Corrective Action PlansFrequently Asked Questions

Bonnie Little Grahambgraham@bruman.com Jenny Segaljsegal@bruman.comBrustein & Manasevit, PLLCFall Forum 2012

Intro[N]ewly purchased items of equipment were not consistently entered into the property tracking system or, if entered, some of the items of equipment remained in the warehouses undelivered, were delivered to an incorrect location, or were misplaced or stolen. As of 1998, VIDE began to implement the corrective actions necessary to revamp its property management system as well as to correct other deficiencies in its administration of Federal grant programs. Progress was slow. As a result, VIDE was designated as a “high-risk” grantee and special conditions were imposed. Later, ED and VIDE entered into a compliance agreement that permitted VIDE to continue to receive funding while it implemented a structured plan to correct the administrative and programmatic deficiencies.

Application of U.S. Virgin Islands Dept. of ED, Docket No. 05-04-R (Jan. 24, 2011).

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Agenda

1. When are corrective action plans necessary?2. Can the state/grantee require a corrective action plan from

locals/subgrantees?3. What needs to be in a corrective action plan?4. How are corrective actions enforced?5. Can I appeal required corrective actions?

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WHEN ARE CORRECTIVE ACTION PLANS NECESSARY?

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Identifying Noncompliance

• Monitoring by ED or grantee• OIG audit• A-133 single audit• Performance data• Financial data• Internal review

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Corrective Action Needed

• Program Determination Letters• OIG Audit Report• Single Audit Report• Grant Award Notification – special conditions• Monitoring report

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CAN THE STATE/GRANTEE REQUIRE A CAP FROM LOCALS/SUBGRANTEES?

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Authority• EDGAR 80.40• Grantees are responsible for managing the day-to-day

operations of grant and subgrant supported activities. Grantees must monitor grant and subgrant supported activities to assure compliance with applicable Federal requirements and that performance goals are being achieved. Grantee monitoring must cover each program, function or activity.

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Authority• EDGAR 80.12• A grantee or subgrantee may be considered “high risk” if:

• History of unsatisfactory performance• Is not financially stable• Has management system that does not meet EDGAR standards• Has not conformed to terms and conditions of previous awards• Is otherwise not responsible

• Special condition or restriction may include:• Payment on a reimbursement basis,• Withholding authority to proceed to next phase until receipt of

evidence of acceptable performance,• Requiring additional, more detailed financial reports,• Additional project monitoring,• Requiring technical or management assistance, OR • Establishing additional prior approvals

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WHAT NEEDS TO BE IN A CORRECTIVE ACTION PLAN?

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Corrective Action Plans

• Objective (measurable)• Timeline• Identify person responsible• Budget• Data• Deliverables

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Activity Responsible Party Deliverable Due Date

Ensure compliance with SEA’s application process for

Federal education funds, including using SEA’s

application tools, meeting all SEA deadlines and following

SEA’s amendment procedures. Obtain the

signature under penalty of perjury of the

Superintendent, or highest-ranking administrative

position at LEA, on all LEA applications for Federal

education funds submitted to SEA.

LEA [name or title]

Documentation evidencing that LEA used SEA-provided application tools and submitted its

application for funds and any amendments in

accordance with SEA’s application process and

deadlines. Signature under penalty of perjury by the Superintendent or

highest-ranking administrative position at

LEA affirming that the submitted application(s)

is true and correct.

Consistent with SEA published deadlines

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Example:

• Noncompliance: Insufficient internal controls• Goal of corrective actions:• Implement a comprehensive system of internal controls

that reasonably ensure: (1) obligations and costs are in compliance with applicable state and federal rules; (2) funds, property, and other assets are safeguarded against waste, loss, and unauthorized use or misappropriation; and (3) revenues and expenditures are properly recorded and accounted for. Br

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Example – Corrective Actions

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A. Assess current level of controls over federal funds to determine if they are appropriate for level of risk.

• 1. Establish an Assessment Team to oversee the assessment process.

• Assessment Team will be responsible for:• reviewing audit reports, monitoring reports, independent

consultant reports, etc. to determine what additional assessments need to be done for federal programs

• ensuring assessment objectives are clearly communicated• ensuring the assessment is carried out in a thorough,

effective and timely manner• identifying and ensuring adequate funding and resources

are made available

Example (cont.)

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• 2. Evaluate the entity’s control environment• Ensure all areas of authority are clearly defined• Ensure authority and responsibility are appropriately delegated• Ensure employees have access to appropriate training• Ensure employees have necessary skills to perform all job

functions• Ensure management has resources to appropriately evaluate,

counsel, compensate and discipline employees• 3. Identify internal and external risks that may prevent the

organization from meeting its objectives.• Review prior single audit report, OIG audit reports, internal

audit findings to identify common problems, deficiencies, and risks• Analyze identified risks for their potential effect on federal

programs

Example (cont.)

4. Evaluate existing policies and procedures related to control activities to ensure agency objectives are met.

• Ensure proper segregation of duties• Ensure there are adequate physical controls over assets• Ensure actions require appropriate authorization• Ensure appropriate controls over information systems (e.g.,

general controls, application controls)5. Ensure staff has access to timely and accurate information on

entity policies, as well as state and federal requirements.6. Evaluate entity’s monitoring procedures.

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Example (cont.)B. Based on the assessment, implement new controls or

re-design existing controls as appropriate.1. Document the results of the assessment, including a complete

description of the current controls.2. Prepare a report of recommended changes. Report will

address current areas of weaknesses and recommend improvements.

3. Entity will review the report and make a final decision on the recommendations.

C. Establish a strategic plan for future monitoring and assessment activities, including entity self-assessments, internal audit reviews, and direct testing.

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Example

For each corrective action, include:•Completion date •Measurable objective•Responsible person/office•Confirmation underlying problems resolved

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Corrective Action Plan

• Over-promise• Under-promise• Unrealistic timeframe• Does not address the issue

Correcting noncompliance can be a lengthy process, measured in years rather than months

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HOW ARE CORRECTIVE ACTIONS ENFORCED?

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EnforcementWhenever the Secretary has reason to believe that any recipient of funds under any applicable program is failing to comply substantially with any requirement of law applicable to such funds, the Secretary may—•withhold further payments under that program,•issue a complaint to compel compliance through a cease and desist order of the Office, •enter into a compliance agreement with a recipient to bring it into compliance,• take any other action authorized by law with respect to the recipient.Any action, or failure to take action, by the Secretary under this section shall not preclude the Secretary from seeking a recovery of funds.

•GEPA, 20 USC 1235c

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Cease and Desist Order• ED may issue a complaint to a recipient that:• Describes the factual and legal basis for ED’s belief that the

recipient is failing to comply substantially with a requirement of law; and

• Contains a notice of hearing at least 30 days after service of the complaint

• Recipient may defend against the complaint• Order is issued• Report in writing stating its finding of fact; and• Order requiring cease and desist from the practice, policy or

procedure which resulted in the violation.• Secretary may:• Withhold amount payable• Submit to Attorney General to enforce

• 20 USC 1234e

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Compliance Agreements• Discretionary authority• Before entering into the agreement, hearing determines

compliance is not feasible until a future date• A compliance agreement under this section shall contain—• (1) an expiration date not later than 3 years from the date

of the written findings under subsection (b)(2) of this section, by which the recipient shall be in full compliance with the applicable requirements of law, and

• (2) those terms and conditions with which the recipient must comply until it is in full compliance.

• GEPA, 20 USC 1234f

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Compliance Agreement

Pros• Continue to receive

federal funding• Clear requirements and

deadlines

Cons• Heightened federal

oversight• Deadlines• Inflexible• Expensive

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Enforcement

• Withholding of funds• Reimbursement with special conditions• High risk designation

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Withholding of funds• If ED/state determines a grantee/subgrantee has substantially

not complied with an applicable Federal requirement, it may suspend or withhold payments. 34 C.F.R. § 80.43(a).

• Withholding: • Reasonable notice of intent to withhold and opportunity for a

hearing with an impartial hearing officer. 20 U.S.C. 1232c(b)(2).• Withhold until state is satisfied there is no longer a failure to

comply.• Suspending:• Must provide notice to the grantee/subgrantee and allow it 15

days to show cause why the suspension should not take effect. 20 U.S.C. 1232c(b)(2).

• If the grantee/subgrantee does not show cause, may suspend funds for 60 days

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Reimbursement with Special Conditions• SEAs are responsible for ensuring all expenditures are lawful

(including subgrantees’ expenditures) and for ensuring all findings of noncompliance are resolved. 34 CFR 80.40(a).

• Discretion to impose special conditions.

For example: SEA could reimburse 80% of each Federal draw upon receipt of the summary reports and detailed lists, and then reimburse the remaining 20% after sampling certain expenditures and verifying detailed supporting documentation (Examples of such documentation could include: time and effort documentation supporting payroll charges and requisition requests; purchase orders; contracts; receiving documents; invoices; canceled checks for non-payroll charges).

Is this reimbursement scheme “withholding”?

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High Risk Designation• After placing the subgrantee on high risk, the grantee must

impose special conditions or restrictions that correspond to the high risk condition. Such special conditions or restrictions may include:• Payment on a reimbursement basis;• Withholding authority to proceed to the next phase until receipt

of evidence of acceptable performance within a given funding period;

• Requiring additional, more detailed financial reports;• Additional project monitoring;• Requiring the grantee or subgrantee to obtain technical or

management assistance; or• Establishing additional prior approvals.

• 34 CFR 80.12.

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CAN I APPEAL REQUIRED CORRECTIVE ACTIONS?

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Appeal

• Disallowance v. Corrective Action• GEPA permits an appeal of a

disallowance decision• No appeal of corrective actions

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Appeal

Disallowance decision:• Compromise of claims under GEPA• Claim is for $200,000 or less, or• Difference between the amount of the claim and the

amount agreed to be returned is less than $200,000,• And

• The collection of the amount by which the claim is reduced under the compromise would not be practical or in the public interest, and

• The practice that resulted in the disallowance decision has been corrected and will not occur.

• 34 CFR 81.36

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EXAMPLES

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For example…..• In one jurisdiction ED issued 70 Page PDL, which determined all

findings were either:• 1. Resolved and closed because ED had received sufficient

documentation that corrective action was already in place; or• 2. Required further corrective action: • Please note that corrective action is required for some of

these audit findings, as well as audit findings not specifically addressed in this PDL. [ED] will continue to work with [you] to implement corrective actions required by this PDL.

• Emphasized the importance of:• 1. Producing records at the time they are requested by the

auditors and complying with the requirements in 76.730(e) of EDGAR to keep records “to facilitate an effective audit;”’ and

• 2. Working with ED (not being adversarial).

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For example….• A second jurisdiction received a 76 page PDL regarding two

single-audits. Did not demand recovery of any funds, but mandated several corrective actions, such as:• MOE: Review MOE calculation methodologies and update; use

audited data; and complete MOE calculations in a timely manner and communicate data to LEAs to ensure timely completion of A-133 audits.• Is audited data required?

• Subrecipient Monitoring: Process for identifying “high risk” grantees under EDGAR 80.12; conduct fiscal monitoring (cannot rely solely on A-133 audits).

• Comparability: Develop and implement an indicator for monitoring comparability and integrate this indicator into protocols for subrecipient monitoring.

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For example… Philadelphia

• OIG Audit Report:• Revise its inventory policies and procedures to include

items, such as cell phones, PDA’s, and digital cameras, which are easily pilfered and sought after, and develop a process to ensure that all items receive a property code and that property transfers are properly recorded.

• PDL sustained auditors’ recommendation.

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For example… Philadelphia

• Policies to inventory items with an acquisition cost of $500 or more “failed to meet these requirements” because they did not specifically address controls to avoid loss or theft of “particularly susceptible items” such as PDAs, cell phones, and digital cameras.

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For example… Colorado

Colorado OIG Audit Report:•Document or return $24 million in personnel costs•Adjust charges, as necessary, based on actual effort•Work with the Department to determine the most appropriate approach to account for personnel costs, including consideration of alternate methods allowed for under OMB Circular A-87•Develop and implement enhanced policy and procedures for the system that was determined•Provide training for all CDE employees, supervisors, and managers on how to properly record and certify personnel costs to be paid with Federal education funds

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For example… Colorado

CDE stated that it would:•Provide the Department with its new methodology for recording employee effort, which will not use predetermined allocations to charge personnel costs. •Expects its new methodology for recording employee effort to be fully operational on July 1, 2010. It will develop separate policy manuals for supervisors and employees covering the new methodology. •Train supervisors and employees on its new methodology for recording employee effort to ensure conformance before it becomes effective on July 1, 2010.

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For example… Colorado• We commend CDE for initiating timely corrective actions in

response to the audit’s finding and recommendations. The actions that CDE describes in its comments, in response to our recommendations, would appear to address our finding, but the Department will ultimately make this determination.

• PDL: We find that the policies and procedures provided generally appear sufficient to establish an effective system to account for the distribution of effort for employees’ who work on multiple programs, however we have questions regarding implementation …• Single audit findings!

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Questions?

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Disclaimer

This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the

presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit, PLLC. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar

with your particular circumstances.

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