APPENDIX B

SCHEDULE OF AUDIT REPORTS WITH

($ in thousands)
No. of Questioned. Unsupported
Reports —Costs_ s@osts- +
For which no management decision 6 $151
was made by the commencement of
the reporting period
Which were issued during the 10 $505 434
reporting period
Subtotals (A + B) 16 $505 $585
For which a management decision 9 $ 13 68
was made during the reporting
period
(i) dollar value of disallowed 5 $ 13 -
costs
(ii) dollar value of costs not 4 - 68
disallowed
For which no management decision 7 492 $517
has been made by the end of the
reporting period
Reports for which no management 2, - $ 83”
decision was made within 6 months
of issuance
aU Final decision delayed on one construction project pending completion of project. Action in process to resolve

issues in second report.


OFFICE OF INSPECTOR GENERAL SEMIANNUAL REPORT

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.

Section 4(a)(2)
Section 5(a)(1)
Section 5(a)(2)
Section 5(a)(3)
Section 5(a)(4)

Section 5(a)(5) and
6(b)(2)
Section 5(a)(6)

Section 5(a)(7)

Section 5(a)(8)

Section 5(a)(9)

Section 5(a)(10)

Section 5(a)(11)

Section 5(a)(12)

* None.

R inig Resini
Review of legislation and regulations

Problems, abuses, and deficiencies

Recommendations with respect to problems, abuses, and deficiencies
Prior significant recommendations not yet implemented

Matters referred to prosecutive authorities

Summary of instances where information was refused

Listing of audit reports showing number of reports and dollar value
of questioned costs

Summary of each particularly significant report

Statistical table showing number of reports and dollar value of
questioned costs

Statistical table showing number of reports and dollar value of
recommendations that funds be put to better use

Summary of each audit issued before this reporting period for which
no management decision was made by end of the reporting period

Significant revised management decisions

Significant management decisions with which the Inspector General
disagrees

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

iii

Page 7
Page 3

Page 3

App A

**

App B

App C


project. The grantee believed that the matching contributions were related to all operations
of the grantee and did not have to be identified with the ARC project. We disagreed with
this assertion; and actions are in process to resolve this matter, including identification to the
extent possible of eligible matching contributions.

Other matters noted in individual grant reviews related to the need to improve financial
management systems in order to better track and account for ARC funds, prepare and submit
progress and final reports on a timely basis, utilize interest bearing accounts for fund
advances, and improve controls to preclude the claiming of ineligible costs.

During this period, we performed compliance visits in connection with the J-1 Visa Waiver
program in four 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. Our tests disclosed
that participating physicians were generally complying with program requirements to provide
40 hours of primary care per week in medical professional shortage or underserved areas.
Followup actions were initiated with respect to instances where transfers had not been
reported to ARC, duties included ineligible activities, and employment had been terminated
by a physician. One of our reviews was conducted jointly with the Alabama Department of
Public Health.

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, as noted above, 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
significance was limited understandings 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). Also, in
several other cases, we worked with the grantee to identify eligible costs prior to the issuance
of our final report and, thus, reduced or eliminated questioned costs necessitating additional
audit resolution. Emphasis was placed on recommendations to improve financial and
accounting systems and controls.

Management also initiated actions during the reporting period to speed up the project
application, review, and approval process. This included establishing targets for project turn
around, more timely contract finalization, and improved application formats. Contract
administration was improved by reducing the number of payments and reports and by
finalization of a new Memorandum of Agreement with the US Department of Agriculture
Rural Development that permits obligation of funds as soon as a project is approved.

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,

5


-  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
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 Off

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.

Funding and Staffing

The OIG funding level for FY 1999 is $438,000. For FY 1999, approximately 27 percent will be
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 for non-highway projects.


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 is $66.4 million, which is 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
(Public Law 105-66) appropriated $300 million in FY 1999 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
responsibilities for program development, policy analysis and review, grant development,
technical assistance to States, and management and oversight.

1


was appropriate. We also recommended controls be improved to ensure that grant extensions
be supported by documentation of the need for such extensions.

A grant review disclosed that controls had not been established to determine the eligibility
of companies to receive training funds. Consequently, we noted ARC and matching funds
had been provided to large corporations that did not appear to meet the grantee-established
criteria, which precluded the use of ARC funding for training to large corporations that have
or logically could be expected to have training programs supported with company funds and
provided that ARC assistance would be concentrated on small manufacturing firms that did
not have the financial capability to provide the required training themselves. Based on our
limited research that identified the size of parent and subsidiary companies in terms of sales
and employees, we questioned the eligibility of about $429,000 in ARC and matching funds
provided to 10 of the 30 companies receiving ARC funds during the initial grant year.

The grantee had not instituted controls to assess whether applicants for training funds met
the criteria noted in the project application and proposal submitted to ARC, the terms of
which are expected to be implemented as part of a grant agreement. The grantee believed
it was complying with State policy and noted that additional State funds had been utilized
for the training program but not reported because the required match had been met.

The grantee agreed to deobligate $387,000 that remained available for this project; and
actions are in process to resolve open issues with respect to the remaining questioned costs,
including the extent of offset based on other eligible training activities.

ARC internal controls also identified an instance where a grantee had approved training
funds for several employers substantially in excess of the amounts permitted for an
individual company. Our review confirmed that actions had been initiated to resolve this
condition, including refunds of approximately $163,000 with respect to questionable
expenditures and $40,000 for an unused advance.

A review of an ARC capitalized revolving loan fund disclosed a potential for deobligation
of approximately $300,000 for use on other projects based on available funds and prior and
anticipated loan activity. At the time of our review, loan activity had not been sufficient to
permit compliance with ARC guidelines allowing revocation of a project if an initial advance
payment for loans is not made within 18 months of grant approval or deobligation of funds
not initially disbursed within 36 months from the date of grant approval. The grantee
requested an additional extension based on anticipated loan activity and cited some specific
loan applications for which positive action was contemplated. Actions are in process to
determine the extent of current activity and the propriety of initiating deobligations.

In several cases, substantial costs were questioned because there was insufficient evidence
or documentation available to support required matching contributions or use of program
income. We attributed these occurrences primarily to limited grantee knowledge about
program requirements and related supporting evidence. In one instance, the grantee collected
over $200,000 in program income, which was generated from the use of equipment and
services purchased under the grant. This income was not used to reduce the grant amount
nor was approval received to use the income to expand project services. In another case,
matching expenditures exceeding $200,000 were questioned because of the absence of
documentation to reflect that the reported contributions were connected with the ARC

4


APPALACHIAN REGIONAL COMMISSION

INSPECTOR GENERAL'S

SEMIANNUAL REPORT

TO CONGRESS

APRIL 1- SEPTEMBER 30, 1998



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 and has noted support for
Congressional initiatives dealing with semiannual reporting and reviews of OIG operations.

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 Development District Association of Appalachia, which conducted a successful financial
management teleconference throughout Appalachian in 1996, will be conducting a followup
conference in December 1998. This teleconference affords grantees and public accounting staff
throughout Appalachia a low cost opportunity to expand and maintain financial management skills.
The December teleconference will highlight changes to the Single Audit Act and key cost principles.


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.

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 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 1999
Annual Plan provides the operational details for OIG activities planned during FY 1999 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
with the OIGs at the applicable agencies and reaching concurrence for ARC OIG review of some of
these projects.

FY 1999 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.

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.

6


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.

WM. OIG ACTIVITY
A. AUDITS

During the reporting period, 32 reports were issued, including 27 individual reviews, 1 program
followup survey, and 4 J-1 Visa Waiver compliance reviews. At the end of the reporting period,
5 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.

- A periodic followup review of controls over contracts/grants with expired performance
periods identified a rapidly declining universe of grants in this category. Actions included
grant closings and deobligations of funds for use on other projects and extensions of
performance periods. For example, during this reporting period, deobligations of $114,000
were initiated on grants included in our prior report and $91,000 in deobligations were
attributable to actions initiated on grants in our updated sample. Our review identified
34 additional grants with balances of approximately $1.5 million for which performance
periods had expired prior to December 31, 1997, and for which additional followup action

3


EXECUTIVE SUMMARY

During this reporting period, 32 reports were issued, including 27 individual grant reviews, a
followup report dealing with expired grants, and 4 J-1 visa waiver compliance reviews. At the end
of the reporting period, 5 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 close out 294 projects and deobligate about $2 million
during the reporting period.

Significant reviews included a periodic followup of controls over grants with expired performance
periods. This review disclosed that ARC’s continued aggressive actions had resulted in
deobligations approximating $205,000 on grants noted in prior reports. This review identified an
additional 34 grants with expired performance periods that were subject to further followup and
action with respect to balances approximating $1.5 million.

Grant reviews identified a need for increased controls to ensure employee training projects were
conducted in accordance with grant agreement requirements. We noted one instance where
substantial funds were provided to employers whose eligibility was questionable based on company
size, which conflicted with project requirements for funds to be concentrated on small manufacturing
firms that do not have the financial capability to provide the required training themselves. In this
case, the grantee agreed to deobligate $387,000 in unused funds.

A review of a revolving loan fund identified excess available funds in relation to program activity
and an opportunity to deobligate about $300,000 for use on other projects. In several instances,
limited grantee supporting documentation to establish grantee compliance with matching
requirements resulted in substantial questioned costs.

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.

During this reporting period, our field surveys of the J-1 Visa Waiver program 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 also initiated actions during the reporting period to improve the project
application, review, and approval process and to increase contract administration efficiency by
reducing the number of payments and reports and by finalization of a new Memorandum of
Agreement with the US Department of Agriculture.

di


APPENDIX C

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

No. of Dollar Value
Reports (S in thousands)
For which no management decision was made by the 2 $ 48
commencement of the reporting period
Which were issued during the reporting period 4 $2,467
Subtotals (A + B) 6 $ 2,515
For which a management decision was made during the 4 $ 655
reporting period
(i) dollar value of recommendations that were agreed 3 $ 646Y
to by management
--based on proposed management action 3 $ 646"
--based on proposed legislative action 3 =
(ii) dollar value of recommendations that were not 1 $ 9
agreed to by management
For which no management decision has been made by the 3 $ 1,860”
end of the reporting period
Reports for which no management decision was made 1 $ 39
within 6 months of issuance
y Includes management actions to deobligate $205,340 during this reporting period with decisions in process

on grants with balances approximating $1.5 million.

2 Includes one report on which management decisions were made but action is continuing.


Page

ExectitiveSummarys:" =” s'sisisisiavne aes saeieeitia o% 04 divieiowles's os Seat ii
Purpose and Requirements of the OIG Semiannual Report = =—..... ee eee ee iii

I, Introduction «§«-_——_l cece cc ccccccescccececcseeesseceeeceecoece 1
Ii: Background). --- 22 + rite seeinnmenes eeimgismteaausimenrs ches cneetie L
Appalachian Regional Commission = wee cence eect eeeeneeeeeeeeeeee 1
Office ofInspector General =—=§ = nictccccceciccsrccesteccsescscoesccs 2

I. OlGActivity == —§«§-_ «§_—vadiacevaccevansnccacessavcnsessscsecrceee’ 3
Audits =§-_——— stn cece ccc cceeneccrenscscrensessceresscees 3
Investigations «= he tect eee eee n cece cece cece seeeeeeneeeeeees Ss

TV. Audit Planning (~= = avvsvcisircvecacicvscecccenenecseessecwenecies 6
V. OIGHotline =§«»_———cccecccccccccccccercccccsscccsccesccccesces 6
VI. Legislative & Regulatory Review «= wesc cece cece scence eee eee eeeencee 7
VIE. Other «= hee cece eee c cece eee eee eee cree cece eeeeeees 7

Appendices A. Schedule of Audit Reports Issued
April 1 through September 30, 1998

B. Schedule of Reports with Questioned or Unsupported Costs

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

D. Definition of Terms Used


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

November 20, 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
April 1 through September 30, 1998.

During this reporting period, 32 reports were issued, including 27 individual grant reviews, a followup
report dealing with expired grants, and 4 J-1 Visa Waiver compliance reviews. At the end of the reporting
period, 5 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 $2 million during the reporting period, which included about $205,000 applicable to cases
noted in prior OIG reports.

Significant reviews included a periodic followup of controls over grants with expired performance periods.
This review disclosed that ARC has continued aggressive efforts to ensure timely action on expired grants.
This review identified an additional 34 grants with expired performance periods that were subject to further
followup and action with respect to balances approximating $1.5 million.

Grant reviews identified a need for increased controls to ensure employee training projects were conducted
in accordance with grant agreement requirements. We noted one instance where substantial funds were
provided to employers whose eligibility was questionable based on company size, which conflicted with
project requirements for funds to be concentrated on small manufacturing firms that do not have the
financial capability to provide the required training themselves. In this case, the grantee agreed to
deobligate $387,000 in unused funds.

A review of a revolving loan fund identified excess available funds in relation to program activity and an
opportunity to deobligate about $300,000 for use on other projects. In several instances, limited grantee
supporting documentation to establish grantee compliance with matching requirements resulted in
substantial questioned costs.

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.

ubert N. Spar!

Inspector General

Enclosure
1666 CONNECTICUT AVENUE, NW WASHINGTON, DC 20235 (202) 884-7675 FAX (202) 884-7691

Alabama Kentucky Mississippi North Carolina Pennsylvania Tennessee West Virginia

Georgia Marvland New: York Ohio South Carolina Virginia


APPENDIX A

98-11(H)_|_ West Virginia Development Office International Development Project $133,300 S634
98-13(H)_|_Fayette County, West Virginia Tourism 214,106
98-14(H) | Virginia Department of Housing and Community Development 421,089
Microenterprise Projects
98-19(H) | Tennessee Department of Economic and Community Development 750,000 429,000 $396,187
Customized Industrial Training
98-23(H) _|_North Georgia Waste Management Authority Recycling Project 198,338 44,839
98-24(H) _|_ Georgia Revolving Loan Fund 1,941,149 300,000
98-25(H)_|_Morehead State University Historic Resource Development Project 140,000
98-26(H)_| Morehead State University Child Care Center 300,000
98-27(H)__| Pikeville College School of Osteopathic Medicine 500,000 22,000
98-29(H)_|_ Appalachian School of Law Investment in Tomorrow 280,800
98-30H) | Southwestem Virginia Advanced Manufacturing Technology Center 100,000
Telecommunications Project
98-31(H)__|_Fay-Penn Economic Development Council Demonstration Project 195,000
98-32(H) _|_Pennsylvania State University Demonstration Project Evaluation 180,000
98-33(H)_|_ Economic Planning and Development Council of Pennsylvania 644,500
98-34(H)_|_ Clay County, West Virginia Health Department Youth Wellness Project 240,000 7,122
98-36(H) _|_Sawmill Center for the Arts Expansion Program 330,398 243,777
98-37(H) _|_University of Pittsburgh Manufacturing Assistance Center 139,426 1127
98-38(H)_|_ West Alabama Planning and Development Council Strategic Planning 211,000
98-39(H) _|_University of Alabama Export Assistance 207,895 651
98-40(H) _|_Kentucky International Trade Office 250,000 2,470
98-41(H)_|_ Big Sandy Telecommunications Center 300,000 228,989
98-42(H) | Northwest Pennsylvania Regional Planning and Development Commission 190,601
Business Incubator
98-434 Delaware-Chanango-Madison-Otsego BOCES 115,000
98-44(H)_|_J-1 Visa Waiver Program--Kentucky
98-45(H)_|_J-1 Visa Waiver Program--Alabama
98-46(H)_|_J-1 Visa Waiver Program--Virginia
98-48(H) _|_Ohio Office of Appalachia Technical Assistance 100,000
98-49(H) _|_Ohio Department of Development Industrial Retraining 250,000
98-50(H) _| Rural Action, Inc. Leadership and Civic Development 75,000 2,879
98-51(H)_|_ Interagency Employees Corporation Day Care Center 158,500
98-52(H) _|_J-1 Visa Waiver Program--Ohio
98-534 Expired Grants Followup 1,726,000 205,000
TOTALS $10,292,102 $938,649 $946,026

‘A cost the Office of Inspector General has questioned because of an alleged violation of law, regulation, contract, or other agreements governing the expenditure of
funds; such cost is not supported by adequate documentation; or the expenditure of funds for the intended purpose is unnecessary or unreasonable. Includes required
matching contributions.

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


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.