**Control Number ED-OIG/A05-C0011**

Mr. Wayne Godwin

Executive Vice President & Chief Operating Officer

Public Broadcasting Service

1320 Braddock Place

Alexandria, VA 22314

Dear Mr. Godwin:

This **Final Audit Report** presents the results of our audit of the
Public Broadcasting Service\'s (PBS) administration of the TeacherLine
Grant No. R286A000003-01 (Grant) awarded under the Telecommunications
Demonstration Project for Mathematics for the period June 1, 2000,
through May 31, 2001. Our objective was to determine whether costs
charged to the Grant were allowable, reasonable, and allocable in
accordance with the Elementary and Secondary Education Act of 1965
(ESEA)**,** as amended, Grant terms, Education Department General
Administration Regulations (EDGAR)**,** and the cost principles in
Office of Management and Budget (OMB) Circular A-122.

We provided a draft of this report to PBS. In its response dated August
9, 2002, PBS agreed with the findings and recommendations, except that
it disagreed with unsupported (1) legal fees of \$3,255 and related
indirect costs of \$260; (2) indirect costs of \$52,815 because PBS did
not have an approved indirect cost rate; and (3) rent and utilities
costs of \$41,735 that were allocated based on 10.85 percent of
salaries. In August 13 and 15, 2002, amendments to its response, PBS
stated that it found additional documentation so it disagreed with a
portion of the unsupported salaries, fringe benefits, business meals,
and related indirect costs. After reviewing PBS\'s response, we agreed
to reclassify the legal fees of \$3,255 and a portion of salaries and
fringe benefits as costs recommended for acceptance. We also concluded
that PBS\'s response did not provide sufficient support to cause us to
reclassify business meals, indirect costs and rent and utilities costs
as recommended for acceptance. We have summarized PBS\'s comments after
each finding, and have included the response transmittal letters as
Attachments 2, 3, and 4.

# AUDIT RESULTS

PBS generally complied with the ESEA, Grant terms, EDGAR, and the cost
principles in OMB Circular A-122 in administering the Grant. However, as
discussed in the findings, PBS charged the Grant for unallowable costs
(\$1,974) or for costs which it did not adequately support
(\$147,456)**,** and did not have adequate written policies and
procedures for administering the Grant.

**Finding No. 1 PBS Charged Costs to the Grant that are Unallowable or
Unsupported**

PBS charged costs to the Grant that are unallowable (\$1,974) or
unsupported (\$147,456). The unallowable amount consists of charges for
alcoholic beverages (\$48)**,** gifts (\$676)**,** related indirect
costs (\$58)**,** and missing equipment (\$1,192)**.** The unsupported
amount consists of charges for personnel (\$31,933)**,** fringe benefits
(\$8,868)**,** meals (\$7,448)**,** indirect costs (\$57,472)**,** and
rent and utilities (\$41,735) for which it did not provide adequate
documentation to support that the costs were reasonable, allowable, or
allocable.

OMB Circular A-122, Cost *Principles for Non-Profit Organizations,
Attachment A, General Principles, Paragraph A, Subparagraphs A.2.a and
A.2.g.* (1998) provide that

To be allowable under an award, costs must...Be reasonable for the
performance of the award and be allocable thereto...Be adequately
documented.

Details are discussed in Attachment 1.

**Recommendations**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

1.1 Refund to the Department of Education unallowable costs of \$1,974;
and

1.2 Provide sufficient documentation to support \$147,456 or refund that
amount to the Department of Education.

**Auditee Comments**

PBS concurred with the questioned costs discussed in the draft report.
It did not concur with unsupported legal fees (\$3,255), salaries
(\$10,914), fringe benefits (\$3,031), business meals (\$2,268), and
related indirect costs (\$1,557). PBS believed the legal fees were
allowable based on documents it provided that showed it attempted to
recruit in this country and was unsuccessful. In addition, PBS provided
documents it believed supported the salaries and business meals
discussed above. Therefore, PBS supported the related fringe benefits
and indirect costs. Also, PBS stated that because it had submitted an
indirect cost proposal to the Department of Education that proposed an
indirect cost rate of 12.35 percent, it disagreed that indirect costs
claimed at 8 percent should be classified as unsupported. Finally, PBS
stated that it disagreed that rent and utility costs of \$41,735 may not
necessarily be representative of the space and utilities by an employee.
Its methodology of allocating those costs based on salaries was
consistent with the corporate methodology used at the time. Since then,
PBS has changed its methodology to be based on headcount versus salaries
charged. It provided an analysis for the fiscal year 2003 budget period
that showed allocating rent and utilities based on headcount is
materially consistent with allocating them based on square footage.

**Auditor Response**

We reviewed the documentation PBS provided related to the legal fees.
Based on those documents, we reclassified the legal fees as recommended
for acceptance. In addition, after reviewing the documents PBS provided
in the amendments to its response, we reclassified salaries (\$5,250)
and fringe benefits (\$1,458) as recommended for acceptance. We have not
changed our conclusion regarding business meals because the additional
documents PBS provided still did not adequately support the charges. We
have not changed our conclusion regarding indirect costs. Until the
Department of Education negotiates a final rate with PBS, we have no
basis for agreeing with PBS\'s assertion that its proposed 12.35 percent
rate will result in a negotiated rate greater than the 8 percent rate it
used. We also have not changed our conclusion regarding rent and
utilities costs. Although we agree that a headcount allocation is
materially consistent with a square footage allocation, PBS did not use
either of these methods to allocate rent and utilities costs. Instead
PBS allocated them based on salaries. In its response, PBS did not
provide any documentation to support that a salary allocation is
materially consistent with a headcount or square footage allocation.

**Finding No. 2 PBS Needs to Establish and Implement Written Policies
and Procedures that Comply with the Standards for Financial Management
Systems**

PBS does not have written policies and procedures for financial
management.

The standards for financial management systems are contained in 34
C.F.R. § 74.21. The standards specify various requirements of a
financial management system that recipients must provide that include---

**●** Effective control over and accountability for all funds, property,
and other assets. Recipients shall adequately safeguard all assets and
assure they are used solely for authorized purposes. 34 C.F.R. §
74.21(b)(3) (2000).

**●** Written procedures for determining the reasonableness,
allocability, and allowability of costs in accordance with the
provisions of the applicable Federal cost principles and the terms and
conditions of the award. 34 C.F.R. § 74.21(b)(6) (2000).

**●** Accounting records including cost accounting records that are
supported by source documentation. 34 C.F.R. § 74.21(b)(7) (2000).

Because PBS did not have written policies and procedures that complied
with the standards for financial management, PBS incurred costs that
were unallowable. Also, PBS did not always have source documents to
support that costs incurred were reasonable, allocable, and allowable
(see Attachment 1).

**Recommendation**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

2.1 Develop and implement written policies and procedures that comply
with the standards for financial management.

**Auditee Comments/Auditor Response**

PBS stated that, effective April 1, 2002, it developed written policies
and procedures for financial management. PBS provided training to the
staff on those policies and procedures on April 5, 2002. It appears that
the policies and procedures comply with the standards for financial
management.

### Finding No. 3 PBS Needs to Establish and Implement Written Policies and Procedures that Comply with Federal Property Management Standards

PBS did not have written policies and procedures to record, identify, or
inventory equipment purchased with federal funds. As a result, PBS did
not maintain an inventory that identified equipment purchased with
federal funds, physically mark the equipment to identify it as
government property, or perform physical inventories of equipment.

Property management standards for equipment acquired with federal funds
are set forth in 34 C.F.R. § 74.34 (f) (2000). Requirements in the
property management standards include---

● Equipment records shall be maintained accurately.... 34 C.F.R. §
74.34(f)(1) (2000).

● Equipment owned by the Federal Government must be identified to
indicate Federal ownership. 34 C.F.R. § 74.34 (f)(2) (2000).

● A physical inventory of equipment must be taken and the results
reconciled with the equipment records at least once every two years. Any
differences between quantities determined by the physical inspection and
those shown in the accounting records must be investigated to determine
the causes of the difference. The recipient shall, in connection with
the inventory, verify the existence, current utilization, and continued
need for the equipment. 34 C.F.R. § 74.34 (f)(3) (2000).

As indicated in the Attachment, PBS could not locate a digital camera
and accessories purchased with federal funds. During our on-site field
work, PBS's Controller told us PBS was in the process of developing and
implementing new equipment inventory procedures.

# Recommendation

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

3.1 Develop and implement written policies and procedures that comply
with the federal property management standards.

**Auditee Comments/Auditor Response**

PBS stated that, effective April 1, 2002, it developed written policies
and procedures for property management. It provided training to the
staff on those policies and procedures on April 5, 2002. It appears that
the policies and procedures comply with the standards for property
management.

**Finding No. 4 PBS Needs to Revise Its Travel Policy**

PBS\'s travel policy does not address at least one requirement contained
in the cost principles.

OMB Circular A-122, Cost *Principles for Non-Profit Organizations,*
*Attachment B,* *Selected Items of Cost,* *Paragraph 2* (1998) provides
that---

Costs of alcoholic beverages are unallowable.

PBS employees purchased alcoholic beverages, and PBS charged the costs
to the Grant as travel expenses. We recognize that the unallowable costs
we specifically identified were not significant. However, without a
written policy statement notifying employees that costs of alcoholic
beverages are not allowable, it is likely that they will continue to
claim and be reimbursed for such costs. As a result, federal funds
intended for activities that benefit the Grant will, instead, be used
for unallowable activities.

**Recommendation**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

4.1 Revise its travel policy to ensure that it includes all applicable
cost principles.

**Auditee Comments/Auditor Response**

PBS stated that it revised its travel policy to ensure that it includes
all applicable cost principles, including the prohibition of alcoholic
beverages. It appears the revised policy is adequate.

**OTHER MATTERS**

Our review of 20 procurements valued over \$25,000 each disclosed that
PBS did not obtain competitive bids for 14 procurements. In addition,
PBS named four other vendors in its Grant proposal for which it did not
obtain competitive bids. According to 34 C.F.R.

§ 74.43, \"All procurement transactions shall be conducted in a manner
to provide, to the maximum extent practical, open and free
competition.\" While we did not determine if PBS paid more for the
procurements because it did not competitively bid them, a lack of
competitive bidding can result in less than optimum price, quality, or
other factors. Subsequent to our on-site field work, PBS developed a
policy for its federal programs that requires competitive bids on all
procurements over \$25,000.

# BACKGROUND

PBS, headquartered in Alexandria, Virginia, is a private, non-profit
media enterprise incorporated in 1969 that is owned and operated by the
nation\'s 348 public television stations. PBS uses noncommercial
television, the Internet, and other media to provide programs and
education services to nearly 100 million people each week.

The Telecommunications Demonstration Project for Mathematics is designed
to help elementary and secondary school teachers, on a nationwide basis,
prepare all students to achieve state content standards. The Department
of Education awarded PBS a five-year \$39 million grant under this
program. The PBS Grant, called TeacherLine, was for the period June 1,
2000, through May 31, 2005. The purpose of TeacherLine was to link PBS,
the National Council of Teachers of Mathematics, individual school
districts in 16 states, local public television stations, state
departments of education, 5 colleges of education, the International
Society for Technology in Education, and the Corporation for Public
Broadcasting to create and deliver a comprehensive suite of digital
professional development opportunities that could lead all teachers in
meeting professional and state standards for mathematics education. For
the June 1, 2000, through May 31, 2001, budget period, the Department of
Education authorized funding of \$7,462,331. PBS used about one-half the
funding, charging \$3,133,324 to the Grant.

The Grant is authorized by the ESEA, as amended by the Improving
America's Schools Act of 1994. It is subject to the provisions contained
in 34 C.F.R. Part 74, Administration *of Grants and Agreements with
Institutions of Higher Education,* *Hospitals,* *and Other Non-Profit
Organizations* and OMB Circular A-122, Cost *Principles for Non-Profit
Organizations*.

# OBJECTIVE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine if costs charged to the
Grant during the period June 1, 2000, through May 31, 2001, were
allowable, reasonable, and allocable in accordance with the ESEA, Grant
terms, EDGAR, and the cost principles in OMB Circular A-122, effective
June 1, 1998. Although we tested all cost categories, our testing
emphasized (1) procurements, (2) travel, (3) advertising and promotional
materials, (4) training seminars, and (5) equipment.

To accomplish our objective, we---

1\. Reviewed the OMB Circular A-133 audit reports for the years ended
June 30, 1999-2001, prepared by an independent public accountant, and
the related working papers for the audit of the year ended June 30,
2001, and reviewed working papers prepared by PBS\'s internal auditor
related to various issues, including procurements, cash disbursements,
and payroll.

2\. Reviewed PBS\'s March 10, 2000, application and annual Grant report
for the year ended May 31, 2001.

3\. Reviewed written policies, procedures, and organization charts.

4\. Reviewed procurements over \$25,000 and the related bid files.

5\. Reviewed various records and documents, including accounting and
payroll records, purchase orders, invoices, and other supporting
documents for 142 financial transactions consisting of an initial sample
of 38 randomly[^1] and 15 judgmentally selected transactions from a
universe of 747 transactions, and 89 transactions subsequently selected
on a judgmental basis. The transactions subsequently selected consisted
of all revenue (9), procurements (20), advertising (14), employee bonus
(3), and employee relocation (1); and selected airline tickets (valued
in excess of \$1,000 each) (9), business meals (26), and legal fees (7).

6\. Performed a physical inventory of all equipment purchased with Grant
funds.

7\. Interviewed various PBS employees, Department of Education
personnel, and independent public accountant personnel.

To achieve our audit objectives, we relied, in part, on
computer-processed data related to the TeacherLine Grant contained in
PBS\'s accounting system. We assessed the reliability of these data,
including the relevant general and application controls, and found them
to be adequate. We verified the completeness of the data by comparing
source records to computer generated data, verified the authenticity by
comparing computer generated data to source records, and verified the
accuracy by manually duplicating selected computer processes. Based on
these tests and assessments, we concluded that the data were
sufficiently reliable to be used in meeting the audit's objective.

We conducted our fieldwork at PBS's administrative office in Alexandria,
Virginia, from February 4, 2002, through April 4, 2002. We discussed the
results of our audit with PBS officials on April 4, 2002.

Our audit was performed in accordance with government auditing standards
appropriate to the scope of audit described above.

# STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we did not assess the adequacy of PBS\'s
management control structure applicable to the Grant. Instead, we (1)
gained an understanding of controls, policies, procedures, and practices
related to travel, equipment, legal, procurements,

advertising and promotional materials, training, salaries and fringe
benefits expenses, cost allocations, and equipment, and (2) relied on
substantive testing of costs charged to the Grant. Our testing disclosed
instances of non-compliance with federal regulations and cost principles
that led us to believe weaknesses existed in PBS's controls over the
Grant. These weaknesses and their effects are discussed in the AUDIT
RESULTS section of this report.

**ADMINISTRATIVE MATTERS**

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report represent the opinions of
the Office of Inspector General. Determinations of corrective action to
be taken will be made by the appropriate Department of Education
officials.

If you have any additional comments or information that you believe may
have a bearing on the resolution of this audit, you should send them
directly to the following Education Department official, who will
consider them before taking final Departmental action on the audit.

Grover J. Whitehurst, Assistant Secretary

Office of Educational Research and Improvement

U.S. Department of Education

> Capitol Place, Room 600D

555 New Jersey Avenue, N.W.

Washington, D.C. 20208

Office of Management and Budget Circular A-50 directs Federal agencies
to expedite the resolution of audits by initiating timely action on the
findings and recommendations contained therein. Therefore, receipt of
your comments within 30 days would be greatly appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552),
reports issued by the Office of Inspector General are available, if
requested, to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

Sincerely,

Richard J. Dowd

Regional Inspector General

for Audit

Attachments

  ------------------- ---------------------- ------------------ ------- ---------------------- ------- ----------------------
  **SCHEDULE OF COSTS                                                                                  
  RECOMMENDED FOR                                                                                      
  ACCEPTANCE, COSTS                                                                                    
  QUESTIONED, AND                                                                                      
  COSTS THAT ARE                                                                                       
  UNSUPPORTED**                                                                                        

  **Cost Category**   **Costs Recommended    **Costs                    **Costs Unsupported**          **Total Costs Charged
                      For Acceptance**       Questioned**                                              to Grant**

  Personnel           \$362,547              \$0                        \$31,933               \(1\)   \$394,480

  Fringe Benefits     98,707                 0                          8,868                  \(2\)   107,575

  Travel              85,134                 48                 \(3\)   7,448                  \(4\)   92,630

  Supplies/Services   74,507                 0                          0                              74,507

  Promotions          23,083                 676                \(5\)   0                              23,759

  Equipment Repair    3,000                  0                          0                              3,000

  Software            3,828                  0                          0                              3,828
  Acquisition                                                                                          

  Training Seminars   [19,328]{.underline}   [0]{.underline}            [0]{.underline}                [19,328]{.underline}

  Sub-Totals          \$670,627              \$724                      \$48,249                       \$719,107

  Indirect Costs      [0]{.underline}        [58]{.underline}   \(6\)   [57,472]{.underline}   \(7\)   [57,530]{.underline}

  Sub-Totals          \$670,627              \$782                      \$105,721                      \$776,637

  Contractual         2,090,647              0                          0                              2,090,647

  Equipment           223,113                1,192              \(8\)   0                              224,305

  Rent & Utilities    [0]{.underline}        [0]{.underline}            [41,735]{.underline}   \(9\)   [41,735]{.underline}

  Totals              \$2,984,387            \$1,974                    \$147,456                      \$3,133,324
  ------------------- ---------------------- ------------------ ------- ---------------------- ------- ----------------------

\(1\) Represents the amount of salaries PBS charged to the Grant for
which it did not provide after the fact determinations to support the
charges. *OMB Circular A-122, Attachment B, Paragraph 7, Subparagraph m.
(2)* (1998) states, "Reports reflecting the distribution of activity of
each employee must be maintained for all staff members (professionals
and nonprofessionals) whose compensation is charged, in whole or in
part, directly to awards. ...Reports maintained by non-profit
organizations to satisfy these requirements must\...(a) ...reflect an
*after-the-fact* determination of the actual activity of each employee."
According to *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraph 2.g*. (1998), to be allowable, costs must be adequately
documented.

\(2\) Represents the fringe benefits related to the unsupported
salaries. *OMB Circular A-122, Attachment B, Paragraph 7, Subparagraph
f.(2)* (1998) states, "Fringe benefits\...shall be distributed to
particular awards...in a manner consistent with the pattern of benefits
accruing to the individuals or group of employees whose salaries and
wages are chargeable...." Because the salaries are unsupported, the
related fringe benefits are unsupported.

\(3\) Represents charges for alcoholic beverages. *OMB Circular A-122,
Attachment B, Paragraph 2* (1998) states, "Costs of alcoholic beverages
are unallowable."

\(4\) Represents costs of meals. PBS claimed the meals were served as
part of business meetings. Meals as part of meetings and conferences are
allowable under *OMB Circular A-122,* *Attachment B,* *Paragraph 29,*
*Subparagraph a* (1998). However, PBS did not provide support that
business meetings were held, and business was conducted, when the meals
were provided. According to *OMB Circular A-122, Attachment A, Paragraph
A, Subparagraph 2.g*. (1998), to be allowable, costs must be adequately
documented.

\(5\) Represents gifts provided to people who participated in Community
Center chats and panel discussions. *OMB Circular A-122, Attachment B,
Paragraph 1, Subparagraph f. (3)* (1998) states, "Unallowable...public
relations costs include\...Costs of...gifts."

\(6\) Represents indirect costs related to questioned travel and other
costs. We used the eight percent rate PBS used in lieu of an approved
rate to calculate the unallowable amount.

\(7\) Includes \$3,860 of indirect costs related to unsupported
personnel, fringe benefits, and travel costs. The remaining \$53,607 is
unsupported because PBS did not have an approved indirect cost rate.
*OMB Circular A-122, Attachment A, Paragraph E, Subparagraph 1.f.*
(1998), defines an indirect cost proposal as,\"...the documentation
prepared by an organization to substantiate its claim for the
reimbursement of indirect costs....\" According to *OMB Circular A-122,
Attachment A, Paragraph E, Subparagraph 2.b*. (1998), "A nonprofit
organization which has not previously established an indirect cost rate
with a Federal agency shall submit its initial indirect cost proposal
immediately after the organization is advised that an award will be made
and, in no event, later than three months after the effective date of
the award." Department of Education officials told us PBS had submitted
an initial indirect cost proposal, then withdrew it and did not
re-submit another proposal.

\(8\) Represents the cost of a digital camera and accessories PBS could
not locate. According to *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraph 4.a.* (1998), \"A cost is allocable to a particular cost
objective, such as a grant...in accordance with the relative benefits
received....\" The Grant received no benefits from missing equipment.

\(9\) Represents rent and utility costs PBS allocated based on salaries.
According to *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraph 4.a.* (1998), "A cost is allocable to a particular cost
objective, such as a grant...in accordance with the relative benefits
received...." Salaries are not necessarily representative of the space
and utilities usage by an employee.

[^1]: Results of the random sampling may not be representative of the
    entire population.