oversight

The School District of the City of Detroit's Use of Title I, Part A Funds Under the No Child Left Behind Act of 2001

Published by the Department of Education, Office of Inspector General on 2008-07-18.

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

   The School District of the City of Detroit’s Use of Title I,
  Part A Funds Under the No Child Left Behind Act of 2001




                                 FINAL AUDIT REPORT




                                            ED-OIG/A05H0010
                                                July 2008




Our mission is to promote the efficiency,                     U.S. Department of Education
effectiveness, and integrity of the                           Office of Inspector General
Department's programs and operations.
                        NOTICE

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

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

                                                                                                   AUDIT SERVICES
                                                                               Chicago/Kansas City/Dallas Audit Region


                                                                       July 18, 2008

Michael P. Flanagan
Superintendent of Public Instruction
Michigan Department of Education
608 West Allegan Street
P.O. Box 30008
Lansing, MI 48909

Dear Mr. Flanagan:

Enclosed is our final audit report, Control Number ED-OIG/A05H0010, entitled The School
District of the City of Detroit’s Use of Title I, Part A Funds Under the No Child Left Behind
Act of 2001. This report incorporates the comments you provided in response to the draft report.
If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Department of Education
official, who will consider them before taking final Departmental action on this audit:

                                           Kerri L. Briggs
                                           Assistant Secretary for Elementary and Secondary Education
                                           U.S. Department of Education
                                           400 Maryland Ave., S.W.
                                           Room 3W315
                                           Washington, D.C. 20202

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

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/

                                                                 Gary D. Whitman
                                                                 Regional Inspector General
                                                                 for Audit



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


                                                                                                                             Page


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

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

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

           FINDING NO. 1 – Detroit Charged Unallowable Personnel Costs to the
                          Title I, Part A Program................................................................. 6

           FINDING NO. 2 – Detroit Did Not Always Support Compensation
                          Charges with Adequate and Timely Time and Effort
                          Certifications or Personal Activity Reports ............................... 10

           FINDING NO. 3 – Detroit Used Title I, Part A Funds for Non-
                          Personnel Costs That Were Unallowable or
                          Inadequately Documented .......................................................... 17

           FINDING NO. 4 – Detroit Used Title I, Part A Funds for Contract
                          Expenditures That Were Unallowable or
                          Inadequately Documented .......................................................... 18

           FINDING NO. 5 – MDE Inadequately Monitored the Resolution of a
                          Detroit Internal Investigative Report ......................................... 20

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

Enclosure 1: Cost Schedules for the 2004-2005 School Year ............................................... 26

Enclosure 2: Cost Schedules for the 2005-2006 School Year ............................................... 31

Enclosure 3: Auditee’s Comments ........................................................................................ 41
Final Report
ED-OIG/A05H0010                                                                          Page 1 of 67



                                 EXECUTIVE SUMMARY


The objectives of our audit were to determine whether (1) the School District of the City of
Detroit (Detroit) returned funds received under the Elementary and Secondary Education Act of
1965, as amended by the No Child Left Behind Act of 2001 (NCLB), Title I, Part A (Title I, Part
A), related to contracts for the 2004-2005 school year that a Detroit internal investigative report
identified as unallowable; (2) expenditures related to selected Title I, Part A contracts for the
2004-2005 school year were adequately documented, reasonable, and allowable; and (3) Title I,
Part A personnel and non-personnel expenditures for the 2005-2006 school year were adequately
documented, reasonable, and allowable.

We determined that Detroit (1) did not return Title I, Part A funds related to contracts for the
2004-2005 school year that a Detroit internal investigative report identified as unallowable;
(2) used Title I, Part A funds for expenditures related to selected Title I, Part A contracts for the
2004-2005 school year that were not adequately documented, reasonable, and allowable; and
(3) used Title I, Part A funds for personnel and non-personnel expenditures for the 2005-2006
school year that were not adequately documented, reasonable, and allowable. Specifically,

   ·   Detroit charged unallowable personnel expenditures to the Title I, Part A program
       ($1,025,561);
   ·   Detroit did not always support compensation charges with adequate and timely time and
       effort certifications, personnel activity reports, or employee insurance cost data (a
       projected $49,508,642 in inadequately documented costs);
   ·   Detroit used Title I, Part A funds for non-personnel costs that were unallowable or
       inadequately documented ($348,664 in unallowable costs and $2,918,249 in inadequately
       documented costs, totaling $3,266,913);
   ·   Detroit used Title I, Part A funds for contract expenditures that were unallowable or
       inadequately documented ($14,580 in unallowable costs and $1,764,988 in inadequately
       documented costs, totaling $1,779,568); and
   ·   The Michigan Department of Education (MDE) inadequately monitored the resolution of
       a Detroit internal investigative report.

Unduplicated unallowable costs ($1,388,805) and projected inadequately documented costs
($52,230,054) total $53,618,859.

Detroit’s noncompliance occurred, in part, because MDE did not provide adequate oversight of
federal grant funds distributed to Detroit. Also, Detroit did not have adequate policies and
procedures in place to review Title I, Part A contracts, invoices, employee insurance benefit
costs, and adjusting journal entries to ensure they were adequately documented, reasonable, and
allowable.

We recommend, among other things, that the Assistant Secretary for Elementary and Secondary
Education instruct MDE to require Detroit to —
Final Report
ED-OIG/A05H0010                                                                      Page 2 of 67

 ·   Return $1,388,805 in unallowable charges to the U.S. Department of Education
     (Department);
 ·   Either provide adequate documentation to support $52,230,054 in inadequately
     documented expenditures or return that amount to the Department;
 ·   Develop and implement policies and procedures to ensure that adequate and accurate time
     and effort certifications and personal activity reports are timely prepared; and
 ·   Develop and implement policies and procedures to adequately review contracts, invoices,
     employee insurance benefit costs, and adjusting journal entries.

Additionally, we recommend that MDE track local educational agency (LEA) reviews and
ensure that LEAs take appropriate corrective actions.

MDE and Detroit provided comments in two installments. MDE and Detroit disagreed in whole
with the draft audit report and requested the findings be reconsidered and revised and the
recommendations for repayment be withdrawn. We disagree with their position and have
summarized it and included our response in the Audit Results section. MDE and Detroit also did
not concur specifically with portions of each finding. These comments and the OIG Response to
the finding comments are summarized at the end of each finding and in Enclosures 1 and 2. The
full text of their comments is included as Enclosure 3.

MDE and Detroit also provided additional documentation they claimed refuted the expenditures
questioned in our draft audit report. We considered all of the comments and reviewed all of the
documentation provided in 24 exhibits. Because of the voluminous number of these exhibits, we
have not included them in this report. Based on those comments and additional documentation
provided, we:

 ·   Reclassified $5,180,633 in previously unallowable personnel expenditures for the Head
     Start program to inadequately documented personnel expenditures. We also reclassified
     $1,143,644 in previously unallowable employee insurance benefits costs to inadequately
     documented personnel expenditures and increased the amount to $4,088,095. (See
     FINDING NO. 1 and FINDING NO. 2)

 ·   Accepted $1,903,372 in previously inadequately documented non-personnel costs as
     adequately documented and reclassified $10,330 in previously accepted costs to
     inadequately documented costs. (See FINDING NO. 3)

 ·   Accepted $5,000 in previously inadequately documented contract costs as adequately
     documented. (See FINDING NO. 4)

We made changes to the findings and recommended recoveries to reflect the above
reclassifications in the findings and recommendations but did not substantially change the
remainder of the findings.
Final Report
ED-OIG/A05H0010                                                                        Page 3 of 67



                                      BACKGROUND


The Elementary and Secondary Education Act of 1965, as amended by the NCLB, increases
accountability for states, LEAs, and schools; school choice for parents and students; flexibility
for states’, LEAs’, and schools’ use of federal education funds; and provides an emphasis on
reading. The Title I, Part A program helps LEAs and schools improve the teaching and learning
of children who are failing, or most at-risk of failing, to meet challenging state academic
standards. The program is administered by the Department’s Office of Elementary and
Secondary Education. Under the Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments (34 C.F.R. § 80.40), MDE is required
to monitor Detroit’s compliance with federal requirements.

Incorporated in 1842, Detroit is the largest public school system in Michigan. During the
2005-2006 school year, Detroit enrolled 130,718 students at 97 elementary schools, 81
kindergarten through 8th grade and middle schools, 29 high schools, 10 alternative schools, 11
special education schools, and 4 career technical and vocational centers. It employed
approximately 14,960 employees. Because of declining population and students transferring to
charter schools, private schools, and surrounding school districts, Detroit's enrollment has
declined from 173,848 during the 1998-1999 school year. For the years ended June 30, 2005,
and June 30, 2006, Detroit spent $131,134,604 and $125,896,498, respectively, in Title I, Part A
grant funds. Detroit’s Office of Title I and Section 31a Compliance (Title I Office) oversees its
Title I, Part A program.

Detroit’s Single Audit Report, June 30, 2006, reported an adverse opinion on Detroit’s
compliance with federal requirements for its Title I, Part A program. A Detroit internal
investigative report identified unallowable contracts paid for with Title I funds and identified
other contracts that should also be reviewed. FINDING NO. 5 concluded on the resolution of
this internal investigative report and FINDING NO. 4 concluded on the allowability of
expenditures related to the contracts identified in the report.
Final Report
ED-OIG/A05H0010                                                                          Page 4 of 67



                                      AUDIT RESULTS


Detroit (1) did not return Title I, Part A funds related to contracts for the 2004-2005 school year
that a Detroit internal investigative report identified as unallowable; (2) used Title I, Part A funds
for expenditures related to selected Title I, Part A contracts for the 2004-2005 school year that
were not adequately documented, reasonable, and allowable; and (3) used Title I, Part A funds
for personnel and non-personnel expenditures for the 2005-2006 school year that were not
adequately documented, reasonable, and allowable. Specifically,

   ·   Detroit charged unallowable personnel expenditures to the Title I, Part A program,
       including (1) excessive employee insurance benefits ($571,025), (2) excessive Title I
       Office employee compensation ($203,000), (3) excessive targeted assistance teacher
       compensation ($173,082), (4) disciplinary administrative leave compensation ($73,292),
       and (5) a duplicate compensation payment ($12,492);
   ·   Detroit did not always support compensation charges with adequate and timely time and
       effort certifications, personnel activity reports, or employee insurance cost data (a
       projected $49,508,642 in inadequately documented costs);
   ·   Detroit used Title I, Part A funds for non-personnel costs that were unallowable or
       inadequately documented ($348,664 in unallowable costs and $2,918,249 in inadequately
       documented costs, totaling $3,266,913);
   ·   Detroit used Title I, Part A funds for contract expenditures that were unallowable or
       inadequately documented ($14,580 in unallowable costs and $1,764,988 in inadequately
       documented costs, totaling $1,779,568); and
   ·   MDE inadequately monitored the resolution of a Detroit internal investigative report.

We found unduplicated unallowable costs ($1,388,805) and projected inadequately documented
costs ($52,230,054) totaling $53,618,859.

MDE’s and Detroit’s Overall Comments to the Draft Audit Report
In response to the draft audit report, MDE and Detroit stated OIG erroneously concluded that
Detroit did not properly administer Title I, Part A funds. MDE and Detroit stated the audit
methodology used was seriously flawed for the following reasons:

   1) It appears that the audit failed to review the voluminous documentation and accounting
      records supporting the Title I, Part A expenditures at issue.
   2) The draft audit report erroneously relies in some sections on the amounts budgeted rather
      than the actual expenditures documented after-the-fact.
   3) The audit failed to take into account any schoolwide flexibility, despite the fact that
      Detroit overwhelmingly consists of schoolwide programs.
   4) The draft audit report’s methodology uses extremely small sample sizes to estimate larger
      findings. Although Detroit has approximately 14,960 employees, the audit consistently
      sampled a small number of transactions to arrive at its findings for the entire school
      district. Small employee sample sizes for a district with as many employees as Detroit
      possesses are not statistically significant.
Final Report
ED-OIG/A05H0010                                                                      Page 5 of 67

   5) The audit failed to analyze harm to the Federal interest, as required, in making findings
      and failed to properly consider valid after-the-fact documentation.

OIG Response to MDE’s and Detroit’s Overall Comments to the Draft Audit Report

   1) OIG carefully reviewed and considered all documentation and accounting records that
      Detroit provided during the audit. We reclassified or accepted some Title I, Part A costs
      based on documentation MDE and Detroit provided with their comments to the draft
      audit report that Detroit did not provide during the audit.
   2) In response to the Excessive Employee Insurance Benefits sub-finding in
      FINDING NO. 1 of the draft audit report, MDE and Detroit argue OIG erroneously relied
      on budgeted amounts rather than the actual expenditures documented after-the-fact.
      During the audit, we collected cost data from Detroit’s third-party benefits administrator,
      as recommended by Detroit, because Detroit told us it did not have the supporting
      documentation. The third-party benefits administrator claimed these were actual costs.
      In response to the draft audit report, MDE and Detroit stated this administrator provided
      projected insurance costs based on prior year estimates, rather than actual insurance costs.
      Because (1) we cannot use the budgeted cost data as MDE and Detroit advised, and
      (2) they have not provided any other supporting documentation for the actual costs for
      any of the sampled insurance benefit transactions, insurance benefits for all single cost
      activity employees are inadequately documented (See FINDING NO. 2, Auditee
      Comments and OIG Response, Inadequately Documented Employee Insurance Benefits).
   3) As documented in the OIG Response to FINDING NO. 1, Excessive Targeted Assistance
      Teacher Compensation, and FINDING NO. 2, Inadequate Personal Activity Reports for
      Non-Workshop Duties, we considered the schoolwide status of schools. When expending
      funds for students at any school, including schoolwide schools and schools that could
      qualify as schoolwide schools, Detroit must adequately document Title I, Part A
      expenditures.
   4) The comment regarding the use of extremely small sample sizes relates to three
      sub-findings and is not valid. We used statistical sampling, with a confidence level of 90
      percent and precision of less than 20 percent, to project the inadequately documented
      costs in FINDING NO. 2, Inadequate Time and Effort Certifications. Our sample sizes
      were sufficient within those parameters. The projection of inadequately documented
      insurance benefits for all single cost activity employees (see FINDING NO. 2,
      Inadequately Documented Employee Insurance Benefits) is based on Detroit providing
      inadequate documentation for all 30 sampled transactions. The projection of
      inadequately documented costs related to inadequate personal activity reports for
      non-workshop duties is based on a sample of 57 multiple cost activity employees (see
      FINDING NO. 2, Auditee Comments and OIG Response, Inadequate Personal Activity
      Reports for Non-Workshop Duties). Detroit provided inadequate documentation for all
      57 employees.
   5) All findings in the report included unallowable costs or a lack of demonstrated benefit to
      the Title I, Part A program. We considered all documentation provided. In response to
      the sub-finding related to the charging of Head Start compensation costs (see
      FINDING NO. 2, Auditee Comments and OIG Response, Inadequate Time and Effort
      Certifications or Personal Activity Reports for Compensation Charges in Adjusting
      Journal Entries), MDE and Detroit stated that the charging of these costs did not cause
      harm to the federal interest. However, Detroit has not shown a benefit to the Title I, Part
Final Report
ED-OIG/A05H0010                                                                        Page 6 of 67

       A program because (1) it did not provide personal activity reports or equivalent
       documentation, (2) it did not provide documentation to demonstrate that the identified
       teachers comprise the transferred compensation costs, and (3) it provided certifications
       that are inadequate and conflict with a statement by the Grants Accounting Supervisor
       that the employees were multiple cost activity employees.

FINDING NO. 1 – Detroit Charged Unallowable Personnel Costs to the Title I, Part
                A Program

For the 2005-2006 school year, Detroit charged unallowable personnel expenditures to the Title
I, Part A program. These charges included excessive employee insurance benefits ($571,025),
excessive Title I Office employee compensation ($203,000), excessive targeted assistance
teacher compensation ($173,082), disciplinary administrative leave compensation ($73,292), and
a duplicate compensation payment ($12,492). The unduplicated amount of unallowable
personnel expenditures totaled $1,025,561.

Office of Management and Budget Circular A-87 (Revised 5/10/04) – Cost Principles for State,
Local and Indian Tribal Governments (OMB Circular A-87), Attachment A, Paragraph C.1.b
states that, to be allowable under federal awards, costs must be allocable to the awards.

Excessive Employee Insurance Benefits
Detroit used Title I, Part A funds to pay employee insurance benefits for employees who worked
on supplemental activities, such as workshops and after-school programs. Typically, Detroit
only charges employee insurance benefits to the funding sources that pay for an employee’s
regular work activities. For employees whose regular job duties included only non-Title I, Part
A activities, Detroit improperly charged to the Title I, Part A program $571,025 of employee
insurance benefit costs and related indirect costs. These employees worked on non-Title I, Part
A activities for their regular duties and also worked on Title I, Part A supplemental activities.
These insurance costs should have been charged to the non-Title I, Part A funding sources that
paid for the employees’ regular job duties, not the Title I, Part A program that paid the salary for
the employees’ supplemental work duties.

OMB Circular A-87, Attachment A, Paragraph C.1.e states that, to be allowable under federal
awards, costs charged to the awards must, among other requirements, “be consistent with
policies, regulations, and procedures that apply uniformly to both Federal awards and other
activities of the governmental unit.”

Detroit’s accounting system did not charge employee insurance benefits to compensation for
supplemental activities. However, staff responsible for entering compensation data into the
accounting system did not always properly code after-school programs and workshops as
supplemental activities. Therefore, the accounting system included these activities as regular
work activities and distributed a portion of the insurance benefit costs to the supplemental
activities.

Excessive Title I Office Employee Compensation
Detroit charged an estimated $203,000 in excessive compensation to the Title I, Part A program
by charging the entire salaries, benefits, and related indirect costs of Title I Office employees
who split their time between Title I, Part A program activities and non-Title I, Part A program
Final Report
ED-OIG/A05H0010                                                                                        Page 7 of 67

activities (including the Michigan Section 31a program)1 for 68 of 68 judgmentally selected
transactions for Title I Office employees.2 The Title I Office employees did not create
contemporaneous records documenting the amount of time worked on the activities, and Detroit
provided no evidence of the desired level of time and effort for these employees to dedicate to
each activity. We asked several current Title I Office employees to estimate the actual
proportion of time they spent on each activity. Based on their responses, we conservatively
estimated that they spent approximately 90 percent of their time working on Title I, Part A
activities and approximately 10 percent of their time working on non-Title I, Part A program
activities, including the Michigan Section 31a program.

Detroit believed that it was appropriate to charge the full compensation of program
administrators to the Title I, Part A program because it was not permitted to use Michigan
Section 31a program funds for this purpose.

Excessive Targeted Assistance Teacher Compensation
Detroit charged $173,082 in excessive compensation to the Title I, Part A program for the
salaries, benefits, and related indirect costs of teachers who taught ineligible children in Title I
targeted assistance schools. Even though the teachers taught both Title I and non-Title I
children, Detroit charged to the Title I, Part A program the entire compensation for five of five
judgmentally sampled kindergarten teachers at Title I targeted assistance schools. The
percentages of children who were Title I eligible in these five teachers’ classes ranged from 41 to
72 percent.

NCLB, Title I, Part A, Section 1115(a), states,
         In all schools selected to receive funds under section 1113(c) that are ineligible
         for a schoolwide program under section 1114, or that choose not to operate such a
         schoolwide program, a local education agency serving such school may use funds
         received under this part only for programs that provide services to eligible
         children under subsection (b) identified as having the greatest need for special
         assistance.

Detroit Title I Office staff did not review an adjusting journal entry transferring the
compensation of kindergarten teachers to the Title I, Part A program from the general fund at the
end the 2005-2006 school year, to ensure that the costs were allowable.

Disciplinary Administrative Leave Compensation
Detroit charged $73,292 to the Title I, Part A program for the salary, benefits, and related
indirect costs of an administrator who was placed on administrative leave while under

1
  The Michigan Section 31a program, which provides state funds based on the number of students in districts who
meet income eligibility criteria, has some objectives similar to the Title I, Part A program. Michigan Section 31a
program funds may be used for activities including instructional programs, direct non-instructional services such as
medical or counseling services, breakfast programs, hearing and vision screenings, reduction of class size, adult
education, and early intervention programs.
2
  Detroit charged $2,028,620 in salaries, benefits, and related indirect costs for all Title I Office employees during
the 2005-2006 school year. We conservatively estimated, based on interviews with Title I Office employees, that at
least 10 percent of their time was spent on non-Title I, Part A activities. We applied the 10 percent estimate to the
total salaries, benefits, and related indirect costs of all Title I Office employees, because Detroit charged all
compensation for the 68 sampled transactions to the Title I, Part A program.
Final Report
ED-OIG/A05H0010                                                                        Page 8 of 67

investigation by the district. Detroit did not provide a policy for paying salaries and benefits to
administrators who were on administrative leave. Detroit was not aware that it could not charge
administrative leave to the Title I, Part A grant without an administrative leave policy.

OMB Circular A-87, Attachment B, Paragraph 8.a. (1) states that compensation must conform
“. . . to the established policy of the governmental unit. . . .”

Duplicate Compensation Charge
Detroit charged a duplicate payment totaling $12,492 for salary, benefits, and related indirect
costs to the Title I, Part A program during the 2005-2006 school year. Detroit entered a portion
of one adjusting journal entry into its accounting system twice to transfer an employee’s
compensation from the Reading First program to the Title I, Part A program.

OMB Circular A-87, Attachment A, Paragraph C.1.g states that, to be allowable under federal
awards, costs must be determined in accordance with generally accepted accounting principles.

Two accounting staff members responsible for entering adjusting journal entries into the
accounting system each received the same request to transfer an employee’s compensation from
the Reading First program to the Title I, Part A program. Each accounting staff member entered
the adjustment without knowing that the other staff member entered the same adjustment.

The total unallowable salaries, benefits, and related indirect cost is $1,032,891. Of this amount,
$7,329 is duplicated between the sub-findings. The total unduplicated, unallowable cost is
$1,025,561. Enclosure 2, Table C of this report identifies the duplication.

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education instruct
MDE to require Detroit to

1.1    Return $1,025,561 in unallowable salaries, benefits, and related indirect costs to the
       Department;

1.2    Determine the extent of excessive compensation charged to the Title I, Part A program
       for teachers at targeted assistance schools for the year ended June 30, 2006, and return
       these funds to the Department;

1.3    Provide training to Title I Office officials regarding the allowability of costs charged to
       the Title I, Part A program;

1.4    Develop and implement a policy requiring a Title I Office official to review adjusting
       journal entries that transfer compensation charges to the Title I, Part A program for
       allowability;
1.5    Develop and implement a policy requiring Detroit officials to enter proper codes in the
       system to identify supplemental and overtime activities as non-regular work duties;
1.6    Track the actual time that Title I Office employees work on Title I, Part A activities and
       only charge the Title I, Part A program for the actual time worked on these activities;
Final Report
ED-OIG/A05H0010                                                                       Page 9 of 67

1.7    Track the percentage of eligible Title I students who teachers teach at targeted assistance
       schools and only compensate these teachers with Title I, Part A funds for this percentage
       of their work; and
1.8    Develop and implement a policy to not charge disciplinary administrative leave
       compensation to the Title I, Part A program.

Auditee Comments and OIG Response
As described below, MDE and Detroit disputed the majority of this finding. Based on comments
to the draft report, we moved the Head Start Program Compensation sub-finding and a portion of
the Excessive Employee Insurance Benefits sub-finding to FINDING NO. 2. We did not
substantially change the remainder of the finding or recommendations.

Excessive Employee Insurance Benefits
Auditee Comments. In response to this sub-finding, MDE and Detroit provided documentation
that showed insurance charges were distributed proportionally to the salary charges for
employees’ regular and supplemental duties and stated this cost is allowable. MDE and Detroit
claimed this documentation shows Detroit properly distributed insurance charges.

OIG Response. These charges for employee insurance benefits are unallowable because none
should have been distributed to the Title I, Part A program. All of the charges should have been
distributed to the non-Title I, Part A fund that funded 100 percent of the employees’ regular job
duties. None of the charges should have been distributed to the Title I, Part A program that
funded the employees’ supplemental duties. Charges for employee insurance benefits should not
be distributed proportionally to the salary charges for regular and supplemental duties because
(1) this is not consistent with Detroit’s policy and (2) paying employees for performing
supplemental duties did not increase Detroit’s insurance expense. Insurance charges should only
be distributed proportionally to the salary charges for regular duties. Detroit’s accounting system
is set up to identify supplemental duties so that insurance costs are not distributed to them.
Detroit used this system properly in some cases. However, in our reported cases, data entry
personnel did not code supplemental duties properly, so the accounting system erroneously
distributed insurance costs to the supplemental duties as if they were regular duties.

Excessive Targeted Assistance Teacher Compensation
Auditee Comments. MDE and Detroit stated the Title I targeted assistance schools could have
qualified as schoolwide schools, even though Detroit chose to classify them as Title I targeted
assistance schools. Therefore, they believe the Title I targeted assistance schools should only
have to comply with the requirements of schoolwide schools which do not require schools to
identify children as Title I, Part A eligible. MDE and Detroit provided documentation that
shows the Title I targeted assistance schools’ poverty rates and school improvement plans and
claimed the plans contain “a number of required schoolwide elements.”

OIG Response. The documentation does not demonstrate the targeted assistance schools were
designated as, or operated as, schoolwide schools. NCLB, Title I, Part A, Section 1115 states:
“In all schools selected to receive funds under section 1113(c) that are ineligible for a
schoolwide program under section 1114, or that choose not to operate such a schoolwide
program, a local education agency serving such school may use funds received under this part
only for programs that provide services to eligible children under subsection (b) identified as
Final Report
ED-OIG/A05H0010                                                                                         Page 10 of 67

having the greatest need for special assistance.” (Emphasis added). Without documentation that
shows the schools were designated as, or operated as, schoolwide schools instead of Title I
targeted assistance schools, the rules for Title I targeted assistance schools are controlling. Also,
MDE and Detroit did not claim that the school improvement plans contained all of the
requirements for classification as a schoolwide school, only some of them. We identified
schoolwide requirements that were not included in these school improvement plans.

Disciplinary Administrative Leave Compensation
Auditee Comments. MDE and Detroit provided a sworn affidavit from Detroit’s Executive
Director of Employee Relations stating Detroit pays employees based upon their individual
employment agreements and classification, applicable Michigan state law, as well as practices
and customs. MDE and Detroit claimed that (1) the Teacher Tenure Act, Public Act No. 4,
Public Acts of Michigan, 1937, as amended (Teacher Tenure Act) requires payment for
disciplinary administrative leave for teachers in certain cases, and (2) Detroit consistently
applied the requirements to all employees subject to disciplinary action, taking into account the
employee’s employment agreement and classification.

OIG Response. Detroit has not provided sufficient audit evidence showing it had an official
policy for paying salaries and benefits to administrators who were on administrative leave. We
consider sufficient audit evidence to be written policy and procedures or other documentary
evidence, such as accounting and personnel records showing that others in a similar situation
were paid in a similar manner, not a sworn affidavit from one individual. Also, the Teacher
Tenure Act applies to certified teachers, not administrators. The subject employee was an
administrator. In the affidavit, Detroit’s Executive Director of Employee Relations stated Detroit
gives all employees protections "akin to (although not identical to) those provided to certified
teachers under the [Teacher Tenure Act].” Given that this Detroit official stated that Detroit does
not provide identical protections to all employees, we cannot determine that Detroit had a
disciplinary administrative leave policy for administrators.

FINDING NO. 2 – Detroit Did Not Always Support Compensation Charges with
                Adequate and Timely Time and Effort Certifications or Personal
                Activity Reports

For the 2005-2006 school year, Detroit charged personnel expenditures to the Title I, Part A
program that were inadequately documented. Detroit did not always support the compensation
of (1) single cost activity employees3 with adequate time and effort certifications (a projected
$9,119,940), (2) regular, overtime, and non-workshop supplemental duties of multiple cost
activity employees4 with personal activity reports ($12,979,760), (3) workshop duties of multiple
cost activity employees with sign-in/sign-out sheets ($3,274), and (4) employees included in
adjusting journal entries with adequate time and effort certifications or personal activity reports
($23,317,574). Detroit also did not support insurance benefits charges for single cost activity

3
  Single cost activity employees are employees who were paid for their regular job duties during a time and effort
certification period only with Title I, Part A grant funds.
4
  Multiple cost activity employees are employees who (1) were paid with both Title I, Part A funds and non-Title I,
Part A funds for their regular job duties during a certification period, or (2) were not paid with Title I, Part A funds
for their regular job duties but were paid with Title I, Part A funds for their overtime, supplemental, or workshop
duties during a certification period.
Final Report
ED-OIG/A05H0010                                                                                       Page 11 of 67

employees ($4,088,095). The unduplicated amount of the projected inadequately documented
personnel expenditures totaled $47,546,817.

Inadequate Time and Effort Certifications
Detroit did not always timely prepare time and effort certifications for employees who worked
solely on Title I, Part A activities. For 102 of 400 randomly sampled salary transactions for
single cost activity employees, Detroit either did not provide a time and effort certification or
provided a time and effort certification that was inadequate. The projected salaries, benefits, and
related indirect costs charged for these employees were $9,119,940.5 The following table
identifies the inadequate time and effort certifications from the random sample:

Table 1 – Inadequate Time and Effort Certifications
 Time and Effort Certification Category     Number of Transactions
                        6
 Not Timely Prepared                                  93
 Unsigned                                              0
 Undated                                               0
 Signed by a supervisor who did not oversee
 the work performed by the employee
 during the certification period                       1
 Not provided                                          8
 Total                                                102

Inadequate Personal Activity Reports for Non-Workshop Duties
Detroit did not provide adequate personal activity reports for multiple cost activity employees
whose compensation for their regular, overtime, or supplemental (non-workshop) duties was
charged to the Title I, Part A program. In place of personal activity reports, Detroit provided
examples of multiple cost activity employees’ daily lesson plans or time logs related to the
employees’ regular duties. However, the lesson plans and time logs provided did not specify the
proportion of each employee’s time that was spent on Title I, Part A activities. Additionally, the
lesson plans and time logs were not after-the-fact certifications of actual time spent on Title I,
Part A activities. In the universe of personnel transactions for the Title I, Part A program, we
identified $12,979,760 of salaries, benefits, and related indirect costs charged for the regular,
overtime, and supplemental (non-workshop) activities of multiple cost activity employees.

Inadequate Personal Activity Reports for Workshop Duties
For multiple cost activity employees who attended Title I, Part A funded workshops, Detroit’s
policy was to prepare sign-in sheets. For 20 sampled personnel transactions for workshops,
Detroit provided sign-in and after-the-fact sign-out sheets for 4 transactions, sign-in sheets with

5
  From a universe of 13,948 transactions for single cost activity employees totaling $30,209,812 in salaries and
related fringe benefits, we sampled 400 transactions totaling $863,512 in salaries and related fringe benefits. Of the
400 sampled transactions, 102 transactions totaling $245,464 in salaries and related fringe benefits were
inadequately documented. We are 90 percent confident that the projected inadequately documented salaries and
benefits is $8,587,514, plus or minus $1,327,004 (15.45 percent). We added related indirect costs totaling $532,426
to this projection using a 6.2 percent indirect cost rate to compute a total of $9,119,940 of projected inadequately
documented salaries, benefits, and indirect costs.
6
  These time and effort certifications were prepared by Detroit after we requested them. They were prepared more
than one year after the end of the certification period. Time and effort certifications prepared more than a year after
the work was performed are not credible.
Final Report
ED-OIG/A05H0010                                                                                     Page 12 of 67

no after-the-fact sign-out record for 12 transactions, and no sign-in or sign-out record for
4 transactions. The salaries, fringe benefits, and related indirect costs charged for the 16
transactions without after-the-fact sign-out sheets were $3,274.

Inadequate Time and Effort Certifications or Personal Activity Reports for Compensation
Charges in Adjusting Journal Entries
Using adjusting journal entries, Detroit transferred to the Title I, Part A program $21,824,996 in
charges for the salaries and benefits of employees who were initially paid from non-Title I, Part
A funding sources. The total salaries, benefits, and indirect costs charged to the Title I, Part A
grant for these adjusting journal entries is $23,317,574.7 These employees included kindergarten
teachers ($11,499,897), Head Start Program teachers and assistants ($4,849,251), Michigan
Early Childhood Education program teachers ($3,593,013), and substitute teachers ($1,882,835).

Detroit included charges for the compensation of kindergarten and Michigan Early Childhood
Education program teachers in its Title I, Part A budget approved by MDE. Detroit identified
the kindergarten teachers whose compensation was charged to the Title I, Part A program.
Detroit charged the projected salaries, pension benefits, and tax benefits for these employees
instead of actual compensation. After we requested time and effort certifications, one official
from Detroit signed time and effort certifications for 142 of the 145 teachers included in the
adjusting journal entry for kindergarten teachers. These time and effort certifications were not
timely prepared. For the compensation charges for Michigan Early Childhood Education
program and substitute teachers, Detroit did not identify the employees who were included in the
adjusting journal entries and did not provide time and effort certifications or personal activity
reports for these employees. Detroit charged a portion of the salaries, benefits, and related
indirect costs of all Head Start program teachers and assistants to the Title I, Part A program in a
series of 12 adjusting journal entries. While Head Start is not a Title I, Part A program, NCLB,
Title I, Part A, Section 1112 (b)(1)(K) requires Detroit to include in its LEA plan a description of
how it will use Title I, Part A funds for children, particularly children participating in a Head
Start program. Detroit did not include Head Start in its Title I, Part A program application that
was approved by MDE. Detroit also did not identify the employees whose compensation was
transferred to the Title I, Part A program and did not provide personal activity reports certifying
the employees worked on Title I, Part A program activities.

OMB Circular A-87, Attachment B, Paragraph 8.h. (3) states,
         Where employees are expected to work solely on a single Federal award or cost
         objective, charges for their salaries and wages will be supported by periodic
         certifications that the employees worked solely on that program for the period
         covered by the time and effort certification. These time and effort certifications
         will be prepared at least semi-annually and will be signed by the employee or
         supervisory official having first hand knowledge of the work performed by the
         employee.

OMB Circular A-87, Attachment B, Paragraph 8.h. (4) states, “Where employees work on
multiple activities or cost objectives, a distribution of their salaries or wages will be supported by


7
 This $23,317,574 includes $21,824,996 in charges for salaries and benefits, $1,492,577 in related indirect costs,
and a $1 immaterial rounding difference.
Final Report
ED-OIG/A05H0010                                                                                    Page 13 of 67

personal activity reports or equivalent documentation which meets the standards in subsection
(5). . . .” Subsection (5) states,
        Personnel activity reports or equivalent documentation must meet the following
        standards:

        (a) They must reflect an after-the-fact distribution of the actual activity of each
            employee,
        (b) They must account for the total activity for which each employee is
            compensated,
        (c) They must be prepared at least monthly and must coincide with one or more
            pay periods, and
        (d) They must be signed by the employee.
        (e) Budget estimates or other distribution percentages determined before the
            services are performed do not qualify as support for charges to Federal
            awards. . . .

Detroit required school officials to submit semi-annual time and effort certifications to the Title I
Office for single cost activity employees. However, Title I Office staff did not follow up with
school officials who did not submit time and effort certifications to the Title I Office to ensure
that all time and effort certifications were prepared. Detroit officials were unaware of the
requirement that multiple cost activity employees must sign after-the-fact, monthly personal
activity reports that account for the time spent on Title I, Part A activities. Additionally, Detroit
did not have a process to review adjusting journal entries that charged personnel costs to the Title
I, Part A program.

Inadequately Documented Employee Insurance Benefits
Detroit charged the Title I, Part A program for employee insurance benefit costs that were
inadequately documented. For 29 of 30 randomly sampled employee insurance benefits
transactions, Detroit’s third-party benefits administrator reported employee insurance benefit
costs that were up to $306 less than the amount Detroit charged to the Title I, Part A program for
each of these transactions.8 The third-party benefits administrator subsequently stated this cost
data was projected and not actual. Because Detroit did not provide any supporting
documentation for the actual costs of any of the sampled insurance benefit transactions,
insurance benefits totaling $3,849,430 charged to the Title I, Part A program for all single cost
activity employees were inadequately documented. The total inadequately documented
insurance benefits and related indirect costs for all single cost activity employees is $4,088,095.

The combined total inadequately documented costs for all of the above is a projected
$49,508,642. Of this amount, $1,961,825 is duplicated in FINDING NO. 1. The unduplicated
amount is a projected $47,546,817. Enclosure 2, Table C of this report identifies the cost
duplication.


8
  From a universe of 13,948 salary transactions for single cost activity employees, of which 12,839 had employee
insurance benefit costs totaling $3,849,430, we sampled 30 transactions totaling $9,299 in employee insurance
benefit costs. Of the 30 sampled transactions, 29 transactions had overcharges totaling $2,601.
Final Report
ED-OIG/A05H0010                                                                        Page 14 of 67

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education instruct
MDE to require Detroit to

2.1    Either provide adequate documentation to support the projected $47,546,817 in
       inadequately documented personnel expenditures or return any portion of that amount for
       which it does not provide adequate documentation to the Department;
2.2    Adhere to its policy requiring single cost activity employees or their supervisors to timely
       sign semi-annual time and effort certifications and follow up with school officials to
       ensure that adequate time and effort certifications are timely submitted;
2.3    Develop and implement a policy requiring multiple cost activity employees to, at least
       monthly, prepare and sign after-the-fact personal activity reports, or equivalent sign-
       in/sign-out sheets for workshop activities, that account for the total activity for which
       each employee is compensated, including time spent on Title I, Part A activities;
2.4    Develop and implement a policy requiring a Title I Office official to review adjusting
       journal entries that transfer compensation charges to the Title I, Part A program to ensure
       that the compensation is supported by adequate time and effort certifications or personal
       activity reports; and
2.5    Develop and implement a policy requiring a Title I Office official to review employee
       insurance benefit charges to the Title I, Part A program to ensure that only actual
       employee insurance benefits are charged.

Auditee Comments and OIG Response
As described below, MDE and Detroit disputed the majority of this finding. Based on comments
to the draft report, we moved the Head Start Program Compensation sub-finding and a portion of
the Excessive Employee Insurance Benefits sub-finding from FINDING NO. 1 in the draft audit
report to FINDING NO. 2 and have revised the finding and recommendations accordingly. We
did not substantially change the remainder of the finding or recommendations.

Inadequate Time and Effort Certifications
Auditee Comments. MDE and Detroit claimed they provided credible, after-the-fact time and
effort certifications that met all of the requirements of OMB Circular A-87, Attachment B,
Paragraph 8.h.(3). They provided numerous additional certifications that were prepared after
we requested them. MDE and Detroit also cited many examples they claimed demonstrate that
recipients may use after-the-fact documentation to reconstruct the time and effort they spent on
federal programs.

OIG Response. The documentation does not show the certifications were prepared timely.
Detroit prepared these certifications after we requested them and more than a year after the
certification period ended. They were not prepared at least semi-annually, as required by OMB
Circular A-87, Attachment B, Paragraph 8.h.(3). Additionally, many of these certifications do
not appear credible because they refer to the 20008 project code (i.e., the fiscal year 2008 Title I,
Part A grant) or refer to the 20106 project code (i.e., the Title I, Part A 2006 carryover grant) as a
"Special Education" program, instead of the Title I, Part A program. Also, we contacted four
principals for Title I, Part A funded kindergarten teachers. All four principals stated the
Final Report
ED-OIG/A05H0010                                                                     Page 15 of 67

kindergarten teachers were not Title I, Part A employees. Later, we received untimely
certifications that certified the teachers were Title I, Part A employees. This discrepancy
indicates that these untimely certifications are not credible. Also, all of the examples MDE and
Detroit cited are not relevant because they were dated in 1995 or earlier. OMB Circular A-87,
Attachment B, Paragraph 8.h.(3), which requires that certifications be prepared at least semi-
annually, became effective on June 9, 2004.

Inadequate Personal Activity Reports for Non-Workshop Duties
Auditee Comments. MDE and Detroit stated Detroit did not provide personal activity reports.
They claimed that (1) substitute documentation should be acceptable; (2) personal activity
reports should not be necessary, because most of Detroit’s schools are schoolwide schools; and
(3) our alleged five employee sample size is insufficient. MDE and Detroit provided new
documentation for four sampled employees.

OIG Response. We did not change this sub-finding for the following reasons:
   · These documents are not equivalent to personal activity reports. The documentation
      included time logs or lesson plans in a format that varied from employee to employee.
      None of the documentation indicated the amount of time spent on Title I activities.
      Therefore, we cannot allocate time to the Title I, Part A program based on the documents.
      OMB Circular A-87, Attachment B, paragraph 8.h.(5) requires personal activity reports
      or equivalent documentation to reflect an after-the-fact distribution of the actual activity
      of each employee.
   · The requirements for personal activity reports apply regardless of a school’s schoolwide
      status. Also, non-regulatory guidance issued subsequent to our audit period, entitled
      Non-Regulatory Guidance Title I Fiscal Issues: Maintenance of Effort; Comparability;
      Supplement, Not Supplant; Carryover; Consolidating Funds in Schoolwide Programs;
      and Grantback Requirements (February 2008) states that if schools do not consolidate
      funds, then they must follow the requirements for personal activity reports. Detroit did
      not consolidate funds for schoolwide schools.
   · We sampled 57 multiple cost activity employees (27 Title I Office and 30 non-Title I
      Office employees), not 5 employees. Detroit did not provide personal activity reports for
      any of these 57 employees but stated equivalent documentation was available. Detroit
      provided additional documentation for 5 of the 57 employees. However, it was not
      equivalent documentation because it did not reflect an after-the-fact distribution of the
      actual activity of each employee or facilitate allocation of time to the Title I, Part A
      program. Given the documentation was inadequate, we did not request similar
      documentation for the remaining 52.

Inadequate Time and Effort Certifications or Personal Activity Reports for Compensation
Charges in Adjusting Journal Entries
Auditee Comments. MDE and Detroit stated that all Head Start students were eligible to receive
Title I, Part A services. Therefore, charging these costs to the Title I, Part A program did not
cause harm to the federal interest and Head Start compensation costs should be allowable. MDE
and Detroit provided additional documentation, including a description of the Head Start
program and documentation identifying some Head Start teachers. MDE and Detroit also stated
they provided two semi-annual certifications that demonstrate the relevant employees worked
100% of their time on Title I, Part A program activities for the entire fiscal year 2005-2006,
Final Report
ED-OIG/A05H0010                                                                     Page 16 of 67

which fulfills the requirement of providing signed, semi-annual certifications per OMB Circular
A-87, Attachment B, Paragraph 8.h.(3).

OIG Response. The documentation provided did not consist of personal activity reports or
equivalent documentation. These adjusting journal entries remain inadequately documented
based on the lack of (1) personal activity reports or equivalent documentation and
(2) documentation to demonstrate the identified teachers comprise the transferred compensation
costs (i.e., MDE and Detroit provided no documentation that shows that these teachers'
compensation matches the amounts in the adjusting journal entries). The certifications MDE and
Detroit provided are inadequate because (1) they were signed in January 2008, which is over 18
months after the certification periods ended, and (2) one administrator signed for over 100
employees on one certification for each semester. OMB Circular A-87, Attachment B,
Paragraph 8.h.(3) requires that certifications be prepared at least semi-annually by the employee
or a supervisory official having first-hand knowledge of the work performed by the employee.
These certifications were not prepared semi-annually and it is not reasonable for 1 individual to
have first-hand knowledge of the work performed by over 100 employees more than 18 months
after the certification periods ended. Also, these certifications contradict the Grants Accounting
Supervisor’s statement that a percentage of each employee’s time was charged to the Title I, Part
A program. Because these employees were all multiple cost activity employees, they should
have personal activity reports supporting the allocation of their time between the Head Start and
Title I, Part A programs.

Inadequately Documented Employee Insurance Benefits
Auditee Comments. MDE and Detroit stated that the third-party benefits administrator provided
us with projected insurance costs based on prior year estimates, rather than actual insurance
costs. Therefore, MDE and Detroit claimed that the cost data used for the finding is irrelevant
and they should not have to repay any amounts. MDE and Detroit provided cost data for five
employees and email correspondence with the third-party benefits administrator indicating that it
had provided projected, rather than actual insurance costs.

OIG Response. Because MDE and Detroit stated that the third-party benefits administrator’s
cost data is irrelevant, MDE and Detroit have not provided any supporting documentation for the
actual costs for any of the sampled insurance benefit transactions. During our audit, we collected
cost data from the third-party benefits administrator as recommended by Detroit, because Detroit
said that it did not have the supporting documentation. In the draft report, we questioned only
the costs that Detroit charged in excess of the costs that the third-party benefits administrator
previously claimed were actual costs. However, because the third-party benefits administrator
has now stated that the cost data it provided was projected and not actual, we have increased the
costs to include all of the insurance benefit charges for single cost activity employees and
re-classified them as inadequately documented costs. MDE and Detroit correctly noted projected
costs do not qualify as support for charges to Federal awards.9 The cost data that MDE and
Detroit provided for five employees is not relevant because it does not contain any actual cost
data for the employees that comprised our sample described in this finding.




9
    OMB Circular A-87, Attachment B, Paragraph 8.h (5)(e) quoted above.
Final Report
ED-OIG/A05H0010                                                                                     Page 17 of 67

FINDING NO. 3 – Detroit Used Title I, Part A Funds for Non-Personnel Costs That
                Were Unallowable or Inadequately Documented

For the 2005-2006 school year, Detroit charged unallowable ($348,664) and inadequately
documented ($2,918,249) non-personnel costs, totaling $3,266,913, to the Title I, Part A
program.10 Unallowable costs Detroit charged to the Title I, Part A program consisted of
payments for (1) capital expenditures for general purpose equipment and improvements to
buildings that MDE did not approve, (2) services provided to non-Title I schools or ineligible
students, (3) invoices that exceeded the approved contract amount or paid for shipping costs that
were prohibited by the contract, (4) a duplicate invoice, and (5) an invoice for which Detroit
received a credit from the vendor but did not apply the credit to the Title I, Part A program.

We considered non-personnel costs to be inadequately documented if Detroit did not provide
adequate documentation to support that the costs were necessary, reasonable, and allocable to the
Title I, Part A program, and the documentation provided for these costs did not demonstrate any
benefit to the Title I, Part A program. Inadequately documented costs consisted of payments for
(1) transactions that were not supported by invoices or receipts, (2) invoices that were vague and
did not include adequate documentation, (3) computers for which Detroit could not provide
evidence of existence or use by Title I students, (4) gift cards for which Detroit did not provide
evidence of students receiving them, (5) an invoice paid before the services would have been
received with no after-the-fact documentation demonstrating benefit to the Title I, Part A
program, and (6) a payment for temporary employees with duties similar to Detroit employees.

OMB Circular A-87, Attachment A, Paragraph C.1 provides that costs must be necessary and
reasonable for proper and efficient performance and administration of federal awards, be
allocable to federal awards, and be adequately documented.

Detroit charged unallowable and inadequately documented non-personnel costs to the Title I,
Part A program because it did not (1) ensure that it only paid for invoices that adequately
demonstrated that costs were necessary, reasonable, and allocable to the Title I, Part A program
or (2) require pre-approved purchase orders. Detroit officials stated that the Title I Office did not
always review invoices for charges to the Title I, Part A program before the accounts payable
department paid them because some vendors sent them directly to accounts payable or individual
schools, which then sent them directly to accounts payable. Also, Detroit did not document
(1) which invoices were approved by the Title I Office or (2) who in the Title I Office may have
approved invoices that went to the Title I Office before accounts payable paid them. Having a
Title I Office official who understands the application of OMB Circular A-87 requirements
review all Title I, Part A program invoices and other required support and documenting this
review may have prevented the payment of unallowable and inadequately documented
expenditures. Detroit charged $348,664 in unallowable costs to the Title I, Part A program.
Also, Detroit cannot show how $2,918,249 in inadequately documented costs benefited the Title
I program.

10
  See Enclosure 2, Table A for details about total costs (1) Detroit charged to the Title I, Part A program, (2) we
reviewed, (3) we recommend for acceptance, (4) we determined to be unallowable, and (5) we determined to be
inadequately documented. Unallowable and inadequately documented costs in this finding and Enclosure 2, Table
B, include related indirect costs.
Final Report
ED-OIG/A05H0010                                                                                        Page 18 of 67

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education require
MDE to instruct Detroit to

3.1      Return $348,664 in unallowable costs to the Department;

3.2      Either provide adequate documentation to support $2,918,249 in inadequately
         documented non-personnel costs or return any portion of that amount for which it does
         not provide adequate documentation to the Department; and

3.3      Develop and implement policies and procedures that provide reasonable assurance that
         Title I, Part A expenditures are necessary, reasonable, allocable, and adequately
         documented. Specifically, Detroit should require (1) pre-approved purchase orders for all
         non-personnel expenditures and (2) a designated official in the Title I Office to review all
         invoices for evidence that the expenditures are necessary, reasonable, allocable, and
         adequately document benefit to the Title I, Part A program.

Auditee Comments
MDE and Detroit did not dispute the majority of the unallowable expenditures and a portion of
the inadequately documented expenditures. As described in Enclosure 2, Table B, MDE and
Detroit disputed two unallowable expenditure categories and five inadequately documented
expenditure categories.

OIG Response
As a result of additional documentation MDE and Detroit provided, we accepted $1,903,372 in
previously inadequately documented costs as adequately documented and reclassified $10,330 in
previously adequately documented costs to inadequately documented costs. The finding and
recommendations have been revised accordingly. Enclosure 2, Table B explains OIG’s response
in detail.

FINDING NO. 4 – Detroit Used Title I, Part A Funds for Contract Expenditures
That Were Unallowable or Inadequately Documented11

For 2004-2005 school year contracts, Detroit charged to the Title I, Part A program unallowable
costs ($14,580) and inadequately documented costs ($1,764,988), totaling $1,779,568.12
Unallowable costs Detroit charged to the Title I, Part A program consisted of payments
for invoices that exceeded the approved contract amount with a specific vendor. This contract
did not prescribe an hourly or weekly pay rate and was for an amount not to exceed $18,000.
Detroit used Title I, Part A funds to pay the vendor for non-itemized invoices totaling $31,729,
which exceeded the contract's limit by $13,729. Including related indirect costs, this
unallowable amount is $14,580.

11
   All expenditures included in this finding relate to expenditures with vendors in the internal investigative report
described in FINDING NO. 5.
12
   See Enclosure 1, Table A for details about total costs (1) Detroit paid to selected Title I, Part A program vendors,
(2) we reviewed, (3) we recommend for acceptance, (4) we determined to be unallowable, and (5) we determined to
be inadequately documented. Enclosure 1, Table B includes indirect costs.
Final Report
ED-OIG/A05H0010                                                                      Page 19 of 67

We considered contract-related costs to be inadequately documented because Detroit did not
provide enough documentation to support that the costs were necessary, reasonable, and
allocable to the Title I, Part A program. The documentation provided for these costs did not
demonstrate any benefit to the Title I, Part A program. Inadequately documented costs, totaling
$1,764,988, consisted of payments for (1) transactions not supported by invoices or receipts;
(2) transactions supported only by invoices that were vague and did not include required support;
(3) invoices dated before the services would have been received and for which Detroit provided
no after-the-fact support that these services were received; (4) contractors with prescribed duties
similar to those of Detroit employees; (5) invoices for the development of a grants management
system intended to track Title I, Part A grants and other federal and non-federal grants that was
not completed, and billed for a position not listed in the contract; and (6) one invoice for an
unexplained initial mobilization fee paid to a vendor that was contracted to monitor Title I
programs.

OMB Circular A-87, Attachment A, Paragraph C.1 provides that costs must be necessary and
reasonable for proper and efficient performance and administration of federal awards, be
allocable to federal awards, and be adequately documented.

Detroit charged unallowable and inadequately documented non-personnel costs to the Title I,
Part A program because the Title I Office did not adequately review contracts or invoices.
Detroit’s Office of Contracting and Procurement, rather than the Title I Office, reviewed Title I,
Part A contracts. Detroit officials stated that the Title I Office did not always review invoices
before the accounts payable department paid them because some vendors sent invoices directly
to accounts payable. Detroit did not document (1) which invoices were approved by the Title I
Office or (2) who in the Title I Office may have approved invoices that went to the Title I Office
before accounts payable paid them. Having a Title I Office official who understands the
application of OMB Circular A-87 requirements review all Title I, Part A program contracts,
invoices, and other required support and documenting this review may have prevented the
payment of unallowable and inadequately documented expenditures.

Detroit could have used the $14,580 in unallowable costs charged to the Title I, Part A program
for effective Title I activities and has not demonstrated how it used $1,764,988 to benefit the
Title I, Part A program.

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education require
MDE to instruct Detroit to

4.1    Return $14,580 in unallowable costs to the Department;

4.2    Either provide adequate documentation to support $1,764,988 in inadequately
       documented non-personnel costs or return any portion of that amount for which it does
       not provide adequate documentation to the Department; and
4.3    Develop and implement policies and procedures that provide reasonable assurance that
       Title I, Part A expenditures related to contracts are necessary, reasonable, allocable, and
       adequately documented. Specifically, Detroit should require a designated official in the
Final Report
ED-OIG/A05H0010                                                                      Page 20 of 67

       Title I Office to review all contracts and invoices for demonstration that the expenditures
       are necessary, reasonable, allocable, and adequately document benefit to the Title I, Part
       A program.

Auditee Comments
MDE and Detroit did not dispute the unallowable expenditures and the majority of the
inadequately documented expenditures. As described in Enclosure 1, Table B, MDE and Detroit
disagreed with our conclusion that Detroit paid Title I, Part A funds for certain invoices that
were inadequately documented. Specifically, MDE and Detroit disagreed with our conclusions
regarding payment of invoices (1) that were dated before the services would have been received,
(2) that were vague and did not include adequate documentation, and (3) paid contractors for
duties similar to those of Detroit employees.

OIG Response
As a result of additional documentation MDE and Detroit provided, we accepted $5,000 in
previously inadequately documented costs as adequately documented. Enclosure 1, Table B
explains OIG’s Response in detail.

FINDING NO. 5 – MDE Inadequately Monitored the Resolution of a Detroit
                Internal Investigative Report

MDE did not adequately monitor the resolution of a Detroit internal investigative report that
identified unallowable contracts. MDE was aware that this internal investigation reviewed Title
I, Part A contracts but did not track the resolution of the report. Detroit did not provide this
report to MDE or otherwise notify MDE of the unallowable contracts identified in it.

Under the Uniform Administrative Requirements for Grants and Cooperative Agreements to
State and Local Governments (34 C.F.R. § 80.40), MDE is required to monitor grant and sub-
grant supported activities to assure compliance with federal requirements.

Detroit’s General Counsel stated that because this internal investigative report was prepared for
Detroit during a review by independent counsel, it was protected by Attorney Client Privilege
and could not be released to MDE. During the review, MDE was notified of specific contracts
and concluded whether the contracts were allowable. Detroit was unaware that it had an
obligation to further advise MDE on this issue because MDE had drawn the conclusions. MDE
provided no further formal communication that it disallowed the contracts and related
expenditures. MDE did not have adequate procedures in place to track the resolution of the
report after an MDE official who had knowledge of the review retired.

Because MDE failed to track the resolution of this internal investigative report, Title I, Part A
funds used for unallowable and inadequately documented costs were not returned to the Title I,
Part A program. Also, MDE did not determine if Detroit modified the internal control
deficiencies that resulted in the unallowable and inadequately documented costs.
Final Report
ED-OIG/A05H0010                                                                     Page 21 of 67

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education require
MDE to

5.1    Develop procedures to track LEA reviews that identify unallowable Title I, Part A
       expenditures to ensure that funds are returned to the Title I, Part A program and any
       internal control deficiencies are corrected; and
5.2    Provide greater oversight of federal grant funds that are distributed to Detroit. (This
       recommendation is based on the issues identified in all findings included in the AUDIT
       RESULTS section of this report).

Auditee Comments
MDE did not dispute our finding and stated that it received a copy of the investigative report on
September 10, 2007. In response to the recommendations, MDE stated that (1) it has effective
existing procedures to identify unallowable Title I, Part A expenditures, (2) the MDE School
Auditing Manual contains procedures for reporting unallowable expenses, and (3) it is in the
process of strengthening its monitoring and oversight of LEAs. MDE also described some
corrective actions it will take, including developing procedures to help identify internal
investigations and developing a tracking process to identify and follow up on alleged fiscal
irregularities until they are appropriately dismissed or resolved.

OIG Response
While MDE stated that it has effective existing procedures to identify unallowable Title I, Part A
expenditures, it received a copy of the internal investigative report only after we notified it of
this finding. The corrective action it described to track fiscal irregularities and strengthen
monitoring and oversight of LEAs did not include any documentation to support the tracking
process it plans to establish or specifically address unallowable expenditures. Therefore, we
have not changed our finding or recommendations.
Final Report
ED-OIG/A05H0010                                                                                     Page 22 of 67



                     OBJECTIVES, SCOPE, AND METHODOLOGY


The objectives of our audit were to determine whether (1) Detroit returned funds received under
Title I, Part A related to contracts for the 2004-2005 school year that a Detroit internal
investigative report identified as unallowable; (2) expenditures related to selected Title I, Part A
contracts for the 2004-2005 school year were adequately documented, reasonable, and allowable;
and (3) Title I, Part A personnel and non-personnel expenditures for the 2005-2006 school year
were adequately documented, reasonable, and allowable.

To achieve our objectives, we performed the following procedures:

1. Reviewed significant laws and guidance, including Title I, Part A (Improving Basic
   Programs Operated by Local Educational Agencies) of NCLB; 34 C.F.R. Part 76 (State-
   Administered Programs); 34 C.F.R. Part 80 (Uniform Administrative Requirements for
   Grants and Cooperative Agreements to State and Local Governments); and OMB Circular
   A-87 (Cost Principles for State, Local, and Indian Tribal Governments), effective June 9,
   2004;
2. Interviewed Detroit officials; interviewed officials at MDE and Ceridian, Detroit’s third-
   party benefits administrator; and reviewed documents provided by Detroit to gain an
   understanding of Detroit’s internal control over compliance with Title I, Part A provisions of
   NCLB, applicable regulations, and cost principles;
3. Reviewed Detroit’s organizational chart;
4. Reviewed Detroit’s Title I, Part A Regular – Improving Basic Programs Budget Summary
   and Budget Detail for the 2005-2006 School Year Grant; Comprehensive Annual Financial
   Report for the Fiscal Year Ended June 30, 2005; Comprehensive Annual Financial Report,
   June 30, 2006; Federal Awards Supplemental Information, June 30, 2005;13 and Single Audit
   Report, June 30, 2006;
5. Reviewed accounting records pertaining to Title I, Part A funds budgeted and expended,
   including Detroit’s general ledgers, budget and expenditure summary financial documents,
   non-personnel expenditure sub-ledgers for the period July 1, 2004, through June 30, 2006,
   and payroll sub-ledgers for the period July 1, 2005, through June 30, 2006;14 and
6. Reviewed contracts with vendors, invoices, purchase orders, cancelled checks, time and
   effort certifications, pay rosters, workshop descriptions and sign in sheets, adjusting journal
   entry documentation, lesson plans, and fringe benefits cost data.




13
   Federal Awards Supplemental Information, June 30, 2005, is Detroit’s single audit for the year ended June 30,
2005.
14
   We reviewed these ledgers for both regular and carryover grant funding sources. Regular grant sources are the
original Title I, Part A grants covering a 15-month period. Carryover grant sources are grant funds that were not
expended in their original fiscal year, but were approved by MDE to be spent in the following fiscal year.
Final Report
ED-OIG/A05H0010                                                                                        Page 23 of 67

Review of Personnel Expenditures
Detroit charged $73,211,592 in salaries and fringe benefits to the Title I, Part A program for the
year ended June 30, 2006, including both regular and carryover grant sources. This amount
included a net $23,234,772 in adjusting journal entries. To review these personnel expenditures,
we selected the following four samples of personnel transactions:15

(1) The first sample was from a universe of all personnel transactions from the payroll sub-
ledgers for regular Title I, Part A grant sources for the school year ended June 30, 2006. This
universe did not include carryover grant funding sources. This universe included 34,553 salary
transactions totaling $30,087,010 and 91,138 fringe benefit transactions totaling $11,771,082.
The universe included 125,691 salary and fringe benefits transactions totaling $41,858,092. We
judgmentally selected a sample of 182 salary transactions totaling $441,313. These transactions
were selected to cover compensation for Title I Office staff, workshops, supplemental activities,
hourly employees, regular duties of multiple cost activity employees, regular duties of single cost
activity employees, and salary transactions exceeding $7,400 in one pay period. For the sampled
employees, we collected pay records, including time and effort certifications, pay rosters,
workshop descriptions, and sign-in sheets. The following table identifies the salary transactions
in the sample.

Table 2 – Sampled Salary Transactions
                                                                     Amount of Salary
                                      Number of Salary              Charges for Sample
      Category of Employee          Transactions Sampled              Transactions
     Title I Office                          68                                $137,123
     Workshops                               20                                $ 3,088
     Supplemental Activities                  3                                $ 1,071
     Hourly                                   5                                $ 4,031
     Multiple Cost Activity                  32                                $ 47,878
     Single Cost Activity                    40                                $ 32,083
     Transactions exceeding                  14                                $216,039
     $7,400
     Sampled Items                             182                                 $441,313
     Universe                                 34,553                            $30,087,010

From this universe, we also haphazardly selected 12 fringe benefit transactions totaling $2,008 to
review fringe benefits. For these transactions, we collected records for the cost of employee
insurance benefits, pension, and taxes.

(2) The second sample was from a universe of salary transactions and related fringe benefits
transactions16 from the payroll sub-ledgers for both regular and carryover Title I, Part A grant
sources expended during the period August 13, 2005, through June 2, 2006. This universe only
included single cost activity Title I, Part A employees. This universe partially overlaps with the

15
   A personnel transaction is a charge for salary or fringe benefits for an employee for one pay period for a specific
object code in the payroll sub-ledger.
16
   We selected our sample transactions from the universe of salary transactions only. We then included, in our
review, all fringe benefits transactions related to the selected salary transactions. Therefore, the dollar amount of
each sampled salary transaction includes the amount for the salaries and the related fringe benefits amounts.
Final Report
ED-OIG/A05H0010                                                                                        Page 24 of 67

universe in the first sample. We randomly sampled 400 salary transactions totaling $863,512,
which includes salaries and related fringe benefits, from a universe of 13,948 transactions
totaling $30,209,812 in salaries and related fringe benefits. For all 400 salary transactions, we
reviewed available time-and-effort certifications. For the first 30 transactions, we also reviewed
pay rosters and employee insurance benefit cost data to determine if Detroit charged the correct
insurance benefits for each transaction.

(3) The third sample was from a universe of all salary and fringe benefits adjusting journal
entries for the 2005-2006 school year. We judgmentally selected, based on transaction
descriptions that did not appear to be Title I, Part A program related, 17 adjusting journal entries
totaling a net $21,844,901 from a universe of 49 adjusting journal entries totaling a net
$23,234,772 for the year ended June 30, 2006. This universe included both regular and
carryover grant sources. We traced these transactions to adjusting journal entry documents.

(4) The fourth sample was from a universe of kindergarten teachers whose compensation for the
2005-2006 school year was charged to the Title I, Part A grant in one adjusting journal entry
totaling $11,499,897 in salaries and benefits. This adjusting journal entry was 1 of the 17
sampled entries included in the third sample. We judgmentally selected 5 teachers who received
a total of $408,576 in salary and fringe benefits from a universe of 145 kindergarten teachers,
because these 5 employees were teachers at targeted assistance schools and paid with Title I, Part
A funds. We compared the rosters of students who these teachers taught with a listing of Title I,
Part A students at their schools.

Review of Non-Personnel Expenditures
For the 2004-2005 school year, we tested judgmentally selected non-personnel transactions with
vendors that were included in the Detroit internal investigative report.17 For those vendors that
we determined had unallowable or inadequately documented costs during the 2004-2005 school
year, we also reviewed all expenditures during the 2005-2006 school year. We reviewed a total
of 90 judgmentally selected non-personnel transactions, totaling $1,872,787, from a universe of
148 transactions totaling $2,158,766. The transactions reviewed included 87 of 113 transactions
with 11 vendors and 3 of 35 transactions for a series of Title I, Part A mini-grants from Detroit to
schools.

For the 2005-2006 school year, we reviewed a total of 124 judgmentally selected non-personnel
transactions, totaling $10,417,114, from a universe of 28,515 non-personnel transactions totaling
$46,199,780. We also reviewed a total of 6 adjusting journal entries totaling a net negative
$3,027,550 from a universe of 98 adjusting journal entries totaling a net negative $3,020,701.
These 98 adjusting journal entries included both positive and negative transactions.

Data Reliability
To achieve our objectives, we relied, in part, on computer-processed general ledger and
sub-ledger data originally obtained from Detroit’s accounting system. This data contained our
universe of Title I, Part A personnel and non-personnel expenditures for the 2004-2005 and
2005-2006 school years. We verified the completeness and accuracy of the data by reviewing
supporting documentation to validate expenditure amounts recorded in Detroit’s general ledgers

17
  This report identified unallowable contracts but did not identify the total expenditures charged to the Title I, Part
A grant for each vendor. To achieve Objective 2, we identified and tested expenditures for each vendor.
Final Report
ED-OIG/A05H0010                                                                    Page 25 of 67

and comparing sub-ledgers to the general ledgers. Expenditures were generally supported by
evidence such as invoices, cancelled checks, time and effort certifications, and pay rosters.
Therefore, we concluded that the computer-processed data were sufficiently reliable for the
purposes of our audit.

We performed our audit work at Detroit’s schools and administrative office in Detroit, Michigan,
and our offices, from February through November 2007. We discussed the results of our audit
with Detroit and MDE officials on November 27, 2007. Our audit was performed in accordance
with generally accepted government auditing standards appropriate to the scope of the review
described above.
Final Report
ED-OIG/A05H0010                                                                    Page 26 of 67


     Enclosure 1: Cost Schedules for the 2004-2005 School Year

TABLE A: Schedule of Sampled Costs Reviewed, Recommended for Acceptance,
         Unallowable Costs, and Inadequately Documented Costs for the 2004-2005
         School Year (Excluding Indirect Costs)

              Total Paid to                  Costs                   Inadequately
                Selected    Total Costs Recommended for Unallowable Documented
Cost Category Vendors        Reviewed      Acceptance     Costs         Costs
Non-Personnel
Transactions    $2,158,766 $1,872,787           $196,462     $13,729     $1,662,596


TABLE B: Total Unallowable and Inadequately Documented Costs for the 2004-2005
         School Year (Including Indirect Costs)

                                                                              Total
                           Unallowable Total    Inadequately Inadequately Inadequately
              Unallowable Indirect Unallowable Documented Documented Documented
Cost Category   Costs        Costs     Costs        Costs      Indirect Costs Costs
Non-Personnel
Transactions   $13,729 (1)        $851  $14,580 $1,662,596 (2)       $102,392 $1,764,988

   (1) Contrary to OMB Circular A-87, Attachment A, Paragraph C.1, which provides that, to
       be allowable, costs must be, among other things, necessary and allocable to federal
       awards, Detroit overpaid $13,729 to a vendor to provide consulting services. The
       contract with the vendor did not prescribe an hourly or weekly pay rate and was for an
       amount not to exceed $18,000. Detroit paid this contractor for non-itemized invoices
       totaling $31,729, which exceeded the contract's limit by $13,729.

   (2) Contrary to OMB Circular A-87, Attachment A, Paragraph C.1, Detroit did not provide
       adequate documentation to show that these costs were necessary and reasonable for
       proper and efficient performance of federal awards, and allocable to federal awards.

      ·   Transactions were not supported by invoices or receipts ($8,014).
      ·   Transactions were supported by invoices that were vague and did not include
          adequate documentation ($1,048,563). Detroit paid for (1) a Teacher Toolkit Video
          Conferencing Project but did not provide evidence of the project or what teachers the
          project was for ($3,692), (2) an after school program for which it did not provide the
          specific dates the after school program occurred or a list of students and schools that
          participated in each session ($37,100), (3) payments for invoices for which Detroit
          did not provide Production Reports and Financial Reports required by the contract
          with the vendor ($148,604), and (4) a college preparatory program for which the
          invoices had no itemization of costs as required by the contract, including a
          description of the college preparatory program, an explanation of which students the
Final Report
ED-OIG/A05H0010                                                                     Page 27 of 67

           program was made available to, the dates and locations the program occurred, or the
           names of all students who participated ($859,167).
       ·   Detroit paid for invoices dated before the services would have been received and
           provided no after-the-fact documentation that these services were received
           ($246,167). Detroit paid for (1) martial arts training for which it did not provide the
           dates of the training or a list of the students who participated ($150,000) and
           (2) consulting services with vague invoice descriptions that did not demonstrate
           benefit to the Title I, Part A program ($96,167).
       ·   Detroit paid contractors for duties similar to those of Detroit employees ($111,713).
           Detroit paid for (1) assessment of Title I schools, which was similar to the duties of
           Title I Office program supervisors ($5,000); (2) website management for which it did
           not explain why its internal information technology department did not provide this
           service ($7,000); and (3) other consulting services, including completion of the
           Michigan Electronic Grants System applications and assisting with a U.S. Department
           of Education, Office of Inspector General audit, which were the prescribed duties of
           the Title I Office’s Executive Director and Director ($99,713).
       ·   Invoices paid were for the development of a case management system that was
           intended to track Title I grants and other federal and non-federal grants ($173,140).
           The vendor did not complete this system, Detroit never used the system, and some of
           the invoices billed for a Deputy Consultant, which was not an approved position in
           the contract.
       ·   One invoice ($75,000) was for a Start up cost for Audit Compliance Services. The
           contract with this vendor did not explain why this charge was necessary or how it was
           computed. Therefore, Detroit did not demonstrate the reasonableness of this
           payment. All of the subsequent invoices with this vendor, which was hired to
           monitor Title I programs, were inadequately documented.

Auditee Comments and OIG Response
Title I, Part A Funds Expended for Martial Arts Training (included in the draft report as
Enclosure 1, Table B, Item 2, third bullet)
Auditee Comments. MDE and Detroit stated they provided a number of documents regarding
these services that demonstrate benefit to the Title I, Part A program. They provided two
cancelled checks totaling $150,000, a program description, a list of all of the schools that
received services, and sign-in sheets for all students who participated in the program from
2004-2006.

OIG Response. We determined we already reviewed most of the documentation provided for
this sub-finding. The documentation included some sign-in sheets but did not include a list of all
the schools that received services. The only new documentation provided was several sign-in
sheets for December 2005, January 2006, and April 2006. These sign-in sheets adequately
documented $5,000 of the expenditures for these classes. Therefore, we re-classified as
adequately documented $5,000 of the $155,000 included in the draft report. Because we have no
evidence of benefit to the Title I, Part A program for the remaining expenditures, $150,000
remains inadequately documented. We modified this enclosure to reflect this updated amount.
Final Report
ED-OIG/A05H0010                                                                     Page 28 of 67

Title I, Part A Funds Expended for Accounting and Financial Services
Auditee Comments. MDE and Detroit stated that they have submitted documentation to
demonstrate that EVO Accounting and Financial Services (EVO) provided a benefit to the Title
I, Part program. For certain transactions, MDE and Detroit stated they provided invoices with
(1) weekly status reports that explain accomplishments, new project developments, observations
and recommendations, planned tasks for the subsequent week, and a weekly schedule; and
(2) timesheets. MDE and Detroit stated that the weekly timesheets detail the number of hours
each EVO consultant worked. They also concluded that the documentation adequately
documented the expenditures relating to five specific invoices.

OIG Response. The documentation provided did not demonstrate that Detroit’s Title I, Part A
program benefited from the expenditures relating to the following invoices or that the charges
were reasonable. MDE’s and Detroit’s submissions in response to our draft report provided no
after-the-fact support to show that EVO’s services referred to on the invoices were received, as
may have been documented on the Production Reports and Financial Reports for December
2004, January 2005, and February 2005. These reports were required by the contract between
Detroit and EVO. We requested these reports during our audit, but MDE and Detroit did not
provide them. The charges remain inadequately documented.

Invoice for $6,712.50, dated January 3, 2005 (included in the draft report as Enclosure 1, Table
B, Item 2, second bullet, number 3)
Auditee Comments. In response to our request for the employee hourly reports for the weeks
covered by this invoice (the weeks ended December 17, 2004, and December 24, 2004), MDE
and Detroit provided only employee hourly reports for the week ended December 31, 2004,
which listed no billable hours for EVO. They did not provide the hourly reports for the weeks
ended December 17, 2004, and December 24, 2004. MDE and Detroit stated that the employee
hourly reports for the week ended December 31, 2004, demonstrate that (1) EVO was not
previously paid for services rendered by its consultants for the weeks ended December 17 and
24, 2004; (2) EVO was not paid for 83.5 billable hours; and (3) Detroit paid this amount to
compensate EVO for those billable hours.

OIG Response. MDE and Detroit did not provide support to change this portion of the
sub-finding because (1) they did not provide employee hourly reports for the weeks covered by
the invoice, (2) they did not provide the required Production Report and Financial Report for
December 2004, and (3) the weekly client status report for December 31, 2004, is not reliable.
The latter report is not reliable because it states that billable hours were 83.5 as of
December 31, 2004, while the invoice bills for 89.5 hours through December 24, 2004. Thus,
this invoice remains inadequately documented.

Invoice for $45,833.33, dated January 4, 2005 (included in the draft report as Enclosure 1, Table
B, Item 2, third bullet, number 2)
Auditee Comments. MDE and Detroit stated Detroit did not prepay the invoice because, while
the invoice specified the services were to be provided in January 2005, the invoice is dated
January 4, 2005, and Detroit paid the invoice on January 13, 2005 (as demonstrated by a
“Distributed” stamp and hand-written date on the invoice).

OIG Response. This invoice for EVO services through the end of January was dated before most
of the services were to be provided. Detroit’s contract with EVO requires EVO to bill Detroit for
Final Report
ED-OIG/A05H0010                                                                        Page 29 of 67

services rendered the previous month. Also, the documentation provided no support to change
this portion of the sub-finding because the documentation (1) is vague as to the services to be
rendered, (2) did not provide employee hourly reports for the weeks covered by the invoice, and
(3) did not provide the required Production Report and Financial Report for January 2005. Thus,
this invoice remains inadequately documented.

Invoice for $45,833.33, dated February 8, 2005 (included in the draft report as Enclosure 1,
Table B, Item 2, third bullet, number 2)
Auditee Comments. MDE and Detroit stated Detroit did not prepay the invoice because, while
the invoice specified the services were to be provided in February 2005, the invoice is dated
February 8, 2005, and Detroit paid the invoice on February 10, 2005 (as demonstrated by a
“Distributed” stamp and hand-written date on the invoice).

OIG Response. We do not agree that the stamp and date show when the invoice was paid. This
invoice remains inadequately documented because the invoice was dated before most of the
services were to be provided, and MDE and Detroit have not provided any after-the-fact support,
such as the required Production Report and Financial Report for February 2005, demonstrating
that services were received. Detroit’s contract with EVO requires EVO to bill Detroit for
services rendered the previous month.

Invoice for $22,912.50, dated February 7, 2005 (included in the draft report as Enclosure 1,
Table B, Item 2, fourth bullet, number 2)
Auditee Comments. MDE and Detroit stated the weekly status reports and time sheets for the
weeks ended January 7, January 14, January 21, January 28, and February 4, 2005, demonstrate
that EVO consultants provided services to Detroit for that time period. The hourly reports for
the weeks ended January 7, 14, 21, and 28, 2005, indicate the consultants worked on the plan to
assist Detroit with the U.S. Department of Education, Office of Inspector General audit and
reviewed for compliance documents requested during the audit. MDE and Detroit disagreed
with our view that these services were similar to the duties of the Title I Director.

OIG Response. We have not changed our conclusion that Detroit’s expenditures for these
services are not adequately documented because (1) the identified audit services were similar to
the duties of the Title I Office’s Executive Director and Director; (2) the audit services identified
in the hourly reports were inconsistent with the duties identified in the contract between Detroit
and EVO; and (3) Detroit did not provide the required Production Report and Financial Report
for January 2005, which may have shown in detail the services rendered by EVO during that
month.

Invoice for $5,400, dated February 23, 2005 (included in the draft report as Enclosure 1, Table
B, Item 2, fourth bullet, number 2)
Auditee Comments. MDE and Detroit stated the weekly status report and time sheets for the
weeks ended February 11 and February 18, 2005, demonstrate that EVO consultants provided
services to Detroit during that time period. The hourly reports for those weeks indicate the
consultants worked on assisting Detroit with the U.S. Department of Education, Office of
Inspector General audit. MDE and Detroit disagreed with our view that these services were
similar to the duties of the Title I Director.
Final Report
ED-OIG/A05H0010                                                                        Page 30 of 67

OIG Response. We have not changed our conclusion that Detroit’s expenditures for these
services are not adequately documented because (1) the identified audit services were similar to
the duties of the Title I Office’s Executive Director and Director; (2) the audit services identified
in the hourly reports were inconsistent with the duties identified in the contract between Detroit
and EVO; and (3) Detroit did not provide the required Production Report and Financial Report
for February 2005, which may have shown in detail the services rendered by EVO during that
month.
Final Report
ED-OIG/A05H0010                                                                                     Page 31 of 67


       Enclosure 2: Cost Schedules for the 2005-2006 School Year
TABLE A: Schedule of Sampled Costs Reviewed, Recommended for Acceptance,
         Unallowable Costs, and Inadequately Documented Costs for the 2005-2006
         School Year (Excluding Indirect Costs)

                    Total                      Costs                Inadequately
                Charged to     Total Costs Recommended Unallowable Documented
 Cost Category Title I, Part A Reviewed18 for Acceptance  Costs        Costs
Personnel
Transactions      $49,976,820    $1,303,725      $861,447   $20,926     $421,353
Personnel
Adjusting
Journal Entries   $23,234,772 $21,844,901          $8,222 $173,563 $21,663,117
Non-Personnel
Transactions          $46,199,780       $10,417,114           $7,349,980       $326,757       $2,740,377
Non-Personnel
Adjusting
Journal Entries       ($3,020,702)     ($3,027,550)         ($3,027,550)             $0               $0
Totals (net)         $116,390,670      $30,538,190            $5,192,099       $521,246      $24,824,847




18
   Some totals in this table do not add to the exact dollar because of rounding differences. All amounts are rounded
to the nearest dollar.
Final Report
ED-OIG/A05H0010                                                                                       Page 32 of 67


TABLE B: Total Unallowable and Inadequately Documented Costs for the 2005-2006
         School Year (Including Indirect Costs)

                                                                Inadequately    Total
                             Unallowable  Total    Inadequately Documented Inadequately
      Cost        Unallowable Indirect Unallowable Documented     Indirect   Documented
   Category         Costs      Costs     Costs19      Costs        Costs        Costs
 Personnel
 Transactions20   $786,955              $53,033       $839,988       $22,913,957       $1,488,368      $24,402,325
 Personnel
 Adjusting
 Journal Entries  $173,563              $12,011       $185,574       $21,663,117       $1,481,375      $23,144,492
 Non-Personnel
 Transactions $326,757 (1)              $21,906       $348,664 $2,740,377 (2)            $177,872        $2,918,249
 Non-Personnel
 Adjusting
 Journal Entries         $0                   $0              $0                $0               $0                $0
 Totals          $1,287,275             $86,950     $1,374,226       $47,317,451       $3,147,615      $50,465,066

(1) OMB Circular A-87, Attachment A, Paragraph C.1, provides that, to be allowable, costs
    must be, among other things, necessary and allocable to federal awards.

     ·   Detroit paid for capital expenditures for general purpose equipment and improvements to
         buildings that MDE did not approve ($137,780), including payments for digital copiers
         ($57,492) and classroom repairs and renovations ($80,288). OMB Circular A-87,
         Attachment B, Paragraph 15.b provides that capital expenditures for general purpose
         equipment and improvements to buildings which materially increase their value or useful
         life are unallowable as direct charges, except where approved in advance by the awarding
         agency. Detroit budgeted for these expenditures on its Consolidated Application under
         the category 'Purchased Services,' rather than 'Capital Outlay,' which is for equipment
         items with a cost of $5,000 or more per unit. Therefore, MDE was not aware that Detroit
         was budgeting for capital expenditures.
     ·   Detroit paid for services to non-Title I schools or ineligible students ($100,399),
         including payments totaling $42,943 for reading and mathematics testing at two,
         non-Title I schools (Bates Academy and Renaissance High School) and payments for
         supplemental educational services for students not attending a Detroit school ($57,456).
     ·   Detroit paid for invoices that exceeded the approved contract amount or paid for shipping
         costs that were prohibited by a contract ($86,781). This amount included an
         overpayment to a vendor for consulting services for $81,950, which was for the first
         option year of the contract with the vendor (for the period September 1, 2005, through
         August 31, 2006). The amount paid ($1,314,570) exceeded the approved amount in the
         contract ($1,232,620) by $81,950. Also, Detroit paid a vendor $4,831 for shipping.


19
   Some totals in this table do not add to the exact dollar because of rounding differences. All amounts are rounded
to the nearest dollar.
20
   The costs for personnel transactions in this table include amounts applied or projected to the universe of personnel
costs based on sample testing.
Final Report
ED-OIG/A05H0010                                                                     Page 33 of 67

       However, according to the contract with this vendor, the vendor could not charge for
       shipping expenses.
   ·   Detroit paid for an invoice twice ($1,043). Detroit voided the check for one of the
       payments but did not reverse the duplicate charge to the Title I, Part A program.
   ·   A credit was not applied to the Title I, Part A program ($755). Detroit purchased 31
       computers for Blackwell Institute and received one that was damaged. The school
       received a credit of $755 for this damaged computer, which was no longer at the school.
       However, this credit was not applied to the Title I, Part A program.

Auditee Comments and OIG Response
Capital Expenditures (included in the draft report as Enclosure 2, Table B, item 1, first bullet)
Auditee Comments. MDE and Detroit concurred that MDE did not pre-approve the capital
expenditures. MDE and Detroit provided a sworn affidavit from MDE’s Field Services
Consultant in the Office of School Improvement stating this employee reviewed documentation
related to some of these expenditures after-the-fact. The employee concluded that $90,146 of
these capital expenditures would have been allowable. MDE and Detroit also provided copies of
invoices.

OIG Response. MDE and Detroit did not provide any new documentation and agreed that it did
not approve these expenditures in advance. OMB Circular A-87, Attachment B, Paragraph 15.b
provides that capital expenditures for general purpose equipment and improvements to buildings
which materially increase their value or useful life are unallowable as direct charges, except
where approved in advance by the awarding agency. Without the draft report, MDE would not
have approved, or even been aware of, these capital expenditures because Detroit misclassified
them as ‘Purchased Services’ instead of ‘Capital Outlay’ on its Consolidated Application.

Payments for Reading and Mathematics Testing Software (included in the draft audit report as
Enclosure 2, Table B, item 1, second bullet, for $42,943)
Auditee Comments. MDE and Detroit stated the contract for testing software with Renaissance
Learning, Inc. did not include Bates Academy. MDE and Detroit also provided a letter from this
vendor stating Renaissance High School was originally in the contract, but its software license
was transferred to Chadsey High School. MDE and Detroit stated this documentation
demonstrates that the $42,943 was not for non-Title I, Part A schools and is therefore allowable.

OIG Response. $39,307 of the $42,943 involved a vendor other than Renaissance Learning, Inc.,
so the contract and letter MDE and Detroit described above were only relevant to $3,636 of this
sub-finding. The invoice from Renaissance Learning, Inc. included both Chadsey High School
and Renaissance High School, so the statement that the license was transferred to Chadsey High
School is not valid. Therefore, the $3,636 paid to this vendor remains unallowable.

As part of the response to another sub-finding, MDE and Detroit provided the contract related to
$39,307 of the $42,943, but this contract included no documentation, such as a list of schools, to
refute this sub-finding. Both Renaissance High School and Chadsey High School were also
included on the invoices from that vendor, so the statement that the license was transferred to
Chadsey High School is not valid. Therefore, the $39,307 paid to that vendor remains
unallowable.
Final Report
ED-OIG/A05H0010                                                                      Page 34 of 67

(2) Contrary to OMB Circular A-87, Attachment A, Paragraph C.1, Detroit did not provide
    adequate documentation to show that these costs were necessary and reasonable for proper
    and efficient performance of federal awards, and allocable to federal awards.

   ·   Transactions were not supported by invoices or receipts ($20,763).
   ·   Invoices were vague and did not include adequate documentation ($452,170). Detroit
       paid $92,600 for an invoice that stated that a Project Manager, Technical Assistant, and
       40 Assessment Advisors provided services from September 2005 through March 2006.
       The invoice listed an amount for each month, with no detail of hours worked. Detroit did
       not provide the contract or other evidence to explain what Title I services were provided
       or the hours worked. Detroit also paid $161,000 for a science program that the vendor
       would have provided two years prior to this payment. Detroit provided no after-the-fact
       support to demonstrate what services were received or what students or schools were
       served. Detroit also paid for two invoices totaling $164,713 for school nurses who would
       have provided services over two years prior to the payments. Detroit did not provide the
       contracts for the nurses applicable to the periods covered by the invoices and did not
       provide a description of the type of services provided or Consultants’ Reports, which
       were required by the contract with the vendor for a previous year. Detroit also paid
       $33,857 for meals at local hotels for Title I school events but could not support the
       number of meals purchased.
   ·   Detroit leased computers for which it could not provide evidence of existence or use by
       Title I students ($976,900). Detroit leased 1,534 desktop computers and 554 laptop
       computers, including installation and insurance, for $879,426. Detroit provided us with
       the shipping report from the vendor and shipping records from the schools that were to
       receive these computers. For 5 of 22 judgmentally selected schools, the number of
       computers listed on the vendor’s shipping reports was greater than the number of
       computers shipped to these schools according to Detroit's shipping records. Therefore,
       Detroit's shipping records for these 5 schools did not support all of the computers shipped
       to those respective schools according to the vendor's shipping records. Also, during our
       visit to 1 of these schools (Cleveland High School), the school did not show us any of the
       22 computers that were leased for the school, according to the vendor’s shipping report.
       We have no assurance that (1) Detroit can physically account for $876,428 of the
       computers or laptops leased for $879,426 or that (2) those computers are currently being
       used by eligible Title I students. Detroit also paid $550,145 for computers that were
       supported by an invoice that did not list the number of units purchased or a per unit price.
       Based on another invoice for identical computers that was dated within 16 days of the
       invoice date, we calculated that Detroit purchased 589 computers at a per unit price of
       $934.24. Because Detroit provided serial numbers and locations for only 500 computers,
       89 computers totaling $83,025 are unaccounted for and inadequately documented. Also,
       Detroit purchased 37 computers for Cleveland Middle School. Because we could not
       physically verify 13 of the computers at the school and because we have evidence that 12
       of the 13 computers were either stolen, damaged, or were reported missing, 13 computers
       totaling $17,447 are inadequately documented.
   ·   Detroit paid for supplemental educational services that were not supported by detailed
       attendance forms ($17,581). These forms, required by the contracts with vendors, were
       necessary to document students tutored, hours tutored, and dates of service.
Final Report
ED-OIG/A05H0010                                                                        Page 35 of 67

   ·   Detroit paid $4,028 for movies ($1,500), incentives ($314), gym mats ($790), and book
       bags and T-shirts ($1,423) for which it provided no evidence of benefit to the Title I, Part
       A program.
   ·   Detroit paid $5,675 for gift cards for which it provided no record of whether the
       appropriate students received the gift cards (which were awarded for attendance and
       involvement in a program that encouraged students to improve academic achievement
       and employability skills).
   ·   Detroit paid invoices before the services would have been received ($1,254,935) and did
       not provide any after-the-fact documentation demonstrating benefit to the Title I, Part A
       program. One invoice ($1,232,620) included pre-payment for, among other items,
       (1) 75 consultant days for $112,500, (2) training materials for $105,900, and
       (3) 448 consultant days for $672,000. Detroit only provided support for 10 consultant
       days paid for $15,000. For the remaining $1,217,620 of this invoice, Detroit did not
       provide the specific dates that the consulting services would have been provided at
       schools, the locations of the services, a list of the specific training materials received, or
       evidence that it received $105,900 in training materials. Therefore, $1,217,620 of this
       invoice is inadequately documented. For another invoice ($37,315), Detroit received the
       invoice 4 months before, and paid it 3 months before, the vendor was scheduled to
       provide the service. Detroit provided no after-the-fact support to demonstrate that this
       service was provided.
   ·   Detroit paid for temporary employees whose duties were similar to those of Title I Office
       employees ($8,325). The duties of these temporary employees included monitoring and
       creating Title I budgets, which are similar to the duties of the Title I Director and
       Program Supervisors. Detroit did not explain why it hired these temporary employees or
       demonstrate that they provided any services beyond what the Title I Director and
       Program Supervisors were already paid to do.

Auditee Comments and OIG Response
Harvard Graduate School of Education Professional Program Expenses (included in the draft
report as Enclosure 2, Table B, item 2, first bullet, for $37,315)
Auditee Comments. MDE and Detroit provided the invoice for this transaction which lists the
per-participant charge and provided a list of the participants. MDE and Detroit stated that this
documentation adequately documents the expense.

OIG Response. The invoice, dated February 20, 2006, and paid on March 16, 2006, was for
services to be provided on June 25-30, 2006. Therefore, Detroit received this invoice 4 months
before, and paid it 3 months before, the vendor was scheduled to provide the service. MDE and
Detroit provided no after-the-fact support to demonstrate that the service was provided.
Therefore, we classified this cost as having an invoice paid before the services would have been
received with no after-the-fact support demonstrating benefit to the Title I, Part A program,
rather than a cost not supported by an invoice. We moved this cost to Enclosure 2, Table B,
item 2, seventh bullet.
Final Report
ED-OIG/A05H0010                                                                     Page 36 of 67

Payment for Meals with Title I, Part A Funds Related to 3-Day Workshop (included in the draft
report as Enclosure 2, Table B, item 2, second bullet, for $23,527)
Auditee Comments. MDE and Detroit stated they provided (1) documentation to support the
number of meals purchased, including the $23,527 that was inadequately documented; and
(2) workshop agendas, contemporaneous sign-in sheets for staff, and a list of the Center for
School Leaders staff and Detroit central-level staff that attended.

OIG Response. MDE and Detroit provided a list of the Center for School Leaders staff and
Detroit central-level staff that attended for March 9-11, 2006, and sign-in sheets for these three
days. During the audit, we already received and reviewed the sign-in sheets for March 9 and
March 11. The sign-in sheets for March 10 were new sign-in sheets that were completely
different from the ones Detroit provided during the audit. While most of the names are different,
we identified 13 names that were on both sign-in sheets. Some of the 13 names were initialed on
both sheets, and others were only initialed on one sheet. MDE and Detroit did not explain why
these individuals would have signed two sign-in sheets for the same day. Additionally, the
initials for 6 names on the 2 sign-in sheets appear different. These discrepancies place the
authenticity and credibility of both sign-in sheets for March 10 in question. Therefore, we did
not accept either sign-in sheet and classified the entire amount paid for meals for March 10 as
inadequately documented. Because we will no longer accept any of the sign-in sheets provided
for March 10, $10,330 that we previously determined was adequately documented is now
inadequately documented. In total, $33,857 is now inadequately documented. We modified this
enclosure to reflect this updated amount.

Detroit provided additional sign-in sheets for March 11. However, these sign-in sheets appeared
to be for a different event because they were identified with the title ‘NBPTS 2005-2006
Additional Sessions’ rather than ‘The Challenge of Leadership. . .’ title that was on the other
sign-in sheets for March 10 and March 11. We also did not accept the list of the Center for
School Leaders staff and Detroit central-level staff that attended because it did not include any
initials. Also, one name on this list also appeared on a sign-in sheet without signed initials.

Computers Leased with Title I, Part A Funds (included in the draft report as Enclosure 2, Table
B, item 2, third bullet, for $879,426)
Auditee Comments. MDE and Detroit disagreed that Detroit purchased the computers and stated
that they were leased. MDE and Detroit also stated that each school’s Receipt of Equipment
Form documents that the leased computers were received by Detroit schools, and therefore,
Detroit adequately documented this expense.

OIG Response. MDE and Detroit provided (1) documentation of a cancelled purchase order and
a new purchase order for the leased computers, (2) the invoice, and (3) Receipt of Equipment
Forms for 4 schools (Academy of the Americas, Bennett, Cleveland, and George Washington
Carver). The only new documentation provided was the Receipt of Equipment Forms. We
reviewed the Receipt of Equipment Forms for the 4 schools to determine if they matched the
shipping records from the vendor. The serial numbers for computers provided for two schools
(Academy of the Americas and Bennett) did not match. Only 3 of 22 computer serial numbers
for Cleveland matched. However, because we were unable to view any of the computers listed
on the shipping report from the vendor during our visit to Cleveland, we did not accept this
documentation. Ten of 11 serial numbers matched for George Washington Carver. Because the
Principal signed this form documenting that these 10 computers were at the school as of October
Final Report
ED-OIG/A05H0010                                                                       Page 37 of 67

29, 2007, we accepted this documentation for the 10 computers. Therefore, $2,998 of the
$879,426 is now adequately documented and $876,428 of the $879,426 remains inadequately
documented. We modified this enclosure to reflect these updated amounts.

We modified this finding to state that Detroit leased the computers. Regardless of whether
Detroit purchased or leased the computers, it should be able to account for the computers that
were shipped to each school. Detroit has not demonstrated schools received computers leased
with Title I, Part A funds.

Title I, Part A Funds Expended for Consulting Services (included in the draft report as Enclosure
2, Table B, item 2, seventh bullet, for $1,232,620)
Auditee Comments. MDE and Detroit stated they provided documentation that clearly
demonstrates the $1,232,620 benefited the Title I, Part A program and stated there is no evidence
that Detroit prepaid invoices. MDE and Detroit also stated they provided supplementary
documents that further demonstrate the vendor provided services to Detroit that benefited the
Title I, Part A program, including the Algebraic Thinking Report for Fourth Quarter, 2005-2006;
an example of the schedule for a professional development Algebraic Thinking Project session; a
chart of the distribution of assessment used for each Skill Builder Assessment; and student
textbook distribution for school year 2005-2006. In addition, it provided a number of sign-in
sheets for training sessions conducted by the vendor for 6th and 8th grade teachers for the
following dates: August 1-5, 2005; August 8-12, 2005; July 24-28, 2006; and July 31-August 4,
2006. MDE and Detroit also stated that because this documentation describes the services
provided, the goods that were delivered, and confirms the dates that training sessions occurred, it
demonstrates that Detroit’s Title I, Part A program received a benefit from this expenditure.

OIG Response. The documentation provided clearly indicates that Detroit paid this invoice
before it would have received most of these services. The invoice was dated September 22,
2005, and Detroit paid the invoice on November 17, 2005. The invoice was for the period
September 1, 2005, through August 31, 2006. The Algebraic Thinking Report for Fourth
Quarter, 2005-2006 includes an undated and unsigned report from the vendor that gives short
summaries of conclusions for many schools, but provides no evidence of if or when required
visitations or consultations sessions were made to these schools. While the invoice itemizes a
total of 448 school visits (8 each to 56 schools), the documentation states that the vendor made at
least 1,386 school visits (14 each to 99 schools). We have no evidence of when this report was
written or by whom. The large discrepancy in the number of schools served and the total number
of school visits and the lack of dates or signatures of any Detroit or vendor official discredits the
entire vendor report. The example of the schedule for a professional development Algebraic
Thinking Project session did not identify the year the session took place. Therefore, we cannot
determine if it took place during the period covered by the invoice, and we cannot accept it as
support. The chart of the distribution of assessment used for each Skill Builder Assessment
provides no evidence of consulting days or visitation to schools, so we cannot accept it. The
student textbook distribution for school year 2005-2006 is too vague to accept as support because
it does not identify the specific books that would have been provided or list the cost per book. It
also does not indicate that any items were actually distributed to schools and has no signatures or
dates. The sign-in sheets provided for August 1-5, 2005, and August 8-12, 2005, are not relevant
because they did not relate to the period covered by the invoice. The sign-in sheets provided for
July 24-28, 2006, and July 31-August 4, 2006, are relevant to the period covered by the invoice
and adequately document 10 consulting days provided by the vendor. For this expenditure,
Final Report
ED-OIG/A05H0010                                                                   Page 38 of 67

$15,000 is adequately documented. Other than documentation for 10 consulting days, Detroit
provided none of the specific after-the-fact documentation we requested to demonstrate it
received any of the items on the invoice. Therefore, $1,217,620 of the $1,232,620 remains
inadequately documented. We modified this enclosure to reflect this updated amount.

Title I, Part A Funds Expended for Math and Reading Testing (included in the draft report as
Enclosure 2, Table B, item 2, second bullet, for $1,885,374)
Auditee Comments. MDE and Detroit provided contracts and contract modifications with the
vendor for 2002-2007. MDE and Detroit referred to specific portions of the contract provided
and stated that this documentation covers a number of different goods and services provided to
Detroit and supports these expenditures for $1,885,374.

OIG Response. The contract MDE and Detroit provided demonstrated benefit to Title I, Part A
schools. Therefore, we reclassified these expenditures totaling $1,885,374 as adequately
documented in this enclosure.
Final Report
ED-OIG/A05H0010                                                                                     Page 39 of 67


TABLE C – Schedule of Unallowable and Inadequately Documented Personnel Cost
          Duplication

                                                                                            Duplicated with
                                       Unduplicated        Duplicated          Total        Finding Number
     PERSONNEL
     TRANSACTIONS
     Unallowable – Finding 1A                 $571,025                $0       $571,025
     Unallowable – Finding 1B                 $203,000                $0       $203,000
     Unallowable – Finding 1D                  $65,962            $7,329        $73,292 1B
     Total Unallowable Costs21                $839,988            $7,329       $847,317

     Inadequately Documented –
     Finding 2A                             $8,042,577        $1,077,363     $9,119,940 2E22
     Inadequately Documented –
     Finding 2B                           $12,268,402           $711,358 $12,979,760 1A, 1B, and 1D23
     Inadequately Documented –
     Finding 2C                                 $3,252                $22         $3,274 1B
     Inadequately Documented –
     Finding 2E                             $4,088,095                 $0    $4,088,095
     Total Inadequately
     Documented Costs                     $24,402,325         $1,788,743 $26,191,069
     Total Unallowable and
     Inadequately Documented
     Costs                                $25,242,313         $1,796,072 $27,038,385

     PERSONNEL ADJUSTING
     JOURNAL ENTRIES
     Unallowable – Finding 1C                 $173,082                 $0      $173,082
     Unallowable – Finding 1E                  $12,492                 $0       $12,492
     Total Unallowable Costs
                                              $185,574                 $0      $185,574

     Inadequately Documented –
     Finding 2D                           $23,144,492           $173,082 $23,317,574 1C
     Total Unallowable and
     Inadequately Documented
     Costs                                $23,330,065           $173,082 $23,503,147

Finding 1A = Excessive Employee Insurance Benefits, page 6.
Finding 1B = Excessive Title I Office Employee Compensation, page 6.


21
   Some totals in this table do not add to the exact dollar because of rounding differences. All amounts are rounded
to the nearest dollar.
22
   We are 90 percent confident that the projected duplicated inadequately documented employee insurance benefits
are $1,014,467, plus or minus $181,372 (17.88 percent). Including indirect costs of $62,897, the duplicated amount
is a projected $1,077,363.
23
   Cost Duplication = $442,396 with Finding 1A only, $195,671 with Finding 1B only, $65,962 with Finding 1D
only, and $7,329 with both Findings 1B and 1D.
Final Report
ED-OIG/A05H0010                                                                   Page 40 of 67

Finding 1C = Excessive Targeted Assistance Teacher Compensation, page 7.
Finding 1D = Disciplinary Administrative Leave Compensation, page 7.
Finding 1E = Duplicate Compensation Charge, page 8.
Finding 2A = Inadequate Time and Effort Certifications, page 11.
Finding 2B = Inadequate Personal Activity Reports for Non-Workshop Duties, page 11.
Finding 2C = Inadequate Personal Activity Reports for Workshop Duties, page 11.
Finding 2D = Inadequate Time and Effort Certifications or Personal Activity Reports for
Compensation Charges in Adjusting Journal Entries, page 12.
Finding 2E = Inadequately Documented Employee Insurance Benefits, Page 13.
Final Report
ED-OIG/A05H0010                                                               Page 41 of 67




                      Enclosure 3: Auditee’s Comments
On March 13, 2008, MDE and Detroit provided comments to the draft report and 17 exhibits.
On March 28, 2008, MDE and Detroit provided supplemental comments to the draft report and
an additional 7 exhibits. We documented the comments and the supplemental comments in this
enclosure. The exhibits will be made available upon request.
    Final Report
    ED-OIG/A05H0010                                                                         Page 42 of 67


                                          STATE OF MICHIGAN
                                     DEPARTMENT OF EDUCATION
                                               LANSING
                                                                                            MICHAEL P. FLANAGAN
JENNIFER M. GRANHOLM                                                                          SUPERINTENDENT OF
      GOVERNOR                                                                                PUBLIC I NSTRUCTION
                                              March 13, 2008


    Mr. Gary Whitman
    Regional Inspector General for Audit
    U.S. Department of Education
    Office of Inspector General
    500 West Madison Street
    Suite 1414
    Chicago, IL 60661

    RE:   The School District of the City of Detroit’s Use of Title I, Part A Funds Under the
          No Child Left Behind Act of 2001; Office of Inspector General Draft Audit Report
          (Control Number ED-OIG/A05H0010)

    Dear Mr. Whitman:

    Thank you for the opportunity to comment on the above referenced Office of Inspector
    Draft Audit Report. Because that report dealt extensively with Detroit Public Schools’
    (DPS) use of funds under Title I, Part A of the No Child Left Behind Act, we worked
    closely with DPS staff in responding to your proposed findings. I am enclosing a
    detailed response, which was developed collaboratively by the Michigan Department of
    Education (MDE) and DPS. I am also enclosing a number of exhibits referenced in our
    response.

    We find compelling assertions involving the audit’s failure to review all available
    provided documentation, erroneous reliance upon budgeted rather than actual
    expenditures, schoolwide flexibility, issues regarding small sample sizes, and a failure
    to analyze harm to the Federal interest. We are also deeply concerned about the
    educational impact that any financial disallowance would have on this very financially
    distressed school district. We are grateful for your cooperative approach in granting us
    a 5-week extension on our original response due date. Nonetheless, given the
    extensive nature of the findings, as well as significant recent turnover among the DPS
    staff, we know that there is much more relevant material to be analyzed and
    submitted. We request your authorization to make a subsequent supplemental
    response to these findings, particularly those involving documentation regarding goods
    and services received by DPS (primarily addressed in Findings No. 3 and 4).



                                          STATE BOARD OF EDUCATION

                     KATHLEEN N. STRAUS – PRESIDENT · JOHN C. AUSTIN – VICE PRESIDENT
                   CAROLYN L. CURTIN – SECRETARY · MARIANNE YARED MCGUIRE – TREASURER
                          NANCY DANHOF – NASBE DELEGATE · ELIZABETH W. BAUER
                                 REGINALD M. TURNER · CASANDRA E. ULBRICH

                       608 WEST ALLEGAN STREET · P.O. BOX 30008 · LANSING, MICHIGAN 48909
                                      www.michigan.gov/mde · (517) 373-3324
Final Report
ED-OIG/A05H0010                                                         Page 43 of 67

Mr. Gary Whitman
Page 2
March 13, 2008


We strongly request your reconsideration of the audit findings and
recommendations.
If we can provide further information, please contact Michael Radke, Assistant
Director, Office of School Improvement, at 517-373-3921.

Thank you for your consideration in this matter.

Sincerely,

/s/

Michael P. Flanagan
Superintendent of Public Instruction

Enclosure
Final Report
ED-OIG/A05H0010                                                                       Page 44 of 67


                             Michigan Department of Education
                      Response to Draft Audit Report: ED-OIG/A05H0010

                                          Submitted to:
                                       Mr. Gary Whitman
                               Regional Inspector General for Audit
                                  U.S. Department of Education
                                   Office of Inspector General
                                    500 West Madison Street
                                           Suite 1414
                                       Chicago, IL 60661


This is the response of the Michigan Department of Education (“MDE”) to the U.S. Department
of Education’s Office of Inspector General (“OIG”) Draft Audit Report ED-OIG/A05H0010
(“Draft Audit Report”), issued January 9, 2008, entitled The School District of the City of
Detroit’s Use of Title I, Part A Funds Under the No Child Behind Act of 2001. OIG reviewed
Title I, Part A (“Title I-A”) programs operated by the Detroit Public Schools (“DPS”) for fiscal
years 2004-2005 and 2005-2006. OIG erroneously concluded that DPS did not properly
administer Title I-A funds expended over that time period.

MDE and DPS respectfully submit that the audit methodology used was seriously flawed for the
following reasons:

     1) It appears that the audit failed to review the voluminous documentation and accounting
        records supporting the Title I-A expenditures at issue.
     2) The Draft Audit Report erroneously relies in some sections on the amounts budgeted
        rather than the actual expenditures documented after the fact.
     3) The audit failed to take into account any schoolwide flexibility, despite the fact that DPS
        overwhelmingly consists of schoolwide programs.
     4) The Draft Audit Report’s methodology uses extremely small sample sizes to estimate
        larger findings. Although DPS has approximately 14,960 employees, the audit
        consistently sampled a small number of transactions to arrive at its findings for the entire
        school district. Small employee sample sizes for a district with as many employees as
        DPS possesses are not statistically significant.
     5) The audit failed to analyze harm to the Federal interest, as required, in making findings
        and failed to properly consider valid after-the-fact documentation.

MDE’s response below, based on each Draft Audit Report finding, addresses the overarching
flaws in audit methodology, the inaccuracy of each of the rationales supplied for the finding, and
supporting documentation for DPS’s expenditures.

I.      Finding No. 1 – Personnel Costs Charged to Title I, Part A
Final Report
ED-OIG/A05H0010                                                                          Page 45 of 67

Head Start Program Compensation

OIG found that DPS charged salaries, benefits, and related indirect costs to its Title I-A program
for Head Start program teachers and assistants through ten adjusting journal entries in the
amount of $5,180,663 for school year 2005-2006. OIG stated that DPS did not identify the
employees whose compensation was transferred to Title I-A and did not provide personnel
activity reports for these employees to certify that they worked on Title I-A program activities.
OIG cited OMB Circular A-87, Attachment A, Paragraph C.3.c, which does not allow costs
allocable to a particular Federal award or cost objective to be charged to other Federal awards to
overcome fund deficiencies.

In order to recover funds, there must be an analysis reflecting the value of the program services
actually obtained in a determination of harm to the Federal interest. 20 U.S.C. 1234a(a)(2). The
U.S. Department of Education (“USDE”) may require recipients to return only an amount that is
proportional to the extent of the harm its violation caused to an identifiable Federal interest
associated with the program. 34 C.F.R. § 81.32(a)(1). MDE and DPS acknowledge that the
accounting procedures could have been clearer. However, these DPS teachers served students
who were Title I-eligible, in an educational program that is an allowable Title I program. Under
the Elementary and Secondary Education Act (ESEA) Sec. 1115(b)(2)(B), a child who, at any
time in the preceding two years participated in a Head Start program, is eligible for Title I-A
targeted assistance services. For students attending schoolwide programs, ESEA Section
1114(a)(2) does not require schoolwide programs to identify children as Title I-A eligible or to
ensure that the services provided to children are supplementary. Therefore, all DPS Head Start
students for school year 2005-2006 were also eligible to received Title I-A services.

DPS has provided a Head Start program description, a calendar describing program activities, a
list of DPS Head Start schools, a Head Start program student application, and a roster of all Head
Start students who participated in the program.1 DPS’s Head Start program description states the
following:

           To meet the identified need to provide full day service for children enrolled in Head Start,
           Title I funds have been allocated to compliment and extend the program service day for
           children eligible for both Title I and Head Start. The Title I funds support a portion of
           the teacher and school service assistant salaries and fringe benefits to all for the extended
           daily schedule and educational services for the children most at risk of not meeting the
           State’s challenging student achievement standards. Head Start funds provide other
           salaries, fringes, and services. (Emphasis added.)

DPS ensured that all of its students met the eligibility criteria for Head Start, which also qualified
them for Title I-A services under ESEA Sec. 1115(b)(2)(B). DPS’s documentation supports this
fact. DPS has provided a Head Start student application.2 The application contains an
“Enrollment Criteria Point System” for the purpose of identifying eligible Head Start students.
The point system takes into account factors such as family income, nutrition, age, and other
indicators. DPS also provided Head Start class lists for all Head Start students in each school
operating a Head Start program. These lists demonstrate that each student is eligible for Head

1
    See Exhibit 1.
2
    See Id.
Final Report
ED-OIG/A05H0010                                                                                 Page 46 of 67

Start based upon accruing the requisite number of points under the Enrollment Criteria Point
System. The lists ensure that DPS’s schools that operate Head Start programs only serve eligible
students, as all DPS students participating in Head Start are eligible for Title I-A. Therefore, the
DPS teachers who taught Head Start students were also instructing Title I-eligible students in a
Title I-A program. Because these DPS teachers were serving Title I-eligible students, there is no
harm to the Federal interest in paying them from Title I-A funds.

Employee Insurance Benefits

OIG found that, based on its projection, DPS charged excessive insurance benefits to Title I-A in
the amount of $1,143,944 for the 2005-2006 school year. OIG based this projection on a sample
of 30 selected employees, where it found that, in 29 transactions, Title I-A was overcharged by
$2,601. The State respectfully submits that OIG miscalculated the amounts DPS charged to its
Title I-A program. The amounts OIG cited were based upon beginning of the year estimates by
Ceridian, a private contractor used by DPS to assist with its payroll accounting. Ceridian stated
that it arrived at an annual amount of insurance benefits charged to DPS based upon benefits
rates calculated in June, before the charges actually occurred.3 Therefore, OIG’s finding was not
based upon actual insurance benefit amounts charged to the Title I-A program, but on
projections by Ceridian as to insurance benefit amounts DPS would charge based on prior year
estimates.

Reporting budget estimates rather than actual expenditures violates Federal cost principles.
Under OMB Circular A-87, Paragraph 8.h.(5)(e), “Budget estimates or other distribution
percentages determined before the services are performed do not qualify as support for charges
to Federal awards.” OIG has issued findings against grant recipients for using budget estimates.
For instance, OIG issued a finding against a subgrantee for charging “personnel costs that were
based on budgeted rather than actual school expenditures.”4 OIG further stated that because the
charge was “based on budgeted rather than actual costs, there is no assurance that the amount
was, in fact, used for allowable personnel costs.”5 In another audit, OIG cited a subgrantee for
failure to track expenditures, stating that:

        [Officials] prepared the budget on a per-school basis, but they did not account for Title I
        expenditures for each school. Without determining how much each school actually
        received, we could not determine if [subgrantee] demonstrated that its schoolwide
        program in each school reasonably addressed the intent of the program, particularly as it
        related to the most disadvantaged students.6

Ceridian acknowledges that the amount that DPS’s account is charged can change up to twice
per year, as follows:


3
  See Exhibit 2, email correspondence between [employee name deleted], a Ceridian employee, and [employee name
deleted], Executive Director of the Chief Financial Officer, Detroit Public Schools.
4
  Office of Inspector General Final Audit Report, dated December 6, 2006, entitled KIPP Foundation’s
Administration of the Fund for the Improvement of Education Grants (Control Number ED-OIG/A09G0010).
5
  See Id.
6
  Office of Inspector General Final Audit Report, dated April 10, 2007, entitled Hempstead Union Free School
District’s (Hempstead) Elementary and Secondary Education Act of 1965, as amended (ESEA),6 Title I, Part A (Title
I) Non-Salary Expenditures (Control Number ED-OIG/A02G0007).
Final Report
ED-OIG/A05H0010                                                                                     Page 47 of 67

         1) [W]hen we [Ceridian] receive the renewal rates from DPS that are effective on 7/1 of
         every year and 2) [W]hen the employee can potentially go through open enrollment and
         change what plan they are in. Both of these scenarios can change [the] employer
         amount.7

As Ceridian indicates, due to changes in insurance rates and employee insurance benefit choices,
it is impossible to accurately predict month-by-month charges to DPS based upon a beginning of
the year estimate.

Ceridian also provided a sample spreadsheet for five DPS employees, which shows both the
beginning-of-the-year estimates by Ceridian and the actual charges to employee insurance
benefits.8 The Ceridian spreadsheet demonstrates that often, due to changes in insurance benefit
rates and employee benefits choices, Ceridian’s estimated insurance charges are not
representative of actual charges to employee insurance benefits.9

The amounts Ceridian provided to OIG were estimates, not DPS actual charges for employee
insurance benefits. Because OIG only examined Ceridian estimates, not actual DPS employee
insurance benefits, it did not investigate the proper documentation. Because of this flaw in
OIG’s analysis, DPS should not have to repay any amounts it charged to Title I-A for employee
insurance benefits.

Fringe Benefits Charges for Employee Insurance

OIG found that DPS improperly charged employee insurance benefits to Title I-A in the amount
of $571,025 for employees who worked on Title I-A supplemental activities, including
workshops and after-school programs, for the 2005-2006 school year. OIG provided a sample of
5 selected employees where it found improper distribution of Title I-A funds for insurance
benefits.10

Under OMB Circular A-87, Attachment B, Paragraph 8.d.(5), the cost of fringe benefits in the
form of employer contributions must be allocated to Federal awards and all other activities in a
manner consistent with the pattern of benefits attributable to the individuals or group(s) of
employees whose salaries and wages are chargeable to such Federal awards and other activities.
Here, DPS charged Title I-A for funds expended on employee insurance benefits for employees
who worked on both non-Title I-A and Title I-A activities proportionally to the compensation
paid to each employee. For example, [employee name deleted], Employee ID 35912 (one of the
employees identified in Exception Report #5), one of the sampled employees, was paid as
follows for the identified pay periods:




7
  See Exhibit 2.
8
  See Id.
9
   On the Ceridian sample spreadsheet, for each of the five employees listed, there are two columns each for the
following categories: medical, dental and vision benefits. The first column for each category represents the
estimated cost, while the second column represents the actual cost. There are discrepancies for some employees
between Ceridian’s estimated cost and the actual costs expended.
10
   See Exception Report #5.
Final Report
ED-OIG/A05H0010                                                                              Page 48 of 67

                                                 DPS
                                                 General                                           Title I-A
            DPS                                  Fund         Title I-A   Total        Title I-A   % of
Pay End     General     Title I-A    Total       Insurance    Insurance   Insurance    % of        Insurance
Date        Fund Pay    Pay          Gross Pay   Cost         Cost        Cost         Gross Pay   Cost
9/9/05      $2,736.73   $172.50      $2,909.23   $228.57      $14.40      $242.97      5.93%       5.93%

The chart immediately above demonstrates that [employee name deleted] was paid Title I-A
funds for compensation and employee insurance benefits in equal proportion. DPS has provided
similar data, including a spreadsheet and payroll distribution data by employee for the five
sampled employees as evidence that Title I-A funds were expended in equal proportion for
employee compensation and insurance benefits.11 These documents prove that DPS expended its
Title I-A funds in accordance with the Federal cost principles in OMB Circular A-87.

Title I Targeted Assistance Teacher Compensation for Golightly and Beard Schools

OIG found that DPS charged excessive compensation to Title I-A for salaries, benefits, and
indirect costs of teachers who taught ineligible children in Title I-A targeted assistance schools in
the amount of $173,082 for the 2005-2006 school year. OIG provided a sample of five selected
kindergarten teachers from Title I-A targeted assistance schools and determined that they taught
both Title I-A and non-Title I-A students. Specifically, OIG stated that the five sampled DPS
teachers taught ineligible students at Golightly Educational Center (“Golightly”) and Beard
(“Beard”).12

For school year 2005-2006, Golightly had a poverty rate of forty-eight percent and Beard had a
poverty rate of seventy-nine percent.13 The Title I-A schoolwide model is based on the belief
that once poverty reaches a certain threshold in a school, it makes more sense to improve the
whole instructional program than to provide services separately to some students. Under ESEA
Sec. 1114(a)(1), a local educational agency, such as DPS, may operate schoolwide programs for
schools serving an attendance area with forty percent or more of the children from low-income
families. Section 1114(a)(2) does not require schoolwide programs to identify children as
Title I-A eligible or to ensure that the services provided to children are supplementary. Instead,
schoolwide program schools can serve all students using Federal funds. ESEA presumes that a
school eligible to operate as a schoolwide program will operate as a schoolwide program. ESEA
Sec. 6315(a). Title I presumes that unless a school is ineligible or “opts out” of the schoolwide
program, it will operate as a schoolwide program school.

Although the Draft Audit Report treats Golightly and Beard as targeted assistance schools, they
meet the qualifications of schoolwide program schools under Section 1114 and essentially
function as schoolwide programs. As evidence that Golightly and Beard operated similarly to a
schoolwide school, DPS has provided their school plans, which demonstrate that both schools
adhere to a number of the statutory requirements for a schoolwide plan in Section 1114(b).14


11
   See Exhibit 3. On the document entitled “Detroit Public Schools Payroll Distribution Data by Employee,”
expenditures under Project ID 0000000000 are funds drawn from DPS’s General Fund, while expenditures under
Project ID 0000020005 are funds drawn from DPS’s Title I-A fund.
12
   See Exception Report #11.
13
   See Exhibit 4.
14
   See Exhibit 5.
Final Report
ED-OIG/A05H0010                                                                     Page 49 of 67

Golightly’s school plan includes a number of required schoolwide program elements, such as:

   ·   The plan was developed with the input of Golightly’s school staff and a school
       improvement team consisting of parents, community and business members, students,
       staff and administrators. It was developed using the five-phase school improvement
       model developed by DPS to ensure that all school plans are aligned and comply with
       Federal, state, and district requirements. The plan uses data-driven decision-making and
       research-based proven practice strategies in identifying the needs of the school.

   ·   Golightly conducted a needs assessment to identify areas where improvements are
       necessary. The school analyzed the disaggregated Michigan Educational Assessment
       Program (MEAP) data, which showed improvement in reading and math skills among its
       students. Golightly needs to improve the experience level of non-certified and substitute
       teachers in regular positions, address personnel scarcity, and improve the teacher-to-
       student ratio. Through the school’s Performance Improvement System, the school
       aspires to enhance the academic program while developing and expanding a diversified
       curriculum that facilitates the needs of all students.

   ·   The plan identifies students at risk of not meeting student academic achievement
       standards through a set of risk factors, which include collecting data on students
       transferring into Golightly, students in temporary housing, number of suspensions per
       student for the year, and students changing schools in the past year. The school also
       relies upon teacher observations and assessment performance to identify students with
       difficulties. To address these needs, Golightly offers after-school enrichment activities
       and tutoring.

   ·   Golightly has a number of opportunities for parental involvement. The school has a
       leadership team that involves parents within the school’s decision-making process.
       Golightly also has a school committee, which represents all stakeholders, including
       parents, which meets monthly and discusses various strengths and weaknesses and
       focuses on academic student achievement.

Beard’s School Improvement Plan also includes a number of the required elements, such as:

   ·   The plan addresses the process of identifying the needs of low-achieving children through
       a number of different techniques. Teachers identify students with difficulties based on
       classroom observations, student portfolios, progress reports, parent observations, reading
       and mathematics assessments, and daily logs. For students identified as at risk of not
       meeting academic standards, there are additional measures taken, including (1) Bilingual
       staff to interpret for English language learners, (2) Individual Education Plans for all
       Prekindergarten students, (3) multi-level instruction, (4) and small group instruction for
       children with academic challenges.
Final Report
ED-OIG/A05H0010                                                                         Page 50 of 67

       ·   The plan provides for high-quality and ongoing professional development for teachers,
           principals through programs such as “6+1 Writing Traits,” “Hampton Brown Training,”
           and a number of bilingual education and early childhood professional development
           programs. Professional development also occurs through visits to other classrooms for
           cooperative peer observation, progress reports and evaluations, and extended learning
           activities.

       ·   The plan addresses attempts to increase parental involvement through a number of
           activities. Beard involves parents through monthly parent meetings, home activity
           calendars, district parenting classes, a parent group, and parental involvement on school
           improvement and Title I committees. The school has a student/parent/school compact
           with a number of pledges by parents, Beard staff, and students. Also, Beard holds adult
           and community education activities, including English, GED, parenting, literacy, Omni
           arts and education, and Migrant Education programs. In addition, the school conducts
           library classes for parents.

       ·   The plan contains activities to assist preschool children transitioning from early
           childhood programs to local elementary programs, including the following: (1) Pre-
           kindergarten teachers, parents, and students visiting kindergarten classes and meeting
           with teachers to receive an overview of expectations; (2) Preschoolers participate in
           cross-grade activities with kindergarteners; (3) Teachers introduce lessons explaining the
           similarities and differences in the upcoming grade; (4) Kindergartners visit the local
           elementary school; (5) Professional Growth and Development opportunities for teachers
           to attend workshops on bridging the grade levels; (5) Teachers attend collaborative
           learning sessions for pre-kindergarten and 1st grade learning; and (6) Linking curriculum
           expectations with correlations between grade levels.

This documentation demonstrates that these high-poverty schools were functioning as
schoolwide programs. Therefore, they should be treated as schoolwide programs for purposes of
determining whether the expenditures resulted in any harm to the Federal interest. Because
funds in a schoolwide program may be used to benefit all students in a school, the Federal
expenditures in this case would have been allowable had the two schools been treated as
schoolwide program schools. Therefore, there is no identifiable harm to the Federal interest in
this case because Golightly and Beard schools were eligible to operate as schoolwide programs
and essentially functioned as schoolwide schools.

II.        Finding No. 2 – Time and Effort Certifications and Personnel Activity Reports

Time and Effort Certifications for Single Cost Objective Employees

OIG found that, for a number of sampled salary transactions, DPS did not provide adequate time
and effort certifications for single cost objective employees for school year 2005-2006.15 For


15
     See Attachment to Exception Report #7.
Final Report
ED-OIG/A05H0010                                                                               Page 51 of 67

some of the employees sampled, DPS has provided after-the-fact time and effort certifications. 16
These certifications confirm that the employee worked 100% of his or her time on a single cost
objective for the relevant time period and are signed by each employee’s school administrator or
principal.

Under OMB Circular A-87, Attachment B, Paragraph 8.h.(3) states,

        Where employees are expected to work solely on a single Federal award or cost
        objective, charges for their salaries and wages will be supported by periodic certifications
        that the employees worked solely on that program for the period covered by the
        certification. These certifications will be prepared at least semi annually and will be
        signed by the employee or supervisory official having first hand knowledge of the work
        performed by the employee.

All of DPS’s certifications meet these requirements, as each (1) certifies that the employee
worked only on Title I-A activities for the relevant work period, (2) is prepared semi-annually,
and (3) is signed by a supervisor with first-hand knowledge of the employee’s work. For
example, [employee name deleted], a teacher at Drew Middle School, has a certification that
confirms that she only worked on Title I-A activities for July 1, 2005 – November 30, 2005,
which was signed by [employee name deleted], the principal of Drew Middle School. All of the
semi-annual certification provided by DPS similarly meet all of the requirements of OMB
Circular A-87 Attachment B, Paragraph 8.h.(3).

It is well settled that recipients may use after-the-fact documentation to reconstruct the time and
effort they spent on Federal programs. See Application of the New York State Department of
Education, Docket No. 90-70-R (1994) (“This tribunal will also accept the after-the-fact
affidavits executed by supervisors and submitted by NYSED in the case at bar.”); Consolidated
Appeals of the Florida Department of Education, Docket Nos. 29-293-88 & 33-297-88 (1990)
(“The use of later affidavits... is not categorically precluded... This Panel... finds the [affidavits
submitted] to be credible and useful evidence.”); Application of Escambia County Board of
Education, Docket No. 89-9-R (1989) (“The Education Appeal Board (EAB) and the Secretary
of Education have indicated that after-the-fact evidence can be considered to substantiate costs
disallowed in a Final Letter of Determination.”); Appeal of Fort Valley State College, Docket
No. 21(196)85 (1987) (“The EAB has in the past permitted such expenditures if, after the fact,
the grantee can support them with alternative, equivalent, or contemporaneous documentation.”);
Appeal of Government of Guam, Docket No. 30(162)84 (1986) (“The Secretary agrees that
where appropriate, a Panel can permit a recipient to meet its burden by constructing a time
distribution formula based on credible evidence.”); Appeal of Albany State College, Docket No.
41(173)84 (1986) (“[T]he Department of Education... has indicated its satisfaction with certain
after-the-fact affidavits and has revised its demand accordingly.”).

There is no limit on the types of after-the-fact documentation that can be submitted as long as the
evidence is “credible.” Application of Escambia County Board of Education, Docket No. 89-9-R
(1989). See also Appeal of Fort Valley State College, Docket No. 21(196)85 (1987). When

16
  See Exhibit 6. DPS has provided semi-annual certifications for July 1, 2005 to November 30, 2005 for the
following employees: [11 employee names deleted]. DPS has provided semi-annual certifications for December 31,
2005 to May 30, 2006 for the following employees: [26 employee names deleted].
Final Report
ED-OIG/A05H0010                                                                       Page 52 of 67

reviewing affidavits, the U.S. Department of Education’s Office of Administrative Law Judges
(OALJ) typically looks to a variety of factors to determine if they are credible such as whether
they are specific and whether the affiant had personal knowledge of the facts set out in the
affidavit. See, e.g., Appeal of Indiana State Library, Docket No. 19(219)86 (1987). For
example, the OALJ rejected affidavits from a supervisor that did not have actual knowledge of
how the relevant employees spent their time. See Application of the New York State
Department of Education, Docket No. 90-70-R (1994). The OALJ also rejected documentation
that did not specifically relate to the amount of time an employee spent on a particular cost
objective such as travel logs. See, e.g., Application of Escambia County Board of Education,
Docket No. 89-9-R (1989). The OALJ has, however, repeatedly accepted affidavits from
supervisors with first hand knowledge of an employee’s activities, especially when such
affidavits are supported by job descriptions, work evaluations and payroll records supporting the
statements made in the affidavit. See Application of New York State Education Department,
Docket No. 91-81-R (1995); Application of the New York State Department of Education,
Docket No. 90-70-R (1994); Consolidated Appeals of the Florida Department of Education,
Docket Nos. 29-293-88 & 33-297-88 (1990).

DPS’s after-the-fact, semi-annual certifications constitute an accurate, credible representation of
relevant single cost objective employees’ time for a number of reasons. First, because the
sampled DPS employees worked on a sole cost objective, Title I-A, for school year 2005-2006,
there is little risk of confusion regarding work activities. An administrator or principal, without a
significant amount of research, could determine which employees worked on a single cost
objective for relevant time periods. Second, because each of the semi-annual certifications was
signed by an administrator or principal, DPS has demonstrated that its staff is certain that each of
the sampled employees was a single cost objective employee. Because of the credibility of these
certifications, DPS has proven that its Title I-A expenditures for these employees have been
adequately documented.

Personnel Activity Reports for Multiple Cost Objective Employees

OIG found that DPS did not provide adequate personnel activity reports for multiple cost
objective employees whose compensation was charged in part to Title I-A funds for school year
2005-2006. OIG identified $12,979,760 in salaries, benefits, and related indirect costs charged
for multiple cost objective employees without adequate documentation. OIG sampled
five multiple cost objective employees, [five employee names deleted], in making its finding.17
DPS provided after-the-fact documentation of each employee’s activities, including daily lesson
plans, counseling logs, activity sheets, and weekly logs to demonstrate activities performed by
these employees. OIG stated that these lesson plans were not after-the-fact reports of actual time
spent on Title I-A activities.

While DPS did not provide personnel activity reports, it did provide after-the-fact documentation
of the actual activities performed by the sampled DPS employees. As noted above, it is well-
settled that recipients may use after-the-fact documentation to reconstruct the time and effort
they spent on federal programs. Each sampled DPS employee has provided documentation to
demonstrate the activities performed by each employee, as follows:


17
     See Exception Report #6.
Final Report
ED-OIG/A05H0010                                                                      Page 53 of 67

     1) [employee name deleted]

For school year 2005-2006, [employee name deleted] was a guidance counselor at Mark Twain
School & Academy (“Mark Twain”) whose compensation was paid fifty percent from Title I-A
funds and fifty percent from Michigan Section 31a funds. DPS has provided weekly logs of her
activities for the entire 2005-2006 school year, from September 5, 2005 to June 12, 2006.18
Because these activity logs were created contemporaneously to the activities [employee name
deleted] undertook, with her first-hand knowledge, they should be considered an accurate,
credible representation of her time.

For school year 2005-2006, Mark Twain operated a schoolwide program. Therefore, under
ESEA Section 1114(a)(2), in serving students for that school year, Mark Twain staff was not
required to identify children as Title I-A eligible or to ensure that the services provided to
children were supplementary. Instead, Mark Twain staff was allowed to serve all students using
Federal funds. In her capacity as a guidance counselor paid with Title I-A funds, [employee
name deleted] could serve all students within the school. Therefore, in this case, there is no harm
to the federal interest because [employee name deleted]’s activities are allocable to Title I-A
purposes.

     2) [employee name deleted]

For school year 2005-2006, [employee name deleted] was the Project Director for the Head Start
program within DPS’s central office whose compensation was paid twenty percent from Title I-
A funds and eighty percent from Head Start funds. DPS has provided weekly logs of her
activities for the entire 2005-2006 school year, from July 4, 2005 to June 30, 2006.19 Because
these activity logs were created contemporaneously to the activities [employee name deleted]
undertook, with her first-hand knowledge, they should be considered an accurate, credible
representation of her time. [employee name deleted] is paid from both Title I-A and Head Start
funds. The activity logs created by [employee name deleted] denoted which activities were
allocable to Title I-A and Head Start purposes. While OIG stated that the documentation
submitted by DPS did not specify what proportion of each employee’s time was expended on
Title I-A activities, [employee name deleted]’s weekly logs demonstrate that she consistently
worked on Head Start and Title I-A activities every day. Therefore, her salary was properly
charged to those two programs. As a result, in this case, there is no harm to the federal interest
because [employee name deleted]’s activities were allocable to Title I-A purposes.

     3) [employee name deleted]

For school year 2005-2006, [employee name deleted] was a mathematics teacher at Robinson
Middle School (“Robinson”) whose compensation was paid thirty percent from Title I-A funds
and seventy percent from Michigan Section 31a funds. DPS has provided a calculation of her
time distribution and samples of her lesson plans from different points within the 2005-2006
school year.20 As the documentation states, middle school teachers, such as [employee name
deleted], follow the same schedule every day, so these lesson plans are representative of her
activity on a day-to-day basis. Therefore, because [employee name deleted] taught the same six
18
   See Exhibit 7.
19
   See Exhibit 8.
20
   See Exhibit 9.
Final Report
ED-OIG/A05H0010                                                                       Page 54 of 67

block periods noted on the calculation of her time distribution, her Title I-A and Michigan
Section 31a activities were static throughout the school year. [Employee name deleted]’s lesson
plans were created contemporaneously to her activities, with her first-hand knowledge, such that
they should be considered an accurate, credible representation of her time.

For school year 2005-2006, Robinson operated a schoolwide program. Therefore, under ESEA
Section 1114(a)(2), in serving students for that school year, Robinson staff was not required to
identify children as Title I-A eligible or to ensure that the services provided to children were
supplementary. Instead, staff was allowed to serve all students using Federal funds. In her
capacity as a mathematics teacher, paid with Title I-A funds, [employee name deleted] could
serve all students within the school. Therefore, in this case, there is no harm to the federal
interest because [employee name deleted]’s activities are allocable to Title I-A purposes.

       4) [employee name deleted]

For school year 2005-2006, [employee name deleted] was a school service assistant at Clippert
Academy Magnet School (“Clippert”) whose compensation was paid fifty percent from Title I-A
funds and fifty percent from Michigan Section 31a funds. DPS has provided daily logs of her
activities for the entire 2005-2006 school year, from September 12, 2005 to June 15, 2006.21
[Employee name deleted] provided daily information regarding her activities and the students
she served. Because these activity logs were created contemporaneously to the activities
[employee name deleted] undertook, with her first-hand knowledge, they should be considered
an accurate, credible representation of her time.

For school year 2005-2006, Clippert operated a schoolwide program. Therefore, under ESEA
Section 1114(a)(2), in serving students for that school year, Clippert staff was not required to
identify children as Title I-A eligible or to ensure that the services provided to children were
supplementary. Instead, Clippert staff was allowed to serve all students using Federal funds. In
her capacity as a school service assistant, paid with Title I-A funds, [employee name deleted]
could serve all students within the school. Therefore, in this case, there is no harm to the federal
interest because [employee name deleted]’s activities are allocable to Title I-A purposes.

       5) [employee name deleted]

For school year 2005-2006, [employee name deleted] was a mathematics instructional specialist
at Louis Pasteur Elementary School (“Louis Pasteur”) whose compensation was paid fifty
percent from Title I-A funds and fifty percent from Michigan Section 31a funds. DPS has
provided a sample week, January 17-21, 2005, explaining [employee name deleted]’s time
distribution.22 [Employee name deleted] followed the same schedule every day, so these time
distribution records are representative of his activity on a day-to-day basis for the entire school
year. [Employee name deleted]’s records were created contemporaneously to his activities, with
his first-hand knowledge, such that they should be considered an accurate, credible
representation of his time spent.



21
     See Id.
22
     See Exhibit 10.
Final Report
ED-OIG/A05H0010                                                                     Page 55 of 67

For school year 2005-2006, Louis Pasteur operated a schoolwide program. Therefore, under
ESEA Section 1114(a)(2), in serving students for that school year, Louis Pasteur staff was not
required to identify children as Title I-A eligible or to ensure that the services provided to
children were supplementary. Instead, staff was allowed to serve all students using Federal
funds. In his capacity as a mathematics instructional specialist, paid with Title I-A funds,
[employee name deleted] could serve all students within the school. Therefore, in this case, there
is no harm to the federal interest because [employee name deleted]’s activities are allocable to
Title I-A purposes.

III.     Finding No. 3 – Title I, Part A Funds for Non-Personnel Costs

Payments for Reading and Mathematics Testing Software

OIG found that DPS paid for reading and mathematics testing software for non-Title I-A schools,
Bates Academy and Renaissance High School, with Title I-A funds in the amount of $42,943 in
school year 2005-2006. DPS has provided the contract for testing software with Renaissance
Learning, Inc.23 The contract indicates that Bates Academy was not one of the DPS schools that
received services from Renaissance Learning.

DPS has also provided a letter from Renaissance Learning indicating that Renaissance High
School was originally on the contract, but that the software licenses were removed and
transferred to Chadsey High School, effective December 1, 2005.24 DPS also provided an in-
house memorandum addressing this issue with the same explanation.

This documentation demonstrates that DPS did not expend funds for the purchase of software for
non-Title I-A schools. Therefore, DPS should not be required to return $42,943 for this
expenditure.

Harvard Graduate School of Education Professional Program Expenses

OIG found that DPS had transactions unsupported by invoices or receipts, including an expense
for a professional education program at Harvard Graduate School of Education. Specifically,
OIG stated that it received only a purchase order for this expense.25 DPS has provided a detailed
invoice of the expense.26 The invoice, for $37,315, explains the per participant charge, $2,195,
for seventeen total DPS participants. DPS also provided a list of staff who attended the program,
which occurred June 25-30, 2006. These documents demonstrate that DPS has adequately
documented this expense in accordance with the cost principles in OMB Circular A-87.

Payment for Meals with Title I, Part A Funds Related to 3-Day Workshop

OIG found that DPS paid $23,527 for meals at local hotels for Title I-A school events but could
not support the number of meals purchased. In fact, DPS has documentation to support the
number of meals purchased. The Holiday Inn Fairlane-Dearborn quoted DPS a price for a three-

23
   See Exhibit 11.
24
   See Id.
25
   See Attachment to Exception Report #8.
26
   See Exhibit 12.
Final Report
ED-OIG/A05H0010                                                                        Page 56 of 67

day workshop that took place March 9-11, 2006.27 Based on an estimate of the number of Center
for School Leaders staff members, DPS central level staff members, and DPS school personnel
attending the workshops, DPS estimated that it would need 400 breakfast/lunch and dinner meals
for March 9th, 300 breakfast/lunch and dinner meals for March 10th, and 250 breakfast/lunch
meals for March 11th. DPS has also provided agenda for the workshop and contemporaneous
sign-in sheets for staff who attended the workshops. For instance, sign-in sheets demonstrate
that 352 DPS school personnel attended the workshops on March 9, 2006, in addition to
15 Center for School Leaders staff members and 24 DPS central-level staff members. Therefore,
this documentation proves that DPS can support the number of meals purchased and the number
of workshop attendees.

Computers Leased with Title I, Part A Funds

OIG found that DPS paid for computers for which it could it could not provide evidence of
existence or use by Title I-eligible students. Specifically, OIG stated that DPS purchased
1,534 computers and 554 laptops for $979,898, including installation and insurance, and that for
five of the schools receiving computers, the number of computers listed on the vendors’ shipping
report was greater than the number of computers shipped to those schools.

While OIG states that DPS purchased computers, in fact, DPS respectfully submits that it
entered into a lease agreement with Dell, Inc. for 2005-2008, to lease computers. DPS did not
buy computers from Dell; it issued a purchase order to buy computers, which was cancelled.
DPS has provided a number of documents as evidence. In an in-house memorandum, dated
December 21, 2005, [employee name deleted], DPS’s Chief Academic Officer, Division of
Leadership and Educational Accountability, explained the timeline for how DPS entered into a
leasing agreement with Dell28:

           Our office [DPS] was given additional funding to purchase more technology for the
           2005-2006 school year. We decided to use the funds to purchase 533 desktops,
           100 printers and 250 noteboooks. Soon after we issued the purchase order, we learned
           that the Michigan Department of Education would be assessing all eighth graders on the
           newly released Technology Standards and Expectations during this school year… After
           investigating how our office could provide more technology to these schools and further
           our District’s curriculum initiatives, Dell offered a leasing agreement which would allow
           us to proactively provide additional equipment and immediate professional development.

           [DPS entered into a] lease agreement which will provide an additional 1000 desktops,
           300 notebooks, 200 printers and $300,000 to assist our Division with technology-related
           issues that are current obstacles (building wiring, professional development, additional
           equipment, software or however our Division deems necessary). Dell will also insure our
           equipment during this three-year period. After the three years, each school will be
           allowed to purchase each piece of equipment for $1.00.

DPS provided memoranda explaining that purchase order no. 625495, the original purchase order
for 533 desktop computers, was cancelled. DPS also provided internal documentation

27
     See Exhibit 13.
28
     See Exhibit 14.
Final Report
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demonstrating that the purchase order, issued 10/31/2005, was cancelled on 1/6/2006.29 The
lease agreement with Dell, which has also been provided, shows that DPS paid $989,099.23.

Because OIG mischaracterized DPS’s arrangement with Dell as a purchase rather than a lease, it
is unclear to which computers it is referring. For schools receiving leased computers, each has a
“Receipt of Equipment Form,” with model and serial numbers for all computers received.30
These are evidence that DPS has documentation that the leased computers were received by DPS
schools, which were all Title I-eligible schools.31 Therefore, because DPS has demonstrated that
it entered into a lease with Dell and that its schools received the leased computers, it expended its
Title I-A funds properly.

Title I, Part A Funds Expended for Consulting Services

OIG found that DPS misspent Title I-A funds on consulting services to National Training
Network for its Algebraic Thinking Project in the amount of $1,232,620 for school year
2005-2006. Specifically, OIG stated that DPS prepaid invoices, failed to provide after-the-fact
support demonstrating a benefit to the Title I-A program, and failed to provide specific dates or
locations where the services were provided.

DPS has provided a number of documents in response. In an email, [employee name deleted] of
DPS confirms that National Network conducted training sessions on June 27-July 1, 2005,
August 1-5, 2005 and August 8-12, 2005.32 DPS has also provided the Algebraic Thinking
Report for Fourth Quarter, 2005-2006, which details the activities National Training Network
engaged in.33 According to the report, in addition to the on-site visits noted above,

        Monthly classroom visits started on October 17, 2005 and continued throughout the
        school year. A minimum of 14 visits were made to each school this year. The majority
        of coaching time spent in schools consisted of modeling lessons and lesson preparation.

The Algebraic Thinking Report also provides descriptions of services provided at 99 DPS
elementary and middle schools. For each school, the report describes implementation of the
program and the teachers National Training Network served. This document clearly
demonstrates the benefit DPS’s Title I-A program received from National Training Network’s
services.

DPS has also provided National Training Network’s proposal for the Algebraic Thinking Project
and the contract between DPS and National Training Network.34 The Algebraic Thinking
Project proposal details the scope and implementation of the project, as well as its alignment
with successful program standards and the program’s benefits for students and teachers. The
contract contains a payment schedule that specifies that DPS was to pay National Training
Network an initial payment for training, material, expenses and books, followed by payments for

29
   See Id.
30
   See Exhibit 15. Because of the large number of leased computers, DPS has provided Receipt of Equipment Form
from a few of its schools as examples of its process for inventorying its computers.
31
   See Exhibit 4.
32
   See Exhibit 16.
33
   See Id.
34
   See Id.
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ED-OIG/A05H0010                                                                     Page 58 of 67

follow-up training, supervision, and observation every two months until the end of the contract.
There is no provision in the contract stating that DPS was to prepay National Training Network
for its services. There is no evidence that it prepaid invoices. In fact, because DPS has
adequately documented its expenditures for these services, they are allowable under the cost
principles in OMB Circular A-87.

Title I, Part A Funds Expended for Math and Reading Testing

OIG found that DPS misspent Title I-A funds on math and reading testing in the amount of
$1,885,374 for school year 2005-2006. Specifically, OIG stated that DPS “did not provide the
contract or other evidence to explain what schools should have been covered by the invoices and
what the per-student cost should have been.”35 OIG notes that per-student cost ranges from $2.32
to $12.43. This finding relates to goods and services provided by Measured Progress Inc. to
DPS.36 Measured Progress has provided its testing services and products to DPS since 2002.
Therefore, DPS has provided the all of the contracts and contract modifications from
2002-2007.37

OIG questioned the per-student costs paid by DPS to Measured Progress for its services. In fact,
as the contracts demonstrate, Measured Progress provides a number of different goods and
services to DPS at different per-student and per-unit prices. Depending on the year, the contracts
specify between thirty-five and thirty-nine goods and services provided by Measured Progress.
For instance, as noted in the 2005-2006 contract, the per-unit price for a “Consumable Test
Booklet, Grades 1&2” was $1.28, while a “Consumable Large Print Tests, Grades 1&2” costs
$2.40. Because of the different products provided by Measured Progress, there is not a finite
per-student cost for every student or per-unit cost for every item purchased. This documentation
proves that DPS can support the good and services it paid to Measured Progress. Therefore,
because DPS has adequately documented its expenditures for these services, they are allowable
under the cost principles in OMB Circular A-87.

IV.     Finding No. 5 – MDE Monitoring and Oversight of DPS

OIG found that MDE did not adequately monitor DPS’s administration of its Title I-A program,
including the resolution of a DPS internal investigative report that identified unallowable
contracts. OIG recommended that MDE develop procedures to track local educational agency
(LEA) reviews that identify unallowable Title I-A expenditures and internal control deficiencies
and that MDE provide greater oversight of federal grant funds that are distributed to DPS. MDE
respectfully submits that it does have effective existing procedures to identify unallowable Title
I-A expenditures by LEAs. MDE received a copy of the above mentioned DPS internal
investigate report on September 10, 2007. Based on that report and its own evaluation, MDE is
also in the process of strengthening its monitoring and oversight of LEAs.

Currently, the MDE School Auditing Manual contains procedures for reporting unallowable
expenses.38 The manual, under General Audit Issues, Section A, Reports, II. B. 3. Reports on
Findings of Suspected Fraud and or Embezzlement, requires the following:
35
   See Draft Audit Report, p. 24.
36
   See Attachment to Exception Report #8.
37
   See Exhibit 17.
38
   The MDE School Auditing Manual is available at: www.Michigan.gov/mdeaudit.
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ED-OIG/A05H0010                                                                       Page 59 of 67



       During the course of an engagement, the independent CPA should be constantly aware of
       the possibility of fraud and or embezzlement. SAS 54, 82, and 99 should be followed
       where applicable. If the possibility of any fiscal fraud, defalcation, misfeasance,
       nonfeasance, or malfeasance comes to the auditor’s attention, the school should make an
       “oral report” immediately to [employee name and phone number deleted] Director of the
       Michigan Department of Education, Office of Audits. This oral report should be
       promptly followed up by a written report to the Director disclosing the CPA’s findings.
       If the school fails to report, then the CPA is required to report the information to the
       Department…

MDE is also implementing the following measures to strengthen its monitoring and oversight of
LEAs:

1) The MDE School Auditing Manual, General Audit Issues, Section A, Reports, II. B. 3.
Reports on Findings of Suspected Fraud and or Embezzlement, will be revised as follows (the
edits are italicized):

       During the course of an engagement, the independent CPA should be constantly aware of
       the possibility of fraud and or embezzlement. SAS 54, 82, and 99 should be followed
       where applicable. If the possibility of any fiscal fraud, defalcation, misfeasance,
       nonfeasance, or malfeasance comes to the auditor’s attention, the school should make an
       “oral report” immediately to [employee name and phone number deleted] Director of the
       Michigan Department of Education, Office of Audits. This oral report should be
       followed up by a written report to the Director with a copy to the CPA disclosing the
       CPA’s findings within two weeks. If the CPA does not receive a copy of the report to the
       Director within two weeks, then the CPA is required to report the information to the
       Department…

2) MDE will also take the following actions:

   ·   MDE will establish a tracking process to identify alleged fiscal irregularities in a district
       and follow up on them until MDE is satisfied that they have been appropriately dismissed
       or resolved.

   ·   MDE will notify any district of suspected fiscal irregularities that come to the attention of
       MDE independently, giving the district two weeks to conduct an initial investigation and
       report results of the initial investigation. The district will conduct a complete
       investigation and report it to MDE promptly.

   ·   MDE may impose financial penalties consistent with Section 162 of the State School Aid
       Act or 34 CFR Part 80.45 and escalate penalties until MDE receives a copy of the
       internal investigation report.

   ·   MDE will include an article on the proper reporting of suspected fraud, embezzlement or
       other fiscal irregularities in its 2007-2008 accounting and auditing alert.
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     ·   MDE will provide training to the Michigan Association of CPAs, the Michigan School
         Business Officials and other appropriate organizations on this section of the Michigan
         school auditing manual.

     ·   MDE will amend federal fund application assurances to require reporting of suspected
         fiscal irregularities.

     ·   MDE will include in on-site monitoring visits, a question to identify any internal
         investigations that may reveal fiscal irregularities in accordance with the Michigan school
         auditing manual.

V.       Conclusion

In closing, MDE and DPS respectfully disagree in whole with the Draft Audit Report findings
and request that the findings be reconsidered, revised, and that the recommendations for
repayment be withdrawn before the issuance of a final audit report. The serious flaws in audit
methodology led to obvious errors in the Draft Audit Report and bring question to the
management of the audit as a whole, such that the findings and recommendations should be
reviewed and withdrawn.
Final Report
ED-OIG/A05H0010                                                                      Page 61 of 67


                                      STATE OF MICHIGAN
                                 DEPARTMENT OF EDUCATION
                                           LANSING
 JENNIFER M.                                                                    MICHAEL P. FLANAGAN
  GRANHOLM                                                                        SUPERINTENDENT OF
   GOVERNOR                                                                       PUBLIC I NSTRUCTION
                                       March 28, 2008

Mr. Gary Whitman
Regional Inspector General for Audit
U.S. Department of Education
Office of Inspector General
500 West Madison Street
Suite 1414
Chicago, IL 60661

RE:   The School District of the City of Detroit’s Use of Title I, Part A Funds Under
      the No Child Left Behind Act of 2001; Office of Inspector General Draft Audit
      Report (Control Number ED-OIG/A05H0010)

Dear Mr. Whitman:

Thank you for the opportunity to submit supplemental documents and comments
on the above referenced Office of Inspector Draft Audit Report. Because that report
dealt extensively with Detroit Public Schools’ (DPS) use of funds under Title I,
Part A of the No Child Left Behind Act, we worked closely with DPS staff in
responding to your proposed findings. I am enclosing a detailed supplemental
response, which was developed collaboratively by Michigan Department of
Education (MDE) and DPS. I am also enclosing a number of exhibits referenced in
our response.

We are grateful for your cooperative approach in granting us an extension for
further submission of documents. Based upon our initial response to the
Draft Audit Report and this supplemental response, we strongly request your
reconsideration of the audit findings and recommendations.

Thank you for your consideration in this matter.

Sincerely,

/s/

Michael P. Flanagan
Superintendent of Public Instruction
                                   STATE BOARD OF EDUCATION

                 KATHLEEN N. STRAUS – PRESIDENT · JOHN C. AUSTIN – VICE PRESIDENT
               CAROLYN L. CURTIN – SECRETARY · MARIANNE YARED MCGUIRE – TREASURER
                      NANCY DANHOF – NASBE DELEGATE · ELIZABETH W. BAUER
                             REGINALD M. TURNER · CASANDRA E. ULBRICH

                608 WEST ALLEGAN STREET · P.O. BOX 30008 · LANSING, MICHIGAN 48909
                               www.michigan.gov/mde · (517) 373-3324
Final Report
ED-OIG/A05H0010                                                                     Page 62 of 67


                               Michigan Department of Education
                 Supplemental Response to Draft Audit Report: ED-OIG/A05H0010

                                           Submitted to:
                                        Mr. Gary Whitman
                                Regional Inspector General for Audit
                                   U.S. Department of Education
                                    Office of Inspector General
                                     500 West Madison Street
                                            Suite 1414
                                        Chicago, IL 60661


This is the supplemental response of the Michigan Department of Education (“MDE”) to the
U.S. Department of Education’s Office of Inspector General (“OIG”) Draft Audit Report ED-
OIG/A05H0010 (“Draft Audit Report”), issued January 9, 2008, entitled The School District of
the City of Detroit’s Use of Title I, Part A Funds Under the No Child Behind Act of 2001. OIG
reviewed Title I, Part A (“Title I-A”) programs operated by the Detroit Public Schools (“DPS”)
for fiscal years 2004-2005 and 2005-2006. Originally, OIG allowed MDE until March 14, 2008
to respond to the Draft Audit Report. MDE submitted a response on March 14, 2008, in which it
requested additional time from OIG to provide more comments and documentation. OIG has
allowed MDE until March 28, 2008 to provide additional documentation in its response. MDE’s
supplemental response below, based on the Draft Audit Report findings, addresses the
overarching flaws in audit methodology, the inaccuracy of each of the rationales supplied for the
finding, and provides additional supporting documentation for DPS’s expenditures.

I.         Finding No. 1 – Personnel Costs Charged to Title I, Part A

Head Start Program Compensation

OIG found that DPS charged salaries, benefits, and related indirect costs to its Title I-A program
for Head Start program teachers and assistants through ten adjusting journal entries in the
amount of $5,180,663 for school year 2005-2006. OIG stated that DPS did not identify the
employees whose compensation was transferred to Title I-A and did not provide personnel
activity reports for these employees to certify that they worked on Title I-A program activities.
DPS responded and provided documents in its March 14, 2008 response to the Draft Audit.

DPS has provided supplementary documents that further address the time and effort of the
employees paid with Title I-A funds.1 These documents include two signed, semi-annual payroll
certifications, one for July 1, 2005-December 31, 2005 and the other for January 1, 2006-June
30, 2006. The certifications demonstrate that the relevant employees worked 100% of their time
on Title I-A program activities for the entire fiscal year 2005-2006. The documents also fulfill
DPS’s requirement to provide signed, semi-annual certifications for single cost objective
1
    See Exhibit 1.
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employees under OMB Circular A-87, Attachment B, Paragraph 8.h.(3). Because DPS has
adequately documented its salary expenditures, they are allowable under the cost principles in
OMB Circular A-87.

Disciplinary Administrative Leave Compensation

OIG found that DPS charged salary, benefits, and related indirect costs of an employee to its
Title I-A program in the amount of $73,292. That employee was placed on administrative leave
while receiving that amount. OIG stated that this expenditure violated OMB Circular A-87,
Attachment B, Paragraph 8.a.(1), which requires that compensation conform to the established
policy of the governmental unit.

In a sworn affidavit, [employee name deleted], DPS’s Executive Director of Employee
Relations, stated that DPS pays employees based upon their individual employment agreements
and classification, applicable Michigan state law, as well as practices and customs.2 DPS accords
procedural protections to all employees on a district-wide basis under the Teacher Tenure Act,
Public Act No. 4, Public Acts of Michigan, 1937, as amended. The Teacher Tenure Act requires
that a teacher’s salary must continue during suspension, except in cases in which the employee is
suspended or terminated for certain listed offenses or unless the teacher’s classification does not
require paid leave. According to [employee name deleted], DPS consistently applied the
applicable laws, rules, regulations district-wide practices and procedures during the 2005-2006
school year for all employees subject to disciplinary action, also taking into account the
employee’s individual employment agreement and classification. Accordingly, DPS paid the
employee at issue during the time period he was placed on administrative leave.

Under OMB Circular A-87, Paragraph 8.a.(2), compensation for individual employees must be
made in accordance with a governmental unit's laws and rules and meet its merit system or other
requirements required by Federal law, where applicable. In this instance, DPS’s practice
followed Michigan’s state law, as well as the rules established under employees’ employment
agreements and classification. Therefore, DPS’s expenditure was consistent with the applicable
cost principles in OMB Circular A-87 and was allowable.


II.        Finding No. 3 – Title I, Part A Funds for Non-Personnel Costs

Capital Expenditures

OIG found that DPS misspent Title I-A funds on capital expenditures for general purpose
equipment and improvements to buildings, including payments for digital copiers in the amount
of $57,492 and classroom repairs and renovations in the amount of $80,288 for school year
2005-2006 without MDE’s approval. OIG stated that DPS violated OMB Circular A-87,
Attachment B, Paragraph 15.b, which provides that capital expenditures for general purpose
equipment and improvements to buildings which increase their value or useful life are



2
    See Exhibit 2.
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ED-OIG/A05H0010                                                                      Page 64 of 67

unallowable as direct charges, except where approved in advance by the awarding agency (in this
case, MDE).

DPS acknowledges that it did not seek approval from the proper MDE personnel before making
these capital expenditures with Title I-A funds. However, after the fact, DPS provided records of
its capital expenditures ($129,300.00) to MDE’s Field Services Consultant in the Office of
School Improvement, [employee name deleted]. [Employee name deleted] is responsible for
reviewing and approving Consolidated Applications which include these types of capital
expenditures. After reviewing DPS’s documentation regarding these expenditures, [employee
name deleted], in a sworn affidavit, stated that the expenditures, with the exception of
$39,154.00, would have been allowable by MDE.3 Therefore, Title I-A funds expended by DPS
in the amount of $90,146.00 were allowable. Please note that DPS will need additional time to
provide detailed documentation of the expenditure of $39,154.00 to renovate a laboratory, in
order to allow MDE’s field service representative to determine if the expenditures would have
been approved as allowable.

In order to recover funds, there must be an analysis reflecting the value of the program services
actually obtained in a determination of harm to the Federal interest. 20 U.S.C. 1234a(a)(2). The
U.S. Department of Education (“USDE”) may require recipients to return only an amount that is
proportional to the extent of the harm its violation caused to an identifiable Federal interest
associated with the program. 34 C.F.R. § 81.32(a)(1). MDE and DPS acknowledge that the
required pre-approval process for these capital expenditures was not followed. However, DPS
did expend $90,146.00 on allowable Title I-A costs; therefore, there is no harm to the federal
interest for that amount expended and MDE should not be required to repay that amount.

Title I, Part A Funds Expended for Consulting Services

OIG found that DPS misspent Title I-A funds on consulting services to National Training
Network (NTN) for its Algebraic Thinking Project in the amount of $1,232,620 for school year
2005-2006. Specifically, OIG stated that DPS prepaid invoices, failed to provide after-the-fact
support demonstrating a benefit to the Title I-A program, and failed to provide specific dates or
locations where the services were provided. DPS provided documents in its March 14, 2008
response to the Draft Audit Report.

DPS has provided a number of supplementary documents that further demonstrate that NTN
provided services to DPS that benefited the Title I-A program.4 These documents include an
example of the schedule for a professional development Algebraic Thinking Project session, a
chart of the distribution of assessment used for each “Skill Builder Assessment,” and student
textbook distribution for school year 2005-2006. In addition, DPS provided a number of sign-in
sheets for training sessions conducted by NTN for 6th and 8th grade teachers (including some
special education training) for the following dates: August 1-5, 2005, August 8-12, 2005, July
24-28, 2006, and July 31-August 4, 2006.


3
    See Exhibit 3.
4
    See Exhibit 4.
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ED-OIG/A05H0010                                                                      Page 65 of 67

Because this documentation describes the services provided, the goods that were delivered, and
confirms the dates that training sessions occurred, it demonstrates that DPS’s Title I-A program
received a benefit from NTN’s Algebraic Thinking Project. The documents also fulfill DPS’s
requirement to document expenditures adequately. Therefore, because DPS has adequately
documented its expenditures for these services, they are allowable under the cost principles in
OMB Circular A-87.

III.       Finding No. 4 – Title I, Part A Funds for Contract Expenditures

Title I, Part A Funds Expended for Martial Arts/Conflict Resolution Classes

OIG found that DPS paid Title I-A funds to Alkebu-Lan Village (ALV) for martial arts and
conflict resolution training without providing a list of students who participated in the amount of
$155,000.5 DPS has provided a number of documents regarding these services. The documents
include two cancelled checks, totaling $150,000, a program description, a list of all of the
schools that received services, and sign-in sheets for all students who participated in the program
from 2004-2006.6 This documentation demonstrates that DPS’s expenditure for martial arts
services benefited its Title I-A program. Therefore, because DPS has adequately documented its
expenditures for these services, they are allowable under the cost principles in OMB Circular A-
87.

Title I, Part A Funds Expended for Accounting and Financial Services

OIG found that DPS expended Title I-A funds for accounting and financial services with vague
invoices. Specifically, OIG cited DPS for invoices paid for services rendered by EVO
Accounting and Financial Services (EVO) for school year 2004-2005 in the following amounts:
$45,833.33, $6,712.50, $22,912.50, $45,833.33, and $5,400.00.7

DPS has provided documentation to demonstrate that its Title I-A program received a benefit
from EVO.8 OIG found that all of the invoices paid by DPS were vague. DPS has provided the
invoices with weekly client status reports and timesheets. The weekly client reports detail the
following:

       ·   Accomplishments for the time period;
       ·   New project developments;
       ·   EVO observations and recommendations;
       ·   Planned tasks for the subsequent week; and
       ·   Weekly schedule.

The weekly time sheets, by employee, detail the number of hours each EVO employee worked
for the relevant time period. This documentation demonstrates that the work performed by EVO
is documented and benefits DPS’s Title I-A program.
5
  See Attachment to Exception Report #9.
6
  See Exhibits 5, 6.
7
  See Attachment to Exception Report #9.
8
  See Exhibit 7.
Final Report
ED-OIG/A05H0010                                                                     Page 66 of 67


In addition to OIG’s finding that each invoice was vague, OIG provided a specific explanation
for the reason it disallowed DPS’s expenditure. DPS responds to each finding as follows:

   ·   OIG disallowed DPS’s payment of an invoice for $45,833.33, dated January 4, 2005,
       stating that it was dated before the services were provided. In fact, the invoice specified
       that the services were to be provided in January 2005, such that DPS did not prepay the
       invoice. DPS paid the invoice on January 13, 2005 (as demonstrated by the “Distributed”
       stamp on the invoice).
   ·   OIG disallowed DPS’s payment of an invoice for $6,712.50, dated January 3, 2005. DPS
       paid the invoice on January 13, 2005 (as demonstrated by the “Distributed” stamp on the
       invoice). The weekly status report and time sheets for the week ending December 31,
       2004 demonstrate that EVO was not previously paid for services rendered by employees
       [two employee names deleted] for the weeks ending December 17 and 24, 2004. The
       weekly status report and time sheet indicate that EVO was not paid for 83.5 billable
       hours. Therefore, DPS paid this amount to compensate EVO for those billable hours
   ·   OIG disallowed DPS’s payment of an invoice for $22,912.50, dated February 7, 2005.
       DPS paid the invoice on February 10, 2005 (as demonstrated by the “Distributed” stamp
       on the invoice). The weekly status report and time sheets for the weeks ending January 7,
       January 14, January 21, January 28, and February 4, 2005 demonstrate that EVO
       employees [two employee names deleted] provided their consulting services to DPS for
       that time period. OIG stated that “this expenditure is not reasonable because the duties
       are duplicative of the duties of the Director.” DPS respectfully disagrees. DPS’s
       programmatic staff determined that it was necessary and reasonable for EVO to provide
       consulting services on strengthening audit strategies, internal controls, policies and
       procedures. It is within DPS’s local prerogative to determine the most economic and
       efficient manner in carrying out its Title I-A program, including hiring contractors. It is
       improper for USDE to infringe on DPS’s local decision-making.
   ·   OIG disallowed DPS’s payment of an invoice for $45,833.33, dated February 8, 2005,
       stating that it was dated before the services were provided. In fact, the invoice specified
       that the services were to be provided in February 2005, such that DPS did not prepay the
       invoice. DPS paid the invoice on February 10, 2005 (as demonstrated by the
       “Distributed” stamp on the invoice).
   ·   OIG disallowed DPS’s payment of an invoice for $5,400.00, dated February 23, 2005.
       DPS paid the invoice on March 2, 2005 (as demonstrated by the “Distributed” stamp on
       the invoice). The weekly status report and time sheets for the weeks ending February 11
       and February 18, 2005 demonstrate that EVO employees [two employee names deleted]
       provided their consulting services to DPS for that time period. OIG again stated that “this
       expenditure is not reasonable because the duties are duplicative of the duties of the
       Director.” DPS again respectfully disagrees. DPS’s programmatic staff determined that it
Final Report
ED-OIG/A05H0010                                                                    Page 67 of 67

       was necessary and reasonable for EVO to provide consulting services on strengthening
       audit strategies, internal controls, policies and procedures. It is within DPS’s local
       prerogative to determine the most economic and efficient manner in carrying out its Title
       I-A program, including hiring contractors. It is improper for USDE to infringe on DPS’s
       local decision-making.

IV.    Conclusion

In closing, MDE and DPS respectfully disagree in whole with the Draft Audit Report findings
and request that the findings be reconsidered, revised, and that the recommendations for
repayment be withdrawn before the issuance of a final audit report. The serious flaws in audit
methodology led to obvious errors in the Draft Audit Report and bring question to the
management of the audit as a whole, such that the findings and recommendations should be
reviewed and withdrawn.