UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
SOUTHERN DIVISION, SUITE 276
1375 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309
(404) 347-3623 AUDIT
(404) 347-2398 INVESTIGATIONS
REGIONAL OFFICE:
1445 ROSS AVENUE, SUITE 1200
DALLAS, TEXAS 75202-2733
(214) 855-6621 AUDIT
(214) 655-6610 INVESTIGATIONS
November 17, 1989
MEMORANDUM
SUBJECT:
Audit Report No. P5cG*8-04-0091 - 0300010
Report on Interim Audit of Kentucky
Natural Resources and Environmental Protection Cabinet
Cooperative Agreement No. V004484-85
FRCM:
TO:
Mary M.
Divisional Ins
Southern Division
Greer C. Tidwell
Regional Administrator
Region 4
i&t^t*./
'or Audit
Attached is a copy of the subject audit. iMs report provides findings
pertaining to:
- Costs incurred prior to the effective date of the
cooperative agreement;
- Site-specific reporting was not required to be
tracked; and,
- Procurements did not include a cost-effectiveness
comparison of the benefits of purchasing with
federal funds versus other options.
In accordance with EPA Directive 2750, the action official is required to
issue a final determination of costs questioned and any other recommendations
in this report within 150 days of the audit report date. Where the action
official considers a position on the audit findings that differs from our
reconmendations, we would appreciate the opportunity to discuss management's
position before the determination is issued to the auditee. A copy of the
final determination should be provided to our office when issued.
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Should your staff have any questions or need additional information, please
contact Robert Page or Dwight Murray at 347-3623. Please refer to the audit
report number in all correspondence regarding this report.
cc: Director, Waste Management Division - Region 4
Grants Ain. Uhit - Region 4
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REPORT CF INTERIM AUDIT OF
KENTUCKY NATURAL RESOURCES AND ENVIRONMENTAL PROTECTION CABINET'S
ADMINISTRATION OF SUPERFUND COOPERATIVE AGREEMENT NUMBER V004484-85
WITH EPA UNDER THE COMPREHENSIVE ENVIRONHENEAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE PERIOD MARCH lf 1985 THROUGH MARCH 31, 1989
Simmons, Rtehey
& Company. P.C.
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KENTUCKY NATURAL RESOURCES AND ENVIRONMENTAL PROTECTION CABINET
INTERIM AUDIT OF ADMINISTRATION OF SUPERFUND COOPERATIVE
AGREEMENT NUMBER V004484-85
TABLE OF CONTENTS
Scope and Objectives
Seminary of Audit Results
Background
Independent Auditor's Report
Auditor's Report on Internal Control
Auditor's Report on Conpliance
Findings and Recomnendations
Exhibit A - Statement of Costs Claimed, Accepted and
Questioned, Super fund Preliminary Assessment/Site
Inspection Cooperative Agreement V004484-85
Page
1
2
3
5
7
9
11
14
Simmons, Rtehey
& Comoanv. P.C.
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KENTUCKY NATURAL RESOURCES AND ENVIRONMENTAL PROTECTION CABINET
INTERIM AUDIT OF ADMINISTRATION OF SUPERFUND COOPERATIVE
AGREEMENT NUMBER V004484-85
We performed an interim audit of the Kentucky Natural Resources and
Environmental Protection Cabinet's (KNREP's) administration of its
Preliminary Assessment/Site Inspection (PA/SI) cooperative agreement with
the United States Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (CERCLA). The preliminary objectives of our examination were to
determine whether:
(1) Costs claimed under the cooperative agreement for the period March 1,
1985 through March 31, 1989 are reasonable, allowable and allocable to
the sponsored project, and
(2) Controls exercised by the state through its financial management,
accounting, procurement, contract administration and property
management systems are adequate to provide assurance that costs
claimed are reasonable, allowable and allocable to the sponsored
projects.
Cur audit for the period March 1, 1985 through March 31, 1989 was
performed in accordance with generally accepted auditing standards and
Government Auditing Standards (1988 Revision) promulgated by the
Comptroller General of the United States. The Environmental Protection
Agency's DIG Manual entitled "EAG-3—CERCLA Cooperative Agreements" was
also used as a guide. Accordingly, our examination included such tests of
the accounting records and such other auditing procedures as we considered
necessary in the circumstances.
L.
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& Company. P.C.
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Suirtnary of Audit Results
The results of our audit indicate that, except for the natters discussed
in the following paragraphs, costs claimed were reasonable, allowable and
allocable and controls exercised by the state through its financial
management, accounting, procurement, contract and property management
systems were generally adequate to ensure that costs claimed are
reasonable, allowable and allocable to the sponsored project.
Site-Specific Reporting
KNREP was not required to track cost by specific site. The cooperative
agreement covers only pre-remedial activities. EPA did, however, require
the reporting or direct involvement hours by site in a separate section of
the quarterly reports submitted to EPA.
KNREP's formal timekeeping system did not provide for tracking hours by
specific site. Total hours charged to the agreement through March 1989
were 2.69 times greater than direct involvement hours reported to EPA for
the same period. Schedules and/or auxiliary time records supporting the
reported direct involvement hours by site were not retained.
Personnel and Related Indirect Cost
The effective date of the cooperative agreement was March 1, 1985. Cost
reported for March 1985 included $2,455 in direct labor charges for
February 1985. The indirect costs related thereto (at 26.1% of direct
labor) were $643. The $2,455 and $643 have been questioned.
Cost reported for October 1988 included $1,086 and $520 of direct labor
and related overhead, respectively, for an employee whose hours were
erroneously charged to the Agreement. The time report indicated the hours
should have been charged to a state program. The $1,086 and $520 have
been questioned.
Equipment
Cost totaling $32,534 relating to the purchase of two vehicles using
CERCIA funds was claimed. Although EPA's approval was obtained, the
state's written justification did not include a cost-effectiveness
comparison of the benefits of purchasing with Federal funds versus other
options, as required by Appendix T to EPA's "State Participation in the
Superfund Remedial Program."
State's Response
The state's response to the findings presented in the report draft had not
been received as of the September 15, 1989, deadline for issuance of this
report in final.
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& Company. P.O.
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Backaround
The Superfund program was established by the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (CERCLA), Public Law
96-510, enacted on Decenber 11, 1980. The Superfund program was created
to protect public health and the environment from release, or threat of
release, of hazardous substances from abandoned hazardous waste sites and
other sources where response was not required by other Federal law. A
Trust Fund was established by CERCLA to provide funding for responses
ranging from control of emergency situations to provision of permanent
remedies at uncontrolled sites. CEBCLA authorized a $1.6 billion program
financed by a five-year environmental tax on industry and some general
revenues. CEBCLA requires that response, or payment for response, be
sought from those responsible for the problem, including property owners,
^ generators, and transporters.
CERCLA was revised and expanded by the Super fund Amendments and
Reauthorization Act of 1986 (SARA), Public Law 99-499, enacted October 17,
1986. SARA reinstituted the environmental tax and expanded the taxing
mechanism available for a five-year period. The Trust Fund was renamed
the Hazardous Substance Superfund. 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: removal and remedial response. Removals 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 serious abandoned or uncontrolled hazardous
waste sites.
CERCLA recognizes that the Federal government can only ensure
responsibility for remedial response at a limited number of sites
representing the greatest public threat. It therefore requires a National
Priority 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 designate 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 at 100 percent by
EPA. For facilities 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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& Company. P.C.
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Yfrr H
r.|, -^ CERQA Section 104(d)(i) provides that if a state or political subdivision
H ! - thereof is determined to have the capability to respond to the issues
addressed in the Act, they may be authorized to respond by use of a
contract or cooperative agreement. As a result, most states have
participated in some part of the Super fund program. CERCIA Section
;; ; i: 104(d) (2) provides a remedy to the Federal government for failure of a
n~tT"t"H state or political subdivision to perform satisfactorily.
i . [ ' , ,. „,...*
r* •*•»»•* r ;
Cooperative Agreement V004484-85 entered into with the KNREP, as modified
through Amendment Number Ten, involves state participation in pre-remedial
preliminary assessments and site inspections (non-specific PA/SI sites).
The Statement of Work section of the original application contemplated 100
PA sites (87 listed plus thirteen to be discovered) and eighteen SI sites
(fifteen listed plus three to be discovered). Additional sites were
subsequently added; and, the initial budget period has been extended
through December 31, 1989.
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Simmons, Richey
& Company. P.C.
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Simmons, Rlchty
& Company, P.O.
CwtlflMl Public Accountants
1447 Pttchtiw Street, HE
Suite 700
Atlanta, Georgia 30309
(404) 876-6227
MmbmK G«orgto Soetty of CPA'i
Aflwricu lmUhit» of CFA'i
INDEPENDENT AIDITOR'S REPORT
Ms. Mary M. Boyer
Divisional Inspector General for Audits
EPA, Southern Division
1375 Peachtree Street, N.E.
Suite 276
Atlanta, Georgia 30309
Dear Ms. Boyer:
We have audited the costs incurred and claimed by the Kentucky Natural
Resources and Environmental Protection Cabinet (KNREP) under Cooperative
Agreement V004484-85 for the period March 1, 1985 to March 31, 1989,
presented in Exhibit A. Exhibit A is based on financial records which are
the responsibility of KNREP. Cur responsibility is to express an opinion
based on our audit.
Wfe conducted our audit in accordance with generally accepted auditing
standards and "Government Auditing Standards" {1988 Revision). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether costs claimed are eligible in accordance with the
terms of the Cooperative Agreement and free of material mistatement. An
audit includes examining, on a test basis, evidence supporting cost
claimed. The Environmental Protection Agency's DIG Manual "EAG-3—CERCLA
Cooperative Agreements" was also used as a guide in our examination.
As part of our examination, we determined the allowability of costs claimed
under the cooperative agreement in accordance with the provisions of the
agreement and applicable Federal regulations. Exhibit A sets forth the
costs we questioned in this regard and includes an explanation of the
reasons such costs were questioned.
The Statement of Costs Claimed, Accepted and Questioned {Exhibit A) was
prepared on the basis of regulations and criteria established by the U. S.
Environmental Protection Agency relating to Superfund Cooperative
Agreements pursuant to Public Law 96-510. Accordingly, Exhibit A is not
intended to present financial position and results of operations in
conformity with generally accepted accounting principles.
In our opinion, except for the questioned costs referred to in the
preceding paragraph, Exhibit A presents fairly the costs claimed as
eligible by KNREP under the cooperative agreement with EPA on the basis
described above.
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4-: - ' I t
r"T Ti This report is intended for use in connection with the cooperative
•J-i " agreement to which it refers and should not be used for any other purpose.
Atlanta, Georgia
June 16, 1989
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Simmons, Richey
& Company, P.C.
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Simmons, Rlchey
& Company, P.C.
C*rt1fl»d Public Accountant*
*
SttMl, NE
Suit* 700
Atlanta, Georgia 30309
(404) 876-6227
M«Bb*n: doigii Sorter oi CPA'i
Amnrtcw InMituI. aS CPA'i
Ms. Mary M. Boyer
Division of Inspector General for Audits
EPA, Southern Division
1375 Peachtree Street, N.E.
Suite 276
Atlanta, Georgia 30309
REPORT ON INTERNAL CONTROL STRUCTURE
Dear Ms. Boyer:
We have audited the costs incurred and claimed by the Kentucky Natural
Resources and Environmental Protection Cabinet (KNREP) under CERCIA
Cooperative Agreement V004484-85 with the Environmental Protection Agency
from March 1, 1985, to March 31, 1989, as presented in Exhibit A, and have
issued our report thereon dated June 16, 1989.
Vfe conducted our audit in accordance with generally accepted auditing
standards and the Government Auditing Standard^ issued by the Comptroller
General of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial exhibit is free of material misstatement.
In planning and performing our audit of the costs incurred and claimed by
KNREP, we considered its internal control structure in order to determine
our auditing procedures for the purpose of expressing our opinion on the
financial statements and not to provide assurance on the internal control
structure.
The management of KNREP is responsible for establishing and maintaining an
internal control structure. In fulfilling this responsibility, estimates
and judgments by management are required to assess the expected benefits
and related costs of internal control structure policies and procedures.
The objectives of an internal control structure are to provide management
with reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions
are executed in accordance with management's authorization and recorded
properly to permit the preparation of financial statements in accordance
with generally accepted accounting principles. Because of inherent
limitations in any internal control structure, errors or irregularities
may nevertheless occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that
procedures may become inadequate because of changes in conditions or that
the effectiveness of the design and operation of policies and procedures
may deteriorate.
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For the purpose of this report, we have classified the significant
internal control structure policies and procedures in the following
categories:
Disbursements
Payroll
Procurements
Contract Performance and Billings
Management of Federal Cash
Property Management
For all of the control categories listed above, we obtained an
understanding of the design of relevant policies and procedures and
whether they have been placed in operation, and we assessed control risk.
We noted certain matters involving the internal control structure and its
operation that we consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters coining to our attention relating to
significant deficiencies in the design or operation of the internal
control structure that, in our judgment, could adversely affect the
organization's ability to record, process, summarize, and report financial
data consistent with the assertions of management in the financial
statements.
Those reportable conditions relate to KNREP's site-specific reporting
capabilities and to personnel and related indirect costs and are presented
in the findings and recommendations section of this report beginning on
page 11.
A material weakness is a reportable condition in which the design or
operation of one or more of the internal control structure elements does
not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to the
financial statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing their
assigned functions.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be
reportable conditions and accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material weaknesses
as defined above. However, we believe that the conditions referred to
above are material weaknesses.
This report is intended for use in connection with the cooperative
agreement to which it refers and should not be used for any other purpose.
Atlanta, Georgia
June 16, 1989
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Simmons, Richey
& Company. P.C.
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Simmons, Richey
& Company, P.O.
CwtlNwt Public Accountants
1447 PMchtrM StrMt, NE
Suit* 700
Atlanta, G«orgU 30309
(404) 876-6227
Gccnqta Socttr d CPA'i
Jbwiiewi hudtute al CPA'l
Ms. Mary M. Boyer
Division of Inspector General for Audits
EPA, Southern Division
1375 Peachtree Street, N.E.
Suite 276
Atlanta, Georgia 30309
REPORT ON COMPLIANCE WITH LAWS, PECULATIONS AM) TERMS
OF THE COOPERATIVE AGREEMENT
Dear Ms. Boyer:
We have audited the costs incurred and claimed by the Kentucky Natural
Resources and Environmental Protection Cabinet (KNREP) under CERCLA
Cooperative Agreement V004484-85 with the Environmental Protection Agency
from March 1, 1985, to March 31, 1989, as presented in Exhibit A, and have
issued our report thereon dated June 16, 1989.
We conducted our audit in accordance with generally accepted auditing
standards and the Government Auditing Standards issued by the Comptroller
General of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
costs incurred and claimed are free of material misstatenent.
Compliance with laws, regulations, and terms of the cooperative agreement
applicable to KNREP is the responsibility of KNREP's management. As part
of obtaining reasonable assurance about whether the cost incurred and
claimed are free of material misstatement, we performed tests of KNREP's
compliance with certain provisions of laws, regulations, and terms of the
cooperative agreement. However, it should be noted that our objective was
not to provide an opinion with overall compliance with such provisions.
Material instances of noncoitpliance are failures to follow requirements or
violations of prohibitions that cause us to conclude that the aggregation
of misstatements resulting from those violations are material to the cost
claimed. The results of our tests of compliance disclosed the material
instances of nonconpliance, the effects of which have been included in
Exhibit A as questioned cost and referred to in the findings and
recommendations section of this report.
We considered these material instances of nonconpliance in forming our
opinion on whether costs claimed under the cooperative agreement are
presented fairly, in all material respects, and this report does not
affect our report on those costs dated June 16, 1989.
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Except as described above, the results of our tests of compliance indicate
that, with respect to the items tested, KNREP complied, in all material
respects, with the provisions referred to in the third paragraph of this
report, and with respect to items not tested, nothing came to our
attention that caused us to believe that KNREP had not complied, in all
material respects, with those provisions.
This report is intended for use in connection with the cooperative
agreement to which it refers and should not be used for any other purpose.
Atlanta, Georgia
June 16, 1989
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& Company. P.C.
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1
FILINGS AND RECOWEtDATICNS
ji M I i i ! Ji
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Site—Specific Reporting
Cbservation
Direct involvement hours by site included in the quarterly reports
submitted to EPA were significantly below total hours charged to the
Agreement through March 31, 1989. KNREP did not maintain or retain
schedules supporting the direct involvement hours reported. KNREP's
formal timekeeping system, though providing for tracking total hours by
program, did not accommodate the tracking of hours by site. The
site-specific hours cannot, therefore, be reconciled with the formal time
summaries.
Attachment A to EPA's "State Participation in the Superfund Remedial
Program" indicates states are not required to track costs by site under
pre-remedial PA/SI cooperative agreements. The quarterly report required
by EPA does, however, require the reporting of direct involvement hours by
site.
We believe that KNREP's system did not provide for proper monitoring of
program efficiency or the supplying of accurate productivity data to EPA.
Recommendation
We recommend that KNREP implement a timekeeping system which will
facilitate the tracking of hours, by site as well as by activity and
project. We further recommend that KNREP reconcile hours reported to EPA
with the formal timekeeping system and ensure that the data being reported
is accurate.
Personnel and Related Indirect Cost
Background
Personnel costs claimed include fringe benefits. Indirect costs are
allocated based on fringe benefit-loaded salary costs. During our
examination, we noted two instances where ineligible costs were claimed.
A. Cost Prior to Effective Date of Agreement
Cbservation
In summarizing costs for the month of March 1985, KNREP did not take
into account the fact that the first payroll in March 1985 covered the
latter half of February 1985. The beginning project and budget period
date of March 1, 1985 is delineated in the grant award. Cumulative
cost claimed includes direct labor and indirect costs incurred prior
to the effective date of the Agreement in the amounts of $2,455 and
$643, respectively. We believe that costs incurred prior to the start
of the project period are ineligible. Accordingly, the $2,455 and
$643 have been questioned.
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& Company. P.C.
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I Findings and Reconroendations
Page 2
Recommendation
We recommend that KNREP implement cost reporting procedures to ensure
that costs claimed represent cost incurred within the project and
budget period.
B. Inclusion of Cost for Other Project
Observation
Seventy-five hours of time expended by an Environmental Program
Coordinator during the pay period ended October 15, 1988, on another
project (and indicated as such on the enployee's time report) were
charged to the cooperative agreement as the result of an input error.
This resulted in the overstatement of cost claimed under the
Cooperative Agreement. The $1,086 and $520 of personnel and indirect
costs, respectively, claimed as a result of the error are ineligible
and have, thus, been questioned.
Recommendation
We reconmend that KNREP develop and implement procedures (e.g., use of
hash totals) which will reduce the potential for undetected input
errors.
Rscap of Ineligible Cost Questioned
Reference Personnel
A
B
$2,455
1.086
Indirect
$ 643
520
Equipment Cost
Observation
EPA approved the use of CERCIA funds to purchase two vehicles costing
$32,534. An amendment to the cooperative agreement included a list of
proposed equipment, its unit cost and written justification. Not included
was a cost-effectiveness comparison of purchasing with federal funds
versus other options. Appendix T to EPA's "State Participation in the
Superfund Remedial Program" requires the submittal of a cost-effectiveness
comparison when equipment is to be purchased with CERCIA funds.
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& Company. P.C.
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fit
Findings and Recommendations
Page 3
We believe that the purchase authorization was not obtained in accordance
with the requirements of Attachment T. However, the $32,534 has not been
questioned inasmuch as EPA approval was obtained.
Recommendation
We recommend that KNREP and EPA act in accordance with the requirements of
EPA policies and regulations.
State's Response
The state's response to the findings presented in the report draft had not
been received as of the Septentoer 15, 1989, deadline for issuance of this
report in final.
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& Company. P.O.
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1U.U.;..H 4
EXHIBIT
Simmons, Rlchey
& Comoanv. P.C.
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EXHIBIT A
KENTUCKy NATURAL RESOURCES AND ENVIRCMWEMEAL PROTECTION CABINET
SUPERFUNO COOPERATIVE AGREEMENT NUMBER V004484-85
SUMMARY OF COSTS CLAIMED, ACCEPTED AND QUESTIONED
FOR THE PERIOD MARCH 1, 1985 THROUGH MARCH 31, 1989
EPA-Eliaible Costs
Cost Category
Personnel and fringe benefits
Equipment
Contractual
Indirect costs
Questioned
as
Accepted Ineligible
(Note 2)
Claimed
(Note 1)
$469,652
40,239
302,907
180,126
Notes
$466,111
40,239
302,907
178.963
$ 3,541
1,163
4
3
— Subtotals 992,924 988,220 4,704
-1- Less: Program Income 2.232 2.232 -
..... $990,692 g9.g5.j988 £.4,704
Note 1: Cost claimed consists of cumulative expenditures through March
31, 1989, reflected on KNREP's internal Federal Financial Report.
Note 2: These amounts should not be construed as being the final
determination of accepted eligible costs. The amounts may vary
f" r depending upon the final resolution by EPA of the questioned
1 * costs.
, . - Note 3: Costs questioned as to eligibility result from the matters
_. discussed in the Findings and Recommendations section of this
*~~* report beginning on page 11.
•_..„„...,., * jjgj-e 4. contractual consists solely of lab charges. The lab is a
I i~-~-. separate KNREP division. There have been no procurements of
[.,..!.;....'.. outside contractors.
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