oversight

Food Assistance: Efforts to Control Fraud and Abuse in the Child and Adult Care Food Program Should be Strengthened

Published by the Government Accountability Office on 1999-11-24.

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

                 United States General Accounting Office

GAO              Report to Congressional Committees




November 1999
                 FOOD ASSISTANCE
                 Efforts to Control
                 Fraud and Abuse in the
                 Child and Adult Care
                 Food Program Should
                 Be Strengthened




GAO/RCED-00-12
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-283994

      November 29, 1999

      Congressional Committees

      The Child and Adult Care Food Program provides over $1.5 billion in
      benefits annually to children and adults in day care. The U.S. Department
      of Agriculture’s (USDA) Food and Nutrition Service (FNS) administers this
      program through designated state agencies, usually state departments of
      education or health, which are responsible for ensuring that children and
      adults receive nutritious meals. To do this, the states use program funds to
      subsidize the meals served by day care providers. State agencies operate
      their programs through state-approved organizations (sponsors), such as
      nonprofit community action agencies or school districts, which oversee
      the day care providers. In fiscal year 1998, the program benefited a
      monthly average of 2.5 million children and 58,000 adults in the care of
      about 220,000 providers, nationwide.

      The Child and Adult Care Food Program has long been plagued with fraud
      and abuse. Since 1993, USDA’s Office of Inspector General has conducted
      over 55 audits and investigations in 23 states—identifying case after case
      of the intentional misuse of federal funds.1 Scams uncovered included
      sponsors’ creating fictitious day care providers, inflating the number of
      meals served, and padding executives’ salaries and benefits. Given the
      scope of the problems that the Inspector General identified, USDA declared
      the program to have “material weaknesses”—that is, the program lacked
      sufficient controls to ensure that federal funds were adequately
      safeguarded.

      As the principal administrators of this program, state agencies are
      responsible for implementing FNS’ program regulations to protect against
      fraud and abuse. Specifically, these regulations require the state agencies
      to, at a minimum, (1) review and approve sponsors’ budgets to ensure that
      they cover only allowable and reasonable costs; (2) conduct
      administrative reviews of sponsors and providers to ensure compliance
      with the program’s requirements; (3) ensure that required financial audits
      are completed and corrective actions taken; and (4) review all monthly
      claims submitted for meal reimbursements. In 1995, USDA’s Office of



      1
      U.S. Department of Agriculture Office of Inspector General, Food and Consumer Service Child and
      Adult Care Food Program Day Care Homes-Nationwide, Audit Report No. 27600-6At, March 1995; U.S.
      Department of Agriculture Office of Inspector General, Food and Nutrition Service Child and Adult
      Care Food Program National Report on Program Abuses Presidential Initiative: Operation Kiddie Care,
      Audit Report No. 27601-7-SF, Aug. 23, 1999.



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                   Inspector General and a federal-state task force2 recommended that the
                   states implement a number of controls, beyond the minimum program
                   requirements, to better protect against fraud and abuse. These
                   recommended actions included conducting unannounced visits to
                   providers to ensure the accuracy of meal reimbursements, requiring
                   criminal background checks on sponsors’ and providers’ employees, and
                   contacting parents to verify children’s enrollment and attendance. To date,
                   FNS has not incorporated these recommendations into its regulations for
                   detecting and preventing fraud and abuse in the Child and Adult Care
                   Food Program. However, it has provided guidance to the states on how
                   they can adopt some recommended controls on a voluntary basis.

                   Because of continued concerns about fraud and abuse in the Child and
                   Adult Care Food Program, we initiated work that (1) examined the extent
                   to which the states have implemented required and recommended controls
                   to prevent and detect fraud and abuse and (2) reviewed FNS’ effectiveness
                   in directing the states’ efforts to implement these controls. To do this, we
                   surveyed the agencies responsible for administering the program in the 50
                   states, the District of Columbia, Guam, the Commonwealth of Puerto Rico,
                   and the U.S. Virgin Islands. All 54 state agencies responded to our survey.
                   We also reviewed program operations in four states (Florida, Georgia,
                   Maryland, and Texas). Our review focused on the child care component of
                   this program, which accounts for 98 percent of the program participants.
                   Our scope and methodology are discussed in appendix I. This report is
                   being addressed to committees that have jurisdiction over the Child and
                   Adult Care Food Program.


                   Almost all of the state agencies reported they had implemented, at least in
Results in Brief   part, the Food and Nutrition Service’s minimum required controls for
                   detecting fraud and abuse in the Child and Adult Care Food Program.
                   However, these agencies reported variation in implementing the additional
                   controls recommended by the Inspector General and a federal-state task
                   force. For example, 47 state agencies conducted unannounced visits to
                   day care providers, either as needed or routinely; 13 verified children’s
                   enrollment or attendance through contacts with parents; and 8 required
                   criminal background checks. State agencies cited factors that made it
                   difficult to strengthen controls over fraud and abuse, including (1) a lack


                   2
                    This task force was initiated by FNS to provide technical advice on USDA’s efforts to improve
                   management and regulatory compliance at all levels of administration in the Child and Adult Care
                   Food Program. The task force consisted of FNS and state agency officials responsible for program
                   implementation. Among other things, the task force recommended that FNS develop additional
                   guidance materials and suggested regulatory or legislative changes for future consideration.



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             of resources (staff, funding, and/or computer technology); (2) a lack of
             training in and knowledge of how to identify fraud and abuse; and
             (3) unclear regulations by the Food and Nutrition Service on removing
             noncompliant sponsors from the program. Additionally, according to
             Service and state officials, some state agencies may be reluctant to adopt
             additional fraud and abuse controls because they view themselves as
             providers of program benefits—not policing organizations.

             The Food and Nutrition Service has not effectively directed the states’
             efforts to protect against fraud and abuse in this program. First, it has yet
             to strengthen the minimum requirements for the states’ controls over fraud
             and abuse, despite recommendations from the Inspector General and the
             federal-state task force dating back to 1995. This, in part, has contributed
             to many states’ not implementing the types of controls necessary to reduce
             the program’s vulnerability to illegal or inappropriate uses of federal
             funds. Second, the Food and Nutrition Service has not adequately
             monitored the states’ implementation of controls over fraud and abuse
             and, consequently, has little basis for identifying and correcting problems
             that the states may be experiencing. Finally, the Food and Nutrition
             Service has had difficulty correcting problems involving the states’
             compliance with required controls, partially because it lacks an
             appropriate range of sanctions. Agency officials told us that these
             oversight weaknesses largely resulted from insufficient resources, noting
             that in the past few years, the agency needed to concentrate many of its
             resources on implementing changes required by welfare reform. Beginning
             in fiscal year 1999, the Congress authorized an additional $1 million
             annually for 5 years to strengthen the agency’s efforts in preventing and
             detecting fraud and abuse in the food program. The Food and Nutrition
             Service has initiated but not completed actions to address these problems.

             We are making a recommendation to the Secretary of Agriculture that the
             Food and Nutrition Service develop a comprehensive plan to strengthen
             the states’ controls for detecting and preventing fraud and abuse. This plan
             should outline the actions necessary to strengthen states’ controls and
             include measurable goals and objectives.


Background   The Child and Adult Care Food Program was established to ensure that
             children and adults in day care, regardless of their income, receive meals
             and snacks that meet federal nutrition standards. As an entitlement
             program, it serves all eligible children and adults without regard to federal




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budgetary limitations.3 In addition to technical assistance and training in
nutrition education, it provides meal subsidies to participating day care
providers through cash payments or USDA commodity foods. In fiscal year
1998, the program operated in 179,000 day care homes and 38,000 child
care centers.4

Reimbursements to child care centers and day care homes depend on the
type of meal served—breakfast, lunch or supper, or snack—and other
factors, such as the income level of the child’s family or provider. The
rates for reimbursement can differ significantly.5 For example, a center
may be reimbursed daily for meal service, up to $3.61 for a child from a
low-income family and up to $.45 for a child from a family whose income
exceeds a prescribed level. Reimbursements are provided only for
(1) enrolled children present on a given day and (2) the specific meals or
snacks they are served. To be reimbursed, the provider must maintain
records of the type, content, and number of meals served; income
eligibility; and children’s attendance.

FNS administers the food program by providing grants to designated state
agencies.6 To oversee state agencies’ efforts, FNS periodically conducts
on-site management evaluations, which examine agencies’ records to
determine the states’ compliance with program regulations.

At the state level, the designated agency operates through
(1) state-approved sponsors, which oversee all day care homes and some
centers, and (2) independent child care centers. Sponsors are private
nonprofit or public organizations, such as community action agencies or
school districts, to which state agencies delegate key management
responsibilities for overseeing and identifying fraud and abuse in the
program.7 More than 1,200 sponsors nationwide approve day care homes
and/or child care centers for program participation, conduct on-site
compliance visits, reimburse homes and centers with federal funds, and

3
 Eligible children are children age 12 and under, migrant children age 15 and under, and children with
disabilities. Eligible adults are elderly (age 60 or over) or chronically impaired.
4
 The program also operates in homeless shelters and adult day care centers.
5
 In centers, the three maximum daily reimbursement rates, depending on family income, are $.45,
$2.64, and $3.61 per child. For homes, the maximum daily reimbursement rates are $1.49 and $3.11 per
child.
6
 FNS directly implements the program in Virginia—the only state in which program implementation is
not handled by a designated state agency.
7
 For-profit child and adult care centers may also receive program benefits if at least 25 percent of
center participants receive Medicaid or social services provided with title XX funds under the Social
Security Act.


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    ensure that federal nutrition standards are met. In addition, state agencies
    reimburse the sponsors of day care homes for reasonable and allowable
    administrative expenses, based generally on the number of homes they
    oversee. States may also allow the sponsors of child care centers to retain
    a portion of each center’s meal reimbursements to cover allowable
    administrative expenses. Similarly, independent child care
    centers—centers that are overseen directly by the state agency—may
    retain a portion of their meal reimbursements to cover allowable operating
    costs. FNS’ regulations require state agencies to conduct annual on-site
    administrative reviews of one-third of all sponsors and independent child
    care centers. In addition, FNS requires the state agencies, as part of their
    review of sponsors, to conduct on-site visits to a prescribed number of the
    homes and/or centers that the sponsors oversee.8

    Since 1993, USDA’s Office of Inspector General has targeted this program
    for audits and investigations to identify fraud and abuse committed by
    sponsors and day care homes. As a result, since 1994, USDA has recognized
    this program’s vulnerability to fraud and abuse in its annual Federal
    Managers’ Financial Integrity Act report.9 As of February 1999, the
    Inspector General had examined 49 sponsors and their day care homes in
    23 states through unannounced visits. During its audits and investigations,
    the Inspector General has disclosed the following:

•   Thirty-seven of the 49 sponsors had committed serious violations that
    could warrant their removal from the program. These 37 had received
    $76.3 million in food and administrative funds annually. In addition, 28
    individuals associated with these sponsors have pleaded guilty or been
    convicted of committing fraud.
•   Some sponsors of day care homes created fictitious providers; inflated the
    number of meals served; were not monitoring or training their providers;
    and had unallowable, unsupported, and excessive costs in their
    administrative budgets.
•   Providers did not always maintain adequate records, frequently inflated
    the number of meals served, and sometimes served meals that did not
    meet nutrition standards.


    8
     Independent child care centers, sponsors of centers, and sponsors of day care homes with 1 to 200
    homes must be reviewed at least once every 4 years; reviews of these sponsors must include
    15 percent of their child care centers and 10 percent of their day care homes. Sponsors with more than
    200 homes must be reviewed at least once every 2 years; these reviews must include 5 percent of the
    first 1,000 homes and 2.5 percent of homes in excess of 1,000.
    9
     The Federal Managers’ Financial Integrity Act of 1982 (P.L. 97-255) requires the heads of executive
    agencies to annually report to the President and the Congress material weaknesses in their
    management and financial controls.



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                           The Inspector General determined that this fraud and abuse occurred
                           because (1) state agencies’ and FNS’ oversight reviews did not focus on the
                           primary management controls at the sponsors and day care homes and
                           (2) state administrative reviews generally did not include sufficient tests to
                           identify inflated and unsupported meal claims and assess the adequacy of
                           sponsors’ monitoring of homes. Most FNS management evaluations did not
                           include sponsor or day care home visits.

                           FNS is currently revising the program’s regulations to strengthen controls
                           to prevent and detect fraud and abuse. These revisions are in response to a
                           series of Inspector General recommendations, the findings of the
                           federal-state task force, and problems that FNS has noted in its
                           management evaluations. The agency expects to propose these revised
                           regulations in fiscal year 2000. In the interim, it has issued written
                           guidance on some of these recommended controls. However, the state
                           agencies’ implementation of these controls remains voluntary until FNS
                           amends its regulations to include them.



                           Almost all of the 54 state agencies indicated that in fiscal years 1997 and
State Agencies Vary in     1998 they had implemented, at least in part, the minimum required fraud
Their Use of               and abuse controls contained in FNS’ regulations for the Child and Adult
Recommended                Care Food Program. However, the agencies varied in the extent to which
                           they had implemented the controls recommended by the Inspector
Controls to Prevent        General and the task force. State agencies identified several difficulties
and Detect Fraud and       they face in strengthening their controls over fraud and abuse, and FNS and
                           state officials added that some state agencies are reluctant to put more
Abuse                      effort into combating fraud and abuse because these agencies view
                           themselves as service providers, not as investigative entities.


State Agencies Generally   Most state agencies surveyed reported that they are using, at least in part,
Use the Minimum Controls   the minimum required program controls contained in FNS’ regulations.
Required in FNS’           These controls include (1) reviewing and approving the budgets of day
                           care home sponsors to ensure that planned expenditures are adequately
Regulations                supported, (2) conducting administrative reviews of sponsors and
                           providers to ensure compliance with the program’s requirements,
                           (3) ensuring that financial audits of sponsors and providers are completed
                           and corrective actions taken, and (4) reviewing the reimbursement claims
                           submitted by sponsors and providers to detect potentially fraudulent
                           errors prior to payment.



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Regarding sponsors’ budgets, 50 of the 54 state agencies reported that they
had reviewed and approved these annual administrative budgets. These
reviews for the sponsors of day care homes are to determine if the budgets
contain only reasonable, necessary, and allowable costs, in accordance
with federal requirements, prior to the agencies’ paying sponsors their first
reimbursement for meals. The budget is part of a sponsor’s management
plan, which provides information on how the sponsor will use federal
funds to pay employees’ salaries and other program-related costs, such as
those for supplies and travel. According to our survey, when state agencies
reviewed these budgets, they most often required changes in them because
administrative expenses appeared to be unclear (22 state agencies) or
were excessive (16 state agencies). The four state agencies that did not
review sponsors’ budgets received program funds totaling about
$107 million, or about 7 percent, of all the program’s funds for fiscal year
1998.

Administrative reviews, a key tool for states to identify fraud and abuse,
are on-site visits by state agencies to verify children’s eligibility and
attendance, the accuracy of meal claims, and administrative costs. Of the
41 states that fully responded to our questions on these reviews, 31
reported that they conducted administrative reviews of sponsors and of all
three types of providers—independent centers, sponsored centers, and
day care homes—in fiscal years 1997 and 1998. However, of the remaining
10 states, 2 reported that they had conducted no reviews during this time,
while 8 reported not conducting any reviews at either sponsors or one
type of provider in one or both years. Moreover, our survey results
indicate that over half the states had reviewed less than 5 percent of the
day care homes annually. The 10 states that did not conduct all reviews
received program funds totaling $224 million, or 14 percent, of all program
funds for fiscal year 1998.

Concerning financial audits, while only two state agencies reported not
receiving the findings from required financial audits,10 nine reported that,
although they received the findings, they lacked a tracking system to
ensure these findings were resolved. Together, these 11 state agencies
received program funds of about $130 million, or 8 percent, of all program
funds in fiscal year 1998. These audits, usually performed annually by state
government auditors or public accounting firms, can determine whether
(1) program funds have been properly accounted for, (2) adequate internal

10
 Under the Single Audit Act of 1984 as amended, audits are required for all public and nonprofit
organizations, such as sponsors or child care centers, that receive $300,000 or more in federal funds. In
addition, USDA regulations require all for-profit organizations to be audited; however, the states have
discretion in setting a dollar limit on the for-profit organizations subject to this requirement.



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                              controls have been maintained over these funds, and (3) the funds have
                              been used for appropriate program purposes. Ultimately, the effectiveness
                              of the audits depends on ensuring corrective actions are taken.

                              With regard to reimbursement claims, state agencies reported significant
                              variation in the extensiveness of the methods that they used to evaluate
                              the soundness of these claims prior to payment. There are a number of
                              methods, referred to as “edit checks,” including comparing the
                              (1) number of approved sites (day care homes and child care centers) with
                              the number of sites claimed, (2) number of meals claimed with the average
                              daily attendance, (3) number of children enrolled with the average daily
                              attendance, (4) licensed capacity with the number of children claimed,
                              (5) days of operations claimed with the days of operations approved,
                              (6) percentage of children claimed at different reimbursement rates in
                              centers with the number of children approved at those rates for the
                              centers, and (7) number of children claimed at the highest reimbursement
                              rate in day care homes with the number of children approved for those
                              homes at that rate. All states reported using at least one review method. In
                              addition, 26 states reporting using between four and six methods; 18, all
                              seven methods; and 10, three or fewer.

                              While these reviews of reimbursement claims are an important tool for
                              identifying potentially fraudulent or abusive claims, they are not foolproof.
                              For example, one state we visited used all of these methods, but a state
                              reviewer found that the reviews did not catch a $5,000 overpayment to a
                              day care home sponsor. In this case, the claim for reimbursement had
                              jumped in one month to $7,000, from an average monthly claim of $2,000.
                              The overpayment was apparently not detected because the state did not
                              review claims for significant variation between monthly payments.


States Vary in Their Use of   State agencies’ implementation of the additional controls recommended
Recommended Controls to       by the Inspector General and the federal-state task force varied
More Effectively Prevent      considerably. These controls included state agencies’ (1) making
                              unannounced visits to sponsors and providers to assess their operations;
and Detect Fraud and          (2) developing profiles of high-risk sponsors, independent centers, and day
Abuse                         care homes as a basis for conducting more frequent monitoring;
                              (3) verifying children’s enrollment and attendance with parents; and
                              (4) conducting criminal background checks of prospective sponsors and
                              providers.




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Unannounced visits allow a state agency to verify the existence of the
provider, its enrollment, and the quality and quantity of the meals its
serves. Seven state agencies reported never conducting these visits. The
remaining 47 varied considerably in the types of facilities receiving
unannounced visits.11 Moreover, the full extent to which these 47 agencies
use unannounced visits is unknown. In comments in our survey, 21 state
agencies reported that they conducted unannounced visits when they are
following up on previously identified problems. However, two reported
they use unannounced visits for all monitoring visits and said these visits
are valuable for obtaining a realistic view of providers’ operations, without
giving the provider advance notice to allow for special preparation. In
contrast, 16 state agencies responded that unannounced visits may not be
an efficient use of their limited staff because planned visits better ensure
that required records and responsible personnel will be available.

Twenty state agencies reported that they profile high-risk sponsors and
independent centers. These agencies identified certain conditions as
signaling high risk: (1) consistent requests for reimbursements for the
maximum allowable number of children, (2) the program’s funds serving
as the sponsors’ sole source of income, and (3) closed homes or centers
found during on-site reviews. Some agencies reported providing additional
training and technical assistance and conducting more thorough reviews
at these high-risk sponsors and independent centers.

Thirteen state agencies reported contacting parents to verify their
children’s enrollment and attendance in day care. According to FNS and
state officials, parental verification is a useful method to uncover
fraudulent claims by providers for children who either were not enrolled
or who were absent on the day for which the claims were made. The
Office of Inspector General has also used parental verification to uncover
significant fraud and abuse in the food program.

Eight state agencies require criminal background checks for the
employees of sponsoring organizations and child care centers that the
agencies administer directly. Both the Inspector General and the
federal-state task force recommended state agencies do these checks
before approving or renewing sponsors’ applications for program
participation. Such checks would allow state agencies to identify
applicants or staff with a prior criminal conviction that may jeopardize the
safety of children or the integrity of the program.

11
 Of the 47 state agencies that reported making unannounced visits, 21 visited sponsoring
organizations, 26 visited independent child care centers, 27 visited child care centers administered by a
sponsoring organization; and 41 visited day care homes.



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State Agencies and FNS      State agencies cited various difficulties they face in implementing
Identify Difficulties in    additional controls for fraud and abuse, including (1) a lack of resources
Strengthening Controls to   to identify possible fraud and abuse, (2) a lack of training on and
                            knowledge about fraud and abuse, and (3) unclear FNS regulations
Prevent and Detect Fraud    regarding the circumstances that would warrant removing a sponsor or
and Abuse                   provider from the program. Furthermore, FNS and state officials said that
                            some state agencies are reluctant to employ additional controls because
                            they prefer to concentrate their resources on providing nutritious meals to
                            children rather than on investigating sponsors and providers for possible
                            fraud and abuse.

                            First, almost two-thirds (35 of 54) of the state agencies surveyed indicated
                            that they lacked the resources—including staff, funding, and/or computer
                            technology—to adequately detect and prevent fraud and abuse in their
                            programs. In responding to our survey, state officials frequently cited
                            problems with an adequate number of staff. FNS regional and state officials
                            indicated to us that state-imposed hiring ceilings were a major reason the
                            states have inadequate staffing. However, FNS officials also pointed out
                            that the federal funding available for this program is often not fully used
                            by state agencies, although they do not know why.

                            With respect to the second most frequently reported difficulty, one-third
                            (19) of the 54 state agencies reported that their staff’s training was
                            inadequate for detecting or preventing fraud and abuse. These agencies
                            indicated that they would like additional training in identifying fraud and
                            abuse. One survey respondent described the state’s staff as educators who
                            are not trained to conduct fraud and abuse investigations. Moreover, this
                            respondent did not consider conducting these types of investigations to be
                            the staff’s role. FNS is now providing state officials with training that
                            should assist them in identifying fraud and abuse, and FNS officials said
                            that fraud investigations are only to be done by appropriate investigative
                            officials.

                            Regarding the third most frequently reported difficulty, 14 state agencies
                            said that the regulations were unclear or unspecific on how and under
                            what circumstances to remove sponsors or providers from the program.
                            Although the regulations provide examples of activities that are “serious
                            deficiencies”—including the submission of false information, failure to
                            maintain adequate records, and the serving of meals without required
                            components—some of these state agencies indicated that the regulations
                            do not provide specific guidance on how frequent or severe these activities
                            have to be to warrant removal from the program. In addition, some states



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indicated that the regulations should provide other administrative
sanctions short of removal from the program, such as denying
administrative payments to sponsors for noncompliance with program
requirements. One state has taken this approach. Officials in this state said
their agency had promulgated its own regulations to (1) clarify the specific
circumstances in which a sponsor or provider would be subject to removal
from the program and (2) provide additional administrative sanctions
short of removal.12 According to these officials, the additional sanctions
provide a means to progressively penalize a sponsor or provider.13

In addition to the difficulties identified by the state agencies, FNS and state
officials said that some state agencies are reluctant to employ additional
controls because they prefer to concentrate their resources on providing
technical assistance to ensure that children receive nutritious meals rather
than on identifying fraud and abuse. Officials in two of the four state
agencies we visited echoed this sentiment, saying that that they viewed
their agencies primarily as service organizations, not policing
organizations.

In view of this orientation, it is perhaps not surprising that most state
agencies reported that they do not perceive fraud and abuse as a
widespread problem overall—despite the findings of the Department’s
Inspector General over the last several years. For example, 40 states
reported that, in their view, fraud and abuse is little or no problem at
sponsors and sponsored child care centers.

Relatedly, although the state agencies surveyed frequently reported finding
indicators of serious deficiencies in sponsor or provider activities, they
generally did not report taking strong enforcement actions. For example,
30 agencies indicated that they most frequently sent letters of corrective
action and provided technical assistance to first-time offenders who
submitted meal claims for more children than attend the day care center
or home. However, even for repeat offenders, a majority of state agencies
continued most frequently to send corrective action letters, provide
technical assistance, or declare offenders seriously deficient, rather than




12
  State agencies are allowed to issue regulations that supplement those issued by FNS. However, the
state regulations are subject to FNS’ approval and must not deny the program to an eligible institution.
13
  The additional sanctions provided in this state’s regulations include disallowing claims for ineligible
meals for a first violation; disallowing claims for ineligible meals and suspension of administrative
reimbursements for a second offense; and removal from the program for a third offense.


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                       remove the offender from the program.14 For example, 23 of the 54 state
                       agencies reported identifying sponsors and providers that had repeatedly
                       submitted false information, but only 8 of these 23 agencies removed the
                       offenders from the program.


                       FNS has not effectively directed the states’ efforts to control fraud and
FNS Has Not            abuse in the food program in terms of (1) developing adequate minimum
Effectively Directed   requirements for the states to follow, (2) overseeing the states’
States’ Efforts to     implementation of these requirements, and (3) having appropriate
                       sanctions in cases of noncompliance. FNS has begun but not completed
Control Fraud and      actions to address these problems, but it lacks a comprehensive plan with
Abuse                  measurable goals for ensuring that the states are consistently
                       implementing controls to protect the considerable federal investment in
                       this food program.

                       FNS has yet to strengthen the minimum requirements for state controls
                       over fraud and abuse, despite recommendations from the Inspector
                       General and a federal-state task force dating back to 1995. This delay has
                       contributed, in part, to many states’ not implementing the types of controls
                       that the Inspector General and the task force believe are necessary to
                       address the program’s significant vulnerability to fraud and abuse.
                       Originally, FNS planned to issue new requirements for state fraud and
                       abuse controls in fiscal year 1998. However, according to FNS officials, that
                       issuance date has been delayed because they have focused their resources
                       on implementing the significant program changes required by the welfare
                       reform act; FNS currently plans to issue proposed regulations in fiscal year
                       2000.

                       In addition, FNS has not adequately monitored the states’ implementation
                       of fraud and abuse controls and, consequently, has little basis for
                       identifying or correcting problems that states may be experiencing in
                       implementing such controls. FNS relies primarily on broad management
                       evaluations to monitor the states’ program activities, including the
                       controls the states may have over fraud and abuse. However, in fiscal
                       years 1997 and 1998, only 23 of FNS’ 47 management evaluations directly
                       evaluated the states’ implementation of required controls over
                       reimbursements to sponsors and providers. Almost half of these reviews
                       found serious problems, including the failure of some states to conduct

                       14
                        Prior to removing offenders from this program, FNS regulations require state agencies to notify
                       offenders that they are being declared seriously deficient and to provide them with every reasonable
                       opportunity to correct their deficiencies. If they do not correct the identified deficiency within a
                       specified time, the state may remove the offender from the program.



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any administrative reviews of sponsors or providers. FNS officials said that
in fiscal year 2000 their regions will use a comprehensive approach to
evaluate state agencies’ operations.

Finally, even when a management evaluation uncovers a problem, FNS has
difficulties correcting it. FNS officials said that they have only one sanction
to use when states fail to remedy identified problems—to withhold or take
back the state agency’s funds for administering child nutrition programs.15
They say that this “all or nothing” sanction has rarely been imposed. For
example, they did not impose this sanction when the Inspector General
identified major problems with fraud and abuse in California—one of the
largest state programs. Similarly, FNS has not taken any formal action
against the state agencies that were not implementing minimum required
controls, such as administrative reviews and required financial audits.
Instead, FNS only required that these states develop a plan to correct their
deficiencies. FNS has also not pursued obtaining authority to impose
additional forms of sanctions.

Beyond this lack of a flexible array of sanctions, FNS officials told us that
the oversight problems they have experienced were in large part a result
of insufficient resources. More specifically, according to these officials,
the agency focused its resources on ensuring that the states were
implementing changes to the program associated with the welfare reform
changes enacted in 1996, including changing the reimbursement structure
for day care homes.

FNS has begun to take actions to strengthen its oversight of states’ controls
over fraud and abuse. It has been authorized an additional $1 million
annually for 5 fiscal years, beginning in fiscal year 1999, to strengthen
program integrity. In the first year, FNS spent most of this money to hire
additional staff, develop training for federal and state officials, and
increase travel budgets in its regional offices, which are responsible for
overseeing the states’ activities. Furthermore, as noted earlier, FNS plans to
issue proposed regulations for minimum state controls over fraud and
abuse.

While FNS has taken certain steps to correct oversight problems, it has not
developed a comprehensive plan for reducing the food program’s
vulnerability to fraud and abuse. Currently, FNS’ course of action for

15
  These funds (referred to as state administrative expenses funds) are paid to state agencies to cover
their administrative costs for managing a number of child nutrition programs. Besides the Child and
Adult Day Care Program, these programs include the National School Lunch Program, Special Milk
Program, and School Breakfast Program.



Page 13                              GAO/RCED-00-12 Child and Adult Food Assistance Program
                 B-283994




                 addressing weaknesses in the program’s controls over fraud and abuse can
                 be found in an “action plan” developed in response to USDA’s identifying
                 the controls in the program as materially weak. This two-page plan
                 broadly summarizes the agency’s intended actions, which are primarily to
                 develop new regulations and guidance for state controls over fraud and
                 abuse and to assess the states’ implementation of these new controls. The
                 plan does not, however, contain specific, measurable goals and objectives
                 that would allow FNS to evaluate how successfully it implemented these
                 actions or how successful these actions were in reducing fraud and abuse.
                 For example, the plan does not include goals for the minimum number of
                 evaluations that should be completed within a given time frame.
                 Furthermore, it does not discuss what measures could or should be used
                 to indicate the level of fraud and abuse in the program—a key piece of
                 management information that currently is unavailable.


                 Despite FNS’ and the states’ efforts to reduce the vulnerability of the Child
Conclusions      and Adult Care Food Program to fraud and abuse, USDA’s Office of
                 Inspector General continues to uncover these problems in the program.
                 Part of the responsibility for this situation rests with the states as the
                 program’s principal administrators. However, FNS shares in the
                 responsibility—it has not exercised its leadership role effectively. Perhaps
                 most importantly, FNS has not sent clear messages to the states that it
                 expects them to have strong programs to detect fraud and abuse. This is
                 evidenced by, among other things, its failure to (1) quickly incorporate
                 recommended improvements for minimum required state controls over
                 fraud and abuse into its regulations and (2) systematically monitor states
                 efforts to prevent and detect fraud and abuse. Furthermore, FNS has rarely
                 used the one sanction available to ensure the states comply with its
                 minimum controls and has not sought the authority to use other forms of
                 sanction. FNS is taking actions that could, if properly implemented, help
                 send a clearer message to the states that fraud and abuse is a serious
                 problem. However, it has no comprehensive plan to guide these actions
                 nor a means of evaluating their success. As a result, FNS has little
                 assurance that its corrective actions are anything more than a band-aid
                 approach.


                 To reduce the Child and Adult Care Food Program’s vulnerability to fraud
Recommendation   and abuse, we recommend that the Secretary of Agriculture direct the
                 Administrator of the Food and Nutrition Service to develop and implement
                 a comprehensive plan for strengthening state controls for detecting and



                 Page 14                    GAO/RCED-00-12 Child and Adult Food Assistance Program
                  B-283994




                  preventing fraud and abuse. The plan should identify actions that the
                  agency needs to take and include measurable goals and objectives for each
                  action. These actions should include, but not be limited to, (1) expediting
                  the issuance of regulations strengthening the minimum requirements for
                  the states’ controls over fraud and abuse, (2) developing a systematic
                  means of monitoring the states’ compliance with minimum requirements,
                  (3) examining ways to address difficulties the states face in implementing
                  strong program controls (such as unclear federal guidance and inadequate
                  training), and (4) exploring alternative types of sanctions that could be
                  invoked in cases of noncompliance. Furthermore, as part of the plan, the
                  Food and Nutrition Service should examine measures for evaluating the
                  success or failure of the combined actions it carries out in terms of their
                  ultimate impact on the level of fraud and abuse in the program.


                  We provided USDA with a draft of this report for its review and comment.
Agency Comments   We met with officials from the Food and Nutrition Service, including the
                  Director of the Child Nutrition Division, and officials from the Grants
                  Management Division and the Office of Analysis, Nutrition, and
                  Evaluation.

                  USDA  generally agreed with our report and recommendation. Even so, USDA
                  told us that it has initiated a comprehensive approach to correcting the
                  problems in the food program, pointing out that it has issued two guidance
                  manuals and is providing national training for state agencies as well as
                  drafting revised regulations designed to improve program management at
                  all levels. We agree that such actions are important and believe they would
                  be further bolstered by a written plan with measurable goals and
                  objectives. Such a plan would better enable the agency to evaluate its
                  progress in implementing planned actions and to evaluate the impact that
                  these or other actions may have on the level of fraud and abuse in the
                  program.

                  Additionally, USDA believes that because many states do not perceive fraud
                  and abuse as a significant problem, it is hindered in its efforts to
                  encourage states to make concerted efforts to institute stronger controls
                  over fraud and abuse. However, USDA believes that its improved guidance
                  materials, the training it has under way, and its strengthened oversight
                  activities will have a significant effect on states’ efforts to combat fraud
                  and abuse. USDA also provided a number of technical changes and
                  clarifications to the report, which we incorporated as appropriate.




                  Page 15                    GAO/RCED-00-12 Child and Adult Food Assistance Program
B-283994




We conducted our work from January 1999 through October 1999 in
accordance with generally accepted government auditing standards.

Copies of this report will be sent to the congressional committees
responsible for the Child and Adult Care Food Program; the Honorable
Dan Glickman, Secretary of Agriculture; the Honorable Shirley Watkins,
Under Secretary for Food, Nutrition, and Consumer Services, USDA; the
Honorable Samuel Chambers, Administrator, Food and Nutrition Service,
USDA; and the Honorable Roger Viadero, Inspector General, USDA. We will
also make copies available on request.

If you or your staff have any questions about this report, please contact me
or Cathy Helm, Assistant Director, at (202) 512-5138. Key contributors to
this report are listed in appendix II.

Sincerely yours,




Robert E. Robertson
Associate Director, Food
  and Agriculture Issues




Page 16                    GAO/RCED-00-12 Child and Adult Food Assistance Program
B-283994




List of Recipients

The Honorable Richard G. Lugar
Chairman
The Honorable Tom Harkin
Ranking Minority Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Pete V. Domenici
Chairman
The Honorable Frank R. Lautenberg
Ranking Minority Member
Committee on the Budget
United States Senate

The Honorable William F. Goodling
Chairman
The Honorable William (Bill) Clay
Ranking Minority Member
Committee on Education and the Workforce
House of Representatives

The Honorable C. W. Bill Young
Chairman
The Honorable David R. Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives

The Honorable John R. Kasich
Chairman
The Honorable John M. Spratt, Jr.
Ranking Minority Member
Committee on the Budget
House of Representatives


Page 17                   GAO/RCED-00-12 Child and Adult Food Assistance Program
Contents



Letter                                                                                          1


Appendix I                                                                                     20

Scope and
Methodology
Appendix II                                                                                    21

Key Contacts and
Staff
Acknowledgements




                   Abbreviations

                   FNS       Food and Nutrition Service
                   USDA      U.S. Department of Agriculture


                   Page 18                  GAO/RCED-00-12 Child and Adult Food Assistance Program
Page 19   GAO/RCED-00-12 Child and Adult Food Assistance Program
Appendix I

Scope and Methodology


             To examine the extent to which state agencies have implemented required
             and recommended controls to prevent and detect fraud and abuse, we
             conducted a mail survey of all 54 state agencies administering the Child
             and Adult Care Food Program, including agencies in the District of
             Columbia, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin
             Islands. Our survey asked the state directors to provide information on
             program and financial management, state agencies’ internal controls,
             administrative review activities, areas of fraud and abuse in sponsoring
             organizations and child care providers, and their opinions about fraud and
             abuse. We received survey responses from all 54 state agencies. In
             addition, we interviewed staff at agencies in four states—Florida, Georgia,
             Maryland, and Texas—to better understand activities, problems, and
             limitations affecting the states’ efforts to identify fraud and abuse. We
             visited Florida and Texas because of their unique approaches to
             combating fraud and abuse. At the four state agencies, we also reviewed
             and analyzed relevant program documentation, including their regulations,
             policies, and procedures; application and renewal files; administrative
             reviews; and financial audits. These four states accounted for about
             15 percent of the total monthly participation for fiscal year 1998.

             To review the Food and Nutrition Service’s (FNS) effectiveness in directing
             the states’ efforts to implement these required and recommended controls,
             we interviewed FNS officials at headquarters and four FNS regional
             offices–the Southeast Region in Atlanta, Georgia; the Southwest Region in
             Dallas, Texas; the Mountain Plains Region in Denver, Colorado; and the
             Mid-Atlantic Region in Robbinsville, New Jersey. We also reviewed and
             analyzed relevant program documentation, such as regulations, guidance,
             training manuals, OMB circulars, Federal Managers’ Financial Integrity Act
             reports, and over 40 management evaluation reports. In addition, we met
             with OIG officials and reviewed their reports on this program. We
             conducted our work from January 1999 through October 1999 in
             accordance with generally accepted government auditing standards.




             Page 20                    GAO/RCED-00-12 Child and Adult Food Assistance Program
Appendix II

Key Contacts and Staff Acknowledgements


                   Robert E. Robertson, (202) 512-5138
GAO Contacts       Cathy Helm, (202) 512-5138


                   In addition to those named above, Galen Barnett, Jacqueline Cook, Don
Acknowledgements   Ficklin, Patricia Gleason, Fred Mayo, Luann Moy, Renee McGhee-Lenart,
                   Carol Herrnstadt Shulman, John C. Smith, and Janice Turner made key
                   contributions to this report.




(150098)           Page 21                   GAO/RCED-00-12 Child and Adult Food Assistance Program
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