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  Puerto Rico Department of Education's Administration of Title I
  Services Provided to Private School Students

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## FINAL AUDIT REPORT

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**ED-OIG/A04H0017**

**October 2008**

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NOTICE

> 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, including the recovery of funds, will
> be made by the appropriate Department of Education officials, in
> accordance with the General Education Provisions Act.
>
> In accordance with the Freedom of Information Act (5 U.S.C. § 552),
> reports issued by the Office of Inspector General are available to
> members of the press and general public to the extent information
> contained therein is not subject to exemptions in the Act.
>
> ![](media/image3.png){width="0.9in"
> height="0.8604166666666667in"}**UNITED STATES DEPARTMENT OF
> EDUCATION**

OFFICE OF INSPECTOR GENERAL

Audit Services

Region IV

October 9, 2008

**Control Number**

> **ED-OIG/A04H0017**

Honorable Rafael Aragunde-Torres

Secretary

Puerto Rico Department of Education

P.O. Box 190759

San Juan, Puerto Rico 00919-0759

Dear Secretary Aragunde-Torres:

Enclosed is our final audit report*,* Control Number ED-OIG/A04H0017,
entitled *Puerto Rico Department of Education's Administration of Title
I Services Provided to Private School Students*. This report
incorporates the comments you provided in response to the draft report.
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 this audit.

Kerri L. Briggs

Assistant Secretary

Office of Elementary and Secondary Education

U.S. Department of Education

400 Maryland Avenue, SW

Washington, D.C. 20202

It is the policy of the U. S. Department of Education 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 appreciated.

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

Sincerely,

> /s/
>
> Denise M. Wempe

Regional Inspector General for Audit

Enclosures

TABLE OF CONTENTS

####### 

####### Page

EXECUTIVE SUMMARY 1

BACKGROUND 3

AUDIT RESULTS 4

FINDING NO. 1 -- Inadequate Monitoring of Title I Contracts 4

FINDING NO. 2 -- Improper Allocation of Title I Funds for Parental
Involvement Activities for Parents of Participating Private School
Students 12

FINDING NO. 3 -- Unrecorded Title I Property and Equipment 14

FINDING NO. 4 -- Inconsistent Consultations with Private School
Officials Prior to Providing Title I Services 17

OBJECTIVE, SCOPE, AND METHODOLOGY 20

**ENCLOSURE 1** **Summary of Costs Billed by COSEY Under Administrative
Expenses Not Adequately Supported**

**ENCLOSURE 2** **Puerto Rico Department of Education\'s Response to
Draft Audit Report**

EXECUTIVE SUMMARY

The objective of the audit was to determine if the Puerto Rico
Department of Education (PRDE) administered Title I services provided to
private school students, their teachers, and their parents through
contracts awarded to NETS,[^1] Braxton,[^2] and COSEY,[^3] in compliance
with Title I requirements. Specifically, we determined if PRDE 1)
monitored the contractors for compliance; 2) ensured that the costs
claimed by the contractors were allowable and followed contract
requirements; 3) properly allocated Title I funds for services to
eligible private school students; 4) properly accounted for Title I
funds used to purchase property and equipment; and 5) consulted with
private school officials to determine the needs of eligible children and
the services to be provided.

We found that PRDE did not adequately administer Title I services
provided to private school students, their teachers, and their parents
through contracts awarded to NETS, Braxton, and COSEY during the
2006-2007 award year in compliance with Title I requirements.
Specifically, PRDE 1) did not properly monitor the contractors for
compliance before paying them \$17,998,543 and, as a result, paid at
least \$365,089 in costs that were not supported with adequate and
reliable documentation, \$16,800 in excessive charges, and \$892 in
unallowable costs; 2) allocated \$430,897 in Title I funds for services
to parents of participating private school students in excess of the
entitlement for parental involvement; 3) did not account for \$8,036 in
Title I property and equipment purchased by the contractors during the
2006-2007 award year; and 4) did not consistently consult with private
school officials prior to providing services.

We recommend that the Assistant Secretary for Elementary and Secondary
Education (OESE) require PRDE to---

-   Review the contractors' supporting documentation to ensure
    compliance with Title I requirements for payments made without
    proper contract monitoring, including the \$365,089 identified in
    Finding No. 1 as not supported with adequate and reliable
    documentation; and return to the U.S. Department of Education
    (Department) all unallowable costs paid;

-   Return to the Department the \$16,800 in excessive charges and \$892
    in unallowable costs paid;

-   Ensure that proper supporting documentation and reports submitted by
    contractors are reviewed prior to making payments to ascertain that
    the services reported were actually provided and funds were used in
    compliance with contract deliverables and Title I regulations; and
    develop adequate internal controls and assign the staff necessary to
    properly monitor the contractors;

-   Return to the Department the \$430,897 in Title I funds allocated
    for services to parents of participating private school students in
    excess of the entitlement for parental involvement activities for
    the 2006-2007 award year; re-calculate the amount of Title I funds
    that should have been properly allocated for all years back to 2001,
    and return to the Department the amount allocated for parental
    involvement for parents of participating private school students in
    excess of the entitlement during those years; and implement adequate
    internal controls and develop standard written procedures to ensure
    that future parental involvement allocations for parents of both
    public and private school students are made in compliance with Title
    I requirements;

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-   Implement adequate internal controls to ensure proper review,
    receipt, and recording of property and equipment purchased with
    Title I funds; and

-   Implement adequate internal controls and develop standard written
    procedures to ensure that the consultation process with private
    school officials is consistent and includes all the issues required
    by the Title I regulations prior to providing services.

In its response to the draft audit report, PRDE did not concur with our
findings and recommendations and requested that the findings be
reconsidered, revised, and that the recommendations for repayment be
withdrawn before the issuance of a final audit report. PRDE submitted
additional supporting documentation to account for \$202,103 of the
expenditures questioned in Finding No. 1 of the draft audit report.[^4]
Prior to responding to the draft, PRDE acknowledged that the additional
documentation in support of the \$202,103 was not available for our
review during the audit.

We considered PRDE's response and, based on our review of the additional
documentation, revised[^5] Finding No. 1 and Recommendations 1.1 and
1.2. However, the reduction to the unsupported payments did not
substantially change our finding or recommendations. PRDE lacked
adequate internal controls and the necessary staff to properly monitor
the contractors and did not properly review the contractors' supporting
documentation before paying them \$17,998,543. As a result, PRDE made
payments without ensuring that services were rendered and funds were
used in compliance with Title I requirements and contract deliverables.
PRDE did not provide any additional information that would warrant a
change to Finding No. 2; Finding No. 3; Finding No. 4, or any of their
related recommendations.

PRDE's comments and our responses to the comments are summarized at the
end of each finding. The full text of PRDE's response is included as
Enclosure 2. Copies of the attachments that were included with the
response are available upon request.

**BACKGROUND**

Section 1120 of Title I, Part A of the Elementary and Secondary
Education Act of 1965 (ESEA), as amended by the No Child Left Behind Act
of 2001, requires a participating Local Educational Agency (LEA) to
provide eligible children attending private elementary and secondary
schools, their teachers, and their parents with Title I services or
other benefits that are equitable to those provided to eligible public
school children, their teachers, and their parents. The Title I services
provided by the LEA for private school participants are designed to meet
their educational needs and supplement the educational services provided
by the private school. The Title I regulations allow the LEAs to
contract with third parties to provide the services.

During the 2006-2007 award year,[^6] PRDE awarded \$27,448,528 in
professional services contracts to NETS, Braxton, and COSEY to provide
Title I services to eligible private school children, their teachers,
and their parents throughout the ten school regions that comprised the
public school system of Puerto Rico − \$5,932,079 to NETS, \$13,693,725
to Braxton, and \$7,822,724 to COSEY. NETS was contracted to provide
services to students in 51 private schools from three school regions,
Braxton to students in 133 private schools from three other school
regions, and COSEY to students in 77 private schools from the remaining
four school regions.[^7]

According to the terms of the contracts, each contractor was required to
provide a Title I program to private school children in the three core
subjects -- English, Spanish, and mathematics, based on the educational
needs of the students selected to participate in the program. The
services contracted included, but were not limited to (1) determining
and coordinating the educational needs of the students by staff
certified to provide instruction; (2) providing instruction in reading
and language skills in the three core subjects; (3) providing
computer-assisted instruction; and (4) providing equitable participation
to parents and teachers of private school participants in parental
involvement and professional development activities.

AUDIT RESULTS

PRDE did not adequately administer Title I services provided to private
school students, their teachers, and their parents through contracts
awarded to NETS, Braxton, and COSEY during the 2006-2007 award year in
compliance with Title I requirements. Specifically, PRDE 1) did not
properly monitor the contractors for compliance before paying them
\$17,998,543 and, as a result, paid at least \$365,089 in costs that
were not supported with adequate and reliable documentation, \$16,800 in
excessive charges, and \$892 in unallowable costs; 2) allocated
\$430,897 in Title I funds for services to parents of participating
private school students in excess of the entitlement for parental
involvement activities; 3) did not account for \$8,036 in Title I
property and equipment purchased by the contractors during the 2006-2007
award year; and 4) did not consistently consult with private school
officials prior to providing services.

FINDING NO. 1 -- Inadequate Monitoring of Title I Contracts

PRDE lacked adequate internal controls and the necessary staff to
properly monitor the three contractors that provided Title I services to
private school students during the 2006-2007 award year. In addition,
PRDE did not properly review the contractors' supporting documentation
prior to making payments totaling \$17,998,543 − \$4,402,543 to NETS,
\$8,807,198 to Braxton, and \$4,788,802 to COSEY. As a result, PRDE paid
COSEY \$365,089 in costs that were not supported with adequate and
reliable documentation, \$16,800 in excessive charges, and \$892 in
unallowable costs.

According to 34 C.F.R. § 76.702, a State and a subgrantee shall use
fiscal control and fund accounting procedures that insure proper
disbursement of and accounting for Federal funds.[^8]

Pursuant to 34 CFR § 80.40, grantees must monitor grant and subgrant
activities to ensure compliance with applicable Federal requirements.

According to OMB Circular A-87, Attachment A, Paragraph C.1, to be
allowable under Federal awards, costs must be, among other things,
necessary and reasonable for proper and efficient performance and
administration of Federal awards, and adequately documented.[^9]

Under the terms of the contracts, the contractors were required to
submit monthly invoices accompanied with monthly and bi-monthly status
reports describing the tasks and activities they performed during the
contract period. PRDE did not provide evidence showing that it reviewed
the reports to ensure that the services were actually provided. In
addition, PRDE's monitoring activities did not include routine site
visits to the participating private schools and activities offered by
the contractors. PRDE's Monitoring Unit provided evidence of only two
monitoring visits made during the contract period -- one parental
involvement activity held by NETS and one by Braxton. Also, PRDE
provided evidence of only three meetings held with the contractors
during the contract period.[^10] In general, the issues discussed during
the three meetings held served as orientation and technical assistance
to the contractors mainly for the Title I services to be provided during
the 2007-2008 award year.

The contract terms did not require the contractors to submit to PRDE
specific source documentation supporting the costs claimed, such as
cancelled checks, paid bills, detailed payrolls, and time and attendance
records. However, they were required to maintain documentation that
showed how the contract funds were used. The contractors were also
required to bill PRDE under four expense categories − 1) Administrative,
2) Parental Involvement, 3) Professional Development, and 4)
Instructional Services. PRDE agreed to pay the contractors for the
allowable costs incurred, up to a maximum amount established per expense
category.

Since PRDE did not require the contractors to submit specific source
documentation with their invoices, in general, the supporting
documentation we found consisted of an itemization of the costs incurred
under each of the four expense categories identified in the contracts.
They also included tables identifying the expense code and description,
the check number of the payments made to third parties, the third
parties' names, and the amount of the checks. For salaries and fringe
benefits, the contractors submitted payroll summaries in table format
identifying the expense category, an employee identification number
and/or employee name, the payroll period, date of payment, payment type
(regular, sick, vacation), amount of hours worked, gross salary
deductions, employers' contributions, and the net amount paid. However,
the documentation did not specify the employees' positions, or the
schools or offices where the employees worked. The only exception was
COSEY, which, in addition to the breakdown of expenses, payroll
summaries, and tables, submitted source documentation for \$1,472,625 in
costs billed under the Administrative expense category.

We reviewed all 24 invoices submitted by the three contractors to PRDE
for services rendered during the period of November 2006 through June
2007, totaling \$17,998,543[^11] -- NETS submitted eight invoices
totaling \$4,402,543, Braxton eight totaling \$8,807,198, and COSEY
eight totaling \$4,788,802. We found that PRDE's review of the costs
claimed was restricted to verifying that the contractors correctly
charged the expenses according to the four expense categories identified
in their contracts. In addition, PRDE did not monitor the contractors
sufficiently to ensure that services were rendered and funds were used
in compliance with Title I requirements and contract deliverables before
paying the \$17,998,543 invoiced by the three contractors.

We also reviewed the source documentation submitted by COSEY for the
\$1,472,625 in costs billed under the Administrative expense category
and found that PRDE paid \$365,089 in costs that were not supported with
adequate and reliable documentation, \$16,800 in excessive charges, and
\$892 in unallowable costs.

Table 1.1 summarizes the amounts invoiced by the three contractors and
the questioned costs found.

+-------+--------+---------+---------+---------+---------+----------+
| **Co  | **Am   | **A     | **Que   |         |         |          |
| ntrac | ount** | mount** | stioned |         |         |          |
| tor** |        |         | Costs** |         |         |          |
|       | **     | **I     |         |         |         |          |
|       | Contra | nvoiced |         |         |         |          |
|       | cted** | /Paid** |         |         |         |          |
+-------+--------+---------+---------+---------+---------+----------+
|       |        |         | **      | **Exce  | *       | *        |
|       |        |         | Costs** | ssive** | *Unallo | *Total** |
|       |        |         |         |         | wable** |          |
|       |        |         | **Not\  | **Ch    |         | **Qu     |
|       |        |         | Adequ   | arges** | **      | estioned |
|       |        |         | ately** |         | Costs** | Costs**  |
|       |        |         |         |         |         |          |
|       |        |         | **Supp  |         |         | **Based  |
|       |        |         | orted** |         |         | on       |
|       |        |         |         |         |         | Docum    |
|       |        |         |         |         |         | entation |
|       |        |         |         |         |         | Re       |
|       |        |         |         |         |         | viewed** |
+-------+--------+---------+---------+---------+---------+----------+
| NETS  | \$5,9  | \$4,    | Undet   | Undet   | Undet   | \$0      |
|       | 32,079 | 402,543 | ermined | ermined | ermined |          |
+-------+--------+---------+---------+---------+---------+----------+
| Br    | \$13,6 | \$8,    | Undet   | Undet   | Undet   | \$0      |
| axton | 93,725 | 807,198 | ermined | ermined | ermined |          |
+-------+--------+---------+---------+---------+---------+----------+
| COSEY | \$7,8  | \$4,    | \$      | \       | \$892   | \        |
|       | 22,724 | 788,802 | 365,089 | $16,800 |         | $382,781 |
+-------+--------+---------+---------+---------+---------+----------+
| **To  | **\$   | **      | **\$36  | **\$1   | **      | **\$3    |
| tal** | 27,448 | \$17,99 | 5,089** | 6,800** | \$892** | 82,781** |
|       | ,528** | 8,543** |         |         |         |          |
+-------+--------+---------+---------+---------+---------+----------+

**Table 1.1** **Summary of Questioned Costs**

NETS submitted to PRDE eight invoices totaling \$4,402,543. PRDE did not
monitor NETS sufficiently and did not properly review the contractor's
supporting documentation to ensure that services were rendered and funds
were used in compliance with Title I requirements and contract
deliverables before making the payments.

Braxton submitted to PRDE eight invoices totaling \$8,807,198. PRDE did
not monitor the contractor sufficiently and did not properly review the
contractor's supporting documentation to ensure that services were
rendered and funds were used in compliance with Title I requirements and
contract deliverables before making the payments. From the invoices we
reviewed, we found that, of the \$8,807,198 invoiced, Braxton billed
PRDE \$40,074 for the purchase of trailers without providing PRDE
recommendations, specifications, and price quotes prior to
purchase.[^12] According to the contract terms, PRDE authorized the
contractors to purchase, lease, and refurbish real and personal property
(including, but not limited to, mobile educational units and leasing of
neutral sites or spaces), insurance and maintenance costs,
transportation, and other comparable goods and services. However, the
contractors were required to present to PRDE their recommendations,
specifications, and prices of the property prior to purchase. Although
PRDE officials stated that they orally authorized Braxton to purchase
the trailers, PRDE did not require Braxton to submit the required
documentation prior to purchase. Therefore, PRDE did not enforce the
contract terms.

COSEY submitted to PRDE eight invoices totaling \$4,788,802. PRDE did
not monitor the contractor sufficiently and did not properly review the
contractor's supporting documentation to ensure that services were
rendered and funds were used in compliance with Title I requirements and
contract deliverables before making the payments. However, we found that
COSEY submitted specific source documentation for the \$1,472,625 in
costs billed under the Administrative expense category. As a result, we
were able to determine the adequacy and reliability of the documentation
for charges against that expense category. We reviewed the source
documentation and found that COSEY did not provide adequate and reliable
documentation for \$365,089billed under that category -- \$31,597 in
non-personnel costs and \$333,492 in salaries. The source documentation
supporting the \$31,597 in non-personnel costs was not adequate or
sufficient to determine if the invoiced costs were allowable. The
\$333,492 in salaries was not supported with adequate and reliable
documentation because, although COSEY submitted payroll summaries and
copies of the checks issued, the documentation did not specify the
employees' positions, or the schools or offices where the employees
worked. Enclosure 1 shows a summary of the costs COSEY billed under the
Administrative expense category that were not adequately supported.

COSEY billed a total of \$350,292 in salaries under the Administrative
expense category that were not supported with adequate and reliable
documentation. In its response to the draft audit report, PRDE provided
additional documentation for the salaries. Our review of the additional
information identified excessive charges of \$16,800 billed by COSEY for
three management positions. According to COSEY'S proposal, which was
incorporated in the contract, COSEY would pay \$42,000 to the Executive
Director, \$31,800 to the Auxiliary Executive Director, and \$31,800 to
the Administrative Director. However, COSEY billed PRDE \$48,000 for the
Executive Director, \$37,200 for the Auxiliary Executive Director, and
\$37,200 for the Administrative Director, resulting in excessive charges
of \$6,000, \$5,400, and \$5,400, respectively. The excessive payments
could have been used for providing additional Title I services to
eligible students.

We also found that COSEY billed PRDE \$892 in unallowable costs under
the Administrative expense category. The unallowable costs consisted of
(1) a charge of \$342 for a late insurance payment,[^13] and (2) \$550
billed for recording a video of an activity provided to Title I
teachers.[^14]

In addition, we found that COSEY billed \$5,136 for the purchase of a
trailer for which PRDE did not provide authorization, as required by the
contract terms.[^15] According to PRDE officials, COSEY did not request
authorization to purchase the trailers; and they did not notice that
COSEY billed for the unauthorized purchase, since it was billed under
the "Equipment Repairs" account instead of the "Acquisition of Trailers"
account. PRDE was unaware of the trailer purchase until it was
identified in our audit. According to PRDE's response to the draft audit
report, it cancelled the purchase and COSEY returned the money. COSEY
also billed for \$1,466 in costs that were incurred outside the contract
period, consisting of (1) \$1,166 billed for rental car costs (rent paid
from October 6, 2006, through November 7, 2006, although the contract
was awarded on November 1, 2007); and (2) \$300 billed for a month's
rent of a trailer, incurred in October 2006.[^16] Failure to identify
unauthorized purchases under contract requirements, and costs claimed
that were incurred outside the contract period placed Title I funds at
risk of abuse and misuse.

The lack of proper monitoring of the Title I services provided by the
contractors to private school students during the 2006-2007 award year
precluded PRDE from identifying: (1) costs claimed by the contractors
that were not adequately documented; (2) excessive charges billed; (3)
costs claimed by the contractors that were not allowable uses of Title I
funds; (4) unauthorized purchases; and (5) costs claimed that were
incurred outside the contract period. The lack of proper monitoring may
have affected PRDE's ability to fully and effectively comply with Title
I program requirements. Specifically, PRDE could not ensure that
participating private school children, their teachers, and their parents
received the full level of services contracted, and that Title I funds
were used for their intended purposes.

**Recommendations:**

We recommend that the Assistant Secretary for OESE require PRDE to---

1.1 Review the contractors' supporting documentation to ensure
compliance with Title I requirements for payments made without proper
contract monitoring, including the \$365,089 identified in the finding
as not supported with adequate and reliable documentation, and return to
the Department all unallowable costs paid;

1.2 Return to the Department the \$16,800 in excessive charges and \$892
in unallowable costs paid;

1.3 Ensure that proper supporting documentation and reports submitted by
contractors are reviewed prior to making payments to ascertain that the
services reported were actually provided and funds were used in
compliance with contract deliverables and Title I regulations; and

1.4 Develop adequate internal controls and assign the staff necessary to
properly monitor the contractors.

PRDE's Comments

In its response to the draft audit report, PRDE did not concur with our
findings and recommendations and requested that the findings be
reconsidered, revised, and that the recommendations for repayment be
withdrawn before the issuance of a final audit report. PRDE contended
that the audit failed to review the voluminous documentation that
supported the Title I expenditures at issue and failed to analyze harm
to the Federal interest, as required, in making findings. PRDE also
disagreed with Recommendation 1.1 to review the contractors' supporting
documentation for the payments made without monitoring to ensure
compliance with Title I requirements. It contended that we based our
recommendation on a perceived lack of adequate and reliable
documentation. PRDE also stated that with the additional documentation
it provided in its response, it had proved that it had adequate,
reliable documents for its contractors, and therefore, it would be
unnecessary and unduly burdensome for PRDE to review all \$17,998,543 in
payments made to NETS, Braxton and COSEY for the 2006-2007 award year.

Summarized in the following pages are PRDE's comments regarding specific
costs questioned in the draft audit report.

*[Inadequately Documented Non-Personnel Costs Charged by COSEY in the
Administrative Expense Category]{.underline}*

PRDE submitted additional documentation in its response for \$31,597 in
non-personnel costs paid to COSEY that were not adequately documented.
It also included a brief explanation on how the funds were used for the
specific costs questioned, and concluded that the documents submitted in
its response demonstrated that PRDE adequately documented the expenses
in accordance with the cost principles in OMB Circular A-87.

*[Inadequately Documented Salaries Charged by COSEY in the
Administrative Expense Category]{.underline}*

According to PRDE, the documentation provided in its response provided
evidence of the employees' positions and the facilities in which they
worked, and demonstrated that PRDE adequately documented these expenses
in accordance with the cost principles in OMB Circular A-87. In
addition, PRDE stated that the documents also demonstrated that PRDE's
Title I program received a benefit from this expenditure, and therefore,
the salary costs were allowable.

*[Unallowable Costs Charged by COSEY in the Administrative Expense
Category]{.underline}*

PRDE did not provide documentation or specific comments in its response
related to the \$342 in unallowable late payment insurance costs charged
by COSEY. Regarding the \$550 in unallowable costs billed by COSEY for
recording a video, PRDE stated that the purpose of these costs was to
use the videotaping as a means to foster professional development, and
therefore, the Title I program received a demonstrable benefit as a
result of these expenditures.

*[Unauthorized Trailer Purchase]{.underline}*

PRDE stated in its response that the purchase of a trailer in the amount
of \$5,136 was cancelled and the money was returned by COSEY to PRDE.

*[Costs Incurred Outside the Contract Period]{.underline}*

According to PRDE's comments, the purpose of the \$1,166 billed for
rental car costs incurred by COSEY outside the contract period was to
pay for the rental car that COSEY primarily used to deliver equipment
and materials to various colleges, correspondence, and reports to the
Office of Federal Affairs (OFA) under a prior contract that was extended
until October 2006. PRDE also stated that the Title I program received a
demonstrable benefit as a result of these expenditures. PRDE did not
provide documentation or specific comments in its response related to
the \$300 billed for a month's rent of a trailer incurred in October
2006.

OIG's Response

We considered PRDE's response and, based on our review of the additional
documentation, revised[^17] Finding No. 1 and Recommendations 1.1 and
1.2. However, the reduction to the unsupported payments did not
substantially change our finding or recommendations. PRDE lacked
adequate internal controls and the necessary staff to properly monitor
the contractors and did not properly review the contractors' supporting
documentation before paying them \$17,998,543. As a result, PRDE made
payments without ensuring that services were rendered and funds were
used in compliance with Title I requirements and contract deliverables.
Our findings are not based on a perceived lack of adequate and reliable
documentation, but on the issues identified in our review regarding
PRDE's lack of monitoring and review of adequate supporting
documentation before paying contractors' invoices.

Prior to responding to the draft, PRDE acknowledged that the additional
documentation provided in support of payments was not available for our
review during the audit. The additional documentation was requested by
PRDE from the contractors in order to respond to the draft report.
However, after considering all the additional supporting documentation
PRDE provided in its response, we revised Finding No. 1 and
Recommendations 1.1 and 1.2. PRDE provided support for \$202,103 of the
\$584,884 in expenditures questioned as unallowable and inadequately
documented in the draft audit report. The additional supporting
documentation consisted of (1) \$153,327 in non-personnel costs billed
by COSEY that were questioned as inadequately documented; (2) \$8,702 in
costs billed by COSEY that were questioned as unallowable, and (3)
\$40,074 in costs billed by Braxton that were questioned as unallowable.
Our revision of the documentation also led to the addition in Finding
No. 1 of \$16,800 in excessive charges that had been originally
questioned as inadequately supported.

In addition, the documentation submitted by PRDE in its response was
generally in support of the questioned costs related to costs billed by
COSEY under the Administrative expense category. However, our finding
involves all the costs claimed by the three contractors. Below is an
explanation of the costs that were questioned in the draft audit report
for which PRDE provided additional documentation in its response, but
remained questioned in the final audit report.

*[Inadequately Documented Non-Personnel Costs Charged by COSEY in the
Administrative Expense Category]{.underline}*

We reviewed the documentation submitted by PRDE in its response
concurrently with the documentation already provided during the course
of the audit and determined that PRDE did not provide sufficient
documentation in its response to determine that the \$31,597 in
non-personnel costs paid to COSEY were allowable.

*[Inadequately Documented Salaries Charged by COSEY in the
Administrative Expense Category]{.underline}*

PRDE provided additional documentation in its response consisting of
employee contracts and attendance sheets, a list of all teachers
contracted by school, and payroll records that showed the names of the
employees, their identification number, and amounts paid, with each
employee divided by category -- Management, Administration, and
Instructional, and all other employees by educational region served.
However, PRDE did not submit supporting documentation or payroll records
for the salary costs billed that consolidated this information, clearly
showing the amounts billed by employee, the employee positions, and the
schools where each employee worked. This information is necessary to
determine if COSEY correctly billed PRDE for the employee positions and
related contracted salaries, and to properly monitor the level of
services provided and billed by the contractor.

The payroll records submitted by PRDE in its response identified only
the positions of three management staff− the Auxiliary Executive
Director, the Administrative Director, and the Executive Director of the
project. We used that information to determine if COSEY correctly billed
PRDE for the employee positions and related contracted salaries. As
stated in the finding, we determined that of the \$350,292 billed by
COSEY in salaries, it billed PRDE \$16,800 in excessive charges related
to the salaries of the three management positions. Without the
information of these employee positions, we could not have made such a
determination. Since the payroll records submitted by COSEY as
supporting documentation for the invoices did not include this
information, PRDE could not determine if the \$350,292 in salaries
billed by COSEY were allowable.

In addition, the payroll records submitted by PRDE in its response were
insufficient to determine if the remaining \$333,492 in salaries billed
by COSEY were allowable. As a result, we maintain that \$333,492 billed
by COSEY in salaries was not supported with adequate and reliable
documentation; and we added the \$16,800 in excessive charges paid to
Finding 1 and Recommendation 1.2 of the final audit report.

*[Unallowable Costs Charged by COSEY in the Administrative Expense
Category]{.underline}*

PRDE provided additional supporting documentation in its response to
properly account for the \$40,074 paid to Braxton and \$8,702 of the
\$9,594 paid to COSEY. We revised our finding and recommendations as a
result of the additional support. However, the remaining \$842 of the
\$9,594 remained questioned as unallowable. Specifically,

-   PRDE did not provide documentation or specific comments in its
    response showing that the \$342 in late payment insurance costs
    charged by COSEY was allowable.

-   PRDE did not provide additional documentation evidencing that the
    \$550 billed by COSEY for recording a video of an activity provided
    to Title I teachers was allowable. According to PRDE's response,
    COSEY used the \$550 for recording the Achievement Day of the San
    German Region, which showcased the efforts and achievements of
    schools in accordance with Title I objectives. However, PRDE did not
    provide evidence showing how the videotape was used for the
    professional development of the Title I teachers, or provide
    evidence that the expense was necessary for the proper and efficient
    performance and administration of Title I funds.

Without any evidence to the contrary, these expenditures are
unallowable.

*[Unauthorized Trailer Purchase]{.underline}*

We questioned COSEY's purchase of a trailer in the amount of \$5,136 as
unallowable in the draft audit report. PRDE provided documentation in
its response showing that it cancelled this purchase and that COSEY
returned the money. As a result, we revised our finding and
recommendation, accordingly. However, PRDE's failure to identify this
unauthorized purchase shows a weakness in PRDE's internal controls and
lack of proper monitoring of the contractor that could have placed Title
I funds at risk of abuse and misuse.

*[Costs Incurred Outside the Contract period]{.underline}*

We questioned \$1,166 billed for rental car costs and \$300 billed for a
month's rent of a trailer incurred by COSEY outside the contract period
as unallowable in the draft audit report. PRDE provided documentation in
its response that showed that the expenses were incurred by COSEY during
the 2005-2006 contract period, which had just expired. However, PRDE
should have paid the contractor for services rendered under the correct
contract period to ensure that grant funds were used only for expenses
that were allocable and allowable under the particular grant and
contract agreement. As a result, we did not question these expenses as
unallowable, but as expenses incurred outside the contract period.

**FINDING NO. 2 -- Improper Allocation of Title I Funds for Parental
Involvement Activities for Parents of Participating Private School
Students**

PRDE lacked adequate internal controls and did not have standard written
procedures in place to ensure that it allocated Title I funds for
parental involvement activities for parents of participating public and
private school students in compliance with Title I requirements. As a
result, PRDE improperly allocated \$430,897 in Title I funds for
services to parents of participating private school students in excess
of the entitlement for parental involvement activities for the 2006-2007
award year. This prevented the parents of 38,729 children[^18] in public
schools from receiving Title I services during that award year.

Pursuant to 34 CFR § 200.64(a)(2)(i)(B), the amount of funds available
to provide equitable services from the applicable reserved funds must be
proportionate to the number of private school children from low-income
families residing in participating public school attendance areas.

For the 2006-2007 award year, PRDE allocated \$5,271,000 in Title I
funds for parental involvement activities -- \$783,000 for parents of
participating private school students and \$4,488,000 for parents of
participating public school students. PRDE based the allocation on a
cost per school of \$3,000,[^19] instead of an amount proportionate to
the number of private school students from low-income families residing
in participating public school attendance areas, as required by the
regulations. According to PRDE officials, the incorrect method of
allocation dated back to 2001, when a former Director of the OFA decided
to assign an equal amount of Title I funds to both public and private
schools for parental involvement activities by establishing a cost per
school of \$3,000.

After that year, they continued to use the same cost per school to make
the allocation of parental involvement activities for parents in both
private and public schools. Table 2.1 shows the correct allocation PRDE
should have made for services to parents of participating private school
students for parental involvement activities for the 2006-2007 award
year compared to the actual allocation made.

**Table 2.1** **Title I Allocation for Parental Involvement Activities**

+--------+-------+--------+---------+---------+-----------+---------+
| **A**  | **B** | **C**  | **D**   | **E**   | **F**     | **G**   |
+--------+-------+--------+---------+---------+-----------+---------+
| Amount | N     | Number | [Pr     | [Correc | [A        | [Exces  |
| Re     | umber | of     | oportio | t]{.und | ctual]{.u | s]{.und |
| served | of    | St     | n]{.und | erline} | nderline} | erline} |
| for    | Stu   | udents | erline} | P       | Parental  | Al      |
| Pa     | dents | [in    | of      | arental | In        | located |
| rental | in    | Pr     | S       | Invo    | volvement | for     |
| Invol  | [P    | ivate] | tudents | lvement | A         | Parents |
| vement | ublic | {.unde | in      | All     | llocation | of      |
|        | &     | rline} | Private | ocation | for       | Private |
| \[[    | Pr    | S      | Schools | for     | Parents   | School  |
| Public | ivate | chools | Under   | Parents | of        | S       |
| &      | Schoo | Under  | Poverty | of      | [Pr       | tudents |
| P      | ls]{. | P      | Level   | Private | ivate]{.u |         |
| rivate | under | overty |         | School  | nderline} | (F-- E) |
| Scho   | line} | Level  | (C / B) | S       | School    |         |
| ols]{. | Under |        |         | tudents | Students  |         |
| underl | Po    |        |         |         |           |         |
| ine}\] | verty |        |         | (A x D) | (261 x    |         |
|        | Level |        |         |         | \$3,000)  |         |
+--------+-------+--------+---------+---------+-----------+---------+
| **\    | *     | **31   | **      | **\$35  | **\$      | **\$43  |
| $5,271 | *473, | ,660** | .0668** | 2,103** | 783,000** | 0,897** |
| ,000** | 773** |        |         |         |           |         |
+--------+-------+--------+---------+---------+-----------+---------+

The excess allocation of \$430,897 for parents of participating private
school students for parental involvement activities reduced the amount
of funds that public school parents were entitled to receive for such
activities. As a result, the parents of 38,729 students from public
schools did not benefit from the Title I program during the 2006-2007
award year, as detailed in Table 2.2.

Table 2.2

+-----+---------+-----------+---------+----------+----------+--------+
| **  | **B**   | **C**     | **D**   | **E**    | **F**    | **G**  |
| A** |         |           |         |          |          |        |
+-----+---------+-----------+---------+----------+----------+--------+
| Num | Amount  | [Co       | Correct | [Exc     | [Correct | Number |
| ber | R       | rrect]{.u | P       | ess]{.un | Parental | of     |
| of  | eserved | nderline} | arental | derline} | Involvem | Public |
| St  | for     | Parental  | Invo    | Parental | ent]{.un | School |
| ude | P       | In        | lvement | Inv      | derline} | St     |
| nts | arental | volvement |         | olvement |          | udents |
|     | Invo    | A         | All     | Al       | [Al      | Whose  |
| \   | lvement | llocation | ocation | location | location | P      |
| [Pu |         | for       | for     | for      | Per      | arents |
| bli | \[      | Parents   | Parents | Parents  | Public   | Did    |
| c\] | [Public | of        | of      | of       | School   | Not    |
|     | &       | Private   | Public  | Private  | Student  | B      |
| Un  | Private | School    |         | School   | Under    | enefit |
| der | School  | Students  | School  | Students | Poverty  | from   |
| P   | s]{.und |           | S       |          | Le       | the    |
| ove | erline} |           | tudents |          | vel]{.un | Title  |
| rty |         |           |         |          | derline} | I      |
| Le  |         |           | (B --   |          |          | P      |
| vel |         |           | C)      |          | (D / A)  | rogram |
|     |         |           |         |          |          |        |
|     |         |           |         |          |          | E / F  |
+-----+---------+-----------+---------+----------+----------+--------+
| **  | *       | **\$      | *       | **\$4    | **\      | **38   |
| 442 | *\$5,27 | 352,103** | *\$4,91 | 30,897** | $11.13** | ,729** |
| ,11 | 1,000** |           | 8,897** |          |          |        |
| 3** |         |           |         |          |          |        |
+-----+---------+-----------+---------+----------+----------+--------+

**Recommendations:**

We recommend that the Assistant Secretary for OESE require PRDE to---

2.1 Return to the Department the \$430,897 in Title I funds allocated
for activities for parents of participating private school students in
excess of the entitlement for parental involvement activities for the
2006-2007 award year;

2.2 Re-calculate the amount of Title I funds that should have been
properly allocated for parents of both private and public school
students for parental involvement activities for all years back to 2001;
and return to the Department the amount allocated for parents of private
school students in excess of the entitlement during those years; and

2.3 Implement adequate internal controls and develop standard written
procedures to ensure that future parental involvement allocations for
parents of both public and private school students are made in
compliance with Title I requirements.

PRDE's Comments

In its response to the draft audit report, PRDE disagreed with our
findings and recommendations, and requested that the findings be
reconsidered, revised, and that the recommendations for repayment be
withdrawn before the issuance of a final audit report.

OIG's Response

PRDE provided no additional information that would warrant a change to
Finding No. 2 or the related recommendations.

**FINDING NO. 3 -- Unrecorded Title I Property and Equipment**

PRDE lacked adequate internal controls to properly account for property
and equipment purchased with Title I funds by the contractors. As a
result,

-   PRDE's Property Division[^20] did not account for \$8,036 in Title I
    property and equipment purchased by NETS, Braxton, and COSEY during
    the 2006-2007 award year for 10 private schools;

-   The contractors' inventory records did not include information
    regarding the Title I property and equipment that was moved or
    relocated, disposed, or in need of disposal; and

-   Property and equipment was not properly labeled or tagged with the
    name of the Title I program.

Pursuant to 34 CFR § 200.67(a), a public agency must exercise continuing
administrative control of all property, equipment, and supplies that the
public agency acquires with Title I funds for the benefit of eligible
private school children.

Section X. B. 3 of PRDE's "*Procedures for the Control and Accounting of
the Property of the Puerto Rico Department of Education"* specifies that
the equipment acquired with Federal funds shall be identified with the
name of the program that funded its purchase. In addition, clause number
20 of the contracts awarded to NETS, Braxton, and COSEY established that
educational and capital property or equipment acquired with Federal
funds granted by virtue of the contracts should be labeled as "Property
of Title I, Part A, Department of Education of Puerto Rico." Further,
the contracts stated that the contractors "shall not move or relocate
such property or equipment without previous notice and written
authorization from the Office of Federal Affairs of the Department of
Education."

We reviewed the inventory records of Title I property and equipment
located at 10 private schools randomly selected for review, served by
the three contractors during the 2006-2007 award year − three served by
NETS, three by Braxton, and four by COSEY. The records were prepared by
the respective contractors that provided the Title I services at each
school. The property and equipment consisted mainly of trailers,
computers, air conditioners, desks, chairs, blackboards, and filing
cabinets. We found that PRDE's inventory records for the 10 schools were
understated by \$8,036. The PRDE records did not reconcile to the
contractors' inventory records because the Private Schools Unit of the
OFA[^21] did not send the inventory records to PRDE's Property Division
to be properly recorded. The PRDE's Private Schools Unit of OFA and its
Property Division did not properly coordinate and share the information
necessary to account for all the property and equipment purchased by the
contractors with Title I funds. We also found that PRDE did not have
documented evidence indicating that it authorized the contractors'
movement or relocation of Title I property and equipment, as required by
the contract terms.

We performed physical inventories at 3 of the 10 schools selected for
review -- one served by NETS, one by Braxton, and one by COSEY − and
reconciled the property and equipment listed in the contractors'
inventory records with the property and equipment at the three
schools.[^22] We were able to account for all the property and equipment
listed in the contractors' inventory records. However, we found that the
Title I property and equipment located at two of the three schools
visited -- one served by NETS and one by COSEY − had not been properly
labeled or tagged with the name of the Title I program, as required by
the contract terms and PRDE's written procedures for the control and
accounting of PRDE property. The property and equipment inventoried at
the two schools were labeled by the contractors, not by PRDE's Property
Division.

PRDE's 2004, 2005, and 2006 Single Audits continually reported that
PRDE's Property Division lacked internal controls over property and
equipment acquired with Federal funds. According to the single audits,
PRDE's Property Division (1) did not maintain an effective property and
equipment system from which a current and complete subsidiary ledger
could be prepared; (2) had not established adequate procedures and
controls to ensure that all of the property and equipment acquired under
the different Federal programs and community schools were recorded; and
(3) had not established procedures to immediately update the property
records when an item of property and equipment was, either transferred
from one location, or disposed of.

PRDE cannot ensure adequate safeguards to prevent the loss, damage, or
theft of property and equipment acquired with Title I funds because it
does not (1) accurately account for all Title I property and equipment,
(2) maintain record of inventory movement, and (3) ensure adequate
labeling of property and equipment. In addition, without a master
inventory record that accounts for all property and equipment acquired
with Title I funds and processes for reconciling to the contractors'
inventory records, PRDE cannot ensure that the property and equipment
acquired by the contractors is necessary.

**Recommendations:**

We recommend that the Assistant Secretary for OESE require PRDE to---

3.1 Instruct its Property Division to account for the \$8,036 in Title I
property and equipment purchased by NETS, Braxton, and COSEY during the
2006-2007 award year for the 10 private schools reviewed;

3.2 Implement adequate internal controls to ensure proper review,
receipt, and recording of property and equipment purchased with Title I
funds;

3.3 Establish efficient means of communication between the OFA offices
in charge of administering Title I and other Federal programs and PRDE's
Property Division, to ensure that they properly coordinate and share the
information necessary to account for the property and equipment;

3.4 Maintain documentation of approval for the movement of inventory;
and

3.5 Ensure that Title I property and equipment is appropriately labeled.

PRDE's Comments

In its response to the draft audit report, PRDE disagreed with our
findings and recommendations, and requested that the findings be
reconsidered, revised, and that the recommendations for repayment be
withdrawn before the issuance of a final audit report.

OIG's Response

PRDE provided no additional information that would warrant a change to
Finding No. 3 or the related recommendations.

**FINDING NO. 4 -- Inconsistent Consultations with Private School
Officials Prior to Providing Title I Services**

PRDE did not have adequate internal controls and standard written
procedures in place to ensure that consultations with private school
officials were consistent and addressed all the issues required by the
Title I regulations prior to providing Title I services during the
2006-2007 award year. Specifically, PRDE did not require the contractors
to submit written reports documenting the results of the consultation
they performed, and did not maintain written affirmations signed by the
private school officials documenting that the required consultations
occurred.

According to 34 CFR § 200.63(a), in order to have timely and meaningful
consultation, an LEA must consult with appropriate officials of private
schools during the design and development of the LEA\'s program for
eligible private school children. In addition, section 200.63(b)
provides that an LEA must consult, at a minimum, on the following
issues.

1)  How the LEA will identify the needs of eligible private school
    children;

2)  What services the LEA will offer to eligible private school
    children;

3)  How and when the LEA will make decisions about the delivery of
    services;

4)  How, where, and by whom the LEA will provide services to eligible
    private school children;

5)  How the LEA will assess academically the services to eligible
    private school children in accordance with Sec. 200.10, and how the
    LEA will use the results of that assessment to improve Title I
    services;

6)  The size and scope of the equitable services that the LEA will
    provide to eligible private school children, and, consistent with
    Sec. 200.64, the proportion of funds that the LEA will allocate for
    these services;

7)  The method or sources of data that the LEA will use under Sec.
    200.78 to determine the number of private school children from
    low-income families residing in participating public school
    attendance areas, including whether the LEA will extrapolate data if
    a survey is used; and

8)  The equitable services the LEA will provide to teachers and families
    of participating private school children.

Pursuant to 34 CFR § 200.63(d)(1)(ii), consultation must include a
thorough consideration and analysis of the views of the officials of the
private schools on the provision of services through a contract with a
third-party provider.

In addition, 34 CFR § 200.63(e) requires an LEA to maintain written
affirmation, signed by officials of each private school with
participating children or appropriate private school representatives,
that the required consultation had occurred.

According to officials from eight of the private schools selected for
review[^23] and our review of documentation, PRDE, either directly or
through the contractors, consulted with schools on the Title I services
PRDE would provide.[^24] In addition, PRDE initiated the consultation
process timely. However, neither PRDE nor the contractors consistently
consulted with all the private school officials interviewed on the
following required issues.

-   How PRDE was going to identify the needs of eligible private school
    children;

-   How and when PRDE was going to make decisions about the delivery of
    services;

-   How, where, and by whom PRDE was going to provide the services;

-   The size and scope of the equitable services that PRDE was going to
    provide;

-   The method, or the sources of data, that PRDE was going to use to
    determine the number of private school children from low-income
    families residing in participating public school attendance areas;
    and

-   The services that PRDE was going to provide to teachers and families
    of participating private school children.

The majority[^25] of the private school officials also stated that
neither PRDE nor the contractors consulted with them on the following
issues.

-   How PRDE was going to use the results of the academic assessment to
    private school children to improve Title I services;

-   Whether PRDE should have contracted with a third-party provider; and

-   The options for using the funds reserved for instructional services:
    on a school-by-school basis or the pooling option.

The lack of consistent consultation with private schools officials
reduced the level of assurance that the Title I services provided by the
contractors met the needs of eligible private school children, their
teachers, and their parents. In addition, without sufficient
documentation to support the consultations, PRDE could not support the
payments allocated for the contract requirement or refute contractors'
disagreements or requests for additional funding.

**Recommendations:**

We recommend that the Assistant Secretary for OESE require PRDE to---

4.1 Implement adequate internal controls and develop standard written
procedures to ensure that the consultation process with private school
officials is consistent and includes all the issues required by the
Title I regulations prior to providing services;

4.2 Require contractors of Title I services to provide a written report
to PRDE on the results of the consultation performed, and ensure that
written evaluations of the reports are performed and maintained to
support PRDE's monitoring of the contractors' deliverables; and

4.3 Obtain and maintain written affirmations from private school
officials documenting that the required consultation occurred.

PRDE's Comments

In its response to the draft audit report, PRDE disagreed with our
findings and recommendations, and requested that the findings be
reconsidered, revised, and that the recommendations for repayment be
withdrawn before the issuance of a final audit report.

OIG's Response

PRDE provided no additional information that would warrant a change to
Finding No. 4 or the related recommendations.

OBJECTIVES, SCOPE, AND METHODOLOGY

The objective of the audit was to determine if PRDE administered Title I
services provided to private school students, their teachers, and their
parents through contracts awarded to NETS, Braxton, and COSEY, in
compliance with Title I requirements. Specifically, our objectives were
to determine if PRDE 1) ensured that the costs claimed by the
contractors were allowable and followed contract requirements; 2)
properly allocated Title I funds to private schools; 3) properly
accounted for Title I funds used to purchase property and equipment; 4)
consulted with private school officials to determine the needs of the
children and the services to be provided; and 5) monitored the
contractors for compliance. Our audit period was November 1, 2006,
through June 31, 2007.

To accomplish the audit objectives, we reviewed PRDE's allocation of
Title I funds to private schools, reviewed the contracts awarded to
NETS, Braxton, and COSEY during the 2005-2006 and 2006-2007 award years,
and interviewed officials from PRDE.

We selected a random sample of 10 private schools from the universe of
261 private schools that received Title I services during the 2006-2007
award year under the three contracts. We interviewed the Directors from
8 of the 10 selected private schools and reviewed documentation for
determining if the required consultation occurred -- three included site
visits and five were through telephone interviews. We also reviewed
inventory records and performed physical inventories of the Title I
property and equipment at the three private schools visited (Colegio San
Isidro Labrador, La Escuelita, and Christian Military Academy). We
performed our fieldwork at PRDE's OFA and the three schools visited.

Table 3.1 identifies the random sample of private schools selected for
review and the scope of the work performed.

**Table 3.1 Random Sample of Private Schools Selected for Review**

+--------+-----------+-----------+------------+----------+-----------+
| **     | **Consu   |           | **Title I  |          |           |
| Random | ltation** |           | Property   |          |           |
| Sa     |           |           | and        |          |           |
| mple** |           |           | E          |          |           |
|        |           |           | quipment** |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **Sch  | **Pe      | **Pe      | **Reviewed | **Took** | **Rec     |
| ools** | rformed** | rformed** | Inventory  |          | onciled** |
|        |           |           | Records**  | **       |           |
|        | *         | **        |            | Physical | **        |
|        | *Personal | Telephone |            | Inv      | Inventory |
|        | Int       | Int       |            | entory** | With      |
|        | erviews** | erviews** |            |          | Contr     |
|        |           |           |            |          | actors'** |
+--------+-----------+-----------+------------+----------+-----------+
| **1**  | **√**     |           | **√**      | **√**    | **√**     |
+--------+-----------+-----------+------------+----------+-----------+
| **2**  | **√**     |           | **√**      | **√**    | **√**     |
+--------+-----------+-----------+------------+----------+-----------+
| **3**  | **√**     |           | **√**      | **√**    | **√**     |
+--------+-----------+-----------+------------+----------+-----------+
| **4**  |           | **√**     | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **5**  |           | **√**     | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **6**  |           | **√**     | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **7**  |           | **√**     | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **8**  |           | **√**     | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **9**  |           |           | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **10** |           |           | **√**      |          |           |
+--------+-----------+-----------+------------+----------+-----------+
| **T    | **3**     | **5**     | **10**     | **3**    | **3**     |
| otal** |           |           |            |          |           |
+--------+-----------+-----------+------------+----------+-----------+

We reviewed a total of 24 invoices (8 submitted by each contractor) for
the period of November 2006 through June 2007, and the supporting
documentation of the expenses billed under each invoice maintained by
PRDE. We also reviewed PRDE's procedures and activities performed to
monitor the contractors for compliance, including a review of the first
two monthly status reports submitted by each contractor (November and
December 2006).

We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.

**ENCLOSURE 1**

+----------+-------+-------------------+--------------+---------------+
| *        |       |                   |              |               |
| *Summary |       |                   |              |               |
| of Costs |       |                   |              |               |
| Billed   |       |                   |              |               |
| by COSEY |       |                   |              |               |
| Under    |       |                   |              |               |
| Admini   |       |                   |              |               |
| strative |       |                   |              |               |
| Expenses |       |                   |              |               |
| Not      |       |                   |              |               |
| Ad       |       |                   |              |               |
| equately |       |                   |              |               |
| Sup      |       |                   |              |               |
| ported** |       |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
| *        | *     | **Cost**          | **N          | **Salaries**  |
| *Notes** | *Invo |                   | on-Personnel |               |
|          | ice** | **Category**      | Costs**      |               |
+----------+-------+-------------------+--------------+---------------+
|          | **Nov |                   |              | \$24,536      |
|          | -06** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
|          | **Dec |                   |              | 42,631        |
|          | -06** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
| **1**    | **Jan | Rent -- Office    | 1,050        | 43,700        |
|          | -07** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
| **2**    | **Feb | Travel - Inside   | 2,400        | 46,904        |
|          | -07** | PR                |              |               |
+----------+-------+-------------------+--------------+---------------+
|          | **Mar |                   |              | 39,212        |
|          | -07** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
|          | **Apr |                   |              | 24,167        |
|          | -07** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
|          | **May |                   |              | 38,863        |
|          | -07** |                   |              |               |
+----------+-------+-------------------+--------------+---------------+
| **3**    | **Jun | Travel - Inside   | 2,303        | 90,279        |
|          | -07** | PR                |              |               |
+----------+-------+-------------------+--------------+---------------+
| **4**    |       | Rent -- Office    | 25,000       |               |
+----------+-------+-------------------+--------------+---------------+
| **5**    |       | Rent -- Other     | 494          |               |
|          |       | Equipment         |              |               |
+----------+-------+-------------------+--------------+---------------+
| **6**    |       | Rent -- Trailers  | 350          |               |
+----------+-------+-------------------+--------------+---------------+
| *        |       | **\$381,889**     | **\$31,597** | **\$350,292** |
| *Total** |       |                   |              |               |
+----------+-------+-------------------+--------------+---------------+

**Notes:**

1.  In the January 2007 invoice, COSEY billed PRDE a total of \$2,100
    for office rent. COSEY provided PRDE source documentation for one
    month of rent (January 2007), totaling \$1,050. However, COSEY did
    not provide source documentation for the remaining \$1,050. In its
    response, PRDE provided the same payment order, invoice, and
    cancelled check supporting only the \$1,050. As a result, we were
    unable to determine if the expenses billed for office rent were
    allowable.

2.  In the February 2007 invoice, COSEY billed PRDE \$2,400 for travel
    expenses inside PR. However, COSEY did not provide documentation to
    support the charges. In its response, PRDE provided a list of three
    administrative staff to which COSEY paid \$800 each for the period
    of November 2006 through January 2007, totaling \$2,400. PRDE also
    provided reports of local travel for three COSEY employees that were
    not the same three employees that were paid the \$2,400. PRDE did
    not provide local travel reports for the three employees, or any
    type of travel documentation showing the actual expenses incurred,
    or the basis for the amounts allocated to each employee, either on
    an actual cost basis, on a per diem or mileage basis in lieu of
    actual costs incurred, or any other basis. As a result, we were
    unable to determine if the expenses billed for travel inside PR were
    allowable.

3.  In the June 2007 invoice, COSEY billed PRDE \$2,303 for travel
    expenses inside PR that were not adequately supported. The
    supporting documentation included a statement certifying local
    travel expenses incurred by three staff members during the period of
    February through June 2007. It also included a copy of the three
    cancelled checks paid. However, COSEY did not provide a
    justification for the travel or source documentation, such as
    receipts or other travel records. In its response, PRDE stated that
    the purpose of the trips was to pay for staff to visit schools and
    attend program activities at different educational regions. PRDE
    provided in its response a list of three administrative staff to
    which COSEY paid \$2,303 (\$767 to two and \$769 to one) for the
    period of February through June 2007. PRDE also provided in its
    response reports of local travel for a COSEY employee that was not
    one of the three employees that were paid the \$2,303. However, PRDE
    did not provide local travel reports for the three employees paid,
    or any type of travel documentation showing the actual expenses
    incurred, or the basis for the amounts allocated to each employee,
    either on an actual cost basis, on a per diem or mileage basis in
    lieu of actual costs incurred, or any other basis. As a result, we
    were unable to determine if the expenses billed for travel inside PR
    were allowable.

4.  In the June 2007 invoice, COSEY billed PRDE \$25,000 for office rent
    costs that were not adequately supported. The supporting
    documentation included purchase and payment orders for the rent of
    facilities of participating private schools during the month of June
    2007 to provide Title I services during a summer program. It also
    included copies of ten checks (not cancelled) of \$2,500 each,
    issued to the private schools. PRDE did not provide additional
    supporting documentation in its response evidencing that the charges
    were adequately documented and allowable. It provided documentation
    that showed that the payments were made to 10 private schools to
    which COSEY provided Title I services for the use of their own
    buildings. In its response, PRDE stated that these costs were to pay
    the rent of the buildings used by the various private schools for
    their summer camp programs. In addition, PRDE provided documentation
    in Enclosure #24 of its response indicating that it had one or more
    trailers at each of the 10 schools that were used to provide the
    Title I services to participating private school children. Further
    analysis should be made by PRDE to determine if the expenses billed
    for office rent complied with the requirements in 34 CFR § 200.66 to
    ensure that the funds were not used for the needs of the private
    schools or the general needs of the children in the private schools
    attending their summer programs, and were necessary for the proper
    and efficient performance and administration of Title I funds.
    According to 34 CFR § 200.66, Title I funds must be used to provide
    services to supplement, and in no case supplant, the services that
    would, in the absence of Title I services, be available to
    participating private school children. It further states that Title
    I funds must not be used for the needs of the private school or the
    general needs of children in the private school.

5.  In the June 2007 invoice, COSEY billed PRDE \$494 for the rent of
    equipment. However, COSEY did not provide supporting documentation.
    In our draft audit report, we reported the \$494 with no supporting
    documentation as charged to the conservation and repair of equipment
    account, but the expenses were actually charged to the rent of other
    equipment account. PRDE did not provide additional supporting
    documentation in its response for the \$494 billed by COSEY for the
    rent of other equipment. As a result, we were unable to determine if
    the expenses billed were allowable.

6.  In the June 2007 invoice, COSEY billed PRDE \$350 for the rent of a
    trailer that was not adequately supported. COSEY billed PRDE a total
    of \$3,600 for the rent of trailers. The supporting documentation
    submitted by PRDE included 5 invoices from third party vendors one
    for \$350 for the month of June 2007; two for \$250 for the months
    of May and June 2007; another for \$2,400 for the period of October
    2006 through May 2007; and another for \$350 that did not specify
    the period rented. This expense was not adequately documented
    because we could not determine if it was incurred inside the
    contract period. PRDE provided supporting documentation in its
    response for the \$350 billed for the month of June 2007 which was
    considered adequately documented, but not for the \$350 that did not
    specify the period rented. With the documentation provided, we were
    unable to determine if the expense billed was allowable.

**ENCLOSURE 2**

**Puerto Rico Department of Education**

**Response to Draft Audit Report: ED-OIG/A04H0017**

Submitted to:

Ms. Denise M. Wempe

U.S. Department of Education

Office of Inspector General

61 Forsyth SW

Room 18T71

Atlanta, GA 30303

This is the response of the Puerto Rico Department of Education ("PRDE")
to the U.S. Department of Education's Office of Inspector General
("OIG") Draft Audit Report ED-OIG/A04H0017 ("Draft Audit Report"),
issued June 2, 2008, entitled *Puerto Rico Department of Education's
Administration of Title I Services Provided to Private Schools*. OIG
reviewed Title I equitable services PRDE provided to private school
students, their teachers, and their parents for the 2006-2007 award
year. OIG erroneously concluded that PRDE did not properly administer
Title I-A funds expended over that time period. OIG specifically
questioned a number of PRDE's Title I expenditures on equitable services
provided to private school students, their teachers, and their parents
through contracts awarded to National Educational and Technological
Services, Inc. ("NETS"), Braxton School of Puerto Rico, Inc.
("Braxton"), and Corporación de Servicios Educativos de Yabucoa
("COSEY"). In addition, OIG recommended that the Assistant Secretary for
Elementary and Secondary Education (OESE) require PRDE to review the
contractors' supporting documentation for the \$17,413,659 paid to
ensure compliance with Title I requirements.

PRDE respectfully submits that the audit methodology used was seriously
flawed. It appears that the audit failed to review the voluminous
documentation that supports the Title I expenditures at issue. In
addition, the audit failed to analyze harm to the Federal interest, as
required, in making findings. PRDE's response below, based on each Draft
Audit Report finding, demonstrates the underlying flaws in the
rationales supporting the findings, and explains the extensive
supporting documentation for the expenditures questioned by OIG.

***Braxton Expenditure for Trailers***

Braxton is a contractor, hired by PRDE, to provide equitable services to
private school students. OIG found that PRDE charged its Title I program
\$40,074 in unallowable costs for the purchase of trailers by
Braxton.[^26] OIG stated that PRDE did not authorize the contractors to
purchase, lease, and refurbish real and personal property (including
mobile educational units and leasing of neutral sites or spaces). As a
result, it found the cost unallowable.

In response, PRDE submits:

-   A letter from Saint Patrick's Bilingual School requesting the
    trailers and justifying the use for its Title I-eligible students;

-   Three price quotes;

-   A letter explaining why Braxton selected Fox Trailer Company as its
    vendor to purchase the trailers;

-   Purchase order;

-   Receipts of the trailer delivery;

-   Check request form;

-   Two checks (each for \$20,036); and

-   Contract with Braxton.[^27]

OMB Circular A-87, *Attachment A, Paragraph C.1* provides that costs
must be necessary and

reasonable for proper and efficient performance and administration of
federal awards, be

allocable to federal awards, and be adequately documented. In order to
recover funds, there must be an analysis reflecting the value of the
program services actually obtained in a determination of harm to the
Federal interest. 20 U.S.C. 1234a(a)(2). The U.S. Department of
Education ("USDE") may require recipients to return only an amount that
is proportional to the extent of the harm its violation caused to an
identifiable Federal interest associated with the program. 34 C.F.R.
§ 81.32(a)(1).

As OIG acknowledges, "according to the contract term, PRDE authorized
the contractors to purchase, lease, and refurbish real and personal
property (including, but not limited to, mobile educational units and
leasing of neutral sites or spaces), insurance and maintenance costs,
transportation, and other comparable goods and services."[^28] OIG also
acknowledges that PRDE officials gave verbal authorization to Braxton
officials to purchase the trailer. PRDE's authorization is noted in the
documents submitted.[^29] OIG stated that Braxton was required to
present PRDE with its recommendations, specifications, and prices of the
property prior to purchase.

PRDE acknowledges that it could have created a stronger paper trail
documenting this transaction. However, as the documentation submitted
demonstrates, in soliciting three price quotes, Braxton and PRDE
diligently ensured that the trailers were bought for a competitive
price, maximizing the benefit to the Title I program. Furthermore, the
documents provided demonstrate that PRDE adequately documented this
expense in accordance with the cost principles in OMB Circular A-87.

***Non-Personnel Costs Incurred by COSEY***

COSEY is a contractor, hired by PRDE, to provide equitable services to
private school students. OIG found that PRDE charged non-personnel costs
to its Title I program that lacked adequate and reliable documentation
in the amount of \$184,924 for fiscal year 2006-2007. OIG stated that
PRDE's source documentation was not adequate or sufficient to determine
if the invoiced costs were allowable. OIG cited OMB Circular A-87,
*Attachment A, Paragraph C.1*, which requires costs charged to Federal
grants to be necessary and reasonable for proper and efficient
performance and administration of Federal grant and adequately
documented.

OIG questioned a number of specific transactions invoiced to PRDE by
COSEY involving non-personnel charges to Title I for equitable
services.[^30] PRDE's response to OIG on each expenditure follows.

1)  [Property Insurance Expenditure]{.underline}

In November 2006, COSEY billed PRDE \$13,699 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included two payment stubs, two payment orders, and two cancelled
checks. OIG stated that the documentation provided did not specify the
type of insurance paid.

PRDE submits policy documents with Liberty Finance, evidence that the
insurance paid for covered both commercial property liability and
commercial general liability.[^31] Specifically, the insurance policy
covered a number of premises (described in the policy) where private
school students receive equitable services. Therefore, these documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

2)  [Travel Expenses]{.underline}

In December 2006, COSEY billed PRDE \$224 for travel expenses it
incurred. As OIG acknowledges, PRDE submitted supporting documentation,
including a purchase order, hotel bill, and credit card bill.[^32] OIG
stated that the documentation provided did not detail the purpose of the
travel expenses. The purpose of the travel was to attend the Florida
Educational Technology Conference (FETC) in Orlando, Florida. The
conference program presents educators and administrators with an
opportunity to learn how to integrate different technologies across the
curriculum. PRDE submits promotional materials and an agenda explaining
the academic purpose for the conference.[^33] As the documents prove,
the Title I program received a demonstrable benefit as a result of these
expenditures, and the expenditures are adequately documented in
accordance with the cost principles in OMB Circular A-87.

3)  [Equipment Rental Expenditure]{.underline}

In December 2006, COSEY billed PRDE \$1,463 for rental equipment costs
it incurred. As OIG acknowledges, PRDE submitted supporting
documentation that included a payment stub (\$508) and two invoices
(\$538 and \$417). OIG stated that the documentation provided did not
specify the type of equipment that was rented.

PRDE submits documents indicating that the equipment rented was three
photocopiers.[^34] In addition, PRDE submitted two cancelled checks, one
in the amount of \$508 and one in the amount of \$955 (for the \$538 and
\$417 expenditure). The photocopiers were used at three locations where
students received equitable services. These documents demonstrate that
PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

4)  [Property Insurance Expenditure]{.underline}

In December 2006, COSEY billed PRDE \$6,850 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included a payment stub. OIG stated that the documentation provided
did not specify the type of insurance paid.

PRDE submits documents that demonstrate that the insurance paid to
Liberty Finance covered both commercial property liability and
commercial general liability.[^35] In addition to the payment stub, PRDE
has also submitted a cancelled check. As noted above, this insurance
policy was purchased in November 2006 for a number of premises where
private school students receive equitable services. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

5)  [Automotive Equipment Repair Expenditure]{.underline}

In December 2006, COSEY billed PRDE \$240 for automotive repairs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
of this transaction. OIG stated that the documentation provided did not
adequately support the expenditure.

The documents submitted by PRDE including the following: an order form,
a requisition form that describes the services provided a certification
of inspection, and a cancelled check.[^36] PRDE owns two trucks that
primarily move equipment, materials, and service trailers. The trailers
are used to provide equitable services to private school students. The
purpose of these costs was to renew the registration of these two
vehicles. These documents demonstrate that PRDE adequately documented
this expense in accordance with the cost principles in OMB Circular
A-87.

6)  [Electricity Costs]{.underline}

In January 2007, COSEY billed PRDE \$29,066 for electricity costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
of this transaction, including bills for electricity costs,
individualized to each private schools, checks, and payment orders.[^37]
OIG stated that the documentation provided did not provide a
justification for the amount billed by each school.

The documents submitted by PRDE include invoices for various schools
where private school students receive equitable services. COSEY does not
pay an electric bill throughout the year, but rather allocates funds for
this particular expense. These documents demonstrate that PRDE
adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

7)  [Rent Expenditures]{.underline}

In January 2007, COSEY billed PRDE \$1,050 for office rent it incurred.
OIG stated that PRDE provided no source documentation for this
expenditure. The documents submitted by PRDE include a purchase order,
an invoice, and a cancelled check.[^38] The rent payment was used to
rent "Alquiler de Centro de Servicios Educativos Ponce" in order to
provide equitable services to private school students. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

8)  [Property Insurance Expenditure]{.underline}

In January 2007, COSEY billed PRDE \$6,850 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included a payment stub. OIG stated that the documentation provided
did not specify the type of insurance paid.

The documents submitted by PRDE evidence that the insurance paid to
Liberty Finance for both commercial property liability and commercial
general liability.[^39] In addition to the payment stub, PRDE has also
submitted a cancelled check. As noted above, this insurance policy was
purchased in November 2006 for a number of premises where private school
students receive equitable services. These documents demonstrate that
PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

9)  [Travel Expenses]{.underline}

In January 2007, COSEY billed PRDE \$1,050 for travel expenses it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included three purchase orders, three payment orders, and three
cancelled checks.[^40] OIG stated that the documentation provided did
not provide justification or specified criteria for the amounts billed
per staff member, and that OIG could not determine if the staff worked
on the project.

The purpose of the travel was to attend the FETC in Orlando, Florida and
the Title I "Avenues of Excellence" conference in Long Beach, California
in January 2007.[^41] PRDE has provided the aforementioned
documentation, as well as promotional materials, an agenda, and those
whom attended. These documents demonstrate that PRDE adequately
documented this expense in accordance with the cost principles in OMB
Circular A-87.

10) [Postage Expenditures]{.underline}

In February 2007, COSEY billed PRDE \$12 for postage costs it incurred.
OIG stated that PRDE provided no source documentation for this
expenditure. The documents submitted by PRDE include a purchase order,
an invoice, and a cancelled check.[^42] These documents demonstrate that
PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

11) [Travel Expenses]{.underline}

In February 2007, COSEY billed PRDE \$2,400 for travel expenses it
incurred. OIG stated that PRDE provided no source documentation for this
expenditure. The documents submitted by PRDE include a list of employees
travelling, including the cost per employee, three cancelled checks, and
an agenda from the trip.[^43] The purpose of this trip was to pay for
staff to visit schools and attend program activities at different
educational regions. These funds are allocated for such travel expense
within Puerto Rico twice a year. These documents demonstrate that PRDE
adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

12) [Travel Expenses]{.underline}

In February 2007, COSEY billed PRDE \$1,392 for travel expenses it
incurred. OIG stated that PRDE provided no source documentation for this
expenditure. The documents submitted by PRDE include a list of employees
travelling to the FETC in Orlando, Florida, including the cost per
employee, purchase orders, and three cancelled checks.[^44] In addition,
PRDE submitted promotional materials and an agenda explaining the
academic purpose for the conference.[^45] These documents demonstrate
that PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

13) [Property Insurance Expenditure]{.underline}

In February 2007, COSEY billed PRDE \$6,850 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included a payment stub. OIG stated that the documentation provided
did not specify the type of insurance paid.

The documents submitted by PRDE evidence that the insurance paid to
Liberty Finance covered both commercial property liability and
commercial general liability.[^46] In addition to the payment stub, PRDE
has also submitted a cancelled check. As noted above, this insurance
policy was purchased in November 2006 for a number of premises where
private school students receive equitable services. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

14) [Electricity Costs]{.underline}

In January 2007, COSEY billed PRDE \$267 for electricity costs it
incurred. OIG stated that the documentation provided did not provide a
justification for the amount billed by each school. PRDE submitted
supporting documentation of this transaction, including a list of
schools served, a purchase order, and cancelled checks.[^47]

The documents submitted by PRDE include invoices for various schools
where private school students receive equitable services. COSEY
allocated part of its electric bill to the services provided to Title I
students throughout the year and submitted it to PRDE. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

15) [Property Insurance Expenditure]{.underline}

In March 2007, COSEY billed PRDE \$6,850 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included a payment stub. OIG stated that the documentation provided
did not specify the type of insurance paid.

The documents submitted by PRDE evidence that the insurance paid to
Liberty Finance covered both commercial property liability and
commercial general liability.[^48] In addition to the payment stub, PRDE
has also submitted a cancelled check. As noted above, this insurance
policy was purchased in November 2006 for a number of premises where
private school students receive equitable services. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

16) [Equipment Rental Expenditure]{.underline}

In December 2006, COSEY billed PRDE \$1,496 for rental equipment costs
it incurred. As OIG acknowledges, PRDE submitted supporting
documentation that included two payment stubs (one for \$988 and one for
\$508), two payment orders and two cancelled checks. OIG stated that the
documentation provided did not specify the type of equipment that was
rented.

The documents submitted by PRDE evidence that the equipment rented was
two photocopiers.[^49] In addition, PRDE submitted the two payment
orders and the two cancelled checks, one in the amount of \$988 and one
in the amount of \$508. The photocopiers were used at "Centros Servicios
Educativos Ponce/Humacao" in connection with providing equitable
services to students. These documents demonstrate that PRDE adequately
documented this expense in accordance with the cost principles in OMB
Circular A-87.

17) [Rental Expenditure]{.underline}

In April 2007, COSEY billed PRDE \$1,050 for costs it incurred by
renting an office. As OIG acknowledges, PRDE submitted supporting
documentation that included a payment order prepared by COSEY and a copy
of check that was not cancelled.  OIG stated that the documentation
provided did not indicate if the expenses were allowable. 

PRDE has submitted documents that include an invoice, a payment
authorization, and a copy of a check (\$1,050).[^50] The purpose of
these costs was to rent an office in the region of Ponce. These
documents demonstrate that PRDE adequately documented this expense in
accordance with the cost principles in OMB Circular A-87.

18) [Equipment Rental Expenditure]{.underline}

In April 2007, COSEY billed PRDE \$508 for costs it incurred by renting
office equipment. As OIG acknowledges, PRDE submitted supporting
documentation that included a copy of a payment stub for \$508.  OIG
stated that the documentation provided did not specify the office
equipment rented and if the expenses were allowable. 

The documents submitted by PRDE include an invoice, a payment
authorization, and a copy of a check (\$507.92).[^51] The purpose of
this cost was to rent a photocopier for an office in connection with
providing equitable service to students. These documents demonstrate
that PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

19) [Electricity Costs Expenditures]{.underline}

In April 2007, COSEY billed PRDE \$10,933 for electricity costs it
incurred. OIG stated that the documentation provided did not provide a
justification for the amount billed by each school. PRDE has documents
that include a request for services, an invoice for the region of
Humacao (\$1,866.62), an invoice for the Ponce region (\$5,599.86), an
invoice for the Fajardo region (\$2,133.28), an invoice for the San
German region (\$1,333.30), and several copies of checks.[^52] The
purpose of these costs was for electricity used by these 4 regions for
various schools where private school students receive equitable
services.

COSEY allocated part of its electric bill to the services provided to
Title I students throughout the year and submitted documentation to
PRDE. These documents demonstrate that PRDE adequately documented this
expense in accordance with the cost principles in OMB Circular A-87.

20) [Office Equipment Repair Expenditures]{.underline}

In April 2007, COSEY billed PRDE \$119 for costs it incurred repairing
office equipment. As OIG acknowledges, PRDE submitted supporting
documentation that included a purchase order and a copy of check that
was not cancelled.  OIG stated that the documentation provided did not
indicate if the expenses were allowable. 

PRDE has documents that include an invoice, a request for services, a
payment authorization, and a copy of a check (\$118.56).[^53] The
purpose of these costs was to repair a building. Therefore, these
documents demonstrate that PRDE adequately documented this expense in
accordance with the cost principles in OMB Circular A-87.

21) [Property Insurance Expenditure]{.underline}

In April 2007, COSEY billed PRDE \$6,850 for insurance costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included a payment stub. OIG stated that the documentation provided
did not specify the type of insurance paid.

The documents submitted by PRDE evidence that the insurance paid to
Liberty Finance covered both commercial property liability and
commercial general liability.[^54] In addition to the payment stub, PRDE
has also submitted a cancelled check. As noted above, this insurance
policy was purchased in November 2006 for a number of premises where
private school students receive equitable services. These documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

22) [Electricity Costs Expenditures]{.underline}

In May 2007, COSEY billed PRDE \$39,732 for electricity costs it
incurred. As OIG acknowledges, PRDE submitted supporting documentation
that included payment orders and copies of checks.  OIG stated that the
documentation provided did not provide a justification for the amount
billed by each school.

The documents submitted by PRDE include requests for services, an
invoice for the Humacao region (\$10,399.74), an invoice for the Ponce
region (\$16,799.58), an invoice for the San German region (\$5,066.54),
an invoice prepared for the Fajardo region (\$7,773.14), and several
copies of checks that were not cancelled.[^55] The purpose of these
costs was to pay the electricity used by the regions of Humacao,
Fajardo, Ponce, and San German for various schools where private school
students receive equitable services. COSEY allocated part of its
electric bill to the services provided to Title I students throughout
the year and submitted it to PRDE. Therefore, these documents
demonstrate that PRDE adequately documented this expense in accordance
with the cost principles in OMB Circular A-87.

23) [Travel Expenses]{.underline}

In June 2007, COSEY billed PRDE \$2,303 for travel costs it incurred. As
OIG acknowledges, PRDE submitted supporting documentation that included
a statement certifying local travel and copies of three cancelled checks
(one for \$769, one for \$769, and one for \$767).  OIG stated that the
COSEY did not justify the reason for local travel and did not indicate
if the expenses were allowable. 

PRDE has documents that include a statement certifying local travel,
copies of the aforementioned three cancelled checks, and the trip
agenda.[^56] The purpose of this trip was to pay for staff to visit
schools and attend program activities at different educational regions.
These funds are allocated for such travel expense within Puerto Rico
twice a year. Therefore, the Title I program received a demonstrable
benefit as a result of these expenditures.

24) [Office Rental Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$25,000 for costs it incurred by
renting an office. As OIG acknowledges, PRDE submitted documentation
that included purchase and payment orders, copies of 10 checks. OIG
stated that the documentation provided did not indicate if the expenses
were allowable. 

PRDE has submitted documents that include 10 invoices, copies of 10
checks (each in the amount of \$2,500), and 10 payment
authorizations.[^57] The purpose of these costs was to pay the rent of
the buildings used by the various private schools for their summer camp
programs. Therefore, these documents demonstrate that PRDE adequately
documented this expense in accordance with the cost principles in OMB
Circular A-87.

25) [Equipment Rental Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$508 for costs it incurred by renting
office equipment. As OIG acknowledges, PRDE submitted documentation that
included a payment stub. OIG stated that the documentation provided did
not indicate if the expenses were allowable. 

PRDE has submitted documents that include an invoice, a payment
authorization, and a check (\$507.92).[^58] The purpose of these costs
was to pay for the rental of a photocopier. These documents demonstrate
that PRDE adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

26) [Conservation and Repair of Equipment Expenditures]{.underline}

In June 2007, COSE billed PRDE \$414 for costs it incurred by conserving
and repairing office equipment. OIG stated that PRDE provided no source
documentation for this expenditure.

PRDE has submitted documents that include invoices, a request for
services, authorization for payments, and two checks (\$350 and
\$67.31).[^59] The purpose of these costs was to pay for the
conservation and repairing of equipment at "Collegio Mi Cuido y
Educación," a location in which equitable services for students are
provided. Therefore, these documents demonstrate that PRDE adequately
documented this expense in accordance with the cost principles in OMB
Circular A-87.

27) [Trailer Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$350 for costs it incurred when renting
a trailer. As OIG acknowledges, PRDE submitted documentation that
included a third party invoice. OIG stated that the documentation
provided did not indicate if the expenses were allowable. 

PRDE has submitted documents that include an invoice prepared by COSEY,
a payment authorization prepared by COSEY, and a check (\$350).[^60] The
purpose of these costs was to pay for the rental of a trailer at the
Paoliny campus. Therefore, these documents demonstrate that PRDE
adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

28) [Property Insurance Expenditures]{.underline}

In June 2007, COSE billed PRDE \$13,699 for insurance costs it incurred.
As OIG acknowledges, PRDE submitted documentation that included two
payment stubs and two cancelled checks. OIG stated that the
documentation provided did not specify the type of insurance paid.

The documents submitted by PRDE evidence that the insurance paid to
Liberty Finance covered both commercial property liability and
commercial general liability.[^61] In addition to the two payment stubs,
each for \$6,849.52, PRDE has also submitted a cancelled check. As noted
above, this insurance policy was purchased in November 2006 for a number
of premises where private school students receive equitable services.
These documents demonstrate that PRDE adequately documented this expense
in accordance with the cost principles in OMB Circular A-87.

29) [Office Equipment Expenditures]{.underline}

In June 2007, COSE billed PRDE \$3,619 for costs incurred for the
purpose of purchasing office equipment. As OIG acknowledges, PRDE
submitted documentation that included an invoice prepared by a third
party, two purchase orders, and a check that was not cancelled. OIG
stated that the documentation provided did not indicate if the expenses
were allowable. 

PRDE has documents that include three invoices prepared by COSEY
(\$1,904.60, \$761.84, and \$952.30), 3 requests for services, three
payment authorizations, a check (\$3,618.74), and a copy of bids from
various contractors.[^62] The purpose of these costs was to pay for
computer desks for several schools in which students are provided
equitable services. Therefore, these documents demonstrate that PRDE
adequately documented this expense in accordance with the cost
principles in OMB Circular A-87.

***Administrative Costs Incurred by COSEY***

OIG found that PRDE charged administrative costs to its Title I program
that lacked adequate and reliable documentation in the amount of \$9,594
for fiscal year 2006-2007.  OIG stated that PRDE's lack of proper
monitoring of the Title I services provided by COSEY prohibited PRDE
from identifying costs that were unallowable under Title I.

1)  [Rental Car Expenditures]{.underline}

In November 2006, COSEY billed PRDE \$1,166 for a rental car. As OIG
acknowledges, PRDE submitted supporting documentation that included an
invoice from October 2006-November 2007.  OIG stated that the
documentation provided did not indicate if the expenses were allowable
since COSEY billed PRDE prior to the November 1, 2007 contract.

The documents submitted by PRDE include an invoice from October
2006-November 2006.[^63] The purpose of these costs was to pay for the
rental car that COSEY primarily used to deliver equipment and materials
to various colleges, correspondence, and reports to the Office of
Federal Affairs (OFA). COSEY's contract with PRDE was extended until
October 2006 and COSEY continued to lease this particular car.
Therefore, the Title I program received a demonstrable benefit as a
result of these expenditures.

2)  [Travel Expenditures]{.underline}

In April and May 2007, COSEY billed PRDE \$1,836 for travelling outside
of Puerto Rico. As OIG acknowledges, PRDE submitted supporting
documentation that included invoices for three employee trips to
professional development seminars.  OIG stated that these expenses were
unallowable.

PRDE has documents that include various invoices for these trips,
payment authorizations, promotional materials, agendas, confirmation
letters, and registration forms.[^64] Specifically, COSEY paid for
employees to travel to Toronto, Canada, Seattle, Washington, and
Orlando, Florida for the professional development of its employees.
Therefore, the Title I program received a demonstrable benefit as a
result of these expenditures.

3)  [Videotaping Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$550 for the making of a videotape for
Title I teachers. As OIG acknowledges, PRDE submitted supporting
documentation that included an invoice and a payment authorization.  OIG
stated that the documentation provided did not indicate if the expenses
were allowable.

PRDE has documents that include an invoice, payment authorization, an
agenda of the program, an attendance sheet, and an evaluation of the
videotape.[^65] The purpose of these costs was to use the videotaping as
a means to foster professional development. Therefore, the Title I
program received a demonstrable benefit as a result of these
expenditures.

4)  [Catering Service Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$264 for catering services at the
Colegio Dr. Roque Diaz Tizol. As OIG acknowledges, PRDE submitted
supporting documentation that included an invoice, a payment
authorization, quotes from various vendors, and request for services.
OIG stated that the documentation provided did not indicate if the
expenses were allowable.

PRDE has submitted an invoice, a payment authorization, quotes from
various vendors, request for services, an agenda of the workshop, an
attendance sheet, an evaluation of the workshop, and an itemized list of
the breakfast food ordered for this particular workshop.[^66] The
purpose of these costs was to provide food for a workshop on reading
materials and technology**.** Therefore, the Title I program received a
demonstrable benefit as a result of these expenditures.

5)  [New Trailer Expenditures]{.underline}

In June 2007, COSEY billed PRDE \$5,136 for the purchase of a new
trailer As OIG acknowledges, PRDE submitted supporting documentation
that included an invoice, price quotation from a vendor, request for
services, and a payment authorization. OIG stated that the documentation
provided did not indicate if the expenses were allowable.

The purchase of this trailer was cancelled and the money was returned.
The documents submitted by PRDE include a check to Hacienda (Puerto
Rico's Treasury Department) from COSEY.[^67] Therefore, the Title I
program was not charged for this particular item.

***Salary Costs Incurred by COSEY***

OIG found that PRDE charged salary costs to its Title I program that
lacked adequate and reliable documentation in the amount of \$350,292
for fiscal year 2006-2007. These charges specifically related to COSEY.
As OIG acknowledges, PRDE submitted payroll summaries and copies of
checks issued. However, OIG stated that the documentation provided did
not specify employees' positions, or the schools or offices where the
employees worked.

PRDE has submitted detailed payroll records of Title I employees related
to the provision of services to private schools students, employee
contracts, employee time and attendance records, and a list of employee
positions, including the schools where each employee worked.[^68] The
documents provide evidence of the employees' positions and the
facilities in which they worked. Furthermore, these documents
demonstrate that PRDE adequately documented these expenses in accordance
with the cost principles in OMB Circular A-87. Because these documents
also demonstrate that PRDE's Title I program received a benefit, these
salary costs are allowable.

***OIG Recommendation to Review Contractors' Documentation***.

As noted above, OIG recommended that the Assistant Secretary for
Elementary and Secondary Education (OESE) require PRDE to review the
contractors' supporting documentation for the \$17,413,659 paid to
ensure compliance with Title I requirements.[^69] OIG bases its
recommendation on its perceived lack of adequate and reliable
documentation. However, as the documents submitted with this response
demonstrate, PRDE has documentation for nearly all of the specifically
questioned expenditures in the Draft Audit Report. Because PRDE has
proven that it has adequate, reliable documents for its contractors, it
would be unnecessary and unduly burdensome for PRDE to review all
expenditures made to NETS, Braxton and COSEY for the 2006-2007 award
year.

***Conclusion***

In closing, PRDE respectfully disagrees in whole with the Draft Audit
Report findings and request that the findings be reconsidered, revised,
and that the recommendations for repayment be withdrawn before the
issuance of a final audit report. The serious flaws in audit methodology
led to obvious errors in the Draft Audit Report and raise questions as
to the management of the audit as a whole, such that the findings and
recommendations should be reviewed and withdrawn.

[^1]: National Educational and Technological Services, Inc.

[^2]: Braxton School of Puerto Rico, Inc.

[^3]: Corporación de Servicios Educativos de Yabucoa.

[^4]: The expenditures originally questioned as unallowable and
    inadequately documented in Finding No. 1 of the draft audit report
    totaled \$584,884.

[^5]: The additional documentation provided by PRDE supported \$202,103
    of the \$584,884 questioned in Finding No. 1 of the draft audit
    report. As a result, we reduced the amounts in our finding and the
    related recommendations, accordingly. In reviewing the
    documentation, we also identified \$16,800 in excessive charges that
    we had originally questioned as inadequately supported.

[^6]: The contract period covered from November 1, 2006, through June
    30, 2007.

[^7]: According to the Department's Office of the General Counsel, the
    three contracts were fixed-fee contracts for services.

[^8]: CFR citations in this report are from the July 1, 2005 edition.

[^9]: OMB Circular A-87 citations in this report are from the revised
    version of May 10, 2004, effective June 9, 2004.

[^10]: The evidence consisted of minutes of the issues discussed during
    the meetings.

[^11]: Of the \$27,448,528 PRDE awarded to the three contractors, they
    invoiced \$17,998,543. According to PRDE officials, Title I funds
    that are not used by the contractors are carried over to the next
    award year.

[^12]: Of the total \$40,074 in costs billed by Braxton for the purchase
    of trailers, \$20,037 pertained to the January 2007 invoice, and
    \$20,037 to the April 2007 invoice.

[^13]: The unallowable cost billed for the late insurance payment
    (\$342) was billed in the November 2006 invoice. The late insurance
    payment was considered unallowable under OMB Circular A-87,
    Attachment B, Number 5, which states that bad debts, including
    losses arising from uncollectible accounts and other claims, are
    unallowable.

[^14]: The unallowable cost billed for video services (\$550) was billed
    in the June 2007 invoice. It was considered unallowable under OMB
    Circular A-87, Attachment A, Paragraph C.1, because the expense was
    not necessary for the proper and efficient performance and
    administration of Title I funds.

[^15]: The unauthorized trailer purchase (\$5,136) was billed in the
    June 2007 invoice.

[^16]: The rental car costs (\$1,166) incurred outside the contract
    period was billed in the November 2006 invoice. The trailer rental
    costs (\$300) incurred outside the contract period was billed in the
    June, 2007 invoice.

[^17]: The additional documentation provided by PRDE supported \$202,103
    of the \$584,884 questioned in Finding No. 1 of the draft audit
    report. As a result, we reduced the amount in our finding and the
    related recommendations, accordingly. In reviewing the
    documentation, we also identified \$16,800 in excessive charges that
    had been originally questioned as inadequately supported.

[^18]: The equivalent public school students who could have been served
    by the amount excessively allocated for private school parents, as
    shown in Table 2.2.

[^19]: 261 private schools at \$3,000 per school; and 1,496 public
    schools at \$3,000 per school

[^20]: PRDE's Property Division is the unit in charge of maintaining the
    centralized records of all PRDE property and equipment.

[^21]: PRDE OFA's Private Schools Unit maintained the inventory records
    of the property and equipment purchased by the contractors.

[^22]: The three schools visited were Colegio San Isidro Labrador, La
    Escuelita, and Christian Military Academy.

[^23]: We were unable to interview the Directors of the remaining two
    private schools selected for review.

[^24]: As a contract deliverable under the 2005-2006 and 2006-2007
    contracts, PRDE required the contractors to consult with private
    schools officials.

[^25]: We considered a majority to be five or more of the eight private
    school officials interviewed.

[^26]: See Draft Audit Report, Finding No. 1.

[^27]: See EX 1.

[^28]: Draft Audit Report, p. 6; See also EX 1, specifically p. 6 of the
    contract between PRDE and Braxton.

[^29]: See EX 1, specifically the cover page detailing the submitted
    documents.

[^30]: See Draft Audit Report, p. 18-21 (Finding No. 1).

[^31]: See EX 2.

[^32]: See EX 3.

[^33]: See EX 4.

[^34]: See EX 5.

[^35]: See EX 2, 6.

[^36]: See EX 7.

[^37]: See EX 8.

[^38]: See EX 9.

[^39]: See EX 2, 10.

[^40]: See EX 11.

[^41]: See EX 4.

[^42]: See EX 12.

[^43]: See EX 13.

[^44]: See EX 14.

[^45]: See EX 4.

[^46]: See EX 2, 15.

[^47]: See EX 16.

[^48]: See EX 2, 17.

[^49]: See EX 18.

[^50]: See EX 19.

[^51]: See EX 20.

[^52]: See EX 21.

[^53]: See EX 22.

[^54]: See EX 2, 23.

[^55]: See EX 24.

[^56]: See EX 25.

[^57]: See EX 26.

[^58]: See EX 27.

[^59]: See EX 28.

[^60]: See EX 29.

[^61]: See EX 2, 30.

[^62]: See EX 31.

[^63]: See EX 32.

[^64]: See EX 33.

[^65]: See EX 34.

[^66]: See EX 35.

[^67]: See EX 36.

[^68]: See EX 37(a)-(f).

[^69]: OIG stated that PRDE paid \$4,402,543 to NETS, \$8,767,124 to
    Braxton, and \$4,243,992 to COSEY.