PURPOSE AND REQUIREMENTS OF THE

The Inspector General Act of 1978 requires the IG 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 Co-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.

Resta

Section 4(a)(2) Review of legislation and regulations Page 7

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

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

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

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

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

6(b)(2)

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

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

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

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

Section 5(a)(10) Summary of each audit issued before this Teporting 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 J
disagrees

* None.

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

iv


APPENDIX A

SCHEDULE OF REPORTS ISSUED OCTOBER 1, 1997 TO MARCH 31, 1998

98-1(H)__|_Jacksonville State University Manufacturing Technology Consortium $144,000
98-2(H) _]_ Auburn University Leadership for Economic Development 200,000 S_ 2,742
98-3(H) | ARC Financial Management System 393,000 a
98-4(H) | Infrastructure Job Creation Survey 30,317,000
98-5(H)__| Tri-County Technical College Equipment Utilization 200,000
98-6(H)__| Enterprise Development, Inc. of South Carolina--Incubator 250,000 “a
98-7(H) Frostburg State University--Microscope Facility 55,710 370 a]
98-8(H) _] Frostburg State University--High Performance Computing Equipment 156,372 40,858 4
98-9(H)__| Frostburg State University--Business School Technology 62,500 13,740
98-10(H)_| Marshall University--Health Care Project 95,435 2,500

| 98-12H) __| Frostburg State University--Distance Learning 68,465 10,686 pil
98-15(H)_|_ Kemper County, Mississippi--Lake Access Road 113,384 |
98-16(H)_|_Kemper County, Mississippi--Solid Waste Landfill 75,000, 54,984 |

| 98-17(H)__|_ Pennsylvania Technical Assistance 350,000 27,858 $38,198
98-18(H)_| Tennessee Technical Assistance 210,000

98-20(H)_| Tennessee Quality Award--Business Development 150,000 9.377
98-22(H) _|_Georgia Tech Research Corporation--Demonstration Project 199,470

I 98-28(H) | J-1 Visa Waiver Program--Georgia
98-351 J-1 Visa Waiver Program--Tennessee

Funds the Office of Inspector General has identified in an audit r
operational funds, avoiding unnecessary expenditures, or taking other efficiency measures, such as timely use of funds,

$47,575

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 forthe intended purpose is unnecessary or unreasonable, Inelence required
matching contributions.

‘ecommendation that could be used more efficiently by reducing outlays, deobligating program or


8 percent, for all other activities (training, equipment, space, supplies, etc.). The OIG funding level
represents about .24 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 (e.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 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, 19 reports were issued, including 13 individual reviews, 2 program
surveys, 2 J-1 visa waiver compliance reviews, and 2 followup summaries. At the end of the
reporting period, 23 grant reviews 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, such as revisions of. accounting systems and service agreements;
strategic planning, including assessment of appropriate internal and external performance measures;
and issuance of revised policies and procedures and guidance to grantees, are in line with OIG
recommendations and executive and legislative initiatives to improve Government operations.

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. ARC
actions on contracts/grants resulted in recoveries of approximately $4 million from project


IL 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.

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.

-  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 staffs 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. Also, the Department of Transportation and Related Agencies Appropriation
Act for Fiscal Year 1998 (Public Law 105-66) appropriated $300 million for carrying out the
provisions of section 1069(y) of Public Law 102-240 relating to the construction of, and
improvements to, corridors of the Appalachian Development Highway System (ADHS). The
funding will be distributed among the states with unfinished ADHS segments as determined
by ARC.

- 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


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
are considered an important element of planning, and discussions with ARC management have
identified several areas for review.

The OIG's strategies and objectives for the next 5 years are defined in a strategic plan. The FY 1998
Annual Plan provides the operational details for OIG activities planned during FY 1998 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.

FY 1998 audit work includes about 40 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.

In order to maximize use of available resources directed at reviewing ARC activities, emphasis will
continue to be placed on nonstandard Teporting 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.

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.

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.

7


APPALACHIAN REGIONAL COMMISSION

INSPECTOR GENERAL'S

SEMIANNUAL REPORT

TO CONGRESS

OCTOBER 1, 1997 - MARCH 31, 1998


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APPENDIX C

SCHEDULE OF AUDIT REPORTS WITH

No. of Dollar Value

Reports ($ in thousands)

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

Which were issued during the Teporting period pig $2. 4g

Subtotals (A + B) 2 $ 48

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 it $ 136 V/

--based on proposed legislative action s 3

(ii) dollar value of recommendations that were not - -
agreed to by management

For which no management decision has been made by the 2. $ 48
end of the reporting period

Reports for which no management decision was made 7 =
within 6 months of issuance

Y Includes continued management action to resolve issues for which management decisions were previously
made,


-- New employment objectives were noted as met in 2 cases, 12 grantees reported
achieving 50 to 100 percent of objectives, and 8 responses indicated accomplishment
of 20 to 50 percent of employment objectives.

-- In 4 cases, the grantees reported little or no job creation to date; and in 3 cases,
achievement of less than 20 percent of job creation goals were noted. In these cases,
the grantees indicated that development efforts were continuing and positive results
were expected in most cases. We will followup to ascertain the status of these
projects.

-- _ In4 instances, project completion had been delayed by various factors, including late
Starts, litigation about faulty construction, and bad weather. In each case, the grantee
indicated that a successful outcome would be achieved when the project was
completed. We will followup to ascertain the status of these projects.

-- In 62 cases, responses noted that additional job creation was expected within the next
2 years. An analysis of the information provided indicated that the applicants had
estimated creation of about 15,000 jobs when submitting grant requests and that
about 30,000 jobs had been created in the project areas since grant approval. Based
on project funding, the cost per estimated job noted in grant applications was
approximately $10,000, of which the ARC portion was about $2,000 per job; and the
cost of each reported job creation was about $5,000, including an ARC portion of
$1,000 per job.

With respect to project results, we did not request information about the extent of job
retention resulting from the projects. However, information supplied by some grantees
identified substantial job retention, which we concluded indicated that job retention was an
important project result.

Grantee comments, where provided, unanimously cited the importance of the ARC project
approval and funding as critical for development in the applicable location; and in many
cases, the questionnaire was annotated to identify the number of jobs that were retained
because of project implementation. For example, in one case, a grantee, while noting
creation of 199 new jobs, also noted an overall net loss of 226 jobs from 12 businesses
between 1993 and 1997 but a retention of 2,393 jobs that would have been lost without the
project.

Grantees also noted, especially with Tespect to sewer and water projects, that these projects,
in addition to assisting with commercial economic development, were essential for
residential development and improvement, including assistance to poverty population areas.

We conducted J-1 visa waiver program reviews in two States and disclosed that participating
physicians were complying with program requirements to provide 40 hours of primary care
per week in medical shortage or underserved areas. We also participated with ARC
management in a successful followup effort to obtain required information from participating
J-1 visa waiver physicians about their employment status. Such information is necessary in
connection with ARC and State agency responsibilities for ensuring the program is
implemented effectively.


EXECUTIVE SUMMARY

During this reporting period, 19 reports were issued, including 13 individual grant reviews, a survey
of infrastructure project results, an evaluation of ARC’s new financial management system, 2 J-]

improved accounting and financial systems and controls, including eligibility of expenditures and
identification and support for matching contributions. During the reporting period, ARC
management continued to emphasize timely followup and review of expired grants. This action
resulted in management actions to deobligate about $4 million during the reporting period, which

included about $136,000 applicable to cases noted in prior OIG reports,

An evaluation of ARC’s new financial management system and related accounting and systems
controls was completed during this reporting period. The evaluation disclosed that the financial
management system was generally meeting intended purposes, provided more efficient and effective
fiscal control than was achieved through a service bureau, and enhanced overall financial
management. Conditions and recommendations were noted as respects improving system
functionality, especially reporting capabilities, obtaining OMB and Treasury clarification about ARC
reporting responsibilities for nonexpenditure fund transfers and periodic evaluations of systems
controls. Management responded positively to the recommendations.

A survey of job creation attributable to 105 infrastructure grants approved between 1984 and 1993
disclosed that roughly twice as many jobs were created than were projected in the original project
application estimates. Grantee information and field observations indicated that, for about
65 percent of the grants, job creation was substantially in excess of original estimates and job
creation to date was limited for about 10 percent of the grants. The survey, which emphasized
industrial site improvement projects for which ARC contributed funds (including water and sewer
infrastructure and access roads), concluded that the projects produced about 28,000 jobs at an ARC
investment of about $1,000 per job. Additional benefits resulting from retention of jobs were also
reported by grantees. The results of this Survey were essentially similar to a prior survey of 41 other
industrial site development grants.

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.
Primary areas in need of improvement with Tespect to grantee financial operations included
identification and support of matching contributions and program expenditures.

We participated with ARC management in a successful followup with J-1 visa waiver physicians
who had not provided required information to ARC with respect to their employment status. During
this reporting period, our field Surveys did not disclose any serious problems related to
noncompliance with program provisions; and we attributed this primarily to ARC and State agency
actions to educate and monitor health care providers and participating physicians.

ARC management continued actions to improve grant implementation and administration including
the drafting of grantee guidance pertaining to key provisions of OMB circulars, including conditions
reported in prior OIG reports. This guidance, which is in question and answer form, deals with
financial management, reporting, and audit requirement issues and should be of particular benefit

di


Page

Executive Summary kee eee eee eeeeesecseeceseuseeceeceec. ii
Purpose and Requirements of the OIG Semiannual Report — ........... iv

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Appalachian Regional Commission ss... eee eee eececececeeceee 1
Office of Inspector General ook eee ccesseucceccecceseccecces Z

WM, OIG Activity — aa aecavensscescctesstscorecsecovenceeverces 3
em Fee astease ts wield otetgddiiews 2 a dima ett leds ot cam: 3
Mnvestigations: passes 5 sibina 44 é seme » vx ontariod a smttinn dels 6

TV. Audit Planning hee eee c ees eeeeeeeeceeseecseceeseneeeces. 6
V. OIG Hotline acs ecceeecceecceseeesssaeceessenseusceescs 7
VI. Legislative & Regulatory RevieW oe. eee eee eeceeee eee ceucee, 7
VIL, Other tb i bnenecscewessatansiedctecennersconnsescese 8

Appendices A. Schedule of Audit Reports Issued
October 1, 1997 through March 31, 1998

B. Schedule of Audit Reports with Questioned or Unsupported Costs

Cc; 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 A New Vision
commission

April 30, 1998

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 October 1, 1997, through March 31, 1998.

During this reporting period, 19 reports were issued, including 13 individual grant reviews, a survey
of infrastructure project results, an evaluation of ARC’s new financial management system, 2 J-1
visa waiver compliance reviews, and followup summaries in 2 instances. At the end of the reporting
period, 23 grant reviews were in process. Recommendations in grant reviews were directed at
improved accounting and financial systems and controls, including eligibility of expenditures and
identification and support for matching contributions. During the reporting period, ARC
management continued to emphasize timely followup and review of expired grants. This action
resulted in management actions to deobligate about $4 million during the reporting period, which
included about $136,000 applicable to cases noted in prior OIG reports.

An evaluation of ARC’s new financial management system was completed. The evaluation
disclosed that ARC’s decision to bring accounting functions in-house has provided the Commission
with more efficient and effective fiscal control and has enhanced overall financial management.
Recommendations were made with respect to improving system functionality, especially reporting
capabilities, obtaining OMB and Treasury clarification about ARC reporting responsibilities for
nonexpenditure fund transfers and periodic evaluations of systems controls.

A survey of job creation attributable to 105 infrastructure projects approved between 1989 and 1993
disclosed that roughly twice as many jobs were created than were projected in the original project
application estimates. For about 65 percent of the projects, job creation was substantially in excess
of original estimates and job creation to date was limited in about 10 percent of the projects.

We participated with ARC management in a successful followup with J-1 visa waiver physicians
who had not provided required information to ARC with respect to their employment status. During
this reporting period, our field surveys did not disclose any serious problems related to
noncompliance with program provisions; and we attributed this primarily to ARC and State agency
actions to educate and monitor health care providers and participating physicians.

ARC management continued actions to improve grant implementation and administration, including
the drafting of grantee guidance pertaining to key provisions of OMB guidance, including conditions
reported in prior OIG reports. This guidance, which was provided in question and answer form,

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