oversight

The Osage County Interlocal Cooperative

Published by the Department of Education, Office of Inspector General on 2008-11-14.

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

                       UNITED STATES DEPARTMENT OF EDUCATION

                                          OFFICE OF INSPECTOR GENERAL




                                                                          NOV 1 4 2008
MEMORANDUM

TO: 	           Thomas Skelly
                Acting Chief Financial Officer
                Office of the Chief Financial Officer

                Richard Smith 

                Acting Assistant Deputy Secretary 

                Office of English Language Acquisition 


                       lsI
FROM: 	         Richard T. Rasa
                Director
                State and Local Advice and Assistance

SUBJECT: 	 Final Report on the Osage County Interlocal Cooperative
           Control Number ED-0IG/S14J0001


Attached is the final report on the Osage County Interlocal Cooperative (OCIC)
conducted by our contract audit firm, McBride, Lock and Associates. This report
was completed in response to a request from OELA staff for a fiscal review of
OCIC.

The report identifies a variety of issues including OCIC's large cash balance, its
allocation of direct and indirect costs, and some questionable charging practices.
Therefore, our office is recommending that the Department conduct a financial
monitoring review of OCIC's expenditure of federal grant funds.

You have been designated as the action officials responsible for the resolution of
the findings and recommendations in the attached final report. We also provided
a copy to OCIC and your audit liaison officers.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports
issued by the OIG are available to members of the press and general public to
the extent information contained therein is not subject to exemptions in the Act.




                                400 MARYLAND AVE.,      s.w. WASHINGTON,     D.C. 20202-1510

        Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
We appreciate the cooperation of OELA staff during this review. If you have any
questions concerning this matter, please contact me at 202-245-6954.

Attachment


cc: 	   OIG Report Distribution List
        Cynthia Ryan
        Trinidad Torres-Carrion
        Samuel Lopez
        Sherrice Rucker
SUITE 900
1111 MAIN STREET
KANSAS CITY, MO 64105
TELEPHONE: (816) 221-4559
FACSIMILE: (816) 221-4563
EMAIL: MCBRIDELOCK@EARTHLlNK.NET
CERTIFIED PUBLIC ACCOUNTANTS


McBRIDE, LOCK & ASSOCIATES



         U.S. Department of Education 

         Washington, DC 20202 


         RE:     Osage County lnterlocal Cooperative - Hominy, Oklahoma

         We have completed a post-award review of the Osage County lnterlocal Cooperative
         (OCrC) Title III American and Alaska Native Children in School Program grant award,
         PRlAward Number T365C030038, known as Project Eagle. Our review was performed
         in accordance with Generally Accepted Government Auditing Standards issued by the
         Comptroller General of the United States and professional standards published by the
         American Institute of Certified Public Accountants. It was conducted during the period
         August 15,2007 through February 15, 2008. The scope of our review included:

             • 	 Adequacy of OClC to administer discretionary grants through fiscal control and
                 fund accounting procedures;
             • 	 Review of the OClC financial statement history and analysis of independent
                 auditor results;
             • 	 Review of prior on-site reviews conducted by the U.S. Department of Education
                 (ED) and follow-up from said review;
             • 	 Testing of grant disbursements to determine allowability of cost and proper
                 accounting for Federal funds; and,
             • 	 Physical observation of equipment purchased ~ith Federal funds and procedures
                 ensuring proper control of and accounting for equipment inventory.

        The objective of the review was to determine whether the grantee has in place adequate
        personnel, systems, and controls to administer, safeguard and account for federal grant
        funds in accordance with ED requirements.

        The review was performed for the period August 1, 2003 through January 31, 2008.
        During that period $1,038,907 in expenditures have been charged to this grant and an
        additional $61,428 is available for drawdown. A breakdown of charges is as follows:

                                                      Amount        %
                                   Payroll             $425,975    41.00%
                                   Fringe Benefits       87,002     8.37%
                                   Other Direct         479,530    46.16%
                                   Indirect 	            46,400     4.47%
                                                     $1,038,907   100.00%
The methodology used to conduct our review involved an assessment of control risk,
development of an audit plan and gathering evidential matter through interview,
observation and testing of events occurring during the review period adequate to provide
assessment of the capability to administer, safeguard and account for Federal grant funds.

Background of OCIC

Oklahoma law established the OCIC as a public school district. Each calendar year the
OCIC submits to the Oklahoma Department of Education copies of interlocal cooperative
agreements with its participating individual school districts containing the authorized
signatures of school superintendents and local boards of education presidents. The annual
interlocal cooperative agreements specify the services, duties, functions, obligations, or
responsibilities which are to be performed by the Interlocal Cooperative for its
participating individual districts to include:

   1. 	 A centralized interlocal cooperative office to write grants and coordinate
        interlocal staff and programs;
   2. 	 An executive director;
   3. 	 A business manager/secretary;
   4. 	 A professional development center for teachers and parents;
   5. 	 Certified and non-certified staff to implement the specific and special programs
        authorized by the interlocal cooperative board of directors;
   6. 	 A comprehensive OCIC policy book; and,
   7. 	 A board of directors.

ocrc Comments
The Osage County Educational Cooperative became an "Interlocal" in 1993 with passage
of Oklahoma House Bill 1393. Prior to this legislation, the organization had existed
mainly as a Special Education Coop, with one of the public schools serving as the Local
Educational Agency (LEA). With the formation of the ocrc, an annual membership fee
structure was established as part of the By-Laws. Initial membership in the ocrc
required school districts to expend local funds to pay a joining fee and an annual
membership fee thus creating a "cash fund balance" to be utilized by ocrc for operating
expenses.

Audit Reply

No modification was made to the final report as a result of the response.

Adequacy of the Organization to Administer Discretionary Grants

ocrc maintains its financial records on a basis of accounting required by Oklahoma
statutes and uses the Oklahoma Cost Accounting System COCAS) using Municipal
Accounting Systems, Inc. software. OCIC was able to readily identify all expenditures


                                            2

under the grant award and these expenditure reports were tied to the drawdowns from the
ED website portal for electronic grants without exception.

A review of OCIC's internal controls indicates that there is adequate segregation of
duties over disbursements of grant funds. Overall, OCIC has created sufficient
accounting systems and procedures to ensure and maintain proper stewardship of
taxpayer dollars over Federal funds. However, compliance with established processes
have caused concerns regarding the allowability of certain expenditures and financial
management which are addressed in the balance of this report.

Review of Financial Statement History and Analysis of Independent Auditor Results

The independent Office of Management and Budget COMB) Circular A-133 audits for
fiscal years 2003 through 2006 were reviewed. Each report included a qualified opinion
with respect to the statutory basis of accounting and contained disclosure of lack of
segregation of duties as a reportable condition in the internal controls over major
programs, which was not considered a material weakness. The reports for all four years
disclosed no instances of noncompliance material to the financial statements, no audit
findings which are required to be reported under OMB Circular A-133 and an unqualified
opinion report was issued on the compliance of major programs. Project Eagle was
determined to be a major program in 2004 and in 2006.

While the independent audit determined the lack of segregation of duties as a reportable
condition, this is considered an inherent limitation in small organizations. The
organization has segregated the receipting function in the disbursement process.
Additionally, the recording, disbursing and reconciliation functions have been segregated.
We consider these compensating controls adequate to reduce the risk of any material
misstatements, which the audit results support.

The audited financial statements indicate that from 90.7 to 93.5% of the total revenues of
the OCIGare derived from Federal"sources. Of these Federal sources, 78.5% are derived
from direct program grants from ED with an additional 20% in pass through monies from
ED through the Oklahoma Department of Education. The local sources account for only
3.2% oftotal revenues. Remaining funds are from state sources and earned interest.

The OCIC reported a cash fund balance at the end of fiscal year 2006 of $1 ,41 0,291 and
interest earnings for that year of$24,919. The Federal grant funds have elected the option
to be received on a reimbursement basis. Given this parameter, it is interesting to note the
large cash balance is adequate to fund over 4.5 months of activity for the organization.
The earning of interest income in an organization receiving predominantly Federal funds
indicates that cash management concerns are likely present.

OCIC Comments

In the Draft Review, it states "The earning of interest income in an organization receiving
predominantly Federal funds indicates that cash management concerns are likely
present." The large cash balance of OCle is also called into question. The Draft Review


                                             3

assumes that since these two things are present, there must be cash management
concerns. In fact both items are not a problem once the facts are known.

The cash balance noted is a result of 13 years of conducting business to provide
educational support services to member school districts. As set out above, each member
of oerc is required to pay a joining fee when the school district first joins, plus an
annual membership fee. This money plus fees from professional development and special
educational services, with the passage of time and frugal management by OCIC, has
created the large cash balance noted in the draft report. In addition, this large cash
balance has also created the interest income noted in the Draft Review. Since grant
management by the OCIe operates on a reimbursement basis, an adequate cash balance is
essential.

Since its inception as an Interlocal in 1993, the oerc has utilized the aUditing firm,
SANDERS, BLEDSOE & HEWETT, Certified Public Accountants, LLP to perform
annual audits (with an exception of a different auditing firm used in FY96). These annual
audits, which are required by Oklahoma School Law, as well as by federal law, are
reviewed by the oeIC Board of Directors. The OeIe Board of Directors consists of the
superintendents of each of the fifteen member districts. As part of a monthly Board of
Directors meeting, all revenue and expenditures are presented and approved by the said
Board. Each annual audit report is then forwarded to the Oklahoma State Department of
Education for further review. In reviewing 14 years of annual audit reports, no cash
management concerns have been noted. Contact information for the aUditing firm is:
Stephen H. Sanders, CPA, Eric M. Bledsoe, CPA, and Jeffrey D. Hewett, CPA of the
finn SANDERS, BLEDSOE & HEWETT, 112 W. Dallas St. Broken Arrow, OK 74013,
(918) 449-999l.

Accordingly, the comments concerning the "large cash balance" and interest income
should be deleted from the Draft Review.

Audit Reply

The OeIC reply provides certain additional information that was not previously provided.
Accumulation of funds over a 13 year period could conceivably account for the
significant cash balances. In evaluating individual revenue sources over the past four
years, it is significant to note that over 90% of revenues are generated from Federal
sources. It is therefore logical under this environment to further evaluate the cash
management of Federal funds and the potential impact that these revenue streams have on
allowing significant cash balances to exist.

No modification was made to the final report as a result of the response.

Prior On-Site Review

Staff members of the Title III Native American and Alaska Native Children in School
Program of ED and the Oklahoma Department of Education conducted an on-site visit to
the OCIe district during the period September 27 through September 28, 2006. As a


                                             4

result of the visit, six areas of critical issues concerning project perfonnance and fiscal
compliance were identified and funding was temporarily halted, as follows:

    • 	 No grant file or other documentation to establish implementation of the grants in
        accordance with the approved applications;
    • 	 Grantee failed to establish that it is one of the eligible entities listed in section
        3112(a);
    • 	 Both grants under the Native American and Alaska Native Children in School
        Program, Project Eagle and Project WOHALI (Working on High Achievement in
        Language Instruction), are intended to serve the same schools and grade levels,
        with the same project goals, objectives and activities;
    • 	 No evidence of Native American Limited English Proficiency (LEP) students
        participating in the program;
    • 	 Grantee failed to inform parents of the LEP students participating in the program,
        Section 3302 - Parental Notification; and,
    • 	 Entity received a subgrant under Title HI, Section 3114 while receiving the Native
        American and Alaska Native Children in School grants, contrary to Section
        3112(c) ofthe Elementary and Secondary Education Act (ESEA).

On November 15, 2006, based on ED's review and approval of OCIC responses and
documentation provided regarding the concerns, the Office of English Language
Acquisition (OELA) of ED allowed OCIC to resume withdrawal of funds from Project
WOHALI.

ED learned of concerns which centered on discrepancies noted in the reporting of LEP
students to the State versus those reported to the Federal government and also expressed
concerns regarding the type of expenditures being made by the OCIC with Federal funds.
The OCIC is working to ensure that those students who have been identified as LEP for
the purposes of Federal funding also met the State requirements, due to differences in the
criteria used by both. The required fonns for the State have not yet been obtained on all
students being served under the federal program. The initial determination of LEP
students was questioned and has not been resolved between ED and OCIC. Concerns
regarding types of expenditures are further addressed in this report in the section on
testing of grant disbursements.

OCIC Comments

In reference to the six areas 0/ critical issues, grant draw-downs were voluntarily
suspended by the OCIC from September of 2006 to November of 2006 until all of the
critical issues were addressed. As stated in the letter of November 15, 2006 from ED, all
of the critical issues were resolved. It should be noted that several of the critical
issues identified were merely communication issues. Information was available but
was not requested during an on-site visit; the miscommunication issues were
resolved quickly. The process of identifying LEP students and obtaining Home
Language Surveys has been revised by the OCIe. It should also be noted that the abstract
and the proposal narrative, which was approved by ED, states that Project EAGLE will
serve LEP and non-LEP students in the four districts named in the grant proposal.


                                             5

Discussions continue between the OCIC Project Director and the OELA Program
Supervisor concerning the differences in the State of Oklahoma and ED definition of an
LEP student. Accordingly, these comments regarding the six areas of critical issue
should either be removed from the Draft Review or the Draft Review should reflect the
information set out in this paragraph, since a failure to do so would give a false
impression.

It should also be noted on page 4 of this section that the sub grant was received under
Title III, Section 3114, and not Title II as reflected in the Draft Review.

Audit Reply

The final report includes the OCIC comments in full. The issues developed as a result of
the review have not been modified as a result of the response.

The final report modified the typographical error regarding the reference to the Title III
program.

Testing of Grant Disbursements to Determine Allowability of Cost and Proper
Accounting for Federal Funds

Our review included testing of 55% of the total direct non-personnel related expenditures
and review of personnel charges related to one of the project directors and a Curriculum
Technology Specialist charged to the grant. These positions were determined to be of
higher risk because of their lack of association with student activity. Our review was
conducted to determine the disbursement procedures of the grantee, the allowability of
costs being charged to the grant, the adequacy of time and attendance records, and the
appropriateness of the grantee's accounting for expenditures. In determining the
allowability of costs being charged to the grant we considered the basic guidelines
affecting the allowability of costs, in addition to the concerns expressed in both the site
visit and prior employee comments regarding duplicative efforts and unreasonable and
unnecessary expenses; The following areas of concern or questioned costs were
identified:

   •   Indirect versus Direct Costs

       The review of direct non-personnel expenditures charged to the Project Eagle
       grant revealed many incidental items that would appear to be indirect in nature.
       For instance, charges to the grant were made for maintenance of the OCIC office
       color copier, toner cartridges for the OCIC office fax machine, monthly telephone
       bills and paper and other incidental office supplies.          In addition, these
       expenditures were often found to be split between several federal grant programs.

       Per OMB Circular No. A-87, direct costs are those that can be identified
       specifically with a particular final cost objective, while indirect costs are those:
       (a) incurred for a common or joint purpose benefiting more than one cost
       objective, and (b) not readily assignable to the cost objectives specifically


                                            6
       benefited. With regards to specific items of cost, OMB Circular No. A-87, states
       that "Only materials and supplies actually used for the performance of a Federal
       award may be charged as direct costs."

       OCIC serves 15 different school districts, of which only four are participating in
       Project Eagle. Incidental materials and supplies used by the oeIe would be
       difficult to allocate on a direct basis, using a reasonable methodology, to anyone
       particular Federal Grant award. Additionally, the fact that many of these
       expenditures are being charged to several projects as a direct charge would tend to
       support the conclusion that the costs could not specifically be identified with a
       final cost objective, or could allow for a situation in which duplicated costs could
       be charged to the various grant programs.

       The OCIC also receives an indirect reimbursement of 4.5% of direct charges.
       This indirect rate is based upon an average of the State approved indirect rates for
       the four school districts that are the subject of the grant. This reimbursement rate
       bears no relationship with the indirect costs of the OCIC. These costs are also
       used by the OCIe in calculation of their reimbursement of the organizations
       overall expenditures. It could not be ensured that this charge was not duplicative
       of direct charges previously made.

oeIC eomments

On page 4 of the Draft Review, it is stated that the review of direct non-personnel
expenditures "revealed many incidental items that appeared to be indirect in nature. II On
the original Project EAGLE budget, which was approved by ED, there was an annual line
item for $125.00/month for printing and copying materials as a direct cost. There was
also a line item direct cost for office supplies in the amount of $90.00/month for each
year of the grant. This was approved by ED. In addition, since OCIC is on a
reimbursement basis, each charge for these items is specifically approved again by ED
prior to payment. These types of budget items are prevalent within most of the approved
budgets of federal grants administered by the OCIC. Various grant activities listed in
approved original budgets and narratives required printing and copying such as:
newsletters, data analysis reports disseminated to participating districts, professional
development training materials, family/parent education materials, native language
materials, etc. A system currently is in place that identifies direct cost with a particular
final cost objective for each grant program. For example, copying and telephone costs are
tracked by employees utilizing codes specific to a grant. Accordingly, this portion of the
Draft Review is inaccurate and should be changed to reflect this information or removed
from the Draft Review.

It should also be noted that on page 5, under this section that OCIe serves 15 member
school districts not 16 as noted in the Draft Review.

Audit Reply

The final report modifies the number of schools served from 16 to 15.


                                             7
The issues developed as a result of the review have not been modified as a result of the
response.

Questionable Costing Practices

Because of the manner by which the organization computes grant reimbursement, several
specific instances were noted that created concern regarding the allowability of certain
costs to specific grants.

   • 	 In April of 2005, aelc charged $650 to the Project Eagle grant for a car lease for
        the prior Executive Director. Further review indicates that additional months at
       $650 a month were charged to the following Federal grant projects: Tassels (2
       months), Play (2 months), Icon, Clio and Pisces. Vehicle costs would generally be
       charged to various grants based on usage. If the usage is administrative in nature
       an allocation method should be demonstrated. It is unclear as to the manner the
       oele used to allocate such costs.
   • 	 In June of 2005, oCle charged $100 to the Project Eagle grant for cell phone
       usage of the prior Executive Director. Further review indicates that $602 in total
       was charged to Project Eagle and other Federal grants for the April through July
       2005 wireless bills. The support for the allocation basis to the grant was not
       present.
   • 	 In May 2007, a check for $3,189 was written to the OCIC and charged to Project
       Eagle. Further investigation revealed that several projects were charged prorated
       amounts that were reimbursed to the oele for the purchase of a van to be used by
       oelc and its personnel. A mileage log is being maintained, however, at the time
       of our review, trips recorded were for administrative duties rather than for any
       specific project related objective.
   • 	 In June of 2004, the Project Eagle grant was charged $560 for installation of a
       document camera in the Board room. This charge would appear to be an indirect
       cost not specifically chargeable to any particular Federal grant since the use of the
       Board room would benefit the organization as a whole, rather than any specific
       grant.
   • 	 Employees, in addition to their base salary, often receive one time awards,
       resembling a year end bonus, or other stipends for additional duties. These
       additional duties, and one time payments, do not appear to benefit any specific
       grant program. These amounts are being charged to the grants in the same ratio as
       the employee's base salary. Specifically, the one time awards ranged between
       $200/year for a part-time employee and $400/year for a full-time employee.
       Stipends for additional duties varied. In one case, an additional stipend of $930
       was being paid to an employee being charged to the grant for Web Master duties
       for the organization.

aele Comments

Beginning in July 2005, the oele implemented revised processes and procedures
concerning requisitions, documentation of expenditures to grants, and reimbursement of


                                            8

expenditures. Most of the "questionable costing practices" noted in the draft occurred
prior to this time. The current procedures require detailed documentation of an
expenditure before it can be charged to a specific grant. Efforts to ensure the
aUowability of expenditure now include consultation with the Business Manager and
the Budget Director, and signatures by a Project Director and an oele Administrator.
Responses to specific items of costing practices in the Draft Review follow:

Item #1 and #2
The process the oele used to allocate the cost of a car lease and cell phone costs
was to divide the cost equally among the number of active grants that were in place at
that time.

 Item #3
After conversations with the auditor, on August 15,2007, the Transportation Log kept in
the van was revised to include: Date, Driver, Starting Mileage, Destination, Purpose,
and Grant. According to the auditor, since this grant is not a "direct cost" grant, pre­
billing for mileage to conduct grant activities when the oele van was utilized is
acceptable. However the maximum rate that can be used is the IRS Approved rate (.485
for FY 07 and .505 for FY 08). A log must be kept showing staff member, date,
destination, purpose, miles driven.

On May 15, 2007 Project EAGLE was billed $3,189 for an estimated 4,251 miles for
April, May, and June 2007. A rate of .75/mile was used which was the actual cost of
leasing a van from a commercial company and then providing fuel and insurance for a
maximum of 3,000 miles per month. The mileage estimate was based on a line item for
transportation in the budget.

As a result of conversations with the auditor on August 15, 2007 and February 15, 2008,
the Transportation Expense (May 15, 2007) for Project EAGLE will be adjusted
according to miles actually documented in the Transportation Log at the IRS approved
rate (A85/mile for FY07 and 50.5/mile for FY08). Adjustments will also be made to
all grants that were charged a prorated amount for transportation expense in May 2007.
The difference between the amount billed and the adjusted amount (utilizing
Transportation Log miles and the approved rate) will be returned to ED.

Item #4
OCle's response did not mention this issue.

Item #5
Professional Development Stipends have been paid to Oele employees who
complete optional professional development courses. The stipends are paid with grant
funds, processed through payroll, and considered as part ofthe employee's salary.




                                           9

The Extra-duty Contract for Web Master duties should have been paid with local
funds, rather than grant funds, since that duty affects all activities of the OCIC. This
amount will be returned to ED.

Audit Reply

The corrective action noted will benefit future accountability for the findings noted. No
resolution was proposed in the response for previous inadequacies in accountability for
items 1 and 2. For the remaining items, the proposed return of funds appears reasonable.
However, [mal agreement for these amounts rests with ED.

Physical Observation of Equipment Purchased with Federal Funds and Procedures
Ensuring Proper Control of and Accounting for Equipment Inventory

We physically observed several items of equipment that had been charged to the grant
program and identified as purchased for the nearby Hominy Elementary School. We
were able to locate these items of equipment, find them on the inventory maintained by
the grantee and observe the bar coded identification number assigned by the grantee. The
procedures observed appear to be adequate to ensure proper control and accountability
for equipment purchased with Federal funds. We were unable to verify the actual use of
equipment.

Conclusion

The grantee has systems in place to ensure fiscal control for grant expenditures.
However, due to the volume of Federal funds and the large variety of projects being
administered, the accounting system is not adequate to ensure that the costs being
charged to a particular program are allowable direct charges and that there is no
duplication of charges to various grant programs.

Additionally, OCIC is expending in excess of $3,500,000 with less than 3% of these
expenditures being paid by local sources. We believe it is this local limitation of funding
that has contributed to the need to charge non-grant specific costs to the grant programs
as direct charges. Our review indicates that a cost audit of any particular grant program
would necessitate reviewing the entirety of grant programs in order to accurately
determine the allowability of costs. It is evident from our review of the Project Eagle that
there are items of cost that have been charged to this project which would be considered
unallowable or unallocable to the grant. We recommend that such a review be performed.

OCIC has a significant cash balance which requires additional analysis to determine its
source. Accordingly, cash management of federal funds should be analyzed. The
corresponding interest earnings also require additional scrutiny.




                                            10 

This report is intended for the infonnation of ED and the OCIC and is not intended to be
and should not be used by anyone other than these specified parties.




                                          11 

ATTACHMENT 

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                        O~6CO~NTY'NT6RLDCALCOOP6RAnV6
                            207- 6. MAIN • HOMINY, OK.:r+o35-1.51::1.
                                        www.oei.o.t<.:L:2.oR..1otS 

                                 Dr: c::;ert;lLd   w. /-tt;lmS, 6)cecutLvt Dtrector 





       April 28, 2008

      Robert J. Lock
      McBride, Lock & Associates
      Suite 900, 1111 Main Street
      Kansas City, MO 64105

      Dear Mr. Lock,

             Enclosed is the RESPONSE BY OCIC to the draft of post-award review by
      McBride, Lock & Associates and communication on April 10,2008. An electronic copy
      was sent bye-mail on Friday, April 25, 2008.

             Further communication concerning the post-award review can be directed to
      Jacque Canady or myself at the OCIC.



      Sincerely,




      Gerald W. Harris, Ed.D.
      OCIC Executive Director




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                                     RESPONSE BY OCIC 

                              To Draft of Post-Award Review 

              By McBride, Lock & Associates &Communication on April 10, 2008 




    Set out below are a number of clarifications and comments regarding the Draft of the Post­
    Award Review ("Draft Review") by McBride, Lock & Associates sent to the Osage County
    Interlocal Cooperative ("OCIC") on April 10, 2008. The section headings are the same as set
    out in the Draft Review.


   Background of OCIC

   The Osage County Educational Cooperative became an "Interlocal" in 1993 with passage of
   Oklahoma House Bill 1393. Prior to this legislation, the organization had existed mainly as a
   Special Education Coop, with one of the public schools serving as the Local Educational
   Agency ("LEA"). With the formation of the OCIC, an annual membership fee structure was
   established as part of the By-Laws. Initial membership in the OCIC required school districts
   to expend local funds to pay a joining fee and an annual membership fee thus creating a "cash
   fund balance" to be utilized by OCIC for operating expenses.


   Review of Financial Statement History and Analysis of Independent Audit ResiIlts

   In the Draft Review, it states "The earning of interest income in an organization receiving
   predominantly Federal funds indicates that cash management concerns are likely present."
   The large cash balance of OCIC is also called into question. The Draft Review assumes that
   since these two things are present, there must be cash management concerns. In fact both
   items are not a problem once the facts are known.

   The cash balance noted is a result of 13 years of conducting business to provide educational
   support services to member school districts. As set out above, each member of OCIC is
   required to pay a joining fee when the school district first joins, plus an annual membership
   fee. This money plus fees from professional development and special educational services,


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                                       SCHOOL.. DISTRICT sy. I<.D01.
with the passage of time and frugal management by OCIC, has created the large cash balance
noted in the draft report. In addition, this large cash balance has also created the interest
income noted in the Draft Review. Since grant management by the OCIC operates on a
reimbursement basis, an adequate cash balance is essential.

Since its inception as an lnterlocal in 1993, the OCIC has utilized the auditing firm,
SANDERS, BLEDSOE & HEWETT, Certified Public Accountants, LLP to perform annual
audits (with an exception of a different auditing firm used in FY96). These annual audits,
which are required by Oklahoma School Law, as well as by federal law, are reviewed by the
acre Board of Directors. The OCIC Board of Directors consists of the superintendents of
each of the fifteen member districts. As part of a monthly Board of Directors meeting, all
revenue and expenditures are presented and approved by the said Board. Each annual audit
report is then forwarded to the Oklahoma State Department of Education for further review.
In reviewing 14 years of annual audit reports, no cash management concerns have been noted.
Contact information for the auditing firm is: Stephen H. Sanders, CPA, Eric M. Bledsoe,
CPA, and Jeffrey D. Hewett, CPA of the finn SANDERS, BLEDSOE & HEWETT, 112 W.
Dallas St. Broken Arrow, OK 74013, (918) 449-9991.

Accordingly, the comments concerning the "large cash balance" and interest income should
be deleted from the Draft Review.


Prior On-Site Review

 In reference to the six areas ofcritical issues, grant draw-downs were voluntarily suspended
 by the OCIC from September of 2006 to November of 2006 until all of the critical issues
were addressed. As stated in the letter of November 15, 2006 from the U.S. Department of
Education, all of the critical issues were resolved. It should be noted that several of the
critical issues identified were merely communication issues. Information was available but
was not requested during an on-site visit; the miscommunication issues were resolved
quickly. The process of identifying LEP students and obtaining Home Language Surveys has
been revised by the OCle. It should also be noted that the abstract and the proposal narrative,
which was approved by the USDE, states that Project EAGLE will serve LEP and non-LEP
students in the four districts named in the grant proposal. Discussions continue between the
Oele Project Director and the OELA Program Supervisor concerning the differences in the
State of Oklahoma and the U.S. Department of Education definition of an LEP student.
Accordingly, these comments regarding the six areas of critical issue should either be
removed from the Draft Review or the Draft Review should reflect the information set out in
this paragraph, since a failure to do so would give a false impression.

It should also be noted on page 4 of this section that the sub grant was received under Title III,
Section 3114, and not Title II as reflected in the Draft Review.


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Indirect vs. Direct

On page 4 of the Draft Review, it is stated that the review of direct non-personnel
expenditures "revealed many incidental items that appeared to be indirect in nature." On the
original Project EAGLE budget, which was approved by the USDE, there was an annual line
item for $125.00/month for printing and copying materials as a direct cost. There was also a
line item direct cost for office supplies In the amount of $90.00/month for each year of the
grant. This was approved by the USDE. In addition, since OeIC is on a reimbursement basis,
each charge for these items is specifically approved again by USDE prior to payment. These
types of budget items are prevalent within most of the approved budgets of federal grants
administered by the OCIe. Various grant activities listed in approved original budgets and
narratives required printing and copying such as: newsletters, data analysis reports
disseminated to participating districts, professional development training materials,
family/parent education materials, native language materials, etc. A system currently is in
place that identifies direct cost with a particular final cost objective for each grant program.
For· example, copying and telephone costs are tracked by employees utilizing codes specific
to a grant. Accordingly, this portion of the Draft Review is inaccurate and should be changed
to reflect this information or removed from the Draft Review.

It should also be noted that on page 5, under this section that OCIe serves 15 member school
district not 16 as noted in the Draft Review.


Questionable Costing Practices

Beginning in July 2005, the OCIe implemented revised processes and procedures concerning
requisitions, documentation of expenditures to grants, and reimbursement of expenditures.
Most of the "questionable costing practices" noted in the draft occurred prior to this time.
The current procedures require detailed documentation of an expenditure before it can be
charged to a specific grant. Efforts to ensure the allowability of an expenditure now include
consultation with the Business Manager and the Budget Director, and signatures by a Project
Director and an OeIC Administrator. Responses to specific items of costing practices in the
Draft Review follow:

Item #1 and #2

The process the OCIe used to allocate the cost of a car lease and cell phone costs was to
divide the cost equally among the number of active grants that were in place at that time.


Item #3

After conversations with               on August 15,2007, the Transportation Log kept in
the van was revised to include: Date, Driver, Starting Mileage,. Destination, Purpose, and

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Grant. According t o " , since this grant is not a "direct cost" grant, pre-billing for mileage
to conduct grant activities when the aCIC Van was utilized is acceptable. However the
maximum rate that can be used is the IRS Approved rate (.485 for FY 07 and .505 for FY 08).
A log must be kept showing staff member, date, destination, purpose, miles driven.

an May 15,2007 Project EAGLE was billed $3,189 for an estimated 4,251 miles for April,
May, June 2007. A rate of .75/mile was used which was the actual cost ofleasing a van from
a commercial company and then providing fuel and insurance for a maximum of 3,000 miles
per month. The mileage estimate was based on a line item for transportation in the budget.
As a result of conversations with auditor,                  on August 15, 2007 and February
15, 2008, the Transportation Expense (May 15, 2007) for Project EAGLE will be adjusted
according to miles actually documented in the Transportation Log at the IRS approved rate
(A85/mile for FY07 and 50.5/mile for FY08). Adjustments will also be made to all grants
that were charged a prorated amount for transportation expense in May 2007. The difference
between the amount billed and the adjusted amount (utilizing Transportation Log miles and
the approved rate) will be returned to the U.S. Department of Education .

Item #5

Professional Development Stipends have been paid to aCIC employees who complete
optional professional development courses. The stipends are paid with grant funds, processed
through payroll, and considered as part ofthe employee's salary.

The Extra-duty Contract for Web Master duties should have been paid with local funds,
rather than grant funds, since that duty affects all activities of the aCIC. This amount will be
returned to the U.S.D.E.




At the end of the Draft Review the date should be February 15,2008, not 2007.




OCIC\RES PONS E - to Auditor Review of Project Eagle Grant

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