-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-518		

TITLE:     Disaster Relief: Reimbursement to American Red Cross 
for Hurricanes Charley, Frances, Ivan, and Jeanne

DATE:   05/30/2006 
				                                                                         
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GAO-06-518

     

     * Report to Congressional Committees
          * May 2006
     * DISASTER RELIEF
          * Reimbursement to American Red Cross for Hurricanes Charley,
            Frances, Ivan, and Jeanne
     * Contents
          * Results in Brief
          * Background
          * Scope and Methodology
          * Criteria Were Established for Reimbursement
               * Mass Care
               * Client Personal Living and Housing Needs
               * Client Health Needs
               * Direct Service Delivery Support
               * Operational Support
          * Controls Avoided Duplication of Expenses Reimbursed by Other
            Federal Funds
          * Expenses Were Incurred in Eligible States and Territories
          * Incurred Expenses Were Generally for Eligible Services and Were
            Adequately Supported
               * The Red Cross Reported $88.6 Million of Incurred Expenses
               * Audit Identified Six Reportable Conditions in Internal
                 Controls
                    * Client Assistance Debit Cards Were Missing Support and
                      Approval Signatures, Had Occasional Loading Errors, and
                      Were Not Reconciled
                    * Client Assistance Debit Cards Were Not Being Adequately
                      Monitored
                    * Disbursing Orders for Client Assistance Were Not Always
                      Signed or Supported
                    * Disbursing Orders for Client Assistance Were Not Always
                      Reconciled to Merchant Reimbursements
                    * Expense Transactions Were Sometimes Missing Support
                    * Client Case Files Were Sometimes Missing Support to
                      Determine Eligibility
               * Known and Likely Questioned Costs
          * Agency Comments
     * Comments from the American Red Cross

Report to Congressional Committees

May 2006

DISASTER RELIEF

Reimbursement to American Red Cross for Hurricanes Charley, Frances, Ivan,
and Jeanne

Contents

Tables

Figures

May 30, 2006Letter

The Honorable Christopher Bond Chairman The Honorable Patty Murray Ranking
Member Subcommittee on Transportation, Treasury, the Judiciary,   Housing
and Urban Development, and Related Agencies Committee on Appropriations
United States Senate

The Honorable Joe Knollenberg Chairman The Honorable John W. Olver Ranking
Member Subcommittee on Transportation, Treasury, and Housing and Urban  
Development, the Judiciary, District of Columbia, and Independent  
Agencies Committee on Appropriations House of Representatives

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 deaths2 of estimated 1
and $45 billionproperty 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.3

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.

Results in Brief

We found that FEMA and the Red Cross properly established criteria for Red
Cross reimbursement requests through a signed agreement that included
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 related to the four
hurricanes, and established administrative procedures for reimbursement
requests and payment of appropriated funds.

The FEMA/Red Cross agreement also 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 transient accommodations and
deployment expenses paid by FEMA 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 reimbursement
requests $60.2 million of private donations designated for disaster relief
related to the four hurricanes.

The Red Cross incurred expenses of $88.6 million in states and territories
eligible for disaster relief under the four hurricanes in accordance with
the FEMA/Red Cross agreement. Twenty-one federal disaster declarations
were made by the President and issued by FEMA for the four hurricanes that
cumulatively covered federal disaster aid to 12 states and 2 territories.
Federal disaster declarations were also issued for 4 additional states 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
emergency assistance where it determines there is a need. As a result, the
FEMA/Red Cross agreement included some hurricane-associated expenses
incurred in states that were not covered by federal disaster declarations.
Arkansas and Texas were used by the Red Cross as staging areas for
emergency relief aid to the areas affected by the hurricanes, and Maryland
was affected by flooding as a result of Hurricane Ivan.

The Red Cross requested reimbursements of $28.1 million related to the
four 2004 hurricanes for the period August 11, 2004, through June 30,
2005, that 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, the Red Cross's entitywide financial statements and
schedule of expenditures of federal awards were audited by the public
accounting firm of KPMG, LLP (KPMG) in accordance with OMB Circular No.
A-133, Audits of States, Local Governments, and Non-Profit Organizations.
So as not to duplicate audit effort as provided by the Single Audit Act,
as amended,4 we reviewed and tested the audit work of KPMG related to the
$88.6 million of incurred Red Cross expenses associated with the four 2004
hurricanes. In its audit, KPMG concluded that Red Cross expenses were
generally incurred for eligible disaster services and supported by
adequate documentation. We concurred with that determination. However,
KPMG identified six weaknesses in the Red Cross's internal controls
related to the reimbursement of expenses associated with the four 2004
hurricanes that it

considered to be reportable conditions.5 KPMG also considered one of
these, related to debit cards for client assistance, to be a material
weakness.6

In its report, KPMG made recommendations to 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. Known questioned costs were primarily caused by a bank reporting
error of $657,000 on client assistance debit cards and $55,000 of missing
or incomplete documentation to support incurred expenses. 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. 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 KPMG findings and questioned costs. The awarding federal
agency has 6 months from receipt of the report to issue management's
decision. Corrective action should also be initiated within 6 months after
receiving the audit report and proceed as rapidly as possible.

We provided a draft copy of this report to the American Red Cross; FEMA;
and the Department of Homeland Security (DHS), for which FEMA is a
component agency. The Red Cross stated that it agreed with the report
contents, including the six weaknesses identified by KPMG, and described
steps it is taking to remedy the weaknesses in anticipation of the 2006
Hurricane Season. The full Red Cross response is presented in appendix I.
FEMA had no comments on the draft report.

Background

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.7 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.

Figure 1: Paths of 2004 Hurricanes Charley, Frances, Ivan, and Jeanne

Note: For official hurricane tracks, see http://www.nhc.noaa.gov .

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.8 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 Peninsula9 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.

Figure 2: Tornadoes Spawned from Hurricanes

Note: The hurricanes generated numerous tornadoes, such as the one
depicted here.

This included two category F2 tornadoes10 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 Act11 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.

Scope and Methodology

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.

Criteria Were Established for Reimbursement

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.

Mass Care

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.

Figure 3: Red Cross Sheltering Efforts

Note: People sought refuge in shelters established by the Red Cross in
response to hurricanes Charley, Frances, Ivan, and Jeanne.

Mass care operations included

o 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;

o food, water, ice, fuel, and other consumable supplies for bulk
distribution;

o shipping and storage for safekeeping of household goods;

o sanitation projects, mass immunization, emergency first aid, and
supplies used in shelters, first aid stations, service centers, or other
Red Cross facilities; and

o 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,12 and provided more than 149,000
comfort kits and 113,000 cleanup kits.

Client Personal Living and Housing Needs

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

o 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

o 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.

Figure 4: Extensive Damage to Homes Caused by the Hurricanes

Note: This home near the Alabama coast was destroyed, and the owners lost
their business and farm as well.

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.

Client Health Needs

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

o medical professional fees;

o hospital, ambulance, X ray, and laboratory charges;

o eyeglasses, dentures, hearing aids, and artificial limbs;

o prescriptions, over-the-counter medication, and first aid supplies;

o special dietary, housing, or mobility devices;

o mental health services;

o blood and blood products; and

o 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.

Direct Service Delivery Support

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.

Figure 5: Emergency Response Vehicles Provide Disaster Relief

Note: Emergency response vehicles provide meals, water, and snacks to
hurricane victims.

Direct service delivery support included

o salaries, travel, and maintenance of disaster staff assigned to provide
mass care, family living and housing, and client health services;

o purchase, rental, repair, and service of nonexpendable equipment and
vehicles used to provide direct services and services in shelters and
facilities;

o telephone and related communications equipment;

o rent, repair, and operating expenses of facilities used to provide
direct services;

o shipping, freight, and handling expenses; and

o 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.

Operational Support

Operational support covered expenses of managing and administering a
disaster relief operation that included

o 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;

o rental, repair, and service of nonexpendable equipment, computer
equipment, and vehicles used to provide management and administration;

o telephone and related communications equipment for field, district, and
administrative offices;

o rent, repair, and operating expenses of facilities used to provide
management and administration;

o printing, copy, postage, and delivery expenses; and

o meeting expenses and activity expenses to recognize volunteer efforts.

Controls Avoided Duplication of Expenses Reimbursed by Other Federal Funds

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 costs13 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.

Expenses Were Incurred in Eligible States and Territories

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.

Figure 6: Red Cross Reported Expenses by Hurricane

Notes: Red Cross combined expenses for hurricanes Frances and Jeanne of
$31,283,711 were allocated 57 percent and 43 percent, respectively, based
upon FEMA incurred expenses of $1.2 billion and $0.9 billion,
respectively.

General relief includes call center, other recovery costs, and FEMA
funding not specifically identified with any particular one of the four
hurricanes.

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.

Table 1: Red Cross Reported Expenses by State and U.S. Territory

                                        

             State or territory                             Reported expenses 
Alabamaa                                                        $4,346,183 
Arkansas                                                           193,942 
Floridaa                                                        70,124,454 
Delaware                                                                 0 
Georgiaa                                                         1,383,791 
Louisiana                                                          653,402 
Maryland                                                            11,109 
Mississippia                                                       532,388 
New Jersey                                                          58,459 
New York                                                                 0 
North Carolina                                                   1,035,541 
Ohio                                                               168,329 
Pennsylvania                                                     2,031,663 
Puerto Rico                                                      3,272,864 
South Carolina                                                      42,823 
Tennesseea                                                          50,037 
Texas                                                                    0 
U.S. Virgin Islands                                                    472 
Vermont                                                                  0 
Virginia                                                             2,763 
West Virginia                                                    1,582,654 
General relief                                                   3,074,977 
Total                                                          $88,565,851 

Source: GAO analysis of Red Cross reimbursement information.

aRed Cross combined regional expenses for hurricane Ivan of $20,014,594
were allocated based upon assistance cases opened by state: Alabama, 20.64
percent; Florida, 74.88 percent; Georgia, 1.57 percent; Mississippi, 2.66
percent; and Tennessee, 0.25 percent.

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.

Incurred Expenses Were Generally for Eligible Services and Were Adequately
Supported

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.14 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.

The Red Cross Reported $88.6 Million of Incurred Expenses

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.

Table 2: Reported Red Cross Expenses and Reimbursement Requests, August
11, 2004, through June 30, 2005

                                        

                      Expense category                                 Amount 
Personal living and housing needs                              $32,628,820 
Mass care, shelter, and feeding                                 22,110,251 
Health services                                                     99,968 
Operational support                                                 42,518 
Total victim financial assistance by Red Cross                 $54,881,557 
Red Cross expenses                                     
Travel                                                          15,849,991 
Equipment                                                        7,532,683 
Miscellaneous                                                    7,649,457 
Professional fees                                                1,148,339 
Supplies                                                           750,202 
Building and occupancy                                             565,800 
Program materials                                                  187,822 
Total expenses                                                 $88,565,851 
Less: Other federal funds                                         -294,266 
Less: Private donations                                        -60,161,105 
Reimbursement request                                          $28,110,480 

Source: GAO analysis of Red Cross reimbursement information.

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.

Audit Identified Six Reportable Conditions in Internal Controls

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.

Client Assistance Debit Cards Were Missing Support and Approval
Signatures, Had Occasional Loading Errors, and Were Not Reconciled

One method used by the Red Cross to provide financial assistance to
disaster victims is the client assistance card, which is a MasterCard(R)
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.

Client Assistance Debit Cards Were Not Being Adequately Monitored

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.

Disbursing Orders for Client Assistance Were Not Always Signed or
Supported

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.

Disbursing Orders for Client Assistance Were Not Always Reconciled to
Merchant Reimbursements

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.

Expense Transactions Were Sometimes Missing Support

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.

Client Case Files Were Sometimes Missing Support to Determine Eligibility

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.

Known and Likely Questioned Costs

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.

Table 3: KPMG Known and Likely Questioned Costs

                                        

Reportable             KPMG test                   Known Likely questioned 
condition                                     questioned             costs 
                                                      costs 
1          Support for client assistance         $55,334        $2,893,650 
              cards                                         
1          Loading of client assistance cards      4,085               N/A 
1          Reconciliation of client              657,619               N/A 
              assistance cards                              
2          Monitoring of client assistance             0               N/A 
              cards                                         
3          Support for disbursing orders           2,409               N/A 
4          Reconciliation of disbursing           85,588               N/A 
              orders                                        
5          Support for other expenses             21,526               N/A 
6          Support for disaster client             2,415               N/A 
              eligibility                                   
Subtotal   Total questioned costs               $828,976        $2,893,650 
              Less amount related to nonfederal  (116,523)a      (1,967,682)b 
              participation                                 
Total      Federal share of questioned costs    $712,453          $925,968 

Source: GAO analysis of KPMG report.

Note: The nonfederal contribution of $60.2 million divided by $88.6
million of total incurred expenses results in a 68 percent nonfederal
share.

aAfter deduction of $657,619 for the reconciliation error that affected
the entire federal reimbursement share, the remaining known questioned
costs of $171,357 were reduced by the 68 percent nonfederal share, or
$116,523.

bTotal likely questioned costs of $2,893,650 were reduced by the 68
percent nonfederal share, or $1,967,682.

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.

Agency Comments

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 [email protected] .
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.

Steven J. Sebastian Director Financial Management and Assurance

Comments from the American Red Cross Appendix I

(196067)

transparent illustrator graphic

www.gao.gov/cgi-bin/getrpt? GAO-06-518 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Steven J. Sebastian at (202) 512-3406 or
[email protected].

Highlights of GAO-06-518 , a report to congressional committees

May 2006

DISASTER RELIEF

Reimbursement to American Red Cross for Hurricanes Charley, Frances, Ivan,
and Jeanne

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.

GAO is not making any recommendations in this report.

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.

Paths of 2004 Hurricanes Charley, Frances, Ivan, and Jeanne

Note: For official hurricane tracks, see http://www.nhc.noaa.gov.
*** End of document. ***