36
i V UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
FEB I 6 1988
OFFICE OF
MEMORANDUM THE INSPECTOR GENERAL
SUBJECT: Supplemental Report of Audit of Region 3's
"J Superfund Indirect Cost Rate Under CERCLA
r* for the Fiscal Year Ended September 30, 1984
rt? Audit Report No. P5EH8-11-0036-8061,1
V
>> FROM: Kenneth D. Hockman
* Divisional Inspector General for Audit
Internal Audit Division
TO: David P. Ryan
Comptroller
Office of the Comptroller (PM-225)
Attached are two copies of a supplemental report of audit of Region 3's
Superfund Indirect Cost Rate for the Fiscal Year Ended September 30, 1984.
We, have no objection to the further release of this report at your
discretion.
SCOPE AND OBJECTIVES
The firm of Tichenor and Eiche, Certified Public Accountants (CPA) previously
performed an audit of the Superfund Indirect Cost Rates for the Fiscal Years
ended September 30, 1984 and 1983. We transmitted the CPA's report to you
on March 18, 1987 (Audit Report No. P5E16-11-0020-70901). Due to questioned
and set-aside Personnel Compensation and Benefits costs (PC*B), the CPA did
not express an opinion on Region 3's Superfund Indirect Cost Rate for fiscal
1984. Subsequently, Region 3 personnel reviewed PC&B costs for fiscal 1984
and adjusted the previously reported amounts. The CPA audited the adjusted
PC4B costs for fiscal 1984 in accordance with generally accepted auditing
standards and the Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions, issued by the U.S. General Accounting Office.
HEADQUARTERS LIBftART
ENVtMNMEWALPlWncn
WASHINGTON, DX. 20460
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RESULTS OF AUDIT
The CPA accepted Region 3's Superfund Indirect Cost Rate of $52 for each
regional program hour charged to hazardous waste sites in fiscal 1984.
'Additional.details are contained in the attached CPA's report.
ACTION REQUIRED
None. In accordance with EPA Directive 2750, you are the designated Action
Official for this report. Since the report contains no recommendations,
a formal written response is not required. We have closed out this audit
in the Audit Tracking and Control System.
Should your staff have any questions, please have them contact
Roland W. Cyr on 382-4930.
Attachment
cc: Tichenor and Eiche, CPAs
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DISTRIBUTION
Copies
A. Office of the Inspector General 5
Director, Audit Operations Staff (3)
Chief, Program Analysis Unit (1)
Divisional Inspector General for Audit
Mid-At!antic Division (1)
B. Headquarters Offices
Comptroller (PM-225) 2
Director, Financial Management Division (PM-226) 12
Chief, Superfund Accounting Branch (PM-226) 1
Agency Follow-up Official (PM-225) 1
Attn: Resource Systems Management Division
Associate Enforcement Counsel for Hazardous Waste 1
Enforcement (LE-134S)
C. Region
low-up Coordinator 1
Regional Administrator, Region 3 2
Audit Follow-up Coordinator
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UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
REGION 3
PHILADELPHIA, PENNSYLVANIA
REPORT OF AUDIT OF SUPERFUND INDIRECT COST RATE
UNDER THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1984
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UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
REGION 3
PHILADELPHIA, PENNSYLANIA
REPORT OF AUDIT OF SUPERFUND INDIRECT COST RATE
UNDER THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1984
TABLE OF CONTENTS
SCOPE AND OBJECTIVES
BACKGROUND
AUDITORS' REPORT ON SUPERFUND INDIRECT COST RATE
AUDITORS' REPORT ON COMPLIANCE
EXHIBIT
EXHIBIT A - SUPERFUND INDIRECT COST RATE
EXHIBIT B - NOTES TO SUPERFUND INDIRECT COST RATE
PAGE
1
2
A
6
7
8
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UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
REGION 3
PHILADELPHIA, PENNSYLANIA
REPORT OF AUDIT OF SUPERFUND INDIRECT COST RATE
UNDER THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1984
SCOPE AND OBJECTIVES
We have performed an audit of the Superfund Indirect Cost Rate of
the Hazardous Substance Response Trust Fund (Superfund) reported
by the U.S. Environmental Protection Agency (EPA) for Region-3,
for the fiscal year ended September 30, 1984. Superfund was
established under the Comprehensive Environmental Response, Com-
pensation, and Liability Act of 1980 (CERCLA). CERCLA [section
lll(k)] states that the Inspector General shall audit as appro-
priate all payments, obligations, reimbursements, or other uses
of Superfund to assure that Superfund is being .properly admin-
istered and that claims are being appropriately and expeditiously
considered.
Our examination was performed in accordance with generally ac-
cepted auditing standards and the standards for financial and
compliance audits contained in the Standards for Audit of Govern-
mental Organizations, Programs, Activities, and Functions^issued
by the U.S. General Accounting Office.Accordingly, our examina-
tion included such tests of the accounting records and such other
auditing procedures as we considered necessary in the circum-
stances.
The primary objectives of the audit were to determine if:
(1) The indirect costs are allowable and allocable in accordance
with the indirect cost allocation system adopted by EPA;
(2) EPA management established appropriate indirect cost pools
and bases; and
(3) The indirect cost rate is reasonable and supportable.
We previously performed an audit of the Superfund Indirect Cost
Rates for the fiscal years ended September 30, 1984 and 1983, and
issued our Auditors' Report on Superfund Indirect Cost Rates,
dated September 15, 1986. Due to questioned and set-aside
Personnel Compensation and Benefits costs (PC&B), we did not ex-
press an opinion on the Superfund Indirect Cost Rate for Region 3
for fiscal 1984. Subsequently, Region 3 conducted a review of
PC&B costs for fiscal 1984 and made adjustments to the previously
reported amounts. We have performed an audit of the adjusted
PC&B costs for fiscal 1984 and issued our Auditors' Report on
Personnel Compensation and Benefits, dated August 21, 1987.
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BACKGROUND
The "Superfund" program was established by the Comprehensive En-
vironmental Response, Compensation and Liability Act of 1980
(CERCLA), Public Law 96-510, enacted on December 11, 1980. The
Superfund program was created to protect public health and the
environment from the release, or threat of release, of hazardous
substances from abandoned hazardous waste sites (sites) and other
sources where response was not required by other Federal laws. A
Trust Fund was established by CERCLA to provide funding for re-
sponses ranging from control of emergency situations to provision
of permanent remedies at uncontrolled sites. CERCLA authorized a
$1.6 billion program financed by a five-year environmental tax on
industry and some general revenues. CERCLA requires that re-
sponse, or payment for response, be sought from those responsible
for the problem, including property owners, generators and trans-
porters.
The basic regulatory blueprint for the Superfund Program is the
National Oil and Hazardous Substances Contingency Plan (NCP), 40
CFR Part 300. The NCP was first published in 1968 as part of the
Federal Water Pollution Control Plan, and has been substantially
revised to meet CERCLA requirements. The NCP lays out two broad
categories of response: removals and remedial response. Re-
movals are relatively short-term responses, and modify an earlier
program under the Clean Water Act. Remedial response is long-
term planning and action to provide permanent remedies for seri-
ous abandoned or uncontrolled sites.
CERCLA recognizes that the Federal Government can only assume
responsibility for remedial response at a limited number of sites
representing the greatest public threat. It therefore requires
the maintaining of a National Priorities List (NPL), which must
be updated at least annually. The NPL is composed primarily of
sites which have been ranked on the basis of a standard scoring
system which evaluates their potential threat to public health.
In addition, each State was allowed to name its highest priority
site without regard to the ranking system.
CERCLA section 104(c)(3) provides that no remedial actions shall
be taken unless the State in which the release occurs enters into
a contract or cooperative agreement with EPA to provide certain
assurances, including cost-sharing. At most sites, the State
must pay 10 percent of the costs of remedial action. Preremedial
activities (preliminary assessments, site inspections), remedial
planning (remedial investigations, feasibility studies, remedial
designs) and removals may be funded 100 percent by EPA. For fa-
cilities operated by a State or political subdivision at the time
of disposal of hazardous substances, the State must pay at least
50 percent of all response costs, including removals and remedial
planning previously conducted.
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BACKGROUND (CONTINUED)
CERCLA was revised and expanded by the Superfund Amendments and
Reauthorization Act of 1986 (SARA), Public Law 99-499, enacted on
October 17, 1986. SARA reinstituted the environmental tax and
expanded the taxing mechanisms available for a five-year period.
It authorized an $8.5 billion program for the 1987-1991 period.
The Trust Fund was renamed the Hazardous Substance Superfund.
To accomplish its mission, EPA has incurred direct and indirect
costs in the cleanup of individual Superfund sites. The indirect
cost allocation system was developed and implemented to distrib-
ute the Agency's program support costs to Superfund sites. The
allocation is performed in a three stage proces.s.
The system takes Agency personnel and program overhead costs such
as employee supervision and fringe benefits, program management,
administrative support, rent, utilities, telephone and other
indirect costs and allocates them to various EPA programs. The
portions allocated to the Superfund program are subsequently al-
located to regional organization units and cost pools. The indi-
rect cost rate for each region results from total dollars al-
located to specific sites located in each region divided by
regional program hours charged to sites.
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TICHENOR & EICHE
CERTIFtEO PUBLIC ACCOUNTANTS
THE SUMMIT, SUITE 200
4350 BROWNSBORO ROAD
LOUISVILLE. KENTUCKY 40207
(502) 893-0700
Mr. Kenneth D. Hockman
U.S. Environmental Protection Agency
Divisional Inspector General for Audit
Internal Audit Division
Office of Inspector General
Washington, D.C. 20460
AUDITORS' REPORT ON SUPERFUND INDIRECT COST RATE
We have examined the Superfund Indirect Cost Rate of the U.-S.
Environmental Protection Agency's (EPA) Hazardous Substance Re-
sponse Trust Fund (Superfund ) for Region 3 for the fiscal year
ended September 30, 1984, as presented in Exhibit A. Our ex-
amination was performed in accordance with generally accepted
auditing standards and the standards for financial and compliance
audits contained in the Standards for Audit of Governmental Orga-
nizations, Programs, Activities, and Functions,issuedBythe
U. S. General Accounting Office. Accordingly, our examination
included such tests of the accounting records and such other au-
diting procedures as we considered necessary in the circum-
stances.
The indirect cost rate referred to above contains EPA personnel
and program overhead costs, which are allocated to various EPA
programs. The portions allocable to the Superfund program are
subsequently allocated to regional organization units and cost
pools. The indirect cost rate for each region results from total
dollars allocated to specific hazardous waste sites (sites)
located in each region divided by regional program hours charged
to sites. The Superfund Indirect Cost Rate was prepared by EPA
for EPA use and is based upon Allowance Holder financial
information contained in the Financial Management System (Thir-
teenth month Master Files for fiscal year 1984). Exhibit A is
not intended to present either the financial position or the fi-
nancial results of operations in conformity with generally ac-
cepted accounting principles, in that allowable costs and
accounting policies and practices are legislatively established
and promulgated through various Federal and EPA policy and
procedural standards.
We have been informed that the documents that govern the deter-
mination of EPA's Superfund Indirect Cost Rates are (a) the "Pro-
cedures for Developing Indirect Cost Rates for Superfund Sites"
and "Evaluation of Existing E.P.A. Cost Accounting Principles and
Procedures and Recommendations for a Cost Allocation Process and
Methodology for Superfund Sites" prepared by the accounting firm
of Ernst & Whinney; (b) the United States Environmental Protec-
tion Agency Stand-Alone Document For Allocating FY83 Indirect
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-.^ w» .jufc.ru:ut>nj ilNLJiRECT COST RATE (CONTINUED)
Costs To Superfund Sites; and (c) the "Environmental Protection
Agency Superfund Indirect Cost Manual For Cost Recovery Purposes
FY 1983 through FY 1986."
We have relied upon legal interpretations from the Grants, Con-
tracts and General Law Division of EPA's General Counsel and the
U.S. Department of Justice regarding the allowability of recovery
of indirect costs under CERCLA and the propriety of EPA's Super-
fund indirect cost allocation system. Additionally, we have
relied upon the Auditors' Report on Financial Statements for the
Financial and Compliance Audit of Obligations and Disbursements
Under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 for the fiscal years ended September 30,
1984 and 1983 (Region 3), dated April 30, 1985} the Auditors'
Report on Statements of Obligations and Statements of Disburse-
ments for the financial and compliance audit of EPA's portion of
Superfund for the fiscal years ended September 30, 1984 and 1983
(Consolidated), dated May 30, 1985; and the Auditors' Reports on
Internal Accounting Control and Compliance contained therein
(Region 3 and Consolidated); performed by us, to ensure that
Superfund financial information recorded in the Financial Manage-
ment System (FMS) for fiscal 1984 was fairly stated. We also
have relied on the Auditors' Report on Personnel Compensation and
Benefits under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 for the fiscal year ended
September 30, 1984 (Region 3), dated August 21, 1987, and the
Auditors' Report on Internal Accounting Control and Compliance
contained therein, performed by us, to ensure that the Personnel
Compensation and Benefits costs recorded in the FMS for fiscal
1984 were fairly stated.
In our opinion, Exhibit A presents fairly the Superfund Indirect
Cost Rate for Region 3 for the fiscal year ended September 30,
1984, on the basis described in the second paragraph and in
accordance with the documents described in the third paragraph.
This report is intended solely for use of EPA management and
should not be used for any other purpose.
•VI
TICHENOR & EICHE
Louisville, Kentucky
September 18, 1987
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TlCHENOR & ElCHE
CERTIFIED PUBLIC ACCOUNTANTS THE SUMMIT, SUITE 200
4350 BROWNSBORO ROAD
LOUISVILLE. KENTUCKY 40207
(502) 893-0700
Mr. Kenneth D. Hockman
U.S. Environmental Protection Agency
Divisional Inspector General for Audit
Internal Audit Division
Office of Inspector General
Washington, D.C. 20460
AUDITORS' REPORT ON COMPLIANCE
We have examined the Superfund Indirect Cost Rate of the U.S.
Environmental Protection Agency's (EPA) Hazardous Substance Re-
sponse Trust Fund (Superfund) for Region 3 for the fiscal year
ended September 30, 1984 and have issued our report thereon dated
September 18, 1987. Our examination was made in accordance with
generally accepted auditing standards and the standards for fi-
nancial and compliance audits contained in the Standards for Au-
dit of Governmental Organizations, Programs, Activities, an3
Functions,issued by the U.S.General Accounting Office.Accord-
ingly,our examination included such tests of the accounting
records and such other auditing procedures as we considered
necessary in the circumstances.
The management of EPA is responsible for Region 3's compliance
with laws and regulations. In connection with the examination
referred to above, we selected and tested transactions and
records to determine Region 3's compliance with laws and
regulations, noncompliance with which could have a material
effect on the Superfund Indirect Cost Rate presented in Exhibit
A.
The results of our tests indicate that for the transactions and
records tested, Region 3 complied with the laws and regulations
referred to above, except as described in Exhibit B. Our testing
was more limited than would be necessary to express an opinion on
whether EPA administered those programs in compliance in all
material respects with laws and regulations, noncompliance with
which could have a material .effect on the Superfund Indirect Cost
Rate presented in Exhibit A. With respect to the transactions ,
that were not tested by us, nothing came to our attention which
indicated that Region 3 had not complied with the laws and re-
gulations other than those laws and regulations for which we
noted noncompliance in our testing referred to above.
This report is intended solely for the use of EPA management and
should not be used for any other purpose.
TlCHENOR & EICHE
Louisville, Kentucky
September 18, 1987
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EXHIBITS
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EXHIBIT A
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
HAZARDOUS SUBSTANCE RESPONSE TRUST FUND (SUPERFUND)
REGION 3
PHILADELPHIA, PENNSYLVANIA
SUPERFUND INDIRECT COST RATE (Notes 1 and 2)
FISCAL YEAR ENDED SEPTEMBER 30, 1984
Region
Region 3
Indirect
Cost Rate
$52
The Notes to Superfund Indirect Cost Rate (Exhibit B) are an
integral part of this statement.
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EXHIBIT B
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
HAZARDOUS SUBSTANCE RESPONSE TRUST FUND (SUPERFUND)
REGION 3
PHILADELPHIA, PENNSYLANIA
NOTES TO SUPERFUND INDIRECT COST RATE
FISCAL YEAR ENDED SEPTEMBER 30, 1984
Note 1: Indirect Cost Rates
EPA utilizes a cross allocation system in determining its indi-
rect cost rates. Cross allocation is a thorough method for de-
veloping indirect costs as it appropriately recognizes the inter-
dependence of support departments. Each department is charged
for a portion of the costs of each of the other departments from
which it receives support. Multiple steps of the cross allo-
cation process are required to arrive at an accurate distribution
of costs.
EPA's indirect cost allocation system takes Agency personnel and
program overhead costs such as employee supervision and fringe
benefits, program management, administrative support, rent, util-
ities, telephone and other indirect costs and allocates them to
various EPA programs. The portions allocated to the Superfund
program are subsequently allocated to regional organization units
and cost pools. The indirect cost rate for each region results
from total dollars allocated to specific hazardous waste sites
(sites) located in each region divided by regional program hours
charged to sites.
The indirect cost rates are expressed as dollar amounts to facil-
itate application of these rates. The most representative allo-
cation base for application of indirect cost charges proved to be
regional program hours charged to each site. Therefore, to
assess indirect costs, dollars per direct labor hours was chosen
as the best method to express the indirect cost rates.
Note 2: Accounting Principles
The Superfund Indirect Cost Rate was prepared based upon Allow-
ance Holder financial information contained in the Financial Man-
agement System. The rate is not intended to present either the
financial position or the financial results of operations in
conformity with generally accepted accounting principles, in that
allowable costs and accounting policies and practices are legis-
latively established and promulgated through various Federal and
EPA policy and procedural standards. The dollars allocated to
sites consist of funds disbursed during the fiscal year against
either prior years' or current year's obligations.
EPA's Superfund Accounting Branch inputs expense data into the
indirect cost allocation system based on accounting principles of
conservatism and consistency, and financial information which is
supportable. The dollars allocated to sites do not contain cer-
tain expenses which are allowable under cost accounting princi-
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EXHIBIT B
(CONTINUED)
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
HAZARDOUS SUBSTANCE RESPONSE TRUST FUND (SUPERFUND)
REGION 3
PHILADELPHIA, PENNSYLANIA
NOTES TO SUPERFUND INDIRECT COST RATE
FISCAL YEAR ENDED SEPTEMBER 30, 1984
pies. The inclusion of these allowable expenses in the allo-
cation would result in higher indirect cost rates by an unde-
termined amount. The allowable expenses which were not included
in the allocation are described below.
a) Depreciation is generally recognized as an indirect
cost if the expenses cannot be allocated to specific
programs. EPA does not account for depreciation ex-
pense on capital items. As such, capital expenses were
not included in the allocation process, and applicable
depreciation expense was not included in the indirect
cost allocation. Depreciable capital expenditures
under the Superfund appropriation for fiscal 1984
amounted to $3,250,807. Depreciable capital expendi-
tures under the Salaries and Expenses appropriation
amounted to $21,820,070. Total cumulative capital
expenditures for the Superfund and Salaries and
Expenses appropriations since October 1, 1980 through
September 30, 1984 amounted to $80,777,982.
b) Non-site disbursements charged to certain Allowance
Holders from funds obligated in fiscal year 1981 under
the Superfund appropriation amounted to $416,019.
c) The Salaries and Expenses appropriation is a one year
appropriation. When a year lapses, remaining monies
revert to a merged appropriation for future funding.
Non-site disbursements under the merged Salaries and
Expenses appropriation amounted to $1,286,767.
d) Disbursements under transfer allocation interagency
agreements amounted to $10,673,287. The amount noted
includes site and non-site costs. Separate identifi-
cation of non-site costs was not available.
.9.
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