Inspector General’s

Semiannual Report to Congress

October 1, 2006–March 31, 2007

APPALACHIAN REGIONAL COMMISSION
April 2007 

MEMORANDUM FOR THE FEDERAL CO-CHAIR 

SUBJECT: Semiannual Report to Congress 

In accordance with the requirements of the Inspector General Act Amendments of 1988, Public Law 

100-504, I am pleased to submit the Office of Inspector General Semiannual Report to Congress. 

This Semiannual Report to Congress summarizes the activities of our office for the 6-month period 

ending March 31, 2007. During this Semiannual period we issued three reports to the Appalachian 

Regional Commission. During period, the Inspector General continued to serve as representative of 

the Executive Council on Integrity and Efficiency. 

The Inspector General Act of 1978, as amended by the Inspector General Act Amendments of 1988, 

provides that this report be forwarded to appropriate Congressional committees within 30 days and 

that you provide whatever additional comments you consider appropriate. 

I appreciate the Commission’s and your offices’ cooperation with the Office of Inspector General in 

the conduct of our operations. 

Clifford H. Jennings 

Inspector General 

Enclosure 
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. OIG Hotline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

 V. Legislative & Regulatory Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

 

Appendices A. Schedule of Audit Reports Issued, 

 October 1, 2006, through March 31, 2007 

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 3 reports to the 

Appalachian Regional Commission. Audit recommendations were directed at internal financial 

management and internal control issues. 

The lower than normal production of final reports this reporting period was caused by delaying 

the start of many efforts awaiting full year funding. Many of previous period audits were billed 

this period causing unwillingness to obligate further funding for new efforts. Currently there are 

multiple reports in draft comment phase. 

A change in audit reporting procedures is successfully bringing more oversight to grants by the 

program managers. Upcoming work is focusing on telecommunications and the J-1 visa waiver 

program. A comprehensive audit guide is being developed for use in performing J-1 visa waiver 

programs audit now and in the future. The J-1 Visa Waiver program provides a waiver of 

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 and 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. 
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 7 

 

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 prospective authorities * 

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 long-term 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 numbers 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, is responsible for ARC operations. The States maintain an Office of States' 

Representative (2 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 2007 is $8,403 million. ARC was fully reauthorized by 

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

addition, Section 1101 of the Safe, Accountable, Flexible, and Efficient Transportation Equity 

Act: A Legacy for Users (SAFETEA-LU) provides annual authorizations of $470 million for 

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

the 1965 Appalachian Regional Development Act, for a total of $2.35 billion over the five-year 

period, FY 2005 through FY 2009, from the Highway Trust Fund. Although these funds are 

derived from the Highway Trust Fund they 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. 

ARC ORGANIZATION CHART
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 2007 is $472,000 after the $5000 rescission. For FY 2007, approximately 

44 percent will be used for contract audit services; 46 percent, for salaries and benefits; 2 percent, for 

travel; and 8 percent, for all other activities (training, equipment, space, supplies, etc.). There will be 

some additional expenses as we modernize some equipment to coincide with an office move to another 

location within the building. Some additional security will also be purchased as we will now be colocated with the rest of the commission staff. 

 

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 
6

the nature of ARC operations and limited resources. Currently the Department of Homeland Security 

(DHS) OIG is conducting a computer security review of ARC operations at our request. 

III. OIG ACTIVITY

A. AUDITS

During the reporting period, three reports were issued dealing with financial and internal controls. Other 

ongoing reviews are in their final stages. The division of OIG resources results in audit work being 

performed by a combination of permanent and contractor’s staff. 

Revolving Loan Funds (RLF) 

Five RLF audits were conducted during the previous reporting period covering a total of $1,562,000 of 

ARC funds. ARC currently has a total of 46 RLF grants. Findings were mainly recommendations to 

strengthening internal controls. The responses by the grantees are considered generally responsive to 

the recommendations of the audit reports. All ARC RLF’s have now been currently audited. The RLF 

program at ARC is now considered to be in good shape with excellent oversight. 

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 prospective authorities 

for action. 

As a result of preliminary results from the computer security review performed by the DHS OIG an 

investigation was opened and certain personnel actions taken. The investigation should be completed 

within the next reporting period. 

IV. OIG HOTLINE

A region wide 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. 

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. 
7

V. 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. Currently we are also reviewing the impact of OMB Circular A-136 on the 

conduct of the annual financial statement audit. 
8

APPENDIX A 

 SCHEDULE OF AUDIT REPORTS ISSUED OCTOBER 1, 2006 TO MARCH 31, 2007

Report 

No. 

Entity and Title Program Dollars 

or Contract/Grant 

Amount* 

Questioned/ 

Unsupported 

Costs** 

Funds to Better 

Use***

07-01 Financial Statement and Independent Audit 

07-02 Internal Control Review of Disbursement Procedures for ARC 

 

07-03 Internal Control Review of Administrative Functions on ARC 

 

 

TOTALS 

 

 * 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. 
9

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 

 6 $ 677 

 

B. Which were issued during the 

reporting period 

 0 $ 0 $ 0

 Subtotals (A + B) 6 $ 677 $ 

 

C. For which a management decision 

was made during the reporting 

period

 $ 

 

(i) dollar value of disallowed 

costs 

 3 $ 203 $ 

 

(ii) dollar value of costs not 

disallowed 

 1 $ 34 

 

D. For which no management decision 

has been made by the end of the 

reporting period 

 3 $ 440 $0 

 

E. Reports for which no management 

decision was made within 6 months 

of issuance 

 3 $ 440 
10

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 

 3 $ 249 

 

B. Which were issued during the reporting period 0 $ 0

 Subtotals (A + B) 3 $ 249 

 

C. For which a management decision was made during the

reporting period 

 3 $ 249 

 

(i) dollar value of recommendations that were

agreed to by management

 3 $ 249 

 --based on proposed management action - 

--based on proposed legislative action - 

(ii) dollar value of recommendations that were not

agreed to by management

 0 $ 0 

 

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

end of the reporting period 

 0 $ 0 

 

E. Reports for which no final management decision was

made within 6 months of issuance 

 0 $ 0 

 
11

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.
Appalachia as defined in the legislation, from which the Appalachia Regional Commission derives its authority, is a

200,000-square-mile region that follows the spine of the Appalachian Mountains from southern New York to

northern Mississippi. It includes all of West Virginia and parts of twelve other states: Alabama, Georgia, Kentucky,

Maryland, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, and Virginia.

Appalachian Regional Commission

Office of Inspector General 

1666 Connecticut Avenue, NW, Suite 700

Washington, DC 20009-1068