U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Quality Control Review
Quality Control Review of
Leland O'Neal, CPA,
Single Audit for Town of
Worthington, West Virginia, for
Fiscal Year Ended June 30, 2004
Report No. 09-2-0195
July 14, 2009
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Report Contributors:
Leah Nikaidoh
Lisa McCowan
Abbreviations
AICPA
Assistance Agreement
Auditor
CFR
CPA
CPE
EPA
FY
GAS
OIG
OMB
Recipient
SEFA
American Institute of Certified Public Accountants
EPA Assistance Agreement No. C546600-01
Leland O'Neal, CPA
Code of Federal Regulations
Certified Public Accountant
Continuing Professional Education
U.S. Environmental Protection Agency
Fiscal Year
Government Auditing Standards
Office of Inspector General
Office of Management and Budget
Town of Worthington, West Virginia
Schedule of Expenditures of Federal Awards
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
09-2-0195
July 14, 2009
Catalyst for Improving the Environment
Why We Did This Review
One of the responsibilities of
I Federal agencies is to conduct
quality control reviews of
selected audits made by non-
Federal auditors. In reviewing
the single audit for the Town of
Worthington, West Virginia, for
the fiscal year ending June 30,
2004, we found a lack of
adequate detail in describing the
reported deficiencies and how the
related recommendations would
address the findings reported.
Background
On June 8, 2000, the U.S.
Environmental Protection
Agency (EPA) awarded the Town
of Worthington, West Virginia, a
grant for $1.2 million for
designing and constructing a
drinking water system. Federal
regulations require entities that
expend more than $500,000 of
Federal funds in a given year to
have a single audit conducted.
Leland O'Neal, CPA, conducted
the single audit for the fiscal year
ending June 30, 2004.
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/
20090714-09-2-0195.pdf
Quality Control Review of Leland O'Neal, CPA,
Single Audit for Town of Worthington,
West Virginia, for Fiscal Year Ended June 30, 2004
What We Found
The single audit report for the Town of Worthington, West Virginia, for the
fiscal year ending June 30, 2004, was substandard. According to the Uniform
Quality Control Guide for A-l 33 Audits, issued by the President's Council on
Integrity and Efficiency, a substandard audit is defined as one that contains
significant audit deficiencies that could potentially affect the audit results. The
audit did not meet general, field work, and reporting standards as required by
the Government Auditing Standards. For example,
• The audit documentation did not contain sufficient evidence that the
audit was adequately planned and compliance testing was not
supported by evidential matter.
• The audit report did not contain a finding that the recipient's
accounting system was inadequate when it should have, and did not
include a corrective action plan from the recipient.
• The auditor did not meet Federal continuing education requirements.
As a result, the audit report could not be used for its intended purpose, which
was to provide the Federal agency with assurance that the grant funds were
spent in compliance with Federal requirements.
What We Recommend
We recommend that EPA's Region 3 Regional Administrator:
• Meet with the Town of Worthington officials to ensure that the Town
understands Office of Management and Budget Circular A-133
requirements, and its obligations to meet these requirements.
• Designate the Town of Worthington as a high-risk grant recipient, in
accordance with Title 40 Code of Federal Regulations Part 31.12,
should the recipient receive any new EPA awards.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
July 14, 2009
MEMORANDUM
SUBJECT: Quality Control Review of
Leland O'Neal, CPA,
Single Audit for Town of Worthington, West Virginia,
for Fiscal Year Ended June 30, 2004
Report No. 09-2-0195
"W\ f; ' V-vx "\ '
' \.'J..k-\-^SLA- Y^ X V
FROM: Melissa M. Heist
Assistant Inspector General for Audit
TO: William C. Early
Acting Regional Administrator, Region 3
This is our final report on the quality control review of the single audit of the Town of
Worthington, West Virginia, for the year ended June 30, 2004, performed by Leland O'Neal,
CPA. The report represents the opinion of the Office of Inspector General (OIG), and the
findings contained in this report do not necessarily represent the final U.S. Environmental
Protection Agency (EPA) position. The OIG has no objection to the release of this report.
We would like to acknowledge the cooperation and assistance provided by Region 3 staff
during the course of our review.
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 $152,290.
On February 13, 2009, we issued a draft report to the recipient and the single auditor for
comment. Region 3 incorporated responses from the recipient, and responded to our report
on April 24, 2009. The single auditor did not respond to the draft report. We modified our
recommendations based upon Region 3's response to the draft report. We have included an
analysis of Region 3's response in the appropriate sections of this report. Region 3's entire
response is included as Appendix B.
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Action Required
In accordance with EPA Manual 2750, you are required to submit a written response to our
office within 90 days of report date. Your response should include a corrective action plan,
including milestones and dates. This report will be available at http://www.epa.gov/oig.
If you have any questions or need additional information, please contact Janet Kasper at
(312) 886-3059 or kasper.janet@epa.gov. or Leah Nikaidoh at (513) 487-2365 or
nikaidoh.leah@epa.gov.
Enclosure
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Quality Control Review of Leland O'Neal, CPA, Single Audit for 09-2-0195
Town of Worthington, West Virginia, for Fiscal Year Ended June 30, 2009
Table of Contents
Chapters
1 Introduction 1
Purpose 1
Background 1
2 Noncompliance with Field Work Standards 3
Planning Not Documented 3
Insufficient Evidential Matter 5
Lack of Documentation 8
Major Program Compliance Testing Not Done for Recipient 9
Recommendations 9
Auditee Response and OIG Analysis 10
3 Noncompliance with Reporting Standards 12
Inadequate Recipient Accounting System Not Reported 12
No Corrective Action Plan 13
Federal Criteria Not Cited 13
Schedule of Expenditures of Federal Awards Incomplete 13
Corrective Actions 13
4 Noncompliance with General Standards 14
Auditee Response and OIG Analysis 15
Schedules
1 Town of Worthington Single Audit Findings and Relevant Federal Criteria.... 16
2 Status of Recommendations and Potential Monetary Benefits 18
Appendices
A Scope and Methodology 19
B Auditee's Response 20
C Distribution 22
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09-2-0195
Chapter 1
Introduction
Purpose
We conducted a quality control review of the single audit1 for the Town of
Worthington, West Virginia (recipient), for the fiscal year ended June 30, 2004.
The audit was performed by Leland O'Neal, Certified Public Accountant (CPA).
The purpose of the quality control review of a single audit is to determine whether
the audit was conducted in accordance with generally accepted government
auditing standards and reporting requirements of Office of Management and
Budget (OMB) Circular A-133, Audits of States, Local Governments, andNon-
Profit Organizations, including its related compliance supplement; and other
applicable audit guidance.
OMB Circular A-133 § 400 (3) states that one of the responsibilities of Federal
agencies is to obtain or conduct quality control reviews of selected audits made by
non-Federal auditors. In reviewing the single audit for the Town of Worthington
for the year ending June 30, 2004, we found a lack of adequate detail describing
the reported deficiencies and how the related recommendations would address the
findings reported. In addition, we found that the Schedule of Expenditures for
Federal Awards (SEFA) did not meet the requirements of OMB Circular A-133
§ 310(b). As a result, we initiated a quality control review.
As part of performing a quality control review, the reviewer is to determine
whether a noncompliance results in a substandard audit or a technically deficient
audit. A substandard audit notes significant audit deficiencies that could
potentially affect the audit results, thus making the report unusable for fulfilling
one or more audit objectives. A technically deficient audit identifies deficiencies
requiring corrective action that do not appear to affect the audit results.
Background
EPA awarded EPA Assistance Agreement No. C546600-01 (Assistance
Agreement) to the Town of Worthington on June 18, 2000. The assistance
agreement was awarded for the project period of June 18, 2000, through
September 30, 2004, for a total of $1,286,787. EPA's participation was
96 percent, or $1,235,316, under this grant. The purpose of the assistance
agreement was to provide funding to design and construct a drinking water
system, including replacing the existing water lines in the Town of Worthington,
The term "single audit" means an audit conducted in accordance with OMB Circular A-133.
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09-2-0195
replacing existing water meters in the Four States Public Service District, and
extending a new drinking water service for certain areas in the district.
Under OMB Circular A-133, non-Federal entities that expend Federal funds of
$500,000 in a given year are required to have a single audit conducted. A single
audit has two main objectives: (a) to conduct an audit of the entity's financial
statements and the report on the SEFA, and (b) to conduct a compliance audit of
Federal awards expended during a fiscal year. OMB Circular A-133 requires that
auditors comply with generally accepted government auditing standards when
conducting the audit.2
Under Title 40, Code of Federal Regulations (CFR), Part 31.12, a grantee may be
considered "high-risk" if the awarding agency determines that the grantee has
financial or grants management concerns. The awarding agency can impose
special conditions or restrictions on grant awards accordingly.
In December 2004, the recipient entered into a contract with Leland O'Neal, CPA
(auditor) to conduct a single audit of the Town of Worthington, West Virginia, for
the year ended June 30, 2004. The auditor signed the report on December 29,
2004.
The audit was for the year ending June 30, 2004. The June 2003 version of Government Auditing Standards is
applicable to financial audits with performance periods ending after January 2004.
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09-2-0195
Chapter 2
Noncompliance with Field Work Standards
The single auditor did not meet field work standards when conducting the Fiscal
Year (FY) 2004 single audit of the Town of Worthington, West Virginia.
Specifically, the audit documentation did not demonstrate that the auditor:
• Adequately planned the audit,
• Adequately supported compliance testing with evidential matter,
• Adequately supported reported conclusions, and
• Performed compliance testing at the Town of Worthington.
Government Auditing Standards (GAS) have three field work standards that
require the auditor to: (a) adequately plan the audit work, (b) obtain a sufficient
understanding of internal control to plan the audit, and (c) obtain sufficient
evidence to provide a reasonable basis for the opinion rendered in the audit report.
To conduct the audit, the auditor relied upon a series of standard checklists from
the Practioners Publishing Company's Guide to Audits of Local Governments.
The intent of the checklists is to provide a standardized method to conduct various
aspects of the single audit, such as planning and internal control testing. Other
than the checklists, little other documentation supported the single auditor's
planning decisions, compliance testing, and reported conclusions.
The audit documentation did not provide sufficient information to show that the
single auditor met GAS standards. Therefore, EPA cannot rely on the findings
and conclusions presented in the single audit report.
Planning Not Documented
The single auditor did not adequately document his decisions when planning the
audit. The purpose of planning is to gain an understanding of the entity's internal
controls in order to assess the risk of material misstatement and to design
additional audit procedures. The planning documentation the auditor prepared
was not sufficient to determine whether GAS standards were met.
GAS has several requirements that pertain to planning the audit that need to be
met for an audit to comply with GAS.
• GAS 4.03 requires the auditor to gain a sufficient understanding of
internal control in order to plan the audit and design audit procedures.
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• GAS 4.17 requires auditors to design the engagement to provide
reasonable assurance of detecting material misstatements that result from
violations of contract or grant agreement provisions.
The auditor relied upon checklists to plan the audit; we found little other
documentation to demonstrate the auditor's understanding of internal controls or
what audit procedures the auditor decided were necessary based on that
understanding. Below are some examples of the checklists and deficiencies.
• Form SAP-1: Audit Program for Federal Award Programs-General
Procedures - The first seven program steps relate to planning the
assignment. The audit program had preparer initials next to each step to
indicate that the step was completed, but did not include indices to
supporting documentation that showed what work was performed. Some
documents to support the audit steps, such as board meeting minutes and
the engagement letter, were included in the audit documentation but were
not labeled or indexed. For other steps, audit documentation existed that
could have been used to complete the analysis, but no evidence existed
that the analysis was actually performed. For example, one of the
planning steps requires the auditor to compare the grant budget to actual
expenditures to identify any violations or over-expenditures. The auditor
indicated on the audit program that the step was performed, and the audit
documentation included a copy of the grant budget. However, we found
no evidence that the auditor compared the budget to actual expenditures or
what conclusions the auditor drew from the analysis. This analysis should
have influenced the auditor's testing of allowable activities and cost
controls.
• Form GCX-3a: Planning Form -Audits of Federal Award Programs -
This checklist is to be used to gather planning information on an auditee's
operations, organization, and internal controls as they pertain to selected
Federal programs. The single auditor did not adequately document
conclusions on this checklist or identify related supporting documentation.
For example, Question 31 asks if the flow of information through the
financial reporting system as it applies to Federal programs is adequately
documented. The auditor answered "no" to the question. However, no
audit documentation showed how the auditor arrived at that answer. The
checklist refers to another checklist, GCX-3, as the basis for the response
to Question 31, but that checklist was not included in the audit
documentation. The instructions for this question also state that if the
single auditor answered "no," then the single auditor needed to either
complete two additional checklists or prepare a memorandum covering the
flow of information for the Federal programs. The auditor did not provide
any such documentation. Therefore, we cannot determine how the auditor
concluded that the flow of information through the financial reporting
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system was not adequately documented or how that conclusion influenced
the audit testing.
Although the single auditor identified in the audit documentation concerns
regarding the adequacy of prior years' audits, the auditor did not report
this issue in the FY 2004 single audit report. The auditor used checklist
GCX-3a to gather the information needed to understand the recipient's
internal control system and compliance with laws and regulations. For
Step 21, the auditor was asked to describe the nature and cause of the
misstatements and programs affected if material misstatements have been
noted in prior audits. The auditor indicated on the checklist "initialyears
not properly audited. " The auditor did not provide any other information
or documentation to elaborate on the nature of this problem and how this
issue would impact the audit of the financial statements and the report on
major Federal program compliance. As a result, we cannot determine if
this matter was adequately resolved or if it should have been reported as
an internal control weakness in the FY 2004 single audit report.
Form GCX-5d: Considering Fraud Risk Factors for an Audit of Federal
Award Programs - This checklist is used to document the single auditor's
consideration of whether information that has been gathered about the
auditee and its operations indicate the presence of one or more fraud risk
factors. The single auditor indicated that there were some risk factors for
fraud, but did not provide any evidence of how he addressed the risk
factors in designing the audit. For example, in Part 1 - Fraudulent
Financial Reporting (Opportunities) of the checklist, the single auditor
provided several notations in the Optional Comments column, including
"N/A," "RIC VI need to meet payroll," "RIC," "RIC VI," "Bldg Acq.,"
and "RIC in control." Since there was no further explanation of the
comments, it was not clear what risk factors the auditor identified, how
they were identified, or how the conclusions impacted the audit design.
Insufficient Evidential Matter
The single auditor did not provide sufficient evidential matter to support the
conclusions on internal controls and compliance with law, regulations, and grant
agreements. GAS 4.03(c) requires the auditor to obtain sufficient competent
evidential matter to provide a reasonable basis for the report's opinion. The
auditor concluded that the Town of Worthington did not comply with Federal
regulations and that the internal controls were not adequate. However, the
documentation contained limited or no evidence that the auditor tested those areas
for which Federal guidelines require testing. As a result, the documentation did
not contain the evidence needed to support the conclusion in the audit report.
The single auditor used a standardized checklist to assess and test internal controls
for the EPA grant. The checklist, Internal Control System - Federal Award
Programs (Form SCX-8a), allows the single auditor to assess internal controls for
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individual Federal programs selected for audit. The checklist is divided into
sections that correspond to the OMB Circular A-133 2003 Compliance
Supplement audit objectives for the 14 compliance requirements. For those
compliance requirements applicable to a Federal program, the single auditor is to
assess if the overall objectives of related internal controls have been met, and to
conduct tests on the internal controls. The checklist instructions state that as part
of internal control testing the auditor should provide references to memos or other
worksheets to document evidence of tests performed.
The auditor did not correctly assess which of the 14 compliance areas were
applicable to the Town of Worthington. The auditor selected Real Property
Acquisition and Relocation Assistance as applicable for reviewing the purchase of
a building by the grant recipient. However, the auditor should have selected
Equipment and Real Property Management. The intent of the Real Property
Acquisition and Relocation Assistance compliance area is to assess a
government's acquisition of real property for a Federal program or project
resulting from displacement, as allowable under the Uniform Relocation
Assistance and Real Property Acquisition Policies Act of 1970, as amended.
Since the purchase of the building was not part of a relocation effort due to
displacement, the single auditor should have assessed this acquisition under the
Equipment and Real Property Management compliance area.
No Evidence of Testing
While the auditor identified nine compliance areas as being applicable to the
Town of Worthington, the audit documentation did not show any evidence of
testing for three compliance areas, as shown in Table 2-1.
Table 2-1: Analysis of Compliance Supplement Requirements
Compliance Supplement Area Tested
Allowable Activities
Allowable Costs
Cash Management
Davis-Bacon Act
Eligibility
Matching, Level of Effort
Procurement
Real Property Acquisition, Relocation
Reporting
Total
No Evidence
of Testing
X
X
X
3
Limited
Documentation
of Testing
X
X
X
X
X
X
6
Source: Selected audit areas from single audit documentation; noncompliance
information based upon Office of Inspector General (OIG) analysis
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For example:
• To test compliance with the Davis-Bacon Act, the auditor is required to
determine whether the non-Federal entity notified contractors and
subcontractors of the requirements to comply with the Davis-Bacon Act
and obtained copies of certified payrolls. The auditor marked on the
checklist that controls were effective, but audit documentation contained
no evidence to support the conclusion or what testing was performed.
• To test compliance for procurement, the auditor is required to determine
whether procurements were made in compliance with the provisions of
OMB Circular A-102, Grants and Cooperative Agreements with State and
Local Governments, and other procurement requirements specific to an
award. The auditor marked on the checklist that matters controlled by the
project management contractor were not adequate. However, no audit
documentation or analysis supported this conclusion or what testing was
performed.
Lack of Evidential Support
For six compliance areas tested, there was an overall lack of evidential support for
the testing performed and to support the applicability of testing to compliance
supplement requirements and the outcome of the test results as presented in the
single audit report. For example:
• The single auditor assessed the internal controls as ineffective for three
compliance areas: Allowable Activities, Allowable Costs, and Reporting.
For the first two compliance areas, the single auditor stated in the
comments column that all transactions were examined. For the reporting
compliance area, the single auditor stated in the comments column that
this area was the responsibility of the project administration contractor.
While some audit documentation could have been attributed to these three
compliance areas, the single auditor did not specifically identify or
document any testing of related internal controls, or how the results of
testing related to specific major program compliance supplement
requirements. Therefore, we could not determine if the single auditor's
assessment is valid.
• The single auditor assessed the internal controls to be ineffective for Cash
Management and Matching, Level of Effort, Earmarking requirements and
reported a finding for each requirement (Findings 04-04 and 04-05).
When we initially reviewed the single audit documentation provided, we
could not readily identify the documentation that related to these findings.
Only through additional written explanation provided by the single auditor
were we able to identify the worksheet that the single auditor prepared to
assess this compliance area.
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Lack of Documentation
The audit did not comply with the GAS standard for audit documentation. GAS
4.22 requires that auditors prepare documentation in sufficient detail to provide a
clear understanding of the work performed, the audit evidence obtained, and the
conclusions reached. As described in the Evidential Matters section of this report,
audit documentation was not sufficient for us to determine how the auditor
planned the audit or the nature and extent of testing that he performed. As a
result, the audit of the Town of Worthington did not meet the standard for
documentation.
The American Institute of Certified Public Accountants (AICPA) standards state
that audit documentation is an essential element of audit quality and provides the
principal support for the auditor's report. While the standards do allow for
professional judgment in regards to the quantity, type, and content of audit
documentation, the standards do state that audit documentation should enable an
experienced auditor to understand:
• The nature, timing, and extent of audit procedures;
• The results of the audit procedures and evidence obtained; and
• The conclusions reached on significant matters.
As discussed in the Evidential Matters section of this report, the audit
documentation often did not identify what procedures the auditor performed to
evaluate compliance with Federal requirements. While the auditor did indicate on
the checklists whether he concluded that controls over specific areas were
effective or ineffective, because we could not identify related audit documentation
it was not always clear to us how the auditor reached those conclusions.
The single auditor issued an adverse opinion on the report of major program
compliance. From the documentation that he provided, we could not determine
how he arrived at an adverse opinion. In a conference call with us, the auditor
stated that he issued an adverse opinion because he had to reconstruct the Town of
Worthington's financial records. Without this explanation, we would not been
able to determine why he issued an adverse opinion on the report on major
program compliance.
The single auditor provided a variety of documents to support his audit work, but
we could not easily relate these documents to audit steps performed. The
documents were missing specific information, such as the purpose, source, and
conclusions. For example, a copy of the Town of Worthington's cash receipts
journal for the EPA project was included in the audit documentation. No
indication existed on this document as to its purpose, who prepared the document,
or what audit steps were performed to evaluate the information.
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Similar issues regarding the completeness of the audit documentation were
identified in the single auditor's peer review conducted for the fiscal year ended
December 31, 2004. The reviewer found the practitioner to be in substantial
compliance, but identified the following issues that he provided separately in a
letter to the single auditor:
The firm's quality control policies and procedures require the
engagement partner to document planning stages of audit
engagements in the area of assessment of fraud risk factors within
the internal control structure and planning materiality. During
our review of engagements, we noted instances where this
documentation was partial and incomplete. We satisfied ourselves
that the engagement partner appropriately addressed the issues
that did not completely document the conclusions.
Major Program Compliance Testing Not Done for Recipient
No evidence existed in the audit documentation that the auditor tested compliance
with program requirements at the Town of Worthington. The auditor focused his
review on the organization that administered the grant for the town. The auditor
did not evaluate the town's oversight of the contractor. The Town of
Worthington had a contract with West Virginia's Region VI's Planning and
Development Council to administer the water project, including the grant. The
auditor's report stated that the contractor assumed responsibility for compliance
as one consideration in its contract as project administrator. The single auditor
assessed the contractor's compliance with program requirements, but no evidence
existed that he assessed the Town of Worthington's compliance.
As part of the procurement compliance testing, the auditor is to evaluate the grant
recipient's monitoring of contracting activities. One of the questions the auditor
is to consider is whether management has a policy to periodically review
contractor activities and take follow-up action for identified problems. The
auditor indicated on the checklist that a policy did not exist, but no indication
existed that additional testing was performed to address the issue. In the report,
the auditor expressed concerns about the contractor's management of the grant,
but no indication existed about what the Town was doing to oversee the
contractor.
Recommendations
We recommend that EPA's Region 3 Regional Administrator:
2-1 Meet with the Town of Worthington officials to ensure that the Town
understands OMB Circular A-133 requirements and its obligations to meet
these requirements.
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2-2 Designate the Town of Worthington as a high-risk grant recipient, in
accordance with 40 CFR 31.12, should the recipient receive any new EPA
awards. As part of this process, Region 3 should conduct a pre-award
financial management analysis of the recipient, to ensure that the recipient
has the ability to manage its grant funds in accordance with Federal
regulations.
Auditee Response and OIG Evaluation
Region 3 coordinated with the Town of Worthington, West Virginia, and
provided a response to the draft report on April 24, 2009. Region 3 spoke with
the Town Mayor on two occasions to discuss the recipient's responsibilities under
OMB Circular A-133.
In the draft report, we had two recommendations that the Region did not agree to,
as follows:
• Require the Town of Worthington and the single auditor to develop a plan to
address the deficiencies identified in the single audit, including additional
planning and testing that may need to be performed.
• Require the Town of Worthington to submit a revised single audit report for
FY 2004.
Since the OIG determined that the single audit report was substandard, Region 3
did not believe that addressing the audit report deficiencies and reissuing the
single audit report would be the best options. Instead, Region 3 proposed that, for
future awards, the Town of Worthington would be designated as high-risk, in
accordance with 40 CFR Part 31.12, and appropriate special conditions would be
imposed upon the Town.
Under 40 CFR Part 31.12, a grantee may be considered "high-risk" if the
awarding agency determines that the grantee has financial or grants management
concerns. The awarding agency can impose special conditions or restrictions on
grant awards accordingly. As discussed under Major Program Compliance Not
Tested section, the single auditor did not perform major program compliance
testing for the Town of Worthington. Therefore, we have no assurance that the
Town of Worthington had the programmatic ability to manage its assistance
agreements. Also, as discussed in Chapter 3, the recipient was unable to prepare
its Schedule of Expenditures of Federal Awards and related notes because the
recipient did not have adequate accounting records. Given these concerns, we
agree that it would be appropriate for Region 3 to make a high risk determination
for the Town of Worthington for any future grant awards.
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Region 3, when it was performing close-out of this grant, stated that it contacted
the single auditor. Region 3 discussions with the single auditor were not
productive. Region 3 questioned the quality of the single audit report, and did not
place any reliance on the findings. Instead, Region 3 performed its own review of
the grant final payment package and determined that all of the costs claimed by
the Town were eligible. Region 3 also noted that, as part of grant oversight,
Region 3 had the West Virginia Bureau of Public Health perform grant
management oversight, including review of procurements and project inspections.
The single auditor did not provide any formal response to the draft report to
Region 3 for consideration.
Region 3's discussions with the Town of Worthington regarding its
responsibilities under OMB Circular A-133 addressed Recommendation 2-1.
Therefore, no further action is required for this recommendation.
In light of Region 3's response and our document review, we deleted
Recommendations 2-2 and 2-3 that were presented in the draft report, and
incorporated Region 3's suggested recommendation for high-risk designation. We
reviewed project officer documentation related to Region 3's review and close-out
of the grant. Region 3's review of the final grant payment package, and oversight
performed by the West Virginia Bureau of Public Health provided adequate
assurance that the costs claimed by the Town were allowable for reimbursement
by EPA.
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Chapter 3
Noncompliance with Reporting Standards
The Town of Worthington, West Virginia, FY 2004 single audit report did not
meet the report requirements of OMB Circular A-133. The report did not include:
• A finding that the recipient's accounting system was not adequate.
• A corrective action plan from the recipient.
• Applicable Federal criteria that would be relevant to findings.
• Notes to the Schedule of Federal Expenditures (SEFA)
As a result, the single audit report did not meeting GAS reporting requirements
and was not adequate to allow EPA to assess the Town of Worthington's
compliance with applicable Federal regulations.
Inadequate Recipient Accounting System Not Reported
The recipient did not prepare its SEFA, as required by OMB Circular A-133. The
single auditor informed us that he had to prepare the recipient's SEFA because the
project administration contractor's accounting records were inadequate. The
single auditor should have reported that the recipient was in noncompliance with
OMB Circular A-133 and 40 CFR Part 31.20.
Federal regulations state that the grant recipient is to identify the amounts
expended under Federal grants and the recipient is to maintain records showing
how the funds were used. OMB Circular A-133 §.300(a) states that the auditee
shall identify in its accounts all Federal awards received and expended and the
Federal programs under which they were received. Section .300(d) states that the
auditee will prepare appropriate financial statements, including the schedule of
expenditures of Federal awards. Also, 40 CFR Part 31.20(b)(2) states that
grantees must maintain records which adequately identify the source and
application of funds provided for financially-assisted activities.
In Finding 04-01 in the single audit report, the single auditor reported that the
project administration contractor did not construct proper journals of original entry
and related ledgers to allow the Town to prepare its accounting entries correctly.
As the Town of Worthington is the grant recipient, the Town is responsible for
preparing the SEFA, not the single auditor or the project administration contractor.
If the grant recipient is unable to prepare the SEFA, the single auditor should have
reported this fact as a noncompliance with OMB Circular A-133. If the Town's
accounting records were inadequate due to incomplete information from its
contractor, then the single auditor should have reported that the Town's accounting
system did not meet the requirements of 40 CFR Part 31.20.
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No Corrective Action Plan
OMB Circular A-133 requires the recipient to prepare and submit a corrective
action plan in the single audit report when there are reported findings. The single
auditor obtained comments from the project administration contractor regarding
the single audit findings. There was no evidence in the audit documentation or
single audit report showing that the single auditor: (1) submitted the draft report
to the Town of Worthington for its response, and (2) obtained a corrective action
plan from the recipient to include in the single audit report. Because the single
audit report did not include a corrective action plan from the recipient, the single
audit report is incomplete.
Federal Criteria Not Cited
The single audit findings did not contain sufficient applicable Federal criteria that
would be relevant to findings. The single auditor either included only State-related
criteria or general citations to Federal criteria, or had no reference to criteria.
Without properly identifying relevant criteria, EPA will not have all the information
it needs to adequately resolve single audit findings with the grant recipient.
OMB Circular A-133 § 510(b) states that audit findings shall be presented in
sufficient detail for the auditee to prepare a corrective action plan and take
corrective action, and for Federal agencies and pass-through entities to arrive at a
management decision. OMB Circular A-133 § 510(b)(2) specifically states the
criteria or the specific requirement upon which the audit finding is based will be
included as part of the single audit finding.
The single auditor reported eight findings in the single audit report. For one
finding, the single auditor identified State criteria but no Federal criteria (Finding
04-01). For two other findings, the single auditor generally referenced OMB
Circular A-133 or OMB Circular A-87 but did not include the specific applicable
citations (Findings 04-06 and 04-07). For five remaining findings, the single
auditor did not identify any criteria in his report (Findings 04-02, 04-03, 04-04,
04-05, and 04-08). Details of our analysis are presented in Schedule 1.
Schedule of Expenditures of Federal Awards Incomplete
The SEFA, as opined on by the single auditor, did not include required notes.
OMB Circular A-133 § 310(b)(4) specifically states, at a minimum, the schedule
shall include notes that describe the significant accounting policies used in
preparing the schedule. The single auditor asserted that as long as notes were in the
financial statements, no other notes were required. This point is not correct. The
recipient should have prepared required notes as part of its auditee responsibilities.
Corrective Actions
See Chapter 2 for recommended actions to address these issues.
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Chapter 4
Noncompliance with General Standards
The single auditor did not meet continuing professional education (CPE)
requirements, as required by GAS, for the 2-year period covering the single audit.
While the single auditor was able to provide training information to show that he
met State requirements, he did not provide information to show that he met more
stringent Federal requirements. As a result, the single auditor did not fully
comply with professional education requirements required by GAS.
GAS 3.45 requires that each auditor performing work under GAS should
complete, every 2 years, at least 80 hours of CPE that directly enhance the
auditor's professional proficiency to perform audits and/or attestation
engagements. At least 24 hours of the 80 hours of CPE should be in subjects
directly related to government auditing, the government environment, or the
specific or unique environment in which the audited entity operates. At least
20 of the 80 hours should be completed in any 1 year of the 2-year period.
We reviewed CPE documentation provided by the single auditor. The single
auditor provided CPE information for the period January 1, 2002, to December
31, 2004. For our review, we assessed the training information provided for the
2-year period from January 1, 2003, to December 31, 2004. For this period, the
CPA obtained 20 hours of CPE training in 2003 and 44 hours in 2004, for a total
of 64 hours. The CPA did meet the requirements to have at least 20 hours in each
fiscal year under review, as well as having 24 hours of government-related
training. However, the single auditor did not meet the overall requirement of
having 80 hours of CPE for the 2-year period under review.
We reviewed the single auditor's peer review report for the fiscal year ending
December 31, 2004, to determine if the reviewer identified any issues regarding
the single auditor's CPE requirements. While no findings were in the peer
review, in a separate letter to the single auditor the reviewer reported:
The firm's quality control policies and procedures require firm
personnel to meet the professional development requirements of
both their state board of accountancy and the American Institute of
Certified Public Accountants. While those requirements were met,
the courses taken did not provide firm personnel with sufficient
information about current developments in professional
accounting standards.
The peer reviewer determined that the single auditor met CPE requirements for
the State of West Virginia. However, the State's CPE requirements vary slightly
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from GAS. The State requires that for a 3-year rolling period, the single auditor
obtain 120 hours of CPE and at least 20 hours in any individual year. While the
single auditor met the State's requirements, he did not meet the 2-year continuing
professional education requirement for GAS. Therefore, the single auditor may
not be qualified to perform any Federal audits, including single audits performed
in accordance with OMB Circular A-133.
Auditee Response and OIG Analysis
The single auditor did not provide a response to the draft report. Consequently,
we were unable to assess his quality control procedures to ensure that applicable
GAS continuing professional education requirements were identified and met.
Region 3 does not have any responsibilities to address this noncompliance
finding. The OIG will continue to pursue this matter separately with the single
auditor.
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Schedule 1
Town of Worthington Single Audit Findings and Relevant Federal Criteria
Summary of Findings
Criteria Identified
in Report
Applicable Criteria
04-01 The project administration contractor failed
to properly construct accounting records to allow
the town's personnel the ability to make
appropriate entries into its journals.
State of West
Virginia's Public
Service Commission
requires the utilization
of its prescribed code
of accounts; State
Auditor requires that
books be maintained
according to its
standards.
40 CFR Part 31.20(b)(1) states the financial
management systems of other grantees and
subgrantees must meet the following standard:
Financial Reporting. Accurate, current and
complete disclosure of the financial results of
financially assisted activities must be made in
accordance with the financial reporting
requirements of the grant or subgrant.
04-02 The town filed inaccurate annual reports
with the State. The town provided incomplete
books and financial statements to the auditors for
these same years.
The noncompliance was due to the professional
administration contractor's failure to meet its
contracted responsibility and created major
inaccuracies in the town's financial filings with the
State.
No criteria identified.
40 CFR Part 31.20(b)(1) as presented above.
04-03 The project administration contractor wrote
a check to the town to purchase a building.
However, the building is encumbered by a lien that
precludes the purchase.
Further, the contractor was aware that the Town
Council had previously chosen not to enter into this
transaction under the current circumstances. As
such, the contractor intentionally controverted the
will of Council.
This expenditure is disallowed and Region VI
should recover these grant and loan monies since
the expenditure was unauthorized. Further, Region
VI should file the appropriate financial forms with
the State and Federal agencies showing the money
as being recovered.
No criteria identified.
OMB Circular A-87, Attachment B, paragraph
19(c) states that capital expenditures for
equipment, including capital assets, and
improvements are unallowable as direct charges
except where approved in advance by the
awarding agency.
The grant award documents showed the scope
of the grant was to provide funding to design and
construct a drinking water system to replace the
existing water lines in the Town of Worthington,
replace existing meters, and extend new drinking
water service. There was no specific approval for
the purchase of the building, nor was the building
identified in the scope of the project. Also, the
building was to be used for the Town as an
administrative office. This type of expense would
normally be treated as an indirect expense.
04-04 There was a 4% matching requirement. In
reviewing cash draws, during fiscal years 2001 and
2002, the project administrator paid themselves
and the engineering firm entirely from EPA grant
funds without any matching level of effort.
The project administrator also failed to utilize
separate checking accounts for the EPA grant
monies and the matching loan money. Also,
separate checks were not written for expenditures
whereby the matching level of effort could be
recognized and accounted for in journals. As such,
making a determination regarding the matching
level of effort is not possible in the years when loan
monies were in fact drawn and utilized for the costs
of the project.
No criteria identified.
40 CFR Part 31.24(b)(6) states that for matching,
costs and third party in-kind contributions
counting towards satisfying a cost-sharing or
matching requirement must be verifiable from the
records of grantees and subgrantee or cost-type
contractors.
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Summary of Findings
Criteria Identified
in Report
Applicable Criteria
04-05 The project administration contractor failed
to properly manage the cash utilized for the
payments of the project costs. The contractor drew
cash funds in June 2002, but did not expend the
funds until February 2003. The contractor also
commingled the EPA grant funds and matching
funds, as such, it was not possible to isolate that
proper cash management occurred during fiscal
years 2003 and 2004.
Auditor stated that
project administrator
violated
reimbursement
requirement, but did
not cite specific
criteria.
40 CFR Part 31.21(b) states method and
procedures for payment shall minimize the time
elapsing between the transfer of funds and
disbursement by the grantee and subgrantee, in
accordance with Treasury regulations at 31 CFR
Part 205.
04-06 As part of initial preparations for the single
audit, the single auditor requested expenditure
information from the project administration
contractor. Over the course of the audit, various
amounts were provided by the contractor.
Ultimately, the single auditor determined that
Federal expenditures were $885,759, as presented
in the SEFA.
Also, based upon the conversations with the
contractor, the contractor was unaware of the
$500,000 threshold and the prior $300,000
threshold that requires the OMB Circular A-133 to
apply.
OMB Circular A-133,
but no specific
citations.
40 CFR Part 31.20(b)(1), as described
previously, under Finding 04-01.
OMB Circular A-133 § 200(a).
04-07 The project administration contractor did not
budget for the cost of the single audit. The project
administration contractor refused to recognize the
need to fund audit costs.
OMB Circular A-87,
but no specific
citations.
OMB Circular A-87, Appendix B, (5), allowability
of single audit costs.
04-08 The project administration contractor did not
perform its contracted duties, as described in its
contract with the Town of Worthington.
The single auditor questioned the reasonableness
of the fee paid to the project administration
contractor, stating that in an arms-length
transaction, the reasonable value of their services
would not exceed $15,000, although the contract
was for $50,000. The single auditor questioned all
fees paid to the contractor, totaling $49,965.
No criteria cited.
40 CFR Part 31.36 Procurement:
(b) Procurement standards. (1) Grantees and
subgrantees will use their own procurement
procedures which reflect applicable State and
local laws and regulations, provided that the
procurements conform to applicable federal law,
the standards identified in this section, and if
applicable, §31.38.
(2) Grantees and subgrantees will maintain a
contract administration system which ensures
that contractors perform in accordance with the
terms, conditions, and specifications of their
contracts or purchase orders.
(8) Grantees and subgrantees will make awards
only to responsible contractors possessing the
ability to perform successfully under the terms
and conditions of a proposed procurement.
Consideration will be given to such matters as
contractor integrity, compliance with public
policy, record of past performance, and financial
and technical resources.
OMB Circular A-87, Appendix A, § C(1)(a) states
that for a cost to be allowable, it must be
necessary and reasonable for proper and
efficient performance of the Federal award.
Sources: Finding information from single audit report; criteria presented based upon OIG analysis.
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Schedule 2
Status of Recommendations and Potential Monetary Benefit
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in $OOOs)
Rec. Page
No. No.
Subject
Status1
Action Official
Planned
Completion
Date
Claimed Agreed To
Amount Amount
2-1 9 Meet with the Town of Worthington officials to
ensure that the Town understands OMB Circular
A-133 requirements and its obligations to meet
these requirements.
2-2 10 Designate the Town of Worthington as a high-risk
grant recipient, in accordance with 40 CFR 31.12,
should the recipient receive any new EPA awards.
As part of this process, Region 3 should conduct a
pre-award financial management analysis of the
recipient to ensure that the recipient has the ability
to manage its grant funds in accordance with
Federal regulations.
Regional Administrator,
Region 3
Regional Administrator,
Region 3
04/24/2009
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
Scope and Methodology
We conducted a quality control review of the single auditor's audit of the Town of Worthington,
West Virginia, for the fiscal year ended June 30, 2004, signed by the single auditor on
December 29, 2004, and the resulting reporting package that was submitted to the Federal Audit
Clearinghouse dated January 26, 2005. We performed the review using the 1999 edition of the
Uniform Quality Control Review Guide for A-l 3 3 Audits, issued by the President's Council on
Integrity and Efficiency. This guide applies to any single audit subject to the OMB Circular
A-133 and contains the approved checklist of the President's Council on Integrity and Efficiency
for performing the quality control reviews. We assessed the auditor's compliance with general,
field work, and reporting standards, as contained in the Government Auditing Standards.
In May 2006, we performed our initial review of the single audit report. We identified potential
issues and contacted the single auditor accordingly. Subsequent requests were made for
additional documentation, which we received from the single auditor. We had to obtain
additional explanations, which had to be in writing as requested by the single auditor. Based on
the explanations, we began our quality control review in October 2007.
The review was performed in accordance with applicable Government Auditing Standards,
issued by the Comptroller General of the United States (June 2003 version). We reviewed the
audit documentation prepared by the single auditor and discussed the audit results with the single
auditor. We also interviewed the EPA grant specialist responsible for awarding the grant to the
Town of Worthington. We interviewed the Region 3 project officer responsible for managing
the Town of Worthington grant. We also contacted the Town of Worthington regarding grant
expenditure information for FY 2003.
We had no prior audit coverage of the Town of Worthington, West Virginia, or the auditor,
Leland O'Neal, CPA.
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Appendix B
Auditee's Response
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
Region III
1650 Arch Street
Philadelphia, PA 19103-2029
April 24, 2009
SUBJECT: Quality Control Review
Leland O'Neal, CPA
Single Audit for Town of
Worthington, West Virginia, for
Fiscal Year Ended June 30, 2004
Assignment No. 2007-0582
FROM: Edward H. Chu /s/
Acting Assistant Regional Administrator
for Policy and Management (3PMOO)
TO: Robert Adachi,
Director of Forensic Audits
Office of Inspector General (IGA-1-1)
As requested by your office, we have reviewed the subject audit report and the grantee's
response to the findings. Our response to the findings is as follows:
Recommendation 2-1: Meet with the Town of Worthington to ensure that the Town
understands OMB Circular A-133 requirements and its obligations to meet these requirements.
Region III Response: Region III concurs with the Office of Inspector General's (OIG)
recommendation. Region III spoke to Mr. Edward Burley, the Mayor of the Town of
Worthington in October 2008 and April 2009. He understands that the Town is obligated to
meet OMB A-133 requirements. Mr. Burley explained that the Town was put on a bid list by the
state auditor's office. The Town received a list of qualified auditors in which the Town can
request a proposal or an auditor may call the Town and request a request for proposal (RFP). An
audit committee selected Mr. Leland O'Neal from the list of qualified auditors. The Town
assumed that all of the auditors on the list would possess the required qualifications to conduct a
single audit and the Town clearly hired Mr. Leland O'Neal in good faith.
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Recommendation 2-2: Require the Town of Worthington and the single auditor to develop a
plan to address the deficiencies identified in the single audit, including additional planning and
testing that may need to be performed.
Region III Response: Region III does not concur with this recommendation. Since the OIG
report concluded that the single audit report was substandard, Region III does not believe that
addressing deficiencies from the report is the best option. Region III proposes that in accordance
with the Code of Federal Regulations 40 (CFR) 31.12 that Region III classify the Town of
Worthington as high risk, if the town is awarded any future EPA grants, and impose additional
special conditions.
Also, Region III would like the OIG to be aware of some of the specifics regarding this grant.
The Town of Worthington hired Region VI Planning and Development Council to provide grant
management oversight. Region III had the West Virginia Bureau for Public Health (BPH)
perform Grant Management Oversight for this grant. Among other things, BPH reviewed bids
submitted by the contractors and conducted a final inspection on August 31, 2004. In November
2004, BPH submitted the final payment package with a summary of the invoices and proof of
payment. Soon thereafter, Region III received a copy of the Single Audit. After several non-
productive phone calls with the single auditor Region III questioned the quality of the report and
did not place reliance on the findings. Region III reviewed the final payment package carefully
and determined that all of the claimed costs reimbursed to the Town were eligible.
Finding 2-3: Require the Town of Worthington to submit a revised single audit report for FY
2004.
Recommendation: Region III does not concur with this recommendation. First, the grant has
been closed since March 22, 2006. Second, the Town paid Mr. Leland O'Neal for the audit and
according to the EPA project officer, the costs were not reimbursed under the grant. Lastly, the
Town of Worthington selected the auditor from a "qualified list" maintained by the state
auditor's office. Therefore, Region III does not believe it is reasonable to require the Town to
obtain another audit report five years after the fact at its own expense.
Region III tried to contact Mr. Leland O'Neil, the single auditor, and received a hostile
voice message in return and do not believe further communication will be productive. Therefore,
additional attempts to contact him were not pursued. If you have any questions, or need
additional information, please contact Lorraine Fleury at 215-814-2341 or
fleury.lorraine@epa.gov.
cc: Leah L. Nikaidoh (NWD)
LisaMcCowan (3AIOO)
Bruce Smith (3WP50)
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Appendix C
Distribution
EPA Headquarters
Agency Follow-up Official (the CFO)
Agency Follow-up Coordinator
Acting Inspector General
EPA Region 3
Acting Regional Administrator
Acting Assistant Regional Administrator for Policy and Management
Director, Grants and Audit Management Branch
Regional Audit Follow-up Coordinator
Regional Public Affairs Officer
Other
Mayor, Town of Worthington, West Virginia
Single Auditor
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