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.

Il. 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.

-  Administratively, the Office of the Federal Co-Chairman, with a staff of 10, and the
Commission, with a staff of 51, 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 1998 is $170 million, which is divided
approximately $102.5 million for highway projects, $63.9 million for non-highway projects,
and $3.6 million for administrative expenses. ARC is authorized through its current
appropriation.

- 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 review, grant development,
technical assistance to States, and management and oversight.

-  Inorder 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

1


APPENDIX C
SCHEDULE OF AUDIT REPORTS WITH
RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

No. of Dollar Value
Reports ($ in thousands)

For which no management decision was made by the 3 $1,010
commencement of the reporting period

Which were issued during the reporting period als $.. 2)
Subtotals (A + B) 4 $1,012
For which a management decision was made during the 3 $1,012

reporting period

(i) dollar value of recommendations that were agreed - -
to by management

--based on proposed management action 3 $ 634 L/

--based on proposed legislative action 3 A

(ii) dollar value of recommendations that were not 2 $ 368
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

aus Closing actions initiated as of end of reporting period on grants noted in our prior report include
deobligations of about $634,000 as of the end of the reporting period. Action continuing on other grants
noted in reports. Management action includes review of all identified grants with resulting final actions
including payments and/or deobligations.


We also made several program recommendations including reclassification of $150,000 from
an asset to an expense, increased coordination between local area agencies implementing
revolving loan funds capitalized with Federal funds and acceleration of payment in one case.

A survey of the J-1 visa waiver program in one state disclosed substantial noncompliance
with program provisions by one physician who did not comply with provisions requiring
40 hours of primary care service in a Health Professional Shortage Area (HPSA). We noted
that the J-1 visa waiver physician was working a substantial amount of time at an ineligible
location. This occurred primarily because of limited workload at the approved location.

The J-1 visa waiver program provides a waiver of foreign physicians! responsibilities to
return to their home country after completion of medical training in the United States. The
waiver can be granted for various reasons, including the need for health care services in
medically underserved areas in the United States. The Apalachian Regional Commission
participates as a Federal entity sponsor in the Appalachian Region and, based on supporting
information submitted by physicians requesting a waiver, prospective employers, and the
applicable state health agency, recommends, where appropriate, approval of waivers to the
United States Information Agency and Immigration and Naturalization Service (INS).
Current ARC policies and procedures are that the J-1 physician will serve 3 years in a HPSA
in the Appalachian Region and will practice 40 hours of primary care per week. There is no
prohibition on J-1 physicians working extra hours or practicing subspecialties after fulfilling
primary care requirements. Also, transfers to other HPSAs in Appalachia are permitted.
Prior to August 1995, ARC policies provided for a 2-year waiver period.

Actions were initiated to ensure the physician provided primary care practice ina HPSA.

Grantee audits surfaced program issues with respect to the allocation and verification of
personnel assigned to grant activities and the extent of subrecipient monitoring necessary by
grantee. Auditors questioned substantial costs due to the absence of information about time
spent on grant activities and lack of grantee review of subrecipient documentation supporting
claimed costs. The grantee noted that resources were budgeted based on planned project
activities and work was summarized in progress reports and monitored by the project
director. For subrecipients, the grantee noted that independent audits of subrecipients and
other state legislated controls eliminated a need for subgrantees to provide supporting
documentation to the grantee. We generally accepted the grantee’s positions but
recommended that time utilized by persons not assigned full time to grant activities should
be documented and that subrecipient monitoring include some testing of subgrantee activities
in accord with revised OMB Circular A-133.

Work in process included finalization of 3 grant reviews, a survey of approximately
100 infrastructure grants with job creation objectives, and a review of the new ARC financial
management system. Initial results of the infrastructure grant survey indicates a high degree
of accomplishment with respect to job creation attributable to project implementation.

Continued emphasis was placed on testing first-time program participants in order to
determine and evaluate the extent of knowledge and understanding of program procedures
and requirements. Our tests disclosed that these grantees often did not have adequate
financial systems or accounting controls and, thus, were unable to fully support claims for
reimbursement and/or submitted ineligible costs for reimbursement. Of particular

5


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 would welcome initiatives that would facilitate
sharing of investigative resources in order to strengthen this aspect of OIG operations.

I. OIG ACTIVITY
A. AUDITS

During the reporting period, 24 reports were issued, including 21 individual reviews, 1 program
survey, and 2 J-1 visa waiver program followup reviews. At the end of the reporting period, 3 grant
reviews and 2 surveys 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 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, project results, and internal control systems, have been addressed.

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, timely use
of funds and project closings continue to be 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 systems, and allowable costs.
Additionally, ongoing ARC actions, including revisions of accounting systems and service
agreements, and strategic planning, including assessment of appropriate internal and external
performance measures and issuance of revised policies and procedures, are in line with OIG
recommendations and executive and legislative initiatives to improve Government operations.
During the reporting period, ARC issued management guidelines covering numerous financial and
administrative areas.

The ARC OIG will continue to address these issues, including periodic followup on the extent of
actions initiated and results obtained, and, as noted below, will report on issues needing continued
attention.

- Of particular significance was ARC's continued emphasis on identifying and closing old and
inactive grants, including substantial deobligations to ensure that unused funds are made
available for other economic development activities in the Appalachian Region. For
example, deobligations approximating $634,000 were initiated on 28 grants noted in a prior
OIG report. Actions are continuing on grants noted in prior reports. Also, ARC actions on
other contracts/grants resulted in recoveries of approximately $2.5 million from project
deobligations, withdrawals, and closeouts for the period April 1 to September 30-, 1997.

- A survey of 45 tourism grants made between 1990 and 1995, including visits to 15 sites,
determined that most of the projects visited had been implemented in accordance with grant

3


APPENDIX A

SCHEDULE OF REPORTS ISSUED APRIL 1 TO SEPTEMBER 30, 1997

. ‘A cost the Office of Inspector General has questioned because of an alleged violation of law, regulation,
funds; such cost is not supported by adequate documentation;

matching contributions.

“ Funds the Office of Inspector General has identified in an audit recommendation that could be used more efficiently by reducing outlays,
operational funds, avoiding unnecessary expenditures, or taking other efficiency measures, such as timely use of funds.

———
Report Title Program Dollars Questioned Funds to Better
No. or Contract/Grant Unsupported Use**
Amount Costs*

97-16(H) | North Carolina Technical Assistance $400,000

97-18(H) | Oak Ridge Chamber of Commerce 203.000 $_15.000 |
|_97-20(H) _|_ Kentucky Mountain Assn for Economic Development 100.000

97-21(H)__|_Kentucky Department of Local Government, Strategic Planning 300,000 |

97-22(H) _| Pennsylvania Statewide Manufacturing Marketing Network 250.000

97-24(H)_|_ Kentucky Highlands Investment Corporation 250,000 5.158

97-25(H) | Crystal Lake Study, Kentuck; 165,000 10.000

97-26(H) | _Coosa Valley Technical Institute 115,000 3.649 S_2.525

97-27(H)_|_ Pickens Technical Institute 140,000 1,278 eel

97-28(H) _|_ Maryland Canal Parkway Design 325,000

97-291) _|_ North Carolina Empowerment Zones/Enterprise Communities 500,000 |

97-32(H) _|_ Tourism Summary Review 1,919,000

97-36(H)_|_ Chautauqua, New York Revolving Loan Fund

97-37(H) _|_J-1 Visa Waiver Program--Alabama

97-39(H)__|_ Kentucky Technical Assistance 446,000

97-40(H)_|_ Norther Tier Pennsylvania Industry and Education Consortium 137.611 219

97-41(H) _|_SEDA-COG Gis 150,000 207 _|

97-42(H)_|_Earth Conservancy, Pennsylvania 350,000

97-43(H)_| Private Industry Council of Chautauqua, New York 148,950

97-44(H)_| Business and Industry Center, New York 74.650

97-48(H) | _Comell University Enhancing Microcomputer Capacity 90.000

97-49(H) _| Rural New York Health Networking Project 182,114

97-62(H) _| Souther Alleghenies Planning and Development Commission

97-65(H)_|_J-1 Visa Waiver Program--West Virginia

roTALs

‘contract, or other agreements governing the expenditure of
or the expenditure of funds for the intended purpose is unnecessary or unreasonable. Includes required

deobligating program or


APPALACHIAN REGIONAL COMMISSION

INSPECTOR GENERAL'S

SEMIANNUAL REPORT

TO CONGRESS

APRIL 1- SEPTEMBER 30, 1997


completion, the results and information included in such reports is based on evidence and supporting
documentation consistent with generally accepted auditing standards.

Vv. 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.
Efforts continue to publicize the hotline by notifications to contractors and grantees, and field visits
evaluate the extent to which employees were made aware of this system. 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 visa waiver program
and several grants. The ARC OIG initiated reviews in response to these complaints.

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 IGs 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.

Vil. OTHER

The Inspector General continues to serve as the representative of the Executive Council on Integrity
and Efficiency on the Audit Committee of the President’s Council on Integrity and Efficiency.

The IG 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 ongoing 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. This concept will be implemented for FY 1998 by the

7


During this reporting period, ARC management continued actions to implement goals and objectives
identified in the ARC strategic plan completed in 1996. Action included the establishment of
performance goals for FY 1998 based on input from the ARC Policy Development Committee and
the Federal Co-Chairman. Project proposals will contain projected outputs and outcomes and
progress in achieving goals. Goals will be evaluated quarterly. Also, ARC reported substantial
achievements in the five primary goal categories of education, infrastructure, leadership/civic
capacity, dynamic economy, and health identified in its strategic plan. Financial management
guidelines covering a wide range of internal control and financial issues impacting receipt and
disbursement of funds and administrative operations were finalized; and the recently expanded ARC
computer network system that allows staff to track contract proposals from the time of approval
through closeout will facilitate project monitoring, early warning, and timely followup.

add.


Page
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Appendices A. Schedule of Audit Reports Issued
April 1 through September 30, 1997

B. Schedule of Audit Reports with Questioned or Unsupported Costs

CG: Schedule of Audit Reports with Recommendations that Funds be put to
Better Use

D. Definition of Terms Used


APPALACHIAN 4 Proud Past Office of the Inspector General
REGIONAL 1 New Vision
COMMISSION

November 25, 1997

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, 1997.

During this reporting period, 24 reports were issued, including 21 individual grant reviews,
1 program survey, and 2 J-1 visa waiver compliance reviews. 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, 5 reviews were in
process, including 3 grant reviews and 2 program surveys. Management continued to emphasize
timely followup and review of expired grants and improved management information systems to
facilitate grant tracking. These actions resulted in deobligations exceeding $634,000, for 28 projects
noted in our prior report. Appalachian Regional Commission (ARC) actions on other projects,
including basic agency administered grants, resulted in over $2.5 million in fund recoveries to ARC
through project deobligations, withdrawals, and closeouts between April 1 and September 30, 1997.

Several reviews were conducted in response to concerns raised about use and/or accountability for
ARC grant funds. This included concerns about the accountability and administration of a revolving
loan fund. Our review determined that the grantee had initiated actions to correct deficiencies noted
in prior ARC internal reviews and that the revolving loan fund was being administered in accordance
with grant agreements and program requirements. We also determined that differences in reports
of disbursements over the 20-year life of the program were attributable to a combination of reporting
errors and lack of information, especially with respect to older loans.

In another instance, a review of grantee contracting and procurement practices disclosed no
deficiencies with respect to the use of ARC funds. However, based on media publicity and our
record review, we referred one contract to the State of Pennsylvania Office of Inspector General.

We completed a survey of 45 tourism grants awarded by ARC between 1990 and 1995, including
visits to 15 grantees. Survey conclusions related to implementation of a coordinated strategy,
improved project reporting system, post-grant assessments, and identification of performance
measures. ARC noted development of an overall strategy for tourism grants, increased capability
to monitor and followup on approved projects through a new data base system, intention to obtain
improved memorandums of understanding, and development of performance measures and post-
grant assessment procedures.

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