^£0SX
0\
•J % U.S. ENVIRONMENTAL PROTECTION AGENCY
\	/ OFFICE OF INSPECTOR GENERAL
\Z
Catalyst for Improving the Environment
Quick Reaction Report
Examination of Costs Claimed under
EPA Grant X96906001 Awarded to
Walker Lake Working Group,
Hawthorne, Nevada
Report No. 10-2-0054
January 6, 2010

-------
Report Contributors:
Eileen Collins
Michael Owen
Lela Wong
Abbreviations
CFR	Code of Federal Regulations
EPA	U.S. Environmental Protection Agency
FSR	Financial Status Report
OIG	Office of Inspector General

-------
&	U.S. Environmental Protection Agency	10-2-0054
i JUL, \ Office of Inspector General	January 6,2010
UJ
f
At a Glance
Catalyst for Improving the Environment
Why We Did This Examination
The U.S. Environmental
Protection Agency (EPA) Office
of Inspector General is
examining grants awarded to
nonprofit grantees. We selected
Walker Lake Working Group
(grantee) for examination.
Background
EPA Region 9 awarded grant
X96906001 on September 30,
2004. The grant provided
federal assistance of $842,100
for developing a conservation
plan for Walker Lake that will
sustain the native freshwater
ecosystem. The plan will be
based on scientific and social
studies of the basin to show
where water can be acquired or
saved. The grant specifies that
EPA will contribute 100 percent
of the approved allowable
project costs up to the awarded
amount.
Examination of Costs Ciaimed under EPA Grant
X96906001 Awarded to Walker Lake Working
Group, Hawthorne, Nevada
For further information,
contact our Office of
Congressional, Public Affairs and
Management at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.aov/oia/reports/2010/
20100106-10-2-0054.pdf
What We Found
The grantee did not meet financial management requirements specified by Title 40
Code of Federal Regulations Part 30 and Title 2 Code of Federal Regulations
Part 30. In particular, the grantee claimed:
•	Contract costs that were not allowable because analysis and administration
requirements were not met.
•	Travel and other direct costs that were not allowable because
documentation requirements or cost principles were not met.
The grantee's Financial Status Report was also not supported by accounting system
data.
Because of these issues, EPA should recover $384,678 in questioned costs under
the grant. These issues also indicate that the grantee may not have the capability to
manage the grant and future EPA awards.
What We Recommend
We recommend that the Regional Administrator, EPA Region 9, disallow and
recover $384,678 in questioned costs under the grant if the grantee is unable to
provide adequate documentation to meet the appropriate federal financial
management and procurement requirements.
We also recommend that the Region 9 Regional Administrator require the grantee
to improve its procurement process and internal controls, and establish procedures
to ensure that future Financial Status Reports are properly supported by accounting
system data. Further, the Region 9 Regional Administrator should establish special
conditions for the grant and future EPA awards to the grantee that require payment
to the grantee on a reimbursement basis and review and approval by the EPA
project officer of reimbursement requests, including all supporting documentation
for the claims prior to payment.

-------
^£DSX
\ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
X.
Vf.	f\N
PRO'*4'
I	WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
January 6, 2010
MEMORANDUM
SUBJECT: Examination of Costs Claimed under EPA Grant X96906001
Awarded to Walker Lake Working Group, Hawthorne, Nevada
Report No. 10-2-0054
FROM: Robert Adachi
Director of Forensic Audits
TO:	Jared Blumenfeld
Regional Administrator
EPA Region 9
j
This report is on time-critical issues. These issues require immediate attention to protect
the government's interest since the grant is on-going and the grantee continues to make
draw downs of federal funds. This report represents the opinion of the Office of
Inspector General and does not necessarily represent the final position of the U.S.
Environmental Protection Agency (EPA). EPA managers will make final determinations
on matters in this 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 $ 82,312.
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 recipient. Your
proposed decision is due in 120 days, or on May 6, 2010. To expedite the resolution
process, please e-mail an electronic version of your proposed management decision to
adachi.robert@epa.gov.
We have no objections to the further release of this report to the public. This report will
be available at http://www.epa.gov/oig. If you have any questions, please contact me at
(415) 947-4537 or at the e-mail address above.

-------
Examination of Costs Claimed under EPA Grant X96906001
Awarded to Walker Lake Working Group, Hawthorne, Nevada
10-2-0054
Table of C
Introduction		1
Purpose		1
Background		1
Independent Attestation Report		2
Results of Examination		4
Contract Costs Did Not Meet Procurement Analysis and Administration
Requirements 		4
Travel and Other Direct Costs Did Not Meet Documentation Requirements
or Cost Principles		5
Financial Status Reports Are Not Supported by Accounting System Data		6
Conclusion 		7
Recommendations		7
Region 9 and Grantee Comments		8
OIG Response		8
Status of Recommendations and Potential Monetary Benefits		9
Appendix
A Distribution
10

-------
10-2-0054
Introduction
Purpose
The purpose of the examination was to determine whether the costs claimed by Walker
Lake Working Group (grantee) complied with grant requirements and applicable federal
laws and regulations. During our examination, we determined that the grantee did not
comply with federal procurement and cost documentation requirements. We believe
these issues require immediate attention in to protect the government's interest since the
grant is on-going and the grantee continues to make draw downs.
Background
The U.S. Environmental Protection Agency (EPA) Region 9 (Region) awarded grant
number X96906001 on September 30, 2004. The purpose of the grant was to provide
federal assistance for the grantee to develop a conservation plan for Walker Lake that will
sustain the native freshwater ecosystem. The plan will be based on scientific and social
studies of the basin to show where water can be acquired or saved. The grant was to fund
legal and technical experts on western water law, native wildlife, and desert terminal
lakes, who will help design the plan.
The total amount awarded under the grant is $842,100. The grant specifies that EPA will
contribute 100 percent of the approved allowable project costs up to the awarded amount.
The budget and project period for the grant is from October 1, 2004, to October 31, 2011.
The most recent Financial Status Report (FSR) submitted was for the period ended
September 30, 2008, with a cumulative amount claimed of $388,849.
1

-------
10-2-0054
Independent Attestation Report
As part of our continued oversight of grants awarded to nonprofit organizations by EPA,
we have examined the costs claimed by the grantee in its FSR covering the period
October 1, 2004, to September 30, 2008. By signing the award documents, the grantee
accepted responsibility for preparing its cost claim to comply with the requirements of
Title 40 Code of Federal Regulations (CFR) Part 30, Title 2 CFR Part 230, and the terms
and conditions of the grant. Our responsibility is to express an opinion on the grantee's
FSR 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 the attestation standards
established by the American Institute of Certified Public Accountants. We examined, on
a test basis, evidence supporting the amount claimed in the FSR and performed other
procedures we considered necessary under the circumstances. We believe that our
examination provides a reasonable basis for our opinion.
We conducted our audit between April 27, 2009, and October 14, 2009. We performed
the following steps during our audit:
•	Reviewed EPA Region 9 project and grant files.
•	Interviewed the EPA project officer to obtain an understanding of the project.
•	Reviewed grantee support for the cumulative amounts reported for the period
ended September 30, 2008, including the grantee's electronic accounting records
and supporting invoices, bank statements, cancelled checks, contracts, and
procurement documents.
•	Interviewed grantee personnel to obtain an understanding of the project, as well as
the grantee's processes for procurement, drawing down EPA grant funds, and
invoice payment.
•	Performed various fraud detection procedures, including interviewing EPA and
grantee personnel, reviewing drawdown patterns and board of directors' meeting
minutes, performing a duplicate payment test, and performing a missing check
review.
As part of obtaining reasonable assurance that the grantee's FSR is free of material
misstatement, we performed tests of its compliance with the requirements of Title 40
CFR Part 30, Title 2 CFR Part 230, and the terms and conditions of the grant. We also
considered the grantee's internal controls over cost reporting to determine our audit
procedures and to express our opinion on the FSR. Our consideration of internal
control would not necessarily disclose all internal control matters that might be
material weaknesses. A material weakness is a significant deficiency or combination
of significant deficiencies that results in more than a remote likelihood that a material
misstatement will not be prevented or detected. A significant deficiency is a
deficiency in internal control, or combination of control deficiencies, that adversely
affects the grantee's ability to initiate, authorize, record, process, or report data
2

-------
10-2-0054
reliably, in accordance with the applicable criteria or framework, such that there is
more than a remote likelihood that a misstatement of the subject matter that is more
than inconsequential will not be prevented or detected.
Our examination disclosed the following noncompliance and material weaknesses
concerning financial management requirements specified by Title 40 CFR Part 30 and
Title 2 CFR Part 230:
•	The grantee did not comply with the cost analysis and contract administration
requirements of Title 40 CFR Part 30. See discussion on page 4 of this report.
•	The grantee did not have adequate controls to ensure that travel and other direct
costs claimed met documentation requirements and cost principles specified by
Title 2 CFR Part 230. See discussion on page 5 of this report.
•	The grantee's FSR was not supported by accounting system data. See discussion
on page 6 of this report.
As a result of these issues, we questioned $384,678 of the $388,849 claimed under the
grant.
In our opinion, because of the effect of the issues described above, the FSR does not
meet, in all material respects, the requirements of Title 40 CFR Part 30, Title 2 CFR Part
230, and the terms and conditions of the grant for the period ended September 30, 2008.
Robert K. Adachi
Director of Forensic Audits
October 14, 2009
3

-------
10-2-0054
Results of Examination
The grantee did not meet financial management requirements specified by Title 40 CFR
Part 30 and Title 2 CFR Part 230. In particular, the grantee claimed:
•	Contract costs that were not allowable because procurement analysis and
administration requirements were not met.
•	Travel and other direct costs that were not allowable because documentation
requirements or cost principles were not met.
The grantee's FSR was also not supported by accounting system data. As a result of
these issues, EPA should recover $384,678 in questioned costs under the grant. These
issues also indicate that the grantee may not have the capability to manage the grant and
future EPA awards. The questioned costs are summarized in Table 1:
Table 1: Summary of Questioned Costs

Amount
Claimed
Amount
Questioned
Cost Category

Contract Costs1
$367,415
$364,750
Travel and Other Direct Costs^
21,434
19,928
Totals
$388,849
$384,678
See discussion under Contract Costs Did Not Meet Analysis and
Administration Requirements.
2 See discussion under Travel and Other Direct Costs Did Not Meet
Documentation Requirements or Cost Principles.
Sources: Amounts claimed were from accounting system data the
grantee provided in supporting the FSR amount. Costs questioned
were based on OIG's analysis of the data.
Contract Costs Did Not Meet Procurement Analysis and
Administration Requirements
The grantee claimed contract costs of $367,415 that were not allowable because
procurement analysis and administration requirements were not met. According to Title
40 CFR Part 30.45, some form of cost or price analysis shall be made and documented in
the procurement files in connection with every procurement action. The grantee claimed
$367,415 under the grant for legal and other consulting services that were procured
through sole source contracts without conducting the required cost or price analyses.
Without the cost or price analyses, the grantee was unable to demonstrate that the
contract prices and hourly rates charged by the consultants are fair and reasonable.
The grantee also has not established a contract administration system in accordance with
Title 40 CFR Part 30.47. During the examination, the grantee was unable to provide
copies of the contracts for one of the legal consultants and its subcontractor. Title 40
CFR Part 30.47 requires a system for contract administration that ensures contractor
4

-------
10-2-0054
conformance with the terms, conditions, and specifications of the contract, and adequate
and timely follow-up of all purchases. Without formal written contracts on file, the
grantee was unable to demonstrate whether the legal consultant's and subcontractor's
costs claimed under the grant were fair and reasonable and conformed to the scopes of
work, terms, and conditions of the contracts. Because of the analysis and the contract
administration issues, we questioned all contract costs claimed.
In response to our discussion draft issued on October 14, 2009, the grantee provided price
information showing that $2,665 of costs of claimed for one of the contracts was fair and
reasonable. To address the questioned costs for the other contracts, the grantee
conducted surveys of legal firms and other sources and obtained general price
information for their services. However, the survey information the grantee provided to
us was not supported by cost or price documentation, nor did it show that prices were for
services comparable to the work required under the grant. Therefore, the surveys did not
meet the cost analysis requirements specified by Title 40 CFR Part 30.
The grantee also obtained and provided copies of the contracts for the legal consultant
and its subcontractor that were not available for our review during our field work. This
contract information should help the grantee ensure that contract terms and conditions are
met in the future.
Because the grantee provided information showing that $2,665 of costs claimed for one
of the contracts were fair and reasonable, we reduced the questioned costs accordingly.
Total contract costs questioned were reduced from the $367,415 originally questioned in
the discussion draft to $364,750.
Travel and Other Direct Costs Did Not Meet Documentation
Requirements or Cost Principles
The grantee claimed $19,928 in travel and other direct costs that were not allowable
because documentation requirements or cost principles specified by Title 2 CFR Part 230
were not met. The claimed costs included $18,265 that did not meet documentation
requirements and $1,663 that did not meet federal cost principles. Title 2 CFR Part 230,
Appendix A specifies that costs need to be allocable and adequately documented to be
allowable under the grant. Title 2 CFR Part 230, Appendices A and B provide the
principles for determining the allowability of costs.
The grantee claimed travel and other direct costs of $18,265 without vouchers, purchase
orders, or other documentation showing the purpose and approval of the costs. In
preparation for the examination, the grantee's bookkeeper subsequently prepared
vouchers detailing these costs based on available receipts. However, these vouchers were
signed by neither the personnel that incurred the costs nor the approving official.
According to Title 2 CFR Part 230, Appendix A, costs need to be allocable and
adequately documented to be allowable under the grant. The grantee's internal policy,
approved by the board of directors on July 20, 2005, also requires that all travel expenses
relevant to the project be submitted on a travel voucher to the treasurer. Because the
5

-------
10-2-0054
documentation prepared for the examination did not show that the costs were approved or
met requirements of the grantee's policy, we could not determine whether the costs were
authorized and allocable to the grant. As a result, we questioned the $18,265 as not
allowable.
The grantee also claimed $1,663 in costs that were not allowable under the cost principles
established by Title 2 CFR Part 230, Appendices A and B. The unallowable costs
consisted of the following:
•	$1,080 in costs that were miscoded as EPA project costs. The grantee confirmed
that the costs were not allocable to the grant. As discussed previously, Title 2
CFR Part 230, Appendix A, specifies that costs must be allocable to the award in
order to be allowable.
•	$300 incurred for Native American dancing entertainment at an educational event
hosted by the grantee. Title 2 CFR 230 Appendix B, Paragraph 14, specifies that
costs of entertainment, including amusement, diversion, and social activities, are
unallowable.
•	$283 incurred for a television purchased as a raffle prize for an educational event
hosted by the grantee. According to 2 CFR Part 230, Appendix B, Paragraph
l.f(3), costs of promotional items and memorabilia, including models, gifts, and
souvenirs, are unallowable
In response to the discussion draft, the grantee provided vouchers that were retroactively
signed by the individuals that incurred the costs. However, these revised vouchers were
not signed by the approving official. Therefore, we continue to question the costs until
these expenditures have been formally approved by the appropriate official.
Financial Status Reports Are Not Supported by Accounting
System Data
The grantee's FSR was not supported by accounting system data, as required under Title
40 CFR Part 30. The grantee claimed total outlays of $460,297 for the period ended
September 30, 2008, in its January 2009 FSR. However, the grantee was only able to
provide accounting records for $388,849 of incurred costs under the grant. Therefore, the
total outlays reported in the FSR were overstated by $71,448, based on the supporting
accounting system data. According to the grant coordinator, the FSR was prepared based
on copies of contractor invoices she received and travel and miscellaneous expense totals
provided by the bookkeeper. The grant coordinator explained that the discrepancy
between the FSR and accounting records may have been caused by a delay in recording
some costs in the accounting system that were included in the FSR. However, since the
grant coordinator did not maintain the supporting data and calculations for the FSR, the
grantee was unable to reconcile the difference between the outlays reported in the FSR
and the accounting records.
6

-------
10-2-0054
Under Title 40 CFR Part 30.21(b)(1), the grantee must make accurate, current, and
complete disclosure of the financial results of financially assisted activities in accordance
with the financial reporting requirements of the grant. Title 40 CFR 30.21(b)(2) requires
that grantees maintain records that adequately identify the source and application of funds
provided for financially assisted activities. Therefore, the grantee should improve its
FSR preparation process to ensure these federal reporting and financial management
requirements are met.
This issue was discussed with the grantee during our site visit. The grantee submitted a
revised FSR to the EPA on April 28, 2009, to reflect the $388,849 recorded in the
accounting system for the period ended September 30, 2008.
Conclusion
Based on the findings above, the grantee does not meet the minimum requirements for a
financial management system. The findings also indicate that the grantee may not have
the capability to manage the grant and future EPA awards. Therefore, EPA should have
special conditions imposed on the current grant and all future awards of EPA funds as
outlined in Title 40 CFR Part 30.14. Title 40 CFR Part 30.14, Special Award Conditions,
states:
... if an applicant or recipient has a history ofpoor performance; is not
financially stable; has a management system that does not meet the
standards prescribed in Circular A—l 10; has not conformed to the terms
and conditions of a previous award; or is not otherwise responsible, EPA
may impose additional requirements as needed, provided that such
applicant or recipient is notified in writing as to: the nature of the
additional requirements, the reason why the additional requirements are
being imposed, the nature of the corrective action needed, the time
allowedfor completing the corrective actions, and the methodfor
requesting reconsideration of the additional requirements imposed.
The special conditions should include (1) payment on a reimbursement basis, and
(2) EPA review and approval of reimbursement requests prior to payment.
Recommendations
We recommend that the Regional Administrator, EPA Region 9:
1. Disallow and recover $384,678 in questioned costs under the grant. If the grantee
provides adequate documentation to meet the appropriate federal financial
management requirements or demonstrates that the contract costs are fair and
reasonable, the amounts to be recovered should be adjusted accordingly.
7

-------
10-2-0054
2.	Require the grantee to:
a)	Improve its procurement process to ensure compliance with Title 40 CFR
Part 30.
b)	Improve its internal controls to ensure that costs claimed meet
documentation requirements and cost principles specified by Title 2 CFR
Part 230.
c)	Establish procedures to ensure that future FSRs are supported by
accounting system data.
3.	Require that the following special conditions be included for the grant and future
EPA awards to the grantee until the Region determines that the grantee has met all
applicable federal financial and procurement requirements:
a)	Payment on a reimbursement basis.
b)	Review and approval by the EPA project officer of reimbursement
requests including all supporting documentation for the claims prior to
payment.
Region 9 and Grantee Comments
We issued a discussion draft to Region 9 and the grantee on October 14, 2009, to verify
the factual accuracy of our information. We held exit conferences with Region 9 and the
grantee on October 28, 2009, to obtain verbal comments on the discussion draft.
The Region did not have any comment on the findings and recommendations during the
exit conference.
Prior to the exit conference, the grantee provided additional documentation as support for
the questioned costs identified in the discussion draft and stated that more documentation
is forthcoming. The grantee stated during the exit conference that it is capable of
maintaining the grant to meet federal financial management requirements. The grantee
also said that it has already made improvements to ensure procurement policies are
followed, purchase records meet federal financial management requirements, and all
future FSR filings are prepared from current accounting records. According to the
grantee, the improvements include the coordination between its grants administrator and
treasurer or accountant to ensure that all future FSRs are based on the current accounting
records.
OIG Response
Our position on the findings and recommendations remains unchanged. We made minor
changes to the report as appropriate based on the additional documentation provided by
the grantee in response to the discussion draft. However, the grantee has not
demonstrated that it has implemented corrective actions that will ensure that the financial
management requirements specified by Title 40 CFR Part 30 and Title 2 CFR Part 230
will be met in the future.
8

-------
10-2-0054
Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject	Status1
Disallow and recover $384,678 in questioned costs U
under the grant. If the grantee provides adequate
documentation to meet the appropriate federal
financial management requirements or
demonstrates that the contract costs are fair and
reasonable, the amounts to be recovered should
be adjusted accordingly.
Require the grantee to:	U
(a)	Improve its procurement process to ensure
compliance with Title 40 CFR Part 30.
(b)	Improve its internal controls to ensure that
costs claimed meet documentation
requirements and cost principles specified
by Title 2 CFR Part 230.
(c)	Establish procedures to ensure that future
FSRs are supported by accounting system
data.
Require that the following special conditions be	U
included for the grant and future EPA awards to the
grantee until the Region determines that the
grantee has met all applicable federal financial and
procurement requirements:
(a)	Payment on a reimbursement basis.
(b)	Review and approval by the EPA project
officer of reimbursement requests including
all supporting documentation for the claims
prior to payment.
Action Official
Regional Administrator,
Region 9
Planned
Completion
Date
Claimed
Amount
$385
Agreed To
Amount
Regional Administrator,
Region 9
Regional Administrator,
Region 9
1 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
9

-------
10-2-0054
Appendix A
Distribution
Regional Administrator, Region 9
Director, Office of Wastewater Management, Office of Water
Director, Office of Wastewater Management - Municipal Services Division,
Office of Water
Director, Office of Grants and Debarment
Director, Grants and Interagency Agreements Management Division
Agency Follow-up Official (the CFO)
Agency Follow-up Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Region 9 Audit Follow-up Coordinator
Region 9 Public Affairs Office
Chairman, Walker Lake Working Group
Acting Inspector General
10

-------