[Audit of Delaware State University's Administration of the Title
III]{.smallcaps}

[Strengthening HBCU Program]{.smallcaps}

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## 

## 

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## 

## FINAL AUDIT REPORT

## Control Number ED-OIG/A03-B0026

### **[July 2002]{.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

> Statements that managerial practices need improvements, as well as
> other conclusions and recommendations in this audit report represent
> the opinions of the Office of Inspector General. Determinations of
> corrective action to be taken will be made by the appropriate
> Department of Education officials.
>
> In accordance with the Freedom of Information Act (5 U.S.C. § 552),
> audit reports issued by the Office of Inspector General are available,
> if requested, to members of the press and general public to the extent
> information contained therein is not subject to exemptions in the Act.

**[Audit of Delaware State University's Administration of the Title III
Strengthening HBCU Program]{.smallcaps}**

**[Control Number ED-OIG/A03-B0026]{.smallcaps}**

**[Table of Contents]{.smallcaps}**

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| [Executive  |                                                     | 1 |
| Summary]{.  |                                                     |   |
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| [Finding    | DSU did not Handle Funds for the Endowment          | 5 |
| No.         | Challenge                                           |   |
| 1]{         |                                                     |   |
| .smallcaps} | Program Activity in a Timely                        |   |
| --          | Manner...\......\.............................      |   |
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| Recommen    |                                                     | 6 |
| dation..... |                                                     |   |
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| [Finding    | DSU Reported Inaccurate Information on its          | 7 |
| No.         | Endowment Challenge Program                         |   |
| 2]{         | Activity\...........                                |   |
| .smallcaps} | ................................................... |   |
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| Recommenda  |                                                     | 8 |
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| [Finding    | DSU did not Adequately Account for Title III-Funded | 9 |
| No.         |                                                     |   |
| 3]{         | Endowment                                           |   |
| .smallcaps} | Funds\..........                                    |   |
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| Recommenda  |                                                     | 1 |
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| [Finding    | DSU Charged Unallowable and Unsupported Costs to    | 1 |
| No.         |                                                     | 2 |
| 4]{         | HBCU Program                                        |   |
| .smallcaps} | Funds....                                           |   |
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| [Objective, |                                                     | 1 |
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| [Statement  |                                                     | 1 |
| on          |                                                     | 6 |
| Management  |                                                     |   |
| Controls]{. |                                                     |   |
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| [Appendix   |                                                     | 1 |
| A]{         |                                                     | 7 |
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| -- DSU      |                                                     |   |
| Activities  |                                                     |   |
| Supported   |                                                     |   |
| with HBCU   |                                                     |   |
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| [Appendix B |                                                     | 1 |
| --]{        |                                                     | 8 |
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| DSU's       |                                                     |   |
| Comments to |                                                     |   |
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# Executive Summary

The objective of our audit was to determine if Delaware State University
(DSU) administered the Title III, Part B Strengthening Historically
Black Colleges and Universities Program (the HBCU Program) in accordance
with applicable laws, regulations, and program requirements. Our audit
covered the period October 1, 1997, to September 30, 2001. As a result
of concerns identified during our fieldwork, the scope of the audit was
expanded to include DSU's accounting for Title III-funded endowment
funds, including those funded under the Part C Endowment Challenge Grant
Program, for the period July 1, 1992, to December 31, 2001.

Except for DSU's administration of endowment funds established with
funds from the HBCU Program and Endowment Challenge Grant Program, our
audit disclosed that during the period October 1, 1997, to September 30,
2001, DSU generally administered the HBCU Program funds in accordance
with applicable laws, regulations, and requirements.

We found DSU drew down \$200,000 of HBCU Program funds for their
Endowment Challenge Program activity 21 months prior to accounting for
the funds in October 2001. The funds were drawn down on February 9,
2000, and remained on deposit in DSU's bank account earning interest
until December 2001. During this period, DSU reported to the U.S.
Department of Education (the Department) that \$200,000 of matching
funds had been raised and that the endowment fund corpus, consisting of
grant and matching funds, had been placed in a separate investment
account. For the quarter-ended December 31, 2001, DSU deposited into an
endowment fund \$200,000 of grant funds, \$150,000 of matching funds,
and \$18,140 of interest earned, while the grant funds were on deposit
in their bank account.

[]{.mark}

In addition, we found that DSU did not adequately account for endowment
funds established with HBCU Program and Endowment Challenge Grant
Program funds. DSU's accounting records for their pooled endowment fund
did not adequately account for the endowment funds' additions, income,
and withdrawals. In February 2002, DSU prepared revised endowment fund
accounting records for the period July 1, 1992, to December 31, 2001;
the revised accounting records address many of the inadequacies of DSU's
original endowment fund accounting.

We also found that DSU charged \$3,422 of unallowable costs and \$2,289
of unsupported costs to the HBCU Program funds. In February 2002, DSU
returned the unallowable and unsupported costs to the HBCU Program
account.

We recommend that the Assistant Secretary for Postsecondary Education
require DSU to establish controls that ensure: (1) Title III funds for
endowment activities are accounted for, matched, and invested in a
timely manner; (2) Title III-funded endowment activities are properly
reported to the Department; (3) Title III-funded endowment funds are
adequately accounted for; and (4) expenditures made with HBCU Program
funds are supported and reasonable.

A draft of this audit report was provided to DSU. DSU concurred with the
findings and recommendations presented in the audit report. In addition,
DSU noted the corrective actions they have implemented. A copy of DSU's
response is included as an attachment to this audit report.

# Background

Established in 1891, Delaware State University (DSU) is a public
institution that offers baccalaureate and graduate programs. Located in
Dover, Delaware, DSU is designated as a historically black college and
university and has an enrollment of approximately 3,100 students.

The Title III, Part B Strengthening Historically Black Colleges and
Universities Program (the HBCU Program) provides grants to historically
black colleges and universities to assist these institutions in
establishing and strengthening their physical plants, academic
resources, fiscal management, and endowments so that they may continue
to participate in fulfilling the goal of equality of educational
opportunity. To be eligible to receive a grant under the HBCU Program,
an institution must be designated by the U.S. Department of Education
(the Department) as a historically black college and university.

HBCU Program funds may be used for the following activities: (1) the
purchase, rental or lease of scientific or laboratory equipment for
educational purposes; (2) construction, maintenance, and renovation of
instructional facilities; (3) faculty development and exchanges; (4)
academic instruction in disciplines where Black Americans are
underrepresented; (5) the purchase of educational material; (6)
tutoring, counseling, and student service programs; (7) funds and
administrative management and acquisition of equipment for use in
strengthening funds management; (8) joint use of facilities; (9)
establishing or improving a development office; (10) establishing or
improving a program of elementary and secondary school teacher
education; (11) establishing community outreach programs to encourage
the pursuit of postsecondary education; and (12) establishing or
increasing an endowment fund. If an institution uses part of its HBCU
Program funds for establishing or increasing an endowment fund, it is
subject to certain Title III, Part C Endowment Challenge Grant Program
provisions. HBCU Program grants are for a period of up to five academic
years, with authorizations made yearly.

During the audit period, October 1, 1997, to September 30, 2001, DSU was
awarded HBCU Program grants totaling \$6,560,504. During the same
period, DSU expended grant funds totaling \$3,772,749.[^1] Appendix A
provides a description of the activities at DSU that are supported with
HBCU Program funds.

Congress appropriated funds for the Title III, Part C Endowment
Challenge Grant Program during fiscal years 1984 to 1995. The Endowment
Challenge Grant Program provided endowment challenge grants to eligible
institutions to (1) establish or increase endowment challenge funds, (2)
provide additional incentives to promote fund-raising activities, and
(3) foster increased independence and self-sufficiency at eligible
institutions. In general, institutions eligible for the Endowment
Challenge Grant Program included institutions eligible for the
Strengthening Institutions Program and the HBCU Program. The significant
requirements of the Endowment Challenge Grant Program include: (1)
institutions must match the grant awards with non-Federal funds; (2)
endowment challenge grants must be invested for a duration of 20 years;
(3) the endowment fund corpus[^2] may be invested in securities such as
certificates of deposit, mutual funds, stocks or bonds; (4) during the
grant period, the institution may not withdraw any part of the endowment
fund corpus; and (5) during the grant period, the institution may
withdraw, for costs necessary to operate the institution or administer
and manage the endowment fund, up to 50 percent of the total aggregate
endowment fund income earned prior to the date of expenditure.

The Department awarded DSU two Endowment Challenge Grants. In 1986, DSU
received an Endowment Challenge Grant of \$50,000; DSU matched the grant
with \$50,000 for a total original endowment fund corpus of \$100,000.
In 1995, DSU received a second Endowment Challenge Grant of \$382,750;
DSU matched the grant with \$191,375 for a total original endowment fund
corpus of \$574,125.

Unless otherwise specified, all regulatory citations are to the July 1,
1997, volume.

# Audit Results

The objective of our audit was to determine if DSU administered the HBCU
Program in accordance with applicable laws, regulations, and program
requirements. Our audit covered the period October 1, 1997, to September
30, 2001. As a result of concerns identified during our fieldwork, the
scope of the audit was expanded to include DSU's accounting for Title
III-funded endowment funds, including those funded under the Part C
Endowment Challenge Grant Program, for the period July 1, 1992, to
December 31, 2001.

Except for DSU's administration of endowment funds established with
funds from the HBCU Program and Endowment Challenge Grant Program, our
audit disclosed that during the period October 1, 1997, to September 30,
2001, DSU generally administered the HBCU Program funds in accordance
with applicable laws, regulations, and requirements.

A draft of this audit report was provided to DSU. DSU concurred with the
findings and recommendations presented in the audit report. In addition,
DSU noted the corrective actions they have implemented. A copy of DSU's
response is included as an attachment to this audit report.

# Finding No. 1 DSU did not Handle Funds for the Endowment Challenge Program Activity in a Timely Manner

DSU did not: (1) promptly account for HBCU Program funds drawn down for
the Endowment Challenge Program activity,[^3] (2) promptly provide
matching funds for the HBCU Program funds, and (3) deposit and invest
the endowment fund corpus in a timely manner. The table below presents
the significant events for the Endowment Challenge Program activity.

  ---------------- ------------------------------------------------------
  **Date**         **Event/Transaction**

  February 9, 2000 DSU draws down \$200,000 of HBCU Program funds from
                   the Department for their Endowment Challenge Program
                   activity, and deposits the funds into their corporate
                   bank account on March 3, 2000.[^4] While on deposit,
                   the funds are invested in a money market account and
                   earn interest.

  October 26, 2001 Approximately 21 months later, DSU accounts for the
                   funds through journal entries transferring \$200,000
                   from the Endowment Challenge Program activity account
                   to the Federal III endowment fund account.

  November 7, 2001 DSU posts journal entries to transfer \$150,000 of
                   matching funds to the Federal III endowment fund
                   account.

  February 2002    We review DSU's endowment fund accounting records
                   (unitization schedules). DSU establishes the Federal
                   III endowment account in DSU's pooled endowment fund's
                   unitization schedule for the quarter-ended December
                   31, 2001. The Federal III endowment account is funded
                   with \$200,000 of grant funds, \$18,140 of interest
                   earned on the funds while they were on deposit in
                   DSU\'s bank account from March 3, 2000, through
                   December 31, 2001,[^5] and \$150,000 of matching funds
                   from DSU.
  ---------------- ------------------------------------------------------

The delay in accounting for, matching, depositing, and investing the
grant funds was due to inadequate management controls pertaining to the
drawdown and recording of Federal grant funds. As a result, DSU did not
comply with Federal regulations covering cash management and Title
III-funded endowments. Regulations at 34 C.F.R. § 74.22(b)(2) require
cash advances to recipient organizations be limited to the minimum
amounts needed and be timed in accordance with the actual, immediate
cash requirements of the recipient organization in carrying out the
program or project. Pursuant to 20 U.S.C. § 1062(b)(3), the Title III,
Part C Endowment Challenge Grant Program provisions regarding the
establishment or increase of an endowment fund, that are not
inconsistent with the Title III, Part B HBCU Program provisions, shall
apply to Part B funds used for endowment activities. The Endowment
Challenge Grant Program's implementing regulations establish the
following requirements, among others, for institutions that receive
endowment challenge grants:

-   Establish an endowment fund independent of any other endowment fund
    established by or for the institution. 34 C.F.R. § 628.41(a)(2).

-   Deposit the matching funds in the endowment fund established under
    this part. 34 C.F.R. § 628.41(a)(3).

-   Upon receipt, immediately deposit the grant funds into the endowment
    fund established under this part. 34 C.F.R. § 628.41(a)(4).

-   Within fifteen working days after receiving the grant funds, invest
    the endowment fund corpus. 34 C.F.R. § 628.41(a)(5).

Under regulations at 34 C.F.R. § 608.10(d)(3), which became effective
January 18, 2001, institutions are required to match the grant funds
immediately with non-Federal funds when it places those funds into its
endowment fund.

In December 2001, we shared our preliminary finding with DSU officials.
They noted that when the \$200,000 was drawn down, matching funds were
available, but not properly allocated to the Endowment Challenge Program
activity.

Recommendation:

1.1 The Assistant Secretary for Postsecondary Education should ensure
that DSU establishes management controls that result in the immediate
match of the Title III grant funds for endowment activities and the
immediate deposit of the grant and matching funds into an endowment
fund.

Auditee's Comments:

DSU concurred with the finding and recommendation. DSU will ensure that
all future drawdowns will be matched with funds from appropriate sources
in a timely manner.

# Finding No. 2 DSU Reported Inaccurate Information on its Endowment Challenge Program Activity

DSU reported inaccurate information on the status of the Endowment
Challenge Program activity to the Department in the HBCU Program's
continuation grant applications and annual performance reports. The
information was inaccurate, because it did not reflect DSU's actual
accomplishments or transactions. Specifically, in DSU's May 1998 and May
1999 continuation grant applications and annual performance reports,
\$100,000 was budgeted each year for the Endowment Challenge Program
activity. In both the May 1999 and March 2000 continuation grant
applications and annual performance reports, DSU stated that \$100,000
was set aside in the previous year for endowment purposes and that they
raised the required match of 100 percent or \$100,000. In addition, in
both the March 2000 and April 2001 continuation grant applications and
annual performance reports, DSU stated that the endowment fund corpus
was placed in a separate investment account.

These statements indicate that DSU established an independent endowment
fund for the Endowment Challenge Program activity, deposited the grant
and matching funds into the endowment fund, and invested the endowment
fund corpus. The Endowment Challenge Grant Program's implementing
regulations establish the following requirements, among others, for
institutions that receive endowment challenge grants:

-   Establish an endowment fund independent of any other endowment fund
    established by or for the institution. 34 C.F.R. § 628.41(a)(2).

-   Deposit the matching funds in the endowment fund established under
    this part. 34 C.F.R. § 628.41(a)(3).

-   Upon receipt, immediately deposit the grant funds into the endowment
    fund established under this part. 34 C.F.R. § 628.41(a)(4).

-   Within fifteen working days after receiving the grant funds, invest
    the endowment fund corpus. 34 C.F.R. § 628.41(a)(5).

We found that while DSU raised more than \$200,000 of eligible matching
funds, DSU did not post journal entries to transfer the matching funds
to the Federal III endowment account until November 7, 2001, twenty-one
months after DSU drew down the grant funds from the Department. When DSU
finally matched the \$100,000 of fiscal year 1998 grant funds, it
transferred to the Federal III endowment account only \$50,000 of the
\$100,000 of matching funds that it reported in its May 1999
continuation grant application and annual performance report. In
addition, the \$200,000 of federal funds drawn down by DSU on February
9, 2000, remained on deposit in DSU\'s corporate bank account; the funds
were not placed in a separate investment account as reported by DSU in
the March 2000 and April 2001 continuation grant applications and annual
performance reports. In preparing the performance reports, DSU\'s Title
III Coordinator relied on information provided by DSU Business and
Finance Office employees; the information was not verified.

Regulations at 34 C.F.R. § 74.51(d) require that grantee's performance
reports must contain a comparison of the actual accomplishments with the
goals and objectives established for the period, and reasons why
established goals were not met. Annual performance reports that contain
inaccurate information prevent the Department's program staff from
assessing a grantee\'s progress toward meeting the grant\'s goals and
objectives, providing needed technical assistance to the grantee, or
imposing special award conditions on the grantee.

Recommendations:

The Assistant Secretary for Postsecondary Education should:

2.1 Require that DSU establish management controls to ensure the
verification of information (i.e., actual accomplishments, reasons for
deviations from established goals, and developments that have a
significant impact on award funded activities) reported in DSU\'s annual
performance reports.

2.2 Require that DSU submit a report on the current status of the HBCU
Program-funded Endowment Challenge Program activity. Such a report
should include the status of the endowment grant funds, information on
the amounts and sources of the required matching funds, and a comparison
of actual accomplishments of the activity to the previously reported
accomplishments.

Auditee's Comments:

DSU concurred with the finding and recommendations. DSU stated that they
implemented a new procedure to ensure the verification of information
provided in their annual performance reports. In addition, DSU will
submit a performance report on the current status of the Endowment
Challenge Program activity.

# Finding No. 3 DSU did not adequately Account for Title III-Funded 

#  Endowment Funds

DSU did not adequately account for the endowment funds established with
Title III HBCU Program and Endowment Challenge Grant Program funds. DSU
invests most of its endowment fund assets through the Common Fund, an
investment company, in an account for DSU\'s pooled endowment fund. The
assets of DSU\'s various endowment funds were pooled and invested among
stock, bond, and international stock funds.[^6] Endowment fund assets
that were not transferred to the Common Fund remained on deposit in
DSU\'s money market account. DSU uses a quarterly unitization schedule
to apportion the Common Fund account balances and money market account
balances among the participating endowment funds, and to allocate the
market value, income, gain or loss, and distributions attributable to
each participating endowment fund. We reviewed DSU\'s original
unitization schedules for the period October 1, 1997, to September 30,
2001. We found that:

-   In preparing the quarterly unitization schedules, DSU did not
    include \$610,098 of cash net income (e.g., net income not
    reinvested) from Common Fund investments during the period October
    1, 1997, to September 30, 2001.

-   In preparing the quarterly unitization schedules, DSU did not
    include \$136,046 of net income reinvested in Common Fund
    investments during the period October 1, 1997, to March 31, 1999.

-   In preparing the quarterly unitization schedules, DSU did not
    include the interest earned on the pooled endowment fund\'s money
    market account balances. The interest earnings are classified as
    general revenue for DSU. Using DSU\'s revised unitization schedules,
    we estimate that approximately \$123,000 of interest income was
    earned on the pooled endowment fund\'s money market account balances
    during the period October 1, 1997, to December 31, 2001. In
    addition, we estimate that the pooled endowment fund\'s money market
    account balances represent approximately \$1.4 million or 12 percent
    of the total market value reported on the pooled endowment fund
    unitization schedule for the quarter-ended December 31, 2001.

-   DSU did not maintain records detailing the amount and purpose of all
    expenditures of endowment fund income that were withdrawn from the
    various endowment funds (i.e., endowed scholarships, endowed
    professorships, and the Federal and Federal II endowment funds which
    were funded with Title III Endowment Challenge Grant Program
    funds).[^7]

-   DSU did not record additions to the endowment funds, totaling
    \$250,000, on the pooled endowment fund's unitization schedule in
    the quarter in which the additions were received by DSU. The
    \$250,000 consists of \$200,000 of HBCU Program funds drawn down on
    February 9, 2000, and \$50,000 of Luna Mishoe Scholarship Funds
    provided by the State of Delaware for fiscal year 1998.

Regulations applicable to Title III-funded endowment accounts at 34
C.F.R. § 628.47(a) require grantees to keep records of (1) the source,
kind, and amount of matching funds; (2) the type and amounts of
investments of the endowment fund; (3) the amount of endowment fund
income; and (4) the amount and purpose of expenditures of endowment fund
income. In addition, regulations at 34 C.F.R. § 628.43(b) require that,
when investing the endowment fund, grantees shall exercise the judgment
and care that a person of prudence, discretion, and intelligence would
exercise in the management of their own financial affairs. Post-award
requirements for Federal grants awarded to institutions of higher
education require that grantee\'s financial management systems provide:

-   Records that identify adequately the source and application of funds
    for Federally-sponsored activities. These records shall contain
    information pertaining to the activities' assets, outlays, income,
    and interest. 34 C.F.R. § 74.21(b)(2).

-   Effective control over and accountability for all funds, property,
    and other assets. 34 C.F.R. § 74.21(b)(3).

DSU did not adequately account for the endowment funds established with
Title III Endowment Challenge Grant Program and HBCU Program funds,
because of staff turnover in the DSU Business and Finance Office,
unfamiliarity with applicable regulations and requirements, and
inadequate management controls. As a result, DSU\'s original unitization
schedules did not provide adequate information on the market values and
income earned on the endowment funds established with Title III
Endowment Challenge Grant Program funds.

The Department provided DSU with Title III, Part C Endowment Challenge
Grant Program and Part B HBCU Program funds for endowment purposes, as
follows:

+---------+----------+-------------+----------+----------+-----------+
| **Title | **E      | **Date      | *        | **       | *         |
| III**   | ndowment | Funds       | *Federal | Matching | *Original |
|         | A        | Received**  | Amount** | Amount** | Endowment |
|         | ccount** |             |          |          | Corpus**  |
+---------+----------+-------------+----------+----------+-----------+
| Part C  | Federal  | September   | \$50,000 | \$50,000 | \$100,000 |
|         |          | 1986        |          |          |           |
+---------+----------+-------------+----------+----------+-----------+
| Part C  | Federal  | October     | \        | \        | \$574,125 |
|         | II       | 1995        | $382,750 | $191,375 |           |
+---------+----------+-------------+----------+----------+-----------+
| Part B  | #        | ##### Fe    | \        | \        | \$350,000 |
|         | #### Fed | bruary 2000 | $200,000 | $150,000 |           |
|         | eral III |             |          |          |           |
+---------+----------+-------------+----------+----------+-----------+
|         |          | Totals      | \        | \        | \$        |
|         |          |             | $632,750 | $391,375 | 1,024,125 |
+---------+----------+-------------+----------+----------+-----------+

In December 2001, we shared our preliminary finding with DSU officials.
In response, in February 2002, DSU's Business and Finance Office
prepared revised unitization schedules for the period July 1, 1992, to
December 31, 2001. We reviewed the revised unitization schedules, and
found that DSU addressed most of our concerns, except for the crediting
of interest earned on the pooled endowment fund's money market account
balances. However, DSU\'s Associate Vice President for Business and
Finance indicated that DSU will transfer the Title III-funded endowment
accounts (i.e., Federal, Federal II, and Federal III) into separate
Common Fund accounts. This proposed action by DSU will address our issue
concerning the crediting of interest on money market account balances,
because all future income attributable to the Title III-funded accounts
will be recorded on the respective Common Fund statements. In addition,
under regulations governing the withdrawal of endowment fund income, DSU
could be entitled to withdraw the money market account interest that was
attributable to the Title III-funded endowment accounts.[^8]

As a result of DSU's revising the unitization schedules, the market
values for the Federal and Federal II endowment funds increased.

  ------------- -------------- -------------- ---------------- --------------
  **Market                                                     
  Values as of                                                 
  September 30,                                                
  2001**                                                       

  **Endowment   **Revised      **Original     **Difference**   **Percentage
  Account**     Unitization    Unitization                     Difference**
                Schedule**     Schedule**                      

  Federal II    \$831,346      \$478,104      \$353,242        73.88 Percent

  Federal       \$398,965      \$270,053      \$128,912        47.74 Percent
  ------------- -------------- -------------- ---------------- --------------

In addition, the June 30, 2001, market values for the Federal and
Federal II endowment funds that were reported to the Department in the
Financial Report(s) for the Endowment Challenge Grant Program are lower
than the market values for the Federal and Federal II accounts contained
in the revised unitization schedules.

Recommendations:

The Assistant Secretary for Postsecondary Education should:

3.1 Ensure that separate investment accounts are established by DSU with
the correct fund balances for all Title III-funded endowment funds
(i.e., Federal, Federal II, and Federal III).

3.2 Ensure that DSU\'s revised methodology of accounting for Title
III-funded endowment funds meets the requirements set forth in
regulations at 34 C.F.R. § 628.47.

3.3 Determine if DSU should submit revised Financial Report(s) for the
Endowment Challenge Grant Program.

Auditee's Comments:

DSU concurred with the finding and recommendations. DSU stated that they
established separate endowment investment accounts for all Title
III-funded endowment funds with the Common Fund. By establishing
separate endowment investment accounts, DSU revised their methodology of
accounting for Title III-funded endowment funds to meet the requirements
set forth in 34 C.F.R. § 628.47. DSU will submit revised Financial
Reports for the Endowment Challenge Grant Program by July 15, 2002.

# Finding No. 4 DSU Charged Unallowable and Unsupported Costs 

#  to HBCU Program Funds

Our review found that DSU charged \$3,422 in unallowable costs and
\$2,289 in unsupported costs to HBCU Program funds during the period
October 1, 1997, to September 30, 2001. During the same period, DSU
expended grant funds totaling \$3,772,749.

The unallowable costs included \$1,833 for unnecessary, unrelated, or
incorrectly reimbursed travel expenses, \$1,337 for water and water
cooler rentals in DSU offices, and \$253 for the printing of Christmas
cards. The unallowable costs were approved and paid for because certain
expenditures (i.e., for reprographics services) are charged to blanket
purchase orders that are approved for each activity. In addition, DSU's
Title III Coordinator approved expenditures (i.e., for travel and water
cooler charges) in error. The Office of Management and Budget Circular
Number A-21, \"Cost Principals for Educational Institutions,\" Paragraph
C.3 states that one of the major considerations involved in determining
the reasonableness of a cost is whether or not the cost is of a type
generally recognized as necessary for the operation of the institution
or the performance of the sponsored agreement. In addition, DSU's Title
III Operational Manual states, \"Travel supported through the use of
Title III funds must be directly related to achieving the goals of the
specific Activity.\"

Timesheets or time and effort reports supporting two payroll
expenditures could not be located. As a result, costs totaling \$2,289
were unsupported. The unsupported costs occurred because of a loss of
payroll records or employees not submitting timesheets or time and
effort reports. Regulations at 34 C.F.R. § 74.21(b)(7) require that
grantees\' financial management systems provide for accounting records,
including cost accounting records that are supported by source
documentation.

In December 2001, we provided DSU officials with our preliminary
findings. In February 2002, DSU returned to the HBCU Program account
\$3,422 for the unallowable costs, \$2,289 for the unsupported payroll
costs, and \$643 in related benefit costs. As a result, DSU has taken
corrective action to address the unallowable and unsupported costs
identified in our review.

Recommendation:

4.1 The Assistant Secretary for Postsecondary Education should require
that DSU ensures that staff involved in the expenditure approval process
are familiar with what constitutes adequately supported and reasonable
(i.e., necessary and related) HBCU Program expenditures.

Auditee's Comments:

DSU concurred with the finding and recommendation. DSU stated that they
reviewed the expenditure approval process with staff; this review will
assist staff in identifying reasonable expenditures of Title III grant
funds.

# Objective, Scope and Methodology

The objective of our audit was to determine if DSU administered the
Title III, Part B HBCU Program in accordance with applicable laws,
regulations, and program requirements. Our audit covered the period
October 1, 1997, to September 30, 2001. As a result of concerns
identified during our fieldwork, the scope of the audit was expanded to
include DSU's accounting for Title III-funded endowment funds, including
those funded under the Part C Endowment Challenge Grant Program, for the
period July 1, 1992, to December 31, 2001.

To accomplish our objective, we reviewed DSU's policies and procedures
pertaining to the processing of expenditures and payroll, inventory of
equipment, and administration of the endowment funds. We reviewed the
continuation grant applications and annual performance reports submitted
by DSU, accounting reports, payroll reports, bank statements, and
endowment fund reports. We reviewed DSU's single audit reports for the
years ended June 30, 1999, and 2000. We interviewed staff and officials
from DSU's Business and Finance Office, DSU's Title III Program Office,
and the directors for the activities funded with HBCU Program funds.

During the period October 1, 1997, to September 30, 2001, DSU charged
\$2,056,668 in salary and wages to HBCU Program funds. From this
universe, we selected a sample of 12 salary and wage transactions,
totaling \$21,931, for review to determine if the positions and
respective salary or wage rates charged were reasonable, allowable, and
allocable to the HBCU Program. Our sample consisted of four randomly
selected salary and wage transactions, totaling \$7,415, and eight
judgmentally selected transactions totaling \$14,516. The judgmentally
selected transactions were selected from the Enhancing Distance Learning
Program activity. Depending on the activity selected, the payroll
transaction may have consisted of payments to multiple employees.

During the period October 1, 1997, to September 30, 2001, DSU charged
3,654 non-labor expenditures, totaling \$1,313,517, to HBCU Program
funds. From this universe, we selected a sample of 75 transactions,
totaling \$47,307, for review to determine if the expenditures were
reasonable, allowable, and allocable to the HBCU Program. Our sample
consisted of 52 randomly selected transactions, totaling \$21,206, and
23 judgmentally selected transactions, totaling \$26,282. The
judgmentally selected transactions were selected based upon the nature
of the expense (i.e., the payee was a general merchandise retailer,
recurring payments to a payee, large airfare or lodging expenses), or
the dollar amount of the transaction.

Because portions of the payroll and non-labor expenditure samples were
based upon the audit team's judgment, there is no assurance that the
samples were representative of the entire population and, therefore,
should not be projected over the unsampled expenditures.

We compared lists of HBCU Program-funded equipment that were prepared by
DSU's Business and Finance Office and DSU's Title III Program Office. We
performed a physical inspection of eight pieces of equipment with a
value of \$5,000 of more.

We reviewed the pooled endowment fund's original unitization schedules,
covering the period October 1, 1997, to September 30, 2001; the revised
unitization schedules, covering the period July 1, 1992, to December 31,
2001; and the respective Common Fund investment reports. We analyzed the
pooled endowment fund's market values, income, and distributions. We
estimated the amount of interest earned on the grant's and pooled
endowment fund's money market account balances. We reviewed information
on matching funds raised by DSU; and reviewed the revised unitization
schedules' activity for the two endowment funds established with
Endowment Challenge Grant Program funds.

To achieve the assignment\'s objective, we relied upon
computer-processed data contained in DSU\'s Banner Accounting System. We
assessed the reliability of this data. As part of this assessment, we
held discussions with DSU\'s Business and Finance Office officials to
gain an understanding of the expenditure and payroll processes. To
assess the completeness of the computer-processed data provided by DSU,
we compared grant disbursement data from the Department's Grant
Administration and Payment System to HBCU Program expenditure
information provided by DSU. We compared randomly and judgmentally
selected computer-processed data to source records. In addition, we
compared judgmentally selected source records to computer-processed data
in DSU's Banner Accounting System. Based upon these tests and
assessments, we concluded that the data used was sufficiently reliable
to be used for the assignment\'s objective.

We conducted on-site fieldwork at DSU's campus in Dover, Delaware during
the period October 10, 2001, through November 20, 2001. On December 18,
2001, we held a briefing to discuss our preliminary findings with staff
and officials from DSU's Business and Finance Office and Title III
Program Office. We performed additional on-site fieldwork on February 11
and 22, 2002. On April 4, 2002, we held an exit conference with staff
and officials from DSU's Business and Finance Office and Title III
Program Office. We conducted the audit in accordance with government
auditing standards appropriate to the scope described above.

# Statement on Management Controls

As part of our review we assessed the system of management controls,
policies, procedures, and practices applicable to DSU\'s administration
of the HBCU Program. Our assessment was performed to determine the level
of control risk for determining the nature, extent, and timing of our
substantive tests to accomplish the audit objective.

For purposes of this audit, we assessed and classified the significant
controls into the following categories:

-   Program operations.

-   Compliance with laws and regulations.

-   Safeguarding resources.

Because of inherent limitations, a study and evaluation made for the
limited purpose described above would not necessarily disclose all
material weaknesses in the management controls. However, our assessment
disclosed significant management control weaknesses that adversely
affected DSU\'s ability to administer Title III-funded endowment funds.
These weaknesses included not handling funds for the Endowment Challenge
Program activity in a timely manner; reporting inaccurate information on
the Endowment Challenge Program activity; and inadequate accounting of
Title III-funded endowment funds. These weaknesses and their effects are
fully discussed in the Audit Results section of the report.

**[Appendix A]{.smallcaps}**

**[DSU Activities Supported with HBCU Program Funds]{.smallcaps}**

+------------------------+---------------------------------------------+
| ### [Grant Supp        | **[[Activity                                |
| orted Activity]{.mark} | Objective]{.smallcaps}]{.mark}**            |
+------------------------+---------------------------------------------+
| Orientation, Mentoring | To retain students through student and      |
| & Advising             | academic support services.                  |
+------------------------+---------------------------------------------+
| Comprehensive Learning | To enhance DSU's academic support services  |
| Center                 | for all undergraduates.                     |
+------------------------+---------------------------------------------+
| Faculty Development &  | To implement effective strategies and       |
| Assessment             | initiatives to maintain a caring,           |
|                        | competent, and committed faculty; and       |
|                        | enhance teaching and learning through       |
|                        | assessments and testing.                    |
+------------------------+---------------------------------------------+
| Enhancing Distance     | To train and support faculty in providing   |
| Learning               | Web-enhanced courses.                       |
+------------------------+---------------------------------------------+
| Academic Computing     | To support and maintain DSU's computer      |
| Activities             | technology and infrastructure, provide      |
|                        | technical assistance and workshops to       |
|                        | faculty and students, and promote the use   |
|                        | of computers and the Internet in teaching   |
|                        | and learning.                               |
+------------------------+---------------------------------------------+
| Computer Literacy in   | ## To                                       |
| Art                    | support and maintain computer lab equipment |
|                        |  and software for art students and faculty. |
+------------------------+---------------------------------------------+
| Hospitality & Tourism  | To increase the number of students enrolled |
| Management             | in the Hospitality and Tourism Management   |
|                        | Program.                                    |
+------------------------+---------------------------------------------+
| Computer Literacy in   | To enhance the computer literacy of         |
| Business               | students and faculty in the School of       |
|                        | Management.                                 |
+------------------------+---------------------------------------------+
| BIOASSIST              | To integrate technology into the Biology    |
|                        | Department's instruction to emphasize       |
|                        | student-centered learning.                  |
+------------------------+---------------------------------------------+
| Careers Program        | To enhance the opportunity for              |
|                        | underrepresented students to pursue degrees |
|                        | and careers in the fields of Physical       |
|                        | Sciences, Engineering, Life Sciences,       |
|                        | Mathematics, and Computer Sciences.         |
+------------------------+---------------------------------------------+
| Computerized           | To implement electronic student services    |
| Registration           | systems.                                    |
+------------------------+---------------------------------------------+
| Wellness Mentoring     | To support fitness and wellness activities  |
| Program                | for students and faculty.                   |
+------------------------+---------------------------------------------+
| MATHACHIEVE            | To integrate technology into instruction of |
|                        | algebra and calculus to enhance student     |
|                        | achievement.                                |
+------------------------+---------------------------------------------+
| Nursing Faculty and    | To retain students from culturally diverse  |
| Student-Teaching       | and disadvantaged backgrounds in the        |
|                        | Nursing Program, and to facilitate their    |
|                        | academic achievement to graduate and become |
|                        | Registered Nurses.                          |
+------------------------+---------------------------------------------+
| Alumni Training and    | To increase alumni advocacy, service, and   |
| Strategic Planning     | financial contributions to DSU.             |
| Program                |                                             |
+------------------------+---------------------------------------------+
| Endowment Challenge    | To build DSU's endowment and improve        |
| Program                | financial stability.                        |
+------------------------+---------------------------------------------+
| Program Administration | To coordinate and monitor the activities    |
|                        | designed to strengthen and enhance DSU.     |
+------------------------+---------------------------------------------+

[^1]: The amount awarded is for five award years (1997, 1998, 1999,
    2000, and 2001), whereas the amount expended is for a four-year
    period.

[^2]: The endowment fund corpus consists of the Federal grant funds and
    the institution\'s matching funds. 34 C.F.R. § 628.6.

[^3]: The Endowment Challenge Program activity is one of DSU's Title
    III, Part B HBCU Program activities. While similar in name, it
    should not be confused with the Title III, Part C Endowment
    Challenge Grant Program, discussed elsewhere in this report.

[^4]: The funds were held at the State of Delaware between February 9,
    2000, and March 3, 2000.

[^5]: Interest was credited to December 31, 2001, because new endowment
    funds do not begin to participate in the pooled endowment fund's
    income and gains or losses until the following quarter, in this case
    the quarter-ended March 31, 2002.

[^6]: As of December 31, 2001, DSU's pooled endowment fund was
    (approximately) allocated among the following investments: money
    market accounts (12 percent), Multi-Strategy Bond Fund (24 percent),
    Multi-Strategy Equity Fund (56 percent), and International Equity
    Fund (eight percent).

[^7]: We noted only one withdrawal made from Title III-funded endowment
    accounts during the period July 1, 1992, to December 31, 2001. In
    the quarter-ended March 31, 2001, DSU withdrew \$5,000 from the
    Federal endowment account to provide matching funds for the Nwosu
    Endowed Scholarship Fund.

[^8]: Pursuant to 34 C.F.R. § 628.45(a)(1), a grantee may withdraw and
    spend up to 50 percent of the total aggregate endowment fund income
    earned prior to the date of expenditure.