oversight

Fiscal Issues Reported in ED-OIG Work Related to LEAs and SEAs

Published by the Department of Education, Office of Inspector General on 2009-07-21.

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

                            UNITED STATES DEPARTMENT OF EDUCATION
                                    OFFICE OF INSPECTOR GENERAL

                                                                                               Audit Services


                                                    July 21, 2009

FINAL MANAGEMENT INFORMATION REPORT
State and Local No. 09-01

To:      	       Phil Maestri
                 Director, Risk Management Service
                 Office of the Secretary


From:	           Keith West /s/
                 Assistant Inspector General for Audit
                 Office of Inspector General

Subject: 	       Management Information Report, Fiscal Issues Reported in ED-OIG Work
                 Related to LEAs and SEAs
                 Control Number ED-OIG/X05J0005

The purpose of this Final Management Information Report (MIR) is to provide the Office of
the Secretary with information that might be beneficial in overseeing grants provided to State
educational agencies (SEA). As part of the American Recovery and Reinvestment Act of 2009,
Congress dramatically increased SEA and local educational agencies (LEA) funding and
expectations for transparency and accountability in how that funding is used. Therefore, it is
important that SEAs and LEAs have adequate oversight of grants and account for how funding is
used. (See http://www.recovery.gov/ for more information on the American Recovery and
Reinvestment Act of 2009 related to the U.S. Department of Education [Department].)

The purpose of this project was to (1) identify any pervasive fiscal issues reported in prior U.S.
Department of Education, Office of Inspector General (ED-OIG) work related to LEAs and
SEAs (when the SEA work included a review of LEAs), and (2) develop any necessary
suggestions to improve guidance to SEAs and LEAs. The scope of the project included a review
of U.S. Department of Education, Office of Inspector General Audit Services (ED-OIG-AS) final
audit reports issued during fiscal years 2003 through 2009 (the period October 1, 2002, through
April 14, 2009) and U.S. Department of Education, Office of Inspector General Investigative
Services (ED-OIG-IS) investigations that resulted in criminal convictions during the period
October 1, 2002, through December 31, 2008.

This MIR (1) identifies numerous pervasive fiscal issues reported in 41 ED-OIG-AS final audit
reports that included approximately $182 million in questioned costs1 and an additional
$1.4 billion in funds determined to be at risk because of internal control weaknesses,
(2) summarizes 13 ED-OIG-IS investigations that resulted in criminal convictions of LEA
officials, and (3) includes lessons learned and suggestions for enhancing guidance to SEAs and
1
 Consists of approximately $62 million in unallowable costs and approximately $119 million in inadequately
documented costs. These amounts do not add to the total because of rounding.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 2 of 28

LEAs that is designed to mitigate the risk of the pervasive issues and fraud schemes occurring in
the future. We concluded that more effective internal control systems at the SEAs and LEAs
could have mitigated the risk of the pervasive issues and fraud schemes occurring. Despite the
amount of guidance available to SEAs and LEAs, we suggest that the guidance be enhanced
given the high percentage of final reports reviewed that included the pervasive issues.
Attachments 1 and 2 contain details about the ED-OIG-AS final reports summarized in this MIR.

Risk Management Service’s Overall Comments
In its comments to the Draft Management Information Report, Risk Management Service (RMS)
agreed that it is important to ensure American Recovery and Reinvestment Act of 2009 funds, as
well as all Department grant funds, are appropriately administered and accounted for by SEAs
and LEAs. RMS is currently developing a technical assistance plan and training curricula to
provide enhanced guidance and training to the SEAs and LEAs. RMS stated that information
provided in the MIR provides a timely and beneficial resource for the Department’s analysis of
the most prevalent training needs of its grantees. RMS’ comments are summarized following
each suggestion. The full text of RMS’ comments on the Draft Management Information Report
is included as Attachment 3.



                                                 BACKGROUND



The National Center for Education Statistics reported that, in 2008, 49.8 million students at over
14,200 public school districts attended about 97,000 public elementary and secondary schools.
An additional 6.2 million students will attend about 35,000 private schools. Approximately
54 percent of the Department’s $68 billion fiscal year 2008 budget supported elementary and
secondary education grant programs. The Department awards formula or noncompetitive grants,
sometimes referred to as state-administered programs, and discretionary or competitive grants.
Grantees’ fiscal responsibilities for projects funded by the Department include (1) proper
stewardship of Federal funds, (2) compliance with all statutory and regulatory requirements,
(3) appropriate draw down of funds for obligations made under the grant, and (4) maintenance of
records that document the activities and expenditures of the grant. Uniform administrative
requirements for grants and cooperative agreements to State and local governments are in
34 C.F.R. Part 80.2

Since the No Child Left Behind Act of 2001 (NCLB), which reauthorized and amended the
Elementary and Secondary Education Act of 1965 (ESEA), was signed into law on
January 8, 2002, ED-OIG audits and investigations and recent examples cited by the news media
have disclosed a lack of adequate fiscal controls in school districts nationwide. Furthermore,
some LEA officials have been charged with and convicted of fraud and misuse of Federal funds.

During the period October 1, 2002, through April 14, 2009, ED-OIG-AS issued 41 final audit
reports that included fiscal control work at LEAs and included pervasive non-compliance issues.
We considered a non-compliance issue pervasive if it appeared in five or more ED-OIG-AS final
audit reports. Of these 41 reports, 27 reported 1 or more of the following issues: unallowable
costs, inadequately documented costs, violation of the supplanting prohibition, and inadequate
2
    All C.F.R. references are to the January 1, 2008, edition.
         Final Management Information Report
         ED-OIG/X05J0005                                                                                 Page 3 of 28

         inventory control systems. Attachment 1 lists these 27 reports. The other 14 reports included
         questioned costs related to LEAs’ not meeting program requirements, inability to demonstrate
         that program requirements were fulfilled, ineligibility for the programs, or inadequately
         documenting program eligibility. Attachment 2 lists these 14 reports. In addition, we highlight
         13 ED-OIG-IS cases that resulted in criminal convictions of LEA officials during the period
         October 1, 2002, through December 31, 2008.

         The 41 ED-OIG-AS final audit reports that identified pervasive fiscal non-compliance issues
         involved 1 or more of the following programs:

                   NCLB, Title I (Improving the Academic Achievement of the Disadvantaged);
                   NCLB, Title II (Preparing, Training, and Recruiting High Quality Teachers and
                    Principals);
                   NCLB Title V (Promoting Informed Parental Choice and Innovative Programs); and
                   Individuals with Disabilities Education Improvement Act of 2004 (IDEA).

         Table 1 provides funding information for each of the Federal programs affected by the pervasive
         fiscal issues during fiscal years 2003 through 2009. The fiscal year 2009 funding information is
         estimated. For fiscal years 2003 through 2009, the Department awarded approximately
         $193.7 billion in funding for the Title I, II, and V, and the IDEA programs.

         Table 1—Fiscal Years 2003 to 2009 Funding for Federal Programs Affected by Pervasive
         Fiscal Issues
                                                        State Agency
                                                         Program-                           State Grants         Special
                                                          Migrant          Improving       for Innovative       Education
Fiscal   ESEA Grants to           Reading First,         Education,     Teacher Quality,     Programs,       Grants to States,
 Year      LEAs, Title I              Title I              Title I          Title II           Title V            IDEA
2003      $11,680,364,368          $931,886,837          $392,674,972     $2,916,170,876     $382,497,500      $8,851,818,230
2004      $12,336,904,603          $990,880,700          $391,613,840     $2,915,475,501     $296,548,500     $10,045,527,146
2005      $12,731,134,126         $1,006,790,000         $380,428,384     $2,902,021,967     $198,400,000     $10,579,745,824
2006      $12,705,870,097          $997,913,596          $376,523,742     $2,873,001,756       $99,000,000    $10,567,960,540
2007      $12,830,876,901         $1,006,943,243         $376,523,719     $2,873,001,756       $99,000,000    $10,767,961,000
2008      $13,889,944,385          $378,186,700          $356,326,474     $2,920,572,199                $0    $10,932,511,571
2009*     $14,295,901,000          $969,350,000          $387,271,000     $2,821,071,760                $0    $11,269,511,000
Totals    $90,470,995,480         $6,281,951,076       $2,661,362,131   $20,221,315,8143    $1,075,446,000    $73,015,035,311
         *Estimated




         3
             This column total is net of a small rounding difference.
Final Management Information Report
ED-OIG/X05J0005                                                                                                    Page 4 of 28



PERVASIVE FISCAL ISSUES REPORTED IN ED-OIG-AS FINAL AUDIT 

                         REPORTS



Of the 41 ED-OIG-AS final audit reports issued during fiscal years 2003 through 2009
(October 1, 2002, through April 14, 2009) that met our criteria4 and contained pervasive fiscal
issues, (1) 27 included pervasive fiscal issues related to one or more of the following issues:
unallowable or inadequately documented personnel and non-personnel expenditures,
supplanting, and inventory control systems; and (2) 14 included unallowable costs related to
LEAs’ not meeting program requirements, inability to demonstrate that program requirements
were fulfilled, ineligibility for the programs, or inadequately documenting program eligibility.

Pervasive Fiscal Issues Related to Personnel and Non-Personnel Expenditures,
Supplanting, and Inventory Control Systems
From the 27 reports that included pervasive fiscal issues and are listed in Attachment 1, we
identified the following issues and associated unallowable costs:5

     	 Personnel costs totaling $1,398,564 were reported as unallowable because they were not
        allocable to the grant to which they were charged in 8 of 16 audit reports (50 percent) that
        included a review of personnel costs.6
     	 Non-personnel costs totaling $826,183 were reported as unallowable because they were
        unnecessary or unreasonable to carry out the grant or not-for-program purposes in 9 of 20
        audit reports (45 percent) that included a review of non-personnel costs.7
     	 Non-personnel costs totaling $810,055 were reported as unallowable because contracts
        were missing required elements, were unfulfilled, were not approved, or included
        expenditures that exceeded the contract amounts in 8 of 11 audit reports (73 percent) that
        included a review of contract expenditures.
     	 Personnel costs totaling an estimated $66,666,1558 were reported as inadequately
        documented because time and effort certifications were missing, incomplete, inaccurate,
        or untimely in 11 of 16 audit reports (69 percent) that reviewed time and effort
        certifications.
     	 Personnel costs totaling an estimated $36,710,230 were reported as inadequately
        documented because personnel activity reports or timesheets were missing or incomplete
        in 9 of 15 audit reports (60 percent) that included a review of personnel activity reports or
        timesheets.

4
  As described in the Purpose and Methodology section, we included audits reports covering formula grants that contained fiscal

findings.

5
  An additional $29,837,986 in funds was determined to be at risk because of internal control weaknesses uncovered during the

audits.

6
  Five of these eight audit reports included unallowable costs because employees did not work on the grant.

7
  In one report reviewed (Audit Control Number [ACN] ED-OIG A02E0030), the auditors found that the LEA overcharged

Title I for purchased services, which is a non-personnel cost. The audit did not include a specific review of non-personnel costs,

but the auditors discovered the unallowable charge by reviewing the expenditure report the district filed with the SEA. However,

we are including the report in the 9 of 20 reports that included a review of non-personnel costs.

8
  The totals for inadequately documented personnel costs (time and effort certifications and personnel activity reports) are 

estimates. Two of the final audit reports reviewed (ACN ED-OIG A06E0018 and ACN ED-OIG A06H0011) did not 

differentiate between inadequately documented costs, totaling $165,566 for time and effort certifications and personnel activity 

reports. We divided the amount evenly between the two finding sub-categories for the respective audits.

Final Management Information Report
ED-OIG/X05J0005                                                                                                    Page 5 of 28

     	 Non-personnel costs totaling $16,010,550 were reported as inadequately documented
        because of missing or inaccurate supporting documentation in 11 of 19 audit reports
        (58 percent) that included a review of non-personnel costs.
     	 Improper inventory control systems resulted in a total of $2,693,004 in lost or
        unaccounted for property reported in 9 of 9 audit reports (100 percent) that included a
        review of inventory control systems.
     	 Supplanting of $2,504,617 in Federal grant funds was reported in 6 of 6 audit reports
        (100 percent) that included a review for supplanting.

ED-OIG-AS cited the following internal control weaknesses as the causes for the pervasive non-
compliance issues in the 26 audit reports:

         Inadequate policies and procedures (34 times);9

         No policies and procedures (15 times); 

         Not understanding the regulations and guidance (10 times); and 

         Policies and procedures in place but not followed (5 times).


Of the 34 instances where inadequate policies and procedures were cited, monitoring was cited
specifically in 5 instances. Four of the 5 instances dealt with SEAs’ failure to monitor
subrecipients, and 1 of the 5 instances pertained to the SEA’s failure to monitor contractors.

Pervasive Fiscal Issues Related to LEAs Not Meeting Program Requirements or
Demonstrating Eligibility for the Programs
Of the 14 ED-OIG-AS final audit reports that included unallowable costs resulting from LEAs’
not meeting program requirements, inability to demonstrate that program requirements were
fulfilled, ineligibility for the programs, or inadequately documenting program eligibility, 12
covered Title I, Parts A, B, or C of NCLB; and 2 covered IDEA. We list these 14 reports in
Attachment 2.

     	 Eight of 14 contained program requirement findings, resulting in $30,244,522 in
        unallowable or inadequately documented costs, or both, and an additional $893,445,204
        in funds determined to be at risk because of internal control weaknesses uncovered
        during the audits.
     	 Six of 14 contained eligibility findings, resulting in $23,904,648 in unallowable or
        inadequately documented costs, or both, and an additional $543,145,542 in
        funds determined to be at risk because of internal control weaknesses disclosed by the
        audits.




9
  We included all cited internal control weaknesses in our count. In some cases, more than one internal control weakness was
cited as the cause for a particular pervasive issue. Also, some reports with multiple pervasive issues cited the same cause for
each pervasive issue.
    Final Management Information Report
    ED-OIG/X05J0005                                                                        Page 6 of 28

    ED-OIG-AS cited the following internal control weaknesses as the causes for the pervasive fiscal
    non-compliance issues in the 14 audit reports:

             Inadequate policies and procedures, including inadequate monitoring (12 times);
             Not understanding the regulations and guidance (1 time); and
             Policies and procedures in place but not followed (1 time).

    Of the 12 instances where inadequate policies and procedures were cited, monitoring was cited
    specifically in 10 of 12 instances. All 10 instances dealt with the SEAs’ failure to monitor
    subrecipients.

    Table 2 provides a summary of the pervasive fiscal issues and the corresponding internal control
    weaknesses that contributed to the pervasive issues. The numbers in the table represent the
    number of final audit reports that cited the specific internal control weakness as a cause of the
    pervasive fiscal issue.

    Table 2—Pervasive Fiscal Issues and Corresponding Internal Control Weaknesses
                                                  Internal Control Weakness
                                                                          Did Not           Policies and
                            Inadequate     Inadequate   No Policies     Understand         Procedures in
                            Policies and   Monitoring      and         Regulations and     Place But Not
 Pervasive Fiscal Issue     Procedures       by SEA     Procedures       Guidance            Followed
Unallowable Personnel
                                 5                           2                1
Costs
Unallowable Non-
                                 9             2             3                1                   1
personnel Costs
Inadequately
Documented Personnel             6                           3                3                   2
Costs
Inadequately
Documented Non-                  5                           3                                    1
personnel Costs
Improper Inventory
                                 4                           4                1                   1
Control Systems
Supplanting                      5             3                              4
Program Requirements             7             7                              1
Program Eligibility              5             3                                                  1
Totals                           46            15            15              11                   6
Final Management Information Report
ED-OIG/X05J0005                                                                      Page 7 of 28



     FRAUD SCHEMES DISCLOSED IN ED-OIG-IS INVESTIGATIONS



We selected a sample of 13 ED-OIG-IS investigations that resulted in criminal convictions of
LEA officials during the period October 1, 2002, through December 31, 2008, as examples of
fraud schemes encountered by ED-OIG-IS. Below, we classify the 13 cases into five categories
of fraud schemes: (1) kickbacks from consultants, contractors, and employees; (2) fictitious
vendors; (3) false expenditure reports and checks; (4) use of dormant or unknown bank accounts;
and (5) misuse of procurement cards. For each investigation, we describe the time frame of the
fraud, the dollar amount involved, the method of fraud detection, the fraud scheme, the
disposition of the case, and the internal control weakness (or weaknesses) that facilitated the
fraud.

Embezzlement Involving Kickbacks from Consultants, Contractors, and Employees
  Meridian Public School District, Mississippi
      Time frame: March 2000 through January 2003
      Amount of fraud: $217,505
      Method of fraud detection: An individual at Meridian Public School District noticed
         an invoice from a consultant that was incapable of providing the invoiced services
         because of a serious health condition and reported the matter to the Mississippi Office
         of the State Auditor.
     	 Fraud scheme: Individuals submitted false expense reports and invoices to a school
         principal requesting payment for consulting services that did not occur or requesting
         payment for delivery of school supplies that were not delivered. The principal then
         submitted the false forms for payment. The individuals then paid a portion of the
         proceeds to the principal as kickbacks.
     	 Disposition of case: The principal was sentenced to 30 months of incarceration and
         ordered to pay restitution. Three other individuals were ordered to pay restitution and
         sentenced to 12 months and 1 day of incarceration, 5 months of incarceration, and 3
         years of probation, respectively.
     	 Internal control weakness: If Meridian Public School District had a pre-approved
         vendor list that the principal was required to use, or if another employee was required
         to preapprove these purchases, the fraud may have been deterred. As demonstrated
         by the method of fraud detection in this case, having conscientious people with
         integrity in positions of trust may also help deter and detect fraud.

    District of Columbia Public Schools (DCPS)
        Time frame: March 2003 through May 2006
        Amount of fraud: $383,910
        Method of fraud detection: A DCPS employee discovered the fraud scheme and
            reported it to the District of Columbia Office of Inspector General.
       	 Fraud scheme: The Executive Director for DCPS’ Office of Charter School Oversight
            wrongfully diverted funds to personal bank accounts by submitting fraudulent
            invoices and steered no-bid contracts to friends for which she received kickbacks and
            other fraudulent payments. The no-bid contracts totaled approximately $445,000.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 8 of 28

        	 Disposition of case: The employee was sentenced to 35 months of incarceration and
           ordered to pay restitution.
        	 Internal control weakness: The fraud occurred because the employee had little or no
           oversight. There was inadequate review of funding requests and invoices she
           submitted.

    New Orleans Public Schools, Louisiana (Two investigative cases)
       Time frame: Fall 2001 through 2003
       Amount of fraud: $106,505 (One scheme for $36,505 and a second for $70,000)
       Method of fraud detection: A school employee notified school investigators of the
         first scheme. ED-OIG-AS identified unsupported payroll during an audit, which led
         to detection of the second scheme.
       Fraud schemes: In the first scheme, New Orleans Public Schools para-educators,
         teachers, and secretaries received pay they did not earn. These individuals paid
         kickbacks to the school secretary in exchange for falsely inflated class coverage
         hours. In the second scheme, a payroll clerk received kickbacks of 50 percent for
         facilitating payments to teachers, secretaries, and para-educators in the form of false
         travel reimbursements, fraudulent stipend payments, and payroll checks.
       Disposition of cases: For the first scheme, one individual was sentenced to 41 months
         of incarceration, 3 years of supervised release, and ordered to pay a $500 assessment
         fee and restitution; a second individual was sentenced to 30 months of incarceration,
         3 years of supervised release, and ordered to pay a $400 assessment fee and
         restitution; and 2 additional individuals were each sentenced to 3 years of probation
         and ordered to pay restitution. For the second scheme, the payroll clerk was
         sentenced to 24 months of incarceration and 3 years of supervised release, and
         ordered to pay restitution, a $5,000 fine, and a $700 court fee.
       Internal control weaknesses: For the first scheme, the fraud occurred because there
         were no procedures in place for supervisors to review teachers’ class coverage sheets.
         For the second scheme, the fraud occurred because a payroll office employee was
         able to electronically access and edit payroll information without detection.
         Therefore, there were inadequate controls over the electronic payroll system.

    Dallas Independent School District (DISD), Texas
        Time frame: May 2002 through July 2005
        Amount of fraud: $979,221
        Method of fraud detection: A source close to the fraud scheme reported it to an
            investigative reporter.
        Fraud scheme: A former DISD Deputy Superintendent and Chief Operating Officer
            acting as a consultant to a technology contractor assisted in the scheme by helping
            prepare the DISD Request for Proposals for technology contracts. The DISD Chief
            Technology Officer, who was in charge of procuring technology contracts, provided
            specifications for the upcoming DISD technology contract before DISD had issued a
            public Request for Proposal. In turn, the contractor provided kickbacks to the Chief
            Technology Officer, paid bogus invoices to the consultant for consulting fees, and
            received contracts totaling $4,400,000.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 9 of 28

        	 Disposition of case: The former DISD Deputy Superintendent and Chief Operating
           Officer testified as a government witness at the trial of his co-conspirators. He was
           sentenced to one year of probation, 80 hours of community service, and ordered to
           pay a $5,000 fine. The Chief Technology Officer was sentenced to 132 months of
           incarceration and 36 months of supervised release, was ordered to pay a special
           assessment of $1,300, and was jointly liable for a forfeiture verdict.
        	 Internal control weakness: There were inadequate controls over the Request for
           Proposal process. The fraud occurred because the Chief Technology Officer was able
           to bypass bidding rules by claiming urgency or imminent system failure, had quotes
           before the bidding process started, had equipment before purchase orders were issued,
           and compromised the contract selection committee.

    Pharr-San Juan-Alamo Independent School District, Texas
        Time frame: 1997 through 2004
        Amount of fraud: $73,800
        Method of fraud detection: The Federal Bureau of Investigation received several
           complaints over several years, including some from local law enforcement agencies.
        Fraud scheme: At least three contractors paid bribes to the Pharr-San Juan-Alamo
           Independent School District Superintendent and three board members in exchange for
           using their official positions to influence the awarding of district construction
           contracts. The bribes totaled at least $73,800 and influenced the awarding of multiple
           contracts totaling $2,186,981.
        Disposition of case: Sentencing and restitution is pending.
        Internal control weakness: Written procedures for obtaining bids and selecting
           contractors were generally adequate. However, the fraud occurred because of
           (1) collusion among several influential board members accepting bribes for voting on
           certain contracts and (2) the Superintendent accepting bribes for subverting the
           process for presenting bids at school board meetings for votes.

    Puerto Rico Department of Education (PRDE)
        Time frame: 1997 through 2001
        Amount of fraud: $240,000
        Method of fraud detection: A contractor reported favoritism to ED-OIG-IS.
        Fraud scheme: The PRDE Secretary and the Special Assistant to the Secretary took
           bribes from contractors for awarding contracts without participating in the bidding
           process. To avoid the bidding process, the PRDE Secretary ruled that the contracts
           were for “special projects.” One contractor paid bribes totaling $240,000 and
           received Title I contracts totaling approximately $37 million that were awarded
           without full and open competition. From all contractors, the 2 officials requested at
           least 10 percent of the amount of the contract awarded as kickbacks. All invoices
           submitted by the contractors for payment were paid without PRDE questioning the
           lack of adequate supporting documentation or determining whether services were
           provided or the equipment purchases were overstated.
        Disposition of case: The PRDE Secretary was sentenced to 12.7 years of
           incarceration and the Special Assistant to the Secretary was sentenced to 11 years of
           incarceration. Both officials were ordered to pay restitution.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 10 of 28

        	 Internal control weakness: Other PRDE employees overlooked internal controls
           because of the knowledge that the contracts were approved by the Secretary. The
           fraud occurred because (1) contracts were awarded without an official bidding
           process; and (2) invoices were not reviewed to determine whether services were
           provided, accurate, or necessary.

Embezzlement Involving Fictitious Vendors
  Pine Bluff School District, Arkansas
      Time frame: January 2001 through March 2008
      Amount of fraud: $700,000 (including $303,000 in Department funds)
      Method of fraud detection: A school administrator discovered the fraud and notified
         local police.
      Fraud scheme: An administrative assistant/data analyst employed by the district
         created a fictitious vendor and prepared forged purchase orders, invoices, and deposit
         slips with this fictitious vendor name and then diverted checks into an account she
         owned under the false vendor name.
      Disposition of case: The employee was sentenced to 80 years of incarceration and
         ordered to pay restitution.
      Internal control weakness: The fraud occurred because of a lack of segregation of
         duties (i.e., no separate entry and approval of purchase orders and no separate
         approval of invoices).

    Garland Independent School District (GISD), Texas
        Time frame: May 2006 through July 2007
        Amount of fraud: $92,112
        Method of fraud detection: The employee’s bank notified local police when it noticed
           that the employee was receiving payroll via direct deposit and was also depositing
           checks.
       	 Fraud scheme: A Special Programs Federal Bookkeeper used the GISD online
           application system to register a fictitious vendor and then created a fraudulent vendor
           contract. The employee falsified purchase orders and generated fraudulent invoices
           from this vendor detailing services provided. On each invoice, the employee signed
           her name as the GISD point of contact and forged the signature of the vendor. To
           comply with the GISD management approval requirement, the employee used her
           supervisor’s signature stamp on each invoice to indicate that the payment had been
           approved. The GISD Business Office processed the payment requests and then
           issued checks made payable to the vendor. The employee picked up and deposited
           each check into her personal bank account.
       	 Disposition of case: The employee was sentenced to 10 months of incarceration,
           2 years of probation, and ordered to pay restitution.
       	 Internal control weakness: The fraud occurred because there was no policy for
           reviewing online applications from vendors and the employee was able to circumvent
           invoice review procedures with unauthorized access to her supervisor’s signature
           stamp.
Final Management Information Report
ED-OIG/X05J0005                                                                    Page 11 of 28

Embezzlement Involving False Expenditure Reports and Checks
  William Floyd Union Free School District (WFSD), New York10
      Time frame: April 2000 through October 2002
      Amount of fraud: $1,639,625
      Method of fraud detection: ED-OIG-IS Special Agents discovered the fraud involving
         false expenditure reports. WFSD discovered the embezzlement of funds when it
         noted irregularities while filing expenditure reports and reconciling bank statements
         after the employee retired.
      Fraud scheme: The Assistant to the Superintendent for Business filed false
         expenditure reports with the New York State Education Department, enabling WFSD
         to fraudulently obtain Title I, Title II, and other Federal education grant funds. The
         false expenditure reports included fake check numbers, payees, and amounts. The
         employee also obtained funds by writing WFSD checks to himself.
      Disposition of case: Sentencing and restitution is pending.
      Internal control weakness: The fraud involving false expenditure reports
         occurred because the SEA and WFSD both did not have adequate controls in place
         for reviewing expenses and ensuring the amounts claimed on expenditure reports
         were proper (for example, no one from WFSD reconciled the expenditure reports
         with the general ledger). The embezzlement of funds occurred because the employee
         both wrote checks and completed the bank reconciliation (this lack of segregation of
         duties allowed him to remove the checks made out to him when they came from the
         bank).

Embezzlement Involving Use of Dormant or Unknown Bank Accounts
  William Floyd Union Free School District (WFSD), New York
      Time frame: February 1999 through March 2003
      Amount of fraud: $675,616
      Method of fraud detection: The Suffolk County District Attorney’s Office discovered
         this fraud.
      Fraud scheme: After retiring from his job as Assistant Superintendent for Business
         and while receiving a pension, WFSD paid this former Assistant Superintendent as a
         consultant to complete the same duties he performed before retiring. WFSD was
         aware of his former employment with the district. However, it issued IRS Form W-2s
         to the Assistant Superintendent’s consulting company. In addition, the former
         Assistant Superintendent withdrew accrued interest payments from whole life
         insurance policies that WFSD purchased for officials. No one, including the WFSD
         auditor, was aware that these policies were accruing interest in a brokerage account.
         The Assistant Superintendent called the broker and had the funds wired and mailed to
         him via checks.
      Disposition of case: The Assistant Superintendent was sentenced to 2 to 6 years of
         incarceration on each of 4 counts of second-degree grand larceny and 1 to 3 years of
         incarceration each on 1 count of third-degree grand larceny and 4 counts of money
         laundering.
      Internal control weakness: The embezzlement of accrued interest payments occurred
         because WFSD (1) did not adequately account for income earned on insurance
         policies and (2) did not adequately track a related brokerage account. The pension
10
     Attachment 1 lists two ED-OIG-AS audit reports covering WFSD.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 12 of 28

            fraud occurred because (1) neither the Assistant Superintendent nor WFSD applied
            for a waiver, as required by law, to postpone the Assistant Superintendent’s receipt of
            his annual pension; and (2) the school board did not approve or authorize paying the
            Assistant Superintendent’s private consulting contracts.

    Marble City Schools, Oklahoma
       Time frame: July 2002 through June 2007
       Amount of fraud: $1,000,000
       Method of fraud detection: Detection began when a school board member followed
          up on a suspicious transaction.
      	 Fraud scheme: The Marble City Schools Superintendent was previously an officer in
          a rural school organization. The Superintendent changed a bank account, which the
          organization thought it had closed, so the bank statements would go to his home
          address. He then issued false invoices to Marble City Schools and deposited the
          resulting checks into the bank account.
      	 Disposition of case: The Superintendent was sentenced to 24 months of incarceration
          and made a voluntary repayment of funds.
      	 Internal control weakness: The fraud occurred because there were inadequate internal
          controls over the approval of invoices (invoices were not presented to the school
          board for approval, as required).

Embezzlement Involving Misuse of Procurement Cards
  Dallas Independent School District, Texas
      Time frame: 2004 through 2006
      Amount of fraud: $164,633
      Method of fraud detection: An individual obtained procurement card records through
          a public records request, identified improper charges, and reported this information
          on an internet blog.
      Fraud scheme: Two Dallas Independent School District secretaries used district
          procurement cards to purchase personal items. One of the secretaries made almost all
          of the purchases on weekends.
      Disposition of case: One employee was sentenced to 18 months of incarceration and
          ordered to pay restitution. The second employee was sentenced to 12 months of
          incarceration to be followed by 2 years of supervised release and ordered to pay
          restitution.
      Internal control weakness: The fraud occurred because there was a lack of
          supervision over procurement card purchases. The group assigned to supervise the
          purchase card program was understaffed. Beginning in July 2005, supervisors were
          required to sign and approve monthly credit card statements of subordinates, but
          some supervisors did not receive these statements to confirm that goods and services
          were delivered.
Final Management Information Report
ED-OIG/X05J0005                                                                          Page 13 of 28



          LESSONS LEARNED and SUGGESTED ENHANCEMENTS


Based on our analysis of each of the pervasive fiscal issues disclosed in ED-OIG-AS final audit
reports and the fraud schemes uncovered by ED-OIG-IS investigations, we comment on the
(1) mitigating factors that, if present, might have prevented the pervasive fiscal issues or fraud
schemes from occurring; (2) available guidance that could have prevented the pervasive fiscal
issues or fraud schemes from occurring; (3) suggested enhancements to Departmental guidance
and training that could prevent future occurrences of the pervasive fiscal issues and fraud
schemes; and (4) proposed corrective actions SEA and LEA officials are undertaking to prevent
future occurrences of the pervasive fiscal issues.

Pervasive Fiscal Issues Identified in ED-OIG-AS Final Reports: Mitigating Factors and
Available Guidance
The most common internal control weakness that caused the pervasive fiscal issues identified in
the 41 ED-OIG-AS final audit reports we reviewed was inadequate policies and procedures.
Effective internal control systems at the SEAs and LEAs could have mitigated the risk of the
pervasive fiscal issues occurring.

For the pervasive fiscal issues identified in the 41 audit reports, the following criteria apply:

    	 Unallowable Personnel Costs
          o	 Relevant Criteria: Office of Management and Budget (OMB) Circular A-87,
             Attachment A, Paragraphs C.1.b and C.3; and 34 C.F.R. § 80.22.
          o	 Criteria Summary: Criteria cited above establish that allowable costs must be
             allocable to Federal awards and provide a definition for “allocable.” For the costs
             of a State or local government, the cost principles in OMB Circular A-87 apply.

    	 Unallowable Non-personnel Costs
          o	 Relevant Criteria: OMB Circular A-87, Attachment A, Paragraph C.1; and
             34 C.F.R. § 80.22.
          o	 Criteria Summary: Criteria cited above state that allowable costs must be
             necessary, reasonable, and allocable to Federal awards.

    	 Inadequately Documented Personnel Costs
          o	 Relevant Criteria: OMB Circular A-87, Attachment B, Paragraphs 8.h.3 and 8.h.4.
          o	 Criteria Summary: Criteria cited above state that employees working solely on a
              single Federal award or cost objective will complete periodic certifications that
              are prepared at least semi-annually, and employees working on multiple activities
              or cost objectives will complete personnel activity reports that are prepared at
              least monthly.

    	 Inadequately Documented Non-personnel Costs
          o	 Relevant Criterion: OMB Circular A-87, Attachment A, Paragraph C.1.j.
          o	 Criterion Summary: Criterion cited above states that to be allowable costs must be
              adequately documented.
Final Management Information Report
ED-OIG/X05J0005                                                                         Page 14 of 28



      	 Improper Inventory Control Systems
            o	 Relevant Criterion: 34 C.F.R. § 80.32.
            o	 Criterion Summary: Criterion cited above sets forth the minimum requirements
               for managing equipment, including taking a physical inventory.

      	 Supplanting
            o	 Relevant Criteria: OMB Circular A-87, Attachment A, Paragraphs C.1.b and C.3;
               34 C.F.R. § 80.22; and 34 C.F.R. § 200.79.
            o	 Criteria Summary: Criteria cited above establish that allowable costs must be
               allocable to Federal awards and provide a definition for “allocable.” The criteria
               also establish the fiscal requirements for compliance with the supplement, not
               supplant, requirement.

      	 Program Requirements
            o	 Relevant Criteria for Impacted Programs: ESEA § 1116(b),
               34 C.F.R. §§ 200.32-34, and 34 C.F.R. §§ 200.44-50 (Title I, Part A, Public
               School Choice and Supplemental Educational Services); ESEA § 1225 and
               Guidance for the Reading First Program, section G (Title I, Part B, Reading First);
               ESEA § 1306, 34 C.F.R. § 200.82, and 34 C.F.R. § 200.84, and Title I, Part C,
               Education of Migratory Children, Draft Non-Regulatory Guidance, sections IV
               and V (Title I, Part C, Migrant Education); and IDEA § § 612- 613, IDEA § 618,
               34 C.F.R. § 300.205, 34 C.F.R. § 300.224, and 34 C.F.R. § 300.230 (IDEA,
               Part B).
            o	 Criteria Summary: The criteria cited above (1) describe public school choice and
               supplemental education services requirements and responsibilities; (2) define
               Reading First reporting requirements; (3) explain Migrant Education Program
               (MEP) use of funds and program requirements; and (4) outline IDEA eligibility
               requirements and responsibilities.

      	 Program Eligibility
            o	 Relevant Criteria for Impacted Programs: ESEA § 1120a, 34 C.F.R. § 200.79, and
               Non-Regulatory Guidance, Title I, Fiscal Issues: Maintenance of Effort,
               Comparability, Supplement, not Supplant, Carryover, Consolidating Funds in
               Schoolwide Programs, Grantback Requirements, section B (Title I, Part A,
               Comparability of Services); and ESEA § § 1113-1114, ESEA § 1304,
               34 C.F.R. §§ 200.70-71, 200.78, 200.83-85, and Title I, Part C, Education of
               Migratory Children, Draft Non-Regulatory Guidance, sections I and II (Title I,
               Part C, Migrant Education).
            o	 Criteria Summary: The criteria cited above define SEA responsibilities for MEP,
               including State and child eligibility; and establish the fiscal requirements
               for compliance with the comparability requirement of ESEA.

Regarding internal control systems, guidance is available to SEA and LEA officials from the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In January
2009, COSO published its Guidance on Monitoring Internal Control Systems11 to clarify the

11
     See http://www.coso.org/documents/COSO_Guidance_On_Monitoring_Intro_online1.pdf.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 15 of 28

monitoring component of internal control. According to the guidance, effective monitoring can
lead to organizational efficiencies and reduced costs associated with public reporting on internal
control because problems are identified and addressed in a proactive, rather than reactive,
manner. COSO also assigns a significant role to an organization’s internal audit department in
assessing the internal control systems implemented by the organization and contributing to
ongoing effectiveness.

Suggested Enhancements
We reviewed the law, cost principles in OMB Circular A-87, regulations, and non-regulatory
guidance relevant to each program and pervasive fiscal issue identified in the 41 audit reports. In
general, the criteria as a whole adequately explain the administrative requirements for Federal
grants. Despite the adequacy of the available criteria, a high percentage of final reports reviewed
included the pervasive fiscal issues illustrated in Table 2. The most common internal control
weaknesses that caused the pervasive fiscal issues included inadequate or nonexistent policies
and procedures, inadequate monitoring by the SEA, and auditees not understanding the
regulations.

The Department has issued non-regulatory guidance, including guidance on fiscal requirements.
Non-Regulatory Guidance, Title I Fiscal Issues: Maintenance of Effort; Comparability;
Supplement, not Supplant; Carryover; Consolidating Funds in Schoolwide Programs; and
Grantback Requirements was issued in February 2008 and updates the Title I fiscal issues
guidance released in May 2006. The guidance addresses consolidating funds in schoolwide
programs; maintaining fiscal effort with State and local funds; providing services in its Title I
schools with State and local funds that are at least comparable to services provided in its non-
Title I schools; and using Part A funds to supplement, not supplant regular non-Federal funds.

We suggest that the Department enhance guidance to SEAs and LEAs on how to implement the
administrative requirements for Federal grants and ensure that SEA and LEA officials
understand the importance of complying with the requirements. The Department should offer
additional guidance and training workshops to SEAs and LEAs. The guidance and workshops
should stress the existing requirements and provide technical support for ensuring allowable and
adequately documented personnel and non-personnel costs; proper inventory control systems;
and the supplementing, not supplanting, of Federal grant funds. The guidance should include
specific examples of situations where personnel activity reports are required and provide
illustrative examples of time and effort certifications and adequate personnel activity reports.
The guidance should also make SEAs and LEAs aware of the necessity to have and implement
policies and procedures that require proper (1) segregation of duties for procuring goods and
services and reconciling bank statements, (2) bidding procedures, and (3) review of invoices and
supporting documentation.

RMS’ Comments
RMS stated that it is currently developing a technical assistance plan and training curricula to
provide enhanced guidance and training to SEAs and LEAs. The technical assistance plan and
training curricula will include administrative requirements for implementation of Federal grants
and will convey the importance of complying with those requirements. RMS is also working
with the Office of the Chief Financial Officer on indirect cost training. RMS and other program
offices are also looking into opportunities such as conferences, training workshops, and webinars
Final Management Information Report
ED-OIG/X05J0005                                                                                         Page 16 of 28

that they can participate in before December 31, to provide additional technical assistance to
SEAs and LEAs.

The complete list of technical assistance topics is still being drafted and additional topics may be
added as a result of this MIR. RMS is considering the following topics: cash management,
record-keeping, property and procurement, American Recovery and Reinvestment Act of 2009
reporting, sub-recipient monitoring, fraud prevention and detection, allowable activities, school-
wide allocations, cost allocations/indirect costs, internal controls, time and effort, data quality,
and purchase cards.

Auditee-Proposed Corrective Action Plans
For the 41 final audit reports containing pervasive fiscal issues, we analyzed the responses to the
report findings submitted by auditee officials. In the majority of the responses, auditee officials
were receptive to ED-OIG-AS recommendations to enhance existing policies and procedures.

       	 In 31 of 41 audit reports, auditee officials proposed enhancing existing policies and
          procedures;12

       	 In 2 of 41 audit reports, auditee officials proposed reviewing current policies and
          procedures to ensure that policies and procedures complied with applicable regulations;

       	 In 3 of 41 audit reports, auditee officials stated that they did not concur with the audit
          findings and recommendations;

       	 In 4 of 41 audit reports, the report did not contain specific information regarding 

          proposed corrective actions; and 


       	 In 1 of 41 audit reports, William Floyd Union Free School District Allowability of Title I
          Salary and Salary-Related Expenditures, auditee officials did not provide any comments.

Fraud Schemes: Mitigating Factors and Available Guidance
We summarized 13 fraud cases that resulted in criminal convictions of LEA officials and
categorized them based on whether the embezzlement involved (1) kickbacks from consultants,
contractors, and employees; (2) use of fictitious vendors; (3) false expenditure reports and
checks; (4) use of dormant or unknown bank accounts; or (5) procurement card misuse. We
discussed each of the cases with ED-OIG-IS employees and identified internal control
weaknesses that could have contributed to the fraud occurring. In 6 of the cases, LEA employees
acted alone in the fraud scheme. Seven of the cases involved collusion (2 of these cases were
fraud schemes entirely within the organization and 5 of these cases included individuals outside
the organization). In all cases, the scheme was perpetrated over time, from 1 year to 8 years.
Effective internal control systems at the SEAs and LEAs could have mitigated the risk of the
fraud schemes.

According to Managing the Business Risk of Fraud: A Practical Guide,13 a proactive approach to
managing fraud risk is one of the best steps organizations can take to mitigate exposure to


12
     Eleven of the 31 corrective action plans also included provisions for enhancing subrecipient monitoring.
Final Management Information Report
ED-OIG/X05J0005                                                                                        Page 17 of 28

fraudulent activities. Although complete elimination of all fraud risk is most likely unachievable
or uneconomical, organizations can take positive and constructive steps to reduce their exposure.
Only through diligent and ongoing effort can an organization protect itself against significant
acts of fraud. The combination of the following key principles for proactively establishing an
environment to effectively manage an organization’s fraud risk can significantly mitigate fraud
risk:

     	 Fraud risk governance. As part of an organization’s governance structure, a fraud risk
        management program should be in place, including a written policy (or policies) to
        convey the expectations of the board of directors and senior management regarding
        managing fraud risk.
     	 Fraud risk assessment. Fraud risk exposure should be assessed periodically by the
        organization to identify specific potential schemes and events that the organization needs
        to mitigate.
     	 Fraud prevention. Prevention techniques to avoid potential key fraud risk events
        should be established, where feasible, to mitigate possible impacts on the organization.
        According to the American Institute of Certified Public Accountants,14 organizations can
        mitigate the risk of fraud by (1) reducing pressures on employees that might push them
        into committing fraud, (2) reducing perceived opportunities to commit fraud, and (3)
        dispelling rationalizations for engaging in fraudulent conduct.
     	 Fraud detection. Detection techniques should be established to uncover fraud events
        when preventive measures fail or unmitigated risks are realized.
     	 Coordinated and timely investigations and corrective actions. A reporting process
        should be in place to solicit input on potential fraud, and a coordinated approach to
        investigation and corrective action should be used to help ensure potential fraud is
        addressed appropriately and timely.

This guide can be used to assess an organization’s fraud risk management program, as a resource
for improvement, or to develop a program where none exists. It includes a Fraud Prevention
Scorecard and a Fraud Detection Scorecard to help assess the strength of an organization’s fraud
prevention and detection systems.

Suggested Enhancements
We provide two suggestions to help mitigate the risk of fraud. First, the Department provides
guidance and training workshops to SEAs and LEAs on how to implement the administrative
requirements for Federal grants. In its guidance and training sessions, it should consider
presenting information from Managing the Business Risk of Fraud: A Practical Guide. The
Department might also present examples of SEAs and LEAs that have implemented successful
fraud control systems based on this guide. Emphasis should be placed on preventing fraud as
well as detecting it once it has occurred.




13
   This guide, available at http://www.acfe.com/documents/managing-business-risk.pdf, is sponsored by the
Association of Certified Fraud Examiners, the Institute of Internal Auditors, and the American Institute of Certified
Public Accountants.
14
   See https://www.aicpa.org/antifraud/financial_auditors/understanding_programs_controls/advice_audit/87.htm.
Final Management Information Report
ED-OIG/X05J0005                                                                      Page 18 of 28

Second, ED-OIG has its own public access hotline for reporting fraud, waste, and abuse.
However, the investigations we summarized included only one instance of fraud reported
directly to ED-OIG. Making SEA and LEA employees aware of the hotline might expedite the
detection of fraud. Employees may contact the hotline by calling (800) 647-8733, emailing
oig.hotline@ed.gov, or writing to the Inspector General’s Hotline, Office of Inspector General,
U.S. Department of Education, 400 Maryland Avenue, SW, Washington D.C. 20202-1500.

RMS’ Comments
RMS stated that it is planning to include fraud prevention and detection as one of its technical
assistance topics. RMS will consider presenting information from Managing the Business Risk
of Fraud: A Practical Guide and will place emphasis on preventing fraud as well as detecting it
once it has occurred. RMS agreed that it is important to help ensure SEA and LEA employees
are aware of the ED-OIG hotline, and it will include information on how to contact the hotline in
the technical assistance being developed.



                            PURPOSE AND METHODOLOGY



The purpose of this final MIR is to provide the Office of the Secretary with information that may
be beneficial in oversight of grants provided to SEAs. As part of the American Recovery and
Reinvestment Act of 2009, Congress dramatically increased SEA and LEA funding and
expectations for transparency and accountability in how that funding is used. Therefore, it is
important that SEAs and LEAs have adequate oversight of grants and account for how funding is
used. We completed the MIR to (1) provide Department officials with suggestions for
enhancements to existing guidance provided to SEAs and LEAs; (2) assist SEAs and LEAs in
complying with grant administration requirements by providing information on pervasive fiscal
non-compliance issues identified in previous ED-OIG-AS audits; and (3) aid entities conducting
future audits or reviews of SEAs and LEAs in improving oversight by notifying them of
pervasive fiscal non-compliance issues identified in previous ED-OIG-AS audits.

The purpose of this project was to (1) identify any pervasive fiscal issues reported in prior ED-
OIG work related to LEAs and SEAs (when the SEA work included a review of LEAs), and
(2) develop any necessary suggestions to improve guidance to SEAs and LEAs. The scope of
the project included a review of ED-OIG-AS final audit reports issued during fiscal years 2003
through 2009 (October 1, 2002, through April 14, 2009) and ED-OIG-IS investigations that
resulted in criminal convictions during the period October 1, 2002, through December 31, 2008.

To achieve our objectives, we performed the following procedures:

    	 Reviewed information on the Department’s website and other sources for the Title I,
       Title II, Title V, and IDEA programs and documented information about the programs
       applicable to our objectives.

    	 Identified the amount the Department awarded for each of the applicable grant programs
       for fiscal years 2003 through 2009.
Final Management Information Report
ED-OIG/X05J0005                                                                       Page 19 of 28

    	 Reviewed ED-OIG-AS final audit reports issued during the period October 1, 2002,
       through April 14, 2009, that involved SEAs and LEAs. We identified and reviewed
       49 final audit reports of formula grants that contained fiscal findings. We then
       determined that 41 of these 49 reports included pervasive fiscal issues (occurring in more
       than 5 reports). Of these 41 reports, 27 involved 1 or more of the following issues:
       unallowable costs, inadequately documented costs, violation of the supplanting
       prohibition, and inadequate inventory control systems (Attachment 1). The other
       14 included unallowable costs resulting from the LEAs’ failure to meet program
       requirements, inability to demonstrate fulfillment of grant requirements, ineligibility for
       the programs, or inadequate documentation of its eligibility for the program
       (Attachment 2).

    	 Summarized any internal control weaknesses cited in the reports as the cause of each
       pervasive fiscal issue and determined the total amount of unallowable costs associated
       with each pervasive fiscal issue.

    	 Reviewed the criteria relevant to each program and pervasive fiscal issue identified in our
       review of the 41 audit reports.

    	 Reviewed U.S. Department of Education, Inspector General’s Semiannual Report to
       Congress, Nos. 46-57, covering the period October 1, 2002, through September 30, 2008;
       discussed recent fraud cases with ED-OIG-IS employees; and reviewed a draft
       compendium of investigations involving SEAs and LEAs. Using these sources, we
       selected a sample of 13 fraud cases that resulted in criminal convictions of LEA officials.
       We classified these cases into five categories—those involving (1) kickbacks from
       consultants, contractors, and employees; (2) fictitious vendors; (3) false expenditure
       reports and checks; (4) dormant or unknown bank accounts; and (5) procurement cards.
       We discussed each of these cases with ED-OIG-IS employees to obtain details, including
       a description of any internal control weaknesses that allowed fraud to occur.
Final Management Information Report
ED-OIG/X05J0005                                                                      Page 20 of 28



                              ADMINISTRATIVE MATTERS



Statements that managerial practices need improvements, as well as other conclusions and
suggestions 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.

If you would like to discuss the information presented in this MIR or obtain additional
information, please call Gary D. Whitman, Regional Inspector General for Audit, at (312)
730-1620, or me at (202) 245-7050.

Attachments

cc:
Joseph Conaty, Acting Assistant Secretary, OESE
Andy Pepin, Acting Assistant Secretary, OSERS
Bill Modzeleski, Acting Assistant Deputy Secretary, OSDFS
Jim Shelton, Assistant Deputy Secretary, OII
Richard Smith, Acting Assistant Deputy Secretary and Director, OELA
Dennis Berry, Acting Assistant Secretary, OVAE
Mary Mitchelson, Acting Inspector General
Delores Warner, Audit Liaison Officer, OESE
Melanie Winston, Audit Liaison Officer, OSERS, Internal Audits
Anthony White, Audit Liaison Officer, OSERS, Office of Special Education Programs
Tina Otter, Audit Liaison Officer, Risk Management Service, Office of the Secretary
Samuel Lopez, Audit Liaison Officer, OELA
Liza Araujo, Audit Liaison Officer, OII
Michelle Padilla, Audit Liaison Officer, OSDFS
John Miller, Audit Liaison Officer, OVAE
Final Management Information Report
ED-OIG/X05J0005                                                                     Page 21 of 28

                          Acronyms/Abbreviations Used in this Report

ACN             Audit Control Number

C.F.R.          Code of Federal Regulations

COSO            Committee of Sponsoring Organizations of the Treadway Commission

Department      U.S. Department of Education

DCPS            District of Columbia Public Schools

DISD            Dallas Independent School District

ED-OIG          U.S. Department of Education, Office of Inspector General

ED-OIG-AS U.S. Department of Education, Office of Inspector General, Audit Services

ED-OIG-IS       U.S. Department of Education, Office of Inspector General, Investigative Services

ESEA            Elementary and Secondary Education Act of 1965

GISD            Garland Independent School District

IDEA            Individuals with Disabilities Education Improvement Act of 2004

LEA             Local Educational Agencies

MEP             Migrant Education Program

MIR             Management Information Report

NCLB            No Child Left Behind Act of 2001

OMB             Office of Management and Budget

PRDE            Puerto Rico Department of Education

RMS             Risk Management Service

SEA             State Educational Agencies

WFSD            William Floyd Union Free School District
          Final Management Information Report
          ED-OIG/X05J0005                                                                                              Page 22 of 28

          Attachment 1: ED-OIG-AS Final Audit Reports Containing Pervasive Fiscal Issues 

          Related to Personnel and Non-personnel Costs, Inventory Control, and Supplanting

                                                                                       Inadequately   Inadequately
                                                         Unallowable    Unallowable    Documented      Documented     Inventory
Issued            ACN/Title              Program          Personnel    Non-personnel     Personnel    Non-personnel    Control    Supplanting
          A06H0011, Adequacy
          of Fiscal Controls Over
          the Use of Title I, Part
          A Funds at Dallas
          Independent School
 Apr-09   District                    Title I, Part A        X              X               X              X             X
          A05H0025, Harvey
          Public Schools
          District’s Use of           Title I,
          Selected U.S.               Parts A, B;
          Department of               Title II; IDEA,
Nov-08    Education Grant Funds       Part B                                                X              X             X
          A04H0017, Puerto Rico
          Department of
          Education's
          Administration of
          Title I Services
          Provided to Private
 Oct-08   School Students             Title I                               X                                            X
          A07H0017, St. Louis         Title I,
          Public School District’s    Parts A, B;
          Use of Selected U.S.        Title II,
          Department of               Part A; IDEA,
 Sep-08   Education Grant Funds       Part B                 X              X               X              X             X
          A05H0010, The School
          District of the City of
          Detroit's Use of Title I,
          Part A Funds Under the
          No Child Left Behind        Title I,
 Jul-08   Act of 2001                 Part A                 X              X               X              X
          A05G0032, ODE’s
          Administration of its
          Migrant Education           Title I,
 Jan-08   Program                     Part C; MEP                           X
          A02G0020, Elizabeth
          Public School District
          Allowability of Title I,    Title I,
 Oct-07   Part A Expenditures         Part A                                X               X              X             X             X
          A05G0031, Columbus
          City School District’s
          Compliance with
          Financial
          Accountability
          Requirements for Its        Title I, Part A;
          Expenditures Under          Title II,
          Selected No Child Left      Parts A,D;
 Jun-07   Behind Act Programs         Title V, Part A        X                              X                            X
          A05H0008, Indian
          Springs District 109’s
          Use of Individuals with
          Disabilities Education
 Jun-07   Improvement Act Funds       IDEA, Part B           X              X
          A02G0007, Hempstead
          Union Free School
          District’s Elementary
          and Secondary
          Education Act of 1965,
          as amended, Title I,
          Part A Non-Salary
 Apr-07   Expenditures                Title I, Part A                       X                              X             X
          Final Management Information Report
          ED-OIG/X05J0005                                                                                           Page 23 of 28



                                                                                    Inadequately   Inadequately
                                                      Unallowable    Unallowable    Documented      Documented     Inventory
Issued            ACN/Title            Program         Personnel    Non-personnel     Personnel    Non-personnel    Control    Supplanting
          A02F0017, Puerto Rico
          Department of
          Education, Salinas
          School District’s
          Administration of
 Jul-06   Title I Funds             Title I, Part A                                                     X
          A05F0018, The School
          District of the City of
          Detroit’s
          Administration of
          Parental Involvement
          Funds Under the No
          Child Left Behind Act
 Jun-06   of 2001                   Title I, Part A       X              X               X              X
          A02F0005, New Haven
          School District's
          Administration of
          Title I, Part A Summer
          and After School
 Apr-06   Programs                  Title I, Part A                                                                                 X
          A02F0030, William
          Floyd Union Free
          School District
          Allowability of Title I
          Non-Salary
Mar-06    Expenditures              Title I, Part A                      X                                                          X
          A02E0030, William
          Floyd Union Free
          School District
          Allowability of Title I
          Salary and Salary-
Dec-05    Related Expenditures      Title I, Part A       X              X               X
          A09F0009, ARC
          Associates’ and
          Oakland Unified School
          District’s Compliance
          With Supplemental
          Educational Services
 Oct-05   Provisions                Title I, Part A                      X
          A05F0007, The
          Michigan Department
          of Education’s
          Compliance with the
          Public School Choice
          and Supplemental
          Educational Services
          Provisions of the No
          Child Left Behind Act
Aug-05    of 2001                   Title I, Part A                                                                                 X
          A06E0018, Title I funds
          administered by the
          East Baton Rouge
 Jun-05   Parish School District    Title I, Part A                                      X              X
          A06E0008, Title I funds
          administered by the
          Orleans Parish School
 Feb-05   Board                     Title I, Part A                                      X              X
              Final Management Information Report
              ED-OIG/X05J0005                                                                                                     Page 24 of 28


                                                                                              Inadequately   Inadequately
                                                            Unallowable    Unallowable        Documented      Documented         Inventory
    Issued           ACN/Title               Program         Personnel    Non-personnel         Personnel    Non-personnel        Control        Supplanting
              A02E0009, Puerto Rico
              Department of
              Education's Special
              Education Program
    Dec-04    Services                   IDEA                                                                     X
              A06E0017, Title I funds
              administered by the
              Beauregard Parish
    Dec-04    School District            Title I, Part A                                           X
              A06E0012,Title I funds
              administered by the
              Caddo Parish School
    Dec-04    District                   Title I, Part A                                           X
              A02D0014, Puerto Rico
              Department of
              Education’s Title I
              Expenditures for the
              period, July 1, 2002 to
    Mar-04    December 31, 2002          Title I, Part A                       X                                                                     X
              A05D0008, Audit of 20
              Arizona charter schools'
              uses of U.S. Department    Title I, Part A;
    Nov-03    of Education funds         IDEA, Part B                                                                                                X
              A05D0009, Audit of
              Cleveland Municipal
              School District's Set-
              Aside Funds for
    Aug-03    District-Wide Activities   Title I, Part A        X
              A02C0011, The Virgin
              Islands Department of
              Education - St.
              Thomas/St. John School
              District’s Control of
     Jun-03   Equipment Inventory        IDEA, Part B                                                                               X
              A02C0019, The Virgin
              Islands Department of
              Education-St. Croix
              School District’s
              Control of Equipment
    Mar-03    Inventory                  IDEA, Part B                                                                               X
                                                                                                                                              
         Final Management Information Report
         ED-OIG/X05J0005                                                                                             Page 25 of 28

         Attachment 2: ED-OIG-AS Final Audit Reports Containing Pervasive Fiscal Issues
         Related to Program Requirements and Program Eligibility
                                                                                             Unable to
                                                                                            Demonstrate                      Inadequate
                                                                              Failure to      Program                       Documentation
                                                                             Meet Program   Requirements    Ineligibility    of Program
Issued                          ACN/Title                          Program   Requirements     Fulfilled    for Program        Eligibility
            A05G0033, Illinois State Board of Education’s
            Compliance with the Title I, Part A, Comparability    Title I,
 Jun-07     of Services Requirement                               Part A                                                             X
            A09G0020, Arizona Department of Education’s
            Oversight of the ESEA, Title I, Part A                Title I,
 Mar-07     Comparability of Services Requirement                 Part A                                                             X
            A05G0015, Ohio Department of Education’s Title I,     Title I,
 Nov-06     Part A, Comparability of Services Requirement         Part A                                                             X
            A05G0011, Wisconsin Department of Public              Title I,
 Oct-06     Instruction’s Reading First Program                   Part B                         X
                                                                  Title I,
            A06F0016, Arkansas Department of Education’s          Part C,
 Aug-06     Migrant Education Program                             MEP                                            X
                                                                  Title I,
            A06F0013, Oklahoma State Department of                Part C,
 Mar-06     Education’s Migrant Education Program                 MEP                                            X
            A07F0016, Kansas State Department of Education’s
            Maintenance of Effort Under the Individuals with      IDEA,
 Feb-06     Disabilities Education Act of 1997, Part B, Program   Part B                         X
            A07F0003, Illinois State Board of Education’s
            Compliance with the Public School Choice and
            Supplemental Educational Services Provisions of       Title I,
 Aug-05     the No Child Left Behind Act                          Part A          X
            A05F0012, Minnesota Department of Education's
            Maintenance of Effort Under the Individuals with      IDEA,
 Aug-05     Disabilities Education Act of 1997, Part B, Program   Part B                         X
            A05D0038, Michigan’s local educational agencies’
            allocations of Elementary and Secondary Education
            Act of 1965, as amended, Title I, Part A, funds to    Title I,
 Jun-04     schools                                               Part A                                         X
            A06C0033, California Department of Education’s        Title I,
            Compliance with the Priority for Services             Part C,
May-03      Requirements of the Migrant Education Program         MEP                            X
            A06C0032, Kansas Department of Education’s            Title I,
            Compliance with the Priority for Services             Part C,
May-03      Requirements of the Migrant Education Program         MEP                            X
                                                                  Title I,
            A06C0031, The Migrant Education Program at the        Part C,
May-03      Florida Department of Education                       MEP                            X
                                                                  Title I,
            A06C0030, The Migrant Education Program at the        Part C,
 Feb-03     Texas Education Agency                                MEP                            X
Final Management Information Report
ED-OIG/X05J0005                                                                        Page 26 of 28

      Attachment 3: RMS’ Comments to Draft Management Information Report

                                          June 29, 2009


MEMORANDUM

TO:             Gary D. Whitman
                Regional Inspector General for Audit
                Office of Inspector General

FROM:           Phil Maestri /s/
                Director
                Office of the Secretary, Risk Management Service

SUBJECT:        Response to Draft Management Information Report
                Fiscal Issues Reported in ED-OIG Work Related to LEAs and SEAs
                Control Number ED-OIG/X05J0005


Thank you for the opportunity to respond to the Draft Management Information Report (MIR)
cited above. The MIR states that the purpose of this report is to provide the Office of the
Secretary with information that might be beneficial in overseeing grants provided to State
educational agencies (SEAs). As part of the American Recovery and Reinvestment Act of 2009
(ARRA), Congress dramatically increased SEA and local educational agency (LEA) funding and
expectations for transparency and accountability in how that funding is used. Therefore, it is
important that SEAs and LEAs have adequate oversight of grants and account for how funding is
used. The purpose of this project was to (1) identify any pervasive fiscal issues reported in prior
U.S. Department of Education (Department), Office of Inspector General (ED-OIG) work related
to LEAs and SEAs (when the SEA work included a review of the LEAs), and (2) develop any
necessary suggestions to improve guidance to SEAs and LEAs.

ED-OIG requested comments on the information presented in the MIR and a response on the
suggestions provided, so our specific responses on the suggestions are provided below. Risk
Management Service (RMS) agrees that it is important to ensure ARRA funds, as well as all
Department grant funds, are appropriately administered and accounted for by SEAs and LEAs.
RMS, in coordination with other Department Principal Offices (POs) on the ARRA Technical
Assistance (TA) Team, is currently developing a technical assistance plan and training curricula to
provide enhanced guidance and training to the SEAs and LEAs. The information provided in
this MIR provides a timely and beneficial resource for the Department’s analysis of the most
prevalent training needs of our grantees.

Suggestion: OIG suggests that the Department enhance guidance to SEAs and LEAs on how to
implement the administrative requirements for Federal grants and ensure that SEA and LEA
officials understand the importance of complying with the requirements. The Department should
offer additional guidance and training workshops to SEAs and LEAs. The guidance and
workshops should stress the existing requirements and provide technical support for ensuring
allowable and adequately documented personnel and non-personnel costs; proper inventory
Final Management Information Report
ED-OIG/X05J0005                                                                        Page 27 of 28

control systems; and the supplementing, not supplanting, of Federal grant funds. The guidance
should include specific examples of situations where personnel activity reports are required and
provide illustrative examples of time and effort certifications and adequate personnel activity
reports. The guidance should also make SEAs and LEAs aware of the necessity to have and
implement policies and procedures that require proper (1) segregation of duties for procuring
goods and services and reconciling bank statements, (2) bidding procedures, and (3) review of
invoices and supporting documentation.

RMS response: RMS, in coordination with other POs on the ARRA TA Team, is currently
developing a technical assistance plan and training curricula to provide enhanced guidance and
training to SEAs and LEAs, which will include administrative requirements for implementation
of Federal grants and will convey the importance of complying with those requirements. RMS
will be providing cross-Department TA, along with POs, beginning with the States determined to
be most in need of TA in order to appropriately spend ARRA funds (the 1st batch states). RMS
is currently developing a draft list of TA topics, based on its analyses as well as input, analyses
and rankings from Title I and IDEA. The information provided in this MIR will also be included
in the RMS’ and TA Team’s analysis of prevalent issues for which enhanced TA is needed. In
addition, RMS will be contacting the Chief State School Officers (CSSOs) for each of the 1st
batch states to discuss any additional TA they feel is needed in order for them to be able to
appropriately spend ARRA funds.

RMS is developing a set of curricula around basic financial topics, such as those included in this
MIR, including cash management and internal controls. RMS is also working with OCFO on
indirect cost training. In addition, some of the POs are working on curricula for the more
programmatic TA issues, including supplement vs. supplant. RMS will be producing a series of
webinars that will be available to everyone who signs-in, including both SEAs and LEAs. The
webinars will include broad-brush topics common to everyone.

The goal is to get the ARRA-related TA done by December 31, 2009. In addition to providing
TA on-site and through webinars, video teleconferences, and conference calls, RMS and other
POs are also looking into conferences, training workshops, and any other opportunities, between
now and December 31st, that the Department can participate in to provide additional TA to SEAs
and LEAs.

While the complete list of TA topics is still being drafted and individualized TA lists will be
negotiated with the states, the following TA topics are currently being considered: cash
management, record-keeping, property and procurement, ARRA reporting, sub-recipient
monitoring, fraud prevention and detection, allowable activities, school-wide allocations, cost
allocations/indirect costs, internal controls, time and effort, data quality, and purchase cards.
Additional topics may also be added as a result of this MIR.

Suggestion: OIG suggests that in the guidance and training workshops provided by the
Department to SEAs and LEAs on how to implement the administrative requirements for Federal
grants, the Department should consider presenting information from Managing the Business Risk
of Fraud: A Practical Guide. The Department might also present examples of SEAs and LEAs
that have implemented successful fraud control systems based on this guide. Emphasis should
be placed on preventing fraud as well as detecting it once it has occurred.
Final Management Information Report
ED-OIG/X05J0005                                                                    Page 28 of 28

RMS response: RMS is currently planning to include fraud prevention and detection as one of
its TA topics. As this TA is developed, RMS will consider presenting information from
Managing the Business Risk of Fraud: A Practical Guide, and emphasis will be placed on
preventing fraud as well as detecting it once it has occurred.

Suggestion: ED-OIG has its own public access hotline for reporting fraud, waste, and abuse.
However, the investigations we summarized included only one instance of fraud reported
directly to ED-OIG. Making SEA and LEA employees aware of the hotline might expedite the
detection of fraud.

RMS response: RMS agrees that it is important to help ensure SEA and LEA employees are
aware of the ED-OIG hotline, and we will include information on how to contact the hotline in
the TA being developed.

Again, we appreciate the information provided in this MIR and the opportunity to provide this
response.