The Education Leaders Council's Drawdown and Expenditure of Federal
Funds

FINAL AUDIT REPORT

## 

## 

## 

## ED-OIG/A03F0010

### [January 2006]{.smallcaps}

![](media/image3.png)

Our mission is to promote the efficiency, U.S. Department of Education

effectiveness, and integrity of the Office of Inspector General

Department's programs and operations. Philadelphia, Pennsylvania

**NOTICE**

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

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/image4.wmf)**UNITED STATES DEPARTMENT OF EDUCATION**

**OFFICE OF INSPECTOR GENERAL**

100 PENN SQUARE EAST, SUITE 502

THE WANAMAKER BUILDING

PHILADELPHIA, PENNSYLVANIA 19107

PHONE (215) 656-6900 · FAX (215) 656-6397

January 31, 2006

Faye P. Taylor, CEO

Following the Leaders

1225 19^th^ Street NW, Suite 240

Washington, DC 20036

Dear Ms. Taylor:

Enclosed is our final audit report, Control Number ED-OIG/A03F0010,
entitled "The Education Leaders Council's Drawdown and Expenditure of
Federal Funds." This report incorporates the comments that Following The
Leaders (formerly the Education Leaders Council) 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
officials, who will consider them before taking final Departmental
action on this audit:

Danny A. Harris, PhD

Deputy Chief Financial Officer

U.S. Department of Education

400 Maryland Ave

Washington, D.C. 20202-4300

> Margo Anderson

Associate Assistant Deputy Secretary

> Office of Innovation and Improvement

U.S. Department of Education

400 Maryland Ave

Washington, D.C. 20202-5900

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/

Bernard Tadley

Regional Inspector General for Audit

Enclosure

[The Education Leaders Council's]{.smallcaps}

[Drawdown and Expenditure of Federal Funds]{.smallcaps}

[ED-OIG/A03F0010]{.smallcaps}

[Table of Contents]{.smallcaps}

Page

  ----------------------------------------------------------------------------------------------------- ----
  Executive Summary..............................................................................       1

                                                                                                        

  Background....................................................................................\....   3

                                                                                                        

  Audit Results......................................................................................   4

                                                                                                        

  [Finding No. 1]{.underline} -- ELC Overdrew Following the Leaders Phase II Grant Funds..........      5

  Recommendations\...............................................................................       7

                                                                                                        

  [Finding No. 2]{.underline} -- ELC Did Not Have an Approved Indirect Cost                             8
  Plan\...\.................\...                                                                        

  Recommendations\...............................................................................       10

                                                                                                        

  [Finding No. 3]{.underline} -- ELC Charged Questioned and Unsupported Costs to the Following the      11
  Leaders Grants\..............................................................\.................\...   

  Recommendations\...........................................................................\.....     20

                                                                                                        

  Other Matters...................................................................................\...  23

                                                                                                        

  Objective, Scope and Methodology............................................................          24

                                                                                                        

  Appendix A -- FTL Objectives and Measurable Outcomes......\...........................                A

                                                                                                        

  Appendix B -- Finding No. 3 -- Schedule of Questioned Costs.............................              B

                                                                                                        

  Appendix C -- Finding No. 3 -- Schedule of Unsupported Costs..........................                C

                                                                                                        

  Appendix D -- Summary of Selections and Questioned and Unsupported Costs........                      D

                                                                                                        

  Appendix E-- Following the Leaders' Comments to the Report........................\...                E
  ----------------------------------------------------------------------------------------------------- ----

# Executive Summary

The objectives of the audit were to determine if (1) federal funds drawn
down by the Education Leaders Council (ELC) for the Following the
Leaders (FTL) program were used for ELC's operations, and (2)
expenditures allocated to the federally funded FTL program were
reasonable, allocable, and allowable in accordance with regulations. The
audit covered the period January 1, 2004, through December 31, 2004. We
found that ELC: (1) drew down grant funds that could have been used to
cover operating deficits in ELC's non-FTL activities, (2) charged
indirect costs to the federal grants even though it did not have an
approved indirect cost plan, and (3) charged questioned and unsupported
costs to the federal grants.

The U.S. Department of Education's (Department) Fund for the Improvement
of Education (FIE) supports nationally significant programs to improve
the quality of elementary and secondary education at the state and local
levels. The FIE also supports grants to entities that have been
identified by the Congress in appropriations legislation. During the
period July 1, 2002, to December 31, 2004, ELC received three FIE grants
totaling \$23,376,534 for the FTL project. In addition, for fiscal year
2005, Congress directed six grants, totaling \$9,594,623 in awards, to
ELC for the FTL project in various states.

Specifically, the audit disclosed that:

***1. ELC did not comply with federal regulations concerning the
drawdown of grant funds.*** ELC drew down and expended federal funds it
was not entitled to. ELC overdrew the FTL Phase II (fiscal year 2003)
grant by \$495,326. The FTL Phase II grant overdraw could have covered
ELC\'s reported accounting deficits for non-FTL activities in calendar
year 2004. It appears that the grant overdraw occurred because of
inadequate controls. For example, ELC did not maintain supporting
documentation and failed to reinforce and follow established procedures.

***2. ELC did not have an approved indirect cost plan.*** ELC\'s 2002
and 2005 cost policies specified that indirect costs were charged to the
FTL grants using the Office of Management and Budget (OMB) Circular
A-122\'s direct allocation method and that monthly timesheet activity
was used to establish the rate for allocating the indirect costs. ELC
believed that use of the OMB Circular A-122\'s direct allocation method
to allocate indirect costs did not require prior approval. Because ELC
did not have an approved indirect cost plan, \$90,532 in indirect costs
may not have been properly allocated to the grants.

***3. ELC did not comply with cost principles contained in OMB Circular
A-122.*** We found that 28.2 percent of the grant costs reviewed were
either questioned or unsupported. In total, ELC charged \$90,721 in
questioned costs and \$140,922 in unsupported costs to the FTL Phase II
and III grants. It appears that the questioned and unsupported costs
were the result of weak or non-existent internal controls. The
questioned costs included \$69,048 for ELC's annual conferences that
should have been charged to ELC's annual conference cost center, \$4,821
for meals and entertainment costs, and \$4,501 for travel costs that do
not appear to be FTL related. Also, included in the questioned amounts
were costs for alcoholic beverages, advertising, fundraising, and
interest that are specifically unallowable under applicable cost
principles. In August 2005, after ELC had been apprised of the draft
audit findings, ELC removed \$74,990 of the questioned costs and \$2,596
of the unsupported costs from the FTL Phase II and III grant expenses.

We recommend that the Department's Chief Financial Officer and Assistant
Deputy Secretary for Innovation and Improvement require ELC to:

-   Return to the Department \$495,326, and any other grant funds,
    drawndown and not actually disbursed by ELC for FTL Phase II grant
    costs. Submit documentation in support of each drawdown request for
    grant funds, along with proof that the grant funds were disbursed
    for the purpose(s) of the drawdown request. In addition, determine
    the interest earned on federal funds and the amount of such interest
    to be remitted to the Department.

-   Submit an indirect cost plan to the Department\'s Chief Financial
    Officer for negotiation and approval and refund the portion of the
    \$90,532, and any other costs allocated to the FTL grants, on or
    after January 1, 2004, that are not in accordance with the indirect
    cost plan approved by the Department.

-   Refund to the Department \$15,732 for the questioned costs that
    remain charged to the FTL grants and any additional amounts
    identified by the Department.

-   Provide adequate documentation to show that the unsupported
    expenditures of \$138,327 that remain charged to the FTL grants are
    reasonable, allowable, and allocable to the grants, or refund the
    expenditures that the Department determines are not adequately
    supported. In addition, maintain adequate supporting documentation
    for all FTL grant expenditures.

-   Provide all ELC officials and employees copies of OMB Circular A-122
    and ELC\'s internal policies and procedures for determining
    allowable costs, travel, use of charge cards, and payroll; require
    ELC to maintain documentation that each officer and employee have
    reviewed the Circular and internal policies and procedures; and
    develop a process to ensure that the policies and procedures are
    complied with.

In December 2005, ELC changed its name to Following the Leaders.[^1] A
draft of this report was provided to ELC for review and comment. In its
comments on the draft report, ELC did not disagree with our findings as
a whole, however it did take issue with certain aspects of the findings.
In addition, ELC did not disagree with our recommendations. We have
incorporated ELC's comments, where appropriate, into the report and
provide ELC's full response in Appendix E.

# Background

ELC is a non-profit organization, founded in 1995, that was located in
Washington, DC. According to its mission statement, ELC was a
school-reform group committed to leading educational change focused on
improved academic achievement for all students. ELC reported that its
membership base included state boards of education, state and local
superintendents, governors, state and federal legislators,
administrators, teachers, parents and other community leaders.

Administered by the Department's Office of Innovation and Improvement
(OII), the Department's FIE supports nationally significant programs to
improve the quality of elementary and secondary education at the state
and local levels. In addition, the FIE supports grants to state and
local education agencies, nonprofit organizations, for-profit
organizations and other public and private entities that have been
identified by the Congress in appropriations legislation. During the
period July 1, 2002, to December 31, 2004, ELC received three FIE
grants, totaling \$23,376,534, for the FTL project. The first was a
\$3,501,000 unsolicited grant, awarded on July 1, 2002, (Award Number
R215U020001) for FTL Phase I. The second was a \$9,934,999
Congressionally directed grant, awarded on May 1, 2003, (Award Number
U215K030213) for FTL Phase II. The third was a \$9,940,535
Congressionally directed grant, awarded on June 25, 2004, (Award Number
U215K040252) for FTL Phase III. In addition, for fiscal year 2005,
Congress directed six grants, totaling \$9,594,623 in awards, to ELC for
the FTL project in various states.

ELC described the FTL project as a package of tools to assist states and
school districts in meeting the requirements of the No Child Left Behind
Act (NCLB). FTL provided technology resources and support to
approximately 600 schools in 12 states. According to ELC, FTL helps
teachers and administrators incorporate standards-based curriculum into
their classrooms, and assists with the analysis and reporting of student
performance data. FTL's service providers included Accountability Works,
Achievement Technologies, The Princeton Review, and the Milken Family
Foundation. Appendix A details ELC's objectives and measurable outcomes
for FTL Phases II and III, as described in ELC's grant applications
submitted to the Department.

Since 2003, major changes have occurred at ELC. Eight of ELC's board of
directors and ELC's Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer, and President have resigned. On October 1,
2004, ELC announced a planned merger with Accountability Works, one of
its subcontractors, with the President of Accountability Works serving
as ELC's Chief Executive Officer. In November 2005, ELC announced that
ELC and Accountability Works would remain independent organizations.
Additionally, in November 2005, ELC planned or implemented the following
changes:(1) ELC would focus exclusively on its school-based initiative,
(2) ELC would change its name to Following the Leaders to reflect the
new focus, (3) a new Chief Executive Officer would be appointed, and (4)
the organization's headquarters would move to Tennessee. According to
ELC, the new organization's mission will be to serve as a catalyst for
the application of technology to core instructional processes in order
to raise student achievement and fulfill the goals of NCLB. To
accomplish its mission, the new organization stated that it will assist
schools and districts in the selection and implementation of
technology-based resources and support services designed to help
students achieve academic proficiency in core subjects.

On June 9, 2005, the Department designated ELC as a high-risk grantee
with special conditions on its grants. The Department made this
determination based upon the following: (1) ELC was not timely in filing
its single audit covering fiscal year 2003, and there had been no
significant single audit activity covering fiscal year 2004; (2) ELC had
agreed that its fiscal accountability practices in the past have been
problematic and that ELC is improving its practices to address these
problems; and (3) ELC identified that it misspent approximately
\$272,000 in fiscal year 2002 funds, and single audits for fiscal years
2002 and 2003 have identified fiscal problems and questioned costs. The
Department placed special conditions on the grants to ELC, which
include: (1) grant funds must be deposited in and disbursed from a
separate account and a clear and effective audit trail is required; (2)
ELC will enter into a repayment agreement with the Department for the
funds that it cannot account for properly; (3) ELC will be paid by the
Department on a reimbursement basis; (4) ELC will institute appropriate
fiscal controls; (5) ELC must make arrangements for the preparation of
its fiscal year 2004 single audit and the fiscal year 2005 single audit
will be filed timely; (6) ELC must have an approved indirect cost rate
or direct cost allocation plan approved by the Department; and (7) ELC
must promptly provide the Department with any requested records and
information.

# Audit Results

The objectives of our audit were to determine if (1) federal funds drawn
down by ELC for the FTL program were used for ELC's operations, and (2)
expenditures allocated to the federally funded FTL program were
reasonable, allocable, and allowable in accordance with regulations. We
found that ELC drew down grant funds that could have been used to cover
operating deficits in ELC's non-FTL activities, and that expenditures
allocated to the FTL program were not reasonable, allocable, and
allowable in accordance with regulations. Specifically, we found that
ELC overdrew grant funds, did not have an approved indirect cost plan,
and charged questioned and unsupported costs to federal grant funds.

ELC's General Comments:

ELC believes that it is now in full compliance with all regulations
governing the use of federal funds. In addition, ELC noted that it was
ELC's reporting of financial mismanagement and the overdraw of federal
funds to the Department that resulted in our review of ELC's 2004
finances. ELC noted that throughout the period of our audit, ELC had not
closed its 2004 accounting records. ELC was also completing its 2003
audit and reviewing and adjusting the 2004 and 2005 accounting records
in order to make them accurate and to comply with regulations. ELC
believed that many of the shortcomings identified by our audit would
have been corrected as a result of its internal review process. ELC
concurred with the findings concerning financial protocols, and noted
that it had corrected many of the accounting entries. ELC believed its
corrective actions were given minimal attention in the audit report.

OIG's Response:

The audit report noted that ELC had informed the Department that it had
overdrawn grant funds and that ELC's accounting records for 2004 were
not finalized. In response to ELC's statement that its 2004 accounting
records were not finalized, the expenditures that we reviewed had been
charged to the federal grants at the time our audit work was performed.
Furthermore, we disagree with ELC's statement that the report gave
minimal attention to the corrective actions taken by ELC. The report
noted the corrective actions taken by ELC regarding drawdowns and
indirect costs. Additionally, the report noted, in several places, the
questioned and unsupported costs removed from the FTL Phase II and III
grants by ELC.

# Finding No. 1 - ELC Overdrew Following the Leaders Phase II Grant Funds

ELC overdrew the FTL Phase II grant by \$495,326. As a result, ELC did
not comply with regulations in 34 C.F.R. § 74.22 concerning the drawdown
of grant funds. Regulations specify that:

-   "Cash advances to a recipient organization are limited to the
    minimum amounts needed and be timed to be in accordance with the
    actual, immediate cash requirements of the recipient organization in
    carrying out the purpose of the approved program or project." 34
    C.F.R. § 74.22(b)(2).[^2]

-   "The timing and amount of cash advances are as close as is
    administratively feasible to the actual disbursements by the
    recipient organization for direct program or project costs and the
    proportionate share of any allowable indirect costs." 34 C.F.R. §
    74.22(b)(3).

In March 2005, ELC informed the Department that it had overdrawn FTL
Phase II grant funds by \$272,674. ELC\'s calculated FTL Phase II
overdraw amount was based on accrued expenses, not cash basis
expenditures, and included a March 18, 2005, drawdown of \$22,500. We
initially calculated a cumulative FTL Phase II accrual basis overdraw of
\$273,520 as follows:[^3]

+-------------------------------------------------------+--------------+
| #### Cumulative Drawdowns to March 18, 2005           | \$9,916,740  |
+-------------------------------------------------------+--------------+
| Less: Initial Accrual Basis Expenses for Calendar     | (            |
| Years 2003 and 2004                                   | \$9,643,220) |
+-------------------------------------------------------+--------------+
| Cumulative Accrual Basis FTL Phase II Grant Overdraw  | \$273,520    |
+-------------------------------------------------------+--------------+

During the performance of our audit, ELC adjusted the FTL Phase II grant
expenses, resulting in the FTL Phase II grant overdraw increasing to
\$495,326. ELC\'s adjustments, totaling \$221,806, included removing
from FTL Phase II grant expenses \$74,170 for unallowable and
unsupported expenses identified during the audit and charging a
\$148,000 expenditure initially posted to the FTL Phase II grant to the
FTL Phase III grant. We calculated a cumulative FTL Phase II accrual
basis overdraw of \$495,326 as follows:

+-------------------------------------------------------+--------------+
| #### Cumulative Drawdowns to March 18, 2005           | \$9,916,740  |
+-------------------------------------------------------+--------------+
| Less: Revised Accrual Basis Expenses for Calendar     | (            |
| Years 2003 and 2004 (as of September 2, 2005)         | \$9,421,414) |
+-------------------------------------------------------+--------------+
| Cumulative Accrual Basis FTL Phase II Grant Overdraw  | \$495,326    |
+-------------------------------------------------------+--------------+

Because ELC had not finalized its 2004 accounting records, the amount of
FTL Phase II grant expenditures was subject to revision. Any revisions
to FTL Phase II grant expenditures would affect the amount of the FTL
Phase II grant overdraw.

The FTL Phase II grant overdraw could have covered ELC\'s operating
deficits (i.e., expenses in excess of revenue) in 2004. ELC reported
deficits of \$501,595 for non-FTL cost centers in calendar year
2004.[^4] As noted previously, ELC\'s accounting figures are on an
accrual basis, not on a cash basis.

These instances of non-compliance appear to be the result of inadequate
controls. For example, ELC did not maintain supporting documentation and
failed to reinforce and follow established procedures. Regulations in 34
C.F.R. § 74.21(b)(5) and § 74.22(b)(1)(i) require grantees to maintain
written procedures that minimize the time elapsing between the transfer
of funds and disbursement by the recipient. ELC had a written drawdown
policy in place as of October 2002. The policy required (1) an
accounting statement to be prepared to show the funds needed to meet
invoices and payroll, (2) a drawdown for the expenses calculated, and
(3) all funds from the draw to be used within three working days. ELC\'s
former Director of Federal Programs prepared the policy, however, it
appears that ELC's former management did not inform ELC employees of the
policies and procedures regarding drawdowns. As a result, ELC employees
were not knowledgeable of and did not follow the policies and procedures
regarding drawdowns. In addition, ELC did not maintain supporting
documentation for grant drawdowns during the period January 2004 through
June 2004. We reviewed ELC\'s support for 24 drawdowns, totaling
\$1,543,470, of FTL Phase II grant funds during the period December 2003
to March 2005. We found that ELC did not maintain support for 11 of the
drawdowns, totaling \$1,298,924, made during the period January 2004
through June 2004.

ELC\'s recent management has adopted a drawdown policy that requires (1)
a weekly review of invoices, (2) ELC's finance department, along with
the grant coordinator, to prepare and sign the drawdown requests (3) the
drawdown requests to be forwarded to the Chief Executive Officer for
final review, approval, and signature before the drawdowns occur, and
(4) the issuance of checks once funds are transferred to ELC\'s checking
account.

In addition to the overdrawn funds, ELC may have earned excess interest
on the grant funds. The funds drawndown by ELC were deposited into a
bank account established for federal funds. In general, the grant funds
were transferred from this bank account into ELC\'s Operating and Sweep
bank accounts to cover disbursements. ELC's Operating and Sweep bank
accounts earned \$721 of interest in 2004 and \$619 of interest during
the period January 2005 through June 2005. Regulations in 34 C.F.R. §
74.22(l) specify that interest earned on federal advances deposited in
interest bearing accounts shall be remitted annually to the Department.
However, recipients may retain interest amounts up to \$250 per year for
administrative expenses.

[Recommendations:]{.smallcaps}

We recommend that the Department's Chief Financial Officer and Assistant
Deputy Secretary for Innovation and Improvement require ELC to:

1.1 Return to the Department \$495,326, and any other grant funds,
drawndown and not actually disbursed by the grantee for FTL Phase II
grant costs.

1.2 Submit documentation (such as vendor invoices and timesheets) in
support of each drawdown request for grant funds, along with proof that
the grant funds were disbursed (such as cancelled checks or payroll
reports) for the purpose of the drawdown request.

1.3 Provide a schedule detailing the adjustments to FTL Phase II grant
expenses made by ELC to determine any revised overdraw amount.

1.4 Work with the Department to determine the interest earned on the
federal funds and the amount of such interest to be remitted to the
Department.

ELC's Comments:

ELC concurred that it did not comply at times with regulations
concerning the drawdown of grant funds and that it had overdrawn grant
funds. In addition, ELC has taken corrective actions, such as entering
into a repayment plan with the Department to return the overdrawn funds.

ELC noted that, we reviewed 24 of the 63 FTL Phase II grant drawdowns,
and that 10 drawdowns did not have proper documentation. ELC also noted
that, due to adjustments and corrections to the 2004 accounting records,
the overdraw amount had decreased from the \$495,326 contained in the
audit report to \$476,169 (subject to further adjustments).

OIG's Response:

We acknowledge the corrective actions that ELC has taken. In response to
ELC's comments concerning the number of FTL Phase II grant drawdowns, we
note that between May 2003 and March 2005, ELC had made a total of 64
drawdowns (not 63 drawdowns noted by ELC). In addition, as noted in the
audit report, our review of the FTL Phase II grant drawdowns was limited
to the 24 drawdowns made during the period December 2003 through March
2005, and we found ELC did not maintain support for 11 (not 10 noted by
ELC) of the 13 drawdowns made during the period January 2004 through
June 2004.

In response to ELC's comments that the FTL Phase II overdraw had
decreased from the amount contained in Finding 1, we have added
Recommendation 1.3. Furthermore, based upon further review, we have
added to this report information regarding ELC's interest earnings and
Recommendation 1.4.

# Finding No. 2 - ELC Did Not Have an Approved Indirect Cost Plan

ELC did not have an approved indirect cost plan. As a result, indirect
costs may not have been properly allocated based upon the benefits
provided to each activity of the organization. ELC believed that use of
the OMB Circular A-122\'s direct allocation method to allocate indirect
costs did not require prior approval from the Department. Thus, it did
not submit a plan for approval. In January 2005, ELC contacted the OII
program officer to discuss the use of the direct allocation method.
However, the discussion did not cover ELC\'s actual methodology for
applying the direct allocation method or if the Department's approval of
a cost allocation plan was required.

Our review disclosed \$90,532 in indirect costs that may not have been
properly allocated to the FTL Phase II and III grants.[^5] The indirect
costs allocated to the FTL grants included \$68,953 in rent costs,
\$19,422 in other indirect costs, and \$2,157 in charges made with ELC's
corporate American Express credit cards.

ELC\'s 2002 Cost Policy Statement noted that indirect costs are
allocated under a direct allocation basis using salaries and wages as
the allocation base. In addition, ELC\'s 2005 Finance Protocol Manual
stated that joint costs are charged to the FTL grants using the OMB
Circular A-122\'s direct allocation method and that monthly timesheet
activity is used to establish the rate for allocating joint costs to the
FTL grants. However, ELC used several methods to allocate indirect
costs. For example, ELC allocated American Express charges to the FTL
grants based upon one of the following allocations: 100 percent to FTL
cost centers; 33 percent each to cost centers for FTL, ELC, and the
American Board for Certification of Teacher Excellence (ABCTE); and 60
percent to ELC cost centers and 40 percent to FTL cost centers. The 40
percent allocation to the FTL program was based on an analysis of
payroll allocations for the period August 1, 2003, to December 31, 2003,
that showed 42 percent of ELC's staff time being spent on FTL
activities.

Under OMB Circular A-122, Attachment A, Paragraph D, *Allocation of
Indirect Costs and Determination of Indirect Cost Rates*, there are
three methods for calculating indirect cost rates: the simplified
allocation method, the multiple allocation base method, and the direct
allocation method.[^6] In addition, under OMB Circular A-122, a
non-profit organization which has not previously established an indirect
cost rate with a federal agency is required to submit its initial
indirect cost proposal immediately after the organization is advised
that an award will be made and, in no event, later than three months
after the effective date of the award. Furthermore, regulations in 34
C.F.R. § 75.560(b) specify that grantees must have a current indirect
cost rate agreement to charge indirect costs to a grant. To obtain an
indirect cost rate agreement, a grantee must submit an indirect cost
proposal to its cognizant agency and negotiate an indirect cost rate
agreement.[^7] The Department's first grant award, for FTL Phase I, was
made to ELC on July 1, 2002.

The direct allocation method is used by some non-profit organizations
that treat all costs as direct costs except general administration and
general expenses. These organizations generally separate their costs
into three basic categories: (1) general administration and general
expenses, (2) fundraising, and (3) other direct functions, including
projects performed under federal awards. Joint costs, such as
depreciation, rental costs, operation and maintenance of facilities,
telephone expenses, and the like are prorated individually as direct
costs to each category and to each award or other activity using a base
most appropriate to the particular cost being prorated. This method is
acceptable, provided each joint cost is prorated using a base which
accurately measures the benefits provided to each award or other
activity. The bases must be established in accordance with reasonable
criteria, and be supported by current data. Under the direct allocation
method, indirect costs consist of general administration and general
expenses and the indirect cost rates are computed using the simplified
allocation method, which ELC did not use.

ELC's 2002 Cost Policy Statement was based on a model cost policy
statement issued by the Department of Labor, Business Operation Center's
Indirect Cost Rate Determination Guide. The Department's Office of the
Chief Financial Officer, Indirect Cost Group provides a similar model
cost policy statement to grantees requesting information on indirect
costs. The model cost policy statement suggests that office space costs
should be based on square footage, directly and indirectly as follows.
The cost of office space occupied by staff whose salaries are directly
charged is charged directly; the cost of space for staff whose salaries
are charged on a mixed basis is allocated on a mixed basis in the same
ratio as their salaries are allocated; the cost of space occupied by
staff whose salaries are indirectly charged is charged indirectly; and
the cost of space required for common areas is accounted for as an
indirect cost.

ELC's 2004 rent costs totaled \$141,764, of this amount, \$68,953 was
allocated to the FTL grants. The 2004 rent costs charged to the FTL
grants may not have been properly allocated for the following reasons:
(1) ELC did not have an approved indirect cost plan, (2) ELC allocated
total rent costs based upon a weighted average of timesheet activity
allocated to the FTL grants, rather than on an individual employee
basis, and (3) ELC did not exclude the cost of common areas from the
rent costs allocated to the FTL grants.

In addition to rental costs, our review of the disbursements allocated
to the FTL Phase II and III grants identified 20 disbursements for other
indirect costs totaling \$19,422. For the most part, ELC allocated 40
percent of the total amount of the payments to the FTL grants. For
example, ELC allocated 40 percent of various payments for
telecommunications, information technology services, and financial and
accounting services to the FTL grants. Furthermore, our review of ELC\'s
American Express credit card charges allocated to the FTL Phase II and
III grants identified 13 charges for various indirect costs, totaling
\$2,157. For all of the American Express credit card charges, 40 percent
of the total amount was allocated to the FTL grants.

ELC\'s lack of an approved indirect cost plan was also a finding in
ELC\'s calendar year 2003 single audit report and was based upon the
independent auditor\'s inquiries with the Department\'s Indirect Cost
Group and Office of Inspector General to determine if prior approval of
the cost allocation plan was necessary.

In July 2005, ELC notified us that they have begun working with the
Department on the treatment of indirect costs.

[Recommendations:]{.smallcaps}

We recommend that the Department's Chief Financial Officer and Assistant
Deputy Secretary for Innovation and Improvement require ELC to:

2.1 Submit an indirect cost plan to the Department\'s Office of the
Chief Financial Officer for negotiation and approval.

2.2 Refund the portion of the \$90,532, and any other costs allocated to
the FTL grants, on or after January 1, 2004, that are not in accordance
with the indirect cost plan approved by the Department.

ELC's Comments

ELC believed that prior approval was only required when applying for an
indirect rate, and that prior approval was not required to allocate
joint costs on a direct basis. In December 2005, ELC submitted an
indirect rate proposal to the Department. ELC noted that, if approved,
it would be owed funds for indirect costs from 2003 to present, and that
these funds would reduce the amount of the overdraw of FTL Phase II
grant funds.

OIG's Response:

We acknowledge the corrective action taken by ELC.

# Finding No. 3 - ELC Charged Questioned and Unsupported Costs to the Following the Leaders Grants

In administering the FTL grants, ELC did not comply with the cost
principles contained in OMB Circular A-122, *Cost Principles for
Non-Profit Organizations*. Regulations in 34 C.F.R. § 74.27 specify that
private non-profit organizations use the cost principles in OMB Circular
A-122 for determining allowable costs. ELC is a private non-profit
organization. We found that 28.2 percent of the costs we reviewed were
either questioned (11.1 percent) or unsupported (17.2 percent). In
total, our audit found that ELC charged \$90,721 in questioned costs and
\$140,922 in unsupported costs to the FTL Phase II and III grants. In
August 2005, after ELC had been apprised of the draft audit findings,
ELC removed \$74,990 in questioned costs and \$2,596 in unsupported
costs that were identified during our audit from the FTL Phase II and
III grant costs.

We did not determine the specific cause for each questioned and
unsupported cost charged to the grants because officials and employees
responsible for incurring most of the questioned and unsupported costs
were no longer employed by ELC. The management of ELC is responsible for
establishing and maintaining effective internal control over compliance
with requirements applicable to federal grants. It appears that the
questioned and unsupported costs were the result of weak or non-existent
internal controls established and maintained by the management of ELC.
For example, ELC had weak or non-existent internal controls to ensure
that ELC's policies regarding the reasonableness, allocability, and
allowability of grant costs were followed and that grant expenditures
were supported with adequate documentation. Furthermore, in 2002, ELC's
former Director of Federal Programs created a cost policy statement, the
purpose of which was to determine the reasonableness, allocability, and
allowability of costs in accordance with the provisions of the
applicable federal cost principles and terms and conditions of awards,
however the policy does not describe the process for making these
determinations. These policies covered direct and indirect costs, travel
costs, and unallowable costs such as fundraising, entertainment,
alcoholic beverages, advertising costs, and fines and penalties. Recent
ELC management did not locate these policies until late April 2005,
after the start of our audit and following our request for such
policies. In addition, the recent Director of Federal Programs noted
that he was never informed of these policies by former ELC management.
ELC\'s recent management has adopted policies that cover items such as
allowable costs, use of company credit cards, travel, and payroll.

During the period January 1, 2004, to December 31, 2004, 382
disbursements, totaling \$5,212,117, were issued from ELC's operating
account.[^8] These disbursements were allocated to both the FTL grants
and ELC\'s other cost centers. We judgmentally selected transactions,
totaling \$1,474,712, for review. Of the transactions we selected,
\$820,190 (55.6 percent) was allocated to the FTL Phase II and III
grants. A table summarizing our selections and the questioned and
unsupported costs identified is provided in Appendix D.

**ELC Charged QuestionedCosts to the FTL Grants.**

ELC charged \$90,721 in questioned costs to the FTL Phase II and III
grants. The questioned amount consists of \$80,455 charged to the FTL
Phase II grant and \$10,266 charged to the FTL Phase III grant. Of the
total questioned amount, ELC removed \$74,990 from the FTL grant costs,
consisting of \$71,865 from the FTL Phase II grant and \$3,125 from the
FTL Phase III grant. As a result, \$15,732 of costs remained questioned.
A complete listing of the questioned costs is provided in Appendix B.
The questioned costs included amounts spent on the following:

####### **Meals and Entertainment**

ELC allocated 40 percent (\$4,821) of \$12,052 in charges for meals and
entertainment. The charges consisted of a December 2003 Holiday Party, a
February 2004 breakfast meeting for ten guests, a May 2004 reception and
dinner, and a January 2004 dinner for 11 guests. Entertainment costs
such as social activities, meals, rentals, and gratuities are
unallowable under OMB Circular A-122, Attachment B, paragraph 14,
*Entertainment costs*. The amount allocated to the FTL grants included
\$1,630 for alcoholic beverage charges. Costs for alcoholic beverages
are unallowable under OMB Circular A-122, Attachment B, paragraph 2,
*Alcoholic beverages*. Additionally, in 2002, ELC had prepared a cost
policy that stated that entertainment and alcoholic beverage costs are
unallowable charges to federal awards.

In August 2005, ELC removed from the FTL Phase II and III grant expenses
the \$2,640 for the December 2003 Holiday Party, \$304 for the January
2004 restaurant charge, and \$1,643 for the May 2004 reception and
dinner charge. ELC noted that the February 2004 breakfast meeting
expense was for an ELC board meeting. The breakfast meeting cost does
not represent a reasonable expense because the \$583 (of which, 40
percent, or \$233, was allocated to the FTL Phase II grant) was for ten
people, resulting in a cost of \$58 per attendee. By comparison, the
Government Services Administration's (GSA) 2004 per diem meals and
incidental expenses (M&IE) rate for Washington, DC was \$51, of which
\$10 was for breakfast.

####### **Travel Costs**

ELC charged the FTL grants for \$4,501 in travel costs not allocable to
the FTL Phase II or III grants. This amount consisted of \$2,304 for
costs to attend an Alliance for School Choice retreat and \$2,197 for
airfare costs. Under OMB Circular A-122, Attachment A, Subparagraph A.4,
a cost is allocable to a grant award if it is incurred specifically for
the award, benefits both the award and other work and can be distributed
in a reasonable proportion to the benefits received, or is necessary for
the overall operation of the organization. In addition, OMB Circular
A-122, Attachment B, paragraph 55, *Travel costs*, states travel costs
are allowable when they are directly attributable to specific work under
an award or are incurred in the normal course of administration of the
organization. The travel did not fit the definition of an allocable or
allowable cost, as detailed below.

-   In August 2004, ELC\'s former Chief Executive Officer traveled to
    Teton Village, Wyoming to attend an Alliance for School Choice
    retreat. The Alliance for School Choice works to promote, implement,
    and enhance K-12 educational choice. School choice is not an FTL
    related activity. Registration, lodging, airfare and rental car
    costs totaled \$5,761, of which \$2,304 (40 percent) was allocated
    to the FTL Phase II and III grants. The travel costs were questioned
    because the trip does not appear FTL related or necessary for the
    administration of ELC. Additionally, in 2002, ELC had prepared a
    travel policy that stated that travel costs are limited to those
    allowable under Federal Travel Regulations. The lodging costs
    incurred were \$269 per night plus tax and a resort fee of \$11 per
    night, whereas the GSA lodging rate was \$115 per night. The excess
    lodging allocated to the FTL grants was \$282 for four nights.
    Furthermore, ELC allocated \$347 in airfare costs to the FTL Phase
    III grant for the former Chief Executive Office's husband to attend
    the retreat. In addition, \$800 for the conference registration fee
    for the former Chief Executive Officer and her husband was allocated
    to the FTL Phase II grant. In August 2005, ELC removed from the FTL
    Phase II and III grant expenses the \$2,304 of questioned charges
    related to the Alliance for School Choice retreat.

```{=html}
<!-- -->
```
-   Six charges for airfare totaling \$4,708, of which \$2,197 was
    allocated to the FTL Phase II grant, do not appear FTL related or
    necessary for the operations of ELC. The airfare was for trips to
    Alberta, Canada for ELC\'s former Chief Executive Officer and former
    Director of Communications and roundtrip airfare from Hawaii to
    Washington, DC for ELC\'s former President. Alberta, Canada and
    Hawaii are not among the states participating in the FTL program. In
    August 2005, ELC noted that it intended to remove the \$1,701 in
    charges for airfare to Canada and that the \$496 in airfare from
    Hawaii was under review. ELC noted that one of its staff members
    resided in Hawaii and that the travel charge might therefore be FTL
    related.

######### 2003 and 2004 Annual Conferences

The FTL grants were charged \$61,696 for ELC\'s 2003 annual conference
and \$7,352 for ELC\'s 2004 annual conference. The annual conference
costs are questioned because they contain charges specifically
unallowable under OMB Circular A-122, Attachment B, *Selected Items of
Cost* and do not fully comply with the general cost principles contained
in OMB Circular A-122, Attachment A.

**Selected Items of Questioned Cost**

The FTL Phase II grant was charged \$61,696 for ELC\'s 2003 annual
conference held in Nashville, Tennessee in September 2003. These costs
include \$60,000 for the conference center's charges (\$20,000 was paid
in November 2003 and \$40,000 was paid in February 2004), \$508 for
audio-visual services paid in April 2004, \$1,063 for photography
services and \$125 for ELC\'s \"Rebel With a Cause\" jacket presented as
an award, both paid in March 2004.[^9] Our review of the conference
center expenses allocated to the FTL grants for lodging, banquet, room
service, and other charges disclosed unreasonable and unallowable
charges. For example:

-   ELC\'s total banquet charges were \$73,567, of which \$39,800
    (54.1percent) was paid from the FTL Phase II grant. An undetermined
    amount of banquet charges incurred by ELC was unreasonable. ELC\'s
    banquet charges exceeded the GSA M&IE rate of \$46 per day.[^10] For
    example, on one day, ELC charged 30 lunches at \$26 per person, 50
    reception charges at \$35 per person, and 80 deluxe hosted bar
    packages at \$13 per person. On another day, ELC charged 340 dinners
    at \$59 per person, 225 continental breakfasts at \$16 per person,
    and 63 bottles of wine at \$32 each. Included in the banquet charges
    was \$2,415 (54.1 percent of total) for alcoholic beverage costs,
    including service charges and taxes, consisting of \$822 for the
    reception and \$1,593 for the dinner. Alcohol is an unallowable cost
    under OMB Circular A-122 Attachment B, paragraph 2, *Alcoholic
    beverages*, and ELC\'s own 2002 cost policy.

```{=html}
<!-- -->
```
-   ELC\'s 2002 travel policy stated that travel costs are limited to
    those allowable under Federal Travel Regulations. ELC paid \$159 per
    night plus tax for lodging when GSA's maximum per diem rate for
    Nashville, Tennessee in 2003 was \$103 per night, consisting of the
    GSA rate plus a 25 percent conference lodging allowance. ELC\'s
    total lodging cost was \$19,076, whereas using the GSA rate with a
    25 percent conference lodging allowance results in lodging costs of
    \$12,269. The excess lodging amount is \$6,807, of which \$3,683
    (54.1 percent) was paid from the FTL Phase II grant.

```{=html}
<!-- -->
```
-   The conference center's invoices included \$3,977 in total interest
    charges due to late payments by ELC, of which \$2,152 (54.1 percent)
    was paid from the FTL Phase II grant. Interest is unallowable under
    OMB Circular A-122, Attachment B, paragraph 23, *Interest,
    fundraising, and investment management costs*.

-   Excluding telecommunications, business center, and parking charges,
    ELC\'s total room service charges were \$2,272, of which \$1,229
    (54.1 percent) was paid from the FTL Phase II grant. We were unable
    to determine if all the room service charges were reasonable and
    necessary based upon the invoices obtained, the length of stay, and
    the meals provided at conference. However, \$261 of the room service
    charges paid from the FTL Phase II grant was unreasonable and
    questionable. These costs include \$57 for meals where meals were
    already provided during ELC\'s conference; \$106 in unnecessary
    laundry service charges given the length of stay; \$6 for in-room
    movies because entertainment costs are unallowable under OMB
    Circular A-122, Attachment B, paragraph 14, *Entertainment costs*;
    \$6 for golf shop purchases because goods or services for personal
    use are unallowable under OMB Circular A-122, Attachment B,
    paragraph 18, *Goods or services for personal use*; \$67 for meals
    charged after the close of the conference; and \$19 for purchases of
    bottled water from the guestrooms.

In August 2005, ELC removed the \$61,696 of 2003 annual conference costs
charged to the FTL II grant.

The FTL Phase III grant was charged \$7,352 for ELC\'s 2004 annual
conference held in Orlando, Florida in December 2004. These costs, which
were paid in October and November 2004, include \$4,915 for advertising
and \$2,220 for the printing and mailing of postcards. In addition, in
September 2004, \$217 was charged for \"Rebel With a Cause\" jackets
presented as awards. OMB Circular A-122 specifies that selected items of
cost are unallowable, for example:

-   ELC charged \$4,915 to the FTL Phase III grant for the image,
    placement, and purchase of an advertisement for the annual
    conference. Advertising is unallowable under OMB Circular A-122,
    Attachment B, paragraph 1, *Advertising and public relations costs*.
    Additionally, ELC\'s 2002 cost policy stated that advertising costs
    (other than for recruitment of staff or for the disposal of
    property) are unallowable charges to federal awards.

-   ELC allocated \$217 to the FTL Phase III grant for \"Rebel With a
    Cause\" jackets that were presented as awards. However, the cost of
    memorabilia, gifts and souvenirs is unallowable under OMB Circular
    A-122, Attachment B, paragraph 1, *Advertising and public relations
    costs*. In August 2005, ELC removed this cost from the FTL Phase III
    grant expenses.

Pursuant to the selected items of cost contained in OMB Circular A-122,
Attachment B, paragraph 29, *Meetings and Conferences*, to the extent
that meetings and conference costs are identifiable with a particular
cost objective, they should be charged to that objective. Therefore, the
2003 annual conference costs should have been charged to ELC's annual
conference cost center, as ELC reported \$90,455 of annual conference
income in excess of expenses in 2003. The annual conference revenue
reported in 2003 was sufficient to cover ELC\'s 2003 annual conference
costs charged to the FTL Phase II grant. In addition, the 2004
conference costs should have been charged to the annual conference cost
center, as ELC reported revenue in 2004 for the annual conference.

**Compliance With General Cost Principles**

ELC's treatment of annual conference costs did not comply with general
cost principles. Under general cost principles, the annual conference
costs should have been charged to ELC\'s annual conference cost center.
Under OMB Circular A-122, Attachment A, Section B, paragraph 1, direct
costs are those that can be identified specifically with a particular
final cost objective. Costs identified specifically with other cost
objectives of the organization are direct costs of those objectives and
are not to be assigned to other awards directly or indirectly. In
addition, under paragraph 4, the costs of activities, such as meetings
and conferences (except those held to conduct the general administration
of the organization), performed primarily as a service to members,
clients, or the general public when significant and necessary to the
organization\'s mission must be treated as direct costs. Also, ELC\'s
2002 cost policy stated that the cost of activities performed as a
service to members, clients, or the general public are classified as
direct costs, and that such activities include meetings and conferences,
except those held to conduct the general administration of ELC.

Similarly, allocability is among the general criteria for determining
the allowability of costs. Under OMB Circular A-122, Attachment A,
Section A, paragraph 4, a cost is allocable to a grant award if it is
incurred specifically for the award, benefits both the award and other
work and can be distributed in a reasonable proportion to the benefits
received, or is necessary for the overall operation of the organization.
ELC did not include the annual conference as being either a specific
objective or measurable outcome of the FTL project in the FTL Phase II
and III grant applications submitted to the Department. (Appendix A
details ELC's objectives and measurable outcomes for FTL Phases II and
III as detailed in ELC's grant applications submitted to the
Department.) Given the amount of the conference programming devoted to
FTL related matters, ELC\'s charges to the FTL grants were not
reasonable. ELC charged 54.1 percent of the 2003 conference center costs
and 40 percent of the audio-visual and award costs to the FTL Phase II
grant. However, it appears that only 27 percent (approximately) of the
2003 conference\'s programming may have been devoted to FTL related
matters.

In general, ELC intended to allocate 90 percent of 2004 conference costs
to the FTL Phase III grant when the costs were paid in 2004 and 2005.
However, it appears that only 66 percent (approximately) of the 2004
conference\'s programming may have been devoted to FTL related matters.
ELC believes that approximately 90 percent of the 2004 conference was
FTL related, because the overall purpose of the FTL program is to
support the implementation of NCLB and the FTL grant application noted
ELC would disseminate information through speeches and other methods.
The difference in the percentage (i.e., 66 percent versus 90 percent) of
the 2004 annual conference that was FTL related is mainly due to seven
conference sessions, that while they appear to be related to NCLB, do
not appear to be FTL related. These conference sessions include (1)
*General Session: No Child Left Behind: Real Progress So Far?*, (2)
*Reading for All Students: Research-Based Practices*, (3) *General
Session: The President's Next Term Agenda*, (4) *Virtual Schools: A New
Reality?*, (5) *Using Research-Based Practices to Improve School
Discipline: What Works in the Real World*, (6) *Charter Schools:
Promoting Growth and Trimming Chaff*, and (7) lunch with the K12
Chancellor for the Florida Department of Education. ELC did not maintain
documents, such as presentation materials or session handouts, to
support its contention that the sessions were FTL related.

**[Printing Costs]{.underline}**

The FTL Phase II grant was charged \$5,148 for two payments for printing
costs. These costs are questioned because they were not allocable to the
FTL program. For one payment made in March 2004, of which \$2,575 was
charged to the FTL Phase II grant, the invoices were specifically for
printing ELC and ABCTE related items, and should have been charged
directly to ELC\'s communications and marketing and ABCTE cost centers,
respectively. For the second payment, made in February 2004, of which
\$2,573 was charged to FTL Phase II grant, the invoices indicated that
the services were for ELC, ABCTE and annual conference matters. As such,
these costs should have been directly charged to ELC\'s cost centers for
communications and marketing, ABCTE, and annual conference,
respectively. In August 2005, ELC removed the \$2,573 in costs for the
February 2004 payment from FTL Phase II grant expenses.

**[Interest, Delinquency and Late Payment Fees]{.underline}**

ELC charged \$1,294 for interest, delinquency, and late payment fees to
the FTL Phase II and III grants. Interest costs are unallowable under
OMB Circular A-122, Attachment B, paragraph 23, *Interest, fundraising,
and investment management costs*. In addition, when grant funds are
available for the payment of expenses, incurring interest, delinquency,
or late payment fees is not a prudent expenditure of federal grant
funds. In August 2005, ELC removed from FTL II grant expenditures
\$1,164 of American Express credit card delinquency charges.

**[Professional Communication Services]{.underline}**

Portions of three payments for professional communication services were
questioned because not all activities were fully allocable to the FTL
program. The payments were made in September, October, and December
2004, and \$50,700 was charged to FTL Phase III grant funds. We were
unable to determine the allowable amount because the invoices did not
contain sufficient information to permit us to do so. While each invoice
contained FTL related activities, the questioned activities included:

-   The June 23, 2004, invoice for \$16,200 indicated work performed on
    the message and mission of the new ELC, annual conference planning,
    soliciting additional business support, and ABCTE. The costs for
    these services should have been determined and charged to ELC\'s
    communications and marketing, annual conference, fundraising and
    development, and ABCTE cost centers, respectively. The consultant's
    contract called for services in the following three areas:
    communicate with ELC/FTL target audiences, media relations, and
    long-term strategies. Under media relations activities, the
    consultant was to counsel ELC on how to handle inaccurate media
    eruptions, create a strategic media plan for building relationships
    and delivering news to education writers, and monitoring news
    coverage to respond immediately to any negative news and to see
    opportunities and trends in media reports. The initial contract
    covered the period May and June 2004 and was for \$16,200, of which
    60 percent was for communications with target audiences and 40
    percent was for media relations.

-   The July 31, 2004, and September 21, 2004 invoices, totaling
    \$16,200, indicated work on the annual conference and daily scans of
    news coverage. The October 15, 2004, invoice for \$10,200 indicated
    work on the annual conference. In addition, the November 9, 2004,
    invoice for \$8,100 indicated work on the annual conference and
    ELC\'s communications plan. The costs for these services should have
    been determined and charged to ELC\'s respective cost centers, such
    as the annual conference and communications and marketing cost
    centers.

In addition, portions of six payments, totaling \$93,211, made in
September 2003 through March 2004 for professional communication
services may have been over charged to the FTL Phase II grant. Based
upon our review of the information contained in seven of the
consultant\'s invoices, totaling \$81,721, for the period June 2003
through December 2003, \$42,153 in costs were allocable to the FTL Phase
II grant. However, based upon information contained in ELC\'s accounting
records, \$62,806 in costs for these invoices may have been charged to
the FTL Phase II grant. As a result, up to \$20,653 in costs for the
seven invoices may have been over charged to the FTL Phase II grant. We
were unable to determine the specific amount for each invoice that was
charged to the FTL Phase II grant because ELC\'s accounting records did
not contain sufficient information to permit us to do so. The amount
that may have been over charged consists of the following:

-   The June 2003 invoice indicated that approximately 45.3 percent
    (\$5,753) of the total amount of \$12,700 was attributable to FTL.
    It appears that ELC charged the full amount of the invoice to the
    FTL Phase II grant when it disbursed payments in September 2003 and
    February 2004. As a result, \$6,947 may have been over charged to
    the FTL Phase II grant.

-   The November 2003 invoice indicated that approximately 65.9 percent
    (\$6,408) of the total amount of \$9,727 was attributable to FTL. It
    appears that ELC charged the full amount of the invoice to the FTL
    Phase II grant when it disbursed payments in December 2003 and
    February 2004. As a result, \$3,319 may have been over charged to
    the FTL Phase II grant.

-   The December 2003 invoice indicated that approximately 70.9 percent
    (\$5,488) of the total amount of \$7,737 was attributable to FTL. It
    appears that ELC charged \$6,447 to the FTL Phase II grant when it
    paid the invoice in March 2004. As a result, \$959may have been over
    charged to the FTL Phase II grant.

-   The four invoices for July 2003 through October 2003 indicated that
    \$24,504, of the total amount of \$51,557 was attributable to FTL.
    It appears that ELC charged \$33,932 of the four invoices to the FTL
    Phase II grant when it disbursed payments in September 2003,
    November 2003, and March 2004. As a result, \$9,428 may have been
    over charged to the FTL Phase II grant.

Under OMB Circular A-122, Attachment A, Section 4, a cost is allocable
to a particular cost objective in accordance with the relative benefits
received. As a result, costs not allocable to the FTL grants should have
been charged to the respective cost centers or treated as an indirect
cost.

**ELC Charged Unsupported Costs to the FTL Grants.**

ELC charged \$140,922 in unsupported costs to the FTL Phase II and III
grants. The unsupported amount consists of \$40,010 charged to the FTL
Phase II grant and \$100,912 charged to the FTL Phase III grant. Of the
total unsupported amount, ELC removed \$2,596 from the FTL grant costs,
consisting of \$1,182 from the FTL Phase II grant and \$1,413 from the
FTL Phase III grant. As a result, \$138,327 of unsupported costs
remained. Under OMB Circular A-122, Attachment A, Section A, *Basic
Considerations,* one of the factors affecting the allowability of costs
is that the costs must be adequately documented. Regulations in 34
C.F.R. § 75.730 specify that a grantee shall keep records related to
grant funds that fully show how the grantee uses the funds and maintain
records to facilitate an effective audit. In addition, regulations in 34
C.F.R. § 74.53(b) note that financial records, supporting documents,
statistical records, and all other records pertinent to an award shall
be retained for a period of three years from the date of submission of
the final expenditure report or annual financial report. In general, to
be allowable, both direct and indirect costs must be adequately
supported by source documentation that shows the purposes and
circumstances of the cost's incurrence. A complete listing of the
unsupported costs is provided in Appendix C. The unsupported costs that
ELC charged to the FTL Phase II and III grants include:

####### **American Express Charges**

The unsupported costs include \$18,363 for 85 American Express credit
card charges allocated to the FTL Phase II and III grants. At the start
of the audit, we requested documentation supporting ELC\'s American
Express charges. At that time, ELC's supporting documentation consisted
mainly of the monthly American Express billing statements. In April
2005, ELC requested documentation, such as receipts, directly from
American Express. In July 2005, ELC provided receipts for some of the
selected charges. However, most of the charges remain unsupported
because ELC did not provide documentation that indicated the purpose and
circumstance for the cost incurrence. Of the unsupported American
Express credit card charges allocated to the FTL grants, \$1,487 (16
charges) was for restaurants in the Washington, DC area, \$14,019 (56
charges) was for travel costs, and \$2,857 (13 charges) was for other
costs. Although ELC\'s 2002 travel policy stated costs incurred for
travel are to be supported by auditable travel vouchers, travel vouchers
were not prepared. In August 2005, ELC removed from the FTL Phase II and
III grants six restaurant charges totaling \$1,322 and three charges for
other costs totaling \$1,274. As a result, \$15,767 of unsupported
American Express credit card charges remained allocated to the FTL Phase
II and III grants.

####### **Payroll**

Payroll costs of \$60,685 allocated to the FTL Phase II and III grants
were unsupported. For the 45 timesheets with allocations to FTL that we
reviewed, 18 were not signed by the employee, 10 were signed but not
dated, and 10 were signed and postdated in January 2005. OMB Circular
A-122, Attachment B, paragraph 7, *Compensation for personal services*,
states that time reports must be signed by the individual employee, or
by a responsible supervisory official having first hand knowledge of the
activities performed by the employee.

####### **Professional Services**

In September through December 2004, ELC made three disbursements for
professional communication services, totaling \$50,700, that were
charged to FTL Phase III grant. ELC provided invoices detailing the
activities performed by the consultant, however, as noted above under
unallowable expenses, not all activities performed under the contract
and detailed in the invoices were fully allocable to FTL. We were unable
to determine the unallowable amount because the invoices did not contain
sufficient information as to the time expended on each activity to
permit us to determine the allowable portion. As a result, the payments
were also deemed to be unsupported.

####### **Miscellaneous Disbursements**

The FTL Phase II and III grants were charged \$11,175 for seven
disbursements (\$1,200 for accounting services, \$5,890 for auditing
services, \$2,132 for technology services, \$1,245 for design/printing
services, \$40 for a board member's travel costs, and \$668 for newswire
services). These amounts were unsupported because no invoices or
receipts were provided supporting the payments.

[Recommendations:]{.smallcaps}

We recommend that the Department's Chief Financial Officer and Assistant
Deputy Secretary for Innovation and Improvement require ELC to:

3.1 Refund to the Department \$15,732 for the questioned costs that
remain charged to the FTL grants (\$8,590 for the FTL Phase II grant and
\$7,141 for the FTL Phase III grant).

3.2 Provide accounting records and other supporting documents showing
how ELC charged each of the seven invoices, totaling \$81,721, for
professional communication services for the period June 2003 through
December 2003, and require ELC to refund to the Department the portion
of the \$20,653 deemed over charged to the FTL Phase II grant by the
Department.

3.3 Specify all of the 2003 and 2004 annual conference income and
expenses credited and charged to the FTL Phase II and III grants and
refund to the Department any amounts deemed unallowable by the
Department.

3.4 Provide adequate documentation to show that the unsupported
expenditures of \$138,327 that remain charged to the FTL grants
(\$38,828 for the FTL Phase II grant and \$99,499 for the FTL Phase III
grant) are reasonable, allowable, and allocable to the grant(s), or
refund the expenditures that the Department determines are not
adequately supported.

3.5 Maintain supporting documentation for all FTL grant expenditures;
require consultants to provide invoices detailing the work performed,
the time spent, and the associated costs of each activity performed; and
ensure employees sign and date their timesheets.

3.6 Provide all officials and employees copies of OMB Circular A-122 and
ELC\'s internal policies and procedures for determining allowable costs,
travel, use of charge cards, and payroll; ensure that the officials and
employees comply with the policies and procedures; and require ELC to
maintain documentation that each officer and employee had reviewed such
circular and internal policies and procedures.

**ELC's Comments:**

In regards to the \$15,732 of questioned costs, ELC noted that \$192 in
first class airfare has been corrected; costs of \$11,828 will be
approved on the belief that Department officials, who understand the
programmatic nature of the FTL grant activities, will find that these
costs were allocable to the grants; travel costs of \$2,718 will be
approved on the belief that ELC could not obtain GSA rates; and
clarification from the Department is needed regarding items totaling
\$993.

In response to the unsupported costs identified in the audit report, ELC
noted that it had undertaken the following actions and will provide the
results to the Department:

-   ELC contacted all former employees and requested that they certify
    the purpose of each trip taken and charged to ELC's credit cards.
    The results of the effort were being reviewed and will be
    incorporated into the 2004 accounting adjustments.

-   ELC noted that it was alerted to deficiencies in timesheet records
    in 2004, when the 2003 audit was being completed. In response, ELC
    put in place timesheet requirements, but in some instances, only
    electronic copies of the timesheets were maintained. As a result,
    some dates and/or signatures were missing. ELC contacted all
    employees to request that they certify the timesheet records where
    they were missing. ELC will adjust its accounting records based on
    this exercise.

-   ELC disagreed with our assessment of the reasonableness of certain
    vendor invoices. ELC took issue with the notion that only detailed
    activity reports showing how vendors spent their time could support
    the reasonableness of the charges.

In regards to the recommendations made in the draft report, ELC noted
that they will work with the Department to resolve the questioned and
unsupported costs and will provide documentation during the audit
resolution process. ELC believes that it is now in full compliance with
requirements concerning supporting documentation of grant expenditures.
In addition, ELC noted that it had provided officials and employees with
copies of OMB Circular A-122 and its operating protocols and that each
employee had reviewed the documents.

**OIG's Response:**

We acknowledge the corrective actions taken by ELC in response to the
audit recommendations.

ELC commented on some, but not all, of the costs questioned in the audit
report. ELC believes that Department officials who understand the
programmatic nature of the FTL grant activities will approve questioned
costs of \$11,828. We disagree with ELC's assessment because these costs
include items that are clearly not allowable and allocable to the FTL
grants. This amount includes \$130 in interest and late payment charges
that are specifically unallowable under OMB Circular A-122; \$2,575 in
printing costs that were for ELC and ABCTE related items and therefore
not allocable to the FTL program; and \$1,988 for updates to ELC's
website that are not allocable to the FTL grant (other invoices from the
vendor were specifically for work on ELC's FTL websites). The remaining
\$7,135 consists of costs from ELC's 2004 annual conference. While the
Department may conclude that the annual conference costs were allocable
to the FTL grants, we were unable to reach such a conclusion, because
ELC did not maintain documents, such as presentation materials or
session handouts, to support its contention that the conference sessions
in question were FTL related.

ELC believes that the Department would approve the \$2,718 in questioned
travel costs because ELC would have been unable to obtain government
pricing. We note that only the excess hotel charges of \$288 were
questioned because they exceeded the applicable GSA rate by 94 percent.
The remaining travel costs were questioned because they were either not
reasonable or not allocable to the FTL program. The questioned travel
and travel related costs include \$233 for a breakfast meeting for ten
people; the total cost of the breakfast meeting was \$583 or \$58 per
person. To offer a comparison, we noted in the audit report that the GSA
per diem rate allocated \$10 for breakfast. As a result, the \$58 per
person charge for breakfast exceeds that which would be incurred by a
prudent person and is therefore a questioned cost. Also included in
questioned travel costs was \$2,197 in airfare charges that did not
appear FTL related or necessary for the operations of ELC. In August
2005, ELC informed us that they intended to remove the \$1,701 of
airfare costs to Alberta, Canada and that \$496 in airfare from Hawaii
to Washington, DC was under review. If ELC now contends that the trips
to Alberta, Canada and from Hawaii to Washington, DC were FTL related,
ELC did not provide information to support its revised position to us.

ELC noted that it needs clarification from the Department on \$993of
questioned costs. These costs were questioned because they were either
not reasonable or allocable to the FTL program. These questioned costs
include \$600 for a forfeited deposit to a hotel for ELC's annual
retreat; \$60 for American Express credit card membership reward program
fees (this amount is in addition to the fees already removed from the
grant charges by ELC); \$26 for legal fees that are not FTL related
(this amount is in addition to the legal fees already removed from the
grant charges by ELC); and \$307 in payroll charges.

ELC commented on some, but not all, of the unsupported costs contained
in the audit report. We note that ELC's actions to have employees
certify their travel charges and timesheets indicate that these costs
were unsupported at the time of our audit. ELC noted that it was alerted
to deficiencies in its time sheet records in 2004, when the 2003 audit
was being completed. However, we note that a similar issue was raised in
ELC's 2002 single audit, issued in May 2003. In ELC's 2002 single audit,
the auditor recommended that personnel activity reports supporting the
actual amount of time spent for each cost center be maintained. ELC
concurred with the finding and recommendation and noted that it had
adopted a policy of completing timesheets.

In regards to ELC taking issue with the notion that only detailed
activity reports showing how vendors spent their time could support the
reasonableness of the charges. ELC provided no comments that address the
issue raised in the audit report. The audit report noted that the
consultant's invoices in question contained activities that were
allowable, questionable, or not fully allocable to the FTL program, and
that we were unable to determine the allowable amount because the
invoices did not contain sufficient information as to the time expended
on each activity.

In order to facilitate the audit resolution process, we have revised the
report's appendices to provide additional information on the questioned
and unsupported costs discussed in this finding.

# Other Matters

**[ELC's Financial Position]{.underline}**

ELC\'s current financial position is a cause for concern. As a result,
we suggest that the Department's Chief Financial Officer regularly
monitor ELC\'s financial condition. Our concern is due to the following
conditions:

-   ELC\'s net assets have steadily decreased during the period from
    calendar year end (CYE) 2001 to September 2, 2005. At CYE 2001,
    ELC\'s net assets were negative \$25,033, and by September 2, 2005,
    ELC\'s net assets declined to negative \$547,000.[^11] ELC\'s
    increasing negative net assets were the result of recurring
    operating deficits during the intervening periods. Significantly
    decreasing net assets may indicate problems with a non-profit
    entity\'s financial solvency.

-   The current ratio (current assets divided by current liabilities)
    measures an entity\'s ability to cover its current obligations from
    current assets. ELC\'s current ratio was 1:1.62 as of CYE 2003,
    1:1.27 as of CYE 2004, and 1:15.07 as of September 2, 2005. ELC\'s
    current ratios indicate that its current assets are less than its
    current liabilities. Current ratios of less than 1:1 may raise
    concerns regarding an entity\'s liquidity. As of September 2, 2005,
    ELC reported current liabilities of \$427,000 and current assets of
    \$28,000, of which \$23,000 was cash or cash equivalents.

-   The Department\'s grants constitute the majority of ELC\'s revenue.
    In calendar year 2004, the federal grants constituted approximately
    93 percent of ELC\'s total revenue. This percentage has increased
    from calendar 2002, when the federal grants constituted
    approximately 70 percent of ELC\'s total revenue. In 2004, the most
    recent calendar year, ELC reported \$737,000 in revenue from sources
    other than federal grants. Of this amount, \$200,000 was a non-cash
    contribution resulting from the forgiveness of a note payable. An
    organization that relies heavily on few sources of income is more at
    risk financially than an organization with multiple revenue sources.

-   ELC\'s current financial position does not reflect the resolution of
    findings with questioned costs for this audit or ELC\'s CYE 2002 and
    CYE 2003 single audit reports. These single audit reports contain
    findings with questioned costs totaling approximately \$726,000. ELC
    will be liable for the portion of the questioned costs disallowed by
    the Department.

In its comments on the audit report, ELC noted that it has submitted a
turnaround plan to the Department to address the issues pertaining to
ELC's fiscal health

**[ELC's 2004 Accounting Records]{.underline}**

Under OMB Circular A-133, *Audits of States, Local Governments, and
Non-profit Organizations*, ELC's calendar year 2004 single audit report
was due on September 30, 2005. As of September 30, 2005, ELC's
accounting records for calendar year 2004 were not finalized, and the
2004 single audit had not begun. In September 2005, ELC had retained an
independent public accounting firm to perform the 2004 single audit. In
its comments on the audit report, ELC noted that it was ready to
schedule the 2004 single audit.

# Objective, Scope and Methodology

The objectives of our audit were to determine if (1) federal funds drawn
down by ELC for the FTL program were used for ELC's operations and (2)
expenditures allocated to the federally funded FTL program were
reasonable, allocable, and allowable in accordance with regulations. The
audit covered the period January 1, 2004, through December 31, 2004.

To accomplish the audit objectives, we reviewed applicable criteria
contained in the Education Department General Administrative Regulations
(34 C.F.R. Parts 74 and 75) and OMB Circular A-122, *Cost Principles for
Non-Profit Organizations*. [^12] We reviewed ELC's grant applications
for FTL Phase I, II, and III for the fiscal year 2002, 2003, and 2004
grant awards, respectively; single audit reports for CYE 2002 and 2003;
and policies and procedures concerning the drawdown and expenditure of
grant funds. We obtained and reviewed accounting reports from ELC's
finance system, bank statements and cancelled checks, payroll reports
and timesheets, and vendor invoices and other documents supporting
expenditures. We interviewed ELC's current Chief Executive Officer,
Chief Policy Officer, contract Chief Financial Officer, and Director of
Federal Programs.

To achieve the audit\'s objectives, we relied upon computer-processed
data contained in ELC\'s Fast Fund accounting system, ELC\'s accounting
system of record, as of May 17, 2005. We assessed the completeness and
accuracy of this data. As part of this assessment, we compared bank
statements and cancelled checks to transactions contained in ELC\'s
accounting system. We also compared judgmentally selected
computer-processed data to source records. Based upon this preliminary
assessment, we concluded that data used was sufficiently reliable for
the assignment\'s objectives.

To determine if the federal funds drawn down by ELC for the FTL program
were used for ELC's operations, we reviewed ELC's audited financial
statements for calendar years 2002 and 2003, accounting reports from
ELC's finance system for calendar year 2004, and compared the grant
expenditure amounts to grant drawdowns contained in the Department's
Grants Administration and Payment System.

To determine if the costs charged to the federal grants were reasonable,
allocable, allowable and adequately supported in accordance with
applicable regulations and OMB Circular A-122, we selected expenditures
for review. During the period January 1, 2004, to December 31, 2004, ELC
made 382 disbursements totaling \$5,212,117, from its Operating Account.
These disbursements were allocated to both the FTL grants and ELC\'s
other cost centers. The disbursements consisted of nine payments to
American Express totaling \$195,510, 48 disbursements for payroll and
payroll taxes totaling \$721,078, 318 payments for other expenses
totaling \$1,295,529, and 7 payments to Achievement Technologies,
Incorporated totaling \$3,000,000. The 2004 payments to Achievement
Technologies, Incorporated were excluded from our review as they will be
included in our audit of ELC\'s subcontracting activities (Control
Number A03-F0003).

From the remaining population, totaling \$2,212,117, of payments made in
2004, we judgmentally selected transactions as follows:

-   We reviewed the November 2003 through December 2004 American Express
    statements and judgmentally selected 129 charges, totaling \$62,136.
    Of the total selected, 125 charges, totaling \$32,237 (51.9
    percent), were allocated to the FTL Phase II and III grants. Charges
    were selected based upon the type and location of the vendors,
    location of travel, charge type, and amount.

-   We judgmentally selected six pay periods representing payroll
    charges of \$157,162. Of the total payroll charges selected,
    \$70,341 (44.8 percent), were allocated to the FTL Phase II and III
    grants.

-   For the other expenses, we selected all payments of \$1,000 or
    greater (excluding three payments for retirement plan
    contributions), that resulted in 143 payments totaling \$1,235,414
    being selected. Of the total selected, 86 payments, totaling
    \$697,612 (56.5 percent), were allocated to the FTL Phase II and III
    grants.

In addition, we judgmentally selected one \$20,000 payment that was made
in 2003 and allocated to the FTL Phase II grant, because it was for
ELC's 2003 annual conference. Because portions of the selected
expenditures were based upon the audit team's judgment, there is no
assurance that the selections are representative of the entire
population and, therefore, should not be projected over the unselected
expenditures. A table summarizing our selections is provided in Appendix
C. Due to concerns about ELC's charging of questioned expenditures, we
have referred this matter to our Office of Investigations for further
review.

We assessed the system of internal control, policies, procedures and
practices applicable to ELC\'s drawdown and expenditure of federal
funds. For purposes of the audit, we assessed and classified the
significant controls into the following categories: (1) drawdown of
federal funds and (2) expenditure of federal funds. Because of inherent
limitations, a study and evaluation made for the limited purposes
described above would not necessarily disclose all material weaknesses
in internal controls. However, our assessment disclosed significant
internal control weaknesses that adversely affected ELC\'s ability to
administer the federal grant funds. These weaknesses resulted in ELC
overdrawing grant funds, charging questioned and unsupported costs to
the grants, and not having an approved indirect cost plan. These
weaknesses and their effects are fully discussed in the Audit Results
section of the audit report.

We conducted on-site fieldwork at ELC's offices in Washington, DC during
the period March 30, 2005, through April 28, 2005 . On August 16, 2005,
we held an exit conference with ELC's management. We conducted the audit
in accordance with generally accepted government auditing standards
appropriate to the scope of the review described above.

# Appendix A -- FTL Objectives and Measurable Outcomes

+-----------------------------------------------------------------------+
| ## FTL Phase II (FY 2003 Grant)                                       |
+-----------------------------------------------------------------------+
| [Objective 1]{.underline} --                                          |
|                                                                       |
| Help state education agencies (SEAs), local education agencies        |
| (LEAs), schools, classrooms, and families achieve adequate yearly     |
| progress (AYP).                                                       |
|                                                                       |
| [Measurable Outcomes]{.underline} --                                  |
|                                                                       |
| -   All teachers in FTL schools will be using a standards-based       |
|     accountability system, including web-based applications to track  |
|     student progress against the state's academic standards.          |
|                                                                       |
| -   The SEA will have a usable database of instructional resources    |
|     for use by every teacher in the state.                            |
|                                                                       |
| -   States will begin to adopt reforms and other practices to         |
|     professionalize the teaching profession.                          |
|                                                                       |
| -   Parents in FTL schools will have access to a daily progress       |
|     report detailing the progress of their child toward meeting state |
|     standards and achieving AYP.                                      |
|                                                                       |
| -   School and LEA leaders will have access to information on the     |
|     progress of teachers, schools and LEAs in meeting standards and   |
|     AYP.                                                              |
|                                                                       |
| -   Schools and LEAs will identify the assistance the schools and     |
|     teachers need to close achievement gaps and increase academic     |
|     performance.                                                      |
+-----------------------------------------------------------------------+
| [Objective 2]{.underline} --                                          |
|                                                                       |
| Help states determine the real costs of NCLB and optimize state,      |
| local and federal resources to increase student academic success.     |
|                                                                       |
| [Measurable Outcomes]{.underline} --                                  |
|                                                                       |
| -   Participating states will undergo an analysis of the actual costs |
|     of implementing the requirements of NCLB in their state.          |
|                                                                       |
| -   States will receive technical assistance regarding NCLB that      |
|     allow for more flexible administration and oversight of education |
|     programs.                                                         |
|                                                                       |
| -   States will receive guidance regarding the effective use of       |
|     existing resources to optimize educational opportunities for      |
|     students.                                                         |
|                                                                       |
| -   The Department will be provided with information needed to        |
|     determine ongoing budgetary needs for successful implementation   |
|     of NCLB.                                                          |
+-----------------------------------------------------------------------+
| [Objective 3]{.underline} --                                          |
|                                                                       |
| Create state and local-based change agents.                           |
|                                                                       |
| [Measurable Outcomes]{.underline} --                                  |
|                                                                       |
| -   Each participating states will have a project leader appointed    |
|     within 60 days of notification that the state will participate.   |
|                                                                       |
| -   Each LEA added under FTL Phase II will host an event to generate  |
|     awareness of the FTL program and the policies of NCLB.            |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| ## FTL Phase III FY 2004 Grant)                                       |
+-----------------------------------------------------------------------+
| [Objective 1]{.underline} --                                          |
|                                                                       |
| Improve student achievement through the use of FTL tools, project     |
| leaders, and practices via student-teacher interaction.               |
|                                                                       |
| [Measurable Outcomes]{.underline} --                                  |
|                                                                       |
| -   Provide access and support for FTL tools to students.             |
|                                                                       |
| -   Provide professional development and support for FTL tools to     |
|     teachers.                                                         |
|                                                                       |
| -   Provide professional development and support on FTL practices to  |
|     teachers.                                                         |
|                                                                       |
| -   Analyze FTL's progress in helping students achieve proficiency    |
|     against state standards and implement recommendations for         |
|     improving FTL.                                                    |
|                                                                       |
| -   Analyze FTL's progress in helping schools reach their state AYP   |
|     goals.                                                            |
+-----------------------------------------------------------------------+
| [Objective 2]{.underline} --                                          |
|                                                                       |
| Enhance educational network to support student achievement through    |
| use of FTL tools, project leaders, and practices.                     |
|                                                                       |
| [Measurable Outcomes]{.underline} --                                  |
|                                                                       |
| -   Provide school and LEA administrators guidance in analyzing       |
|     student achievement and implementing improvements.                |
|                                                                       |
| -   Provide student achievement data and other information materials  |
|     to parents.                                                       |
|                                                                       |
| -   Engage the Supplemental Services Coalition to introduce services  |
|     to LEAs and SEAs.                                                 |
|                                                                       |
| -   Provide SEAs with FTL progress reports on FTL efforts in their    |
|     LEAs and schools.                                                 |
+-----------------------------------------------------------------------+
| [Objective 3]{.underline} --                                          |
|                                                                       |
| FTL will continue to evaluate and improve its tools, project leaders, |
| and practices.                                                        |
|                                                                       |
| [Measurable Outcome]{.underline} --                                   |
|                                                                       |
| -   Analyze cost of implementation of a sample of FTL school-based    |
|     sites to determine the expected cost range for implementation.    |
|                                                                       |
| -   Develop a comparison of FTL school-based service providers with   |
|     other potential service providers.                                |
|                                                                       |
| -   Evaluate effectiveness of project leaders and implement           |
|     recommendations for improvement.Develop a knowledge sharing       |
|     capability to disseminate best practices across FTL.              |
|                                                                       |
| -   Disseminate best practices and lessons learned about NCLB         |
|     implementation to the broader education community and public      |
|     through publications and speeches.                                |
+-----------------------------------------------------------------------+
| [Objective 4]{.underline} --                                          |
|                                                                       |
| To promote the policy and ideas of NCLB in schools and LEAs           |
| participating in FTL.                                                 |
|                                                                       |
| [Measurable Outcome]{.underline} --                                   |
|                                                                       |
| -   Analyze school and LEA leader understanding of NCLB goals as      |
|     reflected in their diagnostic, instructional and data analysis    |
|     activities.                                                       |
+-----------------------------------------------------------------------+

# Appendix B

# Finding No. 3 -- Schedule of Questioned Costs

  -------------- ---------- ---------- ---------- ------------------------------- ---------------
  **Questioned   **Amount   **Amount   **Amount   **Description**                 **Criteria**
  Amount**       Removed by to be      to be                                      
                 ELC**      Resolved   Resolved                                   
                            FTL Phase  FTL Phase                                  
                            II**       III**                                      

  \$2,370        \$2,344    \$26       \--        ELC allocated 40 percent        Pursuant to OMB
                                                  (\$3,375) of a March 2004       Circular A-122,
                                                  payment (check 3611) for legal  Attachment A,
                                                  fees (Webster, Chamberlain and  Section A,
                                                  Bean, invoice 7640 dated        paragraph 4, a
                                                  October 6, 2003, and invoice    cost is
                                                  8660 dated January 12, 2004) to allocable to a
                                                  the FTL Phase II grant. Of this grant award if
                                                  amount, \$2,370 was not         it is incurred
                                                  allocable to the FTL grants and specifically
                                                  should have been charged to     for the award,
                                                  ELC\'s general and              benefits both
                                                  administrative cost center. In  the award and
                                                  August 2005, ELC removed        other work and
                                                  \$2,344 of the questioned       can be
                                                  charges from the FTL Phase II   distributed in
                                                  grant.                          a reasonable
                                                                                  proportion to
                                                                                  the benefits
                                                                                  received, or is
                                                                                  necessary for
                                                                                  the overall
                                                                                  operation of
                                                                                  the
                                                                                  organization.

  \$1,988        \--        \$1,988    \--        ELC allocated 100 percent of    
                                                  the June 2004 payment (check    
                                                  3672) for updates to ELC's      
                                                  website (Summerhouse Studios,   
                                                  invoice 04-000136 dated April   
                                                  15, 2004) to the FTL Phase II   
                                                  grant. The amount was           
                                                  questioned because it was not   
                                                  allocable to the FTL program.   
                                                  We noted that other invoices    
                                                  (invoice 04-000143 dated April  
                                                  15, 2004, and invoice 04-000121 
                                                  dated February 4, 2004) were    
                                                  specifically for work on ELC\'s 
                                                  FTL websites.                   

  \$288          \--        \$288      \--        ELC charged the FTL Phase II    Pursuant to OMB
                                                  grant \$288 for excess lodging  Circular A-122,
                                                  costs in February 2004 (one     Attachment A,
                                                  night for \$96 in excess        Section A,
                                                  lodging costs, charged on       paragraph 3, a
                                                  February 11, 2004) and March    cost is
                                                  2004 (two nights for \$192 in   reasonable if
                                                  excess lodging costs, charged   it does not
                                                  on March 4, 2004). ELC charged  exceed that
                                                  \$169 per night (excluding      which would be
                                                  taxes) for lodging in Houston,  incurred by a
                                                  Texas at the Houstonian Hotel.  prudent person.
                                                  This rate is 94 percent above   In addition,
                                                  the 2004 GSA rate of \$87 per   ELC's 2002
                                                  night.                          travel policy
                                                                                  stated that
                                                                                  costs incurred
                                                                                  for travel were
                                                                                  limited to
                                                                                  those allowable
                                                                                  under Federal
                                                                                  Travel
                                                                                  Regulations.
  -------------- ---------- ---------- ---------- ------------------------------- ---------------

+-----+-----+-----+-----+----------------------------+--------------+
| **Q | **  | **  | **  | **Description**            | **Criteria** |
| ues | Amo | Amo | Amo |                            |              |
| tio | unt | unt | unt |                            |              |
| ned | R   | to  | to  |                            |              |
| Am  | emo | be  | be  |                            |              |
| oun | ved | Re  | Re  |                            |              |
| t** | by  | sol | sol |                            |              |
|     | EL  | ved | ved |                            |              |
|     | C** | FTL | FTL |                            |              |
|     |     | Ph  | Ph  |                            |              |
|     |     | ase | ase |                            |              |
|     |     | I   | II  |                            |              |
|     |     | I** | I** |                            |              |
+-----+-----+-----+-----+----------------------------+--------------+
| \$  | \-- | \$  | (   | Our review disclosed       | Pursuant to  |
| 307 |     | 423 | \$1 | payroll expenses that were | OMB Circular |
|     |     |     | 16) | not allocable to the FTL   | A-122,       |
|     |     |     |     | grants because amounts in  | Attachment   |
|     |     |     |     | the payroll allocations    | A, Section   |
|     |     |     |     | did not agree with         | A, paragraph |
|     |     |     |     | employees\' timesheets and | 4, a cost is |
|     |     |     |     | amounts that were charged  | allocable to |
|     |     |     |     | to the FTL Phase II grant, | a grant      |
|     |     |     |     | that should have been      | award if it  |
|     |     |     |     | charged to FTL Phase III   | is incurred  |
|     |     |     |     | grant. The questioned      | specifically |
|     |     |     |     | payroll expenses included: | for the      |
|     |     |     |     |                            | award,       |
|     |     |     |     | -   For the pay period     | benefits     |
|     |     |     |     |     ended April 2, 2004,   | both the     |
|     |     |     |     |     48.2 percent of the    | award and    |
|     |     |     |     |     gross pay for the      | other work   |
|     |     |     |     |     Director of            | and can be   |
|     |     |     |     |     Communications should  | distributed  |
|     |     |     |     |     have been allocated to | in a         |
|     |     |     |     |     the FTL Phase II       | reasonable   |
|     |     |     |     |     grant. However, 56.9   | proportion   |
|     |     |     |     |     percent was allocated. | to the       |
|     |     |     |     |     As a result, \$136 was | benefits     |
|     |     |     |     |     over allocated to the  | received, or |
|     |     |     |     |     FTL Phase II grant.    | is necessary |
|     |     |     |     |                            | for the      |
|     |     |     |     | -   For the pay period     | overall      |
|     |     |     |     |     ended June 30, 2004, a | operation of |
|     |     |     |     |     total of \$287 of      | the          |
|     |     |     |     |     gross pay for the      | o            |
|     |     |     |     |     Member Services        | rganization. |
|     |     |     |     |     Coordinator and Chief  |              |
|     |     |     |     |     Operating Officer was  |              |
|     |     |     |     |     over charged to the    |              |
|     |     |     |     |     FTL Phase II grant and |              |
|     |     |     |     |     under charged to the   |              |
|     |     |     |     |     FTL Phase III grant.   |              |
|     |     |     |     |                            |              |
|     |     |     |     | -   For the pay period     |              |
|     |     |     |     |     ended September 15,    |              |
|     |     |     |     |     2004, 39.2 percent of  |              |
|     |     |     |     |     the gross pay for the  |              |
|     |     |     |     |     Chief Executive        |              |
|     |     |     |     |     Officer should have    |              |
|     |     |     |     |     been allocated to the  |              |
|     |     |     |     |     FTL Phase III grant.   |              |
|     |     |     |     |     However, 43.5 percent  |              |
|     |     |     |     |     was allocated. As a    |              |
|     |     |     |     |     result, \$171 was over |              |
|     |     |     |     |     allocated to the FTL   |              |
|     |     |     |     |     Phase III grant.       |              |
+-----+-----+-----+-----+----------------------------+--------------+
| \$  | \-  | \$  | \-- | In January 2004, ELC       | Pursuant to  |
| 192 | -[^ | 192 |     | reimbursed a board member  | OMB Circular |
|     | 13] |     |     | for first-class airfare    | A-122,       |
|     |     |     |     | costs to attend ELC\'s     | Attachment   |
|     |     |     |     | December 2003 board        | B, paragraph |
|     |     |     |     | meeting. ELC allocated 40  | 55, the      |
|     |     |     |     | percent of the payment     | difference   |
|     |     |     |     | (check 3513) to the FTL    | between      |
|     |     |     |     | Phase II grant. We         | first-class  |
|     |     |     |     | estimated the questioned   | air          |
|     |     |     |     | amount of \$192 based upon | ac           |
|     |     |     |     | the average difference     | commodations |
|     |     |     |     | (57.5 percent) between     | and less     |
|     |     |     |     | first-class airfare and    | than         |
|     |     |     |     | coach airfare for two      | first-class  |
|     |     |     |     | comparable trips on the    | air          |
|     |     |     |     | same airline. In August    | ac           |
|     |     |     |     | 2005, ELC informed us that | commodations |
|     |     |     |     | they intended to remove    | is           |
|     |     |     |     | the charges for first      | unallowable. |
|     |     |     |     | class airfare.             |              |
+-----+-----+-----+-----+----------------------------+--------------+

  -------------- ---------- ---------- ---------- ---------------------------- ---------------
  **Questioned   **Amount   **Amount   **Amount   **Description**              **Criteria**
  Amount**       Removed by to be      to be                                   
                 ELC**      Resolved   Resolved                                
                            FTL Phase  FTL Phase                               
                            II**       III**                                   

  \$600          \--        \$600      \--        ELC allocated to the FTL     Pursuant to OMB
                                                  Phase II grant 40 percent    Circular A-122,
                                                  (\$600) of a November 4,     Attachment A,
                                                  2003, hotel charge (\$1,500  Section A,
                                                  in total to Nemacolin        paragraph 3, a
                                                  Woodlands Resort and Spa)    cost is
                                                  for a forfeited deposit for  reasonable if
                                                  ELC's annual retreat.        it does not
                                                                               exceed the
                                                                               which would be
                                                                               incurred by a
                                                                               prudent person
                                                                               and whether the
                                                                               cost is of a
                                                                               type generally
                                                                               recognized as
                                                                               ordinary and
                                                                               necessary for
                                                                               the operation
                                                                               of the
                                                                               organization or
                                                                               performance of
                                                                               the award. In
                                                                               addition,
                                                                               pursuant to OMB
                                                                               Circular A-122,
                                                                               Attachment A,
                                                                               Section A,
                                                                               paragraph 4, a
                                                                               cost is
                                                                               allocable to a
                                                                               grant award if
                                                                               it is incurred
                                                                               specifically
                                                                               for the award,
                                                                               benefits both
                                                                               the award and
                                                                               other work and
                                                                               can be
                                                                               distributed in
                                                                               a reasonable
                                                                               proportion to
                                                                               the benefits
                                                                               received, or is
                                                                               necessary for
                                                                               the overall
                                                                               operation of
                                                                               the
                                                                               organization.

  \$25           \$25       \--        \--        ELC allocated to the FTL     
                                                  Phase II grant 40 percent    
                                                  (\$25) of a January 2004     
                                                  charge for flowers. In       
                                                  August 2005, ELC removed the 
                                                  charge from the FTL Phase II 
                                                  grant expenses.              

  \$130          \$70       \$60       \--        ELC charged the FTL Phase II 
                                                  grant \$130 (100 percent)    
                                                  for American Express credit  
                                                  card membership reward       
                                                  program fees charged on      
                                                  January 1, 2004, (\$70) and  
                                                  March 16, 2004, (\$60). In   
                                                  August 2005, ELC removed     
                                                  \$70 of the charges from the 
                                                  FTL Phase II grant expenses. 

  \$9            \$9        \--        \--        ELC allocated to the FTL     
                                                  Phase II grant 40 percent    
                                                  (\$9) of a March 2004 charge 
                                                  for a Sports Illustrated     
                                                  magazine subscription. In    
                                                  August 2005, ELC removed the 
                                                  charge from the FTL Phase II 
                                                  grant expenses.              
  -------------- ---------- ---------- ---------- ---------------------------- ---------------

+-----+-----+-----+-----+---------------------------+--------------+
| **Q | **  | **  | **  | **Description**           | **Criteria** |
| ues | Amo | Amo | Amo |                           |              |
| tio | unt | unt | unt |                           |              |
| ned | R   | to  | to  |                           |              |
| Am  | emo | be  | be  |                           |              |
| oun | ved | Re  | Re  |                           |              |
| t** | by  | sol | sol |                           |              |
|     | EL  | ved | ved |                           |              |
|     | C** | FTL | FTL |                           |              |
|     |     | Ph  | Ph  |                           |              |
|     |     | ase | ase |                           |              |
|     |     | I   | II  |                           |              |
|     |     | I** | I** |                           |              |
+-----+-----+-----+-----+---------------------------+--------------+
| \   | \   | \$  | \-- | See discussion of [Meals  | See criteria |
| $4, | $4, | 233 |     | and                       | noted in     |
| 821 | 588 |     |     | En                        |              |
|     |     |     |     | tertainment]{.underline}. | Finding No.  |
|     |     |     |     | The questioned cost to be | 3.           |
|     |     |     |     | resolved is a February 5, |              |
|     |     |     |     | 2004, charge of \$583 (40 |              |
|     |     |     |     | percent or \$233 was      |              |
|     |     |     |     | allocated to the FTL      |              |
|     |     |     |     | Phase II grant) from the  |              |
|     |     |     |     | Jefferson Hotel for a     |              |
|     |     |     |     | breakfast meeting for ten |              |
|     |     |     |     | guests.                   |              |
+-----+-----+-----+-----+---------------------------+--------------+
| \   | \   | \   | \-- | See discussion of [Travel |              |
| $4, | $2, | $2, |     | Costs]{.underline}. The   |              |
| 501 | 304 | 197 |     | questioned costs to be    |              |
|     |     |     |     | resolved include:         |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A November 11, 2003,  |              |
|     |     |     |     |     charge of \$1,241 (40 |              |
|     |     |     |     |     percent or \$496 was  |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase II grant) from  |              |
|     |     |     |     |     Expedia for roundtrip |              |
|     |     |     |     |     airfare between       |              |
|     |     |     |     |     Honolulu, Hawaii and  |              |
|     |     |     |     |     Washington, DC for    |              |
|     |     |     |     |     ELC's former          |              |
|     |     |     |     |     President             |              |
|     |     |     |     |                           |              |
|     |     |     |     | ```{=html}                |              |
|     |     |     |     | <!-- -->                  |              |
|     |     |     |     | ```                       |              |
|     |     |     |     | -   Airfare to Alberta,   |              |
|     |     |     |     |     Canada for ELC's      |              |
|     |     |     |     |     former Director of    |              |
|     |     |     |     |     Communications,       |              |
|     |     |     |     |     consisting of a       |              |
|     |     |     |     |     January 14, 2004,     |              |
|     |     |     |     |     charge of \$1,147 (40 |              |
|     |     |     |     |     percent or \$459 was  |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase II grant); a    |              |
|     |     |     |     |     February 5, 2004,     |              |
|     |     |     |     |     charge of \$148 (100  |              |
|     |     |     |     |     percent was allocated |              |
|     |     |     |     |     to the FTL Phase II   |              |
|     |     |     |     |     grant); and February  |              |
|     |     |     |     |     8, 2004, charge of    |              |
|     |     |     |     |     \$375 (100 percent    |              |
|     |     |     |     |     was allocated to the  |              |
|     |     |     |     |     FTL Phase II grant).  |              |
|     |     |     |     |     All charges were from |              |
|     |     |     |     |     Northwest Airlines.   |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Airfare to Alberta,   |              |
|     |     |     |     |     Canada for ELC's      |              |
|     |     |     |     |     former Chief          |              |
|     |     |     |     |     Executive Officer,    |              |
|     |     |     |     |     consisting of a       |              |
|     |     |     |     |     January 15, 2004,     |              |
|     |     |     |     |     charge of \$1,011 (40 |              |
|     |     |     |     |     percent or \$404 was  |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase II grant) from  |              |
|     |     |     |     |     Northwest Airlines;   |              |
|     |     |     |     |     and a February 5,     |              |
|     |     |     |     |     2004, charge of \$786 |              |
|     |     |     |     |     (40 percent or \$315  |              |
|     |     |     |     |     was allocated to the  |              |
|     |     |     |     |     FTL Phase II grant)   |              |
|     |     |     |     |     from America West     |              |
|     |     |     |     |     Airlines.             |              |
+-----+-----+-----+-----+---------------------------+--------------+

+-----+-----+-----+-----+---------------------------+--------------+
| **Q | **  | **  | **  | **Description**           | **Criteria** |
| ues | Amo | Amo | Amo |                           |              |
| tio | unt | unt | unt |                           |              |
| ned | R   | to  | to  |                           |              |
| Am  | emo | be  | be  |                           |              |
| oun | ved | Re  | Re  |                           |              |
| t** | by  | sol | sol |                           |              |
|     | EL  | ved | ved |                           |              |
|     | C** | FTL | FTL |                           |              |
|     |     | Ph  | Ph  |                           |              |
|     |     | ase | ase |                           |              |
|     |     | I   | II  |                           |              |
|     |     | I** | I** |                           |              |
+-----+-----+-----+-----+---------------------------+--------------+
| \$  | \$  | \-- | \-- | See discussion of [2003   | See criteria |
| 61, | 61, |     |     | Annual                    | noted in     |
| 696 | 696 |     |     | Conference]{.underline}.  |              |
|     |     |     |     |                           | Finding No.  |
|     |     |     |     |                           | 3.           |
+-----+-----+-----+-----+---------------------------+--------------+
| \   | \$  | \-- | \   | See discussion of [2004   |              |
| $7, | 217 |     | $7, | Annual                    |              |
| 352 |     |     | 135 | Conference]{.underline}.  |              |
|     |     |     |     | The questioned costs      |              |
|     |     |     |     | include:                  |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   An October 2004       |              |
|     |     |     |     |     payment (check 3777)  |              |
|     |     |     |     |     to KSA Plus           |              |
|     |     |     |     |     Communications        |              |
|     |     |     |     |     (invoice 0502-26,     |              |
|     |     |     |     |     dated September       |              |
|     |     |     |     |     21, 2004) for the     |              |
|     |     |     |     |     purchase of an image  |              |
|     |     |     |     |     (\$234) and the       |              |
|     |     |     |     |     placement of an       |              |
|     |     |     |     |     advertisement in      |              |
|     |     |     |     |     Education Week        |              |
|     |     |     |     |     (\$2,593) and the     |              |
|     |     |     |     |     printing and mailing  |              |
|     |     |     |     |     of postcards          |              |
|     |     |     |     |     (\$2,220) for the     |              |
|     |     |     |     |     annual conference     |              |
|     |     |     |     |     (100 percent was      |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase III grant).     |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A November 2004       |              |
|     |     |     |     |     payment (check 3827)  |              |
|     |     |     |     |     of \$2,320 (90        |              |
|     |     |     |     |     percent or \$2,088    |              |
|     |     |     |     |     was allocated to the  |              |
|     |     |     |     |     FTL Phase III grant)  |              |
|     |     |     |     |     to Editorial Projects |              |
|     |     |     |     |     in Education (invoice |              |
|     |     |     |     |     17686, dated August   |              |
|     |     |     |     |     30, 2004) for the     |              |
|     |     |     |     |     purchase of an        |              |
|     |     |     |     |     advertisement in      |              |
|     |     |     |     |     Education Week.       |              |
+-----+-----+-----+-----+---------------------------+--------------+
| \   | \   | \   | \-- | See discussion of         |              |
| $5, | $2, | $2, |     | [Printing                 |              |
| 148 | 573 | 575 |     | Costs]{.underline}. The   |              |
|     |     |     |     | questioned costs to be    |              |
|     |     |     |     | resolved are from a March |              |
|     |     |     |     | 2004 payment (check 3592) |              |
|     |     |     |     | to Kwik Kopy Printing for |              |
|     |     |     |     | \$6,437 (40 percent or    |              |
|     |     |     |     | \$2,575 was allocated to  |              |
|     |     |     |     | the FTL Phase II grant).  |              |
|     |     |     |     | The payment, for the      |              |
|     |     |     |     | printing of ELC and/or    |              |
|     |     |     |     | ABCTE related items, was  |              |
|     |     |     |     | for the following         |              |
|     |     |     |     | invoices:                 |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36421, dated  |              |
|     |     |     |     |     September 5, 2003,    |              |
|     |     |     |     |     for \$102.            |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36474, dated  |              |
|     |     |     |     |     September 10, 2003,   |              |
|     |     |     |     |     for \$1,101.          |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36512, dated  |              |
|     |     |     |     |     September 12, 2003,   |              |
|     |     |     |     |     for \$778.            |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36521, dated  |              |
|     |     |     |     |     September 12, 2003,   |              |
|     |     |     |     |     for \$540.            |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36736, dated  |              |
|     |     |     |     |     October 3, 2003, for  |              |
|     |     |     |     |     \$2,713.              |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 36776, dated  |              |
|     |     |     |     |     October 3, 2003, for  |              |
|     |     |     |     |     \$180.                |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 37047, dated  |              |
|     |     |     |     |     October 27, 2003, for |              |
|     |     |     |     |     \$564.                |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 37088, dated  |              |
|     |     |     |     |     October 29, 2003, for |              |
|     |     |     |     |     \$111.                |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   Invoice 37097, dated  |              |
|     |     |     |     |     October 29, 2003, for |              |
|     |     |     |     |     \$349.                |              |
+-----+-----+-----+-----+---------------------------+--------------+

+-----+-----+-----+-----+---------------------------+--------------+
| **Q | **  | **  | **  | **Description**           | **Criteria** |
| ues | Amo | Amo | Amo |                           |              |
| tio | unt | unt | unt |                           |              |
| ned | R   | to  | to  |                           |              |
| Am  | emo | be  | be  |                           |              |
| oun | ved | Re  | Re  |                           |              |
| t** | by  | sol | sol |                           |              |
|     | EL  | ved | ved |                           |              |
|     | C** | FTL | FTL |                           |              |
|     |     | Ph  | Ph  |                           |              |
|     |     | ase | ase |                           |              |
|     |     | I   | II  |                           |              |
|     |     | I** | I** |                           |              |
+-----+-----+-----+-----+---------------------------+--------------+
| \   | \   | \$7 | \$  | See discussion of         | See criteria |
| $1, | $1, |     | 123 | [Interest, Delinquency    | noted in     |
| 294 | 164 |     |     | and Late Payment          |              |
|     |     |     |     | Fees]{.underline}. The    | Finding No.  |
|     |     |     |     | questioned costs to be    | 3.           |
|     |     |     |     | resolved include:         |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A January 2004        |              |
|     |     |     |     |     payment (check 3516)  |              |
|     |     |     |     |     to Verizon that       |              |
|     |     |     |     |     included \$17 (40     |              |
|     |     |     |     |     percent or \$7 was    |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase II grant) for a |              |
|     |     |     |     |     late payment fee      |              |
|     |     |     |     |     indicated on the bill |              |
|     |     |     |     |     dated January 4,      |              |
|     |     |     |     |     2004.                 |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A June 5, 2004,       |              |
|     |     |     |     |     American Express      |              |
|     |     |     |     |     credit card           |              |
|     |     |     |     |     delinquency charge of |              |
|     |     |     |     |     \$29 (40 percent or   |              |
|     |     |     |     |     \$12 was allocated to |              |
|     |     |     |     |     the FTL Phase III     |              |
|     |     |     |     |     grant).               |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A July 2004 payment   |              |
|     |     |     |     |     (check 3681) to       |              |
|     |     |     |     |     Verizon that included |              |
|     |     |     |     |     \$43 (40 percent or   |              |
|     |     |     |     |     \$17 was allocated to |              |
|     |     |     |     |     the FTL Phase III     |              |
|     |     |     |     |     grant) for a late     |              |
|     |     |     |     |     payment fee indicated |              |
|     |     |     |     |     on the bill dated     |              |
|     |     |     |     |     June 4, 2004.         |              |
|     |     |     |     |                           |              |
|     |     |     |     | -   A July 2004 payment   |              |
|     |     |     |     |     (check 3696) to K3    |              |
|     |     |     |     |     Communications        |              |
|     |     |     |     |     (invoice 1005, dated  |              |
|     |     |     |     |     June 25, 2004) that   |              |
|     |     |     |     |     included a late       |              |
|     |     |     |     |     payment fee of \$94   |              |
|     |     |     |     |     (100 percent was      |              |
|     |     |     |     |     allocated to the FTL  |              |
|     |     |     |     |     Phase III grant).     |              |
+-----+-----+-----+-----+---------------------------+--------------+
| **\ | **\ | **  | **  | **Totals**                |              |
| $90 | $74 | \$8 | \$7 |                           |              |
| ,72 | ,99 | ,59 | ,14 |                           |              |
| 1** | 0** | 0** | 1** |                           |              |
+-----+-----+-----+-----+---------------------------+--------------+

Note: Amounts subject to rounding.

+------+----+----+-----------------------------------+--------------+
| **Qu | ** | ** | **Description**                   | **Criteria** |
| esti | Am | Am |                                   |              |
| oned | ou | ou |                                   |              |
| Amou | nt | nt |                                   |              |
| nt** | to | to |                                   |              |
|      | be | be |                                   |              |
|      | Re | Re |                                   |              |
|      | so | so |                                   |              |
|      | lv | lv |                                   |              |
|      | ed | ed |                                   |              |
|      | F  | F  |                                   |              |
|      | TL | TL |                                   |              |
|      | P  | P  |                                   |              |
|      | ha | ha |                                   |              |
|      | se | se |                                   |              |
|      | II | I  |                                   |              |
|      | ** | II |                                   |              |
|      |    | ** |                                   |              |
+------+----+----+-----------------------------------+--------------+
| The  |    |    |                                   |              |
| port |    |    |                                   |              |
| ions |    |    |                                   |              |
| of   |    |    |                                   |              |
| the  |    |    |                                   |              |
| f    |    |    |                                   |              |
| ollo |    |    |                                   |              |
| wing |    |    |                                   |              |
| c    |    |    |                                   |              |
| osts |    |    |                                   |              |
| were |    |    |                                   |              |
| qu   |    |    |                                   |              |
| esti |    |    |                                   |              |
| oned |    |    |                                   |              |
| as   |    |    |                                   |              |
| n    |    |    |                                   |              |
| oted |    |    |                                   |              |
| in   |    |    |                                   |              |
| the  |    |    |                                   |              |
| di   |    |    |                                   |              |
| scus |    |    |                                   |              |
| sion |    |    |                                   |              |
| of   |    |    |                                   |              |
| [    |    |    |                                   |              |
| Prof |    |    |                                   |              |
| essi |    |    |                                   |              |
| onal |    |    |                                   |              |
| C    |    |    |                                   |              |
| ommu |    |    |                                   |              |
| nica |    |    |                                   |              |
| tion |    |    |                                   |              |
| Se   |    |    |                                   |              |
| rvic |    |    |                                   |              |
| es]{ |    |    |                                   |              |
| .und |    |    |                                   |              |
| erli |    |    |                                   |              |
| ne}. |    |    |                                   |              |
+------+----+----+-----------------------------------+--------------+
| \$50 | \  | \$ | We were unable to determine the   | See criteria |
| ,700 | -- | 50 | questioned amount because the     | noted in     |
|      |    | ,7 | invoices did not contain          |              |
|      |    | 00 | sufficient information to permit  | Finding No.  |
|      |    |    | us to do so. The following KSA    | 3.           |
|      |    |    | Plus Communications' invoices     |              |
|      |    |    | (paid in September, October, and  |              |
|      |    |    | December 2004 with checks 3752,   |              |
|      |    |    | 3777, and 3840, respectively)     |              |
|      |    |    | contained activities not          |              |
|      |    |    | allocable to the FTL program:     |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 0411-29, dated June   |              |
|      |    |    |     23, 2004, for \$16,200 (100   |              |
|      |    |    |     percent allocated to the FTL  |              |
|      |    |    |     Phase III grant), indicated   |              |
|      |    |    |     work performed on the message |              |
|      |    |    |     and mission of the new ELC,   |              |
|      |    |    |     annual conference planning,   |              |
|      |    |    |     soliciting additional         |              |
|      |    |    |     business support, and ABCTE.  |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 0501-3, dated July    |              |
|      |    |    |     31, 2004, for \$8,100, and    |              |
|      |    |    |     invoice 0502-26, dated        |              |
|      |    |    |     September 21, 2004, for       |              |
|      |    |    |     \$8,100 in services (both 100 |              |
|      |    |    |     percent allocated to the FTL  |              |
|      |    |    |     Phase III grant), indicated   |              |
|      |    |    |     work on the annual conference |              |
|      |    |    |     and daily scans of news       |              |
|      |    |    |     coverage.                     |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 0503-13, dated        |              |
|      |    |    |     October 15, 2004, for         |              |
|      |    |    |     \$11,100 (of which, \$10,200  |              |
|      |    |    |     was allocated to the FTL      |              |
|      |    |    |     Phase III grant), indicated   |              |
|      |    |    |     work on the annual            |              |
|      |    |    |     conference.                   |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 0504-11, dated        |              |
|      |    |    |     November 9, 2004, for \$8,100 |              |
|      |    |    |     (100 percent allocated to the |              |
|      |    |    |     FTL Phase III grant),         |              |
|      |    |    |     indicated work on the annual  |              |
|      |    |    |     conference and ELC's          |              |
|      |    |    |     communications plan.          |              |
+------+----+----+-----------------------------------+--------------+

+------+----+----+-----------------------------------+--------------+
| **Qu | ** | ** | **Description**                   | **Criteria** |
| esti | Am | Am |                                   |              |
| oned | ou | ou |                                   |              |
| Amou | nt | nt |                                   |              |
| nt** | to | to |                                   |              |
|      | be | be |                                   |              |
|      | Re | Re |                                   |              |
|      | so | so |                                   |              |
|      | lv | lv |                                   |              |
|      | ed | ed |                                   |              |
|      | F  | F  |                                   |              |
|      | TL | TL |                                   |              |
|      | P  | P  |                                   |              |
|      | ha | ha |                                   |              |
|      | se | se |                                   |              |
|      | II | I  |                                   |              |
|      | ** | II |                                   |              |
|      |    | ** |                                   |              |
+------+----+----+-----------------------------------+--------------+
| \$20 | \$ | \  | Up to \$20,653 in costs for       | See criteria |
| ,653 | 20 | -- | FitzGerald Communications may     | noted in     |
|      | ,6 |    | have been over charged to the FTL |              |
|      | 53 |    | Phase II grant. We were unable to | Finding No.  |
|      |    |    | determine the specific amount     | 3.           |
|      |    |    | because ELC\'s accounting records |              |
|      |    |    | did not contain sufficient        |              |
|      |    |    | information. The questioned       |              |
|      |    |    | amount consisted of the           |              |
|      |    |    | following:                        |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 130311, dated June    |              |
|      |    |    |     30, 2003, indicated that      |              |
|      |    |    |     approximately 45.3percent     |              |
|      |    |    |     (\$5,753) of the total amount |              |
|      |    |    |     of \$12,700 was attributable  |              |
|      |    |    |     to FTL. It appears that ELC   |              |
|      |    |    |     charged the full amount of    |              |
|      |    |    |     the invoice to the FTL Phase  |              |
|      |    |    |     II grant when it disbursed    |              |
|      |    |    |     payments in September 2003    |              |
|      |    |    |     (check 3343) and February     |              |
|      |    |    |     2004 (check 3536). As a       |              |
|      |    |    |     result, \$6,947 may have been |              |
|      |    |    |     over charged to the FTL Phase |              |
|      |    |    |     II grant.                     |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 130723, dated         |              |
|      |    |    |     November 30, 2003, indicated  |              |
|      |    |    |     that approximately 65.9       |              |
|      |    |    |     percent (\$6,408) of the      |              |
|      |    |    |     total amount of \$9,727 was   |              |
|      |    |    |     attributable to FTL. It       |              |
|      |    |    |     appears that ELC charged the  |              |
|      |    |    |     full amount of the invoice to |              |
|      |    |    |     the FTL Phase II grant when   |              |
|      |    |    |     it disbursed payments in      |              |
|      |    |    |     December 2003 (check 3486)    |              |
|      |    |    |     and February 2004 (check      |              |
|      |    |    |     3536). As a result, \$3,319   |              |
|      |    |    |     may have been over charged to |              |
|      |    |    |     the FTL Phase II grant.       |              |
|      |    |    |                                   |              |
|      |    |    | -   Invoice 130808, dated         |              |
|      |    |    |     December 31, 2003, indicated  |              |
|      |    |    |     that approximately 70.9       |              |
|      |    |    |     percent (\$5,488) of the      |              |
|      |    |    |     total amount of \$7,737 was   |              |
|      |    |    |     attributable to FTL. It       |              |
|      |    |    |     appears that ELC charged      |              |
|      |    |    |     \$6,447 to the FTL Phase II   |              |
|      |    |    |     grant when it paid the        |              |
|      |    |    |     invoice in March 2004 (3587). |              |
|      |    |    |     As a result, \$959 may have   |              |
|      |    |    |     been over charged to the FTL  |              |
|      |    |    |     Phase II grant.               |              |
|      |    |    |                                   |              |
|      |    |    | -   The four invoices (130392,    |              |
|      |    |    |     130476, 130558, and 130639)   |              |
|      |    |    |     for July 2003 through October |              |
|      |    |    |     2003 indicated that \$24,504, |              |
|      |    |    |     of the total amount of        |              |
|      |    |    |     \$51,557 was attributable to  |              |
|      |    |    |     FTL. It appears that ELC      |              |
|      |    |    |     charged \$33,932 of the four  |              |
|      |    |    |     invoices to the FTL Phase II  |              |
|      |    |    |     grant when it disbursed       |              |
|      |    |    |     payments in September 2003    |              |
|      |    |    |     (check 3343), November 2003   |              |
|      |    |    |     (check 3426), and March 2004  |              |
|      |    |    |     (check 3587). As a result,    |              |
|      |    |    |     \$9,428may have been over     |              |
|      |    |    |     charged to the FTL Phase II   |              |
|      |    |    |     grant.                        |              |
+------+----+----+-----------------------------------+--------------+
| **\$ | ** | ** | **Totals**                        |              |
| 71,3 | \$ | \$ |                                   |              |
| 53** | 20 | 50 |                                   |              |
|      | ,6 | ,7 |                                   |              |
|      | 53 | 00 |                                   |              |
|      | ** | ** |                                   |              |
+------+----+----+-----------------------------------+--------------+

Note: Amounts subject to rounding.

# Appendix C

# Finding No. 3 -- Schedule of Unsupported Costs

+---------+-------------+-----------------+-------+-----+------+-------+
| **Unsu  |             |                 |       |     |      |       |
| pported |             |                 |       |     |      |       |
| A       |             |                 |       |     |      |       |
| merican |             |                 |       |     |      |       |
| Express |             |                 |       |     |      |       |
| Ch      |             |                 |       |     |      |       |
| arges** |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| *       | **Vendor**  | ## Charg        | **    | **  | *    | **U   |
| *Charge |             | e Type/Location | Total | FTL | *Uns | nsupp |
| Date**  |             |                 | Amo   | All | uppo | orted |
|         |             |                 | unt** | oca | rted | FTL   |
|         |             |                 |       | tio | FTL  | Phase |
|         |             |                 |       | n** | P    | III   |
|         |             |                 |       |     | hase | Gr    |
|         |             |                 |       |     | II   | ant** |
|         |             |                 |       |     | Gra  |       |
|         |             |                 |       |     | nt** |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| N       | American    | Airfare to      | \$    | 40% | \    |       |
| ovember | Airlines    | Dallas, TX      | 1,312 |     | $525 |       |
| 11,     |             |                 |       |     |      |       |
| 2003    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| N       | Hertz Car   | San Diego, CA   | \$179 | 1   | \    |       |
| ovember | Rental      |                 |       | 00% | $179 |       |
| 13,     |             |                 |       |     |      |       |
| 2003    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| N       | Residence   | La Jolla, CA    | \$330 | 1   | \    |       |
| ovember | Inn         |                 |       | 00% | $330 |       |
| 13,     |             |                 |       |     |      |       |
| 2003    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| D       | St. Gregory | Washington, DC  | \$714 | 40% | \    |       |
| ecember | Hotel       |                 |       |     | $285 |       |
| 16,     |             |                 |       |     |      |       |
| 2003    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| D       | St. Gregory | Washington, DC  | \$379 | 40% | \    |       |
| ecember | Hotel       |                 |       |     | $151 |       |
| 6, 2003 |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| D       | St. Gregory | Washington, DC  | \$182 | 40% | \$73 |       |
| ecember | Hotel       |                 |       |     |      |       |
| 6, 2003 |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | Action      | Membership      | \$50  | 40% | \$20 |       |
| 22,     | Without     | Organization    |       |     |      |       |
| 2004    | Borders     |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | Marriott    | Boston, MA      | \$456 | 1   | \    |       |
| 8, 2004 | Hotel       |                 |       | 00% | $456 |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | MacNair     | Travel Services | \$    | 1   | \$1  |       |
| 13,     | Travel Mgmt |                 | 1,013 | 00% | ,013 |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | Hertz Car   | Phoenix, AZ     | \$125 | 1   | \    |       |
| 27,     | Rental      |                 |       | 00% | $125 |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | Courtyard   | Phoenix, AZ     | \$173 | 1   | \    |       |
| 27,     |             |                 |       | 00% | $173 |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Ricky\'s    | Springfield, VA | \$84  | 40% | \$34 |       |
| ebruary | Taxi        |                 |       |     |      |       |
| 3, 2004 | Services    |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Taxi        | Baltimore, MD   | \$57  | 40% | \$23 |       |
| ebruary | Service     |                 |       |     |      |       |
| 4, 2004 |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| January | America     | Airfare to Los  | \$138 | 40% | \$55 |       |
| 18,     | West        | Angeles, CA     |       |     |      |       |
| 2004    | Airlines    |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Bertucci's  | Washington, DC  | \$69  | 40% | \$28 |       |
| ebruary | Restaurant  |                 |       |     |      |       |
| 6, 2004 |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Nooshi      | Washington, DC  | \$66  | 40% | \$26 |       |
| 1, 2004 | Restaurant  |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Houstonian  | (Restaurant)    | \$338 | 1   | \    |       |
| ebruary | Hotel       | Houston, TX     |       | 00% | $127 |       |
| 11,     |             |                 |       |     |      |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Houstonian  | Houston, TX     | \$198 | 1   | \    |       |
| ebruary | Hotel       |                 |       | 00% | $198 |       |
| 11,     |             |                 |       |     |      |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| F       | Desmond     | (Lodging)       | \$288 | 40% | \    |       |
| ebruary | Great       | Malvern, PA     |       |     | $115 |       |
| 21,     | Valley      |                 |       |     |      |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Bertucci's  | Washington, DC  | \$56  | 40% | \$23 |       |
| 9, 2004 | Restaurant  |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Georgetown  | Washington, DC  | \$45  | 40% | \$18 |       |
| 19,     | Seafood     |                 |       |     |      |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Sorriso     | (Food and       | \$81  | 40% | \$32 |       |
| 22,     |             | Beverage)       |       |     |      |       |
| 2004    |             | Washington, DC  |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Hertz Car   | Miami, FL       | \$267 | 1   | \    |       |
| 28,     | Rental      |                 |       | 00% | $267 |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | American    | Airfare to      | \$    | 1   | \$1  |       |
| 22,     | Airlines    | Miami, FL       | 1,359 | 00% | ,359 |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+
| March   | Aqua Hotel  | Miami, FL       | \$19  | 1   | \$19 |       |
| 26,     | and Lounge  |                 |       | 00% |      |       |
| 2004    |             |                 |       |     |      |       |
+---------+-------------+-----------------+-------+-----+------+-------+

+---------+-------------+-----------------+-------+-----+-------+-------+
| *       | **Vendor**  | ## Charg        | **    | **  | **U   | **U   |
| *Charge |             | e Type/Location | Total | FTL | nsupp | nsupp |
| Date**  |             |                 | Amo   | All | orted | orted |
|         |             |                 | unt** | oca | FTL   | FTL   |
|         |             |                 |       | tio | Phase | Phase |
|         |             |                 |       | n** | II    | III   |
|         |             |                 |       |     | Gr    | Gr    |
|         |             |                 |       |     | ant** | ant** |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Gentner     | Audio           | \$465 | 40% | \$186 |       |
| 6, 2004 |             | Conference      |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Gentner     | Audio           | \$555 | 40% | \$222 |       |
| 6, 2004 |             | Conference      |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Gentner     | Audio           | \$984 | 40% | \$394 |       |
| 6, 2004 |             | Conference      |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Georgetown  | Washington, DC  | \$50  | 40% | \$20  |       |
| 12,     | Seafood     |                 |       |     |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | MWI         | Membership      | \$10  | 40% | \$4   |       |
| 14,     | Connections |                 |       |     |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Starbucks   | Washington, DC  | \$11  | 40% | \$4   |       |
| 29,     |             |                 |       |     |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | US          | (U.S. Airways)  | \$    | 40% | \$465 |       |
| 5, 2004 | Online.com  |                 | 1,162 |     |       |       |
|         |             | Airfare to      |       |     |       |       |
|         |             | Colorado        |       |     |       |       |
|         |             | Springs, CO     |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | America     | Airfare to San  | \$457 | 40% | \$183 |       |
| 20,     | West        | Jose, CA        |       |     |       |       |
| 2004    | Airlines    |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| April   | Northwest   | Airfare to      | \$643 | 40% | \$257 |       |
| 25,     | Airlines    | Minneapolis, MN |       |     |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 14, | Expedia     | Travel          | \$512 | 40% |       | \$205 |
| 2004    | E-Packages  |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 17, | OU CCE      | Col             | \$150 | 40% |       | \$60  |
| 2004    | R           | lege/University |       |     |       |       |
|         | egistration |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 21, | California  | Washington, DC  | \$68  | 40% |       | \$27  |
| 2004    | Pizza       |                 |       |     |       |       |
|         | Kitchen     |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 25, | Seattle's   | Orlando, FL     | \$8   | 40% |       | \$3   |
| 2004    | Best Coffee |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 25, | Seattle's   | Orlando, FL     | \$9   | 40% |       | \$4   |
| 2004    | Best Coffee |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 27, | Allied      | Electronics     | \$575 | 40% |       | \$230 |
| 2004    | Telecom     |                 |       |     |       |       |
|         | Group       |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 27, | Staples     | (Office         | \$293 | 40% |       | \$117 |
| 2004    |             | Supplies)       |       |     |       |       |
|         |             | Washington, DC  |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| June 2, | Trans       | Professional    | \$683 | 40% |       | \$273 |
| 2004    | National    | Services        |       |     |       |       |
|         | Com         |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 21, | Houstonian  | Houston, TX     | \$380 | 40% | \$152 |       |
| 2004    | Hotel FD    |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 21, | Houstonian  | Houston, TX     | \$198 | 40% | \$79  |       |
| 2004    | Hotel FD    |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| June 3, | Harry\'s    | Arlington, VA   | \$63  | 40% | \$25  |       |
| 2004    | Tap Room    |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| May 8,  | Courtyard   | Brighton, MI    | \$89  | 40% |       | \$36  |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| June 8, | Take Out    | (Food and       | \$158 | 40% | \$63  |       |
| 2004    | Taxi        | Beverage) Falls |       |     |       |       |
|         | Arlington   | Church, VA      |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| June    | Avis        | Miami, FL       | \$161 | 40% | \$64  |       |
| 18,     | Rent-A-Car  |                 |       |     |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| June    | Staples     | (Office         | \$193 | 40% | \$77  |       |
| 29,     |             | Supplies)       |       |     |       |       |
| 2004    |             | Phoenix, AZ     |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| July    | Orbitz LLC  | (U.S. Airways)  | \$298 | 40% |       | \$119 |
| 30,2004 |             |                 |       |     |       |       |
|         |             | Airfare to      |       |     |       |       |
|         |             | Columbia, SC    |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| July    | Ortanique   | (Food and       | \$292 | 1   |       | \$292 |
| 14,     |             | Beverages)      |       | 00% |       |       |
| 2004    |             | Washington, DC  |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| July    | MacNair     | (American       | \$793 | 1   |       | \$793 |
| 20,     | Travel Mgmt | Airlines)       |       | 00% |       |       |
| 2004    |             |                 |       |     |       |       |
|         |             | Airfare to Los  |       |     |       |       |
|         |             | Angeles, CA     |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+
| July    | Expedia ESR | Travel/Lodging  | \$288 | 1   |       | \$288 |
| 23,     | Hotel       |                 |       | 00% |       |       |
| 2004    |             |                 |       |     |       |       |
+---------+-------------+-----------------+-------+-----+-------+-------+

+---------+------------+----------------+------+----+------+------+
| *       | **Vendor** | **Charge       | **T  | *  | *    | *    |
| *Charge |            | T              | otal | *F | *Uns | *Uns |
| Date**  |            | ype/Location** | Amou | TL | uppo | uppo |
|         |            |                | nt** | Al | rted | rted |
|         |            |                |      | lo | FTL  | FTL  |
|         |            |                |      | ca | P    | P    |
|         |            |                |      | ti | hase | hase |
|         |            |                |      | on | II   | III  |
|         |            |                |      | ** | Gra  | Gra  |
|         |            |                |      |    | nt** | nt** |
+---------+------------+----------------+------+----+------+------+
| August  | MacNair    | (U.S.          | \    | 10 |      | \    |
| 4, 2004 | Travel     | A              | $257 | 0% |      | $257 |
|         | Mgmt       | irways)Airfare |      |    |      |      |
|         |            | to New York,   |      |    |      |      |
|         |            | NY             |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | American   | Airfare to Los | \    | 10 |      | \    |
| 19,     | Airlines   | Angeles, CA    | $462 | 0% |      | $462 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | America    | Airfare to Los | \    | 10 |      | \    |
| 23,     | West       | Angeles, CA    | $165 | 0% |      | $165 |
| 2004    | Airlines   |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \$47 | 10 |      | \$47 |
| 26,     | Inn        | CA             |      | 0% |      |      |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $124 | 0% |      | $124 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $124 | 0% |      | $124 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $124 | 0% |      | $124 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $124 | 0% |      | $124 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $139 | 0% |      | $139 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $124 | 0% |      | $124 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Holiday    | Los Angeles,   | \    | 10 |      | \    |
| 27,     | Inn        | CA             | $139 | 0% |      | $139 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | American   | Airfare to     | \    | 10 |      | \    |
| 23,     | Airlines   | Washington, DC | $841 | 0% |      | $841 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| July    | Hotels.com | Lodging        | \    | 4  |      | \    |
| 23,     |            |                | $386 | 0% |      | $154 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Orbitz LLC | (Frontier      | \    | 3  |      | \    |
| 6, 2004 |            | Airlines)      | $287 | 9% |      | $111 |
|         |            |                |      |    |      |      |
|         |            | Airfare to     |      |    |      |      |
|         |            | Denver, CO     |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Hertz Car  | Anchorage, AK  | \    | 10 |      | \    |
| 13,     | Rental     |                | $646 | 0% |      | $646 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Expedia    | Travel/Lodging | \    | 10 |      | \    |
| 16,     | ESR Hotel  |                | $549 | 0% |      | $549 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Hotel      | New York, NY   | \    | 10 |      | \    |
| 26,     | Lucerne    |                | $161 | 0% |      | $161 |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Old Ebbitt | Washington, DC | \$54 | 4  |      | \$22 |
| 20,     | Grill      |                |      | 0% |      |      |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| August  | Georgetown | Washington, DC | \$51 | 4  |      | \$20 |
| 27,     | Seafood    |                |      | 0% |      |      |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| Se      | Marriott   | Jackson, MS    | \    | 10 |      | \    |
| ptember |            |                | $183 | 0% |      | $183 |
| 30,     |            |                |      |    |      |      |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| Se      | Lincoln    | Washington, DC | \    | 10 |      | \    |
| ptember | Suites     |                | $500 | 0% |      | $500 |
| 28,     | Downtown   |                |      |    |      |      |
| 2004    |            |                |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| N       | MacNair    | (Southwest     | \    | 10 |      | \    |
| ovember | Travel     | Airlines)      | $177 | 0% |      | $177 |
| 2, 2004 | Mgmt       |                |      |    |      |      |
|         |            | Airfare to     |      |    |      |      |
|         |            | Orlando, FL    |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
| N       | MacNair    | (Northwest     | \    | 9  |      | \    |
| ovember | Travel     | Ai             | $310 | 0% |      | $279 |
| 3, 2004 | Mgmt       | rlines)Airfare |      |    |      |      |
|         |            | to Orlando, FL |      |    |      |      |
+---------+------------+----------------+------+----+------+------+
|         | ##         | ## Totals      | **\$ |    | **\  | **\  |
|         |            |                | 23,4 |    | $7,8 | $7,9 |
|         |            |                | 96** |    | 47** | 20** |
+---------+------------+----------------+------+----+------+------+

Note: Amounts subject to rounding

<table style="width:100%;">
<colgroup>
<col style="width: 15%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 10%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="10"><strong>Unsupported Payroll</strong></td>
</tr>
<tr class="even">
<td rowspan="2"><strong>Pay Period Ending</strong></td>
<td rowspan="2"><strong>Total Payroll</strong></td>
<td rowspan="2"><strong>Total Timesheets</strong></td>
<td rowspan="2"><strong>FTL Allocation</strong></td>
<td colspan="4"><strong>Timesheets with FTL Allocations</strong></td>
<td rowspan="2"><strong>Unsupported FTL Phase II Grant</strong></td>
<td rowspan="2"><strong>Unsupported FTL Phase III Grant</strong></td>
</tr>
<tr class="odd">
<td><strong>Total</strong></td>
<td><strong>Not Signed</strong></td>
<td><strong>Signed But Not Dated</strong></td>
<td><strong>Signed and Postdated</strong></td>
</tr>
<tr class="even">
<td>March 24, 2004</td>
<td>$42,313</td>
<td>10</td>
<td>$14,086</td>
<td>9</td>
<td>5</td>
<td>2</td>
<td>1</td>
<td>$11,888</td>
<td></td>
</tr>
<tr class="odd">
<td>April 2, 2004</td>
<td>$18,940</td>
<td>11</td>
<td>$6,744</td>
<td>9</td>
<td>5</td>
<td>--</td>
<td>3</td>
<td>$6,743</td>
<td></td>
</tr>
<tr class="even">
<td>June 30, 2004</td>
<td>$34,108</td>
<td>9</td>
<td>$13,483</td>
<td>9</td>
<td>5</td>
<td>2</td>
<td>2</td>
<td>$8,310</td>
<td>$5,171</td>
</tr>
<tr class="odd">
<td>September 15, 2004</td>
<td>$29,900</td>
<td>10</td>
<td>$13,093</td>
<td>7</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td></td>
<td>$12,923</td>
</tr>
<tr class="even">
<td>September 30, 2004</td>
<td>$18,650</td>
<td>7</td>
<td>$11,498</td>
<td>6</td>
<td>1</td>
<td>2</td>
<td>2</td>
<td></td>
<td>$10,639</td>
</tr>
<tr class="odd">
<td>December 15, 2004</td>
<td>$13,250</td>
<td>5</td>
<td>$11,437</td>
<td>5</td>
<td>--</td>
<td>2</td>
<td>--</td>
<td></td>
<td>$5,011</td>
</tr>
<tr class="even">
<td><h2 id="totals-1">Totals</h2></td>
<td><strong>$157,162</strong></td>
<td><strong>52</strong></td>
<td><strong>$70,341</strong></td>
<td><strong>45</strong></td>
<td><strong>18</strong></td>
<td><strong>10</strong></td>
<td><strong>10</strong></td>
<td><strong>$26,941</strong></td>
<td><strong>$33,744</strong></td>
</tr>
</tbody>
</table>

Note: Amounts subject to rounding.

+---------+----+----+------+------+--------+----------------------+
| **Unsu  |    |    |      |      |        |                      |
| pported |    |    |      |      |        |                      |
| Profe   |    |    |      |      |        |                      |
| ssional |    |    |      |      |        |                      |
| S       |    |    |      |      |        |                      |
| ervices |    |    |      |      |        |                      |
| and     |    |    |      |      |        |                      |
| Miscel  |    |    |      |      |        |                      |
| laneous |    |    |      |      |        |                      |
| D       |    |    |      |      |        |                      |
| isburse |    |    |      |      |        |                      |
| ments** |    |    |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+
| *       | *  | *  | *    | *    | ##     | **Description**      |
| *Date** | *C | *T | *Uns | *Uns |  Payee |                      |
|         | he | ot | uppo | uppo |        |                      |
|         | ck | al | rted | rted |        |                      |
|         | Nu | ** | FTL  | FTL  |        |                      |
|         | mb |    | P    | P    |        |                      |
|         | er | *  | hase | hase |        |                      |
|         | ** | *P | II   | III  |        |                      |
|         |    | ay | Gra  | Gra  |        |                      |
|         |    | me | nt** | nt** |        |                      |
|         |    | nt |      |      |        |                      |
|         |    | ** |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+
| Se      | 37 | \$ | \--  | \$16 | KSA    | See discussion of    |
| ptember | 52 | 16 |      | ,200 | Plus   | unsupported          |
| 16,     |    | ,2 |      |      | Co     | [Professional        |
| 2004    |    | 00 |      |      | mmunic | S                    |
|         |    |    |      |      | ations | ervices]{.underline} |
|         |    |    |      |      |        | in Finding No. 3 and |
|         |    |    |      |      |        | questioned costs     |
|         |    |    |      |      |        | detailed in Appendix |
|         |    |    |      |      |        | B.                   |
+---------+----+----+------+------+--------+----------------------+
| October | 37 | \$ | \--  | \$8  |        |                      |
| 25,     | 77 | 13 |      | ,100 |        |                      |
| 2004    |    | ,9 |      |      |        |                      |
|         |    | 00 |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+
| D       | 38 | \$ | \--  | \$26 |        |                      |
| ecember | 40 | 27 |      | ,400 |        |                      |
| 7, 2004 |    | ,3 |      |      |        |                      |
|         |    | 00 |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+
| N       | 38 | \  | \--  | \$5  | Draper | Unsupported payment  |
| ovember | 12 | $7 |      | ,890 | and    | because of missing   |
| 12,     |    | ,0 |      |      | Mc     | invoices (27043 and  |
| 2004    |    | 15 |      |      | Ginley | 27239).              |
+---------+----+----+------+------+--------+----------------------+
| Se      | 37 | \  | \--  | \$1  | Summe  | Unsupported payment  |
| ptember | 59 | $1 |      | ,245 | rhouse | because of missing   |
| 21,     |    | ,6 |      |      | S      | invoices (04-000152, |
| 2004    |    | 50 |      |      | tudios | 04-000163,           |
|         |    |    |      |      |        | 04-000164, and       |
|         |    |    |      |      |        | 04-000168). (75      |
|         |    |    |      |      |        | percent of the       |
|         |    |    |      |      |        | payment was          |
|         |    |    |      |      |        | allocated to the FTL |
|         |    |    |      |      |        | Phase III grant.)    |
+---------+----+----+------+------+--------+----------------------+
| June 2, | 36 | \  | \    | \--  | Fin    | Unsupported payments |
| 2004    | 50 | $1 | $600 |      | ancial | because of missing   |
|         |    | ,5 |      |      | and    | invoices for May and |
|         |    | 00 |      |      | Acco   | June 2004. (40       |
|         |    |    |      |      | unting | percent of the each  |
|         |    |    |      |      | Cons   | payment was          |
|         |    |    |      |      | ultant | allocated to the FTL |
|         |    |    |      |      |        | Phase II grant.)     |
+---------+----+----+------+------+--------+----------------------+
| June    | 36 | \  | \    | \--  |        |                      |
| 24,     | 71 | $1 | $600 |      |        |                      |
| 2004    |    | ,5 |      |      |        |                      |
|         |    | 00 |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+

+---------+----+----+------+------+--------+----------------------+
| *       | *  | *  | *    | *    | ##     | **Description**      |
| *Date** | *C | *T | *Uns | *Uns |  Payee |                      |
|         | he | ot | uppo | uppo |        |                      |
|         | ck | al | rted | rted |        |                      |
|         | Nu | ** | FTL  | FTL  |        |                      |
|         | mb |    | P    | P    |        |                      |
|         | er | *  | hase | hase |        |                      |
|         | ** | *P | II   | III  |        |                      |
|         |    | ay | Gra  | Gra  |        |                      |
|         |    | me | nt** | nt** |        |                      |
|         |    | nt |      |      |        |                      |
|         |    | ** |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+
| March   | 36 | \  | \$2  | \--  | Shared | Unsupported payment  |
| 30,     | 01 | $5 | ,132 |      | Techno | because of missing   |
| 2004    |    | ,3 |      |      | logies | invoices (136228,    |
|         |    | 31 |      |      | Fai    | 142403, 146554,      |
|         |    |    |      |      | rchild | 147815, 147817,      |
|         |    |    |      |      | T      | 148515, and 148975). |
|         |    |    |      |      | elecom | (40 percent of the   |
|         |    |    |      |      |        | payment was          |
|         |    |    |      |      |        | allocated to the FTL |
|         |    |    |      |      |        | Phase II grant.)     |
+---------+----+----+------+------+--------+----------------------+
| January | 35 | \  | \$40 | \--  | Board  | Unsupported payment  |
| 20,     | 13 | $1 |      |      | Member | because of missing   |
| 2004    |    | ,4 |      |      |        | receipt for a \$100  |
|         |    | 26 |      |      |        | airfare change fee.  |
|         |    |    |      |      |        | (40 percent of the   |
|         |    |    |      |      |        | payment was          |
|         |    |    |      |      |        | allocated to the FTL |
|         |    |    |      |      |        | Phase II grant.)     |
+---------+----+----+------+------+--------+----------------------+
| F       | 35 | \  | \    | \--  | U.S.   | Unsupported payment  |
| ebruary | 53 | $1 | $668 |      | Ne     | because of missing   |
| 25,     |    | ,6 |      |      | wswire | invoices (116456,    |
| 2004    |    | 70 |      |      |        | 116652, 117795, and  |
|         |    |    |      |      |        | 118732). (40 percent |
|         |    |    |      |      |        | of the payment was   |
|         |    |    |      |      |        | allocated to the FTL |
|         |    |    |      |      |        | Phase II grant.)     |
+---------+----+----+------+------+--------+----------------------+
|         | ** | ** | **\  | **\$ |        |                      |
|         | To | \$ | $4,0 | 57,8 |        |                      |
|         | ta | 77 | 40** | 35** |        |                      |
|         | ls | ,4 |      |      |        |                      |
|         | ** | 92 |      |      |        |                      |
|         |    | ** |      |      |        |                      |
+---------+----+----+------+------+--------+----------------------+

Note: Amounts subject to rounding.

# Appendix D -- Summary of Selections and Questioned and Unsupported Costs

+-----+-------+-------+-------+------+------+------+------+--------+
| **  | ##    | **A   | ##    | *    | *    | *    | *    | *      |
| Pop |  Amou | mount | FTL A | *FTL | *FTL | *FTL | *FTL | *Total |
| ula | nt an | Sel   | mount | Qu   | Qu   | Uns  | Uns  | FTL    |
| tio | d Num | ected |  and  | esti | esti | uppo | uppo | Ques   |
| n** | ber o | and   | Count | oned | oned | rted | rted | tioned |
|     | f Pay | Co    |       | Am   | Cou  | Am   | Cou  | and    |
|     | ments | unt** |       | ount | nt** | ount | nt** | Unsup  |
|     |       |       |       | and  |      | and  |      | ported |
|     |       |       |       | P    |      | P    |      | Amount |
|     |       |       |       | erce |      | erce |      | and    |
|     |       |       |       | nt** |      | nt** |      | Per    |
|     |       |       |       |      |      |      |      | cent** |
+-----+-------+-------+-------+------+------+------+------+--------+
| Am  | \$19  | \$6   | \$3   | \$11 | 33   | \$18 | 85   | \$     |
| eri | 5,510 | 2,136 | 2,237 | ,768 | cha  | ,363 | cha  | 30,131 |
| can |       |       |       |      | rges |      | rges |        |
| E   | (9    | (129  | (125  | (36  |      | (57  |      | (      |
| xpr | paym  | cha   | cha   | .5%) |      | .0%) |      | 93.5%) |
| ess | ents) | rges) | rges) |      |      |      |      |        |
+-----+-------+-------+-------+------+------+------+------+--------+
| P   | \$72  | \$15  | \$7   | \    | 5    | \$60 | 38   | \$     |
| ayr | 1,078 | 7,162 | 0,341 | $307 | ti   | ,685 | ti   | 60,992 |
| oll |       |       |       |      | mesh |      | mesh |        |
|     | (48   | (52   | (45   | (0   | eets | (86  | eets | (      |
|     | paym  | t     | t     | .4%) |      | .3%) |      | 86.7%) |
|     | ents) | imesh | imesh |      |      |      |      |        |
|     |       | eets) | eets) |      |      |      |      |        |
+-----+-------+-------+-------+------+------+------+------+--------+
| Ot  | \     | \     | \$71  | \$78 | 19   | \$61 | 10   | \$1    |
| her | $1,31 | $1,25 | 7,612 | ,647 | paym | ,875 | paym | 40,522 |
| E   | 5,529 | 5,414 |       |      | ents |      | ents |        |
| xpe | (319  |       | (87   | (11  |      | (8   |      | (      |
| nse | paym  | (144  | paym  | .0%) |      | .6%) |      | 19.6%) |
| s[^ | ents) | paym  | ents) |      |      |      |      |        |
| 14] |       | ents) |       |      |      |      |      |        |
+-----+-------+-------+-------+------+------+------+------+--------+
|     | **\$2 | **\$1 | **\   | **\$ |      | *    |      | *      |
|     | ,232, | ,474, | $820, | 90,7 |      | *\$1 |      | *\$231 |
|     | 117** | 712** | 190** | 21** |      | 40,9 |      | ,644** |
|     |       |       |       |      |      | 22** |      |        |
|     | *     |       |       | **(  |      |      |      | **(28  |
|     | *(376 |       |       | 11.1 |      | **(  |      | .2%)** |
|     | p     |       |       | %)** |      | 17.2 |      |        |
|     | aymen |       |       |      |      | %)** |      |        |
|     | ts)** |       |       |      |      |      |      |        |
+-----+-------+-------+-------+------+------+------+------+--------+

Note: Amounts subject to rounding.

Mr. Bernard Tadley

Office of the Inspector General

U.S. Department of Education

The Wannamaker Building

100 Penn Square East, Suite 502

Philadelphia, PA 19107

December 21, 2005

On behalf of Following the Leaders, Inc., we submit the following
response to ED-OIG audit number A03F0010, The Education Leaders
Council's Drawdown and Expenditure of Federal Funds, dated November,
2005.

In December of 2005, The Education Leaders Council (ELC) re-framed its
organizational mission and changed its name to Following the Leaders
(FTL). A new Chief Executive Officer, Faye P. Taylor, assumed leadership
of the organization. Ms. Taylor replaced Mr. Theodor Rebarber who was
the CEO from October, 2004 until December 2005. During his tenure, Mr.
Rebarber worked diligently to correct operational and financial
difficulties that ELC had encountered primarily during the first six
months of 2004.

FTL is now re-organized and in full compliance with all federal
regulations governing the use of federal funds awarded by the United
States Congress for the Following the Leaders program. The comments
provided herein address serious shortcomings that were identified by ELC
under Mr. Rebarber's leadership and were reported to the U.S. Department
of Education (Department) immediately. It was ELC's reporting of
financial mismanagement and the overdraw of federal funds which in turn
resulted in the Inspector General's review of ELC's 2004 finances.

It is important to note that throughout the entire period of the OIG's
audit, ELC had not closed its 2004 accounting records. When Mr. Rebarber
assumed leadership of ELC in late 2004, the 2003 audit was underway but
not yet complete. We set to work completing the 2003 audit and reviewing
and adjusting the 2004 (and 2005) accounting records as needed to make
them accurate and to comply with federal regulations. It is our position
that many of the shortcomings identified by the Department would have
been and were corrected as a result of this internal review process.
Thus, while we concur with the findings concerning financial protocols,
we have long since corrected many of the accounting entries, a fact
which is given minimal attention in this report.

The OIG's report has identified three findings:

1.  *ELC did not comply with federal regulations concerning the drawdown
    of grant funds. ELC overdrew Following the Leaders Phase II Grant
    Funds.*

> Auditee response: We concur that ELC did not comply at times with
> federal regulations concerning the drawdown of grant funds and that,
> as a result, ELC overdrew federal funds. Specifically, weak internal
> controls resulted in a lapse of enforcement of both the "three day
> rule" (34 CFR section 74.22(b)(3) for expending federal funds and of
> ELC's process for matching invoices to drawdowns it had submitted. The
> OIG reviewed 24 drawdowns. There were, in fact 63 total FTL II
> drawdown requests; of these 63, 10 did not have proper documentation.
> All ten of these draws were submitted to the Department between
> January and June of 2004.
>
> The OIG report concludes that ELC overdrew \$495,326 in federal funds
> as a result of weak financial controls. At the time OIG completed its
> review, that number was accurate in our opinion. Based upon ongoing
> adjustments and corrections to our 2004 records, the overdraw has
> actually dropped \$476,169 (this amount might be adjusted further
> pending completion of the 2004 independent audit and could drop
> significantly pending review of our indirect cost proposal). We have
> completed negotiations with the Department about a repayment plan and
> timetable and continue to work closely with the Department to meet our
> obligations. It is also worth noting that we have prepared a repayment
> plan that would allow us to address additional re-payment amounts
> identified during audit resolution.
>
> *The OIG report contains two corrective recommendations under finding
> 1:*

-   *Return overdrawn funds to the Department:* as noted, we have
    negotiated a repayment plan to return funds.

-   *Submit documentation in support of each drawdown request:* we have
    assembled this information and will review it with the Department
    upon request.

2.  *ELC did not have an approved indirect cost plan.*

> ELC allocated indirect expenses using the direct allocation method
> permitted under OMB Circular A-122. ELC did not believe that prior
> approval was required to allocate allowable joint costs on a direct
> basis. ELC was of the opinion that prior approval was only required
> when applying an indirect rate (as stated in OMB A-122). ELC did not
> apply an indirect rate to general and administrative expenses and thus
> believed no prior approval was required.
>
> In December, 2005, ELC did submit an indirect rate proposal (as
> required under Special Conditions put in place by the Department in
> June of 2005). That proposal was based on the most recent audited
> financial statements. If approved, FTL will in fact be owed
> substantial funds for the indirect portion of general and
> administrative costs from 2003 to the present. These funds would
> significantly reduce the overdraw.
>
> *The OIG report contains two corrective recommendations under finding
> 2:*

-   *Submit an indirect cost plan to the Department:* this has been
    done.

-   *Refund any costs allocated to FTL grants not in accordance with the
    approved plan:* as noted above, we expect that approval of the plan
    will actually result in a reduction of the overdraw of federal
    funds.

3.  *ELC did not comply with cost principles contained in OMB Circular
    A-122. ELC charged unallowable and unsupported costs to the
    Following the Leaders grants.*

> The audit concludes that ELC charged \$15,732 in unallowable and
> \$138,327 in unsupported costs to Phase II and III of the Following
> the Leaders appropriations.
>
> *Unallowable Costs:* Of the 12 items that comprise the \$15,732:

-   1 item has since been corrected (\$192)

-   4 items we believe will be approved by the Department staff who
    understand the programmatic nature of the grant activities
    (\$11,828): these items pertain to activities charged to the grant
    that OIG did not believe could reasonably be allocated

-   3 items we disagree with and believe will be approved by Department
    personnel (\$2,718): these items pertain to OIG's assumption that
    ELC should have been able to obtain government pricing on travel and
    travel-related costs. ELC's travel policy called for compliance with
    government regulations but did not specify compliance with GSA
    rates. It is our firm belief that it is not possible -- and
    therefore not reasonable - for a non-profit organization of ELC's
    size to expect to obtain rates available to the federal government
    through its large purchasing power.

-   4 items we need clarification on from the Department (\$993)

> *Unsupported Costs:*
>
> The OIG audit has questioned costs based on an assessment of
> appropriate documentation that focuses on credit card charges for
> travel, timesheet records, and vendor invoice detail. We look forward
> to reviewing and resolving these issues with the Department and offer
> brief comments in response here.

-   Travel receipts and records: In response to concerns raised by OIG,
    ELC completed undertook to contact all former employees and ask them
    to certify the purpose of each trip taken and charged to the company
    credit card. The results of that effort are being reviewed and will
    be incorporated into our final 2004 accounting adjustments.

-   Timesheets: ELC was alerted to deficiencies in timesheet records in
    2004 when the 2003 audit was being completed. The organization put
    in place new timesheet requirements, but in some instances has
    maintained only an electronic copy of the timesheets which means
    that some dates and/or signatures are lacking. ELC undertook another
    exercise to contact all employees to get certification of timesheet
    records where they were missing. We adjusted our accounting records
    based on this exercise and look forward to reviewing the results
    with the Department.

-   Vendor invoice detail: we disagree with OIG's assessment of the
    reasonableness of certain vendor invoices. We believe that the value
    of certain contracts can be demonstrated in a variety of means;
    however, OIG consistently relied on the notion that only detailed
    activity reports showing how time was spent by vendors could support
    the reasonableness of those charges. We will review these items with
    the Department to reach closure.

> *The OIG report contains six corrective recommendations under finding
> 3:*

-   *Refund unresolved unallowable costs:* As noted above, we have
    projected our finances assuming an overdraw amount that is greater
    than the \$476,169 currently booked and will work with the
    Department to resolve potentially unallowable items.

-   *Provide documentation on vendor services:* We will provide this
    during audit resolution.

-   *Specify 2003 and 2004 annual conference income and expenses:* We
    will provide this during audit resolution.

-   *Provide adequate documentation on unsupported costs:* We will
    provide this during audit resolution.

-   *Maintain supporting documentation for all FTL grant expenditures
    and require consultants detail work performed:* We believe that we
    are in full compliance with documentation requirements and will
    re-confirm this with the Department during audit resolution.

-   *Provide all officials and employees copies of OMB Circular A-122
    and require confirmation of receipt and review:* completed: OMB
    Circular A-122 has been provided to all employees; a form indicating
    receipt and review was also circulated, signed by each employee and
    returned; finally, our finance manual, which details operating
    protocols that conform with federal regulations, also has been
    provided to all employees.

*Other Matters:* The OIG report also refers to ELC's fiscal health and
completion of the 2004 audit. We have submitted a turnaround plan to the
Department that we believe will allow FTL to continue operations and
meet the re-payment agreement schedule. That plan calls for repayment of
overdrawn funds over a three year period. We are ready to schedule the
2004 audit and will do so as soon as practicable.

The audit report also referred to Special Conditions imposed on ELC in
June of 2005. The OIG audit refers to seven items from these conditions
(page 4 of the OIG audit). These seven items and their status are as
follows:

1.  *deposit and disperse federal funds from a separate account and
    maintain a clear audit trail:* completed

2.  *enter into a repayment agreement with the Department:* completed

3.  *operate on a reimbursement basis:* implemented and ongoing

4.  *institute appropriate fiscal controls:* completed

5.  *make arrangements for the 2004 audit and file 2005 timely:* bids
    were solicited and a firm has been retained for the 2004 audit; we
    expect to complete 2005 on time

6.  *submit an indirect rate "direct allocation proposal":* submitted
    and under review

7.  *promptly provide documents requested by the Department:* has been
    done consistently

/s/ December 21, 2005

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Meave G. O'Marah, consulting Chief Financial Officer on behalf of
Following the Leaders (formerly Education Leaders Council)

[^1]: In order to differentiate the FTL organization from the program,
    the report refers to the organization as ELC, its former name.

[^2]: Unless otherwise specified, all references to 34 C.F.R. Parts 74
    and 75 are to the July 1, 2003, edition.

[^3]: The \$846 difference between ELC's and our calculations (\$272,674
    versus \$273,520) was due to expenses charged to the grant by ELC in
    calendar year 2002. The 2002 expenses were not allowable, as ELC did
    not receive Department approval to use grant funds for expenses
    incurred prior to February 1, 2003.

[^4]: Amount reported by ELC as of September 2, 2005. A cost center is
    the segment of activity or area of responsibility for which costs
    are accumulated. ELC's non-FTL cost centers include general and
    administrative, communications and marketing, fundraising and
    development, the American Board for Certification of Teacher
    Excellence (ABCTE), Education Leaders Action Council, Charter School
    Leadership Council, annual conference, and board and committee
    meetings.

[^5]: Questioned costs have been excluded from this amount.

[^6]: Unless otherwise specified, all references to the OMB Circular
    A-122 are to the revision effective on June 1, 1998.

[^7]: The Department is ELC's cognizant agency.

[^8]: From the \$5,212,117, we excluded seven payments totaling
    \$3,000,000. We included one \$20,000 payment made in 2003, to
    arrive at a population of \$2,232,117 from which we selected
    transactions for review. The Objective, Scope and Methodology
    section contains addition information on the selection of items for
    review.

[^9]: The conference center's invoices totaled \$110,985, consisting of
    banquet costs of \$73,567, room costs of \$23,663, audio-visual
    costs of \$10,819, a net credit of \$1,040 for miscellaneous costs
    and credits, and interest charges of \$3,977. The \$60,000 (54.1
    percent of the conference center's total costs) charged to the FTL
    Phase II grant in ELC\'s general ledger was classified as lodging.
    As a result, for purposes of our review, we treated 54.1 percent of
    all conference center costs as having been charged to the FTL Phase
    II grant. In addition, we note that among the calendar year end 2003
    adjusting entries was an adjustment for \$12,000. It is possible
    that all or a portion of the adjustment was a reduction in the
    conference center expenses charged to the FTL Phase II grant.

[^10]: The \$46 M&IE rate consists of \$7 for breakfast, \$12 for lunch,
    \$18 for dinner, and \$9 for incidental expenses.

[^11]: Amounts as of September 2, 2005, are approximate amounts,
    reported by ELC that have not been audited.

[^12]: See footnotes 2 and 6.

[^13]: In the comments to the draft report, ELC noted that this
    questioned cost had been corrected.

[^14]: Includes a payment of \$20,000 paid in 2003.