A Microsoft Word version of this letter is available for download and PRINTING.

November 8, 2010

TO THE ADMINISTRATOR ADDRESSED:

SUBJECT: Findings Related to American Recovery and Reinvestment Act of 2009 (ARRA)

During the past fiscal year, the Texas Education Agency (TEA or Agency), Division of Financial Audits’ Special Monitoring Unit (SMU) has been conducting both on-site and desk audits related to the American Recovery and Reinvestment Act of 2009 (ARRA). As a result of these visits and reviews, the Agency is issuing this letter as a reminder to all subrecipients that proper reporting and accounting records are required elements to continue receiving these funds. The agency will continue to monitor these funds throughout the current fiscal year with on-site visits and desk reviews. The SMU is currently finalizing its monitoring process for the 2010-2011 fiscal year and would like to share with you some of the findings observed by the SMU auditors during the past year.

Following is the list of prevailing issues observed by the SMU auditors during their on-site monitoring visits and desk reviews. The purpose of sharing these observations is to provide guidance to subrecipients so that these issues will be adequately addressed as ARRA reporting requirements are completed and funds are expended. Subrecipients should remember that all expenditures of grant funds must comply with the federal cost principles, including the requirement that all costs must be reasonable and necessary for carrying out the objectives of the respective grant program. Subrecipients should ensure that the issues noted below are addressed and maintain proper documentation to support the expenditure of grant funds. The Agency will review its monitoring processes to ensure that the issues noted below are appropriately addressed.

Major Observations Noted by Auditors in Reviews of ARRA Funded Grants

Observations on ARRA Reporting Requirements: Auditors reviewed the quarterly reports filed by the subrecipients and the documentation submitted in support of the data reported to TEA and noted that several subrecipients did not accurately report the data on the quarterly reports and/or did not properly certify Infrastructure Investment projects, as described below.

• The subrecipient did not adhere to reporting requirements promulgated in Section 1512 of the ARRA (the subrecipient did not report accurate data and/or used incorrect methodology to calculate the full-time equivalents (FTEs) reported in the quarterly reports filed by the subrecipient).

The required data elements that are not captured for a subrecipient and that must be separately reported are:

• Number of jobs created/retained.

The estimate of the number of jobs required by the Recovery Act should be expressed as FTEs, which are calculated as total hours worked in jobs created or retained divided by the number of hours in a full-time schedule, as defined by the recipient.

• Description of jobs created/retained.
• Payment to vendors exceeding $25,000.

Observed instances of reporting concerns related to these required data elements include:

• The subrecipient did not maintain DUNS number for vendors with payments exceeding $25,000.
• The subrecipient did not report vendors with payments exceeding $25,000.
• The subrecipient did not maintain documentation supporting the FTEs reported in the quarterly report.

Refer to the following link on TEA’s website for further guidance of Section 1512 reporting requirements: http://www.tea.state.tx.us/arrastimulus/reporting/.

• The subrecipient did not follow all certification requirements for Infrastructure Investments projects under Section 1511 ARRA.

The certification for Infrastructure Investments must include the following and must be posted on the subrecipient's web site along with a link to Recovery.gov:

• The amount of ARRA funds expended on infrastructure investments;
A description of infrastructure investments; and
• The estimated total costs for infrastructure investments.

Refer to the following link on TEA’s website for further guidance on Section 1511 Infrastructure Investment: http://www.tea.state.tx.us/index2.aspx?id=2147484239&menu_id=934&menu_id2=941.

Observations on ARRA Infrastructure Expenditures: Auditors reviewed the subrecipient’s accounting and grant records in support of the expenditures of infrastructure investment projects and noted the following observations:

• The subrecipient did not maintain adequate documentation to demonstrate the subrecipient’s compliance with Buy American Provisions, Section 1605 of ARRA, which required the subrecipient to ensure that all iron, steel and manufactured goods used in infrastructure investment projects were produced in the United States.
• The subrecipient did not maintain adequate documentation to demonstrate the subrecipient’s compliance with the Davis Bacon Act, which required the subrecipient to ensure that, under the provisions of this act, contractors or their subcontractors were paying workers employed directly upon the site of the work no less than the locally-prevailing wages and fringe benefits paid on projects of similar character.

Observations on Subrecipient’s Administration of ARRA Awards: Auditors examined financial records and grant records and assessed the subrecipients’ internal controls over quality of data, budgetary process, and use of ARRA funds. Based on their review of the documents provided by subrecipients in response to auditors’ inquiries, auditors noted the following issues.

• The subrecipient did not adequately maintain time and effort records to ensure compliance with the time and effort reporting requirements promulgated in Office of Management and Budget (OMB) circular A-87, 2 Code of Federal Regulations (CFR) Part 225, and 34 CFR 80.20 (b)(5).
  • The subrecipient did not maintain adequate time and effort documentation (periodic certification/or activities reports) to support the payroll costs charged to the grant.
  • The subrecipient did not maintain job descriptions on file for staff members paid with grant funds.
  • The subrecipient did not maintain adequate documentation to support the payroll costs charged to the grant (extra duty pay agreements, time sheets, stipends etc).
• The subrecipient did not demonstrate that it complied with the standards for financial management systems promulgated in 34 CFR 80.20(b)(1),(2), and (4)/34CFR74.21(b)(1)-(2).
  • The subrecipient did not have specific policies and procedures that addressed the preparation, review, approval and submission of expenditure reports for federal awards.
  • The subrecipient’s accounting records (i.e., detailed general ledger) did not indicate that the subrecipient utilized encumbrances for its purchase orders and other obligations.
  • The subrecipient’s policies and procedures did not adequately describe the processes, authorizations, records and other internal controls required in order for the subrecipient to maintain effective control and accountability for all grant cash, real and personal property, and other assets and to adequately safeguard all such property and assure that it was used solely for authorized purposes.
  • The subrecipient did not maintain a financial accounting system that enables it to compare budgeted amounts for each grant to actual expenditures incurred and outlays of grant funds.
  • The detailed general ledger did not include budgeted expenditures. Specifically, auditors noted that the detailed general ledger did not include an initial appropriation at the beginning of the grant period (e.g., opening entries recorded on the general ledger) and subsequent adjustments to budgeted amounts (e.g., adjusting entries that increase or decrease the budgeted amounts for a general ledger account code classification).
• The subrecipient failed to maintain adequate and sufficient source documentation to support the expenditures charged to grants and reported to TEA as the basis for its reimbursement from the applicable grant program. {(34 CFR 80.20(b)(3)-(4)/34 CFR 74.21(b)(3)-(5)}
  • The subrecipient expended grant funds from a budget category that was not approved in the grant application as amended.
  • The subrecipient did not provide a cost allocation plan demonstrating how a portion of the total cost of the project was allocated to ARRA grant funds.
  • The subrecipient did not provide adequate source documentation (e.g., third-party invoice or receipt) to support the expenditure of grant funds.
  • The date of invoice preceded the date of purchase order.
  • The subrecipient obligated grant funds outside of the grant period.
  • Auditors noted that the fiscal agent and member districts did not record transactions correctly in accordance with the guidance provided by Section 1.3.1.6 of FASRG in their respective financial records.

Thank you for your assistance in this matter. If you have questions concerning this letter or these findings, please contact our office at 512-463-9095 or schoolaudits@tea.state.tx.us.

Sincerely,

Rita Chase, Director
Division of Financial Audits
Texas Education Agency