OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Attestation Report 

America’s Clean Water Foundation 

Incurred Costs for EPA Assistance 

Agreements X82835301, X783142301, 

and X82672301 

Report No. 2007-4-00045 

February 20, 2007 
Report Contributors: Keith Reichard 

 Bill Spinazzola 

 Lela Wong 

 Clem Cantil 

Abbreviations 

CFR Code of Federal Regulations 

EPA U.S. Environmental Protection Agency 

OIG Office of Inspector General 

OMB Office of Management and Budget 

FAR Federal Acquisition Regulations 
U.S. Environmental Protection Agency 2007-4-00045

Office of Inspector General February 20, 2007

At a Glance


Catalyst for Improving the Environment 

Why We Did This Review 

We conducted this 

examination to determine 

whether the total costs 

incurred for three U.S. 

Environmental Protection 

Agency (EPA) assistance 

agreements were fairly

presented, in all material 

respects, and the incurred 

costs were allowable in 

accordance with the terms and 

conditions of the agreements 

and applicable regulations. 

Background 

EPA awarded three assistance 

agreements to the America’s 

Clean Water Foundation 

(Foundation) to perform 

environmental risk 

assessments at agricultural 

facilities and to assist States, 

tribes, and territories in 

complying with the Clean 

Water Act. 

For further information, 

contact our Office of 

Congressional and Public 

Liaison at (202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2007/ 

20070220-2007-4-00045.pdf 

America’s Clean Water Foundation Incurred Costs 

for EPA Assistance Agreements X82835301, 

X783142301, and X82672301 

What We Found 

The Foundation did not comply with the financial and program management 

standards and the procurement standards promulgated in Title 40 Code of Federal 

Regulations (CFR), Part 30. Specifically, the Foundation (1) could not provide 

support for any of its general journal entries; (2) included duplicate transactions in 

its accounting system; (3) recorded labor charged to EPA grants incorrectly; 

(4) could not support the recorded indirect costs; (5) claimed unallowable 

preaward costs; (6) recorded EPA cash draws inaccurately; (7) did not submit 

required indirect cost proposals to EPA; (8) did not complete the required single 

audits for fiscal years ended June 30, 2003, June 30, 2004, and June 30, 2005; and 

(9) did not submit a Federal Cash Transactions Report when required. 

The Foundation’s procurement practices and procedures did not comply with the 

grant regulations. The Foundation awarded sole source contracts without 

performing the cost/price analysis required by Title 40 CFR 30.45. It also 

awarded a contract to a member of its Board of Directors, contrary to the conflict 

of interest provisions at Title 40 CFR 30.42, and reimbursed a contractor for 

billings above contractual ceilings. Because the Foundation did not adequately 

document its costs and did not comply with the EPA regulations, we questioned 

the Federal share claimed of $25,372,590. 

What We Recommend 

We recommend that the Director for the Grants Administration Division: 

(1) disallow the Federal share claimed of $25,372,590, and recover payments 

made of $25,173,266, unless the Foundation reconstructs its accountings records 

to meet the financial management standards required by Title 40 CFR 30.21 

through 30.28; (2) rescind provisional indirect rates for fiscal years ended June 30, 

2005, and June 30, 2006; (3) require the Foundation to obtain single audits for 

fiscal years ended June 30, 2003, June 30, 2004, and June 30, 2005; (4) require the 

Foundation to prepare and submit overdue Standard Form 272 Federal Cash 

Transactions Reports; (5) disallow contract costs procured, claimed, and 

administered in violation of the requirements in Title 40 CFR Part 30; (6) disallow 

contract costs that were not authorized under the contract terms; (7) stop work on 

all active grants; and (8) not award any new grants until the Foundation meets 

minimum financial management requirements and repays all disallowed costs. 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL

February 20, 2007 

MEMORANDUM 

SUBJECT: America’s Clean Water Foundation Incurred Costs for 

EPA Assistance Agreements X82835301, X783142301, and X82672301 

 Report No. 2007-4-00045 

TO: Richard Kuhlman 

Director, Grants Administration Division 

This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the 

U.S. Environmental Protection Agency (EPA). This report contains findings that describe the 

problems the OIG has identified and corrective actions the OIG recommends. This report 

represents the opinion of the OIG and does not necessarily represent the final EPA position. 

Final determination on matters in this report will be made by EPA managers in accordance with 

established audit resolution procedures. 

On September 29, 2006, we issued a draft report to the America’s Clean Water Foundation’s 

(Foundation’s) attorney for comments. On December 7, 2006, we received a response from the 

Foundation’s attorney which also included comments from Validus Services, LLC, the 

Foundation’s contractor. The Foundation and Validus either disagreed with or did not respond to 

the report’s findings. We did not receive the response, as requested, in an acceptable electronic 

format to include in the report. A copy is available on request. We have summarized the 

Foundation’s pertinent comments after each finding in the report. 

The estimated cost of this report – calculated by multiplying the project’s staff days by the 

applicable daily full cost billing rates in effect at the time – is $221,225. 

Action Required 

In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us 

your proposed management decision for resolution of the findings contained in this report before 

any formal resolution can be completed with the Foundation. Your proposed decision is due on 

June 20, 2007. To expedite the resolution process, please email an electronic version of your 

proposed management decision to reichard.keith@epa.gov. 
We have no objections to the further release of this report to the public. For your convenience, 

this report will be available at http://www.epa.gov/oig. We want to express our appreciation for 

the cooperation and support from your staff during our review. If you have any questions about 

this report, please contact Keith Reichard at (312) 886-3045. 

Sincerely, 

Bill A. Roderick 

Acting Inspector General 
America’s Clean Water Foundation 

Incurred Costs for EPA Assistance Agreements

X82835301, X783142301, and X82672301 

Table of Contents 

Background ....................................................................................................................... 1 

Independent Auditor’s Report ............................................................................................ 4 

Results of Examination ....................................................................................................... 6 

Recommendations............................................................................................................... 16 

Status of Recommendations and Potential Monetary Benefits....................................... 17 

Schedules 

Schedule 1 Schedule of Claimed Outlays by Assistance Agreement, 

Unallowable Costs, and Amounts Due EPA 

American’s Clean Water Foundation.......................................................... 18 

Schedule 2 Comparison of Claimed Outlays to Recorded Costs 

 Validus Services, LLC.................................................................................. 19 

Schedule 3 Results of Examination for Claimed Outlays

 Validus Services, LLC.................................................................................. 21 

Appendices 

A Scope and Methodology.......................................................................................... 30 

B Distribution ............................................................................................................... 32 
Background 

The U.S. Environmental Protection Agency (EPA) awarded three assistance agreements1

 (grants) 

to the America’s Clean Water Foundation (Foundation) totaling $25,886,111. The Foundation, 

which is located in Washington, DC, was formed in 1989, and is a Section 501(c) (3) not-forprofit organization (specified in the Internal Revenue Code). The following table summarizes 

information about the authorized project periods and funds awarded under each of the three 

grants: 

Grant 

Award 

Date 

EPA 

Share * 

EPA 

Payments 

Last 

Payment 

Date Project Period 

X82835301 08/31/2000 $ 14,438,750 $ 14,438,750 10/22/2003 07/01/2000 – 06/30/2004 

X783142301 09/26/2003 9,938,000 9,225,155 02/17/2006 06/30/2003 – 06/30/2006 

X82672301 07/23/1998 1,509,361 1,509,361 06/10/2004 06/01/1998 – 05/31/2004 

Total $ 25,886,111 $25,173,266 

Source: The source of the grant information was the OIG’s summary of the grants/amendments. The EPA 

payments and payment dates came from EPA’s Financial Data Warehouse. 

* EPA funded 100 percent of grants X82835301 and X783142301. EPA’s share of grant X82672301 was 

$1,509,361 and the Foundation’s share was $25,000. 

All three grants were awarded under Section 104 (b)(3) of the Clean Water Act. The scopes of 

work are: 

Grant X82835301: This grant was to conduct On-Farm Assessment and Environmental Review 

(OFAER) assessments at pork production facilities to identify actual or potential environmental 

risks, develop steps to mitigate those risks, and prevent them from becoming environmental 

problems. It also was intended to test the assessment process at beef, dairy, and poultry 

facilities. 

Grant X783142301: This grant was for the continuation of the OFAER program described under 

Grant X82835301 above. It included assessments at beef, dairy, and poultry facilities as well as 

pork production facilities. 

Grant X82672301: This grant was to enable the Foundation to continue liaison support by 

assisting States, Indian tribes, and territories in complying with the Clean Water Act, section 

303(d) and Total Maximum Daily Load program requirements. The grant was also intended to 

enable the Foundation to provide Water Quality Standards Circuit Rider support. 

1

 EPA’s assistance to the Foundation was either a grant or cooperative agreement. For reporting purposes, all 

 assistance will be referred to as a grant. 

1
While performing the single audit for the year ended June 30, 2004, RAFFA, the Foundation’s 

accounting firm, discovered accounting irregularities and a potential embezzlement of funds. 

The Foundation’s president and the managing partner of RAFFA met with EPA officials to 

report these irregularities. As a result of this meeting, EPA, on July 18, 2005, changed the 

Foundation’s method of grant payments from “Advance” to “Reimbursement.” EPA officials 

stated they took this action because the circumstances described indicated a breakdown in 

internal controls. They also stated that EPA would not process any new grant awards or 

amendments to existing grants until the Foundation demonstrated it had complied with EPA’s 

standards for financial management systems in Title 40 CFR 30.21(b). 

In a November 8, 2005, letter, EPA informed the Foundation that payment for grant costs 

incurred for contract ACWF-OFAER-01-05 awarded to Environmental Management Solutions, 

LLC (now Validus Services, LLC) would not be approved because the Foundation did not 

comply with EPA procurement requirements. In response, the Foundation provided information 

on the OFAER contract procurement and requested a deviation from the regulations. EPA 

deferred action on the Foundation’s request for deviation to allow the Foundation additional time 

to provide the required cost review documentation. On July 11, 2006, EPA denied the 

Foundation’s request for deviation because (1) the required documentation was not submitted 

and (2) the OIG indicated in a memorandum report2 that costs incurred under the contract were 

not reasonable or allowable. EPA requested that the $5.6 million it reimbursed the Foundation 

under the contract be returned. 

In a July 14, 2006, letter, the Foundation’s attorney notified EPA that the Foundation was 

formally dissolved. The letter stated that all members of the Board of Directors had resigned, the 

Foundation filed dissolution papers with the District of Columbia, and it no longer had any 

employees or an office location. The stated reason for the dissolution was the lack of program 

funding; the Foundation could no longer operate effectively or respond to Agency inquiries. The 

letter indicated that Foundation records and files had been moved to a storage facility in 

Standardsville, Virginia, that access to the records can be arranged, and that the Foundation 

retained its right to initiate and maintain claims. 

Single Audit Activity 

Nonfederal entities that expend $300,000 ($500,000 for fiscal years ending after December 31, 

2003) or more in a year in Federal awards are required by Title 40 CFR 30.26 to have a single 

audit conducted in accordance with applicable requirements of the OMB Circular A-133. The 

Foundation had single audits completed for the fiscal years ended June 30, 2000, June 30, 2001, 

and June 30, 2002. Applicable findings follow. 

Fiscal Year 2000 - During the year, the Foundation advanced $100,000 in Federal funds to 

another not-for-profit organization. The advance was repaid in 90 days. However, the 

Foundation did not follow requirements that Federal funds be used only in strict adherence with 

terms of the grant agreement. 

2

 Memorandum no. 2006-M-0001, dated June 15, 2006, issued to Richard Kuhlman, Director, Grants Administration 

Division. 

2
Fiscal Year 2001 - Several Federal Cash Transactions Reports were not properly supported. 

There were discrepancies between cumulative grant expenditures and amounts in the general 

ledger. Adjustments to the grants were made after the reports were submitted. However, the 

Foundation did not retain support for amounts reported in the Federal Cash Transaction Reports 

or the adjustments to the general ledger. 

The Foundation used accrued expenditures as the basis for the EPA cash draws instead of cash 

disbursements. As a result, an excess cash balance existed. In the case cited in the audit report, 

the Foundation reported excess cash on hand at December 31, 2000, of $506,170. The funds 

were not disbursed until February 21, 2001, a period of about 6 weeks. In addition, the funds 

were not maintained in an interest-bearing account. 

The Foundation did not submit its single audit report for fiscal year 2000 to the Federal Audit 

Clearing House timely. The report was due no later than March 31, 2001. It had not been 

submitted at the time of completion of fieldwork for the fiscal year 2001 audit (January 25, 

2002). 

Fiscal Year 2002 - The Foundation received cash advances in excess of its current cash needs. 

As of June 30, 2002, the recipient had $60,650 unspent from a $100,000 advance on May 7. In 

addition, the funds were not maintained in an interest bearing account. 

Fiscal Years 2003 through 2005 - A single audit for fiscal year 2003 was completed but a 

report was not issued because of accounting irregularities discovered during the fiscal year 2004 

single audit. In March 2005, the Foundation hired RAFFA to provide audit services, which 

included an audit of the fiscal year 2004 financial statements. However, RAFFA discontinued its 

work after identifying accounting irregularities that might extend back to prior years. Effective 

July 8, 2005, RAFFA took over daily accounting duties for the Foundation. The Foundation has 

either not issued or completed the single audits for the years ended June 30, 2003, June 30, 2004, 

and June 30, 2005. 

To assist the reader in obtaining an understanding of the report, key terms are defined below: 

Reported Outlays: Actual cash disbursements identified by the Foundation on 

the Financial Status Report (Standard Form 269A) or the 

Federal Cash Transaction Report (Standard Form 272). 

Questioned Costs: Costs that are (1) contrary to a provision of a law, 

regulation, agreement, or other documents governing the 

expenditures of funds; or (2) not supported by adequate 

documentation. 

3
Independent Auditor’s Report 

We have examined the total outlays and disbursements reported by the Foundation under the 

EPA grants shown below: 

Grant 

Financial Status Report/ 

Federal Cash Transactions Report 

Date 

Submitted 

Period 

Ending 

Reported 

Outlays/ 

Disbursements 

Federal Share 

Of Outlays 

Reported 

X82835301 09/28/2004 06/30/2004 $14,438,750 $14,438,750* 

X783142301 09/22/2005 06/30/2005 9,424,479 9,424,479** 

X82672301 09/28/2004 05/31/2004 1,534,361 1,509,361* 

Total $25,397,590 $25,372,590 

Source: The sources of the reported outlays were the recipient’s Financial Status Reports/Federal Cash 

Transactions Report. 

* Outlays reported on the Final Financial Status Reports 

** Disbursements reported on the Federal Cash Transactions Report

The Foundation certified that the outlays and disbursements reported on the Financial Status 

Reports, Standard Form 269A, and the Federal Cash Transactions Reports, Standard Form 272, 

were correct and for the purposes set forth in the agreements. Preparing these reports was the 

Foundation’s responsibility. Our responsibility is to determine the allowable costs incurred in 

accordance with the terms and conditions of the grants and applicable EPA regulations. 

We conducted our examination in accordance with the Government Auditing Standards issued by 

the Comptroller General of the United States, and the attestation standards established for the 

United States by the American Institute of Certified Public Accountants. We also followed the 

guidelines and procedures established in the Office of Inspector General Project Management 

Handbook, dated January 14, 2005. We examined, on a test basis, evidence supporting the 

reported outlays/expenditures, and performed such other procedures as we considered necessary 

in the circumstances (see Appendix A for details). We believe that our examination provides a 

reasonable basis for our opinion. 

We questioned the Federal share of $25,372,590 that the Foundation claimed because it did not 

comply with the financial and program management standards and the procurement standards 

promulgated in Title 40 Code of Federal Regulations (CFR), Subchapter B, Part 30. 

4
In our opinion, because of the effects of the deficiencies discussed in the Results of Examination, 

the reported Federal outlays and disbursements on the Financial Status Reports and Federal 

Cash Transactions Report do not present fairly, in all material respects, the allowable costs 

incurred in accordance with the terms and conditions of the grants and applicable EPA 

regulations. 

/s/ Keith Reichard 

Keith Reichard 

Office of Inspector General 

U.S. Environmental Protection Agency 

February 20, 2007 

5
Results of Examination 

Financial and Program Management Systems Did Not Comply with 

Standards 

The Foundation did not comply with the financial and program management standards 

promulgated in Title 40 CFR, Subchapter B, Part 30. Because the Foundation did not meet its 

fiduciary responsibilities under the regulations, outlays and expenditures reported on the 

Financial Status Reports and Federal Cash Transactions Reports are not allowable. 

When applying for grant assistance, the Foundation certified that it had the institutional, 

managerial, and financial capability to ensure proper planning, management, and completion of 

the project described in the grant application, and that it would comply with applicable 

requirements of Federal laws, executive orders, regulations, and policies governing the grant. 

EPA’s administrative grant regulations for nonprofit organizations are codified in Title 40 CFR, 

Subchapter B, Part 30. Under the provisions of Title 40 CFR Part 30, the Foundation was 

required to follow the financial and program management standards codified in Title 40 CFR 

30.21 through 30.28. As part of our audit procedures, we asked the Foundation to (1) summarize 

the outlays reported to EPA and (2) reconcile the reported outlays to the Foundation’s book and 

records. In response, the Foundation provided EPA with schedules that presented costs by 

assistance agreement by cost element by fiscal year. However, these schedules did not reconcile 

to the outlays reported on the Financial Status Reports and disbursements on the Federal Cash 

Transactions Report. The Foundation reported outlays to EPA that were greater than amounts it 

recorded in its books and records by a total of $611,289. See Schedule 1 for details on reported 

outlays and disbursements by grant and differences when compared to the Foundation’s books 

and records. 

On May 9, 2006, we discussed these differences with the Foundation’s President and requested 

revisions to grant claims or supporting accounting records. We made similar requests on May 

23, 2006, and May 30, 2006. The Foundation did not respond. Title 40 CFR 30.21(b)(1) 

requires accurate, current, and complete disclosure of the financial results of federally funded 

programs or projects. The Foundation did not comply with this requirement. Because the 

Foundation did not adequately document its costs and did not comply with the grant regulations, 

we questioned the Federal share of $25,372,590 claimed by the Foundation. However, in order 

to provide EPA with pertinent information related to the Foundation’s incurred costs (presented 

in Schedule 1) we conducted additional tests to determine if the costs were supported and 

allowable in accordance with the terms and conditions of the grants and applicable EPA 

regulations. 

Our review disclosed that the Foundation: 

• Did not provide support for any of its general journal entries. 

• Included duplicate transactions in its accounting system. 

• Recorded labor charged to the EPA grants incorrectly. 

6
• Could not support the recorded indirect costs. 

• Claimed unallowable preaward costs. 

• Recorded EPA cash draws inaccurately. 

• Did not submit required indirect cost rate proposals to EPA. 

• Did not complete the required single audits for the fiscal years ended June 30, 2003, June 30, 

2004, and June 30, 2005. 

• Did not submit a Federal Cash Transactions Report when required. 

Title 40 CFR 30.62 provides that if a recipient materially fails to comply with the terms and 

conditions of an award, whether stated in a Federal statute, regulation, assurance, application, or 

notice of award, EPA may disallow all or part of the cost of the activity or action not in 

compliance. Because the Foundation did not adequately document its costs and did not comply 

with the grant regulations, we questioned the Federal share claimed of $25,372,590. Details of 

our findings follow. 

Unsupported General Journal Entries 

The Foundation did not provide the required documentation to support and sufficiently 

explain the general journal entries recorded for any of its three grants. Title 40 CFR 

30.21(b)(7) states that recipient’s financial management systems shall have accounting 

records supported by source documentation. The Foundation used general journal entries 

to (1) record accruals such as payroll costs, (2) reverse posting entries, (3) allocate 

indirect costs, (4) correct errors, (5) record revenue, and (6) post transactions that were 

not recorded in the general ledger by other means. However, the Foundation could not 

provide supporting documentation to explain and support any general journal entries. 

For the three grants under review, the Foundation recorded a net value of $2,703,076 

with general journal entries. Among other items, this amount included $59,857 in 

salaries and $1,391,614 in indirect costs. We requested the Foundation to provide 

support for all general journal entries on three occasions during our review. We have not 

received a response to these requests or any support for the entries. The Foundation has 

not complied with the requirement of Title 40 CFR 30.21(b)(7) that accounting records 

be supported by source documentation. 

Foundation’s Response 

The Foundation did not address this finding. 

Duplicate Recorded Costs 

The Foundation recorded duplicate transactions in its accounting system totaling at least 

$63,388. During the fiscal year ended June 30, 2005, the Foundation used two different 

databases to record grant expenditures in its general ledger. One database covered the 

period July 1, 1999, to November 30, 2004, and the second covered the period July 1, 

2004, to June 30, 2005. There is an overlapping period from July 1, 2004, to November 

30, 2004. We reviewed transactions in both databases for the overlapping period and 

7
noted duplicated amounts of at least $48,008 in salaries and $15,380 in associated fringe 

benefits. Title 40 CFR 30.21 requires the Foundation to maintain a financial 

management system that is accurate, current and complete, and provides for the effective 

control over and accountability for all funds. Because recorded costs were duplicated, 

the Foundation’s financial management system was not accurate, and the incurred costs 

were incorrect and overstated. 

Foundation’s Response 

The Foundation did not address this finding. 

Incorrect Labor Costs 

The Foundation’s recorded labor costs were inaccurate. The Foundation reported labor 

costs for the three grants totaling $1,413,973. We found differences between labor hours 

reported on employee timesheets and labor hours recorded in the Foundation’s 

accounting system. For example, we reviewed the April 2001 pay period for the 

Foundation’s Chief Operations Officer. The Foundation’s accounting system reported 

that 242 labor hours were used to distribute this employee’s gross pay to projects. 

However, labor activity reports only reported 178 hours. We discussed this issue with 

Foundation personnel on April 27, 2006. The Foundation's accountant agreed with the 

finding, said he had also found errors, and stated he would provide us with a spreadsheet 

that documents reconstructed labor dollars based on actual employee timesheets and 

payroll. We have not received the reconstruction. Title 40 CFR 30.21 requires the 

Foundation to maintain a financial management system that is accurate, current and 

complete, and provides for the effective control over and accountability for all funds. 

The Foundation did not comply with this requirement because its recorded labor is 

inaccurate. 

Foundation’s Response 

The Foundation did not address this finding. 

Unsupported and Inaccurate Indirect Cost 

The Foundation’s indirect costs are unsupported and inaccurate. The Foundation 

reported a total of $1,439,947 in indirect costs. Of the total, $1,391,614 was recorded in 

the accounting system using general journal entries. As discussed above under 

Unsupported General Journal Entries, the Foundation did not provide any documentation 

to support its general journal entries. Without any documentation, we were unable to 

determine if the Foundation applied appropriate indirect cost rates or if the base to which 

the rates were applied was correct. 

Also, under Incorrect Labor Costs and Duplicated Recorded Costs discussed above, we 

reported that the Foundation’s recorded labor costs were incorrect, and that duplicate 

labor transactions were recorded in the accounting system. Labor and fringe benefits are 

8
elements of an indirect cost pool and an indirect cost rate allocation base. Inaccuracies in 

these costs would render indirect cost rates and resulting indirect costs inaccurate. 

Title 40 CFR 30.21(b)(7) states that a recipient's financial management system shall 

provide for accounting records including cost accounting records that are supported by 

source documentation. In addition, Title 40 CFR 30.21 requires the Foundation to 

maintain an accurate, current, and complete financial management system. The 

Foundation did not comply with either of these requirements. 

Foundation’s Response 

The Foundation did not address this finding. 

Unallowable Preaward Costs 

The Foundation reported $19,038 under grant X82835301 for costs incurred by The 

Grizzle Company. The costs were billed to the Foundation prior to award of the grant. 

However, the Foundation did not obtain the prior approval for preaward costs required by 

Title 40 CFR 30.25. Without prior approval, the costs are unallowable for 

reimbursement. 

Title 40 CFR 30.25(f) states that recipients are authorized without prior approval or 

waiver to incur pre-award costs 90 calendar days prior to award. Preaward costs incurred 

more than 90 calendar days prior to award require the prior approval of the EPA Award 

Official. The applicant must include all pre-award costs in its application. 

The Grizzle Company billed the $19,038 to the Foundation between September 1, 1999, 

and February 1, 2000. Grant X82835301 was awarded on August 31, 2000, 5 months 

later. The Grizzle Company billed the Foundation between 212 and 365 calendar days 

prior to award of grant X82835301. The costs, therefore, needed the prior approval of 

EPA and they should have been included in the grant application. A review of the grant 

files for grant X82835301 did not disclose any evidence of prior approval by EPA. 

Neither The Grizzle Company contract (by name) nor costs incurred of $19,038 were 

included in the grant application. 

Foundation’s Response 

The Foundation’s response indicated that the OIG referenced the wrong grant 

(X82835301) and the wrong period of performance. They stated that the work was 

authorized and performed under grant X82728401. 

OIG’s Comments 

The Foundation claimed the $19,038 under grant X82835301. However, the contract was 

authorized and performed under the previous grant, X82728401. The costs are, therefore, 

9
not allowable for reimbursement under grant X82835301. The Foundation claimed the 

costs under an incorrect grant. The costs remain questioned. 

Inaccurate Recording of EPA Cash Draws 

Contrary to Title 40 CFR 30.21, the Foundation could not always show the receipt of 

EPA cash draws in the Foundation’s accounting records. Title 40 CFR 30.21(b)(2) states 

that a recipient's financial management system should provide records that adequately 

identify the source and application of funds for federally sponsored activities. In 

addition, Title 40 CFR 30.21(b)(1) requires the Foundation to maintain a financial 

management system that is accurate, current, and complete. The Foundation has not 

complied with these requirements because it recorded EPA cash draws inaccurately and 

was unable to accurately identify the source of funds for the three EPA grants. The 

following table provides a comparison of actual EPA grant payments with the revenues 

recorded in the Foundation’s accounting system. 

EPA Grants 

EPA Grant 

Payments 

Foundation 

Recorded 

Revenues Difference 

X82835301 $14,438,750 $17,661,062 ($3,222,312) 

X82672301 $1,509,361 $1,296,216 $213,145 

X783142301 $9,225,155 $6,184,483 $3,040,672 

Source: The source for the EPA grant payments was EPA’s 

Financial Data Warehouse. The Foundation’s recorded revenues 

came from the Foundation’s accounting system. 

Foundation’s Response 

The Foundation did not address this finding. 

Indirect Cost Rates Were Not Submitted 

In addition to the unsupported indirect costs discussed above, the Foundation has not 

submitted all of the indirect cost rate proposals required by OMB Circular A-122, 

Attachment A, Subparagraph E.2. The Circular requires a recipient to submit an initial 

indirect cost rate proposal no later than 3 months (or 90 days) after the effective date of 

an award. Organizations that have previously established indirect cost rates must submit 

a new indirect cost rate proposal within 6 months after the close of each fiscal year. 

The Foundation provided us with indirect cost rate negotiation agreements for fiscal years 

2005 and 2006. The rates were negotiated by the Department of Interior, National 

Business Center under agreement with EPA. In addition, the Foundation provided us 

with indirect cost rate proposals and transmittal letters for submission to EPA for fiscal 

years 1999 and 2004. We did not find evidence of preparation or submission of 

proposals for fiscal years 2000 through 2003. The Foundation has not demonstrated that 

it complied with the requirements of OMB Circular A-122 regarding submission of 

indirect cost rate proposals for fiscal years 2000 to 2003. 

10
Foundation’s Response 

The Foundation did not address this finding. 

Single Audits Not Completed 

The Foundation has not completed required single audits for the fiscal years ended June 

30, 2003, June 30, 2004, or June 30, 2005. Title 40 CFR 30.26 states that nonprofit 

organizations are subject to the audit requirements of OMB Circular A-133. OMB 

Circular A-133, Subpart B requires a non-Federal entity that expends $300,000 ($500,000 

for fiscal years ending after December 31, 2003) or more in a year in Federal awards to 

have a single audit conducted for that year in accordance with the requirements of the 

Circular. The Circular also requires that the audit be completed and a reporting package 

be submitted no later than 9 months after the end of the audit period. 

The Foundation’s President stated that a single audit had been completed for fiscal year 

2003 but the discovery of accounting irregularities indicated issuance of the report may 

not have been appropriate. The report was, therefore, withheld. In addition, the 

accounting firm contracted to perform the single audit for fiscal year 2004 discontinued 

work after discovery of the irregularities. The Foundation stated it does not have plans 

for an audit of fiscal years 2004 and 2005 at this time. 

Foundation’s Response 

The Foundation did not address this finding. 

Noncompliance with Federal Financial Reporting Requirements 

We noted that the Foundation’s Federal Cash Transactions Report for the 6-month 

period ended December 31, 2005 was overdue. Title 40 CFR 30.52(a)(2) states that EPA 

shall require each recipient to submit a Federal Cash Transactions Report and that it 

should use this report to monitor cash advanced and to obtain disbursement information 

for each agreement with the recipient. As of June 2005, EPA’s policy is to require a 

recipient to submit a Federal Cash Transactions Report within 15 working days following 

the semiannual periods ending June 30 and December 31. As of May 23, 2006, the 

Foundation had not submitted its Federal Cash Transactions Report for the semiannual 

period ended December 31, 2005. The Foundation did not comply with EPA reporting 

requirements. 

Foundation’s Response 

The Foundation did not address this finding. 

11
Procurement System Did Not Comply with Standards 

The Foundation’s procurement system did not comply with EPA’s procurement standards. 

When applying for grant assistance, the Foundation certified that it would comply with 

applicable requirements of Federal laws, executive orders, regulations, and policies governing 

each grant. The procurement standards are codified in Title 40 CFR 30.41 through 30.48. We 

found that the Foundation: 

• Awarded contracts without performing the cost or price analysis required by Title 40 CFR 

30.45. 

• Awarded a contract to a member of its Board of Directors, contrary to the conflict of interest 

provisions in Title 40 CFR 30.42. 

• Continued to reimburse Validus for billings even though the billings exceeded ceilings 

specified in the contract. 

Cost or Price Analysis not Performed 

The Foundation did not comply with EPA regulations when procuring contracts and 

obtaining prior approval for contract costs. The Foundation claimed outlays of 

$21,107,498 ($12,308,145 under grant X82835301 and $8,799,353 under grant 

X783142301) for contracts awarded to conduct on-farm assessments. The first contract 

was originally awarded in fiscal year 1999 to the National Pork Producer's Council 

(Council). Subsequent contracts were awarded to Environmental Management Solutions, 

LLC, a 100 percent owned subsidiary of the Council. Environmental Management 

Solutions, LLC later changed its name to Validus Services, LLC (collectively referred to 

as Validus). The contract was extended several times through fiscal year 2005. 

All of these contracts were awarded without competition and without a cost or price 

analysis. In correspondence with the Director, EPA’s Grants Administration Division on 

July 27, 2005 and September 21, 2005, the Foundation’s Executive Director said that it 

did not perform a cost or price analysis because there were no sources of comparable data 

for it to use. Title 40 CFR 30.45 states that some form of cost or price analysis is 

required in connection with every procurement action. Price analysis may be 

accomplished in various ways, such as comparison of price quotations submitted, market 

prices and similar indicia. A cost analysis is the review and evaluation of each element 

of cost to determine reasonableness, allocability, and allowability. Since the contracts 

were awarded without competition, a price analysis could not be performed because there 

were no prices available to compare. Accordingly, the Foundation’s only alternative was 

to conduct a cost analysis. However, the Foundation did not conduct a cost analysis on 

any of the awarded contracts, and thus was unable to demonstrate that the contract costs 

were reasonable, allowable, and allocable. 

In addition, Title 40 CFR 30.44(e)(2) requires recipients to make pre-award review (i.e., 

costs analysis) and procurement documents available whenever a contract is awarded 

without competition and exceeds the small purchase limit of $100,000. The Foundation 

did not comply with either requirement. Without the required cost or price analysis, we 

12
have no assurance that a reasonable and fair price was obtained for the contracted 

services. 

We performed an on-site review of the $21,107,498 that the Foundations claimed for 

Validus’ services, and found that claimed outlays exceeded recorded costs by $6,195,057 

($3,466,808 for grant X82835301 and $2,728,249 for grant X783142301). This 

significant difference between claimed outlays and recorded costs further indicates that 

the Foundation did not obtain fair and reasonable contract prices. A comparison of 

claimed outlays to recorded costs by cost category is presented in Schedule 2 (page 19). 

We also noted that claimed outlays for Validus’ services included $4,278,615 in 

unallowable costs ($2,223,940 under grant X82835301 and $2,054,675 under grant 

X783142301). Additional details on unallowable costs are presented in Schedule 3 (page 

21). 

Foundation’s Response 

The Foundation did not specifically address this finding other than to say that previous 

grant dispute submissions (see the Foundation’s filing to Disputes Decision Official dated 

May 8, 2006) of the Foundation have argued that the Agency has used a number of 

techniques to recognize the value of such work, regardless of purported defects in the 

contract award, and that EPA must provide funding for Validus work. 

OIG’s Comments 

The Foundation did not demonstrate that it complied with the provisions of Title 40 CFR 

30.45. Accordingly, we did not revise our findings and recommendations. 

Conflict of Interest 

Another contract was awarded to The Grizzle Company on April 5, 1999, on a 

noncompetitive basis. The contract was for a maximum amount of $50,000 and was due 

to expire on March 31, 2000. The Foundation did not comply with the conflict of interest 

requirements at Title 40 CFR 30.42 when awarding the contract. 

The chairman of The Grizzle Company, was also the Vice President of the Foundation’s 

Board of Directors. Title 40 CFR 30.42 states that no employee, officer, or agent shall 

participate in the selection, award, or administration of contracts supported by Federal 

funds if a real or apparent conflict of interest would be involved. Such a conflict would 

arise when the employee, officer, or agent has a financial or other interest in the firm 

selected for award. As chairman of The Grizzle Company, the chairman would have an 

interest in The Grizzle Company being selected for a contract award; and as Vice 

President of the Foundation’s Board of Directors, was potentially in a position to 

influence Foundation actions or decisions to make the contract award. 

13
Foundation’s Response 

The Foundation indicated that Mr. Grizzle recused himself from all Board decisions and 

actions related to this contract, thus he was never in a position to influence the 

Foundation’s actions or decision to make the contract award. 

OIG’s Comments 

The Foundation did not provide any proof that Mr. Grizzle recused himself from any 

Board decisions or actions related to his contract. Even if Mr. Grizzle recused himself 

from any Board decisions related to his contract, he was potentially in a position to 

influence actions or decisions by other Foundation members. Recusing himself would 

not eliminate the influence his presence had on others. 

Improper Contract Administration 

The Foundation continued to reimburse Validus for amounts billed even though the 

billings exceeded maximum amounts specified in the contracts or were for unbillable 

costs. The Foundation awarded four contracts to Validus in fiscal year 2002 through 

fiscal year 2005 to conduct on-farm assessments under the OFAER program. The 

contracts required various services, including program administration and refinement, 

program marketing or promotion, program training, database mining, and verification or 

oversight. Validus was to bill the Foundation for necessary and reasonable costs incurred 

up to the maximum aggregate amounts as specified in the contracts. Maximum billable 

amounts were specified by cost category, as well as for the contract as a whole. We 

found that Validus billed the Foundation for $412,5233 in excess of the categorical 

ceiling amounts under grant X82835301. The excess billings by cost category and by 

contract are summarized in Schedule 3, Note 5 (see page 28). 

In addition, the Foundation reimbursed Validus for $17,074 in program administration 

costs that were not billable by the terms and conditions of its contract. The billing 

occurred under contract ACWF-OFAER-02-99. Billing provisions are provided in 

Section 7.2 and attachment C of the contract. This contract only provided for the billing 

of assessments at a fixed price per assessment. Program administration costs were not 

specified. These costs are, therefore, not reimbursable, and are unallowable (see 

Schedule 3, Note 4 on page 28). 

Title 40 CFR 30.47 requires the Foundation to maintain a system that ensures a 

contractor complies with the terms, conditions, and specifications of its contracts. The 

payments in excess of the contract ceilings indicated that the Foundation did not perform 

its contract administrative functions in accordance with Title 40 CFR 30.47. 

3

 In total, Validus exceeded the contract ceilings by $1,429,507 under Grant X82835301, and $50,362 under Grant 

X783142301. However, in Schedule 3, Notes 1 through 5, our questioned costs exceeded the costs in excess of the 

contract ceilings. Therefore, we did not question any additional costs over and above the $412,523 amount. 

14
Foundation’s Response/OIG’s Comments 

The Foundation did not respond to this finding but see Schedule 3, Notes 4 and 5 for 

Validus’ comments and the OIG’s response. 

15
Recommendations 

We recommend that the Director for the Grants Administration Division: 

1. Disallow the Federal share claimed of $25,372,590, and recover payments made of 

$25,173,266, unless the Foundation reconstructs its accounting records to meet the 

financial management standards required by Title 40 CFR 30.21 through 30.28, 

including: 

a. Correcting the distribution of labor costs and excluding all duplicate transactions. 

b. Providing explanations and support for all general journal entries and ensuring 

that all transactions are supported by adequate source documentation. 

c. Preparing and submitting indirect cost rate proposals for fiscal years 2000 through 

2003 in accordance with OMB Circular A-122. 

d. Resubmitting indirect cost rate proposals for fiscal years 1999 and fiscal years 

2004 through 2006 based on reconstructed accounting records. 

e. Assuring that unallowable preaward costs are excluded from grant claims. 

f. Revising recorded EPA cash draws to accurately identify the source of the funds 

and the amount. 

g. Submitting a final financial status report for grant X783142301and revised final 

financial status reports for grants X82835301 and X82672301 that have been 

reconciled to amounts recorded in the Foundation’s reconstructed accounting 

records. 

2. Rescind provisional indirect rates for fiscal years ended June 30, 2005, and June 30, 

2006. 

3. Require the Foundation to obtain single audits for fiscal years ended June 30, 2003, 

June 30, 2004, and June 30, 2005. 

4. Require the Foundation to prepare and submit overdue Standard Form 272 Federal 

Cash Transactions Reports. 

5. Disallow contract costs procured, claimed, and administered in violation of the 

requirements in Title 40 CFR Part 30. 

6. Disallow contract costs that were not authorized under the contract terms, including 

costs in excess of contract ceilings. 

7. Stop work on all active grants. 

8. Not award any new grants until the Foundation meets minimum financial 

management requirements and repays all disallowed costs. 

16
Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Planned 

Rec. 

No. 

Page 

No. Subject Status4 Action Official 

Completion 

Date 

Claimed 

Amount 

Agreed To 

Amount 

1 16 Disallow the Federal share claimed of 

$25,372,590 and recover payments made of 

$25,173,266 unless the Foundation reconstructs 

its accounting records to meet the financial 

management standards required by Title 40 

CFR 30.21 through 30.28. 

O EPA Director for the 

Grants Administration Division 

TBD $25,372 

2 16 Rescind provisional indirect rates for fiscal years 

ended June 30, 2005, and June 30, 2006. 

O EPA Director for the 

Grants Administration Division 

TBD 

3 16 Require the Foundation to obtain single audits 

for fiscal years ended June 30, 2003, June 30, 

2004, and June 30, 2005. 

O EPA Director for the 

Grants Administration Division 

TBD 

4 16 Require the Foundation to prepare and submit 

overdue Standard Form 272 Federal Cash 

O EPA Director for the 

Grants Administration Division 

TBD 

Transactions Reports. 

5 16 Disallow contract costs procured, claimed and 

administered in violation of the requirements in 

Title 40 CFR Part 30. 

O EPA Director for the 

Grants Administration Division 

TBD 

6 16 Disallow contract costs that were not authorized O EPA Director for the TBD 

under the contract terms, including costs in 

excess of contract ceilings. 

Grants Administration Division 

7 16 Stop work on all active grants. O EPA Director for the 

Grants Administration Division 

TBD 

8 16 Not award any new grants until the Foundation 

meets minimum financial management 

requirements and repays all disallowed costs. 

O EPA Director for the 

Grants Administration Division 

TBD 

O = recommendation is open with agreed-to corrective actions pending 

C = recommendation is closed with all agreed-to actions completed 

U = recommendation is undecided with resolution efforts in progress 

17

4 
Schedule 1 

Schedule of Claimed Outlays by Assistance Agreement, 

Unallowable Costs, and Amounts Due EPA 

America’s Clean Water Foundation

Description 

Grant 

X82835301 X783142301 X82672301 Total

Personnel 

Fringe Benefits 

Travel 

Equipment 

Printing 

Meetings and Training 

Supplies 

Postage 

Telecommunications 

Legal 

Publications and Subscriptions 

Other 

Contracts 

Indirect 

Total Cost (Note 1) 

Less Unpaid Amounts (Note 2) 

Total Incurred and Paid 

Reported Outlays (Note 3) 

Recipient Share of Reported 

Outlays 

EPA Share of Reported Outlays 

Unreconciled Difference between 

Total Incurred Cost and 

Reported Outlays 

Total Cost Questioned 

EPA Payments 

Amount Due EPA 

$631,573 

160,048 

204,882 

3,411 

525 

0 

0 

0 

0 

0 

0 

76,870 

12,794,735 

723,260

$14,595,304 

0

$14,595,304 

$14,438,750 

0

$14,438,750 

$156,554 

$14,438,750 

$14,438,750 

$14,438,750 

$255,730 

193,776 

54,527 

1,995 

7,458 

13,443 

1,468 

1,023 

1,665 

0 

207 

0 

8,961,897 

343,143

$9,836,332 

 (845,034)

$8,991,298 

$9,424,479 

0

$9,424,479 

$(433,181) 

$9,424,479 

$9,225,155 

$9,225,155 

$526,670 

99,061 

146,804 

8,737 

13,209 

5,783 

1,146 

218 

13,555 

2,527 

492 

0 

385,497 

373,544

$1,577,243 

0

$1,577,243 

$1,534,361 

25,000

$1,509,361 

$ 42,882 

$1,509,361 

$1,509,361 

$1,509,361 

$ 1,413,973 

452,885 

406,213 

14,143 

21,192 

19,226 

2,614 

1,241 

15,220 

2,527 

699 

76,870 

22,142,129 

1,439,947 

$26,008,879 

 (845,034) 

$25,163,845 

$25,397,590 

25,000 

$25,372,590 

$(233,745) 

$25,372,590 

$25,173,266 

$25,173,266 

Source: The schedule of claimed outlays came from the Foundation’s February 21, 2006, email to EPA’s Grant Administration 

Division. The unallowable outlays, unreconciled difference, and amount due EPA were based on the OIG analysis of the claimed 

outlays. The EPA payments came from EPA’s Financial Data Warehouse. 

Notes: 

1. Except for contracts, the Foundation reported incurred costs from its accounting system. The 

Foundation summarized amounts for contracts manually from invoices, cash draws, and 

contracts. 

2. Unpaid amounts are for invoices submitted by Validus Services, LLC, a Foundation 

contractor. 

3. The Foundation submitted a final Standard Form 269A Financial Status Report for grant 

X82835301 and X82672301 on September 28, 2004. It submitted a Standard Form 272 

Federal Cash Transactions Report for grant X783142301 on September 22, 2005. Grant 

X783142301 is ongoing and a Final Financial Status report has not been submitted. 

18
Schedule 2 

Comparison of Claimed Outlays to Recorded Costs 

Validus Services, LLC 

The purpose of this schedule is to compare the costs recorded in Validus’ accounting system 

with the outlays that the Foundation claimed for Validus’ contractual services. In total, the 

claimed contractual services exceeded the recorded costs by $6,195,057. 

Excess of 

Claimed Recorded Claimed over 

Cost Category Outlays Costs Recorded Costs 

Grant X82835301 

Assessments $ 7,760,183 $ 5,117,550 $ 2,642,633 

Program Administration and Refinement 

License Fee 575,000 0 575,000 

Facilities/Admin. Allocation 215,495 206,523 8,972 

Labor 1,003,848 785,216 218,632 

Misc. Admin 20,151 18,650 1,501 

Program Refinement 94,737 94,772 (35) 

Other 1,156 0 1,156

 1,910,387 1,105,161 805,226 

Program Marketing or Promotion 387,784 380,890 6,894 

Program Training 598,229 596,423 1,806 

Database Mining 201,432 201,432 0 

Verification or Oversight 1,450,130 1,439,881 10,249

 Total $ 12,308,145 $ 8,841,337 $ 3,466,808 

Grant X783142301 

Assessments $ 5,776,350 $ 3,666,240 $ 2,110,110 

Program Administration and Refinement 

License Fee 675,000 0 675,000 

Facilities/Admin. Allocation 599,481 1,074,802 (475,321) 

Labor 1,041,616 267,358 774,258 

Misc. Admin 29,691 29,731 (40)

 2,345,788 1,371,891 973,897 

Program Marketing or Promotion 214,947 225,038 (10,091) 

Program Training 66,307 66,943 (636) 

Database Mining 52,791 120,272 (67,481) 

Verification or Oversight 343,170 620,720 (277,550)

 Total $ 8,799,353 $ 6,071,104 $ 2,728,249

 Grand Total $ 21,107,498 $14,912,441 $ 6,195,057 

Source: The schedule of claimed outlays came from the Foundation’s February 21, 2006, email to 

EPA’s Grant Administration Division. The recorded costs came from Validus’ books and records. The 

excess of claimed over recorded costs is the difference between claimed outlays and recorded costs. 

19 
Validus’ Response 

According to Validus, the amounts identified as “Billed to the Foundation”5 are not accurate. 

Validus stated that the billed amounts for Grant X82835301 and Grant X783142301 were 

$12,474,067 and $8,534,266, respectively. Because the billed amounts identified in Schedule 2 

differ from the actual billed amounts, Validus was required to adjust the months associated with 

each contract in order to be able to reconcile its billed amounts with the EPA auditor’s billed 

amount (see Tab 22 of Validus’ response for the reconciliation spreadsheet). 

Schedule 2 also purports to identify the amounts by which the Council and Validus “overbilled” 

the Foundation under the two assistance agreements. Both the Council and Validus complied 

with the terms of the contracts and to the extent that the billed amount was in excess of the 

recorded incurred costs, the Council and Validus did so in full compliance with the terms of the 

contracts, and with full knowledge of an acceptance by the Foundation and EPA. 

OIG’s Comments 

Schedule 2 identifies the outlays that the Foundation claimed for Validus’ contractual services in 

comparison to the costs recorded in Validus’ accounting system. The excess of claimed outlays 

over recorded costs merely represent the difference between what the Foundation claimed and 

costs Validus recorded, and does not represent amounts by which Validus “overbilled” the 

Foundation. 

In response to the draft report, Validus provided us with a revised summary of the claimed 

outlays and recorded costs for program administration and refinement (see Tab 22 of Validus’ 

response) under Grant X82835301. We have changed both Schedules 2 and 3 to reflect Validus’ 

revisions. 

5

 The term “Billed to the Foundation” was changed in the final report to claimed outlays. 

20
Schedule 3 

Results of Examination for Claimed Outlays 

Validus Services, LLC 

Cost Category Claimed Unallowable Notes 

Grant X82835301 

Assessments $ 7,760,183 $ 0 

Program Administration and Refinement 

License Fees 575,000 575,000 1 

Facilities and Administration Allocation 215,495 215,495 2 

Labor 1,003,848 1,003,848 3 

Miscellaneous Administration 20,151 0 

Program Refinement 94,737 17,074 4 

Other 1,156 0

 $ 1,910,387 $ 1,811,417 

Program Marketing or Promotion 387,784 17,902 5 

Program Training 598,229 157,299 5 

Database Mining 201,432 7,207 5 

Verification or Oversight 1,450,130 230,115 5 

Total Grant X82835301 $ 12,308,145 $ 2,223,940 

Grant X783142301 

Assessments $ 5,776,350 $ 0 

Program Administration and Refinement 

License Fees 675,000 $ 675,000 1 

Facilities and Administration Allocation 599,481 599,481 2 

Labor 1,041,616 780,194 3 

Miscellaneous Administration 29,691 0 

 $ 2,345,788 $ 2,054,675 

Program Marketing or Promotion 214,947 0 

Program Training 66,307 0 

Database Mining 52,791 0 

Verification or Oversight 343,170 0 

Total Grant X783142301 $ 8,799,353 $ 2,054,675 

Grand Total $ 21,107,498 $ 4,278,615 

Source: The claimed outlays came from the Foundation’s February 21, 2006, email to EPA’s 

Grant Administration Division. The unallowable costs were based on the OIG’s analysis of the 

claimed outlays. 

Our fieldwork at Validus’ offices indicated that the claimed outlays of $21,107,498 included 

unallowable costs of $4,278,615. In addition, we noted that $845,034 of the claimed outlays 

remain unpaid. In total, we questioned the $21,107,498 ($12,308,145 under grant X82835301, 

and $8,799,353 under grant X783142301) claimed because the Foundation was unable to 

demonstrate that the contract costs were reasonable, allowable, and allocable as discussed on 

page 12 of the report under Procurement System Did Not Comply with Standards. 

21
Background 

Six contracts were awarded in fiscal years 1999 through 2005 to conduct on-farm assessments 

under the OFAER program. An on-farm assessment is a voluntary independent review of a 

livestock producer that provides an assessment of water quality, odor, and pest risk factors. 

According to Validus, the National Pork Producers Council and Validus conducted 5,419 initial 

assessments, 569 followup assessments, and trained 570 assessors to perform the assessments. 

Assessments were performed at multiple types and sizes of livestock operations, including pork, 

poultry, turkey, cattle, dairy, cow/calf, sheep, duck, and horse, and at small, medium, and large 

operations in 45 states. 

The contract numbers and their performance periods are: 

Grant X82835301 

ACWF-OFAER-02-996 May 1, 1999, to June 30, 2001 (i) 

ACWF-OFAER-02-99-R16 October 1, 2000, to September 30, 2001 (ii) 

ACWF-OFAER-01-027 July 1, 2001, to June 30, 2002 

ACWF-OFAER-01-037 July 1, 2002, to June 30, 2003 

Grant X783142301 

ACWF-OFAER-01-047 July 1, 2003, to August 30, 2004 

ACWF-OFAER-01-057 September 1, 2004, to August 31, 2005 

(i) Validus stated that performance under this contract ended on September 30, 2000. 

(ii) Validus stated that performance under this contract ended on June 30, 2001. 

The contracts state that the Foundation will reimburse the contractor for reasonable and 

necessary costs incurred associated with the services required in the agreement. The contracts 

provided that the assessments be billed at a fixed rate per assessment. The rate remains fixed for 

the contract period but varies for each contract. For all other services, such as program training, 

program administration, and program marketing or promotion, the Foundation is to be billed for 

necessary and reasonable costs incurred up to the maximum aggregate amounts as specified in 

the contracts. 

We reviewed the billings to determine if the costs were reasonable, allowable, and allocable in 

accordance with the applicable regulations8

 and contract terms and conditions. We performed 

our review at Validus’ offices in Des Moines, IA from May 8 to May 18, 2005. 

We noted that $845,034 of the amounts that Validus billed to the Foundation from June to 

September 2005 are unpaid. The unpaid invoices are: 

6

 Awarded to the National Pork Producer’s Council - a nonprofit organization. 7

 Awarded to Environmental Management Solutions/Validus, a wholly owned subsidiary of the National Pork 

Producers Council, and a limited liability company. 8

 According to the provisions of Title 40 CFR 30.27, allowable costs incurred by commercial organizations are 

determined in accordance with the provisions of Federal Acquisition Regulations (FAR) at 48 CFR Part 31. The

allowable costs incurred by nonprofit organizations are determined in accordance with OMB Circular A-122.

22
Invoice Invoice Date Amount Billed 

241 June 16, 2005 $ 343,320 

278 July 15, 2005 241,748 

282 August 12, 2005 162,019 

303 September 15, 2005 97,947 

Total $ 845,034 

Source: The schedule of unpaid invoices came from the Foundation’s February 21, 

2006, email to EPA’s Grant Administration Division. 

The unpaid invoices are included in the Foundation’s reported outlays. We have shown the 

unpaid amount as a separate item in Schedule 1. 

Our review disclosed that the contractors (both Validus and the National Pork Producers 

Council) did not comply with contract terms and conditions and the applicable regulations when 

billing the Foundation. As a result, $4,278,615 in unallowable costs was billed ($2,223,940 

under grant X82835301, and $2,054,675 under grant X783142301). The results of our review 

are detailed in Schedule 3 on page 21 and the following explanatory notes. 

Note 1: License fees of $575,000 for grant X82835301 and $675,000 for grant 

X783142301 represent billings for amounts that were not incurred. Validus billed 

the Foundation a flat rate of $25,000 per month for the use of an on-farm 

assessment checklist that the Council developed under a contract with the 

National Pork Board. The licensing agreement with the National Pork Board 

provided that the Council would not pay any royalties to the National Pork Board 

for Validus’ use of the checklist for the first 5 years of the license beginning with 

calendar year 2001. In years 6 to 15, the Council was to pay the National Pork 

Board a royalty equal to 5.875 percent of revenues Validus collected annually 

from the use of the checklist. The contracts we audited were performed within 

the 5-year period during which no royalties were paid. Our review of accounting 

records and discussion with Validus personnel indicated that Validus did not incur 

any costs for licensing fees. 

Contract provisions in Section 8.3 and Section C state that administrative 

functions necessary to support assessment activities including salary, office rent, 

postage, supplies, telephone, services, accounting, and license fees are to be billed 

at cost. Actual costs, as defined by Part 31.001 of FAR, means amounts 

determined on the basis of costs incurred. Since Validus did not incur any costs 

for licensing fees, they are not allowable for reimbursement. 

23
Validus’ Response 

Validus responded that the premise that somehow the license fee had to 

correspond with costs incurred is a mistaken one. There was never any question 

among parties to this transaction that the license fee was anything other than a fee. 

The license fee was never represented as a cost. The Foundation fully 

agreed to the payment of a license fee of $25,000 a month in exchange for 

the exclusive rights to the OFAER assessment tool. The assessment tool 

was developed with private funding from pork producers through the use 

of the National Pork Board check-off funds. The license fee was 

reasonable in amount and billed in accordance with the parties agreement 

and the express terms of the contract. The EPA program officer most 

knowledgeable about the OFAER contracts and program did not reject the 

license fee. It was simply included in the Program Administration 

category for billing purposes as a matter of convenience and convention. 

Thus, there is no basis for characterizing the license fee as either over 

billed or unallowable. 

OIG’s Comments 

The contract terms between Validus and the Foundation specifically stated that 

license fees were part of program administration which were to be billed based on 

actual costs. The contract(s) did not specifically mention the $25,000 amount, 

and no documentation was provided to demonstrate the basis for the $25,000 fee 

or how the $25,000 monthly amount was determined to be necessary and 

reasonable as required by FAR Part 31. 

As we stated in the finding, the licensing agreement for the OFAER assessment 

tool provided that the Council would not pay the National Pork Board for any 

royalties for the first five years of the licensing beginning in calendar year 2001. 

Thus, no royalties were due and payable to the National Pork Board until the year 

6. Since Validus did not incur any costs for the use of the OFAER checklist, the 

license fees are not allowed. 

Note 2: Facilities and Administration costs of $215,495 for grant X82835301 and 

$599,481 for grant X783142301 represent allocations of indirect costs to the 

contracts that are not supported by indirect cost rate proposals and negotiation 

agreements. As a nonprofit organization, the Council was required in accordance 

with OMB Circular A-122, Attachment A, Paragraph E(2) to submit new indirect 

cost rate proposals within 6 months after the close of each fiscal year. Similarly, 

as a commercial organization, Validus was also required by the FAR to submit 

indirect cost rates proposals. Specifically, FAR 31.103(b) requires a contracting 

officer (in this case, the Foundation) to use FAR 42.7 for negotiating billing and 

final indirect cost rates with commercial organizations. FAR 42.705-1 requires a 

contractor to submit to the contracting officer a final indirect cost rate proposal 

within 6 months following the end of each fiscal year. Neither the Council nor 

24
Validus provided any documentation to demonstrate that indirect rates were 

submitted and negotiated. 

We noted during our review that the contractor(s) recorded more indirect costs 

than it billed to the Foundation. Recorded indirect costs amounted to $1,074,802 

for grant X783142301, which was $475,321 ($1,074,802 - $599,481) more than 

what was billed. We discussed these differences with Validus personnel. They 

stated that the billed amount is based on their budgeted amounts. Incurred costs 

were greater than the budget but the President and Chief Executive Officer chose 

not to bill the Foundation for the additional costs because the variance from 

estimated was too great. 

Validus’ Response 

Validus does not agree that OMB and FAR regulations apply to the contracts 

under audit. None of the contracts with the Foundation incorporated OMB 

Circular A-122 or FAR Part 31, and none of the contracts otherwise required the 

submissions of indirect cost rate proposals or to negotiate indirect cost rates. As a 

result, the costs should not be disallowed. 

OIG’s Comments 

We disagree. Both Title 40 CFR 30.27 and OMB Circular A-122 provide that 

allowable costs are determined in accordance with the regulations applicable to 

the entity incurring the costs. Thus, for nonprofit contractors, allowable costs are 

determined in accordance with OMB Circular A-122. For commercial 

contractors, allowable costs are determined in accordance with the provisions of 

FAR Part 31. Under both OMB Circular A-122 and FAR Part 31, the 

organizations were required to submit indirect cost rate proposals within 6 months 

after the close of each fiscal year. Neither organization provided indirect cost rate 

proposals or negotiation agreements. Consequently, there is no basis for 

determining the reasonableness and allowability of the facilities and 

administration costs of $215,495 for grant X82835301 and $599,481 for grant 

X783142301. 

Note 3: The labor costs of $1,003,848 for grant X82835301 and $780,194 for grant 

X783142301 are unallowable because neither the Council nor Validus maintained 

supporting records required by OMB Circular A-122 and FAR. The unallowable 

costs are summarized as follows: 

Contractor 

Reported Outlays 

X82835301 X783142301 Note

National Pork Producers Council $198,211 $0 a 

Validus $805,637 $780,194 b 

Total $1,003,848 $780,194 

Source: OIG’s analysis of the contractor’s claimed labor. 

25 
a. The Council billed $198,211 in labor costs to the Foundation but was 

unable to provide any personnel activity reports to support the labor 

charges. OMB Circular A-122, Attachment A, Paragraph (7) (m) requires 

nonprofit contractors to maintain personnel activity reports to support the 

charges for salaries and wages to awards. Since the Council was unable to 

furnish the requested personnel activity reports, the labor costs of 

$198,211 are unallowable. 

Validus’ Response 

Validus stated that the Council used a computerized time distribution 

system that its employees, including those who worked on the OFAER 

contracts, used to record their daily time. The system converted the 

employee time entries into labor charges that were recorded in the general 

ledger. General ledger account numbers corresponded to the projects 

employees used to charge their time. Validus reviewed documents that the 

Council submitted and determined that the Council incurred $198,211 for 

labor and billed the Foundation for the same amount. Since the Council’s 

billed labor amounts were based on recorded costs and the Council 

maintained a time distribution system, the costs are allowable. 

OIG’s Comments 

We requested copies of the daily time records to determine if the Council 

had a time keeping system that complied with the requirements of OMB 

Circular A-122. In response, Validus stated that the Council no longer had 

the time records we requested. The contractor said the document retention 

period in the Council’s contracts expired several years ago. 

Title 40 CFR 30.53 requires supporting documents to be retained for a 

period of three years from the date of the final expenditure report. The 

final financial status report for grant X82835301 was dated September 28, 

2004. The retention period will expire three years later or on September 

28, 2007. As a result, the labor costs remain unallowable. 

b. Labor costs of $805,637 and $780,194 that Validus billed the Foundation 

under grants X82835301 and X783142301, respectively are unallowable. 

The costs are unallowable because Validus did not have a time distribution 

system to identify, accumulate, and report labor costs for contracts and 

was unable to provide employee timesheets to support labor costs charged 

to the contracts. Validus personnel stated that predetermined percentages 

of employees’ time were used to charge the contracts for labor. The 

percentages were determined in discussions with the Foundation and were 

not formally documented. 

26
FAR 31.201-2(d) states that a contractor is responsible for accounting for 

costs appropriately and for maintaining records adequate to document that 

costs claimed have been incurred and are allocable to the contract. Since 

Validus did not maintain documentation required to determine the 

allocability of labor charges we have questioned the amounts billed. 

Under grant X783142301, we noted that Validus began using a time 

distribution system, including employee timesheets, in January 2004 and 

that it recorded $261,422 in labor costs in its accounting system that was 

based on timesheets. However, Validus billed the Foundation $747,334 in 

labor costs, which is $485,912 in excess of the amount supported by 

timesheets. The excess billing resulted from Validus’ continued use of 

predetermined percentages of employees’ time to charge labor to the 

Foundation. 

In total, the unallowable labor for grant X783142301 was $780,194 which 

is the difference between the billed amount of $1,041,616 and the 

$261,422 that was supported by timesheets. 

Validus’ Response 

Validus did not utilize a time keeping system when it was formed in 2001 

because it had only one billable project (the OFAER contract) and there 

was no need for such a system. In addition to working on the OFAER 

contract, three Validus employees spent a small fraction of their time on 

work for the National Pork Board. In 2003, Validus began other projects 

to which its employees charged time. Labor billed to the OFAER 

contracts in 2003 was based on predetermined percentages of an 

employee’s monthly labor costs. The percentages were based on actual 

charges to the OFAER contracts in previous years plus any changes that 

were expected to occur. The same allocation method was followed for 

each of the Validus OFAER contracts. 

Validus provided a number of declarations from its employees to show 

what percentage of time the employees recollected that they worked on the 

OFAER contracts. Based on the employee’s declarations, Validus 

determined that it had overbilled the Foundation by $283,779 for all four 

of its contracts, and that this overbilled amount should be offset by the 

$845,034 in billings that the Foundation has not paid, plus any unbilled 

labor costs related to business development and independent research and 

development labor. 

OIG’s Comments 

We have not changed our opinion on the allowability of labor costs of 

$805,637 for grant X82835301 and $780,194 for grant X783142301. 

27
Validus was unable to provide adequate time records to support labor 

costs charged to the contracts. Without contemporaneous time records, we 

were unable to determine if the labor costs were incurred and properly 

allocated to the contract(s), and complied with all the applicable costs 

principles as required by FAR 31.201-2(d). Consequently, we do not 

consider employees’ recollections of what percentage of time they worked 

on the OFAER contracts as an acceptable alternative to contemporaneous 

time records. 

Note 4: We noted that Validus billed the Foundation for $17,074 in unbillable program 

refinement costs under contract ACWF-OFAER-02-99. Billing provisions are 

provided in Section 7.2 and Attachment C of the contract. This contract only 

provided for the billing of assessments at a fixed price per assessment. Program 

refinement costs were not specified. These costs are, therefore, not allowable for 

reimbursement. 

Validus’ Response 

Validus agreed that contract terms between the Foundation and the Council did 

not provide for program refinement. It stated that the Foundation and the Council 

agreed to begin program refinement work before the start of the next contract. 

Although the parties did not officially execute a modification or addendum to the 

contract, the parties understood that program refinement activities would be 

performed and paid by the Foundation. Validus also stated that if program 

refinement costs were not directly chargeable to the contract, the costs would 

have been billable as an indirect cost. Thus, the costs were in conformance with 

the parties’ understanding and agreement and cannot be disallowed. 

OIG’s Comments 

The contract terms did not provide for program refinement. The costs are outside 

the scope of the contract and are, therefore, unallowable. The contracted fixed 

rates for assessments included costs for salaries, training, certification, 

verification, and building overhead. We have no assurance that the program 

refinement costs are not included in the fixed rates. 

Program refinement costs are not subject to treatment as an indirect cost. FAR 

31.203(a) states that an indirect cost is any cost that is not directly identifiable 

with a single, final cost objective. Since program refinement costs have been 

identified to the OFAER contracts, they are not allowable as indirect costs. 

Note 5: The Foundation claimed unallowable outlays of $412,523 that were in excess of 

the maximum amount allowed under two contracts. The unallowable outlays are 

summarized as follows: 

28
Grant X82835301 

Program 

Marketing or 

Promotion 

Program 

Training 

Databas 

e Mining 

Verification 

or Oversight 

Total 

Questioned 

$412,523 

ACWF-OFAER-01-02 

Maximum Amount $ 160,000 $ 80,000 $ 50,000 $ 400,000 

Billed 147,406 218,311 57,207 630,115 

Amount Billed in Excess 

of Maximum 0 138,311 7,207 230,115 

ACWF-OFAER-01-03 

Maximum Amount 160,000 85,000 55,000 555,000 

Billed 177,902 103,988 10,476 384,855 

Amount Billed in Excess 

of Maximum 17,902 18,988 0 0 

Total Amount Billed in 

Excess of Maximum 17,902 157,299 7,207 230,115 

Source: OIG’s analysis of the recipient’s claimed contractual outlays. 

Validus’ Response 

Validus responded that the budgets were not meant to be firm ceilings that would 

prohibit Validus from receiving payment for its incurred costs that exceed the 

budget thresholds. Instead, the budget thresholds were set based on projected 

performance requirements during the course of a particular contract, and were 

adjusted as necessary when the performance requirements shifted and Validus 

incurred costs greater than expected under one or several cost categories in the 

contract. Whenever Validus realized its costs would exceed a budget threshold 

for a particular cost category, it notified the Foundation and gained the 

Foundation’s acknowledgement that it would be acceptable to exceed the budget 

threshold. Thus, costs in excess of the budget threshold were not indicative of 

Validus’ or the Foundation’s failure to comply with the terms and conditions of 

the contracts. 

 OIG’s Comments 

We disagree. Title 40 CFR 30.47 provides that the recipient is required to 

maintain a system for contract administration to ensure contractor conformance 

with the terms, conditions, and specification of the contract and to ensure 

adequate and timely follow up of all purchases. Also, the agreements between 

Validus and the Foundation provided that no modification of the agreements or 

waiver of the terms and conditions will be binding upon either party unless in 

writing and signed by both parties. Neither the Foundation nor Validus provided 

any contract amendments that authorized Validus to exceed each cost category 

ceiling. 

29
Appendix A 

Scope and Methodology 

We performed our examination in accordance with the Government Auditing Standards, issued 

by the Comptroller General of the United States, and the attestation standards established by the 

American Institute of Certified Public Accountants. We also followed the guidelines and 

procedures established in the Office of Inspector General Project Management Handbook, dated 

January 14, 2005. We conducted this examination to express an opinion on the incurred costs, 

and determine whether the recipient complied with all applicable laws and regulations, as well as 

any special requirements under the agreement. We conducted our field work from November 15, 

2005, through May 18, 2006. Our audit was conducted at the Foundation’s office in Washington 

D.C., and Validus’s office in Urbandale, Iowa. Our audit covered the periods June 1, 1998 

through June 30, 2005. 

In conducting our examination, we performed the following procedures: 

• We reviewed grant and project files to obtain background information on the Foundation 

and the agreement. 

• We interviewed recipient personnel to understand the accounting system and the 

applicable internal controls as they relate to the reported outlays. 

• We reviewed the most recent single audit reports to identify issues which may impact our 

examination. 

• We reviewed costs incurred by a Foundation contractor, Validus Services, LLC. 

We examined the incurred costs on a test basis to determine whether the costs were adequately 

supported and eligible for reimbursement under the terms and conditions of the agreements and 

Federal regulations and cost principles. The Foundation’s internal controls were found to be 

weak and financial records were unreliable. We did not rely on internal controls and based our 

review on transactions testing only. 

On September 29, 2006, we issued the draft report to the Foundation’s attorney for comments. 

On December 7, 2006, we received a response from the Foundation’s attorney which also 

included comments from Validus. The Foundation and Validus either disagreed or did not 

respond to the reports findings. We did not receive the response, as requested, in an acceptable 

electronic format to include in the report. A copy is available on request. We have summarized 

the Foundation’s pertinent comments after each finding in the report. 

30
Prior Audit Coverage 

We issued two previous memos to the Office of Grants and Debarment on these grants. The first 

memo was dated December 15, 2005 (Memo No. 2006-00003), and provided EPA with our 

preliminary observations on potential accounting issues, control weaknesses and regulatory noncompliance that we identified at the Foundation. The second memo was dated June 15, 2006 

(Memo No. 2006-M-00011), and provided EPA with additional information in resolving the 

Foundation’s request to deviate from the applicable grant regulations related to procuring 

Validus’ contracts under two grants. Our initial field work at Validus indicated that fair and 

reasonable contract prices were not obtained. 

31
Appendix B 

Distribution 

Office of the Administrator 

Director, Grants Administration Division (Action Official) 

Director, Office of Grants and Debarment 

Audit Followup Coordinator, Office of Grants and Debarment 

Assistant Administrator for Water 

Assistant Administrator for Air and Radiation 

Agency Followup Official (the CFO) 

Agency Followup Coordinator 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for Public Affairs 

General Counsel 

Acting Inspector General 

32