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OFFICE OF INSPECTOR GENERAL

Catalyst for Improving the Environment
Attestation Report
America's Clean Water Foundation
Incurred Costs for EPA Assistance
Agreements X82835301, X783142301,
and X82672301
Report No. 2007-4-00045
February 20, 2007

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Report Contributors:	Keith Reichard
Bill Spinazzola
Lela Wong
Clem Cantil
Abbreviations
CFR	Code of Federal Regulations
EPA	U.S. Environmental Protection Agency
OIG	Office of Inspector General
OMB	Office of Management and Budget
FAR	Federal Acquisition Regulations

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U.S. Environmental Protection Agency	2007-4-00045
Office of Inspector General	February 20 2007

At a Glance
Catalyst for Improving the Environment
Why We Did This Review
We conducted this
examination to determine
whether the total costs
incurred for three U.S.
Environmental Protection
Agency (EPA) assistance
agreements were fairly
presented, in all material
respects, and the incurred
costs were allowable in
accordance with the terms and
conditions of the agreements
and applicable regulations.
Background
EPA awarded three assistance
agreements to the America's
Clean Water Foundation
(Foundation) to perform
environmental risk
assessments at agricultural
facilities and to assist States,
tribes, and territories in
complying with the Clean
Water Act.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.aov/oia/reports/2007/
20070220-2007-4-00045.pdf
America's Clean Water Foundation Incurred Costs
for EPA Assistance Agreements X82835301,
X783142301, and X82672301
What We Found
The Foundation did not comply with the financial and program management
standards and the procurement standards promulgated in Title 40 Code of Federal
Regulations (CFR), Part 30. Specifically, the Foundation (1) could not provide
support for any of its general journal entries; (2) included duplicate transactions in
its accounting system; (3) recorded labor charged to EPA grants incorrectly;
(4) could not support the recorded indirect costs; (5) claimed unallowable
preaward costs; (6) recorded EPA cash draws inaccurately; (7) did not submit
required indirect cost proposals to EPA; (8) did not complete the required single
audits for fiscal years ended June 30, 2003, June 30, 2004, and June 30, 2005; and
(9) did not submit a Federal Cash Transactions Report when required.
The Foundation's procurement practices and procedures did not comply with the
grant regulations. The Foundation awarded sole source contracts without
performing the cost/price analysis required by Title 40 CFR 30.45. It also
awarded a contract to a member of its Board of Directors, contrary to the conflict
of interest provisions at Title 40 CFR 30.42, and reimbursed a contractor for
billings above contractual ceilings. Because the Foundation did not adequately
document its costs and did not comply with the EPA regulations, we questioned
the Federal share claimed of $25,372,590.
What We Recommend
We recommend that the Director for the Grants Administration Division:
(1) disallow the Federal share claimed of $25,372,590, and recover payments
made of $25,173,266, unless the Foundation reconstructs its accountings records
to meet the financial management standards required by Title 40 CFR 30.21
through 30.28; (2) rescind provisional indirect rates for fiscal years ended June 30,
2005, and June 30, 2006; (3) require the Foundation to obtain single audits for
fiscal years ended June 30, 2003, June 30, 2004, and June 30, 2005; (4) require the
Foundation to prepare and submit overdue Standard Form 272 Federal Cash
Transactions Reports; (5) disallow contract costs procured, claimed, and
administered in violation of the requirements in Title 40 CFR Part 30; (6) disallow
contract costs that were not authorized under the contract terms; (7) stop work on
all active grants; and (8) not award any new grants until the Foundation meets
minimum financial management requirements and repays all disallowed costs.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
February 20, 2007
MEMORANDUM
SUBJECT: America's Clean Water Foundation Incurred Costs for
EPA Assistance Agreements X82835301, X783142301, and X82672301
Report No. 2007-4-00045
This is our report on the subject audit 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 determination on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
On September 29, 2006, we issued a draft report to the America's Clean Water Foundation's
(Foundation's) attorney for comments. On December 7, 2006, we received a response from the
Foundation's attorney which also included comments from Validus Services, LLC, the
Foundation's contractor. The Foundation and Validus either disagreed with or did not respond to
the report's findings. We did not receive the response, as requested, in an acceptable electronic
format to include in the report. A copy is available on request. We have summarized the
Foundation's pertinent comments after each finding in the report.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $221,225.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us
your proposed management decision for resolution of the findings contained in this report before
any formal resolution can be completed with the Foundation. Your proposed decision is due on
June 20, 2007. To expedite the resolution process, please email an electronic version of your
proposed management decision to reichard.keith@epa.gov.
TO:
Richard Kuhlman
Director, Grants Administration Division

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We have no objections to the further release of this report to the public. For your convenience,
this report will be available at http://www.epa.gov/oig. We want to express our appreciation for
the cooperation and support from your staff during our review. If you have any questions about
this report, please contact Keith Reichard at (312) 886-3045.
Sincerely,
Bill A. Roderick
Acting Inspector General

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America's Clean Water Foundation
Incurred Costs for EPA Assistance Agreements
X82835301, X783142301, and X82672301
Table of C
Background 		1
Independent Auditor's Report		4
Results of Examination		6
Recommendations		16
Status of Recommendations and Potential Monetary Benefits		17
Schedules
Schedule 1 Schedule of Claimed Outlays by Assistance Agreement,
Unallowable Costs, and Amounts Due EPA
American's Clean Water Foundation	 18
Schedule 2 Comparison of Claimed Outlays to Recorded Costs
Validus Services, LLC	 19
Schedule 3 Results of Examination for Claimed Outlays
Validus Services, LLC	 21
Appendices
A Scope and Methodology	 30
B Distribution	 32

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Background
The U.S. Environmental Protection Agency (EPA) awarded three assistance agreements1 (grants)
to the America's Clean Water Foundation (Foundation) totaling $25,886,111. The Foundation,
which is located in Washington, DC, was formed in 1989, and is a Section 501(c) (3) not-for-
profit organization (specified in the Internal Revenue Code). The following table summarizes
information about the authorized project periods and funds awarded under each of the three
grants:
Grant
Award
Date
EPA
Share *
EPA
Payments
Last
Payment
Date
Project Period
X82835301
08/31/2000
$ 14,438,750
$ 14,438,750
10/22/2003
07/01/2000 - 06/30/2004
X783142301
09/26/2003
9,938,000
9,225,155
02/17/2006
06/30/2003 - 06/30/2006
X82672301
07/23/1998
1,509,361
1,509,361
06/10/2004
06/01/1998-05/31/2004
Total

$25,886,111
$25,173,266


Source: The source of the grant information was the OIG's summary of the grants/amendments. The EPA
payments and payment dates came from EPA's Financial Data Warehouse.
* EPA funded 100 percent of grants X82835301 and X783142301. EPA's share of grant X82672301 was
$1,509,361 and the Foundation's share was $25,000.
All three grants were awarded under Section 104 (b)(3) of the Clean Water Act. The scopes of
work are:
Grant X82835301: This grant was to conduct On-Farm Assessment and Environmental Review
(OFAER) assessments at pork production facilities to identify actual or potential environmental
risks, develop steps to mitigate those risks, and prevent them from becoming environmental
problems. It also was intended to test the assessment process at beef, dairy, and poultry
facilities.
Grant X783142301: This grant was for the continuation of the OFAER program described under
Grant X82835301 above. It included assessments at beef, dairy, and poultry facilities as well as
pork production facilities.
Grant X82672301: This grant was to enable the Foundation to continue liaison support by
assisting States, Indian tribes, and territories in complying with the Clean Water Act, section
303(d) and Total Maximum Daily Load program requirements. The grant was also intended to
enable the Foundation to provide Water Quality Standards Circuit Rider support.
1 EPA's assistance to the Foundation was either a grant or cooperative agreement. For reporting purposes, all
assistance will be referred to as a grant.
1

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While performing the single audit for the year ended June 30, 2004, RAFF A, the Foundation's
accounting firm, discovered accounting irregularities and a potential embezzlement of funds.
The Foundation's president and the managing partner of RAFF A met with EPA officials to
report these irregularities. As a result of this meeting, EPA, on July 18, 2005, changed the
Foundation's method of grant payments from "Advance" to "Reimbursement." EPA officials
stated they took this action because the circumstances described indicated a breakdown in
internal controls. They also stated that EPA would not process any new grant awards or
amendments to existing grants until the Foundation demonstrated it had complied with EPA's
standards for financial management systems in Title 40 CFR 30.21(b).
In a November 8, 2005, letter, EPA informed the Foundation that payment for grant costs
incurred for contract ACWF-OFAER-01-05 awarded to Environmental Management Solutions,
LLC (now Validus Services, LLC) would not be approved because the Foundation did not
comply with EPA procurement requirements. In response, the Foundation provided information
on the OFAER contract procurement and requested a deviation from the regulations. EPA
deferred action on the Foundation's request for deviation to allow the Foundation additional time
to provide the required cost review documentation. On July 11, 2006, EPA denied the
Foundation's request for deviation because (1) the required documentation was not submitted
and (2) the OIG indicated in a memorandum report2 that costs incurred under the contract were
not reasonable or allowable. EPA requested that the $5.6 million it reimbursed the Foundation
under the contract be returned.
In a July 14, 2006, letter, the Foundation's attorney notified EPA that the Foundation was
formally dissolved. The letter stated that all members of the Board of Directors had resigned, the
Foundation filed dissolution papers with the District of Columbia, and it no longer had any
employees or an office location. The stated reason for the dissolution was the lack of program
funding; the Foundation could no longer operate effectively or respond to Agency inquiries. The
letter indicated that Foundation records and files had been moved to a storage facility in
Standardsville, Virginia, that access to the records can be arranged, and that the Foundation
retained its right to initiate and maintain claims.
Single Audit Activity
Nonfederal entities that expend $300,000 ($500,000 for fiscal years ending after December 31,
2003) or more in a year in Federal awards are required by Title 40 CFR 30.26 to have a single
audit conducted in accordance with applicable requirements of the OMB Circular A-133. The
Foundation had single audits completed for the fiscal years ended June 30, 2000, June 30, 2001,
and June 30, 2002. Applicable findings follow.
Fiscal Year 2000 - During the year, the Foundation advanced $100,000 in Federal funds to
another not-for-profit organization. The advance was repaid in 90 days. However, the
Foundation did not follow requirements that Federal funds be used only in strict adherence with
terms of the grant agreement.
2 Memorandum no. 2006-M-0001, dated June 15, 2006, issued to Richard Kuhlman, Director, Grants Administration
Division.
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Fiscal Year 2001 - Several Federal Cash Transactions Reports were not properly supported.
There were discrepancies between cumulative grant expenditures and amounts in the general
ledger. Adjustments to the grants were made after the reports were submitted. However, the
Foundation did not retain support for amounts reported in the Federal Cash Transaction Reports
or the adjustments to the general ledger.
The Foundation used accrued expenditures as the basis for the EPA cash draws instead of cash
disbursements. As a result, an excess cash balance existed. In the case cited in the audit report,
the Foundation reported excess cash on hand at December 31, 2000, of $506,170. The funds
were not disbursed until February 21, 2001, a period of about 6 weeks. In addition, the funds
were not maintained in an interest-bearing account.
The Foundation did not submit its single audit report for fiscal year 2000 to the Federal Audit
Clearing House timely. The report was due no later than March 31, 2001. It had not been
submitted at the time of completion of fieldwork for the fiscal year 2001 audit (January 25,
2002).
Fiscal Year 2002 - The Foundation received cash advances in excess of its current cash needs.
As of June 30, 2002, the recipient had $60,650 unspent from a $100,000 advance on May 7. In
addition, the funds were not maintained in an interest bearing account.
Fiscal Years 2003 through 2005 - A single audit for fiscal year 2003 was completed but a
report was not issued because of accounting irregularities discovered during the fiscal year 2004
single audit. In March 2005, the Foundation hired RAFFA to provide audit services, which
included an audit of the fiscal year 2004 financial statements. However, RAFFA discontinued its
work after identifying accounting irregularities that might extend back to prior years. Effective
July 8, 2005, RAFFA took over daily accounting duties for the Foundation. The Foundation has
either not issued or completed the single audits for the years ended June 30, 2003, June 30, 2004,
and June 30, 2005.
To assist the reader in obtaining an understanding of the report, key terms are defined below:
Reported Outlays:
Actual cash disbursements identified by the Foundation on
the Financial Status Report (Standard Form 269A) or the
Federal Cash Transaction Report (Standard Form 272).
Questioned Costs:
Costs that are (1) contrary to a provision of a law,
regulation, agreement, or other documents governing the
expenditures of funds; or (2) not supported by adequate
documentation.
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Independent Auditor's Report
We have examined the total outlays and disbursements reported by the Foundation under the
EPA grants shown below:
Grant
Financial Status Report/
Federal Cash Transactions Report
Date
Submitted
Period
Ending
Reported
Outlays/
Disbursements
Federal Share
Of Outlays
Reported
X82835301
09/28/2004
06/30/2004
$14,438,750
$14,438,750*
X783142301
09/22/2005
06/30/2005
9,424,479
9,424,479**
X82672301
09/28/2004
05/31/2004
1,534,361
1,509,361*
Total


$25,397,590
$25,372,590
Source: The sources of the reported outlays were the recipient's Financial Status Reports/Federal Cash
Transactions Report.
* Outlays reported on the Final Financial Status Reports
** Disbursements reported on the Federal Cash Transactions Report
The Foundation certified that the outlays and disbursements reported on the Financial Status
Reports, Standard Form 269A, and the Federal Cash Transactions Reports, Standard Form 272,
were correct and for the purposes set forth in the agreements. Preparing these reports was the
Foundation's responsibility. Our responsibility is to determine the allowable costs incurred in
accordance with the terms and conditions of the grants and applicable EPA regulations.
We conducted our examination in accordance with the Government Auditing Standards issued by
the Comptroller General of the United States, and the attestation standards established for the
United States by the American Institute of Certified Public Accountants. We also followed the
guidelines and procedures established in the Office of Inspector General Project Management
Handbook, dated January 14, 2005. We examined, on a test basis, evidence supporting the
reported outlays/expenditures, and performed such other procedures as we considered necessary
in the circumstances (see Appendix A for details). We believe that our examination provides a
reasonable basis for our opinion.
We questioned the Federal share of $25,372,590 that the Foundation claimed because it did not
comply with the financial and program management standards and the procurement standards
promulgated in Title 40 Code of Federal Regulations (CFR), Subchapter B, Part 30.
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In our opinion, because of the effects of the deficiencies discussed in the Results of Examination,
the reported Federal outlays and disbursements on the Financial Status Reports and Federal
Cash Transactions Report do not present fairly, in all material respects, the allowable costs
incurred in accordance with the terms and conditions of the grants and applicable EPA
regulations.
/s/ "KeitA "^ecc&cvid
Keith Rei chard
Office of Inspector General
U.S. Environmental Protection Agency
February 20, 2007
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Results of Examination
Financial and Program Management Systems Did Not Comply with
Standards
The Foundation did not comply with the financial and program management standards
promulgated in Title 40 CFR, Subchapter B, Part 30. Because the Foundation did not meet its
fiduciary responsibilities under the regulations, outlays and expenditures reported on the
Financial Status Reports and Federal Cash Transactions Reports are not allowable.
When applying for grant assistance, the Foundation certified that it had the institutional,
managerial, and financial capability to ensure proper planning, management, and completion of
the project described in the grant application, and that it would comply with applicable
requirements of Federal laws, executive orders, regulations, and policies governing the grant.
EPA's administrative grant regulations for nonprofit organizations are codified in Title 40 CFR,
Subchapter B, Part 30. Under the provisions of Title 40 CFR Part 30, the Foundation was
required to follow the financial and program management standards codified in Title 40 CFR
30.21 through 30.28. As part of our audit procedures, we asked the Foundation to (1) summarize
the outlays reported to EPA and (2) reconcile the reported outlays to the Foundation's book and
records. In response, the Foundation provided EPA with schedules that presented costs by
assistance agreement by cost element by fiscal year. However, these schedules did not reconcile
to the outlays reported on the Financial Status Reports and disbursements on the Federal Cash
Transactions Report. The Foundation reported outlays to EPA that were greater than amounts it
recorded in its books and records by a total of $611,289. See Schedule 1 for details on reported
outlays and disbursements by grant and differences when compared to the Foundation's books
and records.
On May 9, 2006, we discussed these differences with the Foundation's President and requested
revisions to grant claims or supporting accounting records. We made similar requests on May
23, 2006, and May 30, 2006. The Foundation did not respond. Title 40 CFR 30.21(b)(1)
requires accurate, current, and complete disclosure of the financial results of federally funded
programs or projects. The Foundation did not comply with this requirement. Because the
Foundation did not adequately document its costs and did not comply with the grant regulations,
we questioned the Federal share of $25,372,590 claimed by the Foundation. However, in order
to provide EPA with pertinent information related to the Foundation's incurred costs (presented
in Schedule 1) we conducted additional tests to determine if the costs were supported and
allowable in accordance with the terms and conditions of the grants and applicable EPA
regulations.
Our review disclosed that the Foundation:
Did not provide support for any of its general journal entries.
Included duplicate transactions in its accounting system.
Recorded labor charged to the EPA grants incorrectly.
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Could not support the recorded indirect costs.
Claimed unallowable preaward costs.
Recorded EPA cash draws inaccurately.
Did not submit required indirect cost rate proposals to EPA.
Did not complete the required single audits for the fiscal years ended June 30, 2003, June 30,
2004, and June 30, 2005.
• Did not submit a Federal Cash Transactions Report when required.
Title 40 CFR 30.62 provides that if a recipient materially fails to comply with the terms and
conditions of an award, whether stated in a Federal statute, regulation, assurance, application, or
notice of award, EPA may disallow all or part of the cost of the activity or action not in
compliance. Because the Foundation did not adequately document its costs and did not comply
with the grant regulations, we questioned the Federal share claimed of $25,372,590. Details of
our findings follow.
Unsupported General Journal Entries
The Foundation did not provide the required documentation to support and sufficiently
explain the general journal entries recorded for any of its three grants. Title 40 CFR
30.21(b)(7) states that recipient's financial management systems shall have accounting
records supported by source documentation. The Foundation used general journal entries
to (1) record accruals such as payroll costs, (2) reverse posting entries, (3) allocate
indirect costs, (4) correct errors, (5) record revenue, and (6) post transactions that were
not recorded in the general ledger by other means. However, the Foundation could not
provide supporting documentation to explain and support any general journal entries.
For the three grants under review, the Foundation recorded a net value of $2,703,076
with general journal entries. Among other items, this amount included $59,857 in
salaries and $1,391,614 in indirect costs. We requested the Foundation to provide
support for all general journal entries on three occasions during our review. We have not
received a response to these requests or any support for the entries. The Foundation has
not complied with the requirement of Title 40 CFR 30.21(b)(7) that accounting records
be supported by source documentation.
Foundation's Response
The Foundation did not address this finding.
Duplicate Recorded Costs
The Foundation recorded duplicate transactions in its accounting system totaling at least
$63,388. During the fiscal year ended June 30, 2005, the Foundation used two different
databases to record grant expenditures in its general ledger. One database covered the
period July 1, 1999, to November 30, 2004, and the second covered the period July 1,
2004, to June 30, 2005. There is an overlapping period from July 1, 2004, to November
30, 2004. We reviewed transactions in both databases for the overlapping period and
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noted duplicated amounts of at least $48,008 in salaries and $15,380 in associated fringe
benefits. Title 40 CFR 30.21 requires the Foundation to maintain a financial
management system that is accurate, current and complete, and provides for the effective
control over and accountability for all funds. Because recorded costs were duplicated,
the Foundation's financial management system was not accurate, and the incurred costs
were incorrect and overstated.
Foundation's Response
The Foundation did not address this finding.
Incorrect Labor Costs
The Foundation's recorded labor costs were inaccurate. The Foundation reported labor
costs for the three grants totaling $1,413,973. We found differences between labor hours
reported on employee timesheets and labor hours recorded in the Foundation's
accounting system. For example, we reviewed the April 2001 pay period for the
Foundation's Chief Operations Officer. The Foundation's accounting system reported
that 242 labor hours were used to distribute this employee's gross pay to projects.
However, labor activity reports only reported 178 hours. We discussed this issue with
Foundation personnel on April 27, 2006. The Foundation's accountant agreed with the
finding, said he had also found errors, and stated he would provide us with a spreadsheet
that documents reconstructed labor dollars based on actual employee timesheets and
payroll. We have not received the reconstruction. Title 40 CFR 30.21 requires the
Foundation to maintain a financial management system that is accurate, current and
complete, and provides for the effective control over and accountability for all funds.
The Foundation did not comply with this requirement because its recorded labor is
inaccurate.
Foundation's Response
The Foundation did not address this finding.
Unsupported and Inaccurate Indirect Cost
The Foundation's indirect costs are unsupported and inaccurate. The Foundation
reported a total of $1,439,947 in indirect costs. Of the total, $1,391,614 was recorded in
the accounting system using general journal entries. As discussed above under
Unsupported General Journal Entries, the Foundation did not provide any documentation
to support its general journal entries. Without any documentation, we were unable to
determine if the Foundation applied appropriate indirect cost rates or if the base to which
the rates were applied was correct.
Also, under Incorrect Labor Costs and Duplicated Recorded Costs discussed above, we
reported that the Foundation's recorded labor costs were incorrect, and that duplicate
labor transactions were recorded in the accounting system. Labor and fringe benefits are
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elements of an indirect cost pool and an indirect cost rate allocation base. Inaccuracies in
these costs would render indirect cost rates and resulting indirect costs inaccurate.
Title 40 CFR 30.21(b)(7) states that a recipient's financial management system shall
provide for accounting records including cost accounting records that are supported by
source documentation. In addition, Title 40 CFR 30.21 requires the Foundation to
maintain an accurate, current, and complete financial management system. The
Foundation did not comply with either of these requirements.
Foundation's Response
The Foundation did not address this finding.
Unallowable Preaward Costs
The Foundation reported $19,038 under grant X82835301 for costs incurred by The
Grizzle Company. The costs were billed to the Foundation prior to award of the grant.
However, the Foundation did not obtain the prior approval for preaward costs required by
Title 40 CFR 30.25. Without prior approval, the costs are unallowable for
reimbursement.
Title 40 CFR 30.25(f) states that recipients are authorized without prior approval or
waiver to incur pre-award costs 90 calendar days prior to award. Preaward costs incurred
more than 90 calendar days prior to award require the prior approval of the EPA Award
Official. The applicant must include all pre-award costs in its application.
The Grizzle Company billed the $19,038 to the Foundation between September 1, 1999,
and February 1, 2000. Grant X82835301 was awarded on August 31, 2000, 5 months
later. The Grizzle Company billed the Foundation between 212 and 365 calendar days
prior to award of grant X82835301. The costs, therefore, needed the prior approval of
EPA and they should have been included in the grant application. A review of the grant
files for grant X82835301 did not disclose any evidence of prior approval by EPA.
Neither The Grizzle Company contract (by name) nor costs incurred of $19,038 were
included in the grant application.
Foundation's Response
The Foundation's response indicated that the OIG referenced the wrong grant
(X82835301) and the wrong period of performance. They stated that the work was
authorized and performed under grant X82728401.
OIG's Comments
The Foundation claimed the $19,038 under grant X82835301. However, the contract was
authorized and performed under the previous grant, X82728401. The costs are, therefore,
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not allowable for reimbursement under grant X82835301. The Foundation claimed the
costs under an incorrect grant. The costs remain questioned.
Inaccurate Recording of EPA Cash Draws
Contrary to Title 40 CFR 30.21, the Foundation could not always show the receipt of
EPA cash draws in the Foundation's accounting records. Title 40 CFR 30.21(b)(2) states
that a recipient's financial management system should provide records that adequately
identify the source and application of funds for federally sponsored activities. In
addition, Title 40 CFR 30.21(b)(1) requires the Foundation to maintain a financial
management system that is accurate, current, and complete. The Foundation has not
complied with these requirements because it recorded EPA cash draws inaccurately and
was unable to accurately identify the source of funds for the three EPA grants. The
following table provides a comparison of actual EPA grant payments with the revenues
recorded in the Foundation's accounting system.
EPA Grants
EPA Grant
Payments
Foundation
Recorded
Revenues
Difference
X82835301
$14,438,750
$17,661,062
($3,222,312)
X82672301
$1,509,361
$1,296,216
$213,145
X783142301
$9,225,155
$6,184,483
$3,040,672
Source: The source for the EPA grant payments was EPA's
Financial Data Warehouse. The Foundation's recorded revenues
came from the Foundation's accounting system.
Foundation's Response
The Foundation did not address this finding.
Indirect Cost Rates Were Not Submitted
In addition to the unsupported indirect costs discussed above, the Foundation has not
submitted all of the indirect cost rate proposals required by OMB Circular A-122,
Attachment A, Subparagraph E.2. The Circular requires a recipient to submit an initial
indirect cost rate proposal no later than 3 months (or 90 days) after the effective date of
an award. Organizations that have previously established indirect cost rates must submit
a new indirect cost rate proposal within 6 months after the close of each fiscal year.
The Foundation provided us with indirect cost rate negotiation agreements for fiscal years
2005 and 2006. The rates were negotiated by the Department of Interior, National
Business Center under agreement with EPA. In addition, the Foundation provided us
with indirect cost rate proposals and transmittal letters for submission to EPA for fiscal
years 1999 and 2004. We did not find evidence of preparation or submission of
proposals for fiscal years 2000 through 2003. The Foundation has not demonstrated that
it complied with the requirements of OMB Circular A-122 regarding submission of
indirect cost rate proposals for fiscal years 2000 to 2003.
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Foundation's Response
The Foundation did not address this finding.
Single Audits Not Completed
The Foundation has not completed required single audits for the fiscal years ended June
30, 2003, June 30, 2004, or June 30, 2005. Title 40 CFR 30.26 states that nonprofit
organizations are subject to the audit requirements of OMB Circular A-133. OMB
Circular A-133, Subpart B requires a non-Federal entity that expends $300,000 ($500,000
for fiscal years ending after December 31, 2003) or more in a year in Federal awards to
have a single audit conducted for that year in accordance with the requirements of the
Circular. The Circular also requires that the audit be completed and a reporting package
be submitted no later than 9 months after the end of the audit period.
The Foundation's President stated that a single audit had been completed for fiscal year
2003 but the discovery of accounting irregularities indicated issuance of the report may
not have been appropriate. The report was, therefore, withheld. In addition, the
accounting firm contracted to perform the single audit for fiscal year 2004 discontinued
work after discovery of the irregularities. The Foundation stated it does not have plans
for an audit of fiscal years 2004 and 2005 at this time.
Foundation's Response
The Foundation did not address this finding.
Noncompliance with Federal Financial Reporting Requirements
We noted that the Foundation's Inderal Cash Transactions Report for the 6-month
period ended December 31, 2005 was overdue. Title 40 CFR 30.52(a)(2) states that EPA
shall require each recipient to submit a Federal Cash Transactions Report and that it
should use this report to monitor cash advanced and to obtain disbursement information
for each agreement with the recipient. As of June 2005, EPA's policy is to require a
recipient to submit a Federal Cash Transactions Report within 15 working days following
the semiannual periods ending June 30 and December 31. As of May 23, 2006, the
Foundation had not submitted its Federal Cash Transactions Report for the semiannual
period ended December 31, 2005. The Foundation did not comply with EPA reporting
requirements.
Foundation's Response
The Foundation did not address this finding.
11

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Procurement System Did Not Comply with Standards
The Foundation's procurement system did not comply with EPA's procurement standards.
When applying for grant assistance, the Foundation certified that it would comply with
applicable requirements of Federal laws, executive orders, regulations, and policies governing
each grant. The procurement standards are codified in Title 40 CFR 30.41 through 30.48. We
found that the Foundation:
Awarded contracts without performing the cost or price analysis required by Title 40 CFR
30.45.
Awarded a contract to a member of its Board of Directors, contrary to the conflict of interest
provisions in Title 40 CFR 30.42.
Continued to reimburse Validus for billings even though the billings exceeded ceilings
specified in the contract.
Cost or Price Analysis not Performed
The Foundation did not comply with EPA regulations when procuring contracts and
obtaining prior approval for contract costs. The Foundation claimed outlays of
$21,107,498 ($12,308,145 under grant X82835301 and $8,799,353 under grant
X783142301) for contracts awarded to conduct on-farm assessments. The first contract
was originally awarded in fiscal year 1999 to the National Pork Producer's Council
(Council). Subsequent contracts were awarded to Environmental Management Solutions,
LLC, a 100 percent owned subsidiary of the Council. Environmental Management
Solutions, LLC later changed its name to Validus Services, LLC (collectively referred to
as Validus). The contract was extended several times through fiscal year 2005.
All of these contracts were awarded without competition and without a cost or price
analysis. In correspondence with the Director, EPA's Grants Administration Division on
July 27, 2005 and September 21, 2005, the Foundation's Executive Director said that it
did not perform a cost or price analysis because there were no sources of comparable data
for it to use. Title 40 CFR 30.45 states that some form of cost or price analysis is
required in connection with every procurement action. Price analysis may be
accomplished in various ways, such as comparison of price quotations submitted, market
prices and similar indicia. A cost analysis is the review and evaluation of each element
of cost to determine reasonableness, allocability, and allowability. Since the contracts
were awarded without competition, a price analysis could not be performed because there
were no prices available to compare. Accordingly, the Foundation's only alternative was
to conduct a cost analysis. However, the Foundation did not conduct a cost analysis on
any of the awarded contracts, and thus was unable to demonstrate that the contract costs
were reasonable, allowable, and allocable.
In addition, Title 40 CFR 30.44(e)(2) requires recipients to make pre-award review (i.e.,
costs analysis) and procurement documents available whenever a contract is awarded
without competition and exceeds the small purchase limit of $100,000. The Foundation
did not comply with either requirement. Without the required cost or price analysis, we
12

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have no assurance that a reasonable and fair price was obtained for the contracted
services.
We performed an on-site review of the $21,107,498 that the Foundations claimed for
Validus' services, and found that claimed outlays exceeded recorded costs by $6,195,057
($3,466,808 for grant X82835301 and $2,728,249 for grant X783142301). This
significant difference between claimed outlays and recorded costs further indicates that
the Foundation did not obtain fair and reasonable contract prices. A comparison of
claimed outlays to recorded costs by cost category is presented in Schedule 2 (page 19).
We also noted that claimed outlays for Validus' services included $4,278,615 in
unallowable costs ($2,223,940 under grant X82835301 and $2,054,675 under grant
X783142301). Additional details on unallowable costs are presented in Schedule 3 (page
21).
Foundation's Response
The Foundation did not specifically address this finding other than to say that previous
grant dispute submissions (see the Foundation's filing to Disputes Decision Official dated
May 8, 2006) of the Foundation have argued that the Agency has used a number of
techniques to recognize the value of such work, regardless of purported defects in the
contract award, and that EPA must provide funding for Validus work.
OIG's Comments
The Foundation did not demonstrate that it complied with the provisions of Title 40 CFR
30.45. Accordingly, we did not revise our findings and recommendations.
Conflict of Interest
Another contract was awarded to The Grizzle Company on April 5, 1999, on a
noncompetitive basis. The contract was for a maximum amount of $50,000 and was due
to expire on March 31, 2000. The Foundation did not comply with the conflict of interest
requirements at Title 40 CFR 30.42 when awarding the contract.
The chairman of The Grizzle Company, was also the Vice President of the Foundation's
Board of Directors. Title 40 CFR 30.42 states that no employee, officer, or agent shall
participate in the selection, award, or administration of contracts supported by Federal
funds if a real or apparent conflict of interest would be involved. Such a conflict would
arise when the employee, officer, or agent has a financial or other interest in the firm
selected for award. As chairman of The Grizzle Company, the chairman would have an
interest in The Grizzle Company being selected for a contract award; and as Vice
President of the Foundation's Board of Directors, was potentially in a position to
influence Foundation actions or decisions to make the contract award.
13

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Foundation's Response
The Foundation indicated that Mr. Grizzle recused himself from all Board decisions and
actions related to this contract, thus he was never in a position to influence the
Foundation's actions or decision to make the contract award.
OIG's Comments
The Foundation did not provide any proof that Mr. Grizzle recused himself from any
Board decisions or actions related to his contract. Even if Mr. Grizzle recused himself
from any Board decisions related to his contract, he was potentially in a position to
influence actions or decisions by other Foundation members. Recusing himself would
not eliminate the influence his presence had on others.
Improper Contract Administration
The Foundation continued to reimburse Validus for amounts billed even though the
billings exceeded maximum amounts specified in the contracts or were for unbillable
costs. The Foundation awarded four contracts to Validus in fiscal year 2002 through
fiscal year 2005 to conduct on-farm assessments under the OFAER program. The
contracts required various services, including program administration and refinement,
program marketing or promotion, program training, database mining, and verification or
oversight. Validus was to bill the Foundation for necessary and reasonable costs incurred
up to the maximum aggregate amounts as specified in the contracts. Maximum billable
amounts were specified by cost category, as well as for the contract as a whole. We
found that Validus billed the Foundation for $412,5233 in excess of the categorical
ceiling amounts under grant X82835301. The excess billings by cost category and by
contract are summarized in Schedule 3, Note 5 (see page 28).
In addition, the Foundation reimbursed Validus for $17,074 in program administration
costs that were not billable by the terms and conditions of its contract. The billing
occurred under contract ACWF-OFAER-02-99. Billing provisions are provided in
Section 7.2 and attachment C of the contract. This contract only provided for the billing
of assessments at a fixed price per assessment. Program administration costs were not
specified. These costs are, therefore, not reimbursable, and are unallowable (see
Schedule 3, Note 4 on page 28).
Title 40 CFR 30.47 requires the Foundation to maintain a system that ensures a
contractor complies with the terms, conditions, and specifications of its contracts. The
payments in excess of the contract ceilings indicated that the Foundation did not perform
its contract administrative functions in accordance with Title 40 CFR 30.47.
3 In total, Validus exceeded the contract ceilings by $1,429,507 under Grant X82835301, and $50,362 under Grant
X783142301. However, in Schedule 3, Notes 1 through 5, our questioned costs exceeded the costs in excess of the
contract ceilings. Therefore, we did not question any additional costs over and above the $412,523 amount.
14

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Foundation's Response/OIG's Comments
The Foundation did not respond to this finding but see Schedule 3, Notes 4 and 5 for
Validus' comments and the OIG's response.
15

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Recommendations
We recommend that the Director for the Grants Administration Division:
1.	Disallow the Federal share claimed of $25,372,590, and recover payments made of
$25,173,266, unless the Foundation reconstructs its accounting records to meet the
financial management standards required by Title 40 CFR 30.21 through 30.28,
including:
a.	Correcting the distribution of labor costs and excluding all duplicate transactions.
b.	Providing explanations and support for all general journal entries and ensuring
that all transactions are supported by adequate source documentation.
c.	Preparing and submitting indirect cost rate proposals for fiscal years 2000 through
2003	in accordance with OMB Circular A-122.
d.	Resubmitting indirect cost rate proposals for fiscal years 1999 and fiscal years
2004	through 2006 based on reconstructed accounting records.
e.	Assuring that unallowable preaward costs are excluded from grant claims.
f.	Revising recorded EPA cash draws to accurately identify the source of the funds
and the amount.
g.	Submitting a final financial status report for grant X783142301and revised final
financial status reports for grants X82835301 and X82672301 that have been
reconciled to amounts recorded in the Foundation's reconstructed accounting
records.
2.	Rescind provisional indirect rates for fiscal years ended June 30, 2005, and June 30,
2006.
3.	Require the Foundation to obtain single audits for fiscal years ended June 30, 2003,
June 30, 2004, and June 30, 2005.
4.	Require the Foundation to prepare and submit overdue Standard Form 272 Federal
Cash Transactions Reports.
5.	Disallow contract costs procured, claimed, and administered in violation of the
requirements in Title 40 CFR Part 30.
6.	Disallow contract costs that were not authorized under the contract terms, including
costs in excess of contract ceilings.
7.	Stop work on all active grants.
8.	Not award any new grants until the Foundation meets minimum financial
management requirements and repays all disallowed costs.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
Rec.
No.
Page
No.
Subject
Status4
Action Official
Planned
Completion
Date
POTENTIAL MONETARY
BENEFITS (in!
Claimed Agreed To
Amount Amount
16 Disallow the Federal share claimed of
$25,372,590 and recover payments made of
$25,173,266 unless the Foundation reconstructs
its accounting records to meet the financial
management standards required by Title 40
CFR 30.21 through 30.28.
16 Rescind provisional indirect rates for fiscal years
ended June 30, 2005, and June 30, 2006.
16 Require the Foundation to obtain single audits
for fiscal years ended June 30, 2003, June 30,
2004, and June 30, 2005.
16 Require the Foundation to prepare and submit
overdue Standard Form 272 Federal Cash
Transactions Reports.
16 Disallow contract costs procured, claimed and
administered in violation of the requirements in
Title 40 CFR Part 30.
16 Disallow contract costs that were not authorized
under the contract terms, including costs in
excess of contract ceilings.
16 Stop work on all active grants.
16 Not award any new grants until the Foundation
meets minimum financial management
requirements and repays all disallowed costs.
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
EPA Director for the	TBD
Grants Administration Division
$25,372
O = 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
17

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Schedule 1
Schedule of Claimed Outlays by Assistance Agreement,
Unallowable Costs, and Amounts Due EPA
America's Clean Water Foundation

Grant

Description
X82835301
X783142301
X82672301
Total
Personnel
$631,573
$255,730
$526,670
$ 1,413,973
Fringe Benefits
160,048
193,776
99,061
452,885
Travel
204,882
54,527
146,804
406,213
Equipment
3,411
1,995
8,737
14,143
Printing
525
7,458
13,209
21,192
Meetings and Training
0
13,443
5,783
19,226
Supplies
0
1,468
1,146
2,614
Postage
0
1,023
218
1,241
Telecommunications
0
1,665
13,555
15,220
Legal
0
0
2,527
2,527
Publications and Subscriptions
0
207
492
699
Other
76,870
0
0
76,870
Contracts
12,794,735
8,961,897
385,497
22,142,129
Indirect
723.260
343.143
373.544
1.439.947
Total Cost (Note 1)
$14,595,304
$9,836,332
$1,577,243
$26,008,879
Less Unpaid Amounts (Note 2)
0
(845.034)
0
(845.034)
Total Incurred and Paid
$14,595,304
$8,991,298
$1,577,243
$25,163,845
Reported Outlays (Note 3)
$14,438,750
$9,424,479
$1,534,361
$25,397,590
Recipient Share of Reported




Outlays
0
0
25.000
25.000
EPA Share of Reported Outlays
$14,438,750
$9,424,479
$1,509,361
$25,372,590
Unreconciled Difference between




Total Incurred Cost and




Reported Outlays
$156,554
$(433,181)
$42,882
$(233,745)
Total Cost Questioned
$14,438,750
$9,424,479
$1,509,361
$25,372,590
EPA Payments
$14,438,750
$9,225,155
$1,509,361
$25,173,266
Amount Due EPA
$14,438,750
$9,225,155
$1,509,361
$25,173,266
Source: The schedule of claimed outlays came from the Foundation's February 21, 2006, email to EPA's Grant Administration
Division. The unallowable outlays, unreconciled difference, and amount due EPA were based on the OIG analysis of the claimed
outlays. The EPA payments came from EPA's Financial Data Warehouse.
Notes:
1.	Except for contracts, the Foundation reported incurred costs from its accounting system. The
Foundation summarized amounts for contracts manually from invoices, cash draws, and
contracts.
2.	Unpaid amounts are for invoices submitted by Validus Services, LLC, a Foundation
contractor.
3.	The Foundation submitted a final Standard Form 269A Financial Status Report for grant
X82835301 and X82672301 on September 28, 2004. It submitted a Standard Form 272
Federal Cash Transactions Report for grant X783142301 on September 22, 2005. Grant
X783142301 is ongoing and a Final Financial Status report has not been submitted.
18

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Schedule 2
Comparison of Claimed Outlays to Recorded Costs
Validus Services, LLC
The purpose of this schedule is to compare the costs recorded in Validus' accounting system
with the outlays that the Foundation claimed for Validus' contractual services. In total, the
claimed contractual services exceeded the recorded costs by $6,195,057.



Excess of

Claimed
Recorded
Claimed over
Cost Category
Outlays
Costs
Recorded Costs
Grant X82835301



Assessments
$7,760,183
$5,117,550
$ 2,642,633
Program Administration and Refinement



License Fee
575,000
0
575,000
Facilities/Admin. Allocation
215,495
206,523
8,972
Labor
1,003,848
785,216
218,632
Misc. Admin
20,151
18,650
1,501
Program Refinement
94,737
94,772
(35)
Other
1.156
0
1.156

1.910.387
1.105.161
805.226
Program Marketing or Promotion
387,784
380,890
6,894
Program Training
598,229
596,423
1,806
Database Mining
201,432
201,432
0
Verification or Oversight
1.450.130
1.439.881
10.249
Total
$ 12.308.145
$ 8.841.337
$ 3.466.808
Grant X783142301



Assessments
$ 5,776,350
$ 3,666,240
$2,110,110
Program Administration and Refinement



License Fee
675,000
0
675,000
Facilities/Admin. Allocation
599,481
1,074,802
(475,321)
Labor
1,041,616
267,358
774,258
Misc. Admin
29.691
29.731
(40)

2.345.788
1.371.891
973.897
Program Marketing or Promotion
214,947
225,038
(10,091)
Program Training
66,307
66,943
(636)
Database Mining
52,791
120,272
(67,481)
Verification or Oversight
343.170
620.720
(277.550)
Total
$ 8.799.353
$6,071,104
$ 2.728.249
Grand Total
$ 21.107.498
$14 912 441
$6,195,057
Source: The schedule of claimed outlays came from the Foundation's February 21, 2006, email to
EPA's Grant Administration Division. The recorded costs came from Validus' books and records. The
excess of claimed over recorded costs is the difference between claimed outlays and recorded costs.
19

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Validus' Response
According to Validus, the amounts identified as "Billed to the Foundation"5 are not accurate.
Validus stated that the billed amounts for Grant X82835301 and Grant X783142301 were
$12,474,067 and $8,534,266, respectively. Because the billed amounts identified in Schedule 2
differ from the actual billed amounts, Validus was required to adjust the months associated with
each contract in order to be able to reconcile its billed amounts with the EPA auditor's billed
amount (see Tab 22 of Validus' response for the reconciliation spreadsheet).
Schedule 2 also purports to identify the amounts by which the Council and Validus "overbilled"
the Foundation under the two assistance agreements. Both the Council and Validus complied
with the terms of the contracts and to the extent that the billed amount was in excess of the
recorded incurred costs, the Council and Validus did so in full compliance with the terms of the
contracts, and with full knowledge of an acceptance by the Foundation and EPA.
OIG's Comments
Schedule 2 identifies the outlays that the Foundation claimed for Validus' contractual services in
comparison to the costs recorded in Validus' accounting system. The excess of claimed outlays
over recorded costs merely represent the difference between what the Foundation claimed and
costs Validus recorded, and does not represent amounts by which Validus "overbilled" the
Foundation.
In response to the draft report, Validus provided us with a revised summary of the claimed
outlays and recorded costs for program administration and refinement (see Tab 22 of Validus'
response) under Grant X82835301. We have changed both Schedules 2 and 3 to reflect Validus'
revisions.
5 The term "Billed to the Foundation" was changed in the final report to claimed outlays.
20

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Schedule 3
Results of Examination for Claimed Outlays
Validus Services, LLC
Cost Category
Claimed
Unallowable
Notes
Grant X82835301



Assessments
$ 7,760,183
$ 0

Program Administration and Refinement



License Fees
575,000
575,000
1
Facilities and Administration Allocation
215,495
215,495
2
Labor
1,003,848
1,003,848
3
Miscellaneous Administration
20,151
0

Program Refinement
94,737
17,074
4
Other
1,156
0


$ 1.910.387
$ 1.811.417

Program Marketing or Promotion
387,784
17,902
5
Program Training
598,229
157,299
5
Database Mining
201,432
7,207
5
Verification or Oversight
1.450.130
230.115
5
Total Grant X82835301
$ 12.308.145
$ 2.223.940

Grant X783142301



Assessments
$ 5,776,350
$0

Program Administration and Refinement



License Fees
675,000
$ 675,000
1
Facilities and Administration Allocation
599,481
599,481
2
Labor
1,041,616
780,194
3
Miscellaneous Administration
29.691
0


$ 2.345.788
$ 2.054.675

Program Marketing or Promotion
214,947
0

Program Training
66,307
0

Database Mining
52,791
0

Verification or Oversight
343.170
0

Total Grant X783142301
$ 8.799.353
$ 2.054.675

Grand Total
$21,107,498
$ 4.278.615

Source: The claimed outlays came from the Foundation's February 21, 2006, email to EPA's
Grant Administration Division. The unallowable costs were based on the OIG's analysis of the
claimed outlays.
Our fieldwork at Validus' offices indicated that the claimed outlays of $21,107,498 included
unallowable costs of $4,278,615. In addition, we noted that $845,034 of the claimed outlays
remain unpaid. In total, we questioned the $21,107,498 ($12,308,145 under grant X82835301,
and $8,799,353 under grant X783142301) claimed because the Foundation was unable to
demonstrate that the contract costs were reasonable, allowable, and allocable as discussed on
page 12 of the report under Procurement System Did Not Comply with Standards.
21

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Background
Six contracts were awarded in fiscal years 1999 through 2005 to conduct on-farm assessments
under the OFAER program. An on-farm assessment is a voluntary independent review of a
livestock producer that provides an assessment of water quality, odor, and pest risk factors.
According to Validus, the National Pork Producers Council and Validus conducted 5,419 initial
assessments, 569 followup assessments, and trained 570 assessors to perform the assessments.
Assessments were performed at multiple types and sizes of livestock operations, including pork,
poultry, turkey, cattle, dairy, cow/calf, sheep, duck, and horse, and at small, medium, and large
operations in 45 states.
The contract numbers and their performance periods are:
Grant X82835301
ACWF-OFAER-02-996	May 1, 1999, to June 30, 2001 (i)
ACWF-OFAER-02-99-R16 October 1, 2000, to September 30, 2001 (ii)
ACWF-OFAER-01-027	July 1, 2001, to June 3 0, 2002
ACWF-OFAER-01-037	July 1, 2002, to June 30, 2003
Grant X783142301
ACWF-OFAER-01-047	July 1, 2003, to August 3 0, 2004
ACWF-OFAER-01-057	September 1, 2004, to August 31,2005
(i)	Validus stated that performance under this contract ended on September 30, 2000.
(ii)	Validus stated that performance under this contract ended on June 30, 2001.
The contracts state that the Foundation will reimburse the contractor for reasonable and
necessary costs incurred associated with the services required in the agreement. The contracts
provided that the assessments be billed at a fixed rate per assessment. The rate remains fixed for
the contract period but varies for each contract. For all other services, such as program training,
program administration, and program marketing or promotion, the Foundation is to be billed for
necessary and reasonable costs incurred up to the maximum aggregate amounts as specified in
the contracts.
We reviewed the billings to determine if the costs were reasonable, allowable, and allocable in
accordance with the applicable regulations8 and contract terms and conditions. We performed
our review at Validus' offices in Des Moines, IA from May 8 to May 18, 2005.
We noted that $845,034 of the amounts that Validus billed to the Foundation from June to
September 2005 are unpaid. The unpaid invoices are:
6	Awarded to the National Pork Producer's Council - a nonprofit organization.
7	Awarded to Environmental Management Solutions/Validus, a wholly owned subsidiary of the National Pork
Producers Council, and a limited liability company.
8	According to the provisions of Title 40 CFR 30.27, allowable costs incurred by commercial organizations are
determined in accordance with the provisions of Federal Acquisition Regulations (FAR) at 48 CFR Part 31. The
allowable costs incurred by nonprofit organizations are determined in accordance with OMB Circular A-122.
22

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Invoice
Invoice Date
Amount Billed
241
June 16, 2005
$ 343,320
278
July 15, 2005
241,748
282
August 12, 2005
162,019
303
September 15, 2005
97.947

Total
$ 845,034
Source: The schedule of unpaid invoices came from the Foundation's February 21,
2006, email to EPA's Grant Administration Division.
The unpaid invoices are included in the Foundation's reported outlays. We have shown the
unpaid amount as a separate item in Schedule 1.
Our review disclosed that the contractors (both Validus and the National Pork Producers
Council) did not comply with contract terms and conditions and the applicable regulations when
billing the Foundation. As a result, $4,278,615 in unallowable costs was billed ($2,223,940
under grant X82835301, and $2,054,675 under grant X783142301). The results of our review
are detailed in Schedule 3 on page 21 and the following explanatory notes.
Note 1:	License fees of $575,000 for grant X82835301 and $675,000 for grant
X783142301 represent billings for amounts that were not incurred. Validus billed
the Foundation a flat rate of $25,000 per month for the use of an on-farm
assessment checklist that the Council developed under a contract with the
National Pork Board. The licensing agreement with the National Pork Board
provided that the Council would not pay any royalties to the National Pork Board
for Validus' use of the checklist for the first 5 years of the license beginning with
calendar year 2001. In years 6 to 15, the Council was to pay the National Pork
Board a royalty equal to 5.875 percent of revenues Validus collected annually
from the use of the checklist. The contracts we audited were performed within
the 5-year period during which no royalties were paid. Our review of accounting
records and discussion with Validus personnel indicated that Validus did not incur
any costs for licensing fees.
Contract provisions in Section 8.3 and Section C state that administrative
functions necessary to support assessment activities including salary, office rent,
postage, supplies, telephone, services, accounting, and license fees are to be billed
at cost. Actual costs, as defined by Part 31.001 of FAR, means amounts
determined on the basis of costs incurred. Since Validus did not incur any costs
for licensing fees, they are not allowable for reimbursement.
23

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Validus' Response
Validus responded that the premise that somehow the license fee had to
correspond with costs incurred is a mistaken one. There was never any question
among parties to this transaction that the license fee was anything other than a fee.
The license fee was never represented as a cost. The Foundation fully
agreed to the payment of a license fee of $25,000 a month in exchange for
the exclusive rights to the OFAER assessment tool. The assessment tool
was developed with private funding from pork producers through the use
of the National Pork Board check-off funds. The license fee was
reasonable in amount and billed in accordance with the parties agreement
and the express terms of the contract. The EPA program officer most
knowledgeable about the OFAER contracts and program did not reject the
license fee. It was simply included in the Program Administration
category for billing purposes as a matter of convenience and convention.
Thus, there is no basis for characterizing the license fee as either over
billed or unallowable.
OIG's Comments
The contract terms between Validus and the Foundation specifically stated that
license fees were part of program administration which were to be billed based on
actual costs. The contract(s) did not specifically mention the $25,000 amount,
and no documentation was provided to demonstrate the basis for the $25,000 fee
or how the $25,000 monthly amount was determined to be necessary and
reasonable as required by FAR Part 31.
As we stated in the finding, the licensing agreement for the OFAER assessment
tool provided that the Council would not pay the National Pork Board for any
royalties for the first five years of the licensing beginning in calendar year 2001.
Thus, no royalties were due and payable to the National Pork Board until the year
6. Since Validus did not incur any costs for the use of the OFAER checklist, the
license fees are not allowed.
Note 2:	Facilities and Administration costs of $215,495 for grant X82835301 and
$599,481 for grant X783142301 represent allocations of indirect costs to the
contracts that are not supported by indirect cost rate proposals and negotiation
agreements. As a nonprofit organization, the Council was required in accordance
with OMB Circular A-122, Attachment A, Paragraph E(2) to submit new indirect
cost rate proposals within 6 months after the close of each fiscal year. Similarly,
as a commercial organization, Validus was also required by the FAR to submit
indirect cost rates proposals. Specifically, FAR 31.103(b) requires a contracting
officer (in this case, the Foundation) to use FAR 42.7 for negotiating billing and
final indirect cost rates with commercial organizations. FAR 42.705-1 requires a
contractor to submit to the contracting officer a final indirect cost rate proposal
within 6 months following the end of each fiscal year. Neither the Council nor
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Validus provided any documentation to demonstrate that indirect rates were
submitted and negotiated.
We noted during our review that the contractor(s) recorded more indirect costs
than it billed to the Foundation. Recorded indirect costs amounted to $1,074,802
for grant X783142301, which was $475,321 ($1,074,802 - $599,481) more than
what was billed. We discussed these differences with Validus personnel. They
stated that the billed amount is based on their budgeted amounts. Incurred costs
were greater than the budget but the President and Chief Executive Officer chose
not to bill the Foundation for the additional costs because the variance from
estimated was too great.
Validus' Response
Validus does not agree that OMB and FAR regulations apply to the contracts
under audit. None of the contracts with the Foundation incorporated OMB
Circular A-122 or FAR Part 31, and none of the contracts otherwise required the
submissions of indirect cost rate proposals or to negotiate indirect cost rates. As a
result, the costs should not be disallowed.
OIG's Comments
We disagree. Both Title 40 CFR 30.27 and OMB Circular A-122 provide that
allowable costs are determined in accordance with the regulations applicable to
the entity incurring the costs. Thus, for nonprofit contractors, allowable costs are
determined in accordance with OMB Circular A-122. For commercial
contractors, allowable costs are determined in accordance with the provisions of
FAR Part 31. Under both OMB Circular A-122 and FAR Part 31, the
organizations were required to submit indirect cost rate proposals within 6 months
after the close of each fiscal year. Neither organization provided indirect cost rate
proposals or negotiation agreements. Consequently, there is no basis for
determining the reasonableness and allowability of the facilities and
administration costs of $215,495 for grant X82835301 and $599,481 for grant
X783142301.
Note 3:	The labor costs of $1,003,848 for grant X82835301 and $780,194 for grant
X783142301 are unallowable because neither the Council nor Validus maintained
supporting records required by OMB Circular A-122 and FAR. The unallowable
costs are summarized as follows:
Contractor
Reported Outlays
Note
X82835301
X783142301
National Pork Producers Council
$198,211
$0
a
Validus
$805,637
$780,194
b




Total
$1,003,848
$780,194

Source: OIG's analysis of the contractor's claimed labor.
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The Council billed $198,211 in labor costs to the Foundation but was
unable to provide any personnel activity reports to support the labor
charges. OMB Circular A-122, Attachment A, Paragraph (7) (m) requires
nonprofit contractors to maintain personnel activity reports to support the
charges for salaries and wages to awards. Since the Council was unable to
furnish the requested personnel activity reports, the labor costs of
$198,211 are unallowable.
Validus' Response
Validus stated that the Council used a computerized time distribution
system that its employees, including those who worked on the OFAER
contracts, used to record their daily time. The system converted the
employee time entries into labor charges that were recorded in the general
ledger. General ledger account numbers corresponded to the projects
employees used to charge their time. Validus reviewed documents that the
Council submitted and determined that the Council incurred $198,211 for
labor and billed the Foundation for the same amount. Since the Council's
billed labor amounts were based on recorded costs and the Council
maintained a time distribution system, the costs are allowable.
OIG's Comments
We requested copies of the daily time records to determine if the Council
had a time keeping system that complied with the requirements of OMB
Circular A-122. In response, Validus stated that the Council no longer had
the time records we requested. The contractor said the document retention
period in the Council's contracts expired several years ago.
Title 40 CFR 30.53 requires supporting documents to be retained for a
period of three years from the date of the final expenditure report. The
final financial status report for grant X82835301 was dated September 28,
2004. The retention period will expire three years later or on September
28, 2007. As a result, the labor costs remain unallowable.
Labor costs of $805,637 and $780,194 that Validus billed the Foundation
under grants X82835301 and X783142301, respectively are unallowable.
The costs are unallowable because Validus did not have a time distribution
system to identify, accumulate, and report labor costs for contracts and
was unable to provide employee timesheets to support labor costs charged
to the contracts. Validus personnel stated that predetermined percentages
of employees' time were used to charge the contracts for labor. The
percentages were determined in discussions with the Foundation and were
not formally documented.
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FAR 31.201-2(d) states that a contractor is responsible for accounting for
costs appropriately and for maintaining records adequate to document that
costs claimed have been incurred and are allocable to the contract. Since
Validus did not maintain documentation required to determine the
allocability of labor charges we have questioned the amounts billed.
Under grant X783142301, we noted that Validus began using a time
distribution system, including employee timesheets, in January 2004 and
that it recorded $261,422 in labor costs in its accounting system that was
based on timesheets. However, Validus billed the Foundation $747,334 in
labor costs, which is $485,912 in excess of the amount supported by
timesheets. The excess billing resulted from Validus' continued use of
predetermined percentages of employees' time to charge labor to the
Foundation.
In total, the unallowable labor for grant X783142301 was $780,194 which
is the difference between the billed amount of $1,041,616 and the
$261,422 that was supported by timesheets.
Validus' Response
Validus did not utilize a time keeping system when it was formed in 2001
because it had only one billable project (the OFAER contract) and there
was no need for such a system. In addition to working on the OFAER
contract, three Validus employees spent a small fraction of their time on
work for the National Pork Board. In 2003, Validus began other projects
to which its employees charged time. Labor billed to the OFAER
contracts in 2003 was based on predetermined percentages of an
employee's monthly labor costs. The percentages were based on actual
charges to the OFAER contracts in previous years plus any changes that
were expected to occur. The same allocation method was followed for
each of the Validus OFAER contracts.
Validus provided a number of declarations from its employees to show
what percentage of time the employees recollected that they worked on the
OFAER contracts. Based on the employee's declarations, Validus
determined that it had overbilled the Foundation by $283,779 for all four
of its contracts, and that this overbilled amount should be offset by the
$845,034 in billings that the Foundation has not paid, plus any unbilled
labor costs related to business development and independent research and
development labor.
OIG's Comments
We have not changed our opinion on the allowability of labor costs of
$805,637 for grant X82835301 and $780,194 for grant X783142301.
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Validus was unable to provide adequate time records to support labor
costs charged to the contracts. Without contemporaneous time records, we
were unable to determine if the labor costs were incurred and properly
allocated to the contract(s), and complied with all the applicable costs
principles as required by FAR 31.201-2(d). Consequently, we do not
consider employees' recollections of what percentage of time they worked
on the OFAER contracts as an acceptable alternative to contemporaneous
time records.
Note 4:	We noted that Validus billed the Foundation for $17,074 in unbillable program
refinement costs under contract ACWF-OFAER-02-99. Billing provisions are
provided in Section 7.2 and Attachment C of the contract. This contract only
provided for the billing of assessments at a fixed price per assessment. Program
refinement costs were not specified. These costs are, therefore, not allowable for
reimbursement.
Validus' Response
Validus agreed that contract terms between the Foundation and the Council did
not provide for program refinement. It stated that the Foundation and the Council
agreed to begin program refinement work before the start of the next contract.
Although the parties did not officially execute a modification or addendum to the
contract, the parties understood that program refinement activities would be
performed and paid by the Foundation. Validus also stated that if program
refinement costs were not directly chargeable to the contract, the costs would
have been billable as an indirect cost. Thus, the costs were in conformance with
the parties' understanding and agreement and cannot be disallowed.
OIG's Comments
The contract terms did not provide for program refinement. The costs are outside
the scope of the contract and are, therefore, unallowable. The contracted fixed
rates for assessments included costs for salaries, training, certification,
verification, and building overhead. We have no assurance that the program
refinement costs are not included in the fixed rates.
Program refinement costs are not subject to treatment as an indirect cost. FAR
31.203(a) states that an indirect cost is any cost that is not directly identifiable
with a single, final cost objective. Since program refinement costs have been
identified to the OFAER contracts, they are not allowable as indirect costs.
Note 5:	The Foundation claimed unallowable outlays of $412,523 that were in excess of
the maximum amount allowed under two contracts. The unallowable outlays are
summarized as follows:
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Program
Marketing or
Promotion
Program
Trainina
Databas
e Mininq
Verification
or Oversiqht
Total
Questioned
Grant X82835301





ACWF-OFAER-01 -02





Maximum Amount
$ 160,000
$ 80,000
$ 50,000
$400,000

Billed
147,406
218,311
57,207
630,115

Amount Billed in Excess
of Maximum
0
138,311
7,207
230,115

ACWF-OFAER-01-03





Maximum Amount
160,000
85,000
55,000
555,000

Billed
177.902
103.988
10.476
384.855

Amount Billed in Excess
of Maximum
17.902
18.988
0
0

Total Amount Billed in
Excess of Maximum
17.902
15Z22S
7.207
220115
$412,523
Source: OIG's analysis of the recipient's claimed contractual outlays.
Validus' Response
Validus responded that the budgets were not meant to be firm ceilings that would
prohibit Validus from receiving payment for its incurred costs that exceed the
budget thresholds. Instead, the budget thresholds were set based on projected
performance requirements during the course of a particular contract, and were
adjusted as necessary when the performance requirements shifted and Validus
incurred costs greater than expected under one or several cost categories in the
contract. Whenever Validus realized its costs would exceed a budget threshold
for a particular cost category, it notified the Foundation and gained the
Foundation's acknowledgement that it would be acceptable to exceed the budget
threshold. Thus, costs in excess of the budget threshold were not indicative of
Validus' or the Foundation's failure to comply with the terms and conditions of
the contracts.
OIG's Comments
We disagree. Title 40 CFR 30.47 provides that the recipient is required to
maintain a system for contract administration to ensure contractor conformance
with the terms, conditions, and specification of the contract and to ensure
adequate and timely follow up of all purchases. Also, the agreements between
Validus and the Foundation provided that no modification of the agreements or
waiver of the terms and conditions will be binding upon either party unless in
writing and signed by both parties. Neither the Foundation nor Validus provided
any contract amendments that authorized Validus to exceed each cost category
ceiling.
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Appendix A
Scope and Methodology
We performed our examination 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 also followed the guidelines and
procedures established in the Office of Inspector General Project Management Handbook, dated
January 14, 2005. We conducted this examination to express an opinion on the incurred costs,
and determine whether the recipient complied with all applicable laws and regulations, as well as
any special requirements under the agreement. We conducted our field work from November 15,
2005, through May 18, 2006. Our audit was conducted at the Foundation's office in Washington
D.C., and Validus's office in Urbandale, Iowa. Our audit covered the periods June 1, 1998
through June 30, 2005.
In conducting our examination, we performed the following procedures:
•	We reviewed grant and project files to obtain background information on the Foundation
and the agreement.
•	We interviewed recipient personnel to understand the accounting system and the
applicable internal controls as they relate to the reported outlays.
•	We reviewed the most recent single audit reports to identify issues which may impact our
examination.
•	We reviewed costs incurred by a Foundation contractor, Validus Services, LLC.
We examined the incurred costs on a test basis to determine whether the costs were adequately
supported and eligible for reimbursement under the terms and conditions of the agreements and
Federal regulations and cost principles. The Foundation's internal controls were found to be
weak and financial records were unreliable. We did not rely on internal controls and based our
review on transactions testing only.
On September 29, 2006, we issued the draft report to the Foundation's attorney for comments.
On December 7, 2006, we received a response from the Foundation's attorney which also
included comments from Validus. The Foundation and Validus either disagreed or did not
respond to the reports findings. We did not receive the response, as requested, in an acceptable
electronic format to include in the report. A copy is available on request. We have summarized
the Foundation's pertinent comments after each finding in the report.
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Prior Audit Coverage
We issued two previous memos to the Office of Grants and Debarment on these grants. The first
memo was dated December 15, 2005 (Memo No. 2006-00003), and provided EPA with our
preliminary observations on potential accounting issues, control weaknesses and regulatory non-
compliance that we identified at the Foundation. The second memo was dated June 15, 2006
(Memo No. 2006-M-00011), and provided EPA with additional information in resolving the
Foundation's request to deviate from the applicable grant regulations related to procuring
Validus' contracts under two grants. Our initial field work at Validus indicated that fair and
reasonable contract prices were not obtained.
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Distribution
Office of the Administrator
Director, Grants Administration Division (Action Official)
Director, Office of Grants and Debarment
Audit Followup Coordinator, Office of Grants and Debarment
Assistant Administrator for Water
Assistant Administrator for Air and Radiation
Agency Followup Official (the CFO)
Agency Followup Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
General Counsel
Acting Inspector General
Appendix B
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