SUBJECT: Norwalk Economic Opportunity Now, Inc.

DECISION

Norwalk Economic Opportunity Now, Inc. (NEON) appealed the May 20, 2005 decision by the Administration for Children and Families (ACF) terminating Neon's Head Start grant pursuant to 45 C.F.R. � 1303.14. Under that section, ACF may terminate a Head Start grant if a grantee fails to timely correct deficiencies in meeting performance standards. ACF's decision was based on the results of an on-site review in March 2004 and a follow-up review in November 2004.

Based on the March review, including findings related to the governing body's responsibility to ensure that appropriate internal controls are established and implemented to safeguard federal funds, ACF determined that NEON had a deficiency in Fiscal Management. The findings specified two areas where internal controls were found to be lacking. NEON submitted a quality improvement plan (QIP) addressing the deficiency and, as directed by ACF, setting a six-month deadline for correcting the deficiency, i.e., November 2004. In the follow-up review, ACF determined that the deficiency had not been "fully eliminated" with respect to two types of internal controls, not cited in the March review or a subsequent financial review. Specifically, ACF alleged that NEON failed to perform timely, monthly reconciliations of bank accounts and failed to perform regular analyses of balance sheet accounts, in accordance with "standard practice."

ACF's Regional Administrator initially gave NEON another six months to complete correction of the alleged deficiency. His termination notice, however, said that ACF had determined that he had no authority to extend the corrective action period, so he was terminating NEON's grant based on the November review.

[Page 2] NEON appealed, moving for summary disposition on the grounds that the termination decision was contrary to law and arbitrary and capricious. NEON argues that ACF's actions were contrary to law because: 1) ACF directed that NEON must correct the deficiency found in the March review within six months, rather than letting NEON propose a time period for correction; 2) ACF terminated NEON's grant based on new alleged deficiencies, rather than NEON's failure to correct the deficiency found in the March review; 3) the findings from the November review regarding bank account reconciliations and account analyses on which the new, alleged deficiencies are based are factually incorrect; and 4) the new, alleged deficiencies do not rise to a violation of the terms and conditions of NEON's grant. NEON also asserts that ACF acted arbitrarily and capriciously in first granting and then retroactively rescinding an extension of the time for correcting the deficiency. NEON asserts, moreover, that it 1) had corrected the deficiency as it was described in the findings from the March review, and 2) had other internal controls in place that adequately addressed the new concerns raised by ACF. NEON submitted documentation that it says supports its factual assertions and proffers testimony about its corrective actions and internal controls.

In response, ACF moved for dismissal on the basis that NEON's appeal failed to meet the regulatory requirements for the contents of an appeal. ⁽¹⁾ ACF asserts that NEON did not sufficiently identify any factual or legal disputes and that NEON's documentation is not identified as to source or time period and therefore is insufficient to show compliance. ACF also argues that the appeal does not provide a basis for reversing the termination because NEON alleges only substantial compliance, not timely correction of the deficiency.

[Page 3] In reply, NEON argues that its appeal raises both factual and legal issues. In addition, NEON notes that some of the documents it submitted have dates showing that they were prepared before the November review and asserts that other documents existed at the time of the November review, as shown by the fact that they were produced to NEON from ACF during discovery. NEON asserts that NEON is not merely alleging substantial compliance, but is alleging that it fully corrected the identified deficiency by the time of the November review, taking all of the steps outlined in the QIP. ACF declined to submit a surreply although given an opportunity.

For reasons explained later in detail, we rule as follows:

• We deny summary disposition to ACF since we find that the appeal meets the regulatory requirements for an appeal.



• We grant summary disposition to NEON on the following grounds:



• ACF's assertions that NEON did not timely perform monthly account reconciliations and regular account analyses are new findings related to alleged failures to comply with financial management requirements that were different from, and not reasonably encompassed within, the deficiency cited in the March review. Thus, ACF was obliged to provide notice and an opportunity to correct before terminating NEON based on these additional findings.



• ACF must cite in a termination notice the legal bases for its action. Yet, ACF did not cite in the termination notice (or in response to the appeal) any regulation, policy document, or other written guideline to show that what ACF alleges is "standard practice" is in fact a required practice, or that a grantee's internal controls will not be considered appropriate if the grantee does not follow this practice. ACF did not even submit any documentation to support its assertion about what the "standard practice" is, nor does ACF's description of the areas of testimony it would present at a hearing refer to this assertion.



• Given the findings from the March review and the results of a financial review ACF conducted in May, NEON could have reasonably thought that it would be considered to be in full compliance with the [Page 4] performance standard in question if it took the steps in the approved QIP by November 2004 (which ACF concedes that NEON did).



• ACF does not dispute NEON's assertion that it had in place during the period prior to the November review internal controls other than monthly bank reconciliations and regular account analyses that fulfilled the same purpose.
  

Given these factors, and ACF's admitted action of granting and then retroactively rescinding an extension of the time for correcting any deficiency (which raises questions of fundamental fairness), we see no need for an evidentiary hearing in this case.

Since we conclude that there are other grounds for summary disposition in NEON's favor, we do not address NEON's request for summary disposition on the ground that ACF had no authority to direct NEON to provide a corrective action period of only six months in its QIP.

Legal Background

Head Start is a national program providing comprehensive developmental services, including health, nutritional, educational, social and other services, to economically disadvantaged preschool children and their families. See 42 U.S.C. � 9831; 65 Fed. Reg. 4763, 4764 (February 1, 2000). ACF provides funds to grantees to serve as Head Start agencies within designated communities and periodically reviews their performance in meeting program and fiscal requirements. See generally 42 U.S.C. � 9836.

Central to this appeal is the question of NEON's compliance with Head Start Program Performance Standards. The Program Performance Standards have played a central role in the Head Start program since the 1970s. They provide a standard definition of quality services for community-based organizations nationwide that administer Head Start as grantee or delegate agencies; serve as a training guide for staff and parents on the key elements of quality; articulate a vision of service delivery to young children and families that has served as a catalyst for program development and professional education and training in the preschool field; and provide the regulatory structure for the monitoring and enforcement of quality services in Head Start. 61 Fed. Reg. 57,186 (1996).

[Page 5] This Department promulgated the current performance standards effective in 1998, after the Head Start Act Amendments of 1994, Public Law No. 103-252, mandated a review of the performance standards to bring them up to date and to cover new topics, to ensure that all children and families enrolled in Head Start are offered high quality services that are responsive to their needs. 61 Fed. Reg. at 57,187.

This appeal concerns the circumstances under which ACF may terminate a Head Start agency's federal financial assistance and designation as a Head Start agency. Among the grounds for which ACF may terminate financial assistance to a Head Start grantee at 45 C.F.R. � 1303.14(b) are that the grantee "has failed to timely correct one or more deficiencies as defined in 45 C.F.R. Part 1304;" and that the grantee "has failed to comply with the requirements of the Head Start Act." 45 C.F.R. � 1303.14(b)(4) and (7).

As relevant here, the definition of "deficiency" in section 45 C.F.R. � 1304.3(a)(6) includes the following:

(i) An area or areas of performance in which an Early Head Start or Head Start grantee agency is not in compliance with State or Federal requirements, including but not limited to, the Head Start Act or one or more of the regulations under parts 1301, 1304, 1305, 1306 or 1308 of this title and which involves:

* * * * *

(C) A failure to perform substantially the requirements related to Early Childhood Development and Health Services, Family and Community Partnerships, or Program Design and Management; . . . .

The Early Childhood Development and Health Services, Family and Community Partnerships, or Program Design and Management cited in the definition of deficiency are categories of program performance standards found at 45 C.F.R. Part 1304, Subparts B, C and D. A deficiency can also be "any other violation" which "the grantee has shown an unwillingness or inability to correct within the period specified by the responsible HHS official, of which the . . . official has given the grantee written notice . . . pursuant to section 1304.61." 45 C.F.R. � 1304.3(a)(6)(D)(iii).

Section 1304.50(g), captioned "Governing body responsibilities," provides in pertinent part:

(2) Grantee and delegate agencies must ensure that appropriate internal controls are established and [Page 6] implemented to safeguard Federal funds in accordance with 45 CFR 1301.13.

In addition to being subject to Head Start performance standards, Head Start grantees like NEON are subject to grant administration requirements in 45 C.F.R. Part 74, including section 74.21(b)(3), which requires that financial management systems provide for "[e]ffective control over and accountability for all funds, property and other assets. . . ."

ACF may terminate a Head Start grant where the grantee has been notified of a deficiency and given an opportunity to correct it. ACF may require that the grantee correct deficiencies either immediately, within 90 days, or pursuant to a QIP. 45 C.F.R. � 1304.60(b).

A grantee required to correct a deficiency pursuant to a QIP must submit to the responsible HHS official a plan "specifying, for each identified deficiency, the actions that the grantee will take to correct the deficiency and the timeframe within which it will be corrected." 45 C.F.R. � 1304.60(c). However, in no case may the timeframes proposed in the QIP exceed one year from the date that the grantee received official notification of the deficiencies to be corrected. Id. ACF must, within 30 days of receipt of the QIP, either notify the grantee of approval of the QIP or specify reasons for disapproval. If ACF disapproves the QIP, the grantee must submit a revised QIP, making the changes necessary to address the reasons that the initial QIP was disapproved. ⁽²⁾ 45 C.F.R. � 1304.60(c)-(e).

Section 1304.60(f) states in relevant part:

If [a grantee] fails to correct a deficiency . . . within the timeframe specified in the approved [QIP], the responsible HHS official will issue a letter of termination . . . .

A notice of termination must set forth the "legal basis for the termination . . ., the factual findings on which the termination is based or reference to the specific findings in another document that form the basis for the termination . . . , and citation to any statutory provisions, regulations, or policy [Page 7] issuances on which ACF is relying for its determination." 45 C.F.R. � 1303.14(c)(1).

A Head Start agency that has received a notice of termination from ACF is entitled to "a full and fair hearing" on the proposed termination, which this Board is authorized to provide on behalf of the Secretary. 42 U.S.C. � 9841(a)(3); 45 C.F.R. � 1303.16(a); 57 Fed. Reg. 59,260 (December 14, 1992); Mansfield-Richland-Morrow Total Operation Against Poverty, Inc., DAB No. 1671 (1998). Procedures for the conduct of a hearing are set forth at 45 C.F.R. � 1303.16. The Board's procedural regulations at 45 C.F.R. Part 16 apply to these proceedings insofar as they are not inconsistent with Part 1303. 45 C.F.R. � 1303.14(c)(2).

The standards applicable to terminations are well-settled. The Board has previously stated that the provisions of 45 C.F.R. � 1303.14 require ACF to make a prima facie case that there exists sufficient evidence to satisfy the regulatory standards for termination. See Target Area Programs for Child Development, Inc., DAB No. 1615 at 6 (1997) (and cases cited therein). Once ACF has set forth legally adequate reasons to support a termination and provided sufficient specificity for the grantee to respond to the substance of individual findings, the regulations require the grantee to respond.

A grantee always bears the burden to demonstrate that it has operated its federally funded program in compliance with the terms and conditions of its grant and the applicable regulations. See Lake County Economic Opportunity Council, Inc., DAB No. 1580, at 5 (1996); Meriden Community Action Agency, Inc., DAB No. 1501 at 41 (1994); Rural Day Care Association of Northeastern North Carolina, DAB No. 1489 at 8, 16 (1994), aff'd Rural Day Care Ass'n of Northeastern N.C. v. Shalala, No. 2:94-CV-40-BO (E.D. N.C. Dec. 20, 1995); see also 45 C.F.R. � 74.21(b)(2). Moreover, "a grantee is clearly in a better position to establish that it did comply with applicable requirements than ACF is to establish that it did not. Therefore, the Board has held that the ultimate burden of persuasion is on the grantee to show that it was in compliance with program standards." DOP Consolidated Human Services Agency, Inc., DAB No. 1689, at 6-7 (1999).

We set out other applicable law in our analysis below where relevant.

Factual Background

The following facts are undisputed. NEON is a community action agency located in Norwalk, Connecticut that receives grants from [Page 8] various federal, state, local and other funding sources. In 2004, it received a grant for a Head Start program to serve 275 children. NEON Ex. 8, at NEON-00165. ⁽³⁾ ACF conducted a triennial on-site review of NEON's Head Start program from March 8-14, 2004. By letter dated April 26, 2004, ACF notified NEON that, as a result of this review, ACF had determined that NEON had deficiencies in Program Design and Management relating to Fiscal Management and Human Resources. For each of the latter two areas, the letter identifies several regulations as "[s]tandards applicable to NEON Head Start program." The "standards" cited under "Fiscal Management" include 45 C.F.R. � 1304.50(g)(2) and several provisions of 45 C.F.R. � 74.21(b) (but not section 74.21(b)(3)). NEON Ex. 2, at NEON-00003-00004.

ACF's April 26 letter states that "[t]he areas of noncompliance constituting the deficiency in Fiscal Management must be corrected within six months from the date you receive this letter" and that "[t]he areas of noncompliance constituting the deficiency in Human Resources must be corrected within one year from the date you receive this letter." Id. at NEON-00004 (italics in original). The letter explains the deficiency in Fiscal Management as follows:

[NEON] is substantially deficient in fiscal management. The absence of mechanisms for safeguarding, tracking, and monitoring funds, as well as for communicating fiscal information to the Head Start program[,] are negatively impacting operations throughout the program. Correcting the noncompliances in fiscal management must be your agency's priority in order to ensure the success of the NEON Head Start program in delivering quality comprehensive services to children and families.

ACF is highly concerned about the weaknesses in your internal control systems for fiscal management and the vendor practices identified by the review team. As a result, we intend to pursue a further explanation of your agency's expenditures of Federal funds.

Id.

The review report attached to ACF's April 26, 2004 letter describes ACF's findings relating to section 1304.50(g)(2) as follows:

[Page 9] The grantee's governing body had not ensured that appropriate internal controls were established and implemented to safeguard Federal funds and to ensure appropriate internal controls for safeguarding assets, checking the accuracy and reliability of accounting data, and promoting operating efficiency. Upon review of contracted services expenses it was noted that there were three occurrences in which the same service was contracted to the same vendor, identifying different company names, referencing the same amount, and utilizing the same documentation for back up. It was also noted that the same company official signed all authorizations and checks. Additionally, in one of the three occurrences the check signer was not an authorized official (i.e. the signer was the Assistant Treasurer) as stated in the agency's Finance Policy and Procedures manual. Upon further review, it was evident that three checks were endorsed by the same signature, drawn upon the same bank and into the same account. When this issue was brought to the attention of the Finance Director, he explained that the expenses were for three different projects. However, sufficient documentation was not supplied during the review to verify the explanation given.

NEON Ex. 2, at NEON-00017. The review report also cited NEON for some other financial management failings under the grants administration regulations at 45 C.F.R. Part 74. The report did not, however, cite the provision at section 74.21(b)(3) requiring "[e]ffective control over and accountability for all funds, property and other assets . . . ."

On June 28, 2004, NEON submitted its QIP to ACF for approval. The QIP quotes the findings from the review report under section 1304.50(g)(2) and then lists six corrective actions:

• Revise Finance Policies and Procedures to reflect reference to A-122 Cost Principles.
• Revise Finance Policies to add Assistant Treasurer as a check signer as per agency bi-laws (sic).
• Board of Directors and Policy Council approve revised Finance Policies and Procedures.
• Training for Fiscal Department and Board of Directors on revised Finance Policies and Procedures.
• Establish Audit Committee (sub-committee of the Board of Directors) to ensure Board oversight. This committee will work closely with the Finance Department and the Board of Directors to ensure appropriate internal controls are established and [Page 10] implemented to safeguard Federal funds. The Audit Committee membership will consist of at least one Certified Public Accountant (CPA).
• Test accounting systems to ensure appropriate internal controls are established.

NEON Ex. 4, at NEON-00043-00044. The QIP specifies an "ACF Timeline for completion" of these actions of 11/2004. Id. at NEON-00043. ACF approved the QIP on July 23, 2004. NEON Ex. 6, at NEON-00064.

On July 16, 2004, ACF advised NEON that the further financial review conducted because of concerns raised during the March on-site review found that budget development procedures and contract procedures were weak. No mention was made of internal controls. NEON Ex. 5.

On August 18, 2004, a report on an independent audit of NEON's financial statements for the year ended December 31, 2003 was issued. The audit was performed pursuant to the Single Audit Act, as amended, and the standards for audits of states, local governments, and non-profit organizations in Office of Management and Budget (OMB) Circular A-133. Although the audit report does not question any costs charged to federal funds, it advises NEON that the auditors--

noted certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect NEON's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.

NEON Ex. 7, at NEON-00103.

One reportable condition identified in the audit report is that "[m]onthly bank reconciliation of the operating accounts is not being performed in a timely manner." According to the audit report, "[t]he Agency should prepare monthly bank reconciliations within 30 days of receiving the bank statements. Any differences noted during the reconciliation process should be investigated and properly adjusted. The reconciled balance should agree with the checkbook balance and the general ledger balance for each month end." The auditors attributed this reportable condition to "inappropriate follow-up control procedures from Finance [Page 11] management." Id. at NEON-00126. Another reportable condition identified in the audit report is that "analysis of balance sheet and income statement accounts are not performed on a consistent basis within a reasonable period of time. . . ." According to the audit report, "The Agency must adhere to its internal control procedures and perform on a monthly basis reconciliations and analysis of its balance sheet and income statement accounts." The auditors attributed this reportable condition to "inappropriate follow-up control procedures and excessive workloads from the Finance department's management." Id. at NEON-00127.

ACF conducted a follow-up on-site review of NEON's Head Start program from November 1-4, 2004. In a letter dated December 10, 2004, ACF's Regional Administrator for Region I advised NEON that-

the deficiency in Fiscal Management has not been fully eliminated. While the majority of noncompliances in Fiscal Management have been adequately addressed, there is still an important concern in regard to internal controls. Monthly reconciliation of bank accounts and analysis of balance sheet accounts are still not occurring. As a result, inconsistencies in fiscal records are not resolved, often for extended periods of time.

NEON Ex. 9, at NEON-00170. The letter continues:

It is our understanding that your agency will be transitioning to a new accounting software system in the near future and that the new system is expected to facilitate your fiscal staff's ability to address any concerns remaining in this area. In light of the extensive progress that was demonstrated in the fiscal area overall, your agency has an additional six months to complete implementation of the QIP and eliminate the deficiency in Fiscal Management.

Id. at NEON-00170-00171. The letter also states that a second follow-up review has been scheduled for May 16-20, 2005 to "once again evaluate the status of corrective actions in regard to Fiscal Management" as well as to review the status of several other items. Id. at NEON-00171.

The review report attached to ACF's December 10, 2004 letter states that the deficiency in Fiscal Management under section 1304.50(g)(2) has not been corrected. According to this report, "appropriate controls were in place on the disbursement cycle" [Page 12] since "disbursements were supported by appropriate documentation" and "checks were approved by authorized check signers." NEON Ex. 9, at NEON-00188. The review report states, however, that the August 18, 2004 audit report included findings "that were potentially relevant to internal controls and the safeguarding of Federal funds." Id. The review report goes on to describe the two reportable conditions found by the auditors that are described above. The review report then describes the findings on these matters from the November review:

It was determined that not all balance sheet accounts (including cash accounts as noted above) were regularly analyzed. Through document review and interview of the staff accountant, it was determined that the most recent quarterly reconciliation of the Head Start petty cash account was done on July 27, 2004; there had been no account activity and the reconciliation was done on a quarterly basis. The most recent monthly reconciliation for account #11041 was performed on September 16, 2004 and covered the month of August, 2004. In an interview, the Assistant Finance Director explained that the employee pension liability account (#22309) was cleared each month; however, a review of the account detail showed that the account balance had not cleared after July, 2004 because a payment from the operating account had not been recorded. This condition stemmed from the failure to perform timely reconciliation of the operating bank account.

Standard practice calls for monthly reconciliation of bank accounts and analysis of balance sheet accounts with significant balances or transaction volumes as part of an effective system of internal controls to support timely and accurate reporting. The grantee continues in its failure to implement such practices.

NEON Ex. 9, at NEON-00189 (emphasis added).

In a letter dated May 20, 2005, the Regional Administrator advised NEON that he had decided to terminate NEON's Head Start program. The letter indicates that, after consultation with the Commissioner of ACYF, it had been determined that the six-month extension granted in ACF's December 10, 2004 letter "is not allowable under the statute and regulations." NEON Ex. 10, at NEON-00196. The letter notes that "NEON was given six months from the date of receipt of the report (May 4, 2004) to correct the deficiency in Fiscal Management" and that the follow-up review found that NEON had not corrected "the deficiency in Fiscal Management, specifically regarding internal controls (45 [Page 13] CFR 1304.50(g)(2))." Id. at NEON-00197-00198. ⁽⁴⁾ The letter states that ACF had determined that NEON's failure to comply with this requirement was a failure "to perform the requirements related to Program Design and Management" and that NEON "was therefore deficient as defined in 45 CFR � 1304.3(a)(6)." Id. at NEON-00200.

The letter cites as the bases for termination section 1303.14(b)(4)(failure to correct a deficiency) and section 1303.14(b)(7)(failure to meet requirements of the Head Start Act). According to the letter, NEON's failure to timely correct the deficiency under section 1304.50(g) also constituted a failure to comply with the requirements of the Head Start Act, a basis for termination under section 1303.14(b)(7). Thus, if ACF did not have adequate legal grounds for determining that NEON failed to correct a deficiency, it also did not have adequate grounds for terminating NEON's grant.

NEON's appeal met the applicable requirements, so ACF's motion to dismiss is denied.

ACF moved to dismiss NEON's appeal on the ground that the appeal failed to substantially comply with the requirements for filing an appeal in section 1303.14(d). That section provides that a grantee's appeal must, among other things, "[s]pecifically identify what factual findings are disputed;" and "[i]dentify any legal issues raised, including relevant citations." Section 1303.14(d)(2) and (3). The appeal must also include copies of "each document the grantee believes is relevant and supportive of its position." Section 1303.14(d)4); see also 45 C.F.R. � 16.8(a)(1), (2). In addition, the appeal must "[i]nclude any request for specifically identified documents the grantee wishes to obtain from ACF and a statement of the relevance of the requested documents . . . ." Section 1303.14(d)(5). Section 1303.14(e) provides that if the Board determines that "a grantee has failed to substantially comply with [these provisions], its appeal must be dismissed with prejudice" unless the Board [Page 14] "determines that the grantee has shown good cause for its failure to comply . . . ."

In moving for dismissal of NEON's appeal, ACF first identifies the following general grounds:

• The appeal "only very briefly set out any alleged factual or legal issues, and it does not contain any substantive documentation which is fully identified as to source, date of creation or identity of the preparer or creator."
• NEON's discovery request "presented ACF with [an] exhaustive and non-specific fishing expedition."
  

ACF Response at 14. ACF proceeds to argue that NEON has not raised any legal issues, with the possible exception of the issue of whether an allegation of substantial compliance at the time of the follow-up review is legally sufficient to contest the termination. ACF acknowledges that "NEON raises a factual issue by stating that ACF was wrong when it determined that the grantee was not in compliance with Head Start requirements. NEON contends it is in compliance with all of the regulations and has corrected the deficiencies noted in the 2004 Review Reports . . . ." Id. at 15. ACF suggests, however, that NEON proffered no basis for finding that it timely corrected the deficiency under section 1304.50(g)(2) since NEON does not state when it made the corrections and the documents it submitted with its appeal are "undated and unsigned." Id. ⁽⁵⁾

In spite of having said that NEON's appeal raises no legal issues (other than possibly the issue of substantial compliance, which NEON says it did not raise), ACF then goes on to address the arguments NEON made regarding whether ACF's decision to limit NEON's corrective action period to six months was a violation of the Head Start Act or regulations, and whether ACF failed to follow the notice and corrective action process required by the Head Start Act. See ACF Response at 17-20. ACF's ability to respond to these arguments belies its own argument that NEON does not identify any legal issues.

ACF's position that NEON did not adequately identify factual issues also has no merit. NEON alleges that "[b]ank [Page 15] reconciliations were done by NEON's staff" and that "[b]alance sheet account analysis (sic) have been done by NEON for at least the past three years." Appeal Br. at 6. NEON also alleges that it corrected all of the deficiencies in internal controls identified in the November review report and that it had effective internal controls in compliance with 45 C.F.R. � 1304.50(g)(2). Id. at 10-11. NEON explains the latter allegations in some detail as follows:

NEON vigorously disputes ACF's claims that it had ineffective governance and/or ineffective internal controls. It had both. NEON's Board, as the minutes show, was actively involved in overseeing the actions of management and ensuring that fiscal controls were in place. A new audit committee was formed during the corrective action period and started work; finance policies and procedures were approved and so on.

ACF's entire case for termination rests on its claim that NEON should have improved on the procedures for bank reconciliations and account analysis. As NEON will show, it had other internal controls that were designed to catch the same types of accounting errors, and it was conducting the reconciliations and analysis in a manner that provided reasonable assurances that NEON was properly accounting for its use of federal funds.

Id. at 11-12. NEON also describes in detail three types of such other internal controls it maintains were in place. See Appeal Br. at 6-7 (items 4.a - c). Moreover, contrary to what ACF states, at least some of the documents submitted by NEON (including ones that indicate NEON took the actions listed in its QIP) clearly indicate they were generated prior to the November review. See, e.g., NEON Ex. 13 and Ex. 29 at NEON-00522-00525. ⁽⁶⁾

Finally, we find no support in the regulation for ACF's suggestion that NEON's appeal is subject to dismissal on the basis that it included a discovery request that is overbroad. As noted above, section 1303.14(d)(5) requires a grantee to include in its appeal "any request for specifically identified documents the grantee wishes to obtain from ACF" and a statement of their relevance. NEON submitted with its appeal a copy of a letter to the Regional Administrator listing 13 items of information or [Page 16] types of documents NEON was requesting, which it stated were relevant to the appeal "in that they shed light on either the process HHS followed in terminating NEON's Head Start grant or on the basis for the decision itself." Letter to Regional Administrator dated 6/23/05, at 2.

A mere assertion that this request was "overbroad" is not sufficient to show that NEON did not substantially comply with section 1303.14(d)(5). The proper procedure to address an overbroad discovery request is to seek a protective order. ACF, however, responded to NEON's discovery request without raising any objection to the request. A request for dismissal on this basis is thus ill-founded.

Summary disposition in NEON's favor is appropriate.

NEON argues that ACF advised it that its grant was being terminated without providing notice and an opportunity to correct its deficiencies as required by the Head Start Act. Appeal Br. at 9, citing section 641A(d)(1)(A) of the Head Start Act (requiring that "the Secretary shall-- (A) inform the agency of the deficiencies that shall be corrected"). NEON maintains that it was "in no way on notice that if it did not complete its bank reconciliations or its account analysis that its program would be terminated." Id. at 10. According to NEON, the review documents show that "the understanding between ACF and NEON concerning deficiencies in internal controls revolved around procedures for making and documenting vendor payments, budget procedures, and budget to actual reporting." Id. NEON asserts that the first time ACF notified NEON that it considered the issues regarding bank account reconciliations and account analyses to be "part of the 1304.50(g)(2) deficiency" was when NEON received ACF's December 10, 2004 letter. Id.

The Board addressed a similar issue in First State Community Action Agency, Inc., DAB No. 1877 (2003), as follows:

In general, we agree with ACF that the mere fact that a deficiency was exhibited in a certain way in one review does not mean that different evidence may not be used to support a finding that a grantee continued to be deficient in meeting a requirement. Past Board rulings requiring sufficient similarity between a finding supporting a "repeat deficiency" and the original deficiency finding related to performance standards where the lack of such similarity might raise a legitimate notice question. Richmond Community Action Program, Board Docket No. A-95-167, January 31, 1996 Ruling; Home Education Livelihood Program, Inc., [Page 17] Board Docket No. A-95-54, February 2, 1995 Ruling. Where a requirement is clear and a QIP shows that the grantee understood what it was required to do, no notice question arises.

DAB No. 1877, at 17. In that case, the Board found that First State lacked adequate notice with respect to one of the deficiencies since "ACF itself approved as adequate to correct the deficiency action steps that were limited in nature," so that "the failure found in the [follow-up] Review did not stem from a failure to take corrective action steps to which First State committed itself in its QIP." Id. at 18. On the other hand, the Board found that First State had adequate notice of deficiencies in the area of its organizational structure that "go to the essential systems that First State used to deliver Head Start services." Id. at 78. The Board explained that-

[d]eficiencies in those systems may manifest themselves in different ways which are evidence of the deficiency, rather than the deficiency itself. Addressing a specific manifestation and not the structural or systemic problem that permitted it to flourish does not amount to correction of the deficiency. . . . Limiting ACF's enforcement abilities to individual symptoms of a deficiency would permit grantees to avoid addressing underlying management problems. In sum, First State confuses individual manifestations of a deficiency with the deficiency itself. Corrective measures aimed at those manifestations but not at the underlying problems that made it possible for them to arise are not sufficient to bar a termination action, where ACF has adequately notified the grantee of what is expected.

Id. at 78-79 (emphasis added).

ACF takes the position that the findings in the March review and the findings in the November review are both manifestations of the same systemic problem - lack of internal controls. ACF Response at 20, citing First State. As First State indicates, however, the issue must be viewed from the standpoint of whether NEON had adequate notice that, in order to be considered to have corrected the deficiency, NEON would have to modify its practices with regard to reconciliations of bank balances and analyses of its balance sheet accounts. We conclude that NEON did not have such notice.

First, unlike the requirement on organizational structure that we found sufficiently clear in First State, the requirement at issue here does not specify all of the actions a grantee must take to [Page 18] be in compliance. The performance standard in section 1304.50(g)(2) (under the area of "Program governance") provides that the governing body has the responsibility "to ensure that appropriate internal controls are established and implemented to safeguard federal funds in accordance with 45 CFR 1301.13." (Emphasis added.) Neither this requirement nor the referenced section specifies what internal controls are "appropriate" for any particular grantee. Although the referenced provision does indicate that the controls must include controls for "checking the accuracy and reliability of accounting data," it does not describe those controls or state how often the checking must be done. ⁽⁷⁾ Moreover, the focus of the requirement is on the duties of the governing body. Thus, NEON's approved QIP focused on steps to improve the governing body's role in ensuring that NEON established and implemented appropriate internal controls. NEON's QIP also addressed other areas of financial management where specific noncompliance findings were made, but, as mentioned, no specific findings were made under the requirement in 45 C.F.R. � 74.21(b)(3) that refers to effective controls.

This failing might not be critical if ACF cited to other requirements putting NEON on notice that, in order to fully comply with section 1304.50(g) (and thus avoid termination), NEON needed to be performing bank account reconciliations within a particular time period and needed to be doing regular account analyses on all accounts. But ACF cites no policy documents, generally accepted accounting principles, or other authorities that could constitute such notice. Under section 1303.14(c)(1), ACF was required to cite in its termination letter "any statutory provisions, regulations, or policy issuances on which [it] is relying for its determination." ACF, however, relies on the November review report, which cites only to "standard practice."

Moreover, ACF does not proffer any written or testimonial evidence as to the "standard practice." Thus, we have no reason to believe that ACF would establish at a hearing that the [Page 19] "standard practice" is what its findings state. While ACF points out that an audit report for the year ended December 31, 2003 had identified NEON's failure to perform timely bank account reconciliations and account analyses as "reportable conditions" that might be a cause of concern, that audit report does not identify these as required internal controls, nor necessarily preclude use of another type of internal control that might serve the same purpose. OMB Circular A-133, pursuant to which the audit was performed, does not identify any particular type of internal control as required. ⁽⁸⁾ We also note that, with respect to account analyses, the "standard practice" described in the November review report applies only to accounts with significant balances or transaction volumes. Yet, ACF did not specifically find that the three accounts for which the reviewers said the analyses were not done in a timely manner had significant balances or transaction volumes. ⁽⁹⁾

ACF also relies on the audit report as giving NEON notice regarding the "standard practice." ACF Response at 19-20, citing NEON Ex. 7, at NEON-00113-00127. We can find no reference to standard practice in the audit report, however. ⁽¹⁰⁾ In any event, [Page 20] even if the audit report did find that NEON was not following standard practice, this would not convince us that ACF's position in this proceeding is legally sound, for several reasons. First, merely because something is standard practice does not mean that it is required practice or that other internal controls could not serve the same purpose. Second, the audit report on which ACF relies was not issued until August 2004 (well into the corrective action period) and addressed NEON's performance in 2003. Third, the August 2004 audit report was issued by an independent auditor, not by ACF.

We recognize that it is commonly understood that it is a good practice to reconcile a bank's reported balance at the end of the month with the ongoing balance in an individual or entity's own records. But the issue here is whether NEON had adequate and timely notice that if it did not do this for each of its accounts within 30 days of receiving the bank statement, its grant would be terminated.

In any event, even if ACF could properly cite NEON for failure to comply with a standard practice (without making any proffer to show what the standard practice is), we would still find that the ACF findings here do not provide an adequate basis for terminating NEON's grant. The findings relate to failures during the corrective action period. ACF accepted, as sufficient to correct the other identified financial management problems, actions that NEON took within the corrective action period but did not complete until shortly before the November review. Yet, ACF offers no explanation for why the corrective actions that NEON admittedly took pursuant to its QIP were not fully adequate to meet the governing body's responsibility to ensure that appropriate internal controls were established and implemented. Those actions included obtaining approval of revised Financial Policies and Procedures, establishing an audit committee to ensure follow-up of audit findings, training staff, and hiring a financial consultant. The audit committee (headed by a certified public accountant) was set up to review the audit report findings, so could be expected to implement further controls for bank reconciliations and account analyses if needed, and the consultant hired in October might also be expected to address any related problems.

[Page 21] Finally, there are other reasons why we do not think a hearing is needed in this case. First, ACF does not directly dispute NEON's assertion that it had other internal controls in place prior to the November review that provided adequate safeguards for federal funds, nor describe even generally any testimony ACF will present to rebut NEON's proffered testimony in support of the assertion. While ACF raises some questions regarding when NEON's documents were generated, ACF left unchallenged NEON's assertion that some of the documents were obtained by ACF from NEON during the November review, and, as mentioned above, other documents have dates from periods prior to the review. We also note that the audit reports for 2002 and 2003 show that the auditors did not question any of the costs NEON charged to Head Start or other federal funds. This tends to support NEON's assertion that it did have appropriate internal controls to safeguard federal funds.

Second, NEON asserts that ACF's action in first granting and then retroactively rescinding an extension of the period for correcting the deficiency was arbitrary and capricious. NEON asserts that ACF's past practice was to permit such extensions, citing Community Action of Greene County, Inc., DAB No. 1674 (1998). Reply Br. at 7. ACF's only response is that ACF decided that the Regional Administrator, who granted the extension, did not have the authority to do so because the regulations say that ACF must terminate a grant if a deficiency is not corrected within the timeframe specified in the approved QIP. ACF submits a series of e-mails (at Respondent Exhibits 1 and 5) indicating that this position was taken on the advice of the Office of the General Counsel, but does not provide a copy of a written opinion or any other support for the position.

Since the Regional Administrator acted as the "responsible HHS official" in approving the QIP (and in issuing the termination letter), a question arises as to why his action in extending the time for correction may not be viewed as effectively approving a revised timeframe for corrective action under the QIP, and, therefore, as an action within his authority to approve a corrective action period of up to one year. ACF could, of course, determine not to grant a regional administrator such authority. But ACF does not deny that regional administrators previously considered it within their authority to grant extensions, and this at least suggests that the regulation may reasonably be interpreted to permit them to do so, absent some express limitation on their delegated authority. If, as appears to be the case here, the Regional Administrator was authorized to extend the original six-month period for correcting the deficiencies cited in the March review report for another six [Page 22] months, then arguably ACF could not legally terminate the grant based on its determination that NEON failed to correct those deficiencies by November 2004.

We therefore conclude that summary disposition in NEON's favor is appropriate and that there is no need for a hearing in this case.

This conclusion does not preclude ACF from terminating a Head Start grant on the ground that a grantee failed to correct a deficiency under section 1304.50(g)(2) involving inadequate internal controls where ACF first gives notice sufficient to enable the grantee to correct such a deficiency. Nor is ACF precluded from terminating NEON's Head Start grant if ACF concludes based on a further review that NEON failed to timely correct the deficiency regarding Human Resources.

Conclusion

For the reasons discussed above, we deny ACF's motion for summary disposition and grant summary disposition for NEON.

Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member

1. In acknowledging the appeal, the Board directed ACF not only to respond to NEON's motion for summary disposition but also to submit all documents that relate to the findings on which the termination is based and any documents relevant to any additional facts, asserted by NEON, that ACF disputes. In addition, the Board directed ACF to identify each proposed witness by name and title and to state the areas on which the witness may testify. Letter to parties dated 7/5/05, at 2. When ACF filed only a response to NEON's motion and its own motion for summary disposition with any supporting documents or a witness list, the Board gave ACF additional time to complete its submission. Board letter to parties dated 8/22/05.

2. We note that the fact that ACF had discretion to disapprove a QIP proposing a correction period of more than six months undercuts NEON's challenge to ACF's action in directing correction of the deficiency within six months.

3. We cite to the page numbers added by NEON rather than to the document's internal pagination.

4. The letter also notes that NEON "was allowed up to one year to correct the deficiency in Human Resources (to be determined in May 2005)." Id. at NEON-00197. There is no indication in the record that a follow-up review had been conducted with respect to this deficiency as of the date of the letter.

5. ACF correctly points out that the Board has held that an allegation that a grantee came into compliance after the time provided for correction ended is not relevant to a determination of whether termination is warranted. ACF Response at 16-17, citing DOP Consolidated Human Services Agency.

6. NEON Exhibit 29 is an earlier version of NEON Exhibit 12, and appears to indicate that analyses of most accounts were performed each month through August or September of 2004.

7. Section 1301.13 states that, upon request by the responsible HHS official, "each Head Start agency or its delegate agency shall submit an accounting system certification, prepared by an independent auditor, stating that the accounting system or systems established by the Head Start agency, or its delegate, has appropriate internal controls for safeguarding assets, checking the accuracy and reliability of accounting data, and promoting operating efficiency." The responsible HHS official here did not require NEON to submit such a certification as part of its corrective action.

8. The Circular states in relevant part:

Internal control over Federal programs . . . means a process-effected by an entity's management and other personnel-designed to provide reasonable assurance regarding the achievement of the following objectives for Federal programs:
(1) Transactions are properly recorded and accounted for to:

(i) Permit the preparation of reliable financial statements and Federal reports;
(ii) Maintain accountability over assets; and
(iii) Demonstrate compliance with laws, regulations, and other compliance requirements . . . .

9. The review report notes that there had been no account activity in the petty cash account (one of the three accounts) as of July 27, 2004. NEON Ex. 9, at 17. It is possible that this account continued to be inactive and that is why it was not analyzed.

10. The audit report does imply that monthly reconciliations and analysis of balance sheet accounts were part of NEON's "internal control procedures." However, NEON's Finance Policies and Procedures, which were revised pursuant to the QIP and which ACF apparently reviewed, do not specify that monthly reconciliations and analysis of balance sheet accounts will be required. See NEON Ex. 18.