U.S. ENVIRONMENTAL PROTECTION AGENCY 

OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Quick Reaction Report 

EPA Should Revise its 

Grant Accrual Methodology 

to Address Impact of 

Recovery Act Funds 

 Report No. 09-X-0217 

 August 19, 2009 
Report Contributors: Paul Curtis 

 Meg Hiatt 

Abbreviations 

ARRA American Recovery and Reinvestment Act 

EPA U.S. Environmental Protection Agency 

OCFO Office of the Chief Financial Officer 

OIG Office of Inspector General 

OMB Office of Management and Budget 
U.S. Environmental Protection Agency 09-X-0217 

August 19, 2009 Office of Inspector General 

At a Glance
 

Catalyst for Improving the Environment 

Why We Did This Review 

The Office of Inspector 

General (OIG) of the 

U.S. Environmental Protection 

Agency (EPA) has concerns 

with the impact the American 

Recovery and Reinvestment 

Act (ARRA) of 2009 will 

have on EPA’s grant accrual 

calculation for the Fiscal Year 

2009 financial statements. We 

are alerting EPA management 

of our concerns. 

Background 

In February 2009, EPA was 

provided with $7.2 billion 

under the ARRA for projects 

and programs administered by 

EPA. The funds were to be 

awarded to grantees 

expeditiously. Grant accruals 

in the financial statements 

represent grantee costs 

incurred but not billed. 

For further information, 

contact our Office of 

Congressional, Public Affairs 

and Management at 

(202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2009/ 

20090819-09-X-0217.pdf 

EPA Should Revise its Grant Accrual Methodology 

to Address Impact of Recovery Act Funds 

What We Found 

EPA’s grant accruals for the Fiscal Year 2009 financial statements may not include 

adjustments for additional funds received under the ARRA. EPA has historically 

computed grant accruals based on the results of a grantee billing practice survey. 

The survey documents grantees’ billing practices, the cumulative effect of which is 

used to calculate accrual percentages. Once the grant accrual percentages are 

calculated, they are applied to current year grantee expenditures paid to calculate 

EPA’s liability for grantee expenditures incurred but not yet billed to EPA. 

EPA currently plans to combine ARRA grants with traditional grants and use the 

combined universe as the basis for its grant accrual calculation. Traditional grants 

have longer periods of performance than grants with ARRA funds. Only 

51 percent of the grant funds have been expended on traditional grants over the 

past 5 years. ARRA funds are intended to be used faster than traditional grant 

awards. Consequently, the results of the sample will be skewed because the 

billing practices for ARRA grants will be different than EPA’s traditional grants 

and not representative of all grants, including ARRA grants. This could misstate 

the financial statements regarding grant expenditures incurred but not billed. 

What We Recommend 

We recommend that the Chief Financial Officer modify the current grant accrual 

methodology to account for the increase in and nature of grant expenditures due to 

the ARRA. The revised methodology should separate the two distinct types of 

grants – ARRA and EPA’s traditional grants. EPA should use its historical 

method for computing the accrual for traditional grants and develop a separate 

process for the ARRA grants that will consider the intent to expeditiously award 

and expend ARRA funds. The separate methodology could include amounts 

reported by recipients on the total amount of funds received and the amount spent 

on projects and activities, as required by Office of Management and Budget 

(OMB) Memorandum M09-21, Implementing Guidance for the Reports on Use of 

Funds Pursuant to the American Recovery and Reinvestment Act of 2009. 

The Office of the Chief Financial Officer (OCFO) agreed with OIG’s 

recommendations for the Fiscal Year 2009 grant accruals. OCFO will analyze the 

difference between the grantee’s reported expense and EPA records and determine 

the grant accrual amount for ARRA funds. OCFO is considering other methods 

for calculating the grant accrual rate for ARRA funds in the event the required 

OMB reports are not available. 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

August 19, 2009 

MEMORANDUM 

SUBJECT: Quick Reaction Report: 

EPA Should Revise its Grant Accrual Methodology 

to Address Impact of Recovery Act Funds 

 Report No. 09-X-0217 

FROM: Paul C. Curtis 

 Director Financial Statement Audits 

TO: Maryann Froehlich 

 Acting Chief Financial Officer 

This is our report on the concerns the Office of Inspector General (OIG) of the U.S. 

Environmental Protection Agency (EPA) has with the impact of the American Recovery and 

Reinvestment Act (ARRA) of 2009 on EPA’s grant accrual methodology. This review was not 

an audit conducted in accordance with Government Auditing Standards. We conducted our 

review from February 20 to July 15, 2009, during which time we evaluated EPA’s methodology 

for calculating grant accruals to determine whether ARRA grants would necessitate a change to 

how EPA calculates grant accruals for the Fiscal Year 2009 financial statements. Grant accruals 

in the financial statements represent the costs incurred but not yet paid. 

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 determinations on matters in this report will 

be made by EPA managers in accordance with established audit resolution procedures. 

No written response to this draft is required. 

In Fiscal Year 2008, EPA reported grant accruals totaling $414 million, or 52 percent of EPA’s 

total Accounts Payables and Accrued Liabilities. Such an amount is material to EPA’s financial 

statements. EPA has historically computed grant accruals based on the results of the grantee 

billing practice surveys. The survey results are used to calculate accrual percentages by grantee. 

The percentages are then applied to total estimated expenditures to produce the accrual. EPA 

currently plans to combine the ARRA grants with EPA’s traditional grants and use the combined 

universe for computing grant accruals for Fiscal Year 2009. Office of Management and Budget 

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09-X-0217 

(OMB) Bulletin 09-02, Budget Execution of the American Recovery and Reinvestment Act of 

2009, states in part that Agencies are to take expeditious actions to spend money. EPA’s 

expenditures for grants over the past 5 years have been approximately 51 percent of open grant 

obligations. By combining the grants and using the same methodology for ARRA funds, which 

are intended to be spent expeditiously, the accrual for Fiscal Year 2009 could be materially 

impacted. Because the grant accrual is a significant number on EPA’s financial statements, such 

an impact could materially misstate the financial statements. 

The ARRA includes $7.2 billion for projects and programs administered by EPA. These 

programs, which will protect and promote green jobs and a healthier environment, include: 

Table 1: Programs Receiving ARRA Funds 

Program Purpose Amount 

Clean Water and 

Drinking Water 

State Revolving Funds 

For assistance to help communities with water quality and 

wastewater infrastructure needs ($4 billion) and with drinking water 

infrastructure needs ($2 billion) 

$6 billion 

Brownfields For competitive grants to evaluate and clean up former industrial and 

commercial sites 

$100 million 

Diesel Emissions 

Reduction 

For grants and loans for projects to reduce diesel emissions $300 million 

Superfund Hazardous 

Waste Clean-up 

For clean-up of hazardous sites $600 million 

Leaking Underground 

Storage Tanks 

For clean-up of petroleum leaks from underground storage tanks $200 million 

Source: EPA Website 

The Act and OMB’s guidance require agencies to spend the funds quickly in order to stimulate the 

economy. According to OMB Bulletin 09-02, agencies are to take expeditious actions to spend 

money while maintaining due diligence to ensure that funds are not wasted. Appropriation 

language stipulates that funds will remain available for obligation until September 30, 2010. 

ARRA section 1602 requires that “recipients shall give preference to activities that can be started 

and completed expeditiously, including a goal of using at least 50 percent of the funds for 

activities that can be initiated not later than 120 days after ... enactment” of the Act. The Act was 

enacted on February 17, 2009. For the State Revolving Funds, the law requires that the work “be 

under contract or construction” within 12 months. 

EPA’s expenditures for grants over the past 5 years have been approximately 51 percent of funds 

obligated during the same 5 years. Since ARRA funds are to be awarded and expended quickly, 

the amount of EPA’s expenditures should dramatically increase. Such an increase would impact 

the basis used for grant accruals because EPA uses expenditures as the basis for the calculation. 

OMB Circular A-136, Financial Reporting Requirements, states that “Financial statements shall 

recognize probable and measurable future outflows or other sacrifices of resources arising from 

(1) past exchange transactions, (2) government-related events, (3) government-acknowledged 

events, or (4) non-exchange transactions that, according to current law and applicable policy, are 

unpaid amounts due as of the reporting date.” The Statement of Federal Financial Accounting 

Standards No. 5, Accounting for Liabilities of the Federal Government, describes the general 

principles governing the recognition of a liability, including the requirement to record accruals. 

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09-X-0217 

EPA has historically computed grant accruals based on the results of the grantee billing practice 

surveys. Once the grant accrual percentages are calculated, they are applied to current year 

expenditures to date to project future expenditures. Because the percentages are based on the 

historical spending patterns of grantees prior to the ARRA, the effect of the newer ARRA 

expenditures would not be included in the percentages. 

EPA currently does not plan to revise the historical methodology, and will pull a sample 

consisting of all grantees, combining traditional grants with ARRA grants. By combining the 

traditional grants with ARRA grants and using the same methodology, the grant accrual could be 

distorted due to the effect of the newer ARRA grants that are intended to be expended more 

quickly. By separating the types of grants into two universes, EPA could develop a more 

accurate accrual based on the nature of the grants awarded. The traditional grant accrual 

methodology could be used for traditional grants. EPA should develop a different methodology 

that will take into account the expeditious expenditure of ARRA funds. 

Recommendation 

1.	 We recommend that the Chief Financial Officer separate the ARRA grants from 

traditional grants in developing the 2009 grant accrual. EPA should use its traditional 

grant accrual methodology for traditional grants, and develop a separate methodology for 

ARRA funds that considers the intent to expend such funds expeditiously. The separate 

methodology could include amounts reported by recipients on the total amount of funds 

received and the amount spent on projects and activities, as required by OMB Memorandum 

M09-21, Implementing Guidance for the Reports on Use of Funds Pursuant to the 

American Recovery and Reinvestment Act of 2009. 

Agency Response and OIG Evaluation 

The Office of the Chief Financial Officer (OCFO) agrees with the OIG’s recommendations for 

the Fiscal Year 2009 grant accruals. OCFO is utilizing the traditional methodology for 

non-ARRA grants and grantees. This process will not deviate from prior years. In regard to 

ARRA grants, OMB has directed all grant recipients to report their year-to-date spending by 

September 30, 2009. OCFO will analyze the difference between the grantee’s reported expense 

and EPA records and determine the grant accrual amount for ARRA funds. OCFO is currently 

considering other methods for calculating the grant accrual rate for ARRA funds in the event the 

required OMB reports are not available. We concur with the Agency’s response. 

If you or your staff have any questions regarding this report, please contact Paul Curtis at 

(202) 566-2523 or curtis.paul@epa.gov, or Meg Hiatt at (513) 487-2366 or 

hiatt.margaret@epa.gov. 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 $10,298. 

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09-X-0217 

Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Rec. 

No. 

Page 

No. Subject Status1 Action Official 

Planned 

Completion 

Date 

Claimed 

Amount 

Agreed To 

Amount 

1 3 Separate the ARRA grants from traditional grants 

in developing the 2009 grant accrual. EPA should 

use its traditional grant accrual methodology for 

traditional grants, and develop a separate 

methodology for ARRA funds that considers the 

intent to expend such funds expeditiously. The 

separate methodology could include amounts 

reported by recipients on the total amount of funds 

received and the amount spent on projects and 

activities, as required by OMB Memorandum 

M09-21, Implementing Guidance for the Reports on 

Use of Funds Pursuant to the American Recovery 

and Reinvestment Act of 2009. 

O Chief Financial Officer 

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 

4 

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09-X-0217 

Appendix A 

FY 2008 Methodology for Automated Posting of 

Quarterly Grant Accrual Entries 

1)	 Grant accruals are calculated using accrual rates established annually through grantee billing 

practices surveys. The ratios are revised for the year-end accruals and then used for the first 

three quarters of the next fiscal year. 

2)	 There are different accrual rates calculated for Superfund (Treasury Symbol 68-20X8145) 

and all other EPA appropriations (Treasury Symbols). 

3)	 For Fiscal Year 2008 the grant accrual percentage was 9.33 percent for Superfund and All 

Other. 

4)	 In the automated accrual process, the ratios are applied to grant disbursements made during 

the last 12 months. 

a)	 Disbursements for the last 12 months are summarized by the Servicing Finance Office, 

Budget Fiscal Year, fund, object class (Budget Object Class), Budget Organization, 

Program Results Code, and Site/Project. 

b) Next step is the appropriate accrual rate is applied to generate the Standard Voucher 17 

expense transactions. The Standard Voucher 17 transactions should have an automated 

reversal on the first day of the last month of the next quarter (e.g., first quarter accruals 

reversal date March 1, second quarter June 1, third quarter September 1). 

c)	 The Standard Voucher 17 transactions are created after the nightly cycle (generally the 

last weekend of the reporting period) and process automatically at the end of the next 

business day. 

5) Office of Financial Management/Reporting and Analysis Staff compares calculated accruals 

to unliquidated obligations and notifies the finance offices of any modifications to Standard 

Vouchers that need to be processed in the Suspense Table before the Standard Vouchers post 

to the general ledger. 

6) Research Triangle Park-Finance Center provides Office of Financial Management/Reporting 

and Analysis Staff with a report on Standard Voucher rejects. Office of Financial 

Management/Reporting and Analysis Staff notifies the finance offices of any rejected 

Standard Voucher that requires correction and processing. 

Source: EPA Office of the Chief Financial Officer 

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Appendix B 

Distribution 

Office of the Administrator 

Acting Chief Financial Officer 

Acting Deputy Chief Financial Officer 

Acting Director, Office of Financial Management, Office of the Chief Financial Officer 

Deputy, Office of Financial Management, Office of the Chief Financial Officer 

Director, Reporting and Analysis Staff, Office of the Chief Financial Officer 

Acting Director, Office of Financial Services, Office of the Chief Financial Officer 

Director, Las Vegas Finance Center 

General Counsel 

Agency Follow-up Official (the CFO) 

Agency Follow-up Coordinator 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for Public Affairs 

Audit Follow-up Coordinator, Office of the Chief Financial Officer 

Acting Inspector General 

6