Final OIG Audit Report

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Revolving Loan Fund Reporting and Compliance Requirements

Final OIG Audit Report

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U.S. DEPARTMENT OF COMMERCE
Office of Inspector General

ECONOMIC DEVELOPMENT
ADMINISTRATION
Aggressive EDA Leadership and Oversight
Needed to Correct Persistent Problems
in RLF Program
Audit Report No. OA-18200-7-0001 / March 2007

Public Release

Office of Audits

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

CONTENTS
Page

SUMMARY.……..…….………………………………………….……….…..……………...

INTRODUCTION ………………………………………..…………..…...….……………....

OBJECTIVES, SCOPE, AND METHODOLOGY ...…..………………………………….…

FINDINGS AND RECOMMENDATIONS ...………………………………….………….…

I. EDA HAS NOT EFFECTIVELY MANAGED THE RLF PROGRAM ...………………..

A. EDA FAILED TO ENSURE EFFICIENT CAPITAL

UTILIZATION BY RLF GRANTEES ……………………………………………...

1. EDA Did Not Ensure Grantees’ Compliance with Appropriate Capital

Utilization Rates and Allowed Grantees to Retain Resulting Excess Cash on a

Continuing Basis ……………………...

2. EDA Did Not Require Grantees to Consistently and Aggressively

Sequester Excess Cash………………………………………..……………
B. EDA DID NOT ENSURE GRANTEE COMPLIANCE WITH CRITICAL

RLF REPORTING REQUIREMENTS ……………………...…………

1. EDA Failed to Obtain Required Reports……………………….…….…...…...

2. EDA’s Failure to Obtain Required Reports Resulted in the
Agency Lacking Critical Program Information………………………………..

C. EDA DOES NOT HAVE AN ADEQUATE TRACKING

AND OVERSIGHT SYSTEM .……….………………………………………….....

D. RECOMMENDATIONS …………………………………………………….…..…

E. AGENCY RESPONSE AND OIG COMMENTS .………………………..…….....

F. FUNDS TO BE PUT TO BETTER USE…………………………………..…..….

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

II. EDA DOES NOT UTILIZE SINGLE AUDIT REPORTS
TO IMPROVE GRANTEE MONITORING ………………………………………….....

A. RECOMMENDATIONS………………………...………………………....…..

B. AGENCY RESPONSE AND OIG COMMENTS ………………………..………

Appendix I OIG Revolving Loan Fund Audits
II Objectives, Scope, and Methodology
III Agency Response to Draft Report

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

SUMMARY

For over 40 years, Commerce’s Economic Development Administration has fostered job growth
in distressed communities across the United States by promoting entrepreneurship and business
development and investing in infrastructure to attract private capital and higher-skill, higherwage jobs to these areas. The revolving loan fund (RLF) program, established in 1975, has been
a staple in EDA’s menu of offerings designed to accomplish these goals.
The RLF program provides grants to state and local governments, political subdivisions and
nonprofit organizations to operate a lending program that offers low-interest loans to businesses
that cannot get traditional bank financing. Grant recipients typically must contribute matching
dollars to capitalize the fund. As loans made from this original pool are repaid (with interest and
other fees), the fund is replenished and new loans are extended to qualified businesses. Entities
interested in administering an RLF must present EDA with a comprehensive economic
development strategy that demonstrates how the loan fund fits specific economic development
goals. The RLF funds retain their federal character in perpetuity. In other words, the grant
recipient’s obligation to the federal government continues as long as the federal interest in RLF
assets exists.
EDA reported in June 2003 that it had a portfolio of over 600 grants representing a combined
federal and nonfederal investment estimated to be approximately $1 billion—an amount roughly
four times the size of EDA’s FY 2006 program budget. Staff assigned to monitor and manage the
RLF program averages about one person per region.
Given the size of the federal investment, the RLF program has been an ongoing source of
concern for EDA management. In 1999, EDA created the Revolving Loan Fund Task Force to
consider comments and suggestions from the RLF community to strengthen the program and
make it more responsive to the needs of grantees, borrowers, accounting professionals, and EDA
staff. The task force found that the RLF reporting process needed major improvements because
the system in place was cumbersome for grantees and not particularly effective for EDA. In
addition, several task force members representing regional offices noted that RLF reports from
grantees did not receive ample review and consideration because staff was spread too thin and
had too many competing responsibilities. The task force recommended that EDA develop a new
grantee reporting system that obtains grantee information via the Internet and concluded that
electronic reporting should be EDA’s number one priority for improving the RLF program. To
date, an electronic reporting system has not been implemented.
The RLF program has also been a continuing focus of the work of our office. During the period
January 1, 2001, to September 30, 2006, the OIG issued 50 audit reports on individual RLF
recipients. These audits consistently found problems with grant recipients (1) inappropriately
retaining excess cash, (2) having inadequate annual single audits, (3) violating RLF program
requirements by charging costs to the RLF that were not allowable, (4) having inadequate loan
documentation, and (5) filing inaccurate status reports.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

This report presents our audit of EDA’s oversight, monitoring and management of the RLF
program. It concurrently assesses EDA management’s handling of the aforementioned problems,
in the areas of excess cash, grantee reporting, and single audits, that have been highlighted in
prior individual OIG audit reports. Our audit covered the period September 2004 through
September 2005, with limited extension of the audit period to include the 2006 sequestration of
funds and receipt of reports from grantees not filing required reports for September 30, 2005. We
performed field work at each of the six EDA regional offices (Atlanta, Austin, Chicago, Denver,
Philadelphia and Seattle) during May through September 2006. As a result of this work, we
found that despite the issues consistently raised in OIG audit reports over a period of nearly six
years and EDA’s recognition of serious management problems and needed improvements, EDA
has not addressed significant problems that were previously identified.
Among other things, as discussed in detail in the report, we found that EDA management did not
ensure efficient capital utilization by grantees. To promote efficient use of the money provided
RLF grantees, EDA has established a capital utilization standard of 75 percent intended to ensure
that the money provided the grantees is actively used to make loans. In addition, EDA may
implement a higher capital utilization rate for larger RLFs. If a grantee repeatedly fails to
maintain the appropriate capital utilization rate, EDA may recover the unused funds through a
process known as sequestration and, after a period of time, either transfer the funds to other RLF
recipients who have identified a demand for additional loans or return the funds to the
U.S. Treasury.
We found that as of September 30, 2005, 236 out of 529 RLF grantees had a total of
$70.3 million in excess cash. Furthermore, EDA did not require grantees to sequester excess cash
on an aggressive and consistent basis and only $14.6 million of $44.4 million in eligible excess
funds was sequestered at September 30, 2005. Finally, EDA was not ensuring that larger RLFs
were using appropriate capitalization rates. As a result of these deficiencies, EDA missed
opportunities to ensure the efficient utilization of program funds and to put unused funds to
better use either by increased lending or by recovering the funds and returning them to the
U.S. Treasury.
EDA also failed to ensure grantees’ compliance with critical financial reporting requirements.
When such reports are filed late or not at all, EDA managers lack the information they need to
make timely and informed decisions about a fund’s capital utilization and excess cash; the
agency risks losing control of RLF assets; and there is greater opportunity for fraud, waste, or
abuse of federal dollars. We found that 78 out of 607 grantees failed to file required financial
reports for the period ending September 30, 2005, and 38 percent filed reports over 90 days late.
Because of the missing information, EDA cannot determine the status of RLF assets for many of
the grantees not filing reports or the value of the entire RLF portfolio.
In addition, we found that EDA did not maintain a useful central database containing current,
accurate information on RLF fund balances, and an adequate tracking and oversight system.
EDA’s current database basically includes only award and termination amounts and excludes
operational changes in the fund. As a result, EDA does not have a system capable of determining
the value of the RLF assets it is responsible for monitoring. EDA reported, in June 2003, that the
total value of the RLF program was $1 billion; however, we were only able to identify

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

$716 million in program assets as of September 30, 2005. Lack of an adequate tracking and
oversight system also makes it difficult for EDA regional staff to monitor grantees within their
jurisdiction, and for EDA headquarters staff to monitor the regions’ oversight of those grantees.
Finally, we found that EDA’s lack of policy guidance for using single audit reports as a tool for
managing the RLF program led to ineffective practices among the regions for ensuring that
single audits are obtained and that RLFs are properly identified for single audit purposes.
As a result of these deficiencies, EDA is operating the RLF program without the basic
information needed to provide oversight, management and monitoring. Also, much of the
information available to EDA is not current, complete or accurate. The lack of leadership,
oversight and direction by EDA management is a significant factor in the negative results
presented in this audit report.
EDA senior officials must provide the needed leadership and direction to enhance the RLF
program’s effectiveness by developing a strategy and plan of action that addresses the RLF
program’s problems and challenges, and identifies opportunities for improvement. We
recommend that the Assistant Secretary for Economic Development and EDA senior officials
enhance the RLF program’s effectiveness by taking the following actions:
1.

Develop a strategy and plan of action that addresses the RLF program’s problems
and challenges, and identifies opportunities for improvement. This plan should be
very precise in (1) assigning overall responsibility for the RLF program to an
individual who can be held accountable for its operation and its successes or
failures; (2) laying out a time frame, with specific milestones, for addressing the
program’s known problems and issues; and (3) establishing performance metrics
that will allow the Assistant Secretary for Economic Development and other senior
EDA and Commerce officials to better monitor the program.

Require written evaluations by EDA regional staff of appropriate capital utilization
percentages for all RLFs with a capital base exceeding $4 million and take
appropriate action based on those evaluations where necessary.

Develop policies and procedures that promote a uniform approach to sequestering
excess cash. Among other things, such policies and procedures should provide
guidance regional managers can use to decide when they should require grantees to
sequester excess cash held for at least two reporting periods; require regional
managers to provide written justifications for not sequestering excess cash held for
at least two reporting periods; establish a standard amount of time for sequestering
excess cash, and require regional managers to justify in writing decisions to
continue the sequestration for a longer period.
EDA headquarters should also periodically evaluate the appropriateness of
justifications for not sequestering excess cash maintained for at least two reporting
periods, and continuing sequestration beyond the agreed-upon period.

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U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

4. Monitor grantee operations by consistently collecting and evaluating required
financial reports, and determine the status of the 47 RLFs not reporting as of
September 30, 2005, and not providing subsequent reports in 2006, and document
this status in writing in accordance with the Commerce Grants and Cooperative
Agreements Interim Manual.
5. Develop and implement a database, including a standard grantee reporting and
monitoring system that provides the critical information EDA needs to manage the
RLF program and protect its assets. Among other things, the system should
maintain information about original capitalization for all RLFs, as well as current
information for all RLFs, including award amendments, deobligations,
terminations, and other changes in fund balances. It should also track grantee
reports due and EDA actions taken to obtain grantee compliance with reporting
requirements.
6.

Ensure that all RLF grant recipients undergo required single audits and file reports
with the Federal Audit Clearinghouse, and that EDA staff uses the information
contained in such reports to improve recipient monitoring. In addition, develop
guidance and training for EDA staff on how to review single audit reports and use
them as a tool for managing the RLF program.

The Assistant Secretary of Commerce for Economic Development agreed with the findings and
recommendations in our draft report, and represented that the agency would aggressively
implement the recommendations of this audit. He acknowledged EDA’s ongoing concern about
the RLF program and noted that he is fully committed to implementing remedial actions as well
as a long-term strategy to address systemic RLF administrative and programmatic issues.
The response states that EDA will develop a detailed action plan with milestones, reconcile the
EDA portfolio with the OPCS database, increase emphasis on RLF program management and
issuance of final policy and operational guidance. EDA also indicated that it intends to pursue
additional mechanisms to strengthen management and fiduciary oversight while maximizing the
effectiveness of the intensive resources required to administering the program.
Refer to Appendix III for EDA’s complete response.
EDA’s response to our audit report shows a commitment to address the significant problems
facing the RLF program. By implementing the above recommendations, $29.8 million, as of
September 30, 2005, could be put to better use by increasing the RLF program’s lending. In
addition, as discussed in detail beginning on page 8, had EDA taken action to sequester the full
$44.4 million eligible for sequestration at September 30, 2005, rather than only a portion ($14.6
million), approximately $960,000 in interest on the federal share would be available to be put to
better use.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

INTRODUCTION

Planning
Technical Assistance
Economic Adjustment
Trade Adjustment
Research
Total

24.2
8.3
44.8
11.8
.5
$ 254.0

Source: EDA’s FY 2006 Budget
In Brief

Table 1. Regional RLF Staff Resources
EDA Regions
Atlanta
Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South
Carolina, Tennessee
Austin
Arkansas, Louisiana, New Mexico, Oklahoma, Texas
Chicago
Illinois, Indiana, Michigan, Minnesota, Ohio, Wisconsin
Denver
Colorado, Iowa, Kansas Missouri, Montana, North Dakota, Nebraska, South
Dakota, Utah, Wyoming
Philadelphia
Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts,
New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont,
Virginia, West Virginia, Puerto Rico, Virgin Islands
Seattle
Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Washington,
American Samoa, Northern Mariana islands, Guam, Federated States of
Micronesia, Rep. of Marshall Islands, Rep. Of Palau
Total
Source: OIG analysis of EDA data

Active RLFs1

Staff
Assigned to
Monitor RLFs

1.3

1.0

107

1.2

179

1.0

608

6.2

Active RLFs are those that have not been terminated in accordance with Commerce Grants manual policy.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

Given the size of the federal investment, the RLF program has been a continuing focus of our
audit work and an ongoing source of concern for EDA management. EDA created the Revolving
Loan Fund Task Force in 1999 to consider comments and suggestions from the RLF community
to strengthen the program and make it more responsive to the needs of grantees, borrowers,
accounting professionals, and EDA staff. The task force found that the RLF reporting process
needed major improvements because the system in place was cumbersome for grantees and not
particularly effective for EDA. In addition, several task force members representing regional
offices noted that RLF reports from grantees did not receive ample review and consideration
because staff was spread too thin and had too many competing responsibilities.
The task force recommended that EDA develop a new grantee reporting system that obtains
grantee information via the Internet. According to the task force, the benefits would include the
creation of an RLF database, push-button reporting for grantees, and the ability to flag problems
thereby making more efficient use of limited EDA staff resources. The task force concluded that
electronic reporting was imperative and should be EDA’s number one priority for improving the
RLF program. To date, an electronic reporting system has not been implemented.
OIG Focus on Troubled RLF Program
During the period of January 1, 2001, to September 30, 2006, the OIG conducted 50 audits of
revolving loan funds to determine whether the RLFs were properly managed and operating in
accordance with federal requirements (see Appendix I). In 17 of the 50 audits, we reviewed the
startup phase of the RLF program, that is, how grantees initially drew down RLF funds and made
loans in the community. We identified numerous issues with grantees’ handling of these aspects
of RLF administration, and identified a total of $5.8 million in funds to be put to better use.
For most of the remaining 33 audits, we focused our review on the revolving aspect of the loan
fund, that is, whether grantees met EDA’s 75 percent capital utilization requirement and did not
inappropriately maintain excess cash. The 33 RLF recipients were generally selected for audit
through our survey of active RLFs while a few were chosen in response to a specific request by
EDA management. During this phase, we identified an additional $32.9 million in funds to be
put to better use. Overall, the recommended funds to be put to better use totaled $38.7 million.
These audits identified a number of persistent problems shared by many RLF grantees,
including:
• Thirty percent of the RLFs maintained excess cash for prolonged periods.
• Twenty-seven percent had inadequate single audit coverage.
• Twenty-seven percent violated RLF program requirements by charging
costs to the RLF that were not allowable.
• Thirty-nine percent had inadequate loan documentation.
• Forty-two percent filed inaccurate status reports.
In June 2003, as our audits were proceeding, EDA’s then Assistant Secretary testified before the
House Subcommittee on Economic Development, Public Buildings, and Emergency
Management that the Inspector General was reporting significant problems for RLFs in every
region of the nation, and with many different local, state, and regional development

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

organizations. He stated that EDA believed it was both necessary and appropriate to implement
critical management reforms to ensure the effectiveness and accountability of these funds.
In recognition of the long-standing problems EDA has noted in the RLF program, the persistent
weaknesses identified by our audits, and the Assistant Secretary’s statement that change was
essential, we conducted an audit to assess the agency’s progress in addressing these issues, and
determine whether its oversight, monitoring, and management of the RLF program is adequate.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

OBJECTIVES, SCOPE, AND METHODOLOGY
The objectives of our audit were to assess the following:
1. EDA’s oversight, monitoring, and management of the RLF program and,
concurrently, its handling of certain problems we have highlighted in audit reports
issued since 2001; excess cash, grantee reporting, and inadequate single audits.
2. Current levels and status of excess cash in the RLFs.
3. EDA’s use of RLF grantees’ independent audit reports as a monitoring tool.
Our audit covered the period September 2004 through September 2005, and certain events
occurring after September 30, 2005, namely (1) the sequestration of funds by the Atlanta,
Denver, and Seattle regional offices in March and August 2006, and (2) the filing of 2006
financial reports for 31 of 78 RLFs that failed to file for the September 30, 2005 reporting
period. We performed fieldwork at each of the six EDA regional offices (Atlanta, Austin,
Chicago, Denver, Philadelphia, and Seattle) from May through September 2006. For full details
about objectives, scope and methodology, see Appendix II.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

FINDINGS AND RECOMMENDATIONS

I. EDA Has Not Effectively Managed the RLF Program
This review of the RLF program revealed that problems identified over the years by our prior
audits and by the EDA RLF task force have not been resolved. This situation suggests a lack of
leadership and direction by senior EDA management which has allowed ineffective and
inefficient practices to persist in many RLF operations. Specifically, during the period reviewed,
we found that EDA:
(1) Did not ensure efficient capital utilization by grantees.
(2) Did not ensure grantees’ compliance with critical financial reporting requirements.
(3) Did not maintain a central database containing current, accurate information on RLF
balances and fund changes, and an adequate tracking and oversight system.
These deficiencies have resulted in the agency lacking some of the most basic data it needs to
effectively monitor and manage the RLF program. For example, EDA does not know the status
of RLF assets for 78 out of 607 recipients who did not file reports at September 30, 2005. In
addition, without a central database containing all periodic RLF fund changes and current
balances, EDA has no system to accumulate information on the current dollar value of the RLF
assets to be monitored. Using annual reports filed by grantees, we computed the total dollar
value of the RLF program assets as of September 30, 2005, at $716 million. We were unable to
determine the value of the 78 RLFs for which reports are missing and therefore could not tell
how much those funds would add to our calculation of the total RLF program value. However,
$716 million is significantly below the $1 billion program value EDA reported in June 2003 and
it appears unlikely that the 78 missing reports would account for the entire difference.
EDA senior officials must provide the leadership and direction to enhance the RLF program’s
effectiveness by developing a strategy and plan of action that addresses the program’s problems
and challenges, and identifies opportunities for improvement.
A.

EDA Failed to Ensure Efficient Capital Utilization by RLF Grantees

To help achieve its goals of promoting business and job growth in distressed areas, EDA’s RLF
program provides grants to qualified entities to establish lending programs offering low-interest
loans to businesses that cannot obtain traditional bank financing. To ensure efficient use of the
money provided the grantees, EDA has established a capital utilization standard intended to
ensure that the money provided the grantee is actively used to make loans. If a grantee repeatedly
fails to maintain the appropriate capital utilization rate, EDA may recover the unused funds
through a process known as sequestration and, after a period of time, either transfer them to other
RLF recipients who need money to make additional loans or return them to the Treasury.
By (1) failing to ensure that recipients maintained required capital utilization rates, (2) failing to
ensure the use of appropriate capital utilization rates by larger RLFs, and (3) failing to sequester
unused funds consistently and aggressively, EDA missed opportunities to promote efficient
utilization of program funds and to put unused funds to better use either by increased lending or
by recovering the funds and returning them to the U.S. Treasury. Given our finding that grantees
5

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

persistently fail to meet capital utilization standards without consequence from EDA, it is clear
that agency management has not fulfilled its federal and departmental responsibilities for
managing the RLF program.
1. EDA Did Not Ensure Grantees’ Compliance with Appropriate Capital Utilization Rates
And Allowed Grantees to Retain Resulting Excess Cash on a Continuing Basis
EDA regulations2 require that during a fund’s revolving phase, RLF recipients must manage their
repayment and lending schedules such that at least 75 percent of the fund’s capital is loaned out
or committed at all times. The regulations allow the agency to lower this percentage of capital
utilization for RLFs that anticipate making large loans relative to the size of the capital base, and
raise it for funds that have a capital base exceeding $4 million.

EDA allowed grantees to underutilize capital and accumulate excess cash. When the
percentage of capital loaned out by an RLF grantee falls below the applicable utilization
standard, the resulting funds still on hand are referred to as excess cash. RLFs that continually
accumulate excess cash are clearly failing to utilize the federal funds they have received for the
purposes intended.
Using EDA’s 75 percent criteria, we calculated excess cash from the reported fund balances and
cash available amounts in all grantee financial reports submitted to EDA for the period ending
September 30, 2005, and determined that 236 of 529 recipients had a combined total of
$70.3 million in excess cash (see table 2), $56.6 million of which was the federal share. The
actual amount is likely higher because there were no reports filed for 78 RLFs (see table 5).
Table 2. RLF Excess Cash and Fund Balance at September 30, 2005
Federal Share
Of Excess
Cash

Total
# RLF
Repts
Filed

Fund Balance

Federal Share
of Fund
Balance

$10,922,618
3,430,517
11,494,903
2,136,991
18,986,483
23,304,476

$8,494,863
2,920,681
8,929,075
1,574,862
13,680,418
21,009,876

90
43
97
92
121
86

$133,978,891
41,926,748
119,469,401
72,037,693
216,523,437
132,010,858

$107,244,424
35,816,330
85,761,298
52,395,068
158,158,316
105,131,605

$70,275,988

$56,609,775

529

$715,947,028

$544,507,041

EDA
Regions

Number
of RLFs

Total
Excess
Cash

Atlanta
Austin
Chicago
Denver
Philadelphia
Seattle

43
24
48
28
48
45

Total

236

Source: OIG analysis of EDA data

This problem is not limited to the period ending September 30, 2005. Of the 236 recipients
reporting excess cash at September 30, 2005, 116 also had excess cash at September 30, 2004,
2 Our audit covered RLF recipient information through September 30, 2005, with limited application subsequent to
that date. Title 13 of the Code of Federal Regulations (CFR), Part 308, was the applicable regulation through
September 30, 2005. EDA issued new regulations in the form of an Interim Final Rule (70 Federal Register 47002),
effective October 1, 2005, to reflect amendments to EDA’s authorizing statute, the Public Works and Economic
Development Act of 1965, by the Economic Development Administration Reauthorization Act of 2004. The final
rule became effective on September 27, 2006 (71 Federal Register 56658). The substance of the new regulations in
the areas of capital utilization and sequestration of excess funds is essentially the same as the previous regulations.
The new RLF regulations appear in 13 CFR Part 307.
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U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

and 74 of these 116 had excess cash for the preceding reporting period (either March 2004 or
September 2003, depending on whether they were required to report once or twice a year). The
analysis of excess cash for RLFs located in five of the six EDA regions appears in table 3.
In summary, approximately 45 percent of RLFs had excess funds in the period we examined. For
the RLF program to achieve its goals, the money it provides needs to be used to make
appropriate loans and not allowed to sit inactive for extended periods in the recipients’ bank
accounts.
Table 3. RLFs Retaining Excess Cash on a Continuing Basis
EDA Regions
Atlanta
Austin
Denver
Philadelphiab
Seattle
Total

# of RLFs

Total Excess Cash as
of 09/30/05

Total Excess
Cash as of
09/30/04

29
15
16
27
29

$ 9,002,921
2,627,385
1,479,336
10,197,232
15,097,205

$ 6,749,817
1,861,482
2,017,654
7,731,368
16,267,090

116

$38,404,079

$34,627,411

Prior Period Excess
Cashc
03/31/04
09/30/03
Semiannual
Annual
20
4
8
0
4
5
10
1
19
3
61

Note: Chicago was judgmentally excluded from this test.
b
The reports for 6 Philadelphia recipients failed to disclose excess cash percentages for prior periods, so we
were unable to determine the amount, if any, of excess cash they maintained during those periods.
c
In accordance with EDA reporting requirements, the grantee disclosure of excess cash for periods prior to
September 30, 2004, was given as a percentage only, without dollar amounts.
Source: OIG analysis of EDA data

EDA did not ensure appropriate capital utilization rates for larger RLFs. We found that
EDA was not ensuring that larger RLFs were using appropriate capitalization rates. Determining
an appropriate capital utilization percentage for RLFs with a capital base greater than $4 million
is an important part of managing RLF capital utilization and excess cash. Had EDA evaluated the
rates for these larger RLFs, it likely would have required a higher capital utilization percentage
for many of the grantees which, in turn, may have resulted in a corresponding increase in excess
cash at September 30, 2005.
Based on the RLF recipient reports provided by EDA, we identified 23 RLFs that had a capital
base of over $4 million at September 30, 2005. The total capital base for the 23 RLFs totaled
$160 million while the total federal share of the capital base was $130 million. We inquired of
EDA regional management as to whether any of these RLFs had been evaluated for a higher
capital utilization standard and were informed that only one of these RLFs, in the Atlanta
regional office, had received such an evaluation. We strongly believe that EDA should evaluate
the current capital utilization standard for all RLFs with a capital base exceeding $4 million,
document the results of such evaluations, and take appropriate action based on those results.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

2. EDA Did Not Require Grantees to Consistently and Aggressively Sequester Excess Cash
EDA regulations provide that when a recipient fails to meet the capital utilization standard for
two consecutive reporting periods, the agency may require the recipient to sequester excess
funds--that is, deposit the funds in an interest-bearing account, remit the government’s portion of
the interest to the U.S. Treasury, and obtain EDA approval to withdraw sequestered funds from
the account. However, no further guidance is provided as to specific factors that should be
considered in making a sequestration decision. The regulations also state that an RLF recipient
will normally be provided a reasonable period of time to lend the excess funds, but they do not
define what constitutes a reasonable length of time. Finally, EDA regulations provide that the
agency may suspend or terminate an RLF for persistent noncompliance with the capital
utilization standard, but they do not indicate how to determine if noncompliance is persistent. As
a result of the lack of clarity on these key issues, each regional office has developed its own way
of handling sequestration decisions. The resulting practices are inconsistent across EDA regions
and vary from recovering funds without sequestration to sequestering excess funds for extended
periods of time.
We found that the Austin regional office does not sequester funds at all. Instead, if an RLF
reports excess cash for two consecutive reporting periods, the regional office generally takes
steps to terminate the award. The other regional offices consider excess cash cases individually,
but not one documents the basis for its sequestration decisions. For example, the Atlanta and
Denver regional offices stated that they generally send sequestration letters to recipients who
have maintained excess cash for two consecutive reporting periods. The Atlanta regional office
stated that it bases sequestration decisions on a business-type analysis considering such factors as
recipient lending plans and the economic environment. The Chicago and Philadelphia regional
offices stated that they contact grantees to discuss whether excess funds should be sequestered.
And Seattle merely indicated that it makes sequestration decisions after semiannual reporting
deadlines.
Moreover, none of the regional offices has a standard period for sequestering funds; nor do they
document decisions to continue sequestration. We noted some sequestration periods that seem
excessive. For example, the Atlanta regional office sometimes had funds sequestered for nearly
four years, and we noted one case in the Seattle regional office in which funds had been
sequestered for nearly three years.
While we recognize the need for some flexibility when it comes to sequestration decisions, it
appears that the lack of clear guidance on appropriate criteria for making those decisions has
contributed to the poor sequestration results we found when we examined that process. As part of
our analysis of excess cash at five EDA regional offices at September 30, 2005, we found that
$44.4 million was eligible for sequestration, but only one third of that amount, or $14.6 million,
was actually sequestered (see table 4).

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Table 4. Excess Cash Sequestered
Excess Cash
Amount
Amount
Sequestered
Amount
Sequestered
Eligible for
Amount
9/30/2005
After
Sequestrationb
09/30/2005
$ (millions)
09/30/2005
Atlanta
$10.9
$ 9.3
$ 1.8
$1.8
Austin
3.4
3.2
.0
.0
Denver
2.1
1.6
.0
0.6
Philadelphia
19.0
10.4
10.5
.0
Seattle
23.3
19.9
2.3
4.0
Total
$58.7
$44.4
$14.6
$6.4
Notes: a Chicago was judgmentally excluded from this test.
b
Amount eligible reflects total excess cash maintained by RLFs for at least two consecutive reporting
periods as of September 30, 2005.
EDA
Regionsa

Source: OIG analysis of EDA data

The data in table 4 indicates that of the five EDA regional offices tested, four do not follow a
consistent and aggressive policy for sequestering excess cash. While Philadelphia appears to
have sequestered the full amount eligible, we cannot draw a conclusion on its sequestration
practices because it failed to collect 57 of the 178 grantee reports due for September 30, 2005,
(see table 5) and it is therefore unclear how much excess cash actually existed and whether the
appropriate amount had been sequestered.
EDA’s failure to sequester funds leaves the cash inactive and costs the federal government
hundreds of thousands of dollars in interest payments that could be put to better use. For
example, had EDA sequestered the full $44.4 million eligible at fiscal year-end 2005, rather than
only a fraction of that amount ($14.6 million), the U.S. Treasury would have collected interest on
$24.0 million, the federal portion of the additional $29.8 million. Interest on that amount at the
current interest rate of 4 percent per annum3 would have yielded another $960,000 in interest
payments that year.
EDA should develop policies and procedures that promote a uniform approach to sequestering
excess cash. Among other things, such policies and procedures should (a) provide guidance
regional managers can use to decide when they should sequester excess cash maintained for two
reporting periods, (b) require regional managers to provide written justifications for not
sequestering excess cash maintained for at least two reporting periods, (c) establish a standard
amount of time for sequestering excess cash before suspension or termination, and require
regional managers to justify in writing decisions to continue the sequestration for a longer
period. EDA should also periodically evaluate the appropriateness of justifications for not
sequestering excess cash maintained for two reporting periods, and justifications for continuing
sequestration beyond the agreed-upon period.
B. EDA Did Not Ensure Grantee Compliance with Critical RLF Reporting Requirements
EDA regulations require RLF recipients to submit semiannual reports to EDA on their
operations, although RLFs whose operations appear sound after the first few semiannual
reporting cycles may be permitted to move to an annual reporting schedule. RLF operators
3

Interest rate based on the current U.S. Treasury Current Value of Funds Rate.
9

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March 2007

receive a standard report format and instructions to report their cumulative loan activities
through each semiannual or annual period, as appropriate. Grantees have about 30 days after the
end of a reporting period to submit their reports: November 1 is the deadline for annual reports
for the fiscal year ending September 30; semiannual reports are due May 1 for the period ending
March 31, and November 1 for the period ending September 30. It is essential that RLF operators
submit these reports and do so on time so that EDA can use them to monitor grant projects and
ensure that operators are managing funds in accordance with their RLF plans and the agency’s
administrative requirements. We found that EDA was not ensuring that RLF grantees complied
with this critical reporting requirement.
The Department of Commerce Grants and Cooperative Agreements Interim Manual details
responsibilities for managing Commerce grants and describes options such as suspension or
termination available to grant managers if recipients fail to meet their obligations under the
awards. Submitting annual and semiannual reports within prescribed time frames is one such
obligation that EDA managers are responsible for enforcing. The EDA regions have a poor
record of ensuring that grantees comply with reporting requirements.
1.

EDA Failed to Obtain Required Reports

We found that the EDA regional offices have different practices for managing and monitoring
grantee compliance with agency reporting requirements. This inconsistency is partially a
function of inadequate oversight by headquarters, which should have standard operating
procedures for ensuring grantee compliance. But it also indicates that RLFs are not a priority for
some regional offices, and so they do not aggressively follow up on grantees who fail to report.
As set forth in Table 5, we found that all regions had problems with late reporting and that
several had problems obtaining reports at all. Procedures for obtaining required reports varied
substantially among the regions, with one region (Seattle) having no monitoring system in place
to track report submission at all. Even regions that had developed positive practices resulting in a
high number of report submissions still had problems obtaining those reports on time. For
example, the Atlanta regional office developed its own report tracking system, a report
processing log to show reports due and the procedures employed to bring grantee reporting into
compliance. The region uses the prospect of suspending fund activity as leverage to obtain
reports. Atlanta collected all 90 reports due for September 30, 2005. But 33 percent of these
reports were filed late.
The Denver regional office generally sends warning letters to its grantees 15 days after the report
due date. It collected 92 of the 94 reports due for September 30, 2005, but 25 percent were late.
The Austin regional office—the only one with a web-based grantee reporting system--collected
all 43 reports due, but 30 percent of the reports were late.
The other regions had more serious problems obtaining required reports. The Philadelphia region
collected only 121 of 178 reports due for September 30, 2005, and 36 percent of those collected
were late. Seattle collected 86 of the 95 reports due, but 70 percent were late. Chicago collected
97 of 107 reports, 37 percent of which were late.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Table 5. Grantee Reports Due September 30, 2005 - Not Filed or Filed Late
EDA
Regions
Atlanta
Austin
Chicago
Denver
Philadelphiac
Seattle

Reports
Duea
90
43
107
94
178
95

Number
Not Filed
0
0
10
2
57
9

Percent
Not Filed
0
0
9
2
32
9

Reports
Filed
90
43
97
92
121
86

Number Filed
Late b
30
13
36
23
43
60

Percent
Filed Late
33
30
37
25
36
70

Total
607
78
13
529
205
39
Notes: aThe number of reports due includes 25 reports for RLFs that were removed from the 2001 Operation Planning and
Control System (OPCS) database. EDA has not provided information to support these deletions.
b
In addition to the 205 reports filed late, we identified 52 reports that were not dated: 24 at Philadelphia, 15 at Denver, 8 at
Chicago, 4 at Seattle, and 1 at Atlanta. We were unable to determine how many of the 52 were filed late.
c
Philadelphia has 179 RLFs (see table 1). However, one RLF grant was awarded during the six-month period ending September
30, 2005, and did not have a report due for that period.
Source: OIG analysis of EDA data

Table 6 shows how late the reports were—a total of 38 percent of those that were filed were
more than 90 days late. We even found 17 reports that were filed more than 200 days after the
deadline.
Table 6. Grantee Reports Due September 30, 2005 – Days Late
Regions
Atlanta
Austin
Chicago
Denver
Philadelphia
Seattle
Total

1-30
13
3
8
5
13
37
79

Percent

39%

-----------------------------Days Late----------------------------31-60
61-90
91+
6
6
5
2
3
5
3
0
25
1
1
16
9
10
11
6
1
16
27
21
78
13%

10%

38%

Total
30
13
36
23
43
60
205
100%

Source: OIG analysis of EDA information

When reports are filed late or not at all, EDA managers lack the information they need to make
timely and informed decisions about a fund’s capital utilization and excess cash, the agency risks
losing control of RLF assets, and there is greater opportunity for fraud, waste, or abuse of federal
dollars.
2.

EDA’s Failure to Obtain Required Reports Resulted in the Agency Lacking Critical
Program Information.

As a result of its failure to ensure that all recipients submitted required reports, EDA lacked
critical information needed to manage the RLF program. Among other things, with 78 reports
missing, it lacked information about the current status of the non-reporting RLFs and about the
total assets of the RLF program.

Status of many non-reporting RLFs is unknown. In an attempt to determine the current status
of the 78 non-reporting RLFs, we reviewed data currently contained in EDA’s Operational
Planning and Control System (OPCS) database, as well as information contained in the OPCS in
11

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Office of Inspector General

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March 2007

2001,4 and EDA regional office files. The OPCS is a management information system EDA uses
to collect award information for its various grant programs. The database includes information
on the pre-application and application process, milestone dates, award amounts, and termination
information if applicable. The database is maintained by EDA headquarters, with information
provided by EDA regional managers. According to the database manager, very little RLF
information is entered into the system after a grant’s final disbursement.
In examining the data contained in the OPCS in May 2006, we found that 25 RLFs were not
listed in that database at the time of our review. Using the information contained in OPCS in
2001, we determined that these RLFs were in the system in 2001 and had been removed from it
at some point between 2001 and May 2006. Ordinarily the only reason for removing a grantee
from OPCS would be if the award was terminated. Yet we could find no official documentation
indicating that these grants had been terminated. EDA files should contain, at a minimum, a
letter to the recipient explaining the reasons for any termination for cause, or a memorandum of
agreement or other written agreement between EDA and the recipient in the case of a termination
for convenience. EDA’s grant files did not contain any appropriate documentation of termination
or any other official action taken with regard to these funds. Some files did contain documents
describing the funds as being “closed,” an informal designation that does not meet the
documentation requirements of the Commerce Grants and Cooperative Agreements Interim
Manual.
For the 53 non-reporting RLFs contained in the OPCS in May 2006, we sought any existing
documentation or other information about them from EDA so that we might determine the status
of each fund. We found no documentation of termination for any of the missing RLFs, or any
other records to indicate their current status; nor could we determine when they had last filed an
annual or semiannual report.
Subsequently, EDA was able to provide 2006 reports for 315 of the 78 grantees that had failed to
submit September 2005 reports. This leaves the agency with 47 RLFs that are not reporting at all.
It is possible that many of the non-reporting RLFs lost assets through poor loans and inefficient
operations and therefore have nothing to report. Nonetheless, EDA should take immediate action
to determine the status of these non-reporting funds. Until it does, the agency has no way of
assessing the success or failure of a substantial portion of the awards it has made under this
program. The history and status of these RLFs should be documented in EDA’s files, and not just
in the memories of certain EDA managers.

In 2001 we obtained a printout of the information contained in the OPCS for use in audit planning.

22 of the 31 reports were from the Philadelphia region; 5 were from Seattle; and 2 each from Chicago and Denver.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Table 7. RLFs Not Reporting for September 30, 2005
Region

Reports
Not Filed

RLFs Listed
Only in 2001
OPCS a

RLFs Listed
in 2006
OPCS

Atlanta
0
0
Austin
0
0
Chicago
10
1
9
Denver
2
2
Philadelphia
57
24
33
Seattle
9
9
Total
78
25
53
Note: a The number of reports due includes 25 reports for RLFs that were removed
from the 2001 Operation Planning and Control System (OPCS) database.
EDA has not provided information to support these deletions.
Source: OIG analysis of EDA data

Total Value of RLF Portfolio Is Unknown. Although EDA reported the total RLF program
value as $1 billion in 2003, using grantee annual reports, we were only able to identify program
assets of $716 million as of September 30, 2005. While some of this difference is due to the fact
that 78 RLFs did not submit required reports for that period, it is likely that the missing reports
will not account for the entire difference. EDA should take immediate action to determine the
value of the non-reporting funds so that it can determine the current dollar value of program
assets to be monitored. Without such information, the agency risks losing control of program
assets, and there is an increased chance that such assets will be subject to fraud, waste or abuse.
C.

EDA Does Not Have an Adequate Tracking and Oversight System

The lack of an effective, practical data system that gives EDA headquarters and regional office
staff the ability to track the status of individual RLFs and oversee the RLF program is a key
cause of many of the problems discussed throughout this report.
EDA’s OPCS database contains some information related to the RLF program but does not have
all of the data EDA needs to manage the program. While the OPCS database reflects the amount
at which a fund was capitalized, it does not track changes which occur at each RLF after the
initial capitalization, such as income, losses, and securitizations. As a result, EDA managers
cannot use the OPCS to quickly determine the current value of the entire RLF portfolio or to
make timely, informed decisions about recipient capital utilization and excess cash. To obtain
such information, EDA staff must painstakingly go through annual reports submitted by RLF
grantees to the regional offices. Such a process is time-consuming and ultimately not likely to
yield definitive information, since, as noted previously, many such reports are submitted late,
and a substantial portion are not submitted at all.
OPCS also does not include data for several RLFs that we found were still submitting
semiannual/annual reports to EDA. Among others, this list of recipients includes the city of
Baltimore, the state of Rhode Island, the Massachusetts Commonwealth Economic Development
Corporation, the Commonwealth of Virginia and the West Virginia Office of Economic
Development.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

EDA also lacks a single, uniform system for monitoring grantees’ compliance with RLF program
requirements, as each regional office has its own way of monitoring RLF grantees. Without such
a system, it is difficult for EDA headquarters’ staff to monitor the EDA regional offices’
oversight of grantees under their jurisdiction.
A properly designed online grantee reporting and monitoring system with mandatory use
required of all grantees would eliminate many of the problems we noted. Such a system would
facilitate the reporting process for grantees and should improve its timeliness. It would greatly
enhance EDA’s ability to manage and monitor RLF operations, despite limited staff resources,
and strengthen internal controls over RLF assets, thereby reducing the risk of fraud, waste and
abuse in the program. In an environment of lean staffing, efficient use of such a system is a good
way to maximize staff resources and obtain the greatest return on the investment of management
time.
Such a system could also have built-in edits designed to catch mathematical errors in grantee
reports. As part of our review of the grantee reports for the period ending September 30, 2005,
we tested the mathematical accuracy of those reports in certain EDA regions. We found that in
Atlanta, 21 percent of grantee reports contained math errors, as did 17 percent of Austin’s
reports, 14 percent of Denver’s, and 13 percent of Seattle’s. Generally, the errors were not major.
However, many could be eliminated through the use of simple edits in a database.
EDA should develop and implement a database, including a standard grantee reporting and
monitoring system, that provides the critical information it needs to manage the RLF program
and protect its assets. Among other things, the system should maintain information about original
capitalization for all RLFs, as well as current information for all RLFs, including award
amendments, deobligations, terminations, and other changes in fund balances. It should also
track grantee reports due and EDA actions taken to obtain grantee compliance with reporting
requirements.
D.

Recommendations

We recommend that the Assistant Secretary for Economic Development and EDA senior
officials provide the leadership and direction to enhance the RLF program’s effectiveness by
taking the following actions:
1. Develop a strategy and plan of action that addresses the RLF program’s problems
and challenges, and identifies opportunities for improvement. This plan should be
very precise in (1) assigning overall responsibility for the RLF program to an
individual who can be held accountable for its operation and its successes or
failures; (2) laying out a time frame, with specific milestones, for addressing the
program’s known problems and issues; and (3) establishing performance metrics
that will allow the Assistant Secretary for Economic Development and other senior
EDA and Commerce officials to better monitor the program.
2.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Develop policies and procedures that promote a uniform approach to sequestering
excess cash. Among other things, such policies and procedures should provide
guidance regional managers can use to decide when they should require grantees to
sequester excess cash held for at least two reporting periods; require regional
managers to provide written justifications for not sequestering excess cash held for
at least two reporting periods; establish a standard amount of time for sequestering
excess cash, and require regional managers to justify in writing decisions to
continue sequestration for a longer period.
EDA headquarters should also periodically evaluate the appropriateness of
justifications for not sequestering excess cash maintained for at least two reporting
periods, and continuing sequestration beyond the agreed-upon period.

Develop and implement a database, including a standard grantee reporting and
monitoring system, that provides the critical information EDA needs to manage the
RLF program and protect its assets. Among other things, the system should
maintain information about original capitalization for all RLFs, as well as current
information for all RLFs, including award amendments, deobligations,
terminations, and other changes in fund balances. It should also track grantee
reports due and EDA actions taken to obtain grantee compliance with reporting
requirements.

Agency Response and OIG Comments

In response to our draft report, the Assistant Secretary of Commerce for Economic Development
stated that the agency found no material inaccuracies in the report that warrant correction. His
response acknowledged that the deficiencies identified in the draft report are serious, and
represented that EDA would immediately and aggressively implement the recommendations of
this audit. The Assistant Secretary noted that he is fully committed to implementing remedial
actions as well as a long-term strategy to address systemic RLF administrative and programmatic
issues.
The Assistant Secretary’s response also describes initiatives EDA says it has undertaken to
improve the program, for example, obtaining new authority to streamline program administration
by allowing multiple recipients to merge their operations, and the authority to simplify asset
transfers to third parties in liquidation procedures. EDA also states that it has assigned
responsibility for the RLF program to a senior headquarters official and hired a newly dedicated
staff person, and established a new RLF task force. The taskforce will be responsible for
developing recommendations for new standardized procedures for the administration,
monitoring, and management of RLFs.
15

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March 2007

The response states that EDA will develop a detailed action plan with milestones, reconcile the
EDA portfolio with the OPCS database, increase emphasis on RLF program management and
issuance of final policy and operational guidance. EDA stated that it intends to pursue additional
mechanisms to strengthen management and fiduciary oversight while maximizing the
effectiveness of the intensive resources required to administer the program. EDA also stated that
full resolution of the RLF program’s problems will require not only implementation of the OIG’s
recommendations but additional statutory authorities and accompanying regulatory and
operational measures to enable a more rigorous oversight of portfolio performance.
Finally, EDA attached a Matrix of Recommendations and EDA Actions that specifically
addresses each recommendation. Refer to the matrix for a detailed description of our draft
report’s recommendations and EDA’s detailed response (see Appendix III, pages 5 through 7).
Following the issuance of our draft report, EDA also provided copies of various grantee reports
that were missing at the time of our audit field work. Fifteen additional reports for the period
ended September 30, 2005, were provided and 31 additional reports for reporting periods ending
in 2006 were provided for grantees who had not submitted reports for 2005. We incorporated the
additional reports in our audit analysis, and have modified the tables and results presented in our
final report as appropriate. Refer to Appendix III for EDA’s complete response.
EDA’s response to our audit shows a commitment to address the significant problems facing the
RLF program. EDA has already initiated processes that, if carried through to completion, should
greatly improve the management and monitoring of the program.
F.

Funds to Be Put to Better Use

By implementing the above recommendations, $29.8 million, as of September 30, 2005, could be
put to better use by increasing the RLF program’s lending. In addition, as discussed in detail
beginning on page 8, had EDA taken action to sequester the full $44.4 million eligible for
sequestration at September 30, 2005, rather than only a portion ($14.6 million), approximately
$960,000 in interest on the federal share would be available to be put to better use.

U.S. Department of Commerce
Office of Inspector General

II.

Final Report OA-18200-7-0001
March 2007

EDA Does Not Utilize Single Audit Reports to Improve Grantee Monitoring

The Single Audit Act Amendments of 1996 established uniform audit requirements for state,
local, and tribal governments and nonprofit organizations receiving federal financial assistance.
Under the act, nonfederal entities that expend $500,000 or more in a year in federal awards from
more than one agency must be subject to a “single” audit, conducted by an independent auditor,
and the resulting audit report must be submitted to the Federal Audit Clearinghouse.6 Grantees’
annual and semiannual reports contain the information EDA needs to determine whether an RLF
grantee is required to obtain a single audit.7 Specifically, these reports show a fund’s total capital
base including the federal share. When the federal share of the capital base exceeds $500,000,
the grantee is generally required to obtain a single audit. Most RLF grantees are required to
obtain single audits.
Single audit reports are an important mechanism for keeping managers informed of the financial
health of an organization. They contain information about an auditee’s performance and are a
valuable tool that EDA can use to ensure that organizations receiving RLF grants have
appropriate internal controls in place to safeguard federal funds and that they are using funds in
accordance with grant terms and conditions. OMB Circular A-133 establishes standards for
federal agency use in implementing the Single Audit Act.
We found that EDA staff is not routinely obtaining single audit reports filed by RLF grantees
from the Federal Audit Clearinghouse. We did find paper copies of some single audit reports in
EDA regional files. In most instances, however, the reports had been provided by the grantee and
not obtained from the Clearinghouse. By haphazardly collecting single audit reports from
grantees and not routinely obtaining them directly from the Clearinghouse, EDA cannot be sure
that all grantees required to obtain single audits are actually doing so. We compared the 2004
audit reports on file at the Clearinghouse with the information obtained from our analysis of RLF
semiannual or annual reports at three of the six EDA regions, and found that a number of
recipients had not submitted single audit reports to the Clearinghouse that year (see table 8).

The Federal Audit Clearinghouse serves as the central collection point and distribution center for all single audit
reports. Its primary function is to receive the audit report and data collection form from the auditee, archive a copy
of the report and the data collection form, and make available a copy of the audit report to each federal award
agency that provides direct funding to the auditee when the report identifies a finding related to that agency’s
awards. The clearinghouse also maintains an electronic database, accessible through the Internet, of information
(obtained from data collection forms) about the auditors, recipients, federal awards, major programs tested, and audit
results for all entities that submitted single audit reports beginning in 1997.
7

For RLFs, federal award funds expended are calculated as follows:
(1) Balance of RLF loans outstanding at the end of the fiscal year, plus
(2) Cash and investment balance in the RLF at the end of the fiscal year, plus
(3) Administrative expenses paid out of the RLF during the fiscal year.
Only the federal share (excludes the matching fund share) of the RLF is used in this determination.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Table 8. Regional Compliance with Single Audit Requirement for 2004
EDA
Region

Number of
Recipients

Reports
Required

Reports Filed with
the Clearinghouse

82
72
80
234

82
65
50
197

70
51
28
149

Atlanta
Denver
Seattle
Total

Reports Not Filed
with the
Clearinghouse
12
14
22
48

Source: OIG analysis

EDA staff is also not routinely utilizing the data contained in single audit reports to help manage
the program. EDA has no guidance to explain how regional staff can use such reports to improve
recipient monitoring, and no requirement that they be used as a monitoring tool. As a result,
managers do not routinely use the reports, and are therefore missing out on the opportunity to use
the information they contain to obtain added insight into internal controls over RLF assets,
grantee compliance with award terms and conditions, and the accuracy of information contained
in annual and semiannual reports.
EDA’s failure to review the single audit reports also means that staff are not identifying and
dealing with deficiencies in those reports. Under OMB Circular A-133, recipients of federal
grants are required to identify on the Schedule of Expenditures of Federal Awards all federal
awards expended and the programs under which they were received. We found that in
33 out of 1888 reports we tested, the RLF was not included on the SEFA. Such an omission
creates serious obstacles to obtaining a proper audit. For one thing, the auditor may not realize
that the auditee even has an RLF grant. Failing to include the RLF on the SEFA may also mean
that an RLF that should be considered a major program (see following discussion) is not
identified as such and is therefore not subject to appropriate additional tests. If EDA staff were
routinely reviewing single audits, it would be easy for them to note the omission of an RLF from
the SEFA and bring that omission to the attention of the grantee and its auditors.
Under A-133, the auditor conducting the single audit must determine which programs being
audited have a higher-risk for non-compliance. This part of the analysis is used to identify which
of the auditee’s programs are major programs. Major programs are subject to direct testing and
additional audit procedures and reporting requirements relative to the auditor’s consideration of
internal control over compliance. This usually involves designing specific audit procedures to
determine whether transactions are properly recorded and accounted for, the recipient is in
compliance with laws and regulations, and the funds and other assets are safeguarded against
loss. The failure to properly identify an RLF as a major program will have a negative impact on
the quality of the information related to the RLF contained in the single audit report.
We compared single audit reports with RLF annual and semiannual reports and found that a
significant number of the single audits (73 of the 188, or 39 percent) did not consider the RLF as
a major program, even though the total capital base of the fund indicated that it should probably
have been categorized as one.

We tested the 2004 audit reports found in EDA files, along with reports available from the Clearinghouse, for a
total of 188 reports.
18

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March 2007

While we cannot say conclusively that all of those RLFs would ultimately qualify as major
programs, it is likely that some were misclassified as non-major. If EDA staff were regularly
reviewing these reports, they could have noted the failure to consider the RLF as a major
program and asked questions of the grantees and their auditors to determine if those decisions
were correct. If they had followed these simple steps, it is probable that they would have caught
many instances where the RLF was incorrectly identified as a non-major program, and could
have raised the issue with the grantees and their auditors so that the error could be rectified.
Some regional EDA officials we interviewed stated that they generally rely on the Office of
Inspector General’s review of single audit reports to alert them to audit findings at the recipient’s
organization. While OIG does play a role in the single audit process, we do not routinely review
all reports. Along with EDA program officials, we are responsible for audit resolution and
followup on negative findings in single audit reports. The review we perform is important and it
does serve to bring needed information to the attention of EDA management, but it is limited in
scope and not a substitute for the review that should be performed by EDA staff.
A. Recommendations
We recommend that the Assistant Secretary for Economic Development direct the appropriate
EDA officials to
1. Ensure that all RLF grant recipients undergo required single audits and file reports
with the Federal Audit Clearinghouse, and that EDA staff uses the information
contained in such reports to improve recipient monitoring.
2. Develop guidance and training for EDA staff on how to review single audit
reports and use them as a tool for managing the RLF program.
B. Agency Response and OIG Comments
The Assistant Secretary of Commerce for Economic Development’s response to our draft report
stated that EDA will develop a process to ensure that required single audits are filed with the
Federal Audit Clearinghouse, and that RLFs are included as major programs when appropriate.
The agency will also develop guidance and training for EDA staff on how to review and use
single audit reports as a tool for managing the RLF program.
The Assistant Secretary’s response demonstrates an intent and commitment to address the
problems in EDA’s use of the single audit reports. We believe that completion of the planned
actions represents a positive step in correcting the problems we found in the single audit area.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Appendix I
Page 1 of 2

Date
Issued
Phase I
3/20/01
3/28/01
3/30/01
3/30/01
7/10/01
7/12/01
7/19/01
8/16/01
9/21/01
9/21/01
9/21/01
9/24/01
9/28/01
9/28/01
10/30/01
7/18/02
1/31/02

OIG Revolving Loan Fund Audits
01/01/01 to 09/30/06
Value of Funds
Put to Better
Recipient
Use
RLF Drawdown Phase
Tyler Economic Development Council TX
Stark Development Board Finance Corp. OH
Jefferson Parish Econ Dev. Commission LA
North East Texas EDD
Monterey County CA
Panhandle Area Council ID
Hennepin and Ramsey Counties MN
Affiliated Tribes of Northwest Indians WA
Cumberland Plateau Plan. Dist. Commission VA
Gulf Coast EDD TX
Eastern Oklahoma Development District
Miami Area Econ. Dev. Service, Inc. OK
Cities of East Chicago, Gary, and Hammond IN
Southeast Idaho Council of Governments
Washington Assoc. of Minority Entrepreneurs WA
Eastern Oklahoma Development District
Economic Development Bank for Puerto Rico
Total Phase I

534,582
250,000
286,686
-0
350,000
350,000
880,954
-0503,417
500,000
350,000
265,250
-0225,000
-0300,000
1,000,000

Questioned
Costs
$

$ 5,795,889

-0-0-0-0-0-0-0-0-0-0-0-0$37,500
-053,500
-0-0$ 91,000

Phase II RLF Revolving Phase
3/21/01
3/30/01
3/30/01
3/30/01
2/27/02
3/22/02
3/27/02
3/27/02
7/22/02
7/31/02
8/28/02
8/30/02
8/30/02
9/05/02
9/23/02
9/30/02

Lower Chattahoochee Regional Development Ctr GA
Community Development Commission LA County CA
East Los Angeles Community Union CA
East Los Angeles Community Union CA
City of Lake City SC
Jefferson Parish Economic Dev. Comm. LA
Economic Development Bank for Puerto Rico
Greater North-Pulaski Local Dev. Corp. IL
Detroit Economic Growth Corp. MI
City of East Cleveland OH
Northwest Arkansas EDD
Philadelphia Authority for Ind. Dev. PA
East Arkansas Plan. And Dev. District AR
City of New York
U.S. Virgin Islands
City of Milwaukee WI

$575,247
-045,000
-0193,405
-0204,276
500,000
749,430
513,480
400,899
521,743
808,229
3,457,049
974,378
1,492,626

-0-0-0-0111
-022,283
2,965
-0
-0-0-0-057,977
-0-0-

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001

March 2007

Appendix I
Page 2 of 2
OIG Revolving Loan Fund Audits
01/01/01 to 09/30/06
Value of Funds
Recipient
Put to Better
Use

Date
Issued
2/06/03
3/07/03
3/07/03
3/25/03
3/28/03
3/28/03
3/31/03
3/31/03
7/22/03
9/11/03
12/23/03
3/26/04
3/31/04
9/27/05
1/11/06
3/28/06
9/27/06

Community Invest. Corp. of Decatur, Inc. IL
City and County of San Francisco CA
Northwest Regional Planning Comm. WI
South Carolina Jobs – Economic Dev. Authority
City of Baldwin Park CA
Alaska Village Initiatives
Anacostia Econ. Dev. Corp. DC
Empire State Dev. Corp. NY
High Plains Development Authority, Inc. MT
Southside Planning District Commission VA
Government of D.C. Dept. of Housing & Comm. Dev.
Pease Development Authority NH
North Central PA Regional Plan. & Dev. Commission
Erie County Industrial Development Agency NY
The EDC Fund, Inc., VT
Commonwealth of Pennsylvania
Shorebank Neighborhood Institute IL

1,689,393
2,027,326
260,236
606,790
708,711
324,587
601,618
7,929,294
1,426,242
1,136,348
1,772,666
146,123
409,606
703,718
94,013
2,001,492
648,654

Questioned
Costs
$

44,536
-0-0-0
-0-0
-0
145,583
-0
57,196
-0
-0
-0
221,691
-0
-0
142,018

Total Phase II

$32,922,579

$694,360

Total for 50 Reports Issued 1/01/01– 9/30/06

$38,718,468

$785,360

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

Appendix II
Page 1 of 2
OBJECTIVES, SCOPE, AND METHODOLOGY
The objectives of our audit were to assess the following:
1. EDA’s oversight, monitoring, and management of the RLF program and, concurrently,
its handling of certain problems we have highlighted in audit reports issued since 2001:
excess cash, grantee reporting, and inadequate single audits.
2. Current levels and status of excess cash in the RLFs.
3. EDA’s use of RLF grantees’ independent audit reports as a monitoring tool.
Our audit covered the period September 2004 through September 2005, and certain events
occurring after September 30, 2005, namely (1) the sequestration of funds by the Atlanta,
Denver, and Seattle regional offices in March and August 2006; and (2) the filing of 2006
financial reports for 31 of 78 RLFs that failed to file for the September 30, 2005 reporting
period. We performed fieldwork at each of the six EDA regional offices (Atlanta, Austin,
Chicago, Denver, Philadelphia, and Seattle) from May through September 2006.
We interviewed agency officials and personnel, as appropriate, in EDA headquarters and
regional offices. To assess the status of excess cash, we reviewed grantees’ annual and
semiannual financial reports. We also evaluated EDA management’s control over the program,
and the consistency of practices among the EDA regional offices. We compiled the results of our
analysis of grantee reports, identifying excess cash balances9, excess cash sequestered10, and
timeliness of report submissions11. To assess EDA’s use of RLF grantees’ single audit reports as
a monitoring tool, we asked each regional office how it uses the reports, whether it tracks receipt
of the reports, and how it determines whether submitted reports are accurate and complete.12
9

Excess cash balances: We computed grantee fund balances as of September 30, 2004, March 31, 2005 and
September 30, 2005, by obtaining grantee financial reports submitted to EDA for those periods and entering the fund
balance and cash available amounts into an electronic spreadsheet. The spreadsheet compared the maximum
allowable cash to the reported cash to calculate excess cash.
10

Excess cash sequestered: We determined, by examining the letters of sequestration in EDA’s files, the amount of
cash the EDA regional offices had sequestered for each RLF fund that had excess cash at September 30, 2005. We
also determined the amount of time the cash had been sequestered. Sequestration is discussed in detail on page 8. It
involves EDA requiring a recipient to place excess cash into a separate interest bearing account, and remit the
federal share of the interest to the U.S. Treasury pending ultimate use of the cash for RLF Program purposes.

Annual/semiannual reports: We determined, through inquiry, each EDA region’s practice for tracking and
monitoring grantee submission of required annual/semiannual financial reports. We tested the mathematical
accuracy of the grantee reports for certain regions. We did not otherwise test the accuracy of the financial
information provided by the grantees on annual/semiannual reports.
12

Single audit reports: We queried the Federal Audit Clearinghouse database to determine whether the required
2004 audit reports were filed and accepted as complete. We also compared certain elements in the audit reports with
information in recipients’ annual or semiannual reports, to determine consistency among them and thus assess the
accuracy and completeness of the audit reports.

U.S. Department of Commerce
Office of Inspector General

Final Report OA-18200-7-0001
March 2007

Appendix II
Page 2 of 2
We relied on computer-generated data supplied by EDA as the basis for some of our audit
findings and recommendations. We determined the validity and reliability of computer-processed
data by direct tests of the data to supporting documentation. Based on our tests, we concluded
that EDA’s Operational Planning and Control System database (OPCS), which is maintained by
headquarters, was sufficiently reliable for our objectives. We compared the information in the
OPCS database with differences identified by EDA regional offices, and reconciled the database
information provided to us in 2001 with information currently in the system. We identified RLFs
eliminated from the database after 2001 that were not properly documented as terminations in
EDA’s regional files and assessed whether the current database is useful to the EDA regional
offices. We obtained an understanding of the controls over information in the Federal Audit
Clearinghouse database and noted nothing of concern regarding the credibility of that data.
We reviewed appropriate laws and regulations affecting EDA’s operation of the RLF program:
Title IX of the Public Works and Economic Development Act of 1965, as amended; the
Economic Development Administration Reauthorization Act of 2004; Title 13 Code of Federal
Regulations (CFR) Part 30813, Requirements for Economic Adjustment Grants; EDA’s
Revolving Loan Fund Standard Terms and Conditions; OMB Circular A-133; and Department of
Commerce Grants and Cooperative Agreements Interim Manual, issued in February 2002.
We conducted this performance audit in accordance with Generally Accepted Government
Auditing Standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence that provides a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.

EDA has revised its regulations. The new regulations appear at 13 CFR Part 307. See footnote 2, page 6 for a
detailed discussion.

EDA's ResponSlt to Draft Audit Report No. OA-18200-1.0001, Aaaresslve ECA leadership and Oversiaht Needed to Corre~t Persistent Problems in RLF PrOQram
Matr]x of Recommendations

I'\)
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.and EDA Actions

rG recomme11dation
1.1. Deverop a slrategyand plan of action that addresses lhe
RLF program's probrems and c:l1altenges, and Identifies
opportunities for Improvement. This pran should be very
precise in (1) assigning ovemll responsbllity for the RLF
program to an IndividlSal who can be held' accountable for its
operation and its successes or railures; (2) laylf'lgout a time
frame, with specific mileslones, for addrl!tSses the program's
known problems or Issues; and (3) eslal:ilistling performanO&
melrics 1hal will allow IAe Assistant Secretary for Economic
Development and othel senior EDA and Commerce officials to
better monitor the program.

eDA Actions Taken to Date
Apr-06 Reporting rorms ED-209S, ED-209A, and ED-2091 revised
to clarlry reportin!! requiremenlsto allON Improved analysis
01 RtF capllal u611zationrates and funds expended.

DAAcllons to be Taken

.12m

g-Apr-2007 Report on {he status of the 72 missing rep'cllts idenlif:Id
by (he OIG,

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27 -Juh-tJ6 Regiooal Dlreclor Standardization Team convened. The
purpose 01 Ihe teem was to analyze, standardize and
streamline
EDA grant processes,
including RLF prooesses.
1-NO\I-06 DAS OMSlCFO assigned ovelCllI responsibllily and
aCCQuntabl6tyfor the RLF Program.

g-Apr-2007 Report or the

alue of the RLF portfolio.

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23-Apr-2007 Action Plan Finalized. The Action Plan wiUinclude a
sttategy and plan of action that addresses the RtF
program's problems and challenges, as oulllned in the
dlClft audifs lirst recommendation. The Acllon Plan will
Indllde

metrtcs

rodocumltnt

the

resLPl1s

21-NO\I-Oe RLF Guidance lor COMolidaUng aru:l Recapl1Blizlng
RevolVIng Loen Fund Awards issued.

1.Dec.oo EDA FY 2.007 operalional glJidance IsslJed. Section on the
"GlJldarICS on Management and Monitorif'lg of Re'iohltng
Loan FL1ndGranls" is conlalned In the guidance.
1-Dec.Q6 RLF Task Force convened. The Task Force was assigned
responsibility for developjng recommerKlations
ror new
standardized procedures for Ihe administration, monitoring,
and management of RLFs.
None.

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of 1I1e Action

Plan.

1.2.RlKluire wrttten evaluations by EDA regional staff 01
apprOJ)rtale capilal ulilization percentages for all RLFs with a
capital base exceeding $4 mlion and take approprtale Belian
based on those evallJations when necessary.

0
~

3o..Apr-2007 Regional Director Perlorman09 Ian.srevised to
Increase emphasis on RLF Portfolio Managemilllt
through use of a specific performance element versus
use or an Intlative within an e1ement.
1S-May.2007

Final policy and opera.1ionalguidance on the
ad ministration and management of the agency's RL F
portfolio Issued'.

1.Oct.2007 New Baland

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Scorecard Metnes implemenmd.

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15-May-2007 EDA wl!1address tl'ils issue In final policy and
operational guidance.

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IG reoommendation

EDADn.s

Taken to Datft

promote a ufljform
approach to seq\l8Slering excess cash. Among other things.
such paJicies and procedures should provide guldatlce regional
managers can use to decide vmen they should require
9rants
to sequester eJ(cess cash held for at least two
reporting periods, require regional managel10 to provide wri!ten
justifications for not sequestering excess cash held fer at leasl
two reporting periods, eslabsh a slandard amount 01 time fer
sequestering excess cash, and (IKluire regional managers to
justify in writing decisions to continue th&sequestration for a
longer peood. EDA HQ should also perlodlcatty evaluate the
appropriateness of jusllbllons
to not sequester excess cash
held for at least twO reporting periods and to COJ'Itinue
s.equeslratfon for longer Ihan the agreEd upon
.

1-Dec.06 The RLF Tas!(ferce, which hs composed

F.4. Monitor grantee operations by oonslstenUy ooUecting and

7.Mar-07 EDA has creal:etl a standartlizecl procass to track !he
recelpl or seml-a:nnual anl1annual reports and to document
actions laken to ensure grantee compliance. Data
collected indudes portfolio value anti capllal utllizallon
informalfOl1. receipt of audits, and dooL1menlaon or aclions
laken to aoq ulre missing or late audits. As or Man:l'l7.
2007, all regional cffices had responded to lI1eInillaldata
call. A &!\Concldata call hu been issued IDobtain

1.3. Develop policies and prccedul'es1f1at

evaluating require-A.ug-200B

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Implementation of the RLF Automated Tnlcking

System.
11.1. Ensure !hat aU RLF granl recipients undergo required
single audits and file reports with e FederalAudit
C[e.annghouse and thal EDA slaff uses the Information
contained In such leports 10 improve recipient mOl1itorif1ij.

ol)-9olng

Discussions he1(1wi1l11he RlF Taskforce and Regional
Directors on oorredive actions that will address [he

recommendEltiOl1sof 1118 01G, Bndare feasibrewithinIhe

I\J

-.I
co
co

3O-Jun-20D7 A process will be instituted Ie routin ely query the
Clearinghouse to wrify $ubmisslon; and to retrieve
copies of Itle reports for review and a narysis.

resources available 10 EDA.
30.Jun-2007 The Interim tfac/l;jng system and final automated system
wilr have key Indicators for slnsle audits.
31-Jan-2008 The RLF reporting forms will be modified to Include a

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certilicatlon that the sklgfe audits have been performed
and filed.
U.2. Develop guidance and training for ECA staff in h
review singlEtaudit reports and use them as a tool for
managing the RLF program.

None.

31-Aug-20D7

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EOA will WOfk wh DIG'to develop 1rainil1g on how 10
review single audil repor1s and use lhem as a 1001 fOi
m8llsglng 1I1eRLF program.

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31-Oct-D7 EDA willestablish a !raining curriculum for RLF

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-II
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Administrators In the Regonal Offices, and will \Vork
'MIh OIG to inc1uc1ea training component on how 10
revim single audit reports and use them as a tool lor
managing the RLF program.

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APPENDIX IIIPage 10 of 11

EDA is in the process ofterminating the following non-reporting RLFs:
[Text deleted]

[Text deleted]

EDA has provided copies of documentation related to this ongoing termination effort to
the 010.
These RLFs were determined to have been terminated:

[Text deleted]

EDA has provided copies of the termination documentationto the OIG.
In addition, EDA transferred the assets of project #054902594B (a sub-grant

administered by the Economic Development Corp. of Jefferson Co.) to St.Louis County,

an RLF that filed its report for 9/30/06 on time. EDA has provided the OIG with St.

Loujs County's 9/30/06 report, as well as documentation of the transfer of funds.

These RLFs appear to have been closed out. albeit with insufficientdocumentation:
District of Columbia
Anacostia Economic Development Corporation
District of Columbia
Park Heights Development Corporation

Boston EDIC

Massachusetts Urban Reinvest Group
Harlem Commonwealth Council

013902020
013918007

013902166

013902248
013901977
- 013902245

013902237

These RLFs have agreed to voluntary (grant is less than $500.000) A-I]]
submitting RLF re{>orts:

Affiliated Tribes ofNW Indians
South Central Oregon EDD

audits in lieu of

073903859

077905182

These RLFs have been unresponsiveto date:
Elkhart, City of
Hartford, City of
Berrien County
Montmorency County
Cleveland, City of
Ohio, State of/Akron
Ohio, State of/Toledo
Oconto County Brd of Supervisors
Springfield Business :Qevelopment Fund

061902639
063902170
063901775

061901986

06390177301 [deficient report rec'd]
061901918
061901918
061902137
013902706
..
-';'

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File Type	application/pdf
File Title	Microsoft Word - EDA-RLF REPORT FINAL - 3-31-07 r1 _2_.doc
Author	rdettmar
File Modified	2007-04-26
File Created	2007-04-26