- Contact the Committee

June 21, 2002 

Mr. Arthur K. Wu

Staff Director

Subcommittee on Oversight and Investigations

335 Cannon House Office Building

Washington, DC  20515

Dear Mr. Wu: 

This letter is in response to your June 7, 2002 request to answer specific questions on the Department of Veterans’ Affairs (VA) research and research corporations and educational foundations.  Per your request, we have provided our responses to the Subcommittee’s questions in the Enclosure.  We have also requested more detailed responses to Chairman Stephen Buyer’s questionnaire and we are proceeding with conducting the additional work the Subcommittee requested in our May 30, 2002 meeting.  If you have any questions, please contact me at (202) 565-4625, or Linda Halliday at (202) 565-4501.

Sincerely, 

Michael Slachta, Jr.

Assistant Inspector General for Auditing Enclosure

enclosure 

1.      You stated in your testimony that in your 1994 OIG report, some foundation funds were spent on non-research related items such as conferences, entertainment and travel.  After your discovery, were any efforts made to replace the funds in the foundation that were improperly spent? 

Based on our 1994 review of VA nonprofit research corporations (VANPCs), OIG Report No. 4R2-A09-078 dated June 14, 1994, we reviewed $1,025,008 of $3,641,811 spent at three VANRCs during the period July 1989 to October 1992.  We performed a review and selected accounts for review in categories that allowed latitude for discretionary use.  We concluded that $624,370 was spent on activities not directly related to research, such as general operating expenses of VA Medical Centers (VAMCs), entertainment, and expenses of VA researchers and others.  This occurred because the Veterans Health Administration (VHA) policy and procedural guidance did not clearly describe the types of activities VANPCs could support.   

Existing policy guidelines did not specifically identify restrictions or limitations to be applied in establishing whether obligations and expenditures were allowable and reasonable.  VHA and the Office of General Counsel (OGC) took action to incorporate our recommendations in a draft VHA policy directive chapter on VANRCs.  The process culminated in a new VA policy chapter governing nonprofit research corporations, issued May 1994.  No effort was made to replace the funds expended by the corporations that were identified in our report.  We focused our efforts on ensuring there would be adequate guidance applicable the future VANRCs activities to prevent actual or even the appearance of inappropriate activities or personal benefits in the conduct of future VANRCs activities.   

At the time of the review, we asked both VA and the OGC to define what type of expenditures would be appropriate and what expenditures and/or fund use would be considered inappropriate for VANPCs.  The new guidance identified some examples of the types of expenditures that would be appropriate to expend corporation funds on.  The guidance indicated that corporate funds could be used to pay for professional memberships, publications, and travel expenses directly related to an approved research or educational activity and travel to conduct corporation business.  The guidance prohibited VA corporations from paying for professional licenses for VA employees, however it did not adequately address funds used for entertainment purposes.   

One concern we had in 1994 and continue to have focuses on VA’s response to the Committee’s question regarding what are the criteria for considering an expenditure a research expenditure.  The Acting Secretary for Health’s response to the Committee noted “ If an expenditure is related to research, it is considered to be a research expenditure.”   We believe that VA’s response provides discretionary latitude that is far too broad to provide an effective yardstick to measure what is research related and/or necessary.   

During our 1994 review, auditors identified smaller operating funds being administered by VA Medical Center Directors through VANPC financial accounts, where fund use appeared highly discretionary.  For example, VA corporation funds could be used to send a colleague or researcher to educational activities, however management controls and VA oversight was not adequate to ensure that the related expenditures were not necessary and added reasonable value to direct VA research activities.  In addition, we saw that such potentially questionable expenditures may not be apparent to independent auditors conducting financial statement audits.  As a result, better assurance and management controls including improved oversight and visibility over VA nonprofit corporate funds is needed to ensure VA research corporations expenditures and activities are necessary, reasonable, allowable, and allocable to enhance VA research as intended by the 1988 legislation granting VHA authority to establish these corporations. 

2.      How were these specific research corporations held accountable for that loss? 

The three VA nonprofit corporations reviewed in 1994 were not held accountable for any “loss”.  At that time, VHA guidance that did exist was issued so not to restrict VANRC management with regulatory requirements and to promote the legislative intent for flexible administration of non-VA research funding.  Given the absence of appropriate guidance it would be difficult to hold specific individuals accountable for such expenditures.  In addition, no evidence was identified to support that the expenditures we identified were spent inappropriately for personal gain.  Generally we reported that the expenditures were for general administrative funds needed to operate the VA corporations, but certain expenditures appeared unrelated to VA research and/or unnecessary.   

3.      Based on your review of VA’s non-profit corporations, what should Congress do to raise the level of monitoring of these functions?  Do we need legislation or does the hearing we held on May 16, 2002 and others we may hold in the future suffice for this purpose? 

Our prior review of VA nonprofit corporations occurred several years ago in 1994.  The current review effort based on the Committee’s request shows that the significance of the total revenues reported by the VA’s 85 active corporations in FY 2000 averages slightly less than $2 million annually per corporate entity.  We have also observed that the mix of funding received by VANPCs has increased to include more grant awards from other Federal Agencies.  In most of the larger corporations (based on reported annual revenues), VA is no longer the cognizant Federal agency.  We confirmed that all 15 of the VANPCs reporting they had expended $300,000 or more in Federal awards in FY 2000 had also met the requirements of the Single Audit Act.  Audits were submitted to VA consistent with the provisions set forth in U.S. Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments and Non-Profit Organizations.  These audits add an additional level of oversight over Federal funds to ensure entities are maintaining internal controls over Federal programs and complying with laws, regulations and the provisions of contract and grant agreements.  Compliance requirements considered in every audit conducted under OMB Circular A-133 include reviews of allowable costs and cost principles, as prescribed by A-122, Cost Principles for Non-Profit Organizations.   

Our review also found that 7 of the 15 VA research corporations required to comply with OMB Circular A-133 requirements have Indirect Cost Rate Agreements established with the Department of Health and Human Resources (HHS), the Federal agency designated as the individual non-profit organization’s cognizant Federal agency for the negotiation and approval of indirect cost rates.  Two additional corporations were in the process of negotiating their indirect cost proposals with HHS.   

OMB Circular A-122 guidance requires Federal agencies to accept the terms of rate agreements negotiated by cognizant Federal agencies. The review process that cognizant Federal agencies follow to negotiate and approve indirect cost agreements represents an additional level of oversight and monitoring over non-profit organizations receiving Federal awards and generally entails a review to determine whether organizations have procedures for determining the allowability of costs to Federal awards according to the applicable cost principles and other terms of awards. 

In consideration of our recent review and preliminary findings, we believe that efforts to strengthen management controls over VANPC activities should be focused on improving visibility and accountability over the use of private donations administered by VA research corporations.  Our concerns persist that without adequate guidance and VA oversight some VA corporation’s expenditures will fail the test of being necessary and be made without adequate consideration of VA research program’s mission, strategic goals, and program objectives.   

4.      Do you believe the financial reporting requirements now in the law are sufficient, or do these need strengthening and if so, how would you suggest they be improved? 

In 1994 we concluded that VHA visibility over VANRC activities was generally limited to information provided in the annual reports VANPCs submit to the Secretary.  We found that these reports were inconsistent in scope, depth and timing of the information provided and did not provide comprehensive information to identify non research activity.  Additionally, we were informed that VHA did not substantially review the annual reports to validate compliance. 

VANPC financial reporting could be enhanced by requiring a uniform financial management system be used at each VANPC corporation.  We also believe there is an opportunity to redirect more funds to direct support of research by consolidating and reducing the number of corporations thus reducing the overall administrative costs associated with managing the corporations. 

In our May 16, 2002 testimony, we recommended that annual reporting by the VANPCs could be improved to provide the Congress improved visibility over the use of funds to ensure funds are used as intended by the Congress if VA’s annual report to Congress provided detailed expenditure reporting of VANPC activities.   

5.      15USC 3710d(b) states that for the purposes of specified section “ Federal employees include special Government employees as defined in section 202 of title 18, Unites States Code” i.e., “an officer or employee of the executive or legislative branch of the United States or the District of Columbia, who is retained, designated, appointed, or employed to perform, with or without compensation, for not to exceed one hundred and thirty days during any period of three hundred and sixty-five consecutive days, temporary duties either on a full-time or intermittent basis,… Given this, are not VANRC researchers, who are not specifically employed by the VA, subject to the same oversight and accountability as “ Federal employees”? Does the OIG take this into account in the formulation of its annual audit planning process? 

VANRC researchers, who are not specifically employed by the VA, are not subject to the same oversight and accountability as “ Federal employees”.  They are not Federal employees, but they are subject to same ethics rules as Federal employees.  VHA’s guidance requires that at the time the relationship or employment is initiated, each corporation board member, officer, and employee must sign a statement certifying awareness of and compliance with Federal conduct and conflict of interest laws and regulations.  Annually, each VANPC Executive Director must certify that such a statement is on file for each board member, officer, and employee. 

OIG has not specifically examined VA nonprofit research corporations since our 1994 review.  However, our annual audit planning process does assess the significance of the total revenues reported by the VA’s 85 active corporations in its annual audit planning process in conjunction with identifying significant program risks and vulnerabilities.  Previous audit planning decisions were made that prioritized higher risk programs and operations within other areas and functions of VA.     

6.      When IG audits research and educational foundations, do audits typically include a review of all expenditures of the foundation?  Please describe for the Committees a typical audit of a research foundation. 

Past IG performance audits and reviews of research and educational foundations have all begun with objectives that determined the type of audit to be conducted and the audit or inspection standards to be followed.  Our previous work focused on management and operations, effectiveness of oversight activities, and reliability and accuracy of accounting information of VANRCs.  Audits focusing on performance and evaluating management operations typically assess operational economy and efficiency and generally review the extent to which the desired results or benefits established by the legislature are being achieved, evaluate internal management and program controls, and assess and ensure entities have an adequate system for measuring and reporting performance.   

Audits do not typically include a review of all expenditures of a research foundation, since such efforts would require significant resources and many expenditures made by the corporations may not be significant.  Audits are planned to consider materiality and significance before audit teams select the methodology and design audit tests and procedures.  One criteria considered in determining materiality is the monetary value of an item, such as an asset, revenue, or expenditure. 

Our 1994 review of VA nonprofit research corporations evaluated the management and operation of VANRCs and the effectiveness of VA oversight activities.  This review included conducting: (i) a review of applicable law and pertinent VA policies, (ii) in-depth reviews of operations at three non-profit corporations, (iii) limited reviews of operations and selected information at several other corporations, (iv) review of accounting records, bank records, project files, pertinent financial and administrative records, and reports of independent auditors.  Our review was conducted in accordance with Quality Standards for Inspections published by the President’s Council on Integrity and Efficiency.  

The scope of a VANRC financial audit would generally determine whether the financial statements of a corporate entity present fairly the financial position, results of operations and cash flows or changes in financial position in accordance with generally accepted accounting principles and whether the corporation has complied with laws and regulations for those transactions and events that may have a material effect on the financial statements.  Most VANRC financial audits are conducted by independent certified accounting firms.