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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
EPA Region 10 Took Adequate
Corrective Actions for Alaska
Village Safe Water Program
Report No. 09-P-0085
January 21, 2009
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Report Contributors: Melinda Burks
Randy Holthaus
Madeline Mullen
Abbreviations
EPA U.S. Environmental Protection Agency
FY Fiscal Year
IHS Indian Health Service
MATS Management Audit Tracking System
OIG Office of Inspector General
OAM Office of Acquisition Management
OMB Office of Management and Budget
PART Program Assessment Rating Tool
USD A U. S. Department of Agriculture
VSW Village Safe Water
Cover photo: Sewage pipe system in an Alaska village (EPA photo).
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
09-P-0085
January 21, 2009
Why We Did This Review
We performed this follow-up
review to determine whether
the U.S. Environmental
Protection Agency (EPA)
Region 10 implemented
corrective actions it agreed to
take in response to the Fiscal
Years (FYs) 2003 and 2004
single audit reports and 2006
Office of Management and
Budget (OMB) Program
Assessment Rating Tool
(PART) review. We also
determined whether the
actions addressed, or will
address, the issues in the
reports.
Background
On July 26, 2006, the EPA
Office of Inspector General
(OIG) issued two single audit
reports to EPA Region 10
regarding the State of Alaska
Department of Environmental
Conservation Village Safe
Water Program. The reports
supported the single audit
findings and recommended
various corrective actions.
The most recent PART review
noted various deficiencies.
EPA Region 10 Took Adequate Corrective
Actions for Alaska Village Safe Water Program
What We Found
We found that Region 10 had adequately followed up on each of the findings and
recommendations from the single audit reports. The Region has implemented
corrective actions for the most recent OMB PART review findings. The
corrective actions taken by the Region should address the issues identified in the
single audit reports and PART review.
One corrective action is not complete. To address concerns with the State of
Alaska's monitoring subrecipients, the State performed an independent review of
reconciling project costs by the Alaska Native Tribal Health Consortium (the
Consortium). As part of its corrective action plan, the Region agreed to follow up
on the findings from the independent review. The Region had planned on doing
the follow-up as part of the next annual review in November 2008. However, the
follow-up review was delayed and is now expected to be completed by October 1,
2009. Region 10 concurred with the OIG findings and will continue to follow up
on implementing the State's review findings.
What We Recommend
We recommended that the EPA Region 10 Regional Administrator track the
corrective action for follow-up on the independent review of the Alaska Native
Tribal Health Consortium by re-entering it in the Management Audit Tracking
System. The Region subsequently reopened the Management Audit Tracking
System to track the corrective action. EPA's response to our recommendation is
adequate and should address our report finding.
For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202)566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2009/
20090121-09-P-0085.pdf
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\ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
S WASHINGTON, D.C. 20460
'"U
OFFICE OF
INSPECTOR GENERAL
January 2 1,2009
MEMORANDUM
SUBJECT: EPA Region 10 Took Adequate Corrective Actions for
Alaska Village Safe Water Program
Report No. 09-P-0085
FROM: Melissa M. Heist
Assistant Inspector General for Audit
TO: Michelle Pirzadeh
Acting Regional Administrator
Region 10
This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). This report contains results of our review. It
represents the opinion of the OIG and does not necessarily represent the final EPA position.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $114,006.
Action Required
In accordance with EPA Manual 2750, we are closing this report on issuance in our tracking
system. We request that the Agency provide us with documentation when the next independent
review is complete (anticipated for October 1, 2009). We have no objections to the further
release of this report to the public. This report will be available at http ://www. epa. gov/oig.
If you or your staff have any questions, please contact Janet Kasper, Director, Contracts and
Assistance Agreements Audits, at 312-886-3059 or kasper.janet@epa.gov.
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EPA Region 10 Took Adequate Corrective Actions 09-P-0085
for Alaska Village Safe Water Program
Table of Contents
Purpose 1
Background 1
Fiscal Years 2003 and 2004 Single Audit Reports 1
2006 PART Review 2
Scope and Methodology 2
Noteworthy Achievements 2
Results of Review 2
EPA Adequately Implemented Single Audit Corrective Actions 2
EPA Has Been Responsive to PART Recommendations 5
MATS Tracking Was Still Needed 7
Recommendation 7
Agency Response 7
OIG Evaluation 7
Status of Recommendations and Potential Monetary Benefits 8
Appendices
A Agency Response 9
B Distribution 11
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09-P-0085
Purpose
The objective of our audit was to determine whether EPA Region 10 implemented corrective
actions it agreed to take in response to the Fiscal Years (FYs) 2003 and 2004 single audit reports
and the 2006 Office of Management and Budget (OMB) Program Assessment Rating Tool
(PART) review. We also determined whether EPA's actions addressed, or will address, the
issues in the reports.
Background
In FY 1995, Congress funded a grant program to assist Alaska native villages and rural
communities with constructing new or improved drinking water and wastewater systems. This
funding can also be used to provide training and technical assistance in operating and
maintaining these systems. Significant human health and water quality problems exist in these
communities, due to unacceptable sanitation conditions.
According to a draft EPA document, through 2007, EPA has provided $394 million to the Alaska
Department of Environmental Conservation (State) to address the needs of both rural and native
Alaska communities. EPA Region 10 awards grant funds to the State, which administers these
funds through its Village Safe Water (VSW) Program. The VSW Program's goal is to improve
public health and compliance with environmental laws by upgrading the level of sanitation
facilities in rural communities through financial and technical assistance. The VSW Program
uses a priority list to identify community projects eligible for funding.
Fiscal Years 2003 and 2004 Single Audit Reports
The Single Audit Act of 1984 established uniform entity-wide audit requirements for State and
local governments receiving federal financial assistance. The State of Alaska Division of
Legislative Audit performed the FY 2003 and 2004 single audits for the State. The single audit
reports questioned all labor costs under the VSW Program for those years of almost $2.3 million,
and reported that:
• Labor costs were not properly charged to grants,
• Claimed project costs were advances and not actual costs,
• Dividend and interest income was earned on federal funds, and
• Oversight of funds transferred to a consortium was insufficient.
In fulfilling the requirements of the Single Audit Act, the Office of Inspector General (OIG)
reviews and disseminates the results of single audits to responsible EPA officials. The OIG
conducted additional field work to further develop the findings and recommendations in the
single audit reports. On July 26, 2006, the OIG issued two single audit reports to EPA regarding
the VSW Program.
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2006 PART Review
OMB developed the PART to assess and improve program performance so that the Federal
Government can achieve better results. A PART review helps identify strengths and weaknesses
of programs so that decision makers can make programs more effective. The 2006 OMB PART
review found that the VSW Program performance was adequate, but deficiencies were noted.
Scope and Methodology
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives. We conducted our audit field
work from June to November 2008.
The focus of our follow-up review was on corrective actions in response to the F Ys 2003 and
2004 single audits and 2006 OMB PART review. We reviewed guidance documents, prior OIG
and State single audit reports. To determine what corrective actions have been taken to address
the findings and recommendations in the single audits and PART review, we performed the
following steps in Region 10:
• Conducted interviews of EPA Region 10 staff regarding the audit resolution and PART
corrective actions,
• Interviewed the former OMB PART reviewer,
• Interviewed Alaska Department of Environmental Conservation and Legislative Audit
staff, and
• Reviewed and analyzed regional documentation related to the audit resolution and PART
corrective actions.
Noteworthy Achievements
Region 10 instituted a new Management Controls Policy effective June 26, 2007. The policy
establishes and maintains internal controls to ensure that funded projects are properly monitored
and completed within timeframes. In particular, the policy requires an annual review of stalled
projects so that funding can be reallocated for the benefit of other projects. As of June 2008, the
project officer reported that funding in excess of $5 million was reallocated from 10 stalled
projects to projects that needed supplemental funding to complete the original scope of work.
This reallocation allows timely completion of other projects.
Results of Review
EPA Adequately Implemented Single Audit Corrective Actions
The 2003 and 2004 single audits identified problems with labor charging, accounting for project
costs, dividend and interest income earned on EPA funds, and oversight of a Consortium. As a
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result, the OIG made several recommendations to correct the deficiencies. The Region and State
have subsequently taken, and continue to take, corrective actions to address the issues identified
in the single audits.
Labor Charging Improved
The 2003 and 2004 single audits found that the State was not properly charging labor costs to the
grants. First, the State allocated labor charges to various grants based on budgets, rather than to
the projects on which the employees actually worked. Second, employee timesheets identified
costs to the VSW program, but not the specific grant. Third, personnel costs associated with the
VSW program were charged to the EPA grant, even though the U.S. Department of Agriculture
(USDA) also provided funding for the program. Last, the State needed an approved indirect cost
rate for charging non-engineering employee time to the EPA grants. As a result, the OIG
recommended that EPA disallow $1,166,051 and $1,115,721 of labor costs for 2003 and 2004,
respectively.
The State took actions to correct its labor cost allocation methodology for future years, correct
the labor costs questioned in 2003 and 2004, and obtain approval for allocating non-engineering
employee time to EPA grants. These actions resulted in improvements in the labor charging
practices and costs being adequately supported in 2005 and 2006.
• The State revised its timekeeping system to identify actual engineering labor charges
directly to individual projects. According to the State, timesheets are created semi-
monthly and are certified by the employee and their supervisor. The single audit staff
tested labor charging in FYs 2005 and 2006, and confirmed that staff keep timesheets and
use the right accounting codes for charging to the specific grants and projects.
• The State reallocated the labor costs for 2003 and 2004 between the EPA and USDA
grants. The labor costs were allocated based on the proportion of non-labor costs actually
incurred by these programs. The reallocation allowed $482,960 of EPA funds that had
been used for State labor costs to be used for other VSW construction project costs.
• EPA Office of Acquisition Management (OAM) reviewed and approved the VSW project
cost allocation methodology. VSW program management (non-engineering) hours are
charged to the grants based on the number of hours engineer personnel charge to each
project under the grant. This methodology was appropriate in accordance with OMB
Circular A-87.
Accounting for Project Costs Improved
An unresolved recommendation related to accounting for project costs remained in the 2004
single audit from the prior year 2003 single audit. Disbursements from the State to the
accounting firm and the Consortium that managed the projects were advances and did not
represent actual costs incurred. As a result, the OIG recommended that Region 10 disallow the
remaining $32,721,149 and $31,860,680 of costs associated with EPA funds for 2003 and 2004,
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respectively, unless the State could provide actual cost data by EPA grant, by project for all EPA
grants supporting the VSW program.
OMB also reported on this issue in its 2006 PART review, which noted that funds transferred to
the Consortium did not meet EPA financial requirements for cash management. The PART
review recommended that the State issue a contract for an independent review of the
Consortium's financial processes and records.
The State took actions to reconcile its project funding for projects managed by both the State and
the Consortium, eliminate the practice of advancing funds to the Consortium, and issue a
contract for an independent review of the Consortium's financial processes and records:
• The State and the Consortium have reconciled all funding and no parties have cash
balances. The reconciliations were based on actual cost data. Any excess advance
payments over actual costs incurred for a particular project were credited to the
appropriate grants.
• In conjunction with the Consortium's project cost reconciliation, the State eliminated the
practice of advancing funds for project costs. All project cost payments to the
Consortium are now on a reimbursable payment basis.
• In June 2007, an independent auditing firm performed the independent review of the
Consortium's general accounting procedures for reconciling project expenditures. The
State plans to conduct the review annually. In response to the OIG report, as part of its
corrective action plan, the region stated that it would ensure the State addresses any
findings of the independent review. The State had planned to follow up on the 2007
review during the review that was scheduled for November 2008. However, that review
was delayed because of other federal audits of the Consortium. Therefore, the corrective
action the region agreed to take will not be completed until it receives the results of that
review. This is expected by October 1, 2009.
Consortium Allowed to Keep Dividend and Interest Income
Due to the State's cash draw practices and payment of advances to the Consortium, the
Consortium earned dividend and interest income on federal funds due to cash and security
investments. As a result, the OIG recommended that Region 10 require the Consortium to remit
dividend and interest earned on EPA funds.
The Region took action to refer this matter to the Indian Health Service (THS), based on advice
of EPA's Office of General Counsel that the resolution of this issue was the responsibility of
IHS. IHS determined there was nothing prohibiting the Consortium from earning interest, and
now that payments are on a reimbursable basis, it is no longer a concern. Therefore, the
Consortium was not required to repay any dividend and interest income earned on EPA funds.
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Responsibility for Consortium Oversight Clarified
The single auditor found that the State's oversight of infrastructure funds transferred to the
Consortium was insufficient to ensure compliance with Federal requirements. As a result, the
OIG recommended that Region 10 require the State to enter into an agreement with the
Consortium to recognize and support (1) the direct transfer of EPA grant funds from the State to
the Consortium, and (2) the Consortium's responsibility to comply with all EPA grant
requirements.
The State entered into two new Memorandums of Understanding to address the issues in the
single audit report.
• The State, USD A, and EPA approved a Memorandum of Understanding in March 2006
agreeing that transfers will be contingent upon the State's continued programmatic and
financial oversight to ensure successful project performance. It also states that a funding
transfer does not relieve the State of responsibility for overall grant management and
successful project completion.
• The State and IHS signed a Memorandum of Understanding in May 2006 agreeing that
the State may elect to transfer grant funds from EPA to IHS. It also delineates the roles
of IHS and the Consortium.
EPA Has Been Responsive to PART Recommendations
OMB rated the Alaska Village Safe Water Program as adequate in the 2006 PART review. In
general, a rating of adequate describes a program that needs to set more ambitious goals, achieve
better results, improve accountability, or strengthen its management practices. The PART
review noted deficiencies in the VSW Program with project reporting, efficiency measures, and
program management. We found that Region 10's corrective actions in response to the 2006
PART findings were either complete or progressing toward completion.
Project Reporting Improved
The PART found that Alaska's project progress reports were not accurate and did not contain all
the information required, including comparing outcomes to targets, reason for delays, percentage
of outputs completed, and explanation of changed scope of projects. The database for the project
reporting system was not complete and did not contain all projects funded by EPA dollars.
The OMB PART recommended corrective actions to improve project reporting, including the
following:
• Correct incomplete data fields and reporting deficiencies in the State's project tracking
database to support analysis for cost effectiveness and efficiency.
• Finalize a Web-based project reporting system to include all projects funded by EPA
dollars.
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The State successfully corrected incomplete data fields and reporting deficiencies in the tracking
and reporting database. The database now includes complete information for over 500 projects.
According to OMB, the corrective action for reporting is complete, and the database can be used
to evaluate efficiency.
Efficiency Measure Proposed
The PART found that the State did not have an efficiency measure which managers could use to
improve program performance. The OMB PART recommended that the State develop an annual
programmatic efficiency measure to help managers identify ways to improve overall
programmatic efficiency.
The State and EPA have proposed an annual programmatic efficiency measure to OMB for its
approval. The proposed measure is the percent of project federal funds expended on time within
the anticipated project construction schedule. This measure will help program managers identify
ways to improve overall programmatic efficiency, and it is under the influence and control of the
program.
New Procedures Will Improve Program Management
The PART review found that the program had not implemented regular procedures for achieving
efficiencies and cost effectiveness, or for evaluating grantees. No evidence was provided that
grant managers followed established procedures or schedules for evaluating and notifying
grantees that performance results were not met.
The OMB PART recommended the following corrective actions to improve program
management:
• Implement stalled projects review procedures in accordance with the management control
policy.
• Investigate a strategy for improving the obligation rate of program funds.
• Develop a plan to institutionalize the management framework of the program to ensure
continued program effectiveness.
EPA is working to improve management. EPA established a Management Controls policy and
drafted Standard Operating Procedures. The draft procedures assign funding priorities to
proposed projects as follows: (1) first time service, (2) regulatory required upgrades,
(3) essential infrastructure upgrades, and (4) desired upgrades. The procedures also address
stalled projects. EPA and the State are conducting stalled project reviews in accordance with the
Management Control policy, and the reviews should result in improved obligation rates. EPA is
implementing new procedures to improve program management and institutionalize the
management framework.
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MATS Tracking Was Still Needed
The Region used the Management Audit Tracking System (MATS) to track the OIG report
recommendations, but closed the audit in the system before all corrective actions were
completed. MATS facilitates the Agency's reporting to Congress on OIG audit report follow-up
in accordance with EPA Manual 2750. As a result of the early closure, the Agency did not
accurately report the implementation status of the corrective action resulting from the July 2006
OIG audit reports on Alaska.
Region 10 staff plan to follow up on corrective actions from the first independent review of the
Consortium through a second independent review planned for November 2008. The Region
anticipates that the State's follow-up to the independent review of the Alaska Native Health
Consortium will fully resolve this corrective action at that time. However, the Region closed the
OIG audit in MATS in September 2007. The Region should have kept the audit open in MATS
until the follow-up was completed.
Recommendation
1. We recommend that the EPA Region 10 Regional Administrator track the corrective
action for follow-up on the independent review of the Alaska Native Tribal Health
Consortium by re-entering it and keeping it open in MATS until follow-up is complete.
Agency Response
The Agency concurred with the findings of our report and stated that MATS has been reopened.
The Agency also stated that it will continue to follow up on implementation of the State's review
findings. The corrective action has been reopened in MATS. The independent review of the
Alaska Native Tribal Health Consortium has been delayed, but should be complete by October 1,
2009. See Appendix A for the Agency's complete response.
OIG Evaluation
EPA's response to our recommendation is adequate and should address our report finding. We
request that the Agency provide evidence to us when the next independent review is complete.
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Status of Recommendations and
Potential Monetary Benefits
POTENTIAL MONETARY
RECOMMENDATIONS BENEFITS (in SOOOs)
Planned
Rec. Page Completion Claimed Agreed To
No. No. Subject Status1 Action Official Date Amount Amount
7 Track the corrective action for follow-up on the 0 Regional Administrator, 10/01/09
independent review of the Alaska Native Tribal Region 10
Health Consortium by re-entering it and keeping it
open in MATS until follow-up is complete.
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
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Appendix A
Agency Response
December 19, 2008
Reply to
Attn Of: OWW-137
MEMORANDUM
SUBJECT: OIG Draft Audit Report "EPA Region 10 Took Adequate Corrective Actions for Alaska
Village Safe Water Program," Project No. 2008-0276 - Region 10 Response.
FROM: Michael Gearheard
Director Office of Water & Watersheds, Region 10
TO: Janet Kasper, Director
Assistance Agreement Audits
Office of Inspector General
The OIG Draft Audit Report 2008-0276 regarding the Alaska Village Safe Water
program identified one corrective action set out in the Region's action plan of February 28, 2007
that had not been completed: following up on implementation of findings from an independent
review conducted by the State of Alaska (the State) concerning reconciliation of project costs by
the Alaska Native Tribal Health Consortium (ANTHC). Because of this, you also found that the
tracking of the Region's corrective actions in EPA's Management Action Tracking System
(MATS) had been closed out prematurely. You recommended that the relevant MATS entries be
returned to "active" status, and that the Region continue tracking the identified corrective action
until it is completed.
Region 10 Response
Region 10 concurs with the findings of your report, and will continue to follow up on the
implementation of the State's review findings. The MATS entries for the 2003 and 2004 Single
Audit findings were returned to "active" status shortly after the Discussion Draft for this review
was issued, and the Region 10 Audit Coordinator will continue to track the remaining corrective
action until it is completed.
However, there is one correction which needs to be made with regard to completion of
this action. On pages 4 and 7 of your draft report, you indicated the next independent review of
ANTHC was scheduled for November 2008. Unfortunately, the accomplishment of the review
within that time frame has not been possible due to other review and audit efforts which have
taken precedence and over which ANTHC has had no control. The United States Department of
Agriculture - Rural Development (USDA-RD) Office of Inspector General (OIG) has just
completed a lengthy on-site review of ANTHC's financial records and procedures associated
with an ongoing audit. This has, in turn, caused ANTHC to fall behind schedule in
accomplishing their annual A-133 (Single) Audit, as required. Further, on November 19, 2008,
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the EPA OIG's Office of Forensic Audits, notified ANTHC of their intent to perform a review
related to Interagency Agreements. Because of these audit activities, Region 10 is proposing
that scheduled completion of the next independent review be revised to "between the 2008 and
2009 construction seasons." For tracking and reporting purposes, we propose a date of October
1, 2009, for completion of this finding.
In relation to the planned review by the EPA OIG of Interagency Agreements with
ANTHC, Region 10 has requested that Robert Adachi, Director, Office of Forensic Audits
postpone the review until the USDA-RD OIG audit results are published and ANTHC has had
time to follow up on the recommendations. Region 10 feels that concurrent audits of ANTHC
would be in violation of one of the four major purposes of the Single Audit Act: to promote the
efficient and effective use of audit resources. We ask that EPA's OIG accept the proposed
change in the schedule for completing the one finding still outstanding, and to consider the
impact of multiple audits and reviews on this overall effort.
We appreciate your review of the Region's work in addressing and resolving the findings
identified by your office from the State's 2003 and 2004 Single Audits, and are pleased that you
found that we had essentially accomplished what we committed to do. We look forward to
completion of the single remaining open finding.
cc: Elin Miller, Regional Administrator, Region 10
Michelle Pirzadeh, Deputy Regional Administrator, Region 10
Paula Vanhaagen, Manager, Grants and Planning Unit, OWW -137
Armina Nolan, Manager, Grants Administration Unit, OMP-145
Dennis Wagner, Project Officer, OWW - Anchorage, AOO/A
Bob Phillips, Audit Coordinator, OMP-145
Randy Holthaus, EPA/OIG, Region 6
Melinda Burks, EPA/OIG, Region 10
Madeline Mullin, EPA/OIG, Region 10
10
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Appendix B
Distribution
Office of the Administrator
Acting Assistant Administrator, Office of Water
Acting Regional Administrator, Region 10
Office of General Counsel
Director, Grants and Interagency Agreements Management Division
Agency Follow-up Official (the CFO)
Agency Follow-up Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Audit Follow-up Coordinator, Office of Water
Audit Follow-up Coordinator, Region 10
Public Affairs Office, Region 10
Grants and Planning Unit Manager, Region 10
Grants Administration Manager, Region 10
Deputy Inspector General
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