Office of Inspector General Audit Tips for FEMA Public Assistance Grant Recipients and Subrecipients Tonda L. Hadley, Director Central Regional Office-South Office of Emergency Management Oversight Texas Department of Emergency Management Conference May 2017
Office of Inspector General Overview DHS OIG Organization Emergency Management Oversight (EMO) Mission EMO Audits More than Disasters How We Select Grant Audits Life Cycle Audit Approach Annual Audit Tips Report Applicable Criteria Audit Finding Examples Key Points to Remember Questions 2
External Affairs DHS OIG Inspector General John Roth Deputy Inspector General John V. Kelly Whistleblower Protection Unit Counsel to Inspector General Laurel Loomis Rimon Chief of Staff FOIA Unit Assistant Inspectors General Audits Emergency Management Oversight Information Technology Audits Inspections & Evaluations Enterprise Risk Identification & Management Integrity and Quality Oversight Investigations Management 3
Emergency Management Oversight MISSION (EMO) Provide aggressive and ongoing audit effort to ensure that disaster relief funds are spent appropriately; Identify fraud, waste, and abuse as early as possible; Keep Congress, the Secretary, the Administrator of FEMA and others fully informed on problems relating to disaster operations and assistance programs; Focus heavily weighted toward prevention through review of internal controls and monitoring; and Advise DHS and FEMA officials on contracts, grants, and purchase transactions before they are approved. 4
EMO Audits More than Disasters Recent Shift from Disaster Relief Funds (DRF) to Appropriated Funds Allows Us to Audit All FEMA Activities, Including Non-DRF Programs such as the National Flood Insurance Program and Preparedness Grants and Programs This presentation focuses on our disaster grant audits 5
Emergency Management Oversight (EMO) HOW DO WE SELECT AUDITS? The OIG considers several factors in determining which activities to audit. These factors include: the risk of fraud, waste, and abuse of Federal funds; statutory and regulatory requirements; current or potential dollar magnitude; requests from congressional, FEMA, or State officials; and reports/allegations of impropriety or problems in implementing FEMA programs. 6
Office of Inspector General Life Cycle Approach for Grant Audits Focuses on Public Assistance Grant Phases Response Recovery Close Out Proactive Approach includes 4 Types of Audits Deployment Audits Capacity Audits Early Warning Audits Traditional Audits 7
Annual Audit Tips Report This report provides an overview of OIG responsibilities; Federal statutes, regulations, and guidelines applicable to disaster grants; Frequent audit findings; and Key points to remember when administering FEMA grants. 8
Annual Audit Tips Report Using this report should assist disaster assistance applicants: document and account for disaster-related costs; minimize the loss of FEMA disaster assistance funds; maximize financial recovery; and prevent fraud, waste, and abuse of disaster funds. 9
Audit Tips Applicable Federal Statutes and Regulations Include the Following: Robert T. Stafford Disaster Relief and Emergency Assistance Act 44 Code of Federal Regulations (CFR) 2 CFR Part 200: Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards 10
Audit Tips Applicable FEMA Guidelines Include: Public Assistance Program and Policy Guide (FEMA First Issued in January 2016 and Recently Updated) FEMA 329, Debris Estimating Field Guide (September 2010), Hazard Mitigation Assistance (HMA) Unified Guidance, and Public Assistance Policy on Stafford Act Section 705 (FP-205-081-2, March 31, 2016) 11
Frequent Findings: Example 1 Improper Contracting Practices EMERALD CITY (subgrantee) Received a Public Assistance award that included $6.1 million for disaster-related debris removal and permanent electrical repair work. Solicited bids for the work only from contractors that it had used before the disaster. Used the contractor to complete all emergency and permanent work. 12
Frequent Findings: Example 1 (cont.) Improper Contracting Costs 2 CFR 200.317 to.326 requires all non-federal entities (other than states) to comply with the following procurement standards: Full and open competition Affirmative steps to assure the use of small and minority firms, women s business enterprises, and labor surplus area firms when possible Maintain contract oversight Maintain written standards of conduct Retain records of procurement process and bid selection Use T&M contracts only as a last resort and with a ceiling price Perform a cost analysis Negotiate profit as a separate element 13
Frequent Findings: Example 1 (cont.) Improper Contracting Costs As part of the audit, Emerald City officials stated that they procured the contracts under exigent circumstances. The OIG determined that the subrecipient had restored electrical power to almost all of its customers over the next 10 weeks. After such time, exigent circumstances no longer existed to warrant the use of noncompetitive contracts. The OIG also determined that because the solicitation of bids came from a limited number of contractors, full and open competition did not occur. FEMA had no assurance that contract costs were reasonable or that minority firms, women s business enterprises, and labor surplus area firms had an opportunity to bid on the work. The OIG questioned $6.1 million because Emerald City did not meet Federal procurement standards. 14
Frequent Findings: Example 2 Unsupported Costs Bedrock (subgrantee) 1. Used contract labor to complete 7 large projects to repair an electrical distribution system. Submitted a copy of Invoice 3B as support for labor costs in all 7 PWs. The invoice contained a single line item for $194,000 labeled Salary. No additional documentation was submitted for labor at the time of closeout. 2. Claimed a total of $1.7 million across the 7 PWs for materials withdrawn from existing inventory, using the replacement cost method. 15
Frequent Findings: Example 2 (cont.) Unsupported Costs 1. Federal cost principles (2 CFR 200.403(g) require recipients and subrecipients to adequately document costs that they claim under Federal programs. 2. OMB Circular A-122, Attachment A, A (2)(c), requires recipients and subrecipients to be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization. 16
Frequent Findings: Example 2 (cont.) Unsupported Costs Bedrock could not provide supporting documentation for the labor claim of $194,000 in Invoice 3B. The labor contractor later provided redacted time sheets and payroll registers, claiming that it could not provide the sensitive identifying information to the subrecipient. The time sheets and the payroll registers appeared to match; however, they totaled $174,000. The documentation did not indicate which employee completed what work or if the work was directly assignable to any of the 7 large PWs. The OIG questioned $194,000 because Bedrock could not support the accuracy of the claimed labor costs. 17
Frequent Findings: Example 2 (cont.) Unsupported Costs The Bedrock policy and procedures state that inventory valuation is determined using the average cost method. The OIG also determined that had the subrecipient used its standard method of inventory pricing, the cost of materials would have been $1 million less than the amount claimed. The OIG did not question $700,000 of material costs associated with actual repairs, but did question the $1 million Bedrock claimed for existing inventory costs because the claim was not consistent with Federal cost principles. 18
Frequent Findings: Example 3 Poor Project Accounting METROPOLIS (subgrantee) 1. Created an account within its automated accounting system designated as ice storm disaster to account for $15 million FEMA grant. All costs incurred during the incident period were included in this account with no segregation of eligible and non-eligible disaster related expenditures. No additional system of accounting, such as spreadsheets or project files, was employed to track Federal grant funds received. 2. The journal of expenditures contained reference to Payroll for $950,000 with no reference to projects, pay period(s), or daily activity reports. 19
Frequent Findings: Example 3 (cont.) Poor Project Accounting Federal regulations (2 CFR 200.302 and 44 CFR 206.205) require recipients and subrecipients to maintain a system that accounts for FEMA funds on a project-by-project basis. The system must disclose the financial results for all FEMAfunded activities accurately, currently, and completely. The system must identify funds received and dispersed, and reference source documentation (i.e., cancelled checks, invoices, payroll, time and attendance records, contracts, etc.). 20
Poor Project Accounting (cont.) Finding 1 Finding 2 Metropolis did not account for the expenditures on a project-byproject basis. Further, the single account comingled eligible and noneligible disaster-related expenditures. The OIG questioned the entire $15 million grant because the costs were not auditable by project. Metropolis had timesheets to support costs of $1.7 million for all disaster-related labor. The timesheets did reference work performed, or if it was attributable to eligible work on a specific project. The OIG questioned the entire $950,00 because the labor costs claimed could not be traced and verified to supporting documents. 21
Frequent Findings: Example 4 Direct Administrative Costs GOTHAM CITY (subgrantee) Contracted with Bruce Wayne Consulting (BWC) to perform all grant management functions. 7 BWC employees traveled from Los Angeles to Gotham City and remained on-site for 6 weeks (42 days), rented individual cars, lodged at The Grand Hotel, and leased office space at an area strip mall. On behalf of Gotham City, BWC attended all meetings, conducted site visits, prepared PW packets complete with disaster-related expenditures and supporting documentation, delivered packets to the JFO, reviewed and signed PWs upon completion. In a separate contract, BWC was also hired to manage closeout requests when the recovery projects were complete. Claimed a total of $752,000 direct administrative costs for BWC services allocated evenly across the 10 small and 4 large PWs submitted to FEMA. 22
Frequent Findings: Example 4 (cont.) Direct Administrative Costs Management (324) Costs Indirect costs, administrative expenses, and any other expenses not directly chargeable to a specific project. (44 CFR 207.2) A reasonable calculation of pass-through funds (if any) for management costs to its subgrantees must be identified in the grantee s Admin Plan. (44 CFR 206.207(b)(iii)(K)) Can be used only for the administration of the grant, cannot be charged directly to a project, and are considered management costs. (44 CFR 207.6(a-b)) Direct Administrative Costs Costs identified specifically with a particular final cost objective or can be assigned to such activities relatively easily with a high degree of accuracy (2 CFR 200.413(a)) Costs incurred that can be identified separately and assigned to a specific project (44 CFR 207.6(c)) and treated consistently across all Federal awards and other activities. (2 CFR 200.413(b)) FEMA Disaster Assistance Policy 9525.9. 23
Key Points to Remember 1. Designate a person to coordinate the accumulation of records. 2. Establish a separate and distinct account for recording revenue and expenditures, and a separate identifier for each distinct FEMA project. 3. Ensure that the final claim for each project is supported by amounts recorded in the accounting system. 4. Ensure that each expenditure is recorded in the accounting books and is referenced to supporting source documentation (checks, invoices, etc.) that can be readily retrieved 24
Key Points to Remember 5. Research insurance coverage and seek reimbursement for the maximum amount. Credit the appropriate FEMA project with that amount. 6. Check with your Federal Grant Program Coordinator about to ensure the final project claim does not include costs that another Federal agency funded or should have funded. 7. Ensure that materials taken from existing inventories for use under FEMA projects are documented by inventory withdrawal and usage records. 25
Key Points to Remember 8. Ensure that expenditures claimed under the FEMA project are reasonable and necessary, are authorized under the scope of work, and directly benefit the project. 9. Ensure that costs claimed as Direct Administrative Costs do not include indirect costs allocated across multiple projects. 26
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