oversight

Controls Over Excessive Cash Drawdowns by Grantees.

Published by the Department of Education, Office of Inspector General on 2006-12-18.

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

    Controls Over Excessive Cash Drawdowns By Grantees 



                                 FINAL AUDIT REPORT





                                    ED-OIG/A19F0025 

                                     December 2006 



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

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

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

                                                                         OPERATIONS INTERNAL AUDIT TEAM


                                                    December 18, 2006


Memorandum
TO:             Lawrence Warder
                Chief Financial Officer
                Office of the Chief Financial Officer

FROM:           Helen Lew /s/
                Assistant Inspector General for Audit
                Office of Inspector General

SUBJECT:        Final Audit Report
                Controls Over Excessive Cash Drawdowns by Grantees
                Control Number ED-OIG/A19F0025


Attached is the subject final audit report that covers the results of our review of excessive cash
drawdowns by grantees during Fiscal Year (FY) 2005. An electronic copy has been provided to
your Audit Liaison Officer. We received your comments concurring with three of the four
findings and associated recommendations in our draft report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your
office(s) will be monitored and tracked through the Department’s Audit Accountability and
Resolution Tracking System (AARTS). ED policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days of the issuance of this
report. The CAP should set forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and recommendations contained
in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
six months from the date of issuance.

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.

We appreciate the cooperation given us during this review. If you have any questions, please
call Michele Weaver-Dugan at (202) 245-6941.


          Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
Enclosure

cc:   Blanca Rodriguez, Director, Grants Policy Oversight Staff (GPOS), Office of the Chief
           Financial Officer (OCFO)
      Constance Davis, Director, Financial Systems Operations (FSO), OCFO
      Charlesetta Griffin, Audit Liaison, GPOS
      Greg Robison, Audit Liaison, FSO
                                              TABLE OF CONTENTS 


                                                                                                                                 Page

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


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


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


         FINDING NO. 1 – Excessive Drawdown Reports Did Not Effectively 

                         Identify All Potentially Excessive Cash Drawdowns .....................4


         FINDING NO. 2 – GPOS Did Not Ensure Program Offices Monitored 

                         Excessive Drawdowns.......................................................................8


         FINDING NO. 3 – Improvements Are Needed in Use of Payment Flags 

                         to Prevent Inappropriate Drawdowns ............................................9


         FINDING NO. 4 – The Department Did Not Monitor Formula Grants 

                         Through the Excessive Drawdown Reports .................................12


OBJECTIVE, SCOPE, AND METHODOLOGY ....................................................................14


ATTACHMENT -- AUDITEE COMMENTS...........................................................................17 

Final Audit Report
ED-OIG/A19F0025                                                                            Page 1 of 16




                                   EXECUTIVE SUMMARY 



The objective of our audit was to determine whether the Department’s controls identify and
prevent excessive cash drawdowns by grantees. As a corrective action to a prior Office of
Inspector General (OIG) audit, 1 the Department developed a report to monitor potentially
excessive drawdowns by discretionary grantees. The Excessive Drawdown Report identifies
those discretionary grantees that may have exceeded drawdown thresholds by drawing funds in
excess of a grant’s immediate cash needs. It represents the Department’s primary internal
control in this area. The Grants Policy and Oversight Staff (GPOS) is responsible for generating
the report on a monthly basis from the Grants Administrative Payment System (GAPS) and
distributing the information to applicable Principal Offices (POs). PO staff are responsible for
researching each grant on the report and providing a response to GPOS on the results.

Overall, we found the Department’s controls did not effectively identify or prevent excessive
cash drawdowns. Our audit revealed that the Excessive Drawdown Reports did not identify
1,379 unique grants that met the excessive drawdown threshold criteria during FY 2005. The
net2 drawdown activity for these grants totaled $212 million. We also found that the reports
included some grants that did not meet the criteria. In addition, we found GPOS did not always
fulfill its responsibility to ensure program offices monitored excessive drawdowns. As a result,
the Department is not monitoring all grants for excessive drawdowns, and cannot ensure its
grantees are compliant with fiscal requirements.

We also found improvements were needed in the use of payment flags to prevent inappropriate
drawdowns. Finally, we found that tools such as the Excessive Drawdown Reports had not been
developed and implemented for formula grants.

To correct these weaknesses, we recommend that the Department:

• 	 Correct the deficiencies noted in the query used to generate the Excessive Drawdown Report,
    automate the process for generating the report, and provide additional fields to allow GPOS
    staff to enter resolution status provided by the POs.
• 	 Ensure GPOS staff follow up with PO staff on grants to which they do not respond and
    periodically report to senior management on PO responses.
• 	 Develop and implement a method to communicate payment flag information to all program
    offices responsible for monitoring additional grants awarded to the same recipient and
    require PO staff to evaluate information received on payment flags for other awards to
    grantees to which they have also made or are making awards.
• 	 Resolve issues noted in the payment flag reporting functionality with GAPS.
• 	 Ensure appropriate GAPS reports are developed and implemented to permit effective
    monitoring of formula grant programs and processes.

1
  ED-OIG/A03-80010, Audit of Drawdown Controls in Grant Administration and Payment System, issued 

September 13, 2000. 

2
  Drawdowns less any returns of funds. 

Final Audit Report
ED-OIG/A19F0025                                                                 Page 2 of 16


The Department concurred with three of the four findings and associated recommendations. The
Department did not agree with Finding 4, stating that the Chief Financial Officer does not have
the authority to oversee formula grants, including developing policy for their administration.
However, OIG believes the development and implementation of the Excessive Drawdown
Report, or similar reports, for formula grants would serve as a tool to assist the PO staff in
monitoring grantees’ fiscal activities to ensure they comply with statutory and regulatory
requirements. A task of the Deputy Secretary’s Grants Improvement Project, headed by OCFO,
is to develop a Handbook for Formula Grants, which would include policies and procedures
related to the fiscal management of formula grants. As such, we added to the recommendation
that the Chief Financial Officer work in conjunction with the Deputy Secretary’s Grants
Improvement Project. The full text of the Department’s response is provided as an enclosure to
this report.
Final Audit Report
ED-OIG/A19F0025                                                                                   Page 3 of 16



                                             BACKGROUND 



Office of Management and Budget (OMB) Circular A-123, dated June 21, 1995,3 entitled
Management Accountability and Control, provides guidance on improving the accountability and
effectiveness of Federal programs and operations by establishing, assessing, correcting, and
reporting on management controls. The Circular states, “Management controls must provide
reasonable assurance that assets are safeguarded against waste, loss, unauthorized use, and
misappropriation.” These controls are defined as “. . . the organization, policies, and procedures
used by agencies to reasonably ensure that (i) programs achieve their intended results . . . (iii)
programs and resources are protected from waste, fraud, and mismanagement . . ..”

The Department of Education’s (Department) Handbook for the Discretionary Grant Process
(Handbook) states, “Monitoring is an integral part of grant administration and oversight after a
grant has been awarded.” The Handbook further states,
        Well-designed monitoring must also address [Department of Education’s] ED’s
        fiduciary responsibility to ensure grantees’ compliance with legal and fiscal
        requirements and to protect against fraud, waste and abuse.

The Department’s Grants Policy and Oversight Staff (GPOS), within the Office of the Chief
Financial Officer (OCFO), is responsible for policy development, oversight, research and
analysis, and improvement of the Department’s discretionary grants process. According to the
Handbook, GPOS works collaboratively with other Department offices to achieve effective
monitoring of grant programs and to ensure that monitoring activities and processes are
conducted with consistency and are compliant with Department regulations and policies. GPOS
supports the Department’s Principal Offices (POs) that administer the discretionary grant
programs.

The Handbook directs the Department’s program staff to pay particular attention to grantees’
fiscal activities as part of the monitoring process by using the Grants Administration and
Payment System (GAPS) as the primary tool. GAPS provides payment and expenditure
reporting to users. One of the available reports is the Excessive Drawdown Report, which assists
program offices in identifying those discretionary grantees that may have violated cash
management policies and regulations by drawing funds in excess of a grant’s immediate cash
needs. GPOS generates Excessive Drawdown Reports on a monthly basis and distributes the
information to various POs. PO staff are responsible for researching each grant on the report to
determine whether excessive drawdowns have been made, to assist the grantee in resolving any
problems with excess cash balances, and to report back to GPOS on the results.




3
 OMB Circular A-123 was revised December 21, 2004, effective for Fiscal Year (FY) 2006 and beyond. The
circular quoted above was in effect during our audit period, FY 2005. Similar language also appears in the revised
circular.
Final Audit Report
ED-OIG/A19F0025                                                                   Page 4 of 16



                                    AUDIT RESULTS 



We found the Department’s controls did not identify and prevent excessive cash drawdowns by
grantees during FY 2005. Our audit disclosed that (1) Excessive Drawdown Reports did not
effectively identify all potentially excessive drawdowns, (2) GPOS did not ensure program
offices monitored excessive drawdowns, (3) improvements were needed in use of payment flags
to prevent inappropriate drawdowns, and (4) formula grants were not monitored through the
Excessive Drawdown Reports. As a result, grantees may be drawing down funds in excess of
their immediate cash needs for each grant and using the funds for inappropriate purposes.

In its comments to the draft report, OCFO concurred with three of the four findings and
associated recommendations. OCFO did not concur with Finding 4 and its recommendation.
The comments are summarized at the end of each finding. The full text of OCFO’s comments on
the draft report is included as an attachment to the report.


FINDING NO. 1 – E
                	 xcessive Drawdown Reports Did Not Effectively Identify All
                Potentially Excessive Cash Drawdowns

The Excessive Drawdown Report was developed to monitor drawdowns by discretionary
grantees and identify potential excessive drawdown conditions. This report identifies grantees
that have drawn funds in excess of three specific thresholds during the budget period in place
when the report is generated. The report represents the Department’s primary internal control in
this area. We found, however, that the Excessive Drawdown Report did not identify all grants
with potential excessive drawdown conditions and included grants that were no longer active.
Evaluation of GAPS transactional data identified 1,379 unique grants that met the excessive
drawdown threshold criteria, but the grants did not appear on one or more Excessive Drawdown
Reports during FY 2005. These grants represented net drawdown activity totaling $212 million
during the year, as follows:

   • 	 867 grants with FY 2005 funding or an active budget period during FY 2005 that met
       excess drawdown thresholds were not included in any of the Excessive Drawdown
       Reports generated by GPOS. These grants included an estimated $154.4 million in net
       drawdowns during FY 2005.

   • 	 512 grants with potential excessive drawdowns were not included in one or more
       monthly GPOS reports, but were included in later months during FY 2005. These grants
       represented an estimated $57.6 million in net drawdowns during FY 2005.

We also determined that 166 grants listed on the Excessive Drawdown Reports generated during
FY 2005 had budget periods that ended prior to FY 2005, did not have any fiscal activity during
FY 2005, and did not represent potentially excessive drawdowns.
Final Audit Report
ED-OIG/A19F0025                                                                                  Page 5 of 16

Grant Policy Bulletin #27: Monitoring Discretionary Grants for Excessive Drawdowns
(Bulletin), dated May 24, 2001,4 states,

        The GAPS [Excessive] Drawdown Report (report) has been developed to assist
        program offices in identifying those grantees that might have violated cash
        management policies and regulations by drawing down funds in excess of a
        grant’s immediate cash needs.

        The report indicates those grants that have drawn an unusually large proportion of
        grant funds in any of the first three quarters of the grant’s current budget period.
        A grant will appear on the report if the following drawdown thresholds are
        exceeded:

            • 	 As of the end of the first quarter of the grant’s current budget period,
                more than 50% of the funds obligated for that budget period have been
                drawn.
            • 	 As of the end of the second quarter of the grant’s current budget period,
                more than 80% of the funds obligated for that budget period have been
                drawn.
            • 	 As of the end of the third quarter of the grant’s current budget period,
                100% of the funds obligated for that budget period have been drawn.

The existing process for generating the Excessive Drawdown Reports is cumbersome and time
consuming. There is also a great deal of manual manipulation involved in formatting the reports
to be sent to the POs and in reviewing PO responses. In order to run the reports, GAPS only
allows users to input one PO and one FY at a time, resulting in GPOS staff having to run the
reports multiple times, and combine multiple grant year reports to provide a complete report to
each PO. Since the report includes all previously identified grants, and POs may have responded
to these potential excessive drawdowns, GPOS manually compares prior reports and responses
from the POs each month and manually deletes previously reported drawdowns that had been
resolved. GAPS does not include a feature to allow GPOS staff to run the report for all POs and
all active grants, or to indicate whether a potentially excessive drawdown has been resolved so
that the grant does not appear again on the report until the next threshold is reached.

We attempted to evaluate the programming source code used to generate the Excessive
Drawdown Report. However, OCFO staff could not locate a copy of the source code for the
program currently in use. OCFO did provide a copy of a program it stated was similar to that
currently in use on the system and likely to be the starting point for enhancements and corrective
measures to the existing program. Our evaluation of this program, detail transactional data
extracted from GAPS, and Excessive Drawdown Reports that were generated by GPOS during
the audit period noted the following deficiencies in the processing methodology used for
selection of the grants:



4
 The Bulletin was in effect during the scope of our review, but was rescinded with the update of the Handbook in
February 2006. These requirements are also included in the updated Handbook, Section 5.3.8, subparagraph 6.
Final Audit Report
ED-OIG/A19F0025                                                                    Page 6 of 16

       • 	 Grants with potential excessive drawdowns were not included in the report until after
           the end of the quarter in which the condition occurred. In some cases, this resulted in
           a significant time lag from when the condition occurred to when it first appeared on
           an Excessive Drawdown Report. For example, if an excessive drawdown condition
           occurred during the first week of the quarter for a grant with a 12-month budget
           period, the grant would not be included on the report until after the end of the first
           quarter – three months later.

       • 	 Only the first grant budget period was used to calculate potentially excessive
           drawdowns. Active grants in later budget periods were not included on the reports,
           regardless of the drawdown status.

       • 	 Grants were included in the reports regardless of whether the grant period was active
           or whether funding activity occurred during the budget period. In many cases, these
           were older grants for which the budget period had ended prior to FY 2005, and there
           was no FY 2005 funding for the grant.

       • 	 At the start of a new year, grant records are “rolled over” in the GAPS software to
           facilitate continuation awards. Early “roll-over” of grants for continuation award
           purposes prevented grants from being properly evaluated for excess drawdowns
           conditions. The roll-over process resulted in the status for a future budget period
           being reflected as the current budget period for the grant. In one example evaluated,
           this action occurred approximately six months before the actual start date of the new
           budget period. Once this action occurred, the actual “current” budget period would
           no longer be evaluated, and if an excess drawdown condition occurs, it would not be
           properly identified and included on the report.

       • 	 Similarly, early posting of future year authorizations were improperly included in the
           total obligations used to calculate the percentage of funds drawn down for the current
           period. As a result, the percentage of funds drawn down was understated and grants
           with drawdowns meeting the thresholds were not included on the report.

       • 	 We also noted minor differences of one day in the calculations for the current quarter
           and for the number of days in the current budget period. These calculations were
           used in determining the percentages of funds drawn. Deficiencies noted resulted in
           inaccurate calculation of the quarter end dates and in some cases may have impacted
           the grants included or excluded from the reports.

In addition, GPOS stated that it did not distribute the Excessive Drawdown Reports for the
months of October and November 2004 and January 2005 because it was testing a new query for
the report with the GAPS Report Team. GPOS stated a report was generated in January 2005,
but it found that the January 2005 activity was the same as that in the December 2004 report that
had previously been compiled. Therefore, GPOS distributed the December 2004 activity to POs
in early February 2005. GPOS did not distribute reports in April 2005 due to workload issues in
GPOS. GPOS also stated that in FY 2005, it only generated the reports for grants with award
years from FY 2003 through FY 2005 since most grants were of three years’ or less duration. In
Final Audit Report
ED-OIG/A19F0025                                                                       Page 7 of 16

addition, grants awarded in FY 2005 were not usually included in the report requests until six
months after the start of the FY.

To evaluate GPOS’ statement that most grants were of three years’ duration or less, we analyzed
FY 2005 funding and found that of the 11,483 new and continuation awards, 2,668 unique grants
(23 percent) were originally awarded prior to FY 2003, and therefore were not monitored for
excessive drawdowns. These grants represented approximately $969 million in FY 2005
funding.

As a result of the deficiencies noted in the Excessive Drawdown Report programming, and
GPOS’ process for generating the reports, the Department did not identify and monitor all grants
with potentially excessive drawdown activity during FY 2005. Grantees may be making cash
drawdowns in excess of immediate needs. The funds drawn down are at risk for inappropriate
use without detection by the Department. Without identifying possible excessive drawdowns
soon after they occur, the Department cannot ensure that grantees are financially compliant and
that drawdowns are not made in excess of each grant’s immediate cash needs. In addition, the
inclusion of grants that did not have fiscal activity resulted in PO staff researching grants that did
not represent potentially excessive drawdowns.

Recommendations

We recommend the Chief Financial Officer:

1.1 	   Take immediate action to correct the deficiencies noted in the query used to generate the
        Excessive Drawdown Report to ensure all potentially excessive drawdowns are identified
        for all active grants, and to ensure that grants that are no longer active are not included in
        the report.

1.2 	   Redesign the query used to generate the Excessive Drawdown Report in GAPS to allow
        GPOS staff to query for all active grants, regardless of award year, for all POs. Design
        this query to run automatically each month and be placed in a location for GPOS staff to
        access.

1.3 	   Design additional fields in GAPS to allow GPOS staff to enter resolution information for
        potentially excessive drawdowns so that, if resolved, the grants do not appear on future
        reports until the next threshold is reached.

OCFO Comments:

OCFO concurred with the finding and recommendations. OCFO stated it has corrected the six
query deficiencies noted in the first recommendation to ensure the Excessive Drawdown Report
identifies all potentially excessive drawdowns for all active grants, and that grants that are no
longer active are not included. In addition, OCFO stated the remaining two recommendations
require data base enhancements, which are included in the G5 Phase I implementation. In the
interim, OCFO stated a temporary work process has been developed to provide the necessary
information to the POs.
Final Audit Report
ED-OIG/A19F0025                                                                   Page 8 of 16

FINDING NO. 2 – G
                	 POS Did Not Ensure Program Offices Monitored Excessive
                Drawdowns

GPOS did not always fulfill its responsibility to ensure program offices monitored excessive
drawdowns. We found that GPOS did not always follow up with POs that did not respond to the
reports referred for their research and resolution. We reviewed in detail the Excessive
Drawdown Reports generated by GPOS during FY 2005 for two POs – the Office of Innovation
and Improvement (OII) and the Office of Postsecondary Education (OPE). These two offices
represented 425 of the total 495 potentially excessive drawdowns for the year (86 percent).
These drawdowns were made by 263 unique grantees. We found the POs did not provide
responses for 159 of the 425 excessive drawdowns (37 percent) they were responsible for
researching and resolving. These drawdowns were made by 121 unique grantees. We sampled
the responses these POs did provide for 69 potentially excessive drawdowns, and found that the
POs did not have documentation to support 8 of the responses provided (12 percent). In two
cases, the PO stated the grantee would return funds, but this did not occur.

The Bulletin states GPOS is “. . . responsible for providing overall department-wide oversight to
ensure that program offices are monitoring for excessive drawdowns.” The Bulletin further
states,

       GPOS will run the report on a monthly basis and will contact the Points of
       Contact and program managers to ensure that problems with excess cash balances
       have been resolved and the proper documentation is maintained regarding the
       status of each grant on the report.

In its referral of potentially excessive drawdowns, GPOS establishes a two to three week
deadline for the PO to respond, and requests the response include the following information:

       1. 	 Indicate how the drawdown is consistent with approved project activities and
            approved budget.
       2. 	 If Program Staff determine that an excessive drawdown has occurred, indicate
            the date the grantee was contacted and notified of Department policy.
       3. 	 Indicate the date the grantee resolved the cash management problem.
       4. 	 Indicate if funds were (1) returned to ED or (2) the grantee made an on-line
            adjustment.

When a PO does not respond to drawdowns listed on the monthly Excessive Drawdown Report,
GPOS highlights these unresolved drawdowns in red text on subsequent exception reports until
they are resolved. However, GPOS staff stated that, due to time constraints, they do not always
follow up with the POs that do not respond.

By not ensuring that the POs review the information and provide timely responses, the
Department is not monitoring all grants for excessive drawdowns, and cannot ensure its grantees
are compliant with fiscal requirements and are not making drawdowns in excess of their
immediate cash needs. PO staff may not take seriously their responsibilities to research and
respond to grants listed on the Excessive Drawdown Report if the requirement to respond is not
enforced. By not resolving possible excessive drawdowns soon after they occur, the Department
cannot ensure that grantees are financially compliant and that drawdowns are not made in excess
Final Audit Report
ED-OIG/A19F0025                                                                                   Page 9 of 16

of each grant’s immediate cash needs.

Recommendations

We recommend that the Chief Financial Officer:

2.1 	   Ensure GPOS staff follow up with PO staff on grants to which they do not respond.

2.2 	   Develop and implement a process to periodically report to senior management on the
        responsiveness of POs to the monthly Excessive Drawdown Reports.

OCFO Comments:

OCFO concurred with the finding and recommendations. OCFO stated that it would develop
internal procedures to ensure followup with PO staff on grants where they did not initially
respond to reports referred for research and resolution. OCFO also said an excessive drawdown
summary report would be developed and provided to senior management on a periodic basis to
alert them about the responsiveness of PO staff to the monthly excessive drawdown reports.


FINDING NO. 3 – I	 mprovements Are Needed in Use of Payment Flags to Prevent
                Inappropriate Drawdowns

The Department uses payments flags in GAPS to route or stop payments to grantees. These
payment flags prevent inappropriate drawdowns by requiring review and approval by
Department staff for the release of funds. We found, however, that improvements were needed
in the use of payment flags to ensure that a payment flag applied to one grant is communicated to
all program staff managing other grants by the same grantee, and to ensure payment flag reports
in GAPS present complete and consistent information.

The revised Handbook, dated February 24, 2006, Section 5.3.8, “Fiscal Monitoring,”
Subparagraph 7, “Resolving Excess Cash Balances,” states,5
        c. 	 If the grantee does not resolve excess cash balances within two weeks after
             being contacted, the program official must consult with the program attorney
             and take one of the following actions:

             1) Activate the Route Payment Flag in GAPS and notify the grantee that all
                future payment requests will be routed to the program office for approval.
                Activating this flag ensures that payments will not be made without
                program staff approval.

             2) Require the program staff to transfer the grant from the advance payment
                method to the reimbursement payment method in GAPS, which requires

5
 Prior to the recent update of the Handbook, the three payment flags and their uses were defined in Grants Policy
Bulletin #27, Monitoring Discretionary Grants for Excessive Drawdowns, dated May 24, 2001. The revised
Handbook was in effect for the scope of this review – payment flags as of May 2006.
Final Audit Report
ED-OIG/A19F0025                                                                     Page 10 of 16

               that the grantee be reimbursed for expenses incurred. The license holder
               must activate the Reimbursement Flag in GAPS to take this action. Under
               the reimbursement method, the grantee must submit vouchers as proof of
               expenditures and explain why these expenditures are allowable. The
               program staff member may approve drawdowns only after the grantee has
               substantiated expenditures greater than the amount of the excess balances.
               If a new drawdown is appropriate, the program staff member brings
               supporting documentation to the license holder, who then can authorize
               payment.

       d. 	 If the excess cash balances remain unresolved after taking the actions under
            paragraph c. above, the program official must consult with the program
            attorney and decide whether to designate the grantee as high-risk. If the
            grantee is designated high-risk, the program official must notify the grantee,
            and activate the stop payment flag in GAPS. Activating the stop payment flag
            will prevent the grantee from drawing down funds on an individual award or,
            if necessary, any award made to the entity until the excess cash issue has been
            resolved.

Specifically, we reviewed 163 awards made to 106 unique grantees during FY 2001 through FY
2005 to which payment flags had been assigned in GAPS. We found that 64 of the unique
grantees (60 percent) had other active awards to which no payment flags had been applied.
These 64 grantees had a total of 894 non-flagged awards with $6.6 billion available to draw
down as of May 22, 2006.

In GAPS, PO staff can generate reports to show payment flags by recipient, including the Risk
Management Report and the Payment Flag History – By Grantee. However, we found payment
flag information was not completely or consistently presented within the system. For example, a
printed version of the Risk Management Report for all POs and all awards from FY 2003
returned 12,143 records with obligations totaling $38.3 billion. The data from the same report
exported to an electronic file only included 2,492 records with obligations totaling $13.1 billion.

We also found that the most recent action in the Payment Flag History – By Grantee report did
not correspond to the payment flag status in the Risk Management Report for 107 of the 163
awards reviewed (66 percent). Of these 107 awards:

       • 	 59 awards reported a reimbursement flag in the Risk Management Report, however
           the Payment Flag History – By Grantee report indicated that route and/or stop
           payment flags were in effect,
       • 	 46 awards with the route payment or stop payment flags listed as on the Risk
           Management Report did not match the most recent action on the Payment Flag
           History – By Grantee report, and
       • 	 2 awards had multiple flags on the Risk Management Report that did not match the
           status on the Payment Flag History – By Grantee report.

Finally, we found that when the Payment Flag History – By Grantee listed a flag for an
individual award, the flag did not always appear on the Risk Management Report. We reviewed
all flag actions presented in the Payment Flag History – By Grantee reports for the 106 unique
Final Audit Report
ED-OIG/A19F0025                                                                   Page 11 of 16

recipients with the payment flags on the Risk Management Report. We identified a total of 212
awards with route payment and/or stop payment flags as the most recent action in the Payment
Flag History – By Grantee report for which no flag was listed on the Risk Management Report.


GPOS confirmed that there is currently no mechanism in place to communicate payment flag
information to all program offices that are responsible for monitoring additional grants awarded
to the same grantee. While PO staff can generate GAPS reports to check if payment flags have
been assigned to specific grantees, there is no requirement to do so. Nor is there any function
within GPOS or in GAPS to communicate information regarding payment flags to all offices
with grants to the same grantee.

With respect to the incomplete data in the Risk Management Report, the GAPS Report Team
determined an error in the application caused the export to “crash” before it was completed. The
GAPS Report Team stated they would work to identify the source of the problem and correct the
issue. In addition, GPOS and GAPS Report Team staff were unsure why the reimbursement flag
was not displayed on the Payment Flag History – By Grantee report, and stated this flag could be
added to the report.

Due to the lack of communication regarding payment flags, and inconsistencies relating to
payment flag reporting, the use of awarded funds may not be monitored at a level commensurate
with the actual risk. Payment flags that have been placed on one award for financial
responsibility and compliance issues, may be applicable to all awards for that grantee. In
addition, program officials may not have complete and accurate data relating to payment flags to
consider in making management decisions. This places these additional awards at risk of
mismanagement or the same circumstances that resulted in application of the payment flag on
one award.

Recommendations

We recommend that the Chief Financial Officer:

3.1 	   Develop and implement a method to communicate payment flag information, including
        the reasons the flag was imposed or cleared, to all program offices responsible for
        monitoring additional grants awarded to the same recipient.

3.2 	   Establish and implement policies and procedures to require PO staff to evaluate
        information received on payment flags for other awards to grantees to which they have
        also made or are making awards.

3.3 	   Review the payment flag reporting functionality within GAPS and correct issues noted
        with respect to exporting reports and inconsistencies between reports.

OCFO Comments:

OCFO concurred with the finding and recommendations. OCFO stated it would develop and
implement necessary policies and procedures to address the first two recommendations. With
Final Audit Report
ED-OIG/A19F0025                                                                         Page 12 of 16

respect to the third recommendation, OCFO said it modified the Payment Flag History Report to
include reimbursement flags and corrected the inconsistencies.


FINDING NO. 4 – T
                	 he Department Did Not Monitor Formula Grants Through the
                Excessive Drawdown Reports

The Department developed the Excessive Drawdown Report in GAPS to identify grantees that
may have violated cash management policies and regulations by drawing down funds in excess
of a grant’s immediate cash needs. However, this report was applied only to discretionary grants
and did not include formula grants. The Department does not have a report to facilitate
monitoring of excessive drawdowns for formula grants.

Standards for Internal Control in the Federal Government, issued by the Government
Accountability Office, dated November 1999, provides the minimum level of quality acceptable
for internal control in government and the basis against which internal control is to be evaluated.
The Standards state,

       These standards apply to all aspects of an agencies operations: programmatic,
       financial, and compliance . . . In implementing these standards, management is
       responsible for developing detailed policies, procedures, and practices to fit their
       agency’s operations and to ensure they are built into and an integral part of
       operations.

The third standard for internal control, “control activities,” is defined as follows:

       Internal control activities help ensure that management’s directives are carried
       out. The control activities should be effective and efficient in accomplishing the
       agency’s control objectives . . . Control activities are an integral part of an entity’s
       planning, implementing, reviewing, and accountability for stewardship of
       government resources and achieving effective results.

Education Department General Administrative Regulations, Part 80, “Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local Governments,” dated
November 26, 2003, establishes uniform administrative rules, including financial management,
for Federal grants and subawards to State, local and Indian tribal governments. Section
80.20(b)(7), entitled “Cash management,” states,

       Procedures for minimizing the time elapsing between the transfer of funds from
       the U.S. Treasury and disbursement by grantees and subgrantees must be
       followed whenever advance payment procedures are used.

GPOS staff stated that some PO staff use portions of the Discretionary Grant Handbook to
monitor formula grants, but there is no centralized policy for monitoring formula grants, and
there is an overall lack of direction for formula grants. GPOS agreed that the Excessive
Drawdown Report and other GAPS reports would be useful monitoring tools for formula, as well
as discretionary grants. GPOS staff stated that different thresholds may need to be established
for the formula grant programs, but they would work with the POs to create these thresholds.
Final Audit Report
ED-OIG/A19F0025                                                                   Page 13 of 16


Because the Excessive Drawdown Report or a similar report has not been developed for formula
grants, the Department lacks assurance that program staff are adequately monitoring these grants
to ensure that Department funds are being expended appropriately. In FY 2005, the Department
awarded approximately $38.7 billion in formula grants. By not identifying potential excessive
drawdowns made by formula grantees, these Federal funds are at risk for being misused.
Grantees may be drawing down funds in excess of their immediate cash needs for each grant and
using the funds for inappropriate purposes.

Recommendations

We recommend that the Chief Financial Officer, in conjunction with the Deputy Secretary’s
Grants Improvement Project:

4.1 	   Ensure GAPS reports applicable to monitoring formula grant activity, such as the
        Excessive Drawdown Report, are also developed and implemented for these grants.

OCFO Comments:

OCFO did not concur with this finding and recommendation. OCFO stated that it has no
authority to oversee formula grants, including developing policy for their administration. OCFO
said it miscommunicated a statement regarding GPOS’ oversight role for formula grants during
the audit and that the applicable statement in our draft report was inaccurate.

OCFO also stated that, under 31 CFR, interest penalties are imposed on any state that makes
excessive drawdowns under a formula grant program subject to the Cash Management
Improvement Act. These interest penalties encourage states to follow appropriate cash
management policies. In addition, OCFO said states are frequently late in disbursing funds to
their vendors and subgrantees, and incur substantial interest penalties payable to the Federal
government under the State administered programs of the Department. As a result, OCFO stated
there does not appear to be a significant risk of loss to the Federal government.

OIG Comments:

Although OCFO indicated it has no authority to oversee formula grants, it is our understanding
the Deputy Secretary’s Grants Improvement Project, headed by OCFO, has been tasked to
develop a Handbook for the Formula Grants Process. This handbook will include policies and
procedures related to the fiscal management of formula grants. OIG believes the development
and implementation of the GAPS reports for formula grants, such as the Excessive Drawdown
Report, would be a useful tool for fiscal oversight. It will assist POs in their requirement to
monitor grantees’ fiscal activities to ensure funds are drawn in accordance with statutory and
regulatory requirements. As such, we added to the recommendation that the Chief Financial
Officer work in conjunction with the Deputy Secretary’s Grants Improvement Project.
Final Audit Report
ED-OIG/A19F0025                                                                   Page 14 of 16



                  OBJECTIVE, SCOPE, AND METHODOLOGY 



The objective of our audit was to determine whether the Department’s controls identify and
prevent excessive cash drawdowns by grantees. To accomplish our objective, we performed a
review of internal control applicable to the Department’s monitoring of excessive drawdowns.
We reviewed applicable laws and regulations, and Department policies and procedures. We
conducted interviews with Department officials to gain an understanding of how the Excessive
Drawdown Report is generated in GAPS and used by program staff to monitor excessive cash
draws by grantees. In each PO reviewed, we conducted interviews with program staff
responsible for researching and resolving grant drawdown activity. We also reviewed
documentation provided by Department staff to support the resolution of excessive drawdowns
included in our review. In addition, we evaluated the process used to generate the Excessive
Drawdown Report in GAPS to identify the selection of grants included and excluded from the
FY 2005 reports.

The universe for our audit was identified as excessive cash drawdowns made by grantees that
appeared on the FY 2005 Excessive Drawdown Reports. We obtained the reports from GPOS
and determined the reports included a total of 495 potentially excessive drawdowns made by 330
different grantees. We determined that OII and OPE had the largest number of potentially
excessive drawdowns on the reports, with 236 and 189 drawdowns, respectively. Together, OII
and OPE represented 425 of the 495 total drawdowns on the reports (86 percent). As such, we
limited our detailed review to the drawdowns for these two POs. We selected sample
drawdowns to review in each PO as follows:

• 	 We stratified the universe of OII and OPE drawdowns by the thresholds reached on the
    excessive drawdown reports. We evaluated in three strata all grantees that exceeded the
    threshold level of 50 percent or more drawn in the first quarter, 80 percent or more drawn in
    the second quarter, and 100 percent in the third quarter. We randomly selected grants in each
    stratum in proportion to the universe of grants in each stratum, for a total random sample of
    30 grants for each PO.

•   We reviewed the PO justifications for all drawdowns on the exception reports and also
    judgmentally selected additional drawdowns with responses we deemed to require additional
    followup or for which the resolution provided appeared vague. In total, we judgmentally
    selected an additional 17 drawdowns for OII, and 21 drawdowns for OPE.

•   After further review, we eliminated duplicate drawdowns, those for which PO staff did not
    provide a response (to be reported separately), and one grant for which the file had been
    archived and was no longer available for review. In total we eliminated 18 drawdowns from
    OII’s sample, and 11 from OPE’s sample.

•   In total, our sample for detailed review included 29 OII drawdowns (30 random + 17
    judgmental – 18 eliminated), and 40 OPE drawdowns (30 random + 21 judgmental – 11
    eliminated), for a total of 69 excessive drawdowns.
Final Audit Report
ED-OIG/A19F0025                                                                    Page 15 of 16

We reviewed grant files for each of the 69 excessive drawdowns. In cases where we could not
find appropriate documentation in the grant files, we referred our findings to OII and OPE staff
to determine whether any additional documents existed to support the responses provided to
GPOS. The results presented include consideration of additional documentation provided by OII
or OPE.

To evaluate the appropriateness of the query used to generate the Excessive Drawdown Reports,
we obtained text file extracts from GAPS of grants having excessive drawdown conditions
identified in the reports that were generated by GPOS during FY 2005. A total population of
4,568 drawdowns was noted, representing 720 unique grant numbers. We obtained three detail
data extract files from the GAPS Reports Team staff, which consisted of grant specific data,
budget period date change records, and financial transaction postings. The detail extract files of
grant/budget period level data along with summarized financial transactions were utilized to
evaluate drawdown activity for FY 2005. For evaluation of grants with excessive drawdown
conditions, we identified grant/budget period records that were either funded with FY 2005 funds
or had some portion of an active current grant budget period during FY 2005. We identified a
total population of 12,767 grants, comprised of 1,418 unique grantees, which met the excessive
drawdown thresholds during FY 2005. To evaluate the analysis that produces the report, we
used the extracts of GAPS drawdown data and compared this data to the text file extracts for the
Excessive Drawdown Reports provided by GPOS.

We relied upon computer-processed data in GAPS and the Excessive Drawdown Reports
generated through the GAPS software. We attempted to obtain the source code used to generate
the report, but it was not available. We did obtain a copy of the source code for a different
version of the Excessive Drawdown Report. We also obtained transactional data and repeated
the process used to generate the report, based on descriptions in Department policy documents.
As discussed in Finding 1, we found that the Excessive Drawdown Reports for FY 2005 did not
include all appropriate grants, and did include some grants that should not have appeared on the
report. As a result, we determined that that Excessive Drawdown Reports generated through
GAPS were not accurate or complete. The most significant issue noted with the report was in
completeness as we identified 1,379 grants that should have appeared on the reports, but did not.
Less significant was the fact that the report included 166 grants that it should not have included
because the grant period and funding was not current.

Through our sample of 69 responses provided by the POs to GPOS based on the potentially
excessive drawdowns listed on the report, we found that PO staff generally did not disagree with
the grants that were listed as having potentially excessive drawdowns. In 4 of the 69 responses
(5.8 percent), PO staff stated that the grant period was over – a condition that was found in our
review and reported as part of Finding 1.

While we found the Excessive Drawdown Report was significantly incomplete, and in some
cases included grants it should not have included, we concluded that the issues were due to the
method in which the report was generated, not the underlying data in GAPS. Testing the
accuracy and completeness of the report was part of our objective to evaluate the Department’s
controls to prevent and detect excessive drawdowns. We reported issues noted in Finding 1 and
made recommendations to the Department to correct the issues noted.
Final Audit Report
ED-OIG/A19F0025                                                              Page 16 of 16

We conducted fieldwork at Department offices in Washington, DC, during the period October
2005 through August 2006. We held an exit conference with Department staff on August 10,
2006. Our audit was performed in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.
                                 ATTACHMENT: Auditee Comments


                     UNITED STATES DEPARTMENT OF EDUCATION
                                 OFFICE OF THE CHIEF FINANCIAL OFFICER

                                                                                      THE CHIEF FINANCIAL OFFICER


                                         NOV - 2 2006



TO:              Helen Lew
                 Assistant Inspector General for Audit Services

FROM:            LawrenceA. Warder              ~CJa.~.
SUBJECT:         Draft Audit Report
                 Controls Over Excessive Cash Drawdowns by Grantees
                 Control Number ED-OIG/A19F0025

Thank: you for giving us the opportunity to review the subject draft audit report. We
concur with your first three findings and provide the attached Corrective Action Plan
(CAP) addressing each recommendation. As you can see from our corrective actions,
OCFO is committed to improving policy and monitoring responsibilities for discretionary
grants. We have already corrected several of the deficiencies identified in your draft
audit report. Below is a general discussion of each finding in the draft report.

        Finding No.1 - Excessive Drawdown Reports Did Not Effectively Identify
        All Potentially Excessive Cash Drawdowns.

        We concur with this finding and three recommendations. We have already taken
        immediate action and corrected the six query deficiencies noted in your first
        recommendation and the modified Excessive Drawdown Report was implemented
        on October 10, 2006. This report will ensure that all potentially excessive
        drawdowns are identified for all active grants, and ensure that grants that are no
        longer active are not included.

        The remaining two recommendations under this finding require database
        enhancements and are included in the Phase I requirements for the new grants
        management system, GS. G5 Phase I implementation is to occur during the first
        quarter of fiscal year (FY) 2008. In the interim, we have developed a temporary
        work process, providing the necessary information to the Principal Offices (PO)
        starting in the first quarter of FY 2007.

        Finding No.2 - GPOS Did Not Ensure Program Offices Monitored Excessive
        Drawdowns

        We concur with this finding and two recommendations. We will develop internal
        procedures to ensure foillow up with PO staff on grants where the principal office



                           400 MARYLAND AVE., S.W.     WASHINGTON, D.C. 20202-4300


  Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
                                                                     OCFO Response
                                                                    Draft Audit Report
                                                                   ED-OIG/A19F0025
                                                                                  p.2

did not initially respond to reports referred for research and resolution. PO staff
will be reminded that any unresolved excessive drawdowns will be reported to
Department senior management. The development of an excessive drawdown
summary report is currently underway. Once approved for dissemination, the
report will be provided to senior management on a periodic basis to alert them
about the responsiveness of PO staff to the monthly excessive drawdown reports.
These procedures will be implemented by January 31, 2007.

Finding No.3 - Improvements Are Needed in Use of Payment Flags to
Prevent Inappropriate Drawdowns

We concur with this finding and will establish the necessary policies and
procedures to address the first two recommendations. These policies and
procedures will be implemented in concert with the completion of Phase I ofG5
during the first quarter ofFY 2008.

In anticipation of the third recommendation under this finding, we completed a
review of the payment reporting functionality in GAPS and modified the Payment
Flag History Report to include reimbursement flags. The revised report was
implemented on August 25, 2006. In addition, the inconsistencies you noted in
your draft audit report have also been reviewed and corrected. Therefore, reports
are now displaying consistent information.

Finding No.4 - The Department Did Not Monitor Formula Grants Through
the Excessive DrawdowD Reports

We do not concur with this finding and accompanying recommendation for
various reasons. The CFO has no authority to oversee formula grants, including
developing policy for their administration. The report's paragraph on page 11
regarding GPOS' statem(mt on its oversight role for formula grants is inaccurate.
We regret any miscommunication that you may have received during your audit
on this issue.

Formula grant drawdowns, unlike discretionary grant drawdowns, are governed
by U. S. Treasury regulations for Federal-State fund transfers stipulated in 31
CFR, which the draft cites. Under this statute, interest penalties are imposed on
any state that makes excessive draws under a formula grant program subject to the
Cash Management Improvement Act (CMIA). These interest penalties encourage
states to follow appropriate cash management policies.

In addition, a number of states' constitutions require that states only issue payment
orders when funds are available in the account charged for the payment. Thus,
these states must draw funds before they can issue payments to vendors and
sub grantees. These states are frequently late in disbursing funds to their vendors
and subgrantees, and incur substantial interest penalties payable to the Federal
                                                                               OCFO Response
                                                                             Draft Audit Report
                                                                            ED-OIG/A19F0025
                                                                                           p.3

       government under the State administered programs of the Department. There
       does not appear to be a significant risk ofloss of to the Federal government as a
       result of these state constitutional requirements.

With your recommendations, we are confident that the delivery and monitoring of
discretionary grants will benefit the entire Department. I appreciate your staff s effort in
this area and look forward to working with them regarding the specifics of each finding.

We are providing our comments electronically to Michele Weaver-Dugan, Director,
Operations Internal Audit Team, per the instructions in your September 19,2006 email.
If you have any questions concerning our response or CAP, please contact Constance
Davis at (202) 401-3892 regarding GAPS or G5 issues and Blanca Rodriguez at (202)
245-6121 regarding policy and procedure issues.

Attachment