Report to the Subcommittee on

Department Operations, Oversight,

Nutrition, and Forestry, Committee on

Agriculture, House of Representatives

United States General Accounting Office

GAO

October 2001 USDA GRADUATE

SCHOOL

Revenue Reporting

Needs to Be Improved

GAO-02-5
Page 1 GAO-02-5 USDA Graduate School

October 15, 2001

The Honorable Robert Goodlatte

Chairman

Subcommittee on Department Operations,

 Oversight, Nutrition, and Forestry

Committee on Agriculture

United States House of Representatives

Dear Mr. Chairman:

The U.S. Department of Agriculture (USDA) provides extensive training

opportunities to government employees and others through its Graduate

School. In fact, the USDA Graduate School has a unique role as a training

source for federal employees. As a nonappropriated fund instrumentality

(NAFI), the USDA Graduate School is not funded through congressional

appropriations; its revenue is solely derived from providing training

services to federal employees and others.

Based on your interest in the USDA Graduate School, you asked several

questions about its role in providing training services. In response to your

questions and after discussions with your office, we agreed to conduct an

evaluation that focused on the following objectives:

• characterizing the purpose and operating structure of the Graduate

School, as a NAFI,

• determining the extent of training services that selected federal agencies

obtained from the Graduate School and private companies during fiscal

year 1999 and learning how these agencies decide on vendors, and

• assessing the reasonableness of interagency agreement revenue reported

by the Graduate School in fiscal year 1999.

The U.S. Department of Agriculture Graduate School is a unique source of

training for federal and other professional staff. It is a nonappropriated

fund instrumentality whose purpose is to provide training to the federal

sector as well as to other organizations and individuals. Although

established in 1921 to support the Department of Agriculture’s research

scientists, its purpose and curriculum have expanded over the years to

include many professional disciplines. Its operations are managed by a

governing board that sets policies for the school. As a NAFI, the Graduate

School receives no appropriated funds but operates solely on revenue

derived from providing training services. It is not a federal agency, and

United States General Accounting Office

Washington, DC 20548

Results in Brief
Page 2 GAO-02-5 USDA Graduate School

certain federal laws generally applicable to federal agencies, such as the

Freedom of Information Act, do not apply to its operations. However,

Congress specifically authorized federal agencies to enter into interagency

agreements with the Graduate School to obtain training services.

We examined a nonstatistical sample of agencies for which the Graduate

School indicated it had provided training services in fiscal year 1999 and

assessed the scope of training and how the training services were

provided.1

 During fiscal year 1999, the agencies or agency components we

reviewed had 20 interagency agreements, totaling approximately

$5.7 million, with the Graduate School and 531 contracts, totaling about

$29 million, with private companies for training and other related services.

Agency officials characterized their use of the Graduate School to meet

their training requirements for any given year as limited, ranging from 0 to

11 percent of an agency’s total annual training budget. All of the surveyed

agencies had specific policies, practices, and procedures that governed the

acquisition of external training for their employees and required the

consideration of other vendors to fulfill a training requirement. When a

federal agency selects the Graduate School as the vendor to provide

training, the agency has several options through which to procure the

training, including contracts or interagency agreements. The agencies

indicated that interagency agreements generally are more convenient

because they take less time to process than contracts.

The Graduate School incorrectly identified the portion of revenue that was

earned through interagency agreements in its fiscal year 1999 financial

statements. Specifically, while the Graduate School reported about

$7.1 million in interagency agreement revenue for fiscal year 1999,2

 on the

basis of our stratified random sample, we estimated interagency

agreement revenue to be about $14.9 million.3

 The difference of

$7.8 million represents a misclassification of certain interagency

 1

The sample consisted of six agencies with which, we were told by the school, it had

interagency agreements in fiscal year 1999: the Census Bureau, Customs Service, Federal

Deposit Insurance Corporation, Internal Revenue Service, National Aeronautics and Space

Administration, Rural Development Corporation. The seventh agency in our sample, the

Department of Labor, was identified as not having an agreement during that time. We used

the Department of Labor for comparison purposes.

2

Graduate School, USDA Financial Statements for the Year Ended September 30, 1999.

3

We are 95 percent confident that the interagency agreement revenue is between

$13.9 million and $15.9 million based on our review of a stratified random sample of billings

made in fiscal year 1999.
Page 3 GAO-02-5 USDA Graduate School

agreement revenue as contract training revenue on the financial

statements. This misclassification resulted primarily from the Graduate

School’s reporting policies. Under those policies, the school classified the

fixed-price portion of interagency agreement revenue as contract training

revenue. Graduate School officials told us that they accumulate revenue as

fixed-price versus cost-reimbursable so that the school can monitor the

use of cost-reimbursable contracts.4

 We also noted two other matters

regarding the processing of revenue transactions and the retention of

revenue records. Specifically, we identified about $600,000 in additional

misclassified transactions and missing supporting documentation for six

transactions in the sample we reviewed. We are making recommendations

to the Executive Director of the Graduate School to improve its reporting

of interagency agreement revenue in its financial statements.

The Graduate School commented on a draft of this report and agreed with

our findings. (See appendix I.)

Nonappropriated fund instrumentalities (NAFI) are federal government

entities whose funding does not come from congressional appropriations

but rather from their own activities, such as the sales of goods and

services. Their receipts and expenditures are not reflected in the federal

budget. NAFIs were established to provide services and items for the

morale, welfare, and recreational needs of government employees. Some

NAFIs, for example the exchange system run by the Department of

Defense, are created by statute. Others are created and regulated by

government agencies. Some NAFIs, for example the Department of

Agriculture’s Graduate School, after being established by an agency, may

subsequently receive congressional approval.

No single federal statute establishes the overall authority to create NAFIs

or defines how they are to operate. The Department of Defense military

exchange system—which includes general retail stores, specialty stores,

and consumer services at military installations—is the largest NAFI

program. Some other agencies that use NAFIs are the Department of

Veterans Affairs, the Coast Guard, and the State Department.

 4

Cost-reimbursable contracts provide for payment of allowable incurred costs, to the

extent prescribed in the contract. Absent the contracting officer’s approval, the contractor

exceeds the established cost ceiling at its own risk. Fixed-price contracts provide for a firm

price that is generally not subject to any adjustment on the basis of the contractor’s costs

in performing the contract.

Background
Page 4 GAO-02-5 USDA Graduate School

Procurement laws and regulations applicable to federal government

agencies generally do not apply to NAFIs. For example, the Federal

Acquisition Regulation, the governmentwide regulation prescribing

procedures for federal procurements and acquisitions with appropriated

funds, does not include NAFI procurements with nonappropriated funds.

Even though NAFIs generally are not covered under federal procurement

regulations, the government agency that establishes a NAFI generally has

financial oversight or control of its operations. For example, the

Department of Defense established financial oversight procedures for its

NAFI activities. The Secretary of Defense is required by statute to

prescribe regulations governing (1) the purposes for which

nonappropriated funds of a NAFI may be expended and (2) the financial

management of such funds to prevent waste, loss, or unauthorized use

(10 U.S.C. §2783).

The Graduate School was established by the Secretary of Agriculture on

September 2, 1921, to provide continuing education for research scientists

within the department. Over the years the Graduate School has expanded

as a center for professional training of government employees at the

federal, state, and local levels. A major expansion in its training

curriculum occurred on May 16, 1995, when the Office of Personnel

Management transferred eight of its training centers to the Graduate

School.

The Graduate School currently provides more than 1,500 courses annually

and is open to all adults regardless of their place of employment or

educational background. Training is offered in a variety of subject areas

including computer science, leadership development, and government

auditing. Courses are available during the daytime, evening, and on

weekends. In addition, the Graduate School offers a distance learning

program in which courses can be taken by correspondence and online.

The Graduate School also provides training services such as conference

and meeting management.
Page 5 GAO-02-5 USDA Graduate School

The Graduate School’s stated purpose is, through education, training, and

related services, to improve the performance of government and to

provide opportunities for individual life-long learning. Certificates of

accomplishment to encourage participants to complete planned programs

in their fields of study are awarded by the Graduate School. Some courses

receive college credit recommendations from the American Council on

Education’s College Credit Recommendation Service. The credit

recommendations guide colleges and universities when they consider

awarding credit to participants whom have successfully completed

courses at the Graduate School.

The Graduate School is under the general direction of the Secretary of

Agriculture. Regulations issued by the Secretary require the Graduate

School to be governed by a General Administration Board that sets the

school’s policies, employs its director, and oversees its operations. These

regulations also require that the board and most of the board’s leadership

positions be filled by employees of the department. The Graduate School

employs more than 1,200 part-time faculty who are drawn from

government, academia, and the private sector. Graduate School employees

are not part of the civil service system.

The Graduate School receives no appropriated funds but operates on

revenue derived from providing training services. The school’s revenue

comes primarily from three sources: (1) training services provided through

interagency agreements with federal agencies, (2) training services

provided on a contractual basis, and (3) individual tuition, otherwise

known as “open enrollment.” The school uses three categories to define

and report its revenue each year: (1) interagency agreement revenue,

(2) contractual revenue, and (3) open enrollment revenue. An annual

financial audit conducted by a private sector accounting firm is reviewed

by the school’s board.

In 1984, the Comptroller General ruled that the Graduate School, because

it was not a federal agency, could not enter into interagency agreements

with federal agencies under the Economy Act (31 U.S.C. §1535).5

 After this

ruling, the Graduate School’s revenue decreased about one-third,

according to officials. In 1990, Congress authorized federal agencies to

enter into interagency agreements with the Graduate School for training

and other related services (7 U.S.C. §5922). That authority permits federal

 5

64 Comp. Gen. 110 (1984).

Purpose and

Operating Structure

of the Graduate

School
Page 6 GAO-02-5 USDA Graduate School

agencies to enter into such agreements without regard to competition

requirements mandated in the Federal Property and Administrative

Services Act of 1949 (40 U.S.C. 471, et seq.) or other procurement laws.

The statute also gives the Comptroller General authority to conduct audits

of the Graduate School’s financial records relating to interagency

agreements entered into under this provision.

In 1996, Congress passed legislation that made it clear that as of April 4,

1996, the Graduate School would continue to operate as a NAFI (7 U.S.C.

§2279b). Any fees collected by the Graduate School are not considered

federal funds and are not required to be deposited in the United States

Treasury. That statute also provides that the Graduate School is exempt

from various other federal provisions generally applicable to federal

agencies, including the Freedom of Information Act, the Privacy Act, and

the Federal Tort Claims Act. Consequently, the Graduate School does not

have to respond to Freedom of Information Act requests, nor does it have

any legal obligation to release any of its training materials, such as specific

curriculum outlines, to the general public. The law authorizes the

Graduate School’s use of the Department of Agriculture facilities and

resources on a cost-reimbursable basis. According to financial reports for

fiscal year 1999, the Graduate School reimbursed the department

approximately $1.5 million for use of office space and other facilities.

To get information regarding the extent to which agencies use the

Graduate School, we reviewed seven executive branch agencies.

Collectively, the seven federal agencies we surveyed used private

companies more frequently in fiscal year 1999 than the Graduate School.6

As table 1 indicates, these agencies had far more contracts with the private

sector than interagency agreements with the Graduate School (531 vs. 20,

respectively) for training. In examining the funding received by the

Graduate School, we found a similar result: the agencies surveyed spent

more on contracts with private companies—about $29 million—than on

interagency agreements with the Graduate School—about $5.7 million.

The selected agencies accounted for approximately one-third of the total

interagency agreement revenue earned by the Graduate School in fiscal

year 1999. We also surveyed these agencies regarding their total level of

 6

In addition to using the Graduate School and private companies for external training,

agencies also use colleges, universities, and other training sources, including other federal

agencies.

The USDA Graduate

School Is Not the

Principal Choice of

Agencies for Training

Services
Page 7 GAO-02-5 USDA Graduate School

Table 1: Fiscal Year 1999 Interagency Agreements With the Graduate School and

Contracts With Primarily Private Companies

Agency

Interagency Agreements With

the Graduate School

Contracts With Private

Companies

Number Amount Number Amount

Census Bureau 1 $62,400 2 $192,870

Customs 0 0 55 8,088,087

DOL 0 0 61 —a

IRS 12 3,870,613 15b 7,622,804

FDIC 5 1,476,948 52 10,917,932

NASA

(Headquarters and

Goddard)

2 304,486 346 2,539,009

Rural Development

(Headquarters and

St. Louis Region)

0000

Total 20 $5,714,447 531 $29,360,702

Note: Our sample was drawn from a list of entities that the Graduate School told us had interagency

agreements with it in fiscal year 1999, with the exception of the Department of Labor, which had no

interagency agreements with the school during this time period. Those entities included the Census

Bureau, Customs Service, Federal Deposit Insurance Corporation, Internal Revenue Service,

National Aeronautics and Space Administration (Headquarters and Goddard Space Flight Center),

and Rural Development (Headquarters and St. Louis Region). During our evaluation, we determined

that two of these entities, the Customs Service and Rural Development in fact did not have

interagency agreements with the school in fiscal year 1999. Nonetheless, we retained those entities

along with the Department of Labor in our work because they were able to provide other relevant

information.

a

The dollar amount for these contracts was not available.

b

Sixty-eight task orders were written under 15 umbrella contracts.

Source: Internal Revenue Service, Department of Labor, National Aeronautics and Space

Administration, Rural Development, Census Bureau, Customs Service, and Federal Deposit

Insurance Corporation

training supported by the Graduate School (rather than training only

acquired through interagency agreements). Officials at the agencies

reported that the Graduate School’s share of their overall training budgets

was minimal, ranging from 0 percent to 11 percent of their total annual

training budgets.

Agency officials we surveyed told us they followed specific internally

established policies, practices, and procedures for making decisions on

vendors and procurement methods. While only two of the seven agencies

had documented these policies, officials from all seven told us their

policies were consistently applied and required that at least two other

vendors be considered for any procurement. For example, the U.S.

Customs Service has written policies governing the acquisition of training
Page 8 GAO-02-5 USDA Graduate School

that are published in a directive and a Memorandum from the Assistant

Commissioner. All Customs external training purchases require the

advance approval of the appropriate management officials with delegated

authority to approve training. NASA officials said they follow the external

training guidelines in the Federal Acquisition Regulation. However, NASA

officials at its Goddard Space Flight Center told us that when potential

vendors were considered for each training requirement, a “Request for

Training Quote Information” form is required for each potential vendor.

This form is used to collect information regarding each potential vendor

and to assess its ability to provide the training services required.

All of the agency officials said they consider a number of factors before

deciding which vendor and contracting approach to use. The most

commonly cited factors were cost and the ability of the vendor to provide

the requested training. Additional factors agencies consider include

customer needs, timeliness, past experience with the vendor, and quality

of the product. Some agencies, such as the Internal Revenue Service and

the Census Bureau, indicated that they conduct “market analysis” studies

to identify all potential vendors. In addition, some agencies identified

potential vendors using the General Services Administration’s Federal

Supply Schedule and the Government Wide Awarded Contracts.

If the USDA Graduate School is selected as the vendor to provide training

to an agency, that training can be acquired through a variety of

procurement methods including interagency agreements and contracts. In

general, agencies indicated that an interagency agreement can be easier to

use because it is faster to put into place. Several of the agencies we

surveyed also had formal written guidance addressing the use of

interagency agreements that also applies to those established with the

Graduate School. For example, Census Bureau guidance specifically

mentions that interagency agreements are entered into under the authority

of the Economy Act,7

 including agreements with the Graduate School.

Even though the Customs Service had no interagency agreements with the

Graduate School in fiscal year 1999, its 1998 Interagency Agreement

Guide makes direct reference to the Economy Act and its provisions and

is applicable to agreements established with the Graduate School.

 7

31 U.S.C. §1535
Page 9 GAO-02-5 USDA Graduate School

The interagency agreement line item in the Graduate School’s fiscal year

1999 financial statements did not include all of the revenue received from

interagency agreements. The Graduate School’s fiscal year 1999 financial

statements reported interagency agreement revenue of about $7.1 million.

Graduate School officials acknowledged that its reported revenue by type

was imprecise. We independently estimated interagency agreement

revenue as $14.9 million using a stratified random sample of revenue

billings made in fiscal year 1999.8 The $7.8 million difference between the

reported interagency agreement revenue and our estimate occurred

because the Graduate School included certain revenue under contract

training that should have been reported as interagency agreement revenue.

According to Graduate School officials, only revenue earned under costreimbursable arrangements is reported as interagency agreement revenue.

All fixed-price revenue is recorded as contract training, even though a

significant amount of this revenue was provided through interagency

agreements. Had management labeled these two line items as costreimbursable and fixed-price, rather than contract training and

interagency agreements, the financial statements would have correctly

disclosed the sources of revenue. However, mislabeling these line items

caused the fiscal year 1999 financial statements to be misleading with

regard to the procurement method used to generate revenue.

Graduate School officials said they chose their method of accumulating

revenue as fixed-price because it provides the information needed to

support certain management decisions. For example, the school has a goal

of avoiding heavy reliance on cost-reimbursable interagency agreement

revenue. Further, the Graduate School Board of Directors monitors the

composition of the fixed-price revenue versus cost-reimbursable revenue.

In the course of our work, we noted two other matters regarding

transaction processing and records retention. First, based on our sample

results, we estimated that the Graduate School misclassified $563,4169

 in

fiscal year 1999 revenue that was generated under contracts as interagency

agreement revenue. These misclassification errors resulted from

inaccurate manual coding of revenue transactions. Second, the Graduate

School could not locate five billing invoices and documentation supporting

 8

We are 95 percent confident that the actual total is between $13.9 million and $15.9

million.

9

We are 95 percent confident that the misclassified amount is between $446,872 and

$679,961.

Graduate School’s

Financial Statements

Incorrectly Identified

Interagency

Agreement Revenue
Page 10 GAO-02-5 USDA Graduate School

one cash receipt in our sample. We considered the six items as complete

errors and classified them as interagency agreements.10

The USDA Graduate School is a nonappropriated fund instrumentality

whose purpose is to improve the performance of government through

training of its employees. The operating structure of the Graduate School

includes oversight by the Secretary of Agriculture and a governing board.

Employees of the Graduate School are not part of the civil service. In

examining the extent of training received by selected federal agencies in

fiscal year 1999, the majority of this training was provided by sources

other than the Graduate School.

The Graduate School’s revenue line items need to be consistent with the

revenue sources for the school’s financial statements to be meaningful.

The interagency agreement line item in the school’s fiscal year 1999

financial statements was not clearly and accurately reported because it did

not reflect approximately half of the interagency agreement revenue that

was classified as contract revenue. As a result, a reader could not

determine the actual amount of total revenue derived from interagency

agreements.

We recommend that the Executive Director of the USDA Graduate School

revise the Graduate School’s current financial reporting policy to ensure

that the revenue line items are properly presented in the school’s financial

statements.

We requested comments on a draft of this report from the Executive

Director of the USDA Graduate School. In its written comments, the

Graduate School agreed with the report’s content, conclusions, and

recommendation. The Graduate School comments are reprinted in

appendix I.

 10We are 90 percent confident that at least $147,743 represents the portion of contract

revenue that did not have documentation.

Conclusions

Recommendation

Agency Comments
Page 11 GAO-02-5 USDA Graduate School

Our work was done at the USDA Graduate School headquarters and at

selected federal agencies: the Department of Labor, the Internal Revenue

Service, the Department of Agriculture’s Rural Development, the Federal

Deposit Insurance Corporation, the U.S. Customs Service, the Census

Bureau, and the National Aeronautics and Space Administration.

To provide information on the purpose and operating framework of the

Graduate School we interviewed Graduate School officials and reviewed

documentation including legislation, policies, and strategic plans

governing the Graduate School. We determined the extent of training

services that selected federal agencies obtained from the Graduate School

and private contractors and—by interviewing agency officials and

reviewing appropriate documents, including agency procurement

regulations and listings of agreements and contracts—we learned how

such decisions were made. Six agencies covered by our work were

nonstatistically selected based on their having interagency agreements and

contracts with the Graduate School during fiscal year 1999.11 The seventh

agency in our sample, the Department of Labor had no interagency

agreements with the Graduate School during this period. Our work was

performed using fiscal year 1999 data because this was the last year for

which a complete data set was available when we initiated our evaluation.

The seven nonstatistical selected agencies accounted for approximately

one-third of the total interagency agreement revenue earned by the

Graduate School in fiscal year 1999. To assess the reasonableness of

interagency agreement revenue reported in the Graduate School’s fiscal

year 1999 financial statements, we met with Graduate School officials and

external auditors for the school; read their audited financial statements for

fiscal years 1999 and 1998; and read the school policies and procedures

governing the classification of revenue and contracting. Further, we

 11Our sample was drawn from a list of entities that the Graduate School told us had

interagency agreements with it in fiscal year 1999. Those entities included the Census

Bureau, Customs Service, Federal Deposit Insurance Corporation, Internal Revenue

Service, National Aeronautics and Space Administration (Headquarters and Goddard Space

Flight Center), and Rural Development (Headquarters and St. Louis Region). During our

evaluation, we determined that two of these entities, the Customs Service and Rural

Development, in fact did not have interagency agreements with the school in fiscal year

1999. Nonetheless, we retained those entities in our work because they were able to

provide other relevant information.

Scope and

Methodology
Page 12 GAO-02-5 USDA Graduate School

independently estimated interagency agreement revenue by selecting a

stratified random probability sample of 145 transactions from 2,439

interagency agreement revenue billings made during fiscal year 1999. We

stratified the population into four strata on the basis of the total of

revenue billings for fiscal year 1999. In addition, we independently

estimated contract revenue by selecting a stratified random probability

sample of 185 transactions from 3,523 contract revenue billings made

during fiscal year 1999. We stratified the population into five strata on the

basis of the total amount of revenue billings for fiscal year 1999. Each

sample element was subsequently weighted in the analysis to account

statistically for all members of the respective populations, including those

that were not selected.

Transactions selected in the sample were tested for accuracy and to

determine whether or not they were classified correctly. The confidence

level used for estimating the value of misclassified amounts was

95 percent and the expected tolerable amount in error (test materiality)

was $545,950.

We also tested the reliability of the $6.1 million in fixed-price interagency

agreement revenue identified by Graduate School officials that was

reported as contract training revenue. We did not audit the Graduate

School’s financial statements or review the other auditor’s workpapers.

Furthermore, we are not expressing an opinion on the Graduate School’s

financial statements or on whether their auditors followed professional

standards.

We conducted our review in the Washington, D.C., metropolitan area from

November 2000 to June 2001 in accordance with generally accepted

government auditing standards. We requested comments on a draft of this

report from the Executive Director of the Graduate School.

We are sending copies of this report to the Chairman of the House

Committee on Agriculture; the Director of the USDA Graduate School; the

Secretaries of the Departments of Agriculture, Labor, Treasury, and

Commerce; the Directors of the Federal Deposit Insurance Corporation

and U.S. Census Bureau; the Administrator of the National Aeronautics

and Space Administration; the Commissioners of the Internal Revenue
Page 13 GAO-02-5 USDA Graduate School

Service and U.S. Customs Service; and the Deputy Undersecretary of the

Rural Development and other interested parties. We will also make copies

available to others on request. Major contributors to this report are listed

in appendix II. If you have any questions please call me at (202) 512-9490.

Sincerely yours,

George H. Stalcup

Director

Strategic Issues
Appendix I: Comments From the Department of Agriculture

Page 14 GAO-02-5 USDA Graduate School

Appendix I: Comments From the Department

of Agriculture
Appendix II: GAO Contacts and Staff Acknowledgments

Page 15 GAO-02-5 USDA Graduate School

George H. Stalcup, (202) 512-9490.

Key contributors to this report were Charlesetta Bailey, Jeffrey Bass,

Sharon Byrd, Brandon Haller, Jeffrey Isaacs, Casandra Joseph, Boris

Kachura, Carla Lewis, Delois Richardson, Sylvia Shanks, Alana Stanfield,

Michael Volpe, McCoy Williams, and Gregory Wilmoth.

Appendix II: GAO Contacts and Staff

Acknowledgments

GAO Contact

Acknowledgments

49005450

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