Federal Grants: Agencies Performed Internal Control Assessments Consistent with Guidance and Are Addressing Internal Control Deficiencies
Released: 2014-07-30T00:00:00

Letter

Background

Grant Types and Programs

The federal government uses grants—forms of federal financial assistance to a state, a local government, or a nongovernmental recipient authorized to receive U.S. government assistance (e.g., charitable or educational institutions) for a specified public purpose—to achieve national objectives and respond to emerging trends, such as changing demographics and changing threats to homeland security. Federal grant programs are diverse and can vary in numerous ways including type, size, nature of recipients, and types of programs they fund. Grant programs also vary in the amount of discretion they give to the recipient in how the funds will be used and the way the funds are allocated or awarded. The types of grants awarded by the agencies in our review include the following:

Block grants allow recipients, predominately states, to fund a broad range of activities within more general policy areas, such as community development or law enforcement.

Formula grants are awarded to all eligible grantees based on a statutory allocation formula, which may be based on a number of variables, including population, poverty rate in a given area, or tax effort. The grants are typically awarded to states, which often pass funds through to eligible local government agencies and nonprofit organizations.

Project grants are generally awarded on a competitive basis and provide funding for fixed or known periods for specific projects or the delivery of specific services or products. Project grants can include fellowships, scholarships, research grants, training grants, traineeships, experimental and demonstration grants, evaluation grants, planning grants, technical assistance grants, survey grants, and construction grants.

These categories are not mutually exclusive and can overlap when used to define grant programs. For example, HUD awards Community Development Block Grant funds to states using a formula, and then the states distribute the funds to localities, sometimes as project grants.

Some agencies also use cooperative agreements, another form of financial assistance similar to grants, but one in which the federal agency is more involved with the recipient in implementing the financial assistance program. The distinguishing factor between a grant and a cooperative agreement is the degree of federal participation or involvement during the performance of the work activities.

Program Offices and Grant Programs in Our Review

Most of the program offices included in our review oversee and monitor large block and formula grant programs, while others award and manage numerous project or other smaller grants, as described in table 1.

Importance of Internal Control

At all stages of the grants life cycle, it is essential that effective internal control systems are in place. Internal control represents an agency’s plans, methods, and procedures used to meet its mission, goals, and objectives and serves as the first line of defense in safeguarding assets and preventing and detecting errors, fraud, waste, abuse, and mismanagement. Effective oversight of internal controls for grant programs is important to provide reasonable assurance to taxpayers that grants are awarded properly, recipients are eligible, and federal funds are used as intended and in accordance with applicable laws and regulations. The term reasonable assurance is important because no matter how well- designed and well-operated, internal control cannot provide absolute assurance that agency objectives will be met. Cost-benefit is an important concept to internal control considerations. Internal control is very broad and encompasses all controls within an agency, covering an agency’s entire mission and operations, not just financial operations. Figure 1 shows examples of agencies’ control activities in each phase of the grants life cycle.

Congress passed the Federal Managers’ Financial Integrity Act (FMFIA) to help improve the management of federal government programs and strengthen agency internal control systems by requiring ongoing evaluations and reports on the adequacy of executive agency internal control systems. FMFIA, as implemented by GAO standards and OMB guidance, requires agency managers to establish internal control systems that provide reasonable assurance regarding the agency’s proper use of funds and resources, compliance with statutes and regulations, and preparation of reliable financial reports. In accordance with FMFIA, OMB has established guidance for agencies for evaluating and reporting on their internal controls. This guidance is now contained in OMB Circular No. A-123, Management’s Responsibility for Internal Control. FMFIA also requires GAO to issue internal control standards for the federal government, which are now contained in Standards for Internal Control in the Federal Government. These standards provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. The standards also provide that for internal control to be effective, an agency’s management should establish both a supportive overall control environment and specific control activities directed at carrying out the agency’s objectives.

Annual Internal Control Assessment and Reporting

OMB Circular No. A-123 states that management is responsible for establishing and maintaining internal control to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. OMB Circular No. A-123 provides guidance to federal managers on improving the accountability and effectiveness of federal programs and operations by establishing, assessing, correcting, and reporting on internal control. OMB Circular No. A-123 requires federal agencies and managers to take systematic and proactive measures to, among other things, assess the adequacy of internal control in federal programs and operations and report annually on internal control through management assurance statements.

To assess the adequacy of internal controls, federal agencies conduct an annual assessment that includes testing key controls, identifying needed improvements, and developing and implementing corrective action plans. As part of this assessment, OMB Circular No. A-123 states that management should consider a variety of internal and external sources, including management knowledge and internal program reviews, financial statement audit reports, single audit reports, and improper payment reviews and reports. Further, OMB Circular No. A-123 provides that the agency head should consider input from senior program officials and the OIG.

OMB Circular No. A-123 requires management to annually provide assurances about the adequacy and effectiveness of its internal control in a management assurance statement. This statement of assurance, which is included in an agency’s performance and accountability report or agency financial report, represents the agency head’s informed judgment as to the overall adequacy and effectiveness of internal control within the agency based on management’s assessment as described above, including the consideration of outside sources such as the results of financial statement audits. Management will give an unqualified statement of assurance when there are no material weaknesses to report and will give a qualified statement of assurance when there are material weaknesses related to internal control.

Other Mechanisms for Overseeing and Monitoring Grant Program Internal Controls

Federal agencies, including the five in our review, use other mechanisms and processes, in addition to OMB Circular No. A-123, to oversee and monitor their grants internal controls. The single audit—audit of federal awards, including grant funds, administered by state and local governments and nonprofit organizations—is intended to be an important mechanism used by federal agencies to ensure accountability for federal funds.expenditures, adequacy of internal controls over federal funds, compliance with grant rules and regulations, and questioned amounts. Grant-making agencies use single audit reports to monitor grantees’ compliance with program and financial requirements. The agencies also Single audit reports provide information about the validity of grant use other mechanisms to monitor their grant programs, for example, creating annual grant performance plans, performing eligibility determinations, reviewing grantee financial reports, and conducting management control reviews.

Improper Payments

Congress passed three successive acts from 2002 to 2013 toward eliminating improper payments. The Improper Payments Information Act of 2002 (IPIA) required executive branch agencies to annually review all programs and activities to identify those that are susceptible to significant improper payments, to estimate the annual amount of improper payments for such programs and activities, and to report these estimates along with actions taken to reduce improper payments for programs with estimates that exceed $10 million. This act was subsequently amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA), which expanded on the previous requirements for identifying, estimating, and reporting on programs and activities susceptible to significant improper payments and for recovering overpayments across a broad range of federal programs. On January 10, 2013, the Improper Payments Elimination and Recovery Improvement Act of 2012 was enacted to impose further requirements to identify, prevent, and recover payment errors.

IPERA requires that OIGs determine whether their agencies are in compliance with the criteria listed in IPERA and annually report the results to the head of the agency, among others. OMB also plays a key role in the oversight of the government-wide improper payments issue. OMB has established guidance in Appendix C of OMB Circular No. A-123 to implement the requirements of IPERA. IPERA and the OMB guidance require an OIG to use the following criteria in making a compliance determination on whether the agency has published the agency financial report and OMB-required accompanying information on the agency’s website, conducted a risk assessment for specific programs to determine whether they are susceptible to significant improper payments, published improper payment estimates for all high-risk programs, reported on actions to reduce improper payments, published and met targets for reducing improper payments, reported a gross improper payment rate of less than 10 percent for each high-risk program, and reported efforts to recapture improper payments.

For the period within the scope of this report, IPERA defined significant improper payments as those in any particular program or activity that exceed both 2.5 percent of program or activity payments and $10 million annually or that exceed $100 million. For each program identified as susceptible and determined to be at risk of improper payments, agencies are required to report to the President and Congress the annual amount of estimated improper payments, along with steps taken and actions planned to reduce them. Agencies report this information in their annual performance and accountability report or agency financial report.

Agencies’ Assessments of Internal Controls over Grants Programs Were Consistent with OMB Requirements

The processes used by all five agencies to conduct their internal control assessments for fiscal year 2012 were consistent with the requirements in OMB Circular No. A-123. The agencies identified areas of risk in which to implement key controls and then monitored and tested those controls. The agencies identified deficiencies through the control tests, prepared and implemented corrective action plans to address the deficiencies identified, and reported on their internal control through management assurance statements.

Agencies Identified Significant Grants Programs and Processes to Include in Their Fiscal Year 2012 Internal Control Assessments

OMB Circular No. A-123 requires that agencies identify significant areas within their operations in which to implement key controls and then continuously monitor and test those controls. All five agencies conducted a risk assessment to identify significant processes or programs to include in their internal control assessment processes for fiscal year 2012. Based on these risk assessments, as shown in table 2, each agency selected its grants management process (or parts of its grants management process) or it selected grant programs to test controls as part of its fiscal year 2012 OMB Circular No. A-123 internal control assessment process. OMB Circular No. A-123 does not specify a recommended approach for evaluating or testing controls for processes or programs.

When conducting these risk assessments, the agencies considered the effect that various factors could have on the risk that program objectives may not be met or a misstatement may be made in the financial statements. OMB Circular No. A-123 does not include requirements regarding specific factors to consider when determining which controls to test, and the agencies differed in the number of and specific risk factors they considered, as shown in table 3. Management at all of the agencies approved the selection of processes or programs to be included in their agencies’ internal control assessments.

Agencies Identified Grants Internal Control Issues and Developed Corrective Action Plans

OMB Circular No. A-123 requires agencies to identify needed improvements in controls and take corresponding corrective actions. It also notes that agency managers and staff should be encouraged to identify control deficiencies, as this reflects positively on the agency’s commitment to recognizing and addressing management problems. Further, Standards for Internal Control in the Federal Government states that findings of audits and other reviews should be promptly resolved. The agencies identified deficiencies in certain grants internal controls as a result of their fiscal year 2012 OMB Circular No. A-123 assessment processes. When agencies identified control deficiencies, they prepared corrective action plans that included steps to be taken, responsible parties, and timeframes for completion. We reviewed these plans and determined that if implemented effectively, the steps to be taken should correct the deficiencies. For example:

HHS’s Administration for Children and Families tested controls for the grants management process and identified deficiencies that contributed to delays in receiving grantee financial reports and resolving single audit findings. The Administration for Children and Families developed and implemented corrective actions, including following up with and providing assistance to grantees to improve the timeliness of periodic reporting and taking steps to ensure proper approvals and signatures on documents related to addressing single audit findings.

HHS’s National Institutes of Health tested controls for the grants management process and found deficiencies in following up with grantees regarding their late filing of financial reports during the grant closeout phase and resolution of single audit findings. The National Institutes of Health prepared a corrective action plan that includes procedures to improve the timeliness of grantee reports and actions to improve instructions to grantees regarding repayment of disallowed funds found in single audits. It plans to complete these actions by December 2014.

Education’s Internal Controls Evaluation Group (Evaluation Group) in the Office of the Chief Financial Officer tested related controls for discretionary and formula grants across several program offices, including the Office of Elementary and Secondary Education and Office of Special Education and Rehabilitative Services, and identified deficiencies. Some controls were found to be deficient primarily because of a lack of documentation. The deficiencies resulted in two findings in various offices, including the Office of Elementary and Secondary Education. According to the Evaluation Group, the Office of Elementary and Secondary Education implemented corrective actions, which included ensuring that grantees are making progress on their noncompliance issues before being awarded additional grant funds and providing technical assistance to grantees to help them successfully carry out their projects.

DOT’s Federal Transit Administration identified a deficiency related to tracking single audit findings. The findings were not being entered into the automated system used to manage oversight program activities and were being tracked offline. The Federal Transit Administration implemented its corrective action plan by issuing a memo to regional offices reiterating the requirements to enter single audit findings in the system in a timely manner and holding routine conference calls and training sessions with regional offices about the issue. Also, according to the Federal Transit Administration, it updated the standard operating procedures for single audit findings, which were in the agency’s review process as of April 2014.

USDA’s Food and Nutrition Service and its National Institute of Food and Agriculture tested controls for the grants management process and identified deficiencies related to grant accruals, completion of site visit reports, and review of single audits. For example, the National Institute of Food and Agriculture identified a deficiency in the control related to timely review and resolution of single audits. Its corrective action plan included drafting standard operating procedures; developing a single audit tracking spreadsheet to document open reviews, findings, and timelines; and obtaining contractor assistance to help clear the extensive backlog of single audit reviews. As of February 2014, according to the National Institute of Food and Agriculture, the backlog was being addressed.

HUD’s Office of Community Planning and Development assessed controls for the Neighborhood Stabilization Program and identified a deficiency related to the timeliness of grantee reports used to monitor grantees. In response to the finding, a corrective action plan was created to address the untimely filing of these reports. According to HUD, the Office of Community Planning and Development solicited and received recommendations from field offices for improvements to the process. The field office feedback is being incorporated into guidance, and the Office of Community Planning and Development plans to communicate the updated guidance to field offices no later than June 30, 2014.

Agencies Reported on Their Internal Control Assessments in Management Assurance Statements

OMB Circular No. A-123 requires agencies to report annually on management’s judgment regarding the adequacy and effectiveness of internal control in assurance statements signed by management. All five agencies included management assurance statements in their annual agency financial reports, as required. Based on their fiscal year 2012 OMB Circular No. A-123 assessment processes, which included testing of key program and process controls, results of financial statement audits, and other information, all five agencies gave a qualified statement of assurance for fiscal year 2012.

Three of the five agencies (HHS, DOT, and USDA) qualified their assurance statements because of weaknesses in grants processes or grants programs. Specifically, HHS and USDA reported material weaknesses because of noncompliance with IPERA for some large grant programs, which is discussed later in this report. DOT reported a material weakness involving unliquidated obligations, including in grant programs. These weaknesses were also identified by financial statement auditors, as discussed later in this report.

HUD and Education qualified their fiscal year 2012 assurance for reasons not directly related to grants. HUD qualified its assurance because of weaknesses in its human capital operations, and Education qualified its assurance because of weaknesses in its servicing systems for student loan programs.

In their fiscal year 2013 management assurance statements, HHS and USDA continued to qualify their assurance regarding internal controls because of noncompliance with IPERA. For fiscal year 2013, Education management gave an unqualified statement of assurance (no material weaknesses reported). DOT took steps to correct the problems with its unliquidated obligations and no longer reported the issue as a material weakness in fiscal year 2013. However, HUD qualified its fiscal year 2013 assurance because of, among other reasons, a material weakness related to its accounting for formula grants.

Internal Control Issues Reported Include Control Deficiencies, Improper Payments, and Management Challenges

In addition to the issues identified through the OMB Circular No. A-123 process, other audits and reviews have reported internal control issues related to the grants management process and grant programs. We examined the agencies’ financial statement audit reports and other reports issued by GAO and the agencies’ OIGs and found that internal control deficiencies related to grants, including weaknesses in controls for monitoring and oversight of grantees and unliquidated grant obligations and certain accounting methods for grant programs, have been reported. Further, some of the agencies identified and reported on improper payments in grants programs, and OIGs for some of the agencies reported issues related to agencies’ improper payments information. OIGs have also reported management challenges related to grants.

Financial Statement Auditors Reported Significant Deficiencies in Controls over Grants Programs

The primary purpose of a financial statement audit is to provide an opinion about whether an entity’s financial statements are presented fairly in all material respects in conformity with an applicable financial reporting framework. Reporting on financial statement audits also includes reports on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts, and grant agreements that have a material effect on the financial statements. Financial statement auditors for three of the agencies reported deficiencies in grants monitoring controls and grants accounting methods.

Specifically, for fiscal years 2012 and 2013, financial statement auditors for DOT, USDA, and HUD reported significant deficiencies, some of which were considered to be material weaknesses, in the agencies’ internal controls associated with grant programs. Reported grants- related deficiencies primarily related to accounting for grant programs and monitoring procedures over grant activities. A common issue at many agencies is deficiencies in controls over unliquidated grants obligations. Financial statement auditors at DOT, USDA, and HUD reported such deficiencies, as discussed below, and we have previously reported on the issue. In April 2012, we reported that millions of dollars of grant obligations remain in expired grant accounts—accounts that were more than 3 months past the grant end date and had no activity for 9 months or more. Agency regulations typically impose closeout procedures upon both the awarding agency and the grantee. Generally, within 90 days after the completion of the grant award, grantees must submit all financial, performance, and other reports as required by the terms and conditions of the award. Also within this 90-day period, grantees generally are to liquidate all obligations incurred under the award. These closeout procedures make funds less susceptible to fraud, waste, and mismanagement; reduce the potential costs to agencies for fees paid to maintain grant accounts; and may enable agencies to redirect resources to other projects.

DOT’s financial statement auditors reported deficiencies related to unliquidated obligations in grants programs for both fiscal years 2012 and 2013 and controls over grant accruals in fiscal year 2012.

In fiscal year 2012, the auditors reported a material weakness related to controls over the review and monitoring of grant and nongrant unliquidated obligations, including those at the Federal Highway Administration and the Federal Transit Administration. Specifically, the Federal Highway Administration and the Federal Transit Administration did not timely identify and deobligate unused obligation balances. DOT subsequently performed the necessary deobligations to correct its financial data. Further, to correct the underlying cause, the Federal Highway Administration and the Federal Transit Administration revised their procedures for reviewing and addressing unliquidated obligations in February 2013 and May 2013, respectively. In fiscal year 2013, while the auditors continued to identify issues with unused obligations, they no longer considered the issue a material weakness and reduced it to a significant deficiency. In fiscal year 2012, the auditors reported a significant deficiency related to controls over grant accruals at some program offices, including the Federal Highway Administration. At fiscal year-end, DOT calculated and recorded an estimated liability for amounts owed to its grantees for costs incurred under grant agreements but not yet billed to or reimbursed by DOT. The auditors reported that the Federal Highway Administration did not have adequate controls in place to ensure that all significant grantees and grant programs were properly included in DOT’s grant accrual estimate methodology, and as a result, the grant accruals were potentially understated. This issue was no longer reported as a significant deficiency in fiscal year 2013.

For fiscal years 2012 and 2013, USDA financial statement auditors reported a significant deficiency involving unliquidated obligations. They reported that ineffective monitoring and reviewing resulted in invalid obligations remaining open, thus restricting the availability of funding authority and increasing the risk of misstating obligations as of year-end. In the fiscal year 2012 audit report, the auditors noted that substantial improvements had been made to effectively monitor and review unliquidated obligations since fiscal year 2011, when the auditors reported this issue as a material weakness. The auditors made no new related recommendations in the fiscal year 2012 report and downgraded the material weakness to a significant deficiency. In the fiscal year 2013 audit report, the auditors again reported the issue as a significant deficiency and recommended that the department emphasize the importance of complying with USDA’s requirements related to unliquidated obligations. The auditors also noted that USDA management reported that the Forest Service was not in compliance with certain federal requirements related to managing grants programs in fiscal years 2012 and 2013.

HUD’s financial statement auditors reported significant deficiencies related to controls over unliquidated obligations and controls for monitoring some grant programs for fiscal years 2012 and 2013. In addition, the auditors reported a material weakness caused by HUD’s noncompliance with the Federal Financial Management Improvement Act of 1996 (FFMIA), including noncompliance associated with the Office of Community Planning and Development’s information systems for fiscal years 2012 and 2013.

During the financial statement audits for fiscal years 2012 and 2013, HUD’s financial statement auditors reported a significant deficiency related to unliquidated obligations. The auditors found inadequate procedures related to timely reviews and recapture of unexpended obligations for several grant programs, including those within the Office of Community Planning and Development, which led to misstatements in HUD’s obligation balances. In the fiscal year 2013 audit report, the auditors reported that review and closeout policies had been drafted but not finalized or implemented because of competing priorities. The auditors recommended that the Office of Community Planning and Development review and deobligate invalid obligations.

For fiscal year 2012, the auditors reported a significant deficiency related to the Office of Community Planning and Development’s controls for monitoring grantees, including that the system used to communicate the results and status of on-site monitoring was not effective because field offices did not always follow the monitoring handbook and did not always update the information system to reflect current status of monitoring reviews. The auditors repeated recommendations from the prior year to ensure that the monitoring handbook is followed, the information in the grants management system is accurate, and findings from grantee reviews are closed and funds are collected. By fiscal year 2013, most of the recommendations had been implemented, and the auditors no longer reported this issue as a significant deficiency for fiscal year 2013.

The auditors reported material weaknesses for fiscal years 2012 and 2013 because HUD’s financial management systems did not comply with FFMIA, including noncompliance associated with the Office of Community Planning and Development’s information systems. The material weakness was due, in part, to the Office of Community Planning and Development’s method of accounting and the system used for disbursing obligations, which did not comply with the requirements of FFMIA for maintaining financial management systems that substantially comply with federal financial management systems requirements and applicable federal accounting standards. The auditors reported that the Office of Community Planning and Development was taking steps to address the issues.

Because of many of these internal control issues and ones identified at other federal agencies, we reported a significant deficiency in internal controls related to grants management in our audit reports on the U.S. government’s consolidated financial statements for fiscal years 2012 and 2013.adversely affect the federal government’s ability to ensure that grant funds are being properly reported and used in accordance with applicable program laws and regulations.

Deficiencies in grants management internal controls could In addition to reporting on deficiencies in internal controls, financial statement auditors also report on instances of noncompliance with certain laws and regulations. Auditors for HHS and USDA reported instances of noncompliance with IPERA for some grant programs for fiscal years 2012 and 2013, which are discussed later in this report.

GAO and OIGs Reported Issues Related to Grants Monitoring and Other Aspects of Grant Programs

We and agency OIGs have reviewed federal grants programs and reported findings and recommendations related to monitoring and other aspects of grant programs at many federal agencies, including the five in our review. For example: In December 2012, we reported on HHS’s Administration for Children and Families Temporary Assistance for Needy Families program. We found that the Temporary Assistance for Needy Families program’s accountability framework provided incomplete information on how states’ noncash services were contributing to the program’s purposes. States are required to submit several reports to HHS. Taken together, these reports serve as the accountability framework in place to help HHS and Congress ensure that states use Temporary Assistance for Needy Families program funds for proper purposes and identify needed program improvements. We recommended that HHS develop a detailed plan with timelines to revise reporting categories for program expenditures. HHS formed an internal workgroup to review and revise a Temporary Assistance for Needy Families program reporting form for collecting more-detailed expenditure data, and published two Federal Register notices in September 2013 and January 2014, regarding proposed revisions to the financial reporting form. HHS plans to issue the form effective for fiscal year 2015. In June 2011, we reported on education reform grants to states required by the American Recovery and Reinvestment Act of 2009 We found that Education had provided extensive (Recovery Act). support to grantee states and had begun monitoring states’ progress in meeting program goals.grantees to share information, such as hosting meetings on specific initiatives. Some officials from grantee states said they would find this information useful, but they were generally unaware of these resources or were unable to access them. We recommended that Education facilitate information sharing among grantees. Among other things, Education established communities of practice to address multiple topics. Education oversees the activities of each community Education also developed ways for by managing a work plan that includes the target dates for each activity. In addition, Education communicates these activities to members of each community of practice via emails and calls as well as a monthly update to all grantees with upcoming dates and events. In December 2011, HHS’s OIG reported on a science awards program at the National Institutes of Health. The program is administered through cooperative agreements, which are similar to grants but require more involvement by the awarding agency. The OIG reported that it found documentation and reporting issues, which the National Institutes of Health is taking steps to correct. Specifically, the Clinical and Translational Science Awards Program did not properly document awardees’ progress under their cooperative agreements. The OIG recommended that the National Institutes of Health ensure that program staff document their monitoring of awardee progress; ensure timely submission of required reports; maintain official files in accordance with federal policy; and, as required for cooperative agreements, provide substantial involvement to Clinical and Translational Science Awards Program awardees. The National Institutes of Health concurred with the recommendations and stated that it had taken or planned to take steps to implement them. In August 2012, DOT’s OIG reported on weaknesses in grants oversight at the Federal Transit Administration and made several related recommendations. Federal Transit Administration lacked adequate guidance for ensuring that findings from grantee oversight reviews were consistently identified and adequately tracked to ensure grantees were complying with laws and regulations and implementing corrective actions. In response, the Federal Transit Administration stated that it was (1) revising its oversight and review processes to, among other things, identify grant recipients needing technical assistance and (2) developing standard operating procedures to provide more consistency across regions and implementing new performance measures. The OIG reported that these actions, both those taken and planned, were responsive to the recommendations.

Department of Transportation Office of Inspector General, Improvements Needed in FTA’s Grant Oversight Program, MH-2012-168 (Washington, D.C.: Aug. 2, 2012).

In February 2012, USDA’s OIG performed work related to the Recovery Act and reported that it found that the Food and Nutrition Service did not create adequate, proactive controls to ensure that states awarded grants for schools to purchase and renovate food service equipment based on Recovery Act criteria, and did not ensure timely reporting of Recovery Act spending data on Recovery.gov as required by OMB guidance on using funds pursuant to the Recovery Act. The OIG recommended that the Food and Nutrition Service continue to update and implement adequate, proactive controls for its standard competitive grant award process. The Food and Nutrition Service agreed that continuous improvement of controls over the competitive award process was warranted and agreed with the OIG’s recommendation to update controls. According to USDA’s Office of the Chief Financial Officer, the Food and Nutrition Service took corrective action and the recommendation was closed in February 2013. In July 2013, HUD’s OIG reported that HUD’s guidance for ensuring grantee compliance with the Community Development Block Grant program’s timeliness spending requirement was not always implemented effectively, and documentation of HUD’s rationale for not sanctioning noncompliant grantees was inadequate. HUD is to annually determine whether Community Development Block Grant grantees—states, cities, and counties—are carrying out grant activities in a timely manner, which includes timely drawdown of grant funds. HUD is to generate a monthly report to help field offices monitor grantees’ compliance with the timeliness spending requirement. The OIG recommended, among other things, that HUD (1) strengthen controls over Community Development Block Grant procedures related to the monthly timeliness report and notification to noncompliant grantees and (2) establish documentation requirements and procedures for grantees that do not comply with the timeliness spending requirement. HUD generally concurred with these recommendations and stated that it would enhance current procedures to address the recommendations.

Agencies Reported Improper Payments in Grant Programs

In both fiscal years 2012 and 2013, four of the largest grant-making agencies reported almost $5 billion in estimated improper payments in grants programs. Agencies are required by IPIA, as amended by IPERA and implemented by OMB guidance, to periodically review and assess all programs and activities to identify those susceptible to significant improper payments, estimate the annual amount of improper payments, and report these estimates along with actions taken to reduce improper payments when the estimates exceed both $10 million annually and 2.5 percent of program or activity payments (or 1.5 percent of program or activity payments starting in fiscal year 2014) or when the estimates exceed $100 million.

As shown in table 4, four of the agencies reported improper payment estimates and error rates (i.e., amount of estimated improper payments divided by total program outlays) in grant programs administered by the program offices in our review for fiscal years 2012 and 2013.

OIGs Reported Issues with Agencies’ Improper Payments Information

IPERA requires, among other things, OIGs to determine whether their agencies are in compliance with the criteria listed in IPERA and annually report the results to the heads of their agencies, the Comptroller General, and certain congressional committees. Many OIGs do so by reviewing their agencies’ improper payment reporting in the annual agency financial report and accompanying materials. For fiscal years 2012 and 2013, the OIGs reported the following for their respective agencies.

The HHS OIG reported that while HHS met many of IPERA’s compliance requirements, it did not fully comply with IPERA for fiscal years 2012 and 2013 for some of its grant programs. Specifically, the OIG reported that HHS did not comply with IPERA for the Children’s Health Insurance Program for fiscal year 2012 because it did not publish a corrective action plan for the program’s improper payments. HHS did publish a corrective action plan for this program for fiscal year 2013. For the Foster Care program, the OIG reported that HHS did not comply for fiscal year 2012 because the improper payment rate of 6.2 percent exceeded HHS’s target rate of 4.5 percent. For fiscal year 2013, HHS’s Foster Care improper payments rate of 5.3 percent met the target rate of 6 percent for that year. In the case of the Temporary Assistance for Needy Families program, the OIG reported that HHS did not report an improper payments estimate for either fiscal year 2012 or fiscal year 2013. According to HHS, statutory limitations related to obtaining state data prohibited HHS from developing an estimate. However, HHS has reported that is taking steps and has planned actions to help prevent and reduce improper payments, including providing technical assistance to help strengthen state program integrity efforts, revisions to the Temporary Assistance to Needy Families financial reporting form so that states can provide more accurate information about how they are using program funds, and sharing with states information and best practices for reducing improper payments.

The USDA OIG reported that USDA did not meet IPERA’s compliance requirements for fiscal years 2012 and 2013 for some of its grants programs, including the School Lunch and School Breakfast Programs and the Child and Adult Care Food Program. The OIG reported that the School Lunch and School Breakfast Programs did not comply because they reported improper payment rates that exceeded 10 percent for both fiscal years 2012 and 2013. According to the OIG, the Food and Nutrition Service’s administration of these programs was highly decentralized and involved many governmental and nongovernmental organizations to provide benefits at approximately 100,000 locations. The OIG reported that Food and Nutrition Service officials stated that they were aware of the significant improper payment rate in these two programs, and they hired a contractor to conduct a study to help develop initiatives and practices to address this problem. The OIG reported that the results of the study were pending at the time of its review for fiscal year 2013 and noted that Food and Nutrition Service officials believed it would take time to achieve an error rate less than 10 percent. For the Child and Adult Care Food Program, the OIG reported that USDA reported only a partial estimate of improper payments for both fiscal years 2012 and 2013 because the Food and Nutrition Service did not have a cost- effective method for estimating improper payments for one of the program’s two components—Family Day Care Homes Meal Claims. Food and Nutrition Service officials continued to report difficulties in determining a gross estimate for the Child and Adult Care Food Program, which included over 190,000 participating day care homes and centers with varied eligibility requirements for each of the program’s two components. According to the OIG’s report on its fiscal year 2013 review, the Food and Nutrition Service has conducted feasibility studies since 2006 to develop a reliable method for estimating improper payments, but the studies were not reliable. The Food and Nutrition Service told us that it continues to assess methods of estimating erroneous payments and that a new study will be conducted in 2014 to explore an alternative method of measuring the rate of erroneous payments.

For both fiscal years 2012 and 2013, Education’s OIG reported that Education met IPERA’s compliance requirements; however, improvements were needed in the estimation methodology for both the Pell Grant and Direct Loan Programs. The OIG recommended that Education (1) continue working with OMB to obtain approval for an estimation methodology that addresses current limitations with some data used and (2) where estimates are based on the results of program reviews, include all program review results for a sufficient period of time in the universe of potential improper payments. Education agreed with the OIG’s recommendations and noted that it had modified its fiscal year 2014 estimation methodologies.

For fiscal years 2012 and 2013, DOT’s OIG reported that although DOT met IPERA’s compliance requirements, some of the information reported in its agency financial reports was inaccurate. The OIG recommended, among other things, that DOT implement procedures to ensure that all elements required for IPERA reporting are accurate and supported by documentation. The OIG also reported that while DOT’s programs met IPERA’s required improper payment rate of less than 10 percent for both fiscal years 2012 and 2013, the Federal Transit Administration did not meet its target error rates for those years. In its 2012 and 2013 agency financial reports, DOT reported error rates of 0.44 percent and 0.73 percent, respectively, for its Formula Grants Program. These rates did not did not meet the target error rates reported in DOT’s fiscal year 2012 and 2013 agency financial reports of 0.25 percent and 0.50 percent, respectively.

OIGs Reported Management Challenges Related to Grant Programs

The Reports Consolidation Act of 2000 requires each OIG to prepare a statement that summarizes what the OIG considers to be the most serious management and performance challenges facing its agency. Agencies are to include the OIG’s summary of management challenges in their annual agency financial report or performance and accountability report.

HHS’s OIG reported grants management and identifying and reducing improper payments as top grants-related management challenges for fiscal year 2012. HHS is the largest grant-making agency in the federal government, and oversight and management of both new and continuing grant programs are crucial to HHS’s mission. The OIG has found internal control deficiencies, problems with financial stability, inadequate organizational structures, inadequate procurement and property management, and inadequate personnel policies and procedures among grantees. In addition, the OIG reported that HHS faces challenges complying with IPERA for some of its programs, including the Temporary Assistance for Needy Families program, as discussed above. For fiscal year 2013, the OIG reported a similar challenge for grants management—protecting HHS grants and contract funds from fraud, waste, and abuse. The improper payments- related challenge reported by the OIG for fiscal year 2013 was focused on Medicare programs and not on grants programs.

Education’s OIG reported management challenges for fiscal years 2012 and 2013, including oversight and monitoring of the department’s programs and grantees and improper payments. Regarding oversight and monitoring, the OIG reported that the number of different entities and programs requiring monitoring and oversight, the amount of funding that flows through the department, and the impact that ineffective monitoring could have on stakeholders make monitoring and oversight a challenge. The OIG also reported that Education faces challenges in its efforts to successfully prevent, identify, and recapture improper payments in some programs, including the Pell Grant and Title I Programs. For fiscal year 2013, while the OIG noted progress was being made in some areas, it reported management challenges similar to those for fiscal year 2012.

For fiscal year 2012, DOT’s OIG reported a grants-related management challenge: ensuring effective oversight of Recovery Act projects and applying related lessons learned to improve DOT’s infrastructure programs. For fiscal year 2013, the OIG reported challenges in strengthening existing highway and transit project oversight mechanisms and improving financial management over grants to better use funds, create jobs, and improve infrastructure.

For fiscal years 2012 and 2013, USDA’s OIG reported a management challenge: identifying, reporting, and reducing improper payments, including those in some grant programs. The OIG reported, among other things, that USDA continues to struggle to meet IPERA’s compliance requirements for reporting and preventive measures. Also, the OIG noted that related quarterly reports did not always provide accurate, complete, and timely information.

Among other issues, HUD’s OIG reported oversight and monitoring of some of its grant programs as a management challenge in fiscal years 2012 and 2013. The challenges included oversight of Recovery Act funds and monitoring grants for housing assistance programs and for disaster recovery. For example, the OIG reported that HUD faces challenges in monitoring Community Development Block Grant Disaster Recovery Assistance funds because of, among other things, limited resources for performing oversight, the broad nature of HUD projects, a lack of understanding of disaster recovery grants by the recipients, and the length of time needed to complete projects.

Concluding Observations

In fiscal year 2013, the federal government obligated over $555 billion in grants for a wide array of activities. Effective oversight of internal controls is important for providing reasonable assurance to federal managers and taxpayers that grants are awarded properly, recipients are eligible, and federal grant funds are used as intended and in accordance with applicable laws and regulations. Our review found that the five largest grant-making agencies’ internal control assessment processes were consistent with the requirements in OMB Circular No. A-123 and its Appendix A. The findings from these assessment processes and from other reviews identified material weaknesses and significant deficiencies in grants management. OMB Circular No. A-123 notes that agency managers and staff should be encouraged to identify control deficiencies, as this reflects positively on the agency’s commitment to recognizing and addressing management problems. Further, agencies are estimating that billions of dollars in improper payments occur each year in the grants programs. Financial statement auditors, OIGs, and we continue to focus on grants internal controls through audits and reviews, and the agencies continue to use the results of these reviews and their own assessments to develop corrective actions and oversee internal controls of federal grants to ensure controls are in place and operating effectively.

Agency Comments

We provided a draft of this report to the Secretaries of Health and Human Services, Education, Transportation, Agriculture, and Housing and Urban Development. In general, all five agencies concurred with the information in the report. Education, DOT, USDA, and HUD also provided technical comments that were incorporated as appropriate. In addition, Education provided written comments, which are reprinted in appendix II. We also provided a draft of the report to the Director of OMB, and OMB responded that it had no comments.

We are sending copies of this report to the Secretaries of Health and Human Services, Education, Transportation, Agriculture, and Housing and Urban Development; the Director of the Office of Management and Budget; appropriate congressional committees; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) examine whether the five largest grant-making agencies’ internal control oversight processes for their grant programs were consistent with Office of Management and Budget (OMB) requirements and (2) describe internal control issues that have been reported related to the grants management process and key grant programs.

Agency Selection

To select the agencies to include in our review and to obtain adequate coverage of federal grant dollars for fiscal year 2012—the most recently completed fiscal year at the time we started our review—we reviewed and summarized grant obligations data reported by agencies through USAspending.gov (as of November 19, 2012).five agencies with the highest amounts of grants obligations, which accounted for almost 75 percent of total federal grant obligations for fiscal year 2012, excluding Medicaid, as discussed further below. The Departments of Health and Human Services (HHS), Education (Education), Transportation (DOT), Agriculture (USDA), and Housing and Urban Development (HUD) were the top five federal grant-making agencies based on grants obligations for fiscal year 2012. We also reviewed USAspending.gov data for fiscal year 2013 (as of January 27, We decided to include the 2014) and confirmed that the five largest grant-making agencies, based on obligations, in fiscal year 2012 remained the same in fiscal year 2013.

To assess the reliability of the USAspending.gov obligations data, we (1) reviewed recent GAO work that used the data and (2) compared results of ranking agencies by obligation amounts to the results of ranking agencies based on outlay amounts reported by OMB, as discussed below. In our recent work, we had assessed the reliability of USAspending.gov obligations data for a report we issued in September 2012 by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data, and we determined the data were sufficiently reliable for the purposes of that report. We also determined the data were sufficiently reliable for the purpose of selecting agencies and program offices to review for this report.

OMB collects data from federal agencies each year to prepare the President’s budget. OMB uses these data for a number of purposes related to the budget, including producing the Historical Tables, which are publicly available on OMB’s website. One series of Historical Tables contains information on federal outlays for grants to state and local governments. According to OMB, the purpose of this series of Historical Tables is to identify federal government outlays that constitute income to state and local governments to help finance their services. rigorous review by OMB, we considered them sufficiently reliable for the purposes of this report.

In our review of the USAspending.gov data, we noted that grant obligations for Medicaid, one of HHS’s grant programs, amounted to over 43 percent of total obligations incurred by the federal government for grants in fiscal year 2012. We elected to exclude the Medicaid program from our review because it has been the subject of numerous reviews, including many by GAO and HHS’s OIG, and by doing so, we were able to include HHS grant programs that otherwise would not have been covered in our review and still comply with our selection criteria to cover over 80 percent of each agency’s grant obligations. (See table 5 and the related discussion.) Even after excluding Medicaid funds for fiscal year 2012, HHS was still the largest grant-making agency as measured by grant obligations.

During our initial planning work, we learned that agencies generally include cooperative agreements as part of their grants programs. We also learned that although USAspending.gov data for Education categorize Pell Grants as “direct payments for a specified use” and do not identify them as “grants,” Education considers Pell Grants to be grants, and the Pell Grant Program is Education’s largest grant program. Therefore, in addition to USAspending.gov’s obligations for grants, we included in the scope of our review USAspending.gov amounts for cooperative agreements for the five agencies and Pell Grants. In addition, while HUD considers its Public Housing Operating Fund a subsidy program, and the Catalog of Federal Domestic Assistance categorizes the program as “direct payments for specified use,” we included the program in our review based on the USAspending.gov categorization.

In addition, during our planning work, we found that federal agencies rely on their program offices to provide assurance statements regarding the effectiveness of their internal controls. The program office assurance statements are then rolled up into the agency-wide management assurance statement, which the agencies are required by OMB to provide in their performance and accountability reports or agency financial reports. Therefore, to obtain the most dollar coverage and cover the greatest subject area during our review, we selected the 2 or 3 largest program offices from each agency in order to cover over 80 percent of grant obligations for each agency, resulting in a total of 12 program offices, as shown in table 5. These 12 program offices together represented almost 75 percent of the total government-wide grants obligations (excluding Medicaid) for fiscal year 2012. If we had not excluded Medicaid, the National Institutes of Health grant programs would not have been selected for inclusion in our review as the Centers for Medicare & Medicaid Services and the Administration for Children and Families together would have accounted for about 88 percent of HHS grant obligations. By excluding Medicaid, we were able to include the National Institutes of Health grant obligations, allowing us to cover additional grant programs.

Examination of Agencies’ Internal Control Oversight

To examine whether the five largest grant-making agencies’ internal control oversight processes for their grants programs were consistent with OMB requirements, we focused on the agencies’ fiscal year 2012 internal control evaluations performed to meet the internal control assessment and reporting requirements of OMB Circular No. A-123 and its Appendix A. We also considered Standards for Internal Control in the Federal Government, specifically, the standard for monitoring. The standards provide the overall framework for establishing and maintaining internal control in federal programs. The monitoring standard states that internal control monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved.

We obtained and analyzed documentation from the 12 program offices and from each of the five agencies’ Office of the Chief Financial Officer. This documentation included or described relevant policies and procedures, risk assessments, testing methodologies and results, deficiencies found and corrective action plans developed and implemented as part of the fiscal year 2012 OMB Circular No. A-123 internal control assessment process. We used a data collection instrument to collect and summarize information obtained from the agencies. We did not reperform agency testing of internal controls or conduct our own testing of controls.

We also interviewed officials in the 12 program offices and officials from each of the five agencies’ Office of the Chief Financial Officer and OIG about the agencies’ assessment processes and oversight of grants- related internal control.

Identification of Reported Internal Control Issues

To identify internal control issues that have been reported related to the grants management process and key grant programs, we reviewed the agencies’ financial statement audit reports for fiscal years 2012 and 2013 and relevant GAO and OIG reports issued in fiscal years 2012 and 2013 to identify grants-related internal control findings and recommendations. We also reviewed improper payment information reported by the five agencies in their agency financial reports for fiscal years 2012 and 2013 to determine whether the agencies identified improper payments in their grants programs. We reviewed the OIGs’ reports on their agencies’ compliance with the criteria listed in the Improper Payments Elimination and Recovery Act of 2010 for fiscal years 2012 and 2013. We also reviewed management challenges reported by the agencies’ OIGs for fiscal years 2012 and 2013.

We conducted this performance audit from November 2012 to July 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Education

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Kimberly McGatlin (Assistant Director), Laura Bednar, Maria C. Belaval, Bruce David, Lauren S. Fassler, Maxine Hattery, Diane Morris, Danietta Williams, and Elizabeth Wood made significant contributions to this report.

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Grants Performance: Justice and FEMA Collect Performance Data for Selected Grants, but Action Needed to Validate FEMA Performance Data. GAO-13-552. Washington, D.C.: June 24, 2013.

Grants Management: Improved Planning, Coordination, and Communication Needed to Strengthen Reform Efforts. GAO-13-383. Washington, D.C.: May 23, 2013.

Grants Management: Oversight of Selected States’ Disbursement of Federal Funds Addresses Timeliness and Administrative Allowances. GAO-13-392. Washington, D.C.: April 16, 2013.

WIC Program: Improved Oversight of Income Eligibility Determination Needed. GAO-13-290. Washington, D.C.: February 28, 2013.

Temporary Assistance for Needy Families: More Accountability Needed to Reflect Breadth of Block Grant Services. GAO-13-33. Washington, D.C.: December 6, 2012.

Grants to State and Local Governments: An Overview of Federal Funding Levels and Selected Challenges. GAO-12-1016. Washington, D.C.: September 25, 2012.

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Grants Management: Action Needed to Improve the Timeliness of Grant Closeouts by Federal Agencies. GAO-12-360. Washington, D.C.: April 16, 2012.

Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts. GAO-12-573T. Washington, D.C.: March 28, 2012.

Foster Care Program: Improved Processes Needed to Estimate Improper Payments and Evaluate Related Corrective Actions. GAO-12-312. Washington, D.C.: March 7, 2012.

National Institutes of Health: Employment and Other Impacts Reported by NIH Recovery Act Grantees. GAO-12-32. Washington, D.C.: November 10, 2011.

Highway Emergency Relief: Strengthened Oversight of Project Eligibility Decisions Needed. GAO-12-45. Washington, D.C.: November 8, 2011.

TANF and Child Welfare Programs: Increased Data Sharing Could Improve Access to Benefits and Services. GAO-12-2. Washington, D.C.: October 7, 2011.

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Race to the Top: Reform Efforts Are Under Way and Information Sharing Could Be Improved. GAO-11-658. Washington, D.C.: June 30, 2011.

Federal Grants: Improvements Needed in Oversight and Accountability Processes. GAO-11-773T. Washington, D.C.: June 23, 2011.

Grants.gov: Additional Action Needed to Address Persistent Governance and Funding Challenges. GAO-11-478. Washington, D.C.: May 6, 2011.

Medicaid and CHIP: Reports for Monitoring Children’s Health Care Services Need Improvement. GAO-11-293R. Washington, D.C.: April 5, 2011.

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