oversight

Center for State Scholars.

Published by the Department of Education, Office of Inspector General on 2005-06-01.

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

                       UNITED STATES DEPARTMENT OF EDUCATION
                                         OFFICE OF INSPECTOR GENERAL 

                                 1999 BRYAN STREET, HARWOOD CENTER, SUITE 1440 

                                               DALLAS, TEXAS 75201-6817 

                                                  PHONE: (214) 661-9530 

                              AUDIT FAX: (214) 661-9531 INVESTIGATION FAX: (214) 661-9589 


                                                                                                       Control Number
                                                                                                  ED·OIG!A06·FOOOI


June 1,2005


Mr. Ron McMichael, Interim Director
Center for State Scholars
400 West 15 th Street, Suite 408
Austin, Texas, 78701

Dear Mr. McMichael:

This Final Audit Report presents the results of our audit of the State Scholars Initiative Grant
for the period October 1, 2002, through September 30,2004. Our objectives were to determine if
the Center for State Scholars (Center): (1) used grant funds in accordance with the requirements
of the cooperative agreement and Federal regulations, and (2) had the administrative capability to
administer the program according to the cooperative agreement.

We provided a copy of this report to the Center. In its response to our draft report, the Center
generally agreed with both of our findings. We have summarized their comments after the
recommendation sections of the report and have included the response as an Attachment.



                                                 BACKGROUND 


The State Scholars Initiative (Scholars Initiative) Grant is designed to better prepare high school
students academically by encouraging them to take more rigorous courses that reflect the
National Commission on Excellence in Education (NCEE) recommendations. The Scholars
Initiative is managed jointly through a partnership (cooperative agreement) with the Center
located in Austin, Texas and the Department of Education's Office of Vocational and Adult
Education (OVAE). The Scholars Initiative is authorized under the Carl D. Perkins Vocational
and Technical Education Act of 1998, Section 114.

In June 2002, the Texas Business and Education Coalition (TBEC) provided U.S. Department of
Education (Department) officials with a presentation of the Texas Scholars program. The Texas
Scholars program encourages high school students to complete rigorous courses in math, science,
and foreign language. The Texas Scholars program also teaches local Scholars Coalitions how
to fund local programs, which in tum provides mentors to students.



      Our mission is to promote the efficiency, effectiveness, and integrity of the Department's programs and operations
ED-OIG/A06-F0001                                                                         Page 2 of 10


Shortly after the June presentation, TBEC submitted an undated, unsolicited proposal to the
Department to operate the Scholars Initiative on behalf of the Federal government. TBEC’s
proposal was to create a national program using the Texas Scholars program as a model, and
included the creation of a Center for State Scholars to help states systematically create self-
sustaining, successful, localized versions of the Scholars Initiative.

In August 2002, the Department awarded the Center a four-year grant totaling $9.6 million. The grant
funds were to be used for administrative purposes and to provide start-up funds to participating
states for their scholar programs. During our audit period, 12 States received funding through
the Scholars Initiative.

Although TBEC created a separate entity to administer the national initiative, the Center
contracted with TBEC for administrative, and advisory and assistance services. Specifically,
TBEC performed administrative functions at the Center, including, but not limited to, accounting
functions; maintaining records, time and effort sheets, and payroll; filing the required
administrative reports to the Department; and setting up administrative functions for a new
office. TBEC also provided advice and assistance to the Center on a myriad of other areas,
including, but not limited to, the vision, direction and organization of the Center; contractual
relationships with sponsoring organizations; a methodology to collect state-based and national
interim performance measures; an evaluation of the state-based Scholars Initiatives; and Center
operations.

In November 2002, OVAE entered into a cooperative agreement with the Center to oversee and
monitor the project to ensure that the Center complied with applicable regulatory requirements and the
requirements of the cooperative agreement, and to ensure proper accountability for the grant funds by
the Center and by each state participating in the pilot.

The amounts per grant award year, covered by our audit, were—

                           08/28/02—09/30/03          $2,400,000
                           10/01/03—09/30/04          $2,400,000
                               Total                  $4,800,000



                                        AUDIT RESULTS 


The Center did not properly account for and use over $1.09 million of State Scholars Initiative
funds in accordance with applicable Federal regulations and the requirements in the cooperative
agreement with the Department. Additionally, we determined that the Center did not have the
administrative capability to administer the grant during the first two years, and may not have the
administrative capability to continue to administer this grant. Specifically, the Center did not
maintain adequate supporting documentation for grant expenses relating to payroll ($656,819),
fringe benefits ($83,899), contract services ($340,409), travel ($6,418), and general expenses
ED-OIG/A06-F0001                                                                                       Page 3 of 10


($5,881).1 In addition, the Center did not have adequate grant funds to cover the contract
obligations incurred during the first two years of the grant. As a result, the Center was $173,587
short in its ability to cover all of the States’ contracted obligations with grant funds for the period
in question.

FINDING No. 1 – Expenditures Were Not Adequately Documented

The Center did not provide adequate supporting documentation (receipts) for expenditures
totaling $1,093,426 for FYs 2002-2003 and 2003-2004. The categories with the largest amount
of unsupported costs were personnel and fringe benefits, totaling $740,718, and TBEC contractor
charges, totaling $340,409. Other categories that lacked supporting documentation were travel
($6,418), and general expenditures ($5,881). A detailed summary of the unsupported costs, by
fiscal year, is shown in the Attachment at the end of this report.

In addition, the Center was unable to provide adequate support for the expense reports submitted
by the state contractors, which totaled $1,673,262. We visited 3 of the 12 States participating in
the Scholars Initiative (New Mexico, Oklahoma, and Maryland) to review support for the
expense reports they submitted to the Center. Because these three States were able to provide
supporting documentation for most of their expenses, we are not questioning the $1.6 million in
expenditures to the State contractors.

OMB Circular A-122, Cost Principles for Non-Profit Organizations, Attachment A.2. (1998),
provides in part, that—

           To be allowable under an award, costs must meet the following general criteria: . . .
                  (g) Be adequately documented.

Personnel and Fringe Benefits: The Center was unable to provide either approved time-and-
effort sheets or timesheets for personnel employed at the Center. Because the Center did not
have adequate documentation to support the payroll costs, nor written policies and procedures
regarding timekeeping documentation and requiring employees to keep track of their time, we
have considered the entire payroll and associated fringe to be unsupported ($740,718).

OMB Circular A-122 Cost Principles for Non-Profit Organizations Attachment B.7.m. (1998)
addresses the support of salaries and wages and provides in part that–

       (1) Charges to awards for salaries and wages . . .will be based on documented payrolls
           approved by a responsible official(s) of the organization. The distribution of salaries and
           wages to awards must be supported by personnel activity reports . . .
       (2) Reports reflecting the distribution of activity of each employee must be maintained for all
           staff members (professionals and nonprofessionals) whose compensation is charged . . .

TBEC Contract: The Center was unable to provide receipts for 11 transactions totaling
$340,409 ($332,507 for grant award year 2002-2003 and $7,902 for grant award year 2003-
2004). These costs primarily consisted of salary and travel costs. During our audit period, the


1
    General expenses included such things as supplies, indirect costs, equipment, and miscellaneous expenses.
ED-OIG/A06-F0001 	                                                                   Page 4 of 10


Center had two different management contracts with TBEC. The first contract was from January
8, 2003, through September 30, 2003, in the amount of $312,270. Under this contract, the
Center was to pay TBEC for administrative, advisory and assistance services, and reimburse
TBEC for all reasonable travel costs incurred by its staff. The Center paid TBEC $345,250
under this contract.

The second contract was for $450,000 and covered the period October 1, 2003, through
September 30, 2005. Under this contract, the Center was to pay TBEC for administrative,
advisory and managerial services, and reimburse TBEC for travel costs not to exceed $40,000.
During the first year of the second contract, the Center paid TBEC $183,271. By mutual
agreement, the contract between the Center and TBEC was terminated on September 23, 2004.

Travel: The Center was unable to provide receipts for 12 of 20 travel transactions, totaling
$6,418. The unsupported transactions primarily applied to airfare and lodging expenses.

General: The Center was unable to provide receipts for 7 of 70 general expense transactions,
totaling $5,881. These unsupported transactions primarily applied to office rent and credit card
expenses.

State Contracts: The Center was unable to provide receipts for 145 expense reports submitted
by the 12 participating State contractors, totaling $1,673,262. While the Center did not require
the States to submit supporting documentation with the expense reports, it did require them to
maintain this documentation. We visited three States--New Mexico, Oklahoma, and Maryland--
and found that they had support for most of the expenses the Center paid them. We considered
the amount not supported to be immaterial.

We determined that the unsupported costs above occurred because the Center did not have
proper policies and procedures in place to require approval for expenditures and did not retain
supporting documentation for all expenditures. The lack of internal controls was, in part, due to
the Center operating without an adequate policies and procedures manual. However, during our
review, the Center was in the process of developing a policies and procedures manual to address
the deficiencies found in our audit.

RECOMMENDATIONS

We recommend the Assistant Secretary for OVAE instruct the Center to—

1.1 	   Provide sufficient documentation to support the $1,093,426 in expenditures for the period
        of our review or refund this amount to the Department.

1.2 	   Establish a formal written system of internal controls to ensure costs charged to the
        Scholars Initiative grant are properly accounted for and used in accordance with
        applicable laws and regulations and the cooperative agreement. These controls should
        include policies and procedures to implement approval procedures for all expenditures,
        including payroll and contractors, and retain supporting documentation for all
        expenditures, including expenditures from the participating state subcontractors.
ED-OIG/A06-F0001                                                                             Page 5 of 10


The Center’s Comments

The Center intends to provide adequate documentation, including time and effort reports, payroll
reconciliations, receipts, and other documentation to support the questioned amount. The Center
agreed that time and efforts reports were not approved in writing by a designated authority;
however, the Center proposes to provide existing documentation bearing contemporaneous
approval signature by a Center Board designated authority.

The Center stated they have already made changes and that as of July 24, 2004, the Center
requires contractors to submit time and effort reports on at least a monthly basis. All current
state partners were notified that as of October 1, 2004, all requests for reimbursement must have
copies of receipts and invoices. Additionally, the Center advised that it has implemented
stronger internal controls in response to this report.


OIG’s Response

After reviewing the Center’s response, we did not change our finding or recommendation.


FINDING NO. 2 – Administrative Capability

The Center did not have the administrative capability to administer the grant during award years
2002-2003 and 2003-2004, and may not be able to continue administering the grant in the future.
We determined the Center did not have sufficient grant funds to cover State contracted
obligations for the first two grant award years. We compared the amount of State obligations
remaining to the amount of grant funds available and determined that the Center was $173,587
short.

EDGAR, as of November 26, 2003, 34 C.F.R. § 75.702, Fiscal Control and Fund Accounting
Procedures, states, “A grantee shall use fiscal control and fund accounting procedures that insure
proper disbursement of and accounting for Federal funds.”

OMB Circular A-110,2 states, Federal award recipients shall compare outlays with budget
amounts for each award and have written procedures for determining the reasonableness,
allocability and allowability of costs in accordance with the provisions of the applicable Federal
cost principles and the terms and conditions of the award; and where a funding period is
specified, a recipient may charge to the grant only allowable costs resulting from obligations
incurred during the funding period.




2
 OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements With Institutions of
Higher Education, Hospitals, and Other Non-Profit Organizations, Amended 9/30/99, SUBPART C - Post-Award
Requirements, Financial and Program Management, .21(b)(2,6) and .28.
ED-OIG/A06-F0001                                                                        Page 6 of 10


EDGAR Title 34 C.F.R. § 75.700, Compliance with Statutes, Regulations, and Applications,
provides that “A grantee shall comply with applicable statutes, regulations, and approved
applications, and shall use Federal funds in accordance with those statutes, regulations, and
applications.”

EDGAR Title 34 C.F.R. § 74.21, Standards for Financial Management Systems, provides in
part:
   (b) Recipients’ financial management systems shall provide for the following:
      (1) Accurate, current, and complete disclosure of the financial results of each federally-
sponsored project in accordance with the reporting requirements established in Sec. 74.52…
      (3) Effective control over and accountability for all funds, property, and other assets.
Recipients shall adequately safeguard all assets and assure they are used solely for authorized
purposes.
      (4) Comparison of outlays with budget amounts for each award. Whenever appropriate,
financial information should be related to performance and unit cost data . . .
      (6) Written procedures for determining the reasonableness, allocability, and allowability of
costs in accordance with the provisions of the applicable Federal cost principles and the terms
and conditions of the award.
      (7) Accounting records including cost accounting records that are supported by source
documentation.

In June 2004, OVAE conducted a montioring visit of the Center. This visit revealed several areas of
concern, which resulted in the Department placing the Center on Special Terms and Conditions. These
included, but were not limited to: (1) documentation that accounting policies and procedures in place
must fully comply with all requirements in Parts 74 and 75 of the Education Department’s General
Administrative Regulations (EDGAR); (2) a full accounting, supported by comtemporaneous
documentation, for all expenditures of Federal funds by the Center during the first two years of the
Scholars Initiative; (3) restricting draw downs of FY 2003 funds and FY 2002 carryover funds; and (4)
providing assurance that the Center will repay all Federal funds expended in which it cannot provide
satisfactory accounting and cannot show that the expenditures were allowable and allocable to the
Federal grant.

During our audit period, we noted that the Center had a policy and procedures manual that
lacked policies on procurement, travel, cash management, and documentation of work schedules.
Additionally, payroll costs were not supported with approved time sheets or, in some cases, any
other type of documentation. We identified several internal control weaknesses, such as, having
only one authorized employee sign checks, costs not reconciling to payroll time sheets, time and
effort not approved, working with an incorrect budget amount, and not having an accounting
system in place to account for funds that were obligated but not yet expensed. Also, the Center
uses one bank account for its Federal funds and all of the Center’s Scholars Initiative expenses
are paid from this one account. When the State contracts were obligated, funds were not set
aside for future use by the contractors.

Center officials stated that before March 2003, there was no written cash management policy in
its policy manual. A cash management policy was written but was not included in a new draft of
the policy manual until after OVAE’s June 2004 visit. In July 2004, the Center started putting
some draft policies in place but did not put all new policies in place until October 2004. The
ED-OIG/A06-F0001 	                                                                    Page 7 of 10


Center’s Board of Directors approved the new policies in December 2004. However, the
controls had not been in place long enough for us to evaluate the effectiveness or adequacy of the
Center’s implementation of the new controls.

These serious deficiencies occurred because the Center did not exist prior to the awarding of this
grant and did not have adequate expertise, personnel, or accounting systems in place during the
first two years of the grant. After receiving the grant, the Center contracted with TBEC to
provide many of the administrative services, such as accounting functions, and maintaining
records, time and effort sheets, and payroll. However, TBEC: (1) did not maintain an adequate
accounting system, for the Center, that was consistent with Grant Accounting and Payment
Systems (GAPS) guidelines because expenses were not tracked by GAPS budget categories, (2)
did not maintain adequate documentation for salary and travel expenses incurred under the
TBEC contract, and (3) did not maintain time and effort sheets and payroll data on Center
employees and TBEC employees working on the grant (see Finding No. 1). Additionally, the
Center did not establish accounting procedures to manage its budget, were unable to track line
item spending for each budget category, and overspent in certain budget categories leaving a
deficit in their State contract obligations. As a result, there may not be sufficient funds in the
future to meet the $173,587 shortfall.

RECOMMENDATIONS

We recommend that the Assistant Secretary for OVAE—

2.1 	   Determine whether the Center is administratively capable of administering the State
        Scholars Initiative Grant in the future, and if not, take the appropriate action.

2.2 	   Determine whether the Center is financially solvent and can continue to be financially
        solvent.

2.3 	   Work with the Center to identify how the $173,587 shortfall can be addressed without
        using future grant funds.

2.4 	   Continue to apply the Special Terms and Conditions to the Center.


The Center’s Comments

The Center agreed that it might not have had the administrative capacity to handle the grant in
the beginning. The Center has now hired an executive director that is experienced in managing
government and school district funds, as well as additional staff to administer the program. The
Center believes that the problems noted in the audit were due to the fact the Center was a new
entity that had not completely developed all of its controls and procedures. The Center believes
all funds have been disbursed in a proper manner and can be adequately documented.
Additionally, the Center has developed and will continue to develop the necessary accounting
and administrative controls to properly administer the grant funds.
ED-OIG/A06-F0001 	                                                                    Page 8 of 10


With regards to the shortfall, the Center stated that three of the state contracts contained
language, which erroneously provided for their contracts to automatically renew at the end of the
initial contract period, of which two contacts erroneously did not specify separate contract
amounts for each funding period. The Center acknowledged that the omission of the contract
language unintentionally created a greater obligation of funds, and the Center proposes to amend
the two state partner contracts in question to include the omitted language specifying the contract
period and the funds available for each period.


OIG’s Response

After reviewing the Center’s response, we did not change our finding or recommendations.



                  OBJECTIVES, SCOPE, AND METHODOLOGY 


The objectives of our audit were to determine if the Center: (1) used Federal funds in
accordance with the requirements of the cooperative agreement and Federal regulations, and (2)
has the administrative capability to administer the program according to the cooperative
agreement.

To accomplish our objectives, we—

   • 	 Reviewed the Cooperative Agreements for FY 2002-2003 and FY 2003-2004 between
       the Center and the Department;
   • 	 Reviewed the Center’s general ledger transactions for fiscal years ending September
       2003 and September 2004;
   • 	 Reviewed the Center’s grant application and budget narrative;
   • 	 Reviewed contracts with TBEC and participating States;
   • 	 Reviewed various reports submitted to the Department, including the Center’s Monthly
       and Quarterly Progress Reports and the States’ sustainability reports;
   • 	 Reviewed the A-133 audit report ended September 30, 2003, the internal audit report by
       Eastman Chemical, and a Departmental monitoring visit report;
   • 	 Reviewed the Center’s Board of Directors’ minutes for the meetings held January 2003,
       March 2003, August 2003, January 2004, April 2004, and July 2004;
   • 	 Reviewed written policies and procedures for budgeting, accounting, procurement,
       payroll, and fringe benefits;
   • 	 Judgmentally selected 150 of 1268 transactions from the general ledger and traced them
       to supporting documentation, focusing our selections on large dollar amounts and
       transactions paid to individuals. The transactions reviewed accounted for $984,984 or 27
       percent of the total dollars expended by vendors ($3,666,671). We reviewed 80 of 529
       transactions for FY 2002-03 and 70 of 739 transactions for FY 2003-04;
   • 	 Reviewed 100 percent of TBEC transactions, tracing them to supporting documentation;
ED-OIG/A06-F0001 	                                                                     Page 9 of 10


   • 	 Reviewed all expense reports and accompanying supporting documentation for the three
       States visited, which were judgmentally chosen based on their location and the total
       expenses; and
   • 	 Interviewed various Center officials and State Scholar employees.

To achieve our audit objectives, we relied, in part, on computer-processed general ledger
transactions related to the Scholars Initiative contained in the Center’s accounting system. We
verified the completeness of the data by comparing source records to computer-generated data,
and verified the authenticity by comparing computer-generated data to source documents. Based
on these tests, we concluded that the data were sufficiently reliable to use in meeting our
objectives.

We conducted our fieldwork at the Center for State Scholars Headquarters in Austin, Texas
between November 1, 2004, and December 3, 2004. In addition, we conducted fieldwork at the
Scholars Initiatives in Oklahoma, New Mexico, and Maryland between December 13, 2004, and
January 5, 2005. We discussed the results of our work with Center officials on March 1, 2005.

Our audit was performed in accordance with generally accepted government auditing standards
appropriate to the scope of the audit described above.



                     STATEMENT ON INTERNAL CONTROLS 


As part of our review, we relied on substantive testing of costs charged to the Scholars Initiative
Grant to test internal controls. Our testing disclosed several instances of non-compliance with
Federal regulations, grant and cooperative agreement terms, and cost principles. Our audit
disclosed a significant lack of internal controls, which adversely affected the Center’s ability to
administer the Scholars Initiative Grant. Specifically, we concluded, the Center needs to
improve its internal controls related to the maintenance and retention of payroll, personnel, and
financial records, as well as reviews and approval of transactions charged to the Scholars
Initiative Grant. These weaknesses and their effects are discussed in the AUDIT RESULTS
section of this report.



                             ADMINISTRATIVE MATTERS 


Statements that managerial practices need improvements, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.
ED-OIG/A06-F0001                                                                    Page 10 of 10


If you have additional comments or information that you believe may have bearing on the
resolution of this audit, you should send them directly to the following Department of Education
officials, who will consider them before making final Departmental action on the audit:

               Jack Martin

               Chief Financial Officer 

               Office of the Chief Financial Officer 

               U.S. Department of Education           

               400 Maryland Avenue, SW, Room 4E313 

               Washington, DC 20202 


               Dr. Susan Sclafani 

               Assistant Secretary 

               Office of Vocational and Adult Education 

               U.S. Department of Education 

               400 Maryland Avenue, SW, Room 11139 (PCP) 

               Washington, DC 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 greatly 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/
                                                    Sherri L. Demmel
                                                    Regional Inspector General
                                                      for Audit

Attachments
ED-OIG/A06-F0001                                                              ATTACHMENT
                                                                                Page 1 of 10




           Summary of Unsupported Costs for the State Scholars Initiative 

                            Administered by the Center 

            For the Period August 28, 2002, through September 30, 2004 



           Unsupported
                   Fiscal Year         2002-03       2003-04        Totals
           Personnel                  $320,578.17   $336,241.32    $656,819.49
           Fringe                      $31,131.79    $52,767.51     $83,899.30
           Payroll Total              $351,709.96   $389,008.83    $740,718.79

           Travel                       $2,479.85     $3,937.81      $6,417.66
           TBEC                       $332,506.77     $7,902.13    $340,408.90
           General                      $1,428.47     $4,452.25      $5,880.72
           Non-payroll Total          $336,415.09    $16,292.19    $352,707.28

           Unsupported Expenditures   $688,125.05   $405,301.02   $1,093,426.07
                                        April 11 , 2005



400 West 15th Street. Suite 408         Sherri L. Demmel
Austin. 'fexas 78701                    Regional Inspector General for Audit
877-475-7827                            U.S. Department of Education
fax 512-322-9227                        Office of Inspector General
www.centerfurstatescholars.org          1999 Bryan Street, Suite 2630
info@centerfOrstatescholars.org         Dallas, Texas 75201-6817

BOARD OF DIRECTORS
                                                                                      Ref: ED-OIGIA06-FOOO 1
Brian Ferguson. Chair
Chairman and CEO
                                        Dear Ms. Demmel:
Eastman Chemical Co.

E. Linn Draper. Jr.
                                        Attached you will please fmd the response from the Center for State Scholars to the Draft Audit
Chairman. President and CEO             Report referenced above. It is the Center's belief that we have responded appropriately to each
American Electric Power                 of the fmdings included in the Draft Audit Report. Should you need additional information or
Ray Elliott                             clarification in regard to our response, please feel free to contact me.
Chairman. President, and CEO
Zimmer Holdings, Inc.
                                        We look forward to the issuance of your fmal audit report.
Tom Houlihan
Executive Director
Council of ChiefState School Officers

Rohert A. Mosbacher. Jr.
President and CEO
Moshacher Energy




                                        Ron McMichael
                                        Interim Executive Director
                                                                                              Attachment


Center for State Scholars
Remedies for Findings of
Office of Inspector General
Revised: March 31, 2005

     FINDING                     RECOMMENDATION                RESPONSE AND                   FUTURE
                                                               CURRENT                        CORRECTIVE
                                                               CORRECTIVE ACTION              ACTION
1.   Expenditures were not       We recommend the Assistant    The Center intends to
     adequately Documented.      Secretary for OVAE instruct   provide ad(:quate
                                 the Center to ­               documentation, including
     The Center did not                                        time and effort reports,
     provide adequate            1.1 Provide sufficient        payroll reconciliations,
     supporting                      documentation to          receipts, and other
     documentation (receipts)        support the $1,093,426    documentation to support
     for expenditures totaling       in expenditures for the   the $1,093,426 in question.
     $1,093,426 for FYs              period of our review or
     2002-2003 and 2003­             refund this amount to     Personnel and Fringe           Personnel and
     2004. The categories            the Department.           Benefits:                      Fringe Benefits:
     with the largest amount                                   For the period of Center
     of unsupported costs        1.2 Establish a formal        operations that were           Documentation to
     were personnel and              written system of         audited, payroll               be submitted within
     fringe benefits totaling        internal controls to      reconciliations and time       30 days of the date
     $740,718, and TBEC              ensure costs charged to   and effort reports existed,    of this response.
     contractor charges              the Scholars Initiative   but were not approved in
     totaling $340,409. Other        grant are properly        writing by a designated
     categories that lacked          accounted for and used    authority. The Center
     supporting                      in accordance with        proposes to provide
     documentation were              applicable laws and       existing documentation to
     travel ($6,418) and             regulations and the       support the $740,718 in
     general expenditures            cooperative agreement.    personnel and fringe
     ($5,881);                       These controls should     benefits paid during the
                                     include policies and      audit period in question,
     Personnel and Fringe            procedures to implement   bearing contemporaneous
     Benefits: The Center was        approval procedures for   approval signature by a
     unable to provide either        all expenditures,         CSS board designated
     approved time-and-effort        including payroll and     authority.
     sheets or timesheets for        contractors, and retain
     personnel employed at           supporting                Travel and General: The        Travel and
     the Center. Because the         documentation for all     Center will submit receipts    General:
     Center did not have             expenditures, including   for the unsupported
     adequate documentation          expenditures from the     transactions in question and   In-house
     to support the payroll          participating state       will repay any remaining       documentation to
     costs, nor written              subcontractors.           amount that cannot be          be submitted within
     policies and procedures                                   supported by adequate          30 days of the date
     regarding timekeeping                                     documentation.                 of this response.
     documentation and                                                                        Documentation
     requiring employees to                                                                   ordered from
     keep track of their time,                                                                vendors to be
     we have considered the                                                                   submitted within
     entire payroll and                                                                       90 days of the date
     associated fringe to be                                                                  of this response.
     unsupported
      ($740,718).




                                                  Page I                                          4/8/2005
                                                                   Attachment


Travel: The Center was              TBEC Contract: The             TBEC Contract:
unable to provide                   Center will provide            In-house
receipts for 12 of 20               supporting documentation       documentation to
travel transactions,                and receipts for the amount    be submitted within
totaling $6418. The                 in question.                   30 days of the date
unsupported transactions                                           of this response.
primarily applied to                                               Documentation
airfare and lodging                                                ordered from
expenses.                                                          vendors to be
                                                                   submitted within
General: The Center was                                            90 days of the date
unable to provide                                                  of this response.
receipts for 7 of 70
general expense
transactions, totaling
$5,881. These
unsupported transactions            As of July 24, 2004, the       Time and Effort
primarily applied to                Center requires that           reports available
office rent and credit              contractors submit time and    upon request.
card expenses.                      effort reports on at least a
                                    monthly basis. Employees
TBEC Contract: The                  are required to submit time
Center was unable to                and effort on a bi-weekly
provide receipts for 11             basis in concurrence with
transactions totaling               each payroll period. These
$340,409 ($332,507 for              reports are required to
grand award year 2002­              reflect work block
2003 and $7,902 for                 segments in relation to
grant award year 2003­              grant/award activities and
2004). These costs                  efforts. Designated staff
primarily consisted of              verifies that the report has
salary and travel costs.            been submitted and
                                    approved for the
                                    appropriate payroll period.
                                    This procedure has been
                                    added to the policy manual.

                                    As of July 26, 2004, all       Updated policy
                                    invoices are submitted to a    manual and internal
                                    designated authority for       controls procedures
                                    approval. Additionally, the    available upon
                                    accountant examines every      request.
                                    invoice for proper
                                    approval. All current state
                                    partners were notified on
                                    September 30, 2004, that as
                                    of October 1, 2004, all
                                    requests for reimbursement
                                    must have copies of
                                    receipts and invoices
                                    attached and must bear
                                    proper approval signatures
                                    for payment. This
                                    procedure has been added
                                    to the procurement policy.

                                    Additionally, the Center
                                    has been implementing
                                    stronger internal controls,
                           Page 2                                      4/8/2005
                                                                                                 Attachment


                                                                  including stronger controls
                                                                  over the contracted states,
                                                                  based on the findings and
                                                                  suggested remedies of the
                                                                  audits performed by OV AE
                                                                  and OIG. The policy
                                                                  manual has been updated to
                                                                  reflect these changes and
                                                                  additions and will be
                                                                  presented to the board of
                                                                  directors for approval.
2.   Administrative              We recommend that the            CSS may not have had the       With regard to the
     Capability                  Assistant Secretary for          administrative capacity to     $173,587 shortfall,
                                 OVAE­                            handle the grant in the        three of the state
     The Center did not have                                      beginning, therefore some      contracts contained
     the administrative          2.1 Determine whether the        administration was             language which
     capability to administer        Center is                    contracted with TBEC.          provided for their
     the grant during award          administratively capable     CSS has now hired an           contract to
     years 2002-2003 and             of administering the         executive director that is     automatically
     2003-2004, and may not          State Scholars Initiative    experienced in managing        renew at the end of
     be able to continue             Grant in the future, and     government and school          the initial contract
     administering the grant         if not, take the             district funds as well as      period, of which
     in the future. We               appropriate action.          additional staff to            two contracts
     determined the Center       2.2 Determine whether the        administer the program.        erroneously did not
     did not have sufficient         Center is financially                                       specify separate
     grant funds to cover            solvent and can continue     In general CSS believes        contract amounts
     State contracted                to be financially solvent.   that the problems noted in     for each funding
     obligations for the first                                    the audit were due to the      period. The Center
     two grant award years.      2.3 Work with the Center to      fact that CSS was a new        acknowledges that
     We compared the                 identify how the             entity that had not            the omission of
     amount of State                 $173,587 shortfall can       completely developed all of    contract language
     obligations remaining to        be addressed without         its controls and procedures.   unintentionally
     the amount of grant             using future grant funds.    In the Center's opinion, all   created a greater
     funds available and                                          funds have been disbursed      obligation of funds
     determined that the         2.4 Continue to apply the        in a proper manner and can     for the two state
     Center was $173,587             Special Terms and            be adequately documented.      contracts. The
     short.                          Conditions to the            Additionally, CSS has          Center proposes to
                                     Center.                      developed and will             amend the two
                                                                  continue to develop the        state partner
                                                                  necessary accounting and       contracts in
                                                                  administrative controls to     question to include
                                                                  properly administer the        the omitted
                                                                  grant funds. Furthermore,      language (shown in
                                                                  CSS has an experienced         italics) in
                                                                  executive director and staff   paragraph II,
                                                                  that are capable of            Length of Contract
                                                                  administering the grant        and Conditions of
                                                                  funds in compliance with       Termination: "This
                                                                  the statutes, regulations,     contract shall
                                                                  and applications, and will     commence on
                                                                  work to implement the           [date] and shall
                                                                   recommendations of the         continue for an
                                                                   audit team..                   initial term
                                                                                                  expiring on [date]
                                                                                                  (the "Initial
                                                                                                  Term''). This
                                                                                                  contract shall
                                                                                                  automatically be
                                                                                                  extended [term]
                                                   Page 3                                            4/8/2005
          Attachment



         ("Renewal Term")
         upon expiration of
         the Initial Term."
         And in paragraph
         V, Contract
         Amount: "The total
         amount ofthe
         contract shall be at
         least {amount], not
         to exceed
         $200,000, for the
         Initial Term ofthis
         contract
         agreement.




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