oversight

The Department's Management Controls Over Discretionary Grants Need To Be Strengthened To Ensure Grant Accountability.

Published by the Department of Education, Office of Inspector General on 2002-09-26.

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

             The Department’s Management Controls Over
            Discretionary Grants Need To Be Strengthened To
                       Ensure Grant Accountability




                                     FINAL AUDIT REPORT
                                       ED-OIG/A07-B0016
                                        September 2002




Our mission is to promote the efficiency,                 U.S. Department of Education
effectiveness, and integrity of the                          Office of Inspector General
Department’s programs and operations.                     Region VII, Kansas City Office
                                          NOTICE
             Statements that managerial practices need improvements, as well as other
                           conclusions and recommendations in this report
           represent the opinions of the Office of Inspector General. Determinations of
 corrective action to be taken will be made by the appropriate Department of Education officials.

          In accordance with Freedom of Information Act (5 U.S. C. § 552) reports
             Issued by the Office of Inspector General are available, if requested, to
members of the press and general public to the extent information contained therein is not subject to
                                      exemptions in the Act.
     The Department’s Management Controls Over Discretionary
         Grants Need To Be Strengthened To Ensure Grant
                         Accountability



                             Table of Contents



                                              Page
Executive Summary ………………………….……………………………………………... 1

Background……………………………………………….……………………………….… 3

Audit Results………………………………………………………………………………... 4

   Finding No. 1 – The Department’s Oversight of Grantees Was Not Sufficient
   To Balance Their Discretionary Authority……………………..….…….……...…...… 4

   Finding No. 2 – Program Offices Were Not Able to Use GAPS for Monitoring
   Carryovers of Grant Balances to Subsequent Years as Envisioned by the
   Department….……………………………..……………………….…….………..……..9

   Finding No. 3 – Program Offices Were Not Systematically Using GAPS Data For
   Monitoring Grantees…………………………………………………………………….11

Objectives, Scope, and Methodology……………………………………….…….…...……..13

Statement on Management Controls………………………………………...…….…………15

Appendix – OCFO’s Comments on the Draft Report………………………………………..16




______________________________________________________________________________

ED-OIG/A07-B0016
    The Department’s Management Controls Over Discretionary
        Grants Need To Be Strengthened To Ensure Grant
                        Accountability



                                 Executive Summary


We conducted an audit of the U.S. Department of Education’s (the Department’s) administration
of discretionary grants and cooperative agreements under 34 C.F.R. § 74.25. Our objectives
were to determine whether these regulations provide the appropriate level of accountability for
grant funds, and whether internal Department policies and procedures were sufficient to ensure
that appropriate controls were in place over the use of grant funds while providing for
operational flexibility for grant recipients.

We found that the regulations under 34 C.F.R. §§ 74.25 and 75.253, 75.261, 75.263, and 75.264
could provide the appropriate level of grant fund accountability if additional controls were
incorporated in the Department’s grant oversight policies and procedures and in GAPS. More
specifically, we found that:

•   The Department’s oversight of grantees was not sufficient to balance their expanded
    discretionary authority;

•   Program offices were not able to use the Grant Administration and Payment System (GAPS)
    for monitoring budget carryovers of grant balances to subsequent years as envisioned by the
    Department when the expanded authority flexibilities were first implemented; and

•   Program offices were not systematically using GAPS data for monitoring grantees.




ED-OIG/A07-B0016                                                                          Page 1
We recommend that the Chief Financial Officer establish and implement policies and procedures
that ensure that:

•   The appropriate level of program management is involved in decisions related to project
    period extensions and the resolution of exceptions listed on standard GAPS reports; and

•   GAPS generates standard exception reports that list grants that exhibit large amounts of
    funds available for drawdown near the end of each budget period.

The OCFO generally agreed with our findings and recommendations. We have summarized the
OCFO’s responses at the end of the respective findings to which each relate and provided a full
text of their responses as an Appendix.




ED-OIG/A07-B0016                                                                           Page 2
                                         Background


On July 28, 1997, the Department published significant changes to the Education Department
General Administrative Regulations that affected the way most discretionary recipients
administer their awards. Known as “Expanded Authorities” regulations, these amendments to 34
C.F.R. Part 75 renewed the Department’s emphasis on partnership with grantees by giving them
more flexibility in carrying out their projects.

Provisions of 34 C.F.R. §§ 74.25, 75.253, 75.261, 75.263, and 75.264 significantly expanded
discretionary grant recipients’ authority to undertake specific administrative actions relating to
grants and cooperative agreements without prior approval by Department officials. Specifically,
it allowed grantees to:

•   Carry over unexpended funds from one budget period to the next,

•   Extend the grant project period for a period of up to one year,

•   Obligate funds up to 90 days before the effective date of a budget period without prior approval,
    and

•   Make budget transfers without prior approval.

In making these regulatory changes, the Department envisioned that the greater flexibility in
expending federal funds conferred to grantees would need to be matched with a closer attention
to project monitoring by departmental program staff. The Department implemented a new
financial system, GAPS, in part, to facilitate this improvement in project monitoring. The new
system was expected to allow for review of fiscal drawdowns by grant number and fiscal year.
The Department expected that this system, combined with other information gained by
departmental program staff from such monitoring activities as recurring phone contacts, written
communications, review of performance reports, and site visits, would provide for good
accountability of grant expenditures.



ED-OIG/A07-B0016                                                                              Page 3
                                        Audit Results


We found that the Expanded Authorities regulations could provide the appropriate level of grant
fund accountability if additional controls were incorporated in the Department’s grant oversight
policies and procedures and in GAPS. More specifically, we found that:


•   The Department’s oversight of grantees was not sufficient to balance their discretionary
    authority under 34 C.F.R. §§ 74.25, 75.253, 75.261, 75.263, and 75.264;

•   Program offices were not able to use GAPS for monitoring budget carryovers of grant
    balances to subsequent years as envisioned by the Department when the expanded authority
    flexibilities were first implemented; and

•   Program offices were not systematically using GAPS data for monitoring grantees.




Finding No. 1 – The Department’s Oversight of Grantees Was Not
Sufficient to Balance Their Expanded Discretionary Authority


We found that some grantees drew down significant amounts, as much as 100 percent, of their
total grant award budgets during or after a 12- month- maximum project period extension as
provided under 34 C.F.R. §§ 74.25 and 75.261. We also found instances of project period
extensions exceeding 12 months, project periods that had been extended more than once, and
extensions that were made without the required written notification to the Department. These
facts raised questions as to whether some of these actions did not in fact alter the objectives or
scope of the grant projects or whether they were taken simply to use up unobligated balances,
both of which are unallowable under 34 C.F.R. § 74.25 (e)(2) .




ED-OIG/A07-B0016                                                                              Page 4
Eighteen of the 24 grants we reviewed showed drawdowns of more than 25 percent of their total
grant award budgets during or after project period extensions. For four of these 18, 100 percent
of the total grant award was drawn down during or after the project period extension.

We found that GPOS Bulletin No. 27, Monitoring Discretionary Grants for Excessive
Drawdowns, provides guidance for monitoring grants having unusually large drawdowns at three
different points of their projects:

•   As of the end of the first quarter of a grant’s current budget period, if more than 50 percent of
    the funds obligated for that budget period has been drawn;

•   As of the end of the second quarter of the grant ’s current budget period, if more than 80
    percent of the funds obligated for that budget period has been drawn; and

•   As of the end of the third quarter of the grant’s current budget period, if more than 100
    percent of the funds obligated for that budget period has been drawn.

The drawdown activity we have identified above is not addressed in Bulletin No. 27. We found
grants for which only small amounts, if any, were drawn down during the project period, and
then, unusually large amounts were drawn down at the end of or during the extension of the
project period. The absence of drawdowns for one or more budget periods is not, in itself, a
violation of regulations or departmental policy, but it is out of the norm and could be an indicator
of problems that should be considered for follow-up by program officials.

We also found instances of project period extensions exceeding 12 months, as well as multiple
extension periods. These activities are not, in themselves, violations of regulations or
departmental policy, but they are out of the norm and could be indicators of problems that should
be addressed. An effective management control system would ensure that such activity has been
reviewed by the appropriate level of program management.

In 12 of the 24 grant files we reviewed, we found no written notification from the grantee that
provided supporting reasons for the extension. Seven of the notifications we found in the
remaining 12 grant files were submitted later than their due dates. These instances indicate
noncompliance with requirements regarding written notification that are stated in 34 C.F.R. §
4.25 (e)(2)(ii).




ED-OIG/A07-B0016                                                                                Page 5
Although we agree with the Department’s intention to provide grantees with more flexibility in
carrying out their projects, we have concluded that this flexibility should be balanced by
increased oversight if the Department is to have reasonable assurance that a project period
extension is within the grant’s scope and objectives and not simply made to spend unused funds.

Recommendations

We recommend that the Chief Financial Officer establish and implement policies and procedures
that ensure that:

1.1   Action by the responsible program manager is required for extending a project period:

      1.1.1   More than one time;

      1.1.2   By more than 12 months ;

      1.1.3   If the notification for the extension has been submitted by the grantee later than the
              due date specified under 34 C.F.R. § 74.25; and

      1.1.4   If the extension is for expenditures exceeding a specified percent of the total
              amount of federal funds awarded under the grant.

1.2   The actions listed under Recommendation 1.1 are documented in the program offices’
      official grant files so as to identify who took the action, when the action was taken, and the
      reasons for the action.

OCFO Response and OIG Comment

OCFO Response – OCFO generally agreed with our findings and recommendations. OCFO
stated that they agree that the departmental review and approval of multiple time extensions and
time extensions for more than 12 months is necessary (Recommendations 1.1.1 and 1.1.2).
OCFO stated in its response that its current draft Discretionary Handbook provides procedures
for review and approval by a warrant holder (the person who obligates grants under particular
programs) that are sufficient to address the intent of our recommendations.

OIG Comment – It weakens administrative controls when a warrant holder is responsible for
both approving grantees’ extension requests, for multiple grant extensions and time extensions
exceeding the prescribed 12 months, and obligating the funds that correspond to that time period.


ED-OIG/A07-B0016                                                                                Page 6
According to GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD-
00-21.3.1),

       Key duties and responsibilities need to be divided or segregated among different
       people to reduce the risk of errors and fraud. This should include separating the
       responsibilities for authorizing transactions, processing and recording them,
       reviewing the transactions, and handling any related assets. No one individual
       should control all key aspects of a transaction or event.

 OCFO Response – OCFO noted that GPOS training for grantees emphasizes the importance of
adhering to the 10-day notification period (Recommendation 1.1.3), so that program offices will
have sufficient time to process the extensions in GAPS. OCFO stated that the ultimate goal of
allowing grantees to initiate time extensions is to give them sufficient time to complete approved
project activities that will result in successful project outcomes and that if it is administratively
feasible, program staff should have the latitude to process notifications received with less than 10
days before the end of the project period.

OIG Comment – We do not share OCFO’s perspective that program staff should have the
latitude to process notifications that are not received at least 10 days before the end of the project
period, as specified under 34 C.F.R. § 74.25. If the Department chooses to deviate from the 10-
day requirement, the decision should be documented by management. Eighteen of the 24 grants
reviewed did not receive the notifications for the extension at least 10 days before the project
period. Some of these notifications were sent as late as eight months after the end of the grant
project period.

OCFO Response – The OCFO stated that they do not believe that an additional level of review
and approval is needed for project period extensions that involve expenditures exceeding a
specified percent of the total amount of federal funds awarded under a grant (Recommendation
1.1.4). The OCFO stated that the GAPS exception report to be developed in response to
Recommendation number 2.1 will serve a dual purpose of enabling program staff to take into
account large remaining balances in grantees’ accounts when (1) issuing continuation awards and
(2) considering grantees’ notifications of time extensions. OCFO stated that large available
balances in GAPS are not usually an indicator of a problem since many grantees use their own
funds initially to fund project activities and then reimburse themselves at a later date. Further,
OCFO stated that they believe that large unexplained award balances at the end of the project
period would become rare and infrequent once program officers begin following the new policy
of reviewing the new exception report, addressed under Recommendation 2.1.


ED-OIG/A07-B0016                                                                               Page 7
OIG Comment – Although we agree with the OCFO that the GAPS exception report, to be
developed in response to our recommendation number 2.1, will enable program staff to make
more informed decisions when considering extending project periods that involve large
expenditures, we still believe that review and approval of such decisions should remain part of
management’s responsibilities. As stated earlier, “Key duties and responsibilities need to be
divided or segregated among different people to reduce the risk of errors and fraud.”
(GAO/AIMD-00-21.3.1)




ED-OIG/A07-B0016                                                                           Page 8
Finding No. 2 – Program Offices Were Not Able to Use GAPS for
Monitoring Carryovers of Grant Balances to Subsequent Years as
Envisioned by the Department

We found that program offices were not able to use GAPS for monitoring budget carryovers of
grant balances to subsequent years as envisioned by the Department when the Expanded
Authorities were first implemented. The reason for this is that the Department did not collect
grant expenditure information by the budget period for which the grant was awarded. The
benefits of collecting this information may be outweighed by the additional paperwork burden
for grantees and the Department. An alternative approach for the Department to oversee
grantees that exercise the carryover flexibility would be to develop policy and procedures for
generating exception reports from GAPS that would list grants that exhibit large amounts of
funds available for drawdown near the end of each budget period. This type of report would help
program offices concentrate their resources on grants that might have a higher risk of non-
compliance and from which the Department might be able to realize budget savings.

In implementing the expanded authority provisions, the Department noted that GAPS would
“track all funds by the fiscal year they were made available for obligation by the Department.”
(Final Rule, 62 Fed. Reg. 40422, July 28, 1997) It issued regulations under 34 C.F.R. § 75.253
(c)(3) that state, “In determining the amount of new funds to make available to a grantee . . . the
Secretary considers whether the unobligated funds made available are needed to complete
activities that were planned for completion in the prior budget period.” Office of the Chief
Financial Officer (OCFO) training materials on awarding and administering discretionary grants
instruct grant- making teams to look for “Red Flags ” such as grants that show large amounts of
unobligated funds at the end of a budget period.

Officials in three program offices brought to our attention that they were unable to monitor
unobligated grant balances that were carried forward to subsequent funding periods because the
Expanded Authorities do not require grantees to request approval from the Department for these
actions and GAPS does not provide a breakdown of grant drawdown balances by budget year.

GAPS as currently designed does not provide program offices a monitoring tool to help them
identify large carryovers, and thereby reduce the risk of unallowable drawdowns and
expenditures by grantees, and unrealized budget savings.


ED-OIG/A07-B0016                                                                             Page 9
Recommendation

2.1   We recommend that the Chief Financial Officer establish and implement policies and
      procedures that ensure that GAPS generates standard exception reports that list grants that
      exhibit large amounts of funds available for drawdown near the end of each budget period.

OCFO Response

OCFO agreed with this recommendation.




ED-OIG/A07-B0016                                                                          Page 10
Finding No. 3 – Program Offices Were Not Systematically Using GAPS
Data For Monitoring Grantees

Officials from three program offices advised us that their staffs did not systematically use GAPS
data for monitoring grantees. Also, according to most of the program officials we interviewed,
the monitoring they performed was geared toward providing grantees with technical assistance
and not toward monitoring grantee compliance with laws and regulations. Because of this, their
monitoring was of limited usefulness as an internal control.

As discussed in the Background section of this report, the Department conferred to grantees
Expanded Authorities with the idea that the Department would match the new flexibilities with
closer attention to project monitoring. The Department implemented GAPS, in part, to facilitate
this closer attention to monitoring. However, we did not find evidence of close monitoring or the
use of GAPS for monitoring.

Twenty-two of the 24 grant files we reviewed did not contain evidence that monitoring had been
performed, and neither of the two files that did show a degree of monitoring made any reference
to the use of GAPS data. Officials from OCFO and three program offices told us that one reason
that GAPS was not used for monitoring was the lack of policy in that regard.

We are making recommendations in this report to OCFO to make improvements in GAPS that
would facilitate monitoring. However, if program offices do not systematically use GAPS data
when monitoring grantees, OCFO’s efforts to improve GAPS will be of limited effectiveness in
helping to protect the Department’s programs aga inst mismanagement and fraud.

Recommendations

We recommend that the Chief Financial Officer establish and implement policies and procedures
that ensure that:

3.1   Discretionary grant program staff research each exception listed on OCFO’s standard
      exception reports and document in the official grant file its resolution; and

3.2   Discretionary grant program managers document their approval of these resolutions.


ED-OIG/A07-B0016                                                                          Page 11
OCFO Response and OIG Comment

OCFO Response – OCFO agreed that program staff research each exception listed on OCFO’s
standard exception reports and document in the official grant file its resolution. However, OCFO
stated that, while they agree that program managers will need to be involved in certain instances
where the program staff is unable to resolve a problem with a grantee, they did not believe that
this higher level of review and approval would be necessary in most cases. OCFO stated that in
accordance with policy in the draft Handbook, the program manager or a higher-level program
official will need to be involved in approving serious decisions affecting a grant such as placing
a grant on a “high-risk” status or discontinuing a grant at the time of the continuation award.

OIG Comment – As discussed under our comment section to recommendation 1.1.1, it weakens
administrative controls when responsibilities for authorizing and reviewing transactions, such as
resolutions of exceptions, are not subject to the review and approval of a different person, in this
case a program manager. According to GAO’s Standards for Internal Control in the Federal
Government (GAO/AIMD-00-21.3.1),

       Key duties and responsibilities need to be divided or segregated among different
       people to reduce the risk of errors and fraud. This should include separating the
       responsibilities for authorizing transactions, processing and recording them,
       reviewing the transactions, and handling any related assets. No one individual
       should control all key aspects of a transaction or event.




ED-OIG/A07-B0016                                                                            Page 12
                      Objectives, Scope, and Methodology


Our audit objectives were to determine (1) whether the regulations currently in place for
discretionary grants and cooperative agreements provide the appropriate level of accountability
for grant funds, and (2) whether internal Department policies and procedures are sufficient to
ensure that appropriate controls are in place over the use of grant funds while providing for
operational flexibility for grant recipients.

To accomplish our audit objectives we:

•   Reviewed applicable federal laws and regulations,1 Department policy and guidance, and
    program information available in reports and on the Internet;

•   Interviewed Department officials from OCFO and six program offices: Office of Bilingual
    Education and Minority Languages Affairs, Office of Elementary and Secondary Education,
    Office of Educational Research and Improvement, Office of Special Education and
    Rehabilitative Services, Office of Postsecondary Education, and Office of Vocational and
    Adult Education;

•   Reviewed documentation provided by OCFO and the six program offices;

•   Selected, from a universe of 4,718 discretionary grants,2 a judgmental sample of 24 grants for
    review;3 and

1
  Regulatory citations are to the 1998 Volume of the Code of Federal Regulations.
2
  The universe from which we drew the judgmental sample was limited to discretionary grants for which a
project period extension had been exercised under 34 C.F.R. § 74.25, that had final/current budget
periods beginning between July 1, 1997, and June 30, 1999, and that incurred drawdowns more than 15
months after the beginning of the final/current budget period. In reviewing the data elements contained in
GAPS, we determined that we could only trace in GAPS the use by grantees of one of the expanded
authority flexibilities: the project period extension flexibility. Tracing grantee use of the remaining
flexibilities was not possible because the Department did not collect the required information.
3
  Because we judgmentally selected the sample, based on whether a grant had a lengthy extension, the
results of the sample review cannot be projected to the universe of the Department’s discretionary grants.



ED-OIG/A07-B0016                                                                                 Page 13
•   Reviewed and analyzed the supporting grant administration data contained in the official
    grant file of each grant sampled, including grant performance reports when available, and
    compared it to the data contained in GAPS.

While for purposes of the audit we did not rely solely on the computer-processed data contained
in GAPS, we did use it as the source for the sample and to establish context and illustrate
materiality for some aspects of the findings. We also used the computer-processed data
contained in GAPS to corroborate documentation in the Department’s official grant files. As
part of the audit, we tested GAPS data by reviewing the sampled grant files and found no
exceptions to what we found in GAPS. Given the limited use of GAPS data in the audit and our
testing of the data, we determined that the data was reliable for purposes of the audit.

We performed on-site fieldwork at OCFO and the six program offices intermittently from May 2,
2001, through August 9, 2001. In addition, we continued to collect and analyze data in our
offices through May 1, 2002. On February 20, 2002, we held an exit conference with officials
from OCFO and the program offices we visited. The audit was performed in accordance with
Government Auditing Standards appropriate to the scope of the audit.




ED-OIG/A07-B0016                                                                         Page 14
                      Statement on Management Controls


We have made a study and evaluation of the Department’s management controls in effect during
the period May 2, 2001, through August 9, 2001, as they relate to its administration of
discretionary grants under 34 C.F.R. § 74.25. We conducted our study and evaluation in
accordance with Government Auditing Standards. For the purpose of this report, we assessed
and classified the relevant manage ment control structure into the following categories:

•   Departmental policies and federal regulations for administering discretionary grants under 34
    C.F.R. Part 74; and

•   The design of GAPS with respect to its usefulness as a tool for monitoring discretionary
    grants.

OCFO management is responsible for establishing and maintaining a management control
structure for administering discretionary grants. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related costs of
control procedures. The objectives of the system are to provide management with reasonable,
but not absolute, assurance that assets are safeguarded against loss from unauthorized use or
disposition and that transactions are executed in accordance with management's authorization
and recorded properly, so as to permit effective and efficient operations.

Because of inherent limitations in any mana gement control structure, errors or irregularities may
occur and not be detected. Also, projection of any evaluation of the system to future periods is
subject to the risk that procedures may become inadequate because of changes in conditions, or
that the degree of compliance with the procedures may deteriorate.

Our assessment disclosed weaknesses in the Department’s management control structure, which
result in more than a relatively low risk that errors, irregularities, and other inefficiencies may
occur resulting in inefficient and/or ineffective performance. These weaknesses and their effects
are fully discussed in the Audit Results section of this report.




ED-OIG/A07-B0016                                                                             Page 15
            The Department’s Management Controls Over
           Discretionary Grants Need To Be Strengthened To
                      Ensure Grant Accountability

                             Report Distribution List



                                                                           No. of
                                                                           Copies
ED Action Official
Jack Martin, Chief Financial Officer                                         1
Office of the Chief Financial Officer

Other ED Officials (electronically)
Chief of Staff, Office of the Secretary                                      1
Under Secretary, Office of the Under Secretary                               1
Deputy Secretary, Office of the Deputy Secretary                             1
Director, Budget Service                                                     1
Director, Office of Public Affairs                                           1
Press Secretary, Office of Public Affairs                                    1
Assistant Secretary, Legislation and Congressional Affairs                   1
Assistant Secretary, Office of Intergovernmental and Interagency Affairs     1
Director, Grants Policy and Oversight Staff, OCFO                            1
Director, GAPS Team, OCFO                                                    1
Director, Financial Improvement & Post Audit Operations, OCFO                1
Supervisor, Post Audit Group                                                 1
Audit Liaison Officer, Office of the General Counsel                         1




Office of Inspector General (electronically)
Inspector General                                                            1
Deputy Inspector General                                                     1
Assistant Inspector General for Audit                      1
Assistant Inspector General for Analysis and Inspections   1
Assistant Inspector General for Investigations             1
Deputy Assistant Inspector General for Audit               1
Director, State and Local Advisory and Assistance          1
Regional Inspectors General for Audit                      1 each
Directors, Internal Audit Teams                            1 each