, Vocational Rehabilitation Administration

Published by the Department of Education, Office of Inspector General on 2009-12-15.

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

                  U.S. Department of Education
                   Office of Inspector General


  American Recovery and Reinvestment Act of 2009
                         Puerto Rico Recovery Act Audit

                   Vocational Rehabilitation Administration




                         Puerto Rico Capitol Building

ED-OIG/A04J0009                                               December 2009
                            UNITED STATES DEPARTMENT OF EDUCATION
                                  OFFICE OF INSPECTOR GENERAL

                                                                                         Audit Services
                                                                                            Region IV
                                          December 14, 2009

Ms. Nydia Colón
Administrator
Vocational Rehabilitation Administration
P.O. Box 191118
San Juan, Puerto Rico 00919-1118

Ing. José Ortíz-Vázquez
Director
Puerto Rico Economic Recovery and Reinvestment Task Force
Edif. Sergio Cuevas Bustamante # 604
Ave. Barbosa
San Juan, PR 00916-7066

Dear Ms. Colón and Ing. Ortíz:

This final audit report, Control Number ED-OIG/A04J0009, presents the results of our review of
the designed systems of State-level internal control over American Recovery and Reinvestment Act
funds in Puerto Rico for the Vocational Rehabilitation Administration.

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
official, who will consider them before taking final Departmental action on this audit:

                                          Ms. Alexa Posny
                       Office of Special Education and Rehabilitative Services
                                   U.S. Department of Education
                                      400 Maryland Ave S.W.
                                    Washington, DC 20202-7100

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

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

                                                Sincerely,


                                                /s/
                                                Denise M. Wempe
                                                Regional Inspector General for Audit
             Abbreviations/Acronyms Used in This Report


ARRA             American Recovery and Reinvestment Act

C.F.R.           Code of Federal Regulations

CMIA             Cash Management Investment Act

CRIS             Consumer Rehabilitation Information System

Department       U.S. Department of Education

Hacienda         Puerto Rico Department of Treasury

IDEA             Individuals with Disability Education Act Part B

IL/OB            Independent Living / Older Blind

OIG              Office of Inspector General

OMB              Office of Management and Budget

OSERS            Office of Special Education and Rehabilitative Services

PRIFAS           Puerto Rico Integrated Financial Accounting System

SDO              Special Disbursement Officer

SFSF             State Fiscal Stabilization Act

SILS             State Independent Living Services

VR               Vocational Rehabilitation

VRA              Vocational Rehabilitation Administration
Audit Report
ED-OIG/A04J0009                                                                     Page 1 of 10
                                     Puerto Rico Recover Act
                             Vocational Rehabilitation Administration
                                        ED-OIG/A04J0009
                                           PURPOSE

The American Recovery and Reinvestment Act of 2009 (ARRA) places a heavy emphasis on
accountability and transparency, and in doing so, increases the overall responsibilities of agencies
impacted by the Act. The U.S. Department of Education (Department) is responsible for ensuring that
the education-related ARRA funds reach intended recipients and achieve intended results. This
includes effective implementation and control of funds at the Federal level as well as ensuring that
recipients understand requirements and have proper controls in place for 1) administering and
reporting ARRA funds, and 2) promptly identifying and mitigating instances of fraud, waste, and
abuse of the funds.

The purpose of our review was to determine whether the Vocational Rehabilitation Administration
(VRA) had designed a system of internal controls that were sufficient to provide reasonable assurance of
compliance with applicable laws, regulations, and guidance governing ARRA. This report provides the
results of our review of the controls at the VRA, including those being implemented for ARRA funds.

This report covers only the results of our review performed at VRA. Work performed at other State
agencies charged with responsibility for overseeing ARRA funds will be reported separately.

                                            RESULTS

We found that VRA officials were working diligently and proactively to ensure the proper
administration of ARRA funds. VRA designated a project manager with the responsibility for
providing guidance on the use of ARRA funds and assisting in preparing work plans for ARRA funded
projects. However, in our overall risk assessment of VRA’s internal control over data quality, cash
management, subrecipient monitoring, and the use of funds, we determined that VRA’s system of
internal controls needs to be strengthened to ensure the proper administration of ARRA funds.
Specifically, we found that VRA did not
   •   Withhold appropriate income taxes from payments;
   •   Ensure that financial data were reliable for reporting purposes;
   •   Develop and communicate reporting and job creation or retention guidance;
   •   Update information system policies and procedures;
   •   Ensure that time between receipt and payout of Federal funds was minimized; and
   •   Develop a monitoring plan to ensure compliance with ARRA requirements.
Because of the limited nature of our review, there may be other weaknesses in areas not reviewed – see
limitations included in the Scope and Methodology section of this report.

In response to the preliminary copy of our final audit report, VRA provided further clarification and a
corrective action for each finding included in the report. VRA’s comments are summarized after the
recommendations section of each finding. The full text of VRA’s response is enclosed with the report.
Audit Report
ED-OIG/A04J0009                                                                                    Page 2 of 10
FINDING NO. 1 ─ Tax Withholdings Were Inconsistent

VRA’s computer programs that were used to determine appropriate income tax withholdings on
payments for services rendered were inconsistent. VRA used two programs to calculate income tax
withholdings from payments to individuals – one known as the Consumer Rehabilitation Information
System 1 (CRIS) is used to determine the appropriate withholdings, and the other is a stand-alone
program used to prepare the checks and calculate withholdings. However, the systems were not
synchronized, and the pertinent withholdings processed by the two systems were inconsistent and not
reliable.

Section 1143 of the Puerto Rico Internal Revenue Code of 1994, as amended (Code) and Regulation
No. 5619 of that Section (Regulation) provides that the Government of the Commonwealth of Puerto
Rico and every person, who makes payments for services rendered in conducting business for the
production of income, shall deduct and withhold 7 percent of such payments with certain exclusions
provided by Section 1143(b) of the Code.

We reviewed 35 checks issued 2 by VRA’s Special Disbursement Officer (SDO) as of July 17, 2009,
for services rendered under ARRA. We found that although the payment stubs for all 35 checks
contained the correct amounts to be deducted, that amount was not deducted from 19 checks, or 54
percent of the checks reviewed. As a result, these 19 checks were issued without the appropriate
income tax withholdings required by the Puerto Rico Internal Revenue Code.

The program used by the SDO to prepare the checks automatically displayed a deduction in the
payment stub regardless of whether the payments were subject to that deduction. At the same time, the
deduction in the payment stub was not automatically deducted from the check amount. Deductions
had to be manually entered when checks were being prepared in order to be deducted from the
payment.

According to VRA officials, neither of the systems were synchronized, and the main system used to
calculate the appropriate deductions was not programmed in accordance with the Puerto Rico Internal
Revenue Code of 1994, as amended. VRA officials stated that the first $1,500 paid during the calendar
year to the person who rendered the service was exempt from the 7 percent deduction; however, the
system did not recognize amounts paid by calendar year.

A primary purpose of the ARRA funds is to preserve and create jobs and promote economic recovery
at all levels. Not withholding the appropriate income tax could prevent the Puerto Rico Department of
Treasury (Hacienda) from receiving income from the approximate $13.3 million awarded to Puerto
Rico in Vocational Rehabilitation (VR) ARRA funds, income that could eventually be used to further
stimulate the economy and provide better government services. In addition, the deductions shown on
the payment stubs may appear on the personal income statements at the end of the calendar year,
indicating payments of income taxes that were not actually made. As such, the issue could extend to
refunds of taxes as well. Specifically, individuals, organizations, and corporations could receive credit
for taxes paid that have not been paid.



1
  A program used to track services provided to consumers and their associated expenditures.
2
  Checks were selected as part of our testing to ensure amounts reported as disbursed were correct and modifications made
to CRIS to collect and compile ARRA data were reliable.
Audit Report
ED-OIG/A04J0009                                                                      Page 3 of 10
Recommendations

We recommend that the Assistant Secretary for the Office of Special Education and Rehabilitative
Services (OSERS) require VRA to —

1.1   Review the programming of both systems used to process withholdings on payments for services
      rendered to ensure that appropriate deductions are processed; and

1.2   Determine the extent of the errors and adjust payments and reported tax information, accordingly.

VRA’s Comments

VRA agreed with the finding and stated that on October 1, 2009, they began a restructuring process in
the Finance Division and all payments are now being processed through the Puerto Rico Integrated
Financial Accounting System (PRIFAS). This process will enable VRA to create vouchers from CRIS
to be input in PRIFAS for check issuance. Payments processed through PRIFAS must be approved by
Hacienda after it verifies account codes, amounts and direct income tax withholding. As a result of the
verification process, the risk of not reporting or withholding income tax to an individual in accordance
with section 1143 of the Puerto Rico Internal Revenue Code of 1994 as amended and Regulation No.
5619 is eliminated.

OIG’s Response

VRA’s restructured payment process should mitigate the risk of not reporting or withholding income
tax to individuals in accordance with section 1143 of the Puerto Rico Internal Revenue Code and
Regulation No. 5619. However, VRA still needs adequate controls over creating vouchers in CRIS to
ensure the accuracy and reliability of the data before inputting any information in PRIFAS. VRA did
not provide any corrective action addressing Recommendation 1.2.

FINDING NO. 2 ─ Financial Data Are Not Reliable for Reporting Purposes

VRA uses PRIFAS to report financial data to the U.S. Department of Education's Rehabilitative
Services Administration. The financial data in PRIFAS come from CRIS. VRA is using both PRIFAS
and CRIS to fulfill ARRA reporting requirements.

We found that VRA posted ARRA accounting entries in PRIFAS under its regular VR funding
accounting string with the intent of reimbursing those funds with ARRA funds. However, VRA did
not identify the entries as ARRA expenditures, making those transactions difficult to identify unless
referring back to the source documents. In addition, a disbursement report provided by VRA officials
and obtained from CRIS did not reconcile with the disbursement data in PRIFAS. Specifically, the
report 1) included transactions not related to ARRA and transactions with amounts that did not match
the supporting documentation; and 2) did not include transactions for which supporting documentation
related to ARRA was provided. Without adequate identification of ARRA transactions, VRA will
have to review source documents to identify reimbursements to its regular funding, and as we found,
audit reconciliation could be an issue.

According to ARRA, Section 1512(c)(2), each recipient that receives recovery funds from a Federal
agency shall submit a report to that agency that contains, among other items, the total amount of
Audit Report
ED-OIG/A04J0009                                                                         Page 4 of 10
recovery funds received from the agency, the amount of recovery funds that were expended or
obligated to projects or activities, a detailed list of all projects or activities for which recovery funds
were expended or obligated, and an estimate of the number of jobs created and retained by the project
and activity. In addition, 34 C.F.R. § 80.20(a) & (b)(1) requires that a State must expend and account
for grant funds in accordance with State laws and procedures for expending and accounting for its own
funds. Fiscal control and accounting procedures of the State, as well as its subgrantees and cost type
contractors, require that financial management systems of grantees be able to provide accurate, current,
and complete disclosure of the financial results of financially assisted activities in accordance with the
financial reporting requirements of the grant.

VRA officials stated that they received instructions from Hacienda stating that they could post ARRA
related transactions to their regular Federal fund accounting string while PRIFAS was being modified
to include the new ARRA accounting string. Once modifications were ready, VRA officials could
make the necessary accounting entries. However, if ARRA transactions are not readily identifiable for
reimbursement, accounting entries may not be properly made, and reported ARRA data may be
unreliable.

Recommendations

We recommend that the Assistant Secretary for OSERS require VRA to —

2.1       Ensure that accounting entries posted to the non-ARRA accounting string are reclassified to the
          proper ARRA accounting string to avoid data reliability issues when reporting; and

2.2       Establish adequate supervising procedures to ensure accounting entries are posted to the
          appropriate accounting string and in accordance with supporting documentation.

VRA’s Comments

According to VRA,

      •    PRIFAS is an account expenditure format which includes all the agency’s expenditures and
           does not pertain solely to CRIS.

      •    VRA was instructed to initially charge ARRA expenditures to its regular Federal accounts and
           then adjust the charges after the ARRA account was created in PRIFAS.

      •    All journal entries have been made to adjust VRA’s accounting of ARRA charges from its
           regular Federal accounts to the appropriate ARRA accounts.

VRA added that it had established written procedures for accounting for all ARRA funds; created
separate account codes for ARRA expenses; reconciled ARRA fund information from CRIS and
PRIFAS; and created a separate filing system for ARRA funds.

OIG’s Response

We commend VRA for its immediate actions to address our recommendations, and maintain that VRA
should continue strengthening its procedures to ensure proper accounting of ARRA funds.
Audit Report
ED-OIG/A04J0009                                                                         Page 5 of 10

FINDING NO. 3 ─ No Reporting and Job Creation or Retention Guidance

VRA had not developed guidance for reporting nor had it developed criteria or a methodology to
estimate the number of jobs to be created or retained as a result of the ARRA funds. According to
VRA officials they were in the process of completing a work plan that would include an estimate of the
number of jobs to be created or retained based on the services they provide to consumers. As of
August 2009, VRA officials had not finished with the work plan that would include a methodology for
estimating the number of jobs created or retained. According to VRA, it was waiting for the
Department 3 to issue more specific reporting guidelines before developing its reporting guidance. For
the requirement to report job creation and retention estimates see the Section 1512(c)(2) requirements
under Finding No. 2 of this report.

A primary purpose of the ARRA funds is to preserve and create jobs and promote economic recovery.
To demonstrate the impact of the ARRA funds in achieving its stated purposes, agencies should
establish criteria or a methodology to use in estimating the number of jobs created and or retained, so
that the information can be consistently reported within and between States.

Recommendations

We recommend that the Assistant Secretary for OSERS require VRA to —

3.1       Develop and implement procedures for reporting in accordance with applicable guidance;

3.2       Ensure that proper and accurate ARRA information is reported; and

3.3       Develop criteria or methodology to estimate the number of jobs created or retained in order to
          determine the impact of ARRA funds.

VRA’s Comments

VRA stated that it is currently
      •    Using the Guidance on ARRA reporting issued by the Department on September 2009; and
      •    Reviewing and developing procedures to ascertain full compliance with reporting requirements
           on job creation and retention.

OIG’s Response

We commend VRA for its immediate actions to address our recommendations, and encourage VRA to
continue to develop an internal procedure using the guidance issued by the Department to ascertain full
compliance with reporting requirements and to maintain uniformity in its reporting process.




3
    The Department’s reporting guidance came out in September 2009.
Audit Report
ED-OIG/A04J0009                                                                         Page 6 of 10
FINDING NO. 4 ─ Information System Policies and Procedures Were Outdated

VRA has not updated its information system security policies and procedures since November 2000.
As a result, current policies and procedures do not reflect changes made to the systems in recent years
and are not updated to address the latest threats and security risks. Also, the user manual for CRIS,
one of the systems being used to collect, compile, and report ARRA data hadn’t been updated since
March 2004 despite changes made to the system since that time.

Section 1001 of VRA’s information system security policies and procedures establishes a general rule
that security policies and procedures be revised twice a year regardless of changes made.

The National Institute of Standards and Technology from the U.S. Department of Commerce, Special
Publication 800-53, revision 2, provides guidance for organizations to establish the necessary controls
“to meet security requirements defined by applicable laws, Executive Orders, directives, policies,
standards, or regulations (e.g., Federal Information Security Management Act, Office of Management
and Budget (OMB) Circular A-130, Appendix III). The ultimate objective is to implement information
systems that are dependable in the face of threats.”

In addition, the Government of Puerto Rico established Law 151, known as “Ley de Gobierno
Electrónico,” 4 providing the Puerto Rico OMB the authority to issue general directives to employ
adequate security controls to guarantee the confidentiality, integrity, and availability of data which
includes security policies and procedures.

VRA officials have not reviewed and updated its information system security policies and procedures
to reflect the latest changes and security threats. Updated security policies and procedures minimize
the risk of compromising the agency’s information and shows due diligence to the individuals served.
Without adequate security policies and procedures the data may be compromised from within or
outside the agency, potentially affecting the data reliability of the information reported, including the
$13.3 million in ARRA funds awarded to VRA.

Recommendations

We recommend that the Assistant Secretary for OSERS require VRA to —

4.1       Update its information system security policies and procedures as well as the CRIS manual to
          reflect changes made to the systems in recent years, and to incorporate information addressing
          the latest security threats; and

4.2       Develop a schedule for periodically updating its information systems security policies and
          procedures.

VRA’s Comments

VRA agreed with the finding and recommendation. According to VRA,
      •     It created a team to review the required information and update changes made to the systems in
            recent years.
4
    Electronic Government Law, dated June 22, 2004.
Audit Report
ED-OIG/A04J0009                                                                                  Page 7 of 10

    •    A new policy will include the practice of reviewing the documentation twice a year; and
         references to current Government laws, official communications and best practices.
    •    The documentation will address the latest threats and security issues.

OIG’s Response

We commend VRA for its immediate action to address our recommendations in updating its
information system security policies and procedures to minimize the risk of compromising the
agency’s information.

FINDING NO. 5 ─ Inadequate Procedures to Minimize the Time Between Receipt and Payout of
                Federal Funds

VRA did not have adequate procedures in place to minimize the time lapse between the receipt and
payout of Federal funds for program purposes. VRA relied on Regulation 9, 5 a regulation issued by
Hacienda that dictates the duties and responsibilities of SDOs. However, the regulation did not include
a procedure for SDOs to minimize the time between receipt and payout of Federal funds; instead, the
procedure stated that payout will be made according to all applicable laws and regulations.

A similar situation was reported in the Single Audit Report for the year ended June 30, 2008. The
auditors reported that the VRA had delays in the time elapsed between the transfer of Federal funds
and the disbursement of the funds. The delay was attributed to inadequate procedures to minimize the
time elapsed between the transfer of Federal funds and the payout of funds.

According to 34 C.F.R. § 80.21(b), methods and procedures for payment shall minimize the time
elapsing between the transfer of funds and disbursement by the grantee or subgrantee, in accordance
with Treasury regulations at 31 C.F.R. Part 205 (Rules and Procedures for Efficient Federal State
Funds Transfers). Furthermore, according to 31 C.F.R. § 205.11(a) & (b), a State and a Federal
program agency must minimize the time elapsing between the transfer of funds from the United States
Treasury and the State’s payout of funds for Federal assistance program purposes, whether the transfer
of funds occurs before or after the payout of funds. In addition, a State and a Federal program agency
must limit the amount of funds transferred to the minimum required to meet a State’s actual and
immediate cash needs.

VRA officials had not taken appropriate actions to implement a written procedure for the SDO
regarding the requisition of funds and subsequent disbursements in order to minimize the time between
receipt and payout of Federal funds. As a result, the local Government could incur an interest liability
to the Federal Government for the $13.3 million in ARRA funds awarded to VRA. The issue
concerning the lack of procedures had been previously reported to the VRA in its Single Audits and
resulted in findings of delays in the time lapsed between the transfer of Federal funds and the payout of
funds. However, VRA has not corrected the situation and, as such, is not in compliance with Federal
requirements.


5
 Regulation 9 is known as “Normas Básicas para los Pagadores Especiales Nombrados por el Secretario de Hacienda”
(English translation – Basic Norms for Special Disbursement Officers Appointed by the Secretary of the Puerto Rico
Department of Treasury). The regulation was approved on May 15, 1997.
Audit Report
ED-OIG/A04J0009                                                                                   Page 8 of 10
Recommendation

We recommend that the Assistant Secretary for OSERS require VRA to —

5.1   Establish and document procedures to minimize the time elapsing between the receipt and payout
      of funds.

VRA’s Comments

VRA emphasized that it was under the Cash Management Investment Act 6 (CMIA) for all payments
processed through Hacienda including ARRA funds. Effective October 1, 2009, VRA established a
procedure mandating that all consumer services including those funded with ARRA should be
processed through Hacienda. VRA stated that by using this process there will be no time elapsed
between fund transfers.

OIG’s Response

As of the time of our review, it was unclear whether VRA ARRA funds would fall under the CMIA
and a procedure had not been established for processing ARRA funds. VRA should establish a written
procedure clarifying how and what type of services funded with ARRA will be processed through
Hacienda to minimize the time between receipt and payout of Federal funds.

FINDING NO. 6 ─ Monitoring Plan Needed to Ensure Compliance with ARRA Requirements

VRA had not developed a monitoring plan nor had it assigned responsibility for ensuring compliance
with the requirements governing ARRA funding and the proper use of funds to mitigate risk of waste,
fraud, and abuse.

Title 34 C.F.R. § 80.40(a) requires States to monitor subrecipients to ensure compliance with
applicable Federal requirements. Specifically, “Grantees are responsible for managing the day-to-day
operations of grant and subgrant supported activities. Grantees must monitor grant and subgrant
supported activities to assure compliance with applicable Federal requirements and that performance
goals are being achieved. Grantee monitoring must cover each program, function or activity.”
VRA had not developed a monitoring plan to ensure compliance with applicable Federal requirements.
The lack of a monitoring plan increases both the risk of non-compliance with requirements governing
ARRA and the possibility of waste, fraud, and abuse.

Recommendation

We recommend that the Assistant Secretary for OSERS require VRA to —

6.1   Develop and implement procedures to adequately monitor grant and subgrant activities to ensure
      compliance with the requirements governing ARRA, including assigning the responsibility for
      ensuring compliance.

6
  The CMIA is an agreement between the State receiving the funds and the United States Department of Treasury that
specifies among other stipulations, the programs and entities covered and the funding techniques to be followed. VRA’s
statement that they were under the CMIA means that they were under a reimbursement method and that they would pay
first with State funding to later request reimbursement from the Federal government.
Audit Report
ED-OIG/A04J0009                                                                         Page 9 of 10
VRA’s Comments

VRA stated that it had a monitoring plan for all agency activities, but at the time of the audit it had not
assigned responsibility for ensuring compliance to any unit in particular. As of October 1, 2009, the
Internal Audit Office in coordination with the Budget Division Monitoring Section had been assigned
responsibility to review VRA’s compliance with ARRA requirements. According to VRA, ARRA
funds follow the same regulation as regular funds for expending purposes; as such, it was not
necessary to incorporate changes to its procedures manuals to ensure compliance. In addition, VRA
stated that it did not have any subrecipients and, therefore, did not need to develop a monitoring plan
for such purposes.

OIG’s Response

Although ARRA funds may follow the same regulations for expending purposes as regular funds,
VRA should develop and implement procedures to adequately monitor its grant activities related to
ARRA as stated in our recommendation. ARRA places a heavy emphasis on accountability and
transparency, therefore, a plan or monitoring tool containing ARRA related requirements will help
form the oversight strategy for ensuring that ARRA funds are used appropriately and will also help the
Internal Audit Division, as well as the Budget Division Monitoring Section, understand the principles
of ARRA and will help ensure compliance with its requirements.

                                            BACKGROUND

VRA is an agency of the Commonwealth of Puerto Rico organized to manage the funds for VR as
established in the Rehabilitation Act of 1973, as amended, Public Law 93-112. VRA was previously
an operational component of the Department of the Family of the Commonwealth of Puerto Rico until
June 10, 2000, when Law 97 transferred it to the Department of Labor and Human Resources of the
Commonwealth of Puerto Rico. VRA’s mission is to enable individuals with disabilities to enter the
workforce so they can lead independent lives.

ARRA appropriated significant new funding for the VR State Grants program, authorized under Title I
of the Rehabilitation Act. The VR State Grants program provided grants to States to help individuals
with disabilities, especially those individuals with the most significant disabilities, prepare for, obtain,
and maintain employment.

The ARRA provides an unprecedented opportunity for States and VR agencies to implement
innovative strategies to improve employment outcomes for individuals with disabilities. The
Department awarded to VRA $13.3 million for its Basic Support, Independent Living/Older Blind
(IL/OB) and State Independent Living Services (SILS) programs. On April 1, 2009, the Department
made available to VRA the full amount of funds for the IL/OB and SILS programs and 50 percent
($6,298,416) of the funds for the Basic Support program. The remaining funds were awarded on
August 31, 2009.

      CFDA NO.                                PROGRAM                                  AMOUNT ($)
       84.390A        Basic Support                                                       12,596,832
       84.399A        Independent Living – Older/Blind,                                      469,910
       84.398A        State Independent Living Services                                      242,913
                      TOTAL                                                              $13,309,655
Audit Report
ED-OIG/A04J0009                                                                         Page 10 of 10
                                     SCOPE AND METHODOLOGY

We assessed VRA’s designed system of internal controls, at the time of our field work, to use in
administering funds received under ARRA for VR agencies. The review covered controls related to
data quality, cash management, subrecipient monitoring, and use of funds.

Our review was limited to assessing the design of the internal controls. We did not evaluate or test in
depth the implementation of the controls because ARRA funds had not been drawn down as of the
conclusion of our fieldwork. 7 However, we conducted limited testing on transactions that VRA
identified as ARRA but posted in its accounting system under their regular VR accounting string for
later reimbursement from ARRA funds. Because of the limited nature of our review, there is a
possibility that weaknesses exist in areas that we did not examine.

To understand and assess VRA’s designed system of ARRA internal controls that were being
implemented at the time of our field work, we
      •    Reviewed prior single audit reports and monitoring reports issued by the Department;
      •    Identified ARRA funds allocated to VR;
      •    Interviewed responsible officials for the implementation of controls, including officials from
           Hacienda;
      •    Obtained and reviewed written policies and procedures related to data quality, cash
           management, subrecipient monitoring, and use of funds;
      •    Observed payment and accounting process for ARRA related transactions;
      •    Conducted limited testing of controls over ARRA related transactions to ensure data were
           reliable for reporting purposes; and
      •    Reviewed VRA’s draft work plan.

The scope of our audit originally included ARRA funds for Title I, Part A of the Elementary and
Secondary Education Act (Title I), Individuals with Disability Education Act, Part B (IDEA), and State
Fiscal Stabilization Fund (SFSF). However, it was modified to report first on VRA’s system of
internal control and we plan to issue a separate report for Title I, IDEA, and SFSF.

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.




7
    August 28, 2009.
Enclosure




                                                             ~UERTO RICO
                                         COMlJ',cNVVEAlTH OF PUERTO
                                         COMMCNWEALTH
                                   DEPARTMENT OF LABOR
                                                   LASOR AND
                                                         ANO HUMAN RESOURCES




            October 28, 2009



            M~.
            tk.          W~mpe
                 Denise Wempe
            Regionol In~pector General
            Regi<><KI1         Generol for Audit
            U.S. Department
                  Deportment of Education
            Office of the In~r General
            61 FOf"'lyth
                Forsyth SW, Rm
                            R'm 18T71
            Atlonto, GA 30303
            Atlanta,

            Oear Ms. Wempe:
            Oeor     Wempe

            W~ would like to thank you and your ~Iaff,
            We                                            ~toff, specificolly
                                                                 ~petilkally Mr. Juan Santiago,
                                                                                             Sontiogo, auditor in
            thor~e af
            d!afijl!  of -file       inte~lltiQl1
                         'the recenl inte rventIon to our agency
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            ensure PrQPllr
            .nsure                               American Rewvery ond Reinve~tmel1l
                     pf'9per administration of Amancdn                     l1einve~tmel1r Act of 2009 funds.


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            be included in the. finol report.

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                                                                             \lodoUI f.,dlngs   re lating to
                                                                                       findings relating
            inconsistencies in income lax withholdin<;J from payments
                                      tox withholding        paymen ts 10 individuals.
                                                                          indiyiduals.

            As.
            As of October 1,   I, 2009, ARV began a restructuring
                                                           reslructuring prote~
                                                                           process in Ihe Finance Oivbion.
                                                                                   i'llhc           Division. One of
            the changes
                  change s impJemented is thot    rhot all payments afe   g re being processed
                                                                                        proceued through the PR      rR
            Treasury
            Treosury OepQrtJnent's
                        Deportment's PR1FAS.
                                          rRIFAS. This e:nables us 10 creote
                                                                           c'eofe vouchers
                                                                                   voucne rJ from !he
                                                                                                    the CIlIS
                                                                                                         CRIS system
            which, in tum, wHl
                             "...111 be inputted 10       PRIFAS
                                                     tOO PRI
                                                  to the     FAS for check i<oluonce. All pcrymenll
                                                                                               paymenll processed
                                                                                                            proceSSl!d
            thrpugh P!l:IFAS
                      PRIFAS muu ha       ve The
                                       have  thl!opprovol             Departmenl 01
                                                  approval of the DeporlTne!ll          the Treasury
                                                                                     of !hI! Treosury which verifies
                                                                                                               ve rifies
            accoont
            oc.<:oont codes. omounts
                               amounTS ond direCT
                                               direCI income lox ..... ilhhold,ng. Th;~ eell iminotl!~
                                                                    withholding.             imlnate~ Ihe
                                                                                                       the risk of nol
            reporting or Withholding income lax 10 on                                  Section 11 43 01
                                                             em individual aass per Se,ticn            of Ihe   Pu&fIo
                                                                                                           the Puerto
            Rico Internal
                  Intemo l Revenue Code of 1994 as       0$ amended
                                                            omended (Code)
                                                                         iCode) and    Regulation No. 56 19.
                                                                                 ond Reguitltion            1Q. (Refer
                Enclosu res A, B, C)
            10 EnclOlOu

            Finding
            Find            Finllncrall Datu Are Not Reliable
                 ing No.2 - Finlln[iG                Re liab le for
                                                                fo r Reporting
                                                                     Repo rting Purposes
                                                                                Purpo ses

            ¥If! would like to dorify
            Wf!                   clorify thot the information ill
                                                                in PRIFAS does not
                                                                                nOf pertoin
                                                                                     pertain IOlely to (RIS.CRIS.
            CR IS Is our
            CRIS          serviur delivery progrom
                     ou r serviw"                           ,ontoin~ a f;s~ol
                                            program whkh contains      f;~col module. Information
                                                                                       Informotion in CRIS CR1S is
            on individu(ll  ~mer bOiis
                individuo l <:ornumer  bosis and PR
                                                  PR1FAS
                                                     lfAS is on o«ounl   expe~dfNre formal
                                                                 DecOUn! expendihJre  lormol whidl
                                                                                              ..... hid, indudes
            all
            011 agen,y
                 agency expenQilures..
                           expenQ ilure\- The Commonwealth
                                                 Cammonwealth Deportment
                                                                  Depornnent of the Treosury
                                                                                      Treosu ry treated on
            ac;<ount
            a!;Count for ARRA agency
                                  ogency expenditurel,                                   moniToring prote~s,
                                           expenditures; however, 01 the time of the monito.lng          process,
            the inslructions tor Ihe
                 imtructions for  rhe o«OIIn!ing
                                      oCCOllnling of these
                                                     the5e expenditurel
                                                           expendiTUre, wos to chorge
                                                                                charge them to our regulor



                                     Mercanbl Pl...... Pilo
                                     M~rcanbl PI.u,    Piso 11,
                                                            11 , AVI!-.
                                                                 Ave-. PQI1cede
                                                                        POI1ce<;le Leon,
                                                                                   Wn, Hllto
                                                                                         Halo RlIy
                                                                                              Rwy
                                          PO Sc>c
                                             9<I>c 191118.
                                                   191I1S. Sin JUOIIO   PI4~o
                                                               JUOIIn . f'\,.     Rklo OOSW·":8
                                                                              110 Rk:ooosw·' , \0
                                                  T.~" ('i31112t-01eO
                                                  T.~;      lia1112i-01eO "eld.  ' ~!d. 1260
Page 2


federal \J~counts and then adiust
                               adjust the same when the ARRA account was finaUy
                                                                              finally created. At
1his          journal eentries
?his time all iournal   nlTies have been accounted
                                              accaunted for in 1heir
                                                               their correct ARRA accounts.
                                                                                   occounts. We
are including
     induding Treasury's    instrllctiam ali evidence.
               Treowry's indrudiam

In addition, the Administration hOi,
                                hos:

     o Established written procedure$
                           procedures for a~counting all ARRA funds .
                                      far a(counting
     o                     accOtJllt codes for ARRA eeJ(p~ses.
         Creafed separate accO\ll\t                   .. p~me$.
     o   Reconciled information from CRIS
                                       eRIS and PRIFAS
                                                PRfFAS for ARRA funds.
     o   Created a separate filing system for ARRA funds

Finding No.3 - No Reporting and Job Creation or Retention a",idante
                                                          Guidante

VRA 'sis using The
               the "Guldcmce  01'\ American Recovery and Reinvestment Act
                   "GUidance 01'1                                     ACT of 2009 Section
                                                                                   SectiOt'l
15 12 Quarterly Reporting" issued oonn September 2009 by the U.S. Department of
Education. We are
EdUcation.         ore review ing and
                                    ond developing procedures to ascertain
                                                                 oscertoin full compliance
wiTh
with reporting requirements on Job Creation and Retention Guidance.

Finding No.+
        No.4- Infolmotion
              Information System$              Procedu~s were outdoted.
                                  Polities and Procedures
                          Syslem$ Policies                    outdated.

     re<:enlly ocknowledged
We recently    odc.nowledged That            No. 4- Information Systems
                             that Finding No.4-                               Polkies and
                                                                     System.. Policies
Procedures were OUTdated.
                 outdated. We agree on 'this
                                        this finding and initiatives
                                                         inilioTives were Token
                                                                           TokCl'l 10 correct
it.

Following Ihe
           the AlJdit Report ED-OIGjA04J009
                              ED-OIG/A04J009 recommendotions,
                                                  recommendations, we created
                                                                           crealed a learnteam 10
                                                                                                to
review the required information and   updale changes
                                 arod update  charoges mode 10   the systems
                                                              to Ihe s)"slems in
                                                                               il'l .ecent  yeors.
                                                                                    recerot years.
A new policy will indude the practice of reviewing this documentation twice a year. Also,
              CUrrer'lT GovernmenT
references to currenl   Government lows, officia! communicalion~ and best
                                         officio! communicotions        besl pr(!ctices
                                                                              proctiC8s will be
included. The documentation
              documentotion will addren       lotestthreats
                                 address the latest  threats and seevrily  issues.
                                                                 secvrity 'Slues.

The strategy
     5trotegy 10 camply with
              to comply   wiTh these findings indude:
                                                include: First, a three month plan to revie
                                                                                       review.... and
             manllal'~ hilormOlion
update the manual's    informaTion thOI
                                      thaT will be due on Joftl/ory
                                                             Janl/ory 29, 2010. Second: Identify
the Impact of the new proieel
                         proiecls.. and current developments on these Ihe~e manual,.
                                                                            manllols. Third, assign
resources with the responsibility 10
reSOUfces                            to maintain informaCion
                                                   Informa tion syslems
                                                                 systems documentation updoted.
                                                                                         updated.
The development of the three month plan indudes   includes The
                                                            the implementotlon
                                                                 lmplemenlatlOfl of the following
action items.
aelion

Adion Item
      Ittlm 1I - The securi ty polities and prol:edures
                     security               proced",res include;
                                                        inelllde;

    •    IT organi:ratianol
            orgoni:rotlonol structure
                            strucll.lre modifications

    •    Policy 400 Security Standards
                              Standords changes were caused by the physical relocation of
         the Information Systems
                         Sy!lems and
                                 ond the architecture was altered.

    •    Policy 800 Training chgnges
                             changes will now include
                                              indude           0
                                                               (I       hwnon resources training
                                                                    new humon
         divi~ion
         division

    •    Policy 900 Customer Ser'li,es          becol/se new technologies were developed
                             Services changes because
         10               support. This also (allsed
           provide remote lupport.           caused Ihe
                                                     the Procedure 1009 to be updoted
                                                                              updated as
                                                                                      0$
         well.
Pag ina 3
Pagina



     •    Pr<><:edure 3007 Pow ere r Off
                                     OfF          I   Power ON ~hQnge~
                                                               ~honge~ of ler the modificolion
                                                                       o fter     modification of the
                                                                                                                                              -
          communlcaliOtls o.d,ileclu re,
          communications o(chilecture,
                                                                                                                                              I
Adion IIem

     •

     •
           1 · Threots
      Item 1·          gnd security risk'
               Th'eots ond

          Risk of   u~ing
                                    risks will iincl"d

                            the In,e.nel.

          VPN connection. There is a0 "irluol
                                                 ... dud... lI,ese

                                          Manyy Uler~
                                Internet. Man
                                                            th •••

                                                users in VRA U'"

                                      virtual (ormedion
                                              wnnedion b
                                                             use lhe tOle met o.
                                                                 Ihe Imemel

                                                         elween the Inlernel
                                                        between
                                                                                  iin"e~:
                                                                                   uu.~ :


                                                                              05 pOrT

                                                                    Internet and
                                                                                 part at
                                                                                      of lheir

                                                                                 the VRA.
                                                                             ond Ihe
                                                                                         thei, work.                                          •
     •    Ope n ports on Switches and
          Open                    ond Raute"
                                      Router! ._These learns ore
                                                             are In mot! offices VRA.
                                                                    mo,l of/ices

          U~er accounts
          User   a((QUnt~, ",ha'e
                           .... ho.e poWword~
                                     pawword. do not eexpire.
                                                       xpire . The    occo~nts are
                                                                   se occounts
                                                               Thele           gre used for
                                                                                        lor "orious
                                                                                            various
          se ryice! in the Syl1em.
          reryicel         Sy~lem.


Adi on Item 3 - Users monu al
Adion                      at for CRtS
                                  CR IS will include Ihu se issues:
                                                     these  issuu:;:

     •    The original CRIS did not
                                nol have
                                    ha"e the ticket to work form
                                                            form,.
                                                                 •.

     •    F;~co l recomilial;on
          Fiscal  recomiliafion wm
                                wOl modif ie d.
                                    modified.

     •    The fa,m other refeTrol
              form olher                ch·o nge d.
                         referral items changed.

     •    The main farm ;1'in1 Ihe
              moin form                           chO"llged.
                               tlw! report module chcmged.

     •    Mad;flcal ion~ were made
          Modifications       mode ;n
                                   in Ihe
                                      the employment
                                          employ ment form.

The ;mpoct     neW IT proje
     impact of new          cts in 1hese
                       projects    !hes.e manuals
                                          manual! is in Ihe
                                                         the evaluation
                                                             evolual;OI1 phose. The  resources
                                                                                T~ relourcel
055igned
assigned to maintain the manuals'    updp t"" In the
                           manuals· updp1es                    ond communiCOlion.
                                                 tile network and    communication. oreo are
the Diredor of Ihe   InformOlion Sy.tem. and
                 the Information           cmd the Di reClor
                                                        reclo, of Programming (lnd
                                                                                 tlnd System'
                                                                                       Systems
Oe"elopment   oreo.
Developmel'l' 0'1'0.

Finding No.5 - Inadequate
Fjl'lding            tnodequote            Proced\lfe~
                                           Pro cedure~    10
                                                          to Minimi=e
                                                             Minimize th e Time Between Re
                                                                           Tim, B'tween    ce ipt and
                                                                                        Rete;pt   ond
pgyout af
Payout       Federal Funds
          of federal

We wOilld
      would like to emphasize !hal          Ihol ARV i,   is onder
                                                             under the Co\h  COVl MOl'logemenl
                                                                                    Monagement Inye~ment            ACI,
                                                                                                       Inve~ment Act.
{C.M,IA.j
{(.M.f.A.) 101 101 all     poymunl$
                      oil pa            processed Ih
                               ymenl$ proces.ed            rOllgh Department
                                                        Ihroogh       Deportment of Ihe    the Trea,ury.
                                                                                                T.e05u,y. We are    ore
includIng 0
indud,ng        flow~hort with Ihe
              a flQwchort            the specific procedures.
                                                     p ro(edu'es. As    A~ of
                                                                            01 OCTober 1, 2009, 1he  the Administra tion
                                                                                                         Adminlstro!jon
for Vocolional
    Vocational Rehabilitation ho. ,mobJi.hedestobli.hed Ihot all consume,
                                                                      conOllme r .ervice.
                                                                                 service. of01 for incl~dinSi
                                                                                                   ind~d;nSl Ihoie  w,lk
                                                                                                              Ihoje wilk
ARRA fund., .I!o<ll
                 .1IooJ1 be p,ateu<'Id
                              proteued ,h.o..gh     the Deportment of me
                                           thro..gh 1h"                       the Trl'!a,ury
                                                                                  Treasury witn
                                                                                              with payment. n..re
                                                                                                                n~re i,
no lime    elop..,d
    limllt ..            belween hmd transfers,
              Iop ... d between             tronslers, .In(e
                                                        .inc.. it Iiis 1010lly an
                                                                       t010lly  on "a re lmbvr.emcnl
                                                                                          imb u'~mcnl method.       We
therefore    believe lItot
merelor.. beli.v"       tIlol Ihe
                              th. liodin.,  wo, addressed
                                  lloding was    oddre~5ed and 01'<1 corrucred.
                                                                      com,cted.

FINDING NO. 6 - Monitoring Plan Need..,
                                Need'" to Ensu •• Compliance
                                          En$ure  Compliante with ARRA
Requ irem!nls
Requi reme nts

AIIV has 0a moniloring
             monilor;I'I9 pion
                          plan fo,
                               for all ageru::y
                                       0gency oCl;vit; el. II
                                                OClivitil'I.   It had nol o.signed re'P<'n,ibility
                                                                      nat a.signed   responsibility for
emuring compliancl'!
ensuring  camplience 01 lhe lime
                               time of thl'!
                                        Ihe aud!!
                                             audh proce
                                                   prote".  ••. Howeve
                                                                  How"ver,r, e,
                                                                              0, of October
                                                                                    O<:tober I.
                                                                                             I, 2009,
Ihe Internal
    Inlem al Audit
             Audi' Office, in coordinOlion
                                coordinotion with   the &Jdgel
                                               wi1h Ihe   &..odgel Div;,;ol'l
                                                                    Division MOllitoring  5eClion, hos
                                                                               Mo"iloring Section,  has
been OS5igned
      o,signed review af  of complionte
                             complionce with ARRA Re      quiremen".
                                                     Requiremen".




              "       U           I,,,, ,R'Z>=
                                  ! .k
                                                         wi                        we: as 1P                     t'fft!%'s " ' f   83'§ii@1
 6o.h Ol~i lionl hove
 60th Oioil;ons       cdequc;e proc~<l!
                 have (ldeqvo'e procetlutc,      f.llc:c••0 tIIoflitot
                                       ... c, in flint      nlooito. ''''9ulot
                                                                       '1;!9u lgr                       gdjvi.io~.
                                                                                                        Cldjvl.io~,     A ~ ~A
                                                                                                                            RA
 l un d ~ foll o w th~
 fun,lIlollow            ~~mc 'ClOuf"liom
                    :tic :omc        "::~c"c tiom Cl
                                                   Ol ••    \:ulo l fundI
                                                        '.<;IuIOI           fo' .~i''''...cft,g
                                                                    fundi for   .~;:>",nC~ pu'posel;       'here/or
                                                                                                pUlpO!e! ; .h              II i.
                                                                                                                      .., iI;1
                                                                                                             ..... for.,
 .,.." ~~",!j
 ",",'           ot':' '<)
        ~~ '! !IQ'l'              ~<:>'P¢'o '., (I>CI"l'}'e"
                              .. co.po'"""
                        ") ;; ..                d>QO'l'}<!" 'to     01.1' p.oced",,'!
                                                                 0 OUI                     mo"\>Ch In o,d
                                                                          proc ~d"',,,\\ "'Clf>\Wh            .. , '0 1"lfill
                                                                                                         ~,(I""         1,,1/;11
 CQITI;)lion<e , W
 {OlIIPlior><..       W.".....   il!> '0 ~phOI;z.
                            .... il-"     ~pholize 'he                   d~! 110'
                                                           fho .l VRIo doe,     no' hoye      l",bredpl~.s, rM
                                                                                     hove !ub.edpl."."s,           ,~IO'e (:
                                                                                                               :""'t~IO'."    c:
 mot\ilOtotlg pion ~I nor
 monilOtont;l                       n.or hov."
                                         ho~e 1 0 be d ..... loped fM
                                               10                            wch PUtPO~1-
                                                                         for wcl!  purpo .....

 We
 W." hope  rho. Ollt
     hop." rile.      c:mu'1C<l1l '.Cllure
                 OIIt {OlIlItleflll I.onura ou'  commitment '0 comp
                                            OIl' commil1t19<l.              wilh on 'lee d.
                                                               coomp r."",. ",ith           ' 1l1
                                                                                         cl.tol
 re quiremenTS 10'
 requirernenll     rhe.. p...,;:>e.
               for !h    p""pc, ociminiltrorion
                                    cciminn"o.ion of
                                                  01 AmericCfl
                                                     American                   ~"cll •• ry
                                                                                ~eco~.ry      coo
                                                                                              ond    ~"in ••nlm""1
                                                                                                     R.;n~Clll monl    Ar;t 01
                                                                                                                       ACT  III
 2009 flJnds.
      funds.

 Pleat."  f ••
 PI.oll! le  .11 fi e. '0 con.c<:,
                 h.".              UI cl
                          conlco' '"  01 your (on
                                              cony.ni!!nc.,
                                                  ••nionce. Should     r~q\lire
                                                            Ihoold you ... qul,e cnl'
                                                                                 any cddilienc
                                                                                      odditiono l
 ir.lormlllion.
 ir.f"'mOli",,,

 Co,diellv.
 Cordiolk


"""lIlyo 'e
"'"I'I)'o   Ho,OtI !CI)'
          leHOIOII   w 'I' el
                           ClI
  Ad.,,;ni's.J,o
  Admiolst·olor  ler
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