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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Quick Reaction Report
Internal Control Weaknesses
under EPA Grant Nos. 1004802070
and BG96483308, Awarded to the
Eastern Band of Cherokee Indians,
Cherokee, North Carolina
Report No. 10-4-0001
October 5, 2009
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Report Contributors: John Trefry
Phil Cleveland
Abbreviations
EBCI Eastern Band of Cherokee Indians
EPA U.S. Environmental Protection Agency
OIG Office of Inspector General
SF 272 Federal Cash Transaction Report
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5
U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
10-4-0001
October 5, 2009
Catalyst for Improving the Environment
Why We Did This Review
The Office of Inspector
General (OIG) received a
hotline complaint regarding
U.S. Environmental Protection
Agency (EPA) Assistance
Agreement Numbers
1004802070 and BG96483308,
awarded to the Eastern Band of
Cherokee Indians (EBCI),
Cherokee, North Carolina.
Background
EPA Region 4 awarded EBCI
Assistance Agreement Number
1004802070 for $259,964
(federal share) on June 20,
2007. The Region subsequently
issued two amendments that
increased the available funds
by $93,920 (total federal share
of $353,884). EPA awarded
Assistance Agreement Number
BG96483308 for $152,000
(federal share) on September
24,2007. The Region
subsequently issued an
amendment that increased the
available funds by $124,967
(total federal share of
$276,967).
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/2010/
20091005-10-4-0001.pdf
Internal Control Weaknesses under EPA Grant Nos.
1004802070 and BG96483308, Awarded to the Eastern
Band of Cherokee Indians, Cherokee, North Carolina
What We Found
EBCI does not have a conflict of interest and its SF 272s are correct and prepared
in compliance with federal requirements, EPA policies, and grant terms and
conditions. However, during the course of our examination, we identified
significant deficiencies in internal control concerning equipment purchases and
segregation of duties that we believe require immediate attention. Regarding our
concern with equipment purchases, we found that:
• Some purchase authorizations were dated the same day equipment was
delivered.
• EBCI did not always obtain three quotes.
• The Asset Compliance Officer did not always authorize purchases.
Regarding our concern on segregation of duties, we found that one employee
within the Office of Environment and Natural Resources - the Water Quality
Section Supervisor - is authorized to write grant proposals; solicit funding to
carry out the program goals; prepare budgets; oversee the expenditure of funds;
and purchase, maintain, repair, and inventory all equipment.
What We Recommend
We recommend that the Regional Administrator, EPA Region 4, require EBCI to
comply with its internal control policies and procedures with respect to
equipment purchases, require all future purchases under these grants to be
properly approved, and require that EBCI establish internal controls to ensure the
proper segregation of duties for grant award and administration.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
October 5, 2009
MEMORANDUM
SUBJECT:
FROM:
TO:
Internal Control Weaknesses under EPA Grant Nos. 1004802070 and
BG96483308, Awarded to the Eastern Band of Cherokee Indians,
Cherokee, North Carolina
Report No. 10-4-0001
B . rt A . , -
Robert Adachi
Director, Forensic Audits
A. Stanley Meiburg
Acting Regional Administrator
EPA Region 4
Mr. Michell Hicks
Principal Chief
Eastern Band of Cherokee Indians
This is our report on the results of the Office of Inspector General (OIG) review of Grant Nos.
1004802070 and BG96483308 awarded to the Eastern Band of Cherokee Indians (EBCI), located
in Cherokee, North Carolina. Final determination on matters in this report will be made by the
U.S. Environmental Protection Agency (EPA) managers in accordance with established
resolution procedures.
The estimated cost of this report, calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time, is $38,221.
Action Required
We recommend the Regional Administrator require EBCI to comply with its internal control
policies and procedures with respect to equipment purchases and require all future purchases
under these grants to be properly approved, and require EBCI to establish internal controls to
ensure the proper segregation of duties for grant award and administration.
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In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 180 calendar days of the date of this report. Please follow the directions of EPA
Manual 2750 for the report resolution process.
If you or your staff have any questions regarding this report, please contact me at (415) 947-4537
or adachi.robert@epa.gov: or John Trefry, Associate Director of Forensic Audits, at
(202) 566-2474 or trefry.john@epa.gov.
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10-4-0001
Introduction
Purpose
The Office of Inspector General (OIG) received a hotline complaint regarding U.S.
Environmental Protection Agency (EPA) Assistance Agreement Numbers 1004802070 and
BG96483308, awarded to the Eastern Band of Cherokee Indians (EBCI), Cherokee, North
Carolina. The complainant expressed concerns about an apparent conflict of interest involving
EBCI contracts with previous employees. The purpose of our examination was to determine
whether a conflict of interest existed within EBCFs Office of Environment and Natural
Resources and whether EBCI complied with federal requirements, EPA policies, and grant terms
and conditions.
Background
On June 20, 2007, EPA Region 4 awarded EBCI Assistance Agreement Number 1004802070 for
$259,964 (federal share). The grant project period was from October 1, 2006, through
September 30, 2008, and was for developing and implementing a strategy to monitor the quality
of tribal waters. The Region subsequently issued two amendments that increased the available
funds by $93,920 (total federal share of $353,884) and extended the project period to
September 30, 2009.
On September 24, 2007, EPA Region 4 awarded EBCI Assistance Agreement Number
BG96483308 for $276,967(federal share). The grant project period was from October 1, 2007,
through September 30, 2009, for work in several areas including regulatory development and
compliance, responding to underground storage tank leaks or spills, and operating and
maintaining ozone and fine particulate matter monitors.
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10-4-0001
Independent Attestation Report
As part of our continued oversight of the grants awarded by EPA, we have examined a hotline
complaint regarding Assistance Agreement Numbers 1004802070 and BG96483308, awarded to
EBCI, Cherokee, North Carolina. The purpose of our examination was to determine whether a
conflict of interest existed within EBCI's Office of Environment and Natural Resources and
whether EBCI complied with federal requirements, EPA policies, and grant terms and
conditions. By signing the award documents, EBCI has accepted responsibility for complying
with these requirements, and by signing the Federal Cash Transaction Report (SF 272) EBCI
certifies ".. .that all disbursements have been made for the purpose and conditions of the grant or
agreement." Our responsibility is to express an opinion on EBCFs compliance based on our
examination.
We examined the complainant's assertion concerning the apparent conflict of interest involving
EBCI contracts with previous employees. Further, we examined management's assertion that its
SF 272s are adequately supported and prepared in compliance with federal requirements, EPA
policies, and grant terms and conditions. EBCI's management is responsible for preparing SF
272s. Our responsibility is to express an opinion based on our examination.
Our examination was conducted in accordance with generally accepted government auditing
standards issued by the Comptroller General of the United States. Our review was also
conducted in accordance with attestation standards established by the American Institute of
Certified Public Accountants and, accordingly, included examining, on a test basis, evidence
supporting management's assertion and performing such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a reasonable basis for
our opinion. Field work was completed between January 5, 2009, and February 5, 2009.
We made site visits to EPA's Region 4 office in Atlanta, Georgia, and performed the following
steps:
• Reviewed EPA Assistance Agreement Numbers 1004802070 and BG96483308 and
modifications to determine criteria relevant to our objectives.
• Reviewed all payments made under these grants to determine whether there was a history
of suspended or disallowed costs.
• Conducted interviews with and reviewed files maintained by EPA's Project Officers to
gather information concerning any apparent conflict of interest and assess EBCI's
performance under the subject grants.
We made site visits to EBCI's Cherokee, North Carolina, offices and performed the following
steps:
• Reviewed EBCI's accounting records and supporting documentation for costs associated
with Assistance Agreement Numbers 1004802070 and BG96483308.
• Traced labor and other direct costs to time sheets, invoices, and labor distribution reports.
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10-4-0001
• Conducted interviews with EBCI managers and staff to gather information concerning
any apparent conflict of interest.
• Made inquiries of EBCI's Legal Counsel to acquire legal opinions related to potential
conflicts of interest.
• Verified that EBCFs Water Quality Section Supervisor satisfied the educational and
experience requirements for the labor category for which he was billed.
• Gained an understanding and assessed the effectiveness of the internal controls applicable
to EBCFs Department of Water Quality.
In our opinion, EBCI does not have a conflict of interest and its SF 272s are correct and prepared
in compliance with federal requirements, EPA policies, and grant terms and conditions.
However, during the course of our examination, we identified significant deficiencies in internal
controls concerning equipment purchases and segregation of duties that we believe require
immediate attention. Generally accepted government auditing standards define a significant
deficiency in internal controls as "a deficiency.. .that adversely affects the entity's ability to
initiate, authorize, record, process, or report data reliably in accordance with the applicable
criteria or framework such that there is more than a remote likelihood that a misstatement of the
subject matter that is more than inconsequential will not be prevented or detected."
Robert K. Adachi
Director, Forensic Audits
February 5, 2009
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10-4-0001
Results of Examination
We identified significant deficiencies in internal control concerning equipment purchases and
segregation of duties that we believe require immediate attention.
Equipment Purchases
EBCFs internal controls over equipment purchases do not operate as designed. EBCI policy and
procedures for equipment purchases require a purchase authorization for any proposed capital
acquisition exceeding $1,000, quotes from three vendors, and authorization by the Asset
Compliance Officer. A second authorization is required for purchases over $5,000.
We found that: (1) some purchase authorizations were dated the same day equipment was
delivered, (2) EBCI did not always obtain three quotes, and (3) the Asset Compliance Officer did
not always authorize purchases. Specifically:
• Our examination found three invoices from a specific vendor that violated EBCI internal
control polices. One invoice did not contain a purchase authorization as required. The
other two invoices contained purchase authorizations but the authorizations were not
prepared until after the equipment was invoiced. EBCI did not obtain three bids for any
of the purchases nor were proper authorizations obtained prior to purchase.
• On September 26, 2007, EBCI ordered a meter costing $2,143.16. The vendor billed
EBCI for the meter on October 9, 2007, and was paid on October 26, 2007. EBCI
records for this transaction showed that no purchase authorization was completed. The
purchase was processed without quotes from three vendors or authorization by the Asset
Compliance Officer. The Water Quality Section Supervisor authorized payment of this
purchase. Further, the Water Quality Section Supervisor would have been responsible for
placing an inventory tag on the meter, as well as maintaining and inventorying the meter.
We found that this meter was not tagged and was still unopened in its original box and
considered a spare. EBCI officials could offer no explanation as to why this transaction
was not processed in compliance with its policies and procedures.
We believe EBCI is not consistently following its internal control procedures related to
equipment purchases because too much authority has been given to the Water Quality Section
Supervisor.
Despite this internal control weakness, nothing came to our attention that led us to believe that
equipment purchases were either unreasonable in price or not applicable to the grant.
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10-4-0001
Segregation of Duties
EBCFs internal controls are not properly designed to allow proper segregation of duties. One
employee within the Office of Environment and Natural Resources, the Water Quality Section
Supervisor, is authorized to write grant proposals; solicit funding to carry out the program goals;
prepare budgets; oversee the expenditure of funds; and purchase, maintain, repair, and inventory
all equipment.
Government Accountability Office Standards for Internal Control in the Federal Government
state that key duties and responsibilities need to be divided or segregated among different people
to reduce the risk of error or fraud. This separation should include the responsibilities for
authorizing transactions, processing and recording them, reviewing the transactions, and
handling any related assets. No one individual should control all key aspects of a transaction or
event.
EBCI, by allowing the Water Quality Section Supervisor to perform these tasks, circumvents
sound internal control practices as described above. EBCI officials assert its Water Quality
Section Supervisor knows what equipment is required under the grant. EBCI defers to the Water
Quality Section Supervisor's expertise when ordering equipment with respect to whether it is
needed or authorized under the grant.
Recommendations
We recommend that the Regional Administrator, EPA Region 4:
1. Require EBCI to comply with its internal control policies and procedures with respect
to equipment purchases and require all future purchases under these grants to be
properly approved. The Project Officer should monitor all grant purchases closely
and conduct periodic unannounced site visits to review EBCI property records.
2. Require that EBCI establish internal controls to ensure the proper segregation of
duties for grant award and administration.
Region 4 and Auditee Comments
On September 14, 2009, an exit conference was held with the Region. The Region concurred
with our report findings and recommendations. Based on this report, the Region agreed to take
steps to inform the EBCI and assist it with ensuring its internal control policies are sufficient and
being followed. The Region also noted that in its annual training held with grant and contract
officials, of which the OIG participates, internal controls will be emphasized.
On September 17, 2009, the grantee notified us that it had no comments to provide with the
report. As a result, the final report is being issued without the grantee's comments on our
recommendations.
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10-4-0001
Status of Recommendations and
Potential Monetary Benefits
POTENTIAL MONETARY
RECOMMENDATIONS BENEFITS (in SOOOs)
Planned
Rec. Page Completion Claimed Agreed To
No. No. Subject Status1 Action Official Date Amount Amount
Require EBCI to comply with its internal control 0 Regional Administrator,
policies and procedures with respect to equipment EPA Region 4
purchases and require all future purchases under
these grants to be properly approved. The
Project Officer should monitor all grant purchases
closely and conduct periodic unannounced site
visits to review EBCI property records.
Require that EBCI establish internal controls to 0 Regional Administrator,
ensure the proper segregation of duties for grant EPA Region 4
award and administration.
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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10-4-0001
Appendix A
Distribution
Regional Administrator, Region 4
Director, Office of Wastewater Management, 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 4 Audit Follow-up Coordinator
Region 4 Public Affairs Office
Acting Inspector General
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