##### Control Number ED-OIG/A05-C0020

Mr. Wayne Godwin

Executive Vice President & Chief Operating Officer

Public Broadcasting Service

1320 Braddock Place

Alexandria, VA 22314

Dear Mr. Godwin:

This **Final Audit Report** presents the results of our audit of the
Public Broadcasting Service\'s (PBS) administration of the
Ready-To-Learn Cooperative Agreement No. R295A000002 (Agreement) awarded
under the Department of Education's Ready-To-Learn Television program
for the period September 1, 2000, through August 31, 2001. Our objective
was to determine whether costs charged to the Agreement were allowable,
reasonable, and allocable in accordance with the Elementary and
Secondary Education Act of 1965 (ESEA), as amended, Agreement terms,
Education Department General Administration Regulations (EDGAR), and the
cost principles in Office of Management and Budget (OMB) Circular A-122.

We provided a draft of this report to PBS. PBS agreed with the findings
and recommendations, except that it disagreed with all or part of
unsupported salaries, fringe benefits, business meals, indirect costs,
and rent and utilities costs. After reviewing PBS\'s response, we
concluded that we could reclassify salaries and related fringe benefits
as recommended for acceptance because PBS provided a supporting
timesheet. PBS provided adequate documentation to support reclassifying
\$591 of business meals as recommended for acceptance. For the remaining
disputed costs, PBS did not provide sufficient support to cause us to
reclassify these costs as recommended for acceptance. We have summarized
PBS\'s comments after each finding, and have included the response
transmittal letters as Attachment 2.

# AUDIT RESULTS

PBS generally complied with the ESEA, Agreement terms, EDGAR, and the
cost principles in OMB Circular A-122 in administering the Agreement.
However, as discussed in the findings, PBS charged the Agreement for
unallowable costs (\$52) or for costs it did not adequately support
(\$140,664), and did not have adequate written policies and procedures
for administering the Agreement.

**Finding No. 1 PBS Charged Costs to the Agreement that are Unallowable
or Unsupported**

PBS charged costs to the Agreement that are unallowable (\$52) or
unsupported (\$140,664). The unallowable amount consists of charges for
alcoholic beverages (\$48) and related indirect costs (\$4). The
unsupported amount consists of charges for meals (\$1,122), indirect
costs (\$93,927), and rent and utilities (\$45,615) for which it did not
provide adequate documentation to support that the costs were
reasonable, allowable, or allocable.

OMB Circular A-122, Cost *Principles for Non-Profit Organizations,
Attachment A, General Principles, Paragraph A, Subparagraphs A.2.a and
A.2.g.* (1998) provides that---

To be allowable under an award, costs must...Be reasonable for the
performance of the award and be allocable thereto...Be adequately
documented.

Details are discussed in the Attachment.

**Recommendations**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

1.1 Refund to the Department of Education unallowable costs of \$52; and

1.2 Provide sufficient documentation to support \$140,664 or refund that
amount to the Department of Education.

**Auditee Comments**

PBS concurred with the questioned costs. It did not concur with
unsupported salaries (\$1,737), related fringe benefits (\$482),
business meals (\$1,494), indirect costs (\$93,909), and rent and
utilities (\$45,615). PBS provided a timesheet to support the salaries.
Based on the timesheet documenting the salary costs, it asserted that
related fringe benefits and indirect costs also are allowable. PBS
provided various documents that it asserted supported most of the
unsupported business meals. Also, PBS stated that, because it had
submitted an indirect cost proposal to the Department of Education that
proposed an indirect cost rate of 12.35 percent, it disagreed that
indirect costs claimed at 8 percent are unsupported. PBS also stated
that its methodology of allocating rent and utilities based on salaries
was consistent with the corporate methodology used at the time. Since
then, PBS has changed its methodology to be based on headcount versus
salaries charged. It provided an analysis for the fiscal year 2003
budget period that showed

allocating rent and utilities based on headcount is materially
consistent with allocating them based on square footage.

**Auditor Response**

We reviewed PBS\'s response and have reclassified the unsupported
salaries and related fringe benefits as recommended for acceptance. We
also concluded that, for business meals, PBS provided adequate
documentation to support \$591 of the \$1,494 it disagreed with, so we
reclassified \$591 as recommended for acceptance. We have not changed
our conclusion regarding the remaining business meals costs, indirect
costs, and rent and utilities. Until the Department of Education
negotiates a final rate with PBS, we have no basis for agreeing with
PBS\'s assertion that its proposed 12.35 percent rate will result in a
negotiated rate greater than the 8 percent rate it used. With respect to
rent and utilities, we agree that its analysis shows that a headcount
allocation is materially consistent with a square footage allocation.
However, PBS did not use either of these methods to allocate rent and
utilities costs. Instead PBS allocated them based on salaries. In its
response, PBS did not provide any documentation to support that the
salary allocation was materially consistent with a headcount or square
footage allocation.

**Finding No. 2 PBS Needs to Establish and Implement Written Policies
and Procedures that Comply with the Standards for Financial Management
Systems**

PBS does not have written policies and procedures for financial
management.

The standards for financial management systems are contained in 34
C.F.R. § 74.21. The standards specify various requirements of a
financial management system that recipients must provide that include---

**●** Effective control over and accountability for all funds, property,
and other assets. Recipients shall adequately safeguard all assets and
assure they are used solely for authorized purposes. 34 C.F.R. §
74.21(b)(3) (2000).

**●** Written procedures for determining the reasonableness,
allocability, and allowability of costs in accordance with the
provisions of the applicable Federal cost principles and the terms and
conditions of the award. 34 C.F.R. § 74.21(b)(6) (2000).

**●** Accounting records including cost accounting records that are
supported by source documentation. 34 C.F.R. § 74.21(b)(7) (2000).

Because PBS did not have written policies and procedures that complied
with the standards for financial management, PBS incurred costs that
were unallowable. Also, PBS did not always have source documents to
support that costs incurred were reasonable, allocable, and allowable
(see Attachment).

**Recommendation**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

2.1 Develop and implement written policies and procedures that comply
with the standards for financial management. (Note: We made this same
recommendation in Finding No. 2 in audit report ED-OIG/A05-C0011.)

**Auditee Comments/Auditor Response**

PBS stated that, effective April 1, 2002, it developed written policies
and procedures for financial management. PBS provided training to the
staff on those policies and procedures on April 5, 2002. It appears that
the policies and procedures comply with the standards for financial
management.

**Finding No. 3 PBS Needs to Revise Its Travel Policy**

PBS\'s travel policy does not address at least one requirement contained
in the cost principles.

OMB Circular A-122, Cost *Principles for Non-Profit Organizations,*
*Attachment B,* *Selected Items of Cost, Paragraph 2* (1998) provides
that---

Costs of alcoholic beverages are unallowable.

PBS employees purchased alcoholic beverages, and PBS charged the costs
to the Agreement as travel expenses. We recognize that the unallowable
costs we specifically identified were not significant. However, without
a written policy statement notifying employees that costs of alcoholic
beverages are not allowable, it is likely that they will continue to
claim and be reimbursed for such costs. As a result, federal funds
intended for activities that benefit the Agreement will, instead, be
used for unallowable activities.

**Recommendation**

We recommend that the Assistant Secretary for the Office of Educational
Research and Improvement instruct PBS to---

3.1 Revise its travel policy to ensure that it includes all applicable
cost principles. (Note: We made this same recommendation in Finding No.
4 in audit report ED-OIG/A05-C0011.)

**Auditee Comments/Auditor Response**

PBS stated that it revised its travel policy to ensure that it includes
all applicable cost principles, including the prohibition of alcoholic
beverages. It appears the revised policy is adequate.

**OTHER MATTERS**

Our review of 14 procurements valued over \$25,000 each disclosed that
PBS did not obtain competitive bids for 5 procurements. In addition, PBS
named three other vendors in its Agreement proposal for which it did not
obtain competitive bids. According to 34 C.F.R. § 74.43, \"All
procurement transactions shall be conducted in a manner to provide, to
the maximum extent practical, open and free competition.\" While we did
not determine if PBS paid more for the procurements because it did not
competitively bid them, a lack of competitive bidding can result in less
than optimum price, quality, or other factors. Subsequent to our on-site
fieldwork, PBS developed a policy for its federal programs that requires
competitive bids on all procurements over \$25,000.

# BACKGROUND

PBS, headquartered in Alexandria, Virginia, is a private, non-profit
media enterprise incorporated in 1969 that is owned and operated by the
nation\'s 348 public television stations. PBS uses noncommercial
television, the Internet, and other media to provide programs and
education services to nearly 100 million people each week.

The Ready-to-Learn Television program\'s purposes are the development of
(1) educational programming for preschool and early elementary school
children and their families; (2) educational television programming and
printed materials to increase school readiness for young children in
limited English proficient households and to increase family literacy;
and (3) accompanying support materials and services that promote the
effective use of educational television programming. The Department of
Education awarded PBS a five-year \$80 million Agreement under this
program. The PBS Agreement was for the period September 1, 2000, through
August 31, 2005. For the September 1, 2000, through August 31, 2001,
budget period, the Department of Education authorized funding of
\$15,994,925. PBS charged \$11,478,218 to the Agreement.

The Agreement is authorized by the ESEA, as amended by the Improving
America's Schools Act of 1994. It is subject to the provisions contained
in 34 C.F.R. Part 74, Administration *of Grants and Agreements with
Institutions of Higher Education, Hospitals,* *and Other Non-Profit
Organizations* and OMB Circular A-122, *Cost Principles for Non-Profit
Organizations*.

# OBJECTIVE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine if costs charged to the
Agreement during the period September 1, 2000, through August 31, 2001,
were allowable, reasonable, and allocable in accordance with the ESEA,
Agreement terms, EDGAR, and the cost principles in OMB Circular A-122,
effective June 1, 1998. Although we tested all cost categories, our
testing emphasized (1) procurements, (2) travel, (3) advertising and
promotional materials, (4) training seminars, and (5) equipment.

To accomplish our objective, we---

1\. Reviewed the OMB Circular A-133 audit reports for the years ended
June 30, 1999-2001, prepared by an independent public accountant, and
the related working papers for the audit of the year ended June 30,
2001, and reviewed working papers prepared by PBS\'s internal auditor
related to various issues, including procurements, cash disbursements,
and payroll.

2\. Reviewed PBS\'s June 2, 2000, application and annual Agreement
report for fiscal year 2000.

3\. Reviewed written policies, procedures, and organization charts.

4\. Reviewed procurements over \$25,000 and the related bid files.

5\. Reviewed various records and documents, including accounting and
payroll records, purchase orders, invoices, and other supporting
documents for 137 financial transactions consisting of an initial sample
of 37 randomly[^1] and 6 judgmentally selected transactions from a
universe of 2,969 transactions, and 93 transactions subsequently
selected on a judgmental basis. The transactions subsequently selected
consisted of all revenue (16), procurements (14), program acquisition
(8), equipment (5), advertising (4), employee bonus (3), and employee
relocation (1); and selected airline tickets (valued in excess of
\$1,000 each) (11), business meals (25), and legal fees (6).

6\. Interviewed various PBS employees, Department of Education
personnel, and independent public accountant personnel.

To achieve our audit objectives, we relied, in part, on
computer-processed data related to the Ready-To-Learn Agreement
contained in PBS\'s accounting system. We assessed the reliability of
these data, including the relevant general and application controls, and
found them to be adequate. We verified the completeness of the data by
comparing source records to computer generated data, verified the
authenticity by comparing computer generated data to source records, and
verified the accuracy by manually duplicating selected computer
processes. Based on these tests and assessments, we concluded that the
data were sufficiently reliable to be used in meeting the audit's
objective.

We conducted our fieldwork at PBS's administrative office in Alexandria,
Virginia, from February 4, 2002, through April 4, 2002. We discussed the
results of our audit with PBS officials on April 4, 2002.

Our audit was performed in accordance with government auditing standards
appropriate to the scope of audit described above.

# STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we did not assess the adequacy of PBS\'s
management control structure applicable to the Agreement. Instead, we
(1) gained an understanding of controls, policies, procedures, and
practices related to travel, equipment, legal, procurements, advertising
and promotional materials, training, salaries and fringe benefits
expenses, cost allocations, and equipment, and (2) relied on substantive
testing of costs charged to the Agreement. Our testing disclosed
instances of non-compliance with federal regulations and cost principles
that led us to believe weaknesses existed in PBS's controls over the
Agreement. These weaknesses and their effects are discussed in the AUDIT
RESULTS section of this report.

**ADMINISTRATIVE MATTERS**

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.

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

Grover J. Whitehurst, Assistant Secretary

Office of Educational Research and Improvement

U.S. Department of Education

> Capitol Place, Room 600D

555 New Jersey Avenue, N.W.

Washington, D.C. 20208

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 by the Office of Inspector General are available, if
requested, to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

Sincerely,

Richard J. Dowd

Regional Inspector General

for Audit

Attachment

  ------------------- ------------------- ----------------- ------- ---------------------- ------- ----------------------
  **SCHEDULE OF COSTS                                                                              
  RECOMMENDED FOR                                                                                  
  ACCEPTANCE, COSTS                                                                                
  QUESTIONED, AND                                                                                  
  COSTS THAT ARE                                                                                   
  UNSUPPORTED**                                                                                    

  **Cost Category**   **Costs Recommended **Costs                   **Costs Unsupported**          **Total Costs Charged
                      For Acceptance**    Questioned**                                             to Agreement**

  Personnel           \$444,332           \$0                       \$0                            \$444,332

  Fringe Benefits     116,749             0                         0                              116,749

  Travel              142,751             48                \(1\)   1,122                  \(2\)   143,921

  Supplies/Services   170,248             0                         0                              170,248

  Training            194,697             0                         0                              194,697

  Professional        100,153             0                         0                              100,153
  Services                                                                                         

  Equipment Lease     2,200               0                         0                              2,200

  Software            1,330               0                         0                              1,330
  Acquisition                                                                                      

  Promotions          [395]{.underline}   [0]{.underline}           [0]{.underline}                [395]{.underline}

  Sub-Totals          \$1,172,855         \$48                      \$1,122                        \$1,174,025

  Indirect Costs      [0]{.underline}     [4]{.underline}   \(3\)   [93,927]{.underline}   \(4\)   [93,931]{.underline}

  Sub-Totals          \$1,172,855         \$52                      \$95,049                       \$1,267,956

  Contractual         10,164,555          0                         0                              10,164,555

  Equipment           92                  0                         0                              92

  Rent & Utilities    [0]{.underline}     [0]{.underline}           [45,615]{.underline}   \(5\)   [45,615]{.underline}

  Totals              \$11,337,502        \$52                      \$140,664                      \$11,478,218
  ------------------- ------------------- ----------------- ------- ---------------------- ------- ----------------------

\(1\) Represents charges for alcoholic beverages. *OMB Circular A-122,
Attachment B, Paragraph 2* (1998) states, "Costs of alcoholic beverages
are unallowable."

\(2\) Represents costs of meals. PBS claimed the meals were served as
part of business meetings. Meals as part of business meetings and
conferences are allowable under *OMB Circular A-122, Attachment B,
Paragraph 29, Subparagraph a* (1998). However, PBS did not provide
support that business meetings were held, and business was conducted,
when the meals were provided. According to *OMB Circular A-122,
Attachment A, Paragraph A, Subparagraph 2.g*. (1998), to be allowable,
costs must be adequately documented.

\(3\) Represents indirect costs related to questioned travel and other
costs. We used the eight percent rate PBS used in lieu of an approved
rate to calculate the unallowable amount.

\(4\) Includes \$90 of indirect costs related to unsupported travel
costs. The remaining \$93,827 is unsupported because PBS did not have an
approved indirect cost rate. *OMB Circular A-122, Attachment A,
Paragraph E, Subparagraph 1.f.* (1998), defines an indirect cost
proposal as,\"...the documentation prepared by an organization to
substantiate its claim for the reimbursement of indirect costs....\"
According to *OMB Circular A-122, Attachment A, Paragraph E,
Subparagraph 2.b*. (1998), "A nonprofit organization which has not
previously established an indirect cost rate with a Federal agency shall
submit its initial indirect cost proposal immediately after the
organization is advised that an award will be made and, in no event,
later than three months after the effective date of the award."
Department of Education officials told us PBS had submitted an initial
indirect cost proposal, then withdrew it and did not re-submit another
proposal.

\(5\) Represents rent and utility costs PBS allocated based on salaries.
According to *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraph 4.a.* (1998), "A cost is allocable to a particular cost
objective...in accordance with the relative benefits received...."
Salaries are not necessarily representative of the space and utilities
usage by an employee.

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[^1]: Results of the random sampling may not be representative of the
    entire population.