The Public Broadcasting Service's administration of the Ready-To-Learn Cooperative Agreement No. R295A000002 awarded under the Department of Education's Ready-To-Learn Television program for the period September 1, 2000, through August 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)

Final Audit Report                                                    ED-OIG/A05-C0020

Finding No. 1         PBS Charged Costs to the Agreement that are Unallowable or

PBS charged costs to the Agreement that are unallowable ($52) or unsupported
($140,664). The unallowable amount consists of charges for alcoholic beverages ($48)
and related indirect costs ($4). The unsupported amount consists of charges for meals
($1,122), indirect costs ($93,927), and rent and utilities ($45,615) for which it did not
provide adequate documentation to support that the costs were reasonable, allowable, or

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) provides

       To be allowable under an award, costs must…Be reasonable for the
       performance of the award and be allocable thereto…Be adequately

Details are discussed in the Attachment.


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 $52; and

1.2    Provide sufficient documentation to support $140,664 or refund that amount to
       the Department of Education.

Auditee Comments

PBS concurred with the questioned costs. It did not concur with unsupported salaries
($1,737), related fringe benefits ($482), business meals ($1,494), indirect costs
($93,909), and rent and utilities ($45,615). PBS provided a timesheet to support the
salaries. Based on the timesheet documenting the salary costs, it asserted that related
fringe benefits and indirect costs also are allowable. PBS provided various documents
that it asserted supported most of the unsupported business meals. 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 are unsupported. PBS also stated that its methodology of allocating rent and
utilities 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

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allocating rent and utilities based on headcount is materially consistent with allocating
them based on square footage.

Auditor Response

We reviewed PBS's response and have reclassified the unsupported salaries and related
fringe benefits as recommended for acceptance. We also concluded that, for business
meals, PBS provided adequate documentation to support $591 of the $1,494 it disagreed
with, so we reclassified $591 as recommended for acceptance. We have not changed our
conclusion regarding the remaining business meals costs, indirect costs, and rent and
utilities. 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. With respect to rent and utilities,
we agree that its analysis shows that a headcount allocation is materially consistent with
a square footage allocation. However, 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 the salary allocation
was 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).

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).

Final Audit Report                                                     ED-OIG/A05-C0020


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. (Note: We made this same recommendation
       in Finding No. 2 in audit report ED-OIG/A05-C0011.)

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 Revise Its Travel Policy

PBS's travel policy does not address at least one requirement contained in the cost

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
Agreement 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 Agreement will, instead, be used for unallowable activities.


We recommend that the Assistant Secretary for the Office of Educational Research and
Improvement instruct PBS to—

3.1    Revise its travel policy to ensure that it includes all applicable cost principles.
       (Note: We made this same recommendation in Finding No. 4 in audit report ED-

Final Audit Report                                                   ED-OIG/A05-C0020

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 14 procurements valued over $25,000 each disclosed that PBS did not
obtain competitive bids for 5 procurements. In addition, PBS named three other vendors
in its Agreement 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 fieldwork, PBS developed a policy for its federal
programs that requires competitive bids on all procurements over $25,000.


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 Ready-to-Learn Television program's purposes are the development of (1)
educational programming for preschool and early elementary school children and their
families; (2) educational television programming and printed materials to increase school
readiness for young children in limited English proficient households and to increase
family literacy; and (3) accompanying support materials and services that promote the
effective use of educational television programming. The Department of Education
awarded PBS a five-year $80 million Agreement under this program. The PBS
Agreement was for the period September 1, 2000, through August 31, 2005. For the
September 1, 2000, through August 31, 2001, budget period, the Department of
Education authorized funding of $15,994,925. PBS charged $11,478,218 to the

The Agreement 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.

Final Audit Report                                                      ED-OIG/A05-C0020


The objective of our audit was to determine if costs charged to the Agreement during the
period September 1, 2000, through August 31, 2001, were allowable, reasonable, and
allocable in accordance with the ESEA, Agreement 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 June 2, 2000, application and annual Agreement report for fiscal
          year 2000.
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 137
          financial transactions consisting of an initial sample of 37 randomly1 and 6
          judgmentally selected transactions from a universe of 2,969 transactions, and 93
          transactions subsequently selected on a judgmental basis. The transactions
          subsequently selected consisted of all revenue (16), procurements (14), program
          acquisition (8), equipment (5), advertising (4), employee bonus (3), and employee
          relocation (1); and selected airline tickets (valued in excess of $1,000 each) (11),
          business meals (25), and legal fees (6).
6.        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 Ready-To-Learn Agreement 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

    Results of the random sampling may not be representative of the entire population.

Final Audit Report                                                  ED-OIG/A05-C0020

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.


As part of our review, we did not assess the adequacy of PBS's management control
structure applicable to the Agreement. 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 Agreement. 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 Agreement. 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

  Final Audit Report                                                                  Attachment 1
  ED-OIG/A05-C0020                                                                      Page 1 of 2

                            Costs                                                         Total Costs
                       Recommended           Costs                 Costs                  Charged to
   Cost Category       For Acceptance      Questioned           Unsupported               Agreement
Personnel                    $444,332              $0                     $0                   $444,332
Fringe Benefits               116,749               0                      0                    116,749
Travel                        142,751              48 (1)              1,122 (2)                143,921
Supplies/Services             170,248               0                      0                    170,248
Training                      194,697               0                      0                    194,697
Professional                  100,153               0                      0                    100,153
Equipment Lease                   2,200               0                     0                     2,200
Software Acquisition              1,330               0                     0                     1,330
Promotions                          395               0                     0                       395
   Sub-Totals                $1,172,855             $48                $1,122                $1,174,025
Indirect Costs                        0               4 (3)            93,927 (4)                93,931
   Sub-Totals                $1,172,855             $52               $95,049                $1,267,956
Contractual                  10,164,555               0                     0                10,164,555
Equipment                            92               0                     0                        92
Rent & Utilities                      0               0                45,615 (5)                45,615
   Totals                   $11,337,502             $52              $140,664               $11,478,218

  (1) Represents charges for alcoholic beverages. OMB Circular A-122, Attachment B, Paragraph 2
      (1998) states, “Costs of alcoholic beverages are unallowable.”

  (2) Represents costs of meals. PBS claimed the meals were served as part of business meetings.
      Meals as part of business 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 provided.
      According to OMB Circular A-122, Attachment A, Paragraph A, Subparagraph 2.g. (1998), to
      be allowable, costs must be adequately documented.

  (3) 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.

  (4) Includes $90 of indirect costs related to unsupported travel costs. The remaining $93,827 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
Final Audit Report                                                                  Attachment 1
ED-OIG/A05-C0020                                                                      Page 2 of 2

   officials told us PBS had submitted an initial indirect cost proposal, then withdrew it and did
   not re-submit another proposal.

(5) 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…in accordance with the relative benefits received….” Salaries are
    not necessarily representative of the space and utilities usage by an employee.