UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF THE INSPECTOR GENERAL FOR AUDITS
WESTERN DIVISION
211 Main Str««t, Suit* 220
San Franclteo, CA 94105
415 974-7084
March 30, 1990
.SUBJECT: Audit Report No. S5bG*8-09-0202-0300037
Report on Interim Audit of Costs Claimed and
v. Review of Financial Management System for the
California Department of Health Services-
Toxics Substance Control Program
Under the Stringfellow Superfund
*: Cooperative Agreement Number V-009380-01
FROM: Geary H. Pena
Audit Manager
Sacramento Office
TO: Daniel M. McGovern
Regional Administrator
EPA, Region 9
SCOPE AND OBJECTIVES
We have performed an interim audit of the California
Department of Health Services-Toxics Substances Control Program's
(DHS-TSCP) accounting procedures for controlling costs under the
Stringfellow Cooperative Agreement. The audit covered the period
from inception of the cooperative agreement award on July 28,
1983, through September 30, 1988. The audit was conducted to
determine the reasonableness, allowability, and allocability of
the costs claimed to date under the Stringfellow cooperative
agreement, and to determine the adequacy of the DHS's financial
management system under the cooperative agreement.
The DHS-TSCP records and costs claimed were reviewed by the
audit staff of the California State Controller. Their report
states they performed the examination in accordance with
Standards for Audit of Governmental Organizations, Programs^
Activities, and Functions, issued by the Comptroller General of
the United States. The audit fieldwork was performed during the
period July 25, 1988 to August 4, 1989.
SUMMARY OF FINDINGS
Our review of the $15,399,411 of costs claimed by DHS-TSCP
through September 30, 1988, disclosed that costs of $3,788,684
are questionable. The questionable costs included $2,149,415 for
HEADQUARTERS LIBRARY
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
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ineligible costs, and $1,639,269 of unreasonable costs. In
addition, our review of DHS's accounting system showed that DHS-
TSCP has not complied with requirements of 40 CFR 30.340-2, and
therefore did not meet the minimum requirements necessary to
qualify as a responsible grantee. The audit disclosed a
continuing problem with the DHS-TSCP labor time reporting system.
The Controller's report explained that certain employee labor
costs were based on allocations of employee time and not actual
employee time charges. This same condition was noted in our two
prior EPA audit reports issued in 1981 and 1985.
Audit of Costs
In our opinion, subject to the effect of EPA's ultimate
resolution of questionable expenditures summarized below and
detailed in the attached audit report prepared by the California
State Controller, the costs claimed fairly represent the
financial information in accordance with the financial provisions
of the cooperative agreement.
Costs Per Auditor
Description Reviewed Accepted Ineligible Unreasonable Note
(Note a) (Note b)
x^w
«•
Force Account $ 1,356,265 $ 327,973 $1,028,292 $ C,
Contract Costs 14.043.146 11.448.490 955.387 1.639.269 d.
ptal Costs $15.399.411 $11.776.463 $1.983.679 $1.639.269
ount of Federal
runds Overdrawn 165.736 e.
Total Ineligible Cost $2.149.415
Note a. The costs reviewed column represents costs claimed
by the DHS-TSCP under the Financial Status Report covering the
period of costs from inception of the cooperative agreement
through September 30, 1988. The costs were funded by EPA at 100
percent.
Note b. We have reclassified $1,639,269 of costs set aside
in the State Controller's report to the unreasonable category.
These costs represented (i) laboratory costs for a laboratory
subcontractor, pending further review by EPA of the adequacy of
laboratory contractor's testing procedures; and (ii) equipment
rental charges by another subcontractor, pending a DHS-TSCP
review of these charges.
Note c. Ineligible costs questioned of $1,028,292
represented force account costs of (i) $482,045 which could not
be reconciled with the official DHS accounting records; (ii)
$422,027 that were not supported by adequate source
documentation; and (iii) $124,220 that were claimed in excess of
the actual labor costs incurred.
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Note d. The ineligible contract costs questioned of
$955,387 consisted of: (i) $496,933 which pertained to
unapproved change orders; (ii) $185,773 that were not supported
by adequate source documentation; (iii) $158,291 that were
previously determined ineligible by EPA; and (iv) $114,390 for
duplicated costs previously claimed.
Note e. The $165,736 of costs questioned represented the
Federal funds overdrawn by the DHS-TSCP under its letter of
credit through September 30, 1988. This issue was discussed in
Finding 4 of the Controller's report. However, the associated
costs were not questioned. We have included the costs as
additional costs questioned in our report since they represented
amounts paid in excess of the costs claimed by DHS-TSCP. In
accordance with the provisions of 40 CFR 30.705 only reasonable
costs are allowable for grant participation.
Financial Management Review
In addition to the above cost audit, the Controller's report
also concluded that the DHS-TSCP had not established the
financial management procedures necessary to effectively
administer the Stringfellow Cooperative Agreement. In this
respect, the DHS-TSCP financial management system did not comply
with the requirements of 40 CFR 30.340-2, and therefore DHS-TSCP
did not qualify as a responsible grantee. Many of the same
financial deficiencies were previously commented on in two prior
EPA, OIG audits of DHS-TSCP and its predecessor organizations.
The applicable audit reports were EPA Audit Report Nos. EbH4-09-
0152-51287, dated August 8, 1985, and E2b09-09-0300-10620, dated
February 24, 1981.
The primary area with a continuing problem concerned the
DHS-TSCP labor time reporting system. In this respect, our 1985
audit report stated that "actual labor costs were not being
reported to EPA by TSCD..." This condition was "...previously
reported in our prior audit report no. E2b09-09-0300-10620, dated
February 24, 1981. However, corrective action had not been
taken...at the time of our audit some 4 years later." The same
condition continues to exist today, about 8 years since it was
initially reported. In this respect, the Controller's report
commented that certain employee labor costs were still based on
allocations of employee time and not actual employee time
charges. In each of our three prior audits, we commented that
the DHS accounting system, if it was implemented by TSCP, would
constitute an acceptable system. However, TSCP has continued to
predesignate the time of their personnel. In view of the
continuing nature of this problem, we will recommend that the
Region suspend all payments to DHS-TSCP for its direct labor,
fringe, and indirect costs under the Stringfellow cooperative
agreement. The suspension should continue until it has
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demonstrated that its employee labor is being distributed on the
basis of actual and not predesignated time charges. It is
important that the financial management deficiencies be corrected
since EPA's- ability to recover costs from the Primary Responsible
Parties under the Stringfellow and other superfund sites is based
on the accuracy in which the Superfund costs are recorded and
supported. Since the clean up efforts at the Stringfellow site
may eventually exceed $330 million, it is important that an
effective financial management system be established to assure
that all hazardous waste costs are recovered.
A summary of the financial management deficiencies discussed
in the Controller's report are described below and detailed in
the attached Controller's audit report.
1-Failure to Utilize the Official State Accounting System.
DHS-TSCP failed to utilize the official California State
Accounting and Reporting System (CALSTARS) in accounting for
costs under the Stringfellow project. To the contrary, DHS-TSCP
used manually prepared spreadsheets compiled from a combination
of sources, including interoffice memorandums and piecemeal data
extracted from CALSTARS, to report the source and application of
funds for EPA supported activities. The use of a manual
spreadsheet system was duplicative, resulted in inaccuracies, and
was more time consuming than using the official state accounting
system. In this case, the use of the manual spreadsheets has
resulted in the questioning of more than $2 million of non-
reconcilable, duplicate, and unsupported costs in the
Controller's audit report (see Finding 2A of the Controller's
audit report).
2-Inadeojaate Labor Distribution System. DHS-TSCP used an
inadequate labor distribution system to accumulate and claim
labor costs against the cooperative agreement. The majority of
the labor costs claimed were based on allocations of employee
time and not actual time charges. Our prior audit reports also
noted that the DHS-TSCP timekeeping system predesignated
personnel to various programs and claimed their labor, fringe,
and associated indirect costs on the basis of this predesignated
determination. The current DHS time reporting system is similar,
in that the costs of supervisorial and clerical positions are
allocated as direct charges to projects based upon the direct
labor hours spent by the working level staff. Supervisorial and
clerical staff do not fill out timesheets. Regardless of the
method, the validity of employee and related costs allocated to
EPA funded projects could not be verified (see Finding 2D of the
Controller's audit report).
3-Failure toDevelop An Indirect Cost Rate. DHS-TSCP failed
to develop an indirect cost rate proposal for periods beginning
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with the 1987-1988 fiscal year. This situation resulted from an
inability to adequately identify direct and indirect costs. The
indirect cost proposal was necessary to support indirect billings
to EPA and other vendors (see Finding 2E of the Controller's
audit report).
4-Costs Claimed Not Reconciled. DHS-TSCP failed to
establish procedures to reconcile Federal funds requested to
actual disbursement of Federal funds. As a result, DHS-TSCP had
overdrawn Federal funds in the amount of $165,736 through
September 30, 1988 (see Finding 2C of the Controller's audit
report).
5-Audit Resources Not Adequately Utilized. DHS-TSCP did not
adequately use its audit resources. The DHS-TSCP has used its
audit resources almost exclusively to perform external contract
cost audits, in lieu of performing internal audits of its
operating procedures. In addition, the audit group had no audit
plan to fulfill its audit responsibilities (see Finding 2G of the
Controller's audit report).
6~Lackj3f^£ejitrjil.4zed Filing System. DHS-TSCP had not
established a centralized filing system to maintain documentation
applicable to the Stringfellow Superfund site. Without site
specific files, the probability increases for the occurrence of
errors and omissions involving the accounting and reporting of
costs and other information (see Finding 2B of the Controller's
audit report).
7-Lack ofWritten AccountingProcedures. DHS-TSCP had not
established written procedures for preparing and reviewing
quarterly Financial Status Reports (FSR). Specifically, no
procedures existed to detail the process used to identify and
summarize expenditures from the source documentation or the
official accounting records to the FSR. In addition, there was
no provision for DHS management personnel to review the accuracy
of the completed FSRs (see Finding 1A of the Controller's audit
report).
8-Staff Not Trained in Preparation of FSRs. DHS-TSCP has
failed to devote sufficient resources to the FSR claiming
process. In this regard, the FSRs were prepared by one
accountant who was not thoroughly knowledgeable on how the costs
shown on the FSRs were accumulated. In addition, no other DHS
employee had been designated to assist this employee if he became
ill (see Finding IB of the Controller's audit report).
9-Lack of Coordination Between Accounting and Program
Section. The audit noted a lack of coordination between DHS-
TSCP 's Accounting and Program sections to assure that only
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eligible costs were claimed. In this respect, procedures had not
been established for the two sections to mutually review and
certify that costs were accurate before they were claimed against
the EPA cooperative agreement (see Finding 1C of the Controller's
audit report).
10-Prior Audit Findings Are Not Resolved in a Timely Manner.
The audit noted an absence of procedures for ensuring timely
resolution of audit findings. We noted that several of the same
accounting system deficiencies found in prior audits continued to
be problems in the current audit. We have previously discussed
one of these areas (the time distribution area) in this report
(see Finding ID of the Controller's audit report).
11-Procedures for Determining DHS-TSCP Advance Matching
Costs Are Inadequate. The Region approved DHS-TSCP use of state
advance match costs to offset against the future state cost for
remedial action. However, DHS-TSCP has not established
procedures to account for these costs (see Finding 2F of the
Controller's audit report).
As a result of the cumulative effect of the above
deficiencies, DHS-TSCP has not fulfilled the requirements of 40
CFR 30.340-2 that require grantees to have an adequate financial
management system and effective audit procedures to control
funds. In this respect, the provisions of 40 CFR 30.800 require
that a grantee's financial management system be capable of
providing: (i) accurate, current, complete disclosure and
reporting of financial matters; (ii) records which adequately
identify the source of funds; (iii) effective control over and
accountability of project funds; (iv) procedures to minimize the
time elapsed between the transfer of funds from the U. S.
Treasury and disbursement by the grantee whenever Federal funds
are advanced; (v) procedures for determining the allowability and
allocability of costs; (vi) accounting records which are
supported by source documentation; (vii) audits to be made or
directed by the grantee to determine, as a minimum, the financial
integrity of financial transactions and reports and compliance
with terms of the grant agreement; and (viii) a systematic method
to assure timely and appropriate resolution of audit findings and
recommendations.
RECOMMENDATIONS
We recommend that the Regional Administrator:
a. Advise the DHS-TSCP that the $2,149,415 of ineligible
costs questioned in this report are disallowed for Federal
participation, and recoup the Federal share of these costs.
b. Assess the grant eligibility of the $1,639,269 of
unreasonable costs discussed in this report. In this respect,
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the Region should assure that: (i) the proper laboratory testing
procedures were utilized to analyze samples taken from the
Stringfellow site; and (ii) the equipment rental costs charged to
the project were reasonable and necessary.
c. Suspend all payments to DHS-TSCP for its direct labor,
fringe, and indirect costs under the Stringfellow cooperative
agreement until it has demonstrated that labor charges are
distributed on the basis of actual and not predesignated time
charges.
d. Advise DHS-TSCP of its failure to meet the minimum
standards necessary to qualify as a responsible grantee in
accordance with 40 CFR 30.340, and establish procedures to
follow-up on DHS-TSCP's actions to meet these standards.
e. Assure that the recommendations pertaining to the
financial management weaknesses presented in Findings 1 and 2 of
the State Controller's audit report are implemented.
AUDITEE COMMENTS
A draft report was provided to DHS-TSCP for response on
September 29, 1989, and a final exit conference was held with
DHS-TSCP officials on February 15, 1990. The grantee generally
did not concur with the results of audit. The grantee's comments
are summarized following the notes to Schedule 2 and Findings 1
and 2 of the attached State Controller's report, along with
additional auditor comments as necessary.
ACTION REQUIRED
In accordance with EPA Directive 2750, the Action Official
is required to provide a copy of the proposed determination on
the costs questioned and other recommendations in the audit
report, within 90 days.
BACKGROUND
The EPA cooperative agreement was awarded on July 28, 1983
to provide Federal funds to assist in the Remedial Investigation,
initial Remedial Measures, and Remedial Actions taking place at
the Stringfellow Hazardous Waste Site. The cooperative agreement
was originally awarded in the amount of $2,772,234. Subsequent
amendments have revised the Federal share to $21,467,917.
The EPA, Office of the Inspector General, has no objection
to the release of this report at the discretion of the
responsible program official to the authorized representatives of
the grantee.
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Please refer to the audit report number on all related
correspondence. If you have any questions concerning this
report, please contact Ms. Angela Bennett of our Sacramento
office at FTS 460-1076.
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