oversight

Adequacy of Fiscal Controls Over the Use of Title I, Part A Funds at Dallas Independent School District.

Published by the Department of Education, Office of Inspector General on 2009-04-14.

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

                                 UNITED STATES DEPARTMENT OF EDUCATION
                                       OFFICE OF INSPECTOR GENERAL

                                                                                                              Audit Services
                                                                                     Chicago/Kansas City/Dallas Audit Region



                                                      April 14, 2009

                                                                                                    Control Number
                                                                                                    ED-OIG/ A06H0011

Mr. Robert Scott
Commissioner of Education
Texas Education Agency
1701 N. Congress Avenue
Austin, TX 78701

Dear Mr. Scott:

This Final Audit Report, entitled Adequacy of Fiscal Controls Over the Use of Title I, Part A
Funds at Dallas Independent School District, presents the results of our audit. The objective of
the audit was to determine whether Dallas Independent School District (DISD) had adequate
fiscal control over the use of Title I, Part A funds. Our audit covered DISD’s system of internal
control as of June 30, 2006, and Title I, Part A funds expended for the period July 1, 2005,
through June 30, 2006 (2005-2006 school year).




                                                      BACKGROUND



Title I, Part A of the Elementary and Secondary Education Act of 1965 (ESEA), as amended by
the No Child Left Behind Act of 2001 (NCLB), provides financial assistance through State
educational agencies (SEAs) to local educational agencies (LEAs) and public schools with high
numbers or high percentages of economically disadvantaged children. This financial assistance
provides additional academic support and learning opportunities to help students meet State
academic content and student academic achievement standards. Funds are allocated based
primarily on census poverty estimates and the cost of education in each State. Title I, Part A
funds may be used by LEAs for schoolwide or targeted assistance programs. Under a
schoolwide program, an LEA may consolidate and use Title I, Part A funds with other Federal,
State, and local funds to upgrade the entire educational program of a school. If a schoolwide
program exercises this authority, it is exempt from many statutory and regulatory provisions of
the programs whose funds and resources it combines as long as it meets the intent and purposes
of those programs. For the period July 1, 2005, through June 30, 2006, DISD operated over 200
schools, 191 of which ran schoolwide programs.



 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
Final Report
ED-OIG/A06H0011                                                                     Page 2 of 26

For the 2005–2006 school year, DISD had an approximate enrollment of 161,000 students.
Demographically, the DISD student body was 62.6 percent Hispanic, 30.8 percent African
American, 5.3 percent Caucasian, 1 percent Asian/Pacific Islander, and 0.3 percent Native
American. In total, 83 percent of the student body was considered economically disadvantaged.
According to its approved Consolidated Application for Federal Funding, DISD was awarded
about $79.3 million in Title I, Part A funds for the 2005-2006 school year. For that period,
DISD’s Title I, Part A expenditures totaled $64,037,684. The Texas Education Agency (TEA)
approved the carryover of approximately $15 million to the subsequent school year.




                                    AUDIT RESULTS



As of June 30, 2006, DISD did not have adequate fiscal control over the use of Title I, Part A
funds during the 2005-2006 school year. As a result, DISD charged over $1.6 million in costs to
the grant (1) without the required prior approval from TEA, (2) for unreasonable and
unnecessary costs, and (3) for purchases of other unallowable items. In addition, DISD
expended over $1.8 million in Title I, Part A funds for which it provided us with either no
documentation or insufficient documentation to demonstrate (1) management approval,
(2) purpose of the purchase or how grant objectives were met, (3) proof of cancellation, or
(4) whether payroll costs were appropriately charged to the Title I, Part A program.
 
The improper use of Title I, Part A funds occurred because, as of June 30, 2006, DISD’s system
of internal control over the expenditure of Title I, Part A funds was inadequate to provide
reasonable assurance that Title I, Part A funds were used only for allowable purposes. DISD’s
practices, controls, guidelines, and processes were not applied consistently throughout the
district. Written policies and procedures and effective employee training were lacking, resulting
in documentation that could not be located or was not presented for audit. Also, the Grants
Department did not effectively monitor grant expenditures during the 2005-2006 school year.
Further, DISD management was either slow in taking, or took no, corrective action in response to
internal control weaknesses cited in prior audits, reviews, and investigative reports made
between August 2003 and November 2006.

We provided a draft of this report to TEA for review and comment on December 23, 2008. We
received TEA’s comments, along with additional documentation, on February 9, 2009. In its
comments, TEA acknowledged the serious weaknesses in DISD’s grants management and
concurred, in part, with the finding and recommendations. As a result, in a letter dated August
26, 2008, TEA designated DISD as a high-risk grantee. TEA stated that it has implemented
several special grant conditions for DISD. TEA required DISD to contract with and pay for a
grants manager. In addition, each month, TEA is requesting from DISD the supporting
documentation for expenditures for one formula grant and one discretionary grant.

After reviewing supplemental supporting documentation provided by DISD in response to the
draft of this report, TEA concluded that $1,713,340 in costs was still unallowable or
inadequately documented. We made changes to our finding and the recommendations in
response to TEA’s comments and to reflect our review of the additional documentation.
Final Report
ED-OIG/A06H0011                                                                                    Page 3 of 26

However, we did not change our overall conclusion that DISD did not have adequate fiscal
control over the use of Title I, Part A funds. We concluded that $3,524,636 was still unallowable
or inadequately documented. TEA’s comments are summarized at the end of the finding.
Except for personally identifiable information protected under the Privacy Act of 1974 (5 U.S.C.
§ 552a), the entire narrative of TEA’s comments is included as an Attachment to this report.
Because of the voluminous nature of the additional documentation TEA provided with its
comments, we have not included them in the Attachment. Copies of the additional
documentation, less any personally identifiable information, are available on request.

FINDING – DISD’s Inadequate Fiscal Controls Resulted in the Misuse of
          Title I, Part A Funds

As of June 30, 2006, DISD did not have adequate fiscal control over the use of Title I, Part A
funds. As a result, during the 2005-2006 school year, DISD did not use Title I, Part A funds in
accordance with all applicable regulations, grant terms, and cost principles.

From a universe of transactions with an absolute value of $87,133,130, we sampled transactions
with an absolute value of $14,846,991.1 Our tests disclosed that over $11.3 million in costs
charged to the Title I, Part A program was allowable and properly documented. However, DISD
charged over $3.5 million in unallowable or inadequately documented costs to the Title I, Part A
program during the 2005–2006 school year.2

Table 1 – Summary of Transaction Testing
                                                                                                TOTAL
                                                                           Inadequately       QUESTIONED
                                   Allowable          Unallowable          Documented           COSTS
                3
    6100-Payroll                       $252,499            $141,943              $45,507          $187,450
    6200-Professional and
                                      $6,495,414                    $0         $1,045,596           $1,045,596
    Contracted Services
    6300-Supplies and
                                      $3,822,683             $209,027             $499,617            $708,644
    Materials
    6400-Other Operating
                                         $14,294                 $260              $95,163              $95,423
    Costs
    6600-Capital Outlay                $592,437            $1,330,299             $21,958           $1,352,257
              SUB-TOTAL             $11,177,327            $1,681,529          $1,707,841           $3,389,370
    Purchase cards (P-cards)           $145,644                $8,156            $127,110             $135,266
                    TOTAL           $11,322,971            $1,689,685          $1,834,951           $3,524,636




1
  The universe ($87,133,130) and sample ($14,846,991) transaction totals represented here are absolute values and
include the P-card universe ($5,432,334) and sample ($280,170) transactions. Table 3 does not include P-cards.
2
  Because our sample selection was a combination of judgmental and random, the results of our samples should not
be projected to the universe of transactions.
3
  The total ($439,948) of Allowable, Unallowable, and Inadequately Documented payroll costs in Table 1 does not
equal the test value presented in Table 3 ($440,073). The difference of $125 was for one state insurance payment
not included in Table 1.
Final Report
ED-OIG/A06H0011                                                                          Page 4 of 26

DISD Used Title I, Part A Funds for Unallowable Purposes

During the 2005-2006 school year, DISD charged over $1.6 million in costs to the Title I, Part A
program in violation of Federal, State, or district requirements. DISD expended funds (1)
without the required prior approval from TEA, (2) for unreasonable and unnecessary costs, and
(3) for purchases of other unallowable items.

Costs Incurred without Prior TEA Approval. DISD charged the Title I, Part A program over
$1.3 million for capital equipment without prior approval from TEA. While each individual item
purchased fell below DISD’s $5,000 capitalization threshold, we considered these sets, as
described below, individual purchases that required prior approval from TEA because the net
invoice price exceeded $5,000. DISD purchased—

      5 sets of 30 laptop computers (including 30-port rolling carts and rolling cases) and 175
       desktop computers (including monitors) totaling $501,109.
      963 hand-held devices (Palm Pilots) and software for each device (to equip all DISD
       kindergarten through fifth grade reading teachers) for $827,563.

Pursuant to 34 C.F.R. § 80.20(a),4 a State is to expend and account for grant funds in accordance
with State laws and procedures for expending and accounting for its own funds. Office of
Management and Budget (OMB) Circular A-87 (Revised 5/10/04), Cost Principles for State,
Local and Indian Tribal Governments, Attachment B, subsection 15b, requires capital
expenditures to be approved in advance by the awarding agency in order to be allowable. OMB
Circular A-87, subsection 15.a, paragraph (2), defines “equipment” as “an article of
nonexpendable, tangible personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of (a) the capitalization level established by
the governmental unit for financial statement purposes, or (b) $5,000.” DISD set its
capitalization level at $5,000. TEA’s schedule of instructions for the Consolidated Application
for Federal Funding states “Capital expenditures for equipment means the net invoice price of
the equipment, including the cost of any modifications, attachments, accessories, or auxiliary
apparatus necessary to make it usable for the purpose for which it was acquired.” (Emphasis
added.)

The laptop computers and rolling cart sets were purchased to provide campuses with mobile
computers that could be moved from classroom to classroom. The purchase of each item
individually would not accomplish the intended purpose. The purchase of the sets of desktop
computers was to outfit seven high school campuses with computer labs. The purchase of
individual computer components would not have served the same purpose at each of the schools.
Additionally, the Palm Pilots, if purchased only at the request of individual teachers, would not
have enabled the district as a whole to electronically capture and record all kindergarten through
fifth grade student reading development. Purchasing individual units would not have
accomplished the intended purpose of the purchase. Therefore, while each of the invoices
included unit prices that were less than $5,000, the total expenditure exceeded $5,000 and should
have been pre-approved by TEA.



4
    Unless otherwise noted, references are to the July 1, 2005, edition of the C.F.R.
Final Report
ED-OIG/A06H0011                                                                                    Page 5 of 26

Unreasonable and Unnecessary Costs. DISD charged the Title I, Part A program over $208,600
for supplies and capital outlay that were either unreasonable for the value added ($112,488) or
unnecessary because the items were never used or were under used ($75,148). We found that—

	 DISD used $112,4885 to purchase Communicator Clearboard Customized Kits. These kits
   (classroom set of 30) are comparable to plastic page protectors into which worksheets can be
   placed and then students can write on the protectors for simultaneous class participation. We
   consider the cost of $90 per Clearboard kit unreasonable because a local vendor offered three
   different brands of similar clear page protectors at an average cost of $6.00 for 30 protectors.
   We concluded that the lower cost protectors were similar given that both are plastic sleeves
   into which paper may be inserted and on which markers can be used to write and erase for
   reuse.
	 Of 1,204 calculators we physically counted at 5 campuses, 344 ($28,976) had not been used,
   and 392 ($44,845) were used only once, during the annual Texas Assessment of Knowledge
   and Skills.
 Of 26 laptop computers we counted at one campus, 12 ($20,988) were unused.6
 Of 156 algebra text books we counted at one campus, 98 ($1,327) were unused.
 DISD made large purchases in the spring to expend remaining Title I, Part A funds and
   stored the items that were not immediately needed. These unused/under-used items suggest
   that they were unnecessary. However, DISD did not have a system in place to provide
   reasonable assurance that schools need the items purchased with Federal funds. According to
   the central receiving inventory, 18,005 units of various supplies and equipment were ordered
   and received into the central receiving warehouse between July 1, 2005, and June 30, 2006.
   As of August 2007, 5,326 units (29.58 percent) remained in central receiving storage.
   Warehouse personnel did not receive shipments, place barcodes on the controllable assets,
   and distribute the orders to the campuses or other departments. Instead, the warehouse was
   used as a long-term storage facility.

According to OMB Circular A-87, Attachment A, subsection C.1.a., to be allowable under
Federal awards, costs must be necessary and reasonable for proper and efficient performance and
administration of Federal awards.

Other Unallowable Costs. DISD used Title I, Part A funds for various payroll, supplies, and
capital outlay without documentation showing how they related to the purpose of the program.
DISD expended $173,377 on additional unallowable costs, including costs for (1) non-Title I,
Part A activities; (2) books and equipment that could not be accounted for; and (3) various other
purchases for non-academic purposes.

1. 	 DISD charged $141,943 for salaries and related fringe benefits paid to non-Title I employees
     and approximately $17,0167 for books disbursed to non-Title I, Part A campuses. According
     to OMB Circular A-87, Attachment A, subsection A.2.a., paragraph (2), “Governmental units
     assume responsibility for administering Federal funds in a manner consistent with underlying
     agreements, program objectives, and the terms and conditions of the Federal Award.”


5
  These costs were charged to Supplies and Materials.

6
  These costs were questioned as unallowable capital purchases without prior TEA approval.

7
  These costs ($17,016) were charged to Supplies and Materials ($16,838) and Capital Outlay ($177).

Final Report
ED-OIG/A06H0011                                                                                      Page 6 of 26

2. 	 DISD charged the Title I, Part A program $16,284 for books and equipment that could not be
     accounted for during our inventory. DISD purchased 165 books ($2,234) that could not be
     accounted for at 1 district high school, 14 calculators ($1,602) that could not be found at
     another high school, and 7 laptop computers ($12,243) and a hand-held device ($205) that
     could not be accounted for at 3 other district campuses.8 Pursuant to 34 C.F.R. § 80.20(a)
     and TEA’s Financial Accounting and Reporting Guide, school districts must be able to
     account for supplies and equipment purchased with Federal funds.
3. 	 DISD used Title I, Part A funds to purchase various supplies and equipment without
     documentation of the academic purpose. DISD used (a) $4,408 to purchase a message
     system, DVD player, carrying cases, nursing supplies, and maintenance supplies;9 (b) $2,486
     for music and art supplies;10 (c) $2,426 for collectibles, memorabilia, and other promotional
     items, such as mugs and T-shirts;11 (d) $745 in P-card transactions to purchase gifts and
     awards; and (e) P-card charges of $518 to purchase sporting and game equipment. Section
     1001 of the ESEA states the purpose of Title I, Part A of the ESEA is to “ensure that all
     children have a fair, equal, and significant opportunity to obtain a high-quality education and
     reach, at a minimum, proficiency on challenging state academic achievement standards and
     state academic assessments.” In addition, OMB Circular A-87, Attachment B, subsection 1.f,
     paragraph (3), prohibits the use of grant funds for costs of promotional items and
     memorabilia, including models, gifts, and souvenirs.

DISD Used Title I, Part A Funds for Costs That Were Inadequately Documented

DISD provided us with either insufficient documentation ($1,683,145) or no documentation
($151,806) to demonstrate that over $1.8 million in grant expenditures for the 2005-2006 school
year were allowable. The supporting documents that DISD provided for review were inadequate
for us to determine (1) management approval, (2) purpose of the purchase or how grant
objectives were met, (3) proof of cancellation, or (4) whether payroll costs were appropriately
charged to the Title I, Part A program.




8
  These costs ($16,284) were charged to Supplies and Materials ($2,234 and $1602) and Capital Outlay ($12,243

and $205). The Capital Outlay costs are also questioned as unallowable capital purchases without prior TEA 

approval.

9
  These costs ($4,408) were charged to Other Operating Costs ($260), Capital Outlay ($1,250), and P-cards 

($2,898).

10
   These costs($2,486) were charged to Supplies and Materials ($9), and P-cards ($2,477).

11
   These costs ($2,426) were charged to Supplies and Materials ($709), Capital Outlay ($200), and P-cards ($1,518).

  Final Report
  ED-OIG/A06H0011                                                                                   Page 7 of 26


Table 2 – Summary of Inadequately Documented Costs
                           Lack of    No Evidence
                         Documented of How Costs No Evidence No Supporting
                         Management    Met Grant       of       Documentation
                          Approval       Goals     Cancellation   Provided                                TOTAL
6100-Payroll                       $0      $45,507           $0            $0                              $45,507
6200-Professional
and Contracted                 $117,312           $928,284                   $0                    $0    $1,045,596
Services
6300-Supplies and
                               $187,754             $19,305          $249,645               $42,913        $499,617
Materials
6400-Other
                                    $920            $90,402                  $0               $3,841          95,163
Operating Costs
6600-Capital
                                  $3,053             $4,705                  $0             $14,200          $21,958
Outlay
      SUB-TOTAL                $309,039         $1,088,203           $249,645               $60,954      $1,707,841
P-card                          $12,540            $23,718                 $0               $90,852       $127,110
           TOTAL               $321,579         $1,111,921           $249,645              $151,806      $1,834,951

  Lack of Documented Management Approval. Management approval was not sufficiently
  documented for $321,579 in purchases charged to Professional and Contracted Services,
  Supplies and Materials, Other Operating Costs, Capital Outlay, and P-cards. We reviewed 188
  transactions totaling $14 million. Contrary to DISD’s policy, 17 purchases were made from
  vendors not on DISD’s approved vendor list and without the required management approval (14)
  or without prior board approval (3). DISD policy requires that purchases of $10,000 or less
  made from vendors not on the approved vendor list have management approval. DISD policy
  further requires prior board approval for purchases of $50,000 or more.

  Inadequate Evidence of How Costs Were in Line with the Program’s Purpose. Documentation
  that DISD provided was insufficient to show either what was purchased or how the costs tied to
  the Title I, Part A program—

  	 DISD expended $504,036 for which we were unable to determine the funding source or for
     which documents we reviewed conflicted with the approved funding source. Specifically, we
     identified $459,540 of contract services transactions for licensed product agreements and
     contracts that were approved for General Operating Funds without justification for payment
     with Title I, Part A funds. Additionally, DISD charged $44,496 of payroll costs to the grant,
     including travel allowances, undefined payroll stipends, and extra duty pay that lacked
     sufficient documentation of the “extra” duties performed, time period in which they were
     performed, or verification that non-Title I, part A expenses were not paid with Title I, Part A
     funds.
  	 Sufficient documentation was not available to show that the Title I, Part A program benefited
     from $579,15612 expended for various contracts for services, travel costs, supplies, books,
     and equipment.
  12
    This amount consists of $468,744 charged to Professional and contracted Services, $ 19,305 charged to Supplies
  and Materials, $86,402 charged to Other Operating Costs, and $4,705 charged to Capital Outlay.
Final Report
ED-OIG/A06H0011                                                                       Page 8 of 26

	 DISD made P-card purchases of $7,957 for food and beverage costs. P-card receipts
   included purchases of crackers, water, juices, and pastries, which generally are allowable
   expenses; however, proper documentation of purpose, attendees, or work product was not
   maintained by DISD. OMB Circular A-87, Attachment A, section C, requires costs, among
   other requirements, to meet the following general criteria to be allowable “. . . (c) be
   authorized or not prohibited under State or local laws or regulations . . . and; (j) be
   adequately documented.” As described in TEA’s Federal Cost Principles Side By Side
   Matrix, food and beverage charges are an allowable cost only if they were for (1) a light
   lunch during an all day meeting or training session, (2) a working lunch during an all day
   meeting or training session, (3) nutritional snacks for students in extended day programs and
   in child care while parents are participating in grant activities, and (4) food necessary to
   conduct nutrition education programs for parents and parent involvement activities where
   refreshments are necessary to encourage participation or attendance by parents.
   Additionally, TEA requires the grantee to maintain an agenda that clearly identifies the
   exercise or activity in which the participants are engaged and should retain a representative
   sample of any work product.
	 Another $15,761 in P-card receipts reviewed were damaged, illegible, or lacked sufficient
   additional supporting documentation to determine the allowability of the items purchased.
	 DISD charged the Title I, Part A program (a) $4,00013 for field trips to entertainment venues
   (Celebration Station, the Farmers Market, and the Dallas Aquarium) without corresponding
   documentation of how they met program objectives; and (b) $1,011 in monthly payroll travel
   allowances without documentation of authorization for or the purpose of the travel. OMB
   Circular A-87, Attachment B, subsection 14 states, “Costs of entertainment, including
   amusement, diversion, and social activities and any costs directly associated with such costs
   are unallowable.” Although Attachment B, subsection 43.a allows travel costs for
   transportation and related items incurred by employees who are in travel status on official
   business of the governmental unit, TEA’s Federal Cost Principles Side By Side Matrix states
   that field trips in general are not allowable grant expenditures. Also, according to DISD’s
   Finance and Accounting Division Manager, travel allowances are not a Title I, Part A
   expense and should not be charged to the grant.

No Proof of Cancellation. Our sample included $249,645 in cancelled supply invoices as
identified by DISD. The documentation presented for review were screen prints of journal
entries marked by hand “Invoice Cancelled” without a copy of the vendor’s cancelled invoice or
other verification of cancellation. We determined that two supply invoices (for over $249,000)
lacked sufficient documentation that the invoices were in fact cancelled and Title I, Part A funds
were repaid.

Employee Certification Policy Not Followed The Department’s Ed-Flex waiver, which was
granted to all Texas LEAs in 2002, eliminates the employee certification requirement of OMB
Circular A-87, Attachment B, subsection 8.h, paragraph (3), as long as the employee’s job
description clearly states the employee is assigned 100 percent to the program or single cost
objective. However, DISD’s written policy continues to require certifications and personnel
activity reports (PAR) for these exempt employees. DISD violated its own written policy in that,
of the 45 employees sampled—


13
     This cost was charged to Other Operating Costs.
Final Report
ED-OIG/A06H0011                                                                                     Page 9 of 26

       Certifications were not provided for 3 employees.
       23 certifications or PARs for 14 employees were signed after the certification period, 16
        of which were signed during our audit fieldwork.14
     	 10 certifications or PARs for 7 employees contained errors, including 1 certification
        signed for the period July 1, 2005, through December 31, 2005, even though the
        employee was not hired until December 12, 2005.

History of Systemic Internal Control Weaknesses

Based on our review and findings of unallowable and inadequately documented costs charged to
the grant during the 2005-2006 school year, we have concluded that DISD’s system of internal
control over the expenditure of Title I, Part A funds as of June 30, 2006, was inadequate to
provide reasonable assurance that Title I, Part A funds were used only for allowable purposes.
DISD’s practices, policies, guidelines, and processes were not applied consistently throughout
the district. Written policies and procedures and effective employee training were lacking,
resulting in documentation that could not be located or otherwise not presented for audit; and the
Grants Department did not effectively monitor grant expenditures during the 2005-2006 school
year.

During interviews of campus and district-level personnel, we found that implementation and
understanding of written policies and procedures varied. While district-level personnel were
able to convey district policy and procedures, campus employees were unsure of those
procedures. When we requested written policies, we were often directed to the DISD website.
The campuses maintained a “Title I Notebook” in which to keep all records pertaining to the
grant, including procedures, copies of personnel certifications, PARs, budget records, purchase
orders, and receipts. However, the procedures usually consisted only of excerpts from Federal
and State regulations and handwritten notes. The written policies and procedures provided by
DISD for review primarily addressed only purchasing requirements, yet grant purchases were not
authorized in a consistent and efficient manner.

Prior audits and monitoring reports have identified these same weaknesses. DISD management
has been either slow in taking, or took no, corrective action in response to internal control
weaknesses cited in prior audits, reviews, and investigative reports.

	 August 2003: The DISD Internal Audit Department issued a report on the Process Review of
   the P-card Program, which found significant areas of internal control weaknesses and
   recommended the P-card program install control points within the system to allow constant
   monitoring of transactions. DISD management issued an updated P-card manual in June
   2005. A subsequent Internal Audit report, dated August 12, 2005, cited additional
   monitoring deficiencies.
	 August 2004: Our final audit report (ED-OIG/A06D0023) on DISD’s administration of the
   Bilingual Education, Systemwide Improvement Grant, reported that DISD demonstrated
   weak management controls and did not properly account for the grant funds in accordance
   with all applicable regulations, grant terms, and cost principles. Based on the audit work, we
   detailed unallowable costs in the amount of $383,318 and inadequately documented costs in

14
  Employee certification exceptions are not included in questioned costs; however, we include them here to
demonstrate an internal control weakness.
Final Report
ED-OIG/A06H0011                                                                      Page 10 of 26

   the amount of $434,978. Because DISD management did not concur with the OIG findings,
   they made only minor changes and provided subsequent supporting documentation for
   inadequately documented costs. On September 25, 2003, the Office of English Language
   Acquisition, Language Enhancement and Academic Achievement for Limited English
   Proficient Students (OELA) discontinued the grant’s final year of funding because of DISD’s
   “Failure to Achieve Substantial Progress.”
	 January 2005: The Department’s Student Achievement and School Accountability team
   stated in its Title I, Part A Monitoring Report of TEA, that principals of some of the
   schoolwide program schools interviewed by the team, including principals in DISD (DISD
   was one of 4 districts cited), were not familiar with the implementation guidelines for
   schoolwide programs and were unable to articulate their knowledge of schoolwide program
   requirements. The Monitoring Report also stated that DISD (one of two LEAs cited) did not
   maintain control of the Title I program for eligible private school students either directly or
   through a contract with a third party.
	 November 2005: The Independent Auditors’ Report for the year ended June 30, 2005, and
   Information required by the Single Audit Act and Generally Accepted Government Auditing
   Standards, disclosed a material weakness in the Title I, Part A program: expenditures made
   using P-cards were not properly approved. This occurred because the District’s policy for
   fiscal year 2005 was limited to the cardholder reviewing and approving his/her own charges.
   DISD revised the P-card manual in June 2005 to require the approving official to review and
   sign off on the P-card bank statements on a monthly basis and to inform the P-card
   Administrator of cardholder status changes. The P-card program was abolished in 2006
   because of uncontrolled card use.
	 November 2006: DISD’s Comprehensive Annual Financial Report (CAFR), published by
   KPMG LLP for the fiscal year ended June 30, 2006, contained eight findings in the areas of
   internal control, unallowable costs, and compliance. KPMG LLP noted certain matters
   involving the internal control over compliance and its operation were considered to be
   reportable conditions. DISD management made corrections to the calculation used for
   Maintenance of Effort certification and increased contact between the Grants Office and the
   Human Resources office to ensure job descriptions clearly state whether an employee is
   assigned 100 percent to a program or single cost objective.

DISD also was the subject of negative news reports regarding misuse of Federal funds through
its P-card program. In response to the negative reports, the district superintendent terminated the
P-card program in July 2006 and created the Office of District Integrity in August 2006. DISD
hired the outside law firm Fish & Richardson P.C. (F&R) to independently analyze and
investigate the structure, management, and supervision of the P-card program, as well as the
expenditures of the district employees who held these P-cards. In May 2007, F&R concluded
that the P-card program was implemented without adequate and regimented supervisory
protocols. There were extensive failures in the supervision of P-card purchases at all levels,
including the P-card holders themselves, their direct supervisors, and the Quality Control Office.
Two former district employees were criminally charged based on the misuse of the district P-
card. One employee pled guilty and the other was convicted at trial.

Because of the issues and weaknesses cited above, we have concerns about DISD’s expenditure
of all Department funds.
Final Report
ED-OIG/A06H0011                                                                     Page 11 of 26

Recommendations

We recommend that the Assistant Secretary for the Office of Elementary and Secondary
Education instruct TEA to require DISD to—

1.1	 Return to the Department $1,689,685 of Title I, Part A funds expended for unallowable
     costs;

1.2	 Provide adequate documentation supporting the allowability of $1,834,951 in costs
     identified herein as inadequately documented or return the inadequately documented,
     unallowable amount to the Department;

1.3	 Return to the Department the cost of all items purchased with Department funds that have
     been in storage for more than one year;

1.4	 Strengthen fiscal controls to include written procedures and training for all personnel
     responsible for the administration of Title I, Part A funds;

1.5	 Review a statistically valid sample of the Title I, Part A program funds not specifically
     tested as part of our audit or the DISD 2005-2006 school year audit performed in
     accordance with OMB Circular A-133 and provide written assurance that the funds were
     used to meet grant objectives. Return to the Department any funds that are not adequately
     documented, reasonable, and allowable; and

1.6	 Review a statistically valid sample of Title I, Part A program funds not specifically tested
     as part of the DISD audits performed in accordance with OMB Circular A-133 received by
     DISD in subsequent fiscal years and provide written assurance that the funds were used to
     meet grant objectives. Return to the Department any funds that are not adequately
     documented, reasonable, and allowable.

TEA Comments and OIG Response

TEA acknowledged the serious weaknesses in DISD’s current grants management and
concurred, in part, with the finding. As a result, in a letter dated August 26, 2008, TEA
designated DISD as a high-risk grantee. TEA stated that it has implemented several special grant
conditions for DISD. TEA required DISD to contract with and pay for a grants manager to
(1) review DISD’s policies, procedures, and practices with regard to expenditures related to
grants and (2) monitor grant expenditures. TEA approved two grant managers based on their
experience, expertise, and credentials. In addition, each month, TEA is requesting from DISD
the supporting documentation for expenditures for one formula grant and one discretionary grant.
The selection of the grant is done by the TEA senior director of the respective division. The
examination of this documentation will allow TEA funding divisions to determine whether DISD
is in compliance with financial management standards and is expending these funds in
accordance with the approved grant applications and OMB Circular A-87.

After reviewing supplemental supporting documentation provided by DISD in response to the
draft of this report, TEA concluded that $467,112 was still unallowable and $1,246,228 was still
Final Report
ED-OIG/A06H0011                                                                       Page 12 of 26

inadequately documented. Below are TEA’s comments to specific issues identified in the draft
audit report.

Cost Incurred without Prior TEA Approval.

TEA Comments. TEA did not concur and stated that, for the 2005-2006 school year, districts
were required only to request approval of capital outlay items costing $5,000 or more per unit in
the Standard Application System (SAS) budget schedules. TEA did not concur with OIG’s
interpretation that “net invoice price” applies to a group of items that, in aggregate, costs $5,000
or more but believes the $5,000 applies to individual items. TEA stated it exercised its authority
pursuant to OMB Circular A-87, Section 15.b, paragraph (4), that permits the awarding agency
to waive the prior approval requirement for equipment of more than $5,000.

OIG Response. Although TEA stated that the $5,000 threshold applies to individual items in a
set and not to the set or groups of items, we did not drop this finding and related
recommendation. We changed our finding by eliminating the items we could not identify as part
of a set. We also clarified why we concluded that the total cost of a group of items should be
considered when determining whether the purchase should be subjected to the prior approval
rules.

Unreasonable and Unnecessary Costs.

TEA Comments. TEA concurred that the amounts questioned were unreasonable and
unnecessary.

Other Unallowable Costs.

TEA Comments. TEA concurred that the following costs were unallowable:

      $142,000 for salaries and related fringe benefits paid to non-Title I employees;
      $17,000 for books disbursed to non-Title I campuses;
      $2,234 and $1,601 for books and calculators that could not be accounted for; and
      Over $10,500 for a message system, DVD player, carrying cases, nursing supplies,
       maintenance supplies, music and art supplies, collectibles, memorabilia, promotional
       items, gifts and awards, and sporting and game equipment.

However, TEA did not concur with the $12,243 for seven laptops and $205 for the one hand held
device that could not be located, stating that these costs were allowable capital purchases that did
not require prior TEA approval.

OIG Response. We did not change our finding or recommendation. TEA did not address the
fact that the seven laptops and one hand held device could not be accounted for during our
inventory. Pursuant to 34 C.F.R. § 80.20(a) and TEA’s Financial Accounting and Reporting
Guide, districts must be able to account for supplies and equipment purchased with Federal
funds.
Final Report
ED-OIG/A06H0011                                                                      Page 13 of 26

Lack of Documented Management Approval:

TEA Comments. TEA did not concur with all instances of undocumented management or board
approval and submitted additional documentation to support its position.

OIG Response. The additional documentation was not presented to us during our audit. Our
draft report identified $1.6 million in purchases that lacked documentation of management or
board approval. After reviewing the additional documentation TEA submitted with its
comments on the draft report, we modified our report to eliminate the amounts we now consider
as having documentation of management or board approval.

Inadequate Evidence of How Costs Were in Line with Program’s Purpose.

TEA Comments. TEA stated that it did not observe the $459,000 for contract services
transactions for a licensed product agreement in the schedules provided by DISD. TEA did
observe $348,000, and, although DISD addressed the OIG comments, TEA did not agree with
DISD that the costs pertained to an allowable activity that furthered the statutory purpose of the
Title I program. In addition, TEA concurred that the $46,000 in payroll costs did not pertain to
allowable activities that furthered the statutory purpose of the Title I program.

OIG Response. We did not change our finding or recommendation. Although TEA addressed
the issue concerning what was purchased, it did not provide additional documentation to show
how the purchased items pertained to an allowable activity that furthered the statutory purpose of
the Title I, Part A program.

No Proof of Cancellation.

TEA Comments. TEA concurred that DISD did not provide sufficient documentation that
demonstrated the applicable invoices were in fact cancelled.

No Three-Way Match.

TEA Comments. TEA concurred that DISD did not provide documentary evidence that it
complied with its policy and procedure requiring the maintenance of a purchase order form,
invoice, and receipt prior to the issuance of payment to the vendor.

OIG Response. While TEA concurred with the questioned costs without evidence of three-way
match, DISD provided additional documentation that we considered acceptable. We changed the
finding and recommendation to reflect our acceptance of this documentation.

Employee Certification Policy Not Followed.

TEA Comments. TEA agreed that DISD did not provide documentary evidence that the payroll
costs charged to the Title I, Part A grant were for work performed by district personnel that
pertained to activities documented in the applicable campus improvement plans and that were
allowable activities for the Title I, Part A grant.
Final Report
ED-OIG/A06H0011                                                                   Page 14 of 26

Recommendations

TEA Comments. After reviewing DISD’s response to the draft report, TEA concluded that
$467,112 was unallowable. Additionally, TEA concluded that $1,246,228 was inadequately
documented. TEA agreed with the questioned amounts and concurred that the purchases made
with Department funds remaining in storage for more than one year were unreasonable and
unnecessary. TEA has implemented several special grant conditions for DISD addressing
internal control.

As a result of findings and questioned costs in the 2005-2006 CAFR, performed in accordance
with OMB Circular A-133 by KPMG LLP, TEA requested DISD to either provide
documentation to reconcile the questioned costs of $1,343,440 or refund the questioned costs to
TEA. DISD provided sufficient documentation to support all but $111,435.92 of the questioned
costs which was refunded back to TEA.

As a result of the findings and questioned cost in the 2006-2007 CAFR, performed in accordance
with OMB Circular A-133 by Deloitte & Touche LLP, TEA requested DISD submit a refund to
TEA for a total of $1,153,814 in questioned costs ($130,430 for the Title I, Part A grant). TEA
is currently reviewing DISD’s 2007-2008 CAFR performed in accordance with OMB Circular
A-133 by Deloitte & Touche LLP. Deloitte & Touche LLP identified approximately
$16,809,518 in questioned costs. If DISD does not provide the necessary documentation to
support these questioned costs, TEA will request these funds be returned to the agency.

OIG Response. While TEA submitted additional (not presented by DISD during our fieldwork)
documentation it claimed supported questioned costs identified in the draft report, some of the
documentation still did not include adequate information to change our original determination.
However, because we accepted some of the additional documentation, we modified
Recommendation 1.1 to request $1,689,685 of unallowable costs to be returned, and we modified
Recommendation 1.2 to reflect $1,834,951 as inadequately documented costs for which
additional documentation should be provided or the costs returned. We did not modify
recommendations 1.3 and 1.4 because the special grant conditions and changes imposed by TEA
have not been reviewed.

TEA requested and received $111,436 in refunded questioned costs from DISD based on the
CAFR covering the 2005-2006 school year. We have modified our recommendation 1.5 to
exclude transactions covered by our audit and KPMG LLP for the 2005-2006 school year. TEA
has requested $130,430 Title I, Part A questioned costs from DISD based on the CAFR covering
the 2006-2007 school year and is reviewing the CAFR covering the 2007-2008 school year. We
have modified our recommendation 1.6 to exclude transactions covered by our audit and Deloitte
& Touche LLP for subsequent school years.
Final Report
ED-OIG/A06H0011                                                                                  Page 15 of 26




                     OBJECTIVE, SCOPE, AND METHODOLOGY



The objective of the audit was to determine whether DISD had adequate fiscal control over the
use of Title I, Part A funds. Our audit covered DISD’s system of internal control as of June 30,
2006, and Title I, Part A funds expended for the period July 1, 2005, through June 30, 2006.

To accomplish our objective, we—

        Reviewed the procedures and practices DISD used to account for and spend Title I, Part
         A funds;
        Examined OMB Circular A-133 Single Audit Reports for the years ended June 30, 2003,
         through June 30, 2006;
        Requested and obtained an electronic copy of the General Ledger Report of Expenditures
         that showed all costs charged to the Title I, Part A program for the 2005 – 2006 school
         year; and
        Requested and reviewed written policies and procedures used in the administration of the
         Title I, Part A program and interviewed 36 employees at the district office and campus
         levels to determine how DISD tracked grant expenditures.

To test whether the costs DISD charged to the Title I, Part A program during the 2005 – 2006
school year were allowable under applicable law, regulations, and cost principles, we selected
samples of transactions. We separated the transactions recorded in the General Ledger Report of
Expenditures by object code15 and judgmentally selected 5 object codes (6100-Payroll, 6200-
Professional and Contracted Services, 6300-Supplies and Materials, 6400-Other Operating Costs,
and 6600-Capital Outlay). We stratified 4 object codes’ (6200, 6300, 6400, and 6600) universes
into four strata: high, medium, low, and negative. For each of these 4 object codes, we reviewed
100 percent of the high strata items and 10 items from each of the remaining 3 strata. For
Payroll (object code 6100), we obtained a list of employees paid from Title I, Part A funds
during the 2005-2006 school year. We stratified the universe into 4 strata (1) Executive and
Administrative staff, (2) one FTE (Full Time Equivalent), (3) 0.9 – 1 FTE, and (4) No FTE
identified. We reviewed 100 percent of the Executive and Administrative employees and
randomly selected 10 employees from each of the remaining 3 strata. We then randomly
selected 2 months, July 2005 and May 2006, of payroll transactions for review. The sample size,
universe size, and total dollar amount of transactions for each object code selected for review are
summarized in Table 3.




15
  DISD groups expenditures into six major object codes or expenditure categories: 6100-Payroll, 6200-Professional
and Contracted Services, 6300-Supplies and Materials, 6400-Other Operating Costs, 6500-Debt Service, and 6600-
Capital Outlay.
Final Report
ED-OIG/A06H0011                                                                                     Page 16 of 26


      Table 3. Sample and Universe Summary (Absolute Values)
                                          Universe            Universe
                                                                                Test Size       Test Value
                                            Size               Value
      6100-Payroll
                                                   800        $43,351,640                45        $440,073
      (employees)16
      6200-Professional and
                                                 1,019        $15,352,390                54      $7,541,011
      Contracted Services
      6300-Supplies and
                                                 9,130        $16,388,858                59      $4,531,326
      Materials
      6400-Other Operating
                                                 5,146          $2,644,283               31        $109,717
      Costs
      6600-Capital Outlay                         533          $3,963,625                44 $1,944,694
                      TOTAL                    16,628         $81,700,796               233 $14,566,821

We requested and reviewed supporting documentation such as purchase orders, invoices,
cancelled checks, and receiving reports, time sheets, and employee certifications. We considered
a cost allowable, adequately documented, reasonable, and necessary if we were able to identify
the purpose of the cost, proper approval, proof of receipt, and proof of payment or cancellation.

We also randomly selected a sample of 10 P-card holders with charges to Title I, Part A funds
during the 2005 – 2006 school year and tested their charges for allowability. We limited our
review to 10 of 235 cardholders in light of extensive investigations involving the district’s P-card
program. (DISD is in negotiation with TEA to self report P-card abuses.) We tested $280,170
from a universe of $5,432,334 P-card transactions.17

Additionally, we selected a judgmental sample of 12 supplies and capital purchases to test
DISD’s receiving and distribution process, from receipt of goods through distribution to the end-
users (i.e., individual campuses or district departments). We visited the Central Receiving
Warehouse to observe the procedures used in the receiving and disbursing of district shipments.
We then requested and reviewed a copy of DISD’s asset management inventory listing to verify
shipment dates and length of time stored before distribution to campuses/departments.

We also relied, in part, on computer-processed data. DISD officials provided us with an
electronic version of DISD’s general ledger, which recorded all transactions associated with the
Title I, Part A program for the 2005 – 2006 school year. We verified the authenticity of the data
by comparing selected fields to source documents. We noted the information on the source
documents agreed with the information in the general ledger. We also noted that the general
ledger provided included all expenditures related to the Title I, Part A grant for our audit period
and did not include any transactions outside our audit period. Therefore, we concluded that the
data was sufficiently reliable to be used in meeting the audit's objective.


16
   The Payroll universe value represented is the absolute value of transactions posted to the general ledger. The
Test value represented is the absolute value of the annual salaries of the test employees. We tested two months of
earnings including stipends, and extra duty pay ($440,073) for the 45 test employees. The absolute value of the
annual salaries of the 45 test employees was $1,846,858.
17
   The P-Card Universe and Test Values represented are the net balance of P-card charges by each cardholder.
Final Report
ED-OIG/A06H0011                                                                     Page 17 of 26

We conducted our fieldwork at DISD’s offices from March 2007 through October 2007. We
held an exit conference with DISD officials on February 12, 2008, and an update meeting on
June 4, 2008, to discuss the results of the audit. Our audit was performed in accordance with
generally accepted government auditing standards appropriate to the scope of the audit described
above.



                            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 in accordance with the General Education Provisions Act.

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:

                                     Joseph Conaty
                                     Acting Assistant Secretary
                                     Office of Elementary and Secondary Education
                                     U.S. Department of Education
                                     400 Maryland Ave., SW
                                     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

Attachment
Draft Report
ED-OIG/A06H0011                                                                                          Page 18 of 26
                                                                                                      ATTACHMENT

[Graphic Deleted]


        TEXAS EDUCATION AGENCY
          1701 North Congress Avc.* Austin, Texas 78701 -1494 * 512/463-9734 * FAX: 512/463-9K3K * http://www.tca.statc.tx.us


 Robert Scott
Commissioner
  February 6, 2009

  Gary D. Whitman

  Regional Inspector General for Audit

  U. S. Department of Education

  Office of Inspector General 

  1999 Bryan Street 

  Dallas, TX 75201 


  Dear Mr. Whitman:

  On December 30, 2008, the Texas Education Agency (TEA) received the Draft Audit Report,
  ED-OIG/A06H0011, entitled Adequacy of Fiscal Controls Over the Use of Title I, Part A
  Funds at Dallas Independent School District dated December 23, 2008. The TEA
  appreciates the opportunity to respond to the Office of Inspector General's (OIG) findings
  outlined in its draft report. This response was originally due thirty days after the date of the
  letter. On January 14,2009, the TEA requested an extension to respond to the findings. The
  OIG granted the agency a two week extension to respond to the findings.

  Attached is a copy of the Texas Education Agency's response to the findings. If you have any
  questions, please contact Rita Chase, Director, Division of Financial Audits, at 512-463-7595.

  Thank you for your cooperation.

  Sincerely,

  /s/
  Robert Scott 

  Commissioner of Education 


  RS:rc

  Enclosures

  cc:	 Michael Hinojosa, Superintendent, Dallas Independent School District
        Ray Glynn, Deputy Commissioner for School District Leadership and Educator Quality
        Laura Taylor, Associate Commissioner for Accreditation (Acting)
        Nora Hancock, Associate Commissioner, Office for Planning, Grants, and Evaluation
        Earin Martin, Chief Grants Administrator and Director of Discretionary Grants and
       eGrants 

        Cory Green, Director, NCLB Program Coordination 

Draft Report
ED-OIG/A06H0011                                                                      Page 19 of 26
                                                                                  ATTACHMENT




                                   Texas Education Agency 

                       Response to Draft Audit Report: ED-OIG/A06H0011 


                                          Submitted to: 

                                      Mr. Gary D. Whitman 

                               Regional Inspector General for Audit

                                 U.S. Department of Education

                                   Office of Inspector General 

                                 1999 Bryan Street, Suite 2630 

                                    Dallas, TX 75201-6817 



The Texas Education Agency (TEA) appreciates the opportunity to respond to the Office of
Inspector General’s (OIG) findings outlined in its draft report dated December 23, 2008, about
the use of Title I funds administered by the Dallas Independent School District (ISD). This
response was originally due thirty days after the date of the letter. On January 14, 2009, the
TEA requested an extension to respond to the findings. The OIG granted the TEA a two week
extension to respond to the report.

The TEA acknowledges the seriousness of the issues raised in the draft report and recognizes
that there are serious weaknesses in Dallas ISD’s current grants management. As a result of
ongoing concerns related to Dallas ISD’s financial accounting practices and use of grant funds,
the agency notified Dallas ISD in a letter dated August 26, 2008, that the agency has identified
Dallas ISD as a high-risk grantee.

In accordance with 34 CFR §80.12, TEA implemented several special grant conditions for
Dallas ISD. Dallas ISD was required to contract with and pay for a grant manager to review
Dallas ISD’s policies, procedures, and practices with regard to expenditures related to grants
and to monitor grant expenditures. TEA approved 2 grant managers based on their experience,
expertise and credentials to monitor and oversee the quality of work performed by a sufficient
number of full-time employees (FTE) who will review and approve all grant expenditures and to
train those FTEs to build capacity and knowledge related to grant expenditures. In addition to
the grant monitors, each month TEA is requesting from the district the supporting
documentation for expenditures for one formula grant and one discretionary grant. The
selection of the grant is done by the TEA senior director of the respective division. The
examination of this documentation will allow TEA funding divisions to determine whether Dallas
ISD is in compliance with financial management standards and is expending these funds in
accordance with the approved grant applications and OMB Circular A-87, Cost Principles for
State and Local Governments and provides monitoring oversight.

Dallas ISD was also required to work with the contracted grant mangers to develop a corrective
action plan that identifies specifically the issues to be corrected, the detailed plan for correcting
them and a timeline for correcting them. As part of the corrective action, Dallas ISD must
identify a sufficient number of FTEs who will be trained by the contracted grant manager to build
capacity and knowledge related to grants. Dallas ISD has submitted a corrective action plan to
the agency and agency personnel are currently reviewing the plan to determine its adequacy.
Dallas ISD is also required to submit quarterly reports to the contracted grant managers that
Draft Report
ED-OIG/A06H0011                                                                      Page 20 of 26
                                                                                  ATTACHMENT

outline the district’s progress toward implementing the corrective action plan, and the contracted
grant manager will certify to the accuracy and veracity of the quarterly report and submit the
report to TEA.

The TEA and Dallas ISD are committed to addressing these weaknesses and to strengthening
the District’s controls so it can better administer federal funds.

Dallas ISD has taken additional steps to change the management and supervision of the grants
department. These changes will specifically impact the supervision of grant management and
compliance. Dallas ISD has implemented the following major changes:

       	 New financial leadership is present in the district. These changes include new
          management personnel in the following offices: executive chief financial officer, chief
          financial officer, payroll, purchasing, general ledger accounting, grants accounting
          and grants management.
        The Grants Management Department has been restructured and realigned to insure
          adequate oversight and compliance monitoring.
        The District has authorized additional FTEs in the grant compliance and grant
          accounting areas.
        Written departmental policies to address all findings and material weaknesses are
          under development in the grants management area.
        The general ledger account numbers are being redesigned to meet TEA standards.
        The District is committed to providing training and support for district personnel as
          needed through the use of TEA, Texas Association of School Business Officials
          (TASBO), and other consultants.

TEA and Dallas ISD also recognize the specific issues provided in the draft audit report and
provide the following responses to these findings and recommendations.

I. SUBJECT: Response to Finding #1: Dallas ISD’s Inadequate Fiscal Controls Resulted
in the Misuse of Title I, Part A Funds

The finding concludes that the Dallas Independent School District did not have adequate fiscal
controls over the use of Title I, Part A funds. As a result, Dallas ISD did not use Title I, Part A
funds in accordance with all applicable regulations, grant terms, and cost principles.

As discussed in their draft report dated December 23, 2008, the Office of Inspector General
(OIG) of the United States Department of Education questioned $5,167,060 in costs charged to
the Title I, Part A NOGA awarded to the Dallas Independent School District (DISD) for the 2005-
2006 school year. TEA auditors concluded their review of the DISD response to the OIG draft
report, including the attached schedules and concluded that $1,713,340 in costs were still
unallowable or inadequately documented.


Dallas ISD Used Title I, Part A Funds for Unallowable Purposes

Costs Incurred without Prior TEA Approval. Dallas ISD charged the Title I, Part A program over
$1.4 million for capital equipment and supplies, with the intent to purchase sets of equipment for
a particular group or purpose, without prior approval from TEA.
Draft Report
ED-OIG/A06H0011                                                                      Page 21 of 26
                                                                                  ATTACHMENT

TEA offers the following response with regard to OIG’s finding pertaining to costs incurred
without prior approval from TEA.

For the audit year of 2005-2006, school districts were required only to request (i.e., specifically
list) capital outlay items costing $5,000 or more per unit in the Standard Application System
(SAS) budget schedules. In addition, the instructions for preparing the budget schedule for
capital outlay state at the very beginning of the instructions that this schedule is to request items
with a unit cost of $5,000 or more.

OMB Circular A-87, Section 15. Equipment, addresses two sections: a) definitions which apply
and b) rules of allowability which apply to equipment and other capital expenditures.

The following definitions are provided in OMB Circular A-87, Section 15(a):

   (1) “Capital Expenditures” means expenditures for the acquisition cost of capital assets
       (equipment, building, land), or expenditures to make improvements to capital assets that
       materially increase their value or useful life. Acquisition cost means the cost of the asset
       including the cost to put it in place. Acquisition cost for equipment, for example, means
       the net invoice price of the equipment, including the cost of any modifications,
       attachments, accessories, or auxiliary apparatus necessary to make it usable for the
       purpose for which it was acquired. Ancillary charges, such as taxes, duty, protective in
       transit insurance, freight, and installation may be included in, or excluded from the
       acquisition cost in accordance with the governmental unit’s regular accounting practices.
   (2) “Equipment” means an article of nonexpendable, tangible personal property having a
       useful life of more than one year and an acquisition cost which equals or exceeds the
       lesser of the capitalization level established by the governmental unit for financial
       statement purposes, or $5,000.

TEA views the interpretation of “net invoice price” somewhat differently than OIG views it.
Because these definitions point to “the cost of the asset” and “an article of nonexpendable,
tangible personal property” as a single item, TEA does not necessarily interpret that this means
the “net invoice price” always applies to a group of items that, in the aggregate, costs $5,000 or
more. Dallas ISD would account for these funds in accordance with its regular accounting
practices.

OMB Circular A-87, Section 15(b) states “rules of allowability shall apply to equipment and other
capital expenditures.”

Additionally OMB Circular A-87, Section 15(b) (4) states: “Federal awarding agencies are
authorized at their option to waive or delegate the prior approval requirement.” And, an
awarding agency is defined as follows in OMB Circular A-87: “Awarding agency” means (a) with
respect to a grant, cooperative agreement, or cost reimbursement contract, the Federal agency,
and (b) with respect to a subaward, the party that awarded the subaward.

TEA exercised this authority in OMB Circular A-87, Section 15(b)(4) that permits the awarding
agency to waive the prior approval requirement for equipment more than $5,000 in the No Child
Left Behind (NCLB) consolidated grant application, and provided districts with that guidance
based on TEA’s 2005-2006 NCLB consolidated grant application.

It is therefore the recommendation of TEA that OIG accept TEA’s waiver of requiring specific
approval for the items costing more than $5,000 as stated in TEA’s 2005-2006 NCLB
Draft Report
ED-OIG/A06H0011                                                                      Page 22 of 26
                                                                                  ATTACHMENT

consolidated grant application guidelines, provided that Dallas ISD complied with all other
requirements and conditions of the grant. This includes, but is not limited to, obligating funds
within the period of availability, complying with their local capitalization policy, and expending
funds that are reasonable and necessary to carry out the objectives of the applicable grant
projects.

Unreasonable and Unnecessary Costs. Dallas ISD charged the Title I, Part A program over
$209,000 for items that were either unreasonable for the value added ($112,487) or
unnecessary because the items were never or under used ($96,714).

TEA offers the following response with regard to OIG’s finding pertaining to unreasonable and
unnecessary costs. Upon review of the documentation provided by the DISD, TEA auditors
concurred with the OIG that the amounts questioned were unreasonable and unnecessary.

Other Unallowable Costs. Dallas ISD used Title I, Part A funds to purchase various supplies
and equipment without documentation showing how the items related to the purpose of the
program. Dallas ISD expended over $173,300 on additional unallowable costs, including costs
for (1) non-Title I, Part A activities; (2) books and equipment that could not be accounted for;
and (3) various other purchases for non-academic purposes.

TEA offers the following response with regard to OIG’s finding pertaining to other unallowable
costs. Upon review of the documentation provided by the DISD, TEA auditors concurred with
the OIG that the following costs were unallowable.
    	 DISD did not provide documentation to demonstrate that the $142,000 for salaries and
        related fringe benefits paid to non-Title I employees pertained to an allowable activity
        related to its Title I program.
    	 DISD did not provide documentation to demonstrate that the $17,000 for books
        disbursed to non-Title I campuses pertained to an allowable activity related to its Title I
        program.
    	 DISD did not provide documentary evidence that the 165 books and 14 calculators had
        been located and accounted for. TEA auditors concurred with the OIG’s questioned
        costs of $2,234 and $1,601, respectively.
    	 TEA auditors did conclude that the costs for the 7 laptop computers and hand-held
        devices were allowable because the TEA did not require the DISD to obtain prior
        approval for purchase of individual items of equipment with a unit cost of less than
        $5,000.
    	 TEA auditors concurred that the costs for a message system, DVD player, carrying
        cases, nursing supplies, maintenance supplies, music and art supplies, collectibles,
        memorabilia, promotional items, gifts and awards, and sporting and game equipment
        were not allowable because the DISD did not provide any documentary evidence that
        the costs pertained to an allowable Title I activity as documented in the applicable
        Campus Improvement Plan (CIP) and did not further the statutory purpose of the Title I
        program.

DISD Used Title I, Part A Funds for Costs That Were Inadequately Documented

Lack of Management Approval. Management approval was not sufficiently documented for over
$1.6 million in purchases of supplies and contract services.

TEA offers the following response with regard to OIG’s finding pertaining lack of management
approval. In certain instances, DISD provided adequate documentation to demonstrate that
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DISD management approval was obtained for purchases of less than $10,000 from vendors not
on the approved vendor list or that the board approved the purchase of $50,000 or more. In
other instances, the DISD did not provide documentation or did not provide adequate or
sufficient documentation that it complied with its local policy and procedure.

Inadequate Evidence of How Costs Were in Line with the Program’s Purpose. Documentation
that Dallas ISD provided was insufficient to show either what was purchased or how the costs
tied to the Title I, Part A program.

TEA offers the following response with regard to OIG’s finding pertaining to inadequate
evidence of how costs were in line with the program’s purpose. TEA auditors did not observe
the $459,000 in contract services transactions for a licensed product agreement in the
schedules provided by the DISD. TEA auditors did observe $348,000 for 400 NovaNet ports
and the related training. Although the DISD provided documentary evidence that adequately
addressed the OIG’s comments, TEA auditors did not agree with DISD that this cost pertained
to an allowable activity that furthered the statutory purpose of the Title I program.

TEA auditors concurred with the OIG that the payroll costs did not pertain to allowable activities
that furthered the statutory purpose of the Title I program. The DISD did not provide
documentary evidence, such as the CIP and signed and dated job descriptions that indicated
that the work performed by the employees pertained to allowable Title I activities.

No Proof of Cancellation. Auditor’s sample included $275, 234 in cancelled invoices as
identified by Dallas ISD. The documentation presented for review were screen prints of journal
entries marked by hand “Invoice Cancelled” without a copy of the vendor’s cancelled invoice or
other verification of cancellation.

TEA offers the following response with regard to OIG’s finding pertaining to no proof of
cancellation. TEA auditors concurred that the DISD did not provide sufficient and adequate
documentation that demonstrated that the applicable invoices were in fact cancelled.

No Three-way Match. Invoices totaling $51,187 in supplies and materials were paid without
evidence of the necessary three-way match. According to Dallas ISD’s Executive Director of
Accounts Payable and district policy, a match of purchase order, invoice and receipt is required
prior to payment.

TEA offers the following response with regard to OIG’s finding pertaining to no three-way match.
TEA auditors concurred that the DISD did not provide documentary evidence that it complied
with its policy and procedure requiring the maintenance of a purchase order form, invoice and
receipt prior to the issuance of payment to the vendor.

Employee Certification Policy Not Followed. The Department’s Ed-Flex waiver, granted to all
Texas LEAs in 2002, eliminates the employee certification requirement of OMB Circular A-87,
Attachment B, Number 11(h) (3) as long as the employee’s job description clearly states the
employee is assigned 100 percent to the program or single cost objective. However, Dallas
ISD’s written policy continues to require certifications and personnel activity reports (PAR) for
these exempt employees. Dallas ISD violated its own written policy.

TEA offers the following response with regard to OIG’s finding pertaining employee certification
policy not followed. The DISD did not provide documentary evidence that the payroll costs
charged to the Title I, Part A grant were for work performed by district personnel that pertained
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to activities documented in the applicable campus improvement plans and that were allowable
activities for the Title I, Part A grant.

The Office of Inspector General (OIG) recommends that the Assistant Secretary for the Office of
Elementary and Secondary Education instruct TEA to require Dallas ISD to:

Recommendation:
1.1 Return to the Department $1,784,758 of Title I, Part A funds expended for unallowable
    costs.

Response:
Of the $1,784,758 in costs questioned by the OIG because the DISD used the grant funds for
unallowable purposes, TEA auditors concluded that $467,112 was unallowable after having
reviewed the DISD response to the OIG draft report.

Recommendation:
1.2 Provide adequate documentation supporting the allowability of $3,517,568 or return the
    inadequately documented amount to the Department.

Response:
Of the $3,517,568 in costs questioned by the OIG because the DISD did not provide sufficient
or any documentation to support the costs charged to the grant, TEA auditors concluded that
$1,246,228 was unallowable after having reviewed the DISD response to the OIG draft report.

Recommendation:
1.3 Return to the department the cost of all items purchased with Department funds that have
    been in storage for more than one year.

Response:
Upon review of the documentation provided by the DISD, TEA auditors agree with the
questioned amounts and concur that the purchases were unreasonable and unnecessary.

Recommendation:
1.4 Strengthen fiscal controls to include written procedures and training for all personnel
    responsible for the administration of Title I, Part A, and other Department funds.

Response:
TEA implemented several special grant conditions for Dallas ISD. Dallas ISD was required to
contract with and pay for a grant manager to review Dallas ISD’s policies, procedures, and
practices with regard to expenditures related to grants and to monitor grant expenditures. TEA
approved 2 grant managers based on their experience, expertise and credentials to monitor and
oversee the quality of work performed by a sufficient number of full-time employees (FTE) who
will review and approve all grant expenditures and to train those FTEs to build capacity and
knowledge related to grant expenditures.

Dallas ISD has taken steps to change the management and supervision of the grants
department. They are developing written departmental policies to address all findings and
material weaknesses in the grants management area. The District is committed to providing
training and support for district personnel as needed through the use of TEA, Texas Association
of School Business Officials (TASBO), and other consultants.
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Recommendation:
1.5 Review a statistically valid sample of the $49,190,693 of Title I, Part A program funds and
    other Department funds received by Dallas ISD in fiscal year 2005-2006 and provide written
    assurance that the funds were used to meet grant objective. Return to the Department any
    funds that are not adequately documented, reasonable and allowable.

Response:
As a result of the findings and questioned cost in the 2005-2006 Comprehensive Annual
Financial Report conducted in accordance with the OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations, the Texas Education Agency requested Dallas ISD
to either provide documentation to reconcile the questioned cost of $1,343,440 or refund the
questioned cost to TEA. Dallas ISD was able to provide sufficient documentation to support all
but $111,435.92 of the questioned cost which the district refunded back to TEA. The audit was
performed by KPMG LLP.

Recommendation:
1.6 Review a statistically valid sample of Title I, Part A program funds and other Department
    funds received by Dallas ISD in subsequent fiscal years and provide written assurance that
    the funds were used to meet grant objective. Return to the Department any funds that are
    not adequately documented, reasonable and allowable.

Response:
As a result of the findings and questioned cost in the 2006-2007 Comprehensive Annual
Financial Report conducted in accordance with the OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations, the Texas Education Agency (TEA) Office of
Planning, Grants, and Evaluation (OPGE) in a letter dated January 30, 2009 is requesting
Dallas ISD to submit a refund to TEA for the following questioned costs disclosed in the 2006-
2007 audit. The audit was performed by Deloitte & Touche LLP.

Federal Program                                        Total
                                                       Refund
                                                       Due

Title I Part A                                            $130,430
Title II Part A                                           $149,616
Title III Part A                                            $1,292
Special Education Cluster                                  $66,979
Title I School Improvement – Wilmer Hutchins                $9,986
21st Century                                               $17,361
Reading First                                              $40,815
Various Formula and possibly Discretionary Grants        $737,335
Total                                                   $1,153,814

The agency is currently reviewing the Dallas ISD’s 2007-2008 Comprehensive Annual Financial
Report conducted in accordance with the OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations. The audit firm of Deloitte & Touche LLP has
identified approximately $16,809,518 in questioned cost for the 2007-2008 year. If the district
cannot provide the necessary documentation to support these questioned costs, the TEA OPGE
will be requesting these funds be returned to the agency.
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In addition, each month the OPGE is requesting from the district the supporting documentation
for expenditures for one formula grant and one discretionary grant. The selection of the grant is
done by the TEA senior director of their respective division. The examination of this
documentation allows the TEA funding divisions to determine whether Dallas ISD is in
compliance with financial management standards and is expending these funds in accordance
with the approved grant applications and OMB Circular A-87, Cost Principles for State and Local
Governments and provides monitoring oversight.