APPENDIX A

SCHEDULE OF AUDIT, INSPECTION, EVALUATION & REVIEW REPORTS

ISSUED OCTOBER 1, 2016 TO MARCH 31, 2017

Report No. Report Title/Deseription Program Dollars or Questioned Funds to Better
ContracvGrant Unsupported Uses**
Amount* Costs"*
17-01 City of Lawrenceburg, TN $500,000
17-02 Performance Periods/End Dates
17-03 Older Open Basic Agency Grants
17-04 West Liberty, KY $750,000
17-05 Data Act Implementation
17-06 City of Louisville, MS $400,000
17-07 Fiscal Year 2016 Financial Statement
17-08 Lake Cumberland Area Development District $308,788
17-09 Morehead State University $329,235 $329,235
17-10 Kentucky Housing Corporation $500,000
17-11 NE Mississippi Planning Development District $1,810,611
Total $4,519,395 $329,235



ARC’s non-ADHS funds are distributed to state and local entities in accordance 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 monitoring. In order to avail itself of federal agency expertise
and administrative capability in certain areas, 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. Working with State Departments of Transportation, ARC continues to
actively monitor the status of construction in each State and disposition of any remaining ADHS.

ARC relies on Child Agencies, including the Departments of Agriculture (USDA), Housing and Urban
Development (HUD), and the Economic Development Administration (EDA) to administer construction
related grants to oversee non-highway infrastructure grants. Also utilization of State agencies to
administer construction related grants is being emphasized.

N


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. 700

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.


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 and utilizes other OJGs to perform needed investigations. Also, the
results of investigations may be referred to the appropriate Federal, State, or local prospective authorities
for action.

C. OTHER
OIG Working Groups

Smaller OIG offices have some significantly different operational concerns than larger OIG offices in
trying to maintain effective and efficient oversight of agency programs. One challenge involves the
significant human and capital resources being allocated to mandated reviews. The IG is an active
member of the small working group that meets periodically to discuss such issues and recommends
actions/best practices to facilitate smaller OIG operations.

Requests for Information

Each year we receive and comply with requests for information from various governmental entities
compiling statistics on OIG offices or their audited agencies. CIGIE requests information for its annual
OIG profile update and compilation of OIG statistics. The yearly compilation summarizes the results of
audit and inspection activities for of all federal OIG offices.

Implementation of OIG Reform Act

The OIG has implemented the requirements of Pub.L. No. 110-409 the Inspector General Reform Act of
2008.

OSC Certification

The OIG received the Office of Special Counsel (OSC) Certification of compliance with 5 USC-2302(c)
dealing with Prohibited Practices and Whistleblower Protection provisions.

IV. REPORTING FRAUD, WASTE, AND ABUSE

A region wide toll-free hotline is maintained 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. Also, in accordance
with the Inspector General Reform Act of 2008, the ARC OIG implemented another communication
channel allowing anonymous reporting of fraud, waste or abuse via a link on our website’s home page.
The web link is, http://ig.are.gov/.


z= APPALACHIAN REGION
ARC

map cin
aabvase

Appalachia, as defined in the legislation from which the Appalachian Regional Commission derives its
authority, is a 205,000-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 12 other states: Alabama,
Georgia, Kentucky, Maryland, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South Carolina,
Tennessee, and Virginia.

4


Appalachian Regional Commission
Organization Chart

Federal Membership

State Membership

FEDERAL CO-CHAIR

13 GOVERNORS/STATES' CO-CHAIR

ALTERNATE FEDERAL
CO-CHAIR

OFFICE OF THE FEDERAL.
CO-CHAIR

Non-Fed:

GOVERNORS’
ALTERNATES

OFFICE OF THE STATES’
WASHINGTON REPRESENTATIVE

leral Staff

OFFICE OF INSPECTOR
GENERAL

EXECUTIVE DIRECTOR

COMMUNICATIONS.

HUMAN RESOURCES

DIVISION OF COMMUNITY

LOCAL DEVELOPMENT

INVESTMENT

DISTRICT PROGRAM

FINANCE & ADMINISTRATION

GENERAL COUNSEL

RESEARCH & PLANNING



Il. OIG ACTIVITY
A. Audits, Inspections, Evaluations and Reviews

Grant reviews focused on grant implementation and administration in line with ARC and OMB policies
and procedures. Management reviews focused on headquarters program and grant management
activities. During the reporting period seven grants audits and three management reports and the
Financial Statement audit were issued.

Audits of seven grants with total ARC funding of $4.5 million reported overall implementation of grants
in accordance with policies, procedures and regulations. Findings and recommendations were related to
untimely progress reports, documentation and support for matching funds, indirect costs and
identification of performance results. Emphasis was placed on grantee identification and support for
performance measures included in grant applications and approvals.

Management reports emphasized ARC follow-up on inactive grants to determine the need to follow-up
actions and potential for deobligations and use of available funds for other projects in Appalachia.
Follow-up on prior reports and recommendations identified $283,000 for which funds became available
for use on other projects. A report on expired end dates identified numerous grants with balances
totaling $17 million for which grant related expenditures after the end date would be deemed ineligible
based on Federal and ARC provisions and the absence of Basic Agency Monitoring Reports (BAMR)
that are used by ARC to identify project status and needed actions.

ARC agreed with recommendations for follow-up on these grants and emphasized justifiable extensions
prior to expiration dates to preclude ineligible costs.

A review of ARC actions to implement the Data Act determined that ARC had initiated actions to
comply with the Data Act and reporting requirements.

Agency actions on prior reports include implementation of controls to better identify grants needing
follow-up. Actions have also been initiated to improve and increase obtaining information about
accomplishment of performance measures.

ARC Financial Statement Audit

The Financial Statement audit for FY 2016 resulted in an unqualified opinion. The prior seven years
reports have been issued with a clean audit opinion since ARC adopted federal financial reporting rules
in 2007.

Peer Review

Offices of the Inspectors General (OIGs) are required to perform (and undergo) reviews of other OIG
offices every three years to ensure audit policies and/or procedural systems are in place that provide
reasonable assurance of compliance with government auditing standards (GAS). The OIG peer
conducted in FY 2017 by the Commodity Futures Trading Commission OIG disclosed no findings and
the next peer review of ARC is scheduled for FY 2019.


TABLE OF CONTENTS

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VI. Dodd-Frank Legislation

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Appendices
A. Schedule of Reports Issued October 1, 2016 thru March 31, 2017

B. Schedule of Audits, Inspections, Evaluation and Review Reports of Questioned or
Unsupported Cost

Cc. Schedule of Audit, Inspection, Evaluation and Review Reports with Recommendations
that Funds be put to Better Use and Summary of Management Decision

Dz. Definition of Terms Used


Implementation of Recommendations

For unimplemented recommendations that a recent Congressional report noted as 15,222 open
recommendations with potential monetary savings of $87 billion dollars actions include tracking of
unimplemented recommendations, follow-up with higher level agency officials, inclusion in semi-annual
reports and follow-up reports. The IG Act provision 5(a)(12) that provides for including in the semi-
annual report information concerning any significant management decision with which the IG is in
disagreement is seldom, if ever, used to highlight disagreement with management decisions on
significant programmatic or potential large monetary benefit recommendations.

The issue is currently under review by the Federal Audit Executive Council (FAEC).

Actions on reported implementation of recommendations ranges from obtaining implementation plans,
accepting agreement with the recommendation as sufficient to consider the recommendation
implemented, accepting the agency audit resolution officials decisions, or confirming implementation
actions in some cases. Emphasis should be placed on validation of implementation actions with respect
to significant program monetary benefits recommendations.

Audit Peer Reviews

- Develop and implement peer review guides to independently assess OIG audit efficiency and
effectiveness that highlights key operational elements, such as planning, field work, report timeliness,
staff utilization and training, supervision, audit follow-up and actual results. The required peer review
of compliance with audit standards does not address these key operational elements that determine OIG
efficiency and effectiveness. Such reviews should contribute to increased OIG audit efficiency and
effectives such as addressing timely reporting that often surfaces as a criticism.

Some OIGs conduct internal assessments of key operational elements. These reviews are considered
independent since they are conducted by staff from other units within the OIG. This reasoning conflicts
with a major reason for establishment of OIGs being that agency internal audit units were not considered
sufficiently independent even though audits were conducted by units not connected with the audited
unit.

Actual Versus Potential Monetary Results

- Identify outcome based performance measures that, over a multi-year period, provide for
reporting of actual savings in relation to the multi billions of potential audit related savings reported
annually based primarily on questioned and undocumented costs with low actual savings potential. OIG
recommendations result in saving in excess of OIG operational costs. However, actual savings are not
included in the OIG Annual Report to the President or in most OIG Semi-annual reports.

A primary argument presented against including some actual rather than only potential monetary
benefits over a multi-year period in OIG Semi-annual reports (SAR) and the CIGIE Annual Report to
the President is the difficulty in obtaining this information. However, the IG Act and OMB Circular A-
50, Audit Follow-up specifically require the agency head to identify actual monetary related benefits


Vv. LEGISLATIVE AND REGULATORY REVIEW

The OIG reviews legislation germane to ARC, OIG and the OIG community. Our comments are

provided, as appropriate to agency officials, and/or to the CIGIE for incorporation with comments from
all other OIGs.

VI. DODD-FRANK LEGLISATION - Reporting to Full Commission

OMB issued an updated list of Designated Federal Entity (DFE) Agency Head in December 2013 that
confirmed legislation identifying the 13 Appalachian Governors as part of the Appalachian Regional
Commission (ARC) Agency Head (Commissioners) designations. No problems have been experienced
with respect to implementation of the legislation.

VI. OIGs Audit Community Wide Issues

OIG audit units have provided very valuable services to the taxpayers including significant monetary
benefits and major program improvements. However, as with any organization, improvements are
possible and within the OIG community there are areas where O]G-wide audit performance and
credibility can be significantly improved by addressing the following issues.

Performance Audit Skills Gaps

- There is a continuing significant need to address the long standing issue of broader
qualifications with respect to performance auditing that constitutes the majority of audit work at most
OlGs. Currently the Office of Personnel Management (OPM) 0511 auditing series and classification
requires 24 credits of accounting or an equivalent level of accounting credits and experience and the
0343 Management Analyst series is not used to any significant degree. Performance related primary
audit skills, attributes and competencies have been identified as oral and written communications,
analytics, problem solving, interpersonal relationships, and critical thinking and are far more important
than accounting for effective performance auditing.

The IG has recommended that the CIGIE Audit Committee support a Performance Audit classification
that identifies qualifications and competences more closely related to performance auditing or a
separation of the 0511 series between financial and performance auditing with elimination of accounting
as a required performance auditing qualification. Such a classification would better assure the
employment of professional staff that better meet the current and future OIG audit environment, increase
audit effectiveness and reduce waste attributable to primary use of out of touch and out dated auditor
qualifications. Regardless of eventual OPM decisions a primary need is OIG Audit to recognize and
accept the need for significant qualification changes to address performance audits and emphasize
recruiting and employing audit staff best suited to meet the OIG audit workload.

Other government and private sector audit organizations including the Government Accounting Office
(GAO) have recognized and addressed this issue.

Other options are significantly increased use of an upgraded management analyst series with educational
requirements or actions initiated by GAO to address skills gap issues related to performance auditing.

This issue remains under OPM consideration.


B. OFFICE OF INSPECTOR GENERAL

The ARC OIG is an independent Federal audit and investigative unit that reports directly to the Agency
Head.

Role and Authority

The Inspector General Act of 1978, (Pub.L. No. 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 Agency Head 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, inspections, evaluations, 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 provided under 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 operation of the OIG neither replaces established lines of operating authority
nor eliminates 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 OIG.

Funding and Staffing

The OIG funding level for FY 2016 was $710,000. Staffing consists of the Inspector General, an
Assistant Inspector General for Audit, 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 conducted by OIG staff.

In order to comply with Pub.L. No. 110-409, the Inspector General Reform Act of 2008, the OIG
contracts with other IGs for counsel and investigative services to the degree needed.


1. INTRODUCTION - OIG

The Inspector General Act Amendments of 1988, (Pub. L. No. 100-504) provides for the establishment
of an Office of Inspector General (OIG) at Designated Federal Entities (DFEs), 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 - ARC
A. APPALACHIAN REGIONAL COMMISSION

The Appalachian Regional Development Act of 1965, (Pub.L. No. 89-4) established the Appalachian
Regional Commission. 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-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) with 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, energy, human resources, and health and education
programs. Specific priority initiatives to stimulate economic growth and opportunity in the region
include the Partnership for Opportunity and Workforce and Economic Revitalization (POWER),
Southern/South Central Appalachia Workforce Training and Central Appalachia Broadband.

- To ensure that funds are used effectively and efficiently, and to strengthen local participation,
ARC works with the Appalachian states to support a network of multicounty planning and development
organizations, or local development districts (LDDs), throughout the Region, The 73 LDDs cover all
420 counties in Appalachia. The LDDs’ roles include identification of priority needs of local
communities and assisting with participation in ARC programs.

- Administratively, the Commission has a staff of 56 persons that includes 48 Commission
employees responsible for program operations, and the office of the Federal Co-Chair that includes OIG
staff. The Commissions’ administrative expenses, including salaries, are jointly funded by Federal and
State funds.

- The Commission's appropriation for FY 2016 was $146 million.
Although Congress changed the funding method for the Appalachian Development Highway System

(ADHS) in July 2012, ARC continues to support and participate in completion of the ADHS including
fulfilling planning and approval responsibilities,


APPENDIX B

SCHEDULE OF AUDIT, INSPECTION AND EVALUATION REPORTS
WITH QUESTIONED OR UNSUPPORTED COSTS (THOUSANDS)

A. For which no management
decision was made by the
commencement of the reporting period

B. Which were issued during the
reporting period

Subtotals (A + B)

c. For which a management
decision was made during the reporting
period

(i) dollar value of disallowed
costs

(ii) dollar value of costs not
disallowed

D. For which no management
decision has been made by the end of
the reporting period

E. Reports for which no
management decision was made within
6 months of issuance

No. of
Reports

Questioned
Costs

$ 329

Unsupported
Costs

$329 v

1/ Costs that are questioned in audit reports primarily relate to unsupported costs for which support is provided subsequent to the audit

Report. Thus amounts noted are similar.


APPENDIX D

DEFINITIONS OF TERMS USED

The following definitions apply to terms used in reporting audit statistics:

Questioned Cost

Unsupported Cost

Disallowed Cost

Funds Be Put To Better Use

Management Decision

Final Action

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.

A cost which the OIG questioned because the cost was not supported
by adequate documentation at the time of the audit.

A questioned cost that management, in a management decision, has
sustained or agreed should not be charged to the Commission.

A recommendation made by the OIG that funds could be used more
efficiently if management took actions to implement and complete
the recommendation.

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.

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.


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
Section 5(a)(1) | Problems, abuses, and deficiencies Page
Section 5(a)(2) Recommendations with respect to problems, abuses, and deficiencies Page
Section 5(a)(3) Prior significant recommendations not yet implemented *

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

Section 5(a)(5) Summary of instances where information was refused
and —6(b)(2)

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

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

Section S(a)(8) Statistical table showing number of reports and dollar value App C

of recommendations that fund be put to better use

* None.

iil


i

EXECUTIVE SUMMARY

ARC grant operations, including grant management and grant projects represent the most significant
aspect of ARC programs and OIG reviews. For this reporting period OIG activity included issuance of
eleven reports, including seven grant audits and three management evaluation reports and the Annual
Financial Statement audit. Follow-up on prior recommendations and monitoring of contractor grant
audits were also emphasized.

Overall there is a high degree of implementation of ARC policies and procedures. Individual grant
audits disclosed that grants were generally implemented in accordance with applicable regulations and
project objectives. Findings and recommendations pertained to matching funds, progress reports,
performance measures, un-supported or questioned costs, expired end dates that could result in ineli gible
payments, and competitive bidding.

Agency action included grant follow-up and pro-active efforts to address recommendations, including
older grants identified for follow-up and potential deobligations. Follow-up on prior recommendations
disclosed de-obligations of approximately $283,000 with respect to grants identified for follow-up in
prior reports which involved funds for better use in connection with needed projects in the Appalachian
Region.

Management reports emphasized inactive grants, expired end dates that could result in ineligible
payments and Data Act implementation. ARC received another unqualified opinion in the Annual
Financial Statement audit.

The peer review of OIG compliance with audit standards performed by the Commodity Futures Trading
Commission OIG disclosed no deficiencies.

The OIG was certified by the Office of Special Counsel (OSC) to be in compliance with the Prohibited
Practices and Whistleblower Protection provision of 5 USC-2032(c).

In December 2013 OMB issued an updated Designated Federal Entity (DFE) list that identified the
Federal Co-Chair and the Governors of the thirteen Appalachian States as the ARC Agency Head. The
applicable Dodd-Frank legislation provides that the Agency Head can terminate the Inspector General
with a two thirds vote. No problems have resulted from the implementation of this provision.

Within the OIG community and the Council of Inspectors General on Integrity and Efficiency (CIGIE)
the IG continues to emphasize issues impacting efficiency, effectiveness and credibility of OIG-wide
audit operations and actions to address these issues. These issues include identification and support of
revised performance auditor qualifications to address performance auditing skills gaps, addressing open
and unimplemented recommendations, independent peer reviews of the efficiency and effectiveness of
audit operations and reporting of actual monetary rather than primarily potential monetary benefits.


resulting from OIG reports when transmitting the OIG SAR to Congress. Section 5(b)(2)(c)(i) & (ii) of
the IG Act specifies that the agency head will include the disallowed costs that were recovered by
management through collection, offset, property in lieu of cash or otherwise and the dollar of disallowed
costs that were written off by management as part of the agency head transmittal of the OIG SAR to
Congress. OMB circular A-S0 states that the Agency follow-up official Semi-annually provide the head
of the agency the amount of collections, offsets, write-offs, demands for payment and other monetary
benefits resulting from audits.

Based on this available information and OIG Semi-annual reports that identify agreed with
disallowances tracking of some actual savings over a multi-year period appears reasonable and would
better support OIG credibility. Such reporting would also be in conformance with the intent of the
Government Performance and Results Act (GPRA) that emphasizes reporting projected and actual
results.

11


APPENDIX C

SCHEDULE OF AUDIT, INSPECTION AND EVALUATION REPORTS WITH
RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE AND SUMMARY OF
MANAGEMENT DECISIONS (THOUSANDS)

No. of
Reports Dollar Value

A. For which no management decision was made by the
commencement of the reporting period

B. Which were issued during the reporting period 1

Subtotals (A +B) 1

on For which a management decision was made during the
reporting period

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

--based on proposed management action 2 $283 v

--based on proposed legislative action

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

D. For which no management decision has been made by the end
of the reporting period

E. Reports for which no final management decision was made 0 0
within 6 months of issuance

1. Based on value of grants recommended for follow-up in prior report. Management agrees to follow-up on identified grant and the
value noted is actual deobligations during the reporting period.