PURPOSE AND REQUIREMENTS OF THE
OFFICE OF INSPECTOR GENERAL SEMIANNUAL REPORT

The Inspector General’Act of 1978 requires the Inspector General to keep the Federal Co-
Chairman 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 Chairman by April 30 and October 31 and to
Congress 30 days later.

The Co-Chairman 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 9

Section 5(a)(1) Problems, abuses, and deficiencies Page 3

Section 5(a)(2) Recommendations with respect to problems, abuses, and Page 3
deficiencies

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

Section 5(a)(4) Matters referred to prosecutive authorities *

Section 5(a)(5) Summary of instances where information was refused a

and 6(b)(2)

Section 5(a)(6) Listing of audit reports showing number of reports and App A
dollar value of questioned costs

ae

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

Section 5(a)(8) Statistical table showing number of reports and dollar App B
value of questioned costs

Section 5(a)(9) Statistical table showing number of reports and dollar App C
value of recommendations that funds be put to better use

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


A followup review to further identify the current status of program compliance is in process.
Additionally, the ARC OIG has held discussions with other Federal entities about the potential
for cross—agency reviews of similar type programs.

Business Development Revolving Loan Funds (RLFs)

A survey emphasizing the extent of job creation or retention was completed. The review
disclosed that 23 entities receiving about $34 million in RLF capitalizations during the period
surveyed reported about 16,361 jobs had been created or retained. Our visits to 6 entities
identified support for the information submitted, and our recommendations pertained primarily
to efforts to increase loan activity and bank participation in order to maximize program

utilization.
Work in Process

Functional or programmatic reviews with respect to (a) the extent of development and job
creation at industrial sites where ARC contributed funds for infrastructure development between
1987 and 1992; (b) administrative fund contributions, and related memorandums of
understanding, with respect to grant administration services provided by basic agencies; (c) ARC
claims processing; and (d) periodic followup on expired grants are in process and will be
finalized during the next reporting period.

B. INVESTIGATIONS

The Inspector General Act of 1978, as amended, provides that the Inspector General may receive
and investigate complaints or information concerning the possible existence of an activity
constituting a violation of law, rules, or regulations or mismanagement, gross waste of funds, or
abuse of authority. The OIG does not employ special investigators. Should the need arise, the
matter would be referred to the Federal Bureau of Investigation or assistance would be contracted
with another Federal Office of Inspector General. Also, the results of investigations may be
referred to the appropriate Federal, state, or local prosecutive authorities for action.

During the reporting period, there was no new investigation activity.

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 fulfill 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 develop an entity-wide strategic plan
are considered an important element of FY 1996 planning, and discussions with ARC
management have identified several areas for review. Also, planning will include continued
emphasis on incorporating elements noted in the Inspectors General Vision Statement.

7


I. INTRODUCTION

The Inspector Gencral Act Amendments of 1988 (P.L. 100-504) provided for the establishment
of an Office of Inspector General at 32 designated Federal entitics, including the ARC. The
Appalachian Regional Commission (ARC) Office of Inspector General became operational on
October 1, 1989, with the appointment of an Inspector General and provision of budgetary
authority for contracted audit and/or investigation activities.

i. BACKGROUND
A. APPALACHIAN REGIONAL COMMISSION

The ARC was established by the Appalachian Regional Development Act of 1965 (P.L. 89-4).
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-Chairman with the Governors electing one of
their number to serve as the States’ Co-Chairman.

° 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 is established by the
Commission (ARC Code) by the vote of a majority of the State members and the
affirmative vote of the Federal Co-Chairman. Emphasis has been placed on
highways, infrastructure development, business enterprise, and human resources
programs.

to) Administratively, the Office of the Federal Co-Chairman, with a staff of 11, and
the Commission, with a staff of 50, 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 1995 was $282 million, which was
divided approximately $193.6 million for highway projects, $84.8 million for non-
highway projects, and $3.6 million for administrative éxpenses. ARC is
authorized through its current appropriation. As of this report, FY 1996
appropriations for ARC were not finalized.

° 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 have responsibilities for program development, policy analysis and


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.


- The function of the grants management staff now being recruited will be to perform
continuous monitoring of grant status and to follow through with ARC staff and staff at
other Federal agencies so that appropriate actions are taken and documented. In addition,
although the design for data systems on the planned computer network is not yet
complete, management anticipates that project status information on the network will
include not only implementation status and expiration dates, but also the time frames for
grantee actions as recommended in the report.

- Management agrees that report and waiver reviews should be prompt and that waivers
should be documented. Commission managers were called to a meeting with the
Inspector General to discuss the report, and the problem should not recur.

— With regard to performance measures, the Commission is now undertaking a substantial
strategic planning initiative that will include, among many other things, the identification
of performance goals and measures associated with the agency's mission. Management
sees this analysis as essential to establishing a process of reasonable performance
expectations for individual projects that should be designed to carry out the agency
mission. In addition, management is considering methods for reorganizing staff program
work, including monitoring of projects in the field.

- The recommendation for providing complete basic guidance to small and first-time
grantees is well taken, given the complexity of some grant requirements and the various
agencies involved. Management has initiated staff work to design a basic package of
information. In addition, personnel from the Human Resources staff and the Office of
General Counsel have undertaken the planning and implementation of a training session
designed to provide basic grant administration information to small not-for-profit or first
time ARC grantees.

- Analysis of staff resources and requirements for improved grants/contracts management
has resulted in several actions:

--Management has redefined the position previously allocated for grants management
functions, made the position full time, and is recruiting for qualified staff.

--A part-time person has been retained on contract to immediately and directly address
the oldest unclosed grants. There has been significant progress in some areas, such as
grants through the Department of Education for library projects and early HUD grants.
Current emphasis is on state-managed CDBG projects involving ARC grants and certain
health projects.

- The Commission has retained a part-time consultant to advise about appropriate project
file contents and the potential organization of file information on a computer network.
This work will be the starting point for redesigning and improving record control.

Our followup during this reporting period disclosed that the noted actions were generally in
process, including the completion of the enhanced computer system, recruitment of grant
management staff and controls to ensure timely attention to expiring and/or expired grants.

n


Office of the Inspector Ceneral

APPALACHIAN 4 Proud Past
REGIONAL A New Vision
COMMISSION

November 3, 1995

MEMORANDUM FOR THE FEDERAL CO-CHAIRMAN
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 semiannual report of the Office of Inspector General
(OIG) for the period April 1 through September 30, 1995.

During this period, operational activities included issuance of 21 reports, including 18 individual
reviews, 2 program surveys, and a J-1 waiver program memorandum. Primary recommendations
were directed at improved accounting, financial systems, internal controls, and deobligations of
funds. During the reporting period, deobligations of grants noted in reports totaled $414,237 and
potential deobligations exceeding $2 million were identified for ARC followup. Emphasis
continued to be placed on audit followup and resolution. ARC initiated various actions to
address issues noted in OIG reports and memorandums.

The Inspector General had continuing responsibilities as the Vice Chair of the Executive Council
on Integrity and Efficiency (ECIE), which was established by Executive Order in May 1992 to
provide for coordination and cooperation between the 32 designated Offices of Inspectors General
(OIGs). This responsibility included participating as a member of the President's Council on
Integrity and Efficiency and required extensive coordination and liaison between OIGs, OMB,
and Congressional sources with respect to OIG activities. The Inspector General appreciates the
support, cooperation, and assistance provided by ARC management to facilitate performance of
ECIE Vice Chair responsibilities.

The continued support of the OIG by ARC management and utilization of OIG reports and
recommendations have contributed to improved controls and operations. 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.

Hebelgjob

Inspector General

Enclosure
1666 CONNECTICUT AVENUE, NW WASHINGTON, DC 20235 (202) 884-7675 wax (202) 884-7691
Alabama Kentucky Mississippi North Carolina Pennsyteania Tennessee West Virginia

Georgia Maryland New Fark Ohio South Carulina Firginia


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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, complaints were received with respect to the J-1 waiver program
and several grants. The ARC OIG initiated reviews in response to these complaints, and the
results of these reviews will be noted in future reports.

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.

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 [Gs by consideration of alternatives such as
removal for cause criteria and term limits. Also, the ARC OIG continues to support extension
of the Program Civil Fraud Penalties Act to include designated entities, improved protection of
designated IG budgets, and criteria consistent with current qualification requirements for
Presidentially appointed IGs.

VI. OTHER

The Inspector General continued as the Vice Chair of the Executive Council on Integrity and
Efficiency, which was established by Executive Order in May 1992. The ECIE, which is chaired
by OMB, is comprised of the 32 statutorily designated [Gs and other administratively established
IGs and is intended to promote the efficiency and effectiveness of the IG community. As such,
the Vice Chair serves as a coordinator and liaison for ECIE members in dealings with OMB,
Congress, and the PCIE. The IG's Vice Chair term ended on September 30, 1995, after
3-1/2 years, based on the IG's request and his interest in pursuing through other outlets
professional interests related to the overall effectiveness and efficiency of OIG operations,
especially the need for basic re-engineering of overall O[G audit methodologies and strategies
to restore the credibility of this primary OIG function.

Specific activities, which required considerable resource use during the reporting period, included
coordinating monthly ECIE meetings; conducting committee meetings; transmitting IG related
information to all members; correlating and summarizing ECIE positions on various issues;
representing ECIE members’ interests; briefing OMB and Congressional staff; coordinating
project activity, annual reports, and training conferences; and representing ECIE at PCIE
meetings and before Congress. The IG was also the ECIE representative on the PCIE Audit

Committee.


Funding and Staffing

The OIG Funding level for FY 1996 is $400,000. For FY 1996, approximately 30 percent will
be expended for contract audit services; 55 percent, for salaries and benefits; 7 percent, for travel;
and 8 percent, for all other activities (training, equipment, space, supplies, etc.). The OIG
funding level represents about .0014 percent of the total funds available to the Commission.

Initial OIG operations included authorization for an Inspector General and a Confidential
Assistant. A senior auditor was employed in the latter half of FY 1991; no additional staff have
been employed. Grant review activities will continue to emphasize use of contracted services
(c.g. independent public accounting firms or other OIG offices) supplemented by programmatic
and performance reviews directed by OIG staff. Investigative assistance is provided by other
OIG offices on an as-needed basis. This approach has been deemed the most appropriate to date
in view of the nature of ARC operations and limited resources. However, we are participating
with other OIG offices to facilitate sharing of investigative resources in order to strengthen this
aspect of OIG operations. The OIG will continue to monitor this situation as well as the
efficiency and effectiveness of the use of contracted services.

WI. OG ACTIVITY
A. AUDITS

During the reporting period, 21 reports were issued, including 18 individual reviews, 2 program
surveys, and 1 administrative letter. At the end of the reporting period, 4 grant reviews,
4 program surveys, and a J-1 visa waiver program followup review were in process. The
division of OIG resources results in audit work being performed by a combination of permanent
and contractor staff. Emphasis continues to be placed on surveys of ARC operations and
programs, completion of grant audits, audit planning, and audit resolution and followup. During
the reporting period, the Inspector General continued as Vice Chair of the Executive Council on
Integrity and Efficiency (ECIE), which is comprised of 32 statutorily designated Inspectors
General and nonstatutory Inspectors General. The Inspector General was heavily involved with
efforts to ensure implementation of ECIE responsibilities for effective and efficient OIG

operations.

During the term of the OIG operations at ARC, various recommendations, based on audit testing,
have been made to ARC management with respect to improving operations in such areas as
accountability, financial management, fund obligations and deobligations based on project
activity, implementation of cost principles, and audit followup. Programmatic issues, with respect
to grant administration, J-1 visa waiver program, revolving loan funds, and internal control
systems, have been addressed and recommendations made with respect to improved program
operations or activities.

OIG followup tests and reviews of statistical information have reflected positive ARC actions to
address these issues and resulting improvements in program operations. For example, as noted
in prior reports, timely use of funds and project closings have been emphasized; and the number
of funded projects with large unobligated balances has been substantially reduced. ARC
conferences, training, and seminars continue to emphasize accountability, financial management

3


On behalf of the ECIE, the IG testificd on August 1, 1995, before the Subcommittee on
Government management, Information and Technology of the Government Reform and Oversight
Committee, US House of Representatives. Remarks, including personal observations based on
32 years in the civilian IG community emphasized:

— the similarity between the mission, authorities and responsibilities of designated and
establishment IGs;

- the benefits resulting from the presence of an independent oversight function at designated
entitics;

- general support for the National Performance Review recommendations and IG Vision
Statement principles and ECIE development of a "Best Practices" paper dealing with the
role and relationships of [Gs and entity heads;

— some continuing constraints with respect to designated entity heads' interpretation of IG
independence, especially with respect to budget execution;

- the negative impacts of the absence of removal for cause provisions for designated IGs;

- aneed for the OIG audit community to accept criticisms about timeliness, quality, and
scope of work and emphasize actions necessary to increase audit credibility through
improved effectiveness and service.

The Inspector General continues to advocate use of Interservice Agreements by smaller
designated IG offices in order to substantially reduce the costs of independently contracting for
external auditors. This process, which was initiated by the ARC OIG in 1989, is now used by
approximately 10 designated IG offices and results in a substantial reduction in costs with respect
to advertising and bid evaluation, without any reduction in competition or quality of work. In
this regard, the ARC IG strongly supports additional initiatives to encourage and increase the
Governmentwide use of a master contractor concept: for audit services contracts to achieve
substantial economies of scale by eliminating duplicative contracting activities.

iii


EXECUTIVE SUMMARY

During this reporting period, 21 reports were issued, including 18 individual grant reviews,
2 program surveys, and a J-1 waiver program memorandum. Primary recommendations were
directed at improved accounting and financial systems and controls and improved grant
administration, including fund deobligations. At the end of the reporting period, 9 reviews were
in process, including 4 grant reviews, + program surveys, and a J-1 visa waiver program
followup compliance review. Of particular significance during this reporting period were
management actions to address issues related to grant administration and the J-1 visa waiver
program.

Audit resolution actions also included significant progress toward settlement of open issues and
questionable costs. We noted that, in connection with a report dealing with expired grants,
actions were initiated to improve control over such grants and about $414,000 was deobligated
during the reporting period for ARC-administered grants. Also, management emphasis on timely
followup and review of expired grants included assigning staff to implement improvements and
improved management information systems to facilitate grant tracking.

The potential for additional deobligations exceeding $2 million was identified during this period,
and management is reviewing the applicable grants to determine appropriate action.

Our previous semiannual report highlighted reviews of the J-1 visa waiver program and ARC
actions to address the failure of participating providers and physicians to ensure that primary care
was provided in health professional shortage areas. During this reporting period, complaints
about the J-1 program were substantially reduced; and we believe increased program compliance
has resulted from ARC and State agency actions, such as improved screening and review of J-1
applications, employer certifications of compliance with program requirements, extension of the
J-1 waiver period to 3 years, and identification of a standard service period.

In line with reinvention and customer service principles, we continued to work with first-time
and smaller grantees with respect to the implementation of practical accounting and financial
systems and controls sufficient to ensure compliance with grant agreements, identification of
eligible costs, maintenance of records and preparation of reports.

An interim strategic plan was developed that emphasized the OIG mission as agents for positive
change and identified review priorities for the next 5 years. The strategic plan will be finalized
and coordinated with the strategic plan currently being developed by ARC based on input from
and discussion with the Federal, State, local, and Commission elements of ARC.

The Inspector General continued as the Vice Chair of the Executive Council on Integrity and
Efficiency (ECIE), which was established by Executive Order in May 1992 to provide for
coordination and cooperation between the 32 designated Offices of Inspector General (OIGs).
This responsibility included participating as a member of the President's Council on Integrity and
Efficiency (PCIE) and required extensive coordination and liaison between OIGs, OMB, and
Congressional sources with respect to OIG activities. The Inspector General appreciates the
support, cooperation, and assistance provided by ARC management to facilitate performance of
ECIE Vice Chair responsibilities.



Ul.

Iv.

Vv.

MA;

vu.

TABLE OF CONTENTS

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Purpose and Requirements of the OIG Semiannual Report  .........-.. iv
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Legislative:& Regulatory Review. .2-.2esmsmseeeeaeaermeesesamsmens 2
(011 \) ee en eee eee 9

Appendices A. Schedule of Audit Reports Issued

April 1 through September 30, 1995
B. Schedule of Audit Reports with Questioned or Unsupported Costs

G. Schedule of Audit Reports with Recommendations that Funds be put
to Better Use

D. Definition of Terms Used
E. Survey Questionnaire and Summary Results

F. Vision Statement Summary


SCHEDULE OF AUDIT REPORTS WITH

APPENDIX C

RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

For which no management decision was made by the
commencement of the reporting period

Which were issued during the reporting period

Subtotals (A + B)

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

For which no management decision has been made by the
end of the reporting period

Reports for which no management decision was made
within 6 months of issuance

No. of Dollar Value
Reports ($ in thousands)

1 $ 6

2 $2,171

3 $2,177

2 $2,149"

2 $2,143

2 $2,143

1 $ 6

1 $ 28

Pertains to reports and ongoing actions with respect to the closing of expired grants and deobligation of funds.
In some cases, final actions will include payments to grantees based on submission of eligible claims; and in
other cases, fund deobligations will occur. For example, during the reporting period, we noted deobligations of

$414,237 for grants included in our reports.