We were contracted by the U.S. Department of Labor (DOL), Office of Inspector General, to perform an audit of the Hawaii Job Corps Center's (HJCC) Schedule of Job Corps Expenses for the program year ended June 30, 2001, in order to render an opinion on that schedule and to report on internal control and compliance with laws and regulations in accordance with applicable audit standards.

The HJCC is 1 of over 100 Job Corps centers located throughout the country. These centers are funded and regulated by the DOL, Office of Job Corps, and are designed for purposes of operating the Job Corps program, a residential, educational, and training program which serves at-risk youth. The HJCC is operated by Management & Training Corporation (MTC), under contract with the DOL.

Our audit objective was to obtain reasonable assurance that the Schedule of Job Corps Expenses for program year ended June 30, 2001, was presented fairly in all material respects in accordance with the accounting principles prescribed by the DOL, Office of Job Corps, which is a comprehensive basis of accounting other than generally accepted accounting principles. In accordance with this objective, we also obtained an understanding of management's internal controls and assessed control risk, and performed tests of the HJCC's compliance with certain laws, regulations, and contracts. These procedures were performed as part of obtaining reasonable assurance on the Schedule of Job Corps Expenses, and our objective did not include expressing an opinion on the internal control structure or on overall compliance with laws and regulations.

Audit Results

While our opinion on the Schedule of Job Corps Expenses was unqualified, we noted the following matters that were required to be reported in accordance with the applicable audit standards.

Insurance Reserve Balances

We found that the reserves collected over the years to cover future uninsured losses far exceeded the actual amount paid to claimants and they were not deposited into an interest bearing account or set aside specifically to pay future claims. As of November 2000 the reserve balance was approximately $6.48 million. Additionally, it is our understanding that MTC has not obtained approval from the Office of Job Corps for their self-insurance program as required by the regulations.

Weak Controls Over Construction and Rehabilitation Projects

The HJCC is not exercising sufficient internal controls over its construction and rehabilitation (CRA) projects. Due to the restricted nature and purpose of CRA funding, it is essential that centers exercise controls which ensure that these Federal resources are used for their intended purposes and are properly tracked and documented. Specifically, we found the HJCC: (1) was unable to identify the specific projects approved by the Office of Job Corps for over $300,000 of $1.15 million of its CRA funding; (2) vouchered costs in excess of the approved amount for its Maui dorm project; (3) reported about $32,000 of CRA costs in error as operations expenses; and (4) processed 3 out of 10 CRA invoices for payment without written notations or other form of evidence that the goods or services were received and did not have a purchase requisition for 1 invoice.

Inadequate Accountability Over Inventories

The HJCC did not exercise adequate accountability over its inventories of expendable supplies which are Federal assets. Specifically, we found the inventory records did not include a report which provided the detail and composition of the center's ending inventory balances. Additionally, there were large and unusual fluctuations in 9 of the 12 months evaluated (defined as more than 20 percent variance from the preceding month). The HJCC was unable to explain why there were such large fluctuations throughout the audit period.

Journal Entries Not Reviewed

The HJCC did not ensure that journal entries were consistently approved by someone other than the preparer of the entry prior to being recorded in the general ledger. While the MTC policy requires such an approval, the approval line was left empty on all of the journal entries selected for testing. We discussed this finding with HJCC staff, and were told that while MTC policy required approval of journal entries, the finance manager was relatively new to the center and had not yet found the time to initiate this policy. If there are no review and approval procedures in place, there is a much higher risk that erroneous transactions will be recorded and will not be detected on a routine or timely basis.

Excessive Vacation and Sick Leave Balances

The HJCC was maintaining annual and sick leave balances in excess of allowable corporate limits. According to MTC corporate policy, the maximum amount of unused annual leave which employees can carry over to subsequent years ranges from 80 hours to 200 hours. The maximum unused sick leave which may be carried over is 240 hours. We noted many instances where the unused leave balances exceeded these limits. While the accrued balances noted during our audit are not charged to the contract until paid to employees, the payment of these balances to employees could result in unallowable charges to the Job Corps contract.

Recommendations

We recommend that:

• MTC prepare and submit a written plan to the Office of Job Corps which details the self-insurance policies and practices used in charging insurance costs to their government contracts. The plan should entail all of the required components of 48 CFR 28.308. We also recommend that MTC ensure that future charges for uninsured losses be based on the present value of future payments in accordance with the regulations. In addition, we recommend that MTC set aside the funds in an interest bearing account, whereby the interest will offset the cost of further insurance charges. Finally, MTC should ensure that the existing reserve represent only the present value of future payments and refund any excess balance (the proportionate share) to the Federal Government.

• HJCC implement improved controls over the CRA funding provided to ensure that there is: (1) adequate accountability over the CRA funds awarded; (2) adequate tracking and monitoring for timely completion; (3) advanced approval of redirected funds prior to expenditure of such funds for an alternative project; and (4) improved procedures for documenting receipt of goods or services prior to payment. In addition, we recommend that the HJCC adjust its ETA 2110 report to reflect accurate CRA and operations' costs. As of June 30, 2001, the necessary adjustment was $31,980.

• Complete perpetual inventory records are maintained which provide sufficient detail (description, quantity, and value) of the items held in inventory at the end of each reporting period. The balances reflected on the report should support the inventory balances reported on the Job Corps Contract Center Financial Report ETA 2110. We also recommend that HJCC take greater care in maintaining inventory records and in reporting these items on the ETA 2110 to ensure that the reports are accurate, complete, and up to date.

• HJCC initiates procedures which require that journal entries be reviewed and approved by someone other than the preparer. This process should be documented by initialing and dating the appropriate line on the journal entry form.

• MTC reviews the leave balances for HJCC staff and determine whether a portion of these balances should be forfeited by the respective employees. We also recommend that MTC ensures that the policies applicable to the HJCC are clarified and, if unique to the HJCC, put into writing and reissued to all HJCC staff.

Auditee's Response

In its response to our draft report, the auditee generally concurred with all of the recommendations described above, with the exception of those related to the insurance reserve accounts. They believe that the current self-insurance practices are in accordance with the cost accounting standards, and that the reserve balance is not excessive based on their estimate of future insurance losses.

We have incorporated the auditee's detailed comments at the end of each finding, as appropriate. In addition, a copy of the auditee's written response is included, in its entirety, as an appendix to this report.

Auditor's Conclusion

With the exception of the insurance reserve account, we agree with the corrective actions described in the auditee's response and consider all but one recommendation resolved.

As to the insurance reserves, we hold to our conclusion that the current reserve account balance significantly exceeds the actual payments made in any given year since inception of the reserves, and that the reserve funds should have been set aside for payment of insurance claims rather than consumed in the contractors operations. This recommendation is unresolved and will be addressed in ETA's formal resolution process.

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