EPA’s administration and oversight of grants is conducted by its Grants Administration Division within the Office of Grants and Debarment, by its approximately 3,000 grant project officers, and by its 10 regional grants management offices (GMO), all acting in partnership. The Grants Administration Division develops overall grants policy and is responsible for the review, award, and management of headquarters’ grants. The grants project officers are responsible for oversight of the technical or programmatic aspects of the grants. The GMOs are responsible for providing oversight in the following four phases of the grant process: pre-award—EPA reviews the application paperwork and makes an award award—EPA prepares the grant documents and instructs the grantee on technical requirements, and the grantee signs an agreement to comply with all requirements; post-award—the GMO provides technical assistance, oversight, and payments to the grantee; the grantee completes the work; and the project ends; and closeout of the award—the project officer ensures project completion, the GMO initiates grant closeout documents, and the grant closeout letters are issued to the grantee. In the pre-award phase, the GMO reviews the grantee’s application for costs that may be unallowable. EPA officials stated that reviewing the detailed listing of the costs for which the grantee proposes to seek reimbursement from EPA is the primary means used by GMOs to identify unallowable costs. EPA’s revised oversight policy for GMOs focuses on the post-award phase, when an EPA project officer is responsible for each grant and provides ongoing grant oversight. Various audits by EPA’s OIG have disclosed problems with EPA’s oversight of grantees, including nonprofit grantees. For example, the OIG found that a nonprofit organization had spent all of EPA’s grant funds but had completed only a small portion of the work required under the grant.In November 1999, the OIG noted several weak areas in EPA’s oversight during testimony before the Subcommittee on Oversight, Investigations, and Emergency Management, House Committee on Transportation and Infrastructure. The OIG pointed out that many of the recent audits disclosed the same problems as reported in 1996, prior to EPA’s new post- award policy. In November 2000, the OIG identified the use of grants to accomplish EPA’s mission as one of ten key management challenges confronting EPA. Specifically, the OIG noted that recent audits of EPA’s grant recipients disclosed that some grantees did not have adequate financial and internal controls to ensure federal funds were managed properly. As a result, EPA had limited assurance that grant funds were used properly and accomplished the intended results. The OIG has ongoing work related to grants oversight, and for one review it noted that EPA headquarters and one regional office had undertaken several initiatives designed to improve the grants administration process. The Single Audit Act, as amended, requires each nonfederal entity that expends $300,000 or more federal dollars in a year to be audited. The single audit of the entity as a whole replaces multiple grant audits. The objectives of the Single Audit Act, as amended, are to promote sound financial management, including effective internal controls, with respect to federal awards; establish uniform requirements for audits of federal awards; promote the efficient and effective use of audit resources; reduce audit and administrative burdens on state and local governments, Indian tribes, and nonprofit organizations; and ensure that federal departments and agencies, to the maximum extent practicable, rely on and use audit work done pursuant to the act. Office of Management and Budget (OMB) Circular A-133 details how single audits are to be conducted. During a single audit, generally not all of the programs receiving federal dollars are audited. Auditors use criteria based on level of expenditure and risk to determine which programs to include in the scope of a single audit. This gives auditors greater freedom in targeting risky programs and allows for more efficient use of auditing resources. To assist federal agencies, the Chief Financial Officer Council’s Grant Management Committee (GMC) has addressed various financial issues relevant to efficiently managing the federal government’s approximately $300 billion in grant awards. The GMC, which was first convened in 1997, is composed of federal chief financial officers and other financial personnel. Currently, the GMC’s primary task is to coordinate and oversee the government-wide implementation of the provisions of the Federal Financial Assistance Management Improvement Act of 1999 (P.L. 106-107, Nov. 20, 1999). Two of the act’s purposes are to improve the effectiveness and performance of federal financial assistance programs and to simplify the application and reporting requirements for federal financial assistance. As part of its efforts, the GMC is working on issues relating to the single audit process. EPA has taken several actions to improve its oversight of nonprofit and other grantees. However, on-site reviews of nonprofit grantees are limited and do not directly address the issue of unallowable costs. Any such identification is incidental to the activities conducted at the grantee’s offices, in part because EPA believes that there is greater value in assessing a grantee’s system for safe-guarding EPA funds than in examining for unallowable costs. Another limiting factor in identifying unallowable costs for nonprofit grantees is the small number of times that such entities are selected for post-award monitoring. Because a large amount of grant dollars may be one of the criteria for selecting grantees for in-depth review, nonprofit grantees face a very low risk of being selected. EPA data indicate that annually the average grant amount awarded to nonprofit grantees was less than 5 percent of the average amount awarded all other grantees during fiscal years 1994 through 1999, and the average number of grants to nonprofit grantees represented less than 16 percent of all EPA’s grant awards. Moreover, the on-site review teams often are not trained to identify unallowable costs. In addition, some GMO officials believe that EPA’s OIG is responsible for identifying unallowable costs. While OIG officials do conduct reviews involving unallowable costs, OIG officials stated that neither GMO officials nor project officers are precluded from conducting unallowable cost reviews during their grantee on-site reviews. EPA is making efforts to improve its oversight of grantees; however, like other federal agencies, it has not been able to identify best practices for testing for unallowable costs during grant oversight. EPA’s grant oversight policy for GMOs prescribes basic monitoring activities, requires GMOs to develop biennial grant monitoring plans, and establishes guidance for an on-site review of at least one grantee each year. The policy classifies activities as “Tier I” or “Tier II” and calls for different levels of monitoring for each tier. The GMOs implement the policy according to risk-based priorities described in the biennial monitoring plans. In general, Tier I includes 10 monitoring activities relating to the grantees’ administrative compliance with the laws, rules, regulations, and procedures for administering grant funds. These activities do not address unallowable costs. The GMOs review grantees’ documents during these activities and do not need to conduct on-site reviews. Tier II activities comprise on-site reviews of the grantees’ procurement, property, and financial systems; on-site training or technical assistance; and in-depth reviews of selected procurement, property, or financial issues. These activities also do not focus on unallowable costs. Both Tier I and Tier II reviews are intended to provide oversight information to EPA and assistance to the grantee. Appendix I contains a detailed description of activities associated with each tier. EPA’s policy specifically states that the reviews serve as a customer-service mechanism and are not geared toward disallowing costs. Rather, the reviews are designed to verify that the grantee has systems in place that allow expenditures to be identified, captured, and traced to the appropriate ledgers and other financial records. GMO officials stated that only the most obvious unallowable costs are identified during the review process. Grant recipients are, however, notified of any unallowable costs identified during a review and are given an early opportunity to resolve the problem. EPA also works with grantees to improve or correct expenditure tracking systems as necessary. EPA officials believe that post-award monitoring and oversight is a responsibility of both the GMOs and program offices. As a result, in 1999, EPA issued a second and companion policy focusing on the post-award responsibilities of EPA’s program offices. In June 2000, EPA modified both of these policies and established the grantee compliance assistance initiative, which in part established agency-wide targets of 5 to 10 percent for performing evaluative on-site and off-site visits of EPA grant recipients. EPA is currently developing a new policy on post-award monitoring that will consolidate and build upon existing policies. EPA has conducted very few on-site reviews of nonprofit organizations— only a total of 36 out of approximately 900 nonprofit grantees available for reviews each year received such a review between May 1, 1998, and July 6, 2000, the period representing the most recent data available when we conducted our review. One on-site nonprofit grantee review was conducted during the last 5 months of fiscal year 1998, 14 were conducted in fiscal year 1999, and 21 during the first 9 months of fiscal year 2000. The number of nonprofit grantees available for review in each of these years was 969, 915, and 811, respectively. EPA officials stated that they plan to increase on-site reviews of nonprofit grantees in fiscal year 2001. EPA officials also said that between October 2000 and February 2001, the Grants Administration Division performed on-site reviews of 10 nonprofit organizations and that an additional 10 such reviews are scheduled between March and September, 2001.