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  \ PHOv^°   OFFICE OF INSPECTOR GENERAL
                                Catalyst for Improving the Environment
Audit Report
        Costs Claimed by Georgia
        Department of Natural  Resources
        Under EPA Assistance Agreement
        No. VC984299-98
        Report No. 2003-4-00101


        June 26, 2003
This audit report contains findings that describe problems the Office of Inspector General (OIG)
has identified and corrective actions the OIG recommends. The report represents the opinion of
the OIG and findings contained in this report do 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.

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Report Contributors:
                      Keith Reichard
                      Robert Evans
                      Kelly Bonnette
Abbreviations
CFR
CERCLA
EPA
FSR
OIG
OMB
State
Code of Federal Regulations
Comprehensive Environmental Response, Compensation and Liability Act
Environmental Protection Agency
Financial Status Report
Office of Inspector General
Office of Management and Budget
Georgia Department of Natural Resources

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                   UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                                 WASHINGTON, D.C. 20460
                                                                          OFFICE OF
                                                                      INSPECTOR GENERAL
                                     June 26, 2003

MEMORANDUM

SUBJECT:   Report No. 2003-4-00101
             Costs Claimed by Georgia Department of Natural Resources
             Under EPA Assistance Agreement No. VC984299-98
FROM:      Michael A. Rickey /s/
             Director, Assistance Agreement Audits

TO:          Russell L. Wright
             Assistant Regional Administrator for the
              Office of Policy and Management, Region 4

We have examined the costs claimed by the Georgia Department of Natural Resources (State)
under Environmental Protection Agency (EPA) assistance agreement No. VC984299-98. This
Agreement was authorized under Section 104 of the Comprehensive  Environmental Response,
Compensation and Liability Act (CERCLA) to provide financial support for the Superfund Core
and Voluntary Cleanup Programs.

We questioned $16,559 of the total Federal share claimed of $3,930,101 as ineligible, because
the State did not comply with the Federal rules, regulations, and terms of the subject assistance
agreement.

This  audit report contains findings that describe problems the Office  of Inspector General (OIG)
has identified and corrective actions the OIG recommends.  The report represents the opinion of
the OIG, and findings contained in this report do not necessarily represent the final EPA
position. The OIG has no objection to the release of this report to any member of the public
upon request.

We held an exit conference on March 28, 2003, at the conclusion of field work, and informed the
State of the preliminary results of our audit. On April 28, 2003, we issued a draft report to the
State and Region 4 for comments. On June 12, 2003, the State provided comments on the draft
report. The State provided adequate documentation to support questioned travel costs of $1,266.
Thus, the $1,266 amount has been removed from the report. Further, the State indicated that it
had no comments on the questioned ineligible costs, and did not comment on the lack of physical
inventories of its CERCLA-funded property. The State also provided comments on actions
taken to improve the performance reports since the draft report was issued. The State's response
is included in the report as Appendix C.  The State declined a final exit conference after the
issuance of the draft report.

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Action Required

In accordance with EPA Manual 2750, EPA is required to provide this office with a
proposed management decision specifying the Agency's position on all findings and
recommendations in this report. The draft management decision is due within 120 days of the
date of this transmittal memorandum.

If you have questions concerning this report, please contact Keith Reichard, assignment
manager, at (312) 886-3045.

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                 Table of Contents
Independent Accountant's Report 	 1



Background 	 3



Results of Audit 	 5



Recommendations 	 7







 Appendices




     A    Details of Results of Audit	 9



     B    Scope and Methodology	  11



     C    State Response	  13



     D    Distribution 	  15

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                Independent Accountant's Report
We have examined the total costs claimed by the Georgia Department of Natural Resources
(State) under the Environmental Protection Agency (EPA) financial assistance agreement, as
shown below:
Assistance
Agreement No.
VC984299-98
Financial Status Report
Date
Submitted
12/17/02
Period
Ending
9/30/02
Cumulative
Total Outlays
Claimed
$4,366,781
Federal Share
$3,930,101
The State certified that the outlays reported on the Financial Status Report (Standard Form
269A) (FSR) were correct and for the purposes set forth in the Agreement. The preparation and
certification of each claim was the responsibility of the State.  Our responsibility is to express an
opinion on the claim based on our examination.

Our examination was conducted in accordance with the Government Auditing Standards, issued
by the Comptroller General of the United States, and the attestation standards established by the
American Institute of Certified Public Accountants and, accordingly, included examining, on a
test basis, evidence supporting the claimed costs and performing such other procedures as we
considered necessary in the circumstances (see Appendix B for details).  We believe that our
examination provides a reasonable basis for our opinion.

In our opinion, except for items of questioned costs (see Appendix A), the certified costs referred
to above present fairly, in all material respects, the allowable costs incurred in accordance with
the criteria set forth in the Agreement. Therefore, we consider the claims to be acceptable as a
basis to determine reasonable and allowable costs incurred in the performance of the Agreement.
We also found two areas of regulatory noncompliance during our examination. The "Results of
Audit" section, as well as Appendix A, provide details of our examination and conclusions.
                                                    Keith Reichard  /s/
                                                    Assignment Manager
                                                    Field Work End: March 28, 2003

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                                 Background
On September 23, 1997, EPA awarded Assistance Agreement No. VC984299-98 to the State.
The following table provides some basic information about the authorized project period and the
funds awarded under the Agreement covered by this audit.
Assistance
Agreement No.
VC984299-98
EPA
Share *
$4,745,965
Local
Share
$560,662
Total
Costs
$5,306,627
Project 1
Period |
10/01/97-09/30/03 |
       * The EPA share was 90 percent of total costs up to $4,745,965.

This Agreement was authorized under Section 104 of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) to provide financial support for the
following two programs:

       Superfund Core Program: The purpose of this program is to enable the State to
       complete development of a regulatory structure, streamline its environmental oversight
       and permitting functions, and refine its site tracking and assessment capabilities.

       Voluntary Cleanup Program: The purpose of this program is to develop the capacity
       to oversee and support voluntary cleanup projects, as opposed to enforcement or
       compulsory cleanups.  Work products include developing authorizing legislation and
       preparation of a manual for implementation of the program. EPA piggy-backed this
       program with the core program for only 3 years of the grant period (fiscal 1999 through
       2001). EPA then awarded the State a separate agreement to fund future Voluntary
       Cleanup Program activity (VC974387-01).

To assist the reader in obtaining an understanding of the report, key terms are defined below:

       Claimed Costs:
       Ineligible
       Questioned Costs:
Program outlays identified by the State on the Financial
Status Report (Standard Form 269 or 269A).

Costs incurred and claimed contrary to a provision of a law,
regulation, the Agreement, or other agreement or document
governing expenditure of funds.

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                              Results of Audit
Summary of Questioned Costs

      As noted in the following table, we questioned $18,399 in costs claimed under the
      Agreement as ineligible.  The questioned costs are detailed in Appendix A.
Category
Personnel Expenses
Fringe Benefits
Remaining Direct Costs
Totals
Federal Share (90%)
Claimed Costs
$2,972,707
$1,042,982
$351,092
$4,366,781
$3,930,101
Questioned as
Ineligible
$0
$0
$18,399
$18,399
$16,559
Regulatory Noncompliance

      We identified two areas of regulatory noncompliance during our examination. The State
      did not: (1) submit timely and complete performance reports as required by the
      Agreement and Federal regulations, and (2) conduct physical inventories of its
      CERCLA-funded property as required by 40 Code of Federal Regulations (CFR)
      35.6335. The areas of noncompliance are as follows:

             Performance Reports Not Submitted Timely: The  State's quarterly
             performance reports did not meet minimum Federal requirements. Specifically,
             the reports were incomplete and not consistently submitted when  due.

             The provisions of 40 CFR 35.6650 required the State to submit quarterly progress
             reports within 30 days of the end of each Federal fiscal quarter. This regulation
             also specified that the State's quarterly progress reports contain specific data,
             including:

             •  An explanation of work accomplished during the reporting period along with
                a description of corrective measures for any delays or problems.
             •  A comparison of the percentage of project completion to the project schedule
                and an explanation of significant discrepancies.
             •  A comparison of the estimated funds spent to date to planned  expenditures
                and an explanation of significant discrepancies.
             •  An estimate of the time and funds needed to complete the work required in the
                Agreement and a justification for any increase.

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During the period covered by our audit, the State submitted 19 of the 20 quarterly
progress reports that were due.  However, only two of those reports were
submitted timely. Further, four were not dated and thus could not be reviewed for
timeliness. For the remaining 13 quarterly progress reports, the State submitted
the reports an average of 54 days late, with a range of 2 to 238 days late. Also,
the 19 quarterly progress reports were incomplete, since they  did not include the
requisite financial data outlined above.

As a result, Region 4 did not have sufficient information to make an assessment
of the State's progress in meeting the Agreement's objectives, or determine
whether the unexpended funds were adequate to complete all  work required.

   State Comments

   The State has developed new procedures within the Hazardous Waste
   Management Branch to ensure timely submission of quarterly progress
   reports. The State now consolidates the quarterly progress reports with the
   requisite financial information.

   Auditor's Response

   We discussed this issue with the project officer responsible for the subject
   agreement. The State has submitted one satisfactory progress report since the
   issuance of the draft report.  We withhold acceptance of the new procedures
   pending consistency in the timeliness and completeness in the State's
   submission of quarterly progress reports.

CERCLA-Funded Assets Were  Not Inventoried:  The State did not conduct
biennial physical inventories of its CERCLA-purchased assets as required by
EPA regulations. To ensure that property is properly accounted for, the
provisions of 40  CFR 35.6335 required the State to conduct a physical inventory
of CERCLA funded-property at least every 2 years and to reconcile the inventory
to equipment records. The State did not conduct the required inventories or
reconciliations. Consequently, the State may not be able to account for and locate
all equipment purchased with EPA funds.

   State Comments

   The State did not comment on this finding.

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                     Recommendations
We recommend that EPA Region 4:

1.     Recover the Federal share questioned of $ 16,559.

2.     Continue to monitor the State's submission of quarterly progress reports to ensure
      that their new procedures are adequate to fully comply with the requirements of
      40 CFR 35.6650.

3.     Require that the State to: (a) complete a physical inventory of its CERCLA-
      purchased assets and reconcile the inventory to the equipment records, and
      (2) develop written procedures to ensure that the required bi-annual inventories
      are completed in compliance with provisions of 40 CFR 35.6335.

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                                                                   Appendix A
                   Details of Results of Audit
        (Assistance Agreement No. VC984299-98)
Category
(FSR)
Personnel Expenses
Fringe Benefits
Travel
Equipment
Supplies
Contractual
Other
Indirect Costs
Total
Federal Share (90%)
Claimed Costs
(FSR)
$2,972,707
$1,042,982
$66,394
$50,071
$17,018
$2,868
$214,741
$0
$4,366,781
$3,930,101
Questioned
Ineligible
$0
$0
$0
$428
$0
$0
$17,971
$0
$18,399
$16,559
Note



1


2



Note 1:     We questioned claimed equipment costs of $428 as ineligible.  In April 1999, the
           State submitted a purchase order for a computer to run its Geographic Information
           System. The purchase order listed the cost for this computer as $9,316. In June
           1999, the purchasing office amended the request to reflect actual costs of $8,888,
           or a difference of $428. The State recorded and claimed the purchase at the
           requested price of $9,316 instead of the actual price of $8,888. Therefore, we
           questioned the $428 difference as ineligible.

              State Comments

              The State indicated that it had no  comments on this finding.

Note 2:     We questioned claimed equipment rental costs of $17,971 as ineligible. The State
           leased a high capacity copier for 3 years beginning August 2001. The annual lease
           was $21,565, or $1,797 per month. For fiscal 2001 and 2002 combined, the State
           claimed a total of $43,130, or $21,565 per year, in rental expenses for the subject
           copier. Thus, during fiscal 2001, the  State claimed 12 months of rent even though
           the copier had been in place only 2 months. Neither the Agreement nor any of its
           amendments allowed the State to claim advance payments; the State was

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limited to claiming reimbursement of incurred costs. Since the copier had only
been in use for 2 months, the State should only have claimed $3,594 ($1,797 per
month for 2 months) for fiscal 2001 instead of $21,565.  Accordingly, we have
questioned  the $17,971 difference ($21,565 minus $3,594) as ineligible.

   State Comments

   The State indicated that it had no comments on this finding.
                              10

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                                                                          Appendix B

                        Scope and Methodology
We performed our examination in accordance with the Government Auditing Standards, issued by
the Comptroller General of the United States, and the attestation standards established by the
American Institute of Certified Public Accountants.  We also followed the guidelines and
procedures established in the Office of Inspector General Audit Process Handbook dated
November 5, 2002.

We conducted this examination to express an opinion on the claim, and determine whether the
State was managing its EPA assistance agreement in accordance with applicable requirements.
To meet these objectives, we asked the following questions:

       1.     Is the State's accounting system adequate to account for assistance agreement
             funds in accordance 40 CFR 35.6279?

       2.     Does the State maintain an adequate labor distribution system that conforms with
             requirements of Office of Management and Budget (OMB) Circular A-87?

       3.     Is the State properly drawing down assistance agreement funds in accordance with
             40 CFR 31.21?

       4.     Is the State complying with its reporting requirements under 40 CFR 31.41 and
             35.6650?

       5.     Are the costs claimed/incurred under the Agreement adequately supported and
             eligible for reimbursement under the terms and conditions of the Agreement, OMB
             Circular A-87, and applicable regulations?

       6.     Is the State meeting its matching or cost sharing requirements under 40 CFR
             35.6235?

In conducting our examination, we reviewed the project files and obtained the necessary
assistance agreement information for our examination. We interviewed the project officer and the
grants specialist to determine whether they had any concerns that needed to be addressed during
our examination. We also interviewed State personnel to obtain an understanding of the
accounting system and the applicable internal controls. We obtained and reviewed the single
audit reports, and a previous Office of Inspector General interim audit report (E5BGL4-04-0097-
4100496) dated August 22,  1994, to determine whether there were any reportable conditions and
recommendations addressed in those reports.

We reviewed management's internal controls and procedures specifically related to our
objectives.  Our examination included reviewing the State's compliance with OMB Circular


                                          11

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A-87; Title 31 CFR Part 205; Title 40 CFR Part 31; Resource Management Directive 2540,
Chapter 5; Treasury Manual, Chapter 6, Section 2075.30; and the terms and conditions of the
assistance agreement.  We also examined the claimed costs on a test basis to determine whether
the costs were adequately supported and eligible for reimbursement under the terms and
conditions of the assistance agreement, OMB Circular A-87, and applicable regulations. We
conducted our field work from January 27, 2003, to March 28, 2003.

After gaining an understanding of the State's financial management system, we reconciled the
claimed costs with the State's  general ledger.  Based on our judgment, we reviewed selected
transactions for allowableness. For personnel and fringe benefits, we reviewed costs for January,
February, and March of 2002.  For all other direct costs, we tested transactions on a judgmental
basis, and selected at least one transaction from each of the 5 years covered by this examination.
In total, we tested 9.4 percent  of the claimed costs.
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                                                                                  Appendix C

                              State Response
                                          Georgia Department of Natural Resources
                                          2 Martin Luther King, Jr. Dr., S.E., East Floyd Tower, Atlanta, Georgia 30334
                                                                          Lonice C. Barrett, Commissioner
                                                                             Harold F. Reheis, Director
                                                                           David Word, Assistant Director
                                                                                 404/656-4713
                                        June 12, 2003

Mr. Michael A. Rickey, Director
Assistance Agreement Audits
Office of Inspector General
U.S. Environmental Protection Agency
Washington, D.C.  20460

SUBJECT:       Draft Audit Report of Costs Claimed by Georgia Department of Natural
                Resources Under EPA Assistance Agreement No. VC984299-98

Dear Mr. Rickey:

        We appreciate the  opportunity to comment on the draft audit report prepared by your
staff.  It was a pleasure to work with Mr. Kelly Bonnette and Mr. Robert Evans on this project.

        In the Results of Audit, there are two areas addressed, questioned costs and regulatory
noncompliance.  A total of $18,399 was questioned as ineligible and $1,266  as unsupported.
There  are no comments on the "questioned as ineligible" costs.  Additional documentation to
support $2,560.29 in  claimed lodging costs for the period reviewed has already been provided
to the audit team. Therefore,  the $1,266 in "questioned  as unsupported" costs in  the  travel
category should  be removed.

        Two areas of regulatory noncompliance were noted in the draft report.  Although there is
no  way to correct past submittals,  a new  procedure has  already  been established  in  the
Hazardous  Waste Management Branch  to ensure timely  submittals of all  components  of
quarterly  progress  reports required  by the grant.  It should be noted that financial information
was submitted separately from programmatic  information  directly to EPA Program staff for many
of the quarters  in the audit review period.  This  has  now  been consolidated into a single report
to  avoid  any  future  confusion.  There   are  no  additional  comments on  the  regulatory
noncompliance issues.

        We understand that  the report will  now be  finalized  and recommendations  added.
Region IV  will then determine any  further  course  of action on the audit recommendations.
Please  contact  Verona  Barnes  at 404/656-7802 if  you  have  any questions about these
comments.

                                        Sincerely,
                                        Harold F. Reheis, Director
                                        Environmental Protection Division
HFR:vb
cc:      Aubrey Hendrix
        Rehnee Dyer
        Jennifer Kaduck
        Bill Mundy
S:\RDRIVE\GRANTS\CERCLACore\AuditComments.doc
                                           13

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                                                                        Appendix D

                                 Distribution
Region 4
      Assistant Regional Administrator for the Office of Policy and Management,
      Region 4 (Action Official) (Responsible for report distribution to recipient)
      Audit Liaison

Headquarters

      Director, Grants Administration Division (3903R)
      Agency Audit Followup Coordinator
      Associate Administrator for Congressional and Intergovernmental Relations
             (1301A)
      Associate Administrator for Communications, Education, and Media Relations
             (1101A)

Office of Inspector General

      Inspector General (2410)
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