[Audit Report on Selected Federal Grant  Programs, Department of Education, Government  of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-956

Title: Audit Report on Selected Federal Grant  Programs, Department
       of Education, Government  of the Virgin Islands



Date:  September 30, 1999




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




                                               V-IN-VIS-002-99-M
AUDIT REPORT



SELECTED FEDERAL GRANT PROGRAMS,
DEPARTMENT OF EDUCATION,
GOVERNMENT OF THE VIRGIN ISLANDS

REPORT NO. 99-I-956

SEPTEMBER 1999




Honorable Charles W. Turnbull
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802

Subject: Audit Report on Selected Federal Grant 
         Programs, Department of Education, Government 
         of the Virgin Islands (No. 99-i-956)

Dear Governor Turnbull:

This report presents the results of our review of the management
of selected Federal grant programs at the Virgin Islands
Department of Education. The objective of the audit was to
determine whether (1) the Department complied with grant terms
and applicable laws and regulations; (2) charges made against
grant funds were reasonable, allowable, and allocable pursuant to
the grant agreement provisions; (3) funds received through
electronic transfers were appropriately deposited to and
accounted for in the Government's Financial Management System;
and (4) drawdowns were made in accordance with the Cash
Management Improvement Act of 1990. The scope of the audit
included Education Consolidated Grant transactions and School
Lunch Program warehouse activities that occurred during fiscal
years 1997 and 1998.

Based on our audit, we concluded that the Department of Education
generally expended grant funds for purposes that were allowable
under the grants. However, the Department did not effectively
carry out some of the administrative functions related to the
Consolidated Grant and the School Lunch Program.  Specifically,
we found that:

- The Department did not (1) ensure that personal services costs
were properly supported and were charged to the correct accounts
and (2) prepare and submit accurate grant financial reports
within the required time frames. As a result, we took exception
to payroll charges of $61,800 and classified as unsupported
additional payroll charges of $8,340. Additionally, the
Department was at risk of losing Federal grant funds because it
had not complied with grant program requirements, particularly as
they related to the Special Education program.

- The Department did not (1) effectively expend Consolidated
Grant funds when making purchases and (2) have adequate control
over equipment purchased with Federal funds.  As a result, there
was little assurance that the Department received the best prices
for goods and services totaling $2.1 million in fiscal year 1997
and $4.1 million in fiscal year 1998 that were purchased
noncompetitively.  Also, equipment costing at least $1 million
was not adequately safeguarded and was therefore subject to loss,
damage, or theft.

- The Department did not ensure that the School Lunch Program
warehouses had adequate controls over food and other commodities
that included (1) accurately recording incoming shipments and
distributions of items, (2) accurately and continuously updating
perpetual inventory records, (3)  periodically performing
physical inventories of items on hand, (4) reconciling the
results of the physical inventories to the inventory records, (5)
submitting required inventory reports within established time
frames, and (6) ensuring adequate separation of duties among
warehouse personnel.  As a result, food and other commodities of
undeterminable value were subject to loss, pilferage, and
spoilage.

We made 11 recommendations to you, as the Governor of the Virgin
Islands, to address the deficiencies identified by the audit.
However although a response was due by September 3, 1999, we had
not received a response to that draft as of September 22, 1999.
Therefore, the report is being issued without the benefits of
your comments, and the 11 recommendations are unresolved (see
Appendix 2).

Section 5(a) of the Inspector General Act (Public Law 95-452, as
amended) requires the Office of Inspector General to list this
report in its semiannual report to the Congress.  Therefore,
please provide a response to this report by November 12, 1999.
The response should be addressed to our Caribbean Office, Federal
Building - Room 207, Charlotte Amalie, Virgin Islands 00802.  The
response should provide the information requested in Appendix 2.

We appreciate the assistance provided by Department of Education
personnel during the conduct of our audit.

                                         Sincerely,


                                         Earl E. Devaney
                                         Inspector General



CONTENTS


Page

INTRODUCTION.......................................  1  

BACKGROUND..........................................  1  
OBJECTIVE AND SCOPE.................................. 1  
PRIOR AUDIT COVERAGE................................. 2  

FINDINGS AND RECOMMENDATIONS......................... 4  

A.  GRANT MANAGEMENT................................. 4  
B.  PROCUREMENT AND PROPERTY MANAGEMENT..............10  
C.  SCHOOL LUNCH WAREHOUSE OPERATIONS................15  

OTHER MATTERS........................................19  

APPENDICES

1.  CLASSIFICATION OF MONETARY AMOUNTS...............20  
2.  STATUS OF AUDIT REPORT RECOMMENDATIONS...........21  
INTRODUCTION


BACKGROUND

The Virgin Islands Department of Education is responsible for
administering and operating all public elementary and secondary
schools; vocational, adult, and special education programs; and
support services such as curriculum centers and libraries for
both public and nonpublic schools.  The Department received
annual Consolidated Grant awards from the U.S. Department of
Education under authority of the Elementary and Secondary
Education Act of 1965.  The Consolidated Grant permits the
consolidation of two or more authorized programs under one
application to provide for simplified reporting procedures and
flexibility in allocating funds to meet educational needs.  The
Virgin Islands Department of Education managed 29 individual
programs under the Consolidated Grant, and grant funds were
distributed between the districts of St. Thomas/St. John and St.
Croix.

Funds provided through the Consolidated Grant awards were
available for overlapping 2-year periods.  Accordingly, in fiscal
year 1997, the Department received $17.2 million for the period
of October 1, 1996, to September 30, 1998, and in fiscal year
1998, the Department received $19.7 million for the period of
October 1, 1997, to September 30, 1999.  As of November 5, 1998,
drawdowns totaled $15.1 million from the fiscal year 1997 award
and $11 million from the fiscal year 1998 award.

The Virgin Islands Department of Education also participated in
the National School Lunch Program, which is funded by the U.S.
Department of Agriculture.  The Virgin Islands Department of
Education received $5.4 million in fiscal year 1997 and $6.1
million in fiscal year 1998 for School Lunch Program operations.

OBJECTIVE AND SCOPE

The objective of the audit was to determine whether (1) the
Virgin Islands Department of Education complied with grant terms
and applicable laws and regulations; (2) charges made against
grant funds were reasonable, allowable, and allocable pursuant to
the grant agreement provisions; (3) funds received through
electronic transfers were appropriately deposited to and
accounted for in the Government's Financial Management System;
and (4) drawdowns were made in accordance with the Cash
Management Improvement Act of 1990.  

The scope of the audit included a review of Education
Consolidated Grant and School Lunch Program warehouse activities
that occurred during fiscal years 1997 and 1998.  The audit was
conducted at the offices of the Department of Education and the
Department of Finance and at the School Lunch Program warehouses
on St. Thomas and St. Croix.

Our review 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 our audit, we evaluated the internal controls over
grant management, personnel costs, procurement, property
management, and School Lunch Program warehouse operations to the
extent that we considered necessary to achieve the audit
objective.  Internal control weaknesses were identified in the
areas of personnel costs, financial accounting and reporting,
procurement, property management, and School Lunch warehouse
operations.  These weaknesses are discussed in the Findings and
Recommendations section of this report.  Our recommendations, if
implemented, should improve the internal controls in these areas.
Internal control weaknesses related to the drawdown process at
the Department of Finance will be addressed in a separate audit
report.

PRIOR AUDIT COVERAGE

The Office of Inspector General has not conducted any audits of
the Consolidated Grant during the past 5 years.  However, four
reports on related topics have been issued as follows:

- In September 1998, the Office of Inspector General issued the
audit report "Interfund Loans and Federal Grant Balances,
Government of the Virgin Islands" (No. 98-I-670).  The report
stated that complete, current, and reliable information on the
balances of Federal grants awarded to the Government was not
readily available and that the Government had not taken adequate
actions to correct long-standing financial management problems
that had an adverse impact on its financial condition.  Federal
grant management within the Virgin Islands Department of
Education was included in the scope of that audit, and we found,
during our current review, that the reported conditions relating
to the untimely submission of grant financial reports, the
untimely liquidation of encumbrances, and the untimely processing
of requisitions still existed.

- In December 1996, an independent public accounting firm
completed the single audit of the Government of the Virgin
Islands for fiscal year 1994.  The report stated that for two of
the Virgin Islands Department of Education's major grant
programs, the Department (1) prepared the Federal Financial
Reports and Claims for Advances and Reimbursements based on
information contained in internal accounting records rather than
in the Government's centralized Financial Management System, (2)
did not reconcile its internal accounting records to the
Financial Management System, and (3) did not comply with the
requirement for monitoring subrecipients.  The single audit
report included 14 findings and questioned costs totaling
$272,034 that were specifically related to Department of
Education grants.  The findings relating to property management,
financial reporting, and supporting documentation for payroll and
procurement transactions were similar to the findings discussed
in this report.

- In September 1995, the Office of Inspector General issued the
audit report "School Lunch Program, Department of Education,
Government of the Virgin Islands" (No. 95-I-1258).  The report
stated that improvements were needed in the administration of the
School Lunch Program and in the level of control over inventories
of food and other commodities.  Specifically, reimbursement
claims for meals served to students were not always complete,
accurate, or timely, and food and other commodities in School
Lunch Program warehouses were subject to loss and theft because
perpetual inventory records were incomplete and inaccurate and
physical inventories were not conducted of all items in stock.
Additionally, large quantities of food items spoiled because of
malfunctioning refrigeration equipment, and items could not be
distributed efficiently to individual schools because of the lack
of adequate transportation.  We found, during our current audit,
that the conditions related to warehouse operations still
existed.

- In February 1991, the Office of Inspector General issued the
audit report "Consolidated Grant Program, Department of
Education, Government of the Virgin Islands" (No. 91-E-389).  The
report stated that payroll costs of $127,400 were questioned for
individuals who did not perform duties directly related to the
Consolidated Grant programs and that a duplicate payment of
$2,200 to a vendor was also questioned.  The report also stated
that there was a possible conflict of interest involving a
payment of $800 to a Virgin Islands Government employee for the
removal of asbestos from schools.  In addition, the report stated
that the procedures for preparing drawdown requests, monitoring
program activities, and coordinating overall grant management
needed to be strengthened.  We considered three of the report's
eight recommendations unresolved and five recommendations
resolved and implemented.  Based on our current audit, we found
that the deficiencies related to overall grant management still
existed.

FINDINGS AND RECOMMENDATIONS

A.  GRANT MANAGEMENT

The Virgin Islands Department of Education did not ensure that
personal services costs were properly supported and were charged
to the correct accounts and did not prepare and submit accurate
grant financial reports within the required time frames.  U.S.
Office of Management and Budget Circular A-87, "Cost Principles
for State, Local, and Indian Tribal Governments," contains the
standards for the allowability of grant costs, and the Code of
Federal Regulations (34 CFR 80), "Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and
Local Governments," contains the administrative requirements for
grant programs.  However, the Department did not (1) establish
procedures to verify that correct account codes for employees'
payroll costs were entered into the Financial Management System,
(2) ensure that personnel files were complete and accurate, and
(3) enforce compliance with the financial reporting requirements
for the Consolidated Grant.  As a result, we questioned costs of
$ 70,140: cost exceptions of $61,800 for payroll charges and
unsupported costs of $8,340 for additional payroll charges (see
Appendix 1).  In addition, the Department was at risk of losing
future Federal funding because of noncompliance with grant
program requirements.

Personal Services Costs

Circular A-87, Attachment B, paragraph 11(h)(1), states, "Charges
to Federal awards for salaries and wages, whether treated as
direct or indirect costs, will be based on payrolls documented in
accordance with generally accepted practice of the governmental
unit and approved by a responsible official(s) of the
governmental unit."  Circular A-87 also requires that the payroll
costs for employees who are expected to work for only one
activity be supported at least by semiannual certifications that
the employees' work activities are for the specific program.
When employees are expected to work for more than one activity,
detailed personnel activity reports or other time distribution
records are required to be maintained to record the number of
hours worked by the employees on each activity, and those records
are required to be used to distribute the related payroll costs
among the various activities.  To determine the extent of
compliance with Circular A-87, we reviewed the payroll documents
for a sample of 10 pay periods from fiscal years 1997 and 1998,
which had salaries and fringe benefits totaling $2.7 million.
Based on our review, we took exception to payroll costs of
$61,800 and classified costs of $8,100 as unsupported for the 10
pay periods reviewed as follows:

- We took exception to payroll costs of $37,200 for 22
Consolidated Grant employees whose salaries were incorrectly
charged to account codes for work that was not for the
Consolidated Grant.  Under established procedures, Notices of
Personnel Action are prepared and the appropriate information is
entered into the centralized payroll system by the Division of
Personnel.  The Department of Education then receives preprinted
biweekly Time and Attendance Records for the preparation of
payroll for submission to the Department of Finance for
processing and payment.  Department of Education officials told
us that Division of Personnel employees may have inadvertently
entered the incorrect account codes but that the Department of
Education's Payroll Office had not detected the incorrect codes.

- We took exception to payroll costs of $24,600 for five
employees who did not work directly for Consolidated Grant
programs.  Three employees were paid $3,700 from Consolidated
Grant funds, although they worked for the School Lunch Program.
One employee was paid $13,700 from Consolidated Grant funds,
although the individual worked for a separate Education grant,
and one employee was paid $7,200 from Consolidated Grant funds,
although the employee worked for General Fund activities.  We
brought the $7,200 error to the attention of Department of
Education officials, who notified the Department's Payroll Office
to make the necessary corrections.  

At the July 28, 1999, exit conference on the preliminary draft of
this report, the Department's payroll officer stated that the
correction had been made.

- We classified as unsupported payroll costs of $8,100, which
represented unreconciled variances between the Time and
Attendance Reports submitted by the Department's Payroll Office
for processing and the Payroll Registers that documented the
payrolls.  We initially identified 85 variances, totaling 1,497.5
hours, but Department of Education officials were able to explain
77 of the variances.  The remaining eight variances accounted for
95 hours and payroll costs of $8,100.

The Department of Education should process the necessary
documents to correct the erroneous payroll charges we identified.
In addition, we believe that the Department of Education should
establish written procedures to require the initial salaries and
subsequent salary changes for all Consolidated Grant employees to
be verified between the Notices of Personnel Action and the first
payroll register on which the new or revised salary appears.  For
subsequent pay periods, the current payroll totals should be
compared with the totals on the prior payroll register to
identify variances for more detailed followup review.

At the July 28, 1999, exit conference on the preliminary draft of
this report, Department of Education officials said that although
they reviewed payroll records to identify incorrect account codes
or salaries for new employees, they may not have always followed
through to request that the Division of Personnel make the
necessary corrections to the master payroll file in the
Government's Financial Management System.  They also stated that
when they submit adjustments to the Department of Finance to have
payroll errors corrected, the Department of Finance does not
always enter the adjustments into the Financial Management System
in a timely manner.

Personnel Files.  As an additional test of the accuracy of
personal services costs charged to the Consolidated Grant, we
attempted to review the personnel files for a judgmental sample
of 56 employees.  We found that the personnel files were not
adequately maintained.  The Department's Personnel and Labor
Relations Office could not verify that 11 individuals listed in
the Time and Attendance Records but not on personnel listings of
the Consolidated Grant program worked at the Department of
Education.  Initially, St. Thomas officials told us that 7 of the
11 personnel files were located at the Department's St. Croix
office.  However, that office also did not have the missing
personnel files.  Although only 1 of the 11 individuals incurred
payroll costs totaling $240, Department employees could not
explain how the 11 individuals' names were included on the
preprinted Time and Attendance Records without supporting
personnel files.  Therefore, we classified the $240 as
unsupported.

We also found that 18 of the 56 employees in our sample were
listed more than once on the personnel listing for the
Consolidated Grant.  Department of Education officials said that
these 18 employees had dual employment status, in that they
worked for more than one program activity.  However, there were
no Notices of Personnel Action on file to document the dual
employment status of 5 of the 18 individuals.  The dual
employment status for the other 13 employees was satisfactorily
documented.

We believe that the Department should require its Personnel and
Labor Relations Office to review the personnel files for all
Consolidated Grant employees and take actions to ensure that all
appropriate Notices of Personnel Action are prepared and placed
in the files.  In addition, the Department should establish
written procedures to require that the personnel files are
promptly updated with copies of Notices of Personnel Action and
other supporting documents for all future personnel actions
involving Consolidated Grant employees.

At the July 28, 1999, exit conference on the preliminary draft of
this report, the Department's personnel officer stated that her
office was reviewing and updating the personnel files for all
Department of Education employees.

Grant Compliance Issues

The Code of Federal Regulations (34 CFR 80.20(a)) requires that
fiscal controls and accountability procedures of entities that
receive Education grants be sufficient to permit the following:

(1). . . preparation of reports required by this part [of the
Code] and the statutes authorizing the grant, and
(2). . . the tracing of funds to a level of expenditures adequate
to establish that such funds have not been used in violation of
the restrictions and prohibitions of applicable statutes.


However, the Virgin Islands Department of Education did not
always comply with these requirements.  Specifically, the
Department's internal financial management system did not provide
accounting records that were supported by source documents.
During our review, we requested the supporting documents used to
prepare the Financial Status Reports for fiscal years 1997 and
1998.  We found that the appropriations, obligations, and
unobligated balances on the Department's Internal Balances Report
for fiscal year 1997 did not match the amounts shown on the
Department's Financial Status Report that was submitted to the
U.S. Department of Education for the same fiscal year.  Further,
the Department did not provide us  the supporting documents for
the Financial Status Report for fiscal year 1998.  Additionally,
although we selected 45 vendor files for our review of
procurement activities (see Finding B), the Department was unable
to provide 19 of those vendors' files, which would have contained
supporting documents for purchases from those 19 vendors.

We also found that the Department did not submit the Financial
Status Report for fiscal year 1998 to the grantor agency.  The
Code of Federal Regulations (34 CFR 80.41(b)) requires that
grantees submit an annual report on the status of funds (the
Financial Status Report) for all nonconstruction projects within
90 days after the grant year.  Although the Department's
Financial Status Report for the Consolidated Grant for fiscal
year 1998 was signed by the Commissioner of Education and dated
December 18, 1998, an official of the U.S. Department of
Education told us, on May 19, 1999, that the report had not been
received.  An official of the Virgin Islands Department of
Education subsequently confirmed that the Financial Status Report
for fiscal year 1998 had not been submitted to the U.S.
Department of Education.

We further noted that programs which received funding under Title
VI of the Elementary and Secondary Education Act were not in
compliance with the terms of the Consolidated Grant applicable to
Title VI programs.  Specifically, education agencies receiving
Title VI funds are required to monitor all programs receiving
such funds.  In the Virgin Islands, Title VI funds were monitored
by the Department of Education's Planning, Research, and
Evaluation Office, which issued compliance alerts[1] as follows:

- In February 1999, the Planning, Research, and Evaluation Office
wrote to the Administrative Assistant stating that future Federal
funds were being withheld from the Special Education Program
until compliance issues were satisfactorily addressed.  We
determined from our review of expenditure records that about 4
months earlier (September 27, 1998, to October 1, 1998), the
Special Education Program held a State Plan Retreat Forum on St.
John at a cost of $39,500 (see Appendix 1), excluding the salary
costs of participants, to develop a plan for the Special
Education Program.  In our opinion, these funds could have been
used in correcting the compliance deficiencies that put the
Program at risk of losing Federal funds.  In early 1999, the
Special Education Program was the subject of 16 lawsuits brought
against the program by parents of children with special needs.
Also, a notice was published in the May 10, 1999, edition of a
local newspaper to announce that public hearings had been
scheduled to discuss whether the U.S. Department of Education
should enter into a compliance agreement with the Virgin Islands
Department of Education for continued funding under Part B of the
Individuals with Disabilities Education Act while the Virgin
Islands Department of Education worked to achieve compliance with
the requirements of that statute.  Under the compliance
agreement, the U.S. Department of Education could impose strict
conditions on the Virgin Islands Department of Education as a
prerequisite for receiving additional Federal funds.  In July
1999, U.S. Department of Education Special Education Program
officials told us that they had made on-site visits to Special
Education classrooms in the Virgin Islands and had found the
conditions for children with special needs to be of such "poor
quality" that they had recommended the immediate execution of the
proposed compliance agreement.

- In February 1999, the Planning, Research, and Evaluation Office
issued a compliance alert to the Commissioner of Education
addressing the problem of the untimely receipt of materials and
equipment needed for the Vocational Education Program.

- In January 1999, the Planning, Research, and Evaluation Office
issued a compliance alert to the Acting Commissioner of Education
to address delays in initiating the Marine and Aviation Programs.

We believe that the Virgin Islands Department of Education should
ensure that it has grant management procedures in place to ensure
that (1) source documents are prepared and maintained to support
that costs charged against Consolidated Grant funds are
allowable, (2) Financial Status Reports are submitted within
required time frames and are reconciled to the official
accounting records, and (3) compliance deficiencies reported by
the Department's Planning, Research, and Evaluation Office are
corrected by the appropriate program officials.

Recommendations

We recommend that the Governor of the Virgin Islands direct the
Commissioner of Education to:

1. Process the necessary documents to correct the erroneous
payroll charges totaling $70,140 that were identified by our
review and provide copies of all related supporting documents to
grant program officials of the U.S. Department of Education.

2. Establish and implement procedures to require that the initial
salaries and subsequent salary changes for all Consolidated Grant
employees be verified between the Notices of Personnel Action and
the first payroll register on which the new or revised salary
appears and that the current payroll totals be compared with the
totals of the prior payroll register for subsequent pay periods
to identify variances between the two pay periods that require
more detailed followup review.

3. Require the Personnel and Labor Relations Office of the
Department of Education to review the personnel files for all
Consolidated Grant employees and take actions to ensure that all
appropriate Notices of Personnel Actions are prepared and placed
in the files.

4. Establish and implement procedures which require that the
personnel files be promptly updated with copies of Notices of
Personnel Action and other supporting documents for all future
personnel actions involving Consolidated Grant employees.

5. Establish and implement grant management procedures which
ensure that source documents are prepared and maintained to
support that costs charged against Consolidated Grant funds are
allowable; required Financial Status Reports are submitted within
required time frames and are reconciled to the official
accounting records; and compliance deficiencies reported by the
Department's Planning, Research, and Evaluation Office are
corrected by the appropriate program officials.

Governor of the Virgin Islands Response and Office of Inspector
General Reply

The Governor of the Virgin Islands did not provide a response to
the report.  Therefore, the recommendations are unresolved (see
Appendix 2).

**FOOTNOTES**

[1]:A "compliance alert" is a notice that a grant compliance
problem exists.
B.  PROCUREMENT AND PROPERTY MANAGEMENT

The Virgin Islands Department of Education did not effectively
expend Consolidated Grant funds when making purchases and did not
have adequate controls over equipment purchased with Federal
funds.  Specifically, (1) purchases were made on the open market
without the benefit of competition, consolidated orders, or
formal purchase contracts and (2) the receipt of purchased items
was not centralized, equipment was not adequately safeguarded,
and disposals of equipment were not adequately documented.  Title
31, Chapter 23, of the Virgin Islands Code and the Virgin Islands
Rules and Regulations contain the procurement requirements for
the Government of the Virgin Islands, and the Code of Federal
Regulations (34 CFR 80, "Uniform Administrative Requirements for
Grants and Cooperative Agreements to State and Local
Governments") contains the administrative requirements related to
procurement and property management for grant programs.  However,
the Department did not comply with the required procurement
regulations and did not establish adequate procedures for the
control of equipment.  As a result, there was little assurance
that the Department received the best prices for goods and
services totaling $2.1 million in fiscal year 1997 and $4.1
million in fiscal year 1998 that were purchased noncompetitively,
and equipment costing at least $1 million was not adequately
safeguarded and therefore was subject to loss, damage, or theft.

Procurement Activities

The Code of Federal Regulations (34 CFR 80.36(a)) states, "When
procuring property and services under a grant, a State will
follow the same policies and procedures it uses for procurements
from its non-Federal funds."  Title 31, Chapter 23, of the Virgin
Islands Code and the Virgin Islands Rules and Regulations require
that all purchases be made on a competitive basis to the maximum
extent practicable.  However, the Department routinely made
purchases without competition and did not consolidate purchases
from the same vendors.

The established procurement process begins when a school requests
the necessary items from the District Superintendent's Office.
The District Superintendent's Office prepares the purchase
order/requisition and submits it to the Department's Property and
Procurement Auxiliary Services Office for review of compliance
with the procurement requirements and then forwards it to the
Department's Business Office for verification of the availability
of funds.  The purchase order/requisition is then forwarded for
additional processing by the Department of Property and
Procurement, the Department of Finance, and the Department of
Education's Business Office.  The purchase order/requisition is
returned to the Department of Education's Property and
Procurement Auxiliary Services Office for mailing to the vendor.
In our opinion, the procurement process within the Department of
Education was unnecessarily complex and cumbersome, which
resulted in orders taking an average of 5 months (and as long as
13 months) to be filled.  A Department of Education official
agreed with our assessment, stating that the procurement process
was "too drawn out" and that funds sometimes expired before
ordered items were received. 

We reviewed a judgmental sample of 97 purchase orders for
equipment, totaling $959,060, that were processed during fiscal
years 1997 and 1998 for public schools on St. Thomas and St.
Croix.  We found that the schools contacted vendors directly and
made purchases without the benefit of competition or formal
purchase contracts.  We also found that the Department of
Education made multiple purchases of equipment from the same
vendor within a 30-day period, although Title 31, Section
239(a)(3), of the Virgin Islands Code states that "no more than
one such purchase of the same supplies, material, or equipment or
contract for the same professional service shall be made by any
agency of the Government from any person, firm, partnership, or
corporation in any 30-day period."  For example, during the
period of February 18 through July 9, 1997, the Department
processed 11 purchase orders, totaling $204,633, with the same
vendor for computer equipment, as shown in Table 1.

Table 1.  Multiple Purchases From the Same Vendor

Requisition Date        Amount      Delivery Date

February 18, 1997    $51,019     March 10, 1998
February 26, 1997     38,320     February 27, 1998
March 7, 1997         30,304     February 27, 1998
April 14, 1997        13,628     February 25, 1998
May 12, 1997          14,724     February 25, 1998
June 6, 1997           5,674     March 31, 1998
June 6, 1997           9,336     April 6, 1998
June 6, 1997          10,167     May 7, 1998
June 17, 1997         15,312     March 7, 1998
July 9, 1997           7,053     March 10, 1998
July 9, 1997           9,096     March 18, 1998

Total Cost            $204,633


Because multiple purchases were made within various 30-day
periods (including three on June 6, 1997) and the computer
equipment acquired through this series of purchases was all
delivered within the relatively short period of about 2 1/2
months, we believe that the purchases should have been combined
and competitive bids solicited to ensure that the Department
obtained the most advantageous prices.  In our opinion, these
purchases were not in compliance with the open market restriction
contained in Title 31, Section 239(a)(3), of the Virgin Islands
Code and the intent of the requirement of the Code of Federal
Regulations (34 CFR 80.36(a)) which states that entities should
use their normal procurement policies and procedures for
Federally funded procurements.

The Department of Education should conduct a review of its
internal procurement process to identify opportunities to
streamline and expedite the process and establish internal
procedures that ensure compliance with Federal and local
competitive procurement requirements and consolidation of supply
and equipment needs of schools and other Departmental units to
allow for the more cost-effective procurement of such items.

Control of Equipment

The Code of Federal Regulations (34 CFR 80.32(b)) states, "A
State will use, manage and dispose of equipment acquired under a
grant by the State in accordance with State laws and procedures."
Accordingly, the Government Property Manual, issued by the
Department of Property and Procurement, requires that (1) records
be maintained for capitalized equipment that adequately identify
the units of equipment, including their cost, and "provide a
permanent record of the acquisition and disposition of all
capitalized property and provide information needed for inventory
control and management purposes"; (2) a complete physical
inventory of all capitalized equipment be performed at least once
biennially and at more frequent intervals "whenever experience at
any given location or with any given item indicates that this
action is necessary"; and (3) "prescribed physical inventories of
property, except that which is exempted shall be reconciled with
the responsibility, accountability, stores, and such other
records as may be maintained for inventory control purposes."
The Department of Education did not effectively comply with these
requirements with regard to equipment purchased with Consolidated
Grant funds.

We found that  the Department's warehouse personnel did not have
adequate controls to safeguard equipment from theft, loss, or
damage.  Although the Department's central warehouse on St.
Thomas maintained property control records and performed periodic
physical inventories of equipment, the warehouse did not have
adequate measures to safeguard equipment.  For example, the roof
of the building leaked, requiring warehouse staff to move
supplies and equipment to prevent them from getting wet when it
rained.  Although a warehouse official told us that a cage where
sensitive equipment was stored was kept locked, we noticed,
during our site visit to the warehouse in December 1998, that the
cage was unlocked.  

At the July 28, 1999, exit conference on the preliminary draft of
this report, Department officials stated that the security cage
for sensitive items was sometimes kept unlocked during working
hours but was always locked at other times.

On St. Croix, there was no central location for receiving
equipment delivered by vendors.  Equipment was received at the
Department's warehouse; the Maintenance Division; and the Media,
Library and Technology Office.  In addition, equipment was
sometimes delivered directly to the schools.   Although the
warehouse had a logbook for recording incoming shipments,
warehouse personnel did not place Government property tags on
incoming equipment.  According to a warehouse official, warehouse
personnel  left that task to school personnel because of
insufficient staffing at the warehouse.  As a result, there was
little assurance that all incoming equipment at the warehouse was
properly tagged.  Additionally, the Maintenance Division also did
not tag incoming equipment and did not maintain property control
records other than acknowledgment receipts showing the dates and
the persons to whom equipment items were assigned.  The Media,
Library and Technology Office had an internal inventory system
specifically for computers, which documented the descriptions and
serial numbers of the items and the programs for which the items
were purchased.  None of the three facilities had property
control procedures and records that were adequate to safeguard
equipment and to ensure compliance with the Federal property
management requirements.

During a site visit to a St. Croix school in April 1999, we
attempted to locate 11 items of equipment (4 computers, 3
monitors, 3 printers, and 1 digital camera) that were delivered
to the school in May 1998.  We found that the items were stored
in a leaky closet at the school and that no one in authority was
aware of the stored equipment, although an instructor informed us
that he had been inquiring about the requisitioned items.  This
situation was brought to the attention of the District
Superintendent, who directed a school official to use the
equipment immediately.  At another St. Croix school, five
computers were delivered directly to the school in July 1998, but
the computers had not been tagged and the vendor's invoice did
not show the serial numbers.  Therefore, the items were at risk
of loss or theft.  Additionally, four of the five computers were
stored in a room with roof leaks that was undergoing construction
work.

Disposal of Equipment.  In accordance with procedures in the
Government Property Manual, when property is deemed obsolete, a
Report of Survey is prepared by the school and submitted to the
Department of Property and Procurement, along with the item to be
disposed of.  However, we found that the Department of
Education's warehouse facilities were not provided with copies of
the Reports of Survey and were not involved in the disposition
process.

We believe that the Department of Education should establish
internal property management procedures to ensure that it meets
the requirements of the Government Property Manual and provides
an adequate level of safeguards to protect equipment purchased
with Consolidated Grant funds.  Based on our limited review of
procurement transactions, we estimate that equipment costing at
least $1 million was purchased with Consolidated Grant funds
during fiscal years 1997 and 1998.

Recommendations

We recommend that the Governor of the Virgin Islands direct the
Commissioner of Education to:

1.  Perform a review of the Department of Education's internal
procurement process to identify opportunities for streamlining
and expediting the process.

2.  Establish and implement internal procedures to ensure that
Federal and local competitive procurement requirements are
complied with and that supply and equipment needs of schools and
other Department of Education units are consolidated to allow for
more cost-effective procurements of such items.

3.  Establish and implement internal property management
procedures to ensure that the Department of Education meets the
property management requirements of the Government Property
Manual and provides an adequate level of safeguards to protect
equipment purchased with Consolidated Grant funds from loss or
theft.

Governor of the Virgin Islands Response and Office of Inspector
General Reply

The Governor of the Virgin Islands did not provide a response to
the report.  Therefore, the recommendations are unresolved (see
Appendix 2).

C.  SCHOOL LUNCH WAREHOUSE OPERATIONS

The Virgin Islands Department of Education did not have adequate
control over food and other commodities in the Department's
School Lunch Program warehouses.  Specifically, perpetual
inventory records were inaccurate and were not reconciled to
computerized inventory reports, physical inventory counts were
inaccurate and were not performed for locally purchased
commodities, and inventory reports were not submitted timely.
The Code of Federal Regulations contains the administrative
requirements (7 CFR 210) for the National School Lunch Program
and requirements (7 CFR 250) for the Donated Food Program.
However, the School Lunch Program warehouses did not have
complete and consistent inventory control procedures, adequate
segregation of duties, and adequate facilities for the storage of
food items needing refrigeration.  As a result, food and other
commodities of an undeterminable value were subject to loss,
pilferage, and spoilage.

Federal Food Commodities

The Code of Federal Regulations (7 CFR 250.16) requires that
accurate and complete records be maintained with respect to the
receipt, distribution, and inventory of donated foods.  During
March and April 1999, we performed a limited review of School
Lunch Program warehouse activities on St. Thomas and St. Croix to
determine compliance with these requirements.   During fiscal
years 1997 and 1998, the School Lunch Program warehouses on St.
Thomas and St. Croix received 46,540 cases of donated food and
other commodities from the U.S. Department of Agriculture for the
School Lunch Program and the Temporary Emergency Food Assistance
Program.  These donated commodities were referred to as "Federal
commodities."  All of the commodities were shipped to the St.
Thomas warehouse, and part of the commodities were then
transshipped to the St. Croix warehouse.

On St. Thomas, a manual log was kept of each shipment received,
whereas on St. Croix a computerized shipment log was maintained.
Perpetual inventory records were kept on blue inventory cards at
both warehouses.  When commodities were delivered to schools or
nonprofit organizations, a "card check" was prepared by warehouse
officials to show the quantity of each item shipped, received,
and signed for by the recipient.  The St. Thomas warehouse used
prenumbered card check forms, which were filed by school.  The
St. Croix warehouse used unnumbered card check forms,  which were
filed by month.  Despite these established procedures, we found
errors in the inventory records as follows:

- Perpetual inventory records were not accurate and were not
routinely reconciled to monthly computerized physical inventory
reports.  At the St. Thomas warehouse, based on our comparison of
the balances for 21 food commodities as shown on the perpetual
inventory cards and the computerized physical inventory report as
of February 26, 1999, we found that the balances for 15 items
were not in agreement.  At the St. Croix warehouse, we similarly
compared the balances for 26 food commodities as shown on the
perpetual inventory cards and the computerized physical inventory
report as of April 20, 1999, and found that the balances were not
in agreement for 23 items.

- Physical inventory counts were not accurate.  For example, on
November 27, 1998, the St. Croix warehouse did not have any
meatballs in stock but received a shipment of 2,122 cases of
meatballs later that day.  A physical inventory performed on
April 20, 1999, showed that 1,922 cases were in stock, meaning
that 200 cases should have been distributed during the period of
November 27, 1998, to April 20, 1999.  However, distribution
records and perpetual inventory records showed that 827 cases of
meatballs were distributed during that period and that the
quantities on hand should have been 1,295 (2,122 minus 827).  A
warehouse official stated that the physical inventory count could
not have been correct, but an official of the School Lunch
Program State Office stated that about 700 cases of meatballs had
been unaccounted for when the latest shipment (as of April 20,
1999) was received.  Therefore the quantity of meatballs received
at the warehouse and the quantity distributed during the time
period involved were uncertain.

Based on our review of warehouse operations for Federal
commodities, we found that physical inventory reports were not
submitted timely to the State Office.  Warehouse managers are
required to submit monthly inventory reports within 15 days after
the end of each month.  However, we found that for fiscal year
1998, the St. Thomas warehouse submitted 10 of 12 inventory
reports from 1 to 4 months late and that the St. Croix warehouse
did not submit 4 of the 12 inventory reports and did submit 3 of
the remaining 8 reports from 1 to 2 months late.  We also noted
that the St. Croix warehouse did not have a refrigerated storage
unit and that food commodities requiring refrigeration were
stored at various schools, which made it difficult to safeguard
the food commodities.

Food Commodities From Local Vendors

In addition to items provided by the U.S. Department of
Agriculture, the School Lunch Program purchased food and other
commodities from local vendors for distribution to schools.
These locally purchased items were referred to as "insular
commodities."  The inventory control procedures used for  insular
commodities were different from those used for the Federal
commodities.  On St. Thomas, a manual logbook was maintained to
record all incoming shipments, and "card checks" were used to
record distributions.  The St. Croix warehouse maintained
perpetual inventory records on white inventory cards (to
differentiate them from Federal commodities, which were on blue
inventory cards), but the St. Thomas warehouse did not maintain
perpetual inventory records for insular commodities.
Additionally, neither warehouse was required to submit monthly
physical inventory reports to the School Lunch Program State
Office for local commodities, and the St. Croix warehouse did not
perform periodic physical inventories for such items.  As a
result, we found discrepancies in the inventory records for
insular commodities as follows:

- Although the St. Thomas warehouse prepared computerized
physical inventory reports, the reports were not accurate.  On
March 29, 1999, we performed a physical inventory count for a
judgmental sample of 50 items.  For 32 items, the quantities on
hand did not agree with the quantities shown on the warehouse's
physical inventory report for the same date.  For example, we
counted 444 cases of apple juice, but the inventory report listed
677 cases.  We did not find any cases of chicken drumsticks, but
the inventory report listed 141 cases.  We also did not find any
cases of sausage patties, but the inventory report listed 277
cases.

- For the same sample of 50 items on St. Thomas, we found
discrepancies in the quantities recorded as received from the
vendor for 7 items.  For example, the vendor's invoice showed
that 76 cases of chicken breasts were shipped, but only 51 cases
were recorded in the manual logbook as received.

- Prior to April 1999, the St. Croix warehouse had not performed
a physical inventory since August 1988.  Additionally, the
perpetual inventory cards had not been reconciled to the results
of the April 1999 inventory.  For example, for a judgmental
sample of 25 items, we found differences between the physical
inventory and the perpetual inventory cards for 18 items.

- Shipments received by the St. Croix warehouse were not
accurately recorded on the perpetual inventory cards.  Our review
of a judgmental sample of 52 shipments, representing 18 different
items, disclosed that 4 shipments, totaling 131 cases of food
commodities, were not recorded in the perpetual inventory cards
and that the quantities recorded for 2 items were incorrect.

- A log was not maintained of shipments received at the St. Croix
warehouse.  Instead, vendor invoices were placed in a folder in
reverse chronological order.  Although a warehouse official had
created a computer log to record incoming shipments, the log had
not been updated since April 1998.

The Department of Education should require the School Lunch
Program to develop standardized inventory control procedures for
all Federal and local commodities that include (1) establishing
and regularly updating perpetual inventory records; (2)
maintaining a log of incoming shipments of commodities; (3)
preparing card checks to record acknowledgment of receipt of all
commodities distributed to the schools; (4) performing physical
inventories at least every other month; and (5) reconciling the
results of the physical inventories to the perpetual inventory
records, the incoming shipment logs, and the distribution card
checks.  We believe that compliance with a comprehensive system
of inventory controls is needed because food commodities are
items that are at high risk for pilferage in the distribution
system.

We also found that there was a lack of adequate segregation of
duties at the School Lunch Program warehouses.  For example, the
same individuals received shipments of food commodities, made
distributions, performed physical inventories, and prepared the
monthly physical inventory reports for submission to the State
Office.  These conditions occurred because the tasks were not
specifically assigned to different warehouse personnel.  This
internal control weakness further increased the potential for the
pilferage of food and other commodities.

Recommendations

We recommend that the Governor of the Virgin Islands direct the
Commissioner of Education to:

1. Require the School Lunch Program to develop and implement
standardized inventory control procedures for all warehouses that
store Federal and local commodities.  These procedures should
include establishing and continuously updating perpetual
inventory records; maintaining logs of incoming shipments of
commodities; preparing card checks to record acknowledgment of
receipt of all commodities distributed to the schools; performing
monthly physical inventories; reconciling the results of the
physical inventories to the perpetual inventory records, the
incoming shipment logs, and the distribution card checks; and
submitting monthly physical inventory reports to the State Office
within the established 15-day time frame.

2. Require the School Lunch Program to assign tasks to warehouse
personnel in such a manner as to segregate the primary duties and
responsibilities of receiving, distributing, accounting for, and
reporting on food and other commodities.

3. Provide the School Lunch Program with refrigerated storage
units and other storage facilities necessary to safely maintain
food items at the centralized warehouses.

Governor of the Virgin Islands Response and Office of Inspector
General Reply

The Governor of the Virgin Islands did not provide a response to
the report.  Therefore, the recommendations are unresolved (see
Appendix 2).

OTHER MATTERS

Our audit of selected Federal grant programs at the Department of
Education disclosed several deficiencies related to the
processing of Department of Education transactions by the Virgin
Islands Department of Finance.  Specifically, we found that (1)
drawdowns of Federal grant funds were not timely posted to the
appropriate accounts in the Government's Financial Management
System, (2) provisions of the Cash Management Improvement Act of
1990 had not been adequately implemented, (3) payroll deductions
(such as income taxes and Social Security taxes) were not timely
paid to the appropriate agencies, and (4) indirect costs were
charged to the Federal grants without the existence of executed
indirect cost proposals.  However, because similar problems have
been disclosed in other audits of Federal grant programs that
were in progress as of August 1999, we will report on these
issues and provide specific recommendations in a separate audit
report to be issued after completion of the ongoing grant audits.

APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS


Questioned Costs     Funds To Be Cost     Unsupported    Put To  
Finding                   Exceptions*     Costs*      Better Use*

A. Grant Management

Personal Services Costs     $61,800    $8,340

Grant Compliance Issues               $39,500

Totals        $61,800        $8,340   $39,500

                              _______________

*Amounts represent Federal funds.

APPENDIX 2

STATUS OF AUDIT REPORT RECOMMENDATIONS

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

Finding/Recommendation
Action       Reference      Status         Required

Provide a response to the A.1, A.2, A.3, A.4, Unresolved.
recommendations that and A.5 indicates concurrence or
nonconcurrence. If concurrence is indicated, provide a plan of
action, including target dates and titles of the officials
responsible for implementation. If nonconcurrence is B.1, B.2,
and B.3 Unresolved.indicated, provide reasons for the
nonconcurrence.

Provide a response to the recommendations that indicates
concurrence or nonconcurrence. If concurrence is indicated,
provide a plan of action, including target dates and C.1, C.2,
and C.3

Unresolved.titles of the officials responsible for
implementation. If nonconcurrence is indicated, provide reasons
for the nonconcurrence.

Provide a response to the recommendations that indicates
concurrence or nonconcurrence. If concurrence is indicated,
provide a plan of action, including target dates and titles of
the officials responsible for implementation. If indicated,
provide reasons for the nonconcurrence.
-----------------------------------------------------------





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