Final Audit Report ED-OIG/A05-C0011 adequately support ($147,456), and did not have adequate written policies and procedures for administering the Grant. Finding No. 1 PBS Charged Costs to the Grant that are Unallowable or Unsupported PBS charged costs to the Grant that are unallowable ($1,974) or unsupported ($147,456). The unallowable amount consists of charges for alcoholic beverages ($48), gifts ($676), related indirect costs ($58), and missing equipment ($1,192). The unsupported amount consists of charges for personnel ($31,933), fringe benefits ($8,868), meals ($7,448), indirect costs ($57,472), and rent and utilities ($41,735) for which it did not provide adequate documentation to support that the costs were reasonable, allowable, or allocable. OMB Circular A-122, Cost Principles for Non-Profit Organizations, Attachment A, General Principles, Paragraph A, Subparagraphs A.2.a and A.2.g. (1998) provide that− To be allowable under an award, costs must…Be reasonable for the performance of the award and be allocable thereto…Be adequately documented. Details are discussed in Attachment 1. Recommendations We recommend that the Assistant Secretary for the Office of Educational Research and Improvement instruct PBS to— 1.1 Refund to the Department of Education unallowable costs of $1,974; and 1.2 Provide sufficient documentation to support $147,456 or refund that amount to the Department of Education. Auditee Comments PBS concurred with the questioned costs discussed in the draft report. It did not concur with unsupported legal fees ($3,255), salaries ($10,914), fringe benefits ($3,031), business meals ($2,268), and related indirect costs ($1,557). PBS believed the legal fees were allowable based on documents it provided that showed it attempted to recruit in this country and was unsuccessful. In addition, PBS provided documents it believed supported the salaries and business meals discussed above. Therefore, PBS supported the related fringe benefits and indirect costs. Also, PBS stated that because it had submitted an indirect cost proposal to the Department of Education that proposed an indirect cost rate of 12.35 percent, it disagreed that indirect costs claimed at 8 percent should be classified as unsupported. Finally, PBS stated that it disagreed that rent and utility costs of $41,735 may not necessarily be representative of the space and utilities by an 2 Final Audit Report ED-OIG/A05-C0011 employee. Its methodology of allocating those costs based on salaries was consistent with the corporate methodology used at the time. Since then, PBS has changed its methodology to be based on headcount versus salaries charged. It provided an analysis for the fiscal year 2003 budget period that showed allocating rent and utilities based on headcount is materially consistent with allocating them based on square footage. Auditor Response We reviewed the documentation PBS provided related to the legal fees. Based on those documents, we reclassified the legal fees as recommended for acceptance. In addition, after reviewing the documents PBS provided in the amendments to its response, we reclassified salaries ($5,250) and fringe benefits ($1,458) as recommended for acceptance. We have not changed our conclusion regarding business meals because the additional documents PBS provided still did not adequately support the charges. We have not changed our conclusion regarding indirect costs. Until the Department of Education negotiates a final rate with PBS, we have no basis for agreeing with PBS's assertion that its proposed 12.35 percent rate will result in a negotiated rate greater than the 8 percent rate it used. We also have not changed our conclusion regarding rent and utilities costs. Although we agree that a headcount allocation is materially consistent with a square footage allocation, PBS did not use either of these methods to allocate rent and utilities costs. Instead PBS allocated them based on salaries. In its response, PBS did not provide any documentation to support that a salary allocation is materially consistent with a headcount or square footage allocation. Finding No. 2 PBS Needs to Establish and Implement Written Policies and Procedures that Comply with the Standards for Financial Management Systems PBS does not have written policies and procedures for financial management. The standards for financial management systems are contained in 34 C.F.R. § 74.21. The standards specify various requirements of a financial management system that recipients must provide that include— ● Effective control over and accountability for all funds, property, and other assets. Recipients shall adequately safeguard all assets and assure they are used solely for authorized purposes. 34 C.F.R. § 74.21(b)(3) (2000). ● Written procedures for determining the reasonableness, allocability, and allowability of costs in accordance with the provisions of the applicable Federal cost principles and the terms and conditions of the award. 34 C.F.R. § 74.21(b)(6) (2000). ● Accounting records including cost accounting records that are supported by source documentation. 34 C.F.R. § 74.21(b)(7) (2000). 3 Final Audit Report ED-OIG/A05-C0011 Because PBS did not have written policies and procedures that complied with the standards for financial management, PBS incurred costs that were unallowable. Also, PBS did not always have source documents to support that costs incurred were reasonable, allocable, and allowable (see Attachment 1). Recommendation We recommend that the Assistant Secretary for the Office of Educational Research and Improvement instruct PBS to— 2.1 Develop and implement written policies and procedures that comply with the standards for financial management. Auditee Comments/Auditor Response PBS stated that, effective April 1, 2002, it developed written policies and procedures for financial management. PBS provided training to the staff on those policies and procedures on April 5, 2002. It appears that the policies and procedures comply with the standards for financial management. Finding No. 3 PBS Needs to Establish and Implement Written Policies and Procedures that Comply with Federal Property Management Standards PBS did not have written policies and procedures to record, identify, or inventory equipment purchased with federal funds. As a result, PBS did not maintain an inventory that identified equipment purchased with federal funds, physically mark the equipment to identify it as government property, or perform physical inventories of equipment. Property management standards for equipment acquired with federal funds are set forth in 34 C.F.R. § 74.34 (f) (2000). Requirements in the property management standards include— ● Equipment records shall be maintained accurately…. 34 C.F.R. § 74.34(f)(1) (2000). ● Equipment owned by the Federal Government must be identified to indicate Federal ownership. 34 C.F.R. § 74.34 (f)(2) (2000). ● A physical inventory of equipment must be taken and the results reconciled with the equipment records at least once every two years. Any differences between quantities determined by the physical inspection and those shown in the accounting records must be investigated to determine the causes of the difference. The recipient shall, in connection with the 4 Final Audit Report ED-OIG/A05-C0011 inventory, verify the existence, current utilization, and continued need for the equipment. 34 C.F.R. § 74.34 (f)(3) (2000). As indicated in the Attachment, PBS could not locate a digital camera and accessories purchased with federal funds. During our on-site field work, PBS’s Controller told us PBS was in the process of developing and implementing new equipment inventory procedures. Recommendation We recommend that the Assistant Secretary for the Office of Educational Research and Improvement instruct PBS to— 3.1 Develop and implement written policies and procedures that comply with the federal property management standards. Auditee Comments/Auditor Response PBS stated that, effective April 1, 2002, it developed written policies and procedures for property management. It provided training to the staff on those policies and procedures on April 5, 2002. It appears that the policies and procedures comply with the standards for property management. Finding No. 4 PBS Needs to Revise Its Travel Policy PBS's travel policy does not address at least one requirement contained in the cost principles. OMB Circular A-122, Cost Principles for Non-Profit Organizations, Attachment B, Selected Items of Cost, Paragraph 2 (1998) provides that— Costs of alcoholic beverages are unallowable. PBS employees purchased alcoholic beverages, and PBS charged the costs to the Grant as travel expenses. We recognize that the unallowable costs we specifically identified were not significant. However, without a written policy statement notifying employees that costs of alcoholic beverages are not allowable, it is likely that they will continue to claim and be reimbursed for such costs. As a result, federal funds intended for activities that benefit the Grant will, instead, be used for unallowable activities. Recommendation We recommend that the Assistant Secretary for the Office of Educational Research and Improvement instruct PBS to— 4.1 Revise its travel policy to ensure that it includes all applicable cost principles. 5 Final Audit Report ED-OIG/A05-C0011 Auditee Comments/Auditor Response PBS stated that it revised its travel policy to ensure that it includes all applicable cost principles, including the prohibition of alcoholic beverages. It appears the revised policy is adequate. OTHER MATTERS Our review of 20 procurements valued over $25,000 each disclosed that PBS did not obtain competitive bids for 14 procurements. In addition, PBS named four other vendors in its Grant proposal for which it did not obtain competitive bids. According to 34 C.F.R. § 74.43, "All procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open and free competition." While we did not determine if PBS paid more for the procurements because it did not competitively bid them, a lack of competitive bidding can result in less than optimum price, quality, or other factors. Subsequent to our on-site field work, PBS developed a policy for its federal programs that requires competitive bids on all procurements over $25,000. BACKGROUND PBS, headquartered in Alexandria, Virginia, is a private, non-profit media enterprise incorporated in 1969 that is owned and operated by the nation's 348 public television stations. PBS uses noncommercial television, the Internet, and other media to provide programs and education services to nearly 100 million people each week. The Telecommunications Demonstration Project for Mathematics is designed to help elementary and secondary school teachers, on a nationwide basis, prepare all students to achieve state content standards. The Department of Education awarded PBS a five-year $39 million grant under this program. The PBS Grant, called TeacherLine, was for the period June 1, 2000, through May 31, 2005. The purpose of TeacherLine was to link PBS, the National Council of Teachers of Mathematics, individual school districts in 16 states, local public television stations, state departments of education, 5 colleges of education, the International Society for Technology in Education, and the Corporation for Public Broadcasting to create and deliver a comprehensive suite of digital professional development opportunities that could lead all teachers in meeting professional and state standards for mathematics education. For the June 1, 2000, through May 31, 2001, budget period, the Department of Education authorized funding of $7,462,331. PBS used about one-half the funding, charging $3,133,324 to the Grant. The Grant is authorized by the ESEA, as amended by the Improving America’s Schools Act of 1994. It is subject to the provisions contained in 34 C.F.R. Part 74, Administration of Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations and OMB Circular A-122, Cost Principles for Non-Profit Organizations. 6 Final Audit Report ED-OIG/A05-C0011 OBJECTIVE, SCOPE, AND METHODOLOGY The objective of our audit was to determine if costs charged to the Grant during the period June 1, 2000, through May 31, 2001, were allowable, reasonable, and allocable in accordance with the ESEA, Grant terms, EDGAR, and the cost principles in OMB Circular A-122, effective June 1, 1998. Although we tested all cost categories, our testing emphasized (1) procurements, (2) travel, (3) advertising and promotional materials, (4) training seminars, and (5) equipment. To accomplish our objective, we— 1. Reviewed the OMB Circular A-133 audit reports for the years ended June 30, 1999-2001, prepared by an independent public accountant, and the related working papers for the audit of the year ended June 30, 2001, and reviewed working papers prepared by PBS's internal auditor related to various issues, including procurements, cash disbursements, and payroll. 2. Reviewed PBS's March 10, 2000, application and annual Grant report for the year ended May 31, 2001. 3. Reviewed written policies, procedures, and organization charts. 4. Reviewed procurements over $25,000 and the related bid files. 5. Reviewed various records and documents, including accounting and payroll records, purchase orders, invoices, and other supporting documents for 142 financial transactions consisting of an initial sample of 38 randomly1 and 15 judgmentally selected transactions from a universe of 747 transactions, and 89 transactions subsequently selected on a judgmental basis. The transactions subsequently selected consisted of all revenue (9), procurements (20), advertising (14), employee bonus (3), and employee relocation (1); and selected airline tickets (valued in excess of $1,000 each) (9), business meals (26), and legal fees (7). 6. Performed a physical inventory of all equipment purchased with Grant funds. 7. Interviewed various PBS employees, Department of Education personnel, and independent public accountant personnel. To achieve our audit objectives, we relied, in part, on computer-processed data related to the TeacherLine Grant contained in PBS's accounting system. We assessed the reliability of these data, including the relevant general and application controls, and found them to be adequate. We verified the completeness of the data by comparing source records to computer generated data, verified the authenticity by comparing computer generated data to source records, and verified the accuracy by manually duplicating selected computer processes. Based on these tests and assessments, we concluded that the data were sufficiently reliable to be used in meeting the audit’s objective. 1 Results of the random sampling may not be representative of the entire population. 7 Final Audit Report ED-OIG/A05-C0011 We conducted our fieldwork at PBS’s administrative office in Alexandria, Virginia, from February 4, 2002, through April 4, 2002. We discussed the results of our audit with PBS officials on April 4, 2002. Our audit was performed in accordance with government auditing standards appropriate to the scope of audit described above. STATEMENT ON MANAGEMENT CONTROLS As part of our review, we did not assess the adequacy of PBS's management control structure applicable to the Grant. Instead, we (1) gained an understanding of controls, policies, procedures, and practices related to travel, equipment, legal, procurements, advertising and promotional materials, training, salaries and fringe benefits expenses, cost allocations, and equipment, and (2) relied on substantive testing of costs charged to the Grant. Our testing disclosed instances of non-compliance with federal regulations and cost principles that led us to believe weaknesses existed in PBS’s controls over the Grant. These weaknesses and their effects are discussed in the AUDIT RESULTS section of this report. ADMINISTRATIVE MATTERS Statements that managerial practices need improvements, as well as other conclusions and recommendations in this report represent the opinions of the Office of Inspector General. Determinations of corrective action to be taken will be made by the appropriate Department of Education officials. 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 the audit. Grover J. Whitehurst, Assistant Secretary Office of Educational Research and Improvement U.S. Department of Education Capitol Place, Room 600D 555 New Jersey Avenue, N.W. Washington, D.C. 20208 Office of Management and Budget Circular A-50 directs Federal agencies 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 greatly appreciated. 8 Final Audit Report Attachment 1 ED-OIG/A05-C0011 Page 1 of 2 SCHEDULE OF COSTS RECOMMENDED FOR ACCEPTANCE, COSTS QUESTIONED, AND COSTS THAT ARE UNSUPPORTED Costs Total Costs Recommended Costs Costs Charged to Cost Category For Acceptance Questioned Unsupported Grant Personnel $362,547 $0 $31,933 (1) $394,480 Fringe Benefits 98,707 0 8,868 (2) 107,575 Travel 85,134 48 (3) 7,448 (4) 92,630 Supplies/Services 74,507 0 0 74,507 Promotions 23,083 676 (5) 0 23,759 Equipment Repair 3,000 0 0 3,000 Software Acquisition 3,828 0 0 3,828 Training Seminars 19,328 0 0 19,328 Sub-Totals $670,627 $724 $48,249 $719,107 Indirect Costs 0 58 (6) 57,472 (7) 57,530 Sub-Totals $670,627 $782 $105,721 $776,637 Contractual 2,090,647 0 0 2,090,647 Equipment 223,113 1,192 (8) 0 224,305 Rent & Utilities 0 0 41,735 (9) 41,735 Totals $2,984,387 $1,974 $147,456 $3,133,324 (1) Represents the amount of salaries PBS charged to the Grant for which it did not provide after the fact determinations to support the charges. OMB Circular A-122, Attachment B, Paragraph 7, Subparagraph m. (2) (1998) states, “Reports reflecting the distribution of activity of each employee must be maintained for all staff members (professionals and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards. …Reports maintained by non-profit organizations to satisfy these requirements must...(a) …reflect an after-the-fact determination of the actual activity of each employee.” According to OMB Circular A-122, Attachment A, Paragraph A, Subparagraph 2.g. (1998), to be allowable, costs must be adequately documented. (2) Represents the fringe benefits related to the unsupported salaries. OMB Circular A-122, Attachment B, Paragraph 7, Subparagraph f.(2) (1998) states, “Fringe benefits...shall be distributed to particular awards…in a manner consistent with the pattern of benefits accruing to the individuals or group of employees whose salaries and wages are chargeable….” Because the salaries are unsupported, the related fringe benefits are unsupported. (3) Represents charges for alcoholic beverages. OMB Circular A-122, Attachment B, Paragraph 2 (1998) states, “Costs of alcoholic beverages are unallowable.” (4) Represents costs of meals. PBS claimed the meals were served as part of business meetings. Meals as part of meetings and conferences are allowable under OMB Circular A-122, Attachment B, Paragraph 29, Subparagraph a (1998). However, PBS did not provide support that business meetings were held, and business was conducted, when the meals were Final Audit Report Attachment 1 ED-OIG/A05-C0011 Page 2 of 2 provided. According to OMB Circular A-122, Attachment A, Paragraph A, Subparagraph 2.g. (1998), to be allowable, costs must be adequately documented. (5) Represents gifts provided to people who participated in Community Center chats and panel discussions. OMB Circular A-122, Attachment B, Paragraph 1, Subparagraph f. (3) (1998) states, “Unallowable…public relations costs include...Costs of…gifts.” (6) Represents indirect costs related to questioned travel and other costs. We used the eight percent rate PBS used in lieu of an approved rate to calculate the unallowable amount. (7) Includes $3,860 of indirect costs related to unsupported personnel, fringe benefits, and travel costs. The remaining $53,607 is unsupported because PBS did not have an approved indirect cost rate. OMB Circular A-122, Attachment A, Paragraph E, Subparagraph 1.f. (1998), defines an indirect cost proposal as,"…the documentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs…." According to OMB Circular A-122, Attachment A, Paragraph E, Subparagraph 2.b. (1998), “A nonprofit organization which has not previously established an indirect cost rate with a Federal agency shall submit its initial indirect cost proposal immediately after the organization is advised that an award will be made and, in no event, later than three months after the effective date of the award.” Department of Education officials told us PBS had submitted an initial indirect cost proposal, then withdrew it and did not re-submit another proposal. (8) Represents the cost of a digital camera and accessories PBS could not locate. According to OMB Circular A-122, Attachment A, Paragraph A, Subparagraph 4.a. (1998), "A cost is allocable to a particular cost objective, such as a grant…in accordance with the relative benefits received…." The Grant received no benefits from missing equipment. (9) Represents rent and utility costs PBS allocated based on salaries. According to OMB Circular A-122, Attachment A, Paragraph A, Subparagraph 4.a. (1998), “A cost is allocable to a particular cost objective, such as a grant…in accordance with the relative benefits received….” Salaries are not necessarily representative of the space and utilities usage by an employee.
The Public Broadcasting Service's administration of the TeacherLine Grant No. R286A000003-01 (Grant) awarded under the Telecommunications Demonstration Project for Mathematics for the period June 1, 2000, through May 31, 2001.
Published by the Department of Education, Office of Inspector General on 2002-09-10.
Below is a raw (and likely hideous) rendition of the original report. (PDF)