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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Quick Reaction Report
Costs Claimed under EPA Grants
XP96909501 and XP97963701
Awarded to the Washoe County
Department of Water Resources,
Nevada
Report No. 09-2-0011
October 20, 2008
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Report Contributors: Michael Owen
Lela Wong
Janet Lister
Jessica Knight
Abbreviations
CFR Code of Federal Regulations
EPA U.S. Environmental Protection Agency
FSR Financial Status Report
Grantee Washoe County Department of Water Resources
OIG Office of Inspector General
OMB Office of Management and Budget
Region Environmental Protection Agency Region 9
SAAP Special Appropriation Act Project
USGS U.S. Geological Survey
Cover photo: Lemmon Valley Project. (Picture taken by OIG staff in February 2008)
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
09-2-0011
October 20, 2008
Catalyst for Improving the Environment
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA)
Office of Inspector General is
reviewing Special
Appropriation Act Project
(SAAP) grants to identify
issues warranting further
analysis. We selected Washoe
County Department of Water
Resources (grantee) for one of
these reviews.
Background
The grantee received two
SAAP grants from EPA
Region 9. Grant XP96909501
was to replace private water
supply wells with community
public water supply services.
Grant XP97963701 was for a
nitrate remediation pilot
project. These grants provided
the grantee with $2,067,700 in
Federal assistance.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2009/
20081020-09-2-0011.pdf
Costs Claimed under EPA Grants XP96909501
and XP97963701 Awarded to the Washoe County
Department of Water Resources, Nevada
What We Found
The grantee did not meet financial management requirements specified by Federal
policy and regulations. In particular, the grantee:
• Claimed indirect costs without approved rates or cost allocation plans;
• Charged estimated labor costs to the grants without adjusting to actual costs;
• Claimed fringe benefit costs that were not based on approved rates or a cost
allocation plan;
• Procured sole source contracts without cost analysis;
• Claimed contract costs under one grant that were not allocable; and
• Claimed unallowable interest expenses.
Because of these issues, EPA will need to recover $291,494 in questioned costs
under the two grants. As of September 2008, Region 9 had recovered $26,774 of the
questioned costs from the grantee. The grantee also needs to strengthen its internal
controls.
What We Recommend
We recommend that EPA Region 9's Regional Administrator:
1. Disallow and recover the remaining uncollected balance of the $291,494
questioned if the grantee is unable to provide documentation that meets
appropriate Federal financial management requirements.
2. Require the grantee to establish procedures to ensure that it: (a) charges labor
and benefit costs to the Federal grants in accordance with Federal policy;
(b) conducts procurement in accordance with Federal regulations; (c) properly
identifies unallowable costs and excludes them from billings to the Federal
Government; (d) limits cash draws for Federal grants to actual disbursements;
and (e) pays contract costs charged to Federal grants in accordance with contract
terms and conditions.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
October 20, 2008
MEMORANDUM
SUBJECT: Costs Claimed under EPA Grants XP96909501 and XP97963701
Awarded to the Washoe County Department of Water Resources, Nevada
Report No. 09-2-0011
FROM: Robert K. Adachi
Director of Forensic Audits
TO: Wayne Nastri
Regional Administrator
EPA Region 9
This report contains a time-critical issue the Office of Inspector General (OIG) identified.
This report represents the opinion of the OIG and does not necessarily represent the final
position of the U.S. Environmental Protection Agency (EPA). EPA managers will make
final determinations on matters in this report.
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 $144,657.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to
provide us your proposed management decision for resolution of the findings contained
in this report before any formal resolution can be completed with the recipient. Your
proposed decision is due in 120 days, or on February 17, 2009. To expedite the
resolution process, please e-mail an electronic version of your proposed management
decision to adachi.robert@epa.gov.
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 have any questions, please contact me at
(415) 947-4537 or at the e-mail address above.
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09-2-0011
Purpose
The Office of Inspector General (OIG) is reviewing Special Appropriation Act Project
(SAAP) grants to identify issues warranting further analysis. This process includes
reviewing the total project costs incurred by selected SAAP grant recipients. During our
review of the SAAP grants awarded to the Washoe County Department of Water
Resources (grantee), we identified the following condition that we believe requires
immediate attention. The grantee did not meet financial management requirements
specified by Office of Management and Budget (OMB) Circular A-87, Title 40 Code of
Federal Regulations (CFR) Part 31, and EPA policy.
Background
The grantee received two SAAP grants from the U.S. Environmental Protection Agency
(EPA) Region 9 (Region). Grant XP96909501 was awarded on September 30, 2004, to
replace private water supply wells with community public water supply services to
Lemmon Valley (Lemmon Valley grant). Grant XP97963701 was awarded on
September 30, 2003, for a nitrate remediation pilot project in the Spanish Springs Valley
(Spanish Springs grant). Total funds awarded under the two grants are $2,067,700. EPA
is responsible for 55 percent of the eligible project costs; the grantee is responsible for the
remaining 45 percent.
The grantee reported total outlays of $3,260,089 under the two grants as of the period
ended September 30, 2007. Table 1 below provides basic information about the grants.
Table 1 : Grant and Outlay Summary
Grant Number
Awarded Amount
Project Period
Total Outlays Reported
EPA's Share (55%)
Grantee's Share (45%)
XP96909501
(Lemmon Valley)
$1,300,100
08/0 1/04 to
06/30/09
$2,189,366
$1,204,151
$985,215
XP97963701
(Spanish Springs)
$767,600
10/0 1/03 to
10/31/08
$1,070,723
$588,898
$481,825
Totals
$2,067,700
$3,260,089
$1,793,049
$1,467,040
Sources: The information is from the grant award documents and Financial Status Reports.
Scope and Methodology
We conducted this audit in accordance with generally accepted government auditing
standards, except we did not obtain an understanding of the information systems. Our
results were based on the output data from the information systems provided by the
grantee and our verification of these data to the corroborating documents, such as
cancelled checks and vendor invoices. The generally accepted government auditing
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence
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09-2-0011
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 fieldwork between February 25, 2008, and September 4, 2008. We
made a site visit to the grantee and performed the following steps:
• Conducted a tour of the facilities;
• Obtained and reviewed grantee support for the cumulative amounts reported for
the period ended September 30, 2007, including the grantee's electronic
accounting records and the supporting payroll reports, invoices, cancelled checks,
contracts, and procurement documents;
• Obtained and reviewed the grantee's drawdown supporting documentation; and
• Conducted interviews of grantee personnel.
We also performed work on an employee embezzlement discovered subsequent to our
first site visit. We confirmed no Federal funds were involved in the embezzlement of
$2.2 million that resulted in a guilty plea by and conviction of a Washoe County
employee. Our work included the following steps:
• Interviewed grantee and Washoe County employees;
• Obtained and reviewed transaction details that related to the embezzlement;
• Obtained and reviewed supporting documents for draws under other Federal
grants and loans; and
• Searched for other potential entities associated with the embezzlement.
Findings
The grantee did not meet financial management requirements specified by OMB Circular
A-87, Title 40 CFR Part 31, and EPA policy. In particular, the grantee:
• Claimed indirect costs without approved rates or cost allocation plans;
• Charged estimated labor costs to the grants without adjusting to actual costs;
• Claimed fringe benefit costs that were not based on approved rates or a cost
allocation plan;
• Procured sole source contracts without cost analysis;
• Claimed contract costs under one grant that were not allocable; and
• Claimed unallowable interest expenses.
Because of the above issues, EPA will need to recover $291,494 in questioned costs
under the two grants. Region 9 provided us with documentation in September 2008 that
showed they recently recovered $26,774 of the questioned costs. Table 2 below
summarizes the questioned costs under each grant.
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Table 2: Summary of Questioned Costs
Cost Category
Costs Claimed
Less: Questioned Costs
Indirect Costs
Labor Costs
Fringe Benefit Costs
Contracts without Cost
Analysis
Unallocable Contract
Costs
Interest Expense
Total Allowable Costs
Federal Share (55%)
Payments Made
Amount Owed to EPA
XP96909501
(Lemmon Valley)
$2,189,366
66,838
26,606
27,760
0
0
12,157
2,056,005
1,130,803
1,204,151
$ 73,348
XP97963701
(Spanish Springs)
$1,070,723
133,745
131,648
49,018
61,365
14,230
6,622
674,095
370,752
588,898
$218,146
Total
$3,260,089
200,583
158,254
76,778
61,365
14,230
18,779
2,730,100
1,501,555
1,793,049
$291,494
Note
1
2
3
4
5
6
Sources: Amounts claimed were from accounting system data
Financial Status Report amounts. Costs questioned
the grantee provided in supporting the
were based on OIG's analysis of the data.
Note 1: See discussion under the Indirect Costs Claimed without Approved Rates or
Cost Allocation Plans section below.
Note 2: See discussion under the Labor Charges Based on Estimates section below.
Note 3: See discussion under the Fringe Benefit Costs Not Based on Approved Rates
or Allocation Method section below.
Note 4: See discussion under the Contracts Procured without Cost Analysis section
below.
Note 5: See discussion under the Contract Costs Claimed Not Allocable to Grant
section below.
Note 6: See discussion under the Unallowable Interest Expenses section below.
The grantee also needs to strengthen its internal controls to ensure that (1) Federal cash
draws reflect its immediate cash needs; (2) contractors are paid in accordance with
contract terms and conditions; and (3) Federal requirements concerning financial
management, procurement, and contract administration are met.
Indirect Costs Claimed without Approved Rates or Cost Allocation Plans
The grantee claimed indirect costs of $66,838 under the Lemmon Valley grant and
$133,745 under the Spanish Springs grant that did not meet the requirements of OMB
Circular A-87 and EPA policy. Specifically, the grantee did not have cost allocation
plans or approved indirect cost rates. OMB Circular A-87 defines indirect costs as those
costs (a) incurred for a common or joint purpose benefiting more than one cost objective, and
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(b) not readily assignable to the cost objectives specifically benefitted, without effort
disproportionate to the results achieved. According to OMB Circular A-87, Attachment A,
Section C.3.d., a cost allocation plan will be required where an accumulation of indirect
costs will ultimately result in charges to a Federal award. EPA policy number GPI 06-01
also requires the grantees to have a current rate agreement, or have submitted an indirect
cost rate proposal in order to be entitled to indirect cost reimbursements. The grantee did
not have the required cost allocation plans, current rate agreements, or indirect cost rate
proposals. As a result, we questioned all indirect costs claimed under the Lemmon
Valley and Spanish Springs grants.
This issue was brought to the grantee's attention during the audit. The grantee
subsequently submitted indirect cost rate proposals to EPA Headquarters. As of June
2008, the grantee had obtained EPA's approval for all indirect rates. The grantee also
submitted a payment request to Region 9 during July 2008 that included an adjustment to
the indirect costs previously claimed under the two grants. According to the Region and
the grantee, this adjustment was based on the indirect rates approved by EPA. The
adjustment identified that the grantee incurred an additional $48,695 in indirect costs that
had not been claimed under the two grants. The Region informed us during September
2008 that they had determined this adjustment was correct. However, the Region has not
provided us with the documentation necessary to verify whether the indirect costs in the
revised and prior payment requests are fully supported and allocable to the Lemmon
Valley and Spanish Springs grants. Therefore, we continue to question the $66,838 and
$133,745 previously claimed under the Lemmon Valley and Spanish Springs grants,
respectively. Some or all of the questioned costs may be allowable if the Region or
grantee provides us with documentation that shows the claimed indirect costs are fully
supported and allocable to these two grants.
Labor Charges Based on Estimates
We questioned labor costs of $158,254 claimed under the Lemmon Valley and Spanish
Springs grants due to noncompliance with the requirements of OMB Circular A-87. The
grantee charged labor costs to the grants based on estimated standard labor rates. This
charging practice does not comply with the requirements of OMB Circular A-87,
Attachment B, Section 8.h(5)(e), which states:
Budget estimates or other distribution percentages determined before the services are
performed do not qualify as support for charges to Federal awards but may be used
for interim accounting purposes, provided that:
• The governmental unit's system for establishing the estimates produces
reasonable approximations of the activity actually performed;
• At least quarterly, comparisons of actual costs to budgeted distributions based
on the monthly activity reports are made. Costs charged to Federal awards to
reflect adjustments made as a result of the activity actually performed may be
recorded annually if the quarterly comparisons show the differences between
budgeted and actual costs are less than ten per cent; and
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• The budget estimates or other distribution percentages are revised at least
quarterly, if necessary, to reflect changed circumstances.
The grantee did not perform quarterly comparisons between estimated and actual costs to
determine whether the estimates produced reasonable approximations of the activities
actually performed. As a result, the grantee did not adjust the estimated costs to actual
according to the OMB requirement.
This issue was discussed with the grantee during our fieldwork. The grantee
subsequently submitted comparisons of the estimated labor costs claimed with actual
costs incurred. We reviewed the cost comparisons and questioned labor costs of $26,606
and $131,648, respectively under the Lemmon Valley and Spanish Springs grants. The
costs questioned represent amounts claimed in excess of actual costs incurred.
To address the questioned costs, the grantee submitted a labor and fringe benefit
allocation methodology to EPA Headquarters. EPA approved this methodology during
May 2008. The grantee also included an adjustment to the direct labor costs that were
previously claimed under the two grants in the payment request submitted to the Region
during July 2008. The Region and the grantee informed us that this adjustment to the
labor costs was based on this approved methodology. The adjustment identified that the
grantee incurred $100,408 less in direct labor costs than previously claimed under the two
grants.
The Region disclosed to us during September 2008 that it had determined that the
adjusted costs were correct. The Region also provided us with analysis documentation to
support its position. However, this documentation did not demonstrate that the Region
had verified the labor costs adjustments were fully supported and complied with the
approved methodology. Some or all of the remaining questioned costs may be allowable
if the Region or grantee provides us with documentation that shows the claimed direct
labor costs are fully supported and allocable to Lemmon Valley and Spanish Springs
grants.
Fringe Benefit Costs Not Based on Approved Rates or Allocation Method
The grantee claimed fringe benefit costs of $27,760 under the Lemmon Valley grant and
$49,018 under the Spanish Springs grant based on rates that did not meet requirements
specified by OMB Circular A-87. According to OMB Circular A-87, Attachment B,
Section 8.d(5), benefit costs are allowable if they are allocated to the Federal awards and
all other activities in a manner consistent with the pattern of benefits attributable to the
individuals or group(s) of employees whose salaries and wages are chargeable to such
Federal awards and other activities. The grantee did not have indirect cost rates or an
allocation method that was approved by EPA. Without an approved rate or allocation
method, we have no assurance that the fringe benefit costs were excluded from indirect
costs and consistently allocated to the two grants and other applicable activities
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conducted by the grantee. Therefore, we questioned fringe benefits costs of $27,760 and
$49,018 claimed under the Lemmon Valley and Spanish Springs grants, respectively.
We discussed this issue with the grantee during our fieldwork. As discussed in the
previous section, EPA approved the grantee's labor and fringe benefit methodology
during May 2008. To address the questioned costs, the Region and grantee said that the
grantee's July 2008 payment request included an adjustment to the fringe benefits costs
that were previously claimed under the two grants. They also said that the adjustment
was based on the approved methodology. The adjustment identified that the grantee
incurred an additional $36,042 in fringe benefits costs that had not been claimed under
the two grants. The Region informed us that the grantee's revised request had resolved
the questioned fringe benefits costs. However, the Region has not provided us with
documentation to demonstrate that it has verified that the fringe benefit adjustments were
fully supported and complied with the approved methodology. Some or all of the
questioned costs may be allowable if the Region or grantee provides us with
documentation that shows the claimed fringe benefits costs are fully supported and
allocable to Lemmon Valley and Spanish Springs grants.
Contracts Procured without Cost Analysis
We questioned contract costs of $61,365 claimed because the grantee did not comply
with the Federal procurement requirements in the award of two sole source contracts
under the Spanish Springs grant. The contracts were for well analysis and depth discrete
flow and contamination testing. The grantee awarded the contracts to one contractor
without conducting a cost analysis. Title 40 CFR 31.36(d) (4) (ii) and 31.36(f) require
the grantees to perform a cost analysis on sole source procurements to verify the cost data
and evaluate the specific elements of costs and profits. Without the required cost
analysis, we have no assurance that the contract prices were fair and reasonable.
Therefore, we questioned the $61,365 claimed for payments made to the contractor under
these contracts.
This issue was brought to the grantee's attention during our fieldwork. The grantee
subsequently attempted to demonstrate price reasonableness by providing a comparison
of the contractor's labor rates with the rates of two other companies that Washoe County
contracted with for similar work. The grantee also provided qualification requirements
for each of the contractor's labor categories. However, we were not able to determine
whether the costs for the sole source contracts were reasonable for the following reasons:
• The labor rate information for the other two companies did not show that the labor
categories were equivalent to the labor rates of the sole source contractor.
• The qualification requirements for the other two companies did not include the
information necessary for an assessment of the companies' technical
proficiencies. Therefore, we were not able to determine whether the two
companies' technical capabilities were comparable to those of the selected
contractor.
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• The two sole source contracts included subcontract costs of $38,200. The
subcontract costs represent approximately 62 percent of the $61,365 claimed
under the two sole source contracts. The grantee did not provide the necessary
documentation to show that the subcontract prices are fair and reasonable.
Contract Costs Claimed Not Allocable to Grant
The grantee claimed contract costs of $14,230 paid to U.S. Geological Survey (USGS)
under the Spanish Springs grant that are not allocable to the grant. According to OMB
Circular A-87, Attachment A, Section C.l.b, a cost must be allocable to the grant in order
to be allowable. The grantee had two separate agreements with USGS. One of these
agreements was for work not covered by the Spanish Springs grant. The grantee
inadvertently claimed $14,230 of costs for work conducted under this USGS agreement.
Because the Spanish Springs grant did not receive any benefit from the work done under the
USGS agreement, the charges are not allocable to the grant. As a result, we questioned the
$14,230 claimed under the grant.
In response to our audit, the grantee included a $14,230 credit adjustment for these
contract costs in the payment request submitted to the Region during July 2008.
Unallowable Interest Expenses
The grantee claimed interest expenses of $12,157 and $6,622, respectively, under the
Lemmon Valley and Spanish Springs grants that were unallowable under OMB Circular
A-87. Table 3 provides additional details on the interest expenses for each grant.
Table 3: Summary of Interest Expenses
Grant Number
XP96909501 (Lemmon Valley)
XP97963701 (Spanish Springs)
Total
Bond
Interest
$10,084
6,622
$16,706
Interest on
Retentions
$2,073
0
$2,073
Total
$12,157
6,622
$18,779
Sources: Interest expense amounts were from accounting system data the grantee provided
in support of the Financial Status Report amounts and OIG's analysis of the data.
The grantee claimed $16,706 for interest on bonds issued by Washoe County to fund the
grantee's share of the costs under the two grants. OMB Circular A-87, Attachment B,
Section 23(b) specifies that financing costs (including interest) associated with the
otherwise allowable costs of building acquisition, construction, or fabrication,
reconstruction or remodeling are allowable if four conditions are met. One of these four
conditions is that the financing is provided by a bona fide third party external to the
governmental unit. Because the bonds were issued by Washoe County, the financing was
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not provided by an external bona fide third party. Therefore, we questioned all bond
interest claimed by the grantee.
Interest of $2,073 paid on construction contract retentions was also claimed by the
grantee under the Lemmon Valley grant. This interest was incurred while the grantee
held 10 percent of all amounts billed under two construction contracts to assure
satisfactory completion of the work. The grantee explained that Washoe County law
requires the grantee to pay interest while withholding payments as contract retentions.
Therefore, the payments withheld under the contracts were the grantee's own funds and
did not represent financing from a bona fide third party. As a result, we questioned all
interest on the contract retentions. To address this issue, the grantee included an $18,779
credit adjustment to the interest costs in the payment request submitted to the Region
during July 2008.
Internal Control Weakness
The grantee also needs to strengthen its internal controls to ensure that (1) Federal cash
draws reflect its immediate cash needs; (2) contractors are paid in accordance with
contract terms and conditions; and (3) Federal requirements concerning financial
management, procurement, and contract administration are met.
Cash Management Needs Improvement
The grantee did not have adequate cash management procedures to ensure that Federal
cash draws reflect its immediate cash needs. During the course of the Lemmon Valley
grant, the grantee made several draws, totaling $104,193, for construction contract
payment retentions. The grantee held the drawn amounts for 2 to 6 months before actual
payment of the retentions.
According to 40 CFR 31.21(g)(3), payments shall be made by the Federal agency when
the grantees or subgrantees actually disburse withheld funds to the contractors or to
escrow accounts established to assure satisfactory completion of work. Title 40 CFR
31.20(b)(7) also requires the grantee to make drawdowns as close as possible to the time
of making disbursements.
This issue did not result in questioned costs because the retention amounts were
eventually paid at contract completion, which was within the time period audited.
However, this non-compliance issue, if not corrected for future grants, will result in lost
interest income opportunities for the Federal Government.
Contract Management Needs Improvement
The grantee needs to improve its contract administration system to ensure that it pays
contractors in accordance with contract terms and conditions. Of the eight payments
made to a contractor under the Spanish Springs grant, five payments included an instance
where the amount billed and paid did not match the contract rate. Two of these instances
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were for a labor category not in the contract and the remaining three were billed at rates
either higher or lower than the contract rates.
Title 40 CFR 31.36(b)(2) requires grantees to maintain a contract administration system,
which ensures that contractors perform in accordance with the terms, conditions, and
specifications of their contracts or purchase orders. As a result of weaknesses in Washoe
County's contract administration system, the grantee overpaid the contractor and over-
billed the EPA grant by $621. Although the overpayment is immaterial, this condition
may result in significant overpayments that are not allowable for future grants if the
grantee's contract administration system is not strengthened.
Grantee Needs to Comply with Federal Requirements
The grantee needs to establish procedures to comply with Federal requirements
concerning financial management, procurement, and contract administration. The grantee
claimed indirect, direct labor, fringe benefit, and interest costs based on criteria that did
not meet Federal financial requirements. The grantee needs to improve its procurement
processes. The grantee awarded sole source contracts without conducting a cost analysis,
and claimed contract costs that did not match the contract rates. The grantee also did not
comply with Federal cash management requirements and claimed unallowable costs.
Recommendations
We recommend that EPA Region 9's Regional Administrator:
1. Disallow and recover the remaining uncollected balance of the $291,494
questioned under Grants XP96909501 and XP97963701. If the grantee provides
documentation that meets appropriate Federal financial management requirements
and shows that some or all of the remaining uncollected questioned costs are
allocable and allowable to these EPA grants, the amounts to be recovered should
be adjusted accordingly.
2. Require the grantee to establish procedures to ensure that it:
a. Charges labor and benefit costs to the Federal grants in accordance with
OMB Circular A-87;
b. Conducts procurement in accordance with 40 CFR 31.36, including cost
analysis for all sole source contracts;
c. Properly identifies unallowable costs and excludes them from billings to
the Federal Government;
d. Limits cash draws for Federal grants to actual disbursements; and
e. Pays contract costs charged to Federal grants in accordance with contract
terms and conditions.
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Region 9's and Auditee's Comments
Region 9 and the grantee submitted written comments on the discussion draft dated
September 11 and September 12, 2008, respectively. We also held an exit conference
with the Region and grantee on September 15, 2008. In general, the Region and grantee
concurred with the findings. However, the Region and grantee believed that the
corrective actions taken subsequent to our fieldwork resolved most, if not all, of the
issues identified in the discussion draft. The Region and grantee explained that these
subsequent actions included submitting a payment request in July 2008 that adjusted the
indirect costs, labor costs, and fringe benefit costs previously claimed under the two
grants to reflect the rates and methodologies approved by the EPA. The grantee also said
that the revised payment request reimbursed the Government $48,680 for unallowable
costs claimed under the Lemmon Valley and Spanish Springs grants. Because of the
corrective actions, the grantee and Region requested that our report be changed to
acknowledge the efforts taken to resolve the findings.
With regard to the two sole source contracts procured without a cost analysis, the grantee
commented that the procedures performed complied with the Federal guidelines. The
grantee explained that the Spanish Springs grant supports the investigation of nitrates that
are contaminating the public water supply, and that the subcontractor, under the sole
source award, is the only manufacturer of the sampling equipment used for the
investigation. The grantee also said that hiring any firm other than this subcontractor
would have significantly exceeded the $38,200 subcontract cost. To further demonstrate
the reasonableness of the subcontract costs, the grantee said it is requesting additional
supporting documentation from the subcontractor.
The grantee also said that it followed Washoe County Purchasing Procedures for the sole
source contracts. The grantee stated the breakdown of labor rates for the sole source
contractor was reviewed and deemed appropriate by the project manager, based on his
experience working with similar consulting firms. The grantee explained that the sole
source procurement was approved by its senior management, as well as the District
Attorney and the Washoe County Board of County Commissioners prior to the award. In
addition, the grantee said it subsequently gathered comparable class specification and pay
scale information from two comparable firms to demonstrate that the rates and fees paid
to the sole source contractor were reasonable and appropriate. The grantee further stated
that the Region deemed these comparisons suitable and in compliance with all required
Federal guidelines.
In response to the $61,365 of sole source contract costs we questioned, the Region stated
that it does not have documentation available to show that the subcontract costs of
$38,200 are fair and reasonable. The Region said it will address the subcontracts issue
during audit resolution. For the other $23,165 paid to the sole source contractor, the
Region stated that the grantee has complied with the procurement requirements of 40
CFR Part 31.36. The Region explained that these regulations allow for sole source
procurement and that the grantee's sole source award complied with the regulations. The
Region also stated that the job description and rate comparisons provided by the grantee
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met the requirements of 40 CFR 31.36; therefore, at a minimum, the questioned costs
should be reduced to $38,200.
The grantee and the Region also commented on the internal control weaknesses we
identified. The grantee stated that it has established procedures that correct the
weaknesses. The Region commented that it would follow up with the grantee to ensure
that appropriate cash management procedures are in place. In addition, the Region said
that it would work with the grantee to set up procedure to ensure contract bills and
payments comply with contract rates. However, the Region did not fully agree that the
grantee needs to establish procedures to comply with Federal requirements for financial
management, procurement, and contract administration. The Region stated that if the
grantee's procedures for drawdown of retention funds and procurement in terms of sole
source contracts have weaknesses, the Region will work with the grantee to develop
procedures as needed.
Appendix A provides the full text of the Region's and the grantee's comments.
OIG Response
Our position on the issues remains unchanged. We made changes to the report, as
appropriate, to acknowledge recent actions taken by the grantee to address the financial
management and internal control weaknesses identified by the audit. Although the
grantee commented that it has repaid EPA $48,680 in response to our audit, the actual
amount repaid through the July 2008 payment request was $26,774 (55 percent Federal
share of the cost adjustment amount of $48,680), as shown in Table 4 below.
Table 4: Summary of July 2008 Cost Adjustments
Cost Category
Indirect Costs
Labor
Fringe Benefits
Contract Costs
Interest Expenses
Total Adjustments
EPA Share of Adjustments
(55% Federal share)
Cost Adjustment
XP96909501
(Lemmon Valley)
$23,985
(16)
14,505
(12,157)
26,317
14,474
Cost Adjustment
XP97963701
(Spanish Springs)
$24,710
(100,392)
21,537
(14,230)
(6,622)
(74,997)
(41,248)
Total
$48,695
(100,408)
36,042
(14,230)
(18,779)
(48,680)
(26,774)
Sources: OIG analysis of grantee's July 15, 2008, payment request for Grants XP96909501 and
XP97963701.
The Region and grantee have not yet completely resolved the questioned costs and
internal control issues. The Region needs to provide us with documentation that
demonstrates that the grantee's adjustments in the July 2008 payment request
satisfactorily resolved the indirect, direct labor, fringe benefit, and sole source contract
costs we questioned. The Region also needs to ensure that the grantee has established
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procedures that satisfactorily address the internal control weaknesses identified by the
audit.
With regard to the grantee's and Region's comments on the sole source contracts, we do
not agree that the information used for the comparison between the sole source contractor
and two other firms has demonstrated compliance with Federal procurement regulations.
Although the grantee stated that the sole source awards have been justified and approved
by the grantee's senior management, the District Attorney and the Washoe County Board
of County Commissioners, they have not met the cost analysis requirement under 40 CFR
31.36(d)(4) (ii) and 31.36(f). 40 CFR 31.36(f)(3) also requires that the costs included in
negotiated prices to be consistent with the Federal cost principles outlined in 40 CFR
31.22. The cost principle applicable to for-profit organizations, such as the grantee's sole
source contractor, is the Federal Acquisition Regulation (FAR), which provides detailed
guidance on cost or price analysis. According to FAR 15.404-l(c), cost analysis is the
review and evaluation of the separate cost elements and profit in the offerer's proposal
(including cost or pricing data). FAR 15.404-l(c)(2)(iii) provides cost analysis
techniques and procedures to ensure a fair and reasonable price. These techniques and
procedures include the comparison of costs proposed by the offerer for individual cost
elements with:
• Actual costs previously incurred by the same offerer;
• Previous cost estimates from the offerer or from other offerers for the same or
similar items;
• Other cost estimates received in response to the Government's request;
• Independent Government cost estimates by technical personnel; and
• Forecasts of planned expenditures.
Since the grantee and the Region have not provided adequate documentation to satisfy
Federal cost analysis requirements, we maintain our position on the issue. If additional
documentation is provided during audit resolution, the Region should adjust the amount
for recovery accordingly.
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Status of Recommendations and
Potential Monetary Benefits
POTENTIAL MONETARY
RECOMMENDATIONS BENEFITS (in $OOOs)
Planned
Rec. Page Completion Claimed Agreed To
No. No. Subject Status1 Action Official Date Amount Amount
Disallow and recover the remaining uncollected U Region 9 $291 $27
balance of the $291,494 of costs questioned under Regional Administrator
Grants XP96909501 and XP97963701. If the
grantee provides documentation that meets
appropriate Federal financial management
requirements and shows that some or all of the
remaining uncollected questioned costs are
allocable and allowable to these EPA grants, the
amounts to be recovered should be adjusted
accordingly.
Require the grantee to establish procedures to U Region 9
ensure that it: Regional Administrator
a. Charges labor and benefit costs to the Federal
grants in accordance with OMB Circular A-87;
b. Conducts procurement in accordance with
40 CFR 31.36, including cost analysis for all
sole source contracts;
c. Properly identifies unallowable costs and
excludes them from billings to the Federal
Government;
d. Limits cash draws for Federal grants to actual
disbursements; and
e. Pays contract costs charged to Federal grants
in accordance with contract terms and
conditions.
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
Region 9 and Grantee Reponses
SUBJECT: Draft Audit Report for EPA Grants XP96909501 and XP97963701 -
Washoe County Department of Water Resources
FROM: Wayne Nastri
Regional Administrator
TO: Robert Adachi
Director of Forensic Audits
Office of the Inspector General
USEPA(IGA-l)
We appreciate the opportunity to comment on the subject draft audit report. Over the
past five months, Washoe County, Region, the OIG, and we completed an extensive
amount of work to resolve issues found during the audit of the subject grants. To more
accurately reflect the current status of the audit's findings, we request that these efforts be
documented in the final audit report. We understand the comments which follow will
become part of the report.
FINDING 1: The OIG questioned Indirect Costs as they were claimed without
Approved Rates or Acceptable Cost Allocation Plans.
RESPONSE: As documented in Attachment 1, the Recipient has received approval
from EPA HQ for all indirect cost rates as of June 26, 2008. The Region has determined
that the Recipient has correctly applied those rates to the approved methodology
(Attachment 5). As this issue has been successfully resolved, we request it be removed
from the report, or at minimum, that the new approved rates be acknowledged.
FINDING 2: Labor charges incurred were based on estimates and not compared to
actual costs incurred.
RESPONSE: The Recipient has corrected this situation by receiving EPA HQ approval
of their labor allocation methodology, comparing actual costs incurred to what was
charged to the grant, and submitting a payment request to reflect the difference between
the estimated costs charged and the actual costs incurred (See Attachments 1 through 5).
The Region acknowledges that the information in this memorandum's Attachments 2, 3
and 4 for salary expenses do not match what was provided to OIG staff during the audit.
This is a direct result of EPA HQ approving a labor allocation methodology different than
the methodology used by the Recipient prior to receiving approval from EPA HQ. To
clarify, we have provided an analysis of each year's expenses using both methodologies
to display the correctly applied rates. (Attachments 2, 3 and 4 reflect the old
methodology; Attachments 2A and 3 A reflect the new approved methodology). As this
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issue has been successfully resolved, we request it be removed from the report, or at
minimum that the results of our efforts be acknowledged.
FINDING 3: Fringe Benefit Costs were not based on Approved Rates or Allocation
Method.
RESPONSE: This Finding has been corrected. The approval of the indirect cost rates as
stated in our response to Finding 1 also approved the fringe benefit rate. The Recipient
resolved this situation by submitting a payment request to reflect the difference between
the charged costs (calculated using the incorrect fringe benefit rate) and the actual costs
incurred (calculated using the correct fringe benefit rate). As this issue has been
successfully resolved, we request it be removed from the report, or at minimum that the
results of our efforts be acknowledged.
FINDING 4: The OIG questioned the Recipient's compliance with federal requirements
concerning contract costs of $61,365 incurred in the award of two sole source contracts
under Grant #XP97963701.
RESPONSE: The Region disagrees with this Finding. The Recipient's documentation
(Attachments 10 and 11) provides evidence they were in compliance with regulations
when they completed the sole source procurement and the required cost analysis. Grant
regulations at 40 CFR Part 31.36(4)I(a) allow sole source procurement when the item is
available only from a single source. Attachment 11 documents compliance with federal
regulations by showing that the chosen contractor has specialized experience, and their
subcontractor has patented tools needed to perform the necessary work. In addition, their
product is available only from them or their authorized representative.
Our review also revealed that the Recipient has provided documentation that meets the
requirements of an "evaluation of the specific elements of cost and profit" as required by
40 CFR Part 31.36(4)(D). The Region reviewed job descriptions and rates of pay from
LFR (the contractor selected for the sole source) and two other potential sources (Intera
and Worley Parsons). We determined the sources offered comparable services and
requirements. As sole source requirements were met, the Region requests the amount of
this Finding be reduced at a minimum from $61,365 to $38,200, as $23,165 of the costs
were procured in accordance with regulatory requirements ($61,365-$38,200 sub contract
costs = $23,165).
As part of this Finding, the OIG questions $38,200 of the $61,365 due to the fact that
documentation was not provided to show the subcontract prices were fair and reasonable.
The Region does not have the documentation available and will address it in the audit
resolution.
FINDINGS 5 & 6: The OIG questioned contract costs of $14,230 from the United
States Geological Survey (USGS) and interest costs of $12,157 and $6,622.
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RESPONSE: The Region agrees that the USGS costs as well as the interest costs were
unallowable and the Recipient has already reimbursed the government (Attachments 2, 3
and 4). We request this be noted in the report.
INTERNAL CONTROL WEAKNESSES:
CASH MANAGEMENT: The OIG feels that the Recipient's cash management
procedures need improvement as they found instances where Recipient draw-downs for
retention were not expended in a timely manner as required by regulation.
RESPONSE: The Region believes these were isolated incidences and only dealt with
retention funds. Nevertheless, we will ask our Grants Management Office (GMO) to
follow-up with the Recipient and ensure that appropriate cash management procedures
are in place for draw-downs of retention funds.
CONTRACT MANAGEMENT NEEDS IMPROVEMENT: The OIG noted that of eight
payments made to a contractor under Grant #XP97963701, five payments included an
instance where the amount billed and paid did not comply with contract rates.
RESPONSE: The Region agrees this is problematic. Our GMO will work with the
Recipient to set up procedures to ensure this does not happen in the future.
COMPLYING WITH FEDERAL REQUIREMENTS: The Recipient claimed indirect,
direct labor, fringe benefit and interest costs based on criteria that did not meet federal
standards.
RESPONSE: All indirect, direct labor, fringe benefit and interest cost issues have been
resolved and discussed in earlier parts of the Region's response. As these issues have
successfully been resolved, we request this Finding be removed from the report, or at
minimum that the results of our efforts be acknowledged.
COMPLYING WITH FEDERAL REQUIREMENTS: The OIG feels the Recipient
needs to establish procedures to comply with Federal requirements for financial
management, procurement and contract administration.
RESPONSE: The Region disagrees with the breadth of this recommendation. If
procedures for draw-down of retention funds and procurement in terms of sole source
sub-contracts are lacking, the GMO will work with the Recipient to develop procedures
where needed.
ACKNOWLEDGEMENTS
We thank Ms. Deborah Lambreth of Washoe County for the many hours she spent
working with the Region on this audit, Ms. Lela Wong and Ms. Janet Lister of the OIG
for the professionalism and assistance provided during this audit, and Ms. Jacquelyn
Smith of EPA HQ for the outstanding service she provided to Washoe County in
reviewing and approving the indirect cost rates.
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September 12, 2008
MEMORANDUM
SUBJECT: Costs Claimed under EPA Grants XP96909501 and XP97963701
FROM: Ben Hutchins, CPA, Finance and Customer Services Manager
Washoe County Department of Water Resources
TO: Michael Owen
United States Environmental Protection Agency
San Francisco, California
We appreciate the opportunity to provide additional information on the draft audit
report for EPA Grant numbers XP96909501 and XP97963701.
Washoe County Department of Water Resources (DWR) agrees that the United
States Environmental Protection Agency (EPA) Memorandum dated September 4, 2008,
is factual through May 20, 2008; however, it excludes material facts subsequent to May
20, 2008, that resolves most, if not all, of the items noted in the Memorandum.
As public servants, DWR has the responsibility to provide water services to the
community in the most effective and efficient manner possible and we take this
responsibility very seriously. To provide water services to the community Federal grants
are a vital part of our funding mechanisms. Because the September 4, 2008,
Memorandum does not provide a complete account of the current status of issues noted in
the audit, and steps taken to resolve these issues, we are concerned that granting agencies
could misinterpret the Memorandum in a way that could jeopardize future grant awards.
To this end, we are requesting that the September 4, 2008, Memorandum reflect a
current status of all audit finding issues, as noted below, to provide a full disclosure of
relevant facts. Also, it is our understanding that our September 12, 2008, Memorandum
and the September 11, 2008, Memorandum from EPA Region IX will both be a part of
the final report.
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Summary (Total Outlays = $3,260,089)
Cost Category
Indirect Costs
Labor Costs
Fringe Benefits Costs
Sole Source Contract
Unallowable Contract Costs
Interest Expense
Total
Federal Share 55%
Questioned
Costs
@ 5/20/08
$200,583
158,254
76,778
61,365
14,230
18,779
529,989
$291 ,494
Amount
Owed @
7/21/08
$0
0
0
0
0
0
0
$0
Comments
D
1)
1)
2)
3)
3)
1) Rates approved by EPA; balance owed paid to EPA July 21, 2008.
2) All federal guidelines were met.
3) DWR agrees; paid to EPA July 21, 2008.
As the above table indicates, DWR believes that all amounts owed related to audit
findings have been fully paid as of July 21, 2008, based on EPA evaluations and
approvals subsequent to May 20, 2008. This is the result of joint efforts between DWR,
EPA Region IX and the OIG.
Payment to the EPA was made in the amount of $48,681 through a deduction on a
grant claim submitted to the EPA Grants Management Office PMD-7 (GMO) and the
EPA Las Vegas Finance Center on July 21, 2008 as follows:
Labor & fringe benefits owed to EPA $64,367
Contract costs owed to EPA 14,230
Unallowable grant proj ect interest expense owed to EPA 18,779
Indirect costs owed to DWR (48,695)
Total owed to EPA (paid July 21, 2008)
$48,681
In addition, procedures that were either questioned or found to be inadequate have
been evaluated, modified and implemented in accordance with acceptable federal
guidelines.
Indirect Costs Claimed without approved Rates of Cost Allocation Plan
DWR has prepared indirect cost rate proposals for fiscal years 2004, 2005, 2006,
2007, and 2008. The indirect cost rate proposals were reviewed and approved by
Jacqueline Smith, Rate Negotiator for the EPA Financial Analysis and Oversight Service
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Center (FAOSC). The Negotiation Agreements are dated May 20, June 11 and June 23,
2008.
The revised claim for indirect costs was submitted to the GMO on July 21, 2008.
The amounts of indirect costs allowed by the Negotiated Rate versus amount claimed are
as follows:
Lemmon Valley:
Costs - previously claimed $66,838
Costs - approved rate (90.823)
Amount under claimed (owed to DWR) ($23,985)
Spanish Springs:
Costs - previously claimed $133,745
Costs - approved rate (158,455)
Amount under claimed (owed to DWR) ($24,710)
Total owed DWR ($48,695)
Labor Charges Based on Estimates
DWR prepared labor reports based on actual wages by percentage of work
performed for grants and other direct jobs, for every quarter starting September 2003
through September 2007. These reports were submitted to FAOSC, along with copies of
the Washoe County Comprehensive Annual Financial Reports and Single Audit Reports
for each year. The labor costs were analyzed by Jacqueline Smith and determined to be
acceptable for use as the basis for application of the indirect cost rate.
Fringe Benefit Costs Not Based on Approved Rates or Allocation Method
The questioned costs for this category were a result of all fringe benefits being
disallowed until it was determined that they were not included in indirect costs. As of
May 20, 2008, this determination had not yet been made; however, as a part of the work
performed by Jacqueline Smith, it was verified that indirect costs did not include any
fringe benefits and, as allowed under federal guidelines, were then allowed.
Actual fringe benefit costs were computed for each employee working on DWR
grants for every quarter from September 2003 through September 2007. Fringe benefit
cost computations were submitted to FAOSC along with the labor and indirect costs. As
stated in the OMB CIRCULAR A-87 COGNIZANT AGENCY NEGOTIAION
AGREEMENT between FAOSC and DWR, dated June 11, 2008, "Fringe benefits
applicable to direct salaries and wages are treated as direct costs and are not included in
the base."
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Labor Charges and Fringe Benefits Recalculated
The revised claim for labor and fringe benefits was submitted to the GMO on July
21, 2008. The amounts of labor and fringe benefits allowed by the approved
methodology versus amounts previously claimed are as follows:
Previously
Claimed Approved Difference
Lemmon Valley $385,725 $306,870 $78,855
Spanish Springs 158,129 172,617 (14.488)
Amount owed EPA (repaid July 21, 2008) $64,367
Contracts Procured Without Cost Analysis
Understanding the nature and circumstances surrounding the sole-source contract
being questioned during the audit is necessary to be able to demonstrate why procedures
performed were in compliance with Federal guidelines.
The Spanish Springs grant is in support of the investigation of nitrates that are
contaminating the public water supply to be able to propose remediation remedies. In
order to accomplish this task, it is necessary to measure the nitrates. Besst, Inc.
(subcontractor to LFR, Inc.) is the only manufacturer of the sampling equipment used for
this effort. The US Geological Survey published Fact Sheet 2004-3096 stating "The U.S.
Geological Survey, in cooperation with the manufacturer (Besst Inc.), has modified a
commercially available gas-displacement sample pump to collect water at selected depths
within production wells under pumping conditions." With this new equipment nitrate
levels were tested without disrupting well production, resulting in significant cost
savings. LFR, Inc. formed a team to analyze the data that would be produced by Besst,
Inc. Besst, Inc. proposed a fixed cost bid to travel from California to Reno with two large
trucks and trailers, the newly developed highly specialized testing equipment, and three
hydrogeologist/engineers. They were on site for at least two days for each of four wells.
It is our understanding that they underbid the project because it took longer than
expected. There is no other company that could provide this service; therefore, the only
other option would be to hire a well drilling company to remove the pumping equipment
from four production wells to accommodate water sampling. The cost of this method of
sampling would have significantly exceeded $38,200.
To further demonstrate the reasonableness of these costs DWR is in the process of
requesting information from Besst Inc. concerning costs for services they have provided
to other municipalities for the same type of service.
It is our belief that DWR is in compliance with federal guidelines for the $23,165
paid to LFR, Inc. In the proposal received from LFR, Inc. a breakdown of the labor rates
for the staff that would provide the analysis of the data was reviewed and deemed
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appropriate by the project manager based on his experience working with similar
consulting firms.
DWR also followed Washoe County Purchasing Procedures regarding the award
of a sole-source contract. In addition to the project manager, the merit of the contract
with LFR, Inc. (costs and expertise) was evaluated and approved by Washoe County
hydrogeology staff Jeanne Ruefer (DWR Planning Division Manager), Steve Bradhurst
(DWR Director), John Balentine (Washoe County Purchasing and Contracts Director),
the Finance Department (Ron Steele) and John Rhodes (District Attorney). The contract
was then approved by the Washoe County Board of County Commissioners. Please see
(attached) one of the LFR, Inc. Board of County Commissioners staff reports (requesting
a change order to the agreement), Sole Source Purchase Request Form, and related emails
that outline a portion of the above noted sole-source review and approval process.
In addition, DWR has subsequently gathered comparable class specification and
pay scale information from two similar firms that provide the same type of services. This
information clearly demonstrates that the rates and fees paid to LFR, Inc. were in fact
reasonable and appropriate. This information was provided to EPA Region IX Grants
Management Office who has deemed the comparisons suitable and in compliance with all
required federal guidelines.
Contract Costs Claimed Not Allocable to Grant
DWR agrees that contract costs of $14,230 paid to U.S. Geological Survey should
not have been claimed as grant expense. This amount was repaid on the revised claim
submitted to the GMO on July 21, 2008.
Unallowable Interest Expenses
DWR agrees that interest expenses of $12,157 and $6,622 are unallowable under
OMB Circular A-87. These amounts were repaid on the revised claim submitted to the
GMO on July 21,2008.
Internal Control Weakness
Cash management Improvement
DWR has established procedures to insure that construction contract retention
amounts are not submitted for reimbursement until the actual disbursement has been
made.
Contract Management Needs Improvement
DWR has established procedures to insure that all contract invoices include only
charges for the contracted price.
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Grantee Needs to Comply with Federal Requirements
DWR has established procedures that accommodate all concerns noted in the
September 4, 2008, Memorandum to comply with all Federal requirements.
Conclusion
DWR has, and will continue working with EPA Region IX's Regional
Administrator and OIG to rectify all findings from the audit and believe that final audit
conclusions will demonstrate that DWR has paid the total amount owed ($48,680), has
corrected all internal control weaknesses, and has implemented processes and procedures
to sufficiently address all issues noted in the September 4, 2008, Memorandum.
As noted above, it is our understanding that our September 12, 2008,
Memorandum and the September 11, 2008, Memorandum from EPA Region IX will both
be included as an integral part of the final audit findings report.
We appreciate the time and assistance from all of the dedicated representatives
from both the OIG and EPA Region IX and look forward to a timely resolution to these
matters.
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Appendix B
Distribution
Regional Administrator, Region 9
Director, Office of Wastewater Management, Office of Water
Director, Office of Wastewater Management - Municipal Support Division, Office of Water
Director, Office of Grants and Debarment
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
Region 9 Audit Follow-up Coordinator
Region 9 Public Affairs Office
Director, Washoe County Department of Water Resources, Reno, Nevada
Deputy Inspector General
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