[Audit Report on Management of Federal Grants, Public School System, Commonwealth of the Northern Mariana Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-147

Title: Audit Report on Management of Federal Grants, Public School
       System, Commonwealth of the Northern Mariana Islands

Date:  DECEMBER 15, 1998




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U.S. Department of the Interior
Office of Inspector General


AUDIT REPORT


MANAGEMENT OF FEDERAL GRANTS,
PUBLIC SCHOOL SYSTEM,
COMMONWEALTH OF THE
NORTHERN MARIANA ISLANDS


REPORT NO. 99-I-147

DECEMBER 1998




MEMORANDUM

             TO:  The Secretary

           FROM:  Eljay B. Bowron
                  Inspector General

SUBJECT SUMMARY:  Final Audit Report -
                  "Management of Federal Grants, Public
                  School System, Commonwealth of the
                  Northern Mariana Islands" (No. 99-i-147)

Attached for your information is a copy of the subject final
audit  report.  The objective of the review was to determine
whether the grants management system ensured that applicable
laws and  regulations  were complied with as they related to
(1)  the procurement and  administration  of  contracts  and
property, (2) the identification and allocation of costs for
personnel and for contract employees, and (3) the billing of
and control over cash drawdowns.

Personnel  services  costs charged to Federal grant programs
were adequately supported by time and attendance records and
cash drawdowns were made  in  compliance  with  Federal cash
management  standards.   However,  the Public School  System
needed to make improvements  in the areas of procurement and
property management.  Specifically, the Public School System
(1) did not adequately justify  the  use  of sole source and
emergency  procurement methods; (2) split procurements  into
small   purchases,    which   resulted   in   noncompetitive
procurement methods being  used;  and (3) did not obtain the
required  number  of  written  price  quotations  for  small
purchases.  Furthermore, the Public School  System  did  not
maintain  accurate inventory records for reportable property
and  did  not   ensure  that  all  controlled  property  was
eventually entered  in  the  property  records.   Also,  the
Public  School  System  used   funds  to  pay for school bus
repairs  that  should have been covered under  the  warranty
from  the  seller/manufacturer.    As   a  result  of  these
deficiencies,  the Public School System did  not  have  full
assurance that the best prices were obtained on at least 139
small purchases,  totaling  $523,589;  did  not have control
over Federally funded accountable property of  $197,964; and
unnecessarily used Federal funds of $17,044 to repair buses.

Based  on  the  Public  School  System's  response  to   the
report's10  recommendations, we considered 9 recommendations
resolved but  not  implemented and requested that the Public
School  System reconsider  its  response  to  the  remaining
recommendation.

If you have  any  questions  concerning  this matter, please
contact  me  at  (202) 208-5745 or Mr. Robert  J.  Williams,
Assistant Inspector General for Audits, at (202) 208-4252.

Attachment




                                             N-IN-NMI-005-97


Ms. Marja Lee Taitano
Chairwoman, Board of Education
Public School System
Commonwealth of the Northern Mariana Islands
P.O. Box 1370 CK Saipan, MP 96950

Subject:  Audit Report on Management of Federal Grants, Public
          School System, Commonwealth of the Northern Mariana
          Islands (No. 99-i-147)


Dear Ms. Taitano:

This report presents the results of our review of the Public
School System's management of Federal grants.  The objective
of  the  audit  was  to  determine whether the Public School
System's grants management  system  ensured  that applicable
laws and regulations were complied with as they  related  to
(1)  the  procurement  and  administration  of contracts and
property, (2) the identification and allocation of costs for
personnel and for contract employees, and (3) the billing of
and control over cash drawdowns.

As  part  of  the  audit,  we  evaluated the accounting  and
management  controls over procurement,  property,  personnel
costs,  and  cash   drawdowns.   Our  audit  disclosed  that
personnel services costs  charged  to Federal grant programs
were adequately supported by time and attendance records and
that  cash  drawdowns were made in compliance  with  Federal
cash management  standards.   However,  we  found  that  the
Public  School  System  needed  to  make improvements in the
areas of procurement and property management.

Specifically,  our audit disclosed that  the  Public  School
System (1) did not adequately justify the use of sole source
and emergency procurement  methods;  (2)  split procurements
into   small   purchases,   which  resulted  in  competitive
procurement methods not being  used;  and (3) did not obtain
the  required number of written price quotations  for  small
purchases.   Furthermore,  the  Public School System did not
maintain accurate inventory records  for reportable property
and  did  not  ensure  that  all  controlled   property  was
eventually  recorded in the property records.  In  addition,
the Public School  System used funds provided by the Federal
Transit Administration  to  pay  for school bus repairs that
should  have  been  covered  under  the  warranty  from  the
seller/manufacturer.

These deficiencies occurred because the Public School System
had  not  (1)  developed  procurement  plans  to  facilitate
competitive  procurement,  (2)  developed  and   implemented
written  procedures  to  ensure  that  small purchases  were
reviewed for possible consolidation by the  Procurement  and
Supply  Office,  (3) established adequate written procedures
to ensure that the  Procurement  Rules  and Regulations were
followed, (4) developed adequate property control procedures
and forms, (5) required the seller/manufacturer of the buses
to provide warranty service through a local  representative,
and  (6)  maintained  centralized  files  and controls  over
warranties.  As a result, the Public School  System  did not
have full assurance that the best prices were received on at
least  139 small purchases, totaling $523,589.  In addition,
the  Public   School   System  did  not  have  control  over
accountable property of  $197,964  that  was  purchased with
Federal  funds, and it unnecessarily used Federal  funds  of
$17,044 to repair buses.

To correct these conditions, we recommended that you, as the
Chairwoman   of   the   Board   of   Education,  direct  the
Commissioner  of  Education to develop and  submit   written
procedures to the Board for (1) preparing annual procurement
plans,  (2)  ensuring   that   purchase   requisitions   are
consolidated  to the maximum extent possible, (3) performing
biennial physical inventories, (4) requiring delivery of all
accountable property  directly to the Procurement and Supply
Office's central warehouse  for  receiving  and tagging, and
(5)  ensuring  that  a  centralized  file for warranties  is
maintained  and  that  warranties  are  used   to  make  any
necessary  repairs.   In addition, we recommended  that  the
Public  School  System  (1)   enforce   provisions   of  the
Procurement Rules and Regulations that prohibit artificially
dividing procurements to avoid competitive bidding and  that
require  three written price quotations for small purchases;
(2) conduct  a  complete  physical  inventory of accountable
property,   compare  the  results  with  existing   property
records, and  investigate and resolve any discrepancies; (3)
revise  the property  record  card  format  to  include  all
information  required  by Federal regulations; (4) establish
and maintain a general fixed assets account group in the new
financial   management   system;   and   (5)   require   the
seller/manufacturer of the buses to provide warranty service
through an arrangement with  a local representative and seek
reimbursement from the seller/manufacturer  for  the cost of
repairs made to the school buses during the warranty period.

The Commissioner of Education's November 9, 1998,   response
(Appendix  2) to the draft report on behalf of the Board  of
Education indicated  concurrence  with  Recommendations A.1,
A.2, A.3, B.1, B.2, B.3, B.4, B.5, and B.7.   Based  on  the
response, we consider these recommendations resolved but not
implemented.    However,  the  Board  did  not  concur  with
Recommendation B.6,  and  we  consider  this  recommendation
unresolved.   Accordingly, the unimplemented recommendations
will be referred  to  the  Assistant  Secretary  for Policy,
Management  and  Budget for tracking of implementation,  and
the  Board  is  requested  to  reconsider  its  response  to
Recommendation B.6.

The  Inspector  General  Act,  Public  Law  95-452,  Section
5(a)(3), as amended,  requires  semiannual  reporting to the
U.S.  Congress  on  all  audit reports issued, the  monetary
impact  of audit findings (Appendix  1),  actions  taken  to
implement  audit recommendations, and identification of each
significant  recommendation  on  which corrective action has
not been taken.

In view of the above, please provide a response, as required
by Public Law 97-357, to this report  by  January  15, 1999.
The  response  should  be  addressed  to our Pacific Office,
415 Chalan   San  Antonio,  Baltej  Pavilion,   Suite   306,
Tamuning, Guam  96911.   The  response  should  provide  the
information requested in Appendix 3.

We  appreciate the assistance of the management and staff of
the Public School System in the conduct of our audit.

                                      Sincerely,


                                      Eljay B. Bowron
                                      Inspector General
                                      CONTENTS




                                                        Page

    INTRODUCTION                                           1

    BACKGROUND                                             1
    OBJECTIVE AND SCOPE                                    1
    PRIOR AUDIT COVERAGE                                   2

    FINDINGS AND RECOMMENDATIONS                           3

    A.  PROCUREMENT ACTIVITIES                             3
    B.  PROPERTY MANAGEMENT                                6

    APPENDICES

    1.  CLASSIFICATION OF MONETARY AMOUNTS                10
    2.  RESPONSE TO THE DRAFT AUDIT REPORT                11
    3.  STATUS OF AUDIT REPORT RECOMMENDATIONS            15


                          INTRODUCTION

    BACKGROUND

    The Public School System was established in October 1988
    by  Commonwealth  of the Northern Mariana Islands Public
    Law  No. 6-10  as  a  nonprofit   corporation   of   the
    Commonwealth.   The  Public  School  System is under the
    direction of the Board of Education, which  consists  of
    five  voting  members  elected at large on a nonpartisan
    basis  and  three nonvoting  members  appointed  by  the
    Governor.   The   Public  School  System  is  the  state
    education agency responsible  for  operating  all of the
    Commonwealth's   public   preschool,   elementary,   and
    secondary   education  programs.   The  Commissioner  of
    Education, who is appointed by the Board, is responsible
    for administering the Public School System in accordance
    with applicable  laws and Board policies.  During fiscal
    year 1996, the Public School System had 1,183 employees,
    expended local funds  of $32.3 million and Federal funds
    of $11.5 million, and administered 16 schools located on
    three islands with a total enrollment of 8,250 students.
    By law, the public elementary  and  secondary  education
    system  is guaranteed an annual budget of not less  than
    15 percent of the general revenues of the Commonwealth.

    Through  Board  Policy  1004,  the  Board  of  Education
    adopted the  "CNMI [Commonwealth of the Northern Mariana
    Islands] Public  School  System  Procurement  Rules  and
    Regulations."   These  regulations  created  the  Public
    School System's Procurement and Supply Office, which  is
    headed   by  a  Procurement  and  Supply  Officer.   The
    Procurement  and  Supply  Officer is responsible for (1)
    ensuring that procurement  regulations are followed; (2)
    conducting  procurement  activities   such  as  bidding,
    negotiating   professional   services   contracts,   and
    administering   contracts;   (3)   planning   for    the
    centralized  purchase of supplies; (4) providing general
    supervision and control over supply inventories; and (5)
    establishing   and    maintaining   programs   for   the
    inspection, testing, and acceptance of supplies.

    OBJECTIVE AND SCOPE

    The objective of the audit was to determine whether the
    Public School System's grants management system ensured
    that applicable Federal laws  and regulations were
    complied with as they related to (1)  the  procurement
    and administration of contracts and property,  (2)  the
    identification and allocation of costs for personnel
    and for contract employees, and (3) the billing of and
    control over cash drawdowns.

    The scope of the audit, which  was  conducted during the
    period of September 1997 to May 1998,  included a review
    of  the Public School System's procedures  and  controls
    for the management of Federal grants that were in effect
    during fiscal years 1995 through 1997.  We also examined
    financial  and administrative records and reports at the
    Public School  System's  Federal  Programs,  Fiscal  and
    Budget,  and  Procurement and Supply Offices, as well as
    documents and reports  related to Public School System's
    capital   improvement   projects   maintained   at   the
    Commonwealth's Department  of  Finance.  In addition, we
    interviewed  Public  School  System   and   Commonwealth
    officials  and  private  contractors and visited  public
    schools on the islands of  Saipan,  Tinian,  and Rota to
    inspect property purchased with Federal funds.  However,
    we  could  not  determine the total number and value  of
    property items purchased  with Federal funds because the
    Public School System's property  records were inaccurate
    (see Finding B).

    The audit was made, as applicable,  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  that  were  considered necessary  under  the
    circumstances.

    As part of the audit, we  evaluated  the  accounting and
    management    controls   over   procurement,   property,
    personnel costs, and cash drawdowns.  We determined that
    personnel  services   costs  charged  to  Federal  grant
    programs  were  adequately   supported   by   time   and
    attendance  records and that cash drawdowns were made in
    compliance with Federal cash management standards, which
    require the Public School System to minimize the elapsed
    time  between  the  transfer  of  funds  from  the  U.S.
    Treasury  and  the  disbursement  of funds by the Public
    School  System.   However,  we  found  internal  control
    weaknesses  in  the  methods  used by the Public  School
    System to conduct procurements and manage property.  The
    internal  control  weaknesses  are   discussed   in  the
    Findings  and  Recommendations  section  of this report.
    Our recommendations, if implemented, should  improve the
    internal controls in these areas.

    PRIOR AUDIT COVERAGE

    During the past 5 years, the General Accounting Office
    has  not  issued  any audit reports pertaining to the
    Public  School  System's management of Federal grants.
    However, in January 1993, the Office of Inspector
    General issued the audit report "Food Service Operations,
    Public   School   System, Commonwealth of the Northern
    Mariana Islands" (No. 93-I-403), which  stated that  the
    Public  School System submitted to the Food and
    Nutrition Service, U.S. Department  of  Agriculture,
    claims  for  Federal  cash assistance  based  on  (1)
    meal claims percentages that were not valid and (2) meals
    that were not eligible for reimbursement.

    In addition, in January 1998,   the  Commonwealth Office
    of the Public Auditor issued the audit  report "Audit of
    Marianas High School Gymnasium Contract" (No. AR-98-01).
    The report stated that the Public School  System "poorly
    managed"   the   gym   construction   project   and  was
    "negligent"  in enforcing applicable contract provisions
    and procurement  regulations.  The report concluded that
    about $970,000 in  local  government funds may have been
    "wasted" as a result of mismanagement  by  School System
    officials.

    Finally, in February 1996, a certified public accounting
    firm  issued a single audit on the Public School  System
    for the  fiscal  year  ended  September  30,  1994.  The
    single audit report stated that the Public School System
    (1) did not maintain a properly valued register  of  all
    fixed  assets on hand and (2) did not have title from or
    lease agreements  with  the  Commonwealth's  Division of
    Public  Lands  for land on which several of its  schools
    were located.  Single  audit  reports  for  fiscal years
    1995,  1996,  and  1997  had not been issued as of  July
    1998.

    FINDINGS AND RECOMMENDATIONS


    A.   PROCUREMENT ACTIVITIES

    The Public School System did not ensure that procurement
    activities  involving Federal  grant funds were carried
    out in accordance with applicable laws and regulations.
    Specifically,  the Public  School  System (1) split
    procurements into small purchases to avoid  the  use  of
    competitive procurement methods, (2) did not obtain the
    required  number  of written price quotations for small
    purchases, and (3) did  not adequately justify the use of
    sole  source  and emergency procurement methods.
    Procurement requirements are contained in the "CNMI Public
    School System Procurement Rules and Regulations." The
    deficiencies occurred because the Public School System
    had not developed procurement  plans  to  facilitate  the
    competitive procurement of goods  and  services  by  the
    Procurement  and Supply Office.  In addition, there were
    no written procedures  to  ensure  that  small purchases
    were  reviewed by the Procurement and Supply  Office  to
    determine  whether  separate purchase requisitions could
    be consolidated. Also,  the Public School System had not
    established  adequate  written   procedures   to  ensure
    compliance with the "Procurement Rules and Regulations."
    As a result, the Public School System did not have  full
    assurance that the best prices were received on at least
    139 small purchases, totaling $523,589.

    Procurement Standards

    Section 3-101 of the "Procurement Rules and Regulations"
    requires  that  all contracts of more than $10,000 be
    awarded on the basis of  competitive sealed bids except
    for small purchases, sole source procurements, emergency
    procurements, and procurements of professional and
    architect-engineer services. According to Section 3-104,
    sole source procurements require that the official who has
    expenditure authority provide a written determination of
    "the  unique  capabilities  required  and  why  they are
    required  and  the  consideration  given  to alternative
    sources."   In  addition,  the  Procurement  and  Supply
    Officer  is  required to state in writing that there  is
    only one source  for  the  required  goods  or services.
    Additionally,   according  to  Section 3-105,  emergency
    procurements require  a  written  justification  by  the
    official  who has expenditure authority of the basis for
    the emergency  and  the  basis  for  the  selection of a
    particular  contractor.  The justification must  include
    the extent and  nature  of the harm to the Public School
    System, such as a threat  of  serious financial or other
    injury,  and  must be approved by  the  Procurement  and
    Supply Officer and the Commissioner of Education.

    Further, Section 3-103  of  the  "Procurement  Rules and
    Regulations" defines small purchases as those valued  at
    $10,000  or  less.   Purchases  under $2,500 may be made
    without  obtaining  bids  or  price  quotations  if  the
    Procurement and Supply Officer considers the price to be
    reasonable.   For small purchases valued  at  $2,500  to
    $10,000, written  price quotations must be obtained from
    at least three vendors,  and the selection must be based
    on  competitive price and quality.   Section 3-103  also
    states  that  procurement  requirements  should  not  be
    artificially   divided  so  as  to  constitute  a  small
    purchase.  Section 2-105  of  the "Procurement Rules and
    Regulations" states that if the  Procurement  and Supply
    Officer  determines  that a procurement requirement  has
    been split into smaller  requisitions for the purpose of
    avoiding bidding, the Officer  may  require the contract
    to be bid competitively.

    Small Purchases

    The Public School System split procurement requisitions,
    thereby avoiding the requirement that competitive sealed
    bidding should be used on large dollar procurements, and
    it  processed small purchases without obtaining the
    required number of written price  quotations. These
    conditions  occurred because the Public School System had
    not developed procurement plans to facilitate the
    competitive procurement of goods and services by the
    Procurement and Supply Office. In addition, there were no
    written procedures to ensure that small purchases were
    reviewed by the Procurement and Supply Office to
    determine whether separate purchase requisitions could be
    consolidated.   Also,  the Public School System had  not
    developed adequate written procedures to ensure that the
    "Procurement Rules and Regulations" were followed.  As a
    result,  the Public School  System  did  not  have  full
    assurance  that  the best prices were received for goods
    and services totaling  at  least  $523,589 during fiscal
    years 1995 through 1997.

    Based  on  our  review  of the purchase  order  logbooks
    maintained  by  the  Fiscal   and   Budget   Office,  we
    determined  that during fiscal years 1995 through  1997,
    the Public School  System  processed  7,271 purchases of
    less than $2,500, totaling $5.2 million; 4,768 purchases
    between $2,500 and $10,000, totaling $13.6  million; and
    203   purchases   of   more   than   $10,000,   totaling
    $15.9 million.    Of   these  procurement  actions,  the
    following were for Federal  programs: 3,263 purchases of
    less than $2,500, totaling $2.5 million; 2,634 purchases
    between $2,500 to $10,000, totaling  $6.0  million;  and
    123 purchases    of    more   than   $10,000,   totaling
    $11.9 million.   Of  the  Federally  funded  procurement
    actions,  we  judgmentally  selected   and  reviewed  62
    purchases  of  less  than $2,500, totaling  $96,780;  71
    purchases from $2,500 to $10,000, totaling $361,189; and
    6 purchases of more than $10,000, totaling $1.9 million.
    We did not identify any  exceptions  related  to the six
    purchases of more than $10,000 that were included in our
    sample.  However, we determined that 112 purchase orders
    of  $10,000 or less, totaling $335,354, had been  split,
    thereby  avoiding the requirement that competitive price
    quotations  or  sealed  bids  should  be obtained.  As a
    result,  for  these  112   purchase orders,  the  Public
    School  System  did  not have assurance  that  the  best
    prices were received.

    For  example,  on  November 9,   1995,   the   Research,
    Information,   and   Training   Officer  submitted  four
    internal requisitions--three for $4,521 each and one for
    $2,321--to purchase four copies of  a multiuser computer
    software  package from a local vendor.   In  January and
    February 1996,  four formal purchase orders, each in the
    amount of $3,971  and  totaling  $15,884, were issued to
    the  vendor  to acquire the software  package.   In  our
    opinion, since  the  total  amount  of  the  procurement
    exceeded  the  small purchase threshold of $10,000,  the
    requisitions should have been consolidated and processed
    using competitive procurement methods.

    We also found that  the  Public  School  System  did not
    obtain three written price quotations when it made small
    purchases   of   $2,500  to  $10,000.   We  judgmentally
    selected and reviewed  an additional 46 purchase orders,
    totaling $307,857, and found  that 1 purchase order, for
    $4,000,  was  correctly  processed   as  a  sole  source
    procurement  and  that  18  purchase  orders,   totaling
    $115,622, were processed with the required three written
    price quotations.  However, 15 purchase orders, totaling
    $107,305,  were  processed  with  only two written price
    quotations,  and 12 purchase orders,  totaling  $80,930,
    were processed  with  only  one written price quotation.
    In  addition,  for  the  12  purchase  orders  with  one
    quotation,  5 had no written justifications  to  support
    the  use  of   sole   source  or  emergency  procurement
    methods,   and   7 did   not   have   adequate   written
    justification  to  support  the   use   of  sole  source
    procurement methods.  As a result, for the  27  purchase
    orders, totaling $188,235, the Public School System  did
    not have assurance that the best prices were received.

    The  Procurement and Supply Officer told us that because
    the schools  and  administrative/program offices did not
    plan their procurements, they made many small purchases,
    which could have been  consolidated  and processed using
    competitive  procurement methods.  The  Procurement  and
    Supply Officer  also  said  that  there was no system in
    place  to detect and consolidate requisitions  for  like
    items and  that  she  did  not  have  adequate  staff to
    thoroughly   screen   the   large   number  of  purchase
    requisitions submitted to her office for processing.  In
    our opinion, if the Public School System  had  developed
    and  used annual procurement plans, the Procurement  and
    Supply  Office  would  have  had sufficient lead time to
    consolidate similar items,  process procurement requests
    competitively, and potentially lower costs.

    Recommendations

    We recommend that the Chairperson,  Board  of Education,
    direct the Commissioner of Education to:

    1.  Develop and submit to the Board for approval written
    procedures  for  preparing annual procurement  plans  to
    ensure  that  the  Procurement  and  Supply  Office  has
    sufficient lead time  to  process  purchase requisitions
    competitively.

    2.  Develop and submit to the Board for approval written
    procedures   to   ensure   that  purchase  requisitions,
    including   purchases   of   $10,000   and   less,   are
    consolidated to the maximum extent possible.

    3.   Enforce provisions of the  "Procurement  Rules  and
    Regulations"  that  prohibit  the artificial dividing of
    procurements   which  results  in  competitive   bidding
    requirements being  bypassed  and  require three written
    price  quotations  for  small  purchases  of  $2,500  to
    $10,000.

    Board  of  Education Response and  Office  of  Inspector
    General Reply

    The  Commissioner   of  Education's  November  9,  1998,
    response (Appendix 2)  to  the draft report on behalf of
    the Board of Education concurred  with Recommendations 1
    through 3.  Based on the response, we consider all three
    recommendations   resolved  but  not  implemented   (see
    Appendix 3).

    B. PROPERTY MANAGEMENT

    The Public School System did not adequately record,
    control,  and manage fixed assets acquired with Federal
    grant funds.  Specifically, the Public School System did
    not maintain accurate inventory records for reportable
    property and did not ensure that all controlled property
    was  eventually  recorded  in the property records.   In
    addition,  the Public School  System did not conduct the
    required physical inventories of  accountable  property,
    and  it  used  funds  provided  by  the  Federal Transit
    Administration to pay for school bus repairs that should
    have   been   covered   under  the  warranty  from   the
    seller/manufacturer.   Federal    property    management
    requirements  applicable  to  the Public School System's
    grant programs are contained in  Title 34 of the Code of
    Federal Regulations.   The deficiencies occurred because
    the Public School System did not have  adequate property
    control  procedures and property record cards,  did  not
    require the  seller/manufacturer of the buses to provide
    warranty service through a local representative, and did
    not  maintain  centralized   files   and  controls  over
    warranties.  As a result, the Public School  System  did
    not  have adequate control of accountable property of at
    least  $197,964  that  was purchased with Federal funds,
    and it unnecessarily spent  Federal  funds of $17,044 to
    repair buses.

    Property Management Standards

    Title 34 of the Code of Federal Regulations contains the
    standards for property management activities for equipment
    purchased with Federal grant funds. Section 80.32(d)(1) of
    the Code requires grantees to maintain records that
    include specific information on assets purchased with
    Federal funds, and Section 80.32(d)(2) requires grantees
    to conduct physical inventories at least every 2 years.
    Although   Section 1550   of  Commonwealth  Public   Law
    No. 6-10 (the Education Act  of 1988) requires the Board
    of Education to establish policies for proper management
    and  control  of  property,  including   equipment   and
    vehicles,   the   Board  had  not  established  adequate
    policies and procedures.

    Reportable Property

    The Public School System did not adequately control and
    account for reportable property purchased with Federal
    funds.  This condition occurred because the Public School
    System had not developed and implemented written
    procedures to ensure that reportable property was
    adequately controlled. As a result, the Public School
    System  was unable to locate 70 property items, valued at
    $197,964, and at least 82 property items of unknown value
    located at three schools were not recorded in the Public
    School System's reportable property records, which made
    these items vulnerable to loss or theft.

    As  disclosed in the single audit report for fiscal year
    1994,   the   Public   School  System  did  not  conduct
    inventories  or  value its  fixed  assets  and  did  not
    include a fixed assets  account  group  in its financial
    statements.  The former Fiscal and Budget  Officer  said
    that  the  Public School System planned to resolve these
    deficiencies  with  a new automated financial management
    system, which was scheduled to be implemented by October
    1, 1998.  The Procurement and Supply Officer stated that
    her office had maintained  a  database   for  controlled
    assets  on  a  "stand-alone" personal computer but  that
    this   system   had   malfunctioned   in   April   1997.
    Consequently, for  almost  1 year,  the  control  system
    consisted  of  only  a manually maintained property card
    file.   As  an  interim solution,  the  Procurement  and
    Supply Office created  a  new  computer database file in
    March  1998   from  information shown  on  the  property
    record  cards.  However,  the  database  was  incomplete
    because the  property  record  card form did not include
    all   of   the   data  elements  required   by   Federal
    regulations, such  as  the  source  of the property, the
    grant  award  number, the determination  as  to  whether
    title vests in  the  Public School System or the Federal
    Government, and the percentage  of Federal participation
    in the cost of the property.  In addition, we determined
    that since its inception in October  1988,   the  Public
    School  System  had  not  taken a physical inventory and
    reconciled the results with  the  property  record  card
    file.   Furthermore,  since  the  requesting  school and
    administrative  officials were allowed to receive  goods
    directly from local vendors, there was no assurance that
    equipment was eventually recorded on the property record
    cards or tagged as property of the Public School System.
    Because of the incompleteness  of  the  property  record
    cards,  we  could  not  determine  the  total  value  of
    Federally   funded   property.    Additionally,  because
    equipment was delivered to the individuals who initiated
    the  purchases,  there was insufficient  segregation  of
    responsibilities to  ensure that the items were properly
    controlled and used for  official  purposes.  We believe
    that   vendors   should  be  required  to  deliver   all
    accountable  property  to  the  Procurement  and  Supply
    Office central  warehouse  for  receiving,  tagging, and
    delivery to the requesting official.

    We obtained, from the Procurement and Supply  Office,  a
    listing  of the property record database as of March 20,
    1998.  From  this list, we selected 160  property items,
    valued at $431,473,  for  physical  inspection at a high
    school  on  Saipan  and  at  elementary schools  on  the
    islands of Tinian and Rota.  Of  the 160 property items,
    the schools were unable to locate 70 items (44 percent),
    valued  at  $197,964.   In addition,  the  schools  were
    unable to provide survey or missing property reports for
    the 70  missing items.  At  the  schools,  we also found
    82 property items, consisting of computer,  audiovisual,
    and shop equipment, that were not recorded in the Public
    School  System's  reportable  property  records.   As  a
    result, these sensitive items were vulnerable to loss or
    theft.

    Bus Repairs

    On December 27, 1995, the Public School System awarded,
    to a bus manufacturer in North  Carolina, a contract to
    purchase 12 new school buses. The school buses were
    purchased with funds provided by the Federal Transit
    Administration. The bid specifications required the
    manufacturer to provide a 60-month, 100,000 mile warranty,
    which was shown in the manufacturer's  bid submission.
    However, between August 1996 and May 1997, the Public
    School  System  spent Federal Transit Administration
    funds  of  $17,044  to repair the  air  conditioning on
    the buses, although the repairs should have  been  covered
    by the manufacturer's warranty.

    Based on our review of contract files at the Procurement
    and Supply Office, we found that the manufacturer of the
    new buses had not designated  a  local  repair  shop  to
    handle  warranty  repairs  and  that  the  Public School
    System  administration had not required the manufacturer
    to provide the name of a local representative to provide
    service under  the  warranty.   Also,  we found that the
    Public School System did not have control  records and a
    central file for warranties.

    The  Public  School System's chief mechanic stated  that
    although he had  not seen the warranty documents for the
    new buses and his  shop  did not file warranty documents
    for any of the Public School  System's  vehicles, he did
    have  the  warranty  manual  from  the  factory,   which
    provided  instructions  on  how  to  process  claims for
    warranty repair service.  In addition, the former Fiscal
    and  Budget  Officer  stated that her office planned  to
    submit the invoices and  payment  documents  to  the bus
    manufacturer  for  reimbursement  of  repair costs under
    warranty.    However,   as   of   March  1998,  warranty
    reimbursement had not been requested  or received by the
    Public School System.

    Recommendations

    We recommend that the Chairperson, Board of Education,
    direct the Commissioner of Education to:

    1.  Develop and submit to the Board for approval written
    procedures  for performing biennial physical inventories
    of accountable property acquired with Federal funds.

    2.  Immediately conduct a complete physical inventory of
    accountable property,  compare  results with information
    on  existing  property  records,  and   investigate  and
    resolve  any  discrepancies  found  during the  physical
    inventory.

    3.  Revise the format of the property  record  card form
    to  include  all  the  information  required  by Federal
    regulations, such as the source of the property  and the
    grant  award  number,  the  determination  as to whether
    title  vests in the Public School System or the  Federal
    Government,  and the percentage of Federal participation
    in the cost of the property.

    4.   Establish  and  maintain  a  general  fixed  assets
    account  group in the new financial management system to
    ensure that  property  purchased  with  Federal funds is
    controlled.

    5.  Develop and submit to the Board for approval written
    procedures to require vendors to deliver all accountable
    property directly to the Procurement and  Supply  Office
    central  warehouse  for receiving, tagging, and delivery
    to the requesting official.

    6.   Require the seller/manufacturer  of  the  buses  to
    provide  warranty  service through an arrangement with a
    local representative  and  seek  reimbursement  from the
    seller/manufacturer for the cost of repairing the  buses
    during the warranty period.

    7.  Develop and submit to the Board for approval written
    procedures   to  ensure  that  a  centralized  file  for
    warranties is maintained and that warranties are used to
    make any necessary repairs.

    Board of Education  Response  and  Office  of  Inspector
    General Reply

    The   Commissioner  of  Education's  November  9,  1998,
    response  (Appendix  2) to the draft report on behalf of
    the Board of Education concurred with Recommendations 1,
    2,  3,  4,  5,  and  7.   The   Board   also   indicated
    disagreement with the portion of the finding related  to
    Recommendation  6.   Based  on the response, we consider
    Recommendations 1, 2, 3, 4, 5,  and  7  resolved but not
    implemented   and  request  that  the  Board  reconsider
    Recommendation 6, which is unresolved (see Appendix 3).

    Recommendation 6.  Nonconcurrence indicated.

    Board  of  Education   Response.   The  Board  indicated
    disagreement  with  the  section   of  the  report  "Bus
    Repairs"  and  requested that this section  be  deleted.
    The  Board  stated  that  "because  of  a  dispute  over
    billings   between   the   manufacturer   of   the   air
    conditioning  units and the firm doing the retrofits and
    service,"  the  Public   School   System  paid  for  the
    retrofits and service on the buses and was reimbursed by
    the  seller/manufacturer  of  the  buses   for  services
    covered  under warranty.  In addition, the Board  stated
    that it "must  take issue" with the $17,044 amount cited
    in our report and  that  the  amount  should  be  $9,971
    because  the difference was related to nonwarranty items
    such as oil  filters.  The Board further stated that the
    Public School System expects "to receive a reimbursement
    shortly" from the seller/manufacturer of the buses.

    Office of Inspector  General  Reply.   As  stated in our
    report,  the  Fiscal  and  Budget Officer told us  that,
    although planned, warranty reimbursement  had  not  been
    requested by the Public School System as of the time  of
    our  audit (March 1998).  Although the Board states that
    the  Public   School  System  "was  reimbursed"  by  the
    seller/manufacturer of the buses "for work covered under
    the warranty," the reply to Recommendation 6 states that
    the  Board  has  "requested   reimbursement"   from  the
    seller/manufacturer.    In  regard  to  the  amount,  we
    obtained copies of paid invoices  totaling  $17,044  for
    air   conditioning  repairs  during  the  audit.   These
    invoices  did not include any regular maintenance items,
    such  as  oil  filters,  which  are  not  covered  under
    warranty.   In  our  opinion,  the  dispute  between the
    manufacturer of the air conditioning units and  the firm
    doing the retrofits and service on the buses could  have
    been  avoided  had  the seller/manufacturer of the buses
    appointed  a  local representative  to  handle  warranty
    services on the  buses.   The recommendation is intended
    to reduce the likelihood of  similar  disputes  for  any
    future warranty service that may become necessary on the
    buses.   Therefore,  the Board of Education is requested
    to reconsider its response to the recommendation.


                                                  APPENDIX 1


         CLASSIFICATION OF MONETARY AMOUNTS


     --------------------------------------------------------
                                             Funds To Be Put
                    Finding                   To Better Use*
     Areas
     --------------------------------------------------------
         A.  Procurement Activities                  $523,589

               Small Purchases

                                                     197,964
         B.  Property                                 17,044
     Management
               Reportable                           $738,597
     Property
               Bus Repairs

                     Total
    --------------------------------------------------------
    --------------------------------------------------------
    --------------------------------------------------------


__________
     *Amounts represent Federal funds.
                                                  APPENDIX 2
                                                 Page 1 of 4


                  RESPONSE TO DRAFT REPORT

                                                  APPENDIX 3
                                                 Page 1 of 2

        STATUS OF AUDIT REPORT RECOMMENDATIONS

-----------------------------------------------------------
Finding/Recommendation
                                                    Action
Reference            Status     Required


  A.1 and A.3      Resolved;  No further response to the
                   not        Office of Inspector General
                   implemented.is required.  The
                              recommendations will be
                              referred to the Assistant
                              Secretary for Policy,
                              Management and Budget for
                              tracking of implementation.
                              However, when approved, a
                              copy of the written
      A.2                     procedures should be
                   Resolved;  provided to our Pacific
                   not        Office.
                   implemented.
                              No further response to the
                              Office of Inspector General
                              is required.  The
 B.1, B.5, and B.7              recommendation will be
                              referred to the Assistant
                   Resolved;  Secretary for Policy,
                   not        Management and Budget for
                   implemented.tracking of implementation.

                              No further response to the
                              Office of Inspector General
                              is required.  The
                              recommendations will be
      B.2                     referred to the Assistant
                              Secretary for Policy,
                              Management and Budget for
                   Resolved;  tracking of implementation.
                   not        However, when approved, a
                   implemented.copy of the written
                              procedures should be
                              provided to our Pacific
                              Office.

                              No further response to the
                              Office of Inspector General
                              is required.  The
                              recommendation will be
                              referred to the Assistant
                              Secretary for Policy,
                              Management and Budget for
                              tracking of implementation.
                              However, when completed, a
                              copy of the inventory
                              reconciliation report should
                              be provided to our Pacific
                              Office.

-----------------------------------------------------------


                                                  APPENDIX 3
                                                 Page 2 of 2

-----------------------------------------------------------
Finding/Recommendation
                                                    Action
Reference            Status     Required


      B.3          Resolved;  No further response to the
                   not        Office of Inspector General
                   implemented.is required.  The
                              recommendation will be
                              referred to the Assistant
                              Secretary for Policy,
                              Management and Budget for
                              tracking of
                              implementation.  However,
                              when revised, a copy of the
      B.4                     new property record card
                   Resolved;  form should be provided to
                   not        our Pacific Office.
                   implemented.
                              No further response to the
                              Office of Inspector General
                              is required.  The
                              recommendation will be
                              referred to the Assistant
                              Secretary for Policy,
                              Management and Budget for
      B.6                     tracking of implementation.
                              However, when established, a
                   Unresolved.copy of the system
                              procedures for the general
                              fixed assets account group
                              should be provided to our
                              Pacific Office.

                              Reconsider the
                              recommendation.  If
                              concurrence is indicated,
                              provide the target date and
                              the title of the official
                              responsible for requiring
                              the seller/manufacturer of
                              the buses to designate a
                              local representative to
                              provide any future warranty
                              service and for ensuring
                              that reimbursement is
                              received from the
                              seller/manufacturer  for the
                              cost of repairing the buses
                              during the warranty period.
                              If nonconcurrence is
                              indicated, provide reasons
                              for the nonconcurrence.
-----------------------------------------------------------
-----------------------------------------------------------






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