SCHEDULE OF AUDIT REPORTS WITH
QUESTIONED OR UNSUPPORTED COSTS

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

Which were issued during the
reporting period

Subtotals (A +B)

For which a management decision
was made during the reporting
period

(i) dollar value of disallowed
costs

(ii) dollar value of costs not
disallowed

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

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

($ in thousands)

No. of
Reports

4

Io

Questioned
Costs

$65

wn

$ 65

$35

$35

$-30

$30

APPENDIX B

Unsupported
Costs

$


L INTRODUCTION

The Inspector General Act Amendments of 1988 (P.L. 100-504) provided for the establishment ofan
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 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 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 11, and the
Commission, with a staff of 48, 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 2002 was $71 million. ARC was fully reauthorized
by Congress in FY 1999, for the first time since 1982, and reauthorized in March 2002.
Also, the Transportation Equity Act for the 21% Century (TEA-21) authorized $2.25 billion
for the construction of the Appalachian Development Highway System (ADHS) under
Section 201 of the 1965 Appalachian Regional Development Act. Enacted in 1998, TEA-21
authorizes $450 million to be appropriated from the Highway Trust Fund annually from FY
1999 through FY 2003. These funds are derived from the Federal Highway Trust Fund but
remain under ARC’s programmatic jurisdiction.


OI. OIG ACTIVITY
A. AUDITS

During the reporting period, 12 reports were issued, including 11 individual grant reviews and a
program reviews. The division of OIG resources results in audit work being performed by a
combination of permanent and contractor staff. Emphasis will continue to be placed on surveys of
ARC operations and programs, completion of grant audits, audit resolution and followup, and
physician compliance with J-1 Visa Waiver program requirements.

With the cooperation of the Treasury OIG, a series of vulnerability assessments were conducted
against a sample of ARC information system resources. The audit was performed primarily using
two commercially available scanning tools. These tools were launched against 60 devices on the
network and against a selected sample of servers. ARC has in place a robust firewall that serves to
protect the network from outside attacks. The audit itself did not restrict itself to scanning from
outside but rather from inside as well. The audit detected a number of internal vulnerabilities.
ARC acted immediately to replace vulnerable servers. Further, ARC moved its website offsite where
it will have no connection to the ARC network operations. Lastly, ARC plans to have standards in
place for account policies, password policies and other security procedures in place and enforced
during the first quarter of FY 2003.

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
prosecutive authorities for action.

During this reporting period, the OIG has made five referrals and has utilized the services of criminal
investigators from another Federal OIG.

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


The Appalachian Region

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 southem 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.


- 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.

-  Jnorder 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.

Appalachian Regional Commission

Federal Co-Chairman 13 Governors/States’ Co-Chairman
Federal Alternate i Governors’ Alternates
Federal Office States’ Washington Office

Inspector General Executive Director

General Counsel Local Development Districts

Public Affairs Distressed Counties

[

Planning and Research Program Operations Finance and Administration

Transportation Entrepreneurship Publications



B. OFFICE OF INSPECTOR GENERAL

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

Funding and Staffing

The OIG funding level for FY 2002 was $466,000. For FY 2002, approximately 28 percent was for
contract audit services; 59 percent, for salaries and benefits; 7 percent, for travel; and 6 percent, for
all other activities (training, equipment, space, supplies, etc.).

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 has been employed.
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 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


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

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 Office of Inspector General Semiannual
Report to Congress for the period April 1, 2002, through September 30, 2002.

This Semiannual Report to Congress summarizes the activities of our office for the
6-month period ending September 30, 2002. This report covers 12 reviews, of which-11
were grant audits. There were no investigations closed during this period. Five
investigative referrals were made to other governmental entities.

During the reporting period, the IG continued to serve as representative of the Executive
Council on Integrity and Efficiency. Also, the IG continued to serve as the IG of the Denali
Commission in line with a Memorandum of Agreement between the Appalachian Regional
Commission Inspector General and the Denali Commission Federal Co-Chair.

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.

l appreciate the Commission’s and your cooperation with the Office of Inspector General in
the conduct of our operations.

fa J—~5>

Clifford H. Jennings
Inspector General

Enclosure

4666 CONNECTICUT AVENUE, NW WASHINGTON, DC 20009-1068 (202) 884-7675 ax (202) 884-7696

Alabama Kentucky Mississippi North Carolina Pennsylvania Tennessee West Virginia
Daavnia Marvland New York Ohio South Carolina Virginia


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. The IG disagrees with current proposals about
consolidation of designated IG offices.

VII. OTHER

The Inspector General has met with Commission staff to work towards positioning the Commission
for audited financial statements. While the unique makeup of the Commission requires research on
determining the applicable standard to be used in preparing financial statements, the Commission
staff has made great strides during this period in working towards a final determination of standards
to be used and coming up with a standard format that will be equally acceptable to all parties.
Further, the Inspector General has worked with Commission staff responsible for the J-1 program to
gather information early in the process that will assist not only the Commission but also the OIG in
monitoring the program internal controls. Lastly, the Inspector General has started the process of
designing an-QIG portion of the Commission MIS which, when completed, will allow Commission
managers access to OIG reports and information directly. The OIG will also work with the
Commission staff to place OIG information on the Commission web site.

The Inspector General continued to serve on the Executive Council on Integrity and Efficiency. The
1G continued to serve as the IG of the Denali Commission in line with a Memorandum of Agreement
between the ARC IG aid the Denali Commission Federal Co-Chairman.


The OIG's strategies and objectives for the next 5 years are defined in a strategic plan. The FY 2002
Annual Plan provides the operational details for OIG activities during FY 2002-2005 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.

Planned FY 2003 audit work includes about 50 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. Further emphasis will be placed on audits performed prior to
grant completion. This method will allow the auditors to spot problems during the period of
performance and will allow the grantees, who are usually smaller entities, to correct problems mid-
stream and avoid grant closeout problems that, in many cases, the grantee cannot afford to remedy .
The proactivity with the grantees serves not only the grantee but also the Commission as it allows for
a better use of funding and a greater likelihood of mission accomplishment.

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.
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.
During the reporting period, followup action was initiated on calls identifying concerns with actions
by several grantees.

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. The ARC OIG Hotline also serves as the hotline for the Denali
Commission. During this period, the ARC OIG made one referral to another OIG based on
information provided on the hotline.


Appalachian Development Highway System

Adequate or Complete--
——————"_ September 30, 2001

To be Completed.

————— Interstate System


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

The Federal 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 8
Section 5(a)(1) Problems, abuses, and deficiencies Page 3
Section 5(a)(2) Recommendations with respect to problems, abuses, and deficiencies Page 3
Section 5(a)(3) Prior significant recommendations not yet implemented *
Section 5(a)(4) Matters referred to prosecutive authorities *
Section 5(a)(5) and Summary of instances where information was refused *
6(b)(2)

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

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

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

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

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

« None.

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

iii


APPENDIX C

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

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

Which were issued during the reporting period

Subtotals (A + B)

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

--based on proposed legislative action

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

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

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

Notes:

No. of Dollar Value
Reports ($ in thousands)
1 $ 1V/
2 $133
3 $ 1341/
$ 134
3 $ 134
3 $ 134
. $C
$
$

Report issued at end of reporting period identified open grants
Based on prior reports and management actions, it is estimated
on other projects. This report was closed upon issuance an
semiannual as not having a management decision made.

with balances of $4.1 million for followup.
about $1 million will be deobligated for use
d should not have been listed in previous


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.


EXECUTIVE SUMMARY

During this reporting period, the Office of Inspector General (OIG) issued 12 reports.
Recommendations in grant reviews were directed at improved reporting and eligibility of
expenditures. A review ofinformation systems security revealed certain internal vulnerabilities that
were immediately addressed.

Grant reviews disclosed that projects were generally being implemented in accordance with program
requirements and that grantees generally had satisfactory accounting systems and internal controls.
Surveys of the J-1 Visa Waiver program were deferred during this reporting period as the
Commission is performing a 100 percent validation of all doctors granted waivers. The J-1 Visa
Waiver program provides a waiver of the 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 App alachian Region 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 ina designated Health Profession Shortage Area (HPSA)
in the Appalachian Region. The ARC program requires the physician to 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.

During the reporting period, the IG served on the Executive Council on Integrity and Efficiency and
participated as a panelist reviewing award nominations. The IG was an active participant in matters
impacting the Government Auditor Training Institute and contimued as IG of the Denali Commission

under a Memorandum of Agreement with the Denali Commission Federal Co-Chair.

The OIG has met with Commission staff to work towards positioning the Commission for audited
financial statements. While the unique makeup of the Commission requires much research on
determining the applicable standard to be used in preparing financial statements, the Commission
staff has made great strides during this period in working towards a final determination of standards
to be used and coming up with a standard format that will be equally acceptable to all parties.
Further, the OIG has worked with Commission staff responsible for the J-1 program to gather
information early in the process that will assist not only the Commission but the OIG in monitoring
the program internal controls. Lastly, the Inspector General has started the process of designing an
OIG portion of the Commission Management Information System which, when completed, will
allow Commission managers access to OIG reports and information directly. The OIG will also
work with the Commission staff to place OIG information on the Commission web site.

id.


TABLE OF CONTENTS

Page

Executive Summary tree reer sete e tees e rete erste rene sees e ees ii
Purpose and Requirements ofthe OIG Semiannual Report = se eeeeeeeee iv

I. Introduction settee nett e etree tere ente rer reseses crereie eens 1
Wl Background = trterrtt teen eee ererrttererstseseesrceee sess 1
Appalachian Regional Commission == settee eee e eee e eee e terete eens 1
Office ofInspector General seve eect teeee serene trererertstsee ss 2

TI. OIG Activity §- «ett e teen eet eeeeeneeeerseenreeeeereesss 3
Audits «| teen tee e ete e eee e eee teeeeeeseeeeteereeeees 3
Investigations tree eee t eee tteeeeeeeeeeettessssessreessees 6

IV. AuditPlanning = settee teen e tent tee tee eee reer eressre esses ss 7
V. OlGHotline «reece ttt e ett e etter ec en esse ereeeenseeneees 7
VI. Legislative & Regulatory Review veer eeeeeeeeereste cesses eseeeeces 8
VIL Other «tet ee tent ete e teeter ene eneeeeeeeteeecrsseeerees 8

Appendices A. Schedule of Audit Reports Issued
April 1 through September 30, 2002

B. Schedule of Audit Reports with Questioned or Unsupported Costs

Cc. Schedule of Audit Reports with Recommendations that Funds be put to
Better Use

D. Definition of Terms Used


APPENDIX A

SCHEDULE OF REPORTS ISSUED APRIL 1 TO SEPTEMBER 30, 2002

Report : Entity and Tite 4 ; Program Dollars. | Questioned - Funds to Better
No. : | or Contract/Grant ‘Unsupported User*
s ‘Amount Costs* z
02-21 Georgia Regional Initiatives $ 317,000 $132,821
02-25 Meigs County, Ohio, Dental Program 200,000
02-28 ARC Computer Network/Systems’ Security NA
02-30 Walker County, Georgia School Mentoring 30,712 1,077
02-31 Northwest Georgia Strategic Telecommunications Design 85,300
02-32 Parents, Children, Teachers Force 3 Project 88,600
02.33 Chattooga County, Georgia Telecommunications 254,899
02-34 Next Generation Entrepreneurial Schools Kentucky 200,000
02.35 Hickory Flat Clinic Health Care Equipment, Mississippi 99,960
02-36 Mississippi Governor’s Initiative for Classroom Technology 174,000
02-37 Mississippi State University Virtual Entrepreneurial Incubator 86,350
02-38 Tupelo Middle School SELECT, Mississippi 205,500
$1,762,321 $133,898
| TOTALS
. ‘A cost the Office of Inspector General has questioned because of an alleged violation of law, regulation, contract, or other agreements governing the

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

” Funds the Orfice 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.