Inspector General’s

Semiannual Report to Congress

April 1, 2006–September 30, 2006

APPALACHIAN REGIONAL COMMISSION

i

 TABLE OF CONTENTS

Page

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii 

Purpose and Requirements of the OIG Semiannual Report . . . . . . . . . . . iii 

 I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

 II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

Appalachian Regional Commission .. . . . . . . . . . . . . . . . . . ...... . . . . . . . . . . . 1 

Office of Inspector General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

 III. OIG Activity .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

Investigations . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 6 

 IV. OIG Hotline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

 V. Legislative & Regulatory Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

 

Appendices A. Schedule of Audit Reports Issued, 

 April 1, 2006, through September 30, 2006 

B. Schedule of Audit Reports with Questioned or Unsupported Costs 

C. Schedule of Audit Reports with Recommendations that Funds be put to 

Better Use 

D. Definition of Terms Used 
ii

EXECUTIVE SUMMARY

During this Fiscal Year, the Office of Inspector General (OIG) issued 21 reports to the Appalachian 

Regional Commission covering over $72 million audited with $413,016 questioned and $412,041 

identified to be put to better use. Recommendations in grant and revolving fund reviews were 

directed at improved reporting and eligibility of expenditures. 

Grant reviews disclosed projects were generally being implemented in accordance with program 

requirements and grantees generally had satisfactory accounting systems and internal controls. A 

change in audit reporting procedures has brought more oversight to grants by the program managers. 

The J-1 Visa Waiver program provides a waiver of requirements for a foreign physician to return to 

his/her home country after completion of medical training in the United States. ARC participates as 

a Federal Entity sponsor to assist Appalachian communities in providing healthcare services to 

medically underserved areas. The applicable ARC policies and procedures require J-1 physicians to 

practice 40 hours of primary care per week in a designated Health Profession Shortage Area (HPSA) 

in the Appalachian Region and serve at least 3 years (unless a State has a longer period). There is no 

prohibition on J-1 physicians working extra hours or practicing subspecialties after fulfilling primary 

care requirements. 

A Revolving Loan Fund (RLF) is a business development fund that is used by eligible grantees 

to make loans to create and/or save jobs. Five RLF audits were conducted during this reporting 

period covering a total of $1,562,000 of ARC funds. ARC has a total of 46 RLF grants. 

Findings were mainly recommendations to strengthening internal controls. The responses by the 

grantees are considered generally responsive to the recommendations of the audit reports. 

During the reporting period, the IG served on the Executive Council on Integrity and Efficiency. 
iii

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-Chair 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 Federal Co-Chair by April 30 and October 31 and to Congress 30 days later. 

The Federal Co-Chair 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 6 

Section 5(a)(2) Recommendations with respect to problems, abuses, and deficiencies Page 6 

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

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

Section 5(a)(5) and 

6(b)(2) 

 Summary of instances where information was refused * 

Section 5(a)(6) Listing of audit reports showing number of reports and dollar value 

of questioned costs 

 App A 

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

Section 5(a)(8) Statistical table showing number of reports and dollar value of

questioned costs 

 App B 

 

Section 5(a)(9) Statistical table showing number of reports and dollar value of

recommendations that funds be put to better use 

 App C 

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 * 

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

disagrees 

 * 

 

 * None. 

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

I. INTRODUCTION

The Inspector General Act Amendments of 1988 (P.L. 100-504) provided for the establishment of an 

Office of Inspector General (OIG) at 30 designated Federal entities, including the ARC. The ARC 

OIG became operational on October 1, 1989, with the appointment of an IG and provision of 

budgetary authority for contracted audit and/or investigation activities. 

II. BACKGROUND

A. APPALACHIAN REGIONAL COMMISSION

The Appalachian Regional Development Act of 1965 (P.L. 89-4) established the Appalachian 

Regional Commission. The Act authorizes a Federal/State partnership designed to promote longterm 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-Chair with the Governors electing one of their numbers to 

serve as the States' Co-Chair. 

 - 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-Chair. Emphasis 

has been placed on highways, infrastructure development, business enterprise, and human 

resources programs. 

 - Administratively, the Office of the Federal Co-Chair, with a staff of 11, and the Commission, 

with a staff of 48, is 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 2006 was $64,817 million. ARC was fully 

reauthorized by Congress in FY 1999, for the first time since 1982, and reauthorized in 

March 2002. In addition, Section 1101 of the Safe, Accountable, Flexible, and Efficient 

Transportation Equity Act: A Legacy for Users (SAFETEA-LU) provides annual 

authorizations of $470 million for construction of the Appalachian Development Highway 

System (ADHS), under Section 201 of the 1965 Appalachian Regional Development Act, for 

a total of $2.35 billion over the five-year period, FY 2005 through FY 2009, from the 

Highway Trust Fund. Although these funds are derived from the Highway Trust Fund they 

remain under ARC's programmatic jurisdiction. 
2 

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 has 

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. 

ARC ORGANIZATION CHART
3 

Appalachia as defined in the legislation, from which the Appalachian Regional Commission derives its 

authority, is a 200,000-square-mile region that follows the spine of the Appalachian Mountains from southern 

New York to northern Mississippi. It includes all of West Virginia and parts of twelve other states: Alabama, 

Georgia, Kentucky, Maryland, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South Carolina, 

Tennessee, and Virginia.
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5 

 B. OFFICE OF INSPECTOR GENERAL

 

The ARC OIG is an independent audit and investigative unit. An independent Inspector General 

who reports directly to the Federal Co-Chair heads the OIG. 

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-Chair 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 Federal Co-Chairs, 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-Chair, 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 2006 is $476,000 prior to a rescission. For FY 2006, approximately 

44 percent will be used for contract audit services; 46 percent, for salaries and benefits; 2 percent, 

for travel; and 8 percent, for all other activities (training, equipment, space, supplies, etc.). 

 

Staffing consists of the Inspector General, an auditor, and a confidential assistant. Grant review 

activities 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 has been provided by other OIG offices on an as-needed basis 

through memoranda of understanding. This approach has been deemed the most appropriate to date 

in view of the nature of ARC operations and limited resources. 
6 

III. OIG ACTIVITY

A. AUDITS

During the reporting year, 21 reports were issued dealing with programs, grants and grantees. Six of 

the reports were during this semi-annual reporting period. Other ongoing reviews are in their final 

stages. The division of OIG resources results in audit work being performed by a combination of 

permanent and contractor’s staff. 

Revolving Loan Funds (RLF) 

A RLF is a business development revolving loan fund that is used by eligible grantees to make 

loans to create and/or save jobs. As borrowers repay loans, the money is returned to the RLF to 

make other loans. RLF loans are not intended to match or replace the capacity of lending 

institutions, rather, RLF’s fill gaps in local lending, and provide capital which otherwise would 

not be available for economic development. 

Five RLF audits were conducted during this reporting period covering a total of $1,562,000 of 

ARC funds. ARC currently has a total of 46 RLF grants. Findings were mainly 

recommendations to strengthening internal controls. The responses by the grantees are 

considered generally responsive to the recommendations of the audit 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. When the need has arisen, 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 

prospective authorities for action. 

IV. OIG HOTLINE

A region wide 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. 

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. 
7 

V. 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. The IG disagrees with current proposals about 

consolidation of designated federal entity IG offices. 
8 

APPENDIX A 

 SCHEDULE OF AUDIT REPORTS ISSUED APRIL 1, 2006 TO SEPTEMBER 30, 2006

Report 

No. 

Entity and Title Program Dollars 

or Contract/Grant 

Amount* 

Questioned/ 

Unsupported 

Costs** 

Funds to Better 

Use***

06-16 RLF Southwestern North Carolina Planning & Economic Development 

Commission, Bryson City, North Carolina 

$200,000 

 $200,000 

06-17 RLF Southwestern North Carolina Planning & Economic Development 

Commission, Bryson City, North Carolina 

$650,000 

 

$85,702 

06-18 RLF Mountain Association for Community Economic Development 

Berea, Kentucky 

$262,000 

 

 

06-19 RLF Southern Kentucky Economic Development Corporation 

Somerset, Kentucky 

$150,000 

06-20 RLF Cumberland Valley Area Development London, Kentucky $300,000 $126,339 

06-21 Review of Kentucky Finance and Administration Cabinet, Appalachian 

Kentucky Entrepreneurship Initiative Project 

$250,000 $61,141 

TOTALS 

 

$1,812,000 $61,141 $412,041 

 * Grant amounts reported are for ARC grant amounts and do not include matching funds. 

 ** 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 B

SCHEDULE OF AUDIT REPORTS WITH 

 QUESTIONED OR UNSUPPORTED COSTS

 ($ in thousands) 

 No. of 

 Reports

 Questioned 

 Costs 

 Unsupported 

 Costs 

 

A. For which no management decision

was made by the commencement of

the reporting period 

 5 $ 616 

 

B. Which were issued during the

reporting period 

 1 $ 61 $ 0

 Subtotals (A + B) 6 $ 677 $ 

 

C. For which a management decision

was made during the reporting

period

 $ 

 

(i) dollar value of disallowed

costs 

 0 $ $ 

 

(ii) dollar value of costs not

disallowed

 0 $ 0 

 

D. For which no management decision

has been made by the end of the

reporting period 

 6 $ 677 $0 

 

E. Reports for which no management

decision was made within 6 months 

of issuance 

 5 $616 

*This figure was incorrectly listed in the Apr 05 Semiannual Report to Congress as $93,000 rather than the correct $616,000 due to a typing 

error. 
APPENDIX C

SCHEDULE OF AUDIT REPORTS WITH 

 RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

 No. of 

 Reports

 Dollar Value 

 ($ in thousands)

 

A. For which no management decision was made by the

commencement of the reporting period 

 2 $ 49 

 

B. Which were issued during the reporting period 3 $ 412

 Subtotals (A + B) 5 $ 461 

 

C. For which a management decision was made during the

reporting period 

 2 $ 212 

 

(i) dollar value of recommendations that were agreed

to by management

 2 $ 212 

 --based on proposed management action - 

 --based on proposed legislative action - 

 

(ii) dollar value of recommendations that were not

agreed to by management

 0 $ 0 

 

D. For which no management decision has been made by the

end of the reporting period 

 3 $ 249 

 

E. Reports for which no final management decision was made

within 6 months of issuance 

 0 $ 0 

 
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. 
THE OFFICE OF INSPECTOR GENERAL 

 APPALACHIAN REGIONAL COMMISSION 

 serves American taxpayers 

 by investigating reports of waste, fraud, or abuse 

 involving Federal funds. 

 If you believe an activity is 

 wasteful, fraudulent, or abusive of Federal funds, 

 please call 

 toll free 1-800-532-4611 

 or (202) 884-7667 in the Washington metropolitan area 

 or write to: 

 Office of Inspector General 

 Appalachian Regional Commission 

 1666 Connecticut Avenue, NW, Rm 215 

 Washington, DC 20009-1068 

 Information can be provided anonymously. 

 Federal Government employees are protected from reprisal, 

 and anyone may have his or her identity held in confidence.
Cover Photo: 

Jefferson National Forest, Wise County, Virginia 

Photo by Ken Murray 

 Appalachian Regional Commission 

 Office of Inspector General 

 1666 Connecticut Avenue, NW, Suite 215 

 Washington, DC 20009-1068