[Final Audit Report – Proper Use of Cooperative Agreements Could Improve Interior’s Initiatives for Collaborative Partnerships ]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. W-IN-MOA-0086-2004
Title: Final Audit Report � Proper Use of Cooperative Agreements
Could Improve Interior�s Initiatives for Collaborative
Partnerships
Date: January 31, 2007
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U.S. Department of the Interior
Office of Inspector General
Memorandum
To: Deputy Secretary
Assistant Secretary for Policy, Management and Budget
From: Michael P. Colombo
Regional Audit Manager
Subject: Final Audit Report � Proper Use of Cooperative Agreements Could Improve Interior�s Initiatives for Collaborative Partnerships
(No. W-IN-MOA-0086-2004)
This report presents the results of our audit of the Department of the Interior�s (Interior�s) use of cooperative agreements. Over the past decade, Interior has significantly expanded its use of these agreements and now awards nearly a third of the cooperative agreements issued government-wide. Our objective was to determine whether Interior�s use of cooperative agreements (1)�fostered effective partnerships, (2)�acquired goods and services for allowable and reasonable costs, and (3)�complied with applicable laws and regulations.
We reviewed 119 cooperative agreements totaling about $73�million administered by the U.S. Fish and Wildlife Service (FWS), U.S. Geological Survey (USGS), National Park Service (NPS), Bureau of Land Management (BLM), and Bureau of Reclamation (BOR). Our scope, methodology, and locations visited are detailed in Appendices�1 and 2. We found that the proper use of cooperative agreements could significantly improve Interior�s initiatives for collaborative partnerships and decrease the risk for fraud, waste, and abuse of federal monies.
Of the 119 agreements reviewed, 74, or nearly two-thirds, should have been procurement contracts, that is, they were used for such purposes as hiring employees or building infrastructure. In such situations, contracts better protect the government�s interest because they are competed and contractors are penalized for nonperformance and are paid only for allowable costs. Using cooperative agreements in lieu of contracts increases the government�s exposure to fraud and misuse of federal monies and ultimately jeopardizes the end performance of Interior partnerships.
We concluded that Interior lacked a fundamental understanding as to how and for what purpose cooperative agreements should be awarded. To address this misunderstanding, we prepared a guide delineating the decision points to determine whether a grant, cooperative agreement, or procurement contract was the appropriate legal instrument (Appendix 3) and made five recommendations to improve the management of cooperative agreements by (1) establishing an Interior-wide policy requiring legal reviews, (2) enacting an Interior-wide policy requiring periodic management reviews of the award and administration process, (3) developing competition guidelines, (4)�implementing a financial assistance training program, and (5)�requiring cost reviews during the performance period. If implemented, these recommendations should improve the accountability and effectiveness of Interior partnerships established under cooperative agreements and reduce the risk of fraud.
In his October 2, 2006 response (Appendix 4), the Assistant Secretary for Policy, Management and Budget partially concurred with Recommendations 1 and 3, concurred with Recommendations 2 and 4, and did not concur with Recommendation 5. Based on his response, we revised Recommendations 3 and 5. We consider these recommendations and Recommendation 1 to be unresolved and Recommendations�2 and 4 to be resolved but not implemented. We will refer Recommendations 2 and 4 to the Office of Policy, Management and Budget for tracking of implementation and are asking the Assistant Secretary to reconsider Recommendations�1, 3, and 5.
The legislation, as amended, creating the Office of Inspector General (OIG) requires that we report to Congress semiannually on all audit reports issued, actions taken to implement our audit recommendations, and recommendations that have not been implemented. Please provide a written response to this report by March 2, 2007, that supplies the information requested in Appendix 5. We appreciate the cooperation shown by Interior bureaus during our review. If you have any questions regarding this report, please call me at (916) 978-5653.
Attachment
cc: Assistant Secretary for Water and Science
Assistant Secretary for Land and Minerals Management
Assistant Secretary for Fish and Wildlife and Parks
CONTENTS
Page
Cooperative Agreements Key to Building Successful Partnerships 1
Current Use of Cooperative Agreements and Their Role in
Interior Partnerships 1
Objective and Scope 2
Proper Use of Cooperative Agreements Could Improve Initiatives for
Collaborative Partnerships and Decrease the Risk of Fraud, Waste, and Abuse 4
Ineffective Partnerships Are Not Leveraging Federal Dollars 5
Interior and Bureau Oversight Is Essential 6
Recommendations 9
Assistant Secretary for Policy, Management and Budget Response
and OIG Reply 9
Appendices
1 Objective, Scope, and Methodology 14
2 Sites Visited or Contacted 16
3 Process to Determine Proper Use of Cooperative Agreements 18
4 Assistant Secretary for Policy, Management and Budget Response 20
5 Status of Audit Recommendations 27
Acronyms
BLM Bureau of Land Management
BOR Bureau of Reclamation
CSU California State University
CSUS California State University at Sacramento
DM Departmental Manual
DOI Department of the Interior
FAR Federal Acquisition Regulation
FWS U.S. Fish and Wildlife Service
OIG Office of Inspector General
NPS National Park Service
OMB Office of Management and Budget
USC United States Code
USGS U.S. Geological Survey
COOPERATIVE AGREEMENTS KEY TO BUILDING SUCCESSFUL PARTNERSHIPS
Partnerships with state and local governments, universities, non-profit organizations, and private citizens are essential in helping Interior meet its mission of managing the protection and use of resources, providing recreation, and serving communities. By focusing on the exchange of ideas and resources, partnerships result in a more productive approach to solving problems and working toward mutual goals.
Partnerships can be legally established in several ways, including memorandums of understanding, grants, contracts, and cooperative agreements. The kind of partnership chosen depends on the objective to be met.
(On page 1, text box) What is a Cooperative Agreement?
A cooperative agreement is a legal instrument used to transfer money, property, services, or other things of value from a federal party to a non-federal party under the following conditions:
* When there is congressional authority to do so.
* When the money, property, services, or other thing of value being transferred will be used to accomplish a public purpose.
* When both the federal and non-federal parties will be substantially involved in accomplishing the public purpose
In the case of cooperative agreements, the objective is to partner with non-federal parties to achieve public benefits that neither Interior nor the non-federal party can accomplish alone�in effect getting more than a dollar�s return for every federal dollar spent. When properly used, cooperative agreements are powerful tools. For example, an NPS partner has helped NPS leverage its resources by more than $65�million since 1981 to improve visitor education and recreation in the Golden Gate National Recreation Area in San Francisco.1
Typically, cooperative agreements convey dollars to recipients, who convert the dollars to a variety of goods and services, such as scientific research and habitat restoration on non-federal land, which are related to carrying out, supporting, or stimulating a public purpose, as authorized by law. A guide to properly choose between a grant, cooperative agreement, or procurement contract is shown in Appendix 3.
CURRENT USE OF COOPERATIVE AGREEMENTS AND THEIR ROLE IN INTERIOR PARTNERSHIPS
Over the past decade, Interior has significantly increased its use of cooperative agreements. The extent of Interior�s use of these agreements is shown by comparing Interior�s financial assistance funding and use of cooperative agreements with that of all other federal government agencies (Figures�1 and 2). Although Interior expends only 1�percent ($4.5 billion) of all federal outlays annually ($436.5�billion) for financial assistance, it awards a disproportionate number of cooperative agreements (nearly a third) as compared to other federal agencies.
Figure 1and 2. Graphs, see PDF version, page 2.
The greater reliance on cooperative agreements has occurred, in part, because of legislation that bureaus have interpreted as giving them broader discretion on how and when to use cooperative agreements. For example, under the Federal Land Policy and Management Act of 1976, Section�307(b), BLM, acting through the Secretary, was granted broad authority to enter into both contracts and cooperative agreements that involve the management, protection, development, and sale of public lands.
Bureau officials told us they believe that Section�307(b) allows them to use cooperative agreements to acquire goods and services for mission-related purposes. This view is shared by other Interior officials and contracting officers we interviewed, who believe that agencies having the authority to enter into both a procurement contract and a cooperative agreement also have the discretion to choose either one as the appropriate legal instrument.
OBJECTIVE AND SCOPE
Of Interior�s $13.9 billion fiscal year 2003 budget, $8.8 billion was expended on procurement contracts and financial assistance. Financial assistance, which includes grants and cooperative agreements, totaled $4.5�billion of this amount.
At the time of our review, Interior lacked an integrated information system that managed both financial and program data. As previously reported in our August 2005 grants management report Framework Needed to Promote Accountability in Interior�s Grants Management,2 data generated by current information systems were unreliable to the extent that we could not determine the amounts obligated or expended annually for grants or the award recipients.
Interior�s information systems also generated unreliable data on cooperative agreements. Without summarized information at the Departmental or bureau level, we were limited to visiting or contacting bureau offices and judgmentally selecting cooperative agreement files for review. In certain instances, we used individual cooperative agreement listings prepared by the bureaus to select files for review. In other instances, we used the Federal Assistance and Awards Data System, operated by the U.S. Census Bureau, to select files for review. We based our selections on a cross-section of recipient types, dollar values, work statements, bureaus, and geographic locations.
We reviewed 119�cooperative agreements (Figure�3) totaling $73�million for fiscal years 2001 through 2003 to determine whether they met the following conditions:
(1) Fostered effective partnerships,
(2) Acquired goods and services for allowable and reasonable costs,
(3) Complied with applicable laws and regulations.
Figure 3. Table, see PDF version, page 3.
PROPER USE OF COOPERATIVE AGREEMENTS COULD IMPROVE INITIATIVES FOR COLLABORATIVE PARTNERSHIPS AND DECREASE THE RISK OF FRAUD, WASTE, AND ABUSE
The proper use of cooperative agreements could significantly improve Interior�s partnership initiatives with state and local governments, non-profit organizations, and private individuals. These initiatives are essential in helping Interior meet its mission goals.
The threat posed by Interior�s improper use of cooperative agreements is twofold. First, improper use results in partnerships that do not (a)�leverage federal dollars to accomplish more than would have been accomplished by procurement contracts, (b) provide mutual benefit to achieve a common purpose, (c)�acquire goods and services at reasonable costs, or (d)�comply with applicable laws and regulations. Second, improper use unnecessarily increases Interior�s risk for fraud, waste, and abuse.
Although differing interpretations of bureau legal authorities were a contributing factor, the improper use of cooperative agreements is primarily the result of ineffective Interior oversight coupled with a lack of consistent policies and procedures governing the use of such agreements. Without effective oversight, bureaus adopted their own sets of guidelines. These guidelines neither clarified the proper use of agreements nor provided a system of checks and balances to protect the interests of both the government and the non-federal party, as do the controls for contracts stipulated in Title�48 of the Code of Federal Regulations.
Figure 4. Graph, see PDF version, page 4.
Our review of 119�cooperative agreements (Figure 4) revealed that Interior consistently failed at critical decision points in determining when to use cooperative agreements. For example:
* Nearly all (116) of the cooperative agreements reviewed were awarded without clear legal authority. Thus, the issue of what constitutes legal authority is a fundamental problem in Interior.
* Nearly two-thirds (74) of the cooperative agreements were issued in lieu of procurement contracts to acquire mission-related goods and services and were therefore contrary to one of the primary purposes of the Federal Grant and Cooperative
Agreement Act of 1977 (31 USC 6303),3 namely, to curb the misuse of financial assistance agreements in procurement situations.
* Most (100) cooperative agreements were issued without soliciting for competition and therefore did not ensure that the best goods and services were acquired at the most reasonable price possible.
* Just over half (62) of the cooperative agreements did not have substantial involvement by both parties, a defining characteristic of what constitutes a cooperative agreement.
INEFFECTIVE PARTNERSHIPS ARE NOT LEVERAGING
FEDERAL DOLLARS
As a result, under the guise of forming partnerships, bureaus extensively used cooperative agreements as a procurement tool to hire employees, perform maintenance work, and build infrastructure that directly benefited their own missions. In these cooperative agreements, the non-federal parties and Interior bureaus did not work together as partners to accomplish a mutual goal that benefited the public.
Rather, the non-federal parties functioned solely as contractors or brokers to provide or acquire services for the government. As such, they contributed little or none of their own resources. The use of cooperative agreements in this way did not foster effective partnerships that leveraged federal dollars in accomplishing Interior�s vital mission goals. At best, these agreements could be called one-sided partnerships. At worst, they did not protect the interests of the government, as do contracts, and unnecessarily increased the risk of the misuse of federal monies. For example:
* USGS Used a University as a Payroll Agent to Hire Contractors and Pay Salaries, Thereby Precluding Opportunities for Benefits of Joint Research. Over the past 4�years, the USGS California Water Science Center used a cooperative agreement with California State University at Sacramento (CSUS) to pay 28�full-time contractors ($2�million annually) for work on USGS research projects. Contrary to the original intent of the agreement to establish a partnership between CSUS and USGS for joint research, the contractors worked solely for the Center, some for as long as 7�years.
* BLM Used a Non-Profit to Hire Temporary Employees, Violating 31 USC 6303 and the Federal Acquisition Regulation (FAR�37.104(b)). For 5 years, BLM used a cooperative agreement with a non-profit to hire hundreds of temporary employees to work for up to 2 years at various BLM offices at a cost of $15�million. In this situation, BLM violated FAR, which specifically prohibits agencies from awarding personal service contracts unless specifically authorized by statute to do so. This agreement qualified as a personal services contract because an �employer-employee� relationship was created between BLM and the temporary employees, whom BLM continually supervised.
* Against the Advice of a Regional Solicitor, BOR Used Cooperative Agreements to Hire Law Enforcement Services. In 2002, BOR ignored the advice of a Regional Solicitor to use contracts and instead issued two cooperative agreements totaling $900,000 for law enforcement services to help protect two water projects. Although the BOR Solicitor indicated that use of a cooperative agreement was �legally sufficient,� he stated that a contract would be a better instrument. We agree and believe that the use of a contract would have better protected the government�s interest by (1)�clearly delineating security requirements, (2) including a requirement for cost reviews of extraordinary costs, and (3)�ensuring all agreements include performance enforcement provisions.
* FWS Used a Cooperative Agreement in Lieu of a Contract and Then Paid Summary Billings That Included Unallowable Costs. FWS awarded a $25,000 cooperative agreement to a non-profit for maintenance on FWS refuges. Twenty modifications increased that amount to about $4.15 million. We reviewed $1.5�million of the billed costs and identified questioned and disallowed costs of over $73,000 for entertainment, alcohol, excessive travel, and unsupported charges. FWS conducted only minimal and sporadic reviews of the costs charged against this agreement. Federal regulations governing these types of contracts require that costs be reviewed for accuracy, allowability, and reasonableness. The $73,000 paid for questioned or disallowed costs could have been used for other maintenance activities.
* FWS Improperly Used a Cooperative Agreement to Pay for the Construction of a Science Building. Over the last 3�years, FWS used a cooperative agreement in lieu of a construction contract to pay a non-federal party $6.5�million for constructing a science laboratory at Sevilleta National Wildlife Refuge in New Mexico. Although Congress appropriated funds for the laboratory as a budget line-item, Congress did not expressly authorize the use of a cooperative agreement. FWS therefore lacked specific statutory authority to award a cooperative agreement for this construction project. Further, FWS was not substantially involved in construction oversight, as it would have been with a construction contract. Ultimately, project completion lagged a year behind schedule, and the square footage of the original building plan was reduced by about 50�percent. A contract might have better protected the government�s interest.
INTERIOR AND BUREAU OVERSIGHT IS ESSENTIAL
Interior must improve its oversight on the use of cooperative agreements to ensure that partnerships leverage federal dollars; bureaus obtain goods and services at reasonable costs; and cooperative agreements, once issued, comply with laws and regulations. The requirements for effective oversight are threefold:
* Conducting thorough legal reviews prior to awarding a cooperative agreement.
* Reviewing billed costs during the cooperative agreement performance period.
* Performing periodic management reviews of all processes related to awarding and administering cooperative agreements.
LEGAL REVIEWS
Because of legal authorities that can be interpreted in multiple ways, we questioned all but three of the legal authorities used to justify the use of the 119 cooperative agreements. We also questioned whether 74 of the 119�agreements should have instead been procurement contracts. Before bureaus award cooperative agreements, Interior solicitors should confirm that bureaus have the legal authority to do so and, if so, whether agreements comply with all laws and regulations.
At the time of our audit, there was no Interior-wide policy requiring legal reviews before the award of cooperative agreements. Absent such a policy, bureaus adopted differing financial thresholds for legal reviews, as follows:
Figure 5. Table, see PDF version, page 7.
Lacking the checks and balances provided by FAR, the indiscriminate use of cooperative agreements in lieu of procurement contracts also increases the government�s exposure to the misuse of federal monies.
Without a statute expressly exempting the acquisition of goods and services from the requirements of the Federal Grant and Cooperative Agreement Act of 1977, the use of a cooperative agreement to obtain mission-related goods and services violates 31 USC 6303. As defined in the 1977 Act, cooperative agreements are financial assistance instruments to be used, like grants, for acquiring goods and services that serve a public purpose, but which require a greater degree of federal involvement than grants.
The distinction between contracts and cooperative agreements is a clear one that has been consistently upheld by the Comptroller General of the United States. Given the current use of cooperative agreements, Interior must take steps to better control the selection of cooperative agreements as the appropriate mechanism.
On March 29, 2006, Interior adopted a new policy in the Departmental Manual (DM 505 2.8.D), which required legal reviews for cooperative agreements with values over $750,000.
COST REVIEWS
Given Interior�s practice of using cooperative agreements as streamlined procurements contracts, reviews of billed costs during the performance period are critical to ensure that goods and services are produced at reasonable costs.
Reviews should include evaluating the basis for cost estimates and incurred costs to validate billed costs and matching requirements. Although bureaus sometimes reviewed, planned, or budgeted costs before awarding cooperative agreements, they rarely reviewed incurred costs, including any matching requirements. As some of the examples discussed previously demonstrated, bureaus have sometimes paid for unallowable and excessive costs.
PERIODIC MANAGEMENT REVIEWS
In addition to legal and cost reviews, bureaus must periodically review processes related to awarding and administering cooperative agreements. These processes include, but are not limited to, (1)�ensuring the required legal reviews are done, (2)�soliciting for competition, (3)�requiring substantial involvement from both parties, (4)�obtaining goods and services at allowable and reasonable costs, and (5)�properly coding transactions to all financial and program systems. Such reviews, when coupled with effective corrective actions, would address another primary deficiency, namely the lack of competition.
Lacking a competition advocate4 and an enforceable requirement for competition, bureau personnel prefer not to seek competitive proposals. However, Congress encourages competition in awarding both grants and cooperative agreements, as does Interior, through Part 505, Chapter�2.13 of the DM and through Office of Management and Budget (OMB) Circulars A-102 and A 110.
The emphasis on competition is based on the assumption that competition encourages innovation, increases efficiency, and lowers prices. Studies by OMB, the University of Maryland, and the Reason Foundation show average savings of around 30 percent when competition is introduced.
In an effort to address compliance with laws and regulations covering financial assistance, the Office of Acquisition and Property Management, in fiscal year 2006, took its first step towards effective oversight by requiring bureaus to review 25�percent of all financial assistance transactions as part of their annual �functional review requirement.� In the past, Interior had no such specific review requirement.
We commend this step and believe that Interior should build on this effort of the Office of Acquisition and Property Management by developing an Interior-wide policy for periodic management reviews. Such reviews would provide the information necessary for more informed decisions, better use of resources, and greater accountability, thereby improving program management and fostering collaborative partnerships
RECOMMENDATIONS
We recommend that the Deputy Secretary take the following actions:
1. Establish an Interior-wide policy to require, in conjunction with bureau solicitors, reviews of all proposed cooperative agreements to ensure that (a) the bureau has the legal authority, (b) there is substantial involvement by both parties to the agreement, (c) the correct legal instrument is used, and (d) all authorities and responsibilities, deliverables, cost budgets, and time frames for completing agreement objectives are clearly delineated.
2. Establish an Interior-wide policy to require periodic management reviews of all processes related to awarding and administering cooperative agreements. These processes should, at a minimum, include determining whether (a)�required legal reviews were completed, (b)�competition was solicited, (c)�substantial involvement occurred from both parties, (d)�goods and services were obtained at allowable and reasonable costs, and (e)�transactions were properly coded to all financial and program systems.
3. Develop competition guidelines and metrics to evaluate and annually report the use of competition in awarding cooperative agreements to maintain the transparency consistent with the customer service mandates prescribed in Public Law 106-107.5
4. In conjunction with DOI�s University, establish and implement a training program for all acquisition and program personnel. This training program should provide instruction on how to use applicable OMB circulars to conduct thorough cost reviews of budgeted and actual expenditures.
5. Require cost reviews during the cooperative agreement�s performance period to monitor billed costs and matching requirements. This would include comparing cost estimates developed during the application process to incurred costs.
ASSISTANT SECRETARY FOR POLICY, MANAGEMENT AND BUDGET RESPONSE AND OIG REPLY
In his October 2, 2006 response to our draft report (Appendix 4), the Assistant Secretary for Policy, Management and Budget generally agreed with our �overall findings that program and administrative improvements and management support are needed� to improve the award and administration of cooperative agreements. The Assistant Secretary�s response included attachments detailing general comments on the report and comments of individual bureaus. Although we did not include the attachments in Appendix 4, we addressed these comments in the report as appropriate.
The Assistant Secretary partially concurred with Recommendations 1 and 3, concurred with Recommendations 2 and 4, and did not concur with Recommendation 5. Based on the response, we consider Recommendations 2 and 4 to be resolved, and are referring them to the Assistant Secretary for Policy, Management and Budget for tracking of implementation. Based on the response, we revised Recommendations 3 and 5. We consider these recommendations and Recommendation 1 to be unresolved. We are asking the Assistant Secretary to reconsider these three recommendations and provide the information requested in Appendix 5.
RECOMMENDATION 1
The Assistant Secretary appreciated our flowchart (Appendix 3 of our report) and agreed to develop and implement an Interior-wide policy that requires adequate consideration of points (a) through (d) in Recommendation 1. The Assistant Secretary stated that the policy would require, �at minimum, use and completion of [a] . . . Financial Assistance Agreement Review Sheet� that would be �built into� the agreements and completed at the �practitioner� level. The Assistant Secretary disagreed, however, on the need for legal reviews for all cooperative agreements, citing Interior�s new policy (505 DM 2.8.D), adopted on March 29, 2006, which requires legal reviews of proposed cooperative agreements exceeding $750,000. The Assistant Secretary also stated:
505 DM 2.8.D makes provision for legal review, not only for proposed grants and cooperative agreements with values in excess of $750,000, but [also] those �of which the bureau or office otherwise seeks legal review.�
OIG Reply. The Assistant Secretary�s plan to implement a �built in� review sheet and Interior�s adoption of a legal review policy for agreements in excess of $750,000 do not address the widespread confusion and misuse of cooperative agreements within Interior for the following reasons:
* The Assistant Secretary does not state who would complete the review sheet, when it would be completed, what level of management would evaluate the answers, and what documentation would be required in support of the answers given.
* Under the existing $750,000 threshold, 105 of the 119 agreements included in our audit would not have been reviewed. These legal reviews are needed because we found that (1)�legal authorities were too vague; (2) procurement contracts would have been more appropriate; (3)�both parties to the agreements were not adequately involved; and (4)�authorities, responsibilities, deliverables, cost budgets, time frames, and objectives were not clearly delineated. For example, in the 74�cases where procurement contracts should have been used instead of cooperative agreements, only 38 received legal reviews. Bureaus often used vague legal authorities to justify issuing cooperative agreements. For many agreements, we questioned whether bureaus had the legal authority to distribute financial assistance funds.
We are concerned that the Assistant Secretary�s response will not effectively address all the elements of our recommendation. We believe that until Interior officials, in conjunction with solicitors, are better able to ensure the proper use of cooperative agreements, the $750,000 threshold should be suspended and that all proposed cooperative agreements should be reviewed.
It should be noted that the Assistant Secretary stated that a �revised� version of the flowchart in Appendix 3 would be included in the DM. As the Assistant Secretary felt it was important to revise the original flowchart, we believe the revised version should be evaluated for accuracy and appropriateness before being incorporated into the DM.
RECOMMENDATION 2
The Assistant Secretary concurred with the recommendation and stated that, effective fiscal year 2006, Interior had begun requiring �bureaus to perform annual internal control reviews of 25�percent of their financial assistance programs . . . resulting in review of all of these programs over a four-year period.� The Assistant Secretary also stated that bureaus would be required to �provide evidence that corrective action plans have been established and are being monitored for all cited deficiencies.�
OIG Reply. We agree with the Assistant Secretary and would encourage that the internal control reviews include all cooperative agreements, even those that are not associated with established Interior financial assistance programs.
RECOMMENDATION 3
The Assistant Secretary agreed that competition should be encouraged and stated that �existing policy meets the letter and spirit of the Federal Grant and Cooperative Agreement Act of 1977.� The Assistant Secretary stated that �505 DM 2.13,� adopted in March 2006, �requires, with few exceptions, that all discretionary grant and cooperative agreement funding opportunities be posted to the Grants.gov web site.� The Assistant Secretary stated that �rather than designating competition advocates, Departmental policy . . . should be advocated and enforced at the practitioner level.�
OIG Reply. The March 2006 policy lacks a provision for monitoring and reporting on competition advocacy by practitioners. For example, a cursory review of financial assistance awards posted to Grants.gov in November 2006 revealed that only 40 programs out of about 150�programs were posted. Of the posted programs, 28, or 70�percent, contained readily available information indicating competition was being solicited in some manner. Interior should therefore develop criteria for reporting the success of competition efforts and post this information in such a way as to be available to the general public. Based on the March 2006 policy, we revised Recommendation 3 to remove competition advocates in favor of annual reporting on the use of competition.
We commend the encouragement of competition stated in the March 2006 policy; specifically the mandate that bureaus and offices (1) post all agreements on Grants.gov, (2)�provide for an independent objective evaluation of all applications prior to award, (3)�ensure that applications are reviewed and evaluated by qualified reviewers and scored and ranked and selections are made based on the announced criteria, and (4) notify unsuccessful applicants as to why their applications were disapproved.
RECOMMENDATION 4
The Assistant Secretary concurred with Recommendation 4 and stated that the Office of Acquisition and Property Management would work with DOI�s University to establish and implement a mandatory training program for all employees with financial assistance responsibilities. The training program will include instructions on OMB Circular requirements and the conduct of cost reviews of budgeted and actual expenditures.
OIG Reply. We agree with the Assistant Secretary�s response and believe that required training should also include program officials and managers.
RECOMMENDATION 5
The Assistant Secretary confirmed the importance of reviewing the allocability, allowability, and reasonableness of costs to produce goods and services related to cooperative agreements but stated:
Additional cost review requirements are incompatible with the administrative requirements and procedures of . . . OMB Circulars A-102, A-110, and A-133, and the goal of reducing administrative burdens placed on applicants/recipients as identified in the Federal Grants and Cooperative Agreements Act of 1977, and the Federal Financial Assistance Management Improvement Act of 1999, Public Law 106-107.
The Assistant Secretary also stated that inappropriate charges should be prevented through the recipients� systems of internal controls and monitored through the Single Audit process.
OIG Reply. We disagree with the Assistant Secretary�s statement that �additional cost reviews requirements are incompatible with the administrative requirements and procedures of . . . OMB Circulars� and that �unallowable� or �unallocable� costs would be prevented or detected through the Single Audit process. We revised our report and Recommendation 5 to clarify our definition of cost reviews; that is, reviews conducted during the performance period to monitor billed costs and matching requirements. Such monitoring is consistent with the intent of OMB circulars, specifically Circular A-110 Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations and Circular A-102 Grants and Cooperative Agreements with State and Local Governments. For example Circular A-102 states �In assessing the adequacy of an applicant's financial management system, the awarding agency shall rely on readily available sources of information, such as audit reports, to the maximum extent possible.� The Circular also states, however, that if �additional information is necessary to assure prudent management of agency funds, it shall be obtained from the applicant or from an on-site review.� In addition, Circular�A 110 states �Federal awarding agencies shall require recipients to relate financial data to performance data . . . whenever practical.�
The need for financial performance monitoring by awarding agencies is inherent in the recipients� responsibilities under the circulars. For example, Circular A-110 requires that recipients� financial systems provide for �accurate, current, and complete disclosure of the financial results,� �records that identify adequately the source and application of funds,� �effective control over and accountability for all funds,� �comparison of outlays with budget amounts for each award,� �written procedures for determining the reasonableness, allocability, and allowability of costs,� and �accounting records including cost accounting records that are supported by source documentation.�
Although the single audits stipulated in Circular A-133 Audits of States, Local
Governments, and Non-Profit Organizations may be useful in monitoring financial performance, the single audit alone can not satisfy all financial performance monitoring aspects. Single audits ensure the accountability of federal funds at a broad, entity-wide level for a snap-shot in time but are not done contemporaneously with agreement performance and do not meet monitoring requirements for each individual cooperative agreement. The cost reviews we are recommending�reviews conducted during the performance period�generally fall under the provisions of OMB Circulars A-110 and A 102, which govern cost accountability for individual financial assistance awards, from award through close-out.
Overall, we made our recommendations because of the lack of accountability and transparency in Interior�s management of financial assistance awards. As Interior �builds in� the controls needed to achieve accountability and transparency, as stated by the Assistant Secretary, the need for comprehensive oversight of award recipients, such as cost reviews, should decrease. Such �built in� controls would improve the quality of financial assistance management, encourage public participation, and achieve the public benefits intended by Congress.
APPENDIX 1 � OBJECTIVE, SCOPE, AND METHODOLOGY
We focused our audit on the $1.5�billion in financial assistance annually managed by Interior bureaus during fiscal years 2001 through 2003. We did not review partnerships created with other legal instruments, such as �joint funding agreements.�
Using the definition of cooperative agreements as a guide,6 we determined whether Interior�s use of these agreements (1) fostered effective partnerships, (2)�acquired goods and services for allowable and reasonable costs, and (3)�complied with applicable laws and regulations.
Because summarized Departmental information on cooperative agreements was not available, we visited and contacted Interior and bureau offices located throughout the country and judgmentally selected cooperative agreement files for reviews (see Appendix�2).
To accomplish our audit, we tested 119�cooperative agreements totaling about $73�million administered by FWS, USGS, NPS, BLM, and BOR. As part of our tests, we determined whether the proper goods and services for 20�cooperative agreements were acquired in accordance with the terms and conditions of the agreements.
Our audit was conducted in accordance with the Government Auditing Standards, issued by the Comptroller General of the United States. Accordingly, we included such tests of records and other auditing procedures considered necessary to accomplish our objective.
Our audit was conducted during fiscal years 2004 through 2006. We interviewed numerous Interior and bureau officials to understand the processes related to awarding and administering cooperative agreements. We reviewed laws; OMB circulars; Interior and bureau policies and procedures; Comptroller General Decisions; and past reports related to cooperative agreements issued by the OIG, Government Accountability Office, and other federal and non-federal agencies. We also reviewed bureau financial and program information.
We reviewed Interior�s Performance and Accountability Reports for fiscal years 2001 through 2003, which included information required by the Federal Managers� Financial Integrity Act, and bureau annual assurance statements. We found that Interior identified �controls over financial reporting� for grants as a material weakness in fiscal year 2002. We addressed this weakness in our August 2005 grants management report Framework Needed to Promote Accountability in Interior�s Grants Management.
We also determined whether Interior had designed and implemented a system of internal controls to provide reasonable assurance that cooperative agreements (1)�fostered effective partnerships, (2)�acquired the goods and services for allowable and reasonable costs, and (3)�complied with applicable laws and regulations.
We found weaknesses in Interior�s oversight of cooperative agreements. These weaknesses and recommended corrective actions are discussed in this report. If implemented, the recommendations should improve internal controls over Interior�s use of cooperative agreements.
APPENDIX 2 � SITES VISITED OR CONTACTED
(Table, see PDF version, page 16-17)
APPENDIX 3 � PROCESS TO DETERMINE PROPER USE OF COOPERATIVE AGREEMENTS
(Flowchart, see PDF version, page 18-19)
APPENDIX 4 � ASSISTANT SECRETARY FOR POLICY, MANAGEMENT AND BUDGET RESPONSE
(see PDF version, page 20-26)
APPENDIX 5 - STATUS OF AUDIT RECOMMENDATIONS
Recommendations: 2 and 4
Status: Resolved; Not implemented.
Action Required: We will refer the recommendations to the Assistant Secretary for
Policy, Management and Budget for tracking of implementation.
Recommendations: 1, 3, and 5
Status: Unresolved.
Action Required: We are asking the Assistant Secretary for Policy, Management and Budget to reconsider the recommendations and provide a plan identifying actions to be taken, target dates for completion, and the titles of the officials responsible for implementation.
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FOOTNOTES:
1 NPS Report, National Park Service: Partnering & Managing for Excellence, July 2, 2003, www.nps.gov/accomreport2003
2 This report, focused solely on grants, revealed serious deficiencies, such as lack of competition, training, reliable data, and effective monitoring, which collectively did not ensure the use of federal dollars as intended; promote fair treatment for both grant applicants and recipients; or reduce the susceptibility of programs to fraud, waste, and abuse. The report included a framework for action, such as using the Department of the Interior�s (DOI) University for training, to significantly improve the quality of grants management within Interior and to encourage public participation in and benefit from financial assistance programs, as intended by Congress.
3 This law requires use of a procurement contract (unless Congress states otherwise) as the legal instrument when the principal purpose is to acquire property or services for the direct benefit or use of the U.S.�Government.
4 We identified the use of a competition advocate to approve non-competitive awards as a promising practice in our August 2005 grants management report Framework Needed to Promote Accountability in Interior�s Grants.
5 The 1999 Federal Financial Assistance Management Improvement Act (Public Law 106-107) and a clarifying OMB Directive require posting financial assistance funding opportunities to a single source to simplify and streamline financial assistance applications and reporting procedures.
6 Federal Grant and Cooperative Agreement Act (31 USC 6305)
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