Inspector General’s

Semiannual Report

To Congress

October 1, 2002 – March 31, 2003

Appalachian Regional Commission

i

TABLE OF CONTENTS

Page

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii 

Purpose and Requirements of the OIG Semiannual Report . . . . . . . . . . . iii 

 I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

 II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

Appalachian Regional Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

Office of Inspector General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

 III. OIG Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

 IV. Audit Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

 V. OIG Hotline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

 VI. Legislative & Regulatory Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

 VII. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

Appendices A. Schedule of Audit Reports Issued

October 1, 2002, through March 31, 2003

B. Schedule of Audit Reports with Questioned or Unsupported Costs

C. Schedule of Audit Reports with Recommendations that Funds be put to 

Better Use

D. Definition of Terms Used
ii

EXECUTIVE SUMMARY

During this reporting period, the Office of Inspector General (OIG) issued 13 reports. 

Recommendations in grant reviews were directed at improved reporting and eligibility of

expenditures. 

Grant reviews disclosed that projects were generally being implemented in accordance with program 

requirements and that grantees generally had satisfactory accounting systems and internal controls. 

However, reading all reports as a group, the need for better oversight and management by

Commission staff is apparent. Reviews and checks of the J-1 Visa Waiver program were deferred 

during this reporting period as the Commission recently performed a 100-percent validation of all 

doctors granted waivers. The J-1 Visa Waiver program provides a waiver of the requirements for a 

foreign physician to return to his/her home country after completion of medical training in the United 

States. ARC participates as a Federal Entity sponsor to assist Appalachian communities in providing 

healthcare services to medically underserved areas. The applicable ARC policies and procedures 

require J-1 physicians to practice 40 hours of primary care per week in a designated Health Profession 

Shortage Area (HPSA) in the Appalachian Region. The ARC program requires the physician to serve 

at least 3 years (unless a State has a longer period). There is no prohibition on J-1 physicians working 

extra hours or practicing subspecialties after fulfilling primary care requirements. 

During the reporting period, the IG served on the Executive Council on Integrity and Efficiency and 

attended the joint meeting with the President’s Council on Integrity and Efficiency. The IG is a

member of the Government Audit Training Institute Advisory Committee. The IG continued as the 

Inspector General of the Denali Commission under a Memorandum of Agreement with the Denali 

Commission Federal Co-Chair. 

The OIG has met with Commission staff and contractors to work towards positioning the

Commission for audited financial statements. While the unique makeup of the Commission requires 

much research on determining the applicable standard to be used in preparing financial statements, the 

Commission staff has made great strides during the past year in working towards a final determination 

of standards to be used and coming up with a standard format that will be equally acceptable to all 

parties. Lastly, the Inspector General has continued the process of designing an OIG portion of the 

Commission Management Information System (MIS), which, when completed, will allow

Commission managers access to OIG reports and information directly. The OIG will also work with 

the Commission staff to place OIG information on the Commission web site.
iii

PURPOSE AND REQUIREMENTS OF THE

OFFICE OF INSPECTOR GENERAL SEMIANNUAL REPORT

The Inspector General Act of 1978 requires the IG to keep the Federal Co-Chair and Congress fully 

and currently informed about problems and deficiencies in the Commission's operations and the

necessity for corrective action. In addition, the Act specifies that semiannual reports will be provided 

to the Federal Co-Chair by April 30 and October 31 and to Congress 30 days later.

The Federal Co-Chair may transmit comments to Congress along with the report but may not change 

any part of the report. The specific requirements prescribed in the Act, as amended (Public Law 100-

504), are listed below.

Reporting Requirements

Section 4(a)(2) Review of legislation and regulations Page 8

Section 5(a)(1) Problems, abuses, and deficiencies Page 6

Section 5(a)(2) Recommendations with respect to problems, abuses, and deficiencies Page 6

Section 5(a)(3) Prior significant recommendations not yet implemented *

Section 5(a)(4) Matters referred to prosecutive authorities Page 6

Section 5(a)(5) and

6(b)(2)

Summary of instances where information was refused *

Section 5(a)(6) Listing of audit reports showing number of reports and dollar value of 

questioned costs

App A

Section 5(a)(7) Summary of each particularly significant report **

Section 5(a)(8) Statistical table showing number of reports and dollar value of

questioned costs

App B

Section 5(a)(9) Statistical table showing number of reports and dollar value of

recommendations that funds be put to better use

App C

Section 5(a)(10) Summary of each audit issued before this reporting period for which no 

management decision was made by end of the reporting period

*

Section 5(a)(11) Significant revised management decisions *

Section 5(a)(12) Significant management decisions with which the Inspector General 

disagrees

*

 

 * None.

** See references to Sections 5(a)(1) and 5(a)(2) for discussion of significant reports.
1

I. INTRODUCTION

The Inspector General Act Amendments of 1988 (P.L. 100-504) provided for the establishment of an 

Office of Inspector General (OIG) at 30 designated Federal entities, including the ARC. The ARC 

OIG became operational on October 1, 1989, with the appointment of an IG and provision of

budgetary authority for contracted audit and/or investigation activities.

II. BACKGROUND

A. APPALACHIAN REGIONAL COMMISSION

The Appalachian Regional Development Act of 1965 (P.L. 89-4) established the Appalachian

Regional Commission. The Act authorizes a Federal/State partnership designed to promote longterm economic development on a coordinated regional basis in the 13 Appalachian States. The

Commission represents a unique experiment in partnership among the Federal, State, and local levels 

of Government and between the public and private sectors. It is composed of the Governors of the 

13 Appalachian States and a Federal representative who is appointed by the President. The Federal 

representative serves as the Federal Co-Chair with the Governors electing one of their number to 

serve as the States' Co-Chair.

 - Through joint planning and development of regional priorities, ARC funds are used to assist 

and encourage other public and private resources to address Appalachia's unique needs.

Program direction and policy are established by the Commission (ARC Code) by the vote of a 

majority of the State members and the affirmative vote of the Federal Co-Chair. Emphasis 

has been placed on highways, infrastructure development, business enterprise, and human 

resources programs.

 - Administratively, the Office of the Federal Co-Chair, with a staff of 11, and the Commission, 

with a staff of 48, are responsible for ARC operations. The States maintain an Office of

States' Representative (3 persons) that has primarily liaison responsibilities. All personnel are 

located in Washington, DC. The Commission staff's administrative expenses, including

salaries, are funded jointly by Federal and State funds; the States' Representative staff is

funded entirely by the States; and the Federal Office staff is funded entirely from Federal

funds.

 - The Commission's appropriation for FY 2003 was $71 million. ARC was fully reauthorized 

by Congress in FY 1999, for the first time since 1982, and reauthorized in March 2002. Also, 

the Transportation Equity Act for the 21st Century (TEA-21) authorized $2.25 billion for the 

construction of the Appalachian Development Highway System (ADHS) under Section 201 

of the 1965 Appalachian Regional Development Act. Enacted in 1998, TEA-21 authorizes 

$450 million to be appropriated from the Highway Trust Fund annually from FY 1999 

through FY 2003. These funds are derived from the Federal Highway Trust Fund but remain 

under ARC’s programmatic jurisdiction.
2

- Program funds are distributed to State and local entities in line with an allocation formula 

intended to provide fair and reasonable distribution of available resources. ARC staff has 

responsibilities for program development, policy analysis and review, grant development,

technical assistance to States, and management and oversight.

 - In order to avail itself of Federal agency expertise and administrative capability in certain

areas, the ARC often relies on other departments and agencies for program administration, 

especially with respect to highways and infrastructure projects. For example, the Appalachian 

Regional Development Act authorizes the Secretary of Transportation to administer the

Commission's highway programs. Under this arrangement, the Commission retains

responsibility for priorities, highway locations, and fund allocations.

Federal Alternate

Inspector General Executive Director

Planning and Research Program Operations Finance and Administration

General Counsel

Public Affairs

Entrepreneurship Publications

Human Resources

Local Development Districts

Transportation

Federal Office

Governors’ Alternates

States’ Washington Office

Federal Co-Chair 

Appalachian Regional Commission

13 Governors/States’ Co-Chair
3
4
5

B. OFFICE OF INSPECTOR GENERAL

The ARC OIG is an independent audit and investigative unit. An independent Inspector General who 

reports directly to the Federal Co-Chair heads the OIG.

Role and Authority

The Inspector General Act of 1978 (P.L. 95-452), as amended in 1988, states that the IG is

responsible for (1) audits and investigations; (2) review of legislation; and (3) recommendation of 

policies for the purpose of promoting economy and efficiency in the administration of, or preventing 

and detecting fraud and abuse in, the program and operations of the establishment. In this regard, the 

IG is responsible for keeping the Federal Co-Chair and Congress fully informed about the problems 

and deficiencies in ARC programs and operations and the need for corrective action. The IG has 

authority to inquire into all ARC programs and activities that are Federally funded. The inquiries may 

be in the form of audits, surveys, investigations, personnel security checks, or other appropriate

methods. The two primary purposes of these inquiries are (1) to assist all levels of ARC management 

by identifying and reporting problem areas, weaknesses, or deficiencies in procedures, policies,

program implementation, and employee conduct and (2) to recommend appropriate corrective

actions.

Relationship to Other Principal ARC Offices

The States’ and Federal Co-Chairs, acting together as the Commission, establish policies for ARC's 

programs and its administration. These policies are codified in the ARC Code and implemented by 

the Commission staff, which is responsible for monitoring project performance and providing

technical assistance as needed. The Federal Co-Chair, as the Federal fiscal officer, is responsible for 

the proper use and protection of Federal funds, for ensuring compliance with applicable Federal laws 

and regulations, and for taking appropriate action on conditions needing improvement, including 

those reported by the OIG. The operations of the OIG neither replace established lines of operating 

authority nor eliminate the need for the Commission offices to take reasonable measures to protect 

and enhance the integrity and effectiveness of their operations. All Commission offices are

responsible for monitoring and evaluating the programs entrusted to them and reporting information 

or incidences needing further audit and/or investigation to the IG.

Funding and Staffing

The OIG funding level for FY 2003 was $501,000 prior to a rescission. For FY 2003, approximately 

25 percent was for contract audit services; 62 percent, for salaries and benefits; 6.5 percent, for

travel; and 6.5 percent, for all other activities (training, equipment, space, supplies, etc.).

Staffing consists of the Inspector General, an auditor, and a confidential assistant. Grant review

activities continue to emphasize use of contracted services (e.g., independent public accounting firms 

or other OIG offices) supplemented by programmatic and performance reviews directed by OIG staff. 

 Investigative assistance has been provided by other OIG offices on an as-needed basis through

memoranda of understanding. This approach has been deemed the most appropriate to date in view 

of the nature of ARC operations and limited resources.
6

III. OIG ACTIVITY

A. AUDITS

During the reporting period, 13 reports were issued dealing with grants and grantees. The division of 

OIG resources results in audit work being performed by a combination of permanent and contractor 

staff. Emphasis will continue to be placed on surveys of ARC operations and programs, completion 

of grant audits, audit resolution and followup, and physician compliance with J-1 Visa Waiver

program requirements.

The one common theme resulting from a reading of all the audit reports as a group is the need for 

ARC staff to put more emphasis on oversight of ongoing grants and to be firmer in the administration 

and management of grants. There have been instances where grantees have been given further

funding when they had not submitted status reports supporting the expenditure of previous

allocations. The problems we have seen appear to stem from a lack of initial understanding by the 

grantees of grant terms and the necessity to stick to the grant terms absent official approval for

deviations. The IG met with program operations staff to discuss the need for better grant oversight 

and the need to require that the grantees adhere to grant provisions and timeframes. 

B. INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the IG may receive and investigate 

complaints or information concerning the possible existence of an activity constituting a violation of 

law, rules, or regulations; mismanagement; gross waste of funds; or abuse of authority. The OIG 

does not employ criminal investigators. When the need has arisen, the matter would be referred to 

the Federal Bureau of Investigation or assistance would be contracted with another Federal OIG. 

Also, the results of investigations may be referred to the appropriate Federal, State, or local

prosecutive authorities for action. 

During this reporting period, the OIG has made one referral and is utilizing the services of criminal 

investigators from another Federal OIG.

IV. AUDIT PLANNING

The OIG will be alert for new or revised areas of ARC operations based on the priorities and

emphasis of ARC management, including results of strategic planning initiatives. Audit planning will 

include consideration of such initiatives with the overall goal being to ensure coverage of high

priority, including high dollar, areas in order to assist management to fulfill their responsibilities for 

effective and efficient program operations.

Of particular importance is maintaining the flexibility of the audit plan to address changing needs and 

priorities. Coordination with ongoing ARC efforts to implement an entity-wide strategic plan is

considered an important element of planning, and discussions with ARC management have identified 

several areas for review.
7

The OIG's strategies and objectives for the next 5 years are defined in a strategic plan. The FY 2003 

Annual Plan provides the operational details for OIG activities during FYs 2002-2005 to implement 

this strategic plan. We expect to revise this strategic plan periodically until our experiences validate 

our planning assumptions and we have achieved a comfort level with how we have programmed 

activities over this extended time period.

Planned FY 2003 audit work includes about 30 individual grant audits in the Appalachian States; 

additional followup on grants with completed budget periods, grant extensions, and project results; 

and tests of the J-1 Visa Waiver program. Continued emphasis will be placed on audit followup and 

corrective action plans, including working with agency management to address open issues and

achieve audit resolution and closure. Further emphasis will be placed on audits performed prior to 

grant completion. This method will allow the auditors to spot problems during the period of

performance and will allow the grantees, who are usually smaller entities, to correct problems midstream and avoid grant closeout problems that, in many cases, the grantee cannot afford to remedy. 

The proactivity with the grantees serves not only the grantee but also the Commission as it allows for 

a better use of funding and a greater likelihood of mission accomplishment.

In order to maximize use of available resources directed at reviewing ARC activities, emphasis will 

continue to be placed on nonstandard reporting formats including memorandum, letter, and survey 

reports. Although such reporting formats reduce the time and resources necessary for review

completion, the results and information included in such reports is based on evidence and supporting 

documentation consistent with generally accepted auditing standards.

V. OIG HOTLINE

A regionwide toll-free hotline was previously established to enable direct and confidential contact 

with the ARC OIG in line with governmental and longstanding OIG initiatives as identified in the IG 

Act of 1978 to afford opportunities for identification of areas subject to fraud, waste, or abuse.

However, contacts with the ARC OIG relative to public complaints or concerns continue to be

primarily received through ARC staff, on regular OIG phone lines, or from other OIG offices. During 

the reporting period, followup action was initiated on calls identifying concerns with actions by

several grantees.

Also, numerous hotline calls were received with respect to matters for which other agencies have 

jurisdiction. This resulted primarily from the ARC OIG hotline apparently being the first such OIG 

listing in some telephone directories, resulting in ARC OIG being contacted by citizens who did not 

know the appropriate agency for handling their concerns. The ARC OIG facilitated the complaint 

process by identifying the applicable agency based on complainant information and providing the 

correct OIG hotline number. The ARC OIG Hotline also serves as the hotline for the Denali

Commission. During this period, the ARC OIG made three referrals to other OIGs based on

information provided on the hotline or by mail.
8

VI. LEGISLATIVE AND REGULATORY REVIEW

Primary efforts in this area continued to be related to potential legislative initiatives with respect to 

OIG operations. The ARC OIG continues to support legislation that would provide improved

protections for IGs, including designated and career IGs, by consideration of alternatives such as 

removal for cause criteria and term limits. The IG disagrees with current proposals about

consolidation of designated federal entity IG offices.

VII. OTHER

The Inspector General has met with Commission staff to work towards positioning the Commission 

for audited financial statements. While the unique makeup of the Commission requires research on 

determining the applicable standard to be used in preparing financial statements, the Commission staff 

has made great strides during this period in working towards a final determination of standards to be 

used and coming up with a standard format that will be equally acceptable to all parties. Further, the 

IG has worked with Commission staff responsible for the J-1 program to gather information early in 

the process that will assist not only the Commission but also the OIG in monitoring the program

internal controls. Lastly, the IG has started the process of designing an OIG portion of the

Commission MIS, which, when completed, will allow Commission managers access to OIG reports 

and information directly. The OIG will also work with the Commission staff to place OIG

information on the Commission website.

The IG continued to serve on the Executive Council on Integrity and Efficiency. The IG continued to 

serves as the Inspector General of the Denali Commission in line with a Memorandum of Agreement 

between the ARC IG and the Denali Commission Federal Co-Chair. During this period, we issued 

one report to the Denali Commission. A partial followup was conducted and will be completed early 

in the next fiscal year. The full audit report is included in the most recent Denali Commission annual 

report. The Denali Commission has also forwarded an inquiry into a project that the OIG will review 

during the upcoming period.

The IG worked with the Commission staff to help plan an upcoming teleconference dealing with the 

Governmental Accounting Standards Board’s Statement No. 34, which deals with basic financial

statements for State and local governments. The IG attended the annual joint meeting of the

President’s Council on Integrity and Efficiency and the Executive Council on Integrity and Efficiency 

as well as the annual Development Districts Association of Appalachia conference.
APPENDIX A

SCHEDULE OF REPORTS ISSUED OCTOBER 1, 2002, TO MARCH 31, 2003

Report 

No.

Entity and Title Program Dollars or 

Contract/Grant 

Amount*

Questioned/

Unsupported 

Costs**

Funds to Better 

Use***

03-1

Shoals Entrepreneurial Center, Alabama

Kitchen Incubator $ 98,730 

03-2

Kentucky Department for Local Government

Kentucky Flex-E Grant 377,000 

03-3

Itawamba County Development Council, Mississippi

Small Business Entrepreneurship Pilot Project 26,750 $15, 877 

03-4

Grace Child Development Center, Alabama

Courtland School Readiness Program 196,000 2,783 $14,660

03-5

Byesville Area Community Development Corporation, Ohio

Byesville Area Entrepreneur Development Partnership (C1) 20,000

03-6

Center for Information Technology Enterprise, Inc., Kentucky

Telecommunications Regional Initiative Project 249,994

03-7

University of Alabama Rural Services and Research Program

Better Schools Building Better Communities Project 197,179

03-8

Kentucky Department for Local Government

Kentucky Appalachian Housing Program 1,450,000

03-9

Kentucky Finance and Administrative Cabinet

Appalachian Kentucky Entrepreneurship Initiative 250,000 

03-10

Byesville Area Community Development Corporation, Ohio

Byesville Area Entrepreneur Development Partnership (I) 48,940

03-11

Big Sandy Telecommuting Services, Inc., Kentucky

Big Sandy Telecommunications Center, Phases II and III 453,530

03-12

Pikeville College School of Osteopathic Medicine, Kentucky

Appalachian Osteopathic Postgraduate Training Institute Consortium 370,000

03-13

Brushy Fork Institute, Kentucky

East Kentucky Leadership Network/Youth Leadership Program 285,750

TOTALS 

$4,023,873 $18,660 $14,660 

 * Grant amounts reported are for ARC grant amounts and do not include matching funds.

 ** A cost the Office of Inspector General has questioned because of an alleged violation of law, regulation, contract, or other agreements governing the 

expenditure of funds; such cost is not supported by adequate documentation; or the expenditure of funds for the intended purpose is unnecessary or 

unreasonable. Includes required matching contributions.

 *** Funds the Office of Inspector General has identified in an audit recommendation that could be used more efficiently by reducing outlays, deobligating 

program or operational funds, avoiding unnecessary expenditures, or taking other efficiency measures, such as timely use of funds.
APPENDIX B

SCHEDULE OF AUDIT REPORTS WITH

QUESTIONED OR UNSUPPORTED COSTS

($ in thousands)

No. of

Reports

Questioned

 Costs 

Unsupported

 Costs 

A. For which no management decision 

was made by the commencement of

the reporting period

 1 $ 30 

B. Which were issued during the

reporting period

 2 $ 16 $ 3

Subtotals (A + B) 3 $ 46 $ 3 

C. For which a management decision

was made during the reporting period

 1 $ 3 

(i) dollar value of disallowed

costs

 

(ii) dollar value of costs not

disallowed

 1 $ 3

D. For which no management decision 

has been made by the end of the

reporting period

3 $ 46 

E. Reports for which no management

decision was made within 6 months 

of issuance

1 $ 30
APPENDIX C

SCHEDULE OF AUDIT REPORTS WITH

RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

No. of

Reports

Dollar Value

($ in thousands)

A. For which no management decision was made by the

commencement of the reporting period

0 

B. Which were issued during the reporting period 1 $ 15 

Subtotals (A + B) 1 $ 15

C. For which a management decision was made during the

reporting period

 

(i) dollar value of recommendations that were agreed 

to by management

- 

--based on proposed management action - 

--based on proposed legislative action - 

(ii) dollar value of recommendations that were not

agreed to by management

- 

D. For which no management decision has been made by the end 

of the reporting period

 1 $ 15 

E. Reports for which no final management decision was made 

within 6 months of issuance
APPENDIX D

DEFINITIONS OF TERMS USED

The following definitions apply to terms used in reporting audit statistics:

Questioned Cost A cost which the Office of Inspector General (OIG) questioned

because of an alleged violation of a provision of a law, regulation, 

contract, or other agreement or document governing the expenditure 

of funds; such cost is not supported by adequate documentation; or 

the expenditure of funds for the intended purpose is unnecessary or 

unreasonable.

Unsupported Cost A cost which the OIG questioned because the cost was not supported 

by adequate documentation at the time of the audit.

Disallowed Cost A questioned cost that management, in a management decision, has 

sustained or agreed should not be charged to the Commission.

Funds Be Put To Better Use A recommendation made by the OIG that funds could be used more 

efficiently if management took actions to implement and complete the 

recommendation.

Management Decision Management's evaluation of the findings and recommendations

included in the audit report and the issuance of a final decision by

management concerning its response to such findings and

recommendations, including actions concluded to be necessary. 

Interim decisions and actions are not considered final management 

decisions for the purpose of the tables in this report.

Final Action The completion of all management actions that are described in a

management decision with respect to audit findings and

recommendations. If management concluded that no actions were

necessary, final action occurs when a management decision is issued.
THE OFFICE OF INSPECTOR GENERAL

APPALACHIAN REGIONAL COMMISSION

serves American taxpayers

by investigating reports of waste, fraud, or abuse

involving Federal funds.

If you believe an activity is

wasteful, fraudulent, or abusive of Federal funds,

please call

toll free 1-800-532-4611

or (202) 884-7667 in the Washington metropolitan area

or write to:

Office of Inspector General

Appalachian Regional Commission

1666 Connecticut Avenue, NW, Rm 215

Washington, DC 20009-1068

Information can be provided anonymously.

Federal Government employees are protected from reprisal,

and anyone may have his or her identity held in confidence.
Appalachian Regional Commission

Office of Inspector General

1666 Connecticut Avenue, NW, Suite 215

Washington, DC 20009-1068