UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
              OFFICE OF THE INSPECTOR GENERAL FOR AUDITS   .
                          WESTERN DIVISION            C '

                       211 Main Strvat, Suit* 220
                        San Francisco, CA 94105
                            415 974-7064             ~'

                         September  21,  1989

SUBJECT:   Audit Report No. P5cG*8-08-0117-9100484
           Report of Final Audit of
           Cooperative Agreement No. V008496-010
           Colorado Department of Health
           Denver, Colorado

FROM:      Truman R. Beel«  	      __  	
           Divisional InspecTbr^SeneralTfor Audits
           Western Division

TO:        Mr.  James J. Scherer
           Regional Administrator
           EPA  Region 8


SCOPE AND  OBJECTIVES

     A final audit has been made of Cooperative Agreement No.
V008496-010, awarded to the Colorado Department of Health  (CDH).
The audit,  covering the period February 1, 1985 through March  31,
1988, was  performed to:

        Determine the reasonableness, allocability, and
     allowability of the costs claimed;

        Determine the adequacy, effectiveness and reliability  of
     procurement, accounting and management controls exercised by
     the State in administering the cooperative agreement and;

        Ascertain the State's compliance with the provisions of
     the:; cooperative agreement and applicable EPA regulations  and
     instructions.

     The auditor's field work was conducted between September  12,
1988 and July  7,  1989.  Audit work was conducted in accordance
with Standards for Audits of Governmental Organizations,
Programs,  Activities, and Functions issued by the Comptroller
General of  the United States.  It was considered more efficient
to expand  audit test when necessary.   Accordingly, studies and
evaluations of internal controls were not made.
 10
 (M                       HEADQUARTER LIBRARY
                         ENVITONMENIALPROTECnONAOhW
 &                       WASHINGTON, W. 20460

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SUMMARY OF FINDINGS

COSTS CLAIMED

     In our opinion  $145,855 of the $1,335,292 claimed by CDH is
acceptable in accordance with the provisions of the cooperative
agreement.  The results of our audit are summarized below and
detailed in Exhibit  A of the attached audit report prepared by
Leonard G. Birnbaum  and Company, CPAs.

                                   Amount         Note

Cost Reviewed                    SI,335,292        a

Per Audit:
  Cost Accepted                  $  145,855
  Questioned Costs:
    Ineligible       .            $  221,969        b
    Unsupported                     967,468        c
    Total Questioned Costs       $1,189,437

Note a.  The costs reviewed represent expenditures reported by
CDH for the period February 1, 1985 through March 31/1988 on*the
Financial Status Report attached to its August 31, 1988
memorandum to EPA.

Note b.  Costs questioned and considered ineligible reoresented:
(i) labor ($61,599), fringe benefits ($11,061)' travel"($10,425),
supplies ($2,400) and indirect costs ($5,684) claimed by various
Colorado State Departments which was not supported by adequate
documentation and  (ii) subagreement costs ($130,800) claimed for
unallowable services, unallowable surcharges, or amounts not paid
to the contractor.

Note c.  Costs questioned and considered unsupported represented
the total subagreement costs claimed ($1,098,268) less the
subagreement cost questioned as ineligible ($130,800) in note b.
above.   The subagreement costs were questioned as unsupported
because of deficiencies in the manner in which CDH procured the
subagreement and because CDH had not audited the costs to
determine their allowability in accordance with the terms of the
subagreeapnt and the cooperative agreement.

COLORADtt'rSTATS DEPARTMENTS' ACCOUNTING AND PROCUREMENT SYSTEMS

     The audit found that the various Colorado State Departments
reporting activity under the cooperative agreement had accounting
systems that were not sufficient for the administration of
cooperative agreements.  Accounting systems often lacked support
for costs claimed and were not adequate for accumulating costs by
site/

     Although CDH had self-certified its procurement system as
meeting EPA procurement requirements, the audit found that the

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procurement system did not provide for adequate cost or price
analysis prior to award of the subagreement.

COOPERATIVE AGREEMENT SPECIAL CONDITIONS

     Special conditions in the cooperative agreement were not
adhered to.  Special conditions in the grant required adherence
to the Federal Procurement Regulations and prohibited CDH from
claiming costs incurred strictly to assess injury to the state's
resources or for litigation or enforcement purposes.   The audit
disclosed violations of both of these conditions.

RECOMMENDATIONS

     We recommend that the Regional Administrator:

     1.  Advise CDH that the 3221,969 of ineligible cost claimed
     is disallowed for reimbursement under the cooperative
     agreement.

     2.  Advise CDH that $967,468 of subagreement cost are
     -nallowable until an audit of the subagreement costs claimed
     under the cooperative agreement is made by CDH.   Upon
     completion of the audit, the Region should assess the
     allowability of the subagreement costs.

     3.  Obtain recovery of the cooperative agreement funds paid
     to CDH in excess of the amounts found allowable.

     4.  Notify CDH that no additional cooperative 'agreements
     will be made to them without verification that actions have
     been taken to correct their accounting system deficiencies.
     In addition, the other Colorado State Departments identified
     in this report as having accounting system deficiencies
     should also be required to correct the deficiencies before
     any additional cooperative agreement work is authorized to
     them.

     5.  Revoke CDH's self-certification of their procurement
     system until it corrects the deficiencies found in the audit
     report.  Also, CDH should be notified that no additional
     co«»rative agreements will be made to them without EPA
     fi^B- determining that their procurement system meets
     codf|lrative agreement requirements.

     6.  Alert Region 8 staff responsible for awarding other
     grants and contracts to CDH and the other Colorado State
     Departments identified in this report of the accounting and
     procurement system deficiencies noted in this audit report.
     Although the scope of the this audit does not extend to
     other cost reimbursable type agreements awarded to Colorado
     State Departments by EPA, the nature of the accounting and
     procurement system findings suggests similar conditions
     exist under other agreements.

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     7.  Advise Region 8 staff responsible for administering
     cooperative agreements of the importance of monitoring
     compliance with special terms and conditions in such
     agreements.

OTHER MATTERS

     In response to the draft audit report and at the exit
conference, CDH argued that the work under the cooperative
agreement should not be subject to audit.  It is CDH's position
that the work was a "purchase" of data, analyses, and work of
experts that was substantially complete before the cooperative
agreement was awarded.  Therefore, CDH asserts that it is
inappropriate to expect to audit their claimed costs in
accordance with standard cooperative agreement provisions.  We
believe that this issue needs to be addressed by the Regional
Administrator as he resolves the recommendations made in our
audit report.

     To facilitate a better understanding of whether a
cooperative agreement is the appropriate instrument for EPA to
obtain the work performed, the following information is provided.

     CDH Comments^   An exit conference was held with CDH and EPA
staff on May 22, 1989.  In addition CDH was asked to provide a
written response to the draft report.  CDH complied but requested
that their response not be included as an attachment to this
report.  We complied with their request.  However, we have
summarized their comments in the report, as appropriate.  In
general, CDH did not agree with the audit's findings.  CDH's
rebuttal centers primarily on the fact that the effort, which is
the subject of this cooperative agreement, was generally
completed prior to the award of the agreement and should not be
made to comply with all Federal terms and conditions
retroactively.  They assert the agreement is a "purchase" and is
not auditable for events that occurred prior to the agreement.

     Purpose of Cooperative Agreements.  The purpose of a
cooperative agreement (as distinguished from a grant or a
contract), is to provide financial and other assistance during
the performance of an effort in which there is mutual benefit.
Accordin||ito CDH, EPA was not involved in the conduct of CDH's
work an<^»p could not have made any substantial contribution to
the scope"of work performed as expected in cooperative
agreements.

     Evidence of Purchase^  There is evidence to support CDH's
position that this effort was a purchase.  An agreement in
principle between CDH and EPA which related to the cooperative
agreement stated it was to purchase data, analyses and work of
experts.  The agreement also stated "This purchase shall conform
with applicable federal rules and regulations regarding contracts
to purchase services and expert work products".

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      Based  on  CDH's comments and the  manner  in  which  the  effort
 was  conducted,  we believe the question  of  whether  this  is ah
 appropriate use of a cooperative agreement needs to be  addressed.
 The  Region  should consider the authoritative basis for  awarding
 the  cooperative agreement.  . EPA guidance on  the appropriate use
 of contracts,  grants and cooperative  agreements indicates that
 cooperative agreements  are assistance instruments  to  be used  when
 substantial involvement is anticipated  between  the agency and
 recipient during the performance of the contemplated  activity.
 The  state's response to the draft audit report  indicates  the
 award of the cooperative agreement was  consideration  given to
.settle EPA  and  CDH differences over authority to proceed  at Yak
 tunnel.  The facts also appear to establish  that the  primary
 efforts of  CDH's were already accomplished at the  time  the
 cooperative agreement award was made.

 ACTION REQUIRED

      In accordance with EPA Order 2750, the  Action Official is
 required to provide this office with  a  copy  of  the proposed
 determination on the findings within  ninety  (90) days of  the  .
 audit report date.

      The EPA, Office of the Inspector General,  has no objection
 to the release  of this  report at the  discretion of the
 responsible program official.

      Please refer to the audit report number on all related
 correspondence.   If you have any questions concerning this
 rscort, please  contact  Allen Orand of our  San Francisco office  at
 FTS  454-7084.

 BACKGROUND

      Cooperative agreement no.   V0008496-010  was awarded  to CDH
 on June 29,  1987 in the amount of $1,336,179.   The period of
 performance, through amendment no. 3. was  February 1, 1985
 through April 30,1988.   The cooperative agreement was granted a
 deviation from  40 CFR 30.800 which permitted that costs incurred
 prior to award  of the agreement were  authorized.

      Thad||irpose of the cooperative agreement was to  allow the
 State of^Oiiorado to complete evaluation of  the extent  and degree
 of contamination of the YAK tunnel/California Gulch site,  and
 prepare a risk  assessment and evaluate  remedial alternatives
 relating to that site.

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                                         £ Al-T I
               REPORT OF AUDIT
Report of Final Audit of Cooperative Agreement
V008496-010 Awarded by the EPA, Region VIII
to the Colorado Department of Health, Office of
Health Protection Under the Comprehensive
Environmental Response, Compensation and
Liability Act of 1980.
Audit Report No.  P5CG8-08-0117

     Date:  August 30, 1989

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                        TABLE OF CONTENTS
Scope and Objectives	  1

Summary of Findings 	  2

Background 	:	  3,  4

Findings and Recommendations

     1.  Superfund Procurement System and             11-17
           Subagreement Administration

     2.  Superfund Accounting System                  18-22

     3.  Compliance with Superfund Cooperative        23-25
           Agreement Special Conditions


Exhibit A - Colorado Department of Health             26-31
            Cooperative Agreement V008496-010
            Schedule of Costs Claimed and
            Results of Audit for the
            period ended March 31, 1988
     t
Schedule A - Schedule of Costs Claimed by             32-44
             Colorado State Departments and
             Results of Audit Review

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LEONARD G. BIRNBAUM AND COMPANY
       CERTIFIED PUBLIC ACCOUNTANTS
                                August  30,  1989
         A, SCMNilOfV
         N f UtOJOA
      SUBJECT:
 444 CASTRO STREET. SUITE 1105
  MOUNTAIN VI6W. CA 94041
    TEL: 41S-9&S-8814
    FAX: 415-969-4712


    OTHER OFFICES:


  SUMMIT. N-J. 201-273-2844
WASHINGTON. D.C. 7O3-522-7622
ALBUQUERQUE. MM. 505-883-5811

    TWX: 710 832-0995
    CABLE: LEIPER. D.C,
      FROM;
      TO:
           Audit Report No. P5CG8-08-0117
           Report of Final Audit of Cooperative
           Agreement No. V008496-010
           Between the EPA Region 8 and
           the  Colorado Department of Health
           Denver, Colorado

           Leonard G. Birnbaum and Company
           444  Castro Street, Suite 1105
           Mountain View, California  94041
           Truman R. Beeler
           Divisional Inspector General for Audit
           Western Division
           Environmental Protection Agency
           211  Main Street, Suite 201C
           San  Francisco, California  94105

Scope and  Objectives

     We have performed a final audit of the costs  claimed by the
Colorado Department of Health Services Office of Health
Protection under Cooperative Agreement No. V008496-010  with EPA
Region 8 under the Comprehensive Environmental Response,
Compensation,  and Liability Act, (CERCLA) Section  104,  as
amended.   The  primary objectives of our review were:

     (1)   to determine the reasonableness, allocability,  and
allowability of the costs claimed under Cooperative Agreement No.
V008496-010.

     (2)   to determine the adequacy, effectiveness and
reliability of procurement, accounting, and management  controls
exercised  by the State in administering the subject cooperative
agreement.

     (3)>i-to ascertain the State's compliance with the  provisions
of the cooperative agreement and applicable EPA regulations and
instructions.

     Our audit was performed in accordance with the applicable
Standards  for  Audit of Governmental Organizations, Programs,
Activities and Functions issued by the Comptroller General of the
United States,  and included tests of the accounting records and
other auditing procedures as were considered necessary  in the
circumstances.   Since it was considered more efficient  to expand
the audit  tests when necessary, a study and evaluation  of
internal accounting controls was net made.

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     The audit included a review of the costs incurred and
claimed and the accounting systems employed by five different
Colorado Agencies involved with the subject Cooperative Agreement
(CA).  The CA was awarded to the Colorado Department of Health
(CDH).  The four other state agencies which were reimbursed costs
pursuant to the CA included, the Colorado Attorney General's
Office (AGO), the Colorado Division of Wildlife • (CDW), the
Colorado Division of Geological Survey (CGS), and the Colorado
Division of Mined Land Reclamation (MLR).

Summary of Findings

     In our opinion, the accounting system used by each of the
five Colorado Agencies involved with this CA and the procurement
procedures followed by the AGO required substantial improvement
to effectively administer the Cooperative Agreements.
Specifically, the review indicated that the responsible Colorado
State Agency (Agencies) had not (i) fully complied with the
procurement requirements contained in 40 CFR Part 33, (ii)
implemented accounting controls which fully met the requirements
of 40 CFR 30.510, and (iii) satisfactorily complied with all
Cooperative Agreement special conditions.

     Copies of our draft audit report were provided to the CDH on
March 24, 1989.  CDH responded to the draft report on April 28,
1989.  An exit conference was held on May 22, 1989 with both CDH
and EPA Region 8 representatives in attendance.  In general the
CDH disagreed with our findings.  CDH asked that a copy of their
response not be included as an enclosure to this report.
However,  CDH advised that their response could be quoted as
necessary to make their position on the various issues known.
Accordingly, the pertinent CDH comments have been summarized or
quoted and incorporated throughout this report along with
additional auditor comments when applicable.

     The results of audit are summarized in the following
subparagraphs and detailed, along with related recommendations in
the Findings and Recommendations section of this report.  Details
on the audit of costs claimed, accepted and questioned under the
CA are included in Exhibit A and the supporting Schedule A to
this report!
         •%f:
     1.   SuperfundProcurement System

          The procedure utilized by the AGO to procure contract
service under the subject Superfund Cooperative Agreement did not
assure complete compliance with the requirements of 40 CFR Part
33.  Costs of.the only subcontract awarded accounted for Sl.l
million of the total $1.3 million claimed under the CA.  The
subcontract was awarded without the required cost or price
analysis.  This condition was due to inadequate consideration of
the circumstances (single available contractor ) involved in

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awarding the contract. Therefore, the award did not conform with
40 CFR Part 33.

      2 .   Superfund Accounting System

          The five Colorado Agencies claiming costs under the
subject CA did not fully comply with the requirements of 40 CFR
30.510.  The review indicated that accounting systems used by the
various agencies did not adequately account for labor or other
direct costs (travel or supplies) on a site-specific basis.
Therefore, it was necessary for each of the agencies to
reconstruct the costs claimed under the cooperative agreement for.
audit purposes.

      3.   Compliance with Special Conditions;

          CDH management procedures need improvement to assure
compliance with the special conditions included in the subject
CA.  While CDH met the majority of the special conditions, it had
not complied with these applicable to (i) adherence to the
Federal Procurement Regulations and (ii) eliminating amounts
spent solely to assess the extent of injury to the State's
natural resources, or for litigation and/or enforcement purposes.

          As a consequence of our audit, we questioned $221,969
as ineligible and questioned an additional $967,468 as
unsupported out of the $1,335,292 claimed under the C.A.  The
details relating to the questioned amounts are included in
Exhibit A and Schedule A to this report.

     CDH Ccnments.  CDH generally disagreed in whole or in part
with the various costs questioned and the deficiencies cited in
our audit report.  CDH's specific comments have been included and
discussed in this report.

     Background

     On December 11, 1980, Public Law 96-510, the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA)
was enacted by Congress.  CERCLA, commonly known as the
"Superfund* law, was passed to provide the needed general
authority*aihd to establish a Trust Fund for Federal and state
governments to respond directly to 'any problems at uncontrolled
hazardous waste disposal sites, not only in emergency situations,
but also at sites where longer term permanent remedies are
required.  CERCLA was established to fill the gap in the national
system to protect public health and the environment from
hazardous substances by authorizing Federal action to respond to
the release, or threatened release, from any source, including
abandoned hazardous waste sites, into any part of the
environment.

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      The  blueprint  for  the  Superfunci program under CSRCLA is the
 National  Contingency  Plan  (NC?),  first published in 1968 as part
 of  the  Federal water  pollution  control plan.  The NCP lays out
 three types of responses for  incidents involving hazardous wastes
 which require immediate removal,  planned removal, and remedial
 response.  The first  two types  of  responses were modifications of
 the  earlier program under the Clean Water Act.  However, remedial
 response  is a new type  of response intended to deal with the
 longer  terra problem of  abandoned  or uncontrolled sites.

      CSRCLA requires  the establishment of a National Priority
 List  (NPL) of hazardous waste sites for remedial action.  In
 October 1981, EPA compiled  an interim priorities list of 115
 hazardous waste sites.  The sites were nominated by the EPA
 Regional  Offices and  the states,  primarily on the basis of
 potential threat to the public  health; the threat to the
 environment was also  considered.   In September 1983, EPA
 published the first NPL of  406  sites.

      Section 104{c)(3)  of CERCLA  provides that no remedial
 actions shall be taken  unless the  state in which the release
 occurs  first enters into a  contract or cooperative agreement with
 assurance of payment  of 10  or 50  percent of remedial costs.  The
 state must agree to contribute  10 percent if the site was
 privately owned.  At  publicly owned sites (one owned by the state
 or a  political subdivision  thereof), the state is required to pay
 50 percent of all remedial  action costs.  Certain segments of
 CA's  for  remedial investigations,  feasibility studies, designs,
 and initial action  can  be funded  up to 100 percent fay EPA.

      CA V008496-010 was awarded to the Colorado Department of
 Health, Office of Health Protection on June 29, 1987 in the
 amount  of $1,336,179.   The  Project and Budget Period included in
 the CA was February 1,  1985 through December 31, 1987.  The
 Project and Budget  periods  were extended to March 31, 1988 by
Amendment No. 2 to  the  CA.  Amendment No. 3 subsequently extended
 the Project Period  to April 30, 1988.  The CA included a
deviation from 40 CFR 30.308 of the general grant regulations
which permitted that  costs  incurred prior to award of the
agreementiwould be  allowable.  The purpose of the CA was to allow
the Stat«||;Of Colorado to complete evaluation of the extent and
degree ofContamination of  the YAK tunnel/California Gulch site
 located near Leadville, Colorado, and to prepare a risk
assessment and evaluate remedial alternatives relating to that
 site.  The CA was intended  to reimburse the State of Colorado for
certain costs incurred  for  various tasks related to this effort.
Special Condition Section, b (4) to the CA specified that "No
 funds shall be spent  under  this Cooperative Agreement solely to
 assess the extent of  injury to  the State's natural resources, nor
 for litigation and/or enforcement expenses".

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CDH Response.

1.   The EPA and the State of Colorado entered an agreement
whereby EPA purchased information and data pertaining to the Yak
site from Colorado for the recited amount.  The Agreement
operated as a settlement of the differences between the federal
and state governments regarding their authority to proceed at the
Yak site.  By EPA's choice, a Cooperative Agreement was the
vehicle selected to channel payment pursuant to the underlying
agreement to the State.

Alternatively, if it is now decided that the activities
subsequent to the Cooperative Agreement are to be governed by
federal procurement regulations, one must inquire about what was
procured and who did the procurement.  Colorado asserts that the
federal government procured information from Colorado which the
State previously compiled from the efforts and investigations of
State employees and contractors.  Thus, the U.S. must meet and
achieve federal standards; the State was engaged only as a vendor
of information.

2.   The cooperative agreement under which Colorado has received
reimbursement was executed after incurrence of costs for costs
incurred prior to the award ofthe agreement.  In their review,
the auditors emphasised the procurement, accounting and
management practices and requirements under the federal program
and concluded that $1.1 million expended for consultation
services (of the total $1.3 million claimed under the Cooperative
Agreement) was "questioned" or "unresolved."  Clearly, the
parties did not intend nor anticipate such an extreme result when
they materially altered their positions by execution of, "and
rendered performance pursuant to, the cooperative agreement.  The
auditors' exclusive reliance upon federal regulation without
regard to the circumstances is misplaced.  Under the
circumstances, the procurement, accounting and management
procedures were adequate.

The relevant circumstances are chronicled as follows:
December 9*. 1983
July 31, 1984
October, 1984
Colorado filed its natural resource damage
lawsuit regarding the subject site, Colorado
v. ASARCO, Inc. (D. Colo.}, No. 83-C-2388.

By order of Court, this matter was scheduled
for trial on August 5, 1985.

Discussions between the Colorado Department
of Health, the Colorado Department of Natural
Resources, the Colorado Attorney General, and
the Colorado Division of Purchasing were
conducted regarding contractual assistance
for necessary data review, supplementary

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October  18, 1984
November 6, 1984
November 19, 1984
February 22, 1985
February ,26, 1986

September 18, 1986

November 25, 1986
 field evidence,  economic  evaluation  of  the
 natural resource damages,  and  litigation
 support.

 Request For Proposal  Issuance  relating  to six
 mining and mill  sites.  RFPs solicited
 technical  consultation  for the sites.   Firms
 were required  to eliminate themselves for
 conflict of interest  if they had  previously
 contracted with  the federal government  or any
 of  the potentially responsible parties.

 Department of  Health  responded in writing to
 sixteen questions from  interested firms.

 Bids were  received, in  response to Colorado's
 Request for Proposal, from Engineering
 Science Corporation,  GeoTrans,  Inc.  and Rocky
 Mountain Consultants, Inc., the latter  two
 corporations joining  for  this  proposal  only
 as  a Joint Venture.

 A contract was entered  between the State of
 Colorado for the use  and  benefit  of  the
 Department of  Law and Engineering Science, a
 California corporation, in accordance with
 State procurement practices, whereby a
 contract for consultant services, regarding
 the Yak Tunnel/California Gulch site and the
 Eagle Mine site,  was  awarded by Colorado to
 Engineering Science Corporation.  The term of
 the Contract was from February 22, 1985 until
 conclusion of  the lawsuit.

 Remedial Investigation was finished.

 Feasibility Study was finished.

 An  agreement in  principle  was  reached between
 the United States and Colorado wherebv  the
 U.S.
    "purchased  ... (from the State) all data,
 analyses,  and  other experts' work generated
 by  contractors or employees of the State of
 Colorado with  regard  to the California Gulch
 site in determining the nature and scope of
 the release of hazardous  substances;
 pollutants and or contaminants at the site.
 To  the extent  data relates only to
 assessments of natural  resources  damages the
 United States  is  not  purchasing that data.
.This purchase  shall conform with  applicable

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November 28, 1986
December 4, 1986
December 5, 1986
 federal rules and regulations regarding
 contracts to purchase services and expert
 work product.

 The United States and the State of Colorado
 were ordered by the U.S. District Court to
 confer and reach agreement concerning their
 respective roles and responsibilities in the
 prosecution of all claims asserted in United
 States v. Apache Energy and Minerals Co. (D.
 Colo.), No. 86-C-1675, and Colorado v.
 ASARCO, Inc., supra.
Transmittal of invoices from Engineering
Science Corporation to Elizabeth Mullin, EPA
by Colorado Department of Law for the period
October 12, 1985 thru October 10, 1986
(together with an adjustment invoice dated
September 23, 1985).

The United States and Colorado entered an
Agreement whereby the parties agreed that:

1.   The two federal actions would be
consolidated;

2.   Liability of defendants would be
litigated jointly fay EPA and the State;

3.   EPA would litigate the remedy with
substantial and meaningful participation by
the State;

4.   Colorado would dismiss its action for
injunctive relief under State law in the
District Court cf Lake County,  Colorado,
Colorado v. ASARCO, Inc.,  No. 86-CV-48.

5.   Colorado would prosecute its claim for
damages for injury to its natural resources
separately;

6.   The parties would prosecute their
respective claims for recovery of response
                    costs separately;
                    7.    The United States would compensate the
                    State for:
                         "certain response costs incurred by the
                    State in connection with the California Gulch
                    site.  For  the purposes of this Agreement,
                    these response costs include only those costs

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December 5, 1986
         •"*
December 9^-' 1986
  incurred  by  the  State pursuant to  40  C.F.R.
  pt.  300,  subpart F on or before  the date of
  submission of the cooperative agreement,
  application.  These costs do 'not include
  costs  incurred by the State solely to assess
  the  extent of injury to the State's natural
  resources, nor litigation or enforcement
  expenses."

  8.   The State would submit an application for
  a cooperative agreement award in an amount
  not  to exceed $1,400,000 to compensate the
  State for response costs as defined by this
  agreement.   (The cpoperative agreement would
  be governed by all EPA grant and procurement
  regulations including those procedures
 necessary to approve and implement the
 cooperative agreement.)

 9.   The State would make  available to EPA
 all information and  data pertaining to the
 California Gulch site in the State's
 possession.

 10,   The Stata would  not undertake  future
 activities or response action  in  connection
 with  the California Gulch  site without prior
 approval from EPA pursuant  to  a cooperative
 agreement  or  other contractual arrangement
 between EPA and  the State.

 NOTE:  The State  has discharged each of its
 obligations under this Agreement.

 U.S.  and Colorado filed with the  U.S.
 District Court for the District of Colorado
 the Joint  Agreement of the United States and
 State of Colorado Concerning Their Respective
 Roles in the  Prosecution of This Action and
 Civil Action  No. 83-C-2388.

 A  stop-work order was issued to Engineering
 Science Corporation by Colorado because
   "the agreement with the United States
 Government has significantly changed our
 responsibilities and role on this case, and
 until we have had an opportunity to evaluate
 the actual impact of this agreement, we feel
 it most prudent not to incur any further
costs of any kind on this matter through your
firm."

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June 2, 1987
June 17, 1987
June 29, 1987
EPA Region VIII requested a deviation from
grant regulations (40 C.F.R. 30.308} to
permit an award for costs incurred prior to
the award of the agreement.  The request
recited:

     "Under the circumstances,  the only
     viable means of preserving EPA's claims
     was to incorporate the State's
     investigation into the RI/FS and to
     proceed against the PRPs to recover the
     combined costs.  The State agreed to
     such a strategy and to assist EPA with
     its case, but only if it were
     reimbursed.  An enforcement decision was
     made that preventing EPA's claim
     justified reimbursement".

     The deviation would permit award of a
     cooperative agreement to the State of"
     Colorado Department of Health in the
     amount of $1,336,179 million for costs
     incurred prior to the award of the
     agreement ...

The request for deviation was approved by '
Director, EPA Grants Administration Division.

EPA Assistance Agreement (also known as the
Cooperative Agreement) was entered between
•the EPA and Colorado, specifically reciting
the above-named deviation.  The Narrative for
Statement of Work, California Gulch/Yak
Tunnel, Remedial Investigation/Feasibility
Study. Attachment B to the Cooperative
Agreement recited:

     "The purpose of this Cooperative
     Agreement application is to allow the
     State of Colorado to complete
     evaluations of the extent and degree of
     contamination, to prepare a risk
     assessment and to evaluate the remedial
     alternatives."

Attachment 3 also recited that contractor
procurement was to be accomplished in
accordance with federal guidance and State
procurement requirements.

The original term of the Cooperative
Agreement was from February 1,  1985 through

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                     December  31,  1987.   (Subsequent, extensions
                     through March  31,  1988 were granted by
                     Amendments  1  and  2.)

 3.   The  audit was  conducted  in such  a  manner as to disallow
 broad categories of  claimed costs  without, consideration for the
 unique  factual circumstances  presented  by the after-the-fact
 Cooperative Agreement:.  For instance,  all time reported by the
 contractors which was allocated to the  "litigation" category was
 disallowed, in spite of the specific  language of Attachment C to
 the Cooperative Agreement defining the  "Yak/Colorado CERCLA
 Litigation Support'1  category.  Another  example is the
 disallowance of the  Yak/Plug  Evaluation because that activity was
 not cataloged at the time of  invoicing  to the specific categories
 the auditors sought.  The Yak/Plug Evaluation was a project
 directly  related to  the evaluation of  remedial alternatives, one
 of the  purposes specifically  recited  in Attachment 3 tc the
 Cooperative Agreement.

 In essence, the auditors have elevated  form over substance.  The
 basis of  the EPA-State agreement was  tc transfer the State's
 information and data tc EPA and recognize the EPA's lead
 authority, in exchange for payment to Colorado to reimburse the
 State for costs incurred.  The Department'of Justice and EPA were
well acquainted with the status of Colorado's contract and
 subcontracts, and received copies  of  invoices from Engineering
Science,  and knew that the State's Remedial Investigation and
Feasibility Study efforts were complete prior to the time of the
Cooperative Agreement.  Indeed, Table  1 of the Cooperative
Agreement specifically recognizes  that  $1,336,179 had already
been incurred by the State as response  costs.  Table 2 recites an
obligation to provide SPA with copies of completed reports within
 30 days following execution of the Cooperative Agreement.  It
must be noted that EPA received the benefit of its bargain.

Auditor Comments.  Except for references to Exhibits, the CDH
comments are included in total in  order to provide their opinion
as to the purpose and type of contract  involved between the CDK
and the EPA regarding the Yak tunnel  effort.  The CDH contends
that the •^feCfort had been completed, the costs of the effort had
been inctHHCed and the CA involved  was intended tc be the
contractual: vehicle whereby the EPA could pay CBK for the
services rendered.  As auditors, we cannot speculate on what type
of contract was intended; we  can only audit to the terms,
conditions and requirements of the contractual document
 (Cooperative Agreement) that was signed by both parties.  CDH's
comments relating to specific matters such as "litigation
category and Yak/Colorado C2RCLA Litigation Support1' are
addressed when those items are specifically 'discussed below.
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                  Findings and Recommendations

1.   Superfund Procurement System
     and Subagreement Administration

     Neither the procedure used by the Colorado State Purchasing
Department to procure contract services nor the procedure used by
the AGO to administer the services under the Superfund
Cooperative Agreement (CA) for the YAK tunnel/California Gulch
site were in full compliance with the requirements of 40 CFR Part
33.  As a result, the only contract entered into under this CA .
(amounting to $1.1 million of the CA claim of $1.3 million) did
not (i) incorporate cost or price analysis as required or (ii)
ensure that the contractor invoiced in accordance with contract
terms.  These conditions were primarily attributable to the lack
of complete implementation of the Federal procurement
requirements referenced in the Colorado State's procurement
system self-certification.  It is noted that Colorado State first
certified its procurement system on February 6, 1987.  This was
prior to the effective date {June 29, 1987) of CA No. V008496-01Q
but subsequent to the award of the contract to Engineering
Science Corporation.

     Background

     EPA Regulation 40 CPR, Part 33.110 entitled Applicaticn and
Recipient Certification stipulates that it is the state's
responsibility to evaluate its own procurement system and to
determine whether its system meets the requirements of 40 CFR,
Part 33.  The EPA implementing guidance for the above regulation
is found in its manual, entitled State Participation in the
Superfund Remedial Program.  Chapter 111-12 of the manual
requires that each application for a CERCLA CA must be
accompanied by a completed Procurement JSystem Certification Form
for Applicants for EPA Assistance (EPA Form 5700-48).  Part B of
the EPA Form 5700-48 provides for the following certification
language:  "Based upon my evaluation of the applicant's
procurement system, I as authorized representative of the
applicant, certify that the applicant's procurement system will
meet all-the requirements of 40 CFR, Part 33 including the
attachedFBubparts before undertaking any procurement action with
EPA assistance."

     The subparts referenced in the EPA Form 5700-48 included, in
part,  the following:

40 CFR Part
 Reference         Section Title and Summary cf Requirements

33.210         SUBAGREEMENT ADMINISTRATION.  System must ensure
               that contractors perform in accordance with all
               applicable contract requirements.

                               11

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 33.230       '  COMPETITION.   System must have procurement
               transaction procedures that provide maximum open
               and  free  competition.

 33.235         PROFITS.  System procedures must allow only fair
               and  reasonable profits to contractors.

 33.290         COST AND  PRICE CONSIDERATIONS.  System procedures
               must allow for consideration of cost and price
               as required in this section.

     In addition, an applicant may elect to not certify its
 procurement  system.  Under this situation, the applicant must
 allow EPA to review and  approve proposed procurements before they
 are awarded  in order to  assure that the provisions of 40 CFR Part
 33 are being followed.

     As noted above the  State of Colorado  self-certified its
 procurement  system  February 6, 1987.

     Review of Procurement

     Only one contract was issued under the subject CA.  That
 contract was awarded by  the State of Colorado for the use and
 benefit of the Department of Law (Attorney General Office).  The
 procedures used by  the Colorado State Purchasing Department to
 procure these contract services were not in full compliance with
 the requirements of 40 CFR Part 33 or its procurement system
 certification.  Although Request For Proposal's (RFP's) were
 mailed to 29 companies,  only two companies submitted proposals.
 The RFP requested companies to bid for the services required at
 six separate sites.  During interviews with the two companies
which submitted proposals, information was elicited which
 indicated that neither company had sufficient personnel to
 complete the required services at all six sites within the time
 period required.  Using  evaluation criteria included in the RFP,
 the evaluation committee evaluated the proposals from the two
 companies and awarded a  contract to cover two sites (one of which
was the YAKttunnel/California Gulch site) to Engineering Science
 Corporation|*uid a contract to cover 4 sites to Geo-trans, Inc.,
Rocky Mountain Consultants, Inc.

     The cost or price analysis considerations included in 40 CFR
 Part 33.290 requires that cost or price analysis be performed as
 required.  We found that the Colorado State Purchasing Department
did not fulfill this requirement as illustrated by the following:

     The procedures followed by the state in requesting
 proposals, evaluating the proposals and awarding the contracts
 included some consideration of price. In our opinion, the
 circumstances indicated  a need for a cost analysis of the
 responding companies' .proposals.  Our opinion is based on the

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fact  that only two companies responded to the RFP's and neither
company  had  sufficient personnel to complete the required effort
within the required timerrames.  Therefore, we believe that a
c.ost  analysis should have been performed of the contractors'
proposals prior to negotiation or award of the contracts.

Recommendations:

      We  recommend that prior to the award of future CA'S to CDH,
the Regional Administrator require CDH to initiate improvements
to its procurement and contract administration system to assure
that  all the requirements of 40CFR Parr 33 are met or
demonstrate  that the appropriate improvements have been made.
These improvements should include/ as a minimum, the following:
(1) the dissemination of standard written procurement procedures
and contract administration, (2) the responsible employees should
be familiar with Federal procurement requirements.

CDH Comments;

    .  Colorado disagrees with the auditors' characterization of
the Colorado Procurement System.  The procurement of contract
services was instituted in October 1984 by a group effort of
state officials and employees.  The group included
representatives of the AGO, CDH and Division of Purchasing after
consultation with Governor Richard Lamm, the Attorney General and
David Getches (Colorado Department of Natural Resources).  On
October 18, 1984, CDH and the Division of Purchasing of the
Department of Administration issued a Request for Proposal to 29
known  companies and to any other requesting company.  Proposals
were  received one month later from Engineering Science and
GeoTrans/Rocky Mountain Consultants.  Engineering Science scored
high  in relation to mining sites; GeoTrans/Rocky Mountain
Consultants scored high in relation to milling sites.  The
evaluation criteria included technical merit, ability to respond,
cost  and technical expertise.

The subject contract with Engineering Science was awarded for the
Yak Tunnel/California Gulch site near Leadville, Colorado and the
Eagle Mine.=,site near Eagle, Colorado.  The same RFP process
resulted {in* a second contract award to two companies, who formed
a joint venture for these purposes only, GeoTrans, Inc. and Rocky
Mountain Consultants, Inc.  The joint venture was awarded a
contract for services to be performed in relation to the Idarado,
Uravan, Globe and Cotter sites.

It must be recalled that the subject contract with ES was
finalized February 22, 1985. -The subject Cooperative Agreement
was not finalized until more than 2 years later, on June 29,
1987.  However, at the time the Cooperative Agreement was
negotiated and executed, EPA was aware of the state's contractual
circumstances and the status of the State's investigations.  The

                               13

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subject Cooperative Agreement was based upon the November 1986
agreement "To purchase  ....data, analyses, and other experts'
work generated by contractors or employees of the State...." and
the December 1986 undertaking to "compensate the State for
certain response costs."  EPA strongly desired to assert lead
agency authority and, accordingly, requested a deviation allowing
it to sign an after-the-fact Cooperative Agreement.

On June 2, 1987, Kerry Clough, Assistant Regional Administrator,
EPA Region VIII, wrote:

     Under the circumstances, the only viable means of preserving
     (EPA's) claims was to incorporate the State's investigation
     into the RI/FS and to proceed against the PRPs to recover
     the combined costs.  The State agreed to such a strategy and
     to assist EPA with its case, but only if it were reimbursed.
     An enforcement decision was made that preserving EPA's
     claims justified reimbursement, (emphasis added).

EPA received the benefits of the Agreements by Colorado's     -
performance of all prospective obligations under the Agreements:
EPA received the State's "data, analyses, and other experts' work
generated by contractors (and) employees of the State"; EPA's
lead agency authority was specifically acknowledged by Colorado
in relation to the Yak Tunnel/California Gulch site.

Under these circumstances, Colorado should not be held strictly
accountable to federal procurement requirements that could not
have been anticipated at the time of making the original ES
contract.  Thus, a price analysis should not be required
retroactively.  Moreover, to attribute the contract costs to an
"unresolved" or "questioned" category and to ultimately disallow
these costs would deprive Colorado of the benefit of the bargain
stricken.

Awarding the ES contract was not a result of inadequate
management consideration of the circumstances.  The ES contract
was awarded in full consideration of the circumstances which, at
the time of the award, did not include Colorado as a federal
grant recipient.  Thus, there was no requirement for compliance
with fedWTill procurement regulations.  The auditors have failed
to appreciate the necessary implications of an after-the-fact
Cooperative Agreement.

In addition the RFP process did include the following cost
criteria as identified in October and December 1984 memoranda.

     "1)  Costs to perform each task should be reasonable and
reflect commonly employed cost approaches.

      2)  Evaluation will be dene in recognition of the cost-
effectiveness of proposals to the state".

                               14

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 Even  if  40 C.F.R.  33.290  is applicable, which the State does not
 concede,  the  foregoing  consideration  for cost was sufficient to
 satisfy  the regulatory  requirements.

 Auditors  Comments;

      The  CDH  comments are acknowledged.  However, because there
 was only  one  responsive bidder, in our opinion, inadequate
 consideration was  given to the evaluation of the cost/price
 aspects  before awarding the contract  to Engineering Science.  We
 agree with the CDH that a price analysis should not be required
 retroactively.  The procurement system weakness is identified
 only  for  consideration  by the Regional Administrator before
 awarding  future CA's to the CDH.

     Review of Contract Administration

     40 CFR Part 33.210 requires that the contract administration
 system must ensure that contractors perform in accordance with
 all applicable contract requirements.  The AGO was responsible.-
 for managing the contract services with the Engineering Sciences
 (ES) Corporation under  this CA.  Our review indicated that the
 contract was inadequately managed by  the AGO. This conclusion is
 based in part on the following (additional Management
 deficiencies listed in  Note 3 to Exhibit A):

     1)   Site visits were not made or other controls established
 for the purpose of insuring that contract services billed were
 performed and/or met the technical requirements specified in the
 contract.

     2}   An adequate review of ES vouchers was not made '(one
 instance was noted of a 2nd tier invoice billed twice by ES and
 paid twice by the  State).

     3)   An audit of the ES costs has not been performed by the
 State.  As a result of  the lack of effective subcontract
management (see Finding in the report narrative), $967,468 has
 been questioned as unresolved.

Recommendation;
         Is-
     We recommend  that  the Regional Administrator require that
 the contractor (Engineering Science) costs included in the claim
 be audited to assure their allowability under the CA.  We also
questioned $967,468 as  unsupported until the CDH submits evidence
 that the costs have been audited and are acceptable.

CDH Response;

     1).  The lead attorney and deputy attorney general have
monitored contractor services for the Yak case by telephone

                               15

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communication, site visits, meetings, review of reports from the
field, review of data and written reports.  AGO lead attorneys
performed day to day oversight of contractor assignments and
tasks performed.

          In addition, CDH employee Russell was frequently in the
field with Engineering Science contractors and subcontractors.
Moreover, EPA's consultants and employees, and Colorado's
consultants, conducted all groundwater sampling events together
so as tc provide split samples to Colorado.  The AGO was
satisfied that the contract services billed were performed, based
upon the above-named factors, all of which provide sufficient
evidence of credibility and reliability to support the
Engineering Science invoices.

          For your information, on March 27, 1987, the subject ES
Contract was amended (Amendment No. 1) to encompass a "Task
Order" process.  This process formalized the monitoring system
for contractor activity and established a "not to exceed"
budgetary constraint per task.  Although Amendment No. 1 occurred
near the close of the time frame of the Cooperative Agreement, it
is notable because it demonstrates that the auditors'
recommendation for system improvements has been previously
implemented.

     2).  There was one instance where the State paid ES
$19,672.79 twice for subcontractor Parsons Co. on two separate
invoices, 2 months apart.  The AGO will concede that $19,672.79
must be disallowed under this circumstance.

     3).  It is not the normal State practice to conduct an audit
of independent contractors.  An audit does not appear to be
justified nor cost-effective, given the very limited nature and
extent of apparent discrepancies.

          The AGO provided effective contract management.  Please
see the AGO response to subparagraph  (1), infra.

Auditors Comments;
         , .;.-" r'
     The jjjpiunples above provided by the AGO to demonstrate that
the Contractors activities were adequately monitored appears to
reflect occasions of normal coordination controls in lieu of a
planned visit for the purpose of verifying the accuracy of time
expended by ES employees on the contract effort.  However, even
if adequate controls were used by the AGO, it is our opinion that
because of the numerous questions noted when reviewing the ES
invoices, effective contract administration does require a final
audit of the ES contract.

     The contract with ES is a time and material type contract.
As such, the rates and factors included in the contract are fixed
                                                  X
                               16

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and are not subject to audit.  All other costs including labor
hours, subcontract costs and other direct costs are auditable.
Based on the various noted deficiencies in the ES invoices we
recommend that the audit review include the following:

     1)   Trace a selected sample of employee time sheets to the
payroll, labor distribution and general ledger.  Assure the hours
charged to Yak/Tunnel effort were properly recorded in the ES
accounting records.

     2)   Review ES policy for accounting for overtime labor
costs related to salaried personnel.  If policy is not
consistently followed overtime hours charged to CA and credited
to overhead should be questioned.

     3}   Select a sample of ES employee travel costs charged to
the Yak/Tunnel contract.  Compare costs claimed to costs paid -
also compare to employee labor charges for the period claimed.

    .4)   Review sample of subcontractor invoices for
applicability and allocability to Yak/Tunnel effort - also review
to determine if effort is related to the performance of natural
resource damage assessments and/or litigation support effort.

     5)   Review questions regarding ES "subcontract management
fee" to extent necessary to determine allocability of fee to the
CA.

     6)   The scope of tests for the above tests should be
expanded as necessary based on the results of the sampled items.
                               17

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 2.    Superfund Accounting System

      The various Colorado State Departments involved with the
 subject CA do not  fully  comply with the requirements of 40
 CFR.30.510.  Specifically, our audit disclosed that the labor and
 other direct costs  (travel, supplies, etc.) were not being
 accurately recorded and  accumulated tc this CA.  As such, we were
 unable to verify claimed costs to the accounting records.  In
 addition, it was necessary for each of the Colorado State
 Departments involved  (CDH, CAGO, CDW, CDGS and CDMLR) to totally
 reconstruct support for  the costs claimed in order to satisfy the
 requirements of 40 CFR 30.510.

      Background

      The State of Colorado has a centralized accounting system
which requires all State Departments to report at the same
general level (salaries  and wages, travel, capital, etc.).  The
system does not require  accounting by job or by task.  Each
department is free to upgrade its own system to meet its needs'
provided that it can report at the level required by the State.
      40 CFR 30.510 states, in part, that an awardee must maintain
a financial management system that consistently applies accepted
accounting principles and practices and at least includes:

      "An accurate, current, and complete accounting of all
financial transactions for your project."

      "Records, together  with supporting documents showing the
source and application of all project funds including assistance
awards and authorizations, obligations, unobligated balances,
assets, liabilities, outlays and income."

     As noted above, none of the accounting systems used during
the performance of the CA effort by the various Colorado
Departments were considered to be adequate for CA purposes.  A
brief description of the accounting system deficiencies, by
Department, follows:

      (a) .^-Colorado Department of Health - the accounting system
did not accumulate costs incurred by project or contract.  Thus,
costs related to this CA had to be reconstructed from source data
information (employee time sheets).  Also travel and related
costs claimed to be applicable to the CA did not contain the
required information; e.g., job number/ contract number or
purpose, of trip.

     The CDH representative stated that recent changes tc the CDH
accounting system provides the current system the capability of
accounting for and accumulating costs by project or contract.
The scope of this audit  did net include a verification of the
adequacy of the current  CDH accounting system.

                               18

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     State Response:  When the costs were being accumulated
 (prior to the Cooperative Agreement) there was nc need to
 identify site costs beyond what was being done.  Costs of
 personnel were identified by site and activity, and other costs
 claimed have a written record to identify which site the costs is
 associated with.  At the time, monies expended were state funds
 and were segregated from federal funds.  The Department of Health
 has initiated many changes since the time of the claims (1985).
 All sites have exclusive accounts, all employees complete time
 and effort reports identifying the activities performed by site,
 and all contracted services are accounted for by site.
Additional changes are being implemented as a result of internal
 and external requirements.

 Auditors Comments.

 No additional comments necessary.

     (b)   Colorado Department of Wildlife and Colorado Department
of Mined Land Reclamation - neither of these departments required
that employees prepare timesheets, nor did they identify costs by
projects or contract.  Consequently, the financial management
systems for these Departments did not comply with 40 CFR 30.510
since these departments could not readily support costs related
to the subject CA.

     Mined Land Reclamation Response;  The auditors are correct
     that Mined Land Reclamation did not require timesheets at
     the time (1984-1985) of the Yak Tunnel activities.  The
     individuals involved, however, kept track of time on their
     personal calendars.  The individuals involved estimate the
     costs claimed present only a fraction of the actual time
     spent.  The auditors do not suggest additional documentation
     but the state is willing to produce affidavits for time
     submitted by the former Mine Land Reclamation employees.

     Division of Wildlife Response;  The Division does not
     require the employees to complete timesheets.  The time
     sheets did not specify the CERCLA site by name.  However the
     auditors did not consider documents which would indicate
     performance of activities in the site's immediate vicinity
     which could only relate to the Yak Tunnel/California Gulch
     site.  There was no requirement at the time to use a common
     set of site names or project titles. The staff completed
     timesheets in the normal manner.  The state could, for
     additional administrative dollars, provide affidavits for
     the time spent by regional staff member. This decision has
     not been made due to budget ccnstraints found by the agency.

     Audit Comments:  We have no argument other than whether the
     labor costs claimed were adequately documented so as to be

                               19

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     eligible for funding by SPA.  Salaries and wages of
     employees chargeable to more than one cost objective must
     be supported by time distribution records under Office of
     Management and Budget Circular A-87.  Mere documentation
     of attendance at work is not sufficient, the intent of time
     distribution records is to make, verify and, edit records
     contemporaneously with the transactions.  Human memory is
     net sufficiently reliable to accurately recall the numerous
     tasks ar. individual may have performed several years ago.
     Swearing -3 recalled events won'.t make it accurate,
     necassary,  complete, or beneficial to EPA.  It should be
     nctsd that we do net question that the employees worked on
     the effort or that they were paid as claimed but, without
     further documentation of the precise nature and extent of
     those costs EPA cannot pay for them.

     (c;  Colorado Attorney General's Office - the source
documents maintained by the CAGO identifies costs to individual
contracts.  However, the accounting system does not accumulate
the costs by contract.  In order to determine total cumulative
costs related to this CA, the data had to be reconstructed from
the source documents.

     AGO Response;  The State agrees.  AGO response costs are
     identified by alpha codes for each CSRCLA case.• These costs
     are taken from State Accounting System documents, which
     reflect expenditures.  The State's Central Accounting System
     does not have the capability to accumulate costs by contract
     or by case.  The only recourse available to the AGO is to
     accumulate costs manually using source documents, and a
     reconciliation procedure tying these manually computed
     accumulations to Central Accounting System reports.
     Nevertheless, the AGO system is sufficient to satisfy 40
     C.F.R. 30.510 because it does includes
          An accurate, current, and complete accounting
          of all financial transactions for your project.

          Records, together with supporting documents
          shewing the source and application of all
          project funds including assistance awards and
         •: authorizations, obligations, unobligated
          balances, assets, liabilities, outlays and
          income.

     It is, perhaps, unfortunate that the State's system is not
     fully computerized and easily accessible.  Nevertheless,
     ail items of information are available and were provided
     to the auditors.

     Auditors Comments;

     No comments ara necessary since the costs claimed by the AGO

                               :o

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      (Except for subcontract coses} wera not questioned.

      (d)  Colorado Department of Geological Survey - the
accounting system used by the CDGS is considered capable of
identifying and accumulating costs by project or contract.
However, the CDGS accounting system reflects total billings
related tc a project or contract instead of costs.  The billings
include labor plus a 33% factor for fringes plus a 25% mark-up
from  costs.  Based on the above, we are of the opinion that the
CDGS  accounting system is capable of providing necessary
accounting data but the use of the billing fee approach is
unacceptable for accumulating cost data for CA purposes.

      CGS Response:

      The Colorado Geological Survey is a cash-funded agency by
      statute.  The statute requires the agency to bill for all
      direct costs.  As a result, the agency has developed a fee
      schedule that includes an overhead rate to pay for such
      costs which normally would be included in an indirect rate.
      The billings, if done on an actual cost basis, won't reflect
      any reduction in costs.  The state does not agree the costs
      should be disallowed strictly because a billing method was
      used which conforms to the State's other statutory require-
      ments.
     Auditors Comments:

     We disagree with the CGS response.
     included in Note Ic to Schedule A.
Specific comments are
     During this audit we attempted to trace the labor and other
direct charges claimed by the various State Departments involved
tc>-documentation provided by the departments.  We accepted the
costs whenever the documentation provided (timesheet, travel
reports, invoices, etc.) indicated that the cost incurred was in
the performance of effort under the subject Cooperative
Agreement.  In many instances the documentation was inadequate
and the costs claimed were questioned (Labor $61,599, Travel
$10,425 and Supplies $2,400).  See Notes 1, 2 and 4 to Schedule A
for more detail.

     Colorado Response;

     Response is deferred to the Schedule A portion of this
     response document.

     Recommendation

     We recommend that the Regional Administrator

     1).  Require that the CDH and any State' Agency involved in

                               21

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active or future Cooperative Agreements implement and maintain an
accounting system and related accounting procedures which will
identify and accumulate direct costs incurred by project and/or
contract and which will meet the requirements of 40 CFR 30.510.

     2).  Advise the CDH that $221,969 of claimed Cooperative
Agreement Costs are unallowable for reimbursement under the CA.

     Colorado Response;

     For the detailed reasons presented below, Colorado
     disagrees.
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3 •"   Compliance with Superfund Cooperative
     Agreement Special Conditions

     The CDH needs to improve its management procedures to assure
compliance with all special conditions included in its
cooperative agreements.  While CDH complied with most of the
special conditions included in the Yak/tunnel cooperative
agreement, it did not meet the requirements to (i) fully comply
with Federal Procurement standards and (ii) assure than no funds
were spent under the CA solely to assess the extent of injury to
the State's natural resources, nor for litigation and/or
enforcement expenses.

     Background

     Cooperative Agreements generally include a narrative
statement explaining the hazardous waste problems, a history of
the site, and a statement of work.  The work statement describes
the purpose and scope of the activities and tasks to be carried
out under the proposed project.  A project budget provides the
financial information relating to the cooperative agreement.  In
addition, the Cooperative Agreement provides for certain
assurances on the recipient's part, and for the inclusion of any
applicable special conditions.

     Special condition number 4 under Attachment A to the CA
required that "This award is subject to the procurement standards
of 40 CFR Part 30 and Part 33."  As discussed in finding No. 1
entitled "Superfund Procurement System, the CDH (Colorado State
Purchasing Department) did not fully comply with these standards.
A cost analysis was not performed even though one was required
based on the circumstances.

     In addition, special condition number 4 under b. Special
Conditions states that, "no funds shall be spent under this
Cooperative Agreement solely to assess the extent of injury to .
the State's natural resources, nor for litigation and/or
enforcement expenses".  Our review indicated that the costs
claimed by the CAGO included costs of effort which was
specifica-^f^unallowable per the Special Condition described
above.   vS|f~
     AGO Response;

     In addition, it should be noted that Cooperative Agreements
     are generally prospective in nature, as required by 40
     C.F.R. 30.308, which requirement was waived in this
     instance.  Hence, standard routine language, such as that
     included under Attachment A to the Cooperative Agreement
     about procurement standards is routinely recited in cooper-
     ative agreements.  As discussed above, the recitation of
     special condition No.4 is not dispositive.  The totality

                               23

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     of the circumstances must be examined to ascertain
     Colorado's obligation with regard to procurement and
     accounting responsibilities.

     It is conceded that the Cooperative Agreement, Part
     IIl(b)(4) excludes the expenditures of Cooperative Agreement
     funds.

          To assess the extent of injury to the State's
          natural resources, (or) for litigation and/or
          enforcement expenses.

     Some natural resource damage assessment costs were identi-
     f.. ed by the auditors.  These are excludable under Special
     Condition III(b)(4).  Colorado agrees that this amount is
     unallowable.

     Recommendations

     (1)  We recommend that the Regional Administrator emphasise,
to the various CDH, the importance of complying with all of the
special conditions in the Superfund cooperative agreement.  In
this regard, attention should be given to the special conditions
applicable to the Federal Procurement Regulation.

     (2)  Also we recommend that the Regional Administrator
notify the CDH that Contract costs of ?90,608 ($25,613 labor
costs and $64,995 subcontract costs) incurred for unallowable
functions under Special Condition P.4 and questioned in Exhibit A
of this report are unallowable costs under this Cooperative
Agreement.

     (3)  We also recommend that the Regional Administrator
require the CAGO to identify and remove costs for all unallowable
activities from the CA costs claimed.

     Colorado Response;

     Response to Recommendation (1):  The importance of comply
     ing with all of the previsions of the subject Cooperative
     Agre^aent is acknowledged.  However, the realities of the
     after—the-fact execution of the Cooperative Agreement must
     also be acknowledged.

     Response to Recommendation (2):  Colorado disagrees.

     Response to Recommendation (3):  The AGO does not object.

     Auditors Comments;

     No additional comments are applicable to (1) and (33.
     Additional Colorado responses and auditor comments related

                               24

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to (2) are included in the notes to Exhibit A and Schedule
A.
                              Leonard G.  Birnbaum & Company
                          25

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                                                               EXHIBIT A
                       Colorado Department of Health
             Final Audit Cooperative Agreement No. ¥008496-010
              Schedule of Costs Claimed and Results of Audit
      For the Pericd February 1, 1985 through March 31, 1988
Cost Cateaorv
                                        Per Audit
   Costs
Reviewed
INotes  1&2)
  Cost       Questioned Cost
Accepted  Ineligible unsupported*   Referenc
Labor
Fr. nge Benefits
Travel
Supplies
Subcontracts
$171,517
22,988
14,566
4,800
1,098,268
$109,918
11,927
4,141
2,400
-0-
$ 61,599
11,061
10,425
2,400
130,800
                    23,153
            17,469
            5,684
Indirect Costs  	  	  	
   Total        $1,335,292  $145,855  $221,969
:   -        Schedule £
            Schedule f-
            Schedule f-
            Schedule f-
967,468     Note 3 anc
           .-. Schedule f
            Schedule f-
                                                  $967,468
*  Cur draft report identified the questioned - unsupported costs as
unresolved.  Thus the Colorado response referred to these costs as
unresolved.  The unresolved classification was changed in the final
report to comply with a change in the EPA-DIG report terminology
requirements.  Also, based on certain additional information provided
by Colorado, we have changed the amount questioned ineligible and
questioned unsupported from the amounts included in the draft report.
The Colorado response includes amounts shown in the draft report.

Note 1.  The amounts claimed represent expenditures for the
period February 1, 1985 through March 31, 1988 as reported on the
Financial Status Report attached to a August 31, 1988 memorandum.

Note 2.  The costs claimed under CA V008496-010 include costs
claimed by five different Colorado State Departments:  Department
of Health', State Attorney General's Office, Departments cf
Wildlife,^"Geological Survey and Mined Land Reclamation.  The
costs claimed and questioned as a result of cur audit are
detailed and explained in Schedule A and the notes thereto.

Note 3.  Based on the problems noted (See Finding i in the report
narrative), we have questioned  $967,468 of subcontract costs as
unsupported pending submission of evidence from the CAGO that the
costs have been audited and found to be acceptable.  The
unsupported amount represents the difference between the
subcontract costs claimed, $1,098,268, and the subcontract costs
of $130,800 questioned as ineligible.  The following comments
explain the basis for cur position relating to the lack of
effective contract management and the necessity for the CAGO or
                               26

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CDH to audit the subcontract costs before they can be accepted.
     a.   Special Condition No. 4 to the subject CA states that
"No funds shall be spent under this Cooperative Agreement solely
to assess the extent of injury to the State's natural resources,
nor for litigation and/or enforcement purposes".  However, the
work description in the contract with Engineering Sciences
contains the following requirements:  (Underlining added for
emphasis)

          Phase I consists of history, literature and current
     data, review; preliminary field investigations; preliminary
     site analyses; preliminary valuation of damages; case pre-
     paration ; and litigation consultation.

          Phase II consists of field investigation; site
     analyses; final valuation of natural resource damages;
     case preparation; and litigation consultation.

          Phase III consists of final trial preparation and   ;
     trial testimony.

     Colorado Response:

     The ES contract was effectively managed.  The circumstances
     do net warrant setting aside $926,983 as unresolved cr
     $264,795 as questioned.  The circumstances dc not warrant
     an audit.  Certain modifications to the claimed amounts
     have been made, however.  These modifications are described
     below.

     Again, it must be recalled that the ES contract was written
     2 years before the Cooperative Agreement.  It is notable
     that the scope of the ES contract was broader than the
     Cooperative Agreement.  The operative consideration is that
     Cooperative Agreement funds not be expended solely to
     assess the extent of injury to the State's natural
     resources, nor for litigation and/or enforcement purposes.

     As noted ai>ove, seme natural resource damage assessment
     cost||||{:$34f488) were identified by the auditors.  These
     shottestnot have been included in the State's claim.  The
     totaf^claim of $1,335,292 million is, accordingly diminished
     by $34,488.

     The auditors have taken a very simplistic approach tc
     "litigation" activities based upon billing cedes and
     timesheet notations.  Again, the 2 year time differential
     must be recalled in this regard.  Because there was no
     "billable" vs. "ncn-billable" import to activities at the
     time of their occurrence or recording, the term "litigation"
     was used loosely.  An examination of the underlying activity
     is therefore necessary.  Only those items which were truly

-------
     litigation in the classic sense are properly excluded.

     Auditors Comments;

     Account titles provided by the Contractor were used as a
     basis for identifying costs of the unallowable activity
     under the ES contract.  It is doubtful that this approach
     would result in complete identification.of all of the
     unallowable activities performed under the Contract.  As
     such we recommend that the Regional Administrator require
     the AGO to identify the costs of all unallowable activities
     performed on the contract and exclude them from the CA
     costs claimed.

     b.   The subcontract work description appears to indicate
that a substantial part of the required contractual services were
related to effort specifically unallowable per terms of the
Cooperative Agreement.  Some of this effort was identified and
questioned during our review (See Note 5 to Schedule A).  The
Colorado Department responsible for managing this contract (State
Attorney General's Office) did not attempt to review, identify
and delete the unallowable costs from the contract costs claimed.

     Colorado Response;

     A MINOR part of the required contractual services were
     related to effort unallowable per terms of the Cooperative
     Agreement.  (See the AGO Response to Schedule 5A, Note 5.)
     The AGO has subtracted costs pertaining to an assessment of
     natural resource damages ($34,488) from its claim.

     The other costs questioned by the auditors are related to
     performance of activity properly reimbursable under the
     Cooperative Agreement.  Attachment F to the Cooperative
     Agreement was Engineering Sciences' proposed Scope of Work
     relating to the Yak Tunnel/California Gulch which was origi-
     nally submitted in 1984 with their bid.  The Scope of Work
     included ES1  preliminary proposal for phased investigations.
     SubI|Kfliently, that proposal became a part of the
     Fefa|^|ry 22,  1985, Contract with the State.  At the time of
     finati£zation of the Cooperative Agreement two years later,
     it was recognized that a substantial amount of technical
     work had been performed previously pursuant to the ES
     contract.   Moreover, it was recognized that invoices had
     been submitted to the State (which, in turn, were provided
     to EPA on December 4, 1986, and subsequently) labelled by
     the contractor as follows:
                                             i
          Yak Tunnel Phase I
          Yak Tunnel Phase II                \  •
          Yak/Colorado CERCLA Feasibility Study
          Yak/CSRCLA Litigation Support.     j
                                             i
                               28

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      The  first two  labels  (excluding the assessment of natural
      resource damages) clearly fall within the ambit of the
      Cooperative Agreement, as does the third.  As to the fourth
      label, please  note that Attachment C to tine Cooperative
      Agreement recites that:

          The invoices under Yak/Colorado C2RCLA
          Litigation Support cover the costs fpr
          preparing the draft Record of Decision,
          the Draft Remedial Action Plan and the
          soil survey.                        i

      Thus, although the term "litigation support" is sometimes
      used by the contractor in its invoices, the type of effort
      encompassed by this category should be apparent.  Litiga-
      tion support, as the  term was used by Engineering Science,
      referred to the generic category of costs pertaining to the
      draft Record of Decision, the draft Remedial Action Plan
      and the soils survey.  As such, "litigation" costs are
     properly reimbursed under the Cooperative

     Auditors Comments:
Agreement.
     Comments to Colorado response to Note 3a above also apply
     to the above Colorado response tc Note 3b'.
                              "               i

     c.   An audit of the Engineering Science {ES) costs has net
been performed by the State.

     Colorado Response;

     The auditor's comment is accurate.  However, as noted above,
     the situation dees not appear to warrant an audit.

     Auditors Comments;

     Based on the numerous questions related to a review of the
     ES invoices (Notes 3a through 3f) an audit of the ES costs
     are considered necessary before acceptance of the costs
     claliia.                                 1
         W                                  !
     d.   An adequate review of ES vouchers was not made (one
instance was noted of a 2nd tier invoice for 519,673 billed twice
by ES and paid twice bv the State).  Also see note 5b to Schedule
A.
     e.   Supporting invoices were missing for
2nd tier
subcontractor costs totaling 56,497.  These costs were incurred
for unallowable services and included in the 535,807 questioned
for that reason.  See Note 5b to Schedule A..
                               29

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     Colorado Resconse:
      David A. Savitz, M.D.
      Energy Resource Consultants
?   500.00
  5,996.55
     David A. Savitz, M.D., is a physician wh'o was engaged for
     consultation about the health effects ofj lead in soils and
     blood-lead  studies.  His services are properly reimbursable
     under the Cooperative Agreement.  A copy, of his invoice is
     not currently available but, undoubtedly, can be obtained.

     The subcontractor Energy Resource Consultants conducted
     work concerning natural resource damages.  Accordingly, no
     effort was  made to obtain a copy of the missing invoice and
     $5,997 will be deducted from the state's) claim.

     Auditor Response;

     Based on the additional information provided by the AGO the
     $500 related to David A. Savitz, M.D. isj considered
     acceptable.                             j

     f.   We were provided no evidence to show that the CAGO was
reviewing ES employee timesheets.  Our review! of ES employee
timesheets disclosed the following areas of concern:

          (1)  Time sheets indicate that on several occasions
hours were split between jobs.

          (2)  Some timesheets contained whiteouts or changes not
initialed by the employee.

          (3)  Hours were charged to this program with comments
in description column indicating effort applicable to another
program and vice-versa.                      I

          (4)  Overtime hours charged to this! Cooperative
Agreement with a credit to an overhead account.
                                             i
        •fcJS)  Travel and/or other expenses charged to Coopera-
tive Agrfifijanent does not agree with hours charged per time sheet.
                                             I
     Colorado Response:

     The effect  of the above-quoted observations of the auditors
     upon allocation of costs to the "accepted, "questioned" or
     "unresolved" categories is unclear,  it appears that the
     observations lead to an allocation of $967,468 contract
     costs to the "unresolved" category for the supposed lack of
     effective subcontract management.

     The conclusion of the auditors is extremely disproportionate

                               30

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to the scope of the situation observed.  Specific responses
to the auditors' observations are as follows:
                                        i
(1)  During the start up phase, the contractor began the
site investigation for the Yak Tunnel and Eagle Mine sites.
Split hours between the Yak case and the Eagle mine site
were not problematic to the AGO because both sites were in
a similar litigation time frame and were similar ir. nature
scope and location.  It was expected that the contractor
devote equal time to both cases.

(2)  This procedure was not required byjthe State at the
time of submission of timesheets.  It is not a uniform
requirement of contract management.

(3)  The State is without sufficient knowledge to respond
to this comment.
unintelligible.

Auditors Comments:
The auditors'  comment
is vague and
To clarify the CDH concern regarding Note f(4) above,
"Overtime hours charged to this Cooperative Agreement with
a credit to an overhead account."  This practice is used by
certain contractors to bill overtime hours direct to a
contract for salaried employees who are not eligible for
overtime pay.  The practice would be considered acceptable
provided that (1) it is the contractor's! normal policy,
(2) the policy is implemented on all contracts and
consistently followed, and (3) the reduced overhead rates
are used to develop bid rates used in the contractor's price
proposals.  The acceptability of ES accounting practice
relating to this issue should be determined during the audit
of the subcontract costs.               i
                          31

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                                                       Schedule A
                  Colorado Department of Health
        Final Audit Cooperative Agreement No.
V008496-010
Note 1.   (a)  Costs Questioned 55,299 - Department of Health
                                             i
     The accounting records maintained by the CDH during
performance of the subject agreement did not accumulate costs
(including direct labor costs) by contract.  As such the CDH
prepared a schedule showing hours by employee' charged to this
program.  The schedules included costs charged directly to the
program and employee "General" hours allocated to the program.
The hours were extended by the employee's pay! rate plus a fringe
benefit factor.  Based on our review of selected employee time
sheets and pay rates, we consider CDH labor costs of $70,090
acceptable and have questioned the differencej, $5,299, as
unsupported.  The amount questioned represents the costs
identified as "General" and allocated to this] program.  Since the
"General" labor hours were not actually distributed via an
accounting entry, we cannot be assured that the same "General"
hours could not or have not been used to support charges to other
programs.  They would also be unallowable since they were not
identified specifically to a site on employee timesheets as
required by the State Superfund Financial Management and
Recordkeeping Guidance.

     CDH Response:
     	                            I

     Disagree.  The practice at the time, prior to the issuance
     of the State Superfund Financial Management and Record-
     keeping Guidance, was to charge all salary.costs to the
     identified CERCLA account.  The account was established to
     record the expenditure of state funds on ]CERCLA activities.
     The expenses involved were incurred prior to the Cooperative
     Agreement.                               i

     Colorado filed seven CERCLA lawsuits in 1983.  At that time
     the practice was for the individuals who
were working on
     the CERCLA sites to charge their time either to a. specific
     sitejjlgfir- to a general activity, if the activity was general
     to a||lpseven CERCLA sites.  In preparation for the audit,
     the tiiiiesheets were reviewed and those hours specific to
     the Yak Tunnel were identified and applied to approximate
     payroll costs.  The general hours (non-si!te-specific, yet
     CERCLA activities) were accumulated from [time sheets and
     allocated to Yak Tunnel by applying a factor of seven
     (seven activity sites), then calculating Ithe appropriate
     payroll costs." The auditors are correct [that hours were
     not distributed by an accounting entry because the cost
     recovery was done after the fact.  Cost recovery would have
     been made directly against the PRPs if the Cooperative
     Agreement had net been signed.  Evidence of the allocation
                               32

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     of general hours cannot be presented because all sites have
     net been processed for cost recovery.  The state could
     produce a formal allocation at additional expense which
     has not been approved as a recoverable cost under the
     Cooperative Agreement.

     Auditor Comments:

     The CDH response did not include information or data that
     would give us a basis for changing our po'sirion.  As such
     the labor costs of 55,299 are still considered questioned
     for the reasons stated above.            I
Wildlife
          (b)  Costs Questioned - $47,903 - Department of
     The Colorado Department of Wildlife (DOW) does not account
for costs by program or by contract; hence, employees are not
required to maintain timesheets to identify time by contract.
The direct labor costs claimed by the DOW was ibased on an
analysis of timesheets, estimates based on employee travel
claims, and notes made on desk calendars.  Based on our review,
we accepted $30,665 and questioned $47,903 of the DOW direct
labor costs because of lack of supporting documentation.  The
accepted labor costs were based primarily on descriptions
included on employees "Daily Activity Report Narrative" supported
by employee timesheets and travel expense claims.  The Daily
Activity Report Narrative was used to identify!the work
performed, the travel report data was used to confirm that the
employee was in the Yak/tunnel location during!the period and the
timesheet was used to identify the hours worked for the period.

     DOW Response;

     Disagree.  Without specific information on which records
     were accepted and rejected, a response cannot be formu-
     lated.  In general, the Division disagrees because'of the
     nature of the costs claimed.  The EPA, tojestablish primacy
     oversale state, agreed to reimburse the state and requested
     an i^iatification of costs for the activities involved at
     YaJc iSlftnel.  The Division of Wildlife identified the
     associated costs from 1980 through 1987. JAll costs were
     incurred prior to the signing of the Cooperative Agreement
     on June 29, 1987.  The Department of Wildlife is a cash
     funded agency and it sought to replace expenditures taken
     from those cash funds.  The accounting system used
     accumulated costs by line time or program,; not project.
                                               i
     The activities were recorded in a structure that accommo-
     dates the many divisions, programs, and functions of DCW.
     At the time, CERCLA activities were not identified
     separately because no one foresaw the eventual agreement
                               34

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     with EPA and cost recovery.  The Division can reconstruct
     personal services by team  leaders for sampling activities,
     habitat analysis, etc.  The reconstruction will require
     additional administrative  expenses which have not been
     approved as a recoverable  cost under the Cooperative
     Agreement.  Such reconstruction should have been considered
     in the agreement rather than a blanket application of
     documentation requirements after the tacit.  Another example
     of the problem is the auditors' refusaljtc accept time
     sheets or time cards that  did not specifically identify Yak
     Tunnel but rather identified a task of 'JRepcrt Preparation
     for Work Done on the Arkansas River," when the only reason
     for the use of manpower was to sample th'e aquatic life in
     the river affected by the  Yak Tunnel.  The data was subse-
     quently used by the United States Environmental Protection
     Agency.  The state requests that the entjire disallowance of
     Wildlife's costs be revisited.

     Auditors Comments:

     Since no additional auditable information was provided our
     audit position has not changed.  The DCW is advised that
     supporting documentation if available should be provided
     to the Regional Administrator for their 'consideration.

          (c)  Costs Questioned - $4,998 - Geological Survey
                                             j
     The labor costs claimed by the Colorado Department of
Geological Survey {CGS) are for the services of a Supervisor
Geologist, Senior Geologist and the Director of the CGS.  Except
for the Director, the claimed hours are supported by tirte sheets.
The hourly labor rates used in the claim were
                                              based on a fee rate
                                                              the
schedule used by the CGS for billing purposes.  The amount
claimed for the Director's services is questioned because (1)
EPA State Superfund Financial Management and Recordkeeping
Guidance pamphlet states that Department Heads time should be
charged indirect and (2) the Director's time was not supported by
timesheets.  Mere notations on a desk calendar, provided as
support are not considered acceptable.  The billing fees used by
the CGS to bill for the labor costs were based on the average
salary pSes-fringe benefits of the labor category, adjusted by an
estimated;fjutilization factor, increased by an additional 25% for
indirect expense and divided by the estimated[available working
hours.  A review of the billing records revealed that the
calculated hourly fees were not used consistently by the CGS for
billing purposes.  As such the fee rates used
                                              are considered
unacceptable.  Acceptable rates were calculated based on the
employee's salary plus fringe benefits at the
exoended on the CA.
                                              time the effort was
     CGS labor costs questioned reflect the difference between
the application of the proposed rates and accepted rates to1the

                               35 '

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acceptable  labor hours  for the Supervisor Geologist and Senior
Geologist plus the total  labor costs claimed for the Director.

     CGS Response:

     Disagree.  Again,  the Cooperative Agreement was developed
     after  the costs were expended.  The Geologic Surgey has two
     billing methods:   a prospective federal rate which includes
     all .direct costs plus an indirect; and, a cash billing
     method established by statute for those revenues which come
     to the Division on a cash basis.  The costs were identified
     as a cash source because the monies did not come from US EPA
     directly but through a third party, the Colorado Department
     of Health.  In estimating the costs to be recovered, the
     agency relied upon the cash billing system.  The billing
     method includes a  factor for support costs but does not
     identify an indirect charge.  The billing of the Director's
     time was based on the fact that he worked specifically on
     the site as a geologist not a supervisor!

     The additional amounts" claimed were fringe benefit charges
     and support charges.  One could agree appropriately that
     the second fee is a practice of industry]  It is unfortu-
     nate, but the CGS did not have a detailed time and effort
     system in place at the time, and the reconstruction of past
     expenses had to come from calendars or other documents.
     The reconstruction is, nevertheless, reliable.

     Auditors 'Comments;

     As indicated above we take no exception tio the CGS time-
     keeping system - except for the Director whose time
     (according to the EPA State Superfund Financial Management
     and Recordkeeping Guidance pamphlet) should be charged
     indirect.  During the exit conference additional support
     was provided to document an acceptable indirect expense
     rate of 4.92% for the Co lor adc^. Department of Natural
     Resources (including the CGS).  The acceptable direct labor
     and fringe benefit costs were increased to reflect the
     acceptable indirect expense rates.  The questioned costs
     are t&us reduced from $5,215 to $4,998.
          (d)  Costs Questioned - $3,399 - Mined Land
               Reclamation Division
     The Colorado Mined Land Reclamation Division (MLR)
accounting records did not identify costs by contract nor did
they maintain employee time sheets identifying time charged by-
program or contract.  Therefore, the labor costs claimed by MLR
cannot be supported and have been questioned.
                               36

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     MLR Response;

     Disagree.

     At the time of the activities being performed by the Mined
     Land Reclamation  staff, the funding sources were state funds
     not federal funds.  Time sheets were not kept yet.  It is
     apparent that work was performed as evidenced by the reports
     generated.  The staff involved kept track of time spent on
     their daily log books. 'The practice has not been challenged
     by the U.S. Bureau of Land Management in the various grants
     they have awarded to Colorado.  The time involved could be
     reconstructed at an additional administrative expense but
     such an expense has not been approved as a recoverable cost
     under the Cooperative Agreement.
     Auditors Comments:

     No comments applicable based on the MLF response.
                                             i
Note 2.   Fringe Benefits - Costs Questioned

     The fringe benefit costs questioned of $lll,061 represent the
difference between the amount claimed and the1 amount accepted
based on the application of the proposed and accepted fringe
benefit rates to the accepted direct labor costs.

     Colorado Response;                      i

     The finding is reliant upon the determination of any direct
     salary cost disallowance.  With the direct salary disagree-
     ments, no response can be formulated.

     Auditors Comments;  No additional comments.

Note 3.   Travel - Costs Questioned
                                             i
     Of the $11,913 travel costs claimed by CDW, $10,425 has been
questioned..  The amount questioned represented travel costs that
have beettflcJlaimed based on estimates and inadequate
document!
on.
     State Resocnse:
            ;CDW)
     Disagree.

     The travel costs claimed represent those costs to transport
     both full time and temporary employees to and from the site
     (Denver to Leadville to Denver).  The state agrees that the
     records could be maintained in a better fashion but the
     claims are nevertheless reasonable and appropriate.  The
     auditors could have recommended appropriately that unless
                               37

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     additional documents or affidavits are produced the cost
     should be challenged.  The state objectsjto the disallow-
     ance without additional effort tc reconstruct the costs.

     Auditor Comments;

     The CDW comments dc not provide a basis for a change in cur
     audit position.  We do not object to the state reconstruct-
     ing the costs.  Any additional data or supporting informa-
     tion available may be provided to the Regional Administrator
     during final negotiation of allowable costs under this CA.

Note 4.   Supplies - Costs Questioned
                                              i
     Supply costs of $2,400 claimed by the CDW have been
questioned because the documentation provided did not identify
the costs as applicable to the subject Cooperative Agreement.

     CDW Response;

     Division of Wildlife disagrees with the questioned costs.
     The supplies used were for laboratory sampling which was a
     prorated estimate of expenses.  The expenses could not be
     allocated to a non-existent account.  Aga'in, the Coopera-
     tive Agreement was signed after the expenses were incurred
     and the State believes a reasonable cost was assigned.
                                              i
     Auditors Comments:

     The CDW comments dc not provide a basis for a change in our
     audit position.                          [

Note 5.   Contracts - Costs Questioned - $130,800
                                              I
     Contract costs of $1,098,268 were included in the costs
claimed under the subject Cooperative Agreement.  These costs
were incurred under a contract awarded by the State of Colorado
to Engineering Sciences Corporation.  For morejinformation
regarding^Jthis contract, please see Note 3 to Exhibit A.
     The contract costs questioned in our draft report was
$171,285.  The amount questioned was subsequently reduced to
$130,000 because Colorado as explained in note (b) below was able
to adequately support $40,485 that had been previously
questioned.  (Please see Note 3 tc Exhibit A regarding the
remaining $926,983 of contract costs).
                               38

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          Contract Costs Questioned

          Direct Labor
          Subcontracts (2nd tier)
          Management Fee
          Paid vs.'Claimed Costs
                    Total
                    $ 26,!666  (a)
                      64,|995  (b)
                      32,956  (c)
                       6,3.83  (d)
                    $130,800
     (a)  Direct labor costs questioned includes $25,613 incurred
by Engineering Sciences for purposes specifically unallowable per
terms of the Cooperative Agreement and SI,053-related tc
Engineering Science's use of a billing rate in excess cf the
contractually agreed to rate.

     Special condition b.4 of tne subject Cooperative Agreement
states that "No funds shall be spent under this Cooperative
Agreement solely to assess the extent of injury to the State's
natural resources, nor for litigation and/or enforcement
purposes".  The $25,613 questioned reflect charges to specific:
tasks established by Engineering Sciences to perform certain
unallowable functions or represents "litigation effort" incurred
by Engineering Science employees as noted on the employee's
timesheets.  The schedule below lists Engineering Science task
numbers for apparent unallowable functions and related labor
costs questioned.
              ES
          Task No.
 Task Descriotion
          56094.03
          56095.03
          56095.04
          56095.05
             Total
     Eng. Science Employees
     time sheet charges to
     Litigation effort
Litigation & Consultation
Subcontractor Phase 2
Subcontractor Phase 2
Litigation Consultation
  Amount
Questioned

 $14,223
     165
     696
   5,081
 $20,165
                                5,448
                                                  $25,613
         *»	J.
     Coloijwo Response;

     Attachment C to the Cooperative Agreement recites that The
     invoices under Yak/Colorado CERCLA Litigation Support cover
     the costs of preparing the draft Record cf Decision, the
     Draft Remedial Action Plan and the soils"survey,

     Thus, although the term "litigation support" is used by the
     contractor in its invoices, the type of effort encompassed
     by this category should be apparent:.  Litigation support,
     as the term was used by Engineering Science, referred to the
     generic category cf costs pertaining to the draft Record of
                               39

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      Decision,  the draft Remedial Action  Plan and the  soils
      survey.                                    I

      The  following charges to the listed  Task Nos.  (Project Ncs.)
      was  questioned  by  the auditors.   (See Exhibit  12  attached
      hereto).   The designated Task Nos.,  identifying labels, and
      questioned amounts are  listed below, together  with an

      annotation describing the AGO's position regarding each
      entry.  A  discussion of each entry follows I the table.
 2300.00
56094.03  Litigation Consultation
56095.03  Subcontractor Phase II
56095.04  Subcontractor Phase I
56095.05  Litigation Consultation
66352.00  Colorado Yak
          CERCLA Litigation
66352.01  Project Management
66352.02  Response to
          Interrogatories
66352.10  Leadville Soil
          Sampling
66352.15  Support for RAP
          and ROD
66353.00  Colorado Yak
          C2RCLA Feas. Study
66353.05  Pro ject Management
66353.90  Combination of
          Alternatives
          TOTALS
     Arr.-.unt
 Questioned
by Auditors

 S   135.00
  14,223.50
     165.00
     696.00
   5,081.00
   1,011.50

   2,910.50
      42.00

   1,035.00

     225.00

      30.00

      37.50

      21.00
 $25,613.00
                                                Questionable  Acceptable
                                                     per AGO     per AGO
$ 135.00
   42.00
          $14,223.50
              165.00
            •'• 696.00
            5,081.00
            1,011.50

            2,910.50
            1,035.00

              225.00

               30.00

               37.50

	       21.00
$ 177.00  $25,436.00
     Discussion;
           •i..:.
     The AQ/jfcis unable to identify project code 2300.00.
     Accordingly, no objection to the auditors' allocation of
     $135.00 to the "questionable" category is raised.

     Although Codes 56094.03 ($14,223.50), 56095J.05 ($5,081.00),
     and 66352.00 ($1,011.50) pertain to. "litigation consulta-
     tion," the term was used broadly to refer to activities not
     otherwise classified; use of the term does hot necessarily
     support a litigation effort in the classic sense of the
     word.  See Attachment C to the Cooperative Agreement.
                                                t
     In addition, the auditors have also eliminated the costs
     pertaining to Phase I and Phase II, work codes, 56095.04
                               40

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      ($696.00) and 56095.03  ($165.00).  This set aside was
      apparently made based upon the auditors' understanding that
      the phases pertained to the assessment of natural resource
      damages or litigation.  There is nothingi upon which to base
      such a conclusion.  Those costs should be allowed.
                                             j
      The auditors disallowed costs for project management
      ($2,910.50 and $37.50), Leadville soil sampling  ($1,035.00),
      support for Remedial Action Plan and Record of Decision
      ($225.00), the Feasibility Study ($30.000, and a combination
      of remedial alternatives  ($21.00).  These activities were'
      clearly embraced by the Cooperative Agreement and should be
      allowed.

      Finally, the auditors have disallowed the contractors' costs
      incurred in responding to interrogatories.  While the AGO
      believes that the very technical nature of the interroga-
      tories would qualify the contractor's costs for payment
      under the Cooperative Agreement, it is conceded that the '
      effort could qualify as a litigation effort.  Accordingly,
      no objection.is raised as to the allocation of $42.00 (from
      Code 66352.02) to the "questionable" category.

     Auditors Comments:

     As noted previously the $25,613.00 costs questioned
     primarily reflect charges to specific tasks established by
      Engineering Sciences to perform litigation consultation
      functions - based on the task description the costs were
      considered unallowable.  Additional costs were questioned
      related to litigation effort incurred byJES employees as
     noted on the employees' timesheets.  Based on the Colorado
     Response only $177.00 of the $25,613.00 questioned pertain
     to unallowable activities.

     The Colorado response indicated that the "litigation
consultation term was used broadly to refer to activities not
otherwise classified; use of the term does nod. necessarily
support a:,,3.itigation effort in the classic sense of the word."
In our opjjoion, the Colorado response does not: provide specific
information' to change our audit position.  Where the expense was
originally identified as litigation effort it is now up to the
State to provide "specific" information to assure that it is not
litigation efffort.                           i

     Engineering Science's proposal, in response to the State cf
Colorado RF? quoted a rate of $72 per hour for the Principal
Investigator.  The contract specified that Exh'ibit E of the
subcontract was the Project Rate Sheet.  Exhib'it E shows the
Principal Investigator (PI) Rate to be $72 per hour.  The $75 per
hour  rate,used by Engineering Science for billing was included en
Exhibit F of the Subcontract.
                               41

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     It appears that the $72 hourly rate had been the agreed to
rate and we have questioned the difference (5,1/053) in labor
costs claimed.

     Colorado Response;

     As stated in paragraph 10 of the ES contract dated
     February 22, 1985, the S72/hr rate for the principal
     investigator was effective until December 31, 1985.  After
     that time, the hourly rate was $75.  Thus, 215 hours billed
     to Voucher Ncs. 56094.01, .02, .03, .04 and 56095.01, .02,
     .03 were overbilled by an hourly amount of $3.  Therefore
     $645 is "questionable" but the balance o'f $408 should be
     returned to the acceptable category.

     Auditors Comments;                      J
                                             I
     The Colorado response referred to on April 7, 1986 letter
     to support their contention that the rate was increased
     effective January 1, 1986.  A review of the referenced
     letter revealed that the rate change was]applicable to the
     Eagle Mine segment of the CA and did not|mention the Yak.
     Tunnel/California Gulch segment of the CA.  As such our
     position is unchanged on the $1,053 costs questioned due
     to rate differential.

     (fa)  In our draft report: we questioned (subcontract - 2nd
tier) costs of $105,480 which included $85,807 charged to
specific tasks established by Engineering Sciences to perform
apparent unallowable functions identified in Special condition
b.4 of the subject Cooperative Agreement.  (See comments above
related to this matter.)  In addition $19,673[was questioned as
duplicated costs.  The subcontract cost was billed twice by ES
and paid twice by the AGO.                   j

     A list of unallowable subcontract costs questioned related
to Engineering Science task numbers follows:
            ineering Science
               er      Task Descriction
                                      Subcontract
                                          Costs
                                      Questioned
56095.03    Litigation Description
56095.04    Subcontractor Phase 2
66352.02    Response to Interrogations
66353.41    Yak/Plug Evaluation
66353.42    Water Treatability
56094.06    ECON. ERG

               Total
                               42
                                               $ 37,899
                                                 21,056
                                                  3,736
                                                 10,291
                                                  6,328
                                                  6,497

                                               $ 85,807

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     Auditors Comments:
                                             i
     Colorado agreed with the $19,673 questioned as duplicated
     costs and with $45,322 of the $85,807 questioned as
     applicable to apparent unallowable functions.  They
     provided additional documentation (copies of vendors'
     invoices) to support the possible acceptability of the
     remaining 540,485  ($85,807 - $45,322).  I We have adjusted
     the costs questioned to reflect $64 ,995 | ( $19 , 673 +
     $45,322) in accordance with our revised position of
     subcontract (2nd tier) costs questioned.;  The difference
     is j-.ncluded in the cost questioned - unsupported category
     pending results of audit of the ES costs'.

     (c)  The Engineering Science costs claimed include $32,956
identified as a Management Fee.  This amount represents
Engineering Science's application of a 10 percent factor to 2nd
tier Subcontract costs and certain ODC costs.  We questioned
these costs as unallowable pending a review of Engineering
Science's records to assure that a separate pool has been
established to collect subcontract administration expenses and
that the accounting records support a 10 percent factor.
                                             i
     Colorado Response;                      i

     Based on a letter from Mr. Udin (ES)  thej 10 percent factor
     is considered a standard practice for consultants in the
     environmental engineering field.  Also 40 C.F.R. 33.235(c)
     states:  where the recipient receives two or more bids,
     profit included in a formally advertised; competitively bid,
     fixed price sub-agreement shall be considered reasonable.

     Auditor Comments;

     Exhibits to the original contractual document between the
     State of Colorado and ES refer to the 10% additive factor
     as a "Management cost for prime contractor, Engineering
     Science and as a Management Fee.  In either case, it appears
     to fei^a factor to recoup costs of managing subcontract
     effSppL  If this is the case, ES should be able to provide
     cos<|fddcuinentation to support this factor.  We have not
     changed our position on this matter.   Ifja further review
     indicates the 10% factor is acceptable, it must be applied
     to the total disallowed subcontract costs to calculate
     management fee costs questioned.

     (d)  The $6,183 questioned represents the difference between
subcontract costs claimed of $1,098,263 and subcontract costs
paid, $1,092,085.
paid.
                   Acceptable costs are limited to the amount
                               43

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     Colorado Re spon s e;

     This assessment appears to be accurate.
     accordingly, reduced by $6,183.00.

Note 6.   IndirectCosts - Costs Questioned
The claim is,
     The questioned indirect costs represent the difference
between the indirect costs proposed by the CDH, CDW and the MLR,
and the indirect costs considered acceptable for these
departments based on our review.  The indirect costs considered
acceptable, by Department, were calculated by|applying the
acceptable indirect expense rate approved by the cognizant
Government Agency for that Department to the accepted base costs

     State Response;

     Disagree.  Any indirect costs are of course subject to the
     amount of disallowance of direct expenses.  All indirects"
     are in accordance with cognizant federal•agency approvals.
                                             i
     Auditors Comments;

     The State response indicates agreement with the method used
     to calculate questioned indirect costs -
     the direct costs questioned.
but disagrees with
                               44

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                    SIGNIFICANT REPORT WRITE-UP
    COSTS CLAIMED BY SUPERFUND COOPERATIVE AGREEMENT RECIPIENT
                         ARE QUESTIONABLE
 Problem
 $1,189,437 of the $1,335,292 claimed  by  the Colorado  State
 Department of Health (CDH)  under a  Superfund  cooperative
 agreement associated with the California Gulch  site located near
 Leadville, Colorado was  ineligible  or inadequately supported.

 We  Found That

 EPA awarded a cooperative agreement to the CDH  for the
 preparation of a  risk assessment and  to  evaluate remedial
 alternatives relating to the California  Gulcn Superfund site.  We
 questioned $1,189,437 of the $1,335,292  claimed by CDH for this
 effort:

    $221,969 was for ineligible labor,  fringe benefits, overhead,
 travel,  and supplies claimed by various  Colorado State
 Departments which was not supported by adequate documentation and
 subagreement costs for unallowable  services, unallowable
 surcharges,  and amounts  not actually  paid to the subcontractor.

    $967,468 was for subagreement costs that we  considered
 unsupported due to deficiencies in  the manner in which the
 subagreement services were  procured and  because the subagreement
 costs had not been audited  by CDH.           i

 We  also  reported  deficiencies in the  accounting and procurement
 systems  used by CDH and  other Colorado State iDepartments in the
 administration of the cooperative agreement, j Further, we noted
 that CDH had not  adhered to some special conditions of .the
 cooperative agreement.

 When we  presented the results of our  audit to CDH, they argued
 that performance  under the  cooperative agreement was not subject
 to  audit.   CDH's  opinion is that the  work performed was a
 "purchase"  of data,  analyses,  and work of experts that was
 substantially complete before the cooperative agreement was
 awarded..                                    I
The Regional Administrator, Region 8:

   Disallow $221,969 of ineligible cooperative agreement costs.

   Find $967,468 of subagreement costs claimed under the
cooperative agreement unallowable until CDH makes an audit of the
costs.  Upon completion of the audit, a final
the allowability of the costs should be made.
determination on

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   Require CDH and other Colorado State Departments to correct
deficiencies in their accounting and procurement systems before
additional cooperative agreements are awarded.  CDH's self-
certification of its procurement system should also be revoked.
                                            i
In resolving the issues presented in this audit, we also alerted
the Regional Administrator to the likelihood that he would have
to address CDH's arguments about their work being a "purchase"
and not subject to audit.                   I

What Action Was Taken

The audit report no. P5cG*8-08-0117-9100484 was issued to the
Regional Administrator, Region 8 on September 21, 1989.  A
response to the audit report is due on December 20, 1989.
Congressional or Press Interest

We are not aware of any specific interest in
this report by
either Congress or the press.  However, since the cooperative
agreement costs questioned may be subject to greater challenge in
any cost recovery effort, it is possible that the press may draw
attention to the impact of the audit issues reported on the
Superfund program.

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 (i)  Audit  Report  Tid.e
-(?)  Audit  Report  Nunber
 (4)  AIC    --'—... _
 (6)  Signatory Official
 (7)  Staff  Days Used:   ~
     Less Trainee  Time:
                                                      (3)  Issue Dace 	
                                                      (5)  Supervisor   ;;t^)~
                                                      (8)  Cost of Audit a z~, -, ~ •„
      less GRID Computer -Credit:
      Total Staff Days:  	
                                                     / / INTERNAL
                                                         / /
                                                              National
                                                         /~| Pilot
                                                         fj

                                                         / /
                                                              Follow-on

                                                              Sinale Location
 (9)  Type of Audit:

      P7 EXTERNAL
           	S
          ///  Request by SPA staff

          /~7  Hotline complaint

          /~7  Request by U.S. Attorney

          /~  Conqressional request

          fj  Initiated by OIG

          /~7  Interim audit

          /~7  Followup work

          /7  Other (identify)

(10)  Other Audit Results:

          fj  Referrals to DIGI

          /~7  Referrals for additional external audits

          /~7  Suggestions for annual audit plan (internal)

               Deficiencies in EPA performance/prograns also reported  to orooran
                officials (for external audits only)          j

          /~7  ReccranEndations to program staff for administrative actions  and/or
                      actions against program participants
                                                              Other (identify)
         LJ  OHT( identify)

Reasons for Delay (Be as specific as possible as to reasons and period of time.)

  Assigned	

  Started
  Draft Report  ^^
  Final Report  •-••
  Elapsed Time   1

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