September 30, 2003

[ED-OIG/A09-C0026]{.underline}

Cheryl Crazy Bull

President

Northwest Indian College

2522 Kwina Road

Bellingham, Washington 98226

Dear Ms. Crazy Bull:

This Final Audit Report presents the results of our audit entitled
*Northwest Indian College Administration of the U.S. Department of
Education, Office of Vocational and Adult Education Grant
No.V101A990026*. The grant provided Federal funds for Northwest Indian
College's (NWIC's) administration of two projects: the Document Imaging
Specialist Certificate (DISC) Program[^1] and the Promising Practices
Dissemination Activity (Promising Practices). The purpose of the audit
was to determine whether NWIC (1) delivered the services and products
specified in the grant proposals, and (2) claimed costs under the grant
that were allowable and supported in its financial records. Our review
covered the two-year grant period from July 1, 1999 through
June 30, 2001 for the DISC Program. For Promising Practices, we covered
the period from October 1, 1999 through November 26, 2001.

We provided NWIC with a draft of this report. NWIC agreed that it did
not meet the goals of the DISC Program or complete the deliverables for
Promising Practices, but disagreed with our recommendations regarding
its performance. NWIC partially agreed with our findings concerning its
financial management system and generally agreed with the related
recommendations. NWIC's comments are summarized in the AUDIT RESULTS
section of the report and included as Attachment 3.

# BACKGROUND

NWIC is a tribally controlled postsecondary education institution
located on the Lummi Indian Reservation, near Bellingham, Washington.
The institution is accredited by the Northwest Association of Schools
and Colleges. NWIC received Federal funds from U.S. Department of
Education and other Federal agencies, including the U.S. Department of
Agriculture, U.S. Department of Energy, National Science Foundation,
U.S. Environmental Protection Agency, U.S. Department of Health and
Human Services, and U.S. Department of Defense.

The U.S. Department of Education\'s Office of Vocational and Adult
Education (OVAE) initially awarded Grant No. V101A990026 to NWIC to
administer the DISC Program. In September 1999, the grant was
supplemented to include funds for the Promising Practices activities.

+----------------+-------------+--------------------------------------+
| Program        | Grant       | Performance Period                   |
|                | Amount      |                                      |
+----------------+-------------+--------------------------------------+
| DISC Program   | \$366,166   | July 1, 1999 through June 30, 2001   |
+----------------+-------------+--------------------------------------+
| Promising      | \$266,075   | October 1, 1999 through September    |
| Practices      |             | 28, 2001[^2]                         |
|                |             |                                      |
|                |             | (Includes one-year extension granted |
|                |             | by OVAE)                             |
+----------------+-------------+--------------------------------------+
| Total Grant    | \$632,241   |                                      |
| Award          |             |                                      |
+----------------+-------------+--------------------------------------+

## 

## AUDIT RESULTS

We found that NWIC did not meet the terms and conditions specified in
the grant proposals for delivery of services and products for the DISC
Program and Promising Practices. Also, we found that the NWIC lacked the
financial management systems to properly account for the grant funds.
Thus, we were unable to perform the level of review necessary to
determine whether NWIC claimed costs under the grant were allowable and
supported in its financial records. However, our limited review
identified \$8,839 of grant funds that NWIC needs to return to the
Department for costs not allowed for Promising Practices. We also
identified \$68,863 of costs for Promising Practices for which NWIC
needs to provide required supporting documentation or return the funds.

In addition to addressing the unallowed and unsupported costs, we
recommend that OVAE take action to recover all or part of the \$632,241
grant award due to NWIC's material failure to deliver the services and
products. We also recommend that the Department impose appropriate
special conditions on current and future Departmental grants and take
steps to ensure that NWIC establishes financial management systems that
comply with Federal requirements and submits required audit reports.

### FINDING NO. 1 -- NWIC Did Not Meet the Terms and Conditions Specified in the Grant Proposals for Delivery of Services and Products for the DISC Program and Promising Practices 

NWIC did not meet the terms and condition specified in the DISC Program
proposal since it did not meet the three goals for enrollments,
certification, and job placements and did not report performance data on
three other goals. Also, NWIC did not complete all activities and
deliver the products listed in its Promising Practices proposal. Thus,
NWIC did not meet its responsibility to properly manage and monitor the
DISC Program and Promising Practices activities.

### NWIC Did Not Meet Three Expected Goals and 

**Failed to Report Data on Three Other Goals for the DISC Program**

The purpose of the DISC Program was to provide basic education and
vocational training in electronic document management and document
conversion services to unemployed and low-income members of the tribal
service population. As part of the DISC Program curriculum, the

trainees were to obtain work experience with Core Intelligent Regions of
the 21^st^ Century

(CIR21) Corporation[^3] and ultimately obtain employment with CIR21 or
in the private sector. Trainees were to be paid a stipend of \$5.15 per
attendance hour as an incentive to complete the curriculum, including
the on-the-job component of the program. NWIC provided instruction to
trainees under the DISC Program from January 2000 through June 2001
(18-month period).

[Few Trainees Completed the DISC Curriculum or Obtained
Employment]{.underline}. In its proposal, NWIC stated that the DISC
Program would provide training to 72 individuals over the two-year grant
period. The proposal\'s measurable goals, included:

> **[Goal #3]{.underline}**: 85% of the trainees will successfully
> complete their personal education and training goals as identified in
> their Training Plans and will receive One Year Certificate of
> Completion in the DISC Program from Northwest Indian College.
>
> **[Goal #4]{.underline}**: 80% of the trainees will be placed into
> jobs with the CIR21 Corporation within sixty days of their completion
> of the training program or will be pursuing additional training
> related to their training received under this program.

NWIC did not achieve the above goals. Based on unaudited information
provided by NWIC, only five trainees completed the program and one
trainee was placed with a tribal commercial facility during that
period.[^4]

+-----------------------------------------+--------------+-------------+
| # Trainees                              | **Goal**     | **Actual**  |
+-----------------------------------------+--------------+-------------+
| Enrolled                                | 72           | 39          |
+-----------------------------------------+--------------+-------------+
| Obtained Certificate (85% of 72         | 61           | 5 (a)       |
| trainees)                               |              |             |
+-----------------------------------------+--------------+-------------+
| Placed in Jobs (80% of 72 trainees)     | 57           | 1           |
+-----------------------------------------+--------------+-------------+
| \(a\) Reported number of trainees that  |              |             |
| completed all six DISC course.          |              |             |
+-----------------------------------------+--------------+-------------+

Also, NWIC's statistical analysis showed that less than half of the
enrolled trainees completed four or more of the six DISC courses.[^5]

+----------+-------+-------+--------+--------+-------+--------+--------+
| ##       |       |       |        |        |       |        |        |
| Number o |       |       |        |        |       |        |        |
| f DISC C |       |       |        |        |       |        |        |
| ourses C |       |       |        |        |       |        |        |
| ompleted |       |       |        |        |       |        |        |
+----------+-------+-------+--------+--------+-------+--------+--------+
| Courses  | None  | One   | Two    | Three  | Four  | Five   | Six    |
+----------+-------+-------+--------+--------+-------+--------+--------+
| Trainees | 10    | 5     | 4      | 4      | 2     | 9      | 5      |
+----------+-------+-------+--------+--------+-------+--------+--------+

We identified 12 trainees who attended for a 10 to 17 month period even
though NWIC designed the DISC program to be completed in three academic
quarters (9 months). These 12 trainees received over \$115,000 in
stipends, ranging from total stipends of \$6,097 to \$12,867.
NWIC-provided data showed that only 3 of these 12 trainees completed all
six of the DISC courses.

NWIC cited the late start of the program as a reason for not meeting the
goals. However, even if the goals were adjusted to reflect the 18-month
period of actual instruction, NWIC did not meet the goals. NWIC also
cited the lack of support and involvement of the Lummi Indian Business
Council and dissolution of the CIR21 Corporation as other reasons for
failing to meet the goals. Because the CIR21 Corporation did not become
fully operational, it did not provide on-the-job training for the DISC
program or provide employment for certified graduates.

[NWIC Did Not Report Data on Three Goals]{.underline}. In addition to
the goals on enrollments, certification, and job placements, the grant
proposal contained goals related to basic skills development and
marketable skills.

> **[Goal \#]{.underline}1:** Of the 72 trainees identified, recruited,
> selected and enrolled for participation in the DISC Program, 100% will
> have completed a comprehensive assessment of basic skills levels and
> career aptitudes and interests by the second week of their enrollment
> in the program and will have a completed individual Training Plan by
> one month after enrollment date.
>
> **[Goal #2 (first part)]{.underline}:** 90% of the trainees referred
> to NWIC\'s basic skill education program will raise their education
> level in reading, math and/or writing by at least one grade level
> after one quarter of instruction.
>
> **[Goal #3 (first part)]{.underline}:** 85% of trainees will
> successfully complete their personal educational and training goals as
> identified in their Training Plan.

NWIC did not provide data on these goals in Final Performance Reports
for the first and second year of the grant. Page 35 of the DISC grant
proposal states that the Project Director will generate annual reports
with information on the achievement of stated objectives. The
regulations at 34 C.F.R. § 74.51(d) state that performance reports must
generally contain a comparison of actual accomplishments with the goals
established for the period, and reasons why established goals were not
met, if appropriate.

**NWIC Did Not Complete All Activities or Deliver**

**Acceptable Products For Promising Practices**

The purpose of Promising Practices was to survey, assemble, and
distribute best practices in the use of technology on projects funded by
the Native American Vocational and Technical Education Program
(NAVTEP).[^6] NWIC's project proposal listed the following deliverables:

-   Create a survey instrument in consultation with NAVTEP personnel.

-   Use the returned survey to identify promising practices at
    approximately eight sites in consultation with about eight expert
    consultants in technology.

-   Provide 3000 manuals summarizing current practices for all NAVTEP
    projects and creating case studies (Tool-Kits) for the eight
    sites/projects identified as possessing promising practices.

-   Produce a list of current contacts at each NAVTEP project who are
    responsible for technology.

-   Present the project's findings orally at an NAVTEP Annual Meeting as
    well as mail written manuals and lists to persons throughout the
    NAVTEP Network and other groups as agreed upon.

Even though OVAE staff frequently monitored the status of the project,
NWIC did not complete all activities and the few products delivered were
not acceptable. In a letter dated November 13, 2001, OVAE acknowledged
receipt of mock-ups of the manuals, a contact list, a rough cut of a
video of one site, and an outline of a presentation on the project. OVAE
concluded that the submitted documents did not meet the requirements
specified in the project's scope of work. OVAE stated that the documents
contained no comprehensive discussion of the survey findings and case
studies were not prepared on the selected sites. OVAE concluded that the
quality of all products was severely compromised since a panel of
experts was not used to select the sites of promising practices and NWIC
did not provide OVAE with the criteria or standards used to select
sites. NWIC did not produce the 3000 manuals specified in the grant
proposal.

In the Final Performance Report for Promising Practices, NWIC provided
several reasons for delays in completing the project, including (1)
difficulties in reaching agreement with the Department on the survey
design, (2) lack of awareness until March 2000 that the Office of
Management and Budget (OMB) approval of the survey was required, (3)
unavailability of consultants originally scheduled to review completed
surveys and select sites with promising practices, (4) unavailability of
original NWIC staff to complete the project, and (5) lack of momentum in
the final stages of the project. However, OVAE extended the performance
period to accommodate OMB\'s approval and NWIC was able to gather a
group of consultants.

**NWIC Did Not Meet Its Responsibility to Properly Manage and**

**Monitor the DISC Program and Promising Practices Activities**

> Federal regulations at 34 C.F.R. § 74.51(a) state "\[r\]ecipients are
> responsible for managing and monitoring each project, program,
> subaward, function, or activity supported by the award." Because NWIC
> materially failed to meet the goals of the DISC Program, the Federal
> funds provided under the OVAE grant were not used effectively to
> provide vocational training that led to jobs for unemployed and
> low-income members of the Lummi tribal service population. Because
> NWIC did not complete the Promising Practices activities and products,
> current NAVTEP grantees did not benefit from information on best
> practices in the use of technology and the Department was denied a
> resource for providing technical assistance to future NAVTEP grantees.
>
> When a recipient fails to meet the terms and conditions of an award,
> the Department may disallow all or part of the costs of the project.
>
> *Remedies for noncompliance*. If a recipient materially fails to
> comply with the terms and conditions of an award, whether stated in a
> Federal statute, regulation, assurance, application, or notice of
> award, the Secretary may, in addition to imposing any of the special
> conditions outlined in § 74.14, take one or more of the following
> actions, as appropriate in the circumstances:\...(2) Disallow ... all
> or part of the cost of the activity or action not in compliance.
>
> 34 C.F.R. § 74.62(a)

The special conditions outlined in 34 C.F.R. § 74.14 allow the
Department to place additional requirements on current grants from the
Department and any future grants the Department awards to NWIC when a
recipient has a history of poor performance, has not conformed with the
terms and conditions of a previous award, or is not otherwise
responsible. Another grantee attribute that allows the Department to
impose special award conditions is that the recipient has a management
system that does not meet the standards prescribed in 34 C.F.R. Part 74.
As we report in Finding No. 2, NWIC also met this attribute for special
conditions since it lacked financial management systems to properly
account for the grant.

### Recommendations

The Chief Financial Officer (in collaboration with the Assistant
Secretary for Vocational and Adult Education) should---

1.  Take action as authorized under 34 C.F.R. § 74.62 (a) to recover all
    or part of the \$632,241 awarded under OVAE Grant No.V101A990026.

2.  Impose appropriate special conditions on current and any future
    Department grants to NWIC as authorized under 34 C.F.R. § 74.14.

**NWIC Comments**

NWIC agreed that it did not meet the expected goals of the DISC Program
in terms of the number of trainees, completion of programs, and
placement in jobs. However, NWIC disagreed that its failure to meet
specific goal objectives constitutes a material breach of the terms and
conditions of the award. NWIC stated that neither the award document nor
OMB Circulars specify that failure to meet specific program goals was
grounds for disallowance of total program costs. NWIC acknowledged that
it had not reported on the three goals pertaining to comprehensive
assessments, basic skills education, and completion of goals set forth
in individual training plans.

NWIC agreed that it did not complete the deliverables specified for the
Promising Practices portion of the grant. NWIC stated that its failure
to complete the deliverables was due to a number of circumstances beyond
the control of NWIC and at least partially attributed to communications
problems with the NAVTEP. NWIC also stated that, given the various
problems encountered, the time frame associated with completion of the
project appears to have prevented its successful completion of the
deliverables. NWIC stated that a detailed summary on how it intended to
proceed to complete the project was provided in the Promising Practices
final report, dated December 12, 2001. However, NWIC was uncertain on
whether approval was granted to complete the project. NWIC stated that
it should not be held solely responsible for the project's untimely
implementation since NAVTEP had a critical role in the project's design,
approval, and implementation process.

NWIC disagreed with our recommendation for the Department to impose
special conditions on current and any future grants. NWIC stated that
there is no evidence to indicate that the findings associated with the
OVAE grant were widespread throughout the institution. Also, NWIC stated
that the return of grant funds would impose a serious hardship on NWIC's
financial position. NWIC described the corrective measures taken and in
progress to improve its oversight of grant performance.

**OIG Response**

Our recommendations remain unchanged. The regulation at 34 C.F.R §
74.62(a) lists the grantee's application as a source for "terms and
conditions" of a grant award. The grantee's material failure to meet
those terms and conditions can cause the Department to disallow all or
part of the costs of the activity. The Department awarded NWIC the grant
based on the DISC Program's objective and goals set forth in NWIC's
proposal, a part of its application. The Department's expansion of the
grant was based on the deliverables that NWIC listed in its Promising
Practices proposal. NWIC materially failed to meet those "terms and
conditions." The Department of Health and Human Services (HHS)
Departmental Appeals Board upheld a cost disallowance under an HHS
regulation identical to 34 C.F.R § 74.62(a) based on a grantee's failure
to accomplish the essential objective of a grant \[Tuscarora Tribe of
North Carolina, DAB No. 1835; 2002 HHSDAB LEXIS 79 (July 16, 2002)\].

We concluded that OVAE had given NWIC sufficient time to complete the
Promising Practices activities and deliverables. The original
performance period for Promising Practices was a one-year period. OVAE
extended the performance period an additional year to accommodate the
time needed to develop and obtain OMB approval of the survey instrument.
Except for creating and mailing the survey instrument, NWIC did not
fully perform the other activities or complete the other deliverables.
The grant was effectively terminated on September 28, 2001, since OVAE
did not again extend the performance period. NWIC submitted the proposed
plan to complete the deliverables over two months after the end of the
performance period.

While the corrective actions outlined in NWIC\'s response may improve
its oversight of grants, we remain concerned about current and future
grants due to the seriousness of NWIC\'s failure to meet goals and
provide deliverables on the OVAE grant. Also, without completed audits
and the written assurances recommended in Finding No. 2, we remain
concerned that NWIC does not have an adequate financial management
system.

### FINDING NO. 2 -- NWIC Lacked the Financial Management Systems to Properly Account for Grant Funds

NWIC\'s financial management systems are not adequate to ensure
accountability of grant funds. NWIC has experienced frequent turnovers
in its financial director position. Financial records do not provide an
adequate audit trail for grant expenditures. Due to the condition of the
financial records, NWIC's certified public accountant has been unable to
complete required audits for fiscal years 2001 and 2002. Also, NWIC was
unable to provide a complete list of grant expenditures from its
accounting system to support the expenditures reported to OVAE.
In addition, we found that NWIC did not have adequate procedures for
documenting staff time expended on the grant. We also identified
transactions NWIC charged to the grant that were not allowed or where
NWIC did not have required supporting documentation.

### NWIC Has Experienced Continual 

### Turnover in Financial Directors

Three individuals have held the financial director position at NWIC
since we initiated our review of the grant. The financial director we
initially met with on September 18, 2002, informed us that he was
leaving the position at the end of the week. The subsequent financial
director left on October 25, 2002. In January 2003, a new financial
director was in place. According to NWIC staff, the college has had a
total of six financial directors since April 2000.

### NWIC's Financial Records Do Not 

### Provide An Adequate Audit Trail 

Around the first of June 2000, NWIC experienced a failure in its ability
to retrieve data from its financial accounting database. NWIC eventually
re-established its financial accounting database using journal entries
to record grant expenditures incurred as of December 31, 2000, and in
January 2001, began recording financial transaction in the database.
NWIC was unable to provide financial details to support the journal
entries used to re-establish the database. Due to the condition of the
financial records, the certified public accountant (CPA) firm hired by
NWIC has been unable to complete required audits. Also, we could not
reconcile grant related financial reports to NWIC's financial records
and had difficulty identifying detailed transactions charged to the
grant.

[CPA Firm Unable to Complete Required OMB Circular A-133
Audits]{.underline}. NWIC's CPA firm has been unable to complete the
audits required for fiscal years ended June 30, 2001 and 2002. NWIC
requested that the 2001 audit be delayed due to the database problems,
accounting system changes, and personnel turnover. In October 2002, the
CPA firm began an audit covering both years, but later suspended the
audit to give NWIC additional time to get its records in auditable
condition. The CPA firm was scheduled to restart the audits in June
2003.

The regulations at 34 C.F.R. § 74.26 (a) state that grant recipients are
subject to the audit requirements contained in OMB Circular A-133. The
Circular required NWIC to submit annual audits conducted in accordance
with its provisions. The Circular provides for the following sanctions
in cases of continued inability to provide the required audit:
withholding or disallowing indirect costs, terminating the Federal
award, and withholding a percentage of Federal awards or suspending
Federal awards until required audit is completed.

[Grant Financial Reports Submitted to OVAE Could Not Be Reconciled to
Financial Records]{.underline}. NWIC\'s financial data submitted with
its performance reports could not be reconciled with expenditures
recorded in its current financial database or other available financial
reports.

  ----------------------------------------- ------------- ---------------
                                            **DISC        **Promising
                                            Program**     Practices**

  Final Financial Data Submitted to OVAE    \$310,414     246,353

  NWIC's Current Financial Database         404,140       258,148
  ----------------------------------------- ------------- ---------------

The standards for financial management systems are specified in 34
C.F.R. § 74.21. The regulations at 34 C.F.R 74.21 (b)(1) state the
recipient's financial management systems shall provide for accurate,
current, and complete disclosure of the financial results of each
Federally-sponsored project.

[Difficulty Identifying Detailed Transactions]{.underline}. Extensive
OIG audit effort was needed to identify detailed transactions for
amounts shown in NWIC's current financial database for the grant. From
this effort, we were able to identify detailed transactions totaling in
excess of the amounts shown in NWIC's current financial database for the
DISC Program. For Promising Practices, the total detailed transactions
we identified were less than the amount shown in NWIC's current
financial database. The regulations at 34 C.F.R. § 74.21(b)(2) require
that NWIC's financial management systems provide "\[r\]ecords that
identify adequately the source and application of funds for federally
sponsored activities." Attachment 2 identifies the amounts that we
concluded were unsupported costs for Promising Practices because we
could not identify sufficient detailed transactions.

**NWIC Did Not Have a Payroll Distribution**

**Method in Place for Personnel Costs**

NWIC did not have a payroll distribution system in place to support the
allocation of personnel costs to the grant. OMB Circular A-21 -- Cost
Principles for Educational Institutions establishes the principles for
determining costs applicable to grants with educational institutions.
Paragraph J.8.b. (1) (b) of the Circular states that the apportionment
of employees' salaries and wages which are chargeable to more than one
sponsored agreement or other objective will be accomplished by methods
which will produce an equitable distribution of charges for the
employee's activities. The Circular specifies the criteria for
acceptable methods and provides examples of them. We identified three
NWIC employees whose salaries were charged to Promising Practices and
other activities. Attachment 2 shows the unsupported salaries and
related fringe benefits that we identified as unsupported costs because
NWIC lacked required support for the allocation of the salaries.

**NWIC Charged Costs Not Allowed For**

**The Grant and Did Not Provide Supporting**

**Documentation For Some Transactions**

From our limited review[^7] of the identified detailed transactions, we
concluded that NWIC's current financial database included a transaction
for \$660 that was not necessary for the DISC Program and transactions
for \$14,817 that were not necessary for Promising Practices. OMB
Circular A-21, Paragraph C.2 lists "reasonable" as a factor affecting
allowability of costs charged to grants by educational institutions.
Paragraph C.3 lists the following major consideration for determining
the reasonableness of costs -- "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."

Also, we concluded that NWIC lacked the required documentation for
identified transactions for Promising Practices. The regulations at 34
C.F.R. § 74.21 (b)(7) state NWIC shall provide "accounting records\...
that are supported by source documentation." Given the limited nature of
our review, we are unable to express an opinion on whether the detailed
transactions identified for other costs, for which we did not review
invoices or other supporting documentation, were allowable under the
grant.

Attachment 1 provides details on the cost not allowed for the DISC
Program. Since the amounts recorded in NWIC's financial database were
significantly higher than the portion of the grant awarded for the DISC
Program, we have not recommended that the \$660 plus \$132 in applicable
indirect costs be returned to the Department.

Attachment 2 provides details on the unallowed costs and transactions
that lacked required documentation for Promising Practices. We limited
the recommended funds to be returned for unallowable costs to \$8,839,
which is the amount of funds drawn in excess of the recorded costs after
reduction for the \$14,817 of unallowable costs and inclusion of allowed
indirect costs.

### 

### Recommendations

The Chief Financial Officer (in collaboration with the Assistant
Secretary for Vocational and Adult Education), in addition to imposing
appropriate special conditions on future grants to NWIC, should require
NWIC to---

1.  Instruct its certified public accountant to complete the required
    OMB Circular A-133 audits for fiscal years ended June 30, 2001 and
    2002, and provide copies of the issued audit reports to the
    Department. If the audit reports are not received promptly, the
    Department should consider imposing the sanctions provided in the
    Circular.

2.  Establish a financial management system that complies with the
    requirements of 34 C.F.R. 74.21 and OMB Circular A‑21, and provide
    the Department with written assurances from its certified public
    accountant that the system has been fully implemented.

3.  Return \$8,839 to the Department for disallowed costs for Promising
    Practices.

4.  Provide supporting documentation for \$57,386 of Promising
    Practices' costs for which we could not identify detailed
    transactions, NWIC lacked required salary distribution
    documentation, or other required supporting documents were not
    provided. If adequate supporting documentation is not provided, NWIC
    should be required to return \$68,863 (\$57,386 plus \$11,477 of
    applicable indirect costs). Attachment 2 provides details on the
    unsupported costs that comprise this amount.

The amounts identified in Recommendations 2.3 and 2.4 are also included
in the amount for Promising Practices that is subject for return to the
Department under Recommendation 1.1.

**NWIC Comments**

NWIC partially concurred with the findings and recommendations. NWIC
agreed that there was instability in the financial director position for
several months and unallowable costs should be returned to the
Department after NWIC\'s review of the specific transactions. NWIC
agreed with the recommendations to complete OMB Circular A-133 audits
and provide the Department with written assurances that an adequate
financial management system has been implemented.

NWIC disagreed with the OIG's conclusion that financial records made
available to the auditors did not provide adequate documentation and
stated that it had not received a list of the specific unsupported
transactions referred to in the report. NWIC stated that, according to
its review of the guidelines in OMB Circular A-21, the College had met
the requirements for documentation related to personnel costs. NWIC
stated that it had used time cards to document time at work and the
employee's contract or other personnel documents list the appropriate
institutional or grant line items to which payroll was to be charged.
Nevertheless, NWIC stated it has implemented a time and effort report to
document an employee's time on any individual grant and will review its
policies and procedures to ensure compliance with OMB Circular A-21
requirements.

**OIG Response**

In a letter dated August 20, 2003, we provided NWIC with a detailed list
of the transactions cited in the report as unsupported and questioned
costs. The list identifies the journal entries for which NWIC had not
provided detailed transactions and the transactions for which NWIC has
not identified the payee or provided source documents. NWIC has yet to
provide the needed information or documents for the transactions.

We have not changed our conclusion regarding NWIC's documentation of
personnel costs. Paragraph J.8.b.(2)(b) lists one of the criteria for an
acceptable method of documenting the allocation of personnel costs for
employees whose salaries and wages are chargeable to more than one grant
or other activities. The paragraph states "\[t\]he method must recognize
the principle of after-the-fact confirmation or determination so that
costs distributed represent actual costs, unless a mutually satisfactory
alternative agreement is reached." The procedures described in NWIC's
response to the draft report do not provide an after-the-fact
confirmation of the allocation.

# OBJECTIVES, SCOPE, AND METHODOLOGY

Our audit objectives were to determine whether NWIC (1) delivered the
services and products specified in the grant proposals, and (2) claimed
costs under the grant that were allowable and supported in its financial
records. Our review covered the two-year grant period from July 1, 1999
through June 30, 2001 for the DISC Program. For Promising Practices, we
covered the period from October 1, 1999 through November 26, 2001.

To accomplish these objectives, we reviewed the DISC Program and
Promising Practices grant applications, budget narratives, performance
reports, and correspondence between NWIC and OVAE. We also reviewed
NWIC's OMB Circular A-133 audit report for the year ended June 30, 2000,
which was prepared by its certified public accountant. We interviewed
NWIC accounting staff responsible for the financial administration of
grants and contracts, the instructor whose contracted services were
funded by the DISC Program, and other NWIC officials. We also held
discussions with OVAE grant administration staff responsible for
providing oversight of the grant.

To achieve our audit objectives, we relied on a transaction report
generated from NWIC's current financial database on October 1, 2002,
which showed costs charged to the grant. We also used other
computer-processed reports provided by NWIC. Our review of these reports
identified inconsistencies and a lack of supporting documentation, which
lead us to doubt the completeness and accuracy of the reports and to
limit the extent of our transaction testing. However, when these reports
are viewed in context with other available evidence, we believe the
opinions, conclusions, and recommendations in this report are valid.

To determine if NWIC's financial records supported reported
expenditures, we attempted to reconcile final financial reports
submitted to OVAE to amounts shown in NWIC's current financial database.
Since NWIC's financial database did not provide an adequate audit trail
for all amounts, we expended extensive OIG audit effort to identify
detailed transactions for amounts shown for the grant in NWIC's current
financial database. Due to the significant effort required to identify
transactions and obtain supporting documentation, we limited our review
of the identified detailed transactions to an analysis of the
transaction dates and descriptions in the financial database and other
available financial reports. Except for the review of invoices provided
for the consultant payments and equipment purchases, we did not attempt
to review subsidiary records, invoices, cancelled checks, or other
supporting documentation.

We performed our fieldwork at the NWIC campus on the Lummi Indian
Reservation during September 18-27, October 15-18, and November 4-8,
2002. We held exit conferences with NWIC officials on November 8, 2002
and June 5, 2003. We performed our audit in accordance with generally
accepted government auditing standards appropriate to the scope of the
review described.

# STATEMENT ON MANAGEMENT CONTROLS

Our assessment of NWIC's management control structure was limited to
those areas of control weakness identified while conducting substantive
tests of grant expenditures. The identified weaknesses are listed in
Finding No. 2. Based on the identified control weaknesses, we concluded
that NWIC lacked the financial management systems necessary to properly
account for grant funds.

**ADMINISTRATIVE MATTERS**

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

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

Jack Martin

> Chief Financial Officer

Office of the Chief Financial Officer

U.S. Department of Education

Federal Building No. 6, MS 4300

400 Maryland Avenue, SW

Washington, DC 20202

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

In accordance with the Freedom of Information Act (5 U.S.C. § 552),
reports issued to the Department's grantees and contractors are made
available, if requested, to members of the press and general public to
the extent information contained therein is not subject to exemptions
under the Act.

> Sincerely,
>
> Gloria Pilotti
>
> Regional Inspector General for Audit

######### Attachment 1

# DISC PROGRAM

**Budget, Expenditures, and Questioned and Unsupported Costs**

+-----------------+--------+--------+---------+---------------+------+
| **Cost          | **Ap   | **     | **Que   | **Unsupported | *    |
| Category**      | proved | NWIC's | stioned | Costs         | *Not |
|                 | Bu     | Fin    | Costs** | Detailed      | es** |
|                 | dget** | ancial |         | Transactions  |      |
|                 |        | Da     |         | Not           |      |
|                 |        | tabas* |         | Identified**  |      |
|                 |        | ***e** |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Salaries        | \$1    | \$     |         | \$12,031      | Note |
|                 | 23,830 | 12,031 |         |               | A    |
+-----------------+--------+--------+---------+---------------+------+
| Fringe Benefits | 29,720 | 657    |         | 657           | Note |
|                 |        |        |         |               | A    |
+-----------------+--------+--------+---------+---------------+------+
| Contracted      |        | 1      |         |               |      |
| Services        |        | 27,115 |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Travel          | 3,536  | 1,447  |         | 1,379         | Note |
|                 |        |        |         |               | A    |
+-----------------+--------+--------+---------+---------------+------+
| Supplies &      | 62,000 | 68,230 |         |               |      |
| Equipment       |        |        |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Space Costs     | 11,760 | 18,884 | \$660   | 2,759         | Note |
|                 |        |        |         |               | B    |
+-----------------+--------+--------+---------+---------------+------+
| Total Direct    | 2      | 2      | \$660   | \$16,826      |      |
| Costs           | 30,846 | 28,364 |         |               |      |
| (excluding      |        |        |         |               |      |
| stipends)       |        |        |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Applicable      | 44,784 | 45,673 | 132     | 3,365         | Note |
| Indirect Costs  |        |        |         |               | C    |
| Budgeted Rate   |        |        |         |               |      |
| 19.4%           |        |        |         |               |      |
|                 |        |        |         |               |      |
| Negotiated Rate |        |        |         |               |      |
| 20.0%           |        |        |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Stipends        | 90,536 | 1      |         |               | Note |
|                 |        | 47,434 |         |               | D    |
+-----------------+--------+--------+---------+---------------+------+
| Total           | \$3    | \$4    | \$792   | \$20,191      |      |
|                 | 66,166 | 21,471 |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Less Questioned |        | 792    |         |               |      |
| Costs           |        |        |         |               |      |
+-----------------+--------+--------+---------+---------------+------+
| Total After     |        | \$4    |         |               |      |
| Adjustment for  |        | 20,679 |         |               |      |
| Questioned      |        |        |         |               |      |
| Costs           |        |        |         |               |      |
+-----------------+--------+--------+---------+---------------+------+

**Note A:** [Unsupported Salaries, Fringe Benefit, and Travel
Costs]{.underline}. We were unable to identify detailed transactions for
these amounts shown in NWIC's financial database.

**Note B:** [Questioned Space Costs]{.underline}. We concluded that the
\$660 was not an allowed cost of the DISC Program based on the
transaction description "Torchdown of Roof for Bookstore Addition."

> [Unsupported Space Costs]{.underline}. We were unable to identify
> detailed transactions from documents provided for \$2,759 of costs
> shown in NWIC's financial database.

**Note C:** The indirect costs shown in this schedule for NWIC's
financial database, questioned costs, and unsupported costs were
calculated using the final negotiated rate of 20 percent. The actual
amount of indirect costs recorded in NWIC's financial database was
\$28,342.

**Note D:** The stipends recorded in NWIC's financial database were
significantly higher than the budgeted amount. NWIC reported in its
Final Performance Report for Year 2 that institutional funds were used
to pay students additional stipends.

**Attachment 2**

# 

# PROMISING PRACTICES

**Budget, Expenditures, and Questioned and Unsupported Costs**

+----------------+--------+--------+--------+--------+----------+-----+
| **Cost         | **Bu   | **     | **Ques | *      |          | ##  |
| Category**     | dget** | NWIC's | tioned | *Unsup |          |  No |
|                |        | Fin    | C      | ported |          | tes |
|                |        | ancial | osts** | C      |          |     |
|                |        | Da     |        | osts** |          |     |
|                |        | tabas* |        |        |          |     |
|                |        | ***e** |        |        |          |     |
+----------------+--------+--------+--------+--------+----------+-----+
|                |        |        |        | **De   | **Lacked |     |
|                |        |        |        | tailed | Required |     |
|                |        |        |        | Transa | Docum    |     |
|                |        |        |        | ctions | entation |     |
|                |        |        |        | Not    | for      |     |
|                |        |        |        | Identi | Id       |     |
|                |        |        |        | fied** | entified |     |
|                |        |        |        |        | T        |     |
|                |        |        |        |        | ransacti |     |
|                |        |        |        |        | o****n** |     |
+----------------+--------+--------+--------+--------+----------+-----+
| Salaries       | \$1    | \$1    |        |        | \$36,886 | N   |
|                | 15,513 | 52,440 |        |        |          | ote |
|                |        |        |        |        |          | A   |
+----------------+--------+--------+--------+--------+----------+-----+
| Fringe         | 28,880 | 46,988 | \      |        | 10,324   | N   |
| Benefits       |        |        | $5,029 |        |          | ote |
|                |        |        |        |        |          | A   |
+----------------+--------+--------+--------+--------+----------+-----+
| Contracted     | 16,200 | 10,247 | 2,000  | \$600  | 2,000    | N   |
| Services       |        |        |        |        |          | ote |
|                |        |        |        |        |          | B   |
+----------------+--------+--------+--------+--------+----------+-----+
| Travel         | 27,600 | 1,444  |        |        |          |     |
+----------------+--------+--------+--------+--------+----------+-----+
| Supplies &     | 34,650 | 7,180  | 143    | 4,339  |          | N   |
| Other          |        |        |        |        |          | ote |
|                |        |        |        |        |          | C   |
+----------------+--------+--------+--------+--------+----------+-----+
| Equipment      |        | 10,882 | 7,645  | 3,237  |          | N   |
|                |        |        |        |        |          | ote |
|                |        |        |        |        |          | D   |
+----------------+--------+--------+--------+--------+----------+-----+
| Total Direct   | \$2    | \$2    | 14,817 | \      | \$49,210 |     |
| Costs          | 22,843 | 29,181 |        | $8,176 |          |     |
+----------------+--------+--------+--------+--------+----------+-----+
| Applicable     | 43,232 | 45,836 | 2,963  | 1,635  | 9,842    | N   |
| Indirect Costs |        |        |        |        |          | ote |
|                |        |        |        |        |          | E   |
+----------------+--------+--------+--------+--------+----------+-----+
| Total          | \$2    | \$2    | \$     | \      | \$59,052 |     |
|                | 66,075 | 75,017 | 17,780 | $9,811 |          |     |
+----------------+--------+--------+--------+--------+----------+-----+
| Less           |        | 17,780 |        | Total  |          | \$  |
| Questioned     |        |        |        | Unsup  |          | 57, |
| Costs          |        |        |        | ported |          | 386 |
|                |        |        |        | Direct |          |     |
|                |        |        |        | Costs  |          |     |
+----------------+--------+--------+--------+--------+----------+-----+
| Total After    |        | \$2    |        | Appl   |          | [1  |
| Adjustment for |        | 57,237 |        | icable |          | 1,4 |
| Questioned     |        |        |        | In     |          | 77] |
| Costs          |        |        |        | direct |          | {.u |
|                |        |        |        | Costs  |          | nde |
|                |        |        |        |        |          | rli |
|                |        |        |        | Total  |          | ne} |
|                |        |        |        | Unsup  |          |     |
|                |        |        |        | ported |          | \$  |
|                |        |        |        | Costs  |          | 68, |
|                |        |        |        |        |          | 863 |
+----------------+--------+--------+--------+--------+----------+-----+

**Note A:** [Unsupported Salary and Fringe Benefit Costs]{.underline}.
We were unable to identify the payees for four payroll summary entries
totaling \$6,749. An additional \$30,137 of salaries was not supported
because NWIC did not have the required support for the salary
distribution of personnel who worked on more than one project or
activity. The fringe benefits allocable to the unsupported salary costs
were \$2,015 and \$8,309, respectively.

> [Questioned Fringe Benefit Costs]{.underline}: We concluded that the
> NWIC financial database included \$5,029 of fringe benefit costs that
> were not allocable to Promising Practices. The identified salary
> transactions include three adjusting entries that reduced salaries
> previously charged to Promising Practices. We found that a
> corresponding fringe benefit adjustment for one salary adjustment used
> a fringe benefit rate that was much lower than the actual average rate
> and no fringe benefits were associated with the other adjusting
> entries.

**Note B:** [Questioned Contracted Services]{.underline}: NWIC provided
documentation stating that the invoice for \$2,000 of consultant
services was mistakenly charged to Promising Practices. The document
showed the journal entry needed to remove the charge, but no such
journal entry appeared in the transactions listing provided from NWIC's
financial database.

> [Unsupported Contracted Services]{.underline}: We were unable to
> identify detailed transactions for \$600 of consultant services. Also,
> NWIC was unable to provide an invoice or other supporting
> documentation for a \$2,000 payment to a consultant.

**Attachment 2**

**(Continued)**

**Note C:** [Questioned Supply Costs]{.underline}: We concluded that
\$143 was not an allowed cost for Promising Practices based on the
transaction description "DISC Program Instruction Books."

> [Unsupported Supplies & Other Costs]{.underline}: We were unable to
> identify detailed transactions for \$4,339 of supplies and other costs
> shown in NWIC's financial database.

**Note D:** [Questioned Equipment Costs]{.underline}: We concluded that
two purchases were not allowed costs for Promising Practices because the
approved budget did not include a budget line for equipment purchases
and the items were not one of the listed items under the supplies and
other costs budget line. The purchases were \$99 for a mini F-Tripod and
\$7,546 for a wireless Internet system for WIC's Nesqually site.

> [Unsupported Equipment Costs]{.underline}: We were unable to identify
> detailed transactions for \$3,237 of equipment costs shown in NWIC's
> financial database.

**Note E:** The indirect costs shown in this schedule for NWIC's
financial database, questioned costs, and unsupported costs were
calculated using the final negotiated rate of 20 percent. The actual
amount of indirect costs recorded in NWIC's financial database was
\$28,967.

**Attachment 3**

**NWIC's Comments on the Draft Report**

**OIG NOTE**

The attachments referred to in NWIC's comments are available on request.

[^1]: NWIC's grant proposal called the project the Electronic Document
    Conversion Specialist Training Program. Subsequent grant related
    documents referred to the project as the DISC Program.

[^2]: NWIC continued to record expenditures for Promising Practices
    through November 2001.

[^3]: The Lummi Indian Business Council created CIR21 Corporation, a
    for-profit company, on December 1, 1998, when the Council approved
    the corporation's operating agreement. The Council subsequently
    dissolved the CIR21 Corporation on August 15, 2000, based on a
    taskforce's findings that the corporation needed to be held more
    accountable to the Council and concerns that corporate officers had
    not operated in a forthright manner.

[^4]: NWIC offered DISC program training over an 18-month period
    (January 1, 2000 through June 30, 2001) rather than 24-month period
    specified in the proposal. Even if the goals were adjusted to
    reflect expected trainees for an 18-month period, NWIC did not meet
    the goals.

[^5]: The brochure for the DISC Program showed the program was scheduled
    for a total of 960 hours over three academic quarters. The program
    consisted of three basic skill courses (140 contact hours),
    six DISC-specific courses (110 contact hours, 200 lab hours, and 480
    on-the-job training hours), and one elective course (30 contact
    hours).

[^6]: Native American Vocational and Technical Education Program
    replaced Indian Vocational Education Program.

[^7]: The Objectives, Scope, and Methodology section of this report
    describes the limited nature of our review.