UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
SOLID WASTE AND EMERGENCY RESPONSE
OSWER Directive 9375.5-04
FEE ) 2 ig
MEMORANDUM:
SUBJECT
FROM:
TO:
Involvement of Superfund Program Managers in Euperfund
Response Agreement Audits
Henry L. Longest II, Director
Office of Emergency and Remedial Res
Director, Waste Management Division
Regions I, IV, V, VII, VIII
Director, Emergency and Remedial Response Division
Region II
Director, Hazardous Waste Management Division
Regions III, VI
Director, Toxic and Waste Management Division
Region IX
Director, Hazardous Waste Division
Region X
Purpose
This directive provides general information to Superfund
program managers about the audit process. Although the material
pertains primarily to audits of Cooperative Agreements, it may be
applied to audits of Superfund State Contracts (SSCs) as well.
This is a reference document, not an audit guide. Although the
responsibility for responding to an audit may not rest with
Superfund program managers, all of us must anticipate this
scrutiny and involvement in the process. An audit is not to be
considered a fault-finding mission, but rather, a good business
practice that often brings positive change.
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9375.5-04
Background
In signing a Superfund Cooperative Agreement, the recipient
gives the Environmental Protection Agency (EPA) the right to audit
that Agreement, pursuant to the Inspector General Act of 1978, as
amended (5 U.S.C. App.3) and Section lll(k) of the Comprehensive
Environmental Response, Compensation, and Liability Act, (CERCLA),
as amended (42 U.S.C. 9611(k)). EPA may audit any type of
Superfund Cooperative Agreement2 or SSC while it is in effect, or
may conduct an audit at the completion of federally funded
activities.
The general objectives of an audit are twofold. The first is
to determine whether costs claimed under the Agreement by the
recipient are allowable (i.e., eligible, reasonable, necessary,
allocable to the project, and consistent with applicable Federal
cost principles) under the terms and conditions of the Superfund
Response Agreement, (including all applicable EPA and Federal
regulations and directives).
The second is to determine whether controls exercised by the
recipient through its financial and project management,
accounting, procurement, and property management systems are
adequate to ensure that costs meet these criteria.
Objective
The objective of this directive is to provide Superfund
program managers with a summary of the types of audits and an
overview of the audit process. The following steps outline this
process:
o Schedule for the audit and preliminary activities
o Performance of the audit
o Resolution of audit findings and follow-up actions
o Implementation of corrective actions.
1. The term "recipient" includes States, political subdivisions
thereof, and federally recognized Indian Tribes in either a
lead or support agency role.
2. This includes pre-remedial, removal, enforcement, single-
site, multi-site, and Core Program Cooperative Agreements.
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9375.5-04
This is one in a series of directives to carry the number
9375.5, which are guidance relating to State, political
subdivisions, and federally recognized Indian Tribal involvement in
the Superfund program. We recommend setting aside a special
binder for the directives in this 9375.5 series. Indexing and
keywording will be done under the Office of Solid Waste and
Emergency Response (OSWER) Directives System.
Implementation
This directive provides a detailed outline of the audit
process. Program managers are encouraged to refer to the guidance
referenced throughout this directive. Additional information on
audits can be obtained from the Divisional Inspector General for
Audits (DIGA) covering your Region or the Headquarters' Office of
the Assistant Inspector General for Audits (OAIGA) at FTS or (202)
382-4106.
A. THE AUDIT REVIEW
EPA may conduct an audit prior to the award of a Superfund
Response Agreement, at any time during the period of performance
of the Agreement, or as part of the close-out activities. The
OIAGA makes initial contact with the recipient and the audit is
usually performed in the recipient's office and includes a thorough
review of: the recipient's accounting, procurement, and property
management systems; all costs incurred on a project; and
compliance with the terms and conditions of the Response
Agreement. Exhibit 1 presents several scenarios that can prompt
an audit.
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EXHIBIT 1
Potential Reasons for Conducting an Audit of
Superfund Response Agreements
Before an award is made, to ensure that the recipient can
implement the terms and conditions of the response agreement
Six months to one year after the award of a Cooperative Agreement
to ensure that the recipient is appropriately segregating and accounting for
costs on a site-specific basis
Instances where the recipient has an interest in significantly
expanding its involvement in the Superfund program or has
requested a major amendment to an existing project
At the request of the recipient to resolve potentially questionable
cost issues, or to ensure that appropriate corrective actions
will be undertaken early in project implementation
High staff or management turnover
Previous audits of the recipient have indicated significant
management problems
Indications or allegations of fraud, waste, or mismanagement
Quarterly reports and other deliverables are not received
on time or reports indicate problem areas
Disbursements do not accurately reflect project progress
Requests for verification of CERCLA, as amended, Section 104(c)(5)
credits
Non-compliance or inattention to the requirements of Quality
Assurance/Quality Control Plans, Site Safety Plans,
contractor oversight, Community Relations Plans, or to the
other provisions of the Response Agreement
At the conclusion of one activity, such as a remedial
investigation/feasibility study, at a site
At the close out of a Response Agreement.
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B- Types of Audits
The four categories of audits are discussed below:
1. Pre-Award Audits
Pre-award audits may be conducted by the OAIGA at their
discretion or at the request of a State, political subdivision, or
Indian Tribe. The purpose of a pre-award audit is to assess the
capabilities of a party that is entering into a Superfund
Cooperative Agreement for the first time, or that is taking the
lead role in a response activity for which it has not had previous
lead responsibility. The intent of these audits is to review a
wide range of program-related issues and to identify program needs
in addressing this new responsibility before problems arise. These
reviews are not routine; however, as more States, political
subdivisions, and Indian Tribes become involved in Superfund
response, the number of pre-award audits is likely to increase.
2. Interim Audits
An interim audit may be conducted during any phase of an on-
going project to determine whether the costs charged to EPA under
the Superfund Cooperative Agreement are allowable and whether the
recipient is complying with the terms and conditions of the
Agreement. EPA may schedule interim audits when an Agreement
covers a particularly complex project or when problems,
inaccuracies, discrepancies, or other complications with
administration occur. The interim audit is used as a corrective
tool. Therefore, when improvements are needed, the interim audit
final report will contain recommendations for corrective actions
that EPA and/or the recipient should take to avoid future
problems.
3. Final Audits
Final audits may be conducted when Superfund Response
Agreements are terminated or closed out, when activities are
completed, or when projects within a multi-site Cooperative
Agreement (MSCA) are concluded. Final audit of a Superfund
Cooperative Agreement may be scheduled upon submission of the
final Financial Status Report (SF-269) at the conclusion of the
activity.
Final audits are performed to determine whether costs charged
by the recipient to EPA under the Superfund Cooperative Agreement
were allowable and to verify that any remaining funds have been
deobligated or, in the case of an MSCA, have been transferred to
another site and/or activity. In addition, the final audit is
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9375.5-04
performed to ensure that the project(s) completed under the
Cooperative Agreement meet all agreed-upon terms and conditions,
and that the desired results have been achieved.
4. Other Audits
In contrast to financial audits, which evaluate management of
Superfund Cooperative Agreements by entities outside EPA, the
OAIGA also conducts performance audits of EPA management
practices. Performance audits may address Regional management
oversight of not only Superfund Cooperative Agreements, but also
SSCs, and the supporting management processes/systems that deal
with Superfund obligations and outlays. Although auditors may
perform some work at support-agency offices during performance
audits, the focus is on the EPA Regional office.
In addition, audits of State and local governmental units are
required as recipients of Federal assistance awards in accordance
with the Single Audit Act (Public Law 98-502) and OMB Circular
A-128. These require an auditor to report on: 1) the financial
statements of the government, department, agency, or establish-
ment; 2) internal accounting and other control systems used in
administering Federal financial assistance programs; and 3)
compliance with the applicable laws and regulations.
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B.
THE AUDIT PROCESS
Audits are the responsibility of the OAIGA within the EPA
Office of the Inspector General (OIG). The four step audit
process is outlined in Exhibit 2 below. You may find it useful
to obtain and review the "Audit Handbook for EPA Managers" from
the Director, Resource Systems Management Division, at FTS or
(202) 382-4425.
EXHIBIT 2
The Four-Step Audit Process
Resolve
Audit Findings
Schedule the
Audit
Implement
Corrective
Action
Conduct
The
Audit
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The Four-Step Audit Process
The audit process outlined in this guidance pertains to
OAIGA audits of Superfund Cooperative Agreements and is
applicable to SSCs. This guidance does not describe the single
audit process. For further information on the single audit
process and the Single Audit Act of 1984, see OMB Circular A-128.
Although these audits are different and separate, similar
information, i.e., compliance with Federal law and regulations,
may be required as both part of the EPA's OAIGA audit process and
the single audit process. The OAIGA, however, is responsible for
monitoring the adequacy of audit findings conducted under the
Single Audit Act. This process is discussed below:
1. Scheduling the Audit and Preliminary Activities
The OAIGA schedules an audit on its own initiative, at the
Superfund program's request, or at the recipient's request. The
DIGAs deal directly with recipients and Regional staff to
schedule the audit, resolve any questions or problems, and
provide advice, as necessary. Actual audit work may be performed
by employees of the OAIGA, or by an independent public accounting
firm under contract to EPA to perform audits.
The EPA Regional personnel should be prepared to provide
relevant background information on the administration and
implementation of the Superfund Cooperative Agreement by the
recipient, and the status of funded projects and reports required
in a Cooperative Agreement and/or SSC. Specifically, the
auditors will want to review:
o The Cooperative Agreement/project files, including all
applications and amendments
o The SSC files, if applicable
o Correspondence or memoranda concerning problem areas
o Quarterly and final reports for the Superfund Response
Agreement, as required in 40 CFR Part 35 Subpart 0
o Documentation of Agreements, amendments, and supporting
documents (i.e., letters, memoranda, minutes of
meetings, and logs of telephone conversations).
Before the audit begins, the recipient should ensure that
all records pertaining to the Superfund Cooperative Agreement
and/or SSC are up-to-date and accessible including:
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o Accounting books and records covering the receipt and
disbursement of funds; time and attendance records;
travel; other project costs such as equipment and
training; and cost share, as applicable
o Bank account records and cancelled checks
o Copies of quarterly and technical progress reports, as
well as any other documents specified by the Cooperative
Agreement or SSC
o A list of all equipment and supplies purchased for the
Superfund project and, for final audits, a copy of the
property inventory report and disposition of the property
o Copies of Financial Status Reports (SF-269)
o Copies of Federal Cash Transaction Reports (SF-272)
o Procurement documents including contract files, payment
and receiving documents, and memoranda of contract
negotiations
o Copies of cost-share payment documents for SSC
reconciliation of response costs
o Correspondence relating to activities conducted under the
Superfund Response Agreement
o A list of key personnel working on the project and their
functional responsibilities.
2. Procedures for the Audit
Once the audit has been scheduled and background information
obtained from the Region, audit work can begin in the field or
recipient's office.
a. Entrance Conference
Before beginning work in the recipient's office, the
auditors will hold separate entrance conferences with recipient
and Regional personnel to introduce the audit team, explain the
scope and nature of the audit, and obtain any suggestions on the
audit emphasis. Additional topics to be covered include: the
schedule for completing the audit, provisions for accessing
records and project information, and the audit team's space and
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9375.5-04
equipment requirements. The auditors will also conduct an
in-depth interview with both the recipient and EPA technical
project managers to obtain relevant background and status
information.
b. Standardized Audit Tasks
Although audits differ depending on their scope and purpose,
and on the complexity of the activities funded, the auditors will
perform generally standardized tasks. These include the
following:
o Determine whether the recipient is complying with the
provisions of the Superfund Response Agreement
o Evaluate the recipient's system for accounting for site-
specific costs and ability to document these costs
o Evaluate non-contractual costs incurred and reported
o Evaluate costs incurred and reported by the recipient for
contractual services
o Determine whether the controls being used to ensure the
appropriateness of contractor performance and billing are
adequate
o Determine whether contracts are being awarded in compliance
with applicable EPA procurement procedures
o Determine whether letter of credit drawdowns are being
handled in accordance with Federal requirements
o Determine whether SSC cost-share payments are being sent to
EPA, per the terms of the Agreement
o Determine whether the recipient is complying with EPA
property management requirements, including the special
requirements of CERCLA for equipment
o Determine whether all required financial and technical
reports are being completed and submitted in a timely
manner.
Some audits may also include major program performance
aspects, such as engineering/scientific review of work products.
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c. Draft Audit Report
The results of the auditors' field work are summarized for
recipient and program comment in a draft audit report prepared
and issued by the OAIGA. This draft report states the purpose
and scope of the audit and presents a preliminary description of
the audit team's findings.
An audit finding is defined as a written explanation of an
audited area, including proposed recommendations, and may concern
non-monetary and/or monetary recommendations. Non-monetary
recommendations are an explanation of any changes needed to: 1)
improve the economy, efficiency, or effectiveness of operations
and procedures, or 2) achieve compliance with applicable laws,
regulations, guidance, or special terms and conditions contained
in the Superfund Response Agreement. Monetary recommendations
concern costs incurred by the recipient in the performance of the
Agreement/project, and fall into the following categories:
o Accepted costs: are claimed costs that the auditors have
concluded are allowable under the terms and conditions of
the Agreement or applicable law, regulation, policy, or cost
principles, and were properly charged to the Cooperative
Agreement
o Questioned costs: are claimed costs that the auditors have
concluded should not be allowed because the costs are:
1. Ineligible — a cost claimed which is in violation of a
provision of a law, regulation, contract, Cooperative
Agreement, or other agreement or document governing the
expenditure of funds; or
2. Unsupported — a cost claimed which, at the time of the
audit, is not supported by adequate documentation and/or has
not been approved by responsible program officials; or
3. Unnecessary/unreasonable — a cost claimed for an
expenditure of funds which, at the time of the audit, was
not found to be necessary or reasonable.
The recipient and the EPA Action Official (i.e., the
Regional person designated to resolve the audit) will receive
copies of the draft audit report for comment, unless findings are
immaterial or confidential. Confidential findings within the
report are those that relate to confidential investigative
matters or confidential business information. If significant
policy or programmatic issues are raised in the draft report, a
copy usually is forwarded to the Office of the Assistant
Administrator for Solid Waste and Emergency Response.
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Draft audit findings are tentative and subject to change.
Consequently, the draft audit report should not be released. Any
public requests for draft audit reports should be forwarded to
the OIG for response.
The recipient and EPA are strongly encouraged to provide
comments on the draft audit report within the time frame
specified in the transmittal (usually 30 days from distribution).
If an extension is needed, it may be requested by the Action
Official. Extensions of up to 30 days are usually approved.
Comments on the draft report are considered an important part of
the resolution process since the time period for resolution of
the final report is less flexible.
d. Exit Conference
EPA's audit process is designed to ensure that the recipient
has an adequate opportunity to provide input into the decision-
making process. Auditors provide preliminary findings as the
audit progresses and may hold informal meetings to discuss these
findings. A formal exit conference will be held either at the
completion of audit field work, before issuance of the final
audit report, or after comments on the draft audit report are
received. Meetings may occur separately with recipient and
Regional staff members. As a result of the exit conference,
auditors may request recipient or Regional staff members to make
additional written comments on the draft audit report, which
should be submitted promptly within the specified time frame.
e. Final Audit Report
A final audit report takes into consideration written
comments that were received on the draft audit report, the exit
conference, and documented follow-up actions. This report is
used by the Action Official to make a final determination on
audit disposition.
The final report will be sent to the responsible Action
Official, who must forward a" copy of this report to the
recipient. Potentially controversial findings are normally
highlighted in the transmittal memorandum. At this point, the
OAIGA or Action Official may respond to public requests for final
audit reports in accordance with the Freedom of Information Act
and implementing regulations.
During an audit of a Cooperative Agreement and/or SSC, EPA
oversight and administration may also be evaluated. The OAIGA
will address these findings and recommendations on EPA
deficiencies in a separate report or letter to the responsible
EPA official.
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3. Resolution of Audit Findings and Follow-up Actions
The final audit report provides advice to the Action
Official who can reject or sustain the OAIGA's findings. The
Action Official's determination is reported to the recipient in a
letter. The final determination letter specifies what corrective
actions are required of the State, political subdivision, or
Indian Tribe and the total of allowed and disallowed costs.
a. Resolution of Audit Findings
For each audit, the Action Official will set forth any
initial determinations, ask the recipient for any rebuttal,
evaluate information received, and secure necessary internal
review and concurrences. For questioned costs below $100,000,
the final determination letter must be issued to the recipient
within 150 days of the final audit report date. If questioned
costs are at least $100,000, the Action Official must provide the
DIGA with a copy of the proposed final determination on the
findings within 90 days of the final audit report date. Within
15 days of this transmittal, the DIGA will notify the Action
Official of his agreement provided: 1) the proposed final
determination agrees with the findings and recommendations in the
audit report, or 2) the DIGA accepts the reasons why the
determination differs from the audit report, or 3) the DIGA deems
the differences to be insignificant.
If the DIGA does not accept the Action Official's position,
he will attempt to resolve the differences within 15 days; if
these attempts are unsuccessful, the DIGA will notify the OAIGA
of the disagreement and advise the Action Official. If the
Federal share of questioned costs in the final audit report
totals at least $100,000, the Action Official cannot issue a
final determination until differences with the OAIGA are
resolved.
Once the matter has been referred to the OAIGA, the OAIGA
has 45 days to resolve the issue with the help of the DIGA, the
Action Official, and the affected EPA Headquarters officials. At
the end of that time, the OAIGA must either accept the Action
Official's position or refer the dispute to the Audit Resolution
Board (ARB) for a decision. Questions regarding ongoing
activities pending resolution of the audit should be directed to
the Action Official.
b. The Audit Resolution Board (ARB)
The ARB is composed of three regular members: the Assistant
Administrator for Administration and Resources Management, the
General Counsel, and a Regional Administrator, who is assigned
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for a one-year term on a rotating basis. The Inspector General
and the Assistant Administrator for the specific program for
which the audit was conducted serve in an advisory role to the
Board.
The function of the ARE is to resolve major disagreements
between the OAIGA and Agency officials responsible for acting on
audit recommendations and to establish policy for future actions.
Disagreements between the Action Official and the OAIGA involving
questioned costs in excess of $100,000 are referred to the ARE
for resolution. Once a question involving costs exceeding
$100,000 is referred to the ARE, a final determination letter
cannot be issued until the question is resolved. ARE decisions
on cases exceeding $100,000 will constitute policy for future
actions.
Another function of the ARE is to review issues from final
determinations involving costs less than $100,000, solely to
establish policy for future actions. These ARE reviews of final
determinations involving under $100,000 in questioned costs do
not alter the final determination being reviewed.
c. Final Determination Letter
The Action Official must send a final determination letter
to the recipient within 150 days of the final audit report,
unless a disagreement has been referred to the ARE for
resolution. Determination letters are intended to accomplish the
following:
o Specify the Agency's final position on all findings and
recommendations. As appropriate, the legal and/or other
basis for the position should be stated. All questioned
costs must be either sustained and, therefore,
disallowed, or accepted as allowed
o Identify the actions the recipient must take to be in
compliance with EPA regulations and policies and the
terms and conditions of the Cooperative Agreement
o Confirm and explain EPA/recipient agreements reached
during the resolution process
o Identify any amounts owed to EPA because of disallowed
costs
o Provide standard payment instructions (see "Financial
Management of Superfund Program", Resources Management
Directive 2550D)
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o Notify the recipient of its dispute rights under 40 CFR
Part 31 Subpart F. The recipient has the right to appeal
the position of the Action Official when a disagreement
cannot be resolved and to pursue further resolution
o Additional elements may be included, as required.
In audit disallowances under an SSC, the final determination
letter takes the place of the Bill for Collection, and must
contain the proper Financial Management Office (FMO) address and
policy statement regarding payment due dates (see "Financial
Management of Superfund Program", Resources Management Directive
2550D).
The recipient may appeal the final determination letter
pursuant to 40 CFR Part 31 Subpart F. Appeals are initiated
either at the Regional or Headquarters level depending on where
the award was made. Final decisions on appeals are rendered by
the appropriate Regional Administrator or the Assistant
Administrator for OSWER. During the appeals process the
recipient may be represented by counsel, may submit material for
inclusion in a written record, and is entitled to an informal
conference with EPA officials. However, the recipient cannot
initiate a review by the ARE, since its function is to resolve
internal EPA disagreements.
d. Review for Accuracy
The DIGA reviews all final determinations to evaluate
whether or not they are adequate, address each of the findings
made in the audit report, and explain EPA's position. Adequate
responses will close out the audit report, and the Action
Official will be notified to that effect. The audit process
will not be considered complete until the Action Official has
issued a revised final determination letter that corrects the
deficiencies, or he/she has convinced the DIGA either that the
deficiencies cited are immaterial or that the recommendations
have been addressed.
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EXHIBIT 3
Audit Of Response Agreements
ACTIVITY
RECIPIENT ROLE
ACTION OFFICIAL/DESIGNEE ROLE
Schedule Audit
and Preliminary
Activities
Procedures for
Audit
Resolve Audit
Findings
Implement
Corrective
Actions
Ensure that Relevant
Material is Available
Prepare List of Key
Project Personnel
Participate in Entrance
Conference
Provide Information to
Auditors, as
Requested
Review Draft Audit
Report and Prepare
Comments, as
Appropriate
Consult with Audit
Team, DIGA and Action
Official on Audit
Report Findings
Assist in Resolving
Disagreements, as
Necessary
Participate in Exit
Conference
Assist in Resolving
Disputes on Audit
Issues
Provide Additional
Information to Action
Official, as Necessary
Respond to Initial
Determination, if
Appropriate
Implement Corrective
Actions, as Instructed
Submit Audit Request
Work with Auditors to Clarify Program Procedures
Ensure that Relevant Material is Available
Participate in Entrance Conference
Provide Information to Auditors, as Requested
Review Draft Audit Report and Prepare Comments,
as Appropriate
Request Extension of Draft Audit Report Review
Period, as Necessary
Consult with the Audit Team, DIGA, Regional
Counsel and State on Audit Report Findings
Assist Recipient in Preparing Comments on Draft Audit
Report, as Necessary
Assist in Resolving Disagreements, as Necessary
Participate in Exit Conference
Forward Copy of Final Audit Report to Recipient within
15 Days of Report Date
Forward Copy of Audit Report to Headquarters, if
Significant Policy or Procedural Issues Are Raised
Monitor Status of Audit Reports to Avoid Delays or
Disputes
Inform Recipient and DIGA of Potentially Controversial
Issues/Determinations
Negotiate with DIGA Staff to Resolve Differences,
as Necessary
Transmit Initial Determination and Supplementary
Analysis to the Recipient, as Necessary
Consult with DIGA on Proposed Final Determination
Provide Copy of Proposed Final Determination
to DIGA, if Questioned Costs are $100,000 or More
Resolve Any Differences with DIGA, as Necessary
Issue Final Determination to the Recipient within
150 Days
Provide Copy of All Final Determinations to DIGA
Monitor Status of Recipient Implementation of
Corrective Actions
Report Quarterly on Status of Audit Follow-Up to
HQ Office
Forward Copy of Final Determination to
Servicing Finance Office
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4. Implementation of Corrective Actions
The Action Official must establish a system to monitor the
disposition of sustained findings on active projects, and must
ensure that any corrective actions required by the final
determination letter are implemented. As of October 1, 1989, in
accordance with the new amendments to the Inspector General Act,
EPA is required to track all corrective actions using the
Automated Tracking Report (ATR). The Region must consider audit
findings and recipient efforts to comply with them before
awarding additional funds or subsequent Superfund Cooperative
Agreements. In future contracts, the Action Official may also
stipulate special conditions to ensure that the recipient of
Federal funds takes any required corrective actions. Thorough
documentation of any audits should be retained in the official
Cooperative Agreement or SSC file. Successful implementation of
the necessary corrective actions completes the four-step audit
process that is summarized in Exhibit 3.
Contacts
Should you have any questions regarding the Superfund audit
process, you may contact Richard Johnson, Grants Administration
Division (GAD), at FTS or (202) 382-5296, your DIGA, or Lisa
Karpf, Director, Audit Operations staff at FTS or (202) 475-8380.
Program-specific questions may be directed to Jan H. Baker,
Chief, State Involvement Section, at FTS or (202) 382-2443.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OF
SOLID WASTE AND EMERGENCY RESPONSE
OSWER Directive 9375.5-04
FHB ! 2 jogo
MEMORANDUM:
SUBJECT:
FROM:
TO:
Involvement of Superfund Program Managers in ^uperfund
Response Agreement Audits t/ t A
Henry L. Longest II, Director v ^
Office of Emergency and Remedial Response
Director, Waste Management Division
Regions I, IV, V, VII, VIII
Director, Emergency and Remedial Response Division
Region II
Director, Hazardous Waste Management Division
Regions III, VI
Director, Toxic and Waste Management Division
Region IX
Director, Hazardous Waste Division
Region X
Purpose
This directive provides general information to Superfund
program managers about the audit process. Although the material
pertains primarily to audits of Cooperative Agreements, it may be
applied to audits of Superfund State Contracts (SSCs) as well.
This is a reference document, not an audit guide. Although the
responsibility for responding to an audit may not rest with
Superfund program managers, all of us must anticipate this
scrutiny and involvement in the process. An audit is not to be
considered a fault-finding mission, but rather, a good business
practice that often brings positive change.
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9375.5-04
Background
In signing a Superfund Cooperative Agreement, the recipient
gives the Environmental Protection Agency (EPA) the right to audit
that Agreement, pursuant to the Inspector General Act of 1978, as
amended (5 U.S.C. App.3) and Section lll(k) of the Comprehensive
Environmental Response, Compensation, and Liability Act, (CERCLA),
as amended (42 U.S.C. 9611(k)). EPA may audit any type of
Superfund Cooperative Agreements or ssc wniie it is in effect, or
may conduct an audit at the completion of federally funded
activities.
The general objectives of an audit are twofold. The first is
to determine whether costs claimed under the Agreement by the
recipient are allowable (i.e., eligible, reasonable, necessary,
allocable to the project, and consistent with applicable Federal
cost principles) under the terms and conditions of the Superfund
Response Agreement, (including all applicable EPA and Federal
regulations and directives).
The second is to determine whether controls exercised by the
recipient through its financial and project management,
accounting, procurement, and property management systems are
adeauate to ensure that costs meet these criteria.
Objective
The objective of this directive is to provide Superfund
program managers with a summary of the types of audits and an
overview of the audit process. The following steps outline this
process:
o Schedule for the audit and preliminary activities
o Performance of the audit
o Resolution of audit findings and follow-up actions
o Implementation of corrective actions.
1. The term "recipient" includes States, political subdivisions
thereof, and federally recognized Indian Tribes in either a
lead or support agency role.
2. This includes pre-remedial, removal, enforcement, single-
site, multi-site, and Core Program Cooperative Agreements.
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9375.5-04
This is one in a series of directives to carry the number
9375.5, which are guidance relating to State, political
subdivisions, and federally recognized Indian Tribal involvement in
the Superfund program. We recommend setting aside a special
binder for the directives in this 9375.5 series. Indexing and
keywording will be done under the Office of Solid Waste and
Emergency Response (OSWER) Directives System.
Implementation
This directive provides a detailed outline of the audit
process. Program managers are encouraged to refer to the guidance
referenced throughout this directive. Additional information on
audits can be obtained from the Divisional Inspector General for
Audits (DIGA) covering your Region or the Headquarters' Office of
the Assistant Inspector General for Audits (OAIGA) at FTS or (202)
382-4106.
A. THE AUDIT REVIEW
EPA may conduct an audit prior to the award of a Superfund
Response Agreement, at any time during the period of performance
of the Agreement, or as part of the close-out activities. The
OIAGA makes initial contact with the recipient and the audit is
usually performed in the recipient's office and includes a thorough
review of: the recipient's accounting, procurement, and property
management systems; all costs incurred on a project; and
compliance with the terms and conditions of the Response
Agreement. Exhibit 1 presents several scenarios that can prompt
an audit.
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EXHIBIT 1
Potential Reasons for Conducting an Audit of
Superfund Response Agreements
• Before an award is made, to ensure that the recipient can
implement the terms and conditions of the response agreement
• Six months to one year after the award of a Cooperative Agreement
to ensure that the recipient is appropriately segregating and accounting for
costs on a site-specific basis
• Instances where the recipient has an interest in significantly
expanding its involvement in the Superfund program or has
requested a major amendment to an existing project
• At the request of the recipient to resolve potentially questionable
cost issues, or to ensure that appropriate corrective actions
will be undertaken early in project implementation
• High staff or management turnover
• Previous audits of the recipient have indicated significant
management problems
• Indications or allegations of fraud, waste, or mismanagement
• Quarterly reports and other deliverables are not received
on time or reports indicate problem areas
• Disbursements do not accurately reflect project progress
• Requests for verification of CERCLA, as amended, Section 104(c)(5)
credits
• Non-compliance or inattention to the requirements of Quality
Assurance/Quality Control Plans, Site Safety Plans,
contractor oversight, Community Relations Plans, or to the
other provisions of the Response Agreement
• At the conclusion of one activity, such as a remedial
investigation/feasibility study, at a site
* At the close out of a Response Agreement.
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B. Types of Audits
The four categories of audits are discussed below:
1. Pre-Award Audits
Pre-award audits may be conducted by the OAIGA at their
discretion or at the request of a State, political subdivision, or
Indian Tribe. The purpose of a pre-award audit is to assess the
capabilities of a party that is entering into a Superfund
Cooperative Agreement for the first time, or that is taking the
lead role in a response activity for which it has not had previous
lead responsibility. The intent of these audits is to review a
wide range of program-related issues and to identify program needs
in addressing this new responsibility before problems arise. These
reviews are not routine; however, as more States, political
subdivisions, and Indian Tribes become involved in Superfund
response, the number of pre-award audits is likely to increase.
2. Interim Audits
An interim audit may be conducted during any phase of an on-
going project to determine whether the costs charged to EPA under
the Superfund Cooperative Agreement are allowable and whether the
recipient is complying with the terms and conditions of the
Agreement. EPA may schedule interim audits when an Agreement
covers a particularly complex project or when problems,
inaccuracies, discrepancies, or other complications with
administration occur. The interim audit is used as a corrective
tool. Therefore, when improvements are needed, the interim audit
final report will contain recommendations for corrective actions
that EPA and/or the recipient should take to avoid future
problems.
3 . Final Audits
Final audits may be conducted when Superfund Response
Agreements are terminated or closed out, when activities are
completed, or when projects within a multi-site Cooperative
Agreement (MSCA) are concluded. Final audit of a Superfund
Cooperative Agreement may be scheduled upon submission of the
final Financial Status Report (SF-269) at the conclusion of the
activity.
Final audits are performed to determine whether costs charged
by the recipient to EPA under the Superfund Cooperative Agreement
were allowable and to verify that any remaining funds have been
deobligated or, in the case of an MSCA, have been transferred to
another site and/or activity. In addition, the final audit is
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9375.5-04
performed to ensure that the project(s) completed under the
Cooperative Agreement meet all agreed-upon terms and conditions,
and that the desired results have been achieved.
4. Other Audits
In contrast to financial audits, which evaluate management of
Superfund Cooperative Agreements by entities outside EPA, the
OAIGA also conducts performance audits of EPA management
practices. Performance audits may address Regional management
oversight of not only Superfund Cooperative Agreements, but also
SSCs, and the supporting management processes/systems that deal
with Superfund obligations and outlays. Although auditors may
perform some work at support-agency offices during performance
audits, the focus is on the EPA Regional office.
In addition, audits of State and local governmental units are
required as recipients of Federal assistance awards in accordance
with the Single Audit Act (Public Law 98-502) and OMB Circular
A-128. These require an auditor to report on: 1) the financial
statements of the government, department, agency, or establish-
ment; 2) internal accounting and other control systems used in
administering Federal financial assistance programs; and 3)
compliance with the applicable laws and regulations.
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B.
THE AUDIT PROCESS
Audits are the responsibility of the OAIGA within the EPA
Office of the Inspector General (OIG). The four step audit
process is outlined in Exhibit 2 below. You may find it useful
to obtain and review the "Audit Handbook for EPA Managers" from
the Director, Resource Systems Management Division, at FTS or
(202) 382-4425.
EXHIBIT 2
The Four-Step Audit Process
Resolve
Audit Findings
Schedule the
Audit
Implement
Corrective
Action
Conduct
The
Audit
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The Four-Step Audit Process
The audit process outlined in this guidance pertains to
OAIGA audits of Superfund Cooperative Agreements and is
applicable to SSCs. This guidance does not describe the single
audit process. For further information on the single audit
process and the Single Audit Act of 1984, see OMB Circular A-128.
Although these audits are different and separate, similar
information, i.e., compliance with Federal law and regulations,
may be required as both part of the EPA's OAIGA audit process and
the single audit process. The OAIGA, however, is responsible for
monitoring the adequacy of audit findings conducted under the
Single Audit Act. This process is discussed below:
1. Scheduling the Audit and Preliminary Activities
The OAIGA schedules an audit on its own initiative, at the
Superfund program's request, or at the recipient's request. The
DIGAs deal directly with recipients and Regional staff to
schedule the audit, resolve any questions or problems, and
provide advice, as necessary. Actual audit work may be performed
by employees of the OAIGA, or by an independent public accounting
firm under contract to EPA to perform audits.
The EPA Regional personnel should be prepared to provide
relevant background information on the administration and
implementation of the Superfund Cooperative Agreement by the
recipient, and the status of funded projects and reports required
in a Cooperative Agreement and/or SSC. Specifically, the
auditors will want to review:
o The Cooperative Agreement/project files, including all
applications and amendments
o The SSC files, if applicable
o Correspondence or memoranda concerning problem areas
o Quarterly and final reports for the Superfund Response
Agreement, as required in 40 CFR Part 35 Subpart O
o Documentation of Agreements, amendments, and supporting
documents (i.e., letters, memoranda, minutes of
meetings, and logs of telephone conversations).
Before the audit begins, the recipient should ensure that
all records pertaining to the Superfund Cooperative Agreement
and/or SSC are up-to-date and accessible including:
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o Accounting books and records covering the receipt and
disbursement of funds; time and attendance records;
travel; other project costs such as equipment and
training; and cost share, as applicable
o Bank account records and cancelled checks
o Copies of quarterly and technical progress reports, as
well as any other documents specified by the Cooperative
Agreement or SSC
o A list of all equipment and supplies purchased for the
Superfund project and, for final audits, a copy of the
property inventory report and disposition of the property
o Copies of Financial Status Reports (SF-269)
o Copies of Federal Cash Transaction Reports (SF-272)
o Procurement documents including contract files, payment
and receiving documents, and memoranda of contract
negotiations
o Copies of cost-share payment documents for SSC
reconciliation of response costs
o Correspondence relating to activities conducted under the
Superfund Response Agreement
o A list of key personnel working on the project and their
functional responsibilities.
2. Procedures for the Audit
Once the audit has been scheduled and background information
obtained from the Region, audit work can begin in the field or
recipient's office.
a. Entrance Conference
Before beginning work in the recipient's office, the
auditors will hold separate entrance conferences with recipient
and Regional personnel to introduce the audit team, explain the
scope and nature of the audit, and obtain any suggestions on the
audit emphasis. Additional topics to be covered include: the
schedule for completing the audit, provisions for accessing
records and project information, and the audit team's space and
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9375.5-04
equipment requirements. The auditors will also conduct an
in-depth interview with both the recipient and EPA technical
project managers to obtain relevant background and status
information.
b. Standardized Audit Tasks
Although audits differ depending on their scope and purpose,
and on the complexity of the activities funded, the auditors will
perform generally standardized tasks. These include the
following:
o Determine whether the recipient is complying with the
provisions of the Superfund Response Agreement
o Evaluate the recipient's system for accounting for site-
specific costs and ability to document these costs
o Evaluate non-contractual costs incurred and reported
o Evaluate costs incurred and reported by the recipient for
contractual services
o Determine whether the controls being used to ensure the
appropriateness of contractor performance and billing are
adequate
o Determine whether contracts are being awarded in compliance
with applicable EPA procurement procedures
o Determine whether letter of credit drawdowns are being
handled in accordance with Federal requirements
o Determine whether SSC cost-share payments are being sent to
EPA, per the terms of the Agreement
o Determine whether the recipient is complying with EPA
property management requirements, including the special
requirements of CERCLA for equipment
o Determine whether all required financial and technical
reports are being completed and submitted in a timely
manner.
Some audits may also include major program performance
aspects, such as engineering/scientific review of work products.
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c. Draft Audit Report
The results of the auditors' field work are summarized for
recipient and program comment in a draft audit report prepared
and issued by the OAIGA. This draft report states the purpose
and scope of the audit and presents a preliminary description of
the audit team's findings.
An audit finding is defined as a written explanation of an
audited area, including proposed recommendations, and may concern
non-monetary and/or monetary recommendations. Non-monetary
recommendations are an explanation of any changes needed to: 1)
improve the economy, efficiency, or effectiveness of operations
and procedures, or 2) achieve compliance with applicable laws,
regulations, guidance, or special terms and conditions contained
in the Superfund Response Agreement. Monetary recommendations
concern costs incurred by the recipient in the performance of the
Agreement/project, and fall into the following categories:
o Accepted costs: are claimed costs that the auditors have
concluded are allowable under the terms and conditions of
the Agreement or applicable law, regulation, policy, or cost
principles, and were properly charged to the Cooperative
Agreement
o Questioned costs; are claimed costs that the auditors have
concluded should not be allowed because the costs are:
1. Ineligible — a cost claimed which is in violation of a
provision of a law, regulation, contract, Cooperative
Agreement, or other agreement or document governing the
expenditure of funds; or
2. Unsupported — a cost claimed which, at the time of the
audit, is not supported by adequate documentation and/or has
not been approved by responsible program officials; or
3. Unnecessary/unreasonable — a cost claimed for an
expenditure of funds which, at the time of the audit, was
not found to be necessary or reasonable.
The recipient and the EPA Action Official (i.e., the
Regional person designated to resolve the audit) will receive
copies of the draft audit report for comment, unless findings are
immaterial or confidential. Confidential findings within the
report are those that relate to confidential investigative
matters or confidential business information. If significant
policy or programmatic issues are raised in the draft report, a
copy usually is forwarded to the Office of the Assistant
Administrator for Solid Waste and Emergency Response.
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Draft audit findings are tentative and subject to change.
Consequently, the draft audit report should not be released. Any
public requests for draft audit reports should be forwarded to
the OIG for response.
The recipient and EPA are strongly encouraged to provide
comments on the draft audit report within the time frame
specified in the transmittal (usually 30 days from distribution).
If an extension is needed, it may be requested by the Action
Official. Extensions of up to 30 days are usually approved.
Comments on the draft report are considered an important part of
the resolution process since the time period for resolution of
the final report is less flexible.
d. Exit Conference
EPA's audit process is designed to ensure that the recipient
has an adequate opportunity to provide input into the decision-
making process. Auditors provide preliminary findings as the
audit progresses and may hold informal meetings to discuss these
findings. A formal exit conference will be held either at the
completion of audit field work, before issuance of the final
audit report, or after comments on the draft audit report are
received. Meetings may occur separately with recipient and
Regional staff members. As a result of the exit conference,
auditors may request recipient or Regional staff members to make
additional written comments on the draft audit report, which
should be submitted promptly within the specified time frame.
e. Final Audit Report
A final audit report takes into consideration written
comments that were received on the draft audit report, the exit
conference, and documented follow-up actions. This report is
used by the Action Official to make a final determination on
audit disposition.
The final report will be sent to the responsible Action
Official, who must forward a" copy of this report to the
recipient. Potentially controversial findings are normally
highlighted in the transmittal memorandum. At this point, the
OAIGA or Action Official may respond to public requests for final
audit reports in accordance with the Freedom of Information Act
and implementing regulations.
During an audit of a Cooperative Agreement and/or SSC, EPA
oversight and administration may also be evaluated. The OAIGA
will address these findings and recommendations on EPA
deficiencies in a separate report or letter to the responsible
EPA official.
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3. Resolution of Audit Findings and Follow-up Actions
The final audit report provides advice to the Action
Official who can reject or sustain the OAIGA's findings. The
Action Official's determination is reported to the recipient in a
letter. The final determination letter specifies what corrective
actions are required of the State, political subdivision, or
Indian Tribe and the total of allowed and disallowed costs.
a. Resolution of Audit Findings
For each audit, the Action Official will set forth any
initial determinations, ask the recipient for any rebuttal,
evaluate information received, and secure necessary internal
review and concurrences. For questioned costs below $100,000,
the final determination letter must be issued to the recipient
within 150 days of the final audit report date. If questioned
costs are at least $100,000, the Action Official must provide the
DIGA with a copy of the proposed final determination on the
findings within 90 days of the final audit report date. Within
15 days of this transmittal, the DIGA will notify the Action
Official of his agreement provided: 1) the proposed final
determination agrees with the findings and recommendations in the
audit report, or 2) the DIGA accepts the reasons why the
determination differs from the audit report, or 3) the DIGA deems
the differences to be insignificant.
If the DIGA does not accept the Action Official's position,
he will attempt to resolve the differences within 15 days; if
these attempts are unsuccessful, the DIGA will notify the OAIGA
of the disagreement and advise the Action Official. If the
Federal share of questioned costs in the final audit report
totals at least $100,000, the Action Official cannot issue a
final determination until differences with the OAIGA are
resolved.
Once the matter has been referred to the OAIGA, the OAIGA
has 45 days to resolve the issue with the help of the DIGA, the
Action Official, and the affected EPA Headquarters officials. At
the end of that time, the OAIGA must either accept the Action
Official's position or refer the dispute to the Audit Resolution
Board (ARE) for a decision. Questions regarding ongoing
activities pending resolution of the audit should be directed tc
the Action Official.
b. The Audit Resolution Board (ARB)
The ARB is composed of three regular members: the Assistant
Administrator for Administration and Resources Management, the
General Counsel, and a Regional Administrator, who is assignee
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for a one-year term on a rotating basis. The Inspector General
and the Assistant Administrator for the specific program for
which the audit was conducted serve in an advisory role to the
Board.
The function of the ARE is to resolve major disagreements
between the OAIGA and Agency officials responsible for acting on
audit recommendations and to establish policy for future actions.
Disagreements between the Action Official and the OAIGA involving
questioned costs in excess of $100,000 are referred to the ARE
for resolution. Once a question involving costs exceeding
$100,000 is referred to the ARE, a final determination letter
cannot be issued until the question is resolved. ARE decisions
on cases exceeding $100,000 will constitute policy for future
actions.
Another function of the ARE is to review issues from final
determinations involving costs less than $100,000, solely to
establish policy for future actions. These ARE reviews of final
determinations involving under $100,000 in questioned costs do
not alter the final determination being reviewed.
c. Final Determination Letter
The Action Official must send a final determination letter
to the recipient within 150 days of the final audit report,
unless a disagreement has been referred to the ARE for
resolution. Determination letters are intended to accomplish the
following:
o Specify the Agency's final position on all findings and
recommendations. As appropriate, the legal and/or other
basis for the position should be stated. All questioned
costs must be either sustained and, therefore,
disallowed, or accepted as allowed
o Identify the actions the recipient must take to be in
compliance with EPA regulations and policies and the
terms and conditions of the Cooperative Agreement
o Confirm and explain EPA/recipient agreements reached
during the resolution process
o Identify any amounts owed to EPA because of disallowed
costs
o Provide standard payment instructions (see "Financial
Management of Superfund Program", Resources Management
Directive 2550D)
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o Notify the recipient of its dispute rights under 40 CFR
Part 31 Subpart F. The recipient has the right to appeal
the position of the Action Official when a disagreement
cannot be resolved and to pursue further resolution
o Additional elements may be included, as required.
In audit disallowances under an SSC, the final determination
letter takes the place of the Bill for Collection, and must
contain the proper Financial Management Office (FMO) address and
policy statement regarding payment due dates (see "Financial
Management of Superfund Program", Resources Management Directive
2550D).
The recipient may appeal the final determination letter
pursuant to 40 CFR Part 31 Subpart F. Appeals are initiated
either at the Regional or Headquarters level depending on where
the award was made. Final decisions on appeals are rendered by
the appropriate Regional Administrator or the Assistant
Administrator for OSWER. During the appeals process the
recipient may be represented by counsel, may submit material for
inclusion in a written record, and is entitled to an informal
conference with EPA officials. However, the recipient cannot
initiate a review by the ARE, since its function is to resolve
internal EPA disagreements.
d. Review for Accuracy
The DIGA reviews all final determinations to evaluate
whether or not they are adequate, address each of the findings
made in the audit report, and explain EPA's position. Adequate
responses will close out the audit report, and the Action
Official will be notified to that effect. The audit process
will not be considered complete until the Action Official has
issued a revised final determination letter that corrects the
deficiencies, or he/she has convinced the DIGA either that the
deficiencies cited are immaterial or that the recommendations
have been addressed.
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EXHIBIT 3
Audit Of Response Agreements
ACTIVITY
RECIPIENT ROLE
ACTION OFFICIAL/DESIGNEE ROLE
Schedule Audit
and Preliminary
Activities
Procedures for
Audit
Resolve Audit
Findings
Implement
Corrective
Actions
Ensure that Relevant
Material is Available
Prepare List of Key
Project Personnel
Participate in Entrance
Conference
Provide Information to
Auditors, as
Requested
Review Draft Audit
Report and Prepare
Comments, as
Appropriate
Consult with Audit
Team, DIGA and Action
Official on Audit
Report Findings
Assist in Resolving
Disagreements, as
Necessary
Participate in Exit
Conference
Assist in Resolving
Disputes on Audit
Issues
Provide Additional
Information to Action
Official, as Necessary
Respond to Initial
Determination, if
Appropriate
Implement Corrective
Actions, as Instructed
Submit Audit Request
Work with Auditors to Clarify Program Procedures
Ensure that Relevant Material is Available
Participate in Entrance Conference
Provide Information to Auditors, as Requested
Review Draft Audit Report and Prepare Comments,
as Appropriate
Request Extension of Draft Audit Report Review
Period, as Necessary
Consult with the Audit Team, DIGA, Regional
Counsel and State on Audit Report Findings
Assist Recipient in Preparing Comments on Draft Audit
Report, as Necessary
Assist in Resolving Disagreements, as Necessary
Participate in Exit Conference
Forward Copy of Final Audit Report to Recipient within
15 Days of Report Date
Forward Copy of Audit Report to Headquarters, if
Significant Policy or Procedural Issues Are Raised
Monitor Status of Audit Reports to Avoid Delays or
Disputes
Inform Recipient and DIGA of Potentially Controversial
Issues/Determinations
Negotiate with DIGA Staff to Resolve Differences,
as Necessary
Transmit Initial Determination and Supplementary
Analysis to the Recipient, as Necessary
Consult with DIGA on Proposed Final Determination
Provide Copy of Proposed Final Determination
to DIGA, if Questioned Costs are $100,000 or More
Resolve Any Differences with DIGA, as Necessary
Issue Final Determination to the Recipient within
150 Days
Provide Copy of All Final Determinations to DIGA
Monitor Status of Recipient Implementation of
Corrective Actions
Report Quarterly on Status of Audit Follow-Up to
HQ Office
Forward Copy of Final Determination to
Servicing Finance Office
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4. Implementation of Corrective Actions
The Action Official must establish a system to monitor the
disposition of sustained findings on active projects, and must
ensure that any corrective actions required by the final
determination letter are implemented. As of October 1, 1989, in
accordance with the new amendments to the Inspector General Act,
EPA is required to track all corrective actions using the
Automated Tracking Report (ATR). The Region must consider audit
findings and recipient efforts to comply with them before
awarding additional funds or subsequent Superfund Cooperative
Agreements. In future contracts, the Action Official may also
stipulate special conditions to ensure that the recipient of
Federal funds takes any required corrective actions. Thorough
documentation of any audits should be retained in the official
Cooperative Agreement or SSC file. Successful implementation of
the necessary corrective actions completes the four-step audit
process that is summarized in Exhibit 3.
Contacts
Should you have any questions regarding the Superfund audit
process, you may contact Richard Johnson, Grants Administration
Division (GAD), at FTS or (202) 382-5296, your DIGA, or Lisa
Karpf, Director, Audit Operations staff at FTS or (202) 475-8380.
Program-specific questions may be directed to Jan H. Baker,
Chief, State Involvement Section, at FTS or (202) 382-2443.
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