U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Examination of Costs Claimed
Under EPA Cooperative
Agreements CB-97324701
Through CB-97324705
Awarded to Alliance for the
Chesapeake Bay, Inc.
Report No. 12-4-0720
August 22, 2012
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Report Contributors:
Jean Bloom
Edward Rivers
Shannon Schofleld
Richard Valliere
Abbreviations
CA Cooperative agreement
CFR Code of Federal Regulations
EPA U.S. Environmental Protection Agency
OIG Office of Inspector General
Recipient Alliance for the Chesapeake Bay, Inc.
Hotline
To report fraud, waste, or abuse, contact us through one of the following methods:
e-mail: OIG Hotiirie@epa.aov write: EPA Inspector General Hotline
phone: 1-888-546-8740 1200 Pennsylvania Avenue NW
fax: 202-566-2599 Mailcode 2431T
online: http://www.epa.aov/oia/hotline.htm Washington, DC 20460
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sTA?.
.* *. U.S. Environmental Protection Agency 12-4-0720
£ AM \ Dffiro r»f Incnprtnr August 22, 2012
^ (fcjl z Office of Inspector General
iSIE*1
* At a Glance
Why We Did This Review
The U.S. Environmental Protection
Agency (EPA), Office of Inspector
General, conducted this
examination based upon an
anonymous hotline complaint that
expressed concerns associated
with the publication of the Bay
Journal by the Alliance for the
Chesapeake Bay, Inc. (the
recipient). The purpose of this
examination was to determine
whether the recipient's costs
reported are reasonable,
allowable, and allocable in
accordance with the terms and
condition of the cooperative
agreements and whether results
intended were achieved. EPA
awarded the recipient five
cooperative agreements between
August 2005 and July 2010 with a
total approved project cost of
$3,619,049. The purpose of the
agreements was to promote public
education, outreach, and
participation in the restoration of
the Chesapeake Bay. One of the
tasks under the cooperative
agreements was to produce and
publish the Bay Journal.
Furthering EPA's Goals and
Cross-Cutting Strategies
• Protecting America's waters
• Enforcing environmental laws
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at:
www.epa.gov/oiq/reports/20121
20120822-12-4-0720. pdf
Examination of Costs Claimed Under EPA
Cooperative Agreements CB-97324701 Through
CB-97324705 Awarded to Alliance for the
Chesapeake Bay, Inc.
What We Found
The recipient achieved the intended result of producing the Bay Journal, but
did not comply with the Code of Federal Regulations (CFR)—specifically,
40 CFR Part 30 and 2 CFR Part 230—regarding procurement and financial
management requirements. The recipient did not prepare and document a
cost or price analysis, nor evaluate the performance of its Bay Journal
contractor. Also, its federal financial reports are not supported by its
accounting records. We questioned project costs totaling $1,357,035.
The recipient's written policies and procedures do not include necessary
guidance to ensure compliance with 40 CFR Part 30. When recipients do
not complete the required cost or price analysis, we have no assurance that
costs are fair and reasonable. Due to noncompliance issues and
procurement policy and procedure weaknesses, the recipient may not have
the capability to manage current and future grant awards.
Recommendations and Agency/Recipient Response
We recommend that the Regional Administrator, Region 3, disallow the total
questioned project costs of $1,357,035 and recover $1,189,864 of federal
funds paid under the cooperative agreements. We also recommend that the
Regional Administrator require the recipient to improve its procurement
internal controls and ensure that future federal financial reports are
supported by accounting system data. Lastly, we recommend that certain
special conditions be included for all active and future EPA awards to the
recipient until the region determines that the recipient has met all applicable
federal financial and procurement requirements.
Region 3 proposed an alternative resolution to review the costs of the
contracts. We cannot accept this resolution because the region did not
provide information on how it would demonstrate that the costs associated
with the publication of the Bay Journal were fair and reasonable. The
recipient stated that the facts do not support the recommendation to disallow
and recover the claimed costs. The recipient agreed that it achieved the
intended results of producing the Bay Journal.
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^£Dsr%
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
August 22, 2012
MEMORANDUM
SUBJECT: Examination of Costs Claimed Under EPA Cooperative Agreements
CB-97324701 Through CB-97324705 Awarded to
Alliance for the Chesapeake Bay, Inc.
Report No. 12-4-0720
FROM: Arthur A. Elkins, Jr.
TO:
Shawn M. Garvin
Regional Administrator, Region 3
This is our report on the subject examination conducted by the Office of Inspector General (OIG)
of the U.S. Environmental Protection Agency (EPA). This report contains findings that describe
the problems the OIG has identified and corrective actions the OIG recommends. This report
represents the opinion of the OIG and does not necessarily represent the final EPA position.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
Action Required
In accordance with EPA Manual 2750, Chapter 3, you are required to provide us your proposed
management decision for resolution of the findings contained in this reported before any formal
resolution can be completed with the recipient. Your proposed decision is due in 120 days, or on
December 20, 2012. To expedite the resolution process, please e-mail an electronic version of
your proposed management decision to adachi. robert@,epa. gov.
Your response will be posted on the OIG's public website, along with our memorandum
commenting on your response. Your response should be provided as an Adobe PDF file that
complies with the accessibility requirements of Section 508 of the Rehabilitation Act of 1973, as
amended. The final response should not contain data that you do not want to be released to the
public; if your response contains such data, you should identify the data for redaction or removal.
We have no objection to the further release of this report to the public. This report will be
available at http://www.epa.gov/oig.
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If you or your staff have any questions regarding this report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899 or heist.melissa@,epa. gov: or Robert
Adachi, Product Line Director, at (415) 947-4537 or adachi.robert@epa.gov.
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Examination of Costs Claimed Under 12-4-0720
EPA Cooperative Agreements CB-97324701 Through
CB-97324705 Awarded to Alliance for the Chesapeake Bay, Inc.
Table of Contents
Introduction 1
Purpose 1
Background 1
Independent Auditor's Report 2
Results of Examination 4
Publication of the Bay Journal Achieved 4
Procurement Management Weaknesses Identified 5
Recipient's Financial Records Did Not Support Its Federal Financial Reports .... 6
Recommendations 6
Agency and Recipient Comments 7
OIG Response 8
Status of Recommendations and Potential Monetary Benefits 10
Appendices
A Agency's Comments on Draft Report and OIG Evaluation 11
B Recipient's Comments on Draft Report and OIG Evaluation 13
C Distribution 30
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Introduction
Purpose
The purpose of the examination was to determine whether the Alliance for the
Chesapeake Bay, Inc. (the recipient):
• Reported costs that are reasonable, allowable, and allocable in accordance
with the terms and conditions of cooperative agreements (CAs) CB-97324701
through CB-97324705.
• Achieved intended results of production and publication of the Bay Journal.
We conducted this examination based upon an anonymous hotline complaint that
expressed concerns associated with the publication of the Bay Journal.
Background
The U.S. Environmental Protection Agency (EPA), Region 3 Chesapeake Bay
Program Office, awarded the recipient five CAs with a total approved project cost
of $3,619,049. The purpose of the CAs was to promote public education,
outreach, and participation in the restoration of the Chesapeake Bay. Under the
CAs, EPA is to contribute 95 percent of all approved budget period costs incurred
up to the total federal funding of $3,619,049. One of the tasks under the CAs was
to produce and publish the Bay Journal. The Bay Journal is published to inform
the public about issues and events that affect the Chesapeake Bay.
Table 1 provides basic information about authorized budget periods and funds
awarded under each CA. Region 3 issued separate CAs for each budget period.
Table 1: Schedule of cooperative agreements
Cooperative
agreement
Award
date
EPA
share a
EPA in-kind
share b
Recipient
share
Total
approved
project costs
Budget periods
CB-97324701
8/10/2005
$378,704
$11,700
$45,492
$435,896
8/01/2005-1/31/2006
CB-97324702
2/15/2006
772,264
23,400
41,896
837,560
2/01/2006-1/31/2007
CB-97324703
1/26/2007
765,134
23,400
41,502
830,036
2/01/2007-1/31/2008
CB-97324704
2/14/2008
684,954
15,600
36,871
737,425
2/01/2008-1/31/2009
CB-97324705
2/02/2009
723,625
15,600
38,907
778,132
2/01/2009-1/31/2010
Total
$3,324,681
$89,700
$204,668
$3,619,049
Source: EPA CA award documents.
8 EPA share is 95 percent of the approved budget period costs.
b The dollar value associated with providing space, supplies, etc., for recipient employees located at EPA facilities.
12-4-0720
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Independent Auditor's Report
We examined costs claimed by the recipient of $3,602,784 covering the period
August 1, 2005, to January 31, 2010. The recipient accepted responsibility for
preparing its cost claim to comply with the requirements of the Code of Federal
Regulations (CFR) in 40 CFR Part 30 and 2 CFR Part 230, and the terms and
conditions of the CAs. Our responsibility is to express an opinion on the
recipient's compliance and costs claimed based on our examination.
Our examination was conducted in accordance with the Government Auditing
Standards issued by the Comptroller General of the United States, and the
attestation standards established by the American Institute of Certified Public
Accountants. We examined, on a test basis, evidence supporting the amount
claimed under the CAs and performed other procedures we considered necessary
under the circumstances. We believe our examination provides a reasonable basis
for our opinion.
We conducted our examination from January 10 to December 19, 2011. We
performed the following steps:
• Reviewed EPA project files
• Interviewed the recipient to obtain an understanding of the grants and the
recipient's timekeeping, procurement, and federal financial reporting
internal controls
• Verified deposits of EPA payments (drawdowns) to the recipient's bank
statements from January through April 2010
• Reviewed costs claimed by recipient to obtain reasonable assurance that
costs complied with the applicable federal laws and regulations and the
terms and conditions
• Performed fraud detection procedures, including reviewing Bay Journal
expenditures for transaction patterns, performing duplicate payment
analysis, and reviewing board of director meeting minutes
• Determined whether the recipient met its cost-share match
• Determined whether the work specified under Task 2, Bay Journal, of the
grant was accomplished
• Interviewed the recipient's external financial auditors and reviewed fiscal
years 2005 through 2009 single audit reports to identify issues that might
affect our examination
As part of obtaining reasonable assurance that the recipient's costs claimed under
the CAs are free of material misstatement, we performed tests of its compliance
with the requirements of 2 CFR Part 230, 40 CFR Part 30, and the terms and
conditions of the grant. We also considered the recipient's internal controls over
cost reporting to determine our examination procedures and to express our
12-4-0720
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opinion on the costs claimed. Our consideration of internal controls would not
necessarily disclose all internal control matters that might be material weaknesses.
A material weakness is a significant deficiency or combination of significant
deficiencies that results in more than a remote likelihood that a material
misstatement will not be prevented or detected. A significant deficiency is a
deficiency in internal control, or combination of control deficiencies, that
adversely affects the recipient'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.
Our examination disclosed the following material weaknesses concerning the
recipient's procurement internal controls and compliance with the requirements of
40 CFR Part 30 and 2 CFR Part 230:
• Procurement procedures do not comply with the federal procurement
requirements in the award. See discussion on page 5 of this report.
• The recipient's financial records did not support the recipient's federal
financial reports. See discussion on page 6 of this report.
As a result, we questioned total costs of $1,357,035 (federal share $1,289,183) of
the amount claimed of $3,602,784 (federal share $3,422,645) under the CAs and
recommend that EPA recover $1,189,864.
In our opinion, the costs claimed do not meet, in all material respects, the
requirements of EPA Procurement Standards 40 CFR 30.45, 40 CFR 30.47, and
2 CFR Part 230, and the terms and conditions of the CAs for the project period
ended January 31, 2010.
Robert K. Adachi
Director for Forensic Audits
August 22, 2012
12-4-0720
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Results of Examination
Although the recipient achieved the intended results of producing the Bay
Journal, the recipient did not comply with the procurement and financial
management requirements specified by 40 CFR Part 30 and 2 CFR Part 230.
In particular, the recipient did not:
• Prepare and document a cost or price analysis for the contract awarded to
produce the Bay Journal
• Document how it evaluated the performance of the Bay Journal contractor
• Prepare federal financial reports supported by its accounting records
As a result, we question costs of $1,357,035, and EPA should recover $1,189,864
of federal funds paid under the CAs. These issues also indicate that the recipient
may not have the capability to manage other current and future EPA awards.
Table 2: Summary of claimed and questioned costs
Cooperative agreement
Amount
claimed
Amount questioned
Ineligible3 Unsupported11
Total
questioned
CB-97324701
$435,896
$ 123,802
$ 18,504
$ 142,306
CB-97324702
836,512
241,722
13,931
255,653
CB-97324703
830,825
275,975
24,921
300,896
CB-97324704
722,430
285,596
18,965
304,561
CB-97324705
777,121
322,670
30,949
353,619
Total cost
3,602,784
1,249,765
107,270
1,357,035
Federal share (95%)
3,422,645
1,187,277
101,907
1,289,183
Less net questioned costs (95%)
1,289,183
Net costs (95%)
2,133,462
EPA payment
3,323,326
Amount EPA should recover
$1,189,864
Sources: Amounts claimed were from data the grantee provided in supporting its financial status reports/federal
financial report amounts. Costs questioned based on the Office of Inspector General's (OIG's) analysis of the data.
a Represents contractual costs that did not comply with federal procurement requirements. See
"Procurement Management Weaknesses Identified" for details.
b Represents costs that could not be supported by the recipient's financial records. See "Recipient's
Financial Records Did Not Support Its Federal Financial Reports" for details.
Publication of the Bay Journal Achieved
The CAs require the recipient to produce and publish the Bay Journal. EPA
provided funds to inform the public about issues and events that affect the
Chesapeake Bay. The recipient achieved this intended result of the CAs.
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Procurement Management Weaknesses Identified
We question ineligible costs of $1,249,765 for contractual costs associated with
the Bay Journal because the recipient did not comply with the federal
procurement requirements in the award. In particular, the recipient did not:
• Prepare and document a cost or price analysis as required under
40 CFR 30.45
• Document how it evaluated the performance of the Bay Journal contractor
as required under 40 CFR 30.47
When the recipient applied for federal assistance, it certified that it would comply
with applicable requirements of federal laws, executive orders, regulations, and
policies governing each grant. The recipient did not comply with these
requirements because its written policies and procurement procedures provided
inadequate guidance for documenting cost or price analysis and evaluating
contractor performance.
When recipients do not complete the required cost or price analysis, we have no
assurance that prices are fair and reasonable.
Lack of Cost or Price Analysis
We found no evidence of a cost or price analysis within the recipient's
procurement files for the professional services contract awarded to produce the
Bay Journal under Task 2 of the CAs. Title 40 CFR 30.45 requires the recipient to
complete and document some form of cost or price analysis in the procurement
files in connection with every procurement action.
The recipient stated that a cost or price analysis was not performed because the
contractor was involved in the application and budgeting process. Simply
establishing a budget and application is not a cost or price analysis as defined by
40 CFR 30.45. While a budget may provide the cost of the project on an element-
by-element basis, it does not provide a review or evaluation of each element of
costs for reasonableness, allocability, or allowability. Without a cost or price
analysis, we have no assurance that a fair and reasonable price was obtained.
Therefore, we questioned $1,249,765 claimed under the CAs. See table 2 for a
summary of questioned costs by CA.
Lack of Evaluation of Contractor Performance
The recipient did not evaluate the performance of the Bay Journal contractor to
ensure compliance with the terms and conditions of the agreement, or the
procurement requirements under 40 CFR 30.47. This regulation requires that the
recipient maintain a system for contract administration to ensure contractor
conformance with terms, conditions, and specifications of the contract. Recipients
12-4-0720
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shall evaluate contractor performance and document, as appropriate, whether
contractors have met the terms, conditions, and specifications of the contract.
The recipient has a procurement policy and procedures for evaluating contractor
performance; however, it has not documented whether the contractor has met the
terms, conditions, and specifications of the contract. Without documentation
demonstrating how the recipient evaluated the Bay Journal contractor's
performance, we cannot determine whether the contractor's procurement of goods
and services was proper.
Recipient's Financial Records Did Not Support Its Federal Financial
Reports
The recipient's financial records do not support the federal financial reports as
required under 40 CFR 30.21(b) and 40 CFR 30.23(a). The recipient claimed costs
in excess of the amount incurred. The recipient also could not support its in-kind
costs.
As required by 40 CFR 30.21(b), recipients' financial management systems shall
provide for the following:
1. Accurate, current, and complete disclosure of the financial results of each
federally sponsored project or program in accordance with the reporting
requirements set forth in 40 CFR 30.52
2. Records that identify adequately the source and application of funds for
federally sponsored activities
The recipient reported total costs of $3,602,784 for the period ended January 31,
2010. However, the recipient was only able to provide accounting records supporting
$3,579,588 of incurred costs under the CAs. As a result, the difference of $23,196 is
unsupported. In addition, the recipient's records do not support $84,074 of in-kind
costs claimed as required by 40 CFR 30.23(a), which requires all contributions to be
verifiable. Accordingly we question $107,270 as unsupported. See the OIG response
on page 8 for further explanation.
Recommendations
We recommend that the Regional Administrator, Region 3:
1. Disallow the total questioned costs of $1,357,035 claimed under the CAs.
2. Recover $1,189,864 of federal funds paid in excess of the amounts
determined to be allowable under the CAs.
12-4-0720
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3. Require the recipient to improve its procurement process to:
a. Ensure compliance with 40 CFR 30.45 by conducting and
documenting its cost or price analysis.
b. Maintain documentation in its procurement files to justify sole-
source procurements to ensure compliance with 40 CFR 30.46.
c. Establish a system of contract administration to ensure contractor
conformance with the terms, conditions, and specifications of the
contract, and to ensure adequate and timely follow-up of all
purchases, to comply with 40 CFR 30.47.
d. Establish procedures to evaluate contractor performance and
document whether contractors have met the terms and conditions
of their contracts, to ensure compliance with 40 CFR 30.47.
4. Require the recipient to amend its administrative policies and procedures
to document its process for preparing federal financial reports and require
maintenance of data used in preparing reports to ensure compliance with
40 CFR 30.21(b).
5. Require that the following special conditions be included for all active and
future EPA awards to the recipient until the region determines that the
recipient has met all applicable federal financial and procurement
requirements:
a. Payment on a reimbursement basis.
b. Review and approval by the EPA project officer of reimbursement
requests, including all supporting documentation for the claims,
prior to payment.
Agency and Recipient Comments
The region did not comment on the report recommendations. It acknowledged that
the recipient achieved the task of production and publication of the Bay Journal.
The region plans to resolve the questioned project costs by researching whether
the costs of the contract were fair and reasonable and disallow those costs that
exceed what is allowable based on the results of its review.
The recipient stated that the facts do not support the recommendation to disallow
and recover the claimed costs under the CAs. However, they agreed with our
conclusion that it achieved the intended results of producing the Bay Journal.
The recipient believed that the use and selection of its contractor complied with
federal regulations. The recipient stated the use of the sole-source contractor was
fully justified, documented, and disclosed to EPA in its proposal for the grant.
EPA accepted the proposal based on the sole-source award and was satisfied with
the performance of the contractor. Additionally, the recipient believes its
continual monitoring and the successful performance of the Bay Journal
12-4-0720
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contractor demonstrated there was no need to invest time and resources in a
separate evaluation of the contractor. The recipient understands that its policies
and procedures should be updated to clearly articulate language consistent with
the provisions of federal procurement standards.
OIG Response
The region proposed an alternative resolution position of reviewing the contract
costs to determine whether they are fair and reasonable. We cannot accept this
resolution because the region did not provide information on how it would
demonstrate that the costs associated with the publication of the Bay Journal were
fair and reasonable. As the recipient did not conduct and document a unique cost
or price analysis for the selection and use of the Bay Journal contractor, no
documentation exists to support the reasonableness of costs. Without such
documentation, we cannot support the Agency's position.
Based on the recipient's comments, we have not changed our position on the costs
and continue to question as ineligible costs of $1,249,765 to produce the
Bay Journal. The recipient has not demonstrated that the production costs are
reasonable, allocable, and allowable as required by 40 CFR 30.45. The recipient
acknowledges it will amend its procurement policies and procedures to ensure
compliance with 40 CFR Part 30.
Based on recipient information provided in response to the draft report, we
eliminated the statement that the recipient did not document its justification of a
noncompetitive award. Although the recipient disclosed the use of its contractor,
justifying its basis for contractor selection in its February 2006 memorandum, it
did not make this document available at the time of our field work. Further, this
justification does not document how the contractor's costs were determined to be
reasonable, allocable, and allowable.
The recipient also provided supplemental in-kind cost documentation not
provided during our field work. We adjusted the unsupported questioned costs
based upon the supplemental cost data. However, the recipient was still unable to
support its claimed costs for the two of the CAs, as follows:
Cooperative
Agreement
Total Costs
Claimed
Total Recorded
Costs
Unsupported
Costs
CB-97324703
$830,825
$810,876
$19,949
CB-97324705
777,121
773,874
3,247
Total
$23,196
Source: Financial reports submitted to EPA and recipient's financial records.
The recipient's records provided in its response do not support its in-kind costs
claimed for donated services as required by 40 CFR 30.23(a), which requires all
contributions to be verifiable. The recipient incurred $205,446 of donated time by
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the Citizen Action Committee for its quarterly member meetings and various
executive committee conference calls along with in-kind funding contributions for
producing the Bay Journal. Based upon its conference agenda and meeting
minutes, the recipient could support $82,369. As a result, the difference of
$123,077 is unsupported and questioned. However, after review of the recipient's
response, we have off-set the questioned cost by $39,003, representing additional
allowable costs incurred but not claimed by the recipient. As a result, $84,074 is
being questioned.
The full text of the region's and recipient's comments and the OIG's detailed
response are included in appendices A and B of this report.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in $000s)
Rec. Page
No. No.
Subject
Status1
Planned
Completion
Action Official Date
Claimed
Amount
Agreed To
Amount
Disallow the total questioned costs of $1,357,035
claimed under the CAs.
Recover $1,189,864 of federal funds paid in excess
of the amounts determined to be allowable under
the CAs.
Require the recipient to improve its procurement
process to:
a. Ensure compliance with 40 CFR 30.45 by
conducting and documenting its cost or price
analysis.
b. Maintain documentation in its procurement
files to justify sole-source procurements to
ensure compliance with 40 CFR 30.46.
c. Establish a system of contract administration
to ensure contractor conformance with the
terms, conditions, and specifications of the
contract, and to ensure adequate and timely
follow-up of all purchases, to comply with 40
CFR 30.47.
d. Establish procedures to evaluate contractor
performance and document whether
contractors have met the terms and
conditions of their contracts, to ensure
compliance with 40 CFR 30.47.
Require the recipient to amend its administrative
policies and procedures to document its process for
preparing federal financial reports and require
maintenance of data used in preparing reports to
ensure compliance with 40 CFR 30.21(b).
Require that the following special conditions be
included for all active and future EPA awards to the
recipient until the region determines that the
recipient has met all applicable federal financial and
procurement requirements:
a. Payment on a reimbursement basis.
b. Review and approval by the EPA project
officer of reimbursement requests, including
all supporting documentation for the claims,
prior to payment.
Regional Administrator,
Region 3
Regional Administrator,
Region 3
Regional Administrator,
Region 3
$1,190
Regional Administrator,
Region 3
Regional Administrator,
Region 3
O = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is unresolved with resolution efforts in progress
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Appendix A
Agency's Comments on Draft Report
and OIG Evaluation
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION III
1650 Arch Street
Philadelphia, Pennsylvania 19103-2029
FEB 0 7 2012
MEMORANDUM
SUBJECT: Response to Draft Attestation Report:
Examination of Costs Claimed Under EPA Cooperative Agreements
CB-97324701 Through CB-97324705
Awarded to Alliance for the Chesapeake Bay, Inc.
Project No. OA-FYII-A-0059
FROM: James W. Newsom
Assistant Regional Administrator
Region III
TO: Robert Adachi, Director of Forensic Audits
Office of Inspector General
This is response to your memorandum to Regional Administrator Shawn Garvin dated
December 19, 20.11, requesting a response from Region III on the above subject draft audit
attestation report for two cooperative agreements awarded to Alliance for the Chesapeake Bay
(ACB). I am responding for RA Garvin as the designated Region III Audit Action Official.
Thank you for providing us with the opportunity to review and comment on the draft report
examining the costs claimed under these cooperative agreements.
Proper grants management, either by the recipient or by our staff, is of paramount
importance to me. In that regard, I am very concerned about the findings and recommendations
reached in the draft report. While the report acknowledges that the recipient achieved the task of
production and publication of the Bay Journal, it recommends that the Region disallow all
contractual costs associated with the journal due to noncompliance with contracting
requirements. We look forward to resolving this matter by researching whether the costs of the
contract were fair and reasonable and disallowing any costs over that which is allowable based
on the results of our review.
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Further, in the transmittal memorandum, you specifically request comments regarding the
factual accuracy of the report. The only comment I have to offer on the factual nature is in
regards to the statement made about the cost or price analysis by the recipient on the Bay
Journal contract. In the report, it states that,
"Title 40 CFR 30.45 requires the grantee to complete and document a cost or price
analysis in the procurement files in connection with every procurement action."
Title 40 CFR 30.45 actually requires the grantee to conduct some form of a price and cost
analysis in connection with every procurement action. Therefore, if ACB conducted a price or a
cost analysis, then it has fulfilled the requirement of the regulation.
Again, I thank you for the opportunity to provide feedback on this report and commend
you and your staff for providing a thorough review of these cooperative agreements ensuring the
integrity of the taxpayers' money.
If you have any questions regarding my response, please contact Lorraine Fleury,
Region III Audit Followup Coordinator at (215) 814-2341 or fleury.lorraine@epa.gov.
OIG Response 1: We concur with the region's statement that 40 CFR 30.45 requires the
recipient to conduct some form of a cost or price analysis. The region plans to resolve this matter
by researching whether the costs of the contracts were fair and reasonable, and then disallowing
any costs over that which are allowable based on the results of its review. We cannot accept this
resolution because the region did not provide information on how it would demonstrate that the
costs associated with the publication of the Bay Journal are fair and reasonable. As the recipient
did not conduct and document a unique cost or price analysis for the selection and use of the Bay
Journal contractor, no documentation exists to support the reasonableness of costs. Without such
documentation, we cannot support the Agency's position.
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Appendix B
Recipient's Comments on Draft Report
and OIG Evaluation
A
Alliance/or the
Chesapeake Bay
February 1,2012
Mr. Robert Adachi
Director of Forensic Audits
U.S. Environmental Protection Agency
Office of Inspector General
5 Post Office Square, Suite 100 (OID 15-1)
Boston, Massachusetts 02109-3912
Dear Mr. Adachi:
On December 19,2011, Ms. Jean Bloom presented my office with a Draft Attestation Report
entitled, "Examination of Costs Claimed Under EPA Cooperative Agreements CB-97324701
Through CB 97324705 Awarded to Alliance for the Chesapeake Bay, Inc. " The Report presents
the findings of an audit conducted by your office from December 2010 to January 2011 to
evaluate five consecutive cooperative agreements (CAs) awarded through the EPA Region 3
Chesapeake Bay Program Office. The purpose of these CAs was to promote public education,
outreach, and participation in the restoration of the Chesapeake Bay. One of the tasks under the
CAs was to produce and publish the Bay Journal. The Alliance for the Chesapeake Bay (the
Alliance) appreciates the opportunity to respond to this draft report, to provide information and
comment on the findings made, as well as to bring to your attention information that was not
included in the report, that we feel was factually inaccurate, or that should be considered by the
OIG in making its final recommendations.
The Draft OIG Report contains three primary categories of results. First, the grantee's
achievement of the intended results related to production of the Bay Journal; second, the
identification of alleged material weaknesses in Procurement Management; and third,
unexplained variances in financial documentation. We believe there is critical information about
this grant award and the cooperative agreements that you have not requested or seen and/or is
inconsistent with the conclusions in the Draft OIG Report.
501 6m Street
Annapolis.. MD 21403
PH: 443-949-0575
fax : 443-949-0673
3310 Market Street, Suite A
Camp Hill, FA 17011
PH: 717-737-8622
fax : 717-737-8650
www.alllanceforthebay.org
530 E. Main Street, Suite 200
Richmond, VA 23219
PH: 804-775-0951
fax : 804-775-0954
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The salient facts, discussed in more detail in the attached response and attachments, are as
follows:
• The Draft OIG Report confirms that the Alliance delivered all intended results of the
grant with regard to quantity and quality of production of the Bay Journal in each of the
five years in question at the cost promised and successfully achieved the objectives of
informing the public about issues and events that affect the Chesapeake Bay. (Draft OIG
Report, page 5 & 6)
• The Alliance was the incumbent grantee for producing the Bay Journal between 2000
and 2005, and contracted with Mr. Karl Blankenship as editor during that period on a sole
source basis (Attachment A). All costs of that contract were accepted as reasonable and
allowable. After a competitive bid process in 2010, the EPA also awarded a new 5-year
grant to Mr. Karl Blankenship in 2011, who continues to produce the Bay Journal today
(Attachment F).
• Contrary to the finding stated in the Draft OIG Report that there was "no evidence that
[the Alliance] documented its justification of a noncompetitive award until February
2009," (Draft OIG Report page 5) the Alliance first documented the basis of its
noncompetition award to Mr. Blankenship in February 2006 as per its procurement
guidance as part of the first CA of this grant award. (Attachment B)
• Contrary to the finding that the grantee's written policies and procedures "did not include
requirements for documented cost or price analysis, documenting sole-source
justifications..." (Draft OIG Report page 6), the Alliance had procurement standards in
place prior to the CAs in question (Attachment H).
• The Alliance's 2005 proposal includes unambiguous statements about its intent to
maintain its contractual relationship with Mr. Blankenship as editor of the Bay Journal,
without any indication of intent to compete this role (Attachment A). The EPA awarded
the grant to the Alliance, at least in part, based on the Alliance's disclosed agreement to
award a contract to Mr. Blankenship if the Alliance was selected for the award.
• In updated Scope of Work documents filed by The Alliance after performance of the
grant was underway, the Alliance consistently stated that it would continue to contract
with Mr. Blankenship in his role as editor of the Bay Journal. (Attachment D)
• The Alliance provided continual oversight and review of Bay Journal budgets and
itemized expenses and Mr. Blankenship's performance and his reimbursement for costs
were regularly reviewed as normal business procedure. Submission of annual CAs
necessitated a review of prior performance as well as reasonableness of planned expenses
for delivery of the Bay Journal.
• The Alliance's costs associated with the Bay Journal between 2005 and 2010 were
roughly equivalent to the costs that the EPA had allowed under the prior 5-year grant to
do the same work between 2000 and 2005 (Attachment E).
• The OIG's examination and assessment of financial records included a number of
oversights or misinterpretations of the Alliance's accounting systems and records. The
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claim that $87,467 in costs are unsupported is not accurate and, in fact, the Alliance was
underpaid for performance of the CAs. (Attachments L through P).
The attached narrative response and attachments further elaborate and document these facts for
the record. Thank you for the opportunity to provide these comments.
Sincerely,
ALBERT H. TODD
Executive Director
cc: Jean Bloom, EPA OIG
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Response to Draft Attestation Report,
"Examination of Costs Claimed Under EPA Cooperative Agreements CB-97324701 Through
CB 97324705 Awarded to Alliance for the Chesapeake Bay, Inc."
The Draft OIG Report presents the findings of an audit conducted by the EPA OIG from
December 2010 to January 2011 which evaluated five consecutive cooperative agreements (CAs)
awarded to the Alliance for the Chesapeake Bay through the EPA Region 3 Chesapeake Bay
Program Office. The purpose of these CAs was to promote public education, outreach, and
participation in the restoration of the Chesapeake Bay. One of the tasks under the CAs was to
produce and publish the Bay Journal.
The Draft OIG Report contains three primary categories of results. First, the grantee's
achievement of the intended results related to production of the Bay Journal, second, the
identification of alleged material weaknesses in Procurement Management; and third,
unexplained variances in financial documentation. There is critical information about this grant
award and the cooperative agreements that the OIG may not have requested or seen and that is
inconsistent with the conclusions in the draft report.
Overview of Pertinent Findings
First, it should be noted that the Draft OIG Report points out that the Alliance delivered all
intended results with regard to quantity and quality of Bay Journal production in each of the five
years in question and successfully achieved the objectives of informing the public about issues
and events that affect the Chesapeake Bay. These objectives were met within a budget level
expected by the EPA and at the cost promised in the grant and subsequent CAs (Draft OIG
Report, pages 5 & 6).
In terms of procurement process and financial documentation, in essence, the draft audit report
asserts that the Alliance awarded a sole source contract under the EPA grant at issue without the
kind of written justification required by the relevant regulations. The Draft OIG Report
concludes that because of that alleged failure, all of the costs paid to the contractor should be
disallowed. In fact, as demonstrated below, the sole-source contract at issue was fully justified
and documented, the Alliance's intention to make that sole-source award was disclosed to EPA
in the proposal for the grant, EPA accepted the proposal based on the sole-source award, and
EPA was completely satisfied with the performance of the contractor. Regardless of the clear
communication of the Alliance's intentions, the use of Mr. Blankenship as a sole source was
documented with a note to the file according to Alliance Procurement guidance in both 2006 and
2009 (Attachment B).
Even if the Alliance had failed to justify the sole-source decision as required by the regulation,
we understand that the appropriate remedy would be to disallow the excess cost, if any existed,
paid to the contractor as a result of the lack of competition, rather than to disallow the entire cost
of the contract. The evidence demonstrates that the sole-source award could not have resulted in
an unreasonable or excessive payment that could have created justification for any disallowance
let alone the full disallowance proposed in the Draft OIG Report. The government knew about
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the sole-source contract from the time it accepted the proposal, approved of the Alliance's
cooperative agreements, and received the full value of the products that it paid for.
The Alliance understands that even though it has written policies and procurement procedures,
they should be updated so as to clearly articulate language consistent with the provisions of 40
CFR Part 30, and the Alliance is committed to achieving those improvements within the coming
months. However, we do not believe that the drastic action recommended in the report -
disallowance of all costs of the contract - is justified on this premise.
In addition, the Alliance has reviewed the documentation provided by the Draft OIG Report and
additional information provided on 1/18/2012, by Mr. Richard Valliere (Attachment J) related to
the claims of an unexplained variance of $87,467 in the financial report. Our examination, done
by staff who had no relationship to the original recording, shows that there are no unsupported
expenses for the Bay Journal. Instead, the review showed that the Alliance could instead claim
additional costs.
DRAFT PROCUREMENT MANAGEMENT WEAKNESSES IDENTIFIED
Background
Prior to securing the subject five-year grant in 2005, the Alliance was the incumbent grantee
from August 2000 through July 2005 for work that included preparation and publishing of the
Bay Journal. At all times during this performance period, Karl Blankenship was the editor of the
Bay Journal—a role he has performed continuously since 1991 (Attachment A at page 1 - 5).
Mr. Blankenship has won numerous awards in this capacity, including the Renewable Natural
Resources Foundation's first-ever award for Excellence in Journalism in 2001 (Attachment A at
page 10). Karl Blankenship's 20+ year tenure as editor of the Bay Journal continues today,
making it hard to dispute his uniquely qualifications. In 2011, Mr. Blankenship (through his
newly established business, Chesapeake Media Services, Inc.) received a new 5 year contract
from the EPA to produce the Bay Journal.
Between August 2000 and July 2005, the Alliance received $3,680,677 in cooperative agreement
grant funds under a prior grant (Attachment A at page 5). This figure is slightly more than the
$3,619,049 amount for which the Alliance sought reimbursement for performing the same
services during the grant at issue in your audit report, covering the period August 2005 - July
2010 (iCompare Draft OIG Report at 1 with Attachment A at 5). Moreover, $1,051,459 of the
$3.68 million under the prior grant was devoted to the Bay Journal task, compared to $1,337,232
of the $3.62 million for the grant that is the subject of your audit report. We understand that the
past does not dictate the future but believe that if the Alliance's past costs or performance for the
same work had been considered unsatisfactory, it is unlikely that the EPA would have agreed to
continue in a similar arrangement for five more years.
The EPA was fully aware of the Alliance's long-standing contract with Mr. Blankenship and
coordinated directly with Mr. Blankenship to assist in preparation of budgets and resolution of
issues during the Alliance's work on the Bay Journal. It should also be noted that an EPA
contracting officer, was in direct contact with Karl Blankenship when needed to discuss and
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address various budgeting issues, demonstrating that the EPA was specifically aware of Mr.
Blankenship's role and had direct contact with him regarding oversight of his budget.
(Attachment C at page 1 ("I have spoken to Carl [sic] to let him know that his budget should
only be for what he will use between Feb and July. ")
Furthermore, it is clear from contacts with Mr. Blankenship that the EPA was aware that Mr.
Blankenship was not an employee of the Alliance, and was thus an independent contractor.
Given its experience with earlier cooperative agreements, the Alliance reasonably relied on this
understanding to believe that its documentation supporting the agreement and contract was fully
acceptable.
The Alliance's 2005 Proposal
RFP No. EPA.R3CBP-05-03 was issued in early 2005 seeking grantees for an array of tasks
associated with support of the Chesapeake Bay Program. When The Alliance submitted its
proposal for some of the tasks in question - including continued production of the Bay Journal -
the Alliance clearly disclosed the fact that Mr. Blankenship had already been contracted to retain
his role as the editor of the Bay Journal if an award was made to The Alliance. Within a brief
eight-page proposal, there are at least five (5) clear references to Mr. Blankenship's intended role
as the editor and manager of the Bay Journal and justify the use of his unique experience and
expertise.
On the cover page of the proposal, it states:
"The Alliance will continue to utilize the skills of Karl Blankenship as editor of
the Bay Journal and of Kathleen Gaskell as layout artist. Since 1991, Mr.
Blankenship has served as editor, and helped to develop the Bay Journal as the
prime mechanism for reporting policy and science issues related to the Chesapeake
Bay for the interested public. During that time, he has developed a strong working
relationship not only with various Bay Program committees and subcommittees, but
also with state and federal agencies, scientists, and stakeholder groups involved with
the Chesapeake." (Attachment A at page 1 -emphasis added).
Under the "Background Information" section, it states:
"The Alliance will continue to utilize the skills of Karl Blankenship as editor of
the Bay Journal.... Since 1991, Mr. Blankenship has served as editor, and helped
to develop the Bay Journal as the prime mechanism for reporting policy and science
issues related to the Chesapeake Bay for the interested public. During that time, he
has developed a strong working relationship not only with various Bay Program
committees and subcommittees, but also with state and federal agencies, scientists,
and stakeholder groups involved with the Chesapeake. His work with the Bay
Journal has resulted in numerous awards including the 2001 Excellence in
Journalism Award from the Renewable Natural Resources Foundation, a coalition of
14 scientific and conservation organizations. Other awards include the June Sekoll
Media Award from the Maryland Department of Environment, and the Salute to
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Excellence [Award] from the Maryland Governor, both in 1992. In 2003, he was a
finalist for a Pew Fellowship in Marine Conservation." (Attachment A at page 2 -
emphasis added).
Under the "Evaluation Criteria" section, it states:
2. Organizational Capabilities
The Alliance has assembled a team of highly qualified professionals who will form
the backbone of the workforce of this project. The Alliance for the Chesapeake
Bay has a 5-year agreement to work with Karl Blankenship to produce the Bay
Journal...
4. Ecosystem Knowledge
The Alliance's depth of knowledge is fairly extensive. Karl Blankenship has
more than 16 years of experience in covering the Bay Program, and attending
meetings, conferences, scientific gatherings, public hearings and other events
related to the Bay Program and Chesapeake restoration efforts in general. He has
extensive knowledge of the scientific and policy basis for restoration programs for
the Bay and its watershed, from the role of riparian forest buffers and cover crops in
protecting habitats and waterways to the impacts of nutrient and sediment pollution
on water quality and aquatic habitat. He has extensive knowledge of the
Chesapeake Bay water quality criteria, Total Maximum Daily Loads, best
management practices, and the full array of laws, policies and programs that impact
the bay. . . .
5. Tools and Techniques
In the past 16 years, Karl Blankenship has had contact with a wide range of
stakeholders from watermen to watershed groups to scientists to policy makers and
others involved in the Bay restoration effort.
(Attachment A at page 8 -emphasis added).
In addition to these references, the Alliance also included a full bio for Mr. Blankenship as one
of the three attachments to its proposal. (Attachment A at page 10 -Proposal Attachment #2). It
is clearly stated that there was no one else with the same level of experience, knowledge,
acclaim, and subject-matter expertise to serve as the editor of the Bay Journal. We believe that
the lengthy and detailed discussion of Mr. Blankenship's unique qualifications serves as the sole
source justification required by the Alliance procurement guidelines and is the functional
equivalent of what is called for in 40 CFR § 30.46.
Clearly, the Alliance believed that the content of the proposal itself, included in the files,
satisfied the sole-source justification required and understood that EPA's acceptance of the
Alliance's proposal -- including the clear indication that the Alliance would not compete the role
of editor of the Bay Journal — would be tantamount to acceptance of the Alliance's sole-source
justification. The only issue raised is compliance with a general regulatory requirement to justify
sole source awards which the Draft OIG Report seems to suggest must be made in a different,
separate document. We agree that in 2005, the Alliance could have prepared a separate
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document that reiterated the points made in the proposal and labeled it "Sole Source
Justification" even though regulations do not clearly specify that a separate document justifying
the award is required in all circumstances. However, if a separate justification were required,
that document was prepared in 2006, shortly after award and again in 2009. (Attachment B).
Given these facts and their context alone, we trust that you will reconsider your recommendations.
OIG Response 2: Although the recipient disclosed the use of a contractor to the region, it is still
required to follow 40 CFR 30.45 demonstrating that it evaluated the costs to determine
reasonableness, allocability, and allowability. Its February 2006 sole-source justification stated,
"The cost to establish this writing and editing our Bay Journal [sic] would be prohibitive and
would surely lead to an interruption in our work schedule. ..." It did not provide evidence that a
cost or price review was performed. The fact that EPA approved the use of the contractor does
not ensure that costs are reasonable, allocable, and allowable. The recipient must demonstrate the
reasonableness of the cost of the services as required by 40 CFR 30.45. The recipient has not
provided evidence to support that the costs are reasonable.
The Grant Application
After receiving notice of award from the EPA, the Alliance submitted its grant application as
directed in a timely fashion. In the application, the Alliance continued to be forthright about its
intent to continue its existing contractual relationship with Mr. Blankenship in his role as editor
of the Bay Journal.
"The Alliance is requesting $130,000 to produce five issues of the Bay Journal.
The Bay Journal serves as the principle public information tool of the Chesapeake
Bay Program. . . . The Alliance will be responsible for development of story ideas,
research, writing, editing and preparation of camera ready copy, including
photographs and graphics, printing, postage, mailing list maintenance, mailing and
bulk distribution to libraries. . . . Karl Blankenship will continue to be under
contract as editor of the Bay Journal." (Attachment G - June 2005 grant request
page 2 - emphasis added). An equivalent notice was included in every successive
round of grant applications through 2010. The Alliance can provide further
examples if requested.
The Alliance Procurement Guidelines allow for the use of sole source contracts where highly
specialized knowledge or experience is required or no other sources are available. The reasons
for use of a sole source are to be documented in the terms of the contract decision and the
guidance calls for the funding agency to be notified (Attachment H at page 3). It is our opinion
that the Alliance's Executive Director at the time, David Bancroft, would have felt that these
requirements had been met by the documentation referenced in detail above. However, within 6
months of commencing performance on the first CA under this grant, the Alliance's Executive
Director did issue a memo to file titled "Sole Source Justification-Karl Blankenship." It reads:
"Mr. Blankenship is uniquely qualified to manage editing of the Bay Journal
because:
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• He has long-time relationships with [the Alliance] and knowledge of our
mission and priorities.
• The cost to establish this writing and editing of the Bay Journal would be
prohibitive and would surely lead to an interruption in our work schedule
during the transition to someone else, and increased costs." (Attachment B
at page 1)
While the Alliance submits that its proposal alone was a sufficient sole source justification for
meeting its procurement guidelines for all the reasons stated earlier, the February 2006 memo
provides further evidence of the Alliance's compliance with 40 CFR § 30.46 from the first year
of the Alliance's five-year performance period. Perhaps the OIG staff did not see the
justification during the audit, but its existence invalidates the finding in the Draft OIG Report
that states "[there is] no evidence that [the Alliance] documented its justification of a
noncompetition award until February 2009." (Draft OIG Report at page 6). While The Alliance
did file another sole source justification on February 2009 (Attachment B at page 2), the above-
quoted memo pre-dates the memo relied on in the Draft OIG Report by three full years.
Beyond these sole source memos, in each year's Scope of Work document submitted by the
Alliance with its grant renewal application, it repeated that "Karl Blankenship will continue to
be under contract as editor of the Bay Journal." (Attachment D at page 4- emphasis added).
Therefore, the EPA was not only aware that the Alliance planned to continue to utilize Mr.
Blankenship on a sole source basis in 2005, but that continuing intention was confirmed each
year between 2005 and 2010.
OIG Response 3: Based on the recipient's response, we eliminated the reference in the draft
report stating that we found no evidence that the recipient documented its justification of a
noncompetitive award until February 2009. Title 40 CFR 30.46 requires the grantee to document
the basis for contractor selection and justification for lack of competition when competitive bids
or offers are not obtained. Although the recipient disclosed the use of its contractor, justifying its
basis for contractor selection in its February 2006 memorandum, it did not make this document
available to us at the time of our field work. Further, this justification does not demonstrate that
the contractor's costs are reasonable, allocable, and allowable.
Documentation of Blankenship Role in Contract Performance
Alliance Procurement Guidelines state that "[the Alliance] will evaluate contractor performance
and document, as appropriate, whether contractors have met the terms, conditions, and
specifications of the contract. The Executive Director of the Alliance continually reviewed the
quality of Bay Journal production on an issue by issue basis and had to approve payments on a
regular basis to reimburse Mr. Blankenship for costs incurred in its production. Although not
necessarily documented, payments for work on the Bay Journal would not have been made
without a review of the costs and deliverables specifically related to the contract. In addition,
through quarterly grant reports and their review, there is a continuous feedback loop on
performance with EPA as the funding agency. The provision of and approval of quarterly
reports are requirement of the CAs. The need to annually reapply for approval to continue this
work through a new CA also mandated a regular examination by the Alliance Executive Director
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of the budget associated with the Bay Journal, and the expenses proposed for its production and
delivery.
With this knowledge, the EPA continued to give the Alliance positive evaluations throughout the
review process, including in the specific area of the production of the Bay Journal. The Draft
OIG Report itself does not dispute this and concludes that The Alliance "achieved the intended
result of producing the Bay Journal.'" (Draft OIG Report at page 5) and "inform the public about
issues and events that affect the Chesapeake Bay." (Draft OIG Report at page 6). Accordingly,
there is no dispute that Mr. Blankenship capably performed the job he was hired to do.
Relevant regulations have general requirements that grant recipients evaluate contractor
performance and document, as appropriate, whether contractors have met the terms, conditions
and specifications of the contract. The process of regular grant review through quarterly reports
is identified as a method adequate for this purpose. Neither 40 CFR § 30.47 nor § 30.51 require
a grantee to conduct a separate performance evaluation be prepared to monitor contract
performance unless issues dictate the requirement of such measures.
As such, the Alliance did not conduct a separate parallel review of its Bay Journal contractor,
outside of continual monitoring of Bay Journal production and quality, and quarterly review of
the CA by the EPA. Based on successful performance of contracted tasks, positive feedback
from the public and the EPA, and the continued on schedule production of the Bay Journal
within established costs, the need to invest time and resources in such a separate evaluation
would have served no real purpose under the circumstances and would have been duplicative of
the EPA's regular evaluation of the Bay Journal work.
Moreover, even if it could be considered critical that the Alliance failed to prepare written
evaluations of Mr. Blankenship's performance, there was no damage to the EPA from that failure
and certainly no justification for disallowing any portion of the payments made to Mr.
Blankenship as a contractor based on the quality of his work. It should also be noted that if the
Alliance had been required to prepare written evaluations on a regular basis, the cost of their
preparation should have been included as an allowable reimbursable cost in the grant. It is
unlikely that these evaluations would have resulted in any change in relationships or outputs
under the grant.
OIG Response 4: The recipient's own guidelines require it to evaluate contractor performance
and document, as appropriate, whether contractors have met the terms, conditions, and
specifications of the contract. Title 40 CFR 30.47 requires a system for contract administration to
ensure contractor conformance and compliance with contractual terms where 40 CFR 30.51
makes the recipient responsible for monitoring and reporting project performance. Without a
system to monitor and document contractor performance, we cannot determine whether the
recipient's procurement of goods and services was adequate.
Also, a written evaluation is just one factor in determining the allowability of the costs claimed.
Another factor is whether the costs are reasonable, allocable, and allowable within the terms of
the CA. The recipient's response did not address the reasonableness or allowability of costs at
the time of contract award.
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Cost or Price Analysis (Attachment I)
The Draft OIG Report states on page 5 (emphasis added) that the "grantee did not: Prepare and
document a cost and price analysis for the contract awarded to the Bay Journal." Title 40 CFR
30.45 requires that "Some form of cost or price analysis shall be made and documented in the
procurement files in connection with every procurement action. Price analysis may be
accomplished in various ways, including the comparison of price quotations submitted, market
prices and similar indicia, together with discounts. Cost analysis is the review and evaluation of
each element of cost to determine reasonableness, allocability and allowability." (emphasis
added)
Evaluation of past performance and the ability to work within budget limitations for this task
under the EPA CAs was routinely reviewed during the year as discussed above and annually as
new CA proposals were compiled. Although the Alliance did not conduct and document a
unique cost or price analysis for the selection and use of Mr. Karl Blankenship as the editor and
writer of the Bay Journal for the sole source reasons stated above, printing and mailing of the
Bay Journal were regularly competed with various available vendors (Attachment I. For the
purpose of response to this Draft OIG Report, the Alliance compiled additional cost information
about the Bay Journal and Mr. Blankenship's role as well as a comparison of Bay Journal costs
with the costs of other similar publications. It is our hope that this information will help to better
inform the Report recommendations.
In general, comparative services provided by private sources consistently demonstrate that Mr.
Blankenship continually performed at or below the prevailing market costs for services of similar
complexity and quality. The fact that these costs were low and remained that way over time
(when reviewed on an annual basis as part of the CA application process) is certainly cause for
the decision to not perform repeated cost analysis over the period in question and why the
Alliance continued to use Mr. Blankenship as its contractor. Although, writing, editing, and
layout services remained with Mr. Blankenship, costs of printing and distribution were
repeatedly competed to obtain the lowest and most reasonable cost possible (Attachment I).
OIG Response 5: The recipient states it did not conduct a cost or price analysis of the editor and
writer of the journal because of the contractor's past performance and ability to work within
budgets. In response to our report, the recipient prepared a cost analysis using actual payments to
the contractor. The analysis is not based on the contractor's cost data including the contractor's
direct labor and indirect costs. Instead, the analysis was based upon an industry average and
included indirect cost factors that were not supported. This analysis is not a specific review and
evaluation of each cost component to determine the reasonableness, allocability, and allowablity
of costs. Part of the documentation presented to justify its review of printing and mailing costs is
outside the CA project period. Title 40 CFR 30.45 defines a cost analysis as a review and
evaluation of each element of cost to determine reasonableness, allocability, and allowability.
The recipient has not provided evidence to demonstrate that the costs are reasonable, allocable,
and allowable.
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Conclusions relevant to Procurement Management Weaknesses Identified
The EPA awarded a five year grant and entered into successive cooperative agreements from
2005-2010 with the Alliance that included unambiguous language and justification about the
Alliance's intent to issue a sole source contract to Mr. Karl Blankenship. The arrangements and
the costs relevant to this grant were similar to what Mr. Blankenship had been paid under the
incumbent's previous grant (2000-2005). The EPA awarded the grant to the Alliance knowing
that Mr. Blankenship would reprise his role as editor. The award itself was a clear recognition
that the proposed costs were reasonable in the eyes of the EPA and the continuation of funding in
subsequent years is clear recognition that the EPA concurred that his work was completely in a
fully satisfactory manner.
Documentation of the unique reasons for use of Mr. Blankenship as sole source contractor for the
Bay Journal that the Alliance included in its proposals, grant applications and subsequent
agreements and performance reports was suitable for meeting its procurement guidelines and
additional memos to files in 2006 and 2009 reiterated its justification of this choice as required
by relevant regulations. The EPA assented to the Alliance's proposal terms, approved the
Alliance's contracting approach, funded the Alliance's subsequent grant application, and reaped
the benefit in the form of excellent, on-budget grant performance. The Alliance respectfully
submits that the facts do not support the recommendation to penalize the Alliance and request
that all payments related to the CAs be refunded to the EPA six years after the fact. We hold
that the Alliance did exactly what it promised to do, at the price and in the way it promised to
perform.
While we understand and accept the importance of the regulatory requirements and recognize
that any shortcoming in the Alliance's written policies and practices about such matters should
and will be remedied, there is no reason to conclude that any failure to comply with those
requirements in this particular situation caused any harm to the EPA nor would justify any
disallowance at all, much less 100 percent of the amounts paid to Mr. Blankenship. To the
contrary, costs for the Bay Journal as produced by Mr. Blankenship are competitive and even a
bargain when compared with the production of publications of similar scope and quality.
Moreover, the Draft OIG Report cites no provision in the regulations or the grant that would
support disallowing the Alliance's expenses where services were fully performed on-budget and
there is no allegation or documentation suggested that the work could have been performed at a
lower cost or better quality by anyone else.
OIG Response 6: Although the recipient disclosed the use of its contractor and according to the
recipient, EPA approved the use of a contractor—this does not represent approval of the
contractor's contract. The approval does not ensure that the costs are reasonable, allocable, and
allowable. The recipient must demonstrate the reasonableness of the cost of the services as
required by 40 CFR 30.45. The recipient has not provided such evidence. The recipient also
recognizes that its written policies and procedures should and will be remedied.
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GRANTEE FINANCIAL RECORDS AND FEDERAL FINANCIAL REPORTS -
UNSUPPORTED EXPENSES
The Draft OIG Report states that the grantee did not, "Prepare federal financial reports based
upon or supported by its accounting records." The Alliance has reviewed the report and the
additional documents supplied by the OIG on January 18, 2012 and carefully evaluated the
methods used to arrive at the conclusions made. We have identified a variety of oversights and
misinterpretations of the Alliance's accounting systems and records that we believe have led to
these conclusions. The following are key findings made in this reexamination of the Report:
• The OIG's examination did not take into account the fact that the total project
expenditures which are reported on line 10a on the SF269 (Attachment J) include, as
required, in-kind costs that are not captured in the Alliance's accounting software. As an
illustration, the total project expenditures include: the in-kind EPA contribution of office
space and office equipment, volunteer time, and in one case, a private foundation
matching grant.
• The actual federal share of total expenditures reported on line lOj of the SF269
(Attachment J) which represents the cash reimbursements to the Alliance by the federal
government matches the total Alliance expenses that are recorded in the Alliance
accounting system. The only exception to this accounting occurred with grant
CB97324702 (ACB Job 26) where the federal share listed on line lOj in fact, is lower
than the total of Alliance expenditures captured in the accounting software.
• It is also important to note that the indirect cost rates (SF 269 line 11) that were used by
the Alliance in reporting and billing its costs, in all but one case, were lower than the
final negotiated rates for each year. It would be allowable for the Alliance to request that
additional funds be paid by the USEPA to the Alliance to account for this underpayment
(Attachment J and Attachment K Indirect Cost Rate History)
• The OIG information provided to the Alliance 1/18/12 report includes one small error.
For the record, Agreement # CB97324703 was Job 27 in the Alliance's accounting
records, not Job 37, as listed in the OIG attachments provided 1/18/12 (Attachment J).
Expenses:
Outlined below are additional expenses not recognized by the OIG in their investigations,
analyses, and reporting, but clearly captured by the Alliance's financial record-keeping systems,
as outlined below.
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EXPENSES LEFT OUT OF OIG REPORT
EPA In-
Additional In-
Kind Not
Matching
Total
Total Expenses
Kind Not
included in
Funds Not
Expenses
Corrected
Agreement
ACB
According to
included in
OIG
Included in
left out of
Total
Number
Job #
the OIG *
OIG Report**
Report**
OIG Report**
OIG Report
Expenses
CB-97324701
275
$
401,717
$ 8,479
$ 11,700
$ 14,000
$ 34,179
$ 435,896
CB-97324702
26
$
836,650
$ 23,400
$ 23,400
$ 860,050
CB-97324703
27
$
808,113
$ 23,400
$ 23,400
$ 831,513
CB-97324704
28
$
716,045
$ 6,250
$ 15,600
$ 21,850
$ 737,895
CB-97324705
29
$
758,273
$ 15,600
$ 15,600
$ 773,873
Totals
3,520,798
$ 118,429
$ 3,639,227
* See Attachment J OIG "Summary of Recorded Costs arid Reported Outlays"
** See Attachments L through P
Analysis of these expenses, taking into consideration the proper and allowable accounting for
match and in-kind expenses, indicates that the Alliance, over the five year period, actually
incurred more expenses related to the delivery of the Bay Journal task that it was compensated
for. The total expenditures not recognized by the OIG in its supporting documentation is
$118,492. This is supported by the documentation attached (and listed below).
Agreement # CB9732470K Job 275) (Attachment L)
• Additional In-kind - $8,479 (OIG report listed $23,013 actual was $31,492
• EPA In-kind $11,700 (reference award document )
• Keith Campbell Foundation$14,000 (match tracked under Job 335 )
Agreement CB 97324702, (Job 26) (Attachment M)
• EPA In-kind $23,400 (reference award document)
Agreement CB 97324703, Job 27 (Attachment N)
(listed incorrectly on OIG spreadsheet provided 1/18/12)
• EPA In-kind $23,400 (reference award document )
Agreement CB 97324704 (Job 28) (Attachment O)
• Additional In-kind $6,250 (OIG report listed $31,570 actual was $37,820)
• EPA In-kind $15,600 (reference award document )
Agreement CB 97324705 (Job 29) (Attachment P
• EPA In-kind $15,600 (reference award document)
The Alliance's accounting systems and federal financial reports indicate that in essence the
Alliance did not request reimbursement of all expenses and in fact had expenses in excess of
what was reported in performance of the Bay Journal task. Our analysis indicates that all
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expenses for which the Alliance was compensated were fully supported. When all information is
considered, the claim that $87,467 in costs is unsupported is not justified.
OIG Response 7: The recipient states that the auditor's conclusions are based on a variety of
oversights and misinterpretations. We made many requests, from the date of the notification
letter to the issuance of the draft report, for documentation so that we could gain an
understanding of the composition of claimed costs. The recipient's staff was unable to support all
sources and applications of project costs for each of the CAs under review. One reason was that
the executive director, director of finance, and grants manager, who oversaw most of the C A
activities, were no longer employed and had been replaced by temporary staff. Some of the
temporary staff were part-time employees with little or no knowledge of financial records for the
CAs. In the recipient's response, the recipient's new management still could not reconcile its
claimed costs to its records. The recipient's records did contain some documentation for in-kind
costs at the time of our field work, but the recipient was unable to provide supporting
documentation for all of its in-kind costs.
In its response to the draft report, the recipient included supplemental in-kind cost documentation
not provided during our examination. However, the recipient could not support all of its in-kind
costs claimed for donated services as required by 40 CFR 30.23(a). Specifically, the recipient
claimed unsupported hours for the donated services of the Citizen Action Committee in excess of
its meeting agendas and minutes or conference calls, and without explanation. The recipient also
claimed costs identified as additional funding contributions for the Bay Journal but did not
provide any evidence to support these costs. We accepted the in-kind costs of providing EPA
space, supplies, etc., for the recipient's staff located on-site at EPA, as required by the CA, and
the $14,000 of matching funds identified under a separate project number. We have also off-set
the in-kind questioned costs by additional allowable costs incurred but not reported.
The recipient stated that it used an indirect cost rate lower than its negotiated rate when preparing
its costs claimed on the federal financial reports. It did not identify the under-reported indirect
costs. EPA will need to determine whether the unrecovered costs can be used to off-set the
questioned costs or claimed for reimbursement within the award limits.
Enhancement of Alliance Financial Systems and Guidance
Although not addressed in the Draft OIG Report from the EPA OIG, since late 2010 when the
audit began, the Alliance for the Chesapeake Bay has taken significant steps to improve its
financial management systems and staffing and to improve accounting software. The Alliance's
Executive Director hired Elizabeth Biggs in January 2011 for the expressed purpose of bringing
experienced non-profit accounting expertise to its financial management systems. As of January
1, 2011, the Alliance abandoned its cumbersome accounting software package known as
ACCPAC and began implementation of new Peachtree Complete Accounting software. In 2011,
the Alliance replaced financial and bookkeeping staff who lacked sufficient expertise to fully
manage a nonprofit accounting system.
In is important to note that the Alliance as a matter of financial policy segregates in-kind revenue
and expense items from monetary items in its non-profit financial accounting systems. See
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recommendations by the "Nonprofit Overhead Project" sponsored by the Atlantic Philanthropies,
The Ford Foundation, The Charles Stewart Mott Foundation, the David and Lucille Packard
Foundation, and the Rockefeller Brothers Fund. The Alliance memorialized, effective January 1,
2011 the existing financial management policy and procedure on documenting in-kind
contributions which includes recording:
(a) The date and location of the in-kind contribution.
(b) As appropriate, the name and signature of the donor.
(c) A description of the goods or services.
(d) The estimated fair market value of the contribution.
(e) How or who estimated the value.
Based on recommendations in the Draft OIG Report, the Alliance will also revise its 2004
Procurement Guidelines to use specific language that will better articulate the intent of 40 CFR
30 related to contracting provisions such as cost or price analysis, documentation of sole source
and evaluation of performance.
OIG Response 8: The recipient acknowledged it will amend its procurement policies and
procedures to ensure compliance with 40 CFR Part 30.
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ATTACHMENT LIST
Attachment A: 2005 Alliance for the Chesapeake Bay Proposal for EPA Grant
Attachment B: 2006 and 2009 Sole Source Justification Statements
Attachment C: Emails with EPA Grant Officer
Attachment D: 2006 CA Scope of Work
Attachment E: Alliance 2000-2005 Bay Journal Costs
Attachment F: Bay Journal Web Contact Page
Attachment G: Alliance June 2005 Grant Request
Attachment H: Alliance 2004 Procurement Standards
Attachment I: Cost Analysis for Bay Journal and other comparable publications
Attachment J: Information provided to the Alliance by OIG on 1/18/12
Attachment K: Alliance Indirect Cost History
Attachment L: Documentation related to Agreement # CB97324701( Job 275): Total In-kind
match contributed by CAC members from 8/1/05 - 1/31/06, Award document
CB-97324701-0, and Keith Campbell Foundation award letter and budget vs.
actual report for Job 335
Attachment M: Documentation related to Agreement CB 97324702, (Job 26): Agreement
Award document CB-97324702-0 and Amendment 1, CB-97324702-1 funding
increase.
Attachment N: Award document CB-97324703
Attachment O: Documentation related to Agreement CB 97324704 (Job 28): Total In-kind match
contributed by CAC members from 2/1/2008 - 1/31/2009 and Post Award
Evaluation Protocol for Grant CB-97324704
Attachment P: Award document CB97324705-0 (Job 29)
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Distribution
Regional Administrator, Region 3
Assistant Regional Administrator, Region 3
Agency Follow-Up Official (the CFO)
Agency Follow-Up Coordinator
Director, Grants and Interagency Agreements Management Division,
Office of Administration and Resources Management
Regional Public Affairs Officer, Region 3
Audit Follow-Up Coordinator, Region 3
Executive Director, Alliance for the Chesapeake Bay, Inc.
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