Audit Report - A-13-96-25000

Office of Audit

Audit of Administrative Costs Claimed by the Maryland State Department of Education for Its Disability Determination Services - A-13-96-25000 - 6/9/97

This final report presents the results of our audit of administrative costs claimed by the Maryland State Department of Education (MSDE), for its Disability Determination Services (MDDDS). MDDDS performs disability determinations under the Social Security Administration’s (SSA) Disability Insurance (DI) and Supplemental Security Income (SSI) programs. The objectives of our audit were to:

• determine whether costs claimed on the State Agency Report of Obligations for SSA Disability Programs (Form SSA-4513) for the period October 1, 1992 through September 30, 1995, were allowable and properly allocated;
• determine if the aggregate of the Federal funds drawn down agreed with total expenditures for the Fiscal Years (FY) 1993 through 1995 disability determinations; and
• evaluate internal controls over the accounting and reporting of the administrative costs claimed, as well as of the drawdown of Federal funds.

We reviewed the administrative costs of $43,851,173 for SSA disability determinations claimed as of March 31, 1996 for the years ended September 30, 1993, 1994, and 1995. Our procedures were designed to determine whether costs were allowable and properly allocated and Federal funds were accounted for properly. Also, we reviewed internal controls over the accounting, recording, and reporting of transactions. The obligations reported to SSA for this period should have been reduced by a net amount of $604,496 to adjust for overstated disbursements and unliquidated obligations (see Appendices B, C, and D). Also, based on its accounting records, as of March 31, 1996, $773,003 of the Federal funds drawn by MSDE were in excess of its audited cost accounting records and are due back to SSA with applicable interest. Controls over accounting records, financial reporting, and Federal funds drawdowns need to be strengthened to minimize these reporting, accounting, and drawdown deficiencies from recurring.

MSDE submitted to SSA the final Forms SSA-4513 on October 24, 1996 for the FYs ended September 30, 1994 and 1995 (FY 1993 was finalized prior to the audit field work). MSDE also provided us with comments on our report which generally agreed with our findings and recommendations. The MSDE final Forms SSA-4513 included adjustments that lowered expenditures below the amount we audited. Also MSDE made adjustments to PMS records that show there is no longer funds drawn down in excess of audited costs. Please refer to the section MSDE COMMENTS AND OIG CONCLUSIONS for more details.

INTRODUCTION

The DI program was established in 1954 under title II of the Social Security Act (the Act). The program is designed to provide benefits to wage earners and their families in the event the wage earner becomes disabled. In 1974, the Congress enacted the SSI program (Public Law 92-603). Title XVI of the Act provides a nationally uniform program of income to financially needy individuals who are aged, blind or disabled.

SSA is primarily responsible for implementing the general policies governing the development of disability claims under the DI and SSI programs. Disability determinations under both DI and SSI are performed by an agency in each State in accordance with Federal regulations. In carrying out its obligation, each State agency (SA) is responsible for determining the claimants’ disabilities and ensuring that adequate evidence is available to support its determinations. To assist in making proper disability determinations, each SA is authorized to purchase medical examinations, x-rays, and laboratory tests on a consultative basis to supplement evidence obtained from claimants’ physicians or other treating sources.

SSA pays the SA for 100 percent of allowable expenditures. Each year, SSA determines the amount of funding authorization. Once approved, each SA is allowed to withdraw Federal funds through the Department of Health and Human Services’ (HHS) Payment Management System (PMS) to meet immediate program expenses. HHS` Division of Payment Management is responsible for operating this centralized payment system. Cash drawn from the Department of the Treasury (Treasury) to pay for program expenditures is to be drawn in accordance with 31 Code of Federal Regulation (CFR), Part 205 and, since July 1, 1994, a Treasury/State agreement under the Cash Management Improvement Act. At the end of each quarter of the Federal FY, each SA submits to SSA a "State Agency Report of Obligations for SSA Disability Programs" (Form SSA-4513) to account for program disbursements and unliquidated obligations. An advance or reimbursement for costs under the program is subject to the requirements set forth in the Office of Management and Budget’s Circular A-87, "Cost Principles for State and Local Governments."

MDDDS is a component within the Division of Rehabilitation Services under MSDE. The agency employs approximately 200 personnel and, for the 3 years audited, has an average annual budget of $14.6 million. A budget of $43,851,173 was authorized by SSA for disability determinations for FYs 1993 through 1995 and the only Federal program for which MDDDS conducts operations is the disability determination program. MDDDS’ accounting functions are performed primarily by the MSDE Accounting Branch. Allocation of indirect costs is done according to MSDE’s indirect cost agreement which is approved by the U.S. Department of Education.

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SCOPE

Our audit was conducted in accordance with generally accepted government auditing standards. The objectives of our audit were to:

• determine whether costs claimed on the Form SSA-4513 for the period October 1, 1992 through September 30, 1995, were allowable and properly allocated;
• determine if the aggregate of the Federal funds drawn down agreed with total expenditures for the FYs 1993 through 1995 disability determinations; and
• evaluate internal controls over the accounting and reporting of the administrative costs claimed, as well as of the drawdown of Federal funds.

To accomplish the audit objectives, we:

• reviewed Federal laws, regulations, and instructions pertaining to administrative costs incurred by MDDDS and to the drawdown of Federal funds;
• reviewed MDDDS’ policies and procedures, and internal controls regarding the administration of the disability determination activities;
• performed an examination of the administrative expenditures (personnel, medical service, indirect and all other nonpersonnel costs) incurred by MDDDS and claimed by MSDE for the period October 1, 1992 through September 30, 1995;
• reviewed the reconciling of the official accounting records to the administrative costs reported by MSDE to SSA on the Form SSA-4513 report for the period October 1, 1992 through September 30, 1995; and

• compared the amount of Federal funds drawn for support of program operations to the allowable expenditures.

We did a test of documentation supporting the costs claimed by MSDE for the period October 1, 1992 through September 30, 1995, as reported to SSA as of March 31, 1996. Except as noted under "FINDINGS AND RECOMMENDATIONS," the results of our tests indicated that, with respect to the items tested, MSDE complied in all material respects with the Federal cost principles and regulations. For those items not tested, nothing came to our attention to indicate that the untested items were not in compliance with applicable laws and regulations.

The field work was performed from February to October 1996 at the sites of MDDDS, and MSDE`s Accounting Branch located in the Baltimore, Maryland, area. We held discussions with the MSDE internal auditor, and Arthur Andersen & Company (Single Audit Certified Public Accounting firm for Maryland), and SSA`s Philadelphia Regional Office (see Appendix F for organization of SSA).

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FINDINGS AND RECOMMENDATIONS

The reconciliation of the accounting records to the administrative costs claimed by MDDDS showed that disbursements and unliquidated obligations were overstated. During FYs 1993 through 1995, MDDDS overstated disbursements by $273,543 and unliquidated obligations by $330,953. As a result, total obligations reported to SSA by MDDDS for the period should be reduced by a net amount of $604,496 (see Appendices B, C, and D). Also, MDDDS had drawn Federal funds of $773,003 in excess of its audited accounting records for FYs 1993 through 1995.

ACCOUNTING FOR DISBURSEMENTS

MDDDS costs claimed on Form SSA-4513 were $273,543 more than the audited accounting records reported for the period FYs 1993 through 1995. We compared the line item costs reported on the Form SSA-4513 to the audited cost accounting records for MDDDS. The differences between the costs claimed on Form SSA-4513 and the audited cost accounting records are shown below:

See our Appendices B, C, and D for the amounts adjusted for each FY line item.

ACCOUNTING FOR UNLIQUIDATED OBLIGATIONS

Unliquidated obligations are cost commitments for orders placed, contracts awarded, and services received that have not been paid. Our review showed that MDDDS costs reported to SSA on Form-4513 as of March 31, 1996, were overstated by $330,953 for unliquidated obligations that were either invalid or no longer needed. We found controls were inadequate in detecting the overstatement. MDDDS did not follow procedures over the approval and monitoring of unliquidated obligations. The errors occurred in the following line item categories:

Invalid Purchase Orders

We reviewed the unliquidated obligation line item - All Other Nonpersonnel Costs for FY 1994. MDDDS obligated $250,000 to buy modular furniture (workstations). We obtained a copy of the purchase order and found the purchase order had no specific details of the number and cost of modular furniture. Also, the vendor informed us that the purchase order had never been placed.

MDDDS and MSDE have the responsibility to ensure obligations are proper. The Program Operations Manual System (POMS) 39506.809 states that obligations should be supported by a valid purchase order or other binding agreement for the purchases of supplies, equipment, and other contractual services. For a purchase order to be a valid unliquidated obligation, it must be issued and agreed to in writing by the vendor. MDDDS and MSDE should strengthen internal controls over the approval of purchases to ensure they are valid.

Canceled Unliquidated Obligations

As of March 31, 1996, the FYs 1994 and 1995 unliquidated obligations were respectively $257,940 and $293,335 (Appendices C and D). We reviewed the unliquidated obligations balances and found $80,953 was no longer necessary. The $80,953 consists of the following line items:

As a result of our review of unliquidated balances, MSDE did a review of outstanding unliquidated obligations in FYs 1994 and 1995. Subsequently, MSDE canceled $80,953 of unliquidated obligations from MSDE`s accounting records.

POMS 39506.812 states that valid unliquidated obligations should be supported by documents and records describing the nature of the obligations and supporting the amounts recorded. POMS further indicates SAs should review unliquidated obligations at least once each month and cancel those no longer valid. However, we found MSDE does not review the unliquidated obligations as a monthly routine. Internal controls over the monitoring of unliquidated obligations should be improved so that funds obligated and not needed can be reduced.

DRAWDOWNS OF EXCESS FEDERAL FUNDS

Our review of the accounting records showed the MDDDS drawdown of Federal funds exceeded its expenditures. The MDDDS funds drawn down should represent actual expenditures that require payment advance or reimbursement. We found MDDDS drawdowns were $20,250 less than its costs for the FY ended September 30, 1993, and drawdowns for the FYs ended September 30, 1994 and 1995 respectively were in excess of its cost by $436,573 and $356,680. The total net excess drawdowns amount to $773,003. The excess drawdowns occurred because internal controls were not effective.

The funds authorized and allocated are to be drawn down by MDDDS when an actual expenditure is incurred and it is necessary to be paid. Funds received must be for immediate needs as cited in 31 CFR 205.7. To receive funds with no immediate need is contrary to the regulations. POMS 39506.212 further states all expenditures are deemed to be necessary if they are incurred by the disability determination process, in accordance with standards and other written guidelines of the Commissioner, approved by SSA, and within the limits of the approved MDDDS budget.

Use of 1 year`s disability determination services appropriation to pay for other years` expenses is not allowed. According to the Supplemental Appropriation Act of 1955, section 1311(d), an appropriation is limited for obligation to the appropriation period. Liquidation of expenditures after the expiration can only take place if obligations occurred during the appropriation period. And no appropriations or funds will remain available after the appropriation period authorized by law. In addition, MSDE Policy 02.200.01 explains that any portion of the Federal funds provided to a State in the current FY and not obligated by the State during that year shall be returned to the authorized Federal Agency.

MDDDS drawdowns of Federal funds exceeded its expenditures by $773,003 for the FYs ending September 30, 1993, 1994, and 1995. We determined the excess drawdowns by comparing MDDDS expenditure records of $43,026,355 to the total drawdown amount of $43,799,358. While further investigating the overdraws, MSDE accounting officials told us that $584,794 of FY 1995 funds were improperly spent in FY 1996. Listed below for comparison purposes are the amounts drawn down as compared to MSDE cost records.

We found MSDE controls over drawdowns recording need improvement. Funds drawn down were recorded as another year or program. Inadequacy of controls over tracking and recording drawdowns led to funds being applied to other programs or FYs than appropriated. The drawdown is a violation of rules that require all funds be restricted to MDDDS expenditures and the authorized FY.

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OTHER MATTERS

The MDDDS FY 1993 Form SSA-4513 showed in its final report all expenditures were paid with no funds remaining. This final report showed total expenditures of $13,649,632 equaled the amount authorized. Our review of the PMS allotment account balance showed $13,630,073 drawn down leaving a difference of $19,559. Since no unliquidated obligations exist, SSA should review the matter with PMS and adjust the account balances to its proper outstanding amounts.

RECOMMENDATIONS

We recommend that SSA instruct MSDE to:

1. require MDDDS to amend Forms SSA-4513 for FYs 1993 to 1995 to decrease disbursements by $273,543;

2. require MDDDS to amend the Forms SSA-4513 for FYs 1994 and 1995 to decrease obligations representing unliquidated obligations by $330,953;

3. refund SSA $773,003 with applicable interest for the funds over drawn by MDDDS in excess of its audited costs;

4. improve internal controls over fund drawdowns, expenditures, and unliquidated obligations; and

5. require MDDDS to review unliquidated obligation balances to assure that proper balances are reported on Form SSA-4513.

MSDE COMMENTS AND OIG CONCLUSIONS

The Assistant State Superintendent in Rehabilitation Services provided comments in response to our draft report, dated May 5, 1997. The full text of the comments are in Attachment A of this report. We appreciate the cooperation and prompt action by the State of Maryland to resolve the issues identified in our draft report.

The MDDDS generally agreed with our recommendations. Subsequent to our field work, MDDDS submitted final Forms SSA-4513 for FYs 1994 and 1995 and incorporated audit adjustments applicable to recommendations 1 and 2 by reducing disbursements by $273,543 and unliquidated obligations by $330,953. MDDDS also addressed recommendation 3 by refunding and adjusting PMS records by $897,693. The effect of the MDDDS adjustments also reduced unliquidated obligations to agree with recommendation 5.

We continue to believe that MDDDS needs to improve internal controls over fund drawdowns, expenditures, and unliquidated obligations. Although we did not verify the amounts reported on the final Forms SSA-4513 for FYs 1994 and 1995, they do not reconcile to the State records we audited. And while the adjusted costs are lower than audited costs, it shows that internal control weaknesses exist in the reconciliation of Forms SSA-4513 to State records and in drawdown records as reflected in the following schedules:

The schedules show that FY balances for drawdowns and expenditures are either over or understated. The final Forms SSA-4513 should agree with allowed obligations and the differences should be zero. This reinforces our recommendation 4. SSA needs to work with the MSDE to develop a corrective action plan to improve internal controls over recording and reporting obligations and drawdowns.

Pamela J. Gardiner
Assistant Inspector General
for Audit

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APPENDICES

APPENDIX B

OBLIGATIONS REPORTED/ALLOWED
MARYLAND STATE DEPARTMENT OF EDUCATION
DISABILITY DETERMINATION SERVICES
FOR FY 1993, AS OF MARCH 31, 1996

APPENDIX C

OBLIGATIONS REPORTED/ALLOWED
MARYLAND STATE DEPARTMENT OF EDUCATION
DISABILITY DETERMINATION SERVICES
FOR FY 1994, AS OF MARCH 31, 1996

APPENDIX D

OBLIGATIONS REPORTED/ALLOWED
MARYLAND STATE DEPARTMENT OF EDUCATION
DISABILITY DETERMINATION SERVICES
FOR FY 1995 AS OF MARCH 31, 1996

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APPENDIX E

MAJOR CONTRIBUTORS TO THIS REPORT

This audit report was prepared by the Office of Audit, Central Operations Audit Group in Baltimore, under the direction of Gary Kramer, Director. Audit staff included:

Albert Darago, Acting Director
Lance Chilcoat, Acting Team Leader
Sigmund Wisowaty, Auditor in Charge
Steve Sachs
Bill Richardson

Contributors from our Kansas Audit Group

Wanda Craig
Brenda Cunningham
Tamara Oden