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July 28, 2006

> **Control Number**
>
> **ED-OIG/A03F0003**

Ms. Faye P. Taylor

Chief Executive Officer

Following the Leaders

200 5^th^ Avenue East, Suite B

Springfield, TN 37172

Dear Ms. Taylor:

This **Final Audit Report**, entitled *Education Leaders Council's
Subcontracting Activities*, presents the results of our audit. The
objectives of the audit were to determine if (1) the Education Leaders
Council's (ELC's) subcontracting activities complied with the
procurement standards set forth in the Education Department General
Administrative Regulations (EDGAR), (2) the subcontract costs for
Achievement Technologies, Incorporated (ATI) and the Princeton Review
(TPR) charged to the federal grants were reasonable and allocable, and
(3) any conflict of interest issues exist between ELC and its
subcontractors. Our review covered the period July 1, 2002, through
December 31, 2004.

BACKGROUND

ELC is a non-profit organization, founded in 1995, that was formerly
located in Washington, DC. According to its mission statement, ELC was
committed to leading educational change focused on improved academic
achievement for all students. In November 2005, ELC planned or
implemented changes that included focusing exclusively on the Following
the Leaders (FTL) project, its school-based initiative. As a result, ELC
changed its name to Following the Leaders,[^1] and relocated to
Tennessee. According to the organization, its mission is to serve as a
catalyst for the application of technology to core instructional
processes in order to raise student achievement and fulfill the goals of
the No Child Left Behind Act. To accomplish its mission, the
organization states that it will assist schools and districts in the
selection and implementation of technology-based resources and support
services designed to help students achieve academic proficiency in core
subjects.

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

ELC described the FTL project as a package of tools to assist states and
school districts in meeting the requirements of the No Child Left Behind
Act. As of December 31, 2004, the FTL project provided technology
resources and support to over 600 schools in 11 states. According to
ELC, the FTL project helps teachers and administrators incorporate
standards-based curriculum into their classrooms, and assists with the
analysis and reporting of student performance data. The FTL project's
primary service providers were ATI and TPR. During the period July 1,
2002, through December 31, 2004, the grant expenses for these two
service providers accounted for 75 percent of total grant awards made to
ELC during the period. The grant expenses for ATI totaled \$14,489,593
and the grant expenses for TPR totaled \$3,048,427. The FTL project's
primary software products were ATI's SkillsTutor[^2] and TPR's Homeroom.

Attachment 1 provides supplemental background information on the FIE
grant awards, ELC's contracts with ATI and TPR, the SkillsTutor and
Homeroom software products, and the states participating in the FTL
project.

AUDIT RESULTS

The objectives of the audit were to determine if (1) ELC's
subcontracting activities complied with the procurement standards set
forth in EDGAR, (2) the subcontract costs for ATI and TPR charged to the
federal grants were reasonable and allocable, and (3) any conflict of
interest issues exist between ELC and its subcontractors. We found that
ELC's subcontracting activities did not comply with the procurement
standards set forth in EDGAR. Specifically, we found that ELC did not
have written procurement procedures and did not comply with procurement
standards when it awarded contracts to ATI and TPR. We also found that
ELC did not perform and document an adequate cost or price analysis. As
a result, while the subcontracts' costs were allocable to the federal
grants, we were unable to determine if the costs charged by ATI and TPR
were reasonable relative to other vendors' prices. However, the prices
paid by ELC in 2003 and 2004 for ATI's SkillsTutor software, TPR's
Homeroom software, and training appeared reasonable relative to the
prices paid by other clients of ATI and TPR and the list prices for the
software and training. Additionally, while ATI and TPR made significant
contributions[^3] to ELC and its affiliate in 2003, we found no
conflicts of interest issues between ELC and the subcontractors. A draft
of this report was provided to ELC for review and comment. In its
comments on the draft report, ELC concurred with our finding and did not
disagree with the recommendations. We have incorporated ELC's comments,
where appropriate, into the report and provide ELC's full response as an
attachment to the report.

FINDING -- ELC's Subcontracting Activities Did Not Comply With the
Procurement Standards Set Forth in EDGAR.

We found that ELC's subcontracting activities did not comply with the
procurement standards set forth in EDGAR. Specifically, we found that
ELC did not have written procurement procedures and did not comply with
procurement standards when it awarded contracts to ATI and TPR. These
instances of non-compliance appear to be the result of inadequate
controls. For example, ELC did not develop written procurement policies
and procedures until early 2005, even though the Department\'s first
grant award was made to ELC in July 2002.

Recipients are required under EDGAR, to establish policies and
procedures for procurement. Regulations in 34 C.F.R. §§ 74.40 through
74.48 contain the Procurement Standards to be used by grantees.[^4]
These Procurement Standards include:

-   The recipient shall maintain written standards of conduct governing
    the performance of its employees engaged in the award and
    administration of contracts. 34 C.F.R. § 74.42

-   All procurement transactions shall be conducted in a manner to
    provide, to the maximum extent practical, open and free competition.
    34 C.F.R. § 74.43

-   All recipients shall establish written procurement procedures. 34
    C.F.R. § 74.44(a)

-   Recipients shall, on request, make available for the Secretary,
    procurement documents, such as request for proposals or invitations
    for bids, independent cost estimates, et cetera, when certain
    conditions apply. Examples of these conditions include (1) a
    recipient\'s procurement procedures fail to comply with the
    procurement standards, and (2) the procurement is expected to exceed
    \$25,000 and is to be awarded without competition. 34 C.F.R. §
    74.44(e)

-   Some form of cost or price analysis must be made and documented in
    the procurement files in connection with every procurement action.
    34 C.F.R. § 74.45

-   Procurement records for purchases in excess of \$25,000 must include
    the following at a minimum: (a) basis for contractor selection, (b)
    justification for lack of competition when competitive bids or
    offers are not obtained, and (c) basis for award cost or price. 34
    C.F.R. § 74.46

In addition, regulations in 34 C.F.R. §74.53(b) require recipients to
retain financial records, supporting documents, statistical records, and
all other records pertinent to an award for a period of three years from
the date of submission of the final expenditure report.

The management of ELC was responsible for establishing and maintaining
effective internal control over federal programs that provides
reasonable assurance that the grantee is managing federal awards in
compliance with laws, regulations, and grant provisions. Additionally,
the management of ELC was responsible for complying with laws,
regulations, and grant provisions related to its federal programs.

# ELC Did Not Have Written Procurement Procedures

During the period of our audit, July 1, 2002, through December 31, 2004,
ELC did not have written procurement policies and procedures in
accordance with regulations. Regulations in 34 C.F.R. § 74.44(a) require
that all grantees shall establish written procurement procedures. ELC
was notified of the requirement to have written procurement policies and
procedures through a calendar year 2002 single audit finding that
recommended ELC implement written procedures to comply with 34 C.F.R. §
74.44. In the schedule of prior audit findings that accompanied ELC\'s
calendar year 2003 financial statements and single audit report, ELC
noted that written policies were continuing to be updated and that
completion was scheduled by the fourth quarter of 2004.

ELC's procurement policies entitled *Procurement Procedures for
Following the Leaders*, did not address all the requirements set forth
in EDGAR. These procurement policies were prepared in January 2005, in
advance of our audit. They consisted mainly of a statement that ELC
would follow the procedures laid out in 34 C.F.R. §§ 74.41 through 74.48
and a verbatim copy of regulations in 34 C.F.R. § 74.44.

In early 2005, ELC adopted a Finance Protocol Manual that provided a
summary of ELC's financial practices. ELC provided the Finance Protocol
Manual to us in April 2005. The procurement procedures established in
ELC\'s Finance Protocol Manual did not address all the requirements set
forth in EDGAR. Specifically, competitive bids for contracts under
\$25,000 and professional service contracts were not required; whereas,
regulations in 34 C.F.R. § 74.43 specify that all procurement should be
conducted in a manner to provide, to the maximum extent practical, open
and free competition. The manual also did not specify the use of
solicitations for goods and services as required in 34 C.F.R. §
74.44(a)(3), the type of procurement instrument used shall be determined
to be appropriate for the particular procurement and for promoting the
best interest of the program or project as required in 34 C.F.R. §
74.44(c), and all the required contract provisions contained in 34
C.F.R. § 74.48 and Appendix A.

Furthermore, despite receiving its first grant award in July 2002, ELC
did not adopt a conflict of interest policy until May 2004. ELC's
conflict of interest policy did not fully comply with the requirements
established in 34 C.F.R. § 74.42. Specifically, ELC's conflict of
interest policy (1) allowed, with the approval of ELC's board of
directors, an officer or director to participate in procurement
decisions even if a real or apparent conflict of interest existed; (2)
did not address all individuals specified in 34 CF.R. § 74.42, such as
employees or agents; (3) did not address the solicitation or acceptance
of gratuities, favors, or anything of monetary value that is not a
substantial amount; and (4) did not specify the disciplinary actions
applied to violations, except that, in certain circumstances, the board
could require the resignation of the director or officer.

We informed ELC that its procurement and conflict of interest policies
did not comply with all the requirements set forth in EDGAR. In March
2006, ELC adopted revised policies and procedures covering procurement
and conflicts of interest. ELC provided us with an opportunity to review
and comment on drafts of the policies.

## ELC Did Not Comply With Procurement Standards

ELC did not comply with procurement standards set forth in regulations
when it awarded contracts to the primary FTL service providers. We found
that ELC did not award the contracts to ATI and TPR in a manner that
provided open and free competition; did not perform and document an
adequate cost or price analysis; and did not document the basis for the
selection of the contractors, the justification for the lack of
competition, and the basis for the award cost or price.

ELC did not comply with regulations in 34 C.F.R. § 74.43 that require
all procurement transactions to be conducted in a manner to provide, to
the maximum extent practical, open and free competition. ELC\'s former
Chief Executive Officer and former Chief of Staff, who were at ELC when
the contracts were awarded, noted that ELC did not hold a competition
for the FTL project's vendors, because ATI and TPR were included in the
FTL grant proposals as partners. According to the ATI\'s Chief Executive
Officer, while ATI provided special services to ELC, ATI viewed ELC as a
customer; ATI was not a partner or sub-grantee on the grants. Similarly,
according to TPR\'s Chief Executive Officer, while TPR treated ELC as a
peer, TPR considered itself a vendor for ELC.

ELC also did not comply with regulations in 34 C.F.R. § 74.46 that
require that procurement records for purchases in excess of \$25,000
must include the basis for contractor selection, the justification for
lack of competition, and the basis for award cost or price. ELC\'s
former Chief of Staff noted that ELC performed an informal comparison of
vendors and concluded that ATI had the best product, and that the only
documentation of this comparison was a vendor comparison prepared in
November 2002. The former Chief of Staff also added that there was no
formal written justification for the selection of TPR. Similarly, based
upon our conversation with ELC\'s former Chief Executive Officer, there
was no formal written justification for ELC's selection of ATI and TPR.
The former Chief Executive Officer stated that, at the time of the
initial grant, ATI was the only vendor providing the needed services and
that ELC thought ATI's costs were reasonable. Additionally, the former
Chief Executive Officer stated that ELC did not have a formal process
where it documented the different vendors' prices in the marketplace,
but claimed ELC knew that ATI's and TPR's prices were competitive
relative to other school-based products.

ELC provided us with a two-page matrix comparing nine vendors to nine
criteria established by ELC.[^5] This document was prepared in November
2002, which was after the Department awarded the grant to ELC, and ELC
awarded the initial contract to ATI (both of which occurred in July
2002). The document was prepared in response to a Department request for
ELC to clarify the justification for selecting ATI in a non-competitive
manner. Based upon the information contained in the document, at least
one other vendor in addition to ATI met all of the criteria and seven
vendors met at least seven of the nine criteria. It is possible that, in
addition to ATI, some of the other vendors could have put together or
modified their offerings to meet all of ELC's criteria. As a result, the
document prepared by ELC did not adequately justify the lack of
competition for the procurement action and ELC's basis for the selection
of ATI for the FTL project. TPR was not among the nine vendors included
in the document.

ELC also did not comply with regulations in 34 C.F.R. § 74.45 that
require that some form of cost or price analysis to be made and
documented in connection with every procurement action. The November
2002 matrix presented pricing information for six of the nine vendors.
However, the pricing information was generally presented on a per
student basis and is not comparable among vendors (i.e., some specified
a range of costs, training costs, and implementation costs, whereas
others did not). As a result, the information contained in the matrix
was insufficient to conduct a pricing analysis. Furthermore, ELC
provided the audit team with no documentation of a cost or price
analysis for the subsequent contract that included TPR.

One of the rationales cited by ELC officials in their statements to us
on selecting ATI and TPR as service providers for the FTL project was a
June 2004 Forrester Consulting report.[^6] ELC commissioned the study
that compared software company offerings that provided assessment,
diagnostic, and/or remedial solutions to help students improve test
scores. According to ELC officials, the Forrester Consulting report
indicated that the integrated ATI and TPR products provided a unique
tool not found elsewhere in the marketplace. We reviewed the report and
interviewed the Project Director at Forrester Consulting. Forrester
Consulting assessed the products of ten companies, including ATI and
TPR.[^7] Based upon information contained in the report, it appears that
in addition to the ATI and TPR combination, five other vendors met many
of the criteria specified by ELC. As a result, the study indicated that,
in addition to ATI and TPR, other vendors were capable of providing ELC
with the software and services for the FTL project. While we do not know
the exact number of vendors that were capable of providing the required
software and services in 2002, when ELC contracted with ATI and later
TPR, the report indicated that ATI and TPR were most likely not the only
vendors capable of providing the software or services for FTL. According
to the Project Director at Forrester Consulting, ELC's use of the ATI
and TPR combination met all the criteria, and a combination of other
vendors could have met all the criteria. As a result, the Forrester
Consulting report did not adequately justify the lack of competition and
basis for the selection of ATI and TPR.

ELC's subcontracts with ATI and TPR represented the majority of the
costs for the FTL project. During the audit period, the grant expenses
of \$17,538,020 for ATI and TPR accounted for 75 percent of total grant
awards made to ELC during the period. Had ELC issued a solicitation that
established all the requirements that bidders were to fulfill and
conducted the procurement in a manner to provide free and open
competition, ELC may have been able to obtain the needed services at a
better value. In addition, because ELC did not comply with the
procurement standards set forth in regulations, ELC could not readily
demonstrate that it was a prudent steward of federal grant funds when
contracting with FTL\'s service providers.

## Recommendations: {#recommendations .Style1}

We recommend that the Department\'s Chief Financial Officer, in
collaboration with the Assistant Deputy Secretary for Innovation and
Improvement, require ELC (renamed FTL) to:

1.  Adopt procurement policies and procedures that comply with all the
    requirements set forth in regulations in 34 C.F.R. §§ 74.40 through
    74.48. In addition, such policies and procedures should address the
    record retention requirements established in 34 C.F.R. § 74.53.

1.2 Ensure that it complies with procurement and documentation standards
set forth in Department regulations when renewing or awarding any
federally funded contract.

**ELC's Comments:**

ELC concurred that it did not have the required written procurement
policies in place at the time of our audit. ELC added that it has
developed written procurement policies with input from the OIG that
comply with all EDGAR requirements. ELC also acknowledged that
documentation of its procurement process for the primary FTL service
providers was deemed insufficient. ELC noted that it had responded to
the Department's questions about its use of sole source procurement, and
the Department had approved the applications and budgets, which included
ATI and TPR. Additionally, ELC noted that ATI's and TPR's products were
purchased at a "steep discount."

**OIG's Response:**

When we provided comments on the drafts of ELC's policies and
procedures, we informed ELC that our comments were for its benefit in
drafting polices and procedures and should not be considered as an
approval of such policies and procedures. The procurement policies
adopted by ELC, incorporated many, but not all, of the comments and
suggestions that we provided. Additionally, the Department's approval of
ELC's grant applications and knowledge of ELC's sole source contracts
with ATI and TPR did not relieve ELC of its requirement to comply with
the procurement standards set forth in EDGAR. Furthermore, our
comparison of the prices for software and training paid by ELC to the
prices paid by other clients of ATI and TPR found that ELC was not the
only client to which discounts were extended by ATI and TPR.

We have included Attachments 2 and 3 to present summary-level
information on ELC's and Forrester Consulting's comparison of software
vendors' offerings, both of which are discussed in the finding.

OTHER MATTERS

Our January 2006 audit report entitled *The Education Leaders Council's
Drawdown and Expenditure of Federal Funds* (control number
ED-OIG/A03F0010), reviewed whether federal funds drawndown by ELC for
the FTL project were used for ELC's operations, and whether expenditures
allocated to the federally funded FTL project were reasonable,
allocable, and allowable in accordance with regulations. In general, we
found that ELC drew down grant funds that could have been used to cover
operating deficits in ELC's non-FTL activities, charged indirect costs
to the federal grants even though it did not have an approved indirect
costs plan, and charged questioned and unsupported costs to the federal
grants. A copy of the audit report, including ELC's comments on the
report, may be obtained from the Department's Office of Inspector
General website at
<http://www.ed.gov/about/offices/list/oig/auditreports/a03f0010.pdf>.

OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of the audit were to determine if (1) the ELC's
subcontracting activities complied with the procurement standards set
forth in EDGAR, (2) the subcontract costs for ATI and TPR charged to the
federal grants were reasonable and allocable, and (3) any conflict of
interest issues exist between ELC and its subcontractors. Our review
covered the period July 1, 2002, through December 31, 2004.

To achieve the audit objectives, we performed the following. We reviewed
applicable criteria contained in EDGAR (34 C.F.R. Part 74); OMB Circular
A-122, *Cost Principles for Non-Profit Organizations*; and OMB Circular
A-110, *Uniform Administrative Requirements for Grants and Agreements
With Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations*. We reviewed ELC's grant applications and the grant award
notices for the fiscal year 2002, 2003, and 2004 grant awards. We
reviewed ELC's single audit reports and management letters for fiscal
years 2002 and 2003. We also interviewed ELC's current Chief Executive
Officer and Chief Financial Officer, and ELC's former Chief Executive
Officers, Chief of Staff, Chief Operating Officer, Director of Federal
Programs, Chief Policy Officer, and Chairman of the Board of Directors.

To determine if ELC's subcontracting activities complied with
procurement standards, we performed the following. We reviewed ELC's
policies and procedures covering procurement. We reviewed ELC's
contracts and memorandum of understanding with ATI and TPR. We reviewed
documents provided by ELC regarding the selection of ATI and TPR. We
also reviewed the Forrester Consulting study entitled *Use of Technology
to Improve Student Achievement* and interviewed the Project Director at
Forrester Consulting.

To determine if the subcontract costs for ATI and TPR charged to the
federal grants were reasonable and allocable, we performed the
following. We interviewed officials at ATI, including the Chief
Executive Officer, Chief Financial Officer, Director of Finance, and
Director of Project Management. We interviewed officials at TPR,
including the Chief Executive Officer, Executive Vice President for
Strategic Development, Executive Vice President for the K-12 Division,
Vice President for the K-12 Division, and Division Controller for Test
Preparation. We reviewed financial statements and reports for ATI and
TPR covering calendar years 2002, 2003, and 2004. We reviewed all
invoices submitted to ELC by ATI and TPR during the audit period. We
compared the prices paid by ELC for software and training to ATI's and
TPR's list prices. We compared ELC's purchase prices for software and
training to the prices paid by ATI's and TPR's other clients. We
judgmentally selected sales to ATI's and TPR's other clients for review.
The universe of ATI's K-12 MegaSuite sales consisted of 13 sales in 2003
and 21 sales in 2004, excluding returns and sales to ELC. For each year,
2003 and 2004, the four largest sales to unique clients were selected.
The universe of ATI's training sales was 51 sales in 2003 and 47 sales
in 2004. Three training sales from 2003 and four training sales from
2004 were selected based upon the amount of the sale and the sales
amount relative to ATI's list prices. The universe of TPR's Homeroom
software sales consisted of 908 sales during the period August 2000
through December 2004. We selected the 20 largest Homeroom sales to
unique clients and 10 smaller Homeroom sales; these selections were also
used to review training sales. In selecting sales for review, we
excluded multiple sales to the same client (other than the largest sale)
and sales to ELC. Because there is no assurance that the judgmental
samples were representative of the respective universes, the results
should not be projected to the unsampled records.

To determine if any conflict of interest issues exist between ELC and
its subcontractors, we performed the following. We reviewed ELC's Form
990, Return of Organization Exempt From Income Tax, for calendar years
2001, 2002, 2003, and 2004. We compared listings of officers, employees,
and board members of ELC and its subcontractors. We reviewed ELC's
sources of non-federal revenue for calendar years 2001, 2002, 2003, and
2004. We compared ELC's monthly bank account balances for calendar years
2002 through 2004 to estimates of ELC's monthly operating expenses. We
reviewed documents pertaining to the significant contributions that ELC
and its affiliate received from ATI and TPR in 2003.

The audit team obtained electronic files from ELC\'s accounting systems
of record of ELC\'s 2001 and 2002 non-federal revenue, 2002 federal
grant expenses, and 2003 and 2004 general ledgers. We conducted a
preliminary assessment of the computer-processed data that was obtained
from ELC. The audit team assessed the completeness of the 2001, 2002,
and 2003 electronic data by comparing it to information contained in
ELC\'s respective audited financial statements and, in the case of grant
expenses, to GAPS drawdown data. All of the data was considered fairly
complete. The audit team also assessed the accuracy of the data that was
material to the audit\'s objectives by verifying it to documentation or
through discussions. Nothing came to our attention in this limited
review to indicate the data was not accurate. The audit team was unable
to assess the completeness of the 2004 electronic data because ELC had
not issued audited financial statements at the time our audit was
performed. However, the data was obtained from ELC\'s accounting system
of record and represents the same data used by ELC\'s management for
decision-making and reporting purposes. Therefore, we considered the
data sufficiently reliable for the purposes of this review.

As part of our audit, we assessed ELC\'s system of internal control,
policies, procedures and practices applicable to ELC\'s subcontracting
activities. For purposes of the audit, we assessed and classified the
significant controls into the following category: procurement of goods
and services with federal funds. Because of inherent limitations, a
study and evaluation made for the limited purposes described above would
not necessarily disclose all material weaknesses in internal controls.
However, our assessment disclosed significant internal control
weaknesses that adversely affected ELC\'s ability to administer the
federal grant funds. These weaknesses resulted in ELC\'s procurement
activities not complying with regulations. These weaknesses and their
effects are fully discussed in the Audit Results section of this audit
report.

We conducted on-site fieldwork at ELC's offices in Washington, DC during
the period January 25, 2005, through March 28, 2005; at ATI's offices in
Newton, MA during the period March 14, 2005, through March 18, 2005; and
at TPR's offices in New York City, NY during the period May 24, 2005,
through May 25, 2005. On March 31, 2006, we held an exit conference with
ELC's management. Our audit was performed in accordance with generally
accepted government auditing standards appropriate to the scope of the
review described above.

ADMINISTRATIVE MATTERS

This report incorporates comments you provided in response to the draft
report. If you have any additional comments or information that you
believe may have a bearing on the resolution of this audit, you should
send them directly to the following Department of Education officials,
who will consider them before taking the final Departmental action on
this audit:

> William McCabe
>
> Acting Chief Financial Officer
>
> U.S. Department of Education
>
> 400 Maryland Avenue, SW
>
> Washington, D.C. 20202-4300
>
> Margo Anderson
>
> Associate Assistant Deputy Secretary
>
> Office of Innovation and Improvement
>
> 400 Maryland Avenue, SW
>
> Washington, D.C. 20202-5900

It is the policy of the U.S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained herein. Therefore, receipt of your comments
within 30 days would be appreciated.

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

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

We appreciate the cooperation and assistance extended by your staff
during the audit. If you have any questions, please contact me at (215)
656-6279.

> Sincerely,
>
> /s/
>
> Bernard Tadley
>
> Regional Inspector General for Audit

c.  James Horne, Chairman, FTL

Attachments

Attachment 1: Supplemental Background Information

## FIE Grants Awards: {#fie-grants-awards .Style1}

During the period July 1, 2002, through December 31, 2004, ELC received
three FIE grants totaling \$23,376,534 for the FTL project, as follows:

+-------------+---------------+-----------------+---------------------+
| **Award     | #             | # Award Amount  | # Award Type        |
| Date**      |  Award Number |                 |                     |
+-------------+---------------+-----------------+---------------------+
| July 1,     | R215U020001   | \$3,501,000     | Unsolicited grant   |
| 2002        |               |                 |                     |
+-------------+---------------+-----------------+---------------------+
| May 1, 2003 | U215K030213   | \$9,934,999     | Congressionally     |
|             |               |                 | directed            |
+-------------+---------------+-----------------+---------------------+
| June 25,    | U215K040252   | \$9,940,535     | Congressionally     |
| 2004        |               |                 | directed            |
+-------------+---------------+-----------------+---------------------+

When the fiscal year 2005 grants, of \$9,594,623, to ELC are included,
ELC was awarded FIE grants totaling \$32,971,157.

## ATI and TPR Contracts: {#ati-and-tpr-contracts .Style1}

In July 2002, ELC and ATI entered into a contract for the license,
support, and implementation of ATI's Achieve Resource Center, Project
Achieve Software Suite, and SkillsTutor software in up to 15 schools in
one state. In October 2002, the contract was amended. The amendments
changed the contract's term and authorized software licenses for six
states. In January 2003, the contract was amended and restated. In
addition to ELC and ATI, TPR became a party to the contract. The term of
the amended and restated contract was January 1, 2003, through December
31, 2005. Under the contract, ELC guaranteed purchases from ATI and TPR
equal to a percentage (ranging from 75 percent to 77 percent) of the
funding ELC received for the FTL project during the term of the
contract. ATI and TPR were to provide licenses, training and support for
their products.

## ATI's SkillsTutor and TPR's Homeroom: {#atis-skillstutor-and-tprs-homeroom .Style1}

ELC describes these products as follows. SkillsTutor is a web-based tool
designed to help students master core subjects and skills. It focuses on
four key areas, consisting of supplemental instruction and tutoring;
diagnostic and prescriptive lessons; research-based content; and
individualized instruction aligned to state and national standards.
Homeroom is an online formative assessment and benchmarking tool aligned
to state standards and tests and designed to increase student
achievement. It allows the tracking of student performance to assess
trends and opportunities for remediation, and the use of data to develop
individualized learning plans.

**States Participating in the FTL Project:**

  ------------- ----------- ----------- ----------- --------------- -----------
  **State**     **No. of    **State**   **No. of    **State**       **No. of
                Schools**               Schools**                   Schools**

  Alaska        135         Arizona     7           Florida         25

  Iowa          80          Illinois    77          Massachusetts   42

  Mississippi   83          Ohio        45          Pennsylvania    27

  Tennessee     51          West        61          **Total**       **633**
                            Virginia                                

  Source: ATI's                                                     
  2004 Billing                                                      
  Summary                                                           
  ------------- ----------- ----------- ----------- --------------- -----------

Attachment 2: Summary of ELC's Comparison of Software Vendors

<table style="width:100%;">
<colgroup>
<col style="width: 11%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 19%" />
</colgroup>
<tbody>
<tr class="odd">
<td rowspan="2"><strong>Company</strong></td>
<td colspan="9"><strong>Criteria</strong></td>
<td rowspan="2"><p><strong>Pricing Information</strong></p>
<p><strong>Presented Per</strong></p></td>
</tr>
<tr class="even">
<td><blockquote>
<p><strong>Aligned With State Standards</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Prescribes Individual Student Learning Path</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Generates Curriculum &amp; Lesson Plans</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Creates Assessment Tests</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Training &amp; Service</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Web Based</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Parent Console</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Student Console</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Tutoring Component</strong></p>
</blockquote></td>
</tr>
<tr class="odd">
<td>Achievement Technologies, Incorporated</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Student, Teacher &amp; School</td>
</tr>
<tr class="even">
<td>Company 2</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>√</td>
<td>Grade &amp; Subject</td>
</tr>
<tr class="odd">
<td>Company 3</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>Not Available</td>
</tr>
<tr class="even">
<td>Company 4</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>Student</td>
</tr>
<tr class="odd">
<td>Company 5</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>Student, Implementation, Training</td>
</tr>
<tr class="even">
<td>Company 6</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>√</td>
<td>Limited</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>√</td>
<td>Student</td>
</tr>
<tr class="odd">
<td>Company 7</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>Not Available</td>
</tr>
<tr class="even">
<td>Company 8</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>Not Available</td>
</tr>
<tr class="odd">
<td>Company 9</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Module &amp; Student</td>
</tr>
</tbody>
</table>

Note: √ indicates that the vendor met the criteria.

Source: ELC's vendor comparison matrix, prepared November 2002.

Attachment 3: Summary of Forrester Consulting's Comparison of Software
Company Offerings

Forrester Consulting reviewed software that provided assessment,
diagnostic and/or remedial solutions to help schools improve student
test scores. Forrester Consulting reviewed the software from 10
companies, which were identified by ELC, and noted which offerings met
specific criteria established by ELC. In the report's Executive Summary,
Forrester Consulting states, "In most cases the companies meet many of
the criteria. Some do not have alignment to textbooks or remedial
content built into their application. Others are developing this
capability. Still others believe that teachers have access to many
materials, and as long as teachers know the specific area of students
weakness, they can provide their own remedial materials."

<table style="width:100%;">
<colgroup>
<col style="width: 3%" />
<col style="width: 26%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="2"><strong>Criteria</strong></td>
<td><blockquote>
<p><strong>The Princeton Review</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Achievement Technologies, Incorporated</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 3</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 4</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 5</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 6</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 7</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 8</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 9</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 10</strong></p>
</blockquote></td>
</tr>
<tr class="even">
<td colspan="12"><strong>Software Emphasis</strong></td>
</tr>
<tr class="odd">
<td></td>
<td>Analysis</td>
<td>√</td>
<td>-</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Assessment</td>
<td>√</td>
<td>-</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>Remediation</td>
<td>-</td>
<td>√</td>
<td>-</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
</tr>
<tr class="even">
<td colspan="12"><strong>Formative Assessments</strong></td>
</tr>
<tr class="odd">
<td></td>
<td>Aligned to State Standards</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Linked to Specific Textbooks</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Pending</td>
<td>Custom</td>
<td>No</td>
<td>No</td>
<td>No</td>
<td>√</td>
</tr>
<tr class="odd">
<td colspan="12"><strong>Remediation Strategies</strong></td>
</tr>
<tr class="even">
<td></td>
<td>Aligned to State Standards</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>Linked to Specific Textbooks</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>Custom</td>
<td>No</td>
<td>No</td>
<td>Some</td>
<td>√</td>
</tr>
<tr class="even">
<td colspan="12"><strong>Test Item Banks</strong></td>
</tr>
<tr class="odd">
<td></td>
<td>Sufficient to Assess Grades 3-12</td>
<td>√</td>
<td>√</td>
<td>Not Available</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Same Idiom and Format of State Mandated Assessments</td>
<td>-</td>
<td>Similar</td>
<td>Not Available</td>
<td>-</td>
<td>Possibly</td>
<td>√</td>
<td>Custom</td>
<td>√</td>
<td>Possibly</td>
<td>√</td>
</tr>
<tr class="odd">
<td colspan="12"><strong>Data</strong></td>
</tr>
<tr class="even">
<td></td>
<td>Can be Disaggregated According to NCLB Specifications</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>Reporting Capabilities for Administrators, Principals, Teachers
&amp; Parents</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
</tbody>
</table>

<table style="width:100%;">
<colgroup>
<col style="width: 3%" />
<col style="width: 26%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="2"><strong>Criteria</strong></td>
<td><blockquote>
<p><strong>The Princeton Review</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Achievement Technologies, Incorporated</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 3</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 4</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 5</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 6</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 7</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 8</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 9</strong></p>
</blockquote></td>
<td><blockquote>
<p><strong>Company 10</strong></p>
</blockquote></td>
</tr>
<tr class="even">
<td colspan="12"><strong>Project Management</strong></td>
</tr>
<tr class="odd">
<td></td>
<td>Onsite Training – Initial</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Varies</td>
<td>√</td>
<td>Online</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Onsite Training - Ongoing</td>
<td>-</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Support</td>
<td>√</td>
<td>Support</td>
</tr>
<tr class="odd">
<td></td>
<td>Follow-up School Visits</td>
<td>-</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Consultant Services to District &amp; School Leadership</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>Not Applicable</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td colspan="12"><strong>Customization</strong></td>
</tr>
<tr class="even">
<td></td>
<td>Downloading Student Information Into System</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>Inputting Textbook Correlations</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>No</td>
<td>No</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>Inputting Alignment With State Standards</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>Hardware Compatibility</td>
<td>Hosted</td>
<td>Hosted</td>
<td>Hosted / LAN</td>
<td>Hosted / LAN</td>
<td>Hosted / PC</td>
<td>Hosted</td>
<td>Hosted</td>
<td>Hosted</td>
<td>Hosted / LAN</td>
<td>Hosted</td>
</tr>
<tr class="even">
<td colspan="12"><strong>Aggregation / Usage and Performance
Data</strong></td>
</tr>
<tr class="odd">
<td></td>
<td>Student</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>School</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="odd">
<td></td>
<td>District</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
</tr>
<tr class="even">
<td></td>
<td>State</td>
<td>-</td>
<td>No</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>√</td>
<td>No</td>
</tr>
<tr class="odd">
<td></td>
<td>National</td>
<td>-</td>
<td>No</td>
<td>√</td>
<td>Possibly</td>
<td>Possibly</td>
<td>√</td>
<td>√</td>
<td>Possibly</td>
<td>Possibly</td>
<td>No</td>
</tr>
</tbody>
</table>

Note: √ indicates that the vendor met the criteria.

Source: Forrester Consulting report entitled *Use of Technology to
Improve Student Achievement, Review of Research and Software*, dated
June 28, 2004.

Mr. Bernard Tadley

Office of the Inspector General

U.S. Department of Education

The Wannamaker Building

100 Penn Square East, Suite 502

Philadelphia, PA 19107

June 6, 2006

On behalf of Following the Leaders, Inc., we submit the following
response to ED-OIG audit number A03-F003, Education Leaders Council's
Subcontracting Activities, dated May 8, 2006 and prepared by the U.S.
Department of Education's Office of the Inspector General (OIG)

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

FTL is now re-organized and in full compliance with all federal
regulations governing the use of federal funds awarded by the United
States Congress for the Following the Leaders program. Thus, while we
concur with the findings concerning certain procurement protocols, we
are pleased to report that we have corrected these problems.

The OIG's report identified one finding:

1.  *ELC's Subcontracting Activities Did Not Comply With the Procurement
    Standards Set Forth in EDGAR.*

> *ELC Did Not Have Written Procurement Records*
>
> Auditee response: We concur that ELC did not have appropriate written
> procurement policies in place during the period audited by the OIG.
> However, new management has since developed written procurement
> policies with input from the OIG that comply with all EDGAR
> requirements. In addition, procurement activities since June of 2005
> have been reviewed and approved by the Department of Education.
>
> *ELC Did Not Comply With Procurement Standards*
>
> Auditee Response: The OIG audit notes that no public bidding or
> similar open procurement process was used to enter into contracts with
> Achievement Technologies (ATI) and The Princeton Review (TPR). As the
> OIG audit also notes, however, ELC included ATI and TPR in its budget
> application to the Department of Education. ELC answered the
> Department's questions about sole source procurement to the
> satisfaction of the Department and the budget was approved. ELC
> subsequently included ATI and TPR by name in each budget application,
> each of which was also approved. ELC submitted program reports as
> required under the terms of the awards to the Department; these
> reports contained detailed updates on the objectives and projected
> outcomes of the grant activities. Again, the Department did not
> indicate any dissatisfaction with ELC's progress or with ATI and TPR's
> contribution. Finally, ATI and TPR's products were offered to
> Following the Leaders participants at a steep discount and neither ELC
> nor Department staff had reason to question the value of the services
> received (nor have they challenged costs under current contracts).

In conclusion, while we do not disagree with the importance of clear and
sound operating protocols and acknowledge that procedures were not
always written down as required, we do believe that the value of
services and the deliverables received met the program objectives.
Clearly, following certain steps prior to engaging a contractor's
services can help ensure the quality of the product received. ELC
believed that they had taken such steps, but documentation of the
process was deemed insufficient. The organization has added additional
requirements to its procurement protocols which will ensure that
sufficient documentation exists to demonstrate that procurement
decisions are consistent with the letter as well as the spirit of
Federal regulations.

Sincerely,

/s/

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

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

[^2]: ELC's January 2003 contract defined SkillsTutor as ATI's K-12
    MegaSuite, which included modules of ATI's SkillsTutor, Learning
    Milestones, and K-2 Learning Milestones software.

[^3]: In 2003, ELC and its affiliate, the Education Leaders Action
    Council, reported \$1,326,817 in revenue from non-federal sources.
    In the same year, ELC and its affiliate received \$325,000 from TPR
    and \$147,000 from ATI.

[^4]: Unless otherwise noted, all references to 34 C.F.R. Part 74 are to
    the July 1, 2002, edition.

[^5]: Attachment 2 presents a summary of ELC's comparison of the nine
    vendors.

[^6]: Forrester Consulting report entitled *Use of Technology to Improve
    Student Achievement, Review of Research and Software*, dated June
    28, 2004.

[^7]: Attachment 3 presents a summary of the software comparison
    contained in the Forrester Consulting report.