to preclude standards and positions that are contrary to law being considered for, or included in, the
Government Auditing Standards.

Designated IGs were not successful in dissuading the AICPA from reaching its conclusion. Based
on the Council’s apparent intention to pursue this issue, we have also been unsuccessful, to date, in
convincing the Council that designated IG independence is mandated by law and that provisions of
the IG Act related to IG authorities to independently initiate audits or investigations, full access to
all records, subpoena authorities, public disclosure, and reporting to Congress provide a far greater
assurance of independence than achievable by a public accounting firm paid directly by the client
and having none of the authorities noted above.

Although the Government Auditing Standards apply to audits of Government funds, requiring
disclosures that call into question whether designated IGs are fully independent creates the clear
perception that none of the IG functions, including investigations, is being performed by an
independent unit. This can have a chilling effect on the public perception of Offices of Inspectors
General and substantially reduce public confidence in these offices and willingness to cooperate in
the identification and prevention of fraud, waste, abuse, inefficiency, or ineffectiveness.

The ARC IG believes the Congress intended Presidentially appointed and agency head appointed IGs
to act in a fully independent manner, notwithstanding the appointment process. Congress is urged
to ensure another organization reporting to Congress does not issue standards that conflict with
specific statutory language and the overall intent of Congress. It is hoped that the Council will
rethink its initial position on this important issue and support the concept that designated IGs are
fully independent and should not qualify audit reports by including inappropriate disclosures.


EXECUTIVE SUMMARY

During this reporting period, 19 reports were issued, including 15 individual grant reviews, a
programmatic review, and 3 J-1 Visa Waiver compliance reviews. 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 close out 302 projects and recover about $1.8
million during the reporting period with recoveries being noted for 67 projects, including several
identified in prior OIG reports. A $300,000 deobligation pertained to a revolving loan fund that had
been previously identified as having an excessive balance by OIG and ARC.

Three J-1 Visa Waiver program compliance surveys in two states disclosed that physicians were
generally complying with program provisions. However, several instances of noncompliance due
to the physician’s practicing at locations not previously approved and/or in ineligible areas were
noted and actions are in process to ensure physician compliance with ARC requirements. Also,
coordination between ARC and OIG is ongoing with the Immigration and Naturalization Service
(INS) to ensure the sponsoring agencies, such as ARC, are notified and consulted about INS waiver
approvals that could result in participating physicians not completing their required practice in the
Appalachian region. This action was based on a case that resulted in a J-1 Visa Waiver program
physician seeking an additional waiver from INS, e.g., for extenuating circumstances, and relocating
outside the Appalachian region without any notification to ARC or coordination by INS with the
sponsoring agency.

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 respect to grantee financial operations included
identification and support of matching contributions and program expenditures. For example,
initially questioned costs of about $500,000 resulting from lack of support for matching
contributions were substantially reduced based on discussions with grantees and receipt of additional
information. Grant reviews also identified about $75,000 in unspent funds on three completed
projects, and recovery actions were in process.

The IG continued to participate actively in discussions related to interpretations of the independence
of Designated Inspectors General promulgated by the American Institute of Certified Public
Accountants and being considered by the Advisory Council on Government Auditing Standards.
The IG strongly believes the IG Act and Amendments mandate that all Inspectors General conduct
their operations in a fully independent manner despite the appointment process and actions or
proposals that hinder this requirement are ill-advised and conflict with the law and clear intent of
Congress. Additionally, such action would significantly and negatively impact on the ability of IGs
to accomplish OIG responsibilities. The ARC OIG appreciates the support and cooperation of ARC
management in recognizing the responsibilities of the OIG and ensuring that ARC OIG activities are
conducted in accordance with statutory requirements.

aba


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.


During this period, we performed 3 compliance surveys in connection with the J-1 Visa
Waiver program in two states. ARC participates as a Federal entity sponsor to assist
Appalachian region communities in providing health care services to medically underserved
areas. The program provides a waiver of the requirement for a foreign physician to return
to his/her home country after completion of medical training in the United States. Based on
a state ‘request, ARC acts as the interested Government agency within the Appalachian
region, with waivers being approved by the INS based on an ARC recommendation.

Our tests disclosed that participating physicians were generally complying with program
requirements to provide 40 hours of primary care per week in a medical professional shortage
area. However, we noted several instances of noncompliance and a need for action to ensure
that physicians cannot avoid fulfillment of ARC program requirements by obtaining other
INS waivers without the concurrence of ARC. Our on-site visits disclosed several instances
where physicians were not performing the required service at the approved location, one
instance where a physician was practicing in an ineligible area and instances where notices
identifying the availability of service to all individuals were not posted as required. Based
on these reviews, a survey was initiated to obtain employment verification reports from all
participating physicians for whom such reports were not available at ARC. Also, the
applicable state agencies initiated actions to ensure that the noted physicians’ work schedules
were revised to ensure that service was provided as required at the approved location.

During the reporting period, we were apprised of 2 J-1 Visa Waiver physicians leaving their
employ within the Appalachian region and seeking employment outside the region.
Followup determined that the physicians had left the region, with one case being attributed
to the closing of the facility and the other apparently resulting from an employer/employee
dispute. In one case, the physician is seeking employment at another location in the
Appalachian region; but in the other case, the physician is seeking a hardship waiver from
INS and believes this waiver relieves him of his responsibility to fulfill his agreement with
ARC to provide 3 years of service within the Appalachian region. It is generally agreed that
additional waivers, if granted, should be based on coordination with the sponsoring agency
and that the approval of additional waivers by INS based on extenuating circumstances does
not relieve physicians from fulfilling agreements made with other agencies. For example,
in the subject case, the physician’s need to relocate due to the facility closing could have
been remedied by employment at another location in the Appalachian region. ARC and OIG
are coordinating with INS staff to identify a process whereby all interested parties are
informed prior to approval of additional waivers.

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, although funds were spent and projects
completed in accordance with grant agreements, some grantees did not have adequate
financial system or accounting controls and, thus, were unable to fully support claims for
reimbursement. Also, there was limited understanding with respect to information necessary
to support required matching contributions and allocation of costs between different funding
sources and allowable costs as noted in the applicable OMB Circulars (A-87 and A-122).
We worked with the grantees to identify practical financial and accounting systems. For
example, in several cases, documentation was initially unavailable to support matching
contributions totaling about $500,000. The conditions resulted from factors such as using

4


L 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 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-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 1999 was $66.4 million, which was divided
approximately $62.4 million for non-highway projects and $4 million for administrative
expenses. ARC was fully reauthorized by Congress for the first time since 1982. Also, the
Department of Transportation and Related Agencies Appropriation Act for Fiscal Year 1998
(P.L. 105-66) appropriated $300 million in FY 1999 for carrying out the provisions of section
1069(y) of P.L. 102-240 relating to the construction of, and improvements to, corridors of
the Appalachian Development Highway System (ADHS). The funding was distributed
among the states with unfinished ADHS segments as determined by ARC. For FY 2000,
non-highway funding of $66.4 million was appropriated for ARC, with highway funding
expected to be between $350 million and $400 million.


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-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.

Reporting Requirements

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

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 reporting period for which *
no management decision was made by end of the reporting period

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

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

> None.

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

Lda


Funding and Staffing

The OIG funding level for FY 1999 was $438,000. For FY 1999, approximately 27 percent was
expended for contract audit services; 57 percent, for salaries and benefits: 8 percent, for travel; and
8 percent, for all other activities (training, equipment, space, supplies, etc.). The OIG funding level
represents about .65 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.

Wl. OIG ACTIVITY

A. AUDITS

During the reporting period, 19 reports were issued, including 15 individual reviews, a programmatic
review, and 3 J-1 Visa Waiver compliance reviews. 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, 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.

ARC and OIG continue to emphasize grant management practices including the timely identification
of completed projects and recovery of unused funds. During the reporting period, ARC actions
included closing out 302 projects, including 67 projects with deobligations of over $1.8 million. For
FY 1999, agency actions, including followup on projects identified in prior OIG reports, resulted in
closeouts of 602 projects with recovery of approximately $6.5 million that could be reallocated for
other priority projects.

One example resulting from an OIG recommendation was a $300,000 deobligation from a revolving
loan fund that had exhibited limited activity during the past years. The funds were reallocated to
area development programs, and the revolving loan fund is being monitored to determine the
potential for additional transfers. Followup was also initiated to encourage grantees to improve time
frames between project expenditures and drawdown actions in order to permit more timely
identification of the status of funds and appropriate followup action.


APPALACHIAN REGIONAL COMMISSION

INSPECTOR GENERAL'S

SEMIANNUAL REPORT

TO CONGRESS

OCTOBER 1, 1999 - MARCH 31, 2000


with the OIGs at the applicable agencies and reaching concurrence for ARC OIG review of some of
these projects.

FY 2000 audit work includes about 30 individual grant audits in the Appalachian States; additional
followup on grants with completed budget periods, grant extensions, and project results; and tests
of the J-1 Visa Waiver program. Continued emphasis will be placed on audit followup and
corrective action plans, including working with agency management to address open issues and
achieve audit resolution and closure.

In order to maximize use of available resources directed at reviewing ARC activities, emphasis will
continue to be placed on nonstandard reporting formats including memorandum, letter, and survey
reports. Although such reporting formats reduce the time and resources necessary for review
completion, the results and information included in such reports is based on evidence and supporting
documentation consistent with generally accepted auditing standards.

V. OIG HOTLINE

A regionwide toll-free hotline was previously established to enable direct and confidential contact
with the ARC OIG in line with governmental and longstanding OIG initiatives as identified in the
IG Act of 1978 to afford opportunities for identification of areas subject to fraud, waste, or abuse.
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. During the reporting period, additional legislation
impacting IGs was submitted; and the IG commented on the various initiatives noted in the proposed
legislation. Specifically, the IG concurred with proposals dealing with term limits, reporting to
Congress and additional oversight of OIG offices. With respect to the consolidation of some
designated OIGs, the IG recommended that such action be deferred pending additional study,
including contact and discussion with the applicable OIGs and parent agencies.


grant funds for matching purposes, lack of supporting documentation from third party
contributors, contributions outside the grant period, and incorrect valuation of equipment
used as match. As a result of discussions with grantees and review of additional information,
the questioned costs were substantially reduced, and followup is in process to address the
open issues.

- Other issues identified in our reviews and recommendations pertained to recovery of $78,000
in funds not utilized on 3 completed projects and a need to resolve recommendations related
to adjustments of indirect cost claims, activities performed prior to the start of the grant
period, and receipt of required reports.

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. Should the need arise, the matter would be referred to the
Federal Bureau of Investigation or assistance would be contracted with another Federal OIG. Also,
the results of investigations may be referred to the appropriate Federal, State, or local prosecutive
authorities for action. During the reporting period, the Inspector General conducted followup
administrative inquiries with respect to several hotline concerns and coordinated with the
Department of Justice and the Immigration and Naturalization Service on cases impacting the J-1
Visa Waiver program.

IV. AUDIT PLANNIN

The OIG will be alert for new or revised areas of ARC operations based on the priorities and
emphasis of ARC management, including results of Strategic planning initiatives. Audit planning
will include consideration of such initiatives with the overall goal being to ensure coverage of high
priority, including high dollar, areas in order to assist management to fulfill their responsibilities for
effective and efficient program operations.

Of particular importance is maintaining the flexibility of the audit plan to address changing needs
and priorities. Coordination with ongoing ARC efforts to implement an entity-wide strategic plan
is considered an important element of planning, and discussions with ARC management have
identified several areas for review.

The OIG's strategies and objectives for the next 5 years are defined in a strategic plan. The FY 2000
Annual Plan provides the operational details for OIG activities planned during FY 2000 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.

Additional emphasis will be placed on coordinating OIG reviews with ARC implementation of the
Government Performance and Results Act (GPRA) and revised operational procedures resulting
from reauthorization legislation requirements. In order to provide some coverage of ARC funds that
are administered by other agencies, e.g., construction and technical projects, we are coordinating

5


- 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.

- 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.

B. OFFICE OF INSPECTOR GENERAL

The ARC OIG is an independent audit and investigation unit. The OIG is headed by an Inspector
General who reports directly to the Federal Co-Chairman.

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-Chairman 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 the Federal Co-Chairman, 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-Chairman, 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.


IL.

il.

Vil.

TABLE OF CONTENTS

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Office of Inspector General kee ec eee e ee ee ce eeeeeeecucuueues 2
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Other ae eee e cee e eee eee cece eeeeeeeeeeeeeeeueunes 7

Appendices A. Schedule of Audit Reports Issued

April 1 through September 30, 1999
B. Schedule of Audit Reports with Questioned or Unsupported Costs

GC, Schedule of Audit Reports with Recommendations that Funds be put to
Better Use

D. Definition of Terms Used


APPENDIX A

SCHEDULE OF REPORTS ISSUED APRIL 1 TO SEPTEMBER 30, 1999

Report = Entity and Title Program Dollars Questioned/ Funds to Better
No. or Contract/Grant ‘Unsupported Use**
Amount ‘Costs*
99-16(H) J-1 Visa Waiver Program--Alabama
99-17(H) Lake Cumberland Justice/Victims Advocacy Program S__100,000 $2,277
99-18(H) _| Training Tomorrow's Work Force, Prestonsburg Community College 289,975
99-19(H)__| Rural Health and Wellness Program, Prestonsburg Community College 355,420 $76,917
99-204) _|_ADECA—Technical Assistance 156,000
90-21(H) ADECA—Strategic Plan for Telecommunications 359,016
99-22(H) DeKalb County Tourism/Business Development Center 250,000
99-23(H) Jefferson County Distance Leaming Project 200,000.
99-24(H) Technology 2020, Entrepreneurial Initiative 310,000 30,940
99-25(H) West Virginia Technical Assistance 692,500
99-26(H) Logan County, SW Regional Jail/Industrial Park Water Project 1,600,000 67,425
99-27(H) _|_ Tennessee Quality Award 174,376
99-28(H) North Georgia Technical Institute 110,000
99-29(H) Rockcastle County Economic Development Initiative 400,000
99-31(H) Facilities Master Planning—The Wilds 250,000
99-32(H) _|_ Ohio University, Technology Outreach Center 300,000 139,000 8,992
99-33(H) Claims Processing
99-38(H)_|_J-1_Visa Waiver Program—New York
99-39(H) J-1 Visa Waiver Program--Alabama
TOTALS $5,547,287 $296,857 S$ 78,694
‘ A cost the Office of Inspector General has questioned because of an alleged violation of law, regulation, contract, or other agreements goveming the expenditure of funds;

such cost is not supported by adequate documentation; or the expenditure of funds forthe intended purpose is unnecessary or unreasonable. Includes required matching
contributions,

iad 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,


SCHEDULE OF AUDIT REPORTS WITH

APPENDIX C

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 $ 2,356
commencement of the reporting period
Which were issued during the reporting period 3 $78
Subtotals (A +B) 6 $ 2,434
For which a management decision was made during the 3 $ 1,745
reporting period
(i) dollar value of recommendations that were agreed 2 $ 592 1/
to by management
--based on proposed management action 2 $ 592
--based on proposed legislative action 5 =
(ii) dollar value of recommendations that were not 2 $1,153 2/
agreed to by management
For which no management decision has been made by the 3 $ 689 3/
end of the reporting period
Reports for which no management decision was made = =
within 6 months of issuance
Notes
V Includes deobligations applicable to grants noted in prior reports, including $300,000 pertaining to a
revolving loan fund balance. Also, additional actions, including closings and deobligations, based on ARC
management initiatives are summarized in the report body.
2/ Includes final payments justified based on review of grants identified in prior reports.
3/ Includes grants for which ongoing followup action is in process for grants identified in prior and new

reports. A management decision was made to followup on cases reported but final action not completed.


The IG continued to actively participate in discussions pertaining to interpretations of designated
IG independence. While this matter has no direct impact on ARC OIG operations, the outcome
of the debate on this issue could have a large impact on the OIG concept as noted in the IG Act
of 1978.

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.

ileedt

Inspector General

Enclosure


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

November 16,1999

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, 1999.

During this reporting period, 19 reports were issued, including 15 individual grant reviews, a
programmatic review, and 3 J-1 Visa Waiver compliance reviews. 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 close out 302 projects and recover
about $1.8 million during the reporting period with recoveries being noted for 67 projects,
including several identified in prior OIG reports. A $300,000 deobligation pertained to a
revolving loan fund that had been previously identified as having an excessive balance by OIG
and ARC.

Three J-1 Visa Waiver program compliance surveys in two states disclosed that physicians were
generally complying with program provisions. However, several instances of noncompliance
due to the physician’s practicing at locations not previously approved and/or in ineligible areas
were noted and actions are in process to ensure physician compliance with ARC requirements.
Also, coordination between ARC and OIG is ongoing with the Immigration and Naturalization
Service (INS) to ensure the sponsoring agencies, such as ARC, are notified and consulted about
INS waiver approvals that could result in participating physicians not completing their required
practice in the Appalachian region. This action was based on a case that resulted in a J-1 Visa
Waiver program physician seeking an additional waiver from INS, e.g., for extenuating
circumstances, and relocating outside the Appalachian region without any notification to ARC or
coordination by INS with the sponsoring agency.

ARC and the Local Development Districts continued actions to improve overall grant
administration and program development. During the reporting period, ARC revised Revolving
Loan Fund guidelines to improve the cash management practices and the Development District
Association of Appalachia sponsored satellite broadcasts dealing with grant applications and
fund leveraging.

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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 is participating on a project intended to assess the extent of oversight being provided to
ensure the quality of Single Audit reports that are required in connection with programs financed all
or in part with Federal funds This project is in line with goals to ensure that grant-related
information contained in the financial statements of the Federal government is accurate and reliable.
In connection with this project, a presentation was made to an Intergovernmental Audit Forum on
the status of Single Audit Act implementation.

During the reporting period, the OIG conducted a peer review of another OIG.

Financial management initiatives by ARC during the reporting period included revision of the
Revolving Loan Fund (RLF) guidelines to incorporate or clarify provisions for shortening the lead
time for advance payments, redefining excess cash, interest on grant advance payments, use of
program income, and audit responsibilities. These actions are consistent with OIG emphasis on
reasonable fund balances and effective cash management.

During the reporting period, the Development District Association of Appalachia continued its
efforts to improve grant management and encourage non-governmental participation by sponsoring
satellite broadcasts dealing with grant applications and techniques by which rural communities could
extend or increase economic development activities by raising capital through non-traditional and
non-governmental approaches. These teleconferences, which reach a sizable audience throughout
the Appalachian region, followed a successful financial management broadcast in late 1998.

The IG continued to be an active participant in discussions related to the independence of designated
IGs. This issue initially arose because of interpretations by the American Institute of Certified Public
Accountants (AICPA) that Presidentially appointed and legislatively confirmed IGs meet the AICPA
definition of independence but that designated IGs that are appointed by the head of the designated
Federal entity do not meet this definition. The IG strongly disagreed with the AICPA interpretation
based on the unique and clear language of the Inspector General Act of 1978 and Amendments of
1988 that provide designated IGs, by statute, with the same authorities for independent performance
of their duties as provided Presidentially selected IGs.

Presently, consideration is being given by the Advisory Council on Government Auditing Standards
(Council) to recommending that the AICPA bifurcation of the Federal IG community be reflected
in the Government Auditing Standards issued by the Comptroller General. This would be
accomplished by identifying designated IGs as non-organizationally independent and, therefore,
would require designated IGs to qualify their audit work with some language that is certain to call
into question the independence of the organization performing the review. Such an action would
require designated IGs to either violate the IG Act, which mandates independence by all IGs as
clearly expressed in Section 2 (which starts “to establish independent and objective units. . . .”) in
order to comply with the proposed qualifying language, or violate Government Auditing Standards
in order to comply with the IG Act. The IG does not believe that designated IGs should be placed
in such a position and strongly recommends intervention by the Executive and Legislative Branches


APPENDIX B

SCHEDULE OF AUDIT REPORTS WITH
QUESTIONED OR UNSUPPORTED COSTS

($ in thousands)
No. of Questioned Unsupported
Reports Costs Costs
For which no management decision 3 $21 $306
was made by the commencement of
the reporting period
Which were issued during the 3 $77 $219
reporting period
Subtotals (A + B) 6 $98 $535
For which a management decision 3 $21 $306
was made during the reporting
period
(i) dollar value of disallowed - - -
costs
(ii) dollar value of costs not 3 $21 $306 1/
disallowed
For which no management decision 3 $77 $219
has been made by the end of the
reporting period
Reports for which no management - - -
decision was made within 6 months
of issuance
Notes:
V Information submitted by grantees was sufficient to justify report closing without additional action.

Improved financial management systems were implemented to preclude recurrence.