Disaster Relief: Reimbursement to American Red Cross for Hurricanes Charley, Frances, Ivan, and Jeanne
Published: 2006-05-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In accordance with Public Law 108-324, GAO is required to audit the reimbursement of up to $70 million of appropriated funds to the American Red Cross (Red Cross) for disaster relief associated with 2004 hurricanes Charley, Frances, Ivan, and Jeanne. The audit was performed to determine if (1) the Federal Emergency Management Agency (FEMA) established criteria and defined allowable expenditures to ensure that reimbursement claims paid to the Red Cross met the purposes of the law, (2) reimbursement funds paid to the Red Cross did not duplicate funding by other federal sources, (3) reimbursed funds assisted only eligible states and territories for disaster relief, and (4) reimbursement claims were supported by adequate documentation. The 2004 hurricane season was one of the most destructive in U.S. history. Fifteen named storms resulted in 21 federal disaster declarations. Four hurricanes affecting 19 states and 2 U.S. territories from August 13 through September 26, 2004, triggered the nation's biggest natural-disaster response up to that time. Over 150 deaths and $45 billion of estimated property damage are attributed to hurricanes Charley, Frances, Ivan, and Jeanne in the United States alone. Through 2005, these four storms rank among the seven costliest in U.S. history.
section_title: What GAO Found
paragraphs: The signed agreement between FEMA and the Red Cross properly established criteria for the Red Cross to be reimbursed for allowable expenses for disaster relief, recovery, and emergency services related to hurricanes Charley, Frances, Ivan, and Jeanne. The Red Cross incurred $88.6 million of allowable expenses. Consistent with the law, the agreement explicitly provided that the Red Cross would not seek reimbursement for any expenses reimbursed by other federal funding sources. GAO identified $0.3 million of FEMA paid costs that the Red Cross properly deducted from its reimbursement requests, so as not to duplicate funding by other federal sources. The Red Cross also reduced its requested reimbursements by $60.2 million to reflect private donations for disaster relief for the four hurricanes, for a net reimbursement of 28.1 million. Red Cross expenses were incurred in states and territories eligible for disaster relief associated with the four hurricanes in accordance with the FEMA/Red Cross agreement. The Red Cross requested reimbursement of $28.1 million for the period August 11, 2004, through June 30, 2005, for payment from federal appropriated funds under Public Law 108-324. After review and some retesting, GAO relied upon audit work conducted by the CPA firm of KPMG, LLP, which determined that most Red Cross expenses were incurred for eligible disaster services and were supported by adequate documentation. However, KPMG identified six weaknesses in the Red Cross's internal controls related to expenses incurred for the four hurricanes and reported $712,000 of known questioned costs, with which Red Cross concurred. The Red Cross also concurred with the content of the GAO report.

section_title: Letter
paragraphs: The 2004 hurricane season was one of the most destructive in U.S. history.   Fifteen named storms resulted in 21 federal disaster declarations. Four  hurricanes affected 19 states and 2 U.S. territories from August 13 through  September 29, 2004, which triggered the nation’s largest natural-disaster  response up to that time. Over 150 deaths and $45 billion of estimated  property damage are attributed to hurricanes Charley, Frances, Ivan, and  Jeanne in the United States alone. The National Oceanic and Atmospheric  Administration’s (NOAA) National Weather Service has ranked these four  storms within the seven costliest hurricanes for property damage in U.S.  history.
The Military Construction Appropriations and Emergency Hurricane  Supplemental Appropriations Act, 2005 (Public Law 108-324), enacted on  October 13, 2004, provided up to $70 million of appropriated federal funds  to reimburse the American Red Cross (Red Cross) for disaster relief,  recovery expenses, and emergency services associated with the four 2004  hurricanes. The reimbursement was only to the extent funds were not  made available for eligible activities by other federal sources. The Office of  Management and Budget (OMB) designated the Federal Emergency  Management Agency (FEMA) to administer the appropriated funds.
The Red Cross, founded by Clara Barton in May 1881, was issued a federal  charter by an act of the U.S. Congress on January 5, 1905. Initially, its  primary purpose was to furnish volunteer aid to the sick and wounded of  the armed forces in time of war and to carry on a system of national and  international relief in time of peace to mitigate the suffering caused by fire,  famine, floods, and other great natural calamities. This mission has since  expanded to help people prevent, prepare for, and respond to emergencies.  The disaster and emergency relief effort is the flagship program of the Red  Cross today.
Public Law 108-324 required that we audit the Red Cross reimbursement.  Our objectives were to determine whether (1) criteria were established for  allowable reimbursable Red Cross expenses, (2) reimbursements did not  duplicate funding by other federal sources, (3) reimbursements were paid  only for services in states and territories eligible for disaster relief under  the four hurricanes, and (4) reimbursements were for eligible services and  supported by adequate documentation. We performed our work in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The terms hurricane and typhoon are regionally specific names for a strong  tropical cyclone. These storms are referred to as tropical depressions when  sustained winds are less than 39 miles-per-hour (mph) and are given a name  as a tropical storm if sustained winds exceed gale force of 39 mph up to 74  mph. Hurricanes are tropical cyclones with sustained winds that exceed 74  mph, which circulate counterclockwise about their centers in the Northern  Hemisphere. The Atlantic hurricane season runs from June 1 through  November 30 each year.
On August 13, 2004, the third storm of the 2004 hurricane season, named  Hurricane Charley, made U.S. landfall as a category 4 hurricane near  Charlotte Harbor on the Gulf of Mexico side of the Florida peninsula with  sustained winds of 150 mph. This hurricane was the strongest hurricane to  hit the United States since the category 5 Hurricane Andrew in 1992.  Hurricane Charley caused catastrophic wind damage across central  Florida, with nine tornadoes reported on August 13 in association with the  hurricane. As indicated in figure 1, the hurricane’s path moved northeast  across central Florida, with the center passing near Orlando at 86 mph as it  moved off the northeast coast near Daytona Beach and into the Atlantic  Ocean.
Charley then moved north along the South Carolina coast, making U.S.  landfall again at North Myrtle Beach as a category 1 hurricane with  sustained winds of 75 mph. The hurricane rapidly weakened to a tropical  storm over North Carolina as it moved up the Atlantic coast. Hurricane  Charley created rain, flooding, and seven tornadoes in North Carolina and  Virginia, including category F1 tornado damage at Kitty Hawk, North  Carolina. On August 15, Charley merged with a frontal zone in  southeastern Massachusetts that eventually moved into Canada. Hurricane  Charley was cited in two federal disaster declarations for Florida and South  Carolina. It was responsible for 33 U.S. deaths according to the Red Cross  and 34 U.S. deaths according to NOAA’s National Climate Data Center  (NCDC). The Property Claims Service and the Insurance Information  Institute, both of which provide insurance damage information, estimated  damage to insured property that averaged $7.2 billion and an equal amount  for uninsured damages. With total damage estimated at about $15 billion,  Charley became the third costliest hurricane in U.S. history through 2005.
The sixth storm of the 2004 hurricane season, named Hurricane Frances,  reached peak intensity as a category 4 hurricane with sustained winds of  144 mph out in the Atlantic Ocean as it passed north of the U.S. Virgin  Islands on August 31, 2004. Frances was downgraded to a category 2  hurricane with sustained winds of around 100 mph by the time it made U.S.  landfall near Sewall’s Point, 35 miles north of West Palm Beach on the east  coast of Florida on September 5. As indicated in figure 1, Frances moved  northwest across central Florida and became a tropical storm as it moved  into the Gulf of Mexico near New Port Richey, Florida, on September 6.    Later that day it again made U.S. landfall on the Florida panhandle and  moved west into eastern Alabama and western Georgia. It weakened to a  tropical depression on September 7, and moved into West Virginia early on  September 9. Hurricane Frances produced gale force winds as it briefly  accelerated northeast across New York and into northern New England  until dissipating over the Gulf of St. Lawrence on September 10.
Frances caused widespread rains and flooding over much of the eastern  United States and a total of 101 tornadoes were reported in association  with this hurricane, with 56 occurring in the Carolinas on September 7.  Hurricane Frances was cited in five federal disaster declarations for  Florida, Georgia, North Carolina, Pennsylvania, and South Carolina. It was  responsible for 45 U.S. deaths according to the Red Cross and 38 U.S.  deaths according to NOAA/NCDC. The American Insurance Services  Group, an insurance trade association, estimated damage to insured  property at $4.43 billion and an equal amount for uninsured damages. With  total damage estimated at $8.9 billion, Frances became the fifth costliest  hurricane in U.S. history through 2005.
The ninth storm of the 2004 hurricane season, named Hurricane Ivan,  reached category 5 strength three times in the course of its journey across  the Atlantic into the Gulf of Mexico, with sustained winds as high as 167  mph. From September 5 to 12, Ivan caused considerable property damage  and loss of life primarily in Grenada and Jamaica as it passed through the  Caribbean Sea. Ivan weakened to a category 3 hurricane with sustained  winds of 121 mph when it made U.S. landfall just west of Gulf Shores,  Alabama, on September 16. As indicated in figure 1, Ivan moved across  central Alabama where it weakened to a tropical storm and moved  northeast as far as the Delmarva Peninsula on September 18. However,  even as a weak tropical storm, Ivan produced considerable rain and  flooding, spawning 113 tornadoes across the southeastern United States, as  depicted in figure 2.
This included two category F2 tornadoes in Florida that resulted in five  deaths, and 61 tornadoes reported on September 17. Ivan then ceased its  northeast movement and over the next 3 days made a large loop and moved  southwest along the eastern U.S. coast, crossing Florida back into the Gulf  of Mexico on September 21. There Ivan completed its loop and became a  tropical storm, making landfall in southwestern Louisiana on   September 24. Later that day, it dissipated over the upper Texas coast after  completing a storm track more than 5,600 miles long. Hurricane Ivan was  cited in nine federal disaster declarations for Alabama, Florida, Georgia,  Louisiana, Mississippi, New Jersey, New York, North Carolina, and  Pennsylvania. It was responsible for 63 U.S. deaths according to the Red  Cross and 52 U.S. deaths according to NOAA/NCDC. The American  Insurance Services Group estimated insured property damage at   $7.1 billion and an equal amount for uninsured damages. With total damage  estimated at $14.2 billion, Ivan became the fourth costliest hurricane in U.S.  history through 2005.
The 10th storm of the 2004 hurricane season, named Hurricane Jeanne, was  a tropical storm as it moved over the U.S. Virgin Islands on September 14,  2004, and produced heavy rain over Puerto Rico on September 15, with  sustained winds of 69 mph. Jeanne became a category 1 hurricane over the  Dominican Republic with sustained winds of 81 mph that resulted in an  estimated 3,000 deaths in Haiti from torrential rainfall, mudslides, and  flooding on September 17. Jeanne made U.S. landfall at Port St. Lucie on  the east coast of Florida, very near where hurricane Frances made U.S.  landfall on September 5, as a category 3 hurricane with sustained winds of  121 mph on the morning of September 26.
As indicated in figure 1, Jeanne moved westward across central Florida but  quickly became a tropical storm by the time it reached Tampa. It further  weakened to a tropical depression as it moved northward, dumping heavy  rains across central Georgia and into the Carolinas, Virginia, and the  Delmarva Peninsula. On September 29, Jeanne merged with a frontal zone  that dissipated eastward into the Atlantic. Hurricane Jeanne was cited in  five federal disaster declarations for the U.S. Virgin Islands, Puerto Rico,  Florida, Virginia, and Delaware. It was responsible for 13 U.S. deaths,  according to the Red Cross, and 28 U.S. deaths, according to NOAA/NCDC.  The American Insurance Services Group estimated damage to insured  property at $3.44 billion and an equal amount for uninsured damages. With  total damage estimated at $6.9 billion, Jeanne became the seventh costliest  hurricane in U.S. history through 2005.
The Red Cross activated its preparedness and disaster relief operations  before hurricane Charley made landfall, and remained on the ground  providing critical emergency services through the three subsequent  hurricanes. The Red Cross stated that this effort, through the 2004  hurricane season, resulted in the largest hurricane relief operation in its  123-year history. From mid-August through mid-October 2004, the Red  Cross reported that it had established over 1,800 shelters that housed  almost 425,000 people displaced by the hurricanes, provided over 11  million meals and snacks to hurricane victims and emergency workers, and  provided more than 149,000 comfort kits and 113,000 cleanup kits. The Red  Cross stated that this effort involved over 35,000 workers, of whom 90  percent were volunteers, to set up shelters, provide transportation, support  the sheltering and feeding effort, and distribute supplies.
As required by statute and regulation, the Red Cross receives an annual  audit of its consolidated financial statements, including a schedule of  expenditures of federal awards. The Red Cross is required to have its  activities, including a complete, itemized report of all receipts and  expenditures, audited by the Secretary of Defense through the U.S. Army  Audit Agency pursuant to 36 U.S.C. 300110; Department of Defense  Directive 1330.5; and Army Regulation 930-5. The Red Cross is also subject  to the audit requirements of the Single Audit Act and OMB Circular No. A- 133, Audits of States, Local Governments, and Non-Profit Organizations.
The Red Cross contracted with an independent public accounting firm,  KPMG, to conduct a financial audit of its consolidated financial statements,  as well as an audit of its schedule of expenditures of federal awards, for the  fiscal year ended June 30, 2005. To fulfill its audit responsibilities, avoid  duplication and unnecessary expense, and make the most efficient use of  available resources, the U.S. Army Audit Agency reviewed KPMG’s work  and reports. According to its report of October 21, 2005, the U.S. Army  Audit Agency found nothing during its review to indicate that KPMG’s  unqualified opinion on the Red Cross’s 2005 consolidated financial  statements was inappropriate or could not be relied on.
For the Red Cross single audit, the Department of Health and Human  Services serves as the cognizant federal agency on behalf of all  participating federal agencies under the Single Audit Act audit process. The  cognizant agency will review the audit report submitted by KPMG,  determine if additional workpaper review is necessary, and coordinate a  management decision for KPMG findings and questioned costs. The  awarding federal agency has 6 months from receipt of the report to assess  any audit findings and questioned costs and issue management’s decision.
Known questioned costs are those specifically identified by the auditor.  Likely questioned costs are projected based upon an error rate of  transactions tested. Resolution of questioned costs may be by repayment;  financial adjustments; or other actions, such as changing procedures.
section_title: Scope and Methodology
paragraphs: The objectives of our audit were to determine whether (1) FEMA and the  Red Cross established criteria for allowable reimbursable expenses related  to hurricanes Charley, Frances, Ivan, and Jeanne; (2) Red Cross  reimbursements did not duplicate funding paid by other federal programs;  (3) Red Cross reimbursable claims were paid only for services in states and  territories declared eligible for disaster relief; and (4) Red Cross  reimbursable claims were paid only for allowable categories of services  and support and were supported by adequate documentation.
To determine whether there were established criteria for allowable  reimbursable Red Cross expenses, we initially reviewed a draft agreement  between FEMA and the Red Cross in March 2005. This draft agreement  outlined the operating definitions and the proposed approach for federal  reimbursement of Red Cross disaster relief, emergency services, and  recovery expenditures associated with hurricanes Charley, Frances, Ivan,  and Jeanne. We then participated in a series of meetings with  representatives of the Red Cross, FEMA, DHS’s Office of Inspector  General, KPMG, and OMB. The purpose of these meetings was to refine the  criteria to be consistent with FEMA and Red Cross policies and procedures  for disaster relief and Public Law 108-324. The final agreement was signed  by FEMA and Red Cross officials in May 2005.
To ensure that Red Cross reimbursements did not duplicate funds paid by  other federal programs, we examined the FEMA and Red Cross agreement  that provided that the Red Cross would not request reimbursement for any  expenses paid by other federal funding sources. As the primary federal  funding source for disaster assistance, FEMA identified any payments it  had made to the Red Cross and reconciled amounts to reimbursement  requests to ensure that its federal funds were not duplicated. We reviewed  this identification and reconciliation process, conducted discussions with  FEMA and Red Cross officials, and reviewed for indications of other  federal funding during our audit of Red Cross reimbursement requests.
To determine if Red Cross reimbursable claims were paid only for services  in states and territories declared eligible for disaster relief, we reconciled  21 federal disaster declarations for hurricanes Charley, Frances, Ivan, and  Jeanne to the FEMA and Red Cross agreement. We also identified states  where federal disaster declarations were issued as a result of severe  flooding caused by these four hurricanes. However, the Red Cross, as a not- for-profit organization, is not limited by federal disaster declarations and  can provide emergency assistance where it determines there is a need. As a  result, we identified several other states where Red Cross incurred some  hurricane-associated expenses related to the four hurricanes that were part  of the FEMA/Red Cross agreement.
To determine whether reimbursable claims were paid only for allowable  categories of services and support, and whether those claims were  supported by adequate documentation, we reviewed audit work performed  by the public accounting firm of KPMG. The Red Cross hired KPMG to  perform an entitywide audit of its consolidated financial statements,  including all of its federal awards in accordance with OMB Circular No. A- 133, Audits of States, Local Governments, and Non-Profit Organizations.  In order to avoid duplication of audit work, we reviewed KPMG’s Single  Audit Act audit of the Red Cross for the fiscal year ended June 30, 2005,  that contained $88.6 million of incurred expenses and $28.1 million of net  reimbursements to be paid from federal funds that we were mandated to  audit under Public Law 108-324. We relied on KPMG’s work on the Red  Cross’s internal controls and tests of transactions, retested 10 percent of  741 transactions sampled by KPMG, and performed other audit tests as we  deemed necessary.
We performed our work from March 2005 through March 2006 in  accordance with generally accepted government auditing standards. We  suspended our work from October 2005 through February 2006 because  KPMG was waiting for support from an expanded test of client assistance  debit cards from Red Cross chapter offices in the Gulf States affected by  hurricanes Katrina and Rita.
We provided a draft copy of this report to the American Red Cross and to  FEMA for their review and comment on April 14, 2006, with a follow-up  copy to DHS on May 11, 2006. We received written comments from Red  Cross in a letter dated May 1, 2006, which is reprinted in its entirety in  appendix I of this report. According to DHS, FEMA officials have been  actively preparing for the 2006 Atlantic Hurricane Season and had no  comments on the draft report.
section_title: Criteria Were Established for Reimbursement
paragraphs: We found that FEMA and the Red Cross had properly established criteria  for Red Cross reimbursement requests through a May 2005 agreement that  identified allowable categories for disaster relief, recovery, and emergency  services associated with hurricanes Charley, Frances, Ivan, and Jeanne.  This agreement also included definitions of eligibility, listed 18 states and 2  territories where the Red Cross had incurred expenses associated with the  four hurricanes, and established administrative procedures for Red Cross  reimbursement requests and subsequent payment by federal appropriated  funds. Allowable categories for disaster relief, recovery, and emergency  services under the May 2005 FEMA/Red Cross agreement consisted of   (1) mass care, (2) client personal living needs, (3) client housing needs,   (4) client health needs, (5) direct service delivery support, and   (6) operational support. These categories are discussed in more detail  below.
subsections: section_title: Mass Care
paragraphs: Mass care covered relief supplies and services provided for or distributed  to disaster victims and emergency workers that included food, supplies,  and expendable equipment to provide mass feeding and shelter operations.  An example of Red Cross sheltering efforts is depicted in figure 3.  clothing, medical and other supplies, and expendable equipment  intended for bulk distribution or used in mass care activities, such as  comfort kits, cleanup kits, blankets, lanterns, camp stoves, ice chests,  and cots;    food, water, ice, fuel, and other consumable supplies for bulk   shipping and storage for safekeeping of household goods;  sanitation projects, mass immunization, emergency first aid, and  supplies used in shelters, first aid stations, service centers, or other Red  Cross facilities; and  food, transportation, and other services provided to emergency  workers.
The Red Cross reported that from mid-August through mid-October 2004, it  had established over 1,800 shelters that housed almost 425,000 people  displaced by the hurricanes, provided over 11 million meals and snacks to  hurricane victims and emergency workers, and provided more than  149,000 comfort kits and 113,000 cleanup kits.
section_title: Client Personal Living and Housing Needs
paragraphs: Client personal living and housing needs covered relief supplies and service  given to individuals and families to meet immediate living necessities or to  operate households, such as  living needs, including food, water, clothing, toilet articles, household  supplies, laundry and dry cleaning, storage containers, bedding and  linens, cribs and baby items, and coolers to store food, and  housing needs, including accommodations in commercial facilities, rent  and security deposits, utilities, and emergency repairs to make  residences temporarily habitable.
The Red Cross reported that more than 330,000 homes were damaged by  hurricanes Charley, Frances, Ivan, and Jeanne, with more than 27,000  homes completely destroyed, including the one shown in figure 4.
From mid-August through mid-October 2004, the Red Cross stated that it  had helped more than 73,000 individuals and families in determining their  needs, developing recovery plans, and providing financial aid.
section_title: Client Health Needs
paragraphs: Client health needs covered relief supplies and services provided to  disaster victims on an individual or family basis to provide for physical and  mental health benefits, such as   hospital, ambulance, X ray, and laboratory charges;  eyeglasses, dentures, hearing aids, and artificial limbs;  prescriptions, over-the-counter medication, and first aid supplies;  special dietary, housing, or mobility devices;  blood and blood products; and  burial or cremation expenses.
From mid-August through mid-October 2004, the Red Cross reported that  volunteer nurses helped over 46,000 people with physical needs, and  trained mental health professionals made over 78,000 contacts with people  in need to begin the recovery process.
section_title: Direct Service Delivery Support
paragraphs: Direct service delivery support covered expenses associated with the  delivery of disaster services to disaster victims and workers. Emergency  response vehicles provided mobile relief sites to distribute hot meals,  water, and snacks to hurricane victims, as depicted in figure 5.
Direct service delivery support included  salaries, travel, and maintenance of disaster staff assigned to provide  mass care, family living and housing, and client health services;  purchase, rental, repair, and service of nonexpendable equipment and  vehicles used to provide direct services and services in shelters and  facilities;  telephone and related communications equipment;  rent, repair, and operating expenses of facilities used to provide direct   shipping, freight, and handling expenses; and  other miscellaneous expenses.
The Red Cross stated that over 35,000 workers, 90 percent of whom were  volunteers, were involved in setting up shelters, providing transportation,  supporting the sheltering and feeding effort, and distributing supplies.
section_title: Operational Support
paragraphs: Operational support covered expenses of managing and administering a  disaster relief operation that included  salaries, travel, and maintenance of disaster staff assigned to functions  that support direct service to disaster victims and workers such as  administration, records and reports, accounting, public affairs, logistics,  training, staffing, local disaster volunteers, communications, computer  operations, and liaison functions with other entities;  rental, repair, and service of nonexpendable equipment, computer  equipment, and vehicles used to provide management and  administration;  telephone and related communications equipment for field, district, and   rent, repair, and operating expenses of facilities used to provide  management and administration;  printing, copy, postage, and delivery expenses; and  meeting expenses and activity expenses to recognize volunteer efforts.
section_title: Controls Avoided Duplication of Expenses Reimbursed by Other Federal Funds
paragraphs: Consistent with the law, the May 2005 FEMA/Red Cross agreement  provided that the Red Cross would not seek reimbursement for any  expenses reimbursed by other federal funding sources. We identified about  $0.3 million of FEMA paid transient accommodations and deployment  costs that were properly deducted by the Red Cross from its  reimbursement requests, so as not to duplicate funding by other federal  sources. The Red Cross also deducted from the reimbursements   $60.2 million of private donations designated for disaster relief related to  the four hurricanes.
As the primary federal funding source for disaster assistance, FEMA  established internal controls to identify any payments it made to the Red  Cross. It subsequently reconciled these amounts to Red Cross requests for  reimbursement to ensure that amounts were deducted so that federal funds  were not used to reimburse Red Cross expenses more than once. During  our audit, we reviewed this identification and reconciliation process and  conducted discussions with FEMA and Red Cross officials. We did not  identify any evidence of other federal funding during our audit of the Red  Cross reimbursements.
section_title: Expenses Were Incurred in Eligible States and Territories
paragraphs: The Red Cross reported $88.6 million of incurred expenses in states and  territories eligible for disaster relief under the four hurricanes in  accordance with the FEMA/Red Cross agreement. This included   $3.1 million for general relief for a call center, FEMA transient  accommodations, and other recovery expenses not specifically identified  with any particular one of the four hurricanes. Twenty-one federal disaster  declarations were made by the President and issued by FEMA for  hurricanes Charley (2), Frances (5), Ivan (9), and Jeanne (5), which  cumulatively covered federal disaster aid to 12 states and 2 territories.   Federal disaster declarations were also issued for four additional states— Ohio, Tennessee, Vermont, and West Virginia—as a result of severe flooding  caused by these hurricanes.
However, the Red Cross, as a not-for-profit organization funded primarily  through private donations, is not limited by federal disaster declarations  and can provide assistance where it determines there is a need. As a result,  the FEMA/Red Cross agreement included some hurricane-associated  expenses incurred in Arkansas and Texas that were used by Red Cross as  staging areas for emergency relief aid to the areas affected by the four  hurricanes. The agreement also included Red Cross assistance in Maryland,  which was affected by flooding caused by Hurricane Ivan but was not  covered by a federal disaster declaration.
From August 11, 2004, through June 30, 2005, the Red Cross reported  incurred expenses of $88.6 million in connection with hurricanes Charley,  Frances, Ivan, and Jeanne. These expenses are presented by hurricane in  figure 6.
The reported $88.6 million of Red Cross incurred expenses for the four  hurricanes by state and U.S. territory are presented in table 1.
The May 2005 agreement signed by FEMA and the Red Cross identified 18  states and 2 territories as eligible for reimbursement from the 2004  hurricane appropriation. The agreement did not include Delaware, which  was eligible for federal disaster assistance, because the Red Cross stated it  incurred no expenses in the state. The 12 states and 2 territories presented  in bold in table 1 were determined to be eligible for federal disaster relief in  declarations by the President and FEMA that specifically cited hurricanes  Charley, Frances, Ivan, or Jeanne. Another 4 states—Ohio, Tennessee,  Vermont, and West Virginia—were declared eligible for federal disaster  relief as a result of severe flooding caused by the four hurricanes, even  though none of the hurricanes were specifically mentioned in the federal  disaster declarations.
Arkansas and Texas were not declared eligible for federal disaster relief,  but the Red Cross stated that it had incurred some staging expenses there,  although its expenses in Texas were included with its expenses for  Louisiana. Maryland was not declared eligible for federal disaster relief, but  the Red Cross provided some assistance there when heavy rains generated  by hurricane Ivan caused flooding of the Susquehanna River in Port  Deposit, Maryland, in September 2004. The state of New York expenses  incurred by the Red Cross were included as general relief, which included a  centralized call center and other recovery costs not specifically identified  with any particular one of the four hurricanes.
section_title: Incurred Expenses Were Generally for Eligible Services and Were Adequately Supported
paragraphs: The Red Cross’s requested reimbursements of $28.1 million related to the  four 2004 hurricanes were included in a schedule of $50.0 million of federal  funds from other programs operated by the Red Cross for the fiscal year  ended June 30, 2005. Since the Red Cross expends more than $500,000  annually of federal awards, it is required by the Single Audit Act to obtain  an annual audit. The Red Cross’s entitywide financial statements and a  schedule of expenditures of federal awards for the fiscal year ended   June 30, 2005, were audited by the public accounting firm of KPMG in  accordance with OMB Circular No. A-133, Audits of States, Local  Governments, and Non-Profit Organizations. In order to not duplicate  audit efforts, we reviewed and tested the audit work of KPMG related to  the reported $88.6 million of Red Cross incurred expenses for the four 2004  hurricanes.
In its Single Audit Act audit, KPMG determined that Red Cross expenses  were generally incurred for eligible disaster services and supported by  adequate documentation. We concur with that determination. However,  KPMG identified six weaknesses in the Red Cross’s internal controls  related to the reimbursement for the four 2004 hurricanes that it  considered to be reportable conditions. KPMG also considered one of  these, related to debit cards for client assistance, to be a material  weakness. In its report, KPMG made recommendations to the Red Cross to  strengthen internal controls related to these six reportable conditions, with  which the Red Cross concurred.
The report also identified about $712,000 of known questioned costs  related to the federal share of the 2004 hurricane program identified  through audit sampling that were caused by (1) a bank reporting error of  $657,000 on client assistance debit cards and (2) missing or incomplete  documentation of $55,000 to support incurred expenses.
subsections: section_title: The Red Cross Reported $88.6 Million of Incurred Expenses
paragraphs: The Red Cross reported $88.6 million of incurred expenses related to the  four 2004 hurricanes for the period August 11, 2004, through June 30, 2005.  These expenses, less other federal funds and private donations received,  were submitted to FEMA for reimbursement from federal appropriated  funds provided under Public Law 108-324, as indicated in table 2.
As indicated in table 2, the reported $88.6 million of Red Cross incurred  expenses were reduced by $0.3 million of other federal funds and   $60.2 million of private donations that resulted in a net reimbursement  amount of $28.1 million.
section_title: Audit Identified Six Reportable Conditions in Internal Controls
paragraphs: We reviewed KPMG’s Single Audit Act audit work on the Red Cross’s  internal controls and tests of transactions, and we retested 10 percent of its  741 sample transactions of Red Cross expenses related to the four 2004  hurricanes. We found that we could rely upon the KPMG audit work. In  conducting its audit, KPMG identified six reportable conditions in internal  controls, the first of which KPMG also determined to be a material  weakness. These conditions are discussed in more detail below.
subsections: section_title: Client Assistance Debit Cards Were Missing Support and Approval Signatures, Had Occasional Loading Errors, and Were Not Reconciled
paragraphs: One method used by the Red Cross to provide financial assistance to  disaster victims is the client assistance card, which is a MasterCard®  branded debit card with client assistance amounts determined by on-site  caseworkers. The cards were introduced on a large scale basis for the first  time during the 2004 hurricane response in Florida. The cards are preferred  by the Red Cross in part because of their acceptance by merchants,  reduced paperwork, and the flexibility afforded to disaster clients. An  internal authorizing approval document (Red Cross Form 1030) is used to  issue a card to individual clients following initial casework. Individual card  spending limits are determined by the caseworker’s assessment of the  client’s immediate needs for housing, food, transportation, and other  personal expenses, with a current maximum card balance of $5,000. Card  spending limits can be restored after they are consumed if the caseworker  determines additional client need exists. Most cards were “cash-enabled,”  meaning they could be used to withdraw cash from any ATM. To limit  certain risks of unauthorized card use, specific merchant codes are  blocked by the card program’s bank administrator in order to prevent the  card from being used at locations that principally sell goods such as alcohol  and tobacco and at certain luxury retail outlets.
KPMG conducted a monetary unit statistical sample of 336 transactions on  334 individual debit cards from a population of about 40,000 debit cards  that generated $24.0 million of transactions. The Red Cross could not  locate Form 1030s from local Red Cross chapters to support the debit card  authorization for 23 of the 334 cards. An additional 17 Form 1030s did not  have evidence of appropriate Red Cross approval signatures. For an  additional 3 card transactions that KPMG tested outside the monetary unit  sample, the Red Cross could not locate documentation to support the  transactions. As a result of these exceptions, KPMG identified questioned  costs of $55,334 because of missing support or approval signatures related  to these 43 transactions.
Various reports are available to the Red Cross from the bank issuing the  client assistance debit cards to assist in monitoring the cards. These  included reports showing amounts “loaded” for the authorized spending  limit onto new and existing cards each month, as well as spending reports  detailing amounts, dates, and merchants for all card charges. KPMG  reported that the Red Cross did not have a procedure in place to reconcile  the total amounts authorized by the casework process to the amounts  actually loaded onto the cards. In one case identified in a Red Cross  internal audit, the amount authorized by supporting casework was $41.26  but a debit card was erroneously loaded with an authorized limit of  $4,126.00, all of which was spent. KPMG questioned the excess difference  of $4,085.
Additionally, while determining the population of client assistance card  transactions for audit testing, KPMG identified an amount of $657,619 that  the Red Cross could not initially resolve. This amount was the difference  between detail amounts reported by the issuing bank based upon card  transactions and summary amounts the bank reported to the Red Cross for  the debit card program. The Red Cross used the amounts from the bank  summary reports to record entries to its general ledger and to recognize  debit card expenses for the 2004 hurricane program. No reconciliation  between these two bank reports had been performed by the Red Cross  following the 2004 hurricane season. The bank investigated the difference  and discovered that its summary program reports were erroneously  capturing duplicate cardholder information if a card was assigned to a  cardholder more than one time. This caused an overstatement in the  summary of debit card amounts, although the bank’s detail transaction  reports on cards were correct. As a result of this bank error, KPMG  identified questioned costs of $657,619. The Red Cross subsequently  reduced its final request to FEMA for the 2004 hurricane reimbursement to  $28.1 million after adjusting for the amount of the bank reporting error.
section_title: Client Assistance Debit Cards Were Not Being Adequately Monitored
paragraphs: Client assistance cards were introduced by the Red Cross shortly before  the 2004 hurricane season. During the season, its Disaster Operations unit  was responsible for monitoring transactions on client assistance cards  issued by Red Cross headquarters in Washington, D.C. This unit was to  review reports showing the amounts loaded onto cards for duplicate names  and cards as well as for unusual balances. Any questionable transactions  were to be referred to the Family Services unit for further investigation.  However, no standard procedures were developed for monitoring cards  until May 2005, when a one-page procedure provided examples of  questionable card activity that should be pursued. This included reviewing  card usage that exceeded normal authorized dollar limits, investigating  multiple cards issued to individuals with the same or similar names, and  spot-checking for other unusual data. This guidance also did not specify  how identified suspicious transactions will be referred to the compliance  units within the Red Cross, or require that follow-up or other ultimate  resolution of questionable card activity be documented.
The frequency and depth of Red Cross monitoring activities was unclear,  and those activities were not routinely documented as to follow-up and  resolution of any transactions referred to the Family Services unit. KPMG  therefore considered this to be a reportable condition, with no questioned  costs identified.
section_title: Disbursing Orders for Client Assistance Were Not Always Signed or Supported
paragraphs: Another method used by the Red Cross to provide financial assistance to  disaster clients is the disbursing order (DO). A DO is a hard copy Red Cross  form prepared by a caseworker that describes the specific goods or  services to be provided to the disaster client, the name of the merchant to  provide the goods or services, and the authorized dollar limit of the  expenditure. The DO is first signed by both the caseworker and the disaster  client. After providing the described goods or services to the client, the  merchant submits the DO to the Red Cross for reimbursement. The DO is  to be signed by both the merchant and the disaster client, who  acknowledges receipt of the goods or services.
KPMG judgmentally selected and tested 133 DOs from a population of   $32.3 million that had been paid to merchants. KPMG found that 6 DOs  were not signed by either the disaster client or the merchant and did not  contain sufficient supporting documentation, such as an invoice or  merchant receipt, which might provide alternative documentation that the  goods were received by the intended client. KPMG accepted either  signature as substantiation that the goods were delivered, though Red  Cross procedure is to obtain both signatures. In addition, for another 2 DOs  tested, each amount reimbursed to the merchant was equal to the DO’s  authorized expenditure limit, which was greater than the actual expense  requested by the merchant. As a result of these exceptions, KPMG  identified questioned costs of $2,405 because of missing signatures and   $4 because of excess merchant reimbursement.
section_title: Disbursing Orders for Client Assistance Were Not Always Reconciled to Merchant Reimbursements
paragraphs: From August 2004 through March 2005, the Red Cross negotiated a master  billing contract with a national retailer. The retailer was to centrally gather  all DOs honored at its retail locations for reimbursement, and invoice the  Red Cross for the sum of all such DOs on a monthly basis. Prior to payment  to the merchant, the Red Cross reconciled the invoices to the underlying  DOs, based on the information provided by the retailer. Approximately   $2 million of financial assistance was provided to disaster clients through  this individual merchant billing arrangement. The contract was  discontinued in March 2005 after the bulk of client assistance had been  provided.
During a test of the Red Cross reconciliation process, KPMG could not  match charges of $85,588 reimbursed to the merchant to any supporting  DOs. The Red Cross investigated these differences as they were identified  by KPMG, but was unable to resolve them. These unsupported expenses  were included in the pool of costs subject to reimbursement and appear to  be the only unmatched charges under the master billing arrangement based  on a review of a sample of other monthly invoices and related  reconciliations. As a result of these unsupported differences, KPMG  identified questioned costs of $85,588.
section_title: Expense Transactions Were Sometimes Missing Support
paragraphs: While providing disaster assistance, the Red Cross incurs other expenses  related to managing the overall response effort, such as those for supplies,  staff travel, and other logistics expenses. Most of these expenses for large- scale disasters are procured and paid for through the Red Cross National  Shared Services Center, while other expenses may be incurred at the Red  Cross chapter level and subsequently reimbursed by Red Cross national  headquarters.
KPMG judgmentally selected and tested 120 expense transactions incurred  for other than client financial assistance from a population of $32.6 million.  For 9 transactions primarily related to staff travel and other staff expenses,  the Red Cross could not find supporting documents. As a result of these  exceptions, KPMG identified questioned expenses of $21,526 because of  missing support.
section_title: Client Case Files Were Sometimes Missing Support to Determine Eligibility
paragraphs: Individuals and families requesting financial assistance are required to  provide identification showing that they resided within the disaster- affected area at the time the disaster struck. During disaster response  operations, Red Cross case workers interview affected clients to determine  their eligibility and assess the type and level of assistance to best meet the  clients’ need. For each client, a case file is opened, and a Red Cross  standard assistance Form 901 is completed by the caseworker to document  eligibility. The form is then signed by the caseworker to indicate that he or  she has concluded that the individual or family is eligible for a specified  level of financial assistance. For the 2004 hurricane season, some, but not  all, of the case files were entered after the fact into a Red Cross database  known as the Client Assistance System.
KPMG judgmentally selected and tested 60 case files from the Client  Assistance System. The Red Cross could not find 7 of the case files,  although for 3 files, other records were found to corroborate eligibility. For  2 other case files, there was no evidence of caseworker signature, and for  another case file there was insufficient information to document eligibility.  KPMG identified questioned costs of $2,415 because of the 4 missing case  files and the 1 case file with insufficient documentation.
section_title: Known and Likely Questioned Costs
paragraphs: Based on its audit testing, KPMG identified about $712,000 of known  questioned costs and $0.9 million of likely questioned costs related to the  federal share of the 2004 hurricane program in its Single Audit Act audit of  the Red Cross through June 30, 2005. These questioned costs are shown by  reportable condition in table 3.
In addition to known questioned costs that are specifically identified by the  auditor, OMB Circular No. A-133 requires the auditor to consider the best  estimate of total costs questioned (likely questioned costs). Based upon the  percentage rate of known errors in the statistical monetary unit sample of  client assistance cards, KPMG projected an error rate to the entire  population of $24.0 million using a 96 percent confidence level and  identified total likely questioned costs of about $2.9 million with 32  percent, or about $926,000, related to the federal share, as indicated in table  3. However, that projection is a statistical extrapolation and therefore is not  supported by detailed exceptions within the total population.
The Red Cross reduced its final request for FEMA reimbursement by the  amount of the bank reporting error of $657,619, but did not reduce its  reimbursement request for the other $171,000 of known questioned costs  that included 32 percent, or about $55,000, related to the federal share. The  Department of Health and Human Services, which serves as the cognizant  federal agency for the Red Cross under the Single Audit Act audit process,  will review the KPMG report and coordinate a management decision for the  auditor’s findings and questioned costs. The awarding federal agency has 6  months from receipt of the report to assess any audit findings and  questioned costs and issue management’s decision. Corrective action  should also be initiated within 6 months after receiving the audit report and  proceed as rapidly as possible.
section_title: Agency Comments
paragraphs: We received written comments from the American Red Cross Executive  Vice President and Chief Financial Officer on a draft of this report. The Red  Cross agreed with the report content, including the six weaknesses  identified by KPMG, and stated that it is taking steps to strengthen its  policies, procedures, and practices to remedy these weaknesses. It also  described steps being taken in anticipation of the 2006 Atlantic Hurricane  Season, which runs from June 1 through November 1, 2006. We have  reprinted the American Red Cross comments in their entirety in appendix I.  FEMA had no comments on the draft report.
We are sending copies of this report to Senate Committee on Homeland  Security and Governmental Affairs and the House Committee on  Government Reform. We are also sending copies of this report to the Under  Secretary of Emergency Preparedness and Response in the Department of  Homeland Security responsible for FEMA, the Inspector General for the  Department of Homeland Security, the Director of OMB, and the Vice  President of Finance at the American Red Cross. Copies of this report are  available to other interested parties on request. This report will also be  available at no charge on GAO’s Web site at http://www.gao.gov.
Should you or your staffs have any questions concerning this report, please  contact me at (202) 512-3406 or by e-mail at sebastians@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. Key contributors to this report were  Roger R. Stoltz, Assistant Director; Patricia A. Summers; and Eric S. Huff.