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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Quick Reaction Report
EPA Should Revise its
Grant Accrual Methodology
to Address Impact of
Recovery Act Funds
Report No. 09-X-0217
August 19, 2009
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Report Contributors:
Paul Curtis
Meg Hiatt
Abbreviations
ARRA	American Recovery and Reinvestment Act
EPA	U.S. Environmental Protection Agency
OCFO	Office of the Chief Financial Officer
OIG	Office of Inspector General
OMB	Office of Management and Budget

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U.S. Environmental Protection Agency	09 x 0217
	\ Office of Inspector General	August 19,2009
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At a Glance
Catalyst for Improving the Environment
Why We Did This Review
The Office of Inspector
General (OIG) of the
U.S. Environmental Protection
Agency (EPA) has concerns
with the impact the American
Recovery and Reinvestment
Act (ARRA) of 2009 will
have on EPA's grant accrual
calculation for the Fiscal Year
2009 financial statements. We
are alerting EPA management
of our concerns.
Background
In February 2009, EPA was
provided with $7.2 billion
under the ARRA for projects
and programs administered by
EPA. The funds were to be
awarded to grantees
expeditiously. Grant accruals
in the financial statements
represent grantee costs
incurred but not billed.
For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2009/
20090819-09-X-0217.pdf
EPA Should Revise its Grant Accrual Methodology
to Address Impact of Recovery Act Funds
What We Found
EPA's grant accruals for the Fiscal Year 2009 financial statements may not include
adjustments for additional funds received under the ARRA. EPA has historically
computed grant accruals based on the results of a grantee billing practice survey.
The survey documents grantees' billing practices, the cumulative effect of which is
used to calculate accrual percentages. Once the grant accrual percentages are
calculated, they are applied to current year grantee expenditures paid to calculate
EPA's liability for grantee expenditures incurred but not yet billed to EPA.
EPA currently plans to combine ARRA grants with traditional grants and use the
combined universe as the basis for its grant accrual calculation. Traditional grants
have longer periods of performance than grants with ARRA funds. Only
51 percent of the grant funds have been expended on traditional grants over the
past 5 years. ARRA funds are intended to be used faster than traditional grant
awards. Consequently, the results of the sample will be skewed because the
billing practices for ARRA grants will be different than EPA's traditional grants
and not representative of all grants, including ARRA grants. This could misstate
the financial statements regarding grant expenditures incurred but not billed.
What We Recommend
We recommend that the Chief Financial Officer modify the current grant accrual
methodology to account for the increase in and nature of grant expenditures due to
the ARRA. The revised methodology should separate the two distinct types of
grants - ARRA and EPA's traditional grants. EPA should use its historical
method for computing the accrual for traditional grants and develop a separate
process for the ARRA grants that will consider the intent to expeditiously award
and expend ARRA funds. The separate methodology could include amounts
reported by recipients on the total amount of funds received and the amount spent
on projects and activities, as required by Office of Management and Budget
(OMB) Memorandum M09-21, Implementing Guidance for the Reports on Use of
Funds Pursuant to the American Recovery and Reinvestment Act of2009.
The Office of the Chief Financial Officer (OCFO) agreed with OIG's
recommendations for the Fiscal Year 2009 grant accruals. OCFO will analyze the
difference between the grantee's reported expense and EPA records and determine
the grant accrual amount for ARRA funds. OCFO is considering other methods
for calculating the grant accrual rate for ARRA funds in the event the required
OMB reports are not available.

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|	\	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
|	I	WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
August 19, 2009
MEMORANDUM
SUBJECT:
FROM:
Quick Reaction Report:
EPA Should Revise its Grant Accrual Methodology
to Address Impact of Recovery Act Funds
Report No. 09-X-0217

Paul C. Curtis
Director Financial Statement Audits
TO:	Maryann Froehlich
Acting Chief Financial Officer
This is our report on the concerns the Office of Inspector General (OIG) of the U.S.
Environmental Protection Agency (EPA) has with the impact of the American Recovery and
Reinvestment Act (ARRA) of 2009 on EPA's grant accrual methodology. This review was not
an audit conducted in accordance with Government Auditing Standards. We conducted our
review from February 20 to July 15, 2009, during which time we evaluated EPA's methodology
for calculating grant accruals to determine whether ARRA grants would necessitate a change to
how EPA calculates grant accruals for the Fiscal Year 2009 financial statements. Grant accruals
in the financial statements represent the costs incurred but not yet paid.
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.
No written response to this draft is required.
In Fiscal Year 2008, EPA reported grant accruals totaling $414 million, or 52 percent of EPA's
total Accounts Payables and Accrued Liabilities. Such an amount is material to EPA's financial
statements. EPA has historically computed grant accruals based on the results of the grantee
billing practice surveys. The survey results are used to calculate accrual percentages by grantee.
The percentages are then applied to total estimated expenditures to produce the accrual. EPA
currently plans to combine the ARRA grants with EPA's traditional grants and use the combined
universe for computing grant accruals for Fiscal Year 2009. Office of Management and Budget
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09-X-0217
(OMB) Bulletin 09-02, Budget Execution of the American Recovery and Reinvestment Act of
2009, states in part that Agencies are to take expeditious actions to spend money. EPA's
expenditures for grants over the past 5 years have been approximately 51 percent of open grant
obligations. By combining the grants and using the same methodology for ARRA funds, which
are intended to be spent expeditiously, the accrual for Fiscal Year 2009 could be materially
impacted. Because the grant accrual is a significant number on EPA's financial statements, such
an impact could materially misstate the financial statements.
The ARRA includes $7.2 billion for projects and programs administered by EPA. These
programs, which will protect and promote green jobs and a healthier environment, include:
Table 1: Programs Receiving ARRA Funds
Program
Purpose
Amount
Clean Water and
Drinking Water
State Revolving Funds
For assistance to help communities with water quality and
wastewater infrastructure needs ($4 billion) and with drinking water
infrastructure needs ($2 billion)
$6 billion
Brownfields
For competitive grants to evaluate and clean up former industrial and
commercial sites
$100 million
Diesel Emissions
Reduction
For grants and loans for projects to reduce diesel emissions
$300 million
Superfund Hazardous
Waste Clean-up
For clean-up of hazardous sites
$600 million
Leaking Underground
Storage Tanks
For clean-up of petroleum leaks from underground storage tanks
$200 million
Source: EPA Website
The Act and OMB's guidance require agencies to spend the funds quickly in order to stimulate the
economy. According to OMB Bulletin 09-02, agencies are to take expeditious actions to spend
money while maintaining due diligence to ensure that funds are not wasted. Appropriation
language stipulates that funds will remain available for obligation until September 30, 2010.
ARRA section 1602 requires that "recipients shall give preference to activities that can be started
and completed expeditiously, including a goal of using at least 50 percent of the funds for
activities that can be initiated not later than 120 days after ... enactment" of the Act. The Act was
enacted on February 17, 2009. For the State Revolving Funds, the law requires that the work "be
under contract or construction" within 12 months.
EPA's expenditures for grants over the past 5 years have been approximately 51 percent of funds
obligated during the same 5 years. Since ARRA funds are to be awarded and expended quickly,
the amount of EPA's expenditures should dramatically increase. Such an increase would impact
the basis used for grant accruals because EPA uses expenditures as the basis for the calculation.
OMB Circular A-136, Financial Reporting Requirements, states that "Financial statements shall
recognize probable and measurable future outflows or other sacrifices of resources arising from
(1) past exchange transactions, (2) government-related events, (3) government-acknowledged
events, or (4) non-exchange transactions that, according to current law and applicable policy, are
unpaid amounts due as of the reporting date." The Statement of Federal Financial Accounting
Standards No. 5, Accounting for Liabilities of the Federal Government, describes the general
principles governing the recognition of a liability, including the requirement to record accruals.
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09-X-0217
EPA has historically computed grant accruals based on the results of the grantee billing practice
surveys. Once the grant accrual percentages are calculated, they are applied to current year
expenditures to date to project future expenditures. Because the percentages are based on the
historical spending patterns of grantees prior to the ARRA, the effect of the newer ARRA
expenditures would not be included in the percentages.
EPA currently does not plan to revise the historical methodology, and will pull a sample
consisting of all grantees, combining traditional grants with ARRA grants. By combining the
traditional grants with ARRA grants and using the same methodology, the grant accrual could be
distorted due to the effect of the newer ARRA grants that are intended to be expended more
quickly. By separating the types of grants into two universes, EPA could develop a more
accurate accrual based on the nature of the grants awarded. The traditional grant accrual
methodology could be used for traditional grants. EPA should develop a different methodology
that will take into account the expeditious expenditure of ARRA funds.
Recommendation
1. We recommend that the Chief Financial Officer separate the ARRA grants from
traditional grants in developing the 2009 grant accrual. EPA should use its traditional
grant accrual methodology for traditional grants, and develop a separate methodology for
ARRA funds that considers the intent to expend such funds expeditiously. The separate
methodology could include amounts reported by recipients on the total amount of funds
received and the amount spent on projects and activities, as required by OMB Memorandum
M09-21, Implementing Guidance for the Reports on Use of Funds Pursuant to the
American Recovery and Reinvestment Act of2009.
Agency Response and OIG Evaluation
The Office of the Chief Financial Officer (OCFO) agrees with the OIG's recommendations for
the Fiscal Year 2009 grant accruals. OCFO is utilizing the traditional methodology for
non-ARRA grants and grantees. This process will not deviate from prior years. In regard to
ARRA grants, OMB has directed all grant recipients to report their year-to-date spending by
September 30, 2009. OCFO will analyze the difference between the grantee's reported expense
and EPA records and determine the grant accrual amount for ARRA funds. OCFO is currently
considering other methods for calculating the grant accrual rate for ARRA funds in the event the
required OMB reports are not available. We concur with the Agency's response.
If you or your staff have any questions regarding this report, please contact Paul Curtis at
(202) 566-2523 or curtis.paul@epa.gov, or Meg Hiatt at (513) 487-2366 or
hiatt.margaret@epa.gov. 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 $10,298.
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09-X-0217
Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
Claimed
Amount
Agreed To
Amount
3 Separate the ARRA grants from traditional grants
in developing the 2009 grant accrual. EPA should
use its traditional grant accrual methodology for
traditional grants, and develop a separate
methodology for ARRA funds that considers the
intent to expend such funds expeditiously. The
separate methodology could include amounts
reported by recipients on the total amount of funds
received and the amount spent on projects and
activities, as required by OMB Memorandum
M09-21, Implementing Guidance for the Reports on
Use of Funds Pursuant to the American Recovery
and Reinvestment Act of 2009.
Chief Financial Officer
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
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09-X-0217
Appendix A
FY 2008 Methodology for Automated Posting of
Quarterly Grant Accrual Entries
1)	Grant accruals are calculated using accrual rates established annually through grantee billing
practices surveys. The ratios are revised for the year-end accruals and then used for the first
three quarters of the next fiscal year.
2)	There are different accrual rates calculated for Superfund (Treasury Symbol 68-20X8145)
and all other EPA appropriations (Treasury Symbols).
3)	For Fiscal Year 2008 the grant accrual percentage was 9.33 percent for Superfund and All
Other.
4)	In the automated accrual process, the ratios are applied to grant disbursements made during
the last 12 months.
a)	Disbursements for the last 12 months are summarized by the Servicing Finance Office,
Budget Fiscal Year, fund, object class (Budget Object Class), Budget Organization,
Program Results Code, and Site/Project.
b)	Next step is the appropriate accrual rate is applied to generate the Standard Voucher 17
expense transactions. The Standard Voucher 17 transactions should have an automated
reversal on the first day of the last month of the next quarter (e.g., first quarter accruals
reversal date March 1, second quarter June 1, third quarter September 1).
c)	The Standard Voucher 17 transactions are created after the nightly cycle (generally the
last weekend of the reporting period) and process automatically at the end of the next
business day.
5)	Office of Financial Management/Reporting and Analysis Staff compares calculated accruals
to unliquidated obligations and notifies the finance offices of any modifications to Standard
Vouchers that need to be processed in the Suspense Table before the Standard Vouchers post
to the general ledger.
6)	Research Triangle Park-Finance Center provides Office of Financial Management/Reporting
and Analysis Staff with a report on Standard Voucher rejects. Office of Financial
Management/Reporting and Analysis Staff notifies the finance offices of any rejected
Standard Voucher that requires correction and processing.
Source: EPA Office of the Chief Financial Officer
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09-X-0217
Appendix B
Distribution
Office of the Administrator
Acting Chief Financial Officer
Acting Deputy Chief Financial Officer
Acting Director, Office of Financial Management, Office of the Chief Financial Officer
Deputy, Office of Financial Management, Office of the Chief Financial Officer
Director, Reporting and Analysis Staff, Office of the Chief Financial Officer
Acting Director, Office of Financial Services, Office of the Chief Financial Officer
Director, Las Vegas Finance Center
General Counsel
Agency Follow-up Official (the CFO)
Agency Follow-up Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Audit Follow-up Coordinator, Office of the Chief Financial Officer
Acting Inspector General
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