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entitled 'GAO Review of LEA Controls over and Uses of Recovery Act 
Education Funds (Winston-Salem/Forsyth County Schools)' which was 
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United States Government Accountability Office: 
Washington, DC 20548: 

July 9, 2010: 

June St. Clair Atkinson, Ed.D.
State Superintendent:
North Carolina Department of Public Instruction: 

Subject: GAO Review of LEA Controls over and Uses of Recovery Act 
Education Funds (Winston-Salem/Forsyth County Schools): 

Dear Dr. Atkinson: 

The American Recovery and Reinvestment Act of 2009 (Recovery Act) 
[Footnote 1] mandates GAO to review states' and localities' use of 
funds made available under the act.[Footnote 2] Since April 2009, GAO 
has published bimonthly reports on our findings related to federal, 
state, and local implementation of the Recovery Act.[Footnote 3] 
Currently, we are examining the efforts of selected states and local 
educational agencies (LEA) to ensure appropriate uses of Recovery Act 
funds. In North Carolina, we have been reviewing efforts undertaken by 
the North Carolina Department of Public Instruction (DPI) and selected 
LEAs to administer and oversee the use of Recovery Act funds under the 
State Fiscal Stabilization Fund (SFSF) education stabilization funds; 
Title I of the Elementary and Secondary Education Act of 1965 (ESEA 
Title I), as amended; and Part B of the Individuals with Disabilities 
Education Act (IDEA), as amended. As part of this effort, we met with 
various DPI staff and, from February 23 through 25, 2010, we visited 
Winston-Salem/Forsyth County Schools (WSFCS) to review and test the 
adequacy of controls and procedures in place pertaining to Recovery 
Act funds for these three federal programs. During our visit, we 
interviewed finance and program officials regarding internal controls, 
procurement procedures, and use of Recovery Act education funds. We 
also reviewed a nonstatistical sample of 63 expenditures of Recovery 
Act funds for goods, services, and salaries under these three 
programs. As of February 12, 2010, WSFCS had expended about $17.6 
million in Recovery Act funds. Expenditures in our sample totaled 
$618,814.84, of which $185,256.83 represented nonsalary expenses. We 
conducted our work from February 9, 2010, to April 20, 2010, in 
accordance with generally accepted government auditing standards. The 
purpose of this report is to bring to your attention our findings 
related to WSFCS. 

Internal control helps managers better achieve an entity's mission and 
accountability for results through more effective stewardship of 
public resources. Internal control includes management and program 
policies, procedures, and guidance that help ensure effective and 
efficient use of resources; compliance with laws and regulations; 
prevention and detection of fraud, waste, and abuse; and the 
reliability of financial reporting. According to the Office of 
Management and Budget (OMB) Circular No. A-133, nonfederal entities 
expending federal awards are required to maintain "internal control 
over federal programs that provides reasonable assurance that the 
auditee is managing federal awards in compliance with laws, 
regulations, and the provisions of contracts or grant agreements that 
could have a material effect on each of its federal programs." 
[Footnote 4] U.S. Department of Education (Education) regulations also 
require grantees and subgrantees (other than states) to maintain 
effective internal control over "all grant and subgrant cash, real and 
personal property, and other assets,"[Footnote 5] in addition to other 
controls.[Footnote 6] 

According to Education regulations, grant funds may only be used for 
allowable costs and reasonable fees or profit to cost-type 
contractors, and state and local governments must follow the cost 
principles set out in OMB Circular No. A-87 for determining allowable 
costs.[Footnote 7] For example, OMB Circular No. A-87 states that 
costs for entertainment, promotional materials (such as souvenirs), 
alcoholic beverages, certain lobbying, and organized fund-raising and 
campaigns to raise capital are unallowable. States and LEAs that 
receive federal funds must ensure that the funds are spent on 
allowable costs as described in OMB Circular No. A-87, agency program 
regulations, and the terms of grant and subgrant agreements.[Footnote 

Education's regulations state that grantees and subgrantees will use 
their own procurement procedures that reflect applicable state and 
local laws and regulations, provided that the procurements conform to 
applicable federal law and the standards identified in 34 C.F.R. § 
80.36.[Footnote 9]In May 2009, according to state officials, North 
Carolina's Office of Economic Recovery & Investment (OERI) issued 
management directives regarding the use of Recovery Act funds for 
procurement of goods and services.[Footnote 10] According to state 
officials, OERI directives require recipients of Recovery Act funds to 
advertise contracts for $5,000 or more and obtain multiple bids or 
price quotes for Recovery Act procurements, among other things. 

In the course of our work, we observed that WSFCS has an internal 
control system in place for processing purchasing documents and 
payments of invoices, with defined segregation of duties among those 
approving purchases, paying invoices, and delivering payments to 
vendors. We also learned of efforts by administrators to improve 
processes to ensure that funds are well-spent. For example, according 
to WSFCS officials, the ESEA Title I office implemented additional 
controls over school purchases of food for parental involvement 
meetings to avoid overspending. However, we found several problems 
related to some of the Recovery Act expenditures we reviewed. 
Specifically, we found the following: 

* WSFCS expended $38,400 of ESEA Title I funds[Footnote 11] on a 
program that included some expenses that appeared to constitute 
entertainment, a potentially unallowable use of these funds.[Footnote 
12] WSFCS officials told us that the LEA paid ESEA Title I Recovery 
Act funds to the Housing Authority of Winston-Salem (HAWS) for a 2009 
summer educational program for students entitled the "Summer Teaching 
Enrichment Program" (STEP). According to STEP officials, the ESEA 
Title I funds comprised the majority of STEP's 2009 budget, which also 
included funding from a local corporation and the local police 
department.[Footnote 13] WSFCS and STEP officials described the 
program as providing remedial academic assistance in reading, math, 
science, and technology to help students retain educational gains over 
the summer months. Furthermore, the WSFCS Superintendent said that the 
district's arrangement with the STEP program was to use district funds 
to pay only for teachers' salaries, and that other sources of funds 
would be used to pay for noneducational activities. HAWS officials 
said that they were instructed by a WSFCS official to make sure that 
all of the children enrolled in the program attended ESEA Title I 
schools, and that they obtained confirmation from the district that 
all of the children did so. STEP officials told us that students spent 
approximately 3 hours, 4 days a week, on educational activities and 8 
hours, 1 day a week, on academic field trips. STEP officials said that 
these field trips included trips to science centers, planetariums, and 
colleges. They also said that the program included workshops on 
conflict resolution and crime prevention. However, in our review of 
documents, we found evidence that in addition to paying teachers a 
total of $17,270 in salaries, HAWS also used ESEA Title I funds to pay 
for STEP activities that included other salaries and field trip-
related expenses, including tickets for movies, a water park, fast 
food, and other entertainment. For example, activities for students 
included a trip to the movie theatre to see movies entitled Ice Age 
(for K-5 graders) and Terminator (6-12 graders) for a total of $405.50 
and a trip to a water park, Wet and Wild Emerald Point, for $961.23 
(including food and locker rentals). The invoice that HAWS provided to 
WSFCS lacked supporting documentation for the full range of activities 
paid with ESEA Title I funds. Instead, payment was made at a rate of 
$800 per child attending the program, but no attendance records were 
provided in support of the invoice. Furthermore, WSFCS officials told 
us that they did not provide oversight of STEP activities. Finally, we 
observed and WSFCS officials confirmed that the LEA's final purchase 
order for this expenditure did not specifically state that the grant 
was for teacher salaries, or that the children participating in the 
program must come from ESEA Title I schools. Also, we observed and 
WSFCS officials confirmed that the purchase order was not signed by 
the ESEA Title I Director, per the typical procedure WSFCS officials 
described to us during our visit. A WSFCS official with signature 
authority acknowledged that the signatures on the purchase order were 
not in accordance with LEA practice. In response to our observations, 
WSFCS officials reported to us that they plan to reprogram all or part 
of the ESEA Title I funds spent on this activity to nonfederal funding 

* WSFCS staff could not provide documentation to show that the 
district obtained multiple bids or price quotes for contracts for 
goods and services. WSFCS officials acknowledged that their practices 
were not in compliance with state management directives requiring 
competition or advertising. WSFCS could not provide us with 
documentation to show that the district solicited multiple bids or 
obtained multiple price quotes for contracts for goods purchased with 
Recovery Act funds. In response to our request for information on bids 
or price quotes for purchases of high-definition televisions, 
computers, and other electronic equipment (not purchased from state 
contractors) using ESEA Title I Recovery Act funds, WSFCS staff 
provided us with one list of various items, the chosen vendor for each 
of these items, and the items' price. WSFCS officials also could not 
provide us with documentation of the district having obtained multiple 
bids or price quotes for contracts for services. A senior WSFCS 
official said that documentation was not available because the LEA 
does not solicit bids or obtain multiple price quotes for professional 
development services. WSFCS officials also acknowledged that for at 
least one contract, they were not in compliance with WSFCS's 
purchasing policy to solicit bids/price quotes for purchases of items 
costing more than $5,000 but less than $90,000. 

Federal regulations state that grantees are responsible for managing 
the operations of grant and subgrant supported activities and must 
monitor grant and subgrant supported activities to ensure compliance 
with applicable federal requirements and achievement of performance 
goals.[Footnote 14] Therefore, we are referring our findings to your 
agency for follow-up. We are also sending copies of this report to the 
Superintendent of Winston-Salem/Forsyth County Schools, the North 
Carolina Office of the State Auditor, the U.S. Department of 
Education, and the U.S. Department of Education's Office of the 
Inspector General. In addition, this report will be available at no 
charge on GAO's Web site at [hyperlink,]. We 
included the issues raised in this report, and any actions that DPI or 
WSFCS has taken to resolve them, in our report issued on May 26, 2010, 
and will follow up with you on the resolution of these issues. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-8403 or Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report include 
Bryon Gordon, Assistant Director; Laura Acosta; Bonnie Derby; Brian 
Egger; Tahra Nichols; and Kathleen Peyman. 

Sincerely yours, 

Signed by: 

Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues: 

[End of section] 


[1] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

[2] Recovery Act, div. A, title IX, § 901. 

[3] For GAO bimonthly reports providing a national overview and 
selected state reviews of Recovery Act spending, see [hyperlink,]. 

[4] OMB Circular No. A-133 §___.300(b). 34 C.F.R. § 80.26 requires 
Education's state and local government grantees and subgrantees to 
obtain audits in accordance with OMB Circular No. A-133. 

[5] 34 C.F.R. § 80.20(b)(3). 

[6] See e.g., 34 C.F.R. §§ 80.26 (audit) and 80.40 (monitoring). 

[7] 34 C.F.R. § 80.22. 

[8] 34 C.F.R. § 80.20(b)(5). 

[9] 34 C.F.R. § 80.36(b)(1). 

[10] North Carolina Office of Economic Recovery & Investment 
Directives 3 and 3(b) (May 2009 and January 2010), " Contract 
Provisions for the Procurement of Goods, Services, and Construction 
Projects Including Design Services and Internal Procurement 

[11] Of those funds, $6,400 were Recovery Act ESEA Title I funds and 
$32,000 were regular ESEA Title I funds. 

[12] OMB Circular No. A-87 states that the costs of entertainment, 
including amusement, diversion, and social activities, and any costs 
directly associated with such costs (such as tickets to shows or 
sports events, meals, lodging, rentals, transportation, and 
gratuities) are unallowable. 

[13] The total amount of Recovery Act and regular ESEA Title I funds, 
$38,400, comprised 74 percent of STEP's total estimated budget of 

[14] 34 C.F.R. § 80.40(a). 

[End of section] 

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