oversight

South Carolina: Use of funds and Data Quality for Selected American Recovery and Reinvestment Act Program.

Published by the Department of Education, Office of Inspector General on 2011-04-20.

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

                     Audit Report




                 South Carolina State House


ED-OIG/A04K0005                               April 2011
           Abbreviations, Acronyms, and Short Forms Used in this Report
________________________________________________________________________________________________________________________

Agreement                          Cash Management Agreement

ARRA                               American Recovery and Reinvestment Act of 2009

Charleston                         Charleston County School District

C.F.R.                             Code of Federal Regulations

CIS                                Communities in School

CMIA                               Cash Management Improvement Act of 1990

Department                         U.S. Department of Education

ESF                                Education Stabilization Fund

FTE                                Full-time Equivalent

FY                                 Fiscal Year

Greenville                         Greenville County School District

GSF                                Government Services Fund

IDEA                               Individuals with Disabilities Education Act Part B Grants to States

LEA                                Local Educational Agency

OIG                                Office of Inspector General

OMB                                Office of Management and Budget

Report                             SCDOE February 2010 Accounting Project Information Report

SEA                                State Educational Agency

SFSF                               State Fiscal Stabilization Fund

SCDOE                              South Carolina Department of Education

Spartanburg                        Spartanburg County School District Two

SSN                                Social Security Number

WFK                                Wings for Kids, Inc.

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

Task Force                         South Carolina Stimulus Oversight, Accountability, and Coordination Task Force

Treasury                           U.S. Department of the Treasury

TSA                                Treasury State Agreement
                                    UNITED STATES DEPARTMENT OF EDUCATION
                                          OFFICE OF INSPECTOR GENERAL
                                                                                                                  AUDIT SERVICES
                                                                                                                 Atlanta Audit Region




                                                               April 20, 2011


Mitchell M. Zais, Ph.D.
State Superintendent
South Carolina Department of Education
1429 Senate Street, Suite 1006
Columbia, SC 29201

Dear Dr. Zais:

This final audit report presents the results of our review of “South Carolina’s Use of Funds and Data
Quality for Selected ARRA Programs.”

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

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

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

                              Alexa Posny, Ph.D.
                              Assistant Secretary
                              Office of Special Education and Rehabilitative Services
                              U.S. Department of Education
                              Potomac Center Plaza, Room 5106
                              550 12th Street, S.W.
                              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.
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 Wempe
                                              Regional Inspector General for Audit


Enclosure
Final Audit Report
ED-OIG/A04K0005                                                                                             Page 1 of 25
                                                South Carolina:
                                         Use of Funds and Data Quality
                             for Selected American Recovery and Reinvestment Act
                                                   Programs
                                      Control Number ED-OIG/A04K0005

                                                    PURPOSE
The American Recovery and Reinvestment Act of 2009 (ARRA) places a heavy emphasis on
accountability and transparency, and in doing so, increases the responsibilities of the agencies that are
impacted by ARRA. Overall, the U.S. Department of Education (Department) is responsible for ensuring
that education-related ARRA funds reach intended recipients and achieve intended results. This includes
effectively implementing and controlling funds at the Federal level; effectively ensuring that recipients
understand requirements and have proper controls in place over the administration and reporting of
ARRA funds; and promptly identifying and mitigating instances of fraud, waste, and abuse of the funds.

The purpose of our audit was to determine whether the State of South Carolina (1) used ARRA funds in
accordance with applicable laws, regulations, and guidance; and (2) reported accurate, reliable, and
complete data in compliance with ARRA reporting requirements. This report provides the results of our
audit of the South Carolina Department of Education (SCDOE) and three South Carolina local
educational agencies (LEA) – Charleston County School District (Charleston), Greenville County School
District (Greenville), and Spartanburg County School District Two (Spartanburg). 1 We focused our audit
on the use of funds and data quality related to Title I, Part A of the Elementary and Secondary Education
Act (Title I); Individuals with Disabilities Education Act, Part B Grants to States (IDEA); and State Fiscal
Stabilization Fund (SFSF) – consisting of Education Stabilization Fund (ESF) and Government Services
Fund (GSF) – received through ARRA.


                                                    RESULTS

We found that ARRA funds were generally used in accordance with applicable laws, regulations, and
guidance at the entities reviewed – SCDOE, Charleston, Greenville, and Spartanburg. SCDOE has been
proactive in its efforts to ensure the proper administration of ARRA funds. Specifically, SCDOE
(1) worked closely with its LEAs to develop uses for the ARRA funding and prepare applications and
budgets to account for funds; (2) provided training to LEAs through the use of webinars; and
(3) developed a web-based spreadsheet to provide consistency and efficiency for the LEAs to report
Section 1512 data requirements. In addition, the State established the South Carolina Stimulus Oversight,
Accountability, and Coordination Task Force (Task Force) 2 as a centralized accountability group to
oversee transparency and accountability requirements associated with ARRA funds. Charleston,
Greenville, and Spartanburg used Title I, IDEA, and SFSF ESF funds for summer programs, literacy
programs, personnel, better and assistive technology, and utilities.


1
  The results of our work at the South Carolina Office of the Governor and related subrecipients will be presented in a separate
report.
2
  The Task Force is composed of approximately 18 senior accountability officials that represent various agencies in South
Carolina and includes the Superintendent of Education from SCDOE as a member.
Final Audit Report
ED-OIG/A04K0005                                                                                         Page 2 of 25
Although ARRA funds were used for allowable purposes, we identified internal control weaknesses
related to cash management and contract procurement. Specifically, we found that –
    (1) SCDOE did not assess cash needs of subgrantees prior to advancing Title I ARRA funds; did not
        monitor spending to determine whether the advanced funds were spent in a timely manner; and did
        not have policies and procedures to remit interest earned on Federal cash advances to the
        Department.
    (2) Charleston and Spartanburg did not have documentation available to support that ARRA funded
        contracts were awarded and administered in accordance with district, State, and/or Federal
        procurement requirements.
    (3) SCDOE had insufficient policies and procedures over the ARRA claims reimbursement process.

At the three LEAs reviewed, we identified issues relating to district level accounting, payroll
expenditures, and Section 1512 ARRA reporting of jobs and vendor data. Although the issues identified
resulted in inaccurate reporting of both job and vendor data, the errors in reporting did not materially
misstate the information according to the most recent Office of Management and Budget (OMB) guidance
on materiality. OMB Memorandum M-10-34 3 defines an error as material if the omission or
misstatement in the prior period report could mislead the public on how ARRA funding is being
expended. The specific issues identified in our review of the LEAs, which are detailed in the Appendix,
would not significantly affect the ARRA information reported. As a result, no corrections are required to
SCDOE’s reported vendor data, and the current guidance does not allow changes to the job data. In
addition, all three LEAs made changes to facilitate more accurate reporting in the future.

SCDOE concurred with our findings and stated that the issues reported have been addressed by the
SCDOE and LEAs involved in the audit. In response to SCDOE’s comments, overall, we commend
SCDOE for its prompt response to address the recommendations included in this report. SCDOE
comments are summarized following each of the findings and the entire comments are included as an
Enclosure.

South Carolina’s Office of the State Treasurer responded to the Cash Management Improvement Act of
1990 (CMIA) issue included in the Other Matter section of the draft audit report. According to the Office
of the State Treasurer, Federal programs included in the Treasury State Agreement (TSA) are based on
funds received and included in the State’s most recent Single Audit. 4 No ARRA funds were received
during fiscal year ended June 30, 2009 – the period covered in the State’s most recent Single Audit – and
as a result, the TSA was not modified. The Office of the Treasurer, however, anticipates that the next
TSA will need to be modified to cover Federal ARRA funds. As a result of the State Treasurer’s
comments, we removed the Other Matter section from the final audit report.




3
  The OMB Guidance, titled “Updated Guidance on the American Recovery and Reimbursement Act,” dated September 24,
2010, allows an ARRA recipient or Federal agency to initiate the change to a prior reporting process. However, the Federal
agency must have documentation to support the requested change and must deem that the change is “material.” The guidance
does not allow changes to job data.
4
  South Carolina’s most recent Single Audit (Fiscal Year Ended June 30, 2009) is dated April 5, 2010. The Single Audit
covering Fiscal Year Ended June 30, 2010, is in progress.
Final Audit Report
ED-OIG/A04K0005                                                                                           Page 3 of 25

                                              BACKGROUND
ARRA was signed into law on February 17, 2009, in an unprecedented effort to jumpstart the American
economy. ARRA has three immediate goals – (1) create new jobs and save existing ones, (2) spur
economic activity and invest in long-term growth, and (3) foster unprecedented levels of accountability
and transparency in government spending. To ensure transparency and accountability of spending,
recipients are required under Section 1512 of ARRA to submit quarterly reports on ARRA awards,
spending, and job impact. According to OMB, the reports are required to contain specific detailed
information on the projects and activities funded by ARRA in order to provide the public with an
unprecedented level of transparency for how Federal dollars are being spent. The reports are also
expected to facilitate accountability for the timely, prudent, and effective spending of the ARRA funds.

SCDOE was awarded a total of $509.6 million in education-related ARRA funds. As shown in Table 1,
SCDOE drew down close to $36.6 million in ARRA funds as of December 31, 2009, for Title I, IDEA,
and SFSF.

                 Table 1: SCDOE ARRA Funding for Title I, IDEA and SFSF (Millions)
                                     Total                              Percent of
                                                   Drawdowns as of
                      Program       Amount                             Total Award
                                                  December 31, 2009
                                    Awarded                            Drawn (%)
               Title I             $142,838,914            $24,959,215     17.5
               IDEA                $180,812,151            $11,082,735      6.1
                          5
               SFSF GSF              $1,000,000               $500,000     50.0
               SFSF ESF            $184,922,339                     $0      0.0
                       Total       $509,573,404            $36,541,950      7.2

SCDOE allocated Title I, IDEA, and SFSF ESF funds to the State’s 85 school districts and 3 special
school districts. 6 The $1 million in SFSF GSF funds was equally divided between the South Carolina
Governor's School for Science and Mathematics and the South Carolina Governor's School for the Arts
and Humanities.

Collectively, Charleston, Greenville, and Spartanburg were allocated approximately $29.6 million for
Title I, $15 million for IDEA, and $25.6 million for SFSF ESF. Table 2 shows the total
Fiscal Year (FY) 2010 ARRA allocations for each of the three LEAs reviewed.

                     Table 2: FY 2010 Title I, IDEA, and SFSF ESF ARRA Allocations
                     for the Charleston, Greenville, and Spartanburg School Districts
                                                             Grants
                       School District     Title I--Part A IDEA--Part     SFSF ESF
                                             Allocation     B Allocation  Allocation
                    Charleston                 $14,851,359    $5,404,401   $3,200,175
                    Greenville                 $13,924,747    $8,466,248 $19,387,255
                    Spartanburg                   $845,647    $1,129,021   $3,005,057
                         Total Allocation      $29,621,753   $14,999,670 $25,592,487

5
 Government Services Funds awarded to SCDOE.
6
 SCDOE’s special school districts include the Charter School District, the South Carolina Department of Corrections, and the
South Carolina Department of Juvenile Justice.
Final Audit Report
ED-OIG/A04K0005                                                                                         Page 4 of 25

                                                      FINDINGS

FINDING NO. 1 − SCDOE’s Cash Management and Monitoring Procedures for Title I ARRA
                Cash Advances Need Improvement

SCDOE did not initially (1) assess the cash needs of subgrantees prior to advancing Title I ARRA funds;
(2) monitor spending to determine whether the advanced funds were spent in a timely manner; and
(3) have policies and procedures to remit interest earned on Federal cash advances to the Department. In
June 2009, SCDOE drew down $17.2 million in Title I ARRA funds and advanced approximately
$14.8 million of these funds to 61 of its 85 subgrantees. Two of the three subgrantees reviewed held
Federal funds in an interest bearing account prior to use and earned interest but did not remit the interest
earned to the Department in accordance with Federal regulations. In addition, SCDOE may have earned
interest on the drawdown balance of $2.4 million. The $2.4 million, which were not advanced funds, was
retained by SCDOE to reimburse future expenditure reports 7 submitted by the 24 subgrantees. As a
result, interest would be earned until sufficient expenditure reports were submitted by the remaining
school districts to cover the balance of funds.

South Carolina’s Title I subgrantees were allowed to receive a 15 percent advance of their Title I ARRA
award if an approved application and budget were on file at SCDOE. The advance policy as cited in
SCDOE’s Title I Rules and Regulations Handbook stated that
        [u]pon receipt of a completed project application, fifteen percent of the newly awarded funds will
        be advanced to the recipient. This advance will be recouped upon submission of [the] first
        expenditure report (the difference between the expenditure and advance will be sent to the
        district).
After the first Title I drawdown of $17.2 million, SCDOE operated the Title I program on a cost
reimbursement basis and drew down Title I ARRA funds based on expenditure reports submitted by
subgrantees.

According to SCDOE’s February 2010 Project Accounting Project Information Report (Report) 8 for
Title I ARRA funds, 21 of the 61 subgrantees had outstanding advance balances. Of the nearly
$8.1 million in Title I ARRA funds advanced to the 21 subgrantees, SCDOE had received expenditure
reports for approximately $5.7 million, resulting in an outstanding advance balance of approximately
$2.4 million. We found that SCDOE did not limit Title I ARRA advanced funds to the immediate needs
of subgrantees or conduct any monitoring efforts to determine whether the advanced funds were spent in a
timely manner. According to 34 Code of Federal Regulations (C.F.R.) § 80.21(c) –
        Grantees and subgrantees shall be paid in advance, provided they maintain or demonstrate the
        willingness and ability to maintain procedures to minimize the time elapsing between the transfer
        of the funds and their disbursement by the grantee or subgrantee.

Two of the three LEAs reviewed – Charleston and Greenville – had not submitted sufficient expenditure
reports between June 2009 and January 2010 to use the total advanced Title I funds. Table 3 lists each
subgrantee with corresponding advanced fund balances as of the February 2010 report. As shown in
Table 3, Charleston had $788,844 remaining from the $2.2 million advanced, and Greenville had $84,787
7
  An expenditure report represents a claim for reimbursement. SCDOE officials stated that LEAs typically submit expenditure
reports to SCDOE on a quarterly basis.
8
  Reporting the amounts advanced to each subgrantee by SCDOE and total expenditures claimed by each subgrantee on
expenditure claim reports as of a specific date.
Final Audit Report
ED-OIG/A04K0005                                                                                                Page 5 of 25
remaining from the $2.1 million advanced, resulting in earned interest amounts of $6,283 and $4,338,
respectively. 9 Based on our findings at the two LEAs with Title I advances, the remaining 19 LEAs listed
in Table 3 may also have earned interest that should be remitted to the Department.

                        Table 3: SCDOE Subgrantees with Outstanding Title I ARRA
                                          Advance Balances 10
                                                                            Expenditures             Advanced
                            11
                                      District           Advanced
             Subgrantee                                                      Submitted                 Funds
                                       Code               Amount
                                                                             to SCDOE                 Balance
            Aiken                       201                  $837,795            $419,234                 $418,561
            Allendale                   301                  $164,872             $84,395                  $80,477
            Anderson                    405                  $222,581            $163,383                  $59,198
            Berkeley                    801                  $652,504            $634,544                  $17,960
            Charleston                 1001                $2,227,704          $1,438,860                 $788,844
            Chesterfield               1301                  $210,811            $178,192                  $32,619
            Clarendon                  1401                   $88,071                  $0                  $88,071
            Clarendon                  1402                  $152,997            $149,543                   $3,454
            Colleton                   1501                  $268,471             $78,412                 $190,059
            Edgefield                  1901                   $82,100             $37,973                  $44,127
            Fairfield                  2001                  $103,208                  $0                 $103,208
            Greenville                 2301                $2,054,903          $1,970,116                  $84,787
            Greenwood                  2450                  $231,202             $71,237                 $159,965
            Greenwood                  2452                   $15,303              $7,090                   $8,213
            Jasper                     2701                  $106,557             $96,981                   $9,576
            Laurens                    3055                  $156,816                  $0                 $156,816
            McCormick                  3301                   $45,774                  $0                  $45,774
            Marion                     3401                  $135,843             $75,851                  $59,992
            Orangeburg                 3803                  $205,728            $159,621                  $46,107
            Saluda                     4101                   $43,357             $42,103                   $1,254
            SC Public Ch               4701                   $83,178             $81,135                   $2,043
                         Total                             $8,089,775          $5,688,670               $2,401,105

According to 34 C.F.R. § 80.21(c), (i), SCDOE is required to minimize the time elapsed between the
transfer of the funds and the disbursement when advancing funds and to remit interest earned on cash
advances promptly, at least quarterly, to the Department. However, SCDOE did not have policies and
procedures to ensure that interest earned on Title I ARRA advances was remitted in accordance with
Federal regulations. SCDOE’s Title I Rules and Regulations Handbook, as well as the Title I application
SCDOE used, did not include the requirement to remit any interest earned or explain how LEAs should
comply with the requirement. 12 Despite the lack of guidance, both LEAs calculated the monthly interest
earned using interest rates provided by the South Carolina Office of the State Treasurer and maintained

9
  Charleston submitted its first expenditure report for $1,438,860 in February 2010, just prior to the report used in Table 3.
Greenville submitted two expenditures reports in October 2009, and December 2009, totaling $1,970,116.
10
   The highlighted LEAs were covered by our review.
11
   Several LEAs have the same name and are distinguished by the district code.
12
   The Title I ARRA application used by SCDOE did not include the requirement either.
Final Audit Report
ED-OIG/A04K0005                                                                                        Page 6 of 25
documentation on how the interest amounts were computed. In response to our concern, both Charleston
and Greenville remitted interest earned on the Title I ARRA advances to SCDOE in June 2010.

As a result of our review, SCDOE revised the procedures for advancing Title I funds to subgrantees.
Effective June 25, 2010, SCDOE suspended the practice of issuing cash advances for Federal funds.
SCDOE provided an excerpt from the Title I Rules and Regulations Handbook that reflects the change in
policy. In addition, SCDOE added a policy to its Annual Audit Guide for 2010 requiring LEAs to remit
interest earned when an LEA generates interest on revenue from a Federal grant.

RECOMMENDATIONS

We recommend that the Assistant Secretary for Elementary and Secondary Education require that
SCDOE –

1.1   Identify subgrantees with existing advance balances and ensure that subgrantees minimize the time
      between transfer of funds and disbursement.

1.2   Determine whether interest was earned on Title I ARRA advances given to the remaining 19 school
      districts; and obtain any interest amounts from those school districts and remit to the Department.

Auditee Comments
SCDOE concurred with the findings and noted that it changed its policy for advancing funds to LEAs
prior to the release of this report. SCDOE added that it is in the process of determining whether the
remaining LEAs earned interest on paid cash advances; and, if so, it will request reimbursement and remit
the interest to the Department.

FINDING NO. 2 − Procurement Practices for ARRA Funded Contracts Need Improvement

Charleston did not follow budget amendment and contract modification procedures in a contract with
Communities in School (CIS) for after-school programs. In addition, documentation was not available to
support that two ARRA funded contracts were awarded and administered in accordance with district,
State, and/or Federal procurement requirements. Specifically, we found that a contractual price increase
in Charleston’s contract with Wings for Kids, Inc. (WFK) for after-school programs; and a sole-source
contract at Spartanburg with Hatchette Consulting, LLC, for consulting services were not supported.

Charleston’s CIS Contract. Charleston did not follow budget amendment procedures or contract
modification procedures in its contract for an after-school program provided by CIS. Charleston’s
approved Title I budget included $65,000 for elementary school initiatives for after-school programs.
However, we found two payments 13 to CIS, totaling $337,520. As a result, Charleston expended
$272,520 ($337,250 less $65,000) in excess of its approved Title I ARRA budgeted amount for these
services as of December 2009.

SCDOE’s Title I Rules and Regulations Handbook allows LEAs to expend up to 10 percent above the
current budget in an individual category without requesting an amendment. However, any change in a


13
  We identified these two payments in our review of a judgmentally selected sample of 10 Title I ARRA non-payroll
expenditures at Charleston for the July 2009 through December 2009 period.
Final Audit Report
ED-OIG/A04K0005                                                                                            Page 7 of 25
budgeted item amount that exceeds the 10 percent threshold requires a budget amendment with prior
approval from the State Educational Agency (SEA). According to the handbook, the
        [b]udget amendment must be submitted to [SCDOE’s] Office of Federal and State Accountability
        and approved before making obligations or expenditures above the previously approved budget.
Charleston’s Title I Director acknowledged that an amendment to the budget should have been approved
by SCDOE before the school district expended the funds and indicated that the school district was in the
process of amending the budget at the time of our review.

In addition, the contract between Charleston and CIS, dated September 22, 2009, was for an amount not
to exceed $420,000. However, the invoice, dated November 20, 2009, indicated that Charleston was to
pay CIS four payments of $168,760, totaling $675,040, exceeding the total contract amount by $255,040
($675,040 less $420,000). Charleston’s Title I Director stated that the cost for CIS’ services increased
because the program was expanded to include more schools. According to the CIS contract agreement,
services were to be provided to seven elementary and high schools. The CIS invoice indicated that it
placed a student support specialist at 14 schools, supporting the Title I Director’s explanation of the
increased cost. However, absent any contract modification or amendment, there was no evidence that the
expanded services had been approved.

Charleston’s Wings for Kids, Inc. (WFK) Contract. Wings for Kids, Inc. increased its service price by
$10,000 for three area schools served in Charleston. Although the price increase resulted in WFK’s
receiving an additional $30,000 in Title I ARRA funds, Charleston did not formally revise the three WFK
contracts or document the reason for the price increase. During the 2009-2010 school year, WFK
provided after-school program services to three elementary schools – North Charleston, Chicora, and
Memminger. A separate contractual agreement 14 exists for each school in the amount of $240,000 each.
The contracts state that WFK, Charleston, and the individual schools are to contribute to the total cost of
each contract. Only the amount paid by Charleston – $20,000 per contract – was funded by the Title I
ARRA grant. However, Charleston paid WFK $30,000 per contract, $10,000 above the documented
contractual amount to be paid by the school district for the period of July through December 2009.
Although WFK informed Charleston that the cost of services would increase in FY 2010, Charleston did
not formally amend the WFK contracts to reflect the revised price. The signed contractual agreements
with WFK reflected a price of $20,000 (attributed to ARRA funds) without any change to one contract
and only hand-written changes on the other two. 15 According to 34 C.F.R. § 80.36(b)(9), grantees and
subgrantees will maintain records sufficient to detail the significant history of a procurement. Modifying
the price of a contract would be considered an important part of the procurement history.

In response to our finding, Charleston stated –
        We concur that a more rigorous contract administration system is needed to ensure performance
        by the provider as agreed upon in the contract. The District has already moved to a proposal
        process whereby after-school providers submit a proposal for services to be delivered to our
        students. The proposal will include an evaluation process and all contract documents will flow
        through the procurement office. Schools will no longer be permitted to initiate contracts for these
        services individually.

14
   The contract with North Charleston was dated January 29, 2009. The contracts with Chicora and Memminger were dated
April 20, 2009.
15
   North Charleston - The contract was not revised or annotated; Chicora - The $30,000 was written below the $20,000 along
with printed initials of the contractor’s signatory and a date; and Memminger - The number 3 was written over the number 2 in
$20,000 without any initials and/or dates.
Final Audit Report
ED-OIG/A04K0005                                                                                                  Page 8 of 25

Spartanburg’s Hatchette Consulting, LLC Contract. Spartanburg awarded a sole-source contract to
Hatchette Consulting, LLC, in August 2009, funded with IDEA ARRA funds. However, Spartanburg
could not provide any documentation to support its decision to use a sole-source procurement nor could it
provide information necessary to monitor contract compliance. The purpose of the contract with
Hatchette Consulting, LLC, was to develop policies and procedures for the district’s Special Services 16
program. Spartanburg provided a copy of the contract – a one page, one paragraph, Memorandum of
Understanding, dated August 1, 2009, that was signed by both parties on August 10, 2009. The
memorandum represented all supporting documentation maintained by Spartanburg for procuring services
from Hatchette Consulting, LLC. No additional documentation was provided to show information such
as delivery date for the final or draft policies and procedures (i.e., the contract deliverables), rationale for
the method of procurement, basis for the contract price, and performance period. The memorandum only
stated that –
           Hatchette Consulting LLC agrees to provide written policies and procedures consistent with state
           and federal regulations for the operation of special services in Spartanburg District Two. Billing
           for providing this service will be at the rate of $100.00 per hour and will not exceed $10,000.

According to 34 C.F.R. § 80.36(b)(9), grantees and subgrantees will maintain records sufficient to detail
the significant history of a procurement. These records will include the rationale for the method of
procurement; selection of contract type; contractor selection or rejection; and the basis for the contract
price. In addition, Section 1554 of ARRA limits use of sole-source procurements by grantees.

District regulations require support for selecting a sole-source method of procurement. Section 2-105 (1) of
Spartanburg’s Procurement Code states –
           [Sole source] procurement is the least competitive and, therefore, should have limited use. In
           those instances, however, where the district’s needs can only be met by one method, means or
           item, sole source is an appropriate and necessary method of procurement…Such determination as
           to whether procurement shall be made as a sole source shall be made by the school district. Such
           determination and the basis thereof shall be in writing and shall include an explanation as to why
           no other source will be suitable or acceptable to meet the need.

Spartanburg’s procurement records did not include any information documenting the use of the sole-
source procurement method for securing the services of Hatchette Consulting, LLC. In addition,
Spartanburg’s contract (Memorandum of Understanding) for those services lacked sufficient information
to monitor the contractor’s performance. According to 34 C.F.R. § 80.36(b)(2) –
           Grantees and subgrantees will maintain a contract administration system which ensures that
           contractors perform in accordance with the terms, conditions, and specifications of their contracts
           or purchase orders.

The lack of additional information related to the contract terms may limit Spartanburg’s ability to ensure
it is not overbilled for excess hours and to ensure timely performance. In response to our findings,
Spartanburg stated that additional documentation had been filed with the [Hatchette Consulting, LLC]
contract. In addition, the school district had amended operational procedures to reflect appropriate
documentation prior to approval in contractual issues.



16
     The district’s Special Services are services provided to individuals with disabilities or special educational needs.
Final Audit Report
ED-OIG/A04K0005                                                                           Page 9 of 25
RECOMMENDATIONS

We recommend that the Assistant Secretary for Elementary and Secondary Education and the Assistant
Secretary for Special Education and Rehabilitative Services require that SCDOE ensure that —

2.1    Charleston obtains approval for budget amendments in excess of SCDOE’s 10 percent threshold.

2.2    Charleston’s CIS contract is properly managed by requiring that the contract be amended to
       include changes or adjustments in price or number of schools served.

2.3    Charleston’s WFK contracts are properly managed by requiring that the contracts are amended to
       include price adjustments.

2.4    Spartanburg’s contract with Hatchette Consulting, LLC, complies with Federal and district
       procurement regulations for sole-source contracts.

2.5    Spartanburg’s contracts include contract terms and performance measures needed to monitor
       contracts.

2.6    It reminds LEAs about the importance of following correct procurement procedures and that it
       places emphasis on review of LEA contract administrative controls during monitoring site visits.

Auditee Comments
SCDOE concurred with the findings and added that it has taken steps to ensure a more rigorous contract
monitoring system. Specifically, SCDOE 1) reviewed Charleston’s CIS and WFK contracts, both of
which have been amended as required; 2) consulted with Charleston on when to obtain approval for
Title I budget amendments; 3) discussed with Charleston the importance of including contract terms and
performance measures in its contracts; 4) provided training in March 2011 on the importance of following
district procurement procedures; and 5) developed monitoring protocols related to financial management
and internal controls at the LEA level. Although Spartanburg requested a revised agreement from
Hatchette Consulting, LLC, to allow verification of billing hours and timely performance, Spartanburg is
in the process of terminating the agreement. Spartanburg’s new Director of Special Services will evaluate
the LEA’s special education programs and revise and further develop policies and procedures without the
use of a consultant.

FINDING NO. 3 − SCDOE’s Policies and Procedures over the LEA Reimbursement Process Need
                Improvement

SCDOE had not revised its policies and procedures to sufficiently address SCDOE’s ARRA
reimbursement process. Specifically, SCDOE lacked procedures for approving ARRA claimed costs and
for communicating to its LEAs the results of its reconciliation of expenditure reports to reimbursements.
In addition, Greenville lacked procedures to reconcile its expenditure reports to the funds received from
SDCOE.

Although SCDOE primarily used the reimbursement funding method for its Title I subgrantees, it lacked
formal procedures for approving claims. According to 34 C.F.R. § 80.20(a), SCDOE is required to
establish fiscal control and accounting procedures in accordance with State laws and procedures.
Final Audit Report
ED-OIG/A04K0005                                                                            Page 10 of 25


SCDOE adjusted two Title I ARRA expenditure reports submitted by Greenville; however, those
adjustments were not reflected in Greenville’s expenditure reports. For expenditure reports dated
October 2009 and December 2009, SCDOE disallowed $11,894 and $485, respectively, to exclude costs
claimed in unapproved Title I ARRA budget categories, which were not part of the school district’s
approved budget. However, SCDOE did not have documentation supporting that the two adjustments had
been communicated to Greenville’s Title I accounting personnel. Greenville’s Title I Financial Services
Analyst confirmed that she was not aware of the adjustments and, as a result, Greenville’s expenditure
report records did not match the reimbursement paid by SCDOE. Because Greenville’s procedures did
not require that it reconcile its expenditure reports submitted to SCDOE to the funds received, the
discrepancy in the LEA and State records went undetected until our review.

In addition, SCDOE incorrectly computed the expenditure total on the October 2009 expenditure report.
SCDOE incorrectly recorded a total approved expenditure amount of $539,270 rather than the correct
amount of $536,270, resulting in a $3,000 overstatement. After we identified the error, SCDOE indicated
that it would correct its records. However, according to SCDOE, the keying error would have been
identified during the year-end reconciliations.

Based on the identified findings, SCDOE and Greenville revised procedures for reviewing expenditure
reports to ensure that subgrantees’ expenditure report records accurately reflect reimbursements.
Specifically, effective June 25, 2010, SCDOE no longer makes adjustments to the subgrantees’
expenditure reports for Federal projects. Under the revised procedures, if SCDOE identifies a budget
issue with any of the expenditure categories, it will return the claim to the LEA for correction. As such,
SCDOE should no longer be making adjustments to LEA expenditure reports. In addition, effective
June 24, 2010, Greenville revised its procedures to require reconciliation of its expenditure claims with
amounts reimbursed by SCDOE.

RECOMMENDATION

We recommend that the Assistant Secretary for Elementary and Secondary Education require that
SCDOE –

3.1   Verify the implementation of improved and/or new processes for claims processing and confirm
      corrections have been made at Greenville.

Auditee Comments
SCDOE concurred with the findings and stated that Greenville and SCDOE revised procedures for
reviewing expenditure reports to ensure accuracy and that SCDOE staff verified that the required
adjustments were made in Greenville.
Final Audit Report
ED-OIG/A04K0005                                                                          Page 11 of 25

                                  SCOPE AND METHODOLOGY
The purpose of our audit was to determine whether South Carolina and its subrecipients (1) used ARRA
funds in accordance with applicable laws, regulations, and guidance; and (2) reported accurate, reliable,
complete data in compliance with ARRA reporting requirements. We performed this audit at SCDOE and
three LEAs –Charleston, Greenville, and Spartanburg. Our audit work focused on the ARRA, Title I, IDEA,
and SFSF ESF grants disbursed to the entities reviewed. For use of funds, we reviewed claims and
expenditures incurred from February 17, 2009, through December 31, 2009. For data quality, we reviewed
the quarterly reporting periods ended September 30, 2009, and December 31, 2009.

To gain an understanding of the ARRA requirements applicable to these grants and the areas of use of
funds and data reporting, we obtained background information about the grants and organizations being
audited; and we reviewed Federal laws, regulations, OMB Circulars, and ARRA-specific guidance issued
by OMB and the Department.

To achieve our objectives, we —
 • Examined prior reviews conducted by the South Carolina State Auditor for the Statewide Single
   Audit Report of the State of South Carolina and the SCDOE’s State Audit Report for year ended
   June 30, 2008.
 • Reviewed the single audit report for each of the three LEAs visited for the year ended June 30, 2009.
 • Reviewed the grant applications from the Department to SCDOE.
 • Reviewed SCDOE’s application process in awarding, approving, and monitoring ARRA funds to
   LEAs for each of the programs reviewed;
 • Interviewed key program, accounting, and reporting officials at SCDOE and the three LEAs;
 • Interviewed officials at other State agencies including the South Carolina Office of the State Auditor,
   the Office of the State Treasurer, and Office of State Comptroller.
 • Requested and reviewed supporting documentation for expenditures.
 • Reviewed quarterly reports and Title I expenditure reports to ensure compliance with ARRA grant
   requirements.
 • Obtained from the Department’s payment system, the amount of ARRA Title I, IDEA, and SFSF
   grant funds South Carolina received.
 • Reviewed and tested SCDOE’s controls for requesting, receiving, managing, and disbursing ARRA
   funds to subrecipients.
 • Reviewed and tested SCDOE’s procedures for collecting and reporting data required by Section 1512
   data to Recovery.gov.

To perform our work at the local level, we considered such factors as the total amount of ARRA funds
allocated and any risk designations by the Department. We stratified LEAs according to grant allocations
– 8 LEAs were allocated over $10 million and 25 LEAs were allocated between $3.9 million and
$10 million. We judgmentally selected two LEAs with the largest allocation from the first group and
randomly selected one LEA from the second group. We performed audit steps to ensure compliance with
Federal requirements in the following areas for the entities reviewed – SCDOE, Charleston, Greenville,
and Spartanburg.
Final Audit Report
ED-OIG/A04K0005                                                                                                   Page 12 of 25
Use of Funds: To assess the control structure of the use of ARRA funds, we reviewed the procedures for
approving and accounting for expenditures; and we interviewed officials responsible for procurement,
accounting, payroll and personnel, and technology. We reviewed and tested SCDOE’s policies and
procedures for correctly calculating and timely remitting interest earned on Federal cash balances; the
drawdown and reimbursement request process for the ARRA Title I, IDEA, and SFSF ESF grants; the
auditees’ ability to separately account for ARRA funds; and the monitoring of ARRA funding at the SEA
level. At each LEA, we sampled payroll and non-payroll transactions and traced back to supporting
documentation. Table 4 provides the universe and sample information for each of the samples reviewed
during the audit.

         Table 4: Universe and Sample Information for Use of Funds Testing at LEAs (a)
                              Personnel Costs                   Non-Personnel Costs
         LEA
                      Title I      IDEA       SFSF (b)   Title I      IDEA       SFSF (b)
                                                  (d)              (d)                               (d)               (d)
   Charleston
     Dollar Universe         $1,057,819           $0              $0              $588,960           $0                $0
      Sample Dollars            $82,081           $0              $0              $584,189           $0                $0
        Sample Size            11(c)              0               0                10                 0                 0
                                                                   (e)
   Greenville
     Dollar Universe         $1,760,185       $5,879,203          $0              $471,010          $374,579        $7,502,339
      Sample Dollars          $128,526         $178,546           $0              $400,784          $144,747         $931,605
        Sample Size            14(c)            11( c)            0                 9                15                19
                                                                                                                       (e)
   Spartanburg
     Dollar Universe           $114,881          $73,150       $1,273,091         $293,301          $127,563           $0
      Sample Dollars           $114,881          $73,150        $192,474          $293,301          $127,563           $0
        Sample Size             4(c)             3(c)            15(c)             37                27                 0
   (a) The number of transactions tested at each LEA varied depending on the amount of personnel and non-personnel cost charged
   to each grant. In some cases, the LEA did not expend grant funds during our audit period. Samples were judgmentally selected.
   (b) SFSF Education Stabilization funds.
   (c) Number of employees reviewed.
   (d) No cost charged for this program during the audit period.
   (e) No SFSF funds budgeted for these costs.


We relied on computer-processed data contained in the accounting systems of SCDOE and three LEAs
for the purposes of testing expenditures for payroll and non-payroll transactions. Based on our testing as
described, we determined that the computer-processed data were sufficiently reliable for the purposes of
this audit.

Data Quality: We reviewed SCDOE’s procedures to collect and report data required by Section 1512
and traced data back to source documentation. Specifically, we reviewed and tested data elements to
include amount of sub-award, sub-award disbursed, jobs created and retained, and vendor payments of
more than $25,000. To determine whether the data reported were accurate, reliable, complete, and in
compliance with ARRA reporting requirements, we compared supporting documents provided by the
sampled LEAs and SCDOE’s Office of Finance to data reported in FederalReporting.gov.

SCDOE developed a web-based spreadsheet to collect and consolidate data from the subrecipients. We
performed an assessment of the reliability of data contained in the spreadsheets by tracing reported data
from the subrecipient, to SCDOE’s consolidation, and to Recovery.gov. We concluded that the data were
sufficiently accurate and reliable for the purposes of the audit.
Final Audit Report
ED-OIG/A04K0005                                                                         Page 13 of 25
We conducted our work at SCDOE, the three LEAs, and our offices from January 2010 through October
2010. We discussed the results of our review and recommendation with officials of SCDOE and the three
LEAs on October 20, 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.
Final Audit Report
ED-OIG/A04K0005                                                                                   Page 14 of 25


                                        Appendix
              LEA Specific Results at Charleston, Greenville, and Spartanburg
At the three LEAs reviewed, we identified issues relating to district-level accounting, payroll
expenditures, and Section 1512 ARRA reporting of jobs and vendor data. All three LEAs have made
changes to facilitate more accurate reporting in the future. The specific issues identified in our review of
the LEAs are detailed in the respective sections below.

Lack of Formal Procedures for District-Level Accounting

Spartanburg lacked formal procedures for district-level accounting. According to 34 C.F.R. § 80.20(a),
fiscal control and accounting procedures of subgrantees must be sufficient to permit (1) preparation of
reports required by this part and the statutes authorizing the grant, and (2) 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. Spartanburg had not developed formal district-level accounting and
operational policies and procedures to ensure consistent records of the district’s day-to-day operations and
activities. According to Spartanburg’s Finance Officer, the school district was in the process of developing
a policies and procedures manual that focused on segregation of duties and cross-training.

Salary Overpayments and Incorrect Allocation of Salary Costs

At Charleston and Greenville, we found examples of salary overpayments and/or cost allocation errors
related to ARRA grants. According to the Office of Management and Budget (OMB) Circular A-87, an
allowable cost must be allocable to a particular Federal award. In addition, the Circular states that –
       [a] cost is allocable to a particular cost objective if the goods or services involved are
       chargeable or assignable to such cost objective in accordance with relative benefits received.

We reviewed payroll expenditures for the ARRA Title I, ARRA IDEA, and SFSF ESF programs.
For Charleston, we tested payroll expenditures for 11 ARRA Title I employees. For Greenville,
we tested payroll expenditures for 14 ARRA Title I employees and 11 ARRA IDEA employees.
There were no payroll expenditures for SFSF ESF programs at these two LEAs. We identified the
following payroll concerns at Charleston and Greenville.

   •   Charleston. For the July 2009 – December 2009 period, Charleston erroneously paid two
       employees with Title I ARRA funds, resulting in a grant overcharge of $827. In the first instance,
       an employee was paid $648 when the wages of another employee were posted to her social
       security number (SSN). Charleston determined that the Title I program office sent the wrong SSN
       to the payroll office for payment of wages and incorrectly paid the intended employee with Title I
       ARRA funds; however, the wages paid in error were not reversed. In the second instance,
       Charleston paid another employee $179 in Title I ARRA funds even though he had transferred and
       no longer worked under the Title I program. The payment occurred because the payroll office had
       not changed the payroll account number from Title I ARRA to Title I Regular. Charleston
       corrected this overpayment after we brought the error to its attention.
Final Audit Report
ED-OIG/A04K0005                                                                         Page 15 of 25
   •   Greenville. For the July 2009 – December 2009 period, two employees’ salaries were computed
       with incorrect allocation rates. For 4 of the 14 employees in our sample, Greenville paid part of
       their salary with Title I ARRA funds and part from Greenville’s General fund. Greenville uses a
       form titled “Semi-Annual Certification of Part-Time Employment Under Title I,” to document the
       number of courses taught under Title I and calculate the percentage of time to charge. Allocations
       of salaries for two of the employees to the Title I ARRA grant were in error, resulting in a net
       overcharge of $1,948 to the grant. Greenville used an allocation rate of 50 percent versus the
       correct rate of 40 percent for one employee and used an allocation rate of 50 percent versus the
       correct rate of 60 percent for another employee. Greenville determined that the correct allocation
       rates were not entered into its financial system before our March 2010 onsite visit. However,
       corrections were made in the school district’s system in August 2010.
       For the July 2009 – December 2009 period, one employee’s salary of $4,305 was charged totally
       to the IDEA ARRA grant even though her job responsibilities were not entirely program related.
       The employee served as Greenville’s State Fiscal Stabilization Fund Coordinator and worked on a
       special project for the school district’s IDEA program office. However, payroll records did not
       reflect an allocation of the employee’s salary between the SFSF and IDEA ARRA grants based on
       the amount of time spent on each project. Greenville stated that the allocation was corrected
       June 24, 2010, and that a journal entry was posted to reallocate expenses charged to the
       appropriate expenses accounts based on the time spent on each project.

Reporting Issues Related to Section 1512 Data

Charleston and Greenville reported incomplete or unsupported job and vendor data for the Title I and
SFSF ESF ARRA grants under Section 1512 ARRA reporting requirements for the
September 30, 2009, and December 31, 2009, reporting periods. Specifically, Charleston reported
incomplete and unsupported Title I job data; Charleston transferred $1.3 million of Title I ARRA job and
vendor expenditures to the regular Title I program; both Charleston and Greenville underreported Title I
vendor payments of more than $25,000; and Charleston changed its initial planned use of the SFSF ESF
grants, resulting in an overstatement of jobs. Although the issues identified resulted in inaccurate
reporting of both job and vendor data, none of the errors resulted in a material misstatement of
information as defined in the most recent OMB guidance. OMB Memorandum M-10-34 defines an error
as material if the omission or misstatement in the prior period report could mislead the public on how
ARRA funding is being expended.

SCDOE, as the prime recipient for Title I and IDEA and an SFSF subrecipient, owns the data submitted
for these ARRA programs and is responsible for the quality of the information submitted. Section 4.2 of
OMB Memorandum M-09-21, “Implementing Guidance for the Reports on Use of Funds Pursuant to the
American Recovery and Reinvestment Act of 2009” (June 22, 2009), outlines prime and subrecipients’
responsibilities as they relate to the quality of Section 1512 data. In addition, Section 5.2 of OMB
Memorandum, M-10-08, “Updated Guidance on the American Recovery and Reinvestment Act – Data
Quality, Non-Reporting Recipients, and Reporting of Job Estimates” (December 18, 2009), defines a
funded job “as one in which the wages or salaries are either paid for or will be reimbursed with Recovery
Act funding.” The guidance further requires prime recipients and subrecipients to report vendor payments
greater than $25,000.
Final Audit Report
ED-OIG/A04K0005                                                                                                       Page 16 of 25

Table 5 provides a summary of Section 1512 reporting discrepancies identified.

                          Table 5: Summary of Section 1512 Reporting Discrepancies
                            September 30, 2009 Reporting Period                     December 31, 2009 Reporting Period
                            Reported    Reported by                                Reported by  Reported by
        LEA
                             by LEA     SCDOE to       Supported                      LEA        SCDOE to      Supported
                           to SCDOE    Recovery.gov                                to SCDOE    Recovery.gov
    Job Data(a)
       Charleston
      Title I                  54.9                54.9              43.5(b)            54.9                 54.9              43.5(b)
      SFSF                     49.3                49.3              49.3(c)            49.3                 49.3              49.3(c)
   Vendor Data
       Charleston
      Title I                    5                   5                  0                 0                    0                  5
        Greenville
      Title I                    1                   1                  2                 1                    1                  1
(a) No discrepancies in job data were noted for Greenville and Spartanburg.
(b) Supported by actual job data documentation; subsequently funded by the Title I Regular grant as discussed in the narrative below.
(c) Not supported by job documentation, but reported as initial planned use of SFSF ESF funds; funds were actually used for utilities as
    discussed in the narrative below.


Charleston’s reporting of Title I Job Data. We found that Charleston could not provide documentation
for its reported Title I job data and provided incomplete Title 1 job data. In addition, Charleston
transferred $1.3 million of Title I ARRA expenditures to the regular Title I program.

    •    Charleston’s Title I Job Data Unsupported and Incomplete. We found that 11.4 FTEs of ARRA
         Title I jobs reported to SCDOE by Charleston were not supported. In addition, Charleston did not
         report 29 employees whose summer or after-school stipends were paid with Title I funds.
         According to Charleston’s Title I Director, jobs reported as created/retained were obtained by
         going through each program and counting positions that would be paid for with Title I ARRA
         funds. Charleston’s Accounting Office provided a list of all employees paid with Title I ARRA
         funds, and Charleston’s Title I office indicated the Full-time Equivalents (FTE) for each employee
         listed. The total FTEs provided on the list were 43.5, 11.4 FTEs fewer than the 54.9 FTEs
         reported by SCDOE. Although the jobs data did not include the 29 employees whose summer or
         after-school stipends were paid for by Title I ARRA funds, we are not able to determine the actual
         FTE that should have been reported related to these employees because the Charleston Title I
         office did not provide documentation of the FTE calculations for the 29 employees.

         In response to the unsupported FTEs reported, Charleston stated –
                   [The] ARRA Coordinator did not verify the data in the accounting system to ensure that
                   changes made to the funding plan or information reported through the [district’s]
                   program offices was complete and accurate…and used the information from the
                   program offices as the information to be reported. [Charleston]’s report indicating the
                   number of jobs created/retained under the Title I, Part A ARRA grant include[d] those
                   positions which ha[d] yet to be filled. They were positions created under this funding
                   but ha[d] not been 100% filled by staff. The reporting of these positions in this manner
                   does indicate that jobs were created which was the intent. The Title I program office
                   was not instructed or trained to calculate . . . FTEs (for the 29 positions), that was done
                   by the ARRA Coordinator and all jobs were included in the December 2009 report.
Final Audit Report
ED-OIG/A04K0005                                                                                            Page 17 of 25

Charleston’s Transfer of Title I ARRA Expenditures. Subsequent to reporting job and vendor data,
Charleston transferred $1,290,063 of Title I ARRA expenditures to the Title I Regular grant at the end of
May 2010. Charleston’s Director of Financial Services indicated that the transfer was made to bring the
Title I Regular carryover below the 15 percent carryover limitation. 17 The school district believed the
carryover provision would be applied to both the Title I Regular and Title I ARRA allocations, but the
school district was later instructed that only the Title I Regular allocation could have carryover. In
August 2010, SCDOE approved Charleston's revised Title I ARRA budget detailing how the ARRA
funds would now be used. As a result of the transfer of expenditures from Title I ARRA to Title I
Regular, the 54.9 jobs initially reported by SCDOE for Charleston are no longer valid. The funds
transferred also included vendors payments, which would affect the reporting of those payments as well.

Charleston Changed the Planned Use of SFSF ESF Grant Funds. For the September 30, 2009, and
December 31, 2009, reporting periods, SCDOE reported 49.3 jobs created/retained under the SFSF ESF
grant for Charleston. Although Charleston originally planned to use SFSF ESF funds for payroll
expenses, it later concluded that the use of these funds for payroll expenses would adversely impact the
district. 18 Charleston revised its plans and decided to use its SFSF ESF funds for utility expenses instead
of payroll. Charleston received SCDOE approval for its revised budget on May 25, 2010. As a result of
the approved revisions, SCDOE’s reported job estimates for Charleston’s SFSF ESF grant are no longer
valid. In response to the change in use of the SFSF ESF funds, Charleston stated that they had discussed
this with SCDOE and a journal entry could be made to correct this issue.

Inaccurate Title I Vendor Payments of more than $25,000. We found that both Charleston and
Greenville underreported Title I vendor payments of more than $25,000. Specifically, Charleston’s
accounting records did not support five vendor payments reported in the September 30, 2009, reporting
period; Charleston did not report five vendor payments for the December 31, 2009, reporting period; and
Greenville did not report one vendor payment for the September 30, 2009, reporting period. The results
are summarized in Table 5.

The clarification of M-10-08 Memorandum (dated December 18, 2009) requires prime recipients and
subrecipients to report vendor payments greater than $25,000. The Department’s “Clarifying Guidance
on American Recovery and Reinvestment Act of 2009 Section 1512 Quarterly Reporting” (revised
April 2, 2010) further states that the--
         $25,000 threshold is triggered by individual payments to a vendor within a quarter and not
         cumulative payments to a vendor over the life of the project.

     •   Charleston’s Vendor Payments. For the September 30, 2009, reporting period, SCDOE reported
         five Title I vendor payments greater than $25,000 on behalf of Charleston. Charleston reported to
         SCDOE payments greater than $25,000 for five vendors – College of Charleston, Durham School
         Services, Medical University of South Carolina – School of Nursing, Scholastic, and Voyager
         Expanded Learning. However, Charleston’s accounting records did not contain any evidence of
         payments greater than $25,000 to vendors during the quarter ending September 30, 2009.


17
   Section 1127(a) of Title I of the Elementary and Secondary Education Act limits the amount of Title I, Part A funds an LEA
may carryover from one fiscal year’s allocation to not more than 15 percent of the total Title I, Part A funds allocated to the
LEA for that fiscal year.
18
   Because South Carolina subsidizes teachers’ salaries based on a methodology used to assist all LEAs, if SFSF-ESF funds
were used for payroll, the district would have lost approximately $90,000 in loss of the State funding subsidy.
Final Audit Report
ED-OIG/A04K0005                                                                                    Page 18 of 25
       For the December 31, 2009, reporting period, SCDOE reported no Title I vendor payments greater
       than $25,000 for Charleston. However, Charleston’s accounting records showed five vendor
       payments greater than $25,000 for the quarter ending December 31, 2009--one payment to
       Communities in Schools, one payment to Durham School, and three payments to WFK. Only one
       of these vendors, Durham School Services, was previously reported by SCDOE in the
       September 30, 2009, reporting period, which would indicate that the discrepancy was not a posting
       error from the previous quarter. Charleston’s vendor reporting errors resulted from its lack of
       internal verification procedures. Charleston’s ARRA Coordinator stated that she relied on the
       Title I Director to provide her with the data needed to complete the Section 1512 vendor section.
       In addition, the Coordinator did not verify the data provided back to the general ledger.

   •   Greenville. For the September 30, 2009, reporting period, SCDOE reported Pearson Digital as the
       only Title I vendor payment greater than $25,000 at Greenville. However, Greenville’s Title I
       ARRA accounting records recorded two vendors--Dell Marketing and Pearson Digital--with
       payments greater than $25,000 for the quarter ending September 30, 2009. Greenville’s ARRA
       Coordinator confirmed that she neglected to include Dell Marketing in the vendor listing provided
       to SCDOE.

According to OMB Memorandum M-10-08, “Updated Guidance on the American Recovery and
Reinvestment Act – Data Quality, Non-Reporting Recipients, and Reporting of Job Estimates,”
(December 18, 2009) –
       …Corrections for prior quarters will be handled as follows:

               •   Federal agencies subject to this Guidance shall instruct recipients to maintain within
                   their administrative records comprehensive information on any and all necessary
                   corrections to prior quarter data.
               •   Recipients will be required, at a time and process to be specified in the future, to
                   submit this information to the Federal government, after which the Recovery and
                   Accountability Transparency Board will determine the best approach for making
                   this information available on Recovery.gov.

The most recent guidance, OMB Memorandum M-10-34, “Updated Guidance on the American Recovery
and Reimbursement Act” (dated September 24, 2010), is an update of the requirements set forth in OMB
Memorandum M-10-08 regarding correcting Section 1512 data from previous reporting quarters.
Effective September 24, 2010, an ARRA recipient or Federal agency “may initiate the change to a prior
reporting process if they deem it to be appropriate.” However, the Federal agency must have
documentation to support the requested change and must deem that the change is “material” that is, the
omission or misstatement in the prior period report could mislead the public on how ARRA funding is
being expended. In addition, changes cannot be initiated for the “Number of Jobs field.”
Final Audit Report
ED-OIG/A04K0005                                           Page 19 of 25




                              Enclosure:
            SCDOE’s Comments on Preliminary Version of Report
Final Audit Report
ED-OIG/A04K0005                                                                            Page 20 of 25




                              STATE OF SOUTH CAROLINA
                             DEPARTMENT OF EDUCATION

 Mick Zais                                                                       1429 Senate Street
 Superintendent                                                     Columbia, South Carolina 29201



                                                                                     March 28, 2011


VIA ELECTRONIC MAIL

Ms. Denise M. Wempe
Regional Inspector General for Audit
U.S. Department of Education
Office of Inspector General
61 Forsyth SW, MR 19T30
Atlanta, GA 30303

Dear Ms. Wempe:

        The South Carolina Department of Education (SCDOE) appreciates the opportunity to provide a
response to the United States Department of Education (Department), Office of Inspector General’s draft
audit report regarding South Carolina’s Use of Funds and Data Quality for Selected American Recovery
and Reinvestment Act (ARRA) Programs. The SCDOE is committed to ensuring that the tenets of the
ARRA are implemented effectively and efficiently and concurs with the OIG’s findings and
recommendations. As set forth more fully below and noted in the draft report, many of the issues raised
by the OIG during the audit have been addressed by the SCDOE and local educational agencies (LEAs)
involved in the process.

Finding No. 1: SCDOE’s Case Management and Monitoring Procedures for Title I ARRA Cash
Advances Need Improvement

RECOMMENDATIONS:

1.1   Identify subgrantees with existing advance balances and ensure that subgrantees minimize the time
between transfer of funds and disbursement.

1.2    Determine whether interest was earned on Title I ARRA advances given to the remaining 19
school districts; and obtain any interest amounts from those school districts and remit to the Department.
RESPONSE:
Final Audit Report
ED-OIG/A04K0005                                                                          Page 21 of 25
The SCDOE changed its policy related to cash advances to LEAs for all Title I funds. Funds are currently
distributed on a reimbursement basis as reflected in the revised Title I Rules and Regulations Handbook
which provides:
        The South Carolina Department of Education has been advised to discontinue the practice
        of issuing cash disbursements prior to actual expenditures. All cash disbursements will be
        on a reimbursement basis.

In addition, the SCDOE notified LEAs in its Annual Audit Guide that if interest is earned on any
reimbursed funds, it must be remitted to the SCDOE. Recently, the SCDOE’s Finance Director reiterated
these procedures and the requirements of the Cash Management Improvement Agreement to school
business officials during the S.C. Association of School Business Official’s March 2011 conference.

The SCDOE’s Office of Finance is in the process of determining whether the remaining LEAs earned
interest on the cash advances that were paid. If it is determined that the funds were not expended within
72 hours, the SCDOE will request reimbursement for any interest earned on the funds and remit the
interest to the Department. Interest payments were received from the Greenville County School District
(Greenville) and Charleston County School District (Charleston) as noted in the finding.

Finding No. 2:    Procurement Practices for ARRA Funded Contracts Need Improvement

RECOMMENDATIONS:

2.1    Charleston obtains approval for budget amendments in excess of SCDOE’s 10 percent threshold.

2.2    Charleston’s Communities in School (CIS) contract is properly managed by requiring that the
contract be amended to include changes or adjustments in price or number of schools served.

2.3    Charleston’s Wings for Kids, Inc. (WFK) contracts are properly managed by requiring that the
contracts are amended to include price adjustments.

2.4   Spartanburg County School District Two’s (Spartanburg) contract with Hatchette Consulting,
LLC, complies with Federal and district procurement regulations for sole-source contracts.

2.5    Spartanburg’s contracts include contract terms and performance measures needed to monitor
contracts.

2.6     It reminds LEAs about the importance of following correct procurement procedures and that it
places emphasis on review of LEA contract administrative controls during monitoring site visits.
Final Audit Report
ED-OIG/A04K0005                                                                            Page 22 of 25
RESPONSE:

The SCDOE’s Office of Federal and State Accountability has developed more rigorous Title I monitoring
protocols related to financial management and internal controls at the LEA level. The Charleston
contracts with CIS and WFK have been scrutinized by SCDOE staff and have been amended as required.
The SCDOE consulted with Charleston regarding the requirement that it obtains approval for budget
amendments in excess of the SCDOE’s 10-percent threshold in accordance with the SCDOE’s Title I
Administrative Manual.

With regard to recommendations concerning Spartanburg, the LEA requested a revised agreement from
Hatchette Consulting, LLC, which allows verification of billing hours and timely performance; however,
Spartanburg is in the process of terminating the agreement because its new Director of Special Services
will evaluate the LEA’s special education programs and review, revise, and further develop its special
education policies and procedures without the use of a consultant. As a result, the specific concerns cited
in the draft report regarding the agreement between Spartanburg and Hatchette Consulting, LLC, may be
considered moot once the agreement is terminated. As noted in the draft report, Spartanburg amended its
operational procedures to reflect appropriate documentation prior to approval in contractual issues. In
addition, the SCDOE discussed with Spartanburg the importance of including in its contracts contract
terms and performance measures needed to monitor contracts.

As part of the SCDOE’s Title I Rules and Regulations meeting held on March 15–16, 2011, and the
Office of Exceptional Children (OEC) Spring Administrators Conference held on March 23–24, 2011,
staff presented information pertaining to the importance of following district procurement procedures.
Information related to contract modification was discussed including contract modifications, extensions
and changes in scope, sole source support and contract deliverables. In addition, the SCDOE’s OEC
developed monitoring protocols related to financial management and internal controls at the LEA level.

Finding No. 3:     SCDOE’s Policies and Procedures over the LEA Reimbursement Process Need
Improvement

RECOMMENDATIONS:

3.1     Verify the implementation of improved and/or new processes for claims processing and confirm
corrections have been made at Greenville.

RESPONSE:

As stated in the draft report, Greenville and the SCDOE revised procedures for reviewing expenditure
reports to ensure accuracy. SCDOE staff verified that the required adjustments were made in Greenville.
Greenville currently utilizes a comprehensive spreadsheet to track claims filed and reimbursements
received from the SCDOE and is in the process of developing a new department operational instruction
document.
Final Audit Report
ED-OIG/A04K0005                                                                         Page 23 of 25
OTHER MATTER—ARRA Programs Should Be Covered by South Carolina’s Treasury-State
Management Agreement


RESPONSE:

Please see the attached comments from Paul Jarvis, Jr., Senior Assistant State Treasurer–Treasury
Management in response to this matter.

SUGGESTIONS:

The SCDOE received two suggestions from Greenville regarding the draft report. The first suggestion
concerns including language with Table 2 on page 3 that the ARRA allocations are for fiscal year (FY)
2010, as the report will be published during FY 2011 and the LEAs have received additional funds since
the FY 2010 allocation. The second suggestion is regarding the addition of a statement to the second
paragraph on page 15, concerning an employee’s salary charged to the Individuals with Disabilities
Education Act ARRA grant, to include that a journal entry was posted to reallocate the expenses charged
to the appropriate expense accounts based on the time spent on each project.

       Thank you for the opportunity to respond to the draft report. If you have any questions or need
additional information, please contact Karla Hawkins, SCDOE Deputy General Counsel, at 803-734–
8783 or khawkins@ed.sc.gov.

                                            Sincerely,

                                                /s/

                                            Mick Zais, Ph.D.
                                            State Superintendent of Education

MZ/kmh

Attachment

c:     Jamie Shuster, Director of Budget and Policy, Office of the Governor
       Curtis M. Loftis, Jr., State Treasurer
       Paul D. Jarvis, Jr., Senior Assistant State Treasurer–Treasury Management
       Elizabeth Carpentier, SCDOE Deputy Superintendent of Innovation and Support
       Karla M. Hawkins, SCDOE Deputy General Counsel
Final Audit Report
ED-OIG/A04K0005                                                                            Page 24 of 25

                                                                                          Attachment




                      THE HONORABLE CURTIS M. LOFTIS, JR.
                                             State Treasurer
March 21, 2011

To Whom It May Concern:

We have been asked to provide comments in response to a matter raised by the Office of Inspector
General concerning the coverage of ARRA programs under the Treasury-State Cash Management
Agreement (TSA) pursuant to the Cash Management Improvement Act of 1990 (CMIA).

Given the timing of when ARRA funds were first received by South Carolina and the provisions of our
TSA, we anticipate that next fiscal year will be the first year we are required to include ARRA funds in
our TSA.

Under the TSA, federal assistance programs which are to appear in the TSA are determined based
upon the State’s most recent Single Audit. The most recent Single Audit is dated April 5, 2010 and is
for the fiscal year ended June 30, 2009. During this period, no ARRA funds were received and thus
none have been included in the TSA.

ARRA Funds were first received by the state during the July 1, 2009 to June 30, 2010 fiscal year and
the Single Audit covering this period is currently in progress but not yet complete. Assuming this
Single Audit is completed in its normal time frame, this audit will provide the basis for our amending
our TSA beginning July 1, 2011 to include ARRA funds.

We hope this information is helpful to your analysis. We have had several conversations with our
Treasury contact over the past eighteen months regarding ARRA funds and the TSA and he believes
our reports have been properly filed.

Thank you for the opportunity to share our comments regarding this report and if we may be of any
further assistance, please do not hesitate to contact us.

Sincerely,


Paul D. Jarvis, Jr.
Senior Assistant State Treasurer-Treasury Management
South Carolina Office of State Treasurer
PO Drawer 11778
Columbia, SC 29211

Office Phone Number: (803)734-2654
e-mail Address: paul.jarvis@sto.sc.gov
        Anyone knowing of fraud, waste, or abuse involving
         U.S. Department of Education funds or programs
     should call, write, or e-mail the Office of Inspector General.

                             Call toll-free:
                      The Inspector General Hotline
                   1-800-MISUSED (1-800-647-8733)

                                Or write:
                        Inspector General Hotline
                      U.S. Department of Education
                       Office of Inspector General
                        400 Maryland Ave., S.W.
                         Washington, DC 20202

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

      Your report may be made anonymously or in confidence.

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




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

                                www.ed.gov