fv®;l OIG
X	OFFICE OF INSPECTOR GENERAL
Ca talyst for Improving the Environment
Audit Report
Costs Claimed by Central States Air
Resource Agencies Association
Under EPA Assistance Agreement
Nos. X996940-01 and X986516-01
Report No. 2003-1-00087
March 31,2003
This audit report contains findings that describe problems the Office of Inspector General
(OIG) has identified and corrective actions the OIG recommends. The report represents the
opinion of the OIG and findings contained in this report do not necessarily represent the final
EPA position. Final determinations on matters in this report will be made by EPA managers in

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Report Contributors:
Keith Reichard
Margaret Bastin
Juliet Ober
Abbreviations
CenSARA	Central States Air Resource Agencies Association
CFR	Code of Federal Regulations
EPA	Environmental Protection Agency
FSR	Financial Status Reports
OIG	Office of Inspector General
OMB	Office of Management and Budget

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# %
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
March 31, 2003
MEMORANDUM
SUBJECT: Report No. 2003-1-00087
Costs Claimed by Central States Air Resource Agencies Association
Under EPA Assistance Agreement Nos. X996940-01 and X986516-01
FROM: Michael A. Rickey
Director, Assistance Agreement Audits
TO:	Lynda F. Carroll
Assistant Regional Administrator
for Management, Region 6
We have examined the costs claimed by the Central States Air Resource Agencies Association
(CenSARA), Oklahoma City, Oklahoma, under EPA Assistance Agreement Nos. X996940-01 and
X986516-01. Agreement No. X996940-01 provided funding to establish the Regional Multi-State
Organization, consisting of the states of Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri,
Nebraska, Oklahoma, and Texas, as well as several local governments. No. X986516-01 provided
funding for the establishment of the infrastructure for a Regional Planning Body for CenSARA.
We questioned the total Federal share claimed of $1,644,618 as unsupported, because CenSARA did
not comply with the Federal rules, regulations, and terms of the assistance agreements.
This audit report contains findings that describe problems the Office of Inspector General (OIG) has
identified and corrective actions the OIG recommends. The report represents the opinion of the OIG,
and findings contained in this report do not necessarily represent the final Environmental Protection
Agency (EPA) position. The OIG has no objection to the release of this report to any member of the
public upon request.
On July 30, 2002, we issued a draft report to CenSARA and Region 6 for comments. On September
16, 2002, Region 6 provided comments on the draft report, and included CenSARA's comments
(without CenSARA's attachments). CenSARA did not agree with the report's findings. Region 6 took
action on the draft report and issued a "show cause" letter and reclassified CenSARA as a "high-risk
grantee." CenSARA's response is included in the report as Appendix A. We held a telephone exit
conference on February 13, 2003, and informed CenSARA of the final results of our audit.

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Action Required
In accordance with EPA Manual 2750, the action official is required to provide this office with a
proposed management decision specifying the Agency's position on all findings and recommendations
in this report. The draft management decision is due within 120 days of the date of this transmittal
memorandum.
If you have questions concerning this report, please contact Keith Reichard, assignment manager, at
(312) 886-3045.
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	Table of Contents	
Independent Accountant's Report	 1
Results of Audit	 3
Claimed Outlays Do Not Agree with the General Ledger	 3
Inadequate Labor Distribution System 	 5
Unsupported Direct Costs 	 7
Improper Procurement Practices 	 8
Recommendations	 11
Agency Comments	 13
Background 	 15
Appendices
A CenSARA's Response	 17
B Distribution	 23

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Independent Accountant's Report
We have examined the Federal share of costs claimed by the Central States Air Resource Agencies
Association (CenSARA) under the Environmental Protection Agency (EPA) financial assistance
agreements shown in the following table:
Assistance
Agreement No.
Financial Status Report
Federal Share
Date
Submitted
Period
Ending
Cumulative
Total Outlays
Claimed
X996940-01
10/29/01
9/30/01
$1,508,618
$1,508,618
X986516-01
10/29/01
9/30/01
$136,000
$136,000
Total


$1,644,618
$1,644,618
CenSARA certified that the outlays reported on each Financial Status Report (Standard Form 269A)
were correct and for the purposes set forth in the agreements. The preparation and certification of each
claim was the responsibility of CenSARA. Our responsibility is to express an opinion on these claims
based on our examination.
We conducted our examination in accordance with the Government Auditing Standards, issued by
the Comptroller General of the United States, and included the procedures we considered necessary
under the circumstances. We used the following criteria to evaluate the costs claimed: Title 31 Code
of Federal Regulations (CFR) Part 205; Title 40 CFR Part 30; Office of Management and Budget
(OMB) Circular A-122; Resource Management Directives 2540, Chapter 5; Treasury Financial
Manual, Chapter 6, Section 2075.30; and the terms and conditions of the assistance agreements. We
believe that our examination provides a reasonable basis for our opinion.
In our opinion, the costs claimed for the two assistance agreements do not present fairly, in all material
respects, the allowable costs incurred in the performance of the assistance agreements in accordance
with the criteria set forth in the assistance agreements. Therefore, we do not consider the claims to be
acceptable as a basis to determine reasonable and allowable costs. The following sections provide
details of our examination and conclusions.
Keith Reichard /s/
Assignment Manager
Field Work End: May 3, 2002
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Results of Audit
As a result of the deficiencies described below, we have questioned all $1,644,618 in
costs claimed under the two assistance agreements as unsupported.
Claimed Outlays Do Not Agree with the General Ledger
We were not able to reconcile the total program outlays claimed for each grant with
CenSARA's general ledger. Consequently, we have questioned as unsupported, the
claim costs of $1,508,618 and $136,000 for grant numbers X996940-01 and
X986516-01, respectively. Title 40 CFR 30.21(b)(1) states that the recipient's
financial management system shall provide for 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. Because
CenSARA's financial management system did not meet the requirements of 40 CFR
30.21(b)(1), we were unable to identify the specific costs reported by CenSARA.
CenSARA reported amounts drawn down as outlays, rather than actual expenditures.
The outlays are the sum of actual cash disbursements for goods and services, the
amount of indirect expenses charged, and the value of in-kind contributions applied.
The following two tables outline the differences between costs claimed on the financial
status reports (FSRs) and the expenditures in the General Ledger for the audited
reporting periods:
Assistance Agreement No. X996940-01
Period
Date
Submitted
Costs
Claimed
on FSRs
Expenditures
per General
Ledger
Difference
10/01/97 - 09/30/99
10/19/99
$239,262
$235,164
$4,098
10/01/99 - 09/30/00
12/22/00
$423,625
$487,503
($63,878)
10/01/00 - 09/30/01
10/29/01
$845,731
$916,864
($71,133)
Cumulative Totals
$1,508,618
$1,639,531
($130,913)
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Assistance Agreement No. \986516-01
Period
Date
Submitted
Costs
Claimed
on FSRs
Expenditures
per General
Ledger
Difference
10/01/00 - 09/30/01
10/29/01
$136,000
$148,044
($12,044)
Because costs claimed on the FSRs do not represent actual costs incurred under EPA
assistance agreements, and because CenSARA's financial management system did not
meet the requirements of 40 CFR 30.21 (b)(1), we were unable to identify the specific
costs claimed by CenSARA.
CenSARA's Comments
CenSARA agreed that it did not report actual outlays. Also, the audit team did not
take into account program income that was applied back into the accounts. This
difference accounts for a part of the discrepancies listed in the above tables.
CenSARA also stated that it has reallocated its labor costs and its direct and indirect
costs, so that all costs have been properly expensed. Consequently, all costs have
been properly accounted for and supported in accordance with OMB Circular A-122.
As part of reallocating the labor costs and indirect costs, CenSARA has adjusted the
general ledgers and revised the FSRs.
Auditor's Response
We obtained copies of the revised draft FSRs. However, these FSRs were not dated
or signed by CenSARA. Thus, our finding remains unchanged. However, before the
issues identified in this report can be resolved, the action official will need to consider
the following questions:
1.	What indirect cost allocation method is CenSARA using?
2.	What labor was reallocated to what proj ects?
3.	What specific adjustments were made to the general ledger?
4.	What costs were considered indirect costs?
5.	What costs were considered direct costs?
6.	What specific method did CenSARA use for allocating indirect costs and
computing the indirect cost rates? Is this method in writing?
7.	Does CenSARA have any written procedures defining direct and indirect costs?
8.	What is the indirect cost allocation base?
9.	Did CenSARA allocate indirect costs to the Baylor contract, the two state grants,
the Texas-funded workshop, and the Louisiana contract?
10.	Why were no indirect costs shown on the FSR for the period ended September
30, 1999?
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11.	Did CenSARA submit indirect costs rate proposals for approval?
12.	Is CenSARA planning on revising its financial statements for the years that the
general ledger has been revised?
13.	Do the FSRs reconcile with the general ledger?
Inadequate Labor Distribution System
CenSARA did not maintain an adequate labor distribution system to track labor efforts
spent on each project or final cost objective. Therefore, CenSARA's time distribution
system did not meet the minimum requirements of OMB Circular A-122, Attachment
B, as required by 40 CFR 30.27. As a result, we were unable to determine whether
the labor costs recorded in the general ledger were allowable and allocable to the EPA
assistance agreements.
OMB Circular A-122 requires that CenSARA maintain reports reflecting the
distribution of activity for each employee whose compensation is charged, in whole or
in part, directly to a grant. These reports must account for an after-the-fact
determination of the actual activity for each employee. Budget estimates and allocations
of salary expense based on predetermined percentages do not qualify. The same
records are needed for employees with portions of salaries being allocated indirectly to
assistance agreements. Furthermore, agreement number X996940-01 was amended
five times to add various state projects to the scope of work. The amendments
indicated that multiple appropriations were used to fund the amendments, and that
CenSARA was required to account for and bill each project and activity.
Labor claimed under the EPA assistance agreements was not based on actual hours
worked. Employees prepared time sheets but did not specifically identify any grant
projects or final cost objectives. Further, CenSARA did not use the time sheets to
record salary costs in the general ledger. Instead, CenSARA charged all employee
salaries, including vacation, holiday, and sick leave, to Assistance Agreement
No. X996940-01. No labor was charged to Assistance Agreement No. X986516-01
or any non-EPA project. Without an adequate labor distribution system, we could not
determine how much of these expenses should have been allocated to each final cost
objective.
CenSARA Comments
CenSARA stated that it had only one grant (X996940-01) during the period May 5,
1998 through April 7, 2000, thus all costs were correctly attributed to grant
X996940-01. The only period in question was during April 7, 2000 to September 30,
2001.
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CenSARA has upgraded its personnel activity reports in accordance with OMB
Circular A-122, to more effectively account for and allocate labor costs. This new
system identifies the labor effort to be charged to any of CenSARA's funding sources,
Federal and non-Federal; separates direct from indirect costs; and identifies different
activities under each funding source. CenSARA also stated that it has reallocated its
labor costs so that all costs have been properly expensed. As a result of reallocating
the labor and indirect costs, CenSARA adjusted its general ledger and revised the
FSRs.
Auditor's Response
We disagree with CenSARA's contention that it only had one project during the period
May 5, 1998 through April 7, 2000. During this period, CenSARA had a contract
with Baylor University which generated income of approximately $679,067 plus interest
of $24,813. The funds for the contract came from the Texas Natural Resource
Conservation Commission. The Commission stated that the interest earned on the
funds would cover CenSARA's time since CenSARA was not taking an official
percentage of the costs. However, CenSARA did not identify any labor activity and
corresponding expense for the Baylor contract.
During the period October 1, 1997 through September 30, 1998, CenSARA received
two state grants from Missouri and Oklahoma. CenSARA charged all salary costs to
the two grants during this period even thought it may have started work on the new
EPA grant, X996940-01. Also, during the same period CenSARA was working on
the Baylor University contract, CenSARA earned income of $15,000 for a
Texas-funded workshop. Again, no labor costs were charged to this workshop.
Instead, beginning on October 1, 1998, all payroll costs were inappropriately charged
entirely to EPA grant number X996940-01. Finally, CenSARA charged the labor
costs to procure equipment and services for different states. These labor costs are not
allowable charges to the EPA grants because procurement activity by itself does not
meet the authorized used of the Clean Air Act, Section 103.
With respect to the new labor distribution system and the redistributed labor, we are
unable to comment on the new system and the redistributed labor since the new
procedures were not provided to us.
In summary, CenSARA did not provide us with any documentation to determine
whether the labor costs recorded in the general ledger and charged to EPA grants were
allowable and allocable costs under Federal regulations. Further, as discussed below,
CenSARA claimed outlays did not reconcile with the general ledger; thus, we are still
unable to determine what portion of the labor costs recorded in the general ledger were
claimed under the EPA assistance agreements.
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Unsupported Direct Costs
We were not able to evaluate the claimed direct costs because CenSARA improperly
charged all indirect type costs - such as rent, office supplies, postage, telephone, and
depreciation - to one EPA assistance agreement (X996940-01). No other projects or
EPA assistance agreements were allocated or charged for any of these types of indirect
costs.
Since these costs benefitted more than one cost objective, the costs are not allowable
direct costs. CenSARA did not: (1) have written accounting procedures regarding
allocation of joint costs, (2) develop an indirect cost rate to allocate costs benefitting
multiple projects or assistance agreements, and (3) submit indirect cost proposals that
would distinguish indirect from direct costs. Normally, indirect type costs are allocated
to projects through an indirect cost rate or rates. Title 40 CFR 30.21(b)(6) requires
CenSARA's financial management system to include written procedures for
determining allocability of costs. Without written procedures or an indirect cost plan,
we cannot properly evaluate direct costs charged to the assistance agreements.
In developing written procedures, CenSARA needs to address the requirements of
OMB Circular A-122. Specifically, CenSARA needs to address: (1) the allocability of
costs (Attachment A, paragraph A.4); (2) the three allocation methods authorized for
indirect costs (Attachment A, paragraph D); (3) definition of direct and indirect costs
(Attachment A, paragraphs B and C); and (4) the negotiation and approval of indirect
cost rates (Attachment A, paragraph E).
CenSARA Comments
CenSARA reiterated it position that it had only one grant for the majority of the project
period, and it would be correct to assume that all costs should be allocated to this
source. CenSARA agreed that for the small portion of the audit period where it had
two assistance agreements, the costs were not correctly charged.
With respect to written accounting principles, CenSARA disagreed with the draft
report but stated that it was in the process of upgrading its financial management
manual, and a preliminary draft of the procedures was provided to Region 6.
CenSARA indicated it did not understand what was required to distinguish indirect
costs from direct costs. However, CenSARA plans to work with Region 6 to establish
an indirect rate and will submit an indirect cost rate package to Region 6 as soon as
possible. Meanwhile, CenSARA will assume an indirect cost rate based on "our
experience mode."
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Auditor's Response
Again, we disagree with CenSARA that it had only one grant or project during the
majority of the audit period. From October 1, 1998 through September 30, 2001,
CenSARA improperly charged all of its indirect type costs - such as rent, office
supplies, postage, telephone, and depreciation - direct to EPA grant X996940-01.
During this same period, CenSARA also had one other EPA grant (X986516-01),
contracts with Baylor University and the State of Louisiana, and earned income from
workshops. However, no indirect type costs were allocated to any of these other
projects.
Also, during the period October 1, 1997 through September 30, 1998, CenSARA
charged all of it depreciation expenses1 to EPA grant X996940-01, but all its salaries
and payroll costs were charged entirely to the two state grants awarded by Missouri
and Oklahoma. We do not understand the rationale for charging all depreciation
expenses to one grant when all the labor costs are charged to other projects. This
practice seems inconsistent with accounting requirements in OMB Circular A-122.
According to OMB Circular A-122, indirect costs are those that have been incurred
for common or joint objectives and cannot be readily identified with a particular final
cost objective. Normally, indirect type costs are allocated to projects through an
indirect cost rate or rates. Thus, when a grantee has multiple projects it is necessary to
properly allocate indirect type expenses to all benefitting projects to ensure an equitable
allocation of costs. This was not done.
With respect to the written accounting procedures, we are unable to comment on those
procedures because we were not furnished a copy of the procedures.
In summary, CenSARA did not provide us with any documentation to determine
whether the direct costs recorded in the general ledger were allowable and allocable to
the EPA assistance agreements. Further, as discussed below, CenSARA's claimed
outlays did not reconcile with the general ledger; thus, we are still unable to determine
what portion of the direct costs recorded in the general ledger were claimed under the
EPA assistance agreements.
Improper Procurement Practices
Under Assistance Agreement No. X996940-01, CenSARA: (1) did not competitively
procure equipment and services, and (2) did not perform cost or price analysis for the
purchases of equipment and services.
1 Since CenSARA relies on Federal funds for most of its income, it is unclear what depreciable
assets it might own that would be an allowable direct charge to EPA grants.
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The provisions of 40 CFR 30.43 provide that all procurement transactions shall be
conducted in a manner to provide, to the maximum extent practical, open and free
competition. Further, 40 CFR 30.45 requires some form of cost or price analysis to 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. Costs analysis is the review and evaluation of each element of cost to
determine reasonableness, allocability, and allowability.
For the contract procurements, the state agencies selected the contractors, prepared
the contract documents, and CenSARA signed the contracts. The state agencies
managed the contracts, reviewed and approved invoices, and forwarded the invoices to
CenSARA for payment. CenSARA did not solicit any bids, and did not perform cost
or price analyses for the sole source contracts awarded. As of September 30, 2001,
CenSARA incurred $403,726 in contract expense under nine sole source contracts.
Similarly, for the equipment purchases, the state agencies prepared and forwarded to
CenSARA the purchase requests. The purchase requests identified the vendor,
quantities, total purchase price, and the justification for the purchase. CenSARA
purchased the equipment and instructed the vendor to ship the equipment directly to the
requesting state agency. Once the equipment was received, CenSARA transferred the
title to the equipment to the state agencies. CenSARA did not solicit any bids, and did
not perform cost or price analyses for any of the equipment purchases. As of
September 30, 2001, CenSARA incurred $172,017 for equipment purchases.
CenSARA indicated that various state agencies requested that CenSARA procure
contracts and equipment for specific projects. According to CenSARA, the state
agencies would solicit bids, perform cost or price analysis, and select the contractors
and vendors. CenSARA said that the states maintained the cost or pricing data but
could not provide any support that the cost or price analysis had been performed by the
states. There is no assurance that costs of $575,743, to obtain equipment and services
under these EPA grants, are reasonable. Therefore these costs are not allowable under
Federal rules.
CenSARA's Comments
CenSARA agreed that it did not have documentation readily available in its files for the
audit team. To correct this oversight, CenSARA has requested the justifications from
the requesting states and will in the future ensure that the justifications or price cost
analysis is in the file with the award.
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Auditor's Response
CenSARA did not provide any contemporaneous bidding information or cost or pricing
data to support the procurement under the nine sole source contracts totaling $403,726
or the purchases of goods and services totaling $172,017, a total of $575,743.
Accordingly, these costs are unsupported and should be recovered to the extent that
these costs have been claimed. However, as previously discussed, CenSARA's
claimed outlays did not reconcile with the general ledger; thus, we are still unable to
determine what portion of the contract and procurement costs recorded in the general
ledger were claimed under the EPA assistance agreements. For future purposes, we
recommend that the cost or pricing analysis be retained in the files.
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Recommendations
We recommend that EPA Region 6:
1.	Recover all assistance agreement funds that cannot be supported in accordance with 40
CFR Part 31 and OMB Circular A-122 within 180 days of the date of this report.
2.	Suspend work under the current agreements and make no new awards until CenSARA
can demonstrate that its accounting practices are consistent with Federal requirements (see
recommendation number 4).
3.	Recover the costs of $575,743 for equipment and services unless CenSARA can show
that the requirements of 40 CFR 30.40 through 30.47 were met, including justification for
sole-source procurement under 40 CFR 30.46
4.	Require CenSARA to modify its financial management system to meet the requirements of
40 CFR 30.21. At a minimum, CenSARA's system must:
a.	Ensure that financial results are current, accurate, and complete.
b.	Include records that adequately identify source and application of funds for
Federally-sponsored programs.
c.	Include written procedures to determine reasonableness, allocability, and allowability
of costs in accordance with OMB Circular A-122.
d.	Include accounting records that are supported by adequate source documentation.
e.	Require CenSARA to establish an adequate time distribution system that meets the
requirements of OMB Circular A-122, Attachment B, paragraph 7. The system
should account for total hours worked and leave taken, and identify the specific
activities the employees performed during the pay period. It should also serve as the
basis for charging labor costs to Federal grants and cooperative agreements.
f Require CenSARA to allocate indirect costs in accordance with OMB Circular
A-122.
g. Require CenSARA to follow all procurement standards under 40 CFR 30.40
through 30.48.
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Agency Comments
As previously discussed, Region 6 provided comments on the draft report. Although we considered
these comments, we consider them to be pre-decisional because the final report is subject to the
process outlined in EPA Manual 2750. Therefore, Region 6's preliminary comments are not included in
this report.
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Background
On May 5, 1998, and April 7, 2000, EPA awarded Assistance Agreement Nos. X996940-01 and
X986516-01, respectively, to CenSARA, headquartered in Oklahoma City, Oklahoma. CenSARA is
an association of air quality agencies in nine states located in EPA Regions 5, 6, and 7, and several
local governments in those regions. The States are: Arkansas, Iowa, Kansas, Louisiana, Minnesota,
Mssouri, Nebraska, Oklahoma, and Texas.
The following table provides some basic information about the authorized project periods and the
amounts awarded under the assistance agreements covered by this audit.
Assistance
EPA
Grantee
Total
Project
Agreement No.
Share
Share
Costs
Period
X996940-01
$2,226,243
$0
$2,226,243
05/05/98 - 09/30/02
X986516-01
$1,000,000
$0
$1,000,000
04/10/00-03/31/03
Assistance Agreement No. X996940-01: This provided funding to establish CenSARA, a
Regional Multi-State Organization. The mission of CenSARA is to promote the exchange of
information between its states and other interested parties related to the control of air pollution.
Activities under the assistance agreement included training courses and other projects, such as
ozone mapping. The Federal share was 100 percent of total costs.
Assistance Agreement No. X986516-01: This provided funding to establish the
infrastructure for a Regional Planning Body to enable the states to work together to reduce and
prevent air pollution. The Regional Planning Body is to develop proposals to be reviewed and
considered by the various member states and tribes, when developing State Implementation
Plans, to address regional haze issues. The Federal share was 100 percent of total costs.
To assist the reader in obtaining an understanding of the report, key terms are defined below:
Claimed Costs: Program outlays identified by CenSARA on the Financial Status
Report (Standard Form 269 or 269A).
Unsupported
Questioned Costs: Adjustments made by the Office of Inspector General because the
claimed costs are not supported by adequate documentation and/or
have not been approved by a responsible agency official.
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Appendix A
CenSARA's Response
Attachment 2
CenSARA
Central States Air Resource Agencies Association
i 10005 S. Pennjylvania. Suire C Oklahoma Ciry, OK 73159
i	<405} 378-7377 Fax (405) 378-7379
Larry D. Bynxm, Executive Director
E-mail: Ibyrumfg'ceasafa. org
September 4,2002
Lynda F, Carroll
U.S. Environmental Protection Agency
6MD
1445 Ross Avenue, Suite SI200
Dallas, TX 75202-2733
Re: Audit Response regarding Grant Nos. X-996940-01 and X-986516-01
Dear Ms, Carroil:
CenSARA is in receipt of the draft.audit report dated July 30,2002 and your Show Cause
letter of August 27,2002. We have attached a detailed response to all the issues raised
in that report.
Our response points out many errors and misstatements in the audit document and
strongly disagrees with the findings. While this report represents the opinions of the
Office of Inspector General (OIG), they bear little resemblance to the true facts. In the
attachment, we have addressed each issue raised in the report and comment on each of
the recommendations.
Let me assure you that we share your concern that our financial procedures are of the
highest quality. CenSARA has contracted for outside audits of its financial system every
year we have been in existence. These audits have never found any problems that would
have indicated to us that our system needed changes. These audits were routinely
provided to all three of the EPA regional offices CenSARA supports. We have never
been asked to address any issues resulting from the review of these reports.
At the same time, CenSARA also believes that there is always room for improvement in
management systems. In response to this audit, we have brought in outside assistance to
totally review our financial management system. The results of that review are detailed
in the attachments. We are also attaching revised copies of the five manuals that make up
our policies and procedures. We are continuing to revise our financial management
document and will continue to make changes for the next few weeks. When the changes
are finalized, we wiil forward the manual to EPA Region 6 for your review and
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Re: Audit Response regarding Grant Nos, X-996940-01 and X-9865I6-01
Page 2
September 4, 2002
comment^ We look forward to working with Region 6 to develop any further changes
necessary to strengthen our financial management system.
Finally we must take issue with the statement by Mr. Rickey, the OIG auditor, in his
memorandum to Mr. Gregg A. Cooke, Regional Administrator of Region 6. It states
"CenSARA served as a front for various state agencies." This language is obviously
inflammatory in nature and infers that CenSARA has somehow performed illegal
activities. The truth of the situation is that CenSARA was and is performing those
activities that we were formed by the states to accomplish. The charter of CenSARA
expressly requires that the organization provide services to the member states that allow
them to accomplish their mission under the Clean Air Act in an expeditious and
professional manner. CenSARA contracting performed for the states meets the criteria
of being mission-critical, time-critical or a combination of the two. The contracting we
have accomplished is a very small portion of the contracting accomplished by the states
and is done with the full knowledge of the management of the state agencies as well as
the regional office. Since we are a very small service organization, existing for our
members' benefit, we believe that the efforts by the members to support the procurement
activities as well as the technical activities of the organization are well founded.
We have taken the audit very seriously, and have acted as quickly as possible to have a
complete set of answers to the audit. It is our opinion .that we have answered each of the
findings of the audit and that the efforts we have expended since the receipt of the report
show our resolve to be good stewards of the funding we receive. I appreciate the
opportunity to respond to the draft audit and meet with Region 6 staff to correct any real
deficiencies in our financial management system. " '	• •	•
Sincerely, '
Larry Byrum
cc; Region 5,6 and 7 Air Directors
CenSARA Member State Air Directors
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ATTACHMENT
>	v
CenSARA il in receipt of (he bRAFT audit report ted July 30,2002, The attached is our
response to the issues listed in that report CenSARA finds that there are many errors and
misstatements in this document and strongly disagrees with the findings. While this report
represents the opinions of the Office of Inspector General (OIG) thty hear little resemblance to the
true facts. We will address each issue raised in the report arid comment an each of the
recommendations.
The statement listed in the second paragraph of the memorandum to the audit report is a complete
misstatement of feet. We take great exception to "We questioned the total Federal share claimed
of S 1,644,61 8 as unsupported, because CenSARA did not comply with the terms or conditions of
the assistance agreements". In no- instance did the auditors cite where CenSARA did not comply
with the terms and conditions of the assistance agreements; that is, identify costs that were not
reasonable, ordinary, and necessary for the performance of CenSARA or the awards; or identify .
any costs charged to the assistance agreements that were unallowable costs per OMB Circular A*
122. Additionally, all costs were supported by source documentation, e.g. time sheets were
prepared ftr all employees and invoices supported all payments. In further support of the ftcts,
CenSARA has contracted for outside audits for the entire period in question and beyond. The
audit reports were shared with the regional office and die audit team; there were no findings that
required corrective action on the part of CenSARA. We recognize that improvements in file
methods used to make allocations to direct and Indirect labor costs and to allocate indirect costs
among the funding sources can be made. Corrective action has already been taken and is in place,
including reallocating costs during the period, 10/1/99- 9/30/01, which were in question.
Inadequate Labor Distribution System
In this section of the report, the audit team represents that CenSARA did not have a time ¦
accounting system. They also give the impression that the entire term from 5/5/98 to 9/30/01 is to
question. The actual truth of die situation is that CenSARA had only one grant from 5/5/98 to
4/7/00, For this period all costs were correctly attributable to gram number (X996940-01). The
only period of time in question then becomes the period from 4/7/00 to 9/30/01, During this time
the staff were working with EPA Region 6 to set an indirect cost rate. We met with the.regiotial
office Staff as well as staff from headquarters or the issue. We were advised thai we did not have
sufficient data upon which to build a request for an indirect cost rate. We were advised to utilize
the percentage system we are now being criticized for, in order to obtain the necessary data.
In this section die auditors also address the feet that the gram was amended five times to add ..,
various state projects to the scope of work. While we agree with that statement we cannot agree
with the inference that we did not account for each project CenSARA is an organization formed
for the purpose of aiding each of our members in the implementation of their Clean Air Act
activities. Each of the amendments was for specific projects that the states were required to
perform. These projects were considered to be a part of the mission Sir CenSARA and the
minimal labor costs on these activities were charged to the administrative grant (X996940-O1).
CenSARA has developed a revised time tracking system, which is described in the attached
documents. We will woik with EPA Region 6 to establish an indirect cost rate as quickly as
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possible, Until that time, we will assume an, Indirect cost rate based on our experience mode. We
will be asking for approval of this method until a formal indirect cost rate can be obtained.
s .
Unsupportlc! Direct Costs
Once again the audit report misstates die facts. The fccts reflect that CenSARA had only one grant
for the majority of the audit period. It therefore would be correct to assume that all costs should be
allocated to this source. It is however also true that a small portion of the audit period reflects two
grants, F or that time period, CenSARA did not correctly charge the costs. CenSARA was actively
trying to establish an indirect cost rate. CenSARA staff met with EPA staff to discuss this issue
Mid was following the advice we were given. In response to item (2), CenSARA has now adopted
an interim indirect cost rate, which will be utilized until EPA and CenSARA agree upon a
permanent rate.
Item (1) states that CenSARA did not have written accounting principals. We disagree with this
statement, however CenSARA is in die process of upgrading our financial management manual
and a preliminary draft is attached, It is our belief that the policy and procedure manuals we have
are living documents and revisions will be made to these manuals as needed.
Item (3), states that CenSARA needs to "submit indirect cost proposals that would distinguish
indirect costs from direct costs." This statement is vague and we do not fully understand what is
required here. However, CenSARA plans to submit an indirect cost rate package to Region 6 as
soon as possible. If we have not met the requirements of this item with that work, we will work
wish Region 6 to folly meet their aeeds.
No Cost or Price Analysis
The audit report states, "CenSARA did not perform cost or price analysis for sole" source contracts
awarded tinder Grant No. X995340-01". This statement on its face is true. However CenSARA is
comprised of its members and those members provided the justification for the sole source
procurements, CenSARA did not have that documentation readily available in its files fcr the
audit team; To correct this oversight, CenSARA has requested the justifications from the
requesting states and will in the future ensure that the justifications or price cost analysis is in the
file with the award.
The audit report refers to existing CenSARA procurement procedures and states lhat we did not
follow our written policies for purchasing. This statement is misieading and leads one to believe
that there were single purchases above the $15,000 limit that did not have die necessary
documentation, "Hie truth is that with the exception of die sole source items discussed above
CenSARA did not have any single purchases chat exceeded die S15,000 limit.
In the Memorandum to Mr. Gregg A, Cooke Regional Administrator ofRegion 6, Mr, Rickey
states, "CenSARA served as a from for various state agencies." This language is obviously
inflammatory in nature and infers that CenSARA has somehow perfonned illegal activities. The
truth of the situation "a that CenSARA was and is performing those activities that we were formed
by the states to accomplish. The charter of CenSARA expressly requires that the organization
2
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provide services to the member states that allow them to accomplish their mission under the Clean
Air Act in mvexpeditious and professional manner. The contracting that CenSARA has performed
mission critical, time critical or a combination of the two. The contracting we have accomplished
is a very small portion of the contracting accomplished by the states and is done with the fill!
knowledge of die management of the state agencies as wel! as the regional office. Since we are a
vety small service organization, existing for our members' benefit, we believe that'the efforts by
the members to support die procurement activities as well as the technical activities of the
organization are well (bunded. Mr. Rickey also states that" We do not see any tangible benefit to
use Clean Air, section 103 grant funds in this manner, and it is unclear why this process was
supported by Region 6", We .would refer EPA to the membership, which have been able to utilize
the limited contracting to accomplish timelines, and (tactions tot would have been impossible
under the standard practices.
Claimed Outlays Do Not Agree With the General Ledger
CenSARA disagrees with the statement that its financial system did not meet the requirements of
40 CFR30.21 (bXl). CenSARA has undergone outside audits of its financial system every year as
required by federal guidance. These audits have never found any areas that indicate to us that our
system needed to be addressed. Furthermore these audits have been routinely provided to ail three
of the regional offices CenSARA supports. We have never been asked to address any issues
resulting from the review of these reports. CenSARA however believes that there is' room for
improvement in its systems and is in the process of doing a total revision to its financial
management system. A draft of that plan is attached and we look forward to working with Region 6
•to formulate die final plan. .	• *r •	• •
The audit report states" CenSARA reported amounts drawn down as outlays, rather than actual
expenditures." This statement is true, however when this was noted in the audit visit, our CPA
offered to correct the issue on site; she was fold that theFSR could not be changed. Our
accountant simply read the guidance and interpreted it differently than die audit staff, we have
made die corrections to theFSR uvthe same manner, as we would have done previously.
It should also be noted that the audit team did not take into account program income that was
applied back into the accounts. This difference accounts for a pan of the discrepancies listed in
the table on page four. We have also shown these corrections in our response.
Recommendations
The following are our comments regarding the actions CenSARA has and will be taking to address
and resolve die audit recommendations. Based upon our actions, as discussed below, we strongly •
-believe that satisfactory corrective action has been taken and that each of the recommendations
should be closed.
one or morefjt me following criteria and have often meant the difference between a oroiect beina
I. CenSARA has reallocated its labor costs and its direct and indirect costs, so that
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at! costs have been properly expense! among CenSARA's federal and non-
federal awards. Consequently, all funds have been properly accounted for and
supported in accordance with OMB Circular A-122.
2.'i	CenSARA has changed its accounting practices and has revised its financial
f management manual to more closely mirror the standards set forth in OMB
Circular A-l 10, Subpart C, .2t(bXlK7) and 40CFR 30.21 GOGH?)-
Furthermore the CenSARA staff has taken a one-day workshop on "An
Overview to Managing Federal Grant*." This workshop covered OMB Circulars
A-l 10,40 CFR Fart 30, A-122, and A-l 33, plus other relevant topics.
3.	As part of the reallocating the labor costs and indirect costs, we adjusted our
general ledger and revised the FSRs,
. 4. In our effort to upgrade and modify our financial management systems, we have
developed a financial management manual to meet the standards set forth to the
OMB Circular A-l 10, Sub part C, ,21(b)(lX7) mi 40CFR3CL21 (bX! X?) and-
OMB Circular A-122. As a part of this effort, we have upgraded our personnel
activity reports in accordance with OMB Circular A-S22, Attachment to
. insure we properly account for and allocate labor costs. We have also identified
ail costs as either direct or indirect. Finally, our chart of accounts is being
restructured to more clearly identity funding sources and enhance the allocation
costs to tie appropriate funding source, Federal and Non Federal.
5.	CenSARA las upgraded its personnel activity reports in accordance with OMB
Circular A-122, Attachment B.?.m. to more effectively account for and allocate
labor costs. This new system identifies die labor effort to be charged to any of
our Binding sources, Federal and non-federal, separates direct from indirect
cos^ and identifies different activities under each funding source.
6.	By virtue of refining our chart of accounts and instituting a revised personnel
activity report, we are now able to allocate indirect costs in accordance with
OMB CircukxA-122.
7.	We have greatly expanded our existing procurement policies that action has
resulted in a mors comprehensive Procurement Policy Manual. As described in
the manual, a separate file will be established for each new procurement action,
and the required Price and cost analysis will be kept in the folder. Previously,
CenSARA members in behalf o'f CenSARA performed many of the analyses, and
these analyses were kept by the members and not always forwarded to us for our
flies. As part of our new operating policies and procedures, CenSARA members
have been advised that procurement actions wtl I not be taken until a copy of the
price cost analyses has been forwarded to our offices. CenSARA has also taken
action to request the cost price analyses for prior purchases be forwarded to our
offices so we may be able to establish more complete files.
We have taken the audit very seriously, and have acted as quickly as possible to have a complete
set of answers to the audit We realize that in some few Instances we will still be working on final
versions of manuals after the date the answers are required. We will however continue to reSne or
policies and procedures as necessary to ensure we meet the federal guidance. It is our opinion that
we have answered each of the findings of tile audit aid that the efforts we have expended since the
receipt of the report show our resolve to be good stewatds of the funding we receive. We have
attached the revised copies of the five manuals that make up our policies and procedures. We are
asking that EPA region 6 review the manuals that have been provided and supply comments and or
approve these for use by CenSARA.
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Appendix B
Distribution
Region 6
Assistant Regional Administrator for Management (Action Official)
(Responsible for report distribution to recipient.)
Director, Multimedia Planning and Permitting Division (6PD)
Audit Coordinator (6MD RC)
Headquarters
Director, Grants Administration Division (3903R)
Agency Audit Followup Coordinator (2724A)
Associate Administrator for Congressional and Intergovernmental Relations (1301 A)
Associate Administrator for Communications, Education, and Media Relations (1101A)
Office of Inspector General
Inspector General (2410)
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