U.S. ENVJR,
N AGENCY
AGENCY  FINANCIAL  REPORT

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                                          w

                                ABOUT THIS REPORT

For Fiscal Year 2011, the U.S. Environmental Protection Agency has elected to use the Office of
Management and Budget's three-part reporting approach as an alternative to the consolidated
Performance and Accountability Report. In FY 201 1 , the EPA is producing an Agency Financial Report,
an Annual Performance Report and an FY2011 Financial and Program Performance Highlights,
pursuant to the OMB Circular A-136, Financial Reporting Requirements.

The EPA's AFR provides fiscal and high-level performance results that enable the President, Congress
and the public to assess our accomplishments for each fiscal year (i.e., October 1 through September
30). It will also include the  EPA's FY2011 Financial Statements Audit Report and FY 2011
Management Integrity Act  Report, which provides the Administrator's assurance statement on the
soundness of the agency's internal controls for financial and programmatic activities and presents
progress in addressing Office of Inspector General audit recommendations.

The EPA's APR provides information on the agency's performance and progress in achieving the goals
established in its FY 2011-2015 Strategic Plan and FY 201 1 performance budget. The report is
prepared in accordance with the requirements of OMB Circular A-1 1 , Preparation, Submission and
Execution of the Budget. The EPA will produce the FY 201 1 APR in conjunction with the FY 2013
Congressional Budget Justification and will post it on the agency's website at
http://epa.gov/ocfo/budget/index.htm by February 6, 2012.

In addition, the EPA will publish an online Financial and Program Performance Highlights, which
presents key financial and  performance information from both the AFR and APR in a brief,
nontechnical, user-friendly format. The Highlights will be posted on the agency's website at
http://www.epa.gov/planandbudget/.

How the Report Is Organized

Administrator's Letter

The Administrator's letter transmits the EPA's FY2011 AFR from the agency to the President and
Congress. In the letter,  the Administrator describes the agency's missions, goals and accomplishments.
The letter provides assurance that financial and performance data presented in the AFR is reliable and
complete and conveys  material internal control weaknesses and actions the EPA is taking to resolve
them.

Section I — Management's Discussion and Analysis

This section contains information on the EPA's mission and organizational structure; selected agency
performance results; an analysis of the financial statements and stewardship figures;  information on
systems, legal compliance, and controls; and other management information and initiatives.

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Section II—Financial Section

This section contains the Message from the Chief Financial Officer, the agency's financial statements
and related Independent Auditor's Report, as well as other information on the agency's financial
management.

Section III—Other Accompanying Information

This section provides additional material as specified under OMB Circular A-136, "Financial Reporting
Requirements." The subsection titled "Management Challenges and Integrity Weaknesses" discusses
the EPA's progress in strengthening management practices to achieve program results and presents
the Inspector General's list of top management challenges and the agency's response.

Appendices

The appendices include a list of relevant agency Internet links and a glossary of acronyms and
abbreviations.

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                              TABLE OF CONTENTS

About This Report	ii
Table of Contents	iv
Administrator's Letter	vi

SECTION I: MANAGEMENT'S DISCUSSION AND ANALYSIS	1

About the EPA	2
   History and Purpose	2
   Mission	2
   Organization	3
   Highlights of Environmental Accomplishment, EPA Regions	4
   Collaborating With Partners and Stakeholders	6
   A Framework for Performance Management	6
   Refocusing Performance Management in FY 2011	7

FY 2011 Program Performance	8
   Administrator Jackson's Priorities	8
   American Recovery and Reinvestment Act of 2009 Reporting	12

Financial Analysis and Stewardship I nformation	13
   Sound  Financial Management: Good for the Environment, Good for the Nation	13
   Financial Condition and Results	15
   Financial Management for the Future	20
   Limitations of the Principal Financial Statements	21

Improving Management and Results	22
   Office of Inspector General Audits, Evaluations and Investigations	22
   Grants  Management	22

Accountability: Systems, Controls and Legal Compliance	23
   Federal Managers' Financial Integrity Act	23
   Management Assurances	24
   Federal Financial Management Improvement Act	24
   Federal I nformation Security Management Act	25
   Biennial User Fees	25
   I nspector General Act Amendments of 1988 - Audit Management	25
   Defense Contract Audit Agency Audits	29

SECTION II: FINANCIAL SECTION	31

Message from the Chief Financial Officer	32
Principal Financial Statements	33
Notes to the Financial Statements	44
Required Supplementary Information (Unaudited)	79
Required Supplemental Stewardship  Information  (Unaudited)	81
Supplemental Information and Other Reporting Requirements (Unaudited)	83
Audit of the EPA's Fiscal 2011 and 2010 Consolidated Financial Statements	91
                                           IV

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SECTION III: OTHER ACCOMPANYING INFORMATION	139

Management Integrity and Challenges	140

Overview of the EPA's Efforts	140

Progress in Addressing FY2011 Weaknesses and Significant Deficiencies	141

   Agency Weaknesses	141
   Significant Deficiencies	146
   Summary of Financial Statement Audit	151
   Summary of Management Assurance	151

FY2011 Key Management Challenges	152
   Key Management Challenges	152

I mproper Payments	183
   Risk Assessments	183
   Statistical Sampling	183
   Corrective Action	185
   I mproper Payment Reporting	185
   Recapture of I mproper Payments	188
   Accountability	191
   Agency Information Systems and Other Infrastructure	191
   Barriers	191
   Conclusions	191

APPENDICES

Appendix A: Public Access	192
Appendix B: Acronyms and Abbreviations	194

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                            ADMINISTRATOR'S LETTER

                                    November 15, 2011
The President
The White House
Washington, D.C. 20500

Dear Mr. President:

I am pleased to submit the U.S. Environmental Protection Agency's Fiscal Year 2011 Agency Financial
Report. This report presents the agency's detailed financial information, accounting for the use of funds
entrusted to us to carry out our mission to protect human health and the environment. It also provides
readers with a sense of the  agency's priorities, strengths and challenges in implementing the programs
used to fulfill our mission. The financial and performance data presented in this report are reliable,
complete and updated.

This is the first  of three integrated reporting components. The remaining two reports, the Fiscal Year
2011 Financial and Program Performance Highlights and the Fiscal Year 2011 Annual Performance
Report, will be available in February 2012.

The EPA at 40

The EPA celebrated its 40th anniversary during 2010. For more than four decades, the EPA has worked
to protect human health and the environment. It has matured into the world's preeminent environmental
regulatory agency, grounded in the core values of science, transparency and the rule of law. Although
there is still much left to accomplish, the EPA has made significant strides  in reducing the pollution that
threatens our air, our water  and our communities. During this fiscal year, we took action under the
landmark Clean Air Act to build upon the EPA's efforts to impact climate change. We also put a greater
focus on community-level engagement to augment and reinforce the critical work of our state and tribal
partners. The EPA is taking common-sense steps to achieve an ambitious vision for protecting and
restoring America's waters,  ensuring the safety of chemicals, improving air quality, addressing climate
change, cleaning up communities and ecosystems and strengthening the EPA's scientific and
enforcement capabilities. Further, we are improving the EPA's internal operations to deliver
environmental results for the American people.

Management

At the EPA, we take seriously our responsibility as stewards of taxpayer dollars. We continue to make
every effort to be more efficient, effective and accountable and to eliminate waste wherever it is found.
We are strengthening our internal controls to ensure the EPA achieves its financial and programmatic
objectives in the most cost-effective manner.

For FY 2011, both the EPA  and the Office of the Inspector General identified no new material
weaknesses. We also are addressing a number of less severe weaknesses for which corrective actions
are underway.  My assurance statement, provided under the Federal Managers' Financial Integrity Act,
appears in Section I, "Management's Discussion and Analysis." Section III, "Other Accompanying
Information," provides additional information on the EPA's internal-control weaknesses.

The inspector general,  in compliance with the Reports Consolidation Act of 2000, has identified what he
considers to be the EPA's five most serious management challenges in FY 2011. While we are making
progress, the Inspector General has acknowledged that it might take years to meet these challenges,

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such as measuring the results of our programs on human health and the environment and ensuring that
the nation has the funding needed to construct, repair and maintain its drinking-water and wastewater
infrastructure. Meeting these human-health and environmental challenges also will require collaboration
among many, including Congress, other federal agencies, states, tribes and communities.  The EPA is
committed to working with our partners and stakeholders to address these challenges.

Future Direction

The EPA will continue to lead our nation's efforts to protect our air, water and land. We will put our
expertise and energy to work to meet our responsibilities for enforcing the nation's environmental laws
and regulations, and we will collaborate with our state and local partners to find solutions for our most
significant environmental challenges. Our work as One EPA provides a solid foundation for our future
success, and  I have tremendous confidence in the talent and spirit of our work force. Indeed, the EPA's
dedicated men and women look forward to the next 40 years with a renewed commitment to fostering
healthier families,  cleaner communities and a stronger America.
                                              Respectfully,
                                              Lisa P. Jackson
                                             VII

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             Section I
Management's Discussion and Analysis

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                                ABOUT THE  EPA
                                                                  The Birth of the EPA

                                                            Reorganization Plan No. 3 was an
                                                            executive order submitted to
                                                            Congress on July 9, 1970, by
                                                            President Richard Nixon. The order
                                                            consolidated components from
                                                            different federal agencies to form the
                                                            EPA, "a strong, independent agency"
                                                            that would establish and enforce
                                                            federal environmental protection
                                                            laws. Reorganization Plan No. 3 was
                                                            sent to Congress in agreement with
                                                            the provisions of chapter 9 of title 5
                                                            of the United States Code. The
                                                            Reorganization Plan was enacted in
                                                            Public Law 98-614.
History and Purpose

Born in the wake of elevated
concern about environmental
pollution, the EPA was established
on December 2, 1970, to
consolidate in one agency a variety
of federal research, monitoring,
standard-setting and enforcement
activities to ensure environmental
protection. Since its inception, the
EPA has been instrumental in
fostering a cleaner, healthier
environment for the American
people. Since 1970, America's
environmental history has stood
witness to both dramatic events and
remarkable progress.

In FY 2011, the EPA celebrated 40 years of working to protect human health and the environment.
From regulating vehicle emissions to ensuring that drinking water is safe; from cleaning up toxic waste
to assessing and ensuring the safety of chemicals; and from reducing greenhouse gas emissions to
encouraging conservation, reuse, and recycling, the EPA and its federal, state, local, and community
partners and stakeholders have made enormous progress in protecting and sustaining the nation's
health and environment. America's air, water and land are cleaner today than they were only a decade
ago, and increasingly people are adopting a "greener" way of living. Across all sectors of society,
people are making choices to preserve resources, prevent pollution and reduce impacts on the
environment.

The EPA has made exceptional progress in protecting the environment. Despite the historic
environmental advances the EPA has made along the way, much work remains. The environmental
problems the country faces today are often more complex than those of years past, and implementing
solutions—both nationally and globally—is more challenging. These environmental concerns and other
obstacles drive the agency's commitment to ensure that  communities, individuals, businesses, and
state, local  and tribal governments all have access to accurate  information to  assist in managing human
health and environmental risks.
      The E
Develops and enforces
regulations

Gives grants to states, local
communities and tribes

Studies environmental issues

Sponsors partnerships

Teaches people about the
environment

Publishes information
                                   Mission
                                   The EPA's mission is "to protect human health and the
                                   environment." As America's environmental steward, the EPA
                                   leads the nation's environmental science, research, education,
                                   assessment and enforcement efforts. Maintaining our core
                                   values of science, transparency, and the rule of law, the agency
                                   is strongly committed to meeting growing environmental
                                   protection needs. The EPA's science provides the foundation for
                                   agency decision-making and the basis for understanding and
                                   preparing to address future environmental needs and issues.
                                   Increased transparency is vital for improving programmatic and
                                   financial performance. By making environmental information
                                   both available and understandable, the EPA advances its work
                                   and furthers public trust in its operations.

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Organization
The EPA's headquarters are located in Washington, DC. Together, the EPA headquarters, 10 regional
offices and more than a dozen laboratories and field offices across the country employ more than
17,000 men and women. The agency's employees are highly educated and technically trained. In fact,
more than 50 percent of the agency's employees are engineers, scientists and policy analysts. Many
other talented individuals in scores of vital  occupations, from legal and public affairs to finance and
information technology, make up the agency's workforce.

                              U.S. Environmental  Protection Agency
         The mission of the Environmental Protection Agency is to protect human health and the environment
        Assistant Administrator
         for Administration and
         Resource Management

        Assistant Administrator
        for Chemical Safety and
          Pollution Prevention
Assistant Administrator
  for Research and
    Development
              Region I
             Boston, MA
     Region 2
   New York, NY
              Region 5
             Chicago, IL
     Region 6
     Dallas, TX
                           Assistant Administrator
                            for Enforcement and
                           Compliance Assurance
                                                          Assistant Administrator
                                                             for International
                                                             and Tribal Affairs
                                                 Assistant Administrator
                                                   for Environmental
                                                     Information

Assistant Administrator
 for Solid Waste and
 Emergency Response
     Region 3
   Philadelphia, PA
 Region 4
Atlanta, GA
     Region 7
   Kansas City, KS
 Regions
Denver, CO
                                     Region 9
                                  San Francisco, CA
                               Region 10
                               Seattle, WA

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                         Highlights     of   Environmenta
Region 10 Restoring the Puget Sound Ecosystem

The EPA awarded $38.1 million in grants to facilitate the ecosystem
restoration and protection of Puget Sound, the nation's second-
largest estuary. Funded projects include reducing toxic and bacterial
pollution and protecting at-risk watersheds such as the Duwamish
River, an urban waterway in Puget Sound that is currently under
Superfund cleanup. The port of Seattle and city of Seattle have
committed $33 million to dean up contaminated marine sediment
and soil. Tribes have used the Puget Sound funding to support the
elimination of invasive species and to monitor salmon movement
during the Elwha River Dam removal, the largest project of its kind
in U.S. history.
http://www.epa.gov/pugetsound/
Region 9 Undertaking Uranium Cleanup in Navajo Nation

To address health and environmental impacts of uranium contami-
nation in Navajo Nation, the EPA and Navajo EPA screened 683
structures for potential contamination, completed the demolition
and excavation of 34 structures and 12 residential yards, assessed
452 mines, and started cleanup on the 4 highest priority mines.
Additionally, the EPA tested 240 wells for ground water contamina-
tion and partnered with Indian Health Services and U.S. Housing
and Urban Development to invest $24.5 million in new water lines
serving drinking water to 300 homes. Marking a major accomplish-
ment, the EPA and the Navajo Nation reached agreement on a plan
to dean up the Northeast Church Rock United Nudear Corporation
mine—the largest mine on the reservation—starting in 2012.
http://www.epa.gov/region09/NavajoUranium
Region 7 Responding to Joplin.Missouri.Tornado Aftermath

On May 22,2011, tragedy struck Joplin, Missouri, after an F-5
tornado damaged approximately 8,000 structures in its wake. In
the aftermath of the tornado, the EPA has worked with the Mis-
souri Department of Natural Resources and the Federal Emergency
Management Agency, as well as other state and local partner agendes
and nongovernmental entities, to reuse and recyde more than 156
tons of electronic equipment, 104,000 containers, and 257 tons of
white goods, such as housing materials and propane cylinders. In
addition, the EPA coordinated with partner agendes to conduct rapid
needs assessments, air monitoring for asbestos and particulates, and
household hazardous waste operations, as well as provide long-
term community recovery support The EPA has maintained public
outreach efforts throughout the response, conducting more than 70
news media interviews that resulted in several hundred news stories
mentioning the agency's efforts.
http://www.epa.gov/joplin/
    Region 8Treating Contaminated Mining Drainage in  Colorado

    Using $17 million in hazardous waste cleanup funding from the Ameri-
    can Recovery and Reinvestment Act of 2009, the EPA and the Colorado
    Department of Public Health and Environment constructed a  1,600-gallon-
    per-minute water treatment plant at the Summitville Mine Superfund site
    to remove heavy metal contaminants from mine drainage before the water
    leaves the site and enters the headwaters of the Alamosa River,  a tributary
    of the Rio Grande River. The project has supported job creation in various
    building trades, including mechanics, heavy equipment operators and
    truck drivers. In addition, the EPA and the CDPHE installed a  micro-
    hydropower plant at the site, providing 15 to 20 percent of the site's energy
    needs and resulting in significant cost savings.
    http://wnw.epa.gov/region8/superfund/co/summitville/index.html
Region 6 Ensuring Environmental Justice and Public Health in Texas
The EPA finalized approval of a community-based Supplemental Environmental
Project to build a $1 million health clinic to serve the residents of Port Arthur,
Texas. The clinic is part of the EPA's Environmental Justice Showcase Com-
munity Project, a grassroots program in which the EPA works with city offidals,
industry, and state and federal partners to achieve measurable progress in some
of America's most environmentally distressed communities. In addition, the
EPA has helped establish six multi-stakeholder workgroups designed to improve
environmental conditions, health care, housing, jobs training, energy efEdency
and urban redevdopment projects in the region.
http://www.epa.gov/region06/6dra/oejta/ej/index.html

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Accomplishment,    EPA     Regions
   Region 5 Advancing Northeast Ohio's Water Infrastructure and Economy

   In July 2011, the EPA reached a Combined Sewer Overflow Consent Decree with the North-
   east Ohio Regional Sewer District, mandating a $3 billion effort to reduce the annual
   volume of raw sewage discharged from 4,5 billion gallons to 494 million gallons, including
   a minimum of $42 million for large-scale green infrastructure projects spanning the next
   25 years. Green infrastructure management approaches and technologies include infiltra-
   tion, evapotranspiration, and the capture and reuse of storm water to maintain or restore
   natural hydrologies. Collectively, the implemented control measures will result in the treat-
   ment of more than 98 percent of the wet weather flows in the sewer system. One economic
   impact study concluded that such sewer construction projects will create 31,000 jobs in the
   7 northeast Ohio counties, $3 billion in labor income, and $443 million in tax revenue.
   http://www.epa.gov/compliance/resources/cases/civil/cwa/neorsd.html
    Region 4 Improving Air Quality in the Southeast Through Clean Air
    Act Settlement
    In April 2011, the EPA provided a new benchmark for clean power generation in
    the United States through a Clean Air Act settlement with the Tennessee Valley
    Authority that requires the TVA to spend $350 million on environmental mitiga-
    tion projects, including energy efficiency and renewable energy projects. Once
    fully implemented, the pollution controls could reduce emissions of nitrogen
    oxide by 69 percent and sulfur dioxide by 67 percent from the TVA's 2008 emis-
    sion levels. The settlement will also significantly reduce particulate matter and
    carbon dioxide emissions, leading to estimated annual monetized health benefits
    ranging from $11 billion to $27 billion.
    http://www.epa.gov/compHance/resources/cas es/dvU/caa/tt'acoal-fired.html
Region /  Providing Train ing To Prevent Lead
Exposure in New England

As part of an extensive outreach and assistance effort
reaching more than 125,000 people in the New England
region, the EPA accredited 64 training providers, over a
two-year period, to teach more than 134 courses under
the federal lead renovation, repair and painting rule. The
rule requires that firms performing renovation, repair and
painting projects that disturb lead-based paint in pre-1978
homes, childcare facilities and schools be certified by the
EPA and use certified renovators trained to follow lead-safe
work practices. To date, 12,664 New England firms have
been certified, and almost 2,500 courses have been offered,
providing invaluable training to an estimated 75,000
people. Continuing the EPA's effort to achieve compli-
ance and reduce risks, Region 1 issued the first renovation,
repair and painting rule enforcement action in the nation
resulting from a social media video tip.
http://epa.gov/regionl/enforcement/leadpaint
                                                                                    Region 2 Cleaning Up the Hudson River

                                                                                    Region 2 marked an important milestone in the cleanup
                                                                                    of the Hudson River with the start of the second and final
                                                                                    phase of dredging in spring 2011. Over the next five to
                                                                                    seven years, General Electric will remove about 2.4 million
                                                                                    cubic yards of polychlorinated biphenyls contaminated
                                                                                    sediment from a 40-mile section of the Upper Hudson
                                                                                    River between Fort Edward and Troy, NY. An estimated
                                                                                    1.3 million pounds of PCBs were discharged into the
                                                                                    river from two General Electric capacitor manufactur-
                                                                                    ing plants located in Fort Edward and Hudson Falls over
                                                                                    the course of 30 years. General Electric is conducting the
                                                                                    dredging project, with EPA oversight, under die terms of a
                                                                                    November 2006 legal agreement Approximately 500 jobs
                                                                                    have been created by the cleanup project, and more than
                                                                                    550,000 cubic yards of contaminated sediment has already
                                                                                    been removed.
                                                                                    http://www.epa.gov/hudson/
Region 3 Reducing Surface Mining Impacts on
Appalachian Waters

The EPA vetoed a permit issued by the Army Corps of Engi-
neers for the Spruce No. 1 Surface Mine in Logan County,
West Virginia, marking the most signficant agency action
to date in protecting Appalachian waters and reducing the
environmental impacts of surface coal mining on local and
downstream communities. The EPA held a public hearing
to engage stakeholders—including mining companies
and workers, local community groups and citizens, and
watershed and  conservation groups—coming from all sides
of the issue. The public hearing solicited more than 50,000
public comments. The EPA's efforts will help prevent
harmful levels of selenium and salinity contamination in
downstream waters, and avoid the destruction or degrada-
tion of 3.5 square miles of wildlife habitat
http://yosemite.epa,gov/opa/admpress.nsf/0/6b9ecfafebce
79a5852578170056al79?OpenDocument

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Collaboration with Partners and Stakeholders

Addressing today's complex environmental issues requires greater transparency and cooperative
action; establishing and enhancing working partnerships between all levels of government and with
private industry and nonprofit organizations; and leveraging the EPA's resources with those of other
federal agencies and state, local and tribal partners. The EPA, the states and the tribes largely share
responsibility for implementing environmental laws and policies to protect human health and the
environment. The EPA understands that government alone cannot begin to address all of the nation's
environmental challenges.

A Framework for Performance Management

To carry out its mission to protect human health and the environment, and in compliance with the
Government Performance and Results Modernization Act, the EPA develops a five-year Strategic Plan
(www.epa.gov/ocfo/plan/plan.htm), which establishes the agency's long-term strategic goals, along with
supporting objectives and measures. To support achievement of the long-term goals, objectives and
measures, the EPA prepares an Annual Performance Plan and Budget, which commits the agency to a
suite of annual performance measures. The EPA will report its results against these annual
performance measures and discuss progress toward longer term objectives and measures in its Annual
Performance Report, which the agency presents in its Congressional Budget Justification.

The EPA developed its FY 2011 Annual Plan and Budget under its 2006-2011 Strategic Plan. On
September 30, 2011, the EPA issued its FY 2011-2015 Strategic Plan, which advances the
Administrator's Priorities, and in FY 2011, the agency began assessing performance under this new
plan.


                   EPA's Performance Management System
                                      Strategic Planning

                                      FY 20! I-2015 Strategic Plan
                                      Futures Work
              Results Measurement,
            Reporting, and Evaluation
                (Accountability)

             • Annual Performance Report
             • Program Evaluation
Annual Planning
 and Budgeting

EPA Annual Plan and Budget
Priority Goals
                                         Operations
                                       and Execution

                                     National Program Manager
                                     Guidance
                                     Regional Performance
                                     Commitments
                                     Regional and State Performance
                                     Partnership Agreements (PPAs)

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Refocusing Performance Management in FY 2011

To refocus attention on advancing its FY 2011-2015 Strategic Plan, in FY 2011 the EPA instituted two
new practices that move the agency closer to a goal of using simpler and more meaningful
performance information in managing programs and informing decision-making. For example, the
Deputy Administrator holds quarterly meetings with senior leadership to discuss progress on agency
priority goals, and at midyear and the end of the year on the full suite of performance measures. These
meetings encourage transparency and a dialogue among national program managers and regions on
program performance.

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2011 PROGRAM PERFORMANCE
                               Administrator Jackson's
                                         Priorities


                             *  Taking Action on Climate Change

                             •{»  Improving Air Quality

                             *  Assuring the Safety of Chemicals

                             *  Cleaning Up Our Communities

                             *  Protecting America's Waters

                             *  Expanding the Conversation on
                                Environmentalism and Working
                                for Environmental Justice

                             *  Building Strong State and Tribal
                                Partnerships
During FY 2011, the agency made progress in advancing the Administrator's priorities and mission
goals. Specifically, the EPA and its partners achieved significant results under each of the five long-
term environmental goals established in the agency's FY 2011-2015 Strategic Plan: 1) Taking Action
on Climate Change and Improving Air Quality, 2) Protecting America's Waters, 3) Cleaning  Up
Communities and Advancing Sustainable Development, 4) Ensuring the Safety of Chemicals and
Preventing Pollution and 5) Enforcing Environmental Laws.

Detailed FY 2011 performance results by strategic goal will be presented in the EPA's FY 2011 APR,
which the agency will issue with its FY2013 Congressional Budget Justification and post on its website
atwww.epa.gov/ocfo/budget/index.htm by February 6, 2012. This section highlights the agency's
accomplishments in furthering the Administrator's seven
priorities.

Taking Action on Climate Change. EPA is contributing
to a movement toward more efficient energy use and
reduced consumption of fossil fuels, which will reduce
greenhouse gas emissions that are linked to climate
change. To tackle climate change issues, the agency is
taking a proactive approach to reducing greenhouse gas
emissions by managing and collecting data on emissions
and coordinating with federal, state and local government
agencies and the international community.

On August 22, 2011, the EPA opened the electronic
Greenhouse Gas Reporting Tool for 2010 GHG reporting.
Facilities emitting greenhouse gases reported 2010
emissions to the EPA by September 30, 2011. This
comprehensive, nationwide emission data will provide the
EPA with a better understanding of the sources of
greenhouse gases and will guide development of the
policies and programs to reduce emissions. The publicly
available data will allow facilities to track their emissions,
compare them to similar facilities and identify cost-
effective opportunities for reducing emissions in the future.
An estimated 85 to 90 percent of total U.S. greenhouse
gas emissions from approximately 13,000 facilities will be
reported to the registry.

Improving Air Quality. The EPA is making historic
progress toward improving air quality through the
implementation of the Clean Air Act Amendments of 1990,
particularly by developing new standards for vehicle emissions and fuel economy. In FY 2011, the EPA
and the U.S Department of Transportation announced that they intend to propose new fuel-efficiency
standards increasing fuel economy to 54.5 miles per gallon for cars and light-duty trucks by model year
2025. The standards that EPA and DOT intend to develop could save approximately 4 billion barrels of
oil over the lifetime of the model year 2017-2025 vehicles.  In the near term,  for model year 2013 cars
and trucks, the EPA has unveiled the next generation of fuel economy labels, which provide consumers
with more comprehensive fuel-efficiency information at retailers than is currently available. Specifically,
the labels will compare energy use and purchase  price between new electric cars and conventional
gasoline-powered cars.

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In April 2011, the EPA finalized an important settlement with the Tennessee Valley Authority, which will
result in cleaner power generation in the United States. The settlement will ensure that 92 percent of
the TVA's coal-fired generating capacity will either be equipped with state-of-the-art air pollution
controls for sulfur dioxide and nitrogen oxides or be permanently shut down by the end of 2018. The
settlement also requires the TVA to spend $350 million on environmental mitigation projects, including
energy efficiency and renewable energy projects that will result in further pollution reductions.

In July 2011, the EPA finalized the Cross-State Air Pollution Rule, which will lead to capital investments
in addition to those underway to comply with the predecessor rulemaking, the Clean Air Interstate Rule.
Combined,  these investments will help improve air quality for more than 240 million  Americans from
smog and soot pollution. The EPA estimates $120 to $280 billion in annual benefits associated with the
rule.

Assuring the Safety of Chemicals. In FY 2011, the EPA continued  to ensure that  health impacts
associated with chemicals are reduced, and that restrictions are placed on harmful chemical
substances. To ensure that safe chemicals are used in American commerce, the EPA developed action
plans to address the priority chemicals methylene diphenyl diisocyanate and toluene diisocyanate.
Diisocyanates, widely used in sealants, adhesives and coatings, are well-known dermal and inhalation
sensitizers in the workplace and have been documented to cause asthma, lung damage and, in severe
cases, fatal reactions. To increase transparency, the EPA has removed confidentiality claims for more
than 150 chemicals and is reviewing 100 percent of newly submitted  and, where appropriate, is
challenging CBI claims for Toxic Substances Control Act health and safety studies.

To make chemical data more accessible, the EPA finalized the 2012  Chemical Data Reporting Rule.
Through use of the Chemical Data Access  tool, Americans can access key information about chemical
use. Additionally, the EPA has registered more than 2,500 products that meet the "Safer Product" label.
The  Design for the Environment Safer Product Labeling Program uses the EPA's chemical expertise
and resources to carefully evaluate products and label only those that have met the program's
standards. Use of the logo on products allows consumers to select environmentally friendly chemical
products that do not sacrifice quality or performance.  The "Safer Product" label can  be seen on a
variety of chemical-based products, including all-purpose cleaners, laundry detergents, and carpet and
floor care products.

In FY 2011, the EPA accelerated the pace  of Pesticide Registration Reviews, the program that provides
scientifically sound and transparent reviews of all pesticide chemicals on the market. The EPA's
Registration Review decisions achieve improved public health and environmental protection by directly
contributing to reducing occupational poisoning and the presence of certain pesticides in urban
watersheds.

Cleaning Up Our Communities. Cleaning up contaminated sites and making them ready for reuse not
only reduces human exposure to contaminants but also stimulates economic development.  In FY 2011,
cleanup activities funded by the EPA's Brownfields Program, which provides grants and technical
assistance to communities, states and tribes for the assessment, cleanup and redevelopment of
formerly contaminated properties, leveraged 6,447 jobs. Since 1995, activities have leveraged over
72,000 jobs. In FY 2011, EPA also instituted a new pilot program, called the Brownfields Area-wide
Planning Program, under which 23 communities were awarded grants and provided with technical
assistance to help develop strategies to address cleanup issues, facilitate community-based
partnerships, and advance economic development and job creation through the leveraging of resources
and investments.

In FY 2011, EPA continued cleanup efforts at Superfund sites across all EPA regions. Some of the
highlights of these efforts included:  1) the excavation and disposal of 173 tons of soil from a Superfund
site at the Flash Cleaners site in Pompano  Beach, Florida: 2) the reduction of contamination in the
Portneuf River through the interception of more than 2.4 million pounds of phosphorous at the Eastern

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Michaud Flats Superfund Site in the Southeast; and 3) the adoption of an interagency Federal Facility
Agreement to remediate the Fort Detrick Area B Groundwater Superfund Site, once a testing and
disposal area for chemical, biological and radiological materials, located in Frederick, Maryland. Wastes
disposed of at the Fort Detrick site released hazardous chemicals into the ground water, contaminating
residential drinking water wells. The FFA governs the cleanup and grants the EPA final authority over
cleanup decisions.

In response to the Japanese nuclear incident in March 2011, the EPA utilized its nationwide radiation
monitoring system, RadNet, to collect and analyze data about radiation contamination in U.S. air,
precipitation, drinking water and milk. To enhance transparency and respond to domestic public health
concerns, the EPA created the Japan 2011 website, which contained near-real-time monitoring data
and Japan-related sample analysis results. This data provided  assurances to the American public that
any radiation migrating to the United States from Japan was below levels of concern.

Protecting America's Waters. In FY 2011, the EPA provided expertise and funding to support local
and state governments and tribes working to improve water quality. Through initiatives like the Urban
Waters Program, and Clean and  Drinking Water State Revolving Funds, the EPA is addressing the
nation's aging water infrastructure, reducing nonpoint source pollution and ensuring that America's
waters are clean and safe for recreation and commerce.

Still, communities face many challenges. One such example is the complex environment of the Gulf of
Mexico region. Numerous threats to the Gulf impact the protection, restoration, enhancement and
management of coastal and natural resources. The EPA continues to play a significant leadership role
in the Gulf of Mexico Alliance and supports the collaborative regional watershed  projects. Additionally,
development of the "Gulf of Mexico Ecosystem Valuation Database" (GecoServ) gives the Gulf of
Mexico stakeholders the platform to plan and incorporate the value of ecosystem benefits into their
decision-making  processes.

In May 2011, the EPA issued Clean Water Act Action Plan Implementation Priorities. Addressing these
priorities will increase compliance with and expand transparency of the National  Pollutant Discharge
Elimination System, contributing to improved water quality. Since the Clean Water Act Action Plan was
initiated in 2009,  the EPA has worked collaboratively with state  co-regulators to develop a wide range
of new approaches to compel compliance  through public accountability, including self-monitoring,
electronic reporting and other methods. As of September 2011, NPDES permitting has prevented the
discharge of 203 billion pounds of pollutants into waterways. The EPA and states exceeded their goal
of issuing 763 designated priority NPDES  permits.

In December 2010, the EPA established the Chesapeake Total Maximum Daily Load, a comprehensive
"pollution diet" for meeting water  quality standards in the Chesapeake Bay and its tidal tributaries. The
Chesapeake Bay TMDL includes strict limits on nitrogen, phosphorus and sediment and largely reflects
detailed strategies submitted by the six watershed states and the District of Columbia for achieving the
necessary pollution reductions. The TMDL is designed to ensure that all control measures needed to
meet the jurisdictions' Chesapeake Bay water quality standards are in place by 2025, with 60 percent of
the actions completed by 2017.

Expanding the Conversation on Environmentalism and Working for Environmental Justice. In
FY 2011, the EPA led a number of initiatives designed to promote sustainable development in the
United States and abroad and supported the use of technology innovation  in solving environmental
issues. In August 2011, the EPA  Administrator and Brazil's Minister of Environment formally launched
the U.S.-Brazil Joint Initiative on  Urban Sustainability,  a global model for building greener economies
and smarter cities. This initiative will demonstrate the economic, environmental and social benefits of
increased investment in an urban environment through innovative public-private partnerships for green
infrastructure projects.


                                             10

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The EPA also released the updated Enforcement and Compliance History Online website, which
includes an interactive, comparative map and dashboard for Clean Water Act major and minor facilities
along with an EPA-state enforcement map that allows users to compare enforcement activities across
states by federal and state environmental agencies. In FY 2011, ECHO surpassed 10 million queries
and is a featured site on www.data.gov. This website was recognized by President Obama as a model
for government transparency for regulatory compliance data.

In August 2011, the EPA reached a comprehensive settlement with the Department of the Interior to
address alleged violations of waste, water, air, toxics and community right-to-know laws at schools and
public water systems in Indian Country that are owned or operated by or the legal responsibility of the
Bureau of Indian Affairs. The settlement impacts  60 tribes across the United States and will improve
environmental conditions at 164 Department of the Interior schools in Indian Country, benefitting more
than 40,000 students. The settlement will protect student and community health in Indian Country by
reducing potential exposure to environmental hazards.

During FY2011, the EPA committed $1 million to address environmental justice challenges in 10
communities across the nation. Through the Environmental Justice Showcase Communities initiative,
the EPA is working to address and alleviate environmental and human health challenges. This
regionally focused effort brings together governmental and nongovernmental organizations to pool their
collective resources and expertise on the best ways to achieve real results in communities.

Building Strong State and Tribal Partnerships. The EPA and its partners, the  Department of
Housing and Urban Development and the Department of Transportation, provided assistance through
the Partnership for Sustainable Communities—a  collaborative effort to coordinate and leverage
resources among federal, state and local stakeholders. As part of a broader pilot project for transit-area
development in the  Massachusetts Fairmont-Indigo Corridor,  the EPA will help fund the assessment
and cleanup of more than 30 local brownfields sites, promoting economic development  and community
revitalization in the Boston neighborhoods of Roxbury, Dorchester and Mattapan. Additionally, the EPA
participates in the Water Technology Innovation Cluster, a geographic concentration of  firms that work
together to solve water-related  problems, promoting economic growth and technological innovation in
Ohio, Kentucky and Indiana.

To facilitate coordination with tribal governments  and to consider tribal interests when carrying out the
EPA's programs to protect human health and the environment, on May 4, 2011, the EPA Administrator
announced the EPA Policy on Consultation and Coordination with Indian Tribes.  This policy sets
standards for the consultation process, defining the what, when and how of consultation; designates
specific agency  personnel responsible for serving as consultation points of contact in order to promote
consistency coordination the consultation process; and establishes a management oversight and
reporting structure that will ensure accountability  and transparency.

During FY 2011, and after four years of consultation and facilitation support to the Oregon Department
of Environmental Quality and the Confederated Tribes of the Umatilla Indian Reservation, the EPA
developed recommendations to revise human health criteria for toxics based on an increased fish
consumption rate. The Oregon Environmental Quality Commission approved new rules  reflecting the
recommendations on June 16, 2011.
                                             11

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American Recovery and Reinvestment Act of 2009 Reporting

Since the end of FY 2009, the EPA has tracked program performance for six key ARRA-funded
environmental programs that invest in clean water and drinking water projects, implement diesel
emission reduction technologies, clean up leaking underground storage tanks, revitalize and reuse
brownfields, and clean up Superfund sites. To date, the following have been achieved:

   More than 660 projects have been funded to improve or maintain wastewater treatment works
   serving an estimated 79 million Americans, and  more than 265 drinking water systems have been
   brought into compliance, serving over 7.4 million Americans.

•  Almost 30,000 diesel engines have been retrofitted, replaced or retired.

   Hundreds of contaminated sites have been cleaned up,  including 92 brownfield properties, more
   than 1,300 underground storage tanks and nine Superfund sites. Additionally, more than 50
   Superfund site cleanups have been accelerated.


To ensure accountability and demonstrate progress toward  meeting ARRA goals, the EPA provides
quarterly performance updates at http://www.epa.gov/recoverv/plans.htmltfquarterly.
                                             12

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          FINANCIAL ANALYSIS AND STEWARDSHIP INFORMATION

Sound Financial Management: Good for the Environment, Good for the Nation

The EPA carries out its mission to protect human health and the environment with the support of strong
financial management. The accomplishments described in this section demonstrate that the EPA
adheres to the highest standards for financial management.

•   Audit opinion. For the 12th consecutive year, the EPA's OIG issued an unqualified or "clean"
   opinion on the agency's financial statements. This means that the EPA's financial statements are
   presented fairly in all material aspects and that they conform to generally accepted accounting
   principles for the federal government. In simple terms, a clean opinion means that that agency's
   numbers are reliable.

   Department of Treasury's Collections and Cash Management. The EPA received an award
   from the Department of Treasury for the agency's commitment to 100 percent  Electronic Funds
   Transfer collections. The EPA is the first government agency to ever receive such recognition.

   Compliance with federal financial systems requirements. The EPA is compliant with the
   Federal Financial Management Improvement Act, which means that the agency's financial systems
   comply substantially with federal system requirements and accounting standards. The EPA uses
   reliable and timely information from its financial system to make sound decisions on the use of
   agency resources.

The EPA also accomplished significant achievements in FY 2011, a few of which are highlighted below:

   Financial management system. In FY 2011, the EPA implemented a component-based approach
   as its principal financial management systems strategy. This approach begins  with the FY 2012
   launch of Compass, the core financial system that replaces the Integrated Financial Management
   System, the EPA's legacy core financial system for the past 22 years. The introduction of Compass
   will improve the EPA's financial stewardship by strengthening accountability, data integrity and
   internal controls.

   Timely payments. The EPA paid 99.88 percent of its invoices on time and avoided late payment
   penalties. The improper payment rate was less than 0.12 percent, which means that the correct
   amount was paid to the right recipient in nearly every instance. Furthermore, the EPA paid 100
   percent of its grant payments electronically and 100 percent of them on time.

   Policy verification. In FY 2011, the EPA  conducted a comprehensive review of internal controls
   over its ARRA funds, as part of its new Policy Verification Compliance Initiative. The objective of the
   PVCI is to encourage management integrity  and fiscal accountability.

   Federal relocation services across government. The EPA's Working Capital Fund continues  to
   grow its relocation service offerings across the federal government. The agency provides services
   to the U.S. Department of Agriculture, Department of Labor and Transportation Security
   Administration for home sales, household goods and employee counseling for permanent change of
   station moves.

   Indirect rate and annual allocation rates. During FY 2011, the EPA's continued development  and
   preparation of cost recovery packages resulted in significant gains for the agency. The EPA
   recovered approximately $112 million in Superfund indirect costs and collected $9.7 million in
   interagency indirect costs.
                                            13

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Balanced checkbook. The EPA's checkbook is balanced—the agency general ledger matches the
fund balance records maintained by the Department of the Treasury. This match translates to
greater integrity of financial reports and budget results.

Improved management of unliquidated obligations. In FY 2011, the agency implemented a new
policy and launched an automated system, which resulted in a review of 100 percent of agencywide
ULOs and increased data transparency.
                                        14

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Financial Condition and Results

Financial statements are formal financial records that document the EPA's activities at the transaction
level, where a "financial event" occurs. A financial event is any occurrence having financial
consequences to the federal government related to the receipt of appropriations or other financial
resources; acquisition of goods or
services; payments or collections;
recognition of guarantees, benefits to be
provided, and other potential liabilities; or
                                    Number Crunching
other reportable financial activities.

The EPA prepares four consolidated
statements, including: 1) Balance Sheet,
2) Statement of Net Cost, 3) Statement of
Changes in Net Position, and 4) Statement
of Custodial Activity, and one combined
statement, the Statement of Budgetary
Resources. Together, these statements
with their accompanying notes provide the
complete picture of the EPA's financial
situation. Reviewers can glean a snapshot
of the EPA's overall financial condition by
examining key pieces of information from
these statements. The complete
statements with accompanying notes, as
well as the auditor's opinion, are available
in Section II of this report.

The Balance Sheet displays assets, liabilities and net position as of September 30, 2011, and
September 30, 2010. The Statement of Net Cost shows the EPA's gross cost to operate, minus
exchange revenue earned from its activities. Together, these two statements provide information about
key components of the EPA's financial condition—assets, liabilities, net position and net cost of
operations. The chart that follows depicts the agency's financial activity levels since FY 2009.
                                       Assets: What the
                                       EPA owns and
                                       manages.

                                       Liabilities: Amounts
                                       the EPA owes
                                       because of past
                                       transactions or
                                       events.
               Net Position: The difference between the EPA's
               assets and liabilities.

               Net Cost of Operations: The difference between
               the costs incurred by the EPA's programs and the
               EPA's revenues.
 $25


 $20


 $15


 $10


  $5


  $0
                                Balance Sheet Trend
                                     (dollars in billions)
                                                     2009

                                                     2010

                                                     2011
            Assets
Liabilities
Net Position     Net Cost of Operations
                                             15

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Assets—What the EPA Owns and Manages
The EPA's assets totaled $21.55 billion at the end of FY 2011, a decrease of $1.9 billion from the FY
2010 level. This change is a result of a decrease in the Fund Balance with Treasury primarily related to
the cash that was carried forwarded to the FY 2010 Beginning Balance from the ARRA State & Tribal
Assistance Grant program. The EPA received the program's budgetary authority in FY 2009, the
majority of which was not disbursed fully until FY 2010.

In FY 2011, almost 92 percent of the EPA's assets fall into two categories: 1) its Fund balance with the
Department of the Treasury, the equivalent of the agency's "checkbook" balance available to pay
expenses, and 2) investments that will be used to pay for future Superfund or Leaking Underground
Storage Tank cleanups. All of the EPA's investments are backed by U.S. government securities. The
graphs that follow compare the agency's FY 2011 and FY 2010 assets by major categories.
               FY2011 Composition  of Assets
                                         0%
Fund Balance with Treasury, $12.6
billion
Investments, $7.1 billion
                                                  Property, Plant and Equipment
                                                  (Net), $0.97 billion
                                                  Accounts Receivable (Net), $0.55
                                                  billion
                                                  Other Assets, $0.25 billion

                                                  i Loans Receivable, $.002 billion
               FY2010 Composition  of Assets
                                                  Fund Balance with Treasury, $14.6
                                                  billion

                                                  Investments, $7.2 billion
                                                  Property, Plant and Equipment
                                                  (Net), $0.92 billion

                                                  Accounts Receivable (Net), $0.46
                                                  billion

                                                  Other Assets, $0.23 billion
                                                  i Loans Receivable, $.005 billion
                                          16

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Liabilities—What the EPA Owes
The EPA's liabilities were $ 2.4 billion at the end of FY 2011, marking an increase of $60 million from
the FY 2010 level. The overall increase in EPA's liabilities is attributed primarily to the increase in
Cashout Advances, Superfund in FY 2011 resulting from additional Special Account Settlements
primarily from Helca Mining Company, General Motors and Tronox Incorporated.

In FY 2011, the EPA's largest liability, its combined accounts payable and accrued liabilities, includes
$0.97  billion and represents 40 percent of what the agency owes. The next largest category,
representing 33 percent of the EPA's liabilities, covers Superfund cashout advances that include funds
paid by the EPA to fund cleanup of contaminated sites under the Superfund program. The remaining
two categories represent 27 percent of the agency's liabilities. Payroll and benefits payable include
salaries, pensions and other actuarial liabilities. Other liabilities include the EPA's debt due to Treasury,
custodial liabilities that are necessary to maintain assets for which the EPA serves as custodian,
environmental cleanup costs and other miscellaneous liabilities. The graphs that follow compare FY
2011 and FY 2010 liabilities by major categories.
           FY2011 Composition of Liabilities
                          40%
              13%
  Accounts Payable and
  Accrued Liabilities, $0.97
  billion
 l Cashout Advances,
  Superfund,$0.79 billion

  Other, $0.33 billion
                                                      Payroll and Benefits, $0.32
                                                      billion
             FY2010 Composition of Liabilities
                               46%
                13%
 Accounts Payable and Accrued
 Liabilities, $1.08 billion

i Cashout Advances, Superfund,
 $0.64 billion

 Other, $0.31 billion
                                                     Payroll and Benefits, $0.31
                                                     billion

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Net Cost of Operations—How the EPA Used Its Funds

The graphs that follow show how the EPA divided its funds among its five program goal areas in FY
2011 and FY 2010:
                   FY2011  Net  Cost by  Goal
        18%
                                                 Clean Air, $1.18 billion
i Clean & Safe Water, $5.37
 billion

 Land Preservation &
 Restoration, $1.95 billion

 Healthy Communities &
 Ecosystems, $1.57 billion

 Compliance & Environmental
 Stewardship,$0.80 billion
                   FY 2010  Net  Cost by Goal
                                                 Clean Air, $1.19 billion

                                                 i Clean & Safe Water, $6.385
                                                 billion
                                                 Land Preservation &
                                                 Restoration, $1.89 billion
                                                 Healthy Communities &
                                                 Ecosystems, $1.45 billion
                                                 Compliance & Environmental
                                                 Stewardship,$0.79 billion
     Goal areas: clean air and global climate change, clean and safe water, land preservation and
  restoration, healthy communities and ecosystems, and compliance and environmental stewardship.
                                          18

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Responsible Financial Stewardship

The EPA serves as a steward on behalf of the American people. The chart below presents two
categories of stewardship: RSI (Stewardship Land) and RSSI (Research and Development,
Infrastructure, and Human Capital). In FY 2011, the EPA devoted a total of $5.3 billion to its
stewardship activities.

Per Federal Accounting Standards Advisory Board, stewardship investments consist of expenditures
made by the agency for the long-term benefit of the nation that do not result in the federal government
acquiring tangible assets. As reflected in the graph below,  the FY 2011 land totals $438,000.
                                   FY 2011 Stewardship
                                      (Dollars in Thousands)
                        Infrastructure,
                       $4.6 billion, 87%
                                                               Human
                                                               Capital,
                                                             $0.037 bilion,
                                                                 1%
                                                                 R&D, $0.68
                                                                 billion, 13%
                                                                  Land, $0.004
                                                                     billion,
                                                                      0%
   Infrastructure efforts focus on clean water and drinking water facilities. The EPA funds construction
   of wastewater treatment projects and provides grants to states to support wastewater and drinking
   water treatment facilities. The EPA devoted nearly $4.6 billion in FY 2011 to projects to ensure that
   people have clean, safe drinking water.

   Research and development activities enable the EPA to identify and assess important risks to
   human health and the environment. This critical research investment provides the basis for the
   EPA's regulatory work including those to protect children's health and at-risk communities, drinking
   water, and the nation's ecosystems.

   Human capital includes the EPA's educational outreach and research fellowships, both of which are
   designed to enhance the nation's environmental capacity.

   Land includes contaminated sites to which the EPA acquires title under the Superfund authority.
   This land needs remediation and cleanup because its quality is well below any usable  and
   manageable standards. To gain access to contaminated sites, the EPA acquires easements that
   are in good and usable condition. These easements also serve to isolate the site and restrict usage
   while the cleanup is taking place.

A detailed discussion of this information is available in the  Required Supplementary Stewardship
Information located in Section III of this report.
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Financial Management for the Future

As challenges to the environment grow, sound stewardship of the EPA's financial resources becomes
increasingly critical to the agency's ability to protect the environment and human health locally,
nationally and internationally. Reliable, accurate and timely financial information is essential to inform
decisions on how to address land, water,  air and ecosystem issues.

To strengthen the  EPA's financial stewardship capabilities, the Office of the Chief Financial Officer
focuses on the fundamental elements of financial management:  people and systems.

People: The EPA  leverages every available tool to recruit the best people with the necessary skills to
meet tomorrow's financial challenges. Staff are trained in financial analysis and forecasting to
understand the financial data, and what the data means. The EPA is integrating financial information
into everyday decision-making, so the agency maximizes the use of its resources.

Systems: The EPA's IFMS has served the agency for more than 20 years,  but the technologies used
by this legacy system are inadequate to meet the EPA's financial management objectives. In FY 2011,
the EPA implemented a component-based approach as its principal financial management systems
strategy. This approach begins with the launch of Compass in early FY 2012. Compass is  the core
financial system that replaces the IFMS, the EPA's legacy core financial system for the past 22 years.
The introduction of Compass will improve the  EPA's financial stewardship by strengthening
accountability, data integrity and internal controls. Compass will  be based on a commercial-off-the-shelf
software solution that addresses the EPA's most critical business needs, including:

   General Ledger

•  Accounts Payable

•  Accounts Receivable

   Property

   Project Cost

   Intra-Governmental Transactions

   Budget Execution

Compass will provide core budget execution and accounting functions, including posting updates to
ledgers and tables as transactions are processed and generating source data for the preparation of
financial statements and budgetary reports. Compass will be integrated with 15 agency systems that
support such diverse functions as budget planning, execution, and tracking; recovery of Superfund site-
specific cleanup costs; property inventory; agency travel; payroll time and attendance; document and
payment tracking;  and research planning. Compass is a Web-based, open architecture application
managed at the CGI Federal Phoenix Data Center, a certified shared service provider in compliance
with the Financial Management Line of Business.

Beyond the launch of the new core financial system, the financial systems modernization strategy
builds upon Compass through the implementation of five additional components, subject to future
review by OMB:

   Human Resources, Payroll, and Time and Attendance

   Implementation of the Common Governmentwide Account Code Structure

                                             20

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   Budget Formulation

   Superfund Imaging and Cost Accounting

   Payment Systems

After the Compass implementation, the EPA plans to migrate its human resources, payroll, and time
and attendance systems to an OMB Human Resources Line of Business approved shared service
provider.

The implementation of Compass will also serve as the foundation for the introduction of future
components to establish a unified and integrated systems infrastructure. Compass will leverage
increases in the EPA's wide area network bandwidth as well as its implementation of a trusted Internet
connection to facilitate more efficient transaction processing. As additional components are introduced,
the infrastructure will evolve to effectively centralize the resource footprint and reduce financial
management information silos across the organization.

Limitations of the Principal  Financial Statements

The EPA has prepared the principal financial statements to report the financial position and results of
operations of the agency, pursuant to the requirements of 31 U.S.C. 3515 (b). While the EPA has
prepared the statements from the books and records of the entity in accordance with U.S. generally
accepted accounting principles for federal entities and  the formats prescribed by OMB, the statements
are in addition to the financial reports used to monitor and control budgetary resources that are
prepared from the same books and records. The statements should be read with the realization that
they are for a component of the U.S. government, a sovereign entity.
                                             21

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                   IMPROVING MANAGEMENT AND RESULTS
Office of Inspector General Audits, Evaluations and Investigations

The EPA's OIG contributes to the agency's mission to improve human health and environmental
protection by assessing the efficiency and effectiveness of the EPA's program management and
results; ensuring that agency resources are used as intended; developing recommendations for
improvements and cost savings; and providing oversight and  advisory assistance in helping the EPA
carry out its ARRA objectives. In FY 2011, OIG identified key  management challenges and internal
control weaknesses and provided more than 2,011 recommendations accounting for more than $82.4
million in potential savings and recoveries and more than 315 actions taken for improvement from OIG
recommendations. OIG also contributes to the integrity of and public confidence in the agency's
programs and to the security of its resources by preventing and detecting possible fraud, waste and
abuse and pursuing judicial and administrative remedies. For  example, in response to OIG
recommendations the agency: established procedures to provide reasonable assurance that Diesel
Emissions Reduction Act grant and subgrant grantee progress reports are accurate and emission levels
are verified; agreed to ensure that the Solid Waste Disposal Act site priority requirement is consistently
incorporated into the terms and conditions of future LUST Trust Fund grant agreements; developed
strategic vision and program  design that assures that the ENERGY STAR® label represents superior
energy conservation performance along with a complete set of goals, and valid and reliable measures;
and agreed to revise policies and procedures to ensure that financial monitoring review reports are
distributed timely to all project officers, work assignments managers and task order managers assigned
to the contract impacted by the financial monitoring review. OIG investigations accounted for 160
criminal, civil or administrative enforcement actions or allegations disproved during FY 2011 and $6.4
million in ARRA fund cost savings to date from OIG audits,  evaluations and investigations.

Grants Management

The EPA met or exceeded major performance metrics under its second long term Grants  Management
Plan (2009-2013), including grant closeout and competition goals. The Grants Management Plan
builds on the progress made in the Grants Management Plan  (2003-2008) and will prevent the
recurrence of a grants management weakness.
Grants Management Performance Measures for the EPA
Performance Measure
Percentage of eligible
grants closed out
Percentage of new grants
subject to the competition
policy that are competed
Target
90%
99%
90%
Progress in FY2011
93.4% in 2010
99.5% in 2009 and earlier
96%
Progress in FY2010
95.6% in 2009
99.6% in 2008 and earlier
96.5%
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   ACCOUNTABILITY: SYSTEMS, CONTROLS AND LEGAL COMPLIANCE

Federal Managers' Financial Integrity Act
FMFIA requires agencies to conduct an annual evaluation of their internal controls over programs
(FMFIA Section 2) and financial systems (FMFIA Section 4) and report the results to the President and
Congress. In addition, agencies are required to report on the effectiveness of internal controls over
financial reporting, which includes safeguarding of
assets and compliance with applicable laws and
regulations in accordance with the requirements of
Appendix A of OMB Circular A-123.

Every year, all of the EPA's national program and
regional offices conduct assessments and submit
annual assurance letters attesting to the soundness of
the internal controls within their organizations. These
assurance letters provide the basis for the
Administrator's annual statement of assurance on the
adequacy of the EPA's internal controls over
programmatic operations and financial systems. The
Administrator's FY 2011 statement of assurance is
provided below.  Based on the results of the agency's
FY2011  evaluation, the Administrator can provide
reasonable assurance on the adequacy and
effectiveness of the EPA's internal controls over
programs and financial systems.

To evaluate its internal controls over financial reporting
(as required by OMB Circular A-123, Appendix A), the
agency reviewed 10 key financial  processes and 271
key controls.  Based on this evaluation, no new
material weaknesses were identified. During its financial statement audit process, OIG identified
several significant deficiencies. Based on the results of the evaluation and the OIG findings, the
agency's internal controls over financial operations were found to be operating effectively and
efficiently.
    FY 2011  Key Management
   Challenges Identified by the
    Office of Inspector General

1.   Need for Greater Coordination of
    Environmental Efforts
2.   Oversight of Delegation to States
J.   Safe Reuse of Contaminated Sites
4.   Limited Capability to Respond to
    Cyber Security
5.   EPA's Framework for Assessing
    and Managing Chemical Risks
                             Fiscal Year 2011 Annual Assurance Statement

   The U.S. Environmental Protection Agency conducted its FY2011 assessment of the effectiveness of internal controls
   over programmatic operations and financial activities, as well as conformance of financial systems to government-wide
   standards. The assessment was conducted in compliance with the Federal Managers' Financial Integrity Act, OMB
   Circular A-123, Management's Responsibility for Internal Control, and other applicable laws and regulations.

   Based on the results of the EPA's assessment and no findings of material weaknesses, I am providing reasonable
   assurance that the agency's internal controls over programmatic operations were operating effectively and financial
   systems conform to government-wide standards as of September 30, 2011.

   In addition, based on the results of the EPA's assessment of the effectiveness of internal controls over financial
   activities and no findings of material weaknesses as of June 30, 2011, I am providing reasonable assurance that the
   EPA's internal controls over financial activities were operating effectively.
         Lisa P. Jackson
         Administrator
         (bate
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       Five-Year Trend of Material and Agency
                Weaknesses
 5 -r-          Remaining at Year-End
                                   • Material
                                     Agency
     2007
2008   2009   2010

    Fiscal Year
2011
Management Assurances

For FY 2011, no new material weaknesses
were identified by the agency or the OIG.
The EPA is addressing a number of less
severe weaknesses for which corrective
actions are underway. In FY 2011, the
agency closed one agency-level
weaknesses, identified no new agency-level
weaknesses, identified five new significant
deficiencies and is carrying over four
agency-level weaknesses. Section III  of this
report provides details about corrective
actions underway to  rectify remaining
agency-level weaknesses. The EPA will
continue monitoring progress in correcting
these issues through their resolution. The
accompanying graph depicts the EPA's
progress in correcting its material and
agency-level weaknesses since 2007.

The EPA continues to emphasize the
importance of maintaining effective internal
controls. In FY 2011, the agency continued
to conduct internal program compliance
reviews of program and regional offices  to
help inform and strengthen its FMFIA implementation. Additionally, the agency provided on-line training
for senior managers  and designated staff designed to help them fulfill their roles and responsibilities for
maintaining an effective internal controls program.

Federal Financial Management Improvement Act

FFMIA requires that  agencies implement and maintain financial management systems that comply with
1) federal financial management system requirements, 2) applicable federal accounting standards, and
3) the U.S. Government Standard General Ledger. Annually, agency heads are required to assess and
report on whether these systems comply with FFMIA.

EPA's FY 2011 assessment included  the following:

•    A-123 review found no significant  deficiencies.

•    The OIG's FY 2011 financial statement audit identified no material weaknesses related to financial
    management systems.

•    The agency's annual Federal Information Security Management Act Report did not disclose any
    material weaknesses.

•    The agency conducted other systems-related activities, including:

       o   Initial certification for access to the agency's new accounting system.
       o   Completion of security self-assessments with the online Automated System Security
          Evaluation and Remediation Tracking tool for the accounting system.

Based on the assessment described above, the agency is in compliance with the FFMIA for FY 2011.
24

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Federal Information Security Management Act

FISMA directs federal agencies to annually evaluate the effectiveness of their information security
programs and practices and submit a report—including an independent evaluation by the Inspector
General—to the Department of Homeland Security, OMB and Congress. Agencies also report quarterly
and annually to DHS and OMB on the status of remediation of identified weaknesses.

The EPA's Chief Information Officer and senior agency program officials and the IG's FY 2011 FISMA
Report cite no significant or material weakness in information security. However, the IG noted where
the EPA needs to make significant improvements in risk management, managing plan of actions and
milestones, and continuous monitoring. The report presents the results of the agency's annual security
program reviews and reflects the EPA's continued efforts to ensure that information assets are
protected and secured in a manner consistent with the risk and magnitude of the harm resulting from
the loss, misuse, or unauthorized access to or modification of information. The agency plans to focus its
FY 2012 efforts on improving the effectiveness of the agency information security program by
implementing risk-based  improvements identified by a series of metrics based  on key performance
indicators.

Biennial User Fees

In accordance with OMB  Circular A-25, User Charges, and the Chief Financial  Officer's Act of 1990, the
agency conducted its biennial review of user fees. The FY 2011 review concluded that the EPA's user
fees are in compliance with statutory authority.  However, the agency's OIG issued a report
recommending that the agency update its 2004 fee rule for the Motor Vehicle and Engine Compliance
Program to increase the amount of costs it can recover and conduct biennial reviews of the MVECP fee
collections and full program costs. The EPA concurred with OIG's recommendations and is currently
evaluating options for making necessary revisions to the fee rule. Also during FY 2011, the agency
initiated a feasibility study on the  Energy STAR. The EPA continues to evaluate the viability of
collecting fees for the program.

Inspector General Act Amendments of 1988 -Audit Management

The EPA uses the results of OIG audits and evaluations to assess its progress toward its strategic
goals and make corrections and adjustments to improve program effectiveness and efficiency. The
agency is continuing to strengthen its audit management, addressing audit follow-up issues and
working to complete corrective actions expeditiously and  effectively to improve environmental results.
During FY 2011, for example, the Office of the Chief Financial Officer continued the effort it initiated in
FY 2009 to conduct quality assurance reviews of national program and regional offices to promote
sound audit management and increase agency awareness of, accountability for, and completion of,
outstanding unimplemented OIG  recommendations. Additionally, the Chief Financial Officer instituted a
quarterly report highlighting the status of management decisions and corrective actions. Shared with
program office and regional managers throughout the agency, the quarterly reports promote timely
audit follow-up and completion of corrective actions. OCFO also initiated an update of the agency Order
2750,  "EPA's Audit Management Process."

In FY 2011, the EPA was responsible for addressing OIG recommendations and tracking follow-up
activities for 377 OIG reports. The agency achieved final action (completing all  corrective actions
associated with the audit) on 165 audits, which included program evaluation/program performance,
assistance agreement  and single audits. This total excludes Defense Contract  Audit Agency audits
issued after January 1, 2009; these audits are discussed in a separate section  below. The EPA's FY
2011 management activities for audits with associated dollars are represented  in the following table:
                                             25

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Category
A. Audits with management decisions but
without final action at the beginning of the period
B. Audits for which management decisions were
made during the period
(i) Management decisions with disallowed costs
(12) and with better use funds (2)
(ii) Management decisions with no disallowed
costs (79) and with no better use funds (44)
C. Total audits pending final action during the
period (A+B)
D. Final action taken during the period:
(i) Recoveries
a) Offsets
b) Collection
c) Value of Property
d) Other
(ii) Write-Offs
(iii) Reinstated Through Grantee Appeal
(iv) Value of recommendations completed
(v) Value of recommendations management
decided should/could not be completed
E. Audits without final action at end of period (C-
D)
Disallowed Costs
(Financial Audits)
Number Value
65 $66,371,403
91 $ 853,496
156 $67,224,899
108 $ 39,960,302
$ 1,695,420
$ 1,027,915
$ 0
$ 17,205,909
$ 54,300
$ 19,976,758
48 $ 27,264,597
Funds Put To Better
Use
(Performance Audits)
Number Value
77 * $ 80,070,565
46 $ 9,647,000
123 $89,717,565
57 $ 13,880,370
$13,880,370
66 $ 75,837,195
*This number includes all performance audits.

The EPA's FY 2011 management activities for audits without final corrective action are summarized
below:

    Final Corrective Action Not Taken. Of the 377 audits that the EPA tracked, a total of 199 audits—
    which include program evaluation/program performance, assistance agreement, contracts and
    single audits—were without final action and not yet fully resolved at the end of FY 2011. (The 13
    audits with management decisions under administrative appeal by the grantee are not included in
    the 199 total; see discussion below.)

    Final Corrective Action Not Taken Beyond One Year. Of the 199 audits, the EPA officials had
    not completed final action on 52 audits (five of which involve multiple offices) within one year after
    the management decision (the point at which the OIG and the Action Official reach agreement on
    the corrective action plan). Because the issues to be addressed may be complex, agency
    managers often require more than one year after management decisions are reached with the OIG
    to complete the agreed-on corrective actions. These audits are listed below by category—audits of
    program  performance, single audits and assistance agreements—and identified by title and
    responsible office. Additional details are available on the EPA's website at
    http://www.epa.gov/planandbudget/.

Audits of Program Performance. Final action for program performance audits occurs when all corrective
actions have been implemented, which may require more than one year when corrections are complex
                                             26

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and lengthy. Some audits include recommendations requiring action by more than one office. The EPA
is tracking 38 audits in this category (four of these involve multiple offices):

Office of Administration and Resources Management
9-P00087+     EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
              Critical Assets
10-P00002     Review of Hotline Complaint on Employee Granted Full-Time Work-at-Home Privilege

Office of Air and Radiation
2005-P00003   Development of the Proposed MACT for Utility Units
2005-P00010   Evaluation  of CAA Title V Operating Permit Quality
2008-P00206   Voluntary Greenhouse Gas Reduction Programs Have Limited Potential
9-P00087+     EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
              Critical Assets

Office of the Chief Financial Officer
2008-P00116   Superfund  Expenditures at NPL TRI Sites
9-P00087+     EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
              Critical Assets
10-100029     Audit of 2009 and 2008 (Restated) Consolidated Financial Statements
10-P00077+    EPA Needs to Improve Its Recording and Reporting of Fines and Penalties

Office of Enforcement & Compliance Assurance
2001-P00013   State Enforcement Effectiveness - National Audit
2005-P00024   Priority Enforcement and Compliance Assurance Universe
2007-P00027   Benchmarking Other Organizations Statistically Valid Compliance Practices
2008-P00141   EPA Needs to Track Compliance with Superfund Clean-up Requirements
9-P00092      EPA Can Improve Implementation of the Risk Management Program for Airborn Chemical
              Releases
9-P00144      EPA Needs to Improve Internal Controls to Increase Cost Recovery
10-P00007     EPA Oversight and Policy for High Priority Violations of Clean Air Act Need Improvement
10-P00009+    EPA Needs a Better Strategy to Identify Violations of Section 404 of the Clean Water Act
10-P00077+    EPAA Needs to Improve Its Recording and Reporting of Fines and Penalties
10-P00133     EPA Should Improve Its Oversight of Federal Agency Superfund Reviews
10-P00066     EPA Needs a Coordinated Plan to Oversee Its Toxic Substances Control Act Responsibilities

Office of Environmental Information
2007-P00008   EPA Could Improve Controls over Mainframe Software
2009-P00127   EPA Has Improved its Response to FOIA Requests

Office of Research and Development
9-P00232      EPA's Office of Research and Development Could Better Use the Federal Managers' Financial
              Integrity
2009-P00235   EPA Needs an Oversight Program for Protocol Gases
10-P00042+    Lack of Final Guidance on Vapor Intrusion Impedes Efforts to Address Indoor Air Risks

Office of Solid Waste and Emergency Response
2006-P00013   SF Mandate:  Program Efficiencies
2006-P00007   More Information Is Needed on Toxaphene Degradation Products
2007-200003   Superfund  Cooperative Agreement Obligations
2007-P00002   Asbestos Cleanup in Libby Montana
8-P00265      EPA Should Continue Efforts to Reduce Unliquidated Obligations in Brownfields Pilot Grants
10-P00042+    Lack of Final Guidance on Vapor Intrusion Impedes Efforts to Address Indoor Air Risks
10-P00133     EPA Should Improve Its Oversight of Federal Agency Superfund Reviews

Office of Water
2002-P00012   Controlling and Abating Combined Sewer Overflows
9-P00223      EPA Needs to Accelerate Adoption of Numeric Nutrient Water Quality Standards
10-P00009+    EPA Needs a Better Strategy to Identify Violations of Section 404 of the Clean Water Act

                                               27

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10-P00081
10-R00057

Region 1
2009-P00119

Region 2
2007-P00039
2007-P00016

Region 3
2007-P00031
10-P00055
Region 9:
2008-P00196
EPA Needs Procedures to Address Delayed Earmark Projects
EPA Needs Definitive Guidelines for Recovery Act and Future Green Reserve Projects
Improved Management of Special Accounts Will Make More Funds Available
OIG Congressional Request-Ringwood Mines/Landfill Superfund
Ringwood Mines/Landfill Superfund Site
Chesapeake Bay Land Use
Changes in Conditions at Wildcat Landfill Superfund Site in Delaware Call for Increased EPA
Oversight
Making Better Use of Stringfellow SF Special Accounts
+ Indicates audits involving more than one office

Single audits. Final action for single audits occurs when nonmonetary compliance actions are
completed. Achieving final action may require more than a year if the findings are complex or the
grantee does not have the resources to take corrective action. Single audits are conducted of nonprofit
organizations, universities, and state  and local governments. The EPA is tracking completion of
corrective action on 11 single audits for the period beginning October  1,  2011.
Region 2
2007-300139

Region 9:
9-300234
10-300164

Region 10
2002-300009
2002-300042
2003-300047
2003-300117
2003-300145
2004-300011
2006-300167
2006-300168
State of New York, FY 2006
Guam Waterworks Authority FY 2008
Guan Waterworks Authority FY 2009
Iliama Village Council
Iliama Village Council
Stevens Village Council
Stevens Village Council
Circle Village Council
Northway Village Council
State of Alaska-FY 2003
State of Alaska-FY 2004
Audits of Assistance Agreements. Reaching final action for assistance agreement audits may require
more than one year, as the grantee may appeal, refuse to repay, or be placed on a repayment plan that
spans several years. The EPA is tracking three audits in this category:
Region 2
1989-901299
Nassau County, NY
Region 3
2001-100101   Center for Chesapeake Communities (CCC) Assist. Agreements

Region 5
2008-200039   Village of Laurelville, Ohio
                                               28

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Audits Awaiting Decision on Appeal. The EPA regulations allow grantees to appeal management
decisions on financial assistance audits that seek monetary reimbursement from the recipient. In the
case of an appeal, the EPA must not take action to collect the account receivable until the agency
issues a decision on the appeal. At the end of FY 2011,13 audits were in administrative appeal. When
these audits are out of appeal and all issues have been resolved, they will be captured in audit follow-
up data reported in the EPA's APR.

Defense Contract Audit Agency Audits

Prior to January 1, 2009, DCAA audits of the EPA contracts were requested by the EPA's Office of
Inspector General and the  results included in the OIG's Semi-annual Report to Congress. The EPA will
continue to track and report on these DCAA audits along with other Office of Inspector General audits
until they are resolved and final action taken; they are included in the summary above. Beginning
January 1, 2009, however, the EPA's Office of Acquisition Management assumed responsibility for
requesting DCAA audits. Accordingly, these audits are now reported separately from Office of Inspector
General audits. Following is an overview of DCAA audit activity for the period, October 1, 2010 through
September 30, 2011.

Summary of Audit Activities for the Period Ending September 30,  2011

During this reporting period, agency management was accountable for monitoring 65 DCAA audits. The
agency achieved final action  on 36 audits. The EPA's FY 2011 management activities for DCAA audits
with associated dollars are represented in the following table:
Category
A. Audits with management decisions but
without final action at the beginning of the period
B. Audits for which management decisions were
made during the period
(i) Management decisions with disallowed costs
(6)
(ii) Management decisions with no disallowed
costs (25)
C. Total audits pending final action during the
period (A+B)
D. Final action taken during the period:
(i) Recoveries
a) Offsets
b) Collection
c) Value of Property
d) Other
(ii) Write-Offs
(iii) Reinstated Through Grantee Appeal
(iv) Value of recommendations completed
(v) Value of recommendations management
decided should/could not be completed
E. Audits without final action at end of period
(C-D)
Disallowed Costs
(Financial Audits)
Number Value
1 $ 97,198
35 $ 2,538,189
36 $ 2,635,387
36 $ 2,635,387
$ 0
$ 97,198
$ 0
$2,538,189
$ 0
$ 0
$ 0
0 $ 0
Funds Put To Better
Use
(Performance Audits)
Number Value
0 $ 0
0 $ 0
0 $ 0
0 $ 0
$ 0
$ 0
0 $ 0
                                            29

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Final Corrective Action Not Taken on DCAA Audit Reports: Of the 65 DCAA audits the EPA
tracked, a total of 29 audits were without final action and not yet fully resolved at the end of FY 2011.

DCAA Audits Awaiting Decision on Appeal:  As of September 30, 2011, there were no management
decisions in administrative appeal status.

DCAA Audits Without Management Decision in 180 Days: As of September 30, 2011, the EPA is
tracking no DCAA reports for which EPA is the  cognizant agency, and that have not reached
management decision in over 180 days from the date of the report.
                                          30

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    Section II
Financial Section
        31

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                                Message from the Chief Financial Officer

                  The EPA's Agency Financial Report presents the performance and financial results
                  achieved by the agency during Fiscal Year 2011. It provides information on the EPA's
                  accomplishments and challenges in protecting human health and the environment, use
                  of the financial resources entrusted to us and progress in addressing key management
                  challenges.

	During Fiscal Year 2011, the EPA continued to demonstrate efficient, effective and
accountable administration and to make innovative improvements to eliminate waste and reduce costs.
Highlights of the agency's efforts include becoming the first government agency to receive Treasury's Award
for 100% Electronic Funds Transfer for Collections and Cash Management, an exceptionally low improper
payment rate of 0.01% and a 12th consecutive clean opinion on its audited financial statements.

As required by OMB Circular A-123 and the Federal Managers' Financial  Integrity Act, we conducted an
annual assessment of the effectiveness of internal controls over financial  reporting and programmatic
operations. To strengthen our financial and programmatic stewardship, the agency implemented a multi-year
review strategy to ensure the integrity of agency programs and resources are protected from fraud, waste,
abuse and misappropriation. Based on the results of the agency's Fiscal Year 2011 evaluation  and reviews,
the Administrator can  provide reasonable assurance on the adequacy and effectiveness of the  EPA's internal
controls over programs, financial activities and financial systems.

To ensure the agency is effectively managing its resources, the EPA  implemented its new unliquidated
obligations policy and deployed an agencywide desktop tool to proactively monitor obligation balances for all
grants, interagency agreements,  small purchases, travel documents and contracts. The new tool replaces a
paper-based process  with real-time access to data, creating greater transparency and accountability over
federal funds. As a result, the agency reduced unliquidated obligations by $7.4 billion.

During Fiscal Year 2011, the EPA continued its effort to replace its legacy financial system with a new core
financial system,  Compass. The new system will increase efficiency, improve business performance and
ensure financial integrity. Throughout the year, the Compass team conducted functionality, user acceptance,
performance, integration and end-to-end testing to comprehensively identify and resolve system defects
prior to launch. These testing activities established the foundation fora successful launch of Compass in
early Fiscal Year 2012.

In Fiscal Year 2011, the EPA began a new Policy Verification Compliance Initiative to assess the overall
efficiency, effectiveness and consistency of financial activities. The initiative allows the agency to identify
best practices and potential improvements to  strengthen financial management. The agency targeted the
Recovery Act Stewardship Plan as its first verification review effort. The results ensure that Recovery Act
funds were managed  appropriately.

As Chief Financial Officer, I take  seriously my responsibility to provide informed financial analysis to agency
leaders and the public. As we start the new fiscal year, we will uphold our commitment to financial
excellence, move money out faster for projects  and ensure taxpayers' dollars are utilized effectively in
fulfilling our mission to protect human health and the environment. We achieved  great things this fiscal year
and I look forward to continuing our success through collaboration with our partners and stakeholders and
implementing innovative, cross-cutting strategies to help meet the challenges ahead.
                                                Barbara J. Bennett
                                                Chief Financial Officer
                                                November 15, 2011
                                               32

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Principal Financial Statements

Financial Statements

   1. Consolidated Balance Sheet
   2. Consolidated Statement of Net Cost
   3. Consolidated Statement of Net Cost by Goal
   4. Consolidating Statement of Changes in Net Position
   5. Combined Statement of Budgetary Resources
   6. Statement of Custodial Activity

  Notes to Financial Statements

      Note 1.      Summary of Significant Accounting Policies
      Note 2.      Fund Balance with Treasury
      Note 3.      Cash and Other Monetary Assets
      Note 4.      Investments
      Note 5.      Accounts Receivable, Net
      Note 6.      Other Assets
      Note 7.      Loans Receivable, Net
      Note 8.      Accounts Payable and Accrued Liabilities
      Note 9.      General  Property, Plant and Equipment, Net
      Note 10.    Debt Due to Treasury
      Note 11.    Stewardship Land
      Note 12.    Custodial Liability
      Note 13.    Other Liabilities
      Note 14.    Leases
      Note 15.    Federal Employees Compensation Act Actuarial Liabilities
      Note 16.    Cashout Advances, Superfund
      Note 17.    Unexpended Appropriations - Other Funds
      Note 18.    Commitments and Contingencies
      Note 19.    Earmarked Funds
      Note 20.    Intragovernmental Costs and Exchange Revenue
      Note 21.    Cost of Stewardship Land
      Note 22     Environmental Cleanup Costs
      Note 23.    State Credits
      Note 24.    Preauthorized Mixed Funding Agreements
      Note 25.    Custodial Revenues and Accounts Receivable
      Note 26.    Reconciliation of President's Budget to the Statement of Budgetary Resources
      Note 27.    Recoveries and Resources Not Available, Statement of Budgetary Resources
      Note 28.    Unobligated Balances Available
      Note 29.    Undelivered Orders at the End of the Period
      Note 30.    Offsetting Receipts
      Note 31.    Transfers-ln and Out, Statement of Changes in Net Position
      Note 32.     Imputed Financing
      Note 33.    Payroll and Benefits Payable
      Note 34.    Other Adjustments, Statement of Changes in Net Position
      Note 35.    Non-exchange Revenue, Statement of Changes in Net Position
      Note 36.    Reconciliation of Net Cost of Operations to Budget
      Note 37.    Amounts Held By Treasury (Unaudited)
      Note 38.    Antideficiency Act Violations
                                              33

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Required Supplementary Information (Unaudited)

   1.  Deferred Maintenance
   2.  Stewardship Land
   3.  Supplemental Combined Statement of Budgetary Resources

Required Supplementary Stewardship Information (Unaudited)

Supplemental Information and Other Reporting Requirements (Unaudited)

   Superfund Financial Statements and Related Notes
                                          34

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                               Environmental Protection Agency
                                  Consolidated Balance Sheet
                              As of September 30, 2011 and 2010
                                     (Dollars in Thousands)
                                                                 FY2011
ASSETS
Intragovernmental:
   Fund Balance With Treasury (Note 2)
   Investments (Note 4)
   Accounts Receivable, Net (Note 5)
   Other (Note 6)
Total Intragovernmental

Cash and Other Monetary Assets (Note 3)
Accounts Receivable, Net (Note 5)
Loans Receivable, Net - Non-Federal (Note 7)
Property, Plant & Equipment, Net (Note 9)
Other (Note 6)
   Total Assets

Stewardship PP& E (Note 11 )

LIABILITIES
Intragovernmental:
   Accounts Payable and Accrued Liabilities (Note 8)
   Debt Due to Treasury (Note 10)
   Custodial Liability (Note  12)
   Other (Note 13)
Total Intragovernmental

Accounts Payable & Accrued Liabilities (Note 8)
Pensions & Other Actuarial  Liabilities (Note 15)
Environmental Cleanup Costs (Note 22)
Cashout Advances, Superfund (Note 16)
Commitments & Contingencies (Note 18)
Payroll & Benefits Payable (Note 33)
Other (Note 13)
   Total Liabilities

NET POSITION
Unexpended Appropriations - Other Funds (Note 17)
Cumulative Results of Operations - Earmarked Funds (Note 19)
Cumulative Results of Operations - Other Funds

Total Net Position

   Total Liabilities and Net Position
12,662,541
 7,112,197
    35,518
   251,803
20,062,059   $

       10
   514,190
     2,107
   966,799
     2,566
21,547,731   $
    52,448
     2,593
    56,703
   132,910
   244,654   $

   916,766   $
    44,833
    20,838
   790,069
    10,180
   272,335
   103,989
 2,403,664   $
11,462,598
 7,027,163
  654,306
19,144,067
                    FY2010
14,603,024
 7,243,613
    45,698
   223,296
22,115,631

       10
   417,535
     5,254
   915,121
     2,834
23,456,385
    51,325
     4,844
    52,751
   132,286
   241,206

 1,031,448
    44,938
    20,154
   636,673
     4,373
   264,975
    99,996
 2,343,763
13,342,784
 7,152,382
   617,456
21,112,622
21,547,731   $
23,456,385
       The accompanying notes are an integral part of these financial statements.
                                                  35

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                         Environmental Protection Agency
                        Consolidated Statement of Net Cost
                For the Periods Ending September 30, 2011 and 2010
                              (Dollars in Thousands)

                                     FY2011              FY2010

COSTS

    Gross Costs (Note 20)         $           11,577,224  $           12,406,265
     Less:
    Earned Revenue (Note 20)       	698,331   	693,484

NET COST OF OPERATIONS (Note 20)  $	10,878,893  $	11,712,781
      The accompanying notes are an integral part of these financial statements.

                                        36

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                                  Environmental Protection Agency
                            Consolidated Statement of Net Cost by Goal
                             For the Period Ending September 30, 2011
                                         (Dollars in Thousands)
                                                                                   Healthy        Compliance &
                                                 Clean & Safe     Land Preservation   Communities &     Environmental
                                  Clean Air          Water          & Restoration       Ecosystems       Stewardship
Costs:
 Intragovernmental                  $     159,456   $      252,748    $      390,431    $      335,757    $      192,243
 With the Public                    	1,035,680  	5,125,894   	2,180,996  	1,289,505   	614,514
   Total Costs (Note 20)             	1,195,136  	5,378,642   	2,571,427  	1,625,262   	806,757

Less:
Earned Revenue, Federal                     13,586            7,333           124,874           12,010            3,607
Earned Revenue, non Federal          	1,034  	1,458   	494,249   	38,725   	1,455
Total Earned Revenue (Note 20)        	14,620  	8,791   	619,123   	50,735   	5,062


NET COST OF OPERATIONS (Note 20)   $   1,180,516    $    5,369,851     $    1,952,304    $    1,574,527    $     801,695
                                 Consolidated
                                   Totals
Costs:
 Intragovernmental                  $   1,330,635
 With the Public                     $  10,246,589
   Total Costs (Note 20)                 11,577,224

Less:
Earned Revenue, Federal              $    161,410
Earned Revenue, non Federal          _$	536,921
Total Earned Revenue (Note 20)        	698,331
NET COST OF OPERATIONS (Note 20)   $  10,878,893
         The accompanying notes are an integral part of these financial statements.

                                                     37

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                               Environmental Protection Agency
                        Consolidated Statement of Net Cost by Goal
                          For the Period Ending September 30, 2010
                                     (Dollars in Thousands)
Costs:
 Intragovern mental
 With the Public
   Total Costs (Note 20)

Less:
Earned Revenue, Federal
Earned Revenue, non Federal
Total Earned Revenue (Note 20)
 Clean Air

 ;    170,677
    1,048,124
    1,218,801
      18,923
      5,906
      24,829
Clean & Safe
   Water

$    193,456
    6,197,330
    6,390,786
       2,803
       2,524
       5,327
Land Healthy Compliance &
Preservation & Communities & Environmental
Restoration Ecosystems Stewardship
$

342,734 $
2,096,211
2,438,945
293,850 $
1,265,653
1,559,503
182,299
615,931
798,230
103,687
446,569
 64,034
 44,144
3,400
1,494
550,256
108,178
4,894
NET COST OF OPERATIONS (Note 20)
$  1,193,972    $   6,385,459    $   1,888,689    $   1,451,325
                                               793,336
Costs:
 Intragovern mental
 With the Public
   Total Costs (Note 20)

Less:
Earned Revenue, Federal
Earned Revenue, non Federal
Total Earned Revenue (Note 20)
Consolidated
   Totals

$  1,183,016
$ 11,223,249
  12,406,265
    192,847
    500,637
    693,484
NET COST OF OPERATIONS (Note 20)
$ 11,712,781
      The accompanying  notes are an integral part of these financial statements.
                                                 38

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                                   Environmental Protection Agency
                       Consolidating Statement of Changes in Net  Position
                             For the Period Ending September 30, 2011
                                         (Dollars in Thousands)
Cumulative Results of Operations:

Net Position - Beginning of Period
    Beginning Balances, as Adjusted

Budgetary Financing Sources:
      Appropriations Used
      Nonexchange Revenue - Securities Investment (Note 35)
      Nonexchange Revenue - Other (Note 35)
      Transfers In/Out (Note 31)
      Trust Fund Appropriations
    Total Budgetary Financing Sources

Other Financing Sources (Non-Exchange)
      Donations and Forfeitures of Property
      Transfers In/Out (Note 31)
      Imputed Financing Sources (Note 32)
    Total Other Financing Sources

    Net Cost of Operations

    Net Change

Cumulative Results of Operations
Unexpended Appropriations:

Net Position - Beginning of Period
    Beginning Balances, as Adjusted

Budgetary Financing Sources:
      Appropriations Received
      Appropriations Transferred In/Out (Note 31)
      Other Adjustments (Note 34)
      Appropriations Used
    Total Budgetary Financing Sources

    Total Unexpended Appropriations

TOTAL NET POSITION
FY 201 1
Earmarked
Funds
7,152,382
7,152,382
FY2011
All Other
Funds
617,456
$ 617,456
 120,429
 184,984
  (17,068)
1,156,073
10,287,988

        0
   35,410
(1,156,073)
-
1
29,661
29,662
(1,599,299)
(125,219)
7,027,163
FY 201 1
Earmarked
Funds
50
76
148,993
$ 149,119
(9,279,594)
36,850
$ 654,306
FY2011
All Other
Funds
13,342,784
-
.
-
-
-
13,342,784
8,583,238
1,750
(177,186)
(10,287,988)
(1,880,186)
              11,462,598
                                                                                                  FY 2011
                                                                                               Consolidated
                                                                                                   Total
1,444,418   $    9,167,325   $
                                                                    7,027,163  $   12,116,904  $
                                7,769,838
                                7,769,838
10,287,988
  120,429
  184,984
   18,342

10,611,743
                                     50
                                     77
                                 178,654
                                 178,781

                              (10,878,893)

                                 (88,369)

                                7,681,469
                                                                                                  FY 2011
                                                                                               Consolidated
                                                                                                   Total
                 13,342,784
                 13,342,784


                  8,583,238
                     1,750
                   (177,186)
                (10,287,988)
                 (1,880,186)

                 11,462,598

                 19,144,067
         The accompanying notes are an integral part of these financial statements.
                                                       39

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                                    Environmental Protection Agency
                        Consolidating Statement  of Changes in Net Position
                              For the Periods Ending September 30, 2010
                                           (Dollars in  Thousands)
Cumulative Results of Operations:

Net Position - Beginning of Period
    Beginning Balances, as Adjusted

Budgetary Financing Sources:
      Appropriations Used
      Nonexchange Revenue - Securities Investment (Note 35)
      Nonexchange Revenue - Other (Note 35)
      Transfers In/Out  (Note 31)
      Trust Fund Appropriations
    Total Budgetary Financing Sources

Other Financing Sources (Non-Exchange)
      Transfers In/Out  (Note 31)
      Imputed Financing Sources (Note 32)
    Total Other Financing Sources

    Net Cost of Operations

    Net Change

Cumulative Results of Operations
                                                                    FY2010
                                                                   Earmarked
                                                                     Funds
             FY2010 All
            Other Funds
7,086,476
7,086,476  $~
  130,504
  213,984
  (20,789)
1,280,570
                FY2010
             Consolidated
                 Total
  582,668
  582,668   $~
              11,294,823
   33,859
(1,280,570)
1,604,269  $   10,048,112   $
   27,022
     (546)
  134,618
                                  7,669,144
                                  7,669,144
                                 11,294,823
                                   130,504
                                   213,984
                                    13,070

                                 11,652,381
                                      (546)
	  	  	161,640
    27,022   $     134,072   $       161,094

 (1,565,385)      (10,147,396)        (11,712,781)

    65,906          34,788           100,694
7,152,382  $
  617,456   $
                                  7,769,838
Unexpended Appropriations:

Net Position - Beginning of Period
    Beginning Balances, as Adjusted

Budgetary Financing Sources:
      Appropriations Received
      Appropriations Transferred In/Out (Note 31)
      Other Adjustments (Note 34)
      Appropriations Used
    Total Budgetary Financing Sources

    Total Unexpended Appropriations

TOTAL NET POSITION
                                                                    FY2010
                                                                   Earmarked
                                                                     Funds
             FY2010 All
            Other Funds
              14,536,347
       -  $    14,536,347  $
              10,182,421
                 (17,000)
                 (65,989)
             (11,292,995)
              (1,193,563)

              13,342,784
                                                                    7,152,382  $   13,960,240  $
                FY2010
             Consolidated
                 Total
                 14,536,347
                 14,536,347


                 10,182,421
                    (17,000)
                    (65,989)
                (11,292,995)
                 (1,193,563)

                 13,342,784

                 21,112,622
          The accompanying notes are an integral part of these financial statements.
                                                        40

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                            Environmental Protection Agency
                        Combined Statement of Budgetary Resources
                    For the Periods Ending September 30, 2011 and 2010
                                    (Dollars in Thousands)
                                                               FY2011            FY2010
BUDGETARY RESOURCES
Unobligated Balance, Brought Forward, October 1:                $	4,626,341  $	3,703,022
     Adjusted Subtotal                                                4,626,341          3,703,022
Recoveries of Prior Year Unpaid Obligations (Note 27)                        270,664           277,771
Budgetary Authority:
  Appropriation                                                      8,648,816         10,256,166
  Borrowing Authority                                                       -                52
Spending Authority from Offsetting Collections
  Earned:
     Collected                                                        640,123           918,786
     Change in Receivables from Federal Sources                           11,181             (1,746)
  Change  in  Unfilled Customer Orders:
     Advance Received                                                 79,380           234,559
     Without Advance from Federal Sources                               (15,817)          (132,489)
  Expenditure Transfers from Trust Funds                       	35,410    	36,809
      Total Spending Authority from Offsetting Collections                    750,277          1,055,919
Nonexpenditure Transfers, Net, Anticipated and Actual (Note 31)              1,372,575          1,369,345
Temporarily Not Available Pursuant to Public Law (Note 27)                     (553)           (11,800)
Permanently Not Available (Note 27)                            	(179,693)   	(73,453)
Total Budgetary Resources (Note 26)                         $	15,488,427  $      16,577,022
STATUS OF BUDGETARY RESOURCES
Obligations Incurred:
  Direct                                                  $        11,232,330  $     11,260,452
  Reimbursable                                            	758,247    	690,229
Total Obligations Incurred (Note 26)                                     11,990,577        11,950,681
 Unobligated Balances:
  Apportioned (Note 28)                                      	3,326,812         4,430,813
Total Unobligated Balances                                            3,326,812         4,430,813
Unobligated Balances Not Available (Note 28)                    	171,038    	195,528
Total Status of Budgetary Resources                         $	15,488,427  $     16,577,022
        The accompanying notes are an integral part of these financial statements.

                                               41

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                           Environmental Protection Agency
                      Combined Statement of Budgetary Resources
                  For the Periods Ending September 30, 2011 and 2010
                                  (Dollars in Thousands)

                                                              FY2011            FY2010
CHANGE IN OBLIGATED BALANCE
Obligated Balance, Net:
  Unpaid Obligations, Brought Forward, October 1                $	13,872,909  $      15,788,389
     Adjusted Total                                                 13,872,909         15,788,389
  Less: Uncollected Customer Payments from Federal Sources,
  Brought Forward, October 1                                 	(439,956)  	(573,824)
     Total Unpaid Obligated Balance, Net                               13,432,953         15,214,565
Obligations Incurred, Net (Note 26)                                     11,990,577         11,950,681
Less: Gross Outlays (Note 26)                                        (12,817,928)       (13,588,391)
Less: Recoveries of Prior Year Unpaid Obligations, Actual (Note 27)           (270,664)         (277,771)
Change in Uncollected Customer Payments from Federal Sources    	1,528   	133,869
    Total, Change in Obligated  Balance                                12,336,466         13,432,953

Obligated Balance, Net, End of Period:
  Unpaid Obligations                                                12,774,894         13,872,909
  Less: Uncollected Customer Payments from Federal Sources      	(438,428)  	(439,956)
     Total, Unpaid Obligated Balance, Net, End of Period           $       12,336,466  $      13,432,953
NET OUTLAYS
Net Outlays:
  Gross Outlays (Note 26)                                   $       12,817,928  $      13,588,391
  Less: Offsetting Collections (Note 26)                                  (751,805)         (1,189,788)
  Less: Distributed Offsetting Receipts (Notes 26 and 30)           	(1,291,761)         (1,402,960)
Total, Net Outlays                                         $	10,774,362  $      10,995,643
       The accompanying notes are an integral part of these financial statements.

                                             42

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                       Environmental Protection Agency
                        Statement of Custodial Activity
              For the Periods Ending September 30, 2011 and 2010
                            (Dollars in Thousands)
                                                   FY2011
                       FY2010
Revenue Activity:
Sources of Cash Collections:
   Fines and Penalties
   Other
   Total Cash Collections
   Accrual Adjustment
Total Custodial Revenue (Note 25)
Disposition of Collections:
   Transferred to Others (General Fund)            $
   Increases/Decreases in Amounts to be Transferred
Total Disposition of Collections                     $_
$
$
$
126,212
(4,024)
122,188
4,163
126,351
$
$
$
88,318
18,072
106,390
(16,763)
89,627
         122,910
           3,441
105,684
(16,057)
         126,351    $
 89,627
Net Custodial Revenue Activity (Note 25)
$
   The accompanying notes are an integral part of these financial statements.

                                      43

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                              Environmental Protection Agency
                              Notes to the Financial Statements
                       Fiscal Year Ended September 30, 2011 and 2010
                                   (Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies
A. Reporting Entities

The EPA was created in 1970 by executive reorganization from various components of other federal
agencies to better marshal and coordinate federal pollution control efforts. The agency is generally
organized around the media and substances it regulates - air, water, hazardous waste, pesticides, and
toxic substances.

The FY 2011 financial statements are presented on a consolidated basis for the Balance Sheet,
Statements of Net Cost, Changes in Net Position and Custodial Activity and a combined basis for the
Statement of Budgetary Resources. These financial statements include the accounts of all funds
described in this note by their respective Treasury fund group.

B. Basis of Presentation

These accompanying financial statements have been prepared to report the financial position and
results of operations of the U. S. Environmental Protection Agency (EPA or Agency) as required by the
Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994. The reports
have been prepared from the financial system and records of the agency in accordance with OMB
Circular No. A-136, Financial Reporting Requirements, and the EPA accounting policies,  which are
summarized in this note. The Statement of Net Cost has been prepared with cost segregated by the
agency's strategic goals.

C. Budgets and Budgetary Accounting

   1.  General Funds

       Congress adopts an annual appropriation for State and Tribal Assistance Grants,  Buildings and
       Facilities and for Payments to the  Hazardous Substance Superfund to be available until
       expended, as well as annual appropriations for Science and Technology, Environmental
       Programs and Management and for the OIG to be available for two fiscal years. When the
       appropriations for the General Funds are enacted, Treasury issues a warrant to the respective
       appropriations. As the agency disburses obligated amounts, the balance of funds available to
       the appropriation is reduced at Treasury.

       The Asbestos Loan Program is a commercial activity financed from a combination of two
       sources, one for the long-term costs of the loans and another for the remaining non-subsidized
       portion of the loans.  Congress adopted a one-year appropriation, available for obligation in the
       fiscal year for which  it was appropriated, to cover the estimated long-term cost of the Asbestos
       loans. The long-term costs are defined as the net present value of the estimated cash flows
       associated with the loans. The portion of each loan disbursement that did not represent long-
       term cost is financed under permanent indefinite borrowing authority established with the
       Treasury. A permanent indefinite appropriation is available to finance the costs of subsidy re-
       estimates that occur in subsequent years after the loans were disbursed.
                                             44

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       Funds transferred from other federal agencies are processed as non-expenditure transfers. As
       the agency disburses the obligated amounts, the balance of funding available to the
       appropriation is reduced at Treasury.

       Clearing accounts and receipt accounts receive no appropriated funds. Amounts are recorded
       to the clearing accounts pending further disposition. Amounts recorded to the receipt accounts
       capture amounts collected for or payable to the Treasury General Fund.

   2.  Revolving Funds

       Funding of the Reregistration and Expedited Processing Fund and Pesticide Registration Funds
       is provided by fees collected from industry to offset costs incurred by the agency in carrying out
       these programs. Each year the agency submits an apportionment request to OMB based on the
       anticipated collections of industry fees.

       Funding of the WCF is provided by fees collected from other agency appropriations and other
       federal agencies to offset costs incurred for providing agency administrative support for
       computer and telecommunication services, financial system services, employee relocation
       services and postage.

   3.  Special  Funds

       The Environmental Services Receipt Account obtains fees associated with environmental
       programs.

       Exxon Valdez uses funding  collected from reimbursement from the Exxon Valdez settlement.

   4.  Deposit Funds

       Deposit accounts receive no appropriated funds. Amounts are recorded to the deposit accounts
       pending  further disposition. These are not the EPA's funds.

   5.  Trust Funds

       Congress adopts an annual appropriation amount for the Superfund, LUST and the Oil Spill
       Response Accounts to remain available until expended.  A transfer account for the Superfund
       and LUST Trust Fund has been established for purposes of carrying out the program activities.
       As the agency disburses obligated amounts from the transfer account, the agency draws down
       monies from the Superfund  and LUST Trust Fund at Treasury to cover the amounts being
       disbursed. The agency draws down all the appropriated  monies from the Principal Fund of the
       Oil Spill Liability Trust Fund  when Congress adopts the appropriation amount to the EPA's Oil
       Spill Response Account.

D. Basis of Accounting

Generally Accepted Accounting Principles for federal entities is the standard prescribed by the Federal
Accounting Standards Advisory Board, which  is the official standard-setting body for the federal
government. The financial statements are prepared in accordance with GAAP for federal entities.

Transactions are recorded on an accrual accounting basis and on a budgetary basis (where budgets
are issued). Under the accrual method, revenues are recognized when earned and expenses are
recognized when a liability is incurred, without regard to receipt  or payment of cash. Budgetary
accounting facilitates compliance with legal constraints and controls over the use of federal funds.


                                             45

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E. Revenues and Other Financing Sources

The following agency policies and procedures to account for inflow of revenue and other financing
sources are in accordance with Statement of Federal Financial Accounting Standards No. 7,
"Accounting for Revenues and Other Financing Sources."

The Superfund program receives most of its funding through appropriations that may be used within
specific statutory limits for operating and capital expenditures (primarily equipment). Additional
financing for the Superfund program is obtained through: reimbursements from other federal agencies,
state cost share payments under Superfund State Contracts and settlement proceeds from Potentially
Responsible Parties under the Comprehensive  Environmental Response, Compensation and Liability
Act Section 122(b)(3) placed in special accounts. Cost recovery settlements that are not placed in
special accounts continue to be deposited in the Trust Fund.

Most of the other funds receive funding needed to support programs through appropriations that may
be used within statutory limits for operating and capital expenditures.  However, under Credit Reform
provisions, the Asbestos Loan Program receives funding to support the subsidy cost of loans through
appropriations that may be used within statutory limits. The Asbestos Direct Loan Financing fund 4322,
an off-budget fund, receives additional funding to support the outstanding loans through collections
from the Program fund 0118 for the subsidized portion of the loan.

The Federal  Insecticide, Fungicide and Rodenticide Act and Pesticide Registration funds receive
funding through fees collected for services provided and interest on invested funds. The WCF receives
revenue through fees collected for services provided to agency program offices. Such revenue is
eliminated with related agency program expenses upon consolidation of the agency's financial
statements. The Exxon Valdez Settlement Fund receives funding through reimbursements.

Appropriated funds are recognized as Other Financing Sources expended when goods and services
have been rendered without regard to payment of cash. Other revenues are recognized when earned
(i.e., when services have been rendered).

F. Funds with the Treasury

The agency does not maintain cash  in commercial bank accounts.  Cash receipts and disbursements
are handled by Treasury. The major funds maintained with Treasury are Appropriated Funds, Revolving
Funds, Trust Funds, Special Funds,  Deposit Funds and Clearing Accounts. These funds have balances
available to pay current liabilities  and finance authorized obligations, as applicable.

G. Investments in U.S. Government Securities

Investments  in U.S. Government securities are maintained by Treasury and are reported at amortized
cost net of unamortized discounts. Discounts are amortized over the term of the investments and
reported as interest income. No provision is made for unrealized gains or losses on these securities
because, in the majority of cases, they are held to maturity (see Note 4).

H. Notes Receivable

The agency records  notes receivable at their face value and any accrued interest as of the date of
receipt.

I. Marketable Securities

The agency records  marketable securities at cost as of the date of receipt. Marketable securities are
held by Treasury and reported at their cost value in the financial statements until sold (see Note 4).

                                             46

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J. Accounts Receivable and Interest Receivable

The majority of receivables for non-Superfund funds represent penalties and interest receivable for
general fund receipt accounts, unbilled intragovernmental reimbursements receivable, allocations
receivable from Superfund (eliminated in consolidated totals), and refunds receivable for the STAG
appropriation.

Superfund accounts receivable represent recovery of costs from PRPs as provided under CERCLA as
amended by the Superfund Amendments and Reauthorization Act of 1986. Since there is no assurance
that these funds will be recovered, cost recovery expenditures are expensed when incurred (see Note
5).

The agency records accounts receivable from PRPs for Superfund site response costs when a consent
decree, judgment, administrative order or settlement is entered. These agreements are generally
negotiated after at least some, but not necessarily all, of the site response costs have been incurred. It
is the agency's position that until a consent decree or other form of settlement is obtained, the amount
recoverable should not be recorded.

The agency also records accounts receivable from states for a percentage of Superfund site remedial
action costs incurred by the agency within those states. As  agreed to under SSCs, cost sharing
arrangements may vary according to whether a site was privately or publicly operated at the time of
hazardous substance disposal and whether the agency response action was removal or remedial. SSC
agreements are usually for 10 percent or 50 percent of site  remedial action costs, depending on who
has the lead for the site (i.e., publicly or privately owned). States may pay the full amount of their share
in advance or incrementally throughout the RA process.

K. Advances and Prepayments

Advances and prepayments represent funds advanced or prepaid to other entities both internal and
external to the agency for which a budgetary expenditure has not yet occurred.

L. Loans Receivable

Loans are accounted for as receivables after funds have been disbursed. Loans receivable resulting
from obligations on or before September 30,  1991, are reduced by the allowance for uncollectible
loans. Loans receivable resulting from loans obligated on or after October 1, 1991  are reduced by an
allowance equal to the present value of the subsidy costs associated with these loans. The subsidy
cost is  calculated based on the interest rate differential between the loans and Treasury borrowing, the
estimated delinquencies and defaults net of recoveries offset by fees collected and other estimated
cash flows associated with these loans.

M. Appropriated Amounts Held by Treasury

For the Superfund and LUST Trust Funds and for amounts  appropriated from the Superfund Trust Fund
to the OIG, cash available to the agency that is not needed  immediately for current disbursements
remains in the respective Trust Funds managed by Treasury.
                                             47

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N. Property, Plant and Equipment

The EPA accounts for its personal and real property accounting records in accordance with SFFAS No.
6, "Accounting for Property, Plant and Equipment." For EPA-held property, the Fixed Assets Subsystem
automatically generates depreciation entries monthly based on acquisition dates.

A purchase of  EPA-held or contract personal property is capitalized if it is valued at $25,000 or more
and has an estimated useful life of at least two years. For contractor held property, depreciation is
taken on a modified straight-line basis over a period of six years depreciating 10 percent the first and
sixth year, and 20 percent in years 2 through 5. Detailed records are maintained and accounted for in
contractor systems, not in FAS for contractor held property. Acquisitions of EPA-held personal property
are depreciated using the straight-line method  over the specific asset's useful life, ranging from two to
15 years.

Personal property also consists of capital leases. To be defined as a capital lease, it must, at its
inception, have a lease term of two or more years and the lower of the fair value or present value of the
minimum lease payments must be $75,000 or more. Capital leases may also contain real property
(therefore considered in the real property category as well), but these need to meet an $85,000
capitalization threshold. In addition, the lease must meet one of the following criteria: transfers
ownership to the EPA, contains a bargain purchase option, the lease term is equal to 75 percent or
more of the estimated service life, or the present value of  the lease and other minimum lease payments
equal or exceed 90 percent of the fair value.

Superfund contract property used as part of the remedy for site-specific response actions is capitalized
in accordance  with the agency's capitalization threshold. This property is part of the remedy at the site
and eventually becomes part of the site itself. Once the response action has been completed and the
remedy implemented, the EPA retains control of the property (i.e.,  pump and treat facility) for 10 years
or less, and transfers its interest in the facility to the respective state for mandatory operation and
maintenance - usually 20 years or more. Consistent with  the EPA's 10-year retention period,
depreciation for this property is based on a 10-year life. However, if any property is transferred to a
state in a year or less,  this property is charged to expense. If any property is sold prior to the EPA
relinquishing interest, the proceeds from the sale of that property shall be applied against contract
payments or refunded  as required by the Federal Acquisition Regulations.

An exception to the accounting of contract property includes equipment purchased by the WCF. This
property is retained in FAS and depreciated utilizing the straight-line method based upon the asset's
acquisition date and useful life.

Real property consists of land,  buildings,  capital and leasehold improvements and capital leases. Real
property, other than land, is capitalized when the value is  $85,000  or more. Land is capitalized
regardless of cost. Buildings are valued at an estimated original cost basis, and land is valued at fair
market value if purchased prior to FY 1997. Real property purchased after FY 1996 is valued at actual
cost. Depreciation for real property is calculated using the straight-line method over the specific asset's
useful life, ranging from 10 to 102 years. Leasehold improvements are amortized over the lesser of
their useful life or the unexpired lease term. Additions to property and improvements not meeting the
capitalization criteria, expenditures for minor alterations, and repairs and maintenance are expensed
when incurred.

Software for the WCF, a revenue generating activity, is capitalized if the purchase price is $100,000 or
more with an estimated useful life of two years or more. All other funds capitalize software if those
investments are considered Capital Planning and Investment Control or CPIC Lite systems with the
provisions of SFFAS No. 10, "Accounting for Internal Use  Software." Once software enters the
production life  cycle phase,  it is depreciated using the straight-line  method over the specific asset's
useful life ranging from two to 10 years.

                                              48

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O. Liabilities

Liabilities represent the amount of monies or other resources that are more likely than not to be paid by
the agency as the result of an agency transaction or event that has already occurred and can be
reasonably estimated.  However, no liability can be paid by the agency without an appropriation or other
collections. Liabilities for which an appropriation has not been enacted are classified as unfunded
liabilities and there is no certainty that the appropriations will be enacted. Liabilities of the agency
arising from other than contracts can be abrogated by the government acting in its sovereign capacity.

P. Borrowing Payable to the Treasury

Borrowing payable to Treasury results from loans from Treasury to fund the Asbestos direct loans
Periodic principal payments are made to Treasury based on the collections of loans receivable.

Q. Interest Payable to Treasury

The Asbestos Loan Program makes periodic interest payments to Treasury based on its debt.

R. Accrued Unfunded Annual Leave

Annual, sick and other leave is expensed as taken during the fiscal year. Sick leave earned but not
taken is not accrued as a liability. Annual leave earned but not taken as of the end of the fiscal year is
accrued as an unfunded liability. Accrued unfunded annual  leave is included in Note 33 as a
component of "Payroll and Benefits Payable."

S. Retirement Plan

There are two primary  retirement systems for federal employees. Employees hired prior to January 1,
1987 may participate in the Civil Service Retirement System. On January 1,  1984, the Federal
Employees Retirement System went into effect pursuant to Public Law 99-335. Most employees hired
after December 31, 1983 are automatically covered by FERS and Social Security. Employees hired
prior to January 1, 1984 elected to either join FERS and Social Security or remain in CSRS. A primary
feature of FERS is that it offers a savings plan  to which the agency automatically contributes one
percent of pay and matches any employee contributions up to an additional four percent of pay. The
agency also contributes the employer's matching share for Social Security.

With the issuance of SFFAS No. 5, "Accounting for Liabilities of the Federal Government,"  accounting
and reporting standards were established for liabilities  relating to the federal employee benefit
programs (Retirement, Health Benefits and Life Insurance). SFFAS No. 5 requires that the employing
agencies recognize the cost of pensions and other retirement benefits during their employees' active
years of service. SFFAS No. 5 requires that the Office  of Personnel Management, as administrator of
the CSRS and FERS, the Federal Employees Health Benefits Program, and the Federal Employees
Group Life Insurance Program, provide federal agencies with the actuarial cost factors to compute the
liability for each  program.

T. Prior Period  Adjustments and Restatements

Prior period adjustments, if any, are made in accordance with SFFAS No. 21, "Reporting Corrections of
Errors and Changes in Accounting Principles."  Specifically,  prior period adjustments will only be made
for material prior period errors to 1) the current period financial statements and 2) the prior period
financial statements presented for comparison. Adjustments related to changes in accounting principles
will only be made to the current period financial statements, but not to prior period financial statements
presented for comparison.

                                             49

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U. ARRA Funds

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of
2009. The Act was enacted to create jobs in the United States, encourage technical advances, assist in
modernizing the nation's infrastructure and enhance energy independence. The EPA was charged with
the task of distributing funds to invest in various projects aimed at creating advances in science, health
and environmental protection that will provide long-term economic benefits.

The EPA manages almost $7.22 billion in ARRA funded projects and programs that will help achieve
these goals, offer resources to help other "green" agencies, and administer environmental laws that will
govern Recovery activities. As of September 30, 2011, the EPA has paid out $6.31 billion. The EPA, in
collaboration with states, tribes, local governments, territories and other partners, is administering the
funds it received under the ARRA through four appropriations. The funds include:

STAGs that in turn include: $4 billion for assistance to help communities with water quality and
wastewater infrastructure needs and $2 billion for drinking water infrastructure needs (Clean Water and
Drinking Water State Revolving Fund programs and Water Quality Planning program); $100  million for
competitive grants to evaluate and clean up former industrial and commercial sites (Brownfields
program); $300 million for grants and loans to help regional, state and local governments, tribal
agencies, and non-profit organizations with projects that reduce diesel emissions (Clean Diesel
programs); $600 million for the cleanup of hazardous sites (Superfund program); $200 million for
cleanup of petroleum leaks from underground storage tanks (LUST program); and $20 million for audits
and investigations conducted  by the IG.

The EPA has committed to focusing on the following areas: Clean Diesel Emissions, Superfund
Hazardous Waste Cleanup, Cleaner Underground Storage Tank Sites, Revitalized Neighborhoods from
Brownfields and Cleaner Water and Drinking Water Infrastructures.

The vast majority of the contracts awarded under the ARRA will be entered into using competitive
contracts. The EPA is committed fully to ensuring transparency and accountability throughout the
agency in spending ARRA funds in accordance with OMB guidance.

The EPA has set up a Stimulus Steering Committee that meets to review and report on the status of the
distribution of the ARRA funds to ensure transparency and accuracy. The EPA has also developed a
Stewardship Plan that is an agency-level risk mitigation plan that sets out the agency's ARRA risk
assessment, internal controls  and monitoring activities. The Stewardship Plan is divided into seven
functional areas: grants, interagency agreements,  contracts, human capital/payroll, budget execution,
performance reporting and financial reporting. The Stewardship Plan was developed around
Government Accountability Office standards for internal control. Under each functional area, risks are
assessed and related control,  communication and monitoring  activities are identified for each impacted
program. The Stewardship Plan is a dynamic document; the EPA will update the Stewardship Plan as
revised OMB guidance is issued or additional  risks are uncovered.

The EPA has the three-year EPM treasury symbol 689/10108 that is under the ARRA. The EPA's other
ARRA programs are the following:  OIG, treasury symbol 689/20113; STAG, treasury symbol
689/00102; Payment to the Superfund, treasury symbol 689/00249; Superfund, treasury symbol
689/08195; and LUST, treasury symbol 689/08196.
                                             50

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V. Deepwater Horizon Oil Spill

On April 20, 2010, the Deepwater Horizon drilling rig exploded, releasing large volumes of oil into the
Gulf of Mexico. As a responsible party, British Petroleum is required by the 1990 Oil Pollution Act to
fund the cost of the response and cleanup operations. In FY 2011, the EPA continued to work on the
cleanup effort in conjunction with the U.S. Coast Guard, who was named the lead Federal On-Scene
Coordinator, and is assisting the Department of Justice on the pending civil litigation.

W. Use of Estimates

The  preparation of financial statements requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual  results could differ from those estimates.

Note 2. Fund Balance with Treasury
FBWT as of September 30, 2011 and 2010, consists of the following:



  Trust Funds:
   Superfund
   LUST
   Oil Spill & Misc.
  Revolving Funds:
   FIFRA/Tolerance
   Working Capital
   Cr. Reform Finan.
  Appropriated
  Other Fund Types

  Total

Entity
Assets
$ 114,540 $
60,558
4,085
3,571
68,776
390
12,086,770
314,522
$ 12,653,212 $
FY2011
Non-Entity
Assets
- $
-
-
_
-
-
-
9,329
9,329 $


Total
114,540$
60,558
4,085
3,571
68,776
390
12,086,770
323,851
12,662,541$

Entity
Assets
106,247$
55,132
9,644
4,204
80,485
390
14,049,511
289,149
14,594,762 $
FY2010
Non-Entity
Assets
- $
-
-
_
-
-
-
8,262
8,262 $


Total
106,247
55,132
9,644
4,204
80,485
390
14,049,511
297,41 1
14,603,024
Entity fund balances, except for special fund receipt accounts, are available to pay current liabilities and
to finance authorized purchase commitments (see Status of Fund Balances below). Entity Assets for
Other Fund Types consist of special purpose funds and special fund receipt accounts, such as the
Pesticide Registration funds and the Environmental Services receipt account. The Non-Entity Assets for
Other Fund Types consist of clearing accounts and deposit funds, which are either awaiting
documentation for the determination of proper disposition or being held by the EPA for other entities.
          Status of Fund Balances:
   FY2011
   FY2010
          Unobligated Amounts in Fund Balance:
          Available for Obligation
          Unavailable for Obligation
          Net Receivables from Invested Balances
          Balances in Treasury Trust Fund (Note 38)
          Obligated Balance not yet Disbursed
          Non-Budgetary FBWT


            Totals
  3,326,812  $
   171,038
 (3,485,275)
     1,310
 12,336,466
   312,190
12,662,541  $
  4,430,813
   195,529
 (3,736,818)
    (1,115)
 13,432,954
   281,661
14,603,024
The funds available for obligation may be apportioned by OMB for new obligations at the beginning of
the following fiscal year. Funds unavailable for obligation are mostly balances in expired funds, which
                                               51

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are available only for adjustments of existing obligations. For FY 2011 and FY 2010 no differences
existed between Treasury's accounts and the EPA's statements for fund balances with Treasury.

Note 3. Cash and Other Monetary Assets

As of September 30, 2011 and 2010, the balance in the imprest fund was $10,000.

Note 4. Investments	

As of September 30, 2011 and 2010, investments related to Superfund and LUST consist of the
following:
Cost
6,959,480$
7,079,053$
Amortized
(Premium)
Discount
(137,103) $
(139,302) $
Interest
Receivable
15,614 $
25,258 $
Investments,
Net
7,112,197 $
7,243,613 $
Market
Value
7,112,197
7,243,613
Intragovernmental Securities:
 Non-Marketable   FY 2011
 Non-Marketable   FY2010

CERCLA, as amended by SARA, authorizes the EPA to recover monies to clean up Superfund sites
from responsible parties. Some RPs file for bankruptcy under Title 11 of the U.S. Code. In bankruptcy
settlements, the EPA is an unsecured creditor and is entitled to receive a percentage of the assets
remaining after secured creditors have been satisfied.  Some RPs satisfy their debts by issuing
securities of the reorganized company. The agency does not intend to exercise ownership rights to
these securities, and instead will convert them to cash as soon as practicable (see Note 6).  All
investments in Treasury securities are earmarked funds (see Note 19).

The federal government does not set aside assets to pay future benefits or other expenditures
associated with earmarked funds. The cash receipts collected  from the public for an earmarked fund
are deposited in the Treasury, which uses the cash for general government purposes. Treasury
securities are issued to the EPA as evidence  of its receipts. Treasury securities are an asset to the EPA
and a liability to the Treasury. Because the EPA and the Treasury are both parts of the government,
these assets and liabilities offset each other from the standpoint of the government as a whole. For this
reason, they do not represent an asset or liability in the U.S. governmentwide financial statements.

Treasury securities provide the  EPA with authority to draw  upon the U.S. Treasury to make  future
benefit payments or other expenditures. When the EPA requires redemption of these securities to make
expenditures, the government finances those expenditures out of accumulated cash balances, by
raising taxes or other receipts, by borrowing from the public or repaying less debt, or by curtailing other
expenditures. This is the same way that the government finances all other expenditures.
                                             52

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Note 5. Accounts Receivable, Net
The Accounts Receivable as of September 30, 2011 and 2010 consist of the following:

                                                  FY2011         FY2010
         Intragovernmental:
         Accounts & Interest Receivable       $	35,518$	45,698
            Total                          $       35,518 $        45,698

         Non-Federal:
         Unbilled Accounts Receivable        $       159,170$        143,444
         Accounts & Interest Receivable              2,176,215       1,958,981
         Less: Allowance for Uncollectibles           (1,821,195)      (1,684,890)
            Total                         $      514,190 $      417,535
The Allowance for Uncollectible Accounts is determined both on a specific identification basis, as a
result of a case-by-case review of receivables, and on a percentage basis for receivables not
specifically identified.
Note 6. Other Assets
Other Assets as of September 30, 2011 and 2010 consist of the following:
        Intragovernmental:                          FY 2011         FY2010

         Advances to Federal Agencies         $       251,649$       223,165
         Advances for Postage                 	154  	131
           Total                           $      251,803 $       223,296








Note 7.
Non-Federal:
Travel Advances $
Letter of Credit Advances
Other Advances
Operating Materials and Supplies
Inventory for Sale
Total $

Loans Receivable, Net

486 $
-
1,838
140
102
2,566 $



432
9
2,105
149
139
2,834


Loans Receivable consists of Asbestos Loan Program loans disbursed from obligations made prior to
FY 1992 and are presented net of allowances for estimated uncollectible loans, if an allowance was
considered necessary. Loans disbursed from obligations made after FY 1991  are governed by the
Federal Credit Reform Act, which mandates that the present value of the subsidy costs (i.e., interest
rate differentials, interest subsidies, anticipated delinquencies and defaults) associated with direct loans
be recognized as an expense in the year the loan is made. The net loan present value is the gross loan
receivable less the subsidy present value. The amounts as of September 30, 2011 and 2010 are as
follows:
                                              53

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 Direct Loans
 Obligated Prior to
 FY1992

 Direct Loans
 Obligated After FY
 1991

   Total
                             FY2011                                FY2010
                     Loans               Value of Assets         Loans              Value of Assets
                  ReceiraMe,     Allowance*      Related to      ReceiraMe,     Allowance*      Related to
                     Gross                 Direct Loans         Gross                Direct Loans
  44 $
2,194
                     2,238 $
(131)
             (131) $
              44 $
             545 $
2,063
           2,107 $
            5,476 $
(222)
                                                              545
4,709
(222) $
5,254
* Allowance for Pre-Credit Reform loans (prior to FY 1992) is the Allowance for Estimated Uncollectible
Loans, and the Allowance for Post Credit Reform Loans (after FY 1991) is the Allowance for Subsidy
Cost (present value).
During FY 2008, the EPA made a payment within the Treasury for the Asbestos Loan Program based
on an upward re-estimate of $33,000 for increased loan financing costs. It was believed that the
payment only consisted of "interest" costs and, as such, an automatic apportionment, per OMB Circular
A-11, Section 120.83, was deemed appropriate. However, approximately one-third ($12,000) of the
$33,000 re-estimate was for increased "subsidy" costs which requires an approved apportionment by
OMB before any payment could be made. Therefore, the payment resulted in a minor technical Anti-
deficiency Act violation. On October 13, 2009, the EPA transmitted, as required by OMB Circular A-11,
Section 145, written notifications to the 1) President, 2) President of the Senate, 3) Speaker of the
House of Representatives, 4) Comptroller General  and 5) the Director of OMB. On May 18, 2011, the
EPA sent a supplemental letter to the OMB Director to further identify the names of the persons
responsible for the violation, and that they were not suspected of willfully or knowingly violating the
ADA.
Subsidy Expenses for Credit Reform Loans (reported on a cash basis):
            Upward Subsidy Reestimate - FY2011
            Downward Subsidy Reestimate -FY2011
            FY2011 Totals

            Upward Subsidy Reestimate - FY2010
            Downward Subsidy Reestimate - FY2010
            FY2010 Totals
                           Interest Rate
                            Re-estimate
                                  104 $

                                  104 $

                                    5 $
                          	(35)
                          	(30) $
                             Technical
                           Re-estimate
                                  39 $

                                  39 $

                                   2 $
                                  (16)
                                  (14)$
                                   Total

                                    143
                                   143
                                     7
                                    (51)
                                    (44)
                                               54

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                  Schedule for Reconciling Subsidy Cost Allowance Balances
                                 (Post-1991 Direct Loans)
                                                                                 FY2011         FY2010


 Beginning balance of the subsidy cost allowance                                          $        (222)   $       (948)

 Add: subsidy expense for direct loans disbursed during the
 reporting years by component:
                Interest rate differential costs
                Default costs (net of recoveries)
                Fees and other collections
                Other subsidy costs                                               	 	
 Total of the above subsidy expense components                                          $        -     $

 Adjustments:
                Loan Modification
                Fees received
                Foreclosed property acquired
                Loans written off
                Subsidy allowance amortization                                                234            477
                Other
 End balance of the subsidy cost allowance before reestimates                                         234            477

 Add or subtract subsidy reestimates by component:
 (a) Interest rate reestimate                                                                   (104)            176
 (b) Technical/default reestimate                                                     	(39)  	73_
 Total of the above reestimate components                                                       (143)            249

 Ending Balance of the subsidy cost allowance                                            $        (131)   $       (222)

 EPA has not disbursed Direct Loans since 1993.
Note 8. Accounts Payable and Accrued Liabilities	

The Accounts Payable and Accrued Liabilities are current liabilities and consist of the following
amounts as of September 30, 2011 and 2010:

                                                               FY2011           FY2010
         Intragovernmental:
         Accounts Payable                            $             62 $           1,466
         Accrued  Liabilities                             	52,386  	49,859
            Total                                      $	52,448 $	51,325

         Non-Federal:                                         FY 2011          FY2010
         Accounts Payable                            $          69,505$         118,033
         Advances Payable                                          3                 8
         Interest Payable                                            7                 7
         Grant Liabilities                                        503,249           650,526
         Other Accrued Liabilities                      	344,002  	262,874
            Total                                      $        916,766 $      1,031,448
Other Accrued Liabilities primarily relate to contractor accruals.
                                                        55

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Note 9. General Property, Plant and Equipment, Net
General property, plant and equipment consist of software, real property, the EPA and contractor-held
personal property and capital leases.

As of September 30, 2011 and 2010, General PP&E consist of the following:
EPA-Held Equipment

Software
Contractor Held Equip.

Land and Buildings

Capital Leases

   Total
                                 FY 2011
                                                                   FY2010
Acquisition
Value
255,049 $
527,603
66,808
653,518
35,440
1,538,418$
Accumulated Net Book Value
Depreciation
(147,219$
(190,302)
(22,104)
(188,382)
(23,612)
(571,619)$

107,830$
337,301
44,704
465,136
1 1 ,828
966,799 $
Acquisition
Value
252,920$
443,847
95,494
630,252
35,440
1,457,953 $
Accumulated
Depreciation
(145,672)$
(158,034)
(39,225)
(1 77,654)
(22,247)
(542,832) $
Net Book
Value
107,248
285,813
56,269
452,598
13,193
915,121
Note 10. Debt Due to Treasury
The debt due to Treasury consists of borrowings to finance the Asbestos Loan Program. The debt to
Treasury as of September 30, 2011  and 2010 is as follows:
      All Other Funds                   FY2011                         FY2010
                        Beginning       Net       Ending    Beginning     Net        Ending
                         Balance     Borrowing    Balance    Balance    Borrowing    Balance
      Intragovernmental:

      Debt to Treasury
4,844 $
(2,251)$    2,593$
9,983$
(5,139) $
4,844
Note 11. Stewardship Land
The agency acquires title to certain property and property rights under the authorities provided in
CERCLA Section 104(j) related to remedial clean-up sites. The property rights are in the form of fee
interests (ownership) and easements to allow access to clean-up sites or to restrict usage of
remediated sites. The agency takes title to the land during remediation and transfers it to state or local
governments upon the completion of cleanup. A site with "land acquired" may have more than one
acquisition property. Sites are not counted as a withdrawal until all acquired properties have been
transferred under the terms of 104(j).
                                               56

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As of September 30, 2011, the agency possesses the following land and land rights:
                                           FY2011           FY2010
                Superfund Sites with
                Easements
                Beginning Balance                   35                33
                Additions                            1                  2
                Withdrawals                  	0         	0
                Ending Balance              	36         	35
                Superfund Sites with
                Land Acquired
                Beginning Balance                   32                30
                Additions                            4                 2
                Withdrawals                  	2         	0
                Ending Balance              	34         	32
Note 12. Custodial Liability
Custodial Liability represents the amount of net accounts receivable that, when collected, will be
deposited to the Treasury General Fund. Included in the custodial liability are amounts for fines and
penalties, interest assessments, repayments of loans, and miscellaneous other accounts receivable. As
of September 30, 2011 and 2010, custodial liability is approximately $57 million and $53 million,
respectively.
                                              57

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Other Liabilities consist of the following as of September 30, 2010:

                                        Covered by   Not Covered by
Other Liabilities - Intragovernmental       Budgetary       Budgetary           Total
                                        Resources	Resources	
Current
  Employer Contributions & Payroll Taxes$          22,585$              $           22,585
  WCF Advances                                1,706               -             1,706
  Other Advances                              52,596               -            52,596
  Advances, HRSTF Cashout                     20,431               -            20,431
  Deferred HRSTF Cashout                       1,831               -             1,831
  Liability for Deposit Funds
  Resources Payable to Treasury                    649               -              649
  Subsidy Payable to Treasury                       256               -              256
Non-Current
  Unfunded FECA Liability                           -          10,232            10,232
  Payable to Treasury Judgment Fund   	-  	22,000  	22,000
  Total Intragovernmental          $         100,054  $         32,232$         132,286

Other Liabilities - Non-Federal
Current
  Unearned Advances               $           65,31$              -$          65,314
  Liability for Deposit Funds                       8,128              -             8,128
  Contract Holdbacks                              155              -              155
Non-Current
Other Liabilities                                   -               200             200
  Capital Lease Liability               	-  	26,199	26,199
    Total Non-Federal              $ 	73,597$	26,399$	99,996
Note 14. Leases	

Capital Leases:

The value of assets held under Capital Leases as of September 30, 2011 and 2010 are as follows:

      Summary of Assets Under Capital Lease:           FY 2011         FY2010
      Real Property                            $         35,285 $         35,285
      Personal Property                                    155              155
      Software License                           	-     	-
         Total                                $	35,440  $	35,440
      Accumulated Amortization                  $         23,612$         22,246
The EPA had two capital leases for land and buildings housing scientific laboratories and computer
facilities. All of these leases include a base rental charge and escalation clauses based upon either
rising operating costs and/or real estate taxes. The base operating costs are adjusted annually
according to escalators in the Consumer Price Indices published by the Bureau of Labor Statistics, U.S.
Department of Labor. Two leases terminate in FY 2013 and FY 2025.
                                              59

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Note 13. Other Liabilities
Other Liabilities consist of the following as of September 30, 2011:
                                         Covered by   Not Covered by
 Other Liabilities - Intragovernmental       Budgetary       Budgetary            Total
                                         Resources	Resources	
  Current
   Employer Contributions & Payroll Taxes$        25,495 $              -$          25,495
   WCF Advances                              1,337                -             1,337
   Other Advances                             38,981                -           38,981
   Advances, HRSTF Cashout                   34,979                -           34,979
   Deferred HRSTF Cashout
   Liability for Deposit Funds
   Resources Payable to Treasury                       3              -                3
   Subsidy Payable to Treasury
 Non-Current
   Unfunded FECA Liability                            -           10,115          10,115
   Payable to Treasury Judgment Fund   	- 	22,000	22,000
    Total Intragovernmental          $	100,795$	32,115$	132,910

 Other Liabilities - Non-Federal
 Current
   Unearned Advances, Non-Federal    $          70,084 $              -$          70,084
   Liability for Deposit Funds, Non-Federal          9,194                -             9,194
   Contract Holdbacks
 Non-Current
   Other Liabilities
   Capital Lease Liability               	- 	24,711	24,711
    Total Non-Federal               $         79,278 $         24,711$        103,989
                                               58

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The total future minimum capital lease payments are listed as follows:
                   Future Payments Due:
                   Fiscal Year                                Capital Leases
                   2012                                       $    5,714
                   2013                                            5,714
                   2014                                            4,215
                   2015                                            4,215
                   After 5 years                              	39,340
                   Total Future Minimum Lease Payments              59,198
                   Less: Imputed Interest                         $   (34,487)
                   Net Capital Lease Liability                 	24,711
                   Liabilities not Covered by Budgetary Resources $   24,711
                   (See Note 13)


Operating Leases:

The U.S. General Services Administration provides leased real property (land and buildings) as office
space for the EPA's employees. GSA charges a Standard Level User Charge that approximates the
commercial rental rates for similar properties.

The EPA had two direct operating leases for land and buildings housing scientific laboratories and
computer facilities. The leases include a base rental charge and escalation clauses based upon either
rising operating costs and/or real estate taxes. The base operating costs are adjusted annually
according to escalators in the Consumer Price Indices published by the Bureau of Labor Statistics. Two
leases expire in FY 2017 and FY 2020. These charges are expended from the EPM appropriation.

The total minimum future operating lease costs are listed below:
                                                  Operating Leases, Land and
                                                 	Buildings	
              Fiscal Year
              2012                             $                     89
              2013                                                    89
              2014                                                    89
              2015                                                    89
              Beyond 2015                         	285

              Total Future Minimum Lease Payments$                    641
Note 15. Federal Employees' Compensation Act Actuarial Liabilities	

FECA provides income and medical cost protection to covered federal civilian employees injured on the
job, employees who have incurred a work-related occupational disease, and beneficiaries of employees
whose death is attributable to a job-related injury or occupational disease. Annually, the EPA is
allocated the portion of the long-term FECA actuarial liability attributable to the entity. The liability is
calculated to estimate the expected liability for death, disability, medical and miscellaneous costs for
approved compensation cases. The liability amounts and the calculation methodologies are provided by
the Department of Labor.


                                              60

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The FECA Actuarial Liability as of September 30, 2011 and 2010 was $44.8 million and $44.9 million,
respectively. The FY 2011 present value of these estimated outflows is calculated using a discount rate
of 3.535 percent in the first year, and 4.025 percent in the years thereafter. The estimated future costs
are recorded as an unfunded liability.
Note 16. Cashout Advances, Superfund

Cashout advances are funds received by the EPA, a state or another PRP under the terms of a
settlement agreement (e.g., consent decree) to finance response action costs at a specified Superfund
site. Under CERCLA Section 122(b)(3), cashout funds received by the EPA are placed in site-specific,
interest bearing accounts known as special accounts and are used for potential future work at such
sites in accordance with the terms of the settlement agreement. Funds placed in special accounts may
be disbursed to PRPs, to states that take responsibility for the site, or to other federal agencies to
conduct or finance response actions in lieu of the EPA without further appropriation by Congress. As of
September 30, 2011 and 2010, cashouts are approximately $790 million and $637 million, respectively.
Note 17. Unexpended Appropriations - Other Funds	

As of September 30, 2011 and 2010, the Unexpended Appropriations consist of the following:

       Unexpended Appropriations:                     FY 2011         FY 2010
        Unobligated
         Available                           $       1,151,603$        184,815
         Unavailable                                   74,517        275,592
        Undelivered Orders                           10,236,478      12,882,377
         Total                              $     11,462,598 $     13,342,784
Note 18. Commitments and Contingencies

The EPA may be a party in various administrative proceedings, actions and claims brought by or
against it. These include:

•  Various personnel actions, suits or claims brought against the agency by employees and others.

•  Various contract and assistance program claims brought against the agency by vendors, grantees
   and others.

•  The legal recovery of Superfund costs incurred for pollution cleanup of specific sites, to include the
   collection of fines and penalties from responsible parties.

   Claims against recipients for improperly spent assistance funds, which may be settled by a
   reduction of future agency funding to the grantee or the provision of additional grantee matching
   funds.

As of September 30, 2011 and 2010 total accrued liabilities for commitments and potential loss
contingencies is $10.2 million and $4.37 million, respectively. Further discussion of the cases and
claims  that give rise to this accrued liability are discussed immediately below.
                                             61

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Litigation Claims and Assessments

There is currently one legal claim that has been asserted against the EPA pursuant to the Federal Tort
Claims and  Fair Labor Standards Acts. This loss has been deemed probable, and the unfavorable
outcome is estimated to be between $10 million and $15 million. The EPA has accrued the higher
conservative amount as of September 30, 2011.  The maximum amount of exposure under the claim
could range as much as $15 million in the aggregate.

Superfund

Under CERCLA Section 106(a), the EPA issues administrative orders that require parties to clean up
contaminated sites.  CERCLA Section 106(b) allows a party that has complied with such an order to
petition the EPA for reimbursement from the fund of its reasonable costs of responding to the order,
plus interest. To be  eligible for reimbursement, the party must demonstrate either that it was not a liable
party under CERCLA Section 107(a)  for the response action ordered, or that the agency's selection of
the response action was arbitrary and capricious or otherwise not in accordance with law.

Judgment Fund

In cases that are paid by the U.S. Treasury Judgment Fund, the EPA must recognize the full cost of a
claim regardless of which entity is actually paying the claim.  Until these claims are settled or a court
judgment is assessed and the Judgment Fund is determined to be the appropriate source for the
payment, claims that are probable and estimable must be recognized as an expense and liability of the
agency. For these cases,  at the time  of settlement or judgment, the liability will be reduced and an
imputed financing source  recognized. See Interpretation of Federal Financial Accounting Standards No.
2, "Accounting for Treasury Judgment Fund Transactions."

As of September 30, 2011, there are  no material claims pending in the Treasury's Judgment Fund.
However, the EPA has a $22 million liability to the Treasury Judgment Fund for a payment made by the
Fund to settle a contract dispute claim.

Other Commitments

The EPA has a commitment to fund the United States government's payment to the Commission of the
North American Agreement on Environmental Cooperation between the Governments of Canada, the
Government of the United Mexican States, and the Government of the United States of America
(commonly referred to as  the Commission for Environmental Cooperation). According to the terms  of
the agreement, each government pays an equal share to cover the operating costs of the CEC. For the
periods ended September 30, 2011 and 2010, the EPA paid $3 million for each of these periods to the
CEC. A payment of $3 million was made in FY 2011.

The EPA has a legal commitment under a non-cancellable agreement, subject to the availability of
funds, with the United Nations Environment Program.  This agreement enables the EPA to provide
funding to the Multilateral  Fund for the Implementation of the Montreal Protocol. The EPA made
payments totaling $8.35 million in FY 2011. Future payments totaling $11 million have been deemed
reasonably possible and are anticipated to be paid in FY 2012 through 2014.
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Note  19. Earmarked Funds
Balance sheet as of September 30, 2011
Assets
Fund Balance with Treasury
Investments
Accounts Receivable, Net
Other Assets
          Total Assets

Other Liabilities
          Total Liabilities

Cumulative Results of Operations

  Total Liabilities and Net Position

Statement of Changes in Net Cost for the
Period Ended September 30, 2011
Gross Program Costs
Less: Earned Revenues

          Net Cost of Operations
                                               Environmental
                                               Services
302,677
                                                                                   Superfund
302,677 $

302,677 $
                   60,558 :
                 3,535,052
                   20,757 $
                   20,757
3,575,200 $

3,595,957 $
                                                                         209,613
                                             Other Earmarked
                                             Funds
                  114,540 !
                 3,577,145
                  445,303
                  118,355
                                 4,255,343
                                 1,111,724 $
                                 1,111,724 !
3,146,619 $

4,255,343 $
                  209,613 $      1,908,317 !
                                   532,006
                                                                                         1,376,311 $
                                                          19,500 $
                                                          16,866
                                                          4,415
                                                          35,114 $
                                                          35,114 $
 5,667  $

40,781  $
                                        124,214
                                        110,839
                                                                                                                 13,375
                                                                                                                          Total Earmarked
                                                                                                                          Funds

                                                                                                                                     497,275
                                                                                                                                   7,112,197
                                                                                                                                     462,169
                                                                                                                                     123,117
                                                                                                                                   8,194,758

                                                                                                                                   1,167,595
                                                                                                                                   1,167,595

                                                                                                                                   7,027,163

                                                                                                                                   8,194,758
                                           2,242,144
                                            642,845
                                                                                                                                    1,599,299
Statement of Changes in Net Position for the
Period ended September 30, 2011
Net Position, Beginning of Period
Nonexchange Revenue- Securities Investments
Nonexchange Revenue
Other Budgetary Finance Sources
Other Financing Sources
Net Cost of Operations

Change in Net Position

          Net  Position
                                                       273,416 $

                                                        29,261
                                                        29,261 $
                 3,539,217 $
                   93,156
                  152,127

                     314
                  (209,613)
                                                                          35,984 $
                 3,340,498 $
                   27,266
                    3,596
                 1,120,663
                   27,907
                (1,376,311)
                                                                                          (196,879)$
                          (749) $
                            7

                        18,342
                         1,441
                        (13,375)
                                                                                                                  6,415  $
                   7,152,382
                    120,429
                    184,984
                   1,139,005
                     29,662
                                                                                                                                    (125,219)
                                                       302,677 $
                                                                        3,575,201 $
                                                                                         3,143,619 $
                                                                             63

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Balance sheet as of September 30, 2010
Assets
Fund Balance with Treasury
Investments
Accounts Receivable, Net
Other Assets
       Total Assets

Other Liabilities
       Total Liabilities

Cumulative Results of Operations

 Total Liabilities and Net Position

Statement of Net Cost for the
Period Ended September 30, 2010
Gross Program Costs
Less: Earned Revenues

       Net Cost of Operations
 Environmental
 Services

;      273,420$
                                             LUST
      273,420
         _4_ $
          4 $'
          -  $
          -  $
                                                         Superfund
                    Other Earmarked
                    Funds
  55,132 $
3,502,913

   266
 106,247$
3,740,700
 391,388
 115,729
3,558,311
4,354,064
  19,094 $
1,013,566$
  19,094 $
1,013,566$
 181,870$
 181,870$
1,844,712$
 484,165
1,360,547$
 29,578 $

 7,697
 6,199
 43,474
 44,223 $
 44,223 $
Total Earmarked
Funds

       464,377
      7,243,613
       399,085
       122,194
      8,229,269

      1,076,887
      1,076,887
273,416$
273,420$
3,539,217$
3,558,311$
3,340,498$
4,354,064$
(749) $
43,474 $
7,152,382
8,229,269
121,214$
 98,246
 22,968 $
                                                           2,147,796
                                                            582,411
                                                           1,565,385
Statement of Changes in Net Position for the
Period ended September 30, 2010
Net Position, Beginning of Period
Nonexchange Revenue- Securities Investments
Nonexchange Revenue
Other Budgetary Finance Sources
Other Financing Sources
Net Cost of Operations

Change in Net Position

       Net Position
231,820$
-
41,596
-
-
-
41,596 $
3,436,303$
115,523
168,990
-
271
(181,870)
102,914$
3,416,536$
14,968
3,396
1,241,402
24,743
(1,360,547)
(76,038)$

273,416$
3,539,217$
3,340,498$
                                               1,817 $
                                                13
                                                 2
                                              18,379
                                               2,008
                                              (22,968)

                                              (2,566)$
                                         7,086,476
                                          130,504
                                          213,984
                                         1,259,781
                                           27,022
                                         (1,565,385)

                                           65,906
                                                                               (749) $
                                                           7,152,382
Earmarked funds are as follows:

Environmental Services Receipt Account: The Environmental Services Receipt Account authorized
by a 1990 act, "To amend the Clean Air Act (P.L. 101-549),", was established for the deposit of fee
receipts associated with environmental programs, including  radon measurement proficiency ratings and
training, motor vehicle engine certifications, and water pollution permits. Receipts in this special fund
can only be appropriated to the S&T and EPM appropriations to meet the expenses of the programs
that generate the  receipts if authorized by Congress in the agency's appropriations bill.

LUST Trust Fund: The LUST Trust Fund was authorized by the Superfund Amendments and
Reauthorization Act of 1986 as amended by the Omnibus Budget Reconciliation Act of 1990. The LUST
appropriation provides funding to respond to releases from  leaking  underground petroleum tanks. The
agency oversees  cleanup and enforcement programs that are implemented by the states. Funds  are
allocated  to the states through cooperative agreements to clean up those sites posing the greatest
threat to human health and the environment. Funds are used for grants to non-state entities including
Indian tribes under Section 8001 of the Resource Conservation and ARRA. The program is financed by
a one cent per gallon tax on motor fuels that will expire on September 30, 2011.

Superfund Trust Fund: In 1980, the Superfund Trust Fund was established by CERCLA to provide
resources to respond to and clean up hazardous substance emergencies and abandoned, uncontrolled
hazardous waste  sites. The Superfund Trust Fund financing is shared by federal and state
governments as well as industry. The EPA allocates funds from  its  appropriation to other federal
agencies  to carry  out CERCLA. Risks to public health and the environment at uncontrolled hazardous
                                                 64

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waste sites qualifying for the agency's National Priorities List are reduced and addressed through a
process involving site assessment and analysis and the design and implementation of cleanup
remedies. NPL cleanups and removals are conducted and financed by the EPA, private parties, or
other federal agencies. The Superfund Trust Fund includes Treasury's collections, special account
receipts from settlement agreements, and investment activity.

Other Earmarked Funds:

Oil Spill Liability Trust Fund: The Oil Spill Liability Trust Fund was authorized by the Oil Pollution Act
of 1990. Monies are appropriated from the Oil Spill Liability Trust Fund to EPA's Oil Spill Response
Account each year. The agency is responsible for directing,  monitoring and providing technical
assistance for major inland oil spill response activities. This responsibility involves setting oil prevention
and response standards, initiating enforcement actions for compliance with OPA and Spill Prevention
Control and Countermeasure requirements, and directing response actions when appropriate. The
agency carries out research to improve response actions to oil spills including research on the use of
remediation techniques such  as dispersants and bioremediation. Funding for specific oil spill cleanup
actions is provided through the U.S. Coast Guard from the Oil Spill Liability Trust Fund through
reimbursable Pollution Removal Funding Agreements and other inter-agency agreements.

Miscellaneous Contributed Funds Trust Fund: The Miscellaneous Contributed Funds Trust Fund
authorized in the Federal Water Pollution Control Act (Clean Water Act) as amended P.L. 92-500 (The
Federal Water Pollution Control Act Amendments of 1972), includes gifts for pollution control programs
that are  usually designated for a specific use by donors and/or deposits from pesticide registrants to
cover the costs of petition hearings when such hearings result in unfavorable decisions to the petitioner.

Pesticide Registration Fund: The Pesticide Registration Fund authorized by a 2004 Act,
"Consolidated Appropriations Act (P.L. 108-199),", and reauthorized in 2007 for five more years, for the
expedited processing of certain registration petitions and associated establishment of tolerances for
pesticides to be used in or on food and animal feed. Fees covering these activities, as authorized under
the FIFRA Amendments of 1988, are to be paid by industry and deposited into this fund group.

Reregistration and Expedited Processing Fund: The Revolving Fund was authorized by the FIFRA
of 1972, as amended by the FIFRA Amendments of 1988 and as amended by the  Food Quality
Protection Act of 1996. Pesticide maintenance fees are paid by industry to offset the costs of pesticide
re-registration and reassessment of tolerances for pesticides used in or on food and animal feed, as
required by law.

Tolerance Revolving Fund: The Tolerance Revolving Fund was authorized in 1963 for the deposit of
tolerance fees. Fees are  paid by industry for federal services to set pesticide chemical residue limits  in
or on food and animal feed. The fees collected prior to January 2, 1997 were accounted for under this
fund. Presently, collection of these fees is prohibited by statute, enacted in the Consolidated
Appropriations Act, 2004 (P.L. 108-199).

Exxon Valdez Settlement Fund: The Exxon Valdez Settlement Fund authorized by P.L. 102-389,
"Making appropriations for the Department of Veterans Affairs and Housing and Urban Development,
and for sundry independent agencies, boards, commissions, corporations, and offices for the fiscal year
ending September 30, 1993,", has funds available to carry out authorized environmental restoration
activities. Funding is derived from the collection of reimbursements under the Exxon Valdez settlement
as a  result of an oil spill.
                                             65

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Note 20. Intragovernmental Costs and Exchange Revenue
Exchange, or earned revenues on the Statement of Net Cost include income from services provided to
federal agencies and the public, interest revenue (with the exception of interest earned on trust fund
investments), and miscellaneous earned revenue.
                                        FY 2011
                                                                              FY2010
Clean Air
  Program Costs
  Earned Revenue
   NET COST

Clean and Safe Water
  Program Costs
  Earned Revenue
   NET COSTS

Land Preservation &
Restoration
  Program Costs
  Earned Revenue
   NET COSTS

Healthy Communities &
Ecosystems
  Program Costs
  Earned Revenue
   NET COSTS

Compliance &
Environmental
Stewardship
  Program Costs
  Earned Revenue
   NET COSTS

Total
  Program Costs
  Earned Revenue
   NET COSTS
                        Intragovern   With the
                        mental       Public
                                                Total
 159,456 $
  13,586
 145,870 $
 252,748 $
   7,333
 245,415 $
 390,431 $
 124,874
 265,557 $
 335,757 $
  12,010
 323,747 $
 192,243 $
  3,607
 188,636 $
1,330,635 $
 161,410
 1,035,680 $
   1,034
 1,034,646 $
 5,125,894 $
   1,458
 5,124,436 $
 2,180,996 $
  494,249
 1,686,747 $
 1,289,505 $
  38,725
 1,250,780 $
  614,514 $
   1,455
  613,059 $
10,246,589 $
  536,921
             1,195,136
               14,620
             1,180,516
             5,378,642
                8,791
             5,369,851
             2,571,427
              619,123
             1,952,304
             1,625,262
               50,735
             1,574,527
              806,757
                5,062
              801,695
                      $    1,169,225 $
             11,577,224
	      698,331
 9,709,668 $    10,878,893
Intragovern
mental

   170,677  $
    18,923
With the
Public

  1,048,124
    5,906
                                                                                       Total
   193,456  $
     2,803
   342,734
   103,687
   293,850
    64,034
   182,299
     3,400
   178,899  $
  1,183,016
   192,847
  6,197,330
    2,524
  2,096,211
   446,569
  1,265,653
    44,144
   615,931 $
    1,494
   614,437 $
 11,223,249
   500,637
 1,218,801
  24,829
   151,754  $    1,042,218 $   1,193,972
 6,390,786
   5,327
   190,653  $   6,194,806 $   6,385,459
 2,438,945
  550,256
   239,047  $    1,649,642 $   1,888,689
 1,559,503
  108,178
   229,816  $    1,221,509 $   1,451,325
  798,230
   4,894
  793,336
12,406,265
  693,484
                                         990,169 $   10,722,612 $   11,712,781
Intragovernmental costs relate to the source of goods or services not the classification of the related
revenue.

Note 21. Cost of Stewardship Land	

There were costs of approximately $438,000 related to the acquisition of stewardship land for
September 30, 2011,  and no costs for September 30, 2010. These costs are included in the Statement
of Net Cost.

Note 22. Environmental Cleanup Costs	

As of September 30, 2011, the EPA has two sites that requires clean up stemming from its activities.
For sites that had previously been listed,  it was determined by the EPA's Office of General Counsel to
discontinue reporting  the potential environmental liabilities for the following reasons:  1) although the
EPA has been put on notice that it is subject to a contribution claim under CERCLA, no direct demand
for compensation has been made to the EPA; 2) any demand against the EPA will  be resolved only
                                                    66

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after the Superfund cleanup work is completed, which may be years in the future; and 3) there was no
legal activity on these matters in FY2010 or in FY2011.

Accrued Cleanup Cost:

The EPA has 15 sites that will require permanent closure, and the EPA is responsible to fund the
environmental cleanup of those sites. As of September 30, 2011 and 2010, the estimated costs for site
cleanup were $20.84 million and $20.15 million, respectively. Since the cleanup costs associated with
permanent closure were not primarily recovered through user fees, the EPA has elected to recognize
the estimated total cleanup cost as a liability and record changes to the estimate in subsequent years.

Note 23.  State Credits	

Authorizing statutory language for Superfund and related federal regulations requires states to enter
into Superfund State Contracts when the EPA assumes the lead for a RA in their state.  The SSC
defines the state's role in the remedial action and obtains the state's assurance that it will share in the
cost of the RA. Under Superfund's authorizing statutory language, states will provide the EPA with a 10
percent cost share for remedial action costs incurred at  privately owned or operated sites, and at least
50 percent of all response activities (i.e.,  removal, remedial planning, RA and enforcement) at publicly
operated sites. In some cases, states may use the EPA-approved credits to reduce all or part of their
cost share requirement that would otherwise be borne by the states. The credit is limited to state site-
specific expenses the EPA has determined to be reasonable, documented, direct out-of-pocket
expenditures of non-federal funds for RA.

Once the EPA has reviewed and approved a state's claim for credit, the state must first apply the credit
at the site where it was earned. The state may apply any excess/remaining credit to another site when
approved by the EPA. As of September 30, 2011 and 2010, the total remaining state credits have been
estimated at $22.2 million and $21.0 million, respectively.

Note 24.  Preauthorized Mixed Funding Agreements	

Under Superfund preauthorized mixed funding agreements, PRPs agree to perform response actions at
their sites with the understanding that the EPA will reimburse them a certain percentage of their total
response action costs. The EPA's authority to enter into mixed funding agreements is provided under
CERCLA Section 111(a)(2). Under CERCLA Section 122(b)(1),  as amended by SARA,  PRPs may
assert a claim against the Superfund Trust Fund for a portion of the costs they incurred  while
conducting a preauthorized response action agreed to under a mixed funding agreement. As of
September 30, 2011, the EPA had four outstanding preauthorized mixed funding agreements with
obligations totaling $11.5 million. As of September 30, 2010, the EPA had six outstanding
preauthorized mixed funding agreements with obligations totaling $15.6 million. A liability is not
recognized for these amounts until all work has been performed by the PRP and has been approved by
the EPA for payment. Further, the EPA will not disburse any funds under these agreements until the
PRP's application, claim and claims adjustment processes have been reviewed and approved by the
EPA.
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Note 25. Custodial Revenues and Accounts Receivable
         Fines, Penalties and Other Miscellaneous Receipts?
         Accounts Receivable for Fines, Penalties and Other
         Miscellaneous Receipts:
          Accounts Receivable                          $
          Less: Allowance for Uncollectible Accounts
              Total
$
        FY2011

        126,351 $
        236,313$

        (184,366)
51,947  $
               FY2010

               89,627
               229,658

              (181,153)
48,505
The EPA uses the accrual basis of accounting for the collection of fines, penalties and miscellaneous
receipts. Collectability by the EPA of the fines and penalties is based on the PRPs' willingness and
ability to pay.

Note 26. Reconciliation of President's Budget to the Statement of Budgetary Resources	

Budgetary resources, obligations incurred and outlays, as presented in the audited
FY 2011 Statement of Budgetary Resources will be reconciled to the amounts included in the FY 2012
Budget of the United States government when they become available. The Budget of the United States
government with actual numbers for FY 2011 has not yet been published. The EPA expects it will be
published by early 2012, and it will be available on the OMB website at http://www.whitehouse.gov/.
The actual amounts published for the year ended September  30, 2010 are listed immediately below:
             FY2010

Statement of Budgetary Resources
Expired and Immaterial Funds*
68X6275 adjustment
Rounding Differences**
* Expired funds are not included in Budgetary Resources Available for Obligation in the Budget
Appendix (lines 23.90 and 10.00). Also, minor funds are not included in the Budget Appendix.
** Balances are rounded to millions in the Budget Appendix.
Budgetary
Resources
$ 16,577,022$
(189,104)
2,082
$ 16,390,000 $
Obligations
11,950,68$
1,319
11,952,000$
Offsetting
Receipts
1,402,960$
(6,290)
330
1,397,000 $
Net Outlays
12,398,603
(281)
678
12,399,000
                                              68

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Note 27. Recoveries and Resources Not Available, Statement of Budgetary Resources	

Recoveries of Prior Year Obligations, Temporarily Not Available and Permanently Not Available on the
Statement of Budgetary Resources consist of the following amounts for September 30, 2011 and 2010:

                                                      FY2011       FY2010
           Recoveries of Prior Year Obligations - Downward
           adjustments of prior years'obligations         $   270,664$     277,771
           Temporarily Not Available - Rescinded Authority      (553)       (11,800)
           Permanently Not Available:
            Payments to Treasury                          (2,508)        (5,191)
            Rescinded authority                          (157,166)       (52,897)
            Canceled  authority                            (20,019)       (15,365)
              Total Permanently Not Available        $  (179,693) $     (73,453)
Note 28. Unobligated Balances Available

Unobligated balances are a combination of two lines on the Statement of Budgetary Resources:
Apportioned, Unobligated Balances and Unobligated Balances Not Available. Unexpired unobligated
balances are available to be apportioned by OMB for new obligations at the beginning of the following
fiscal year. The expired unobligated balances are only available for upward adjustments of existing
obligations.

The unobligated balances available consist of the following as of September 30, 2011 and 2010:
                                                FY2011         FY2010
           Unexpired Unobligated Balance   $      3,325,991$      4,441,115
           Expired Unobligated Balance       	171,859 	185,226
              Total                      $     3,497,850 $     4,626,341


Note 29. Undelivered Orders at the End of the Period

Budgetary resources obligated for undelivered orders at September 30, 2011 and 2010 were $11.91
billion and $12.88 billion, respectively.

Please note that in FY 2010, Undelivered Orders at the  End of the Period inadvertently excluded the
paid  portion  of undelivered orders and were highlighted  as $12.63 billion.

Note 30. Offsetting Receipts	

Distributed offsetting  receipts credited to the  General Fund, Special Fund or Trust Fund receipt
accounts offset gross outlays. For FY 2011 and 2010, the following receipts were generated from these
activities:
                                              69

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                                                          FY2011        FY 2010
             Trust Fund Recoveries                     $        97,623 $        53,247
             Special Fund Environmental Service                  29,257          41,599
             Downward Re-estimates of Subsidies                     -               51
             Trust Fund Appropriation                         1,156,073        1,280,570
             Special Fund Receipt Account and Treasury
             Miscellaneous Receipt and Clearing Accounts            8,808          27,493
                Total                               $     1,291,761~ $     1,402,960~
Note 31. Transfers-ln and Out, Statement of Changes in Net Position	

Appropriation Transfers, In/Out:

For FY 2011 and 2010, the Appropriation Transfers under Budgetary Financing Sources on the
Statement of Changes in Net Position are comprised of non-expenditure transfers that affect
Unexpended Appropriations for non-invested appropriations. These amounts are included in the Budget
Authority, Net Transfers and Prior Year Unobligated Balance, Net Transfers lines on the Statement of
Budgetary Resources. Details of the Appropriation Transfers on the Statement of Changes in Net
Position and reconciliation with the Statement of Budgetary Resources follows for September 30, 2011
and 2010:

Transfers In/Out Without Reimbursement, Budgetary:

               Fund/Type of Account                    FY 2011         FY2010
               Army Corps of Engineers             $         1,750  $       (9,000)
               U.S. Navy                                                (8,000)
               Small Business Administration         	  	-
                 Total Appropriation Transfers (Other           1,750         (17,000)
               Funds)                            	  	
               Net Transfers from Invested Funds          1,370,349        1,386,345
               Transfers to Another Agency                   1,750         (17,000)
               Allocations Rescinded               $	476  $	-_

                 Total of Net Transfers on Statement of
               Budgetary Resources                $     1,372,575  $     1,369,345
For FY 2011 and 2010, Transfers In/Out under Budgetary Financing Sources on the Statement of
Changes in Net Position consist of transfers to or from other federal agencies and between the EPA
funds. These transfers affect Cumulative Results of Operations. Details of the transfers-in and
transfers-out, expenditure and nonexpenditure, are listed as follows for September 30, 2011 and 2010:
                                              70

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Type of Transfer/Funds                   FY2011                      FY2010
                                  Earmarked      Other Funds    Earmarked    Other Funds
Transfers-in (out) nonexpenditure,
Earmark to S&T and OIG funds      $       (35,410)$        35,410$     (39,168)$      33,859
Transfer-in nonexpenditure recovery
from CDC
Transfers-in nonexpenditure, Oil Spill           18,342                      18,379
Transfer-in (out) cancelled funds       	 	  	-_ 	-_
Total Transfer in (out) without
Reimbursement, Budgetary         $       (17,068)$        35,410 $      (20,789)$      33,859
Transfers In/Out without Reimbursement, Other Financing Sources:

For FY 2011 and 2010, Transfers In/Out without Reimbursement under Other Financing Sources on the
Statement of Changes in Net Position are comprised of negative subsidy to a special receipt fund for
the credit reform funds.

The amounts reported on the Statement of Changes in Net Position are as follows for September 30,
2011 and 2010:

Type of Transfer/Funds                   FY2011                      FY2010
                                   Earmark       Other Funds     Earmark     Other Funds
Transfers-in by allocation transfer
agency                        $              $              $             $
Transfers-in property                         (1)            180            -           341
Transfers (out) of prior year negative
subsidy to be paid following year      	 	(256)  	-_ 	205
Total Transfer in (out) without
Reimbursement, Budgetary         $	(1) $	(76) $	 $	546
Note 32. Imputed Financing

In accordance with SFFAS No. 5, "Accounting for Liabilities of the Federal Government," federal
agencies must recognize the portion of employees' pensions and other retirement benefits to be paid
by the OPM trust funds. These amounts are recorded as imputed costs and imputed financing for each
agency. Each year the OPM provides federal agencies with cost factors to calculate these imputed
costs and financing that apply to the current year. These cost factors are multiplied  by the current
year's salaries or number of employees, as applicable, to provide an estimate of the imputed financing
that the OPM trust funds will provide for each agency. The estimates for FY 2011 were $164.4 million
($25.8 million from Earmarked Funds,  and $138.6 million from Other Funds). For FY 2010, the
estimates were $146.8 million ($23.7 million from Earmarked  Funds, and $123.1 million from Other
Funds).

SFFAS  No. 4,  "Managerial Cost Accounting Standards and Concepts" and SFFAS No. 30, "Inter-Entity
Cost Implementation," requires federal agencies to recognize the costs of goods and services received
from other federal entities that are not fully reimbursed, if material. The EPA estimates imputed  costs
for inter-entity transactions that are not at full cost and records imputed costs and financing for these

                                              71

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unreimbursed costs subject to materiality. The EPA applies its Headquarters General and
Administrative indirect cost rate to expenses incurred for inter-entity transactions for which other federal
agencies did not include indirect costs to estimate the amount of unreimbursed (i.e., imputed) costs.
For FY 2011 total imputed costs were $11.6 million  ($3.9 million from Earmarked funds, and $7.7
million from Other Funds).

In addition to the pension and retirement benefits described above, the EPA also records imputed costs
and financing for Treasury Judgment Fund payments made on behalf of the agency. Entries are made
in accordance with the Interpretation of Federal Financial Accounting Standards No. 2, "Accounting for
Treasury Judgment Fund Transactions." For FY 2011, entries for Judgment Fund payments totaled
$2.6 million (Other Funds). For FY 2010, entries for Judgment Fund payments totaled $4.0 million
(Other Funds).

The combined total of imputed financing sources for FY2011 and FY2010 is $178.6 million and $161.6
million, respectively.

Note 33. Payroll and Benefits Payable	

Payroll and benefits payable to the EPA employees for the years ending September 30, 2011 and 2010
consist of the following:
                                        Covered by     Not Covered
    FY 2011 Payroll & Benefits Payable      Budgetary    by Budgetary             Total
                                        Resources      Resources 	
    Accrued Funded Payroll & Benefits $        73,432$              -$            73,432
    Withholdings Payable                    32,050               -             32,050
    Employer Contributions Payable-TSP         4,008               -              4,008
    Accrued Unfunded Annual Leave    	-  	162,845  	162,845
      Total - Current               $       109,490$        162,845$           272,335
    FY 2010 Payroll & Benefits Payable
    Accrued Funded Payroll and Benefits $       66,677  $
    Withholdings Payable                     31,298
    Employer Contributions Payable-TSP         3,588
    Accrued Unfunded Annual Leave    	-  _
      Total - Current                $      101,563  $
     -  $
163,412
163,412$
 66,677
 31,298
  3,588
163,412
264,975
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Note 34. Other Adjustments, Statement of Changes in Net Position	

The Other Adjustments under Budgetary Financing Sources on the Statement of Changes in Net
Position consist of rescissions to appropriated funds and cancellation of funds that expired five years
earlier. These amounts affect Unexpended Appropriations.

                                          Other Funds   Other Funds
                                            FY2011       FY2010
                Rescissions to General
                Appropriations              $     157,208$       50,623
                Canceled General Authority    	19,978  	15,366
                   Total Other Adjustments $     177,186 $	65,989
Note 35. Non-exchange Revenue, Statement of Changes in Net Position

Non-exchange Revenue, Budgetary Financing Sources, on the Statement of Changes in Net Position
as of September 30, 2011 and 2010 consists of the following items:

                                         Earmarked Funds   Earmarked Funds
                                             FY2011           FY2010
          Interest on Trust Fund          $           120,429$          130,504
          Tax Revenue, Net of Refunds                152,437            172,127
          Fines and Penalties Revenue                  3,286               261
          Special Receipt Fund Revenue    	29,261  	41,596
             Total Nonexchange Revenu^           305,413 $          344,488
                                             73

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Note 36. Reconciliation of Net Cost of Operations to Budget
                                                                               FY2011
                  FY2010
     RESOURCES USED TO FINANCE ACTIVITIES
     Budgetary Resources Obligated
       Obligations Incurred                                                  $
       Less: Spending Authority from Offsetting Collections and Recoveries
       Obligations, Net of Offsetting Collections                                  $
       Less: Offsetting Receipts
         Net Obligations                                                    $
     Other Resources
       Donations of Property                                                 $
       Transfers In/Out without Reimbursement, Property
       Imputed Financing Sources
         Net Other Resources Used to Finance Activities                         $

     Total Resources Used to Finance Activities                                  $

     RESOURCES USED TO FINANCE ITEMS
     NOT PART OF THE NET COST OF
       Change in Budgetary Resources Obligated                                $
       Resources that Fund Prior Periods Expenses
       Budgetary Offsetting Collections and Receipts that
         Do Not Affect Net Cost of Operations:
           Credit Program Collections Increasing Loan Liabilities for
             Guarantees or Subsidy Allowances
            Offsetting Reciepts Not Affecting Net Cost
           Resources that Finance Asset Acquition

     Total Resources Used to Finance Items Not Part of the Net Cost of Operations     $

     Total Resources Used to Finance the Net Cost of Operations                   $

     COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL
     NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD:
     Components Requiring or Generating Resources in Future Periods:
       Increase in Annual Leave Liability                                       $
       Increase in Environmental and Disposal Liability
       Increase in Unfunded Contingencies
       Upward/ Downward Reestimates of Credit Subsidy Expense
       Increase in Public Exchange Revenue Receivables
       Increase in Workers Compensation Costs
       Other
     Total Components of Net Cost of Operations that Require or
      Generate Resources in Future Periods                                   $

     Components Not Requiring/Generating Resources:
       Depreciation and Amortization
       Expenses  Not Requiring Budgetary Resources
     Total Components of Net Cost that Will Not Require or  Generate Resources       $

     Total Components of Net Cost of Operations That Will Not Require or            $
     Generate Resources in the Current Period
  11,990,577 3
  (1,020,941)
  10,969,6363
  (1,282,958)
   9,686,678 $

        50  $
       (178)
    178,654
    178,526 $
   9,865,204 $
   1,031,615 $
      2,759
    126,885
   (190,101)

    971,158  $

  10,836,362$

FY2011
   (224,315)$
     73,640
    193,206
    266,846

     42,531
 11,950,681
 (1,333,690)
 10,616,991
 (1,375,422)
  9,241,569
      (341)
    161,640
    161,299

  9,402,868



  2,166,944
     5,681
    94,852
   (213,953)

  2,053,524

 11,456,392

FY2010
(823) $
484
5,807
394
(231,519)
(221)
1,563
4,232
630
(200)
(207)
7,375
979
(3,077)
     9,732
    85,741
    160,916
   246,657

   256,389
     Net Cost of Operations
  10,878,893$
 11,712,781
Note 37. Amounts Held by Treasury (Unaudited)
Amounts held by Treasury for future appropriations consist of amounts held in trusteeship by Treasury
in the Superfund and LUST Trust Funds.
                                                        74

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Superfund

Superfund is supported by general revenues, cost recoveries of funds spent to clean up hazardous
waste sites,  interest income, and fines and penalties.

The following reflects the Superfund Trust Fund maintained by Treasury as of September 30, 2011 and
2010. The amounts contained in these notes have been provided by Treasury. As indicated, a portion
of the outlays represents amounts received by the EPA's Superfund Trust Fund; such funds are
eliminated on consolidation with the Superfund Trust Fund maintained by Treasury.
       SUPERFUND FY 2011             The EPA	Treasury	Combined
       Undistributed Balances
        Uninvested Fund Balance     $	- $	15,000$	15,000
       Total Undisbursed Balance                   -          15,000          15,000
       Interest Receivable                         -        4,361,927       4,361,927
       Investments, Net                 3,368,753,717      204,029,927   3,572,783,644
          Total Assets             $   3,368,753,717$     208,406,854$  3,577,160,571

       Liabilities & Equity
       Eq u ity                      $   3,368,753,717$     208,406,854  3,577,160,571
          Total Liabilities and Equity$   3,368,753,717$     208,406,854  3,577,160,571
       Receipts
        Corporate Environmental                   -         310,125         310,125
        Cost Recoveries                           -      97,623,116      97,623,116
        Fines & Penalties             	-        1,755,095       1,755,095
       Total Revenue                             -      99,688,336      99,688,336
       Appropriations Received                     -    1,156,073,340   1,156,073,340
       Interest Income               	-_      27,266,038      27,266,038
          Total Receipts           $	$   1,283,027,714$  1,283,027,714
       Outlays
        Transfers to/from EPA, Net    $   1,292,883,474$  (1,292,883,474$
          Total Outlays                1,292,883,474   (1,292,883,474) 	-
       Net Income                 $  1,292,883,474$     (9,855,760)$  1,283,027,714
In FY 2011, the EPA received an appropriation of $1.16 billion for Superfund. Treasury's Bureau of
Public Debt, the manager of the Superfund Trust Fund assets, records a liability to the EPA for the
amount of the appropriation; BPD does so to indicate those trust fund assets that have been assigned
for use and, therefore, are not available for appropriation. As of September 30, 2011 and 2010, the
Treasury Trust Fund has a liability to the EPA for previously appropriated funds of $3.37 billion and
$3.53 billion,  respectively.
                                               75

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SUPERFUND FY2010               The EPA	Treasury	Combined
Undistributed Balances
 Uninvested Fund Balance    $	- $       4,234,294$      4,234,294
Total Undisbursed Balance                   -         4,234,294       4,234,294
Interest Receivable                          -         4,442,724       4,442,724
Investments, Net                 3,526,671,825      209,585,595    3,736,257,420
   Total Assets             $   3,526,671,825 $     218,262,613$   3,744,934,438
Liabilities & Equity
Receipts and Outlays
Equity                       $   3,526,671,825$     218,262,613$   3,744,934,438
   Total Liabilities and Equity$   3,526,671,825$     218,262,613$   3,744,934,438
Receipts
 Corporate Environmental                     -       3,137,141        3,137,141
 Cost Recoveries                            -      53,246,618       53,246,618
 Fines & Penalties              	        3,451,837        3,451,837
Total Revenue                               -      59,835,596       59,835,596
Appropriations Received                      -   1,280,570,288    1,280,570,288
Interest Income                 	       14,967,685       14,967,685
   Total Receipts           $	$   1,355,373,569$   1,355,373,569
Outlays
 Transfers to/from EPA, Net   $   1,308,704,084$  (1,308,704,084$
   Total Outlays                1,308,704,084   (1,308,704,084) 	-_
Net Income                 $   1,308,704,084$     46,669,485$   1,355,373,569
                                          76

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LUST

LUST is supported primarily by a sales tax on motor fuels to clean up LUST waste sites. In FY 2011
and 2010, there were no fund receipts from cost recoveries. The following represents the LUST Trust
Fund as maintained by Treasury. The amounts contained in these notes are provided by Treasury.
Outlays represent appropriations received by the EPA's LUST Trust Fund; such funds are eliminated
on consolidation with the LUST Trust Fund maintained by Treasury.
       LUST FY 2011                      The EPA	Treasury	Combined
       Undistributed Balances
        Uninvested Fund Balance     $	1$	1,295,063$	1,295,063
       Total Undisbursed Balance                   -        1,295,063       1,295,063
       Interest Receivable                         -       11,252,175      11,252,175
       Investments, Net              	-_    3,523,799,673    3,523,799,673
          Total Assets             $	- $   3,536,346,911 $   3,536,346,911

       Liabilities & Equity
       Equity                      $	-$   3,536,346,911$   3,536,346,911


       Receipts
        Highway TF Tax            $              $    141,300,963$    141,300,963
        Airport TF Tax                            -       10,750,770      10,750,770
        Inland TF Tax               	-_ 	75,023  	75,023
       Total Revenue                             -      152,126,756     152,126,756
       Interest Income               	-_      93,156,165      93,156,165
          Total Receipts           $	- $    245,282,921 $    245,282,921
       Outlays
        Transfers to/from EPA, Net    $    112,874,798$   (112,874,798)$	-_
          Total Outlays                 112,874/798    (112,874,798)            ~
       Net Income                 $    112,874,798$    132,408,123 $    245,282,921
                                               77

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       LUST FY 2010                      The EPA	Treasury	Combined
       Undistributed Balances

        Uninvested Fund Balance     $             -  $     (5,349,000)$      (5,349,000)
       Total Undisbursed Balance                  -       (5,349,000)       (5,349,000)
       Interest Receivable                        -       20,815,275      20,815,275
       Investments, Net                 210,146,189    3,271,951,525    3,482,097,714
          Total Assets             $    210,146,189  $  3,287,417,800$   3,497,563,989

       Liabilities & Equity
       Equity                      $    210,146,189  $  3,287,417,800$   3,497,563,989


       Receipts
        Highway TF Tax            $             - $     158,254,000$     158,254,000
        Airport TF Tax                            -       10,685,000       10,685,000
        Inland TF Tax                	-_  	51,000  	51,000
       Total Revenue                            -       168,990,000      168,990,000
       Interest Income                	-_       115,523,147      115,523,147
          Total Receipts           $	-_ $     284,513,147$     284,513,147
       Outlays
        Transfers to/from EPA, Net    $     103,901,000$   (103,901,000$	-
          Total Outlays                 103,901,000    (103,901,000)  	-
       Net Income                 $     103,901,000$     180,612,147$     284,513,147
Note 38. Antideficiency Act Violations

During FY 2004, the EPA awarded a contract in the amount of $193,545 for the analysis of drinking-
water samples. The funding was available for FY 2004 and FY 2005. However, the contract
performance period crossed three fiscal years, FY 2004, FY 2005 and FY 2006. As a result, the
obligation of funds went beyond the appropriation resulting in an Antideficiency Act violation. On July
14, 2010 the EPA transmitted, as required by OMB Circular A-11, Section 145, written notifications to
the 1) President, 2) President of the Senate, 3) Speaker of the House of Representatives, 4)
Comptroller General and 5) the Director of OMB.

The  EPA experienced an Antideficiency Act violation in November 2010 when EPA made an
expenditure in excess of the funds available in the Inland Oil Spill Program account due to an
inadvertent reporting error in monitoring the cash flow. The required notification letters are awaiting
OMB clearance.
                                              78

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                          Environmental Protection Agency
                                 As of September 30, 2011
                                   (Dollars in Thousands)

1.      Deferred Maintenance

Deferred maintenance is maintenance that was not performed when it should have been, that was
scheduled and not performed, or that was delayed for a future period. Maintenance is the act of
keeping PP&E in acceptable operating condition and includes preventive maintenance, normal repairs,
replacement of parts and structural components, and other activities needed to preserve the asset so
that it can deliver acceptable performance and achieve its expected life. Maintenance excludes
activities aimed at expanding the capacity of an asset or otherwise upgrading it to serve needs different
from or significantly greater than those originally intended.

The EPA classifies tangible property, plant and equipment as follows:  1) EPA-Held Equipment, 2)
Contractor-Held Equipment, 3) Land and Buildings and 4) Capital Leases. The EPA utilizes the
condition assessment survey method of measuring deferred maintenance. The agency adopts
requirements or standards for acceptable operating condition in conformance with  industry practices.
No deferred maintenance was reported for any of the four categories.

2.      Stewardship Land

Stewardship land is acquired as contaminated sites in need of remediation and cleanup; thus, the
quality of the land is far below the standard for usable and manageable land. Easements on
stewardship lands are in good and usable condition but acquired in order to gain access to
contaminated sites.
                                             79

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                                     Environmental Protection Agency
                                               As of September 30, 2011
                                                 (Dollars in Thousands)

3.       Supplemental Combined Statement of Budgetary Resources
         For the Period Ending September 30, 2011
BUDGETARY RESOURCES

Unobligated Balance Brought Forward, October 1
Recoveries of prior year unpaid obligations
Budgetary Authority:
  Appropriation
  Borrowing Authority
Spending Authority from Offsetting Collections:
 Collected
 Change in receivables from Federal sources
 Advance received
 Without advance from Federal sources
Expenditure Transfers from trust funds
Nonexpenditure transers, net anticipated and actual
Temporarily not available pursuant to Public Law
Permanently not available
Total Budgetary Resources

STATUS OF BUDGETARY RESOURCES
Obligations Incurred:
  Direct
  Reimbursable
Total Obligations Incurred
Unobligated Balances:
  Unobligated funds apportioned
  Unobligated balance not available
Total Status of Budgetary Resources

CHANGE IN OBLIGATED BALANCE
Obligated Balance, Net
  Unpaid obligations brought forward, October 1
  Less:  Uncollected customer payments from Federal
sources brought forward, October 1
  Total unpaid obligation balance, net
 Obligations incurred net
Less: Gross outlays
Less: Recoveries of prior year  unpaid obligations, actual
Change in uncollected customer payments from Federal
sources
  Total

Obligated Balance, net, end of period:
  Unpaid obligations
Less: Uncollected customer payments from Federal
sources
Total, unpaid obligated balance, net, end of period
NET OUTLAYS
  Gross outlays
  Less: Offsetting collections
  Less: Distributed Offsetting Receipts
Total, Net Outlays
EPM
481 ,430$
18,183
2,761,994
41,297
(2,668)
20,988
(30,898)
1,750
(16,061)
3,276,016$
2,916,254$
65,946
2,982,200
174,028
119,787
3,276,015$
1,218,961$
(156,949)
1,062,012
2,982,200
(2,776,330)
al (18,183)
33,565
1,283,264$
1,406,648
(123,384)
FIFRA
1,776$

20,927
1,777
24,480 $
$
22,339
22,339
2,141
24,480$
2,427$

2,427
22,339
(23,337)

1,429$
1,430

LUST
7,163$
6,633

51
(10)
113,101
(226)
126,712$
118,878$
118,878
4,345
3,489
126,712$
263,464$

263,464
118,878
(207,759)
(6,633)

167,950$
167,950

S&T
253,199$
6,047
815,110
7,113
734
(1 ,039)
2,423
25,484
(10,687)
1,098,384$
905,157$
4,913
910,070
150,025
38,289
1,098,384$
411,565$
(35,065)
376,500
910,070
(893,623)
(6,047)
(3,717)
383,183$
421,966
(38,781)
STAG
1,717,294$
67,859
3,766,446
7,285
(147,532)
5,411,352$
4,552,822$
4,552,822
855,714
2,816
5,411,352$
10,081,435$

10,081,435
4,552,822
(5,555,301)
(67,859)

9,011,097$
9,011,098

OTHER
2,165,479$
171,942
1,305,266
563,450
13,115
57,664
12,658
9,926
1,257,724
(327)
(5,413)
5,551,484$
2,739,219$
665,049
3,404,268
2,140,559
6,657
5,551,484$
1,895,057$
(247,942)
1,647,115
3,404,268
(3,361 ,578)
(171,942)
(28,320)
1,489,543$
1,765,802
(276,263)
TOTAL
4,626,341
270,664
8,648,816
0
640,123
11,181
79,380
(15,817)
35,410
1,372,575
(553)
(179,693)
15,488,427
11,232,330
758,247
11,990,577
3,326,812
171,038
15,488,427
13,872,909
(439,956)
13,432,953
11,990,577
(12,817,928)
(270,664)
1,528
12,336,466
12,774,894
(438,428)
      1,283,264$   1,430$  167,950$   383,185$  9,011,098$  1,489,539$  12,336,466
      2,776,330$  23,337$  207,759$
       (62,285) (22,704)     (41)
893,523$  5,555,301$  3,361,578$  12,817,828
(30,998)      (7,285)   (628,492)    (751,805)
                   (1,291,761)   (1,291,761)
$    2,714,045$    633$  207,718$   862,525$  5,548,016$ 1,441,325$  10,774,262
                                                               80

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                              Environmental Protection Agency
                       Required Supplemental Stewardship Information
                           For the Year Ended September 30, 2011
                                   (Dollars in Thousands)

INVESTMENT IN THE NATION'S RESEARCH AND DEVELOPMENT:

The EPA's Office of Research and Development provides the crucial underpinnings for the EPA
decision-making by conducting cutting-edge science and technical analysis to develop sustainable
solutions to our environmental problems and more innovative and effective approaches to reducing
environmental risks. The EPA is unique among scientific institutions in combining research, analysis,
and the integration of scientific information across the full spectrum of health and ecological issues and
across the risk assessment and risk management paradigm. Research enables the EPA to identify the
most important sources of risk to human health and the environment and by so doing, informs the
agency's priority-setting, ensures credibility for its policies and guides its deployment of resources.

Among the agency's highest priorities are research programs that address the development of
alternative techniques for prioritizing chemicals for further testing through computational toxicology; the
environmental effects on children's health; the potential risks and effects of manufactured
nanomaterials on human health and the environment; the impacts of global change and providing
information to policy makers to help them adapt to a changing climate; the potential risks of unregulated
contaminants in drinking water; the development of recreational water quality criteria; the health effects
of air pollutants such as particulate matter; the protection of the nation's ecosystems; and the provision
of near-term, appropriate, affordable, reliable, tested, and effective technologies and guidance for
potential threats to homeland security. The EPA also supports regulatory decision-making with
chemical risk assessments.

For FY 2011, the full cost of the agency's Research and Development activities totaled over $678
million. A breakout of the expenses is as follows (dollars in thousands):

                            FY 2007 FY2008  FY2009  FY2010  FY2011
      Programmatic         $624,088 $597,080 $600,552 $590,790 $597,558
      Expenses
      Allocated Expenses    $100,553$103,773$119,630  $71,958  $80,730

Each of the EPA's strategic goals has a Science and Research Objective.

INVESTMENT IN THE NATION'S INFRASTRUCTURE.

The agency makes significant investments in the nation's drinking water and clean water infrastructure.
The investments are the result of three programs: the Construction Grants Program which is being
phased out and two State Revolving Fund programs.

Construction Grants Program: During  the 1970s and 1980s, the Construction Grants Program was a
source of federal  funds, providing more than $60 billion of direct grants for the construction of public
wastewater treatment projects. These projects, which constituted a significant contribution to the
nation's water infrastructure, included  sewage treatment plants, pumping stations collection and
intercept sewers, rehabilitation of sewer systems and the control of combined sewer overflows. The
construction grants led to the improvement of water quality in thousands of municipalities nationwide.

Congress set 1990 as the last year that funds would be appropriated for Construction Grants. Projects
funded in 1990 and prior will continue until completion. After 1990, the EPA shifted the focus of
municipal financial assistance from grants to loans that are provided by SRFs.

                                             81

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SRFs: The EPA provides capital, in the form of capitalization grants, to state revolving funds which
state governments use to make loans to individuals, businesses, and governmental entities for the
construction of wastewater and drinking water treatment infrastructure. When the loans are repaid to
the SRF, the collections are used to finance new loans for new construction projects.  The capital is
reused by the states and is not returned to the federal government.

The agency also is appropriated funds to finance the construction of infrastructure outside the
Revolving Funds. These are reported below as Other Infrastructure Grants.

The agency's investments in the nation's Water Infrastructure are outlined below (dollars in thousands):

                            FY 2007    FY 2008   FY 2009    FY2010    FY 2011
   Construction Grants          $9,975    $11,517   $30,950     $18,186    $35,339
   Clean Water SRF        $1,399,616 $1,063,825  $836,502   $2,966,479 $2,299,721
   Safe Drinking Water SRF   $962,903   $816,038  $906,803   $1,938,296 $1,454,274
   Other Infrastructure        $381,481   $388,555  $306,366    $264,227   $269,699
   Grants
   Allocated Expenses        $443,716   $396,253  $414,460    $631,799   $548,375

HUMAN CAPITAL

Agencies are required to report expenses incurred to train the public with the intent of increasing or
maintaining the nation's economic productive capacity. Training, public awareness, and research
fellowships are components of many of the agency's programs and are effective in achieving the
agency's mission of protecting public health and the environment, but the focus is  on  enhancing the
nation's environmental, not economic, capacity.

The agency's expenses related to investments in Human Capital are outlined below (dollars in
thousands):

                                       FY 2007 FY 2008  FY 2009  FY2010 FY2011

         Training and Awareness Grants   $32,845  $30,768  $37,981   $25,714  $23,386
         Fellowships                     $12,185   $9,650  $6,818   $6,905  $9,538
         Allocated Expenses              $7,255   $7,025  $8,924   $3,973  $4,448
                                             82

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                           Environmental Protection Agency
             Supplemental Information and Other Reporting Requirements
                        Balance Sheet for Superfund Trust Fund
                 For the Periods Ending September 30, 2011 and 2010
                                 (Dollars in Thousands)
                                      (Unaudited)
                                                         FY2011
                FY2010
ASSETS
Intragovernmental:
  Fund Balance With Treasury (Note S1)
  Investments
  Accounts Receivable, Net
  Other
Total Intragovernmental

Accounts Receivable, Net
Property, Plant & Equipment, Net
Other
  Total Assets
 114,540 $
3,577,146
  10,560
   8,076
3,710,322 $

 454,606
 109,272
   1,006
4,275,206 $
 106,247
3,740,700
  27,323
  12,941
3,887,211

 364,065
 101,714
   1,075
4,354,065
LIABILITIES
Intragovernmental:
  Accounts Payable and Accrued Liabilities
  Other
Total Intragovernmental

Accounts Payable & Accrued Liabilities
Pensions & Other Actuarial Liabilities
Cashout Advances, Superfund (Note S2)
Payroll & Benefits Payable
Other
  Total Liabilities

NET POSITION
Cumulative Results of Operations
Total Net Position

  Total Liabilities and Net Position


$
$




$


$
53,778
61,080
114,858 $
141,464 $
7,778
790,069
47,174
30,244
1,131,587 $
3,143,619
3,143,619
4,275,206 $
                      45,641
                      62,260
                     107,901

                     178,045
                       6,420
                     636,673
                      45,792
                      38,736
                    1,013,567
                    3,340,498
                    3,340,498
                    4,354,065
      The accompanying notes are an integral part of these financial statements.
                                           83

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                            Environmental Protection Agency
               Supplemental Information and Other Reporting Requirements
                      Statement of Net Cost for Superfund Trust Fund
                   For the Periods Ending September 30, 2011 and 2010
                                 (Dollars in Thousands)
                                      (Unaudited)

                               	FY2011       	FY2010

COSTS

    Gross Costs                 $            1,908,317$            1,844,712
    Expenses from Other Appropriations             71,457                30,349
     Total Costs                              1,979,774             1,875,061
     Less:
    Earned Revenue              	532,006  	484,165

NET COST OF OPERATIONS         $	1,447,768 $	1,390,896
         The accompanying notes are an integral part of these financial statements.

                                           84

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                       Environmental Protection Agency
         Supplemental Information and Other Reporting Requirements
        Statement of Changes in Net Position for Superfund Trust Fund
             For the Periods Ending September 30, 2011 and 2010
                            (Dollars in Thousands)
                                  (Unaudited)
Cumulative Results of Operations:

Net Position - Beginning of Period
   Beginning Balances, as Adjusted

Budgetary Financing Sources:
     Nonexchange Revenue - Securities Investment
     Nonexchange Revenue - Other
     Transfers In/Out
     Trust Fund Appropriations
     Income from Other Appropriations
   Total Budgetary Financing Sources

Other Financing Sources (Non-Exchange)
     Transfers In/Out
     Imputed Financing Sources
   Total Other Financing Sources

   Net Cost of Operations

   Net Change

Cumulative Results of Operations
                                                           FY2011
                                                         Earmarked
                                                           Funds
3,340,498
             FY 2010
           Earmarked
             Funds
3,416,536
3,340,498 $   3,416,536
27,266
3,596
(35,410)
1,156,073
71,457
14,968
3,396
(39,168)
1,280,570
30,349
1,222,982 $   1,290,115
      1
  27,906
  24,743
27,907 $
(1,447,768)
(196,879)
24,743
(1,390,896)
(76,038)
3,143,619 $   3,340,498
  The accompanying notes are an integral part of these financial statements.
                                       85

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                            Environmental Protection Agency
             Supplemental Information and Other Reporting Requirements
             Statement of Budgetary Resources for Superfund Trust Fund
                  For the Periods Ending September 30, 2011 and 2010
                                 (Dollars in Thousands)
                                       (Unaudited)
                                                             FY2011
               FY2010
BUDGETARY RESOURCES
Unobligated Balance, Brought Forward, October 1:
    Adjusted Subtotal
Recoveries of Prior Year Unpaid Obligations
Budgetary Authority:
  Appropriation
Spending Authority from Offsetting Collections
  Earned:
    Collected
    Change in Receivables from Federal Sources
  Change in Unfilled Customer Orders:
    Advance Received
    Without Advance from Federal Sources
     Total Spending Authority from Offsetting Collections
Nonexpenditure Transfers, Net, Anticipated and Actual
Temporarily Not Available Pursuant to Public Law
Permanently Not Available
Total Budgetary Resources
2,059,687  $
2,059,687
 154,843

  35,410
 313,039
   2,864
1,605,363
1,605,363
 171,423

  36,809
 518,936
     47
63,378
(3,828)
375,453
1,257,724
(250)
3,882,867 $
244,146
4,423
767,552
1,273,244
(2,600)
(4,102)
3,847,690
STATUS OF BUDGETARY RESOURCES
Obligations Incurred:
  Direct
  Reimbursable
Total Obligations Incurred
 Unobligated Balances:
  Apportioned
Total Unobligated Balances
Unobligated Balances Not Available
Total Status of Budgetary Resources (Note S6)
1,450,802
 396,582
1,847,384
2,033,533
2,033,533
   1,950
3,882,867  $
1,475,861
 312,141
1,788,002
2,058,813
2,058,813
    874
3,847,690
      The accompanying notes are an integral part of these financial statements.
                                            86

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                            Environmental Protection Agency
             Supplemental Information and Other Reporting Requirements
             Statement of Budgetary Resources for Superfund Trust Fund
                  For the Periods Ending September 30, 2011 and 2010
                                  (Dollars in Thousands)
                                        (Unaudited)
CHANGE IN OBLIGATED BALANCE
Obligated Balance, Net:
  Unpaid Obligations, Brought Forward, October 1
     Adjusted Total
  Less: Uncollected Customer Payments from Federal Sources,
  Brought Forward, October 1
     Total Unpaid Obligated Balance, Net
Obligations Incurred, Net
Less: Gross Outlays
Less: Recoveries of Prior Year Unpaid Obligations, Actual
Change in Uncollected Customer Payments from Federal Sources
    Total, Change in Obligated Balance

Obligated Balance, Net, End of Period:
  Unpaid Obligations
  Less: Uncollected Customer Payments from Federal Sources
     Total,  Unpaid Obligated Balance, Net, End of Period
                                                              FY2011
         1,692,915
          (123,366)
         1,448,347
         1,570,749
          (122,402)
                        FY2010
         1,692,915  $
1,861,908
1,861,908
 (118,896)
1,569,549
1,847,384
(1,814,706)
(154,843)
963
1,743,012
1,788,002
(1,785,572)
(171,423)
(4,471)
1,569,549
1,692,915
 (123,366)
         1,448,347  $
1,569,549
NET OUTLAYS
Net Outlays:
  Gross Outlays (Note S6)
  Less: Offsetting Collections (Note S6)
  Less: Distributed Offsetting Receipts* (Note S6)
Total, Net Outlays
$
1,814,706 $
(376,417)
(97,623)
1,340,666 $
1,785,572
(763,081)
(53,247)
969,244
Offsetting receipts line includes the amount in 68X0250 (payment to trust fund) from Treasury
The payment cannot be made directly through the trust fund, but must go through a "pass-through" fund
      The accompanying notes are an integral part of these financial statements.
                                             87

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                              Environmental Protection Agency
                 Supplemental Information and Other Reporting Requirements
                    Related Notes to Superfund Trust Financial Statements
                     For the Periods Ending September 30, 2011 and 2010
                                   (Dollars in Thousands)
                                         (Unaudited)
Note S1. Fund Balance with Treasury for Superfund Trust
Fund Balance with Treasury for the Superfund as of September 30, 2011 and 2010 is $114.5 million
and $106.2 million,  respectively. Fund balances are available to pay current liabilities and to finance
authorized purchase commitments (see Status of Fund Balances below).
      Status of Fund Balances:                            FY 2011         FY2010

      Unobligated Amounts in Fund Balance:
       Available for Obligation                     $       2,033,533$      2,058,813
       Unavailable for Obligation                              1,951              874
      Net Receivables from Invested Balances               (3,368,754)       (3,526,672)
      Balances in Treasury Trust Fund                            15           (1,115)
      Obligated Balance not yet Disbursed            	1,447,795  	1,574,347

         Totals                                 $        114,540 $       106,247
OMB may apportion the funds available for obligation for new obligations at the beginning of the
following fiscal year. Funds unavailable for obligation are mostly balances in expired funds, which are
available only for adjustments of existing obligations.

Note S2. Cashout Advances, Superfund	

Cashout Advances are funds received by the EPA, a state or another PRP under the terms of a
settlement agreement (e.g., consent decree) to finance response action costs at a specified Superfund
site.  Under CERCLA Section 122(b)(3), cashout funds received by the EPA are placed in site-specific,
interest bearing accounts known as special accounts and are used for potential future work at such
sites in accordance with the terms of the settlement agreement. Funds  placed in special accounts may
be disbursed to PRPs, to states that take responsibility for the site, or to other federal agencies to
conduct or finance response actions in lieu of the EPA without further appropriation  by Congress. As of
September 30, 2011 and 2010, cashout advances are $790 million and $637 million, respectively.
Note S3. Superfund State Credits	

Authorizing statutory language for Superfund and related federal regulations require states to enter into
SSCs when the EPA assumes the lead for a RA in their state. The SSC defines the state's role in the
RA and obtains the state's assurance that they will share in the cost of the RA. Under Superfund's
authorizing statutory language, states will provide the EPA with a 10 percent cost share for remedial
action costs incurred at privately owned or operated sites, and at least 50 percent of all response
activities (i.e., removal, remedial planning, RA and enforcement) at publicly operated sites. In some
cases, states may use the EPA approved credits to reduce all or part of their cost share requirement
that would otherwise be borne by the states. Credit is limited to state site-specific expenses the EPA

                                             88

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has determined to be reasonable, documented, direct out-of-pocket expenditures of non-federal funds
for remedial action.

Once the EPA has reviewed and approved a state's claim for credit, the state must first apply the credit
at the site where it was earned. The state may apply any excess/remaining credit to another site when
approved by the EPA. As of September 30, 2011, the total remaining state credits have been estimated
at $22.2 million. The estimated ending credit balance on September 30, 2010 was $20.9 million.

Note S4. Superfund Preauthorized Mixed Funding Agreements	

Under Superfund preauthorized mixed funding agreements, PRPs agree to perform response actions at
their sites with the understanding that the EPA will reimburse them a certain  percentage of their total
response action costs. The EPA's authority to enter into mixed funding agreements is provided under
CERCLA Section 111(a)(2). Under CERCLA Section 122(b)(1), as amended by SARA, PRPs may
assert a claim against the Superfund Trust Fund for a portion of the costs they incurred while
conducting  a preauthorized response action agreed to under a mixed funding agreement. As of
September 30, 2011, the EPA had four outstanding preauthorized mixed funding agreements with
obligations  totaling $11.5 million. As of September 30, 2010, the EPA had six outstanding
preauthorized mixed funding agreements with obligations totaling $15.6 million. A liability is not
recognized  for these amounts until all work has been performed by the PRP  and has been approved by
the EPA for payment. Further, the EPA will not disburse any funds under these agreements until the
PRP's application, claim and claims adjustment processes have been reviewed and approved by the
EPA.

Note S5. Income and Expenses from other Appropriations; General Support Services Charged
to Superfund

The Statement of Net Cost reports costs that represent the full costs of the program outputs. These
costs consist of the direct costs and all other costs that can be directly traced, assigned on a cause and
effect basis or reasonably allocated to program outputs.

During FY 2011 and FY 2010, the EPM appropriation funded a variety of programmatic and
non-programmatic activities across the agency, subject to statutory requirements. This appropriation
was created to fund personnel compensation and benefits, travel, procurement, and contract activities.
This distribution is calculated  using a combination of specific identification of expenses to Reporting
Entities and a weighted average that distributes expenses proportionately to  total programmatic
expenses. As illustrated below, this estimate does not impact the consolidated totals of the Statement
of Net Cost or the Statement of Changes in Net Position.

                               FY2011                              FY2010
                  Income from    Expenses from            Income from    Expenses from
                     Other          Other       Net       Other          Other        Net
                 Appropriations   Appropriations   Effect    Appropriations   Appropriations    Effect
      Superfund   $       69,754        (69,754) $     -  $       30,349         (30,349) $
      All Others    	(69,754)   	69,754   	-_ 	(30,349)   	30,349  	-
       Total      $           -$           .$.$           .$           .$.
In addition, the related general support services costs allocated to the Superfund Trust Fund from the
S&T and EPM funds are $48,000 for FY 2011 and $194,000 for FY 2010.
                                             89

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Note S6. Reconciliation of the Statement of Budgetary Resources to the President's Budget

Budgetary resources, obligations incurred, and outlays, as presented in the audited FY 2010 Statement
of Budgetary Resources, will be reconciled to the amounts included in the Budget of the United States
government when they become available. The Budget of the United States government with actual
numbers for FY 2011 has not yet been published. The EPA expects it will be published by March 2012,
and it will be available on the OMB website at http://www.whitehouse.gov/omb. The actual amounts
published for the year ended September 30, 2010 are included in the EPA's FY 2010 financial
statement disclosures.
FY2010
Statement of Budgetary Resources
Rounding Differences**
Reported in Budget of the U. S. Government
Budgetary
Resources
$
$
3,
3
,847,690
(690)
,847,000
Obligations
$
$
1
1
,788,002
(2)
,788,000
$
$
Offsetting
Receipts
53
53
,247$
,247$
Net Outlays
1
1
,022,491
509
,023,000
               Balances are rounded to millions in the Budget Appendix.
Note S7. Superfund Eliminations
The Superfund Trust Fund has intra-agency activities with other the EPA funds that are eliminated on
the consolidated Balance Sheet and the Statement of Net Cost. These are listed below:
                                                  FY2011    FY 2010
                   Advances                        $5,506      $9,265
                   Expenditure Transfers Payable     $28,663    $25,555
                   Accrued Liabilities                   $950      $2,214
                   Expenses                       $25,337    $33,419
                   Transfers                       $35,410    $38,016
                                            90

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(ft)
  ^1 iBHO1*

U.S. ENVIRONMENTAL PROTECTION AGENCY

OFFICE OF INSPECTOR GENERAL
Audit of EPA's
Fiscal 2011 and 2010
Consolidated Financial
Statements
Report No. 12-1-0073
                            November 15, 2011
       91

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Abbreviations

ALJ         Administrative Law Judges
BFY         Budget fiscal year
CFC         Cincinnati Finance Center
EAB         Environmental Appeals Board
EPA         U.S. Environmental Protection Agency
FFMIA       Federal Financial Management Improvement Act of 1996
FMFIA       Federal Managers' Financial Integrity Act of 1982
GAO         U.S. Government Accountability Office
HR Fund     Oil Spill Reimbursable Fund
1FMS        Integrated Financial Management System
LEO         Legal Enforcement Office
OARM       Office of AtlmimstnUion and Resources Management
OCFO       Office of the Chief Financial Officer
OEC A       Office of Enforcement and Compliance Assurance
OIG         Office of Inspector General
OMB        Office of Management and Budget
ORC         Office of Regional Couasel
RMDS       Resource Management Directive System
RPO         Regional program office
RSSI         Required Supplementary Stewardship Information
SFFAS       Statement of Federal Financial Accounting Standards
USCG       U.S. Coast Guard
   Hotline
   To report fraud, waste, or abuse, contact us through one of the following methods:
   e-mail:    OIG Hotline(5jepa.gov
   phone:    1-888-546-8740
   fax:      202-566-2599
   online:    http:/Avww.epa aov/oia/hotline.htm
write:   EPA Inspector General Hotline
        1200 Pennsylvania Avenue NW
        Mailcode2431T
        Washington, DC 20460
                                        92

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 I
U.S. Environmental Protection Agency
Office of Inspector General

At  a   Glance
       12-1-0073
November 15. 2011
Why We Did This Audit

We performed this audit in
accordance with the Government
Management Reform Act, which
requires the U.S. Environmental
Protection Agency (EPA) to
prepare, and the Office of
Inspector General to audit, the
Agency's financial statements
each year. Our primary objectives
were to determine whether:

 •  EPA's consolidated financial
    statements were fairly stated
    in all material respects.
 *  EPA's internal controls over
    financial reporting were in
    place.
 •  EPA management complied
    with applicable laws and
    rcaiil ill ions.

Background

The requirement for audited
financial statements was enacted
to help bring about improvements
in agencies' financial
management practices, systems,
and controls so mat timely,
reliable information is available
for managing federal programs.
For further Information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.

The full report is at:
www.ep a.qo v/oig/re po rtsf 20121
2Q111115.12-1-0073.Ddf
              Audit of EPA's Fiscal 2011 and 2010
              Consolidated Financial Statements
               EPA Receives an Unauahfied Oomion
              We rendered an unqualified opinion on EPA's Consolidated Financial
              Statements for fiscal 2011 and 2010, meaning that they were fairly presented
              and free of material misstatement.
               Internal Cont.ro  Sianificant Deficiencies Noted
              We noted the following significant deficiencies:

               • Regions and headquarters did not timely provide accounts receivable
                 supporting documentation.
               • EPA did not timely bill other federal agencies for reimbursable costs,
               • EPA did not properly close general ledger accounts in its cancelling
                 Treasury symbols.
               • EPA double c ounted contractor-hel d propert y.
               • EPA headquarters could not account for 1,284 personal property items.
               • EPA needs to better secure marketable securities.
               • EPA recorded earned revenue without recognizing corresponding expenses.
               * EPA is withholding payments related to the BP Deepwater Horizon oil
                 spill.
               NoncomDliance With Laws and Peculations Noted
              We noted a rioncompliance issue involving EPA's Oil Spill Response Account
              in relation to the BP Deepwater Horizon oil spill response. EPA violated the
              Aniideficiency Act in November 2010 because it made expenditures in excess
              of funds available. Also, to avoid a second potential Antideficiency Act
              violation, EPA delayed payments to vendors, resulting in the Agency being
              required to make interest penalty payments to vendors as required by the
              Prompt Payment Act.
                                  Aaencv Comments and Office of Inspector Genera Eva mat ion
              The Agency did not concur with our finding regarding cancelling Treasury
              symbols causing inappropriate balances. The .Agency believes that it is
              following Treasury instructions and the balances are proper. While the amounts
              are not material to the financial statements, by reversing the receivable, the
              Agency has understated fiscal 2011 income and bad debt expense related to
              cancelling the Treasury symbol. The Agency agreed with our other findings
              and recommendations.
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                   UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                                 WASHINGTON, D C 20460
                                                                      THE N^ECTOR O0JBWL
                                  November 15, 201 I
MEMORANDUM
SUBJECT:   Audi! of KPA's Fiscal 2011 and 201M Consolidated Financial Statements
             Report No. 12-1-0073
FROM:      Arthur A. HI kins. Jr.
             Inspector General

TO:         I.isaP Jackson
             Administrator

             Barbara J. Bennett
             Chief Financial Ollicer
             Craig li. Hooks
                     i Administrator for Administration and Resources Management
             Cynthia Giles
             Assistant Administrator for Enforcement and Compliance Assurance
Attached is our report on tlw U.S. Environmental Projection Agency's (EPA~s) fiscal 2011 and
2(ll<) consolidated financial statement!). We are reporting eight significant deficiencies We ulso
identified an instance of noneompliaiKc \\ilh laws and regulations related to an AntideJicieneA
Aci \ iolation in the Oil Spill Response Account- Attachment 3 contains Ihe status of
recommendations related lo Ihc material weaknesses, sigmlk-anl deficiencies, and
noncomplianccs with laws and regulations reported in prior years" reports. The significant
deficiencie.s and noncomphunccs included in attachment 3 also apply for llsc;il 2011

This audit report repre!>enls tlw opinion of the Otllce of Inspector General, and the findings in
this report do not necessarily represent I he filial HPA position. HPA managers, in accordance
with established [£PA audit resolution procedures, will make final determinations on Ihe findings
in this audit report. Accordingly, the findings described in this audit report are not binding upon
EPA in any enforcement proceeding brought by [{PA  or the Department of Justice.  We have no
                                          94

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objections to the further release of this report to the public. This report will be available at
http: // w vv w. opa ..gov/oig.

In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days of the final report date. The response should address all  issues and
recommendations contained in attachments 1 and 2. For corrective actions planned but not
completed by the response date, reference to specific milestone dates will assist us in deciding
whether to close this report in our audit tracking system. Your response will be posted on the
OIG's public website, along with our memorandum commenting on your response. Your
response should be provided as an Adobe PDF file that complies with the accessibility
requirements of Section 508 of the Rehabilitation Act of 1973, as amended. The final response
should not contain data that you do not want to be released to the public; if your response
contains such data, you should identify the data for redaction or removal.

Should you or your staff have any questions about the report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899:  or Paul Curtis, Director, Financial
Statement Audits, at (202) 566-2523.
Attachments

cc:  See appendix III. Distribution
                                           95

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Audit of EPA's Fiscal 2011 and 2010                                                12-1-0073
Consolidated Financial Statements
                                      of
                                       EPA's         2011
2010                              Statements[[[     i

   Review of EPA's Required Supplementary Stewardship Information,
   Required Supplementary Information, Supplemental Information, and
   Management's Discussion and Analysis	     2

   Evaluation of Internal Controls	     2

   Tests of Compliance With Laws and Regulations	,,.,,.,,,,.,,.,,,,     8

   Prior Audit Coverage	     7

   Agency Comments and OIG Evaluation	.,,,.,,,,,.,..,,,,     8


Attachments	     s

   1.  Internal Control Significant Deficiencies	     9

          Accounts Receivable Detail Not Provided Timely	   10
          Federal Reimbursable Costs Not Billed Timely	   13
          EPA's Process for Cancelling Treasury Symbols Caused
             Inappropriate Account Balances	   16
          EPA Double Counted Contractor-Held Property	   18
          EPA Headquarters Cannot Account for 1,284 Property Items	   19
          EPA Should Secure Marketable Securities	   20
          EPA Recognized Earned Revenue in Excess of Expenditures	   21
          EPA Is Withholding Payments Related to BP Deepwater Horizon
             Oil Spill Cleanup	,	,	   23

   2,  Compliance with Laws and Regulations „,,,.,,,,,,,,,,,,,„,,,.,.„.,,,,,„,,,,,,„,,,,,,„,,,,,,„,,,   24

          EPA Violated the Antideficiency Act in Its Oil Spill           Account	   25

   3.  Status of Prior Audit Report Recommendations	   27

   4.  Status of Current Recommendations and Potential Monetary Benefits..................   29


Appendices	   31

     I.    EPA's Fiscal 2011  and 2010 Consolidated Financial Statements,.,,,,,,,,,,,,,,,.,,,   31


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     Inspector General's Report on EPA's Fiscal 2011
        and  2010 Consolidated Financial Statements
The Administrator
U.S. Environmental Protection Agency

We have audited the consolidated balance sheet of the U.S. Environmental Protection Agency
(EPA) as of September 30. 2011. and September 30, 2010, and the related consolidated
statements of net cost, net cost by goal, changes in net position, and custodial activity; and the
combined statement of budgetary resources for the years then ended. These financial statements
are the responsibility of EPA management. Our responsibility is to express an opinion on these
financial statements based upon our audit.

We conducted our audit in accordance with generally accepted government auditing standards;
the standards applicable to financial statements contained  in Government Auditing Standards.
issued by the Comptroller General of ihe United States; and Office of Management and Budget
(OMB) Bui letin 07-04, A ttdit Requirements for Federal Financial Statements, as Amended
September 23. 2009. These standards require that we plan  and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatements.
Aii audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management,  as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

'Hie financial statements include expenses of grantees, contractors, and other federal agencies.
Our audit work pertaining to these expenses included testing only within EPA. The U.S.
Treasury collects and accounts for excise taxes that are deposited into the Leaking Underground
Storage Tank Trust Fund, The U.S. Treasury is also responsible for investing amounts not
needed for current disbursements  and transferring funds to EPA as airthorized in legislation.
Since the U.S. Treasury, and not EPA, is responsible for these activities, our audit work did not
cover these activities.

"Hie Office of Inspector General (OIG) is not independent  with respect to amounts pertaining to
OIG operations that are presented in the financial statements. The amounts included for the OIG
are not material to EPA's financial statements. The OIG is organizationally/ independent with
respect to all other aspects of the Agency's activities.

In our opinion, the consolidated financial statements, including the accompanying notes, present
fairly, in all material respects, the consolidated assets, liabilities, net position, net cost, net cost
by goal,  changes in net position, custodial activity, and combined budgetary resources of EPA as
of and for the years ended September 30, 2011 and 2010, in conformity with accounting
principles generally accepted in the United States of America.
12-1-0073
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Review of EPA's Required Supplementary Stewardship Information,
Required Supplementary Information, Supplemental Information, and
Management's Discussion and Analysis

We obtained information from EPA management about its methods for preparing Required
Supplementary Stewardship Information (RSSI). Required Supplementary Information.
Supplemental Information, and Management's Discussion and Analysis, and reviewed this
information for consistency with the financial statements. The Supplemental Information
includes the unaudited Superfund Trust Fund financial statements for fiscal 2011 and 2010,
which are being presented for additional analysis and are not a required part of the basic financial
statements. However, our audit was not designed to express an opinion and. accordingly, we do
not express an opinion on EPA's RSSI. Required Supplementary Information. Supplemental
Information, and Management's  Discussion and Analysis.

We did not identify any material  inconsistencies between the information presented in EPA's
consolidated financial statements and the information presented  in KPA's KSSL Required
Supplementary Information. Supplemental Information, and Management's Discussion and
Analysis.

Evaluation of          Controls

As defined by OMB, internal control, as it relates to the financial statements, is a process,
affected by the Agency's management and other personnel, that  is designed to provide
reasonable assurance that the following objectives are met:

      Reliability of financial reporting	Transactions are properly recorded, processed, and
      summarized to permit the preparation of the iinancial statements in accordance with
      generally accepted accounting principles, and assets are safeguarded against loss from
      unauthorized acquisition, use, or disposition,

      Compliance" with applicable laws, regulations, and government-wide policies
      Transactions are executed in accordance with laws governing the use of budget authority,
      government-wide policies, laws identified by OMB. and  other laws and regulations that
      could have a direct and material effect on the financial statements.

In planning and performing our audit, we considered EPA's internal controls over financial
reporting by obtaining an understanding of* the Agency's internal controls, determining whether
internal controls had been placed in operation,  assessing control  risk, and performing tests of
controls. We did this as a basis for designing our auditing procedures for the purpose of
expressing an opinion on the financial statements and to comply with OMB audit guidance, not
to express an opinion on internal control. Accordingly, we do not express an opinion on internal
control over financial reporting nor on management's assertion on internal controls included in
Management's Discussion and Analysis. We limited our internal control testing to those controls
necessary to achieve the objectives described in OMB Bulletin No. 07-04, Audit Requirements
for Federal b'inancial Statements, as Amended September 23, 2009. We did not test all internal
12-1-0073
                                         98

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controls relevant to operating objectives as broadly defined by the Federal Managers' Financial
Integrity Act of 1982 (FMF1A). such as those controls relevant to ensuring efficient operations,

Our consideration of the internal controls over financial reporting would not necessarily disclose
all matters in the internal control over financial reporting that might be significant deficiencies.
I ;nder standards issued by the American Institute of Certified Public Accountants, a significant
deficiency is a deficiency, or combination of deficiencies, that is less severe than a material
weakness, yet important enough to merit attention by (hose charged with governance. A material
weakness is a deficiency, or combination of deficiencies, such thai there is a reasonable
possibility thai a material misstatemeiit of the entity's financial statements will not be prevented.
or detected and corrected in a timely manner. Because of inherent limitations in internal controls.
misstatements, losses, or noncompliance may nevertheless occur and not be detected. We noted
certain matters discussed below involving the internal control and its operation that we consider
to be significant deficiencies, none of which are considered to be material weaknesses.  These
significant deficiencies are summarized below and detailed in attachment 1.

       Accounts Receivable Source Documentation Not Provided Timely

       EPA regional and headquarters offices did not timely submit supporting documentation
       to (he Cincinnati Finance Center (CFC) so that CFC could promptly record accounts
       receivable  in the financial system.  EPA policies state that within 5 business days of
       determining a debt is owed to the Agency, the responsible office must forward source
       documents to CFC, Regional program office (RPO). Office of Regional Counsel (ORC).
       the Environmental Appeals Board (EAB). Office of Administrative Law Judges (ALJ),
       Office of Enforcement and Compliance Assurance (OECA) staff, and regional E-egal
       Enforcement Office (LEO) staff are responsible for providing this documentation. CFC
       stated that  offices may have been unaware of the 5-day policy, or may have simply
       forgotten to send the documentation. When CFC is unable to create receivables timely,
       the debtor may not be billed appropriately, interest may not accrue, and  F,PA may not
       collect all that it is owed. Further. EPA's delayed recording of accounts  receivable could
       result in a material misstatemcnt of the Financial statements.

       Federal Reimbursable Costs Not Billed Timely

       HPA did not timely bill other federal agencies for S2.210.617 of reimbursable costs. We
       found costs that had not been billed for up to 9 years. In addition, S3.150.692 and
       8521,589 of reimbursable expenses were recorded in funds cancelled in fiscal 2010 and
       2011. respectively.  Reimbursable costs were not timely billed to other federal agencies
       because  EPA had difficulty reconciling costs previously incurred to eosls previously
       billed under individual reimbursable agreements. Untimely billing of reimbursable eosls
       causes delays in replenishing funds spent on reimbursable agreements. Also, untimely
       billing may result in EPA losing the ability to obligate and/or spend funds due to the
       expiration and subsequent cancellation of funds before they are collected.  For example.
       we identified $3.7 million of reimbursable expenses due from other agencies in fiscal
       2010 and 2011 in cancelled funds. Since the funds are now cancelled, if EPA does bill
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      such amounts, the collections must he returned to Treasury and will not be available to
      EPA.

      EPA's Process for Cancelling Treasury Symbols Caused Inappropriate
      Account Balances

      EPA did not properly close general ledger accounts in its cancelling Treasury symbols.
      We identified two instances in which EPA inappropriately recorded general ledger entries
      to elose accounts when it cancelled Treasury symbols. Treasury Financial Manual
      Bulletin Ab. 20] l-0~. Section 21. stales that agencies must cancel any remaining
      balances (whether obligated or unobligated) in a closed appropriation account being
      cancelled and report valid receivable and payable balances associated with a cancelled
      Treasury Appropriation Fund Symbol.  Because EPA did not review the net impact to
      current Treasury funds,  EPA's improper cancellation procedures resulted in various
      misstated general ledger accounts. Consequently, the financial statements were misstated,
      although the misslatemente were not material to the financial statements as a whole.

      EPA Double Counted Contractor-Held Property

      EPA double counted 97 items of capitalized property in  its financial system because it did
      not remove property from its financial  system thai had been transferred to contractors. As
      a result these items were recorded as both EPA-hcld property and contractor-held
      property. The double-counted properly had an acquisition cost ol'S)2.3 million and a net
      hook  value of $5 million. EPA property guidance states that when contractors are
      furnished with government property, the property is deleted from the financial system.
      The contractor-held property items were not removed because EPA does not have a
      policy thai stales who is responsible for removing contractor-held property from EPA's
      financial system. Without clear policies, neither the Office of the Chief Financial Officer
      (OCFO) nor the Office of Administration and Resources Management (OARM) has
      taken responsibility to ensure that EPA property transferred to contractors is  deleted from
      EPA's financial system. The double counting resulted in capitalized property being
      overstated by $5 million in fiscal 2011.

      EPA Headquarters Cannot Account for 1,284 Property Items

      EPA headquarters could not account for 1.284 personal property items  in fiscal 2011 as
      required by EPA's Personal Property and Procedures Manual. Headquarters mid-level
      management was not knowledgeable about Agency property management procedures.
      and EPA did not provide planned property training for Agency employees during fiscal
      20J1. Because EPA could not account  for these property items, it was nol exercising
      proper control over S2,1 million of accountable personal property. Inaccurate personal
      property records compromise EPA's property control system and can lead to the loss or
      misappropriation of Agency assets.
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      EPA Should Secure Marketable Securities

      EPA does not perform inspections of the sale in which marketable securities received
      should be stored to ensure that the securities are adequately safeguarded and that the
      contents of the safe agree with accounting or control records. The U.S. Government
      Accountability Office's (GACVs) Standards for Internal Control in the Federal
      {government, GACKA.IMD-00-21.3.1. states. "An agency must establish physical control
      to secure and safeguard vulnerable assets. Examples include security for and limited
      access to assets such as cash, securities, inventories, and equipment which might be
      vulnerable to risk of loss or unauthorized use. Such assets should be periodically counted
      and compared to control records." By not securing marketable securities, EPA increases
      the risk of loss or theft of its assets.

      EPA Recognized Earned Revenue in Excess of Expenditures

      EPA recorded earned revenue without recognizing corresponding expenses. At the end of
      fiscal 2011. EPA had recorded $7 million more in earned revenue in the Oil Spill
      Reimbursable (IIR) Fund than it recognized in HR reimbursable expenses.  The fund had
      a balance  of S74.5 million in Earned Revenue Federal Billed versus  S67.5 million for
      Operating Expense Public Exchange. These balances were the totals after EPA rceorded
      (1) a $5.7 million entry to accrue unbilled reimbursements and earned revenue, and (2) a
      SI. 1 million entry to reduce  advances from other agencies and to increase earned
      revenue. Statement of Federal Financial .Accounting Standards (SFFAS) No. 7.
      Accounting for Revenue and Other Financing Sources, requires agencies to match
      revenue and expenses. "Hie Agency did not properly match revenues and expenses in the
      IIR Fund  at the end of Fiscal 2011 because it made earned revenue accrual entries without
      recognizing an equal amount in accrued expenses, "flue S7 million imbalance in the HR
      Fund code violates the matching principle required by the standard.

      EPA Is Withholding Payments Related to BP Deepwater Horizon Oil Spill
      Cleanup

      As of September 30. 2011, EPA had not paid contractors working on the  Deepwater
      Horizon oil spill S6.6 million, of which  $2.8 million is late under the Prompt Payment
      Act, HP A violated the Antideficiency Act in November 2010 because it made
      expenditures in excess of funds available. To avoid a second potential Anlidetlcieucy Act
      violation, EPA delayed payments Jo vendors, resulting in the Agency being required to
      make interest penalty payments to vendors as required by the Prompt Payment Act.
      Section 1315.4(g) of the Prompt Payment Act states that paxmenl is due (1) on the date
      specified in the contract. (2) in accordance with discount terms when discounts are
      olTered and taken. (3) in accordance with Accelerated Payment Methods, or (4) 30 days
      after the start of a payment period, when a proper invoice is received. 'Die Agency
      withheld payments to vendors because it did not have suffleient cash in its Deepwater
      Horizon Oil Spill funds to pay its bills. By not paying contractors on time, KPA is
      incurring  interest payments and is losing the opportunity to lake discounts.
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Attachment 3 contains the status of issues reported in prior years" reports. The issues included in
attachment 3 should be considered among EPA's significant deficiencies for fiscal 2011. We
reported to the Agency on less signillcant internal control matters in writing during the course of
the audit. We will not issue a separate management letter.

Comparison of EPA's FMFIA Report With Our Evaluation of Internal Controls

OM B Bulletin No. 07-04. A udit Requirements tor Federal Financial Statements, as A mended
September 23, 2009. requires us to compare material weaknesses disclosed during the audit with
those material weaknesses reported in the Agency's FMFIA report that relate to the financial
statements, and identify material weaknesses disclosed by the audit that were not reported  in the
Agency's FMFIA report.

For financial statement audit and financial reporting purposes. OMB defines material weaknesses
in internal control as a deficiency or combination of deficiencies in internal  control such thai
there is a reasonable possibility that a material misstaiemeni ofthe financial statements will not
be prevented, or delected and corrected on a timely basis,

The Agency reported that no material weaknesses had been found in the design or operation of
internal controls over  financial reporting as of June 30. 2011, We did not identify any material
weaknesses during the course of our audit Details concerning our findings on significant
deficiencies can be  found in attachment I.

Tests of  Compliance With Laws and Regulations

EPA management is responsible for complying with laws and regulations applicable to the
Agency. As part of obtaining reasonable assurance about whether the Agency's financial
statements are free of material misstatement, we performed tests of its compliance with certain
provisions of laws and regulations, noncomptiance with which could have a direct and material
effect on the determination of financial statement amounts, and certain other laws and
regulations specified in OMB Bulletin No. 07-04, Audit Requirements for Federal Financial
Statements,  as Amended September 23, 2009, The OMB guidance requires that we evaluate
compliance with federal financial management system requirements, including the requirements
referred to in the Federal  Financial Management Improvement Act of 1996  (FFMIA). We limited
our tests of compliance to these provisions and did not test compliance with all laws and
regulations applicable to  EPA,

Providing an opinion on compliance with certain provisions of laws and regulations was not an
objective of our audit  and. accordingly, we do not express such an  opinion.  A number of ongoing
investigations involving EPA's grantees and contractors could disclose violations of laws and
regulations, but a determination about these cases has not been made. 'Hie results of our tests of
compliance with laws and regulations are summarized below and detailed in attachment 2.
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       EPA Violated the Antideficiency Act in Its Oil Spill Response Trust Account

       In January 2011. EPA notified OMB that it violated the Antideficiency Act when EPA
       made expenditures in excess of funds available in the Oil Spill Response Account in the
       amount ol"S502.215. The violation occurred because the U.S. Coast Guard (USCG) did
       not timely reimburse 1%PA for BF Deepwater Horizon oil spill response expenses.
       According to EPA, the reason for the reimbursement delay was that USCG wanted EPA
       to provide a greater level of cost documentation than had been acceptable in the past. By
       spending more funds than were available. EPA, violated the Antideficiency Act.

       Federal Financial Management Improvement Act Compliance

       Under F'FMIA. we are required to  report whether the Agency's financial management
       systems substantially comply with the federal Financial management systems
       requirements, applicable federal accounting standards, and the United Stales Government
       Standard General Ledger at the transaction level. To meet the FFXII A requirement, we
       performed tests of compliance with FFVHA Section 803(a) requirements and used the
       OMB guidance. Memorandum M-09-06. Implementation Outdance tor the Federal
       Financial \lanagemcni Improvement Act dated January 9. 2009, for determining
       substantial noncompliancc with FF.V1LA, The results of our tests did not disclose any
       instances in which the .Agency's financial management systems did nol substantially
       comply with FF'MJA requirements.

No other significant matters involving compliance with laws and regulations came to our
attention during the course of the audit. We will not issue a separate management letter.

Our audit work was also performed to meet the requirements in  42 U.S.C. §961 l(k) with respect
to the Hazardous Substance Superftind Trust Fund, to conduct an annual audit of payments.
obligations, reimbursements, or other uses oflhe fund. The significant deficiencies reported
above also relate to  Superfund,

Prior Audit Coverage

During previous financial or financial-related audits, we reported weaknesses that impacted our
audit objectives in the following areas:

   »   Collectibility of federal receivables and recording of any needed allowances for doubtful
       accounts
   »   Headquarters property  items not inventoried
   •   Improper closing of accounts when cancelling Treasury symbols
   »   Uncollectible debt misstated
   »   Financial system user account management
   »   Security planning for Customer Technology Solutions equipment
   •   Assessing automated application processing controls for the Integrated Financial
       Management System (IFVIS)
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Attachment 3 summarizes the current status of corrective actions taken on prior audit report
recommendations related to these issues

Agency Comments and OIG  Evaluation

In a memorandum dated November 111. 2011, (he Agency responded to our draft report

The rationale for our conclusions and a summary of the Agency comments are included in
the appropriate sections of this report, and the Agency's complete response is included as
appendix II to this report

This report is intended solely for the information and use of the management ofKPA, OMB, and
Congress, and is not intended lo be and should not be used by anyone other than these specified
parties.
                                      PaulC Curtis
                                      Director. Financial Statement Audits
                                      Office of Inspector Genera!
                                      U.S. Environmental Protection Agency
                                      November 15, 2011
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                                                                 Attachment 1


          Internal Control Significant Deficiencies



                             Table of Contents



   1—Accounts Receivable Detail Not Provided Timely	,,.,..,.,,.,..,.,,.,..,.,,.,..,.,,.,.  10

   2—Federal Reimbursable Costs Not Billed Timely	  13

   3—EPA's Process for Cancelling Treasury Symbols Caused
      Inappropriate Account Balances	  18

   4—EPA Double Counted Contractor-Held Property	  18

   5—EPA Headquarters Cannot Account for 1,284 Property Items	  19

   6—EPA Should Secure Marketable Securities	  20

   7—EPA Recognized Earned Revenue in Excess of Expenditures	  21

   8—EPA Is Withholding Payments Related to BP Deepwater Horizon
      OH Spill Cleanup	  23
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           1—                                  Not Provided Timely

EPA regional and headquarters offices did not timely submit supporting documentation to CFC
so that CFC could promptly record accounts receivable in Ihc financial system, EPA policies
state that within 5 business days of determining a debt is owed to the Agency, the responsible
office must forward source documents to CFC. RPO. ORC. EAB. ALJ. OECA. and regional
LEO staff are responsible for providing this documentation. CFC stated that the offices may have
been unaware of the 5-day policy, or may have simply forgotten to send the documentation.
When CFC is unable to create receivables timely, the debtor may not be billed appropriately.
interest may not accrue, and KPA may not colled all that il is owed. Further, KPA's delayed
recording of accounts receivable could result in a material misstatement of the financial
statements.

According to GAO's Standards jbr Internal Control in the J-'ederal (Joverimient. transactions
should be promptly recorded to maintain their relevance and value to management in controlling
operations and making decisions. KPA's Resource Management Directive System (RVIDS)
2550D-14-T1 requires Servicing Finance Offices to maintain ongoing communications with the
RPOs, ORCs.  and LEOs regarding the status of settlement agreements and to ensure that
accounts receivable source documents are forwarded within 5 business days.

From our audit of accounts receivable, we found that the offices did not timely forward
supporting documentation (e.g.. consent decrees, consent agreements and final orders,
administrative orders, etc.) to CFC for 39 receivables totaling $106 million. CFC received
associated source documents from 1 day to over 2 years late, 'fable 1 provides a summary of the
relevant exceptions found during our audit.
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Table 1: Summary of receivables support not received timely
Sample ^tpL'' Sons o^pTon?
6th month
Department of Justice Report
Integrated Compliance Information System Report
Superfund Control3
AllOthef Control"
Subtotal
8th month
Department of Justice Report
Integrated Compliance Information System Report
Superfund Control
All Other Control
Subtotal
Year-end:
Integrated Compliance Information System Report
Subtotal
Total

27
11
29
12
79

18
4
2
2
26

16
16
121

6
7
10
0
23

8
1
1
0
10

6
6
39

$58,314,473.66
4,584,50000
27:61 0,137 88
0.00
$90,509,111.54

$13,528,177.32
140,000.00
1,704,020.70
0.00
$15,372,198,02

$508,000.00
$508,000.00
$106,389,309.56
Source: OIG analysis

       J  One Department of Justice exception was also noted in Superfund Control Testing but excluded from
         Number of Exceptions and Dollar Amount of Exceptions in our analysis to avoid double counting.

       c  One Integrated Compliance Information System and one Department of Justice exception were also
         noted in All Other Control Testing but excluded from Number of Exceptions and Dollar Amount of
         Exceptions in our analysis to avoid double counting.


EPA's RMDS,  as updated in April 2011, establishes procedures for timely providing supporting
documentation  for receivables. RMDS 2550D-14-T1 addresses Superfund receivables and
requires the originating office  to forward 10 the Servicing Finance Office copies of all Superfund
consent decrees and judgments within 5 business days of receipt from the court. RMDS 2540-9-
P3 specifically  addresses administrative penalties and referrals of civil enforcement cases to the
Department of Justice. The directive requires that the originating office ensure that
documentation  of administrative orders and bankruptcy proceedings with civil penalties are
provided to  CFC within 5 business days. For regionally initiated administrative enforcement
actions. ORC Regional Hearing Clerks are to ensure thai penalties are entered in the EPA Case
Tracking System, which automatically sends a request to CFC to establish a billing document. It
also states that OECA will develop internal processes to ensure that, in the case of OECA-
initialed administrative enforcement actions, all documentation for administrative penalty
debt/accounts receivable is sent to CFC along with the request for CFC to establish a billing
document. OECA also coordinates with CFC to determine the appropriate action when a penalty
debt/accounts receivable is 120 days past due.
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For regionally initiated cases, the ORC'LEO/RPO is required to provide effective ongoing
communication with Ihc finance center regarding the status of settlement agreements to prevent
untimely recording of accounts receivable. For headquarters-initiated cases, the Headquarters
Hearing Clerk, the EAB, and OECA's Air Enforcement Division are responsible for notifying
CFC after an order becomes final. Untimely receipt of accounts receivable source documentation
results in inaccurate balances in the Agency's financial management system. Therefore, we
believe that regional  and headquarters offices and CFC should work together to resolve this
control issue,

Recom mendation

We recommend thai the Assistant Administrator for Enforcement and Compliance Assurance:

       1.  Require thai regional and headquarters enforcement officials assist CFC by
          implementing EPA's newly updated RMDS policy, which includes the requirement to
          forward legal documentation within 5 business days and to designate regional
          contacts so that receivables are recorded timely.

Agency Comments and OIG Evaluation

'lite Agency concurred •with our finding and recommendation. OECA responded that in October
2011 it issued processes for headquarters-initiated administrative enforcement aetions.
Headquarters-initiated eases include those resolved by Af J. EAB. or  OECA's Air Enforcement
Division. OECA requires these offices to make orders available to CFC within 5 business days of
the order's effective date.
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             2—-Federal                           Not        Timely

EPA did not timely bill other federal agencies for 52,210,617 of reimbursable costs. We found
costs that had not been billed for up to 9 years. In addition. S3.150,692 and $521.589 of
reimbursable expenses were recorded in funds cancelled in fiscal 2010 and 2011. respectively.
Reimbursable costs were not timely billed to other Federal agencies because EPA had difficulty
reconciling costs incurred to costs billed under individual reimbursable agreements. Untimely
billing of reimbursable costs causes delays in replenishing funds spent on reimbursable
agreements. Also, untimely billing results in EPA losing the ability lo obligate and/or spend
funds due to the expiration and subsequent cancellation of funds before they are  collected. For
example, we identified S3.7 million of reimbursable expenses due from other agencies in fiscal
2010 and 2011 in cancelled funds.  Since the funds are mm cancelled, if EPA does bill such
amounts, the collections must be returned to Treasury and will not be available to EPA,

EPA. provides goods or services to other federal agencies and is reimbursed for its expenses
under reimbursable agreements. Under reimbursable agreements. EPA uses reimbursable
authority provided by OMB to perform agreement activities. Reimbursable authority is a type of
borrowing authority that exists for definite periods of time as long as the authority from the year
of funding exists and is not expired or cancelled.

OMB Circular A-l 1, S20. states that during the expired phase, no new obligation can be incurred
against the appropriations. At the end of the expired phase, all obligated and unobligated
balances must be cancelled and the account closed. Cancelled balances may not be used to incur
or pay obligations. Collections authorized or required to be credited to a cancelled appropriation
that are received after the  account is closed must be deposited in the Treasury as miscellaneous
receipts. Therefore, once the appropriation in which the expenditures were  incurred expires or
cancels. EPA no longer has the ability lo obligate and'or spend those funds if collected.

To execute  reimbursable agreements. EPA assigns a unique reimbursable account number
(budget organization code) to each reimbursable agreement.  The budget organization code for
each interagency agreement identifies obligations pertaining to that agreement, and costs of
performance must be charged to reimbursable account numbers. As  EPA performs work
specified in the agreement. EPA should bill the other agency for costs incurred in providing the
services or goods, and be reimbursed by the other agency for those costs.

During our analysis of the fiscal 2011 fourth quarter federal unbilled accrual, we identified more
than S2 million of reimbursable expenses incurred from budget  fiscal years (BFYs) 2000 through
2008 that were not billed to other federal aeencies. as shown in  table 2.
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Table 2: Federal reimbursable costs not timely billed
BFY
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
Expended amount
$909,05680
804,873.23
700,161 16
6,748,900.32
1,881,76295
394,948,066.24
35,943,703.28
23,233,38543
59,463,193.87
$524,633,103.33
Billed amount
855,371.83
702,805.84
681,766.76
6,746,25327
1,804,949.75
394,383,011.57
35.610,641.09
23,072,839.72
58,564,846.32
$522,422,486.15
Unbilled amount
$53,68497
102,067,39
18,39440
2,647,05
76,813.20
565,054.67
333,062.19
160,545.76
898,347.55
$2,210,617.18
Source: OIG analysis.

Not timely billing reimbursable costs may result in EPA losing the ability to obligate and spend
those funds, because collections must be returned to Treasury if the budgetary authority has been
cancelled. For example, we identified unbilled reimbursable expenses of about S3.2 million and
$522,000 remaining in cancelled funds from BFVs 2002 through 2004, as shown in table 3,
These unbilled reimbursable expenses were moved to the miscellaneous receipt Treasury
account. As a result EPA no longer had the ability to obligate and or spend funds collected due
to the cancellation of funds.

Table 3: Unbilled costs in cancelled funds
BFY
2002-2003
2003-2004
Expended amount
$16,008,647.30
3,933,402.14
Billed amount
$12,857,955.39
3,411,813.33
Unbilled amount
$3,150,691.91
521,588.81
Year cancelled
2010
2011
Source: OIG analysis

In response to our inquiry as to why the reimbursable expenses incurred in prior years have not
been billed, the Agency stated that there may be problems with the agreements, expenses may
not be identified to an agreement, or the expenses may have just recently been paid.

Not timely billing other federal agencies for reimbursable costs (1) causes unnecessary delays in
replenishing funds spent on reimbursable agreements, (2) limits EPA's ability to recover all costs
before funding authority cancels, and (3) could result in EPA using appropriated funds to cover
reimbursable costs incurred. If EPA does  not bill atid collect the funds before the funds expire, it
is not able to obligate and expend additional funds from those accounts.

Recommendations

We recommend that the Chief Financial Officer:

       2.  Review unbilled federal reimbursable expenses, determine their collectibility, and bill
          appropriate funds before the funding period is cancelled.
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      3, Create and implement a process to reconcile expenses incurred and costs billed under
         individual reimbursable agreements.

      4. Develop a process or implement a reporting system to track, for each reimbursable
         agreement, the expenses that have been billed for each budget fiscal year.

Agency Comments and OIG Evaluation

"The Agency concurred with our finding and recommendations.
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            3—EPA's Process for Cancelling Treasury Symbols
                   Caused Inappropriate Account Balances

 EPA did not properly close general ledger accounts in its cancelling Treasury symbols. We
 identified two instances in which EPA inappropriately recorded general ledger entries to close
 accounts when it cancelled Treasury symbols. Treasury Financial Manual Bulletin No. 2011-07.
 Section 21. states that agencies must cancel any remaining balances (whether obligated or
 unobligated) in a closed appropriation account being cancelled, and report valid receivable and
 payable balances associated with a cancelled Treasury Appropriation Fund Symbol. Because
 EPA did not review the net impact to current Treasury funds. EPA's improper cancellation
 procedures resulted in various misstated general ledger accounts. Consequently, the financial
 statements were misstated, although the misstatements were not material to the financial
 statements as a whole.

 EPA's closing procedures for accounts receivable in cancelled expenditure accounts resulted in a
 $6.5 million credit balance in the general ledger account. Expense Uncollectible Debt, Other
 Finances (Uncollectible Debt Expense). This account should normally have a debit balance.  A
 credit balance in this account indicates that either the Agency has revenue from uncollectible
 debts or the general ledger account is otherwise misstated. EPA uses Standard Vouchers with
 predetermined debit(s) and credit(s) to record accounting events that occur on a recurring basis in
 accordance with its Comptroller Policy 93-02. Policies for Documenting Agency Financial
 Transactions. EPA moved the balances from the cancelling appropriation without properly
 reviewing the net impact on current Treasury funds.

 This is the third  year we have reported this issue. In fiscal 2009 and 2010, we recommended that
 EPA review and update its required standard voucher entries. In response to our
 recommendations,  EPA noted that it would review the impact of accounting entries, including
 standard vouchers  for billing documents, and provide accounting models and technical advice  as
 appropriate. EPA has not  made changes to accounting entries in the year-end instructions.

 The procedure also resulted in an understatement in the general ledger account. Allowance for
 Loss on Accounts  Receivable (Allowance for Loss). EPA did not properly record the Allowance
 for Loss from cancelling appropriations in fund 3200 (Treasury Symbol for the Collection of
 Receivable from Cancelled Account) along with the  related account receivables. We found thai
 in fund 3200 nonfederal receivables increased by S6.4 million from last fiscal year, but the
 related allowance account activity changed by $3.000. The Agency did not move the related
 allowances from the cancelling appropriations to fund 3200, resulting in the overstatement of the
 receivables net book value. Table 4 shows the fund 3200 balance as of year-end.

Table 4: Fund 3200 account balances
GL
13P3
13P9
GL account name
Billed Wise Receipts Public
Allow For Loss On A/R, Non Fed
2011 balance
$27,667,949.59
(17,317,47461)
2010 balance
521,293,448.77
(17.. 320,502 51)
DiffS
$6,374,500,82
3,027.90
Diff %
2994%
-0.02%
Source: IFMS and OIG analysis.
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EPA recorded this entry in accordance with its Year-End (''losing Instructions, which requires
finance centers to remove accounts receivable and the related allowance lor doubtful accounts
from cancelling appropriations, and establish the receivables in fund 3200, The instructions do
not allow for establishing the related allowance in fund 3200. SFFAS No. 1 states that an
allowance for estimated uncollectible amounts should be recognized to reduce the gross amount
of receivables to its net realizable value. EPA required movement of balances without properly
reviewing the closing entries" net impact on current Treasury funds. In doing so. the entry caused
an understatement in the Allowance for Loss account in fund 3200. By not recording the related
allowance for the receivables, EPA is overstating the net book value of the receivables in fund
3200.

OMB Circular A-127, Financial Management Systems, requires financial  management systems
to provide complete, reliable, consistent,  timely, and useful financial management information
on federal government operations, If EPA had properly reviewed the two general ledger accounts
for the effect of the closing entries prior to the fiscal period close. EPA could have noticed the
net impact on current Treasury funds. By not reviewing the entries and the account balances.
EPA understated Uncollectible Debt Expense and Allowance for Loss in the financial
statements.

Recommendations

We recommend that the Chief Financial Officer:

       5,  Revise the cancellation procedures to ensure accounts are properly stated,

       6,  Posi the proper Allowance for Loss.

       7,  Revise the Year-End Closing Instructions, to prescribe proper procedures for closing
          accounts.

       8,  Prior to year-end closing, review7 and test the net impact of closing entries to ensure
          proper statement  of expenses, revenue, and assets in the financial management system
          and financial statements.

Agency Comments and OIG Evaluation

Hie Agency did not concur with our finding and recommendations. The Agency stated it posted
the appropriate adjustments, it is following Treasury guidance, and balances are properly stated.
Our analysis of the  Agency's adjustments to cancel a receivable and the related allowance
revealed they understated fiscal 2011  revenue and bad debt expense. The understatement
occurred because the Agency reversed the receivable and related allowance accounts creating
postings that decreased revenue and bad debt expense. While the understatements are not
material to the financial statements taken as a whole, we believe the Agency should have
reviewed the impact of the closing entries and posted the proper adjustments so that revenue and
expense were  properly stated.
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            4—EPA          Counted Contractor-Held Property

EPA double counted 97 items of capitalized properly in its financial system because it did not
remove from its financial system property that had been transferred to contractors. As a result.
these items were recorded as both EPA-hekl property and contractor-held property. The double-
counted property had an acquisition cost of SI 2.3 million and a net book value of $5 million.
EPA property guidance states that when contractors are furnished with government property, the
property is deleted from the financial system.  The contractor-held property items were not
removed because EPA does not have a policy that slates who is responsible lor removing
contractor-held property from EPA's financial system.  Without clear policies, neither OCF'O nor
OARM lias taken responsibility to ensure that EPA property transferred to contractors is deleted
from EPA's financial system. The double counting resulted in capitalized property being
overstated by S5 million in fiscal 2011.

EPA's Personal Property Policy and Procedures Manual stales that as an integral part of all
KPA contracts, effective control and accountability must be maintained for all personal property
furnished by  EPA or acquired with EPA funds, in accordance with the Federal Acquisition
Regulations and EPA's Contracts \fanagwneni Manual. Section 5.2.1 of the property manual
states. '"When contractors arc furnished with government property, it is deleted from the IFMS
and the contractor becomes responsible for the property until such time as it is returned to the
Government. In such eases, the Government retains title to the property."'

Recommendations

We recommend that the Assistant Administrator for Administration and Resources Management:

      9.  Develop and implement policies and procedures to address responsibility for the
          removal of EPA property from the Agency financial system when EPA property is
          transferred to contractors.

      10.  Ensure that all EPA property that has been transferred to contractors is removed from
          EPA's financial system.

Agency Comments      OIG Evaluation

      The Agency concurred with our finding    recommendations.
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       5—-EPA                 Cannot Account for 1,284

EPA headquarters could not account for 1.284 personal property items in fiscal 2011 as required
by EPA's Personal Property and Procedures Manual, Headquarters mid-level management was
not knowledgeable of Agency property management procedures, and EPA did not provide
planned property training for Agency employees during fiscal 2011, Because EPA could not
account for these property items, it was not exercising proper control over S2.1 million of
accountable personal property. Inaccurate personal property records compromise EPA's property
control system and can lead to the loss or misappropriation of Agency assets.

The OARM Facilities Management and Services Division is responsible for administering the
EPA Personal Properly Management Program. EPA defines accountable personal property as
"non-expendable personal property with an acquisition cost of S5.000 or greater. EPA-leased
personal property, or property identified as a sensitive item." EPA's Personal Properly ami
Procedures Manual. Section 3.1.1, states that each accountable area must maintain personal
property records in the  I1;V1S.  thus providing all needed data for ellective personal property
management (e.g., location, procurement, utilization,  and disposal). The missing items indicate
that accurate personal property records arc not being maintained. The Personal Property Policy
and Procedures Manual, Section 1.3.2. requires that,  when property is lost, damaged, or
destroyed, a Board of Survey conduct a thorough investigation and provide recommendations to
remove the property from EPA's financial system.  Headquarters has 77 requests for board action
on the 976 items from fiscal 2010.

As of October 15. 2011, EPA headquarters could not  account for 1,284 accountable personal
property items with a value of S2.130,427. EPA headquarters could not account for 769 of the
items (valued at Sl.288.817) missing from the fiscal 2010 inventory \\hen it conducted its 2011
inventory. This is the third consecutive year we have  reported this problem. In fiscal 2010 and
2009, EPA headquarters could not  account for 1,134 and 1.804 items, respectively. In response
to our fiscal 2010 audit, EPA planned to develop a mandatory online property training program,
However, the target date for implementing the training program slipped from March 30, 2011. to
November 15. 2011.

Recommendations

We recommend that the Assistant Administrator  for Administration and Resources Management
require the Director, Facilities Management and Services Division, to:

      11.  Conduct planned property training and require completion of the course by all EPA
          managers.

      12.  Address the missing personal property items in accordance with Agency procedures,

Agency Comments and GIG Evaluation

The Agency concurred with our finding   recommendations.
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               6—EPA Should

EPA does not perform inspections of the sale in which marketable securities should be stored to
ensure that securities are adequately safeguarded and that the contents of the safe agree with
accounting or control records. GAO's Standards for Iniemal Control in the Federal
(Mvernmem. GAO'AIMD-00-21.3,1, states. "An agency must establish physical control to
secure and safeguard vulnerable assets. Examples include security for and limited access to
assets such as cash, securities, inventories, and equipment which might be vulnerable to risk of
loss or unauthorized use. Such assets should be periodically counted and compared to control
records," By not securing marketable securities. EPA increases Ihe risk of loss or theft of its
assets.

During our llscal 2011 financial statement audit, we found that EPA received I wo Common
Stoek Certificates from Exide Technologies totaling SI.2 million that were not placed in a safe
for safeguarding. During our review, we found that EPA does not have regularly scheduled
reviews of the sale. After our inquiry. HP A .stated that il does not schedule inspections of the safe
because the safe is rarely used. In addition, we noted that the safe was located in an open area
instead of in a more secure  location, such as a locked room.

Securities physically received by EPA should be secured in a sale until they are transferred to
Treasury  for disposition. To properly safeguard securities, access to securities should be  limited
to authorized personnel only. During our review, we found that EPA does not have regular
scheduled reviews of the safe. By not having controls in place for safe inspect ions. EPA has
minimal assurance that marketable securities received are properly accounted for and handled,

Recommendations

We           that the Chief Financial Officer;

      13. Develop and implement procedures to  perform inspections of the safe on a
          basis to verily the contents against accounting records.

      14. Move the safe to a secure area, such as a locked room, instead of keeping the safe in
          an open area,

Agency Comments and OIG Evaluation

The Agency concurred with our finding and recommendation to develop and implement
procedures to perform inspections of the safe on a regular basis. The Agency did not concur with
moving the safe to a secure area, staling the safe is behind a desk, weighs 1.000 pounds, and
there is other office security; we concluded that no further action is required.
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    7—EPA Recognized Earned Revenue in Excess of Expenditures

EPA recorded earned revenue without recognizing corresponding expenses. At the end of fiscal
2011, EPA had recorded S7 million more; in earned revenue in the IIR l;und than it recognized in
HR reimbursable expenses. The fund had a balance of S74.5 million in Earned Revenue Federal
Billed versus $67.5 million for Operating Expense Public Exchange. These balances were the
totals after EPA recorded (1) a $5.7 million entry to accrue unbilled reimbursements and earned
revenue, and (2) a Sl.l million entry to reduce advances from other agencies and to increase
earned revenue, SFFAS No. 7, Accounting for Revenue and Other Financing Sources, requires
agencies to match revenue and expenses. The Agency did not properly match revenues and
expenses in the HR Fund at the end of fiscal 2011 because it made earned revenue accrual entries
without recognizing an equal amount in accrued expenses. The S7 million imbalance in the HR
Fund code violates the matching principle required by the standard.

We extracted and reviewed the fiscal 2011 ending balances in general ledger accounts in the HR
Fund. Hie year-end balances showed that EPA reported $74.5 million in earned revenue in
general ledger account 522G—Earned Revenue Federal Billed. EPA also reported S67.5 million
in operating expenses in account 6IPE—Operating Expense Public Exchange. These two
balances represent a surplus of $7,0 million in the HR account at year end, which  violates the
principle of matching revenues and expenses. EPA created the imbalance when it  recorded
entries to recognize unbilled reimbursements for the HR Fund code at year end. The amounts
FPA recorded and the resulting balances are shown in table 5:

Table 5: HR Fund code amounts in fiscal 2011
Event

Balances in HR at 09/30/2011
Entries recorded in the 13th and 14th
months to record unbilled
reimbursements and recognize oil spill
reimbursable revenue
Entries made in 1 3th month to accrue
exchange expenses
Balances in HR at 09OO/2011
{after accruals and adjusting entries)
GIL Account 522G
earned revenue
G/L Account 61 PE
operating expense
Revenue-
expense
.',-, millions
($61.4)
(13.1)
0.0
(74.5)
S61.2
0.0
6.3
675
($0.2)
(13.1)
6.3
(70)
Source: Data from IFMS and OIG analysis.

SFFAS No. 7 establishes the criteria for the recognition and measurement of revenue and
expenses. The guidance notes that revenue conies from two sources: exchange and nonexchange
transactions. The guidance requires agencies to match revenue and expenses. Exchange
(reimbursable funds) revenue is to be recognized at the time goods or services are provided
(i.e., when expenses are incurred),

EPA created the $7 million difference in MR revenues over expenses when it prepared entries for
the 13th- and Mtli-moiith periods. EPA adjusted general ledger account 2315—Other Advances
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Federal, recognizing Sl.l million in earned revenue without recognizing expenses. EPA also
recorded an entry for S5.7 million to adjust the unbilled reimbursement accrual, which increased
earned revenue that was already recognized. Hie $5.7 million was based on accounts payable
recorded in late September 2011. When those payables were recorded, earned revenue was
properh" recognized. However. EPA's entry to adjust the unbilled accrual recognized the
S5.7 million in earned revenue for a second time. By not taking into account the total impact of
its entries, EPA overstated earned revenue by 85.7 million and understated operating expense by
$1,1 million in the JiR Fund. The ncl clTccl was earned revenue exceeding operating expenses in
the HR Fund,  and exchange revenues not properly matching expenses at fiscal year-end 2011.

Recom

We recommend that the Chief Financial Officer:

      15.  Review the entries and accounting models used to record expenditures and recognize
          earned revenue to assess their impact on the financial statements and to ensure that
          they result in the proper recognition of revenue.

      16.  Ensure that exchange revenue is only recognized at the time goods or services are
          provided.

Agency Comments      OIG  Evaluation

The Agency concurred with our finding    recommendations.
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                8—EPA Is Withholding Payments Related to
                  BP Deepwater Horizon Oil Spill Cleanup

.As of September 30. 2011. EPA had not paid contractors working on the Deepwater Horizon oil
spill S6.6 million, of which S2.8 million is late under the Prompt Payment Act. EPA violated the
Antideficieney Act in November 2010 because it made expenditures in excess of funds available.
To avoid a second potential Ajitidefteiency Act violation, EPA delayed payments to vendors,
resulting in the Agency being required to make interest penalty payments lo vendors as required
by the Prompt Payment Act. Section l.315.4(g) of the Prompt Payment Act states that payment is
due (1) on the date specified in the contract, (2) in accordance with discount terms when
discounts are oiTered and taken, (3) in accordance with Accelerated Payment  Methods, or
(4) 30 days after the start of a payment period, when a proper invoice is received. The Agency
withheld the payments because it did not have sufficient cash in its Deepwaler Horizon oil spill
funds to pay its bills, By not paying contractors on time. EPA is incurring interest payments and
is losing the opportunity to take discounts.

The Agency was aware that it would have to pay interest as required by the Prompt Payment Act
if it did not pay the bills timely. The Agency was forced into this situation because of disputes
between EPA and L'SCG on invoices submitted for reimbursement. EPA has  not received
suflieient emergency funding from L'SCG to reimburse the Oil Spill Response Trust Fund for
eosts incurred by EPA's response to the April 2010 Deepwater Horizon incident. This lack of
funding prompted EPA to make a conscious decision to cease payments lo its oil spill contractors
on September 12. 2011. It is not clear when EPA will obtain the funds necessary to resume
payment of the oil spill invoices. As of November 7. 2011, EPA has not resinned payments.
Consequently. EPA owes contractors the S6.6 million due as of September 30, 2011. as well as
any interest and late penalties, and debts incurred since September 30. 2011.

Recom

We recommend that the Chief Financial Officer:

      17.  Resume payments to the oil spill contractors as soon as adequate funds are available
          ifi the Oil Spill Response Trust Fund.

      18.  Include in payments lo contractors the interest penalties prescribed by the Prompt
          Payment Act for invoices that are paid past their due dates.

Agency Comments  and OIG Evaluation

The Agency concurred with our finding and recommendations.
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                                                             Attachment 2



                           With





                           Table of Contents




t—EPA Violated the Antidefrclency Act In Its Oil Spill Response Aecoynt	25
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                9—ERA Violated the Antideficiency Act In Its
                          Oil Spill Response Account

In January 2011, EPA notified OMB that it violated the Antideficiency Act when it made
expenditures in excess of funds available in the Oil Spill Response Account in the amount of
$502.215. The violation occurred because USCG did not timely reimburse EPA for BP
Deepwater Horizon oil spill response expenses. According to EPA. the reason for the
reimbursement delay was that USCG wanted EPA to provide a greater level of cost
documentation than had been acceptable in the past. By spending more funds than were
available. EPA violated the Antideficiency Act.

Hie Deepwater Horizon incident occurred in April 2010. According to  EPA. starting on June 1.
2010. EPA's CFC regularly monitored the cash balance of the Oil Spill Response Account.
According to EPA. in July 2010. EPA requested a cash advance from USCG due to large
amounts being invoiced by contractors working on the response action. In August 2010. USCG
provided EPA with a S32 million advance. EPA used ihe advance to pay contractor invoices, as
well as Agency payroll and travel expenses, related to the Deepwater Horizon response work. On
October 27. 2010. EPA advised  USCG that additional advances would be required to pay oil
spill response bills, but USCG was unwilling to provide additional advances because of cost
documentation concerns. In EPA OIG Report No. I l-P-0527. L'PA 's Guif Coast Oil Spill
Response Sfwws Need for Improved Documentation and Funding Practices. .August 25. 2011.
we identified that EPA needed to improve its cost documentation packages prior to submillal to
USCG. The report recommended that EPA implement controls to ensure that bills and  supporting
cost documentation packages submitted to USCG are clear and complete,  and comply with cost
documentation requirements,

To assist in cash management. EPA developed a cash monitoring report intended to include all
transaction costs, but the report did not include disbursements related to indirect costs.  EPA
discovered this issue on November 23. 2010. In a revised cash monitoring report that included
indirect costs. EPA discovered a negative cash balance in the Oil Spill Response Account on
November 18 and 19. 2010. By spending more cash than available. EPA violated the
Antideficiency Act. Title 31 U.S.C. §1341 (a) states. "'An officer or employee of the United
Slates Government may not make or authorize an expenditure or obligation exceeding  an amount
available in an appropriation or fund for the expenditure or obligation."

Since the date of the violation. EPA has established several reporting and  analysis measures and
safeguards. The measures include (I) establishing a new comprehensive funds-availability report
that includes indirect costs distributed from the account. (2) balancing the new report with the
fund balance with the Department of Treasury at the end of each month, and (3) analyzing the
historical monthly expenses to estimate future expenses.  In addition. EPA indicated that it will
revise its administrative funds control policies to change the minimum required available cash
balance from $500.000 to S2 million or more if the balance cannot support payment of
anticipated fixed costs, and bill USCG weekly or when a disbursement of SI million or more is
made.
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Recommendations

We recommend that the EPA Administrator:

      19. Finalize the reporting of the Antideficiency Act violation to the President, through the
         OMB Director. Congress, and the Comptroller General, as required.

We recommend that the Chief Financial Officer:

      20, Work with I 'SCO lo come to a mutual agreement on what constitutes acceptable cost
         documentation so that reimbursements do not continue to be delayed.

Agency Comments      DIG Evaluation

The Agency concurred with our finding and recommendations.
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                                                                         Attachment 3

      Status of Prior Audit Report Recommendations

¥,PA is continuing to strengthen its audit management to address audit follow-up issues and
complete corrective  actions expeditiously and effectively to improve environmental results. The
Chief Financial Oilicer is Ihe Agency follow-up official and is responsible for ensuring that
corrective actions are implemented. During fiscal 2011. OCFO instituted a new quarterly report
that highlights the status of management decisions and corrective actions. "Iliis report is shared
with program olTice and regional managers throughout the Agency to keep them informed of the
status of progress on their audits. OCFO also initiated an update of EPA Order 2750. EPA 'x
Audit Management I'rocess. Additionally. OCFO continued to conduct the on-site reviews of
national and program offices, which it initiated in fiscal 2009. The reviews locus on offices*
audit follow-up procedures and their use of the Management Audit Tracking System, or MATS.
"Hie reviews are designed to promote sound audit management: increase Agency awareness of,
accountability for, and completion of* unimplemented corrective actions: and ensure that audit
follow-up data are accurate and complete.  OCFO completed seven of these on-site reviews in
fiscal 2011. including four of regional offices and three of national program offices. These
reviews will be performed on an ongoing,  rotating basis,

"Flie Agency has continued to make progress in completing corrective actions from prior years.
'flie status of issues  from prior financial statement audits and other audits with findings and
recommendations that could have an effect on the financial statements, and have corrective
actions that are not completed or have not  been demonstrated to be fully effective, are listed in
the following table.

Table 6: Significant deficiencies—issues not fully resolved
    Automated Application Processing Controls for IFMS
    EPA has taken action to correct this open issue by implementing a new financial system to replace
    IFMS. The new system was implemented in October 2011. We continue to report this issue because
    the fiscal 2011 financial statements were produced using IFMS and the same inability to test
    application controls due to insufficient system documentation stiil exists within iFMS.
     EPA Misstated Uncollectible Debt and Other Related Accounts
     In fiscal 2011. we recommended that prior to year-end closing. EPA should review and test the net
     impact of closing entries to ensure proper statement of expenses, revenue, and assets in the
     financial management system and financial statements. This is the third year we have reported this
     issue. In responses to prior recommendations, EPA noted that it would review the impact of
     accounting entries, including standard vouchers for billing documents, and provide accounting
     models and technical advice as appropriate. EPA has not made changes to accounting entries in the
     year-end instructions See attachment 1. 'Internal Control Significant Deficiencies," for more
     information
     Improvements Needed in Controls for Headquarters Property
     The Agency has not taken sufficient action to address the weakness we noted in the headquarters
     annual personal property inventory. As described in attachment 1. "Internal Control Significant
     Deficiencies/1 EPA headquarters could not account for 1.284 personal property items in fiscal 2011.
     The activation date for the managers' on-line property training has slipped from March 30. 2011, to
     November 15. 2011
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    Integrated Financial Management System User Account Management Needs Improvement
    EPA has made significant strides to complete corrective actions associated with the segregation ot
    duties issue noted during She fiscal 2009 financial statement audit. To date, the Agency has
    implemented a segregation of duties policy and detective systems controls do exist. However, it has
    not provided sufficient documentation to show that the new Agency financial management system
    includes automated controls to enforce separation of duties (recommendation 27 in the fiscal 2009
    financial statement audit report)  Additionally, the OIG recommended that the new financial
    management system include automated controls to link to human resources data
    (recommendation 32 in the fiscal 2008 financial statement audit report)- To date, EPA has not
    implemented any corrective actions in response to this recommendation EPA has indicated that no
    further actions have Seen taken  due to  reevaluation of the business case for a new human resources
    system-
    Improved Security Planning Needed for the Customer Technology Solutions Project.
    Though EPA has taken steps to complete corrective actions, it has not provided all signed
    memoranda of understanding for each General Support System owner as agreed upon. A corrective
    action was rescheduled to be completed by August 29, 2011, but corrective actions are still
    incomplete EPA has not provided an updated milestone date for when it plans to complete the
    corrective actions associated with this report's recommendations.
    EPA Should Assess Collectibility of Federal Receivables and Record Any Needed Allowances
    for Doubtful Accounts
    EPA fully implemented recommendations 5 and 7 from our fiscal 2010 financial statement audit, but
    did not take full corrective actions for recommendation 6 In our fiscal 2011 financial statement audit,
    we found that EPA did not review the collectibility of 10 federal receivables that had been outstanding
    for 4 to 11 years, totaling 5793,000. EPA's CFC did not document efforts to collect the federal debt or
    determine the debt's status after the 3-year delinquent period. During our review of the federal
    allowance for doubtful accounts, we identified 6 of 10 receivable files with  the CFC Director's
    signature noting a review on September 30, 2011, but nothing was in the remaining 4 files Debt files
    are required to document efforts to collect the debt.
    EPA Improperly Closing Accounts When Cancelling Treasury Symbols
    During fiscal 2010. we reported that EPA processed an adjusting entry to close out the Treasury
    symbol 682/30108. and improperly expensed the advance as well as removed other liabilities when
    the funds became cancelled on September 30, 2010 We found that the Working Capital Fund had
    not refunded the remaining  advanced funds to EPA's Environmental Programs and Management
    appropriation. EPA responded that the advanced funds were expended before the Treasury symbol
    was cancelled, and the funds were spent in Treasury symbol 883/40108 Subsequently, EPA
    performed a reconciliation to compare advanced funds recorded in BFY 2002/2003 with drawdowns
    of those advanced funds in  later BFYs. This comparison  reflected activity by service agreement and
    did not identify the specific transactions to record the expenditures. EPA did not adequately track
    where the advanced funds from BFY 2002/2003 were spent. Further, although EPA's updated
    cancellation procedures seemed reasonable, the implementation of the cancellation procedures
    resulted in inappropriate activity and balances due to the cancellation of funds and improper
    procedures prescribed in the fiscal 2011  year-end closing instructions.  Additional support provided by
    the Agency was not provided in time to be considered in  this report.
Source: OIG analysis.
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                                                                                                 Attachment 4
               Status of Current Recommendations and
                             Potential  Monetary Benefits

                                                                                               POTENTIAL MONETARY
                                                                                                 BENEFITS (in SOOOs)
 Rec,
 No,
Page
No,
                            Subject
                                                   Status'       Act ion Official
 Planned
Completion
   Dale
Claimed
Amount
Agreed To
 Amount
         12   Require that regions! and headquarter?
             enforcement officials assist GFC by implementing
             EPA's newly updated RMDS policy, which
             includes the requirement to forward tegs!
             doc indentation within 5 business days and to
             designate regional contacts 50 that receivables
             are recorded timely.

         14   Reyiew unbilled Federal reimbursable expenses.
             determine thesr coltectibility. and bill appropriate
             funds before the funding period is cancelled.

         18   Create and rnptement» process to reconcile
             expenses incurred and costs NletJ under
             individual reimbursable agreements.

         15   Dsyesop a pioc-oss OT implement n reporting
             system to track, for each rgimbtsrsgblg sgregmgnt,
             the expenses that have been billed for each
             budge! fiscai year.

         1?   Revrse the cancellation procedures to ensure
             aecounts are pioperly stated.

         1?   Postthe pioper Allowance for Loss.
         17   Prior to year-end closing review and test the net
             impact of closing entfiss to firtsu/e proper
             statsmsnt of expenses, revesius, snd assets in
             the financial m^nagsmerrt sys-tem and financial
             statements.

         18   Develop and implemsrsl aelicies and prseedures
             to address responsibility for the removal of EPA
             property from the Agency financial system when
                 property is tran&ferred to contractors.
         18   Ensure that all EPA property that has been
             transferred to contractors is removed From EPA's
             Finsnci$! systsm.

         11   Require the Director. Faeces Management gnd
             Services Drvrsion. to cortduct planned psoperty
             training and require completion of the course by
             all EPA managers.
                                             U     Assistant Aommistrstor for
                                                  Enforcement and Compliance
                                             U
                                             U       Chiel Ftnanei.
                                                         'inaiwiai QfRoor




                                             U       Chtaf Financial Dffieer


                                             U       Chief Financiil Officer

                                             U       Chief        OfReer


                                                         "inaneiai Offeer
                                                   Asi^ifrt          for
                                                            and Ressurces
                                             U     Assistant Aclministrator for
                                                  Adminis.trati@n and Resources
                                                        Manggemsnt


                                                  AtoinistratEon and Resources
                                                        Management
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                                                       125

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                                           RECOMMENDATIONS
                                            POTENTIAL MONETARY
                                              BENEFITS (in S0C«Os)

Rec.
No,


No.


Subject
Planned
Completion
Status1 Act ion Official Dale
                                                                                                                 Claimed
                                                                                                                 Amount
                                                         Agreed To
                                                          Amount
          19    Require the Director. Facilities Management and      U
                Services Dwiwosi, to address the missing personal
                property items *n accordance with Aganey
                procedures.

          20    De¥e>op and implement pfoceduses to perform       U
                inspections of the safe on $ regular besss to verify
                the contents against accounting records

          20    Move the safe to 3 secure area, such a locked       C
                room, instead of keeping the safe in an open
                area.

          22    Review the entries and accounting models used      U
                to record expenditures and recognize earned
                revenue to assess their Bnpget on the financial
                statements and to ensure that they result in the
                proper recognition of revenue.

          22    En sura that exchange revenue is only recognized     U
                at the time goods or services are provided.

          23    Resume payment-^ to ihg eil spi c-onlraetors a$       U
                soen as adequate funds are available in the Oil
                Spill Response Trust f untl.

          23    Include tn  payments to contractors the interest       U
                penalties prescribed by the Prompt Payment Act
                for inveices that are paid past their due dates.

          26    Finalize the repotting of the Antideficiency Act       U
                violation to the President, thnjugh the OM8
                Director, Congress, and the Comptroller General
                as required

          26    Work with  USCG to come to a mutual agreement     U
                on what constitutes acceptable cost
                documentation sts that reimbursements da net
                continue to be delayed.
  Assistant Admin is tralor for
Administration and Resource;
       Management


   Chief Financial Officer
   ChM Financial Offfeer
   Chief Financial Officer
   Chief Financial Officer
   Chief Financial Officer
   Chief Financial Officer
     EPA Aobinisfratar
   Chief Financial Officer
                            HrtflftOH
   0 - recommBn:dabGn is open wrth agreed-to corrective actions pending
   C - reconiniendation is closed with all agreed-to actions completed
   U " recommendation is unresolved with resolution efforts in progress
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                                                    Appendix 1
                             201 f and
           Consolidated Financial
Provided separately.
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                             127

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                                              128

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Attachment

cc;  Craig Hooks, Assistant Administrator. Administration and Resources Management
    Cynthia Oiks, Assistant Administrator. Office of Enforcement and Compliance Assurance
    Melissa Heist. Assistant Inspector General for Audit
    Maryann Froehlich. Deputy Chief Financial Officer
    Joshua Baylson. Associate Chief Financial Officer
    Stefan Silzer. Director. Office ofFinaneial Management
    RaJTael Stein. Director, Office ofFinaneial Services
    Renee Page. Director, Office of Administration
    Jeanne Conklin, Deputy Director. Office ofFinaneial Management
    Paul Curtis. Director, Financial Statements Audit
    Jim Wood. Director, Cincinnati  Finance Center
    Chris Osbome. Acting Staff Director. Reporting and Analysis Staff
    Dale Miller, Acting Staff Director, Financial Policy and Planning Staff
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                                                                            Attachment

    Response to Draft OIG Audit of EPA's Fiscal 2011 and 2010 Consolidated Financial
                                      Statements

I - Accounts Receivable Detail Not Provided Timely by Regions

We recommend that the Assistant Administrator lor Enforcement and Compliance Assurance;

   1.  Request that regional enforcement officials assist Cincinnati Finance Center by
   implementing the EPA's newly updated Resource Management Directives System policy.
   which includes the requirement of forwarding legal documentation within 5 business days and
   designating regional contacts so that receivables are recorded timely.

  Response: (Concur)

The Office of Enforcement and Compliance Assurance will continue to work with the regions
and CFC and outline additional actions to be taken in the implementation of the EPA's newly
updated RMDS  policy including the requirement of forwarding legal documentation within 5
business days and designating regional contacts so that receivables are recorded timely. This
ellbn requires the coordination of headquarters enforcement offices, the Department of Justice.
the Environmental Appeals Board and the Office of Administrative Law Judges in addition to the
regional offices  to work with CFC to create accounts receivable in a timely manner,

We request the following corrections be made- in the draft audit report.

   »   In the case of non-Superl'und civil judicial cases. RMDS 2540-9-43 (Procedure 3). issued on
       April 13. 2011. states that the DOJ will notify and provide CFC with documentation when a
       final order is issued requiring the payment of a civil penalty.

   •   In October 2011. the DEC A issued internal procedures governing penalties assessed under
       headquarters initialed administrative enforcement actions,

   *   For Superfund enforcement-related accounts receivable. RMDS 2550D-14-T1 covers live
       types of statutory Superfund accounts receivable (i.e.. cost recoveries, cash outs. Superfund
       slate contract cost share payments, future response costs, and civil and stipulated penalties).

   »   Among the 39 exceptions noted in the draft audit report, some of these involved cases for
       which DOJ or headquarters did not provide timely notification to CFC.

Over the course of* the last year. OFvCA has taken the following steps to address this issue. First, the
Office of Civil Enforcement worked closely with other OECA offices and with the Office of the
Chief Financial  Officer to revise the RMDS policy governing non-Superl'und penalties. Second, by
memorandum dated October 4. 201J. signed by OEC.Vs former Principal Deputy Assistant
Administrator Catherine McCabe and OCTO's Deputy' Chief Financial Officer Man-ami Froehlich.
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OECA and OCFO advised the Regional Administrators. Deputy Regional .Administrators and Senior
Enforcement Managers of the new procedures issued by OCFO requiring the notification to CFC
when penalty accounts receivable are created. Third, as required under Procedure 3. DEC A issued
internal procedures for EPA headquarters-originated administrative enforcement cases.

In addition on November  17. 2011. OCE and OCFO will he presenting a webinar for the regions,
headquarters and staff at the EAB and the OALJ to explain the revised RMDS policy, how to
coordinate with CFC on a timely and consistent basis and to explain the performance measure that
requires notification to CEC within 5 business days of the effective date of a final administrative
order assessing civil penalties and Siipcrlund penalty actions.

With regard to Superfund-related enforcement accounts receivable, the Office of Site
Remediation Enforcement is developing a training course, to be delivered to all regions, on how
to elYectively manage Supcri'und accounts receivable. The training will include a section thai
emphasizes the need for regional offices to forward executed copies of settlement agreements,
and other legal documents, establishing amounts due to CFC within 5 business days as provided
inRMDS2550D-14-TL

Finally, we have been working with OCFO on a FY 2012 performance measure for notifying and
providing CFC with documentation regarding penalty and other enforcement-related accounts
receivable within 5 business days. OCFO  has committed to provide quarterly reports to senior
management in OECA and the regions assessing the extent to  which the regions and headquarters
are meeting this performance metric, 'Iliroughout FY 2012, we will be working with regional
enforcement managers. OCFO and the Department of Justice to ensure that enforcement-related
accounts receivable are created in a timely manner.

2 - Federal Reimbursable Crusts Not Billed Timely

We recommend thai the Chief Financial Officer:

  2. Review unbilled federal reimbursable expenses, determine their collcclabilily and bill
  appropriate funds before the funding period is cancelled,

   Response: (Concur)

  The CFC works diligently to research,  resolve, and bill outstanding reimbursable costs and
  will continue to research and resolve unbilled costs particularly before the funding period is
  cancelled. CEC reviews and bills all active funds-in Interagency Agreements on a quarterly
  basis. Expenditure reports for unique budget organization are reviewed by previously billed
  amount prior to creating a bill for new  costs. In addition, CEC will research methods to
  allocate costs if it cannot  be identified to an agreement and  research their colieetability once
  identified to an IA,

  3. Create and implement a process to reconcile expenses incurred and costs billed under
  individual reimbursable agreements.
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   Response; (Concur)

   CFC currently processes expense reports under individual reimbursable agreements. These
   reports are maintained in the agreement file along with a log of bills, date the bills were issued
   and remaining balance on the agreement, CFC will continue to maintain these records either
   manually in the agreement files or within the Compass financial system.

   4,  Develop a process or implement a reporting system to track, for each reimbursable
   agreement, the expenses that have been billed tor each budget fiscal year.

   Response: (Concur)

   CFC manually tracks these costs in each agreement file using the OCFO Reporting and
   Business Intelligence Tool and Compass Data Warehouse reports. CFC is also exploring
   using functionality within Compass to link the budget organizations and agreement for
   reimbursable costs. This should eliminate charging to generic or ""unlinked" budget
   organizations.

3 - EPA's Processes for Cancelling Treasury Symbols Caused Inappropriate Balances

We recommend that the Chief Financial Officer:

  5. Revise the cancellation procedures to ensure accounts are properly stated.

  Response; (Non-Concur)

  The Treasury financial management guidance supports the agency's  position in regards to how
  it cancels a Treasury Account Symbol. The EPA cancellation procedures support this guidance
  and are properly stated,

  6. Post the proper .Allowance for Loss.

  Response: (Non-Concur)

   The KPA has posted the appropriate adjustments to close the TAS and establish the
   correct balances in the 32HO miscellaneous receipt account.

   7.  Revise the Yeur-l-lncl Closing instructions, to prescribe proper procedures for closing
   accounts,

   Response: (Non-Concur)

   'Hie EPA Year End Closing Instructions already provide proper procedures for dosing
   accounts.
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   8. Prior to year-end closing, review and test the net impact of closing entries to ensure proper
   statement of expenses, revenue, and assets in the financial management system and financial
   statements.

   Response:  (Non-Concur)

   The EPA properly        cancellation of the TAS; no further work is

4 - EPA Double Counted Contractor-Held Property

We recommend that the Assistant Administrator for Administration and Resources Management:

   9. Develop and implement policies and procedures to address responsibility for the removal
   of EPA property from its financial system when it  is transferred to contractors,

  Response; (Concur)

  The Office of Administration and Resources Management will review current policies and
  procedures and revise as needed to ensure they address responsibilities for the removal from
  its financial system when it is transferred to contractors. Current procedures arc in place to
  inform contracting officers, project managers, contractors and agency property personnel on
  how to handle property transfers to contractors. While the appropriate agency guidance exists
  in the Contract Management Manual and the Property Policy and Procedures Manual, agency
  and contractor compliance remains a challenge. Additionally, frequent turnover of positions
  necessitates an increase in both training and cross training ot'COs and Agency  Property
  Managers. Agency property management duties are collateral duties that, in some cases, are
  rotated among program level stall".

  OARM is committed to developing a training program for all parties associated with the
  contract property process during FY 2012. As part of an on-going review and improvement
  program. OARM will continue to provide periodic training information to COs on the
  importance of ensuring that all contracts having contract property clauses are identified as
  such in the U.S. Environmental Protection Agency  Acquisition System. Additional guidance
  and training is being developed to improve communications and eliminate this  issue. In
  addition, the agency's Contractor  Property Coordinator sent an informational memo regarding
  potential double counting issues to APMs on October 13.  2011.

  The following points highlight significant action taken by OARM during FY 2011 to address
  the issue:

       »  Hie CPC provided training to contracting officers at the annual training conference
          and attended three APM's monthly teleconferences to address the issues and answer
          questions.
       «  OARM implemented  a quarterly assessment and  management certification program
          on property management and reporting. This program will aid in the improvement  of
          the agency's compliance with federal and EPA property policies, improve data
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          accuracy through verification and validation and ensure the effectiveness of
          management and oversight systems thai support government property tracking and
          reporting systems.
       «   The Operating Division Directors and Regional Acquisition Managers are provided
          with reports on a quarterly basis, from EAS and Federal Procurement Data System-
          Next Generation on contracts under their purview that have government property
          and.'or government property clauses. Each ODD and RAM is required to: 1) review
          the information  for accuracy and completeness, 2) make any necessary1 corrections,
          and 3) validate thai all necessary information has been provided or when it will be
          provided to the CPC. Using the data from both EAS and FPDS-NCi OARM has the
          reporting capability to identify contracts containing CUP and 'or the  government
          property clauses, as well as a management tool to verity that COs are forwarding
          contracts containing CHF to  the CPC in compliance with Contracts hlanagemern
          Manual 42.5. These two reports provide an independent process methodology for
          identifying and verifying the universe of the EP.-Vs contracts containing CHP.
       «   OARM has also created a new position For data quality as part of its Strategic
          Acquisition Human Capital Plan and found new avenues to electronically collect
          information on government property from contracts.

  10. Ensure that all  EPA property that has been transferred to contractors is removed from
  EPA's financial system.

  Response: (Concur)
          has already taken steps to remedy the issues surrounding data collection and
   maintenance for Government property. A more comprehensive and accurate list of contractors
   having contracts and agency contract property clauses has been compiled and is being used to
   validate the FY 201 1 annual reporting, The list contains 396 contracts: I) 69 had reportable
   contract property greater than or equal to $25.000. 2) 191 had no property, and 2)  136 had
   property but no property at the S25.000 level. A review is underway to identify any
   duplicative recording and ensure corrective action where necessary.

5 - EPA Headquarters Cannot Account for 1,284 Property Items

We recommend that the Assistant .Administrator for Administration and Resources Management
require the Director. Facilities  Management and Services Division, to:

   1 1 .  Conduct planned property training and require completion of the course by all F,PA
   managers.

  Response:  (Concur)

  The planned property training course has been developed and is posted on the agency's
  website. Over the next week, the .Assistant Administrator for OARM will send a notification
  letter to the agency's senior managers outlining the training course instructions and training
  commencement.
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  12. Address the missing personal property items in accordance with agency procedures,

              (Concur)

  OARM is currently addressing the missing personal properly items in accordance with agency
  procedures. OARM is currently working with the Board of Survey to investigate the
  remaining items from previous years. The Board plans to make a decision on missing items
  shortly and it is anticipated the recommendation will be to mark the missing items as inactive
  in the agency's financial system.

6 - EPA Should Secure Marketable Securities

We recommend thai the Oil ice of Chid" financial Officer;

   13.  Develop and implement procedures to perform inspections of the    on a regular
  to verify the contents against accounting records.

  Response:  (Concur)

  CFC will create and maintain a log of accountable items in (he sale.

  14, Move the safe to a secure area, such a locked room, instead of keeping the sale in an open
  area.

   Response:  (Non-Concur)

  The safe is currently in a secure area and is located behind ihe CFC administrative  assistant's
  desk   out of ihe general flow of the office. The safe is the size of a four drawer file cabinet
  and weighs over 1,000 pounds. The building has a guard sitting in the lobby 24 hours-'? days a
  week and non-duty hours access to the building is restricted and monitored through a sign-in
  sheet.

7 - EPA Recognized Earned Revenue In Eicess of Expenditures

We recommend that the Chief Financial Officer:

   13,  Review the entries and accounting models used to record expenditures and recognize
  earned revenue to assess their impact on ihe financial statements and to ensure that they result
  in the proper recognition of revenue,

  Response:  (Concur)

  The                  will be            verified.
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  16. Ensure that exchange revenue is only recognized at the time goods or services are
  provided.

  Response: (Concur)

  The EPA concurs.

8 - EPA is Withholding Payments Related to BP Deepwatcr Horizon Oil Spill Cleanup

We recommend that the Chief Financial  Officer:

   17. Resume payments to the oils spill contractors as soon as adequate Oil Spill Response
   Trust funds are available.

  Response: (Concur)

  The EPA will process the payments to the contractors as soon as adequate funds are available,

  18. Include in the payments the interest penalties prescribed by the Prompt Payment Act for
  invoices that are paid past their due dates,

   Response: (Concur)

   The EPA will include the interest on all          over 30     in           with the Prompt
   Payment Act.

9 - EPA Violated the Antldetieiency Art in Its Oil Spill Response Account

We recommend that the EPA Administrator;

   19. Finalize the reporting of the Anti deficiency Act violation to the President, through the
   Office of Management and Budget Director. Congress and the Comptroller General, as
   required.

  Response: (Concur)

   The agency will continue to  work with OMB to finalize the submission of the Antidcficiency
   Act letters. The EPA Administrator signed the letters on October 25. 2011 and they were
   delivered to OMB. The required notification letters are awaiting OMB clearance.

We recommend that the Chief Financial  Officer:

  20, Work with L'SCG to come to a mutual agreement on what constitutes acceptable cost
  documentation so that reimbursements do not continue  to be delayed.

   Response: (Concur)
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   The CXT'O and L'.S. Coast Guard have been in discussions lor the past several months to
   identify a process to ensure the timely submission and reimbursement of agency costs whik
   adhering to the cost documentation requirements of the U.S. Coast Guard.
       Responsible Managers:

       • s; Original Signed By:                                         November 10. 201'
                                                         	    Signature 'Date
       Stefan Silxer, Director. Office of Financial Management
       •'V Original Signed By;                                         November 10. 201'.
                                                     	    Signature-Dale
       Ruffael Stein. Director. Office of Financial Services
      fsf Original        By:                                         November 10.2011
      	    Signature-''Date
      Craig Hooks.         Administrator for Administration     Resources Management
       •V Original Signed By:                                         November 10. 2011
       	S ignature.- Date
       Cynthia Giles. Assistant Administrator for Enforcement and Compliance Assurance
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                                                                         Appendix III

                                  Distribution

Administrator
Chief Financial Officer
Assistant Administrator for Administration and Resources Management
Assistant Administrator for Enforcement and Compliance Assurance
Assistant Administrator for Environmental Information and Chief Information Officer
General Counsel
.Associate Administrator for Congressional and Intergovernmental Relations
.Associate Administrator for External .Affairs and Environmental Education
Acting Director. Office of Policy and  Resource Management. Office of Administration and
   Resources Management
Director. Office of.Administration. Office of .Administration and Resources Management
Director, Office of Civil Enforcement, Office of Enforcement and Compliance Assurance
Director. Office of Site Remediation Enforcement, Office of Enforcement and Compliance
   .Assurance
Director. Office of Technology Operations and Planning. Office of Environmental Information
Director. Office of Budget. OITice of the Chief Financial Officer
Director. Office of Financial Management. Office of the Chief Financial Officer
Director. Office of Financial Services. Office of the Chief Financial Officer
Director. Research Triangle Park Finance Center, Olllee of the Chief Financial Officer
Director. Cincinnati Finance Center, Office of the Chief Financial Officer
Director. Las Vegas Finance Center. Office of the Chief Financial Officer
Director. Office of Planning, Analysis, and Accountability. Office of the Chief Financial Officer
Director, Reporting and Analysis Staff, Office of the Chief Financial Officer
Director. Office of Technology Solutions. Office of the Chief Financial Officer
Director. Financial Policy and Planning Stall", Office of the Chief Financial Officer
Director. .Accountability and Control Staff. Office of the Chief Financial Officer
Director. Payroll Management and Outreach Staff. Office of the Chief Financial Officer
Agency Audit follow-Up Coordinator
Audit Follow-Up Coordinator, Office  of the .Administrator
Audit Follow-Up Coordinator. Office  of the Chief Financial Officer
Audit Fol low-Up Coordinator, Office  of Administration and Resources Management
Audit Follow-Up Coordinator. Office  of Enforcement and Compliance  Assurance
Audit Follow-Up Coordinator. Office  of Environmental Information
/Audit Follow-Up Coordinator. Office  of Solid Waste and Emergency Response
Audit Follow-Up Coordinator, Office  of Grants and Debatment. Office of Administration and
   Resources Management
.•Audit Follow-Up Coordinator, Office  of Financial Management, Office of the
   Chief Financial Officer
Audit Follow-Up Coordinator. Office  of Financial Services. Office of the Chief Financial Officer
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          Section III
Other A ccompanying Information
              139

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                 MANAGEMENT INTEGRITY AND CHALLENGES

Overview of the EPA's Efforts

Management challenges and integrity weaknesses represent vulnerabilities in program operations that
may impair the EPA's ability to achieve its mission and threaten the agency's safeguards against fraud,
waste, abuse and mismanagement. These areas are identified through internal agency reviews and
independent reviews by the EPA's external evaluators, such as OMB, GAO and the EPA's OIG.  This
section of the APR discusses in detail two components related to challenges and weaknesses: 1) a
brief discussion of the EPA's progress in addressing its FY 2011 integrity weaknesses and 2) key
management challenges identified by the EPA's OIG, followed by the agency's response.

Under the FMFIA, all federal agencies must provide reasonable assurance that policies, procedures
and guidance are adequate to support the achievement of their intended mission, goals and objectives.
(See Section I, "Management Discussion and Analysis," for the Administrator's assurance statements.)
Agencies also must report any material weaknesses identified through internal and/or external reviews
and their strategies to remedy the problems. Material weaknesses are vulnerabilities that could
significantly impair or threaten fulfillment of the agency's programs or mission. For FY 2011, no new
material weaknesses were identified by the agency or the OIG. (See following subsection for a
discussion of new, existing and corrected weaknesses and significant deficiencies.)

The agency's senior managers  remain committed to maintaining effective and efficient internal controls
to ensure that program activities are carried out in accordance with applicable laws and sound
management policy. Agency leaders meet periodically to review and discuss the EPA's progress in
addressing issues raised by OIG and other external evaluators, as well as progress in addressing
current weaknesses and emerging issues. The agency will continue to address its remaining
weaknesses and report on its progress.
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                 PROGRESS IN ADDRESSING
FY 2011 WEAKNESSES AND SIGNIFICANT  DEFICIENCIES
                                          FY 2011 Weaknesses and
                                           Significant Deficiencies


                                              Agency Weaknesses
                                 1.  Program Evaluation*
                                 ?.  Strengthening the Agency's Implementation of
                                    FMFIA
                                 3.  Permit Compliance System
                                 4.  Streamlining EPA's Process for Developing
                                    Chemical Assessments Under IRIS  .
                                 5.  Electronic Content Management

                                             Significant Deficiencies

                                 1.  Improperly Closed Account*
                                 2.  Reconciling Unearned Revenue forSuperfund
                                    State Contract Costs
                                 3.  Collectability of Federal Receivables
                                 4.  Headquarters Personal Property Controls
                                 5.  EPA Double Counted Contractor Held Property**
                                 6.  Federal Reimbursable Costs Not Billed Timely**
                                 7.  EPA is Withholding Payments Related to
                                    Deepwater Horizon Oil Spill Cleanup**
                                 8.  EPA Recognized Earned Revenue in Excess of
                                    Expenditures**
                                 9.  Accounts Receivable Detail Not Provided Timely
                                    By Regions **
In FY 2011, the EPA continued to address its
agency-level internal control weaknesses and
significant deficiencies. This section
discusses the weaknesses resolved in FY
2011, as well as those for which corrective
actions are still underway.

Agency Weaknesses

Program Evaluation

In its September 2007 report, Using the
Program Assessment Rating Tool as a
Management Control Process, OIG identified
several limitations to systematically
conducting program evaluations at the EPA.
These include: 1) funding limitations; 2) lack
of internal and external expertise; 3) the need
for strategic investment in program
evaluation; 4) insufficient data/performance
measurement information; and 5) lack of
participation  and willingness from states. The
EPA declared Program Evaluation as an
agency-level weakness in FY 2009.

To address this weakness, the agency
developed a  two-part program evaluation
strategy that included various focus areas to
strengthen the EPA's evaluation capabilities.
In FY 2011, the agency continued to take
steps to implement key actions in the two-part
program evaluation strategy and  to
strengthen program evaluation throughout the agency. In part one of the strategy, the EPA seeks to
strengthen internal expertise and build access to external expertise to move closer to achieving its long-
term goal of establishing  a program evaluation culture at the EPA. In part two of the strategy, the EPA
seeks to improve strategic investments in program evaluation planning and partnerships.

In addition to the strategy, the agency has taken other actions to strengthen program evaluation at the
EPA:

    Designated a senior executive responsible for developing a more robust evaluation capacity at the
    EPA

    Established guidelines for conducting program evaluation, and considering funding during annual
    planning  and budgeting process.

    Built strategic relationships with external evaluators by co-sponsoring the Environmental Evaluators
    Network  Forum

    In collaboration with EEN partners, developed a peer-reviewed article and a comprehensive
    database of peer-reviewed literature
                                 * All corrective actions were completed in FY 2011.
                                 ** Items identified as new in FY 2011.
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   Maintain access to skilled external evaluators to develop methodologies and to provide specialized
   skills and expert reviews

   Increased the number of evaluations listed in the FY 2011-2015 Strategic Plan

•  Through efforts underway, improving the strategic use of performance measurement for program
   management and  improvement

   The agency has completed all the corrective actions for this weakness. The EPA will continue to
   monitor progress in carrying out the two-part program evaluation strategy. To enhance program
   evaluation in the EPA's performance measurement system, the agency plans to initiate 1-2 larger
   scale program  evaluations. Additionally, the agency will continue to improve impact measurement
   and evaluation capacity by supporting partnerships with states and academic experts.

Strengthening the Agency's Implementation of FMFIA

In FY 2009, the EPA declared Strengthening the Agency's Implementation of FMFIA as an agency-
level weakness. OIG believes that the agency's management integrity guidance for FYs 2008 and 2009
did not require reporting on compliance with all of the GAO's five Standards for Internal Control in the
Federal Government,  as referenced in OMB Circular A-123.

The agency has taken steps to strengthen the EPA's FMFIA process and to address OIG  concerns.
Specifically, the agency has:

   Issued Deputy Administrator and CFO memorandum emphasizing the importance of maintaining
   internal controls over programmatic operations and financial activities, and clarifying expectations
   for senior leadership.

   Released on-line mandatory FMFIA courses and trained almost 2,000 agency senior managers
   (AAs/RAs, SES, and GS-15s designated by their AA/RA), 335 agency staff including Management
   Integrity Advisors.

   Held a training workshop for all agency Management Integrity Advisors to enhance their knowledge
   of internal controls, risk assessment, and the agency's  management integrity program.

   Issued technical guidance and user-friendly fillable forms/templates for developing Program Review
   Strategies which require reporting against all five GAO standards.

   Conducted  Management Integrity Program Compliance Reviews of six regional and five
   headquarters national program offices. Findings from the reviews have informed the FY 2010 and
   FY  2011 Management Integrity Guidance for the agency.

The agency will continue conducting Program Compliance Reviews in selected national program and
regional offices to assess the agency's FMFIA implementation and determine needs for guidance,
training, and other tools and assistance. Additionally, the EPA will use reviews conducted by OIG, or
other oversight agencies, to determine the effectiveness of corrective actions. The agency is validating
the effectiveness of corrective actions and expects to close this weakness in FY 2012.

Permit Compliance System

In FY 1999, the EPA declared Permit Compliance System  as an agency-level weakness. The
weakness focuses on  the need for the EPA to revitalize or  replace PCS to provide an information
system that both the states and the EPA can use to  ensure complete and accurate NPDES permit and
discharge data.

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Although the EPA has now developed and successfully implemented a modern, national information
system designed to meet the needs of today's NPDES permitting and enforcement program, not all of
the states have been migrated from PCS to the new system ICIS. Currently, 34 states, 2 tribes, 8
territories and the District of Columbia are using the new system. That leaves 16 states remaining to be
migrated to ICIS, all of which are authorized to manage the NPDES program. The plan is to complete
the modernization of PCS and migrate those 16 states from PCS to ICIS in FY 2013.

In FY 2011, the agency:

   Completed User Validation and Acceptance Testing for Wave I of ICIS-NPDES Full Batch
   functionality.

   Implemented Wave I of ICIS-NPDES Full Batch (capability to electronic report permit and facility
   data from states to ICIS-NPDES) functionality.

•  Migrated five (FL, KY,  MO, MN, OH) additional states from PCS to ICIS-NPDES.

   Completed Software Technical Specifications for Wave 2 of ICIS-NPDES  Full Batch functionality
   (electronic reporting of NPDES inspection data from states to ICIS-NPDES).

•  Completed Software Development for Wave 2 of ICIS-NPDES Full Batch functionality.

   Completed Functional and Integration testing of Wave 2 of ICIS-NPDES Full Batch functionality.

   Completed Software Technical Specifications for Wave 3 of ICIS-NPDES  Full Batch functionality
   (electronic reporting of NPDES Enforcement Actions,  Program Reports and violation related data
   from states to ICIS-NPDES).

•  Begun Software Development for Wave 3 of ICIS-NPDES Full Batch functionality.

The final closure date for this agency level weakness is projected to be the end of fourth quarter FY
2013. This completion date is based on various assumptions and estimates.1

Streamlining EPA's  Process for Developing Chemical Assessments Under IRIS

In FY 2009, the EPA declared Streamlining EPA's Process for Developing Chemical Assessments
Under IRIS as an agency-level weakness. GAO identified "Transforming EPA's Processes for
Assessing and Controlling Toxic Chemicals" as a high-risk area in its January 2009 High-Risk Series. In
its report, GAO states that the agency needs to take actions to increase the transparency of the
Integrated Risk Information System and enhance its ability under the Toxic Substances Control Act to
obtain health and safety information from the chemical industry.

In May 2009, the agency released a new Integrated Risk Information System  process for completing
health assessments. The goal of the new process is to strengthen program management, increase
transparency and expedite the timeliness of health assessments. Since that time, the agency's National
1 This completion date is based on various assumptions about the future and, therefore, any changes to the assumptions
would impact the schedule. For FY 2011 and beyond, we assumed that annual funding will rise to $ 7.5 million. (If EPA
assumes the President's budget level of $6.7 continues in FY 2011 and beyond, the schedule would likely move 5 or more
quarters into the future, with a shut down date for PCS delayed until FY 2015). Further, as with any project, extended
timelines for completion add risk to the project, and predictions about when the project will be completed become more
speculative.


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Center for Environmental Assessment has completed 16 assessments, more than the number of
assessments completed in the previous three years. Additionally, the agency is making significant
progress on health hazard assessments of numerous high priority chemicals (e.g. formaldehyde,
trichloroethylene, perchloroethylene, dichloromethane, arsenic, chromium VI, methanol,
benzo[a]pyrene and Libby asbestos), including the completion of milestones for interagency science
consultation, external review or posting on the IRIS web page. Progress on these and other IRIS
assessments is available at http://www.epa.gov/IRIS/. Assessments of health effects for chemicals
found in environmental mixtures including PAHs, dioxins, phthalates and PCBs are being developed.
These cumulative assessments will increase the number of chemicals that are addressed by the IRIS
Program and are based upon the expressed needs of the agency. The EPA's Human Health Risk
Assessment program will continue to lead innovation in risk assessment science based on expanding
scientific knowledge.

The EPA recently unveiled a new database that facilitates public access to the scientific studies that
underpin key agency decisions. The Health Environmental Research Online database contains the key
studies the EPA uses to develop environmental risk assessments for the public. It includes references
and data supporting the Integrated Risk Information System, which supports critical agency
policymaking. The HERO database is publicly accessible so anyone is able to review the scientific
literature behind the EPA science assessments. The HERO database strengthens the transparency of
the science supporting agency decisions.

The IRIS update project is in a pilot phase. Toxicity values in IRIS that are more than 10 years old have
been identified, screened, and prioritized based on  agency needs; the first group of 15 high priority
assessments has been selected for update. A Federal Standing Science Review Committee, consisting
of reviewers from the EPA and other federal agencies has been assembled. An independent contractor
will lead and conduct independent external peer reviews of these assessments. A second batch of nine
assessments should be ready for the FSSRC by December 2011, and a Federal Register notice
announcing a new set of 20-30 chemicals.

In July 2011, the EPA announced additional  measures to strengthen the scientific quality of IRIS
assessments based on comments from the National Academy of Sciences. These measures include
making assessment documents clearer, shorter and more transparent. The EPA will evaluate the
strengths and weaknesses of critical studies in a more uniform way and  clearly indicate which criteria
were most influential in weighing scientific evidence supporting its choice of toxicity values. Also, the
EPA will continue to track progress to determine if new timelines need adjustment.

Electronic Content Management

In FY 2009, the EPA declared Electronic Content Management at the EPA as an agency-level
weakness. Although the agency has a formal, structured and vigorously  managed records management
program in place that has met past records management requirements, its roots can  be found in
traditional  paper-based records management, maintenance and access. The agency's inconsistencies
in how electronic content is stored, maintained and  assessed have started to have an impact on critical
processes related to electronic records management.


To implement effective changes to content management practices within the agency, corrective actions
must be addressed enterprise-wide. An enterprise approach will allow for integration  with the agency's
lines of business and replace current piecemeal or ad hoc approaches. To accomplish this, the agency
is implementing a system for the effective management  of its information assets that  will include a
governance structure for content management as well as selection of enterprise tools, and the
formulation of new policies for content management responsibilities and  processes.
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The agency has taken the following corrective actions to address this weakness:

   Established a new QIC Electronic Content Subcommittee

   Developed a charter for the subcommittee

   Established two enterprise-wide workgroups under the subcommittee

   Launched two pilot projects to evaluate tools for eDiscovery and the management of email records.
   The results of the pilot projects will be used to inform the subcommittee's decisions on future policy
   or tool implementation.

The agency anticipates that all remaining corrective actions will be completed in FY 2013.
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Significant Deficiencies

EPA Improperly Closed Accounts When Cancelling Treasury Symbols

During the FY 2010 Financial Statement Audit, OIG stated that the EPA did not properly close the Fund
Balance with Treasury when cancelling treasury symbols on September 30, 2010. Treasury Financial
Manual Bulletin No. 2009-04 states that agencies must cancel any remaining balances (whether
obligated or unobligated) in the account being cancelled. The agency has taken a number of steps to
ensure appropriate funds have been returned to Treasury.

In FY 2011, the agency:

   Conducted an analysis to determine whether funds needed to be returned to Treasury;

   Made the appropriate adjusting entry to treasury symbol;

   Reviewed procedures to ensure processes for reconciliations are in place to prevent future issues;

   Provided guidance to ensure balances are properly reported; and

   Evaluated procedures and revised them to ensure timely review of the balances in cancelling
   treasury symbols.

The agency is utilizing monitoring report information to ensure no variances exist for treasury symbols
that will be cancelled at year-end. All corrective actions for this significant deficiency have been
completed.

Improvement Needed in Billing Costs and Reconciling Unearned Revenue for Superfund State
Contract Costs

During the FY 2009 financial statement audit, the OIG identified the failure of the EPA to properly
review the calculations used to reconcile unearned revenue for SSC. costs as a material weakness. To
remedy the material weakness, the agency improved accountability for the SSC contract requirements
and site status information by researching transactions in older funds to  determine validity;
strengthening the review/verification process for reconciling Superfund site cost; and ensuring data and
calculations used are consistent  and properly supported. In FY 2010, based  on the corrective actions
taken, the issue was downgraded to a significant deficiency.

In FY 2011, the agency continued to provide instructions to the regions for careful review of the "closed"
sites and the steps necessary to complete the closure activity. Extra measures and verifications were
taken to ensure data entered on  the spreadsheets was correctly transferred into the financial system.
For instance, the review of the SSC spreadsheets was added to the regional review of internal controls
over financial activities. This year, the  process included ensuring that the spreadsheets were complete
for all sites, that contract values and percentages were updated, and that credits were not only included
but were for the correct amounts.

As part of the quarterly SSC accrual process, the agency will continue to send  requests to the regions
emphasizing the  need to review all sites they have listed as 'closed' to make sure they are taking care
of all actions. This included, but was not limited to, billing a particular state for its share of the costs,
adjusting the contract values and/or percentages and reclassifying appropriated disbursements where
applicable. The agency has included language in  its quarterly call for regional input into the
spreadsheets. This will help the regions ensure all billings are done timely.
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The agency will continue to review the SSC process as part of its review of internal controls over
financial activities. The agency anticipates that all corrective actions for this significant deficiency will be
completed in FY2012.

Assess Collectability of Federal Receivables and Record Any Needed Allowances for Doubtful
Accounts

During the FY 2010 financial statement audit, OIG stated that the agency should assess federal
receivables collectability and record any needed allowances for doubtful accounts.  Historically, the EPA
has not established allowances for delinquent federal debts because it considered all federal debts to
be collectible. To remedy this significant deficiency, the agency reviewed its open federal debts to
ensure accurate status, established  new procedures to timely bill federal agencies;  and issued a new
policy to address delinquent federal  receivables, Resource Management Directives System, 2540-12-
P1, Intragovernmental Business Rules - Delinquent Federal Accounts Receivable.

The agency anticipates that all corrective actions for this significant deficiency will be complete in FY
2012.

Improvements Needed in Controls for Headquarters Personal Property

During the FY 2010 financial statement audit, OIG identified improvements needed in the controls for
the EPA headquarters. The agency acknowledged several significant challenges with tracking personal
property in the headquarters accountable area. To remedy this significant deficiency, the agency is
developing  training for all managers, revising the current policy and procedures manual, and
establishing standard operating procedures. Additionally, the agency is conducting  a "wall to wall"
inventory of headquarters personal property and will share the results with stakeholders, as
appropriate.

The agency anticipates that all corrective actions for this significant deficiency will be completed in  FY
2012.

EPA Double Counted Contractor Held-Property

During the FY 2011 Financial Statement Audit, OIG stated that the EPA double counted contractor-held
property in its financial system because it did not remove from its financial system property that had
been transferred to contractors. To remedy this issue, the agency will review current policies and
procedures and revise them as needed to ensure it addresses responsibilities for removing from its
financial system property which is transferred to contractors. Current procedures are in place to inform
Contracting Officers, project managers, contractors and agency property personnel on how to handle
property transfers to contractors. While the appropriate agency guidance exists in the Contract
Management Manual and the Property Policy and Procedures Manual, agency and contractor
compliance remains a challenge. Additionally, frequent turnover of positions necessitates an increase in
both training and cross training of COs and Agency Property Managers. Agency property management
duties are collateral duties that, in some cases, are rotated among program level staff.

The agency is committed to developing a training  program for all parties associated with the contract
property process during FY 2012. As part of an on-going review and  improvement program, the agency
will continue to provide periodic training information to COs on the importance of ensuring that all
contracts having contract property clauses are identified as such in EAS. Additional guidance and
training is being developed to improve communications and eliminate this issue. In  addition, the
agency's Contractor Property Coordinator sent an informational memo regarding potential double
counting issues to APMs on October 13, 2011.

In FY 2011, the agency has taken the following actions to address the issue:

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•  The CPC provided training to CO at the annual training conference and attended three ARM
   monthly teleconferences to address the issues and answer questions.

•  The agency implemented a quarterly assessment and management certification program on
   property management and reporting. This program will aid in the improvement of the agency's
   compliance with federal and agency property policies, improve data accuracy through verification
   and validation and ensure the effectiveness of management and oversight systems that support
   government property tracking and reporting systems.

   Operating Division Directors and Regional Acquisition Managers are provided with quarterly reports
   from EAS and Federal Procurement Data System-Next Generation on contracts under their purview
   that have government property and/or government property clauses. Each ODD and RAM is
   required to: 1) review the information for accuracy and completeness, 2) make any necessary
   corrections and 3) validate that all necessary information has been provided or note when it will be
   provided to the CPC. Using the data from both EAS and FPDS-NG, the agency has the reporting
   capability to identify contracts containing CHP and/or the government property clauses, as well as a
   management tool to verify that COs are forwarding contracts containing CHP to the CPC in
   compliance with Contracts Management Manual 42.5. These two reports provide an  independent
   process methodology for identifying and verifying the universe of the EPA's contracts containing
   CHP.

•  The agency has also created a new position for data quality as part of its Strategic Acquisition
   Human Capital Plan and found new avenues to electronically collect information on Government
   property from contracts.

The agency has already taken steps to remedy the issues surrounding data collection and maintenance
for government property. A more comprehensive and accurate list of contractors having contracts and
agency contract property clauses has been compiled and is being used to validate the FY 2011 annual
reporting. The list contains 396 contracts: 1) 69 had reportable contract property greater than or equal
to $25,000, 2) 191 had no property, and 3)  136 had property but no property at the $25,000 level. A
review is underway to identify any duplicative recording and ensure corrective action where necessary.

The agency anticipates that  corrective actions for this significant deficiency will be completed in
FY2012.

Federal Reimbursable Costs Not Billed Timely

During the FY 2011 Financial Statement Audit, OIG stated that the EPA did  not timely bill other federal
agencies for reimbursable costs. The agency works diligently to research, resolve, and bill outstanding
reimbursable costs and will continue to research and resolve unbilled costs particularly before the
funding period is cancelled. The agency reviews  and bills all active funds in Interagency Agreements on
a quarterly basis. Expenditure reports for unique budget organizations are reviewed by previously billed
amount prior to creating a bill for new costs. In addition, the agency will  research methods to allocate
costs if they cannot be identified to an agreement and research their collectability once identified to an
IA.

The agency currently processes expense reports under individual reimbursable agreements. These
reports are maintained in the agreement file along with a log of bills, the dates the bills were issued and
the remaining balance on the agreement. The agency will continue to maintain these records either
manually in the agreement files or within Compass.

The agency anticipates that  corrective actions for this significant deficiency will be completed in
FY2012.

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EPA Is Withholding Payments Related to BP Deepwater Horizon Oil Spill Cleanup

During the FY 2011 Financial Statement Audit, OIG stated that the EPA withheld payments related to
BP Deepwater Horizon Oil Spill. To remedy this issue, the agency will process the payments to the
contractors as soon as adequate funds are available. The EPA will include the interest on all payments
over 30 days in accordance with the Prompt Payment Act.

The agency anticipates that corrective actions for this significant deficiency will be complete in
FY2012.

EPA Recognized Earned Revenue in Excess of Expenditures

During the FY 2011 Financial Statement Audit, OIG stated that the EPA recorded earned revenue
without recognizing corresponding expenses. To remedy this issue, the accounting model will be
reviewed and verified. The EPA will ensure that exchange revenue is only recognized at the time goods
or services are provided.

The agency anticipates that corrective actions for this significant deficiency will be completed  in FY
2012.

Accounts Receivable Detail Not Provided Timely By Regions

During the FY 2011 Financial Statement Audit, OIG stated that the EPA did not provide timely accounts
receivable supporting documentation to be promptly recorded in the financial system. To  remedy this
issue, the agency will continue to work with the regions and Cincinnati  Finance Center and  outline
additional actions to be taken in the implementation of the EPA's newly updated RMDS policy, including
the requirement to forward legal documentation within five business days and designate regional
contacts so that receivables are recorded timely. This effort requires the coordination of headquarters
enforcement offices, DOJ, the Environmental Appeals Board and the Office of Administrative  Law
Judges in addition to the regional offices to work with CFC to create accounts receivable  in  a timely
manner.

Over the course of the last year, the agency has taken the following steps to address this issue. First,
the agency worked closely with other internal offices to revise the RMDS policy governing non-
Superfund penalties. Second, by memorandum dated October 4, 2011, signed by the Office of
Enforcement Compliance and Assurance's former Principal Deputy Assistant Administrator Catherine
McCabe and OCFO's Deputy Chief Financial Officer Maryann Froehlich, OECA and OCFO advised the
Regional Administrators, Deputy  Regional Administrators and Senior Enforcement Managers  of the
new  procedures issued by OCFO requiring the notification to CFC when penalty accounts receivable
are created. Third, as required under Procedure 3, OECA issued internal procedures for EPA
headquarters-originated administrative enforcement cases.

In addition, the agency will be presenting a webinar for the regions and headquarters staff to explain
the revised RMDS policy, how to coordinate on a timely and consistent basis and the performance
measure that requires notification within five days of the effective date of a final administrative order
assessing civil  penalties and Superfund penalty actions.

With regard to Superfund-related enforcement accounts receivable, the agency is developing  a training
course, to be delivered to all regions, on how to effectively manage Superfund accounts receivable.
The training will include a section that emphasizes the need for regional offices to forward executed
copies of settlement agreements and other legal documents establishing amounts due within  five
business days as provided in RMDS 2550D-14-T1, Superfund Accounts Receivable and Billings.
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Finally, the agency is working to develop a performance measure for notifying and providing
documentation regarding penalty and other enforcement-related accounts receivable within five
business days. The agency financial manager has committed to provide quarterly reports to agency
enforcement senior managers in headquarters and the regions assessing the extent to which the
regions and headquarters are meeting this performance metric. Throughout FY 2012, the agency will
be working with its regional enforcement managers, financial managers and DOJ to ensure that
enforcement-related accounts receivable are created in a timely manner.

The agency anticipates that corrective actions for this significant deficiency will be  completed in
FY2012.
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Summary of Financial Statement Audit
Audit Opinion
Restatement
Audit Opinion: Unqualified
No

Material Weaknesses
Total Material Weaknesses
Beginning
Balance
0
New
0
Resolved
0
Consolidated
0
Ending
Balance
0
Summary of Management Assurance
Effectiveness of Internal Control Over Financial Reporting (FMFIA § 2) (A-123 Appendix A)
Statement of Assurance
Unqualified

Material Weaknesses
Total Material Weaknesses
Beginning
Balance
0
New
0
Resolved

Consolidated
0
Reassessed
0
Ending
Balance
0
Effectiveness of Internal Control Over Operations (FMFIA § 2)
Statement of Assurance
Unqualified

Material Weaknesses
Total Material Weaknesses
Beginning
Balance
0
New
0
Resolved
0
Consolidated
0
Reassessed
0
Ending
Balance
0
Conformance With Financial Management System Requirements (FMFIA § 4)
Statement of Assurance
Systems Conform to Financial Management System Requirements

Non-Conformances
Total Non-Conformances
Beginning
Balance
0
New
0
Resolved
0
Consolidated
0
Reassessed
0
Ending
Balance
0
Compliance With FFMIA

Overall Substantial Compliance
1 . System Requirement
2. Accounting Standards
3. USSGL at Transaction Level
Agency
YES

Auditor
YES
YES
YES
YES
  NOTE:  See "EPA Holds Itself Accountable" in Section I of this report for additional information on FMFIA 2, FMFIA 4
  and FFMIA presented in the summary graphs above."
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                    2011 KEY MANAGEMENT CHALLENGES
The EPA's Top Major Management Challenges
As Identified and Reported by the Office of Inspector General
The Need for a National Environmental Policy: Environmental quality depends on
policies related to farming, energy, water, transportation and federal land management.
A national environmental policy would help the EPA and other federal agencies go
beyond existing, fragmented coordination efforts to set national environmental goals
and set regulatory standards, particularly for problems that cross state or national
borders or pose risks to future generations.
Water and Wastewater Infrastructure: Many drinking water and wastewater systems
across the country are unable to maintain compliance with federal water standards due
to needed repairs and new constructions. Over the next 20 years, the EPA estimates
that approximately $633 billion will be needed to pay for water and wastewater
infrastructure. The EPA needs to lead in developing a coherent Federal strategy with
states and local governments to assess and organize resources to meet water and
wastewater infrastructure needs.
Oversight of Delegations to States: Due to differences between state and federal
policies, interpretation, strategies and priorities. The EPA needs to more consistently
and effectively oversee its delegation of programs to the states assuring that delegated
programs are achieving their intended goals.
Safe Reuse of Contaminated Sites: The common practice of not removing all
sources of contamination from hazardous sites is inhibited by a regulatory structure
that places key responsibilities for monitoring and enforcing the long-term safety of
contaminated sites on non-EPA parties that may lack necessary resources,
information, and skill; changes in site risks as site conditions change overtime; and
existing weaknesses in the EPA's oversight of the long-term safety of sites as well
funding deficiencies.
Limited Capability to Respond to Cyber Security Attacks: The EPA is highly
vulnerable existing external network threats, despite reports from security experts that
Advanced Persistent Threats, designed to steal or modify information without detection
are becoming more prevalent throughout the government. Currently, the EPA has
reported that over 5,000 servers and user workstations may have been compromised
from recent cyber security attacks along with national security and confidential
business and personal data. (Previous years reported under Homeland Security)
Reducing Domestic Greenhouse Gas: In response to a Supreme Court ruling in
April 2007, the EPA issued an endangerment finding that current and projected
atmospheric concentrations of six GHGs threaten the public health and welfare of
current and future generations. However, the EPA must take significant actions to
address the adverse impacts of these air pollutants.
EPA's Framework for Assessing and Managing Chemical Risks: The EPA's
effectiveness in assessing and managing chemical risks is limited by its authority to
regulate chemicals under the Toxic Substances Control Act. Chemicals manufactured
before 1976 were not required to develop and produce data on toxicity and exposure,
which are needed to properly and fully assess potential risks.
FY
2009

•
•
•
•


FY
2010
•
•
•
•
•
•
•
FY
2011
•

•
•
•

•
Link to
Agency
Strategic
Goal
Cross-Goal
Goal 2
Cross-Goal
Goal 3
Cross Goal
Goal 1
Goal 4
Goal 5
Key Management Challenges

The Reports Consolidation Act of 2000 requires OIG to identify, briefly assess and report annually the
most serious management and performance challenges facing the agency. In FY 2011, OIG identified
five areas it considers the EPA's most pressing management challenges. The EPA has made progress
in addressing the issues OIG identified and will continue to work diligently in assessing and resolving
vulnerabilities before they become serious management issues. The following pages provide the entire
OIG's Management Challenges report along with the EPA's response to each challenge.
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                 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                              WASHINGTON, D.C  20460


                                   JUN 29 m
                                                                     TH£ WEKCTQHGCNEHAl
MEMORANDUM

SUBJECT:   EPA's Fiscal Year 2011 Management Challenges
TO:
Lisa P. Jackson
Administrator
We are pleased to provide you with a lisi of areas Lhe Office of Inspector General considers as
key management challenges confronting the U.S. Environmental Prelection Agency (EPA). The
passage of the GPRA (Government Performance and Results Act) Moderni ration Act of 2010
provides a new government-wide definition of major management challenges. According to the
Act, major management challenge means programs or management functions, within or across
agencies, that have greater vulnerability to waste, fraud, abuse, and mismanagement where a
failure to perform well could seriously affect the ability of an agency or the federal government
to achieve its mission or goals.

The Reports Consolidation Act of 2000 requires our office to report what we consider as the
most serious management and performance challenges facing the Agency. Given this
requirement, our list includes management challenges and significant performance issues facing
EPA. We used audit, evaluation, and investigative work, as well as additional analysis of Agency
operations, to identify challenges and weaknesses. Additional challenges and weaknesses may
exist in areas that we have noi yet reviewed, and other significant findings could result from
additional work. We provided detailed summaries of each challenge in the attachment.
       Management Challenges
                                                          Page
       Need for Greater Coordination of Environmental Efforts
       Oversight of Delegations to States
       Safe Reuse of Contaminated Sites
       Limited Capability to Respond to Cyber Security Attacks
                                                           12
       EPA's Framework for Assessing and Managing Chemical Risks
                                                           15
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This year we deleted two management challenges (Water and Wastewater Infrastructure and
Reducing Domestic Greenhouse Gas Emissions) because we moved relevant excerpts to the
challenge on the need for greater coordination on environmental efforts.

We welcome the opportunity to discuss our list of challenges and any comments you might have.
                                            ; Arthur A. Elkins, Jr.
Attachment
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Need for Greater Coordination  of Environmental Efforts

Congress passed the National Environmental Policy Act (NEPA) and created the U.S.
Environmental Protection Agency (EPA) in 1970 to carry out national environmental policy.
Before EPA's creation, more than a dozen federal agencies had environmental responsibilities,
resulting in the lack of an organized, concerted focus to address pollution and degradation,
Reorganization Plan No, 3 of 1970 created FPA and transferred to it programs housed in 15 units
of several existing federal departments and independent agencies. Creating EPA served as the
first step to address national environmental policy by consolidating separate federal efforts.
Despite efforts to consolidate federal environmental programs. EPA's 2006-2011 Strategic Plan
noted that 25 other federal departments and agencies conduct environmental activities.

In June 2010, we reported that NEPA does not outline a national strategy, set national priorities
and goals, or unify all stakeholder efforts.1 In addition, EPA faces challenges related to
interagency coordination since EPA Lacks complete authority or control over many activities that
affect the condition of our nation's environment, such as land use  and transportation planning.
Environmental quality depends on policies related to farming, energy, water, transportation, and
federal land management, but neither Congress nor the Executive  Branch has Silly engaged hi
harmonizing these issues.

Funding and budget data illustrate the  degree to which other agencies have a role in protecting
the environment. For example, nearly 20 percent ($147 billion) of the total funding of
$787 billion under the American Recovery and Reinvestment Act of 2009 (ARRA) has gone to
federal agencies other than EPA that have environmental mandates in areas such as energy
usage, air quality, climate change, water quality, solid and hazardous waste, materials
management, or land conservation. Budget data also identify1 potential areas of duplication and
the need to coordinate more efficiently cross-agency efforts to achieve environmental goals.
Testimony in 1995 by the Comptroller General noted that, "The lack of an integrated approach to
government leads to redundancy and waste. Government can make huge efforts to provide
services to the public, yet still fall far short of its intentions because of faulty coordination of its
efforts within and across agency lines."

The following examples of past management challenges identified by our office and the
Government Accountability Office (GAO) illustrate how  EPA cannot fully address the goals of
NEPA due to ineffective, segregated coordination efforts.

       \\atcr and Waste-water  Infrastructure According to some studies, local communities
       will need to spend up to $400 billion over the next 20 years to maintain and improve
       clean water infrastructure.2 EPA's Clean Water and Drinking Water State Revolving
       Funds received about SI.4 billion in federal capitalization grants in FY 2009,J Congress
       added 56 billion to these funds through the ARRA. The U.S. Departments of Housing
1 EPA DIG. National Envtnavnental Polity and Quadrennial Revte* AVofaf, Report No. 10-P-OI40, June 8.2010.
•' Clean Water Funding Network Website.
hBB'/^Jtig|f1liTftiiirihi|.nry/ti>dei-4ihp'1opiion com cnnlctitA-
 i; S, EPA, Drinking Water Sou Revolving FundAllotmtntt; U.S. EPA, Clean Water SKF Federal CapliatKation
Grants by Federal Fiscal Year ofA*ard M State,
                                          155

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       and Urban Development and Agriculture also provided grant and loan assistance for
       walcr and wastewater infrastructure of about S2 billion in FY 2006 and received funding
       through the ARRA. These programs are small in relation to the funding gap and arc not
       part of a comprehensive investment strategy to address water infrastructure needs,  The
       federal government does not have a national approach to bridging the water and
       wastewatcT infrastructure gap. Since EPA is primarily responsible for administering the
       Clean Water Act and Safe Drinking Water Act, it should take the lead in organizing a
       coherent federal strategy within the limits of its statutory authorities and responsibilities.
       A comprehensive approach to bridging the walcr and wastevvater infrastructure gap
       would systematically assess the investment requirements, alert the public and Congress of
       unfunded liabilities and risks, and work with other federal agencies. States and local
       governments to organize resources to meet needs.

       Greenhouse Gases (GHGs) - In October 2009. the GAO recommended developing a
       national strategy for climate change." In October 2010, the White House interagency task
       force on climate change adaptation issued a final report that noted "significant gaps in the
       U.S. government's approach to climate change adaptation and building resilience."6
       Among the gaps the report noted were a unified strategic vision and approach;
       coordinated efforts across state, local, and federal lines; and coherent  research programs
       to assess regional effects. In January 2011. EPA initiated the  Cross-F.PA Climate Change
       Adaptation Planning Work Group to develop and implement  a climate change adaptation
       plan for EPA.' EPA relics on multiagcncv research organizations" for the information and
       tools to help address GHGs,° and to accelerate the development of new and  advanced
       GHG reduction technologies.10 Consequently. EPA has limited control over the content,
       conduct, and timing of this research. The FY 2012 President's Budget shows that EPA is
       one of 13 departments and agencies that contribute research to the U.S. Global  Change
       Research Program" to improve understanding of the science  of climate change and its
4 U.S. Department of Agriculture. Rural Development, Water and Environmental Programs, Annual Actrrtrt' Report
- FY2006. page 6.
* GAO, Climate Change Adaptation: Strategic Federal Planning Could Help Government Officiate Make More
Wormed Decisions. GAO-10-113, October 2009.
* White House Council on Environmental Quality. Progress Report of the Interagency Climate Change Adaptation
Task Farce: Recommended Actions in Support of a National Climate Change Adaptation Strategy, October 5, 2010.
T EPA, Memorandum from Louise Wbe. EPA Acting Associae Administrator for Polk)-, Etiahltshmtnt ofCreas-
EfA Climate Change Adaptation Planning tt'ark Group & Call for Wort Group Member Nominations, January 13.
2011
1 EPA relics on the U.S. Global Change Research Program and the Climate Change Technology Program »
understand better the effects and risks of climate change and to develop new technologies to reduce GHG emissions.
EPA information on climate change regulatory initiatives, policies, and actions, including EPA'i Performance and
Accountability' Report jor Fiscal Year 2QW, November 16.2009.
* EPA OIG, EPA Needs a Comprchensn-e Research Plan and Policies to Fulfill its Emerging Climate Change Role,
Report No 09-P-0089. February 2, 2009; Piclke, Roger A., IT,, "Scientific Information and Global Change
PoMcymaktng,- Climate Change 28: 315-19, 1994.
" C-Span video archives, EPA Administrator's Address to the National Press Club on the Agency's Key Priorities.
March 8, 2010. at 00:24:04 and 00:25:48.
" U.S. Global Change Research Program website. Participating Departments and Agencies
                                            156

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       potential impacts,1' KPA recognizes thai it needs creativity and innovaiiorL among other
       things, from all stakeholders to meet GHG challenges.13 and thai is beyond EPA's direct
       control.14

       Water Ecosystems - Chesapeake Bay - EPA participates in inlcragcncy efforts to solve
       complex environmental challenges in large coasta! freshwater and  marine ecosystems, '
       A joint 2006 report by our office and the U.S. Department of Agriculture OIG on the
       Chesapeake Bay noted that while local farming associations support clean-up efforts.
       they oppose granting EPA authority to control nonpoint source pollution entering the
       watershed. This creates an opportunity for  the U.S. Department of Agriculture to assist
       EPA in working with local farming communities surrounding the Bay.

       US Mexico Border Water Program - In March 2011, GAO issued its first annual report
       to Congress identifying federal programs^ agencies, offices, and initiatives, within
       departments or government-wide, that have similar or overlapping goals or activities.
       The report described how fragmented federal efforts to meet water needs in the U.S.-
       Mexico border region have resulted in an administrative burden, redundant activities, and
       an overall inefficient use of resources. GAO found thai seven federal agencies, including
       EPA, that arc active in the border region obligated at least SI .4 billion from FYs 2000
       through 2008 to fund numerous projects in the region, but their efforts are  ineffective
       because they have not comprehensively assessed the needs of the region. GAO suggested
       that Congress require federal agencies develop a task force in partnership with state and
       local officials to leverage collective resources and establish compatible and coordinated
       polices across relevant agencies.

These complex environmental issues show how EPA needs to continually work to improve
external coordination with federal agencies and others with which  it shares environmental
protection responsibilities. However, as noted in the Environmental Law Reporter, "Inleragcncy
coordination concerning the environment is uneven at best"17 The implementation of a national
environmental policy could reduce or eliminate federal agencies' duplication, overlap, or
fragmentation, and help agencies more  efficiently  and effectively address environmental
problems, while providing the federal government with cost-saving opportunities. Our research
11 U.S. Global Change Research Program website, "About/Program Overview"

' '  -
 ' C-Spaa2 video archives. Administrate* 's address to the National Press Club on the Agency's key priorities,
March 8. 2010, it 00:24:04 and 00:25:48
'*DOE, U.S. Climate Change Technology Program, I 'ision and Framework for Stratew and Planning, Report No.
DOE/PI-OOOS. September 2006.
" We evaluated EPA's attempts to resolve the envirtinnxrmal challenges in these water bodies in several reports,
including: EPA Ptted>i to Accelerate Adoption of Numeric Nutrient Water Quality Standards, Report No. 09-P-0223.
August 26, 2009; EPA Needs a Cohesive Plan lo Clean Up the Great Lake* Areas of Concern, Report No. 09-P-
0231, September 14. 2009; and several reports on the Chesapeake Bay that can be found at
hm>:. ' 'www irp>.eov oia rBPOrtv'cfacurtnhtitom
16 GAO. Opportunities la Reduce Potential Duplication in Guvtmmenl Programs. Save  Tax Dollars, and Enhance
Revenue. GAO- 1 1 -3 1 8SP. March 20 II
17 Environmental Law Reporter News & Analysis, Special Issue: Agenda for a Sustainable America, National
Governance: Still Stumbling Toward SusialnabiMy. 39 Envtl. I.. Rep. News & Analysis  1032 1 (April 20D9>,
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has found a push ibr developing national strategics related to various environmental aspecb.
including invasive species, sustainable development, and environmental justice.

Given the absence of a. national environmental policy, there are a number of near-term corrective
actions that EPA could lake to coalesce various environmental stakeholder efforts. The EPA
Administrator could send a letter to stakeholder groups asking for their insight on areas a
national environmental policy should address. Next, EPA could form study groups to address
key concepts, topics, and/or missions relevant lo a national environmental policy. The EPA
Administrator could send a letter to stakeholder organisations encouraging participation in the
interagency groups. KPA's study groups could then meet regularly and develop position papers
on their respective topics. Position papers could identify shared goals, overlapping/duplicative
programs, strategies to attain goals, and measures to assess progress. Currently. EPA has ad hoc
intcragcncy workgroups   such as that between EPA and the U.S. Departments of Transportation
and Housing and Urban Development to create a framework to foster sustainable communities -
but EPA lacks an overall coordinated strategy and goals that integrate these efforts with other
stakeholder activities. Moreover, Congress should provide EPA and other federal agencies the
capacity to identify and manage environmental problems of national significance. EPA should
work with Congress and the Administration to examine ways to leverage resources expended to
various, insular environmental protection efforts.

Oversight of  Delegations to States

EPA's oversight of state programs is a key management challenge. GAO and our office have
reported that EPA has made some progress in this area; however, the effectiveness of Agency
oversight has a number of limitations.

To accomplish its mission to protect human health and the environment, KPA develops
regulations and establishes programs that implement environmental laws. Many of the federal
statutes establish federal and state regulatory' programs in which states are given the  opportunity
to enact and enforce such laws, meeting minimum federal criteria, to achieve the regulatory
objectives which Congress has established. As such. EPA may authorize state, local, or tribal
governments to implement these laws when they request authorization and EPA deems the
agency capable of operating the program consistent with federal standards. EPA relies heavily on
authorized state, and tribal agencies to obtain performance data and to implement compliance
and enforcement programs. In its FY 2007 Performance and Accountability Report, EPA stated
that it delegated the responsibility for issuing permits and for monitoring and enforcing
compliance to the states and tribes.

EPA does not abrogate its oversight responsibility when it has delegated enforcement
responsibility. Federal intent is to ensure national minimum level environmental protection
standards. In addition, federal requirements establish consistency for businesses and  within
industries nationwide. States' discretion adds flexibility to address specific circumstances and
local issues, but joint implementation and enforcement leads to special challenges in
interpretations, strategies, and priorities. Therefore. F.PA performs oversight of state, local, and
tribal programs to provide reasonable assurance that they achieve national goals.
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Improving EPA-statc relationships is a priority for EPA," and EPA has begun to improve its
oversight by implementing the Slate Review Framework," However, GAO reported that while
EPA has made substantial progress in improving priority setting and enforcement planning with
states, its oversight needed further enhancement. The framework is intended to provide a
consistent approach for overseeing programs and identifying weaknesses and areas for
improvement but EPA has not implemented it in a consistent manner. For example, evaluations
of the State Review Framework show that EPA has limited ability to determine whether states
are performing appropriate enforcement in a timely manner, and whether penalties are applied to
environmental violators in a lair and consistent manner within and among states. In  response to
these Findings, EPA made changes to ihc State Review Framework and initiated a Clean Water
Act Enforcement Action Plan, which among other things is aimed at strengthening Agency-
oversight of state water quality compliance and enforcement.

We have continued our work on this topic over the past year, and our recent reports  demonstrate
that this challenge persists. Two key factors limiting EPA's knowledge about state programs are
(1) data limitations and (2) inadequate oversight of state activities.

       •  Data Limitations—Limitations in the availability, quality, and robustness of program
          implementation and effectiveness data, and limited Agency resources to
          independently obtain such data, prevent EPA from ensuring that the intent of the law
          is met. Our work this year found issues with two federal data systems: the Safe
          Drinking Water Information System and the Resource Conservation and  Recovery-
          Act (RCRA) Information System (RCRAInfo).

             >•  We  found that EPA could not accurately assess the risk of public water
                 systems delivering contaminated drinking water from emergency facilities
                 because of limitations in Safe Drinking Water Information System data
                 management, EPA and state officials we interviewed said they were unaware
                 of instances similar to the situation we reported on in Illinois. However, they
                 also stated that they currently have no way to know whether an emergency
                 facility had been turned on without notice. There is no federal regulatory
                 requirement for UP A or states to oversee or monitor emergency facilities. As a
                 result, neither EPA nor the states know the amount of risk that public water
                 system customers may face from misuse of water from emergency facilities.'"

             >  We  also found that the RCRAInfo data that track hazardous waste handlers
                 and  the shipment and receipt of hazardous waste contain errors and miss
                 source documentation. These conditions call into question the quality and
11 EPA. Administrator Lisa Jackson's Seven Priorities for EPA's Future,
tynp_ tltqLepJLk1                                  '
   _
'* EPA, State Review Framework, http: uww.epa.t-m b
^ EPA O1G, UP.4 Lacks Internal Controls to Prevtra Misuse of Emergenc)- Drinhns Water Facilrtifs, Report No.
tl-P-0001, October 12, 20 10.
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                 reliability of data within the RCRAInfo system, as well as any resulting
                 repotting,1'

          Inadequate Ch-ersighf—Oversight of state activities requires that EPA establish
          national baselines that state programs must meet, and monitor state programs lo
          determine whether they meet federal standards. Our work identified the absence of
          national baselines and a lack of robust state oversight with respect lo the Clean Water
          Act, Superfund program, and RCRA.

              >  EPA's authorizing memoranda of agreement with stales are critical common
                 denominators for state-authorized programs and should represent a common.
                 national baseline. We found that EPA and states have outdated and
                 inconsistent state agreements under the National Pollutant Discharge
                 Elimination System, EiPA headquarters does not hold EPA regional or state
                 offices accountable for updating their memoranda of agreement when
                 necessary. Instead. EPA relics on an inconsistent variety of other planning and
                 management mechanisms to exercise control over state programs.  Without
                 current written agreements with all authorized states, EPA cannot ensure
                 Agency management control and effective oversight over this state-
                 adminislered national program.""

              >  Long-term monitoring of the ground water is necessary to ensure that the
                 Superfund remedial action remains protective of human health and the
                 environment. However, our work found that the State of Pennsylvania did not
                 collect ground water samples from the Bruin Lagoon Superfund Site for
                 6 years, from 2001 to 2007. EPA Region 3 managers told us they made a
                 deliberate hut undocumented decision to not use oversight authority to require
                 the state to conduct ground water sampling at the site. In June 2007.
                 Pennsylvania resumed sampling ground water at the site. The Region's 2009
                 Five-Year Review, which included sht-sc results, indicated that the site was
                 protective. Nonetheless, gaps in Song-term monitoring may result in a failure
                 to detect conditions that indicate that a cleanup remedy is not protecting
                 human health and the environment.23

              >  RCRA requires EPA to provide oversight of sites where cleanup authority is
                 delegated to slates. In addition. EPA's Public Involvement Policy encourages
                 EPA siaffand managers to  ensure that decision-making processes  are open
                 and accessible. Our office received a Hotline complaint from Citizen Action
                 New Mexico alleging that the New Mexico Emironment Department
                 mismanaged the Sandia National laboratory's Mixed Waste Landfill
21 EPA OIGf EPA Colild Improve RCRAIttfa Daia Quality arKJSiTiein Development, Report No, 1l-P-0096,
F<*nW}'7,2QIl.
21 EPA OIG, Ef A Should Rwise Outdated or facorxisient F.FA -Slate Memoranda ofAgrermeta, Report No. 10-P-
0224, September 14,2010.
23 EPA OIO, EPA Shvtild Improve Oversight of Long-term Monitoring at Bruin Lagoon Sttp&funil Site in
Pennsylvania, Report No. 10-P-02I7, September 8,2010,
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                 monitoring wells. We found that Region 6's documentation of its oversight
                 was insufficient. Therefore, we could not determine whether the allegations
                 had merit or whether New Mexico Environment Department's actions and
                 decisions were technically sound.24

While EPA has renewed its attention on the oversight of programs delegated to stales, much
work remains. The Agency must address limitations in the availability, quality, and robustness of
program data, and limitations in implementation across environmental statutes to provide
effective oversight. Effective oversight of delegations to states also requires an organizational
structure capable of maintaining clear lines of accountability. Our ongoing, national review of
issues related to this management challenge focuses on how EPA's organizational structure may
impede its ability to oversee state Clean Air Act (CAA), Clean Water Act, and RCRA
enforcement programs. If EPA does not adequately oversee states' authorized enforcement
programs, it cannot hold states accountable for meeting their enforcement responsibilities. As a
result, EPA would not be able to ensure Americans that states maintain a baseline level of
environmental protection,

Safe Reuse of Contaminated Sites

In the last decade, EPA has increasingly emphasized the reuse of contaminated or once*
contaminated properties. In its 2011 -2015 Strategic Plan, EPA announced a shift in the
definition of success ai a Superfund site from "construction complete" of a site cleanup to when
a site is "ready for anticipated use."'11 Recently, the Agency identified thousands of contaminated
sites that it encourages developers and "anyone interested" to use for building renewable energy
(e.g., wind, solar, biomass) facilities,** EPA has successfully turned some actual or perceived
problem sites into properties that reinvigorated communities and created jobs.2' Contaminated
properties have become viable again as retail stores, public recreation areas, housing complexes,
sports stadiums, and commercial office space.

Recycling and reusing contaminated property can produce measured economic benefits, provide
environmental benefits that result from preserving undeveloped lands, and improve quality of
life for communities. While EPA's recycle and reuse goals are notable and  may have made a
positive contribution in difficult economic limes, EPA's duty is to ensure that contaminated sites
are  safe for humans and the environment. EPA faces significant and increasing challenges in this
area due to: (1) the common practice of not removing all sources of contamination from
hazardous sites; (2) a regulatory structure that places key responsibilities for monitoring and
enforcing the long-term safety of contaminated sites on non-EPA parties that may lack necessary
resources, information, and skill; (3) changes in risks as site conditions change overtime; and
(4)  weaknesses in EPA's oversight of the long-term safety of sites,

Many contaminated sites, such as Superfund sites,  must be monitored in the long term
(i.e., 30 years or more) because known contamination is often not fully removed or remediated.
** EPA OIG, Region t> \'eetis to Improve Ovo-tighl Practice*. Report Mo, 10-P-O100, April 14, 201D.
11 EPA. FY 2011-2015 Strategic Plan, page 38. hnp  »^u.gpa.a>v pl.imiiidbiiiki.-i srr,ilcL:.LpliinJiteiL
24 EPA website, "RE-Powcring America's Land." hup: WAV. ctmovi'imeii»«blgmff tv
37 EPA website, "Superfund Redevelopment,"
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and controls that prevent prohibited activities at sites must be maintained and enforced. New
controls or monitoring may be required if previously undetected or new contaminants emerge,**
which can be a direct result of site changes brought about by reuse. The lack of effective long-
term monitoring and enforcement of reuse controls al contaminated sites can pose significant
risks to human health and the environment. The New York Department of Environmental
Conservation released a report in March 2009 listing hundreds of "old" Superfund. Brownfields.
and other cleanup cases that were reopened to investigate potential new threats from vapor
intrusion.*  Improvements in analytic techniques and knowledge gained from site investigations
has increased awareness of soil vapor as a medium of concern and of the potential for human
exposure from the soil vapor intrusion pathway. °  However, EPA has yet to finali2c guidance on
assessing or addressing potential risks from vapor  intrusion and does not estimate that it will do
so until 2012,JI

EPA has acknowledged challenges to ensuring the long-term safety of contaminated sites. ~ In
2005. the Agency released a report that examined a range of long-term stewardship issues33 and
challenges it faced, as well as the role of non-EPA parties nir»g restrictions).
15 Engineering controls are the engineered physical barriers or structures designed to monitor and prevent or limit
exposure to the contamination.
3* The Uniform Environmental Covenants Act confirms the validity of environmental covenants (i.e.. institutional
CQBBoil/bDd UK controls) by ensuring that land use restrictions, mandated environmental monitoring
requirement*, and a wide range of common engineering controls designed to control the potential environmental
risk of residual contamination will be reflected in land records and effectively enforced over time. Currently, about

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In response to a GAO report on institutional controls. EPA 1ms also taken some steps to better
manage the implementation of institutional controls at Supcrfund siics,"' However, many sites
remain for which the implementation status of institutional controls is not available. * In 2010.
EPA completed an internal evaluation to determine whether the required and necessary
institutional controls were in place at national priority Superfiind sites." EPA's review disclosed
that controls to protect human health were not in place at a number of sites they reviewed. EPA
made recommendations Jo improve the implementation of these controls to protect human health
at sites where risks remained. In November 2010,  EPA also revised Agency guidance and sought
public comment on its "interim final guidance," institutional Controls: A Guide to Planning.
Implementing. Maintaining, and Enforcing Institutional Controls at Contaminated Sites.

Our work has identified a number of additional challenges that EPA faces in ensuring effective
long-term monitoring or stewardship of contaminated sites. We found that some states were not
financially prepared to lake over their long-term monitoring and maintenance responsibilities for
Superfund cleanups.41  In 2010. Michigan's Department of Environmental Quality believed it
would run out of money for its hazardous waste cleanup program, * We have reported on state
failures to enforce cleanup agreements,10 EPA's failure to follow Superfund site deletion
guidance44 and Five-Year Review procedures,45 and EPA's lack of systems to determine whether
a site cleanup is noncompliantw

We found that EPA relies on the self-certification  of a third-party environmental professional to
determine whether statutorily required environmental due diligence has been performed at
Brownfields sites funded by EPA grants. In all sample environmental due diligence
investigations we reviewed, environmental professional certifications  failed to meet federal
requirements and therefore failed to assure that a proper environmental investigation occurred.

one-half of U.S. stales have passed a Uniform Environmental Covenants Act. The Uniform Environmental
Covenants Act was drafted by Ihe National Conference of Commiisioners aa Uniform Slate Laws in August 2003.
" GAO, Hazardous Waste Sties: Improved Effectiveness of Controls at Sites Cmitd Btittr Protect the Public, GAQ
05-163 January 28. 2005. See also                   rcrtiind ptilio :c indc-\ h'm.
" EPA website, "Published institutional Controls."
                                 "I r4.
0 The Detroit News, "Michigan Oul of Cash to Clean Up Toxic Sites." March 4. 2010.
11 EPA OIQ, Imprtn'tti Cantrnh Wuuld Reduce Super/and Backlogs, Report No. OS-P-0169, June 2, 2008
** EPA O1G, EPA Decision* to Delete Superfitnd Sites Should Undergo Qualify Assurance Rttvte*, Report No. 08-
P^J235, August 20,2008,
*' EPA O)G. EPA Has Improved Fivt-Ytar Rtvlfw Process for Superfund Remedies, Bui Further Steps Needed,
Report No. 2007-P-00006, December 5,2006; EPA OtG. EPA > Safety Determination fur Delate Metals
Superfund Site Wax Unsupported, Report No. CW-P-0029. November 19, 2008.
46 EPA OIQ. EPA Heads to Track Compliance with SuperfiatdCleanup Requirements. Repon No. 08-P-OI41,
A$wi)2g, 2008.
" EPA O1G, EPA Must Implement Controls to Ensure Prnper tm'esrigatiam Are Conducted ea Brawnfieldx Silts,
Report No. I l-P-0107, Febraaiy  14, 2011.
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EPA also conducts no oversight of the requirement to meet "continuing obligations" at
Brownfields properties funded by EPA. Continuing obligations include land use controls and
institutional controls designed to prevent unacceptable uses of a contaminated properties,4"
Weaknesses or lapses in meeting environmental due diligence or continuing obligations
requirements can result in undetected or undisclosed contamination and inappropriate land use.

Our January 2010 report found new contamination at a dclisted Supcrfund site in Delaware
where EPA conducted informal and undocumented oversight of the site reuse plans.   The
current site owner had nearly finalized plans for reusing the site for public recreation but in a
manner inconsistent with the site cleanup plan. HP A had not kept current with the current
owners site reuse plans. In addition, HPA did not issue a Ready For Reuse (R£R) determination
for this site because it believed it was not necessary. An RfR could potentially address some of
the internal challenges to ensuring safe reuse of contaminated  sites. However, there is no
requirement to complete RfRs, and they have been treated as discretionary. Nonetheless. EPA
has held up RfRs as providing the necessary "limitations that need to be followed to ensure [site]
proteclivcness," An RfR was not issued for the site reviewed in our January 2010 report because
site managers believed an RfR %vas on!y needed lo aid the real estate market. At another
Superfund site, we also found that EPA did not take action to address a 6-year gap in
environmental sampling thai the state should have conducted.'0 This type of oversight weakness
can result in a failure lo detect conditions that indicate that a cleanup remedy does not protect
human health and the environment.

EPA's management of the long-term oversight and monitoring requirements  for the safe reuse of
contaminated sites has lagged behind its marketing of site reuse opportunities and showcasing of
successes. Only in the last several years has EPA focused attention on the long-term stewardship
aspects of contaminated sites across its cleanup programs. This gap promises to increase
substantially  as EPA continues to heavily promote the reuse of contaminated sites without
investing in tools needed to ensure the safe, long-term use of these sites. Many Supcrfund sites
are now moving to the long-term monitoring phase, with more sites expected to do so in the
future." EPA's December 2008 report on nature Superfund workload needs states thai the "post-
construction" workload will require the greatest increase in coming years and will  increase by 89
percent over the current full-time equivalent distribution." EPA will continually need to assess
challenges it  faces, as well as challenges among the diverse group of non-EPA parties it must
work with, to ensure that sites are safely reused. In its assessments. EPA should consider new or
expanded authorities and regulations, new organizations, measures and goals, new methods of
sharing information, and dedicated funding and resources for long-term stewardship activities.
** EPA, Brtmnfletd* Foci Sheet, EPA Brownfields Grants CEKCL4 Liability and All Appropriate Imptirm, EPA
560-F-M-026,' April 2009.
40 EPA OIG. Changei m Conditions at Wildcat Landfill Sitperfiutd Site in Delcm-are Call far Increased EPA
Oversight, Report No. 10-P-0055, January 27. 2010.
** EPA OIG. EPA Should Improve Oversight of Long-term Monitoring at Brain Lagoon Superfand SUt in
Petaxylvmta, Report No. [O-P-0217. September 8. 2010.
" EPA. Long-Term Stewardship Ensuring Environmental Site Cleanups Remain Protective Over Timt
and Opportunities Facing EPA 'j Cleanup Programs, EPA 500-R-05-00 1 . September 2005.
n EPA, Superfafid Workload Assessment Report, OSWER Document 9200-2-S 1 . Dsc«nl>er 2. 2008 Posl-
constntctkm workload can refer to all activities after a cleanup remedy is constructed (including lone-term
monitoring and reuse activities).
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In 2009, EPA agreed with this challenge.53 In its 2010 response to this challenge, EPA stated that
it had se%reral tools it actively promotes to ensure appropriate and safe reuse of sites, and that it
will continue to explore new tools and approaches to sharing risk information to ensure that sites
remain safe in their future uses.5* EPA stated that its Superfund Five-Year Review process
addresses the vast majority of ""emerging contaminant" situations observed at Superfund
National Priority List sites and conveyed that  the Five-Year Review process worked well. Six
specific "tools" EPA said it promotes to ensure appropriate and safe reuse of sites are: {I) RfR
determinations, (2) comfort and status letters,  (3) prospective purchaser inquiry calls, (4) EPA-
funded reuse planning offers, (5) site reuse fact sheets, and (6) Comprehensive Environmental
Response, Compensation and Liability Information System data on institutional controls. EPA
has recently taken significant steps to address and remedy vulnerabilities  in the Five-Year
Review process. Several actions have been taken in response to our findings. In 2009. EPA
completed a review of the quality of Five-Year Reviews. The Agency identified  many reviews
that needed additional support and some that needed modified safety determinations. Additional
actions such as modifying the Agency's 2001  guidance on Five-Year Reviews may be
forthcoming.

We will review and recognize EPA efforts to address (he significant challenge of ensuring the
long-term safety of contaminated sites. Our work and the Agency's work  have shown that EPA
can address these internal challenges through improved oversight and management of activities
inherent to successful Song-term stewardship of contaminated sites. However, success till long-
term sle%vardship also depends on having properly resourced and informed non-EPA parties, who
have ongoing access to current information, arc actively involved in compliance, and conduct
appropriate due diligence and oversight of contaminated sites. EPA is highly limited in
addressing this challenge when state or local governments with primary responsibility for
addressing many long-term safety issues have neither the money nor the will to do so. The
lessons from recent issues such as vapor intrusion show that site reuse can generate new
environmental risks. In its 2011-2015 Strategic Plan,  EPA states:

             Complications can arise when new scientific information
             concerning contaminants at a site suggests that a risk assessment
             that was protective when a remedy was selected is no longer
             protective given the contaminant levels remaining at a site  and
             their potential exposure pathways..,.  EPA must incorporate
             emerging science into decision making to maintain its commitment
             lo provide permanent solutions."^

EPA needs new strategies that take the Agency beyond merely encouraging non-EPA parties to
fulfill requirements and focus on providing EPA and other parties the information, resources, and
authorities to ensure long-term safety of reused sites.
51 EPA, Perfarfttmo! and Aetovntabitify Report far f'acal Year 2U(W, section IV, page 43.
M EPA, Fiscal Year 2018.tgericy Financial Report. Section III, piges 37 40.
M EPA, Fr 1011-201S Strategic Plan, page 25,
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Limited Capability to Respond to Cyber Security Attacks

Continuing from the management challenge from last year, EPA still has a limited capacity' to
effectively respond to external network threats despite reports that Advanced Persistent Threats
(APTs) designed to steal or modify information without detection are becoming more prevalent
throughout government.5* In addition, the Agency does not have an overarching understanding of
system exploitations from an insider threat perspective. This type of threat can come from a user,
through unauthorized physical access by an individual, through a breach due to access and weak
controls via contract facility connections, or from insertion of mahvarc lhat allows for
unauthorized remote access.

Our ongoing analysis shows that the Agency still faces challenges with respect  to protecting
against APT-typc attacks. Although the Agency has deployed new tools  10 improve its
architecture, these tools raise new security challenges and. therefore,  concerns by our office.
EPA deployed Symantec Endpoint Protection in an attempt to identify mat ware on Agency
systems, The full extent of this deployment and the ability of the Agency to rapidly correlate the
reporting of system vulnerabilities are limited. The Agency implemented "BigFix" servers for
managing patch and software updates. While use of ihcse systems is beneficial, the systems
introduce security  concerns because a single compromise of the BigFix system  could modify
computers throughout the EPA domain. Some of these BigFix servers were reported to have
been compromised this year.

The Agency does not have an Agency-wide governance of its critical infrastructure designed to
identify critical components, systems, and data, and any associated back-up or redundant
systems, so that when a compromise occurs, the Agency  and our office can quickly engage key
stakeholders, assess the significance of the threat, and take appropriate actions.  The Agency
recently had one of these designated "critical" systems reported as compromised. However, due
to a lack of critical system redundancy, investigators responding to the an incident were unable
to take the systems offline to preserve evidence. This failure to provide for critical redundant
capability exist at the wide area network  (WAN) and local area network  levels of EPA
infrastructure.

EPA is in the process of transferring to the U.S. General  Services Administration's Managed
Trusted IP Services (MTIPS) contract. MT1PS is reported to provide  services such as intrusion
detection, intrusion protection, incident response, managed firewall, vulnerability scanning,
antivirus management, and managed c-aulhentication. Integration of these services into the
control and oversight of EPA's Office of Environmental  Information (OEI) has not been fully
realized or understood. When we asked OEI staff whether the Agency and our office would have
access to  the day-to-day EPA's networks security logging data controlled by the MTIPS
contractor, staffhad no ready answers. OEI staff responded that the focus was on transition and
that security was a secondary concern, This response is concerning given that we  noted last year
lhat EPA could not identify the owners of approximately lOjjercent of the Internet Protocol (IP)
addresses that are potentially compromised due to an APT.' These compromised systems extend
to every EPA regional office and headquarters. In September 2010. the Agency stopped
w Federal Computer »'*<:*. "Google Attacks: A Wake-up Call or Curtain Call for AgcnciesT February 4.2010.
*7 Electronic ttwU from EPA's Computer Security Incident Response Capability Center, April 6. 2010.
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producing and or sharing this data with our office: thus, we do know whether EPA has remedied
this situation.

Security of EPA's network greatly depends on ongoing public- and private-sector partnerships
led by the United States Computer Emergency Readiness Team (US-CERT)/* The mission of
US-CERT is to protect the nation's Internet infrastructure and to coordinate national defense
against and responses to cyber attacks." Accordingly, il disseminates actionable cyber security
information to EPA's Computer Security Incident Response Capability Center (CSIRC), whose
goal is to protect EPA information assets and respond to actual and potential incidents.  The
unknown origins of many cyber attacks and the complex ways they compromise data networks'"1
make this ongoing collaboration crucial to the security of EPA's network. Although US-CERT
has been a key provider of cyber threat data or intelligence to the Agency, up until February
2011, EPA only had the Research Triangle Park point of presence (POP) monitored by US-
CERT sensing equipment. While EPA was waiting on the WAN 2010 upgrade lo install a sensor
at its District of Columbia POP, US-CERT did not have visibility on an estimated 8.000-10,000
EPA personnel and contractors utilizing this POP for an extended period.

The management challenge issued in FY 2010 stated, "EPA's CSIRC is expected to have
sufficient technical expertise and resources to coordinate rapid and highly skilled responses to
incidents of malicious attacks on its network." To date, the staffing resources at CSIRC arc
limited and cannot provide the required information requested by our office. We are in
discussions with OEl staff regarding procedures they should follow in handling requests from
our office that exceed their starring resources.6*

EPA is working toward acquiring, training, and deploying forensic tools and experienced
technical specialists to analyze and determine whether attackers have gained entry to EPA's
network systems, what they did while within  EPA's domain space, what information was
compromised, and what information may have been maliciously removed from the EPA
network. Our office is working with OEl on a memorandum of understanding to define roles and
responsibilities for our two offices in response to intrusion activities associated with EPA's
networks. The implementation of this memorandum of understanding and the information
gathered by the Agency's information  technology staff will benefit and support not only EPA's
operational mission, but our investigative mission as well, specifically as it relates to the
preservation of the crime scene associated with intrusion events.

To meet this challenge to EPA's network head on, EPA leadership must understand the threats to
EPA's confidential business informaiion and  the importance of minimizing  those risks. Further.
the Chief Information Officer and the Office of Technology Operations and Planning leadership
should carefully study the classified intelligence materials provided to them regarding threats
against government domains and disseminate the information to necessary offices. These
intelligence materials are especially critical as EPA's network is reportedly compromised, Last
" US-CERT website, tea:.'/ww<».uKen.gpv aboutmJitml.
* US-CERT website, -MIP  « A a M.-it-n it"- ,.•>• ly.iuj !r.:v:.
*° EPA intranet, hBTT /JBfin(lirtBKitP* HP>' oiop security 'ciirc-'aboui UA.Cfro.
"' CNNcomftetiutolf'Ki. "I.1 S aovcmmcni Sites among TTiose Mil b> Cvber Anack," July 8. 2009.
41 Reference e-mail. OEl 10 O1G, dated March 12,2011. JO: 11 AM.
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year, before reporting to our office stopped, there were approximately 7,800 EPA systems
identified as potentially communicating to known hostile IPs or domains. We note that not all
7,800 systems were compromised, but we do not know which ones were compromised.

Further. EPA leadership must clearly articulate to Confess the costs of protecting its
infrastructure and seek from Congress sufficient funds for the development of a real-time
capability to identify and analyze attacks against EPA's computer and network systems,

EPA also should compile a berter inventory' of network assets, including  intellectual properties,
and  identify where data sit on its network. EPA should also deploy a better method of identifying
and  authenticating individuals allowed to access EPA's network. Only then wiit EPA be able lo
execute a strategy that effectively protects its resources. uiirastructureT and intellectual property
from individuals and entities that intend to do harm,

In addition, EPA should aggressively address previously reported security weaknesses to
strengthen its ability to detect and respond to network attacks.6' In particular, EPA should:

        «   Implement a process that tracks  IP address assignments and documents the origin of
           all active IP addresses so responders can take quicker steps to minimize harm caused
           by APTs.M
        •   Implement a vulnerability management program to proacti%'ely identify' and correct
           commonly known vulnerabilities before they can be exploited.65
        •   Communicate high-risk vulnerability alerts more effectively throughout the Agency
           and follow up with responsible parties to ensure satisfactory remediation.'16
        •   Verily that EPA's numerous information security officers are adequately skilled to
           conduct regular vulnerability tests of their respective local area networks and systems,
           as well as successfully recognize and remediate high and medium risks in a uniform
           and acceptable manner.''
63 EPA O1G, Project Delays Prevent EPA from Implementing an Agency-wide Information Security t'ulnerabilttt
Miinajttmiaa Program Report No 09-P-0240. September 2 [. 2009.
w EPA OIG. Management of EPA Headquarters Internet Protocol Atltiressa Mff<& Improvement. Report No 08-P-
0273, September 23.2008.
°* EPA OIG. Project Delays Prevent EPA from Implementing an Agmcy-*'Hit Information Security Vulnerability
Management Program. Report No. 09-P-Q24Q. September 2I. 2009.
** EPA OIG, EPA \eedt to Strengthen Fmattiial Dulaheise Security Oversight and Monitor Compliance, Report No.
2007-P-00017. March 29,2007.
"' E?A OIG, Results ofTeehalcat ftttwork Vulnerability Assotment Region 9, Report No. 09-P-0032, December 9.
2008; EPA OIG, Results of Technical Network Vulnerability Assessment  EPA 's Radiation anil Indoor
Environments National Laboratory. Report So. Q9-P-0053. December?, 2008;  EPA OIG, Results of Technical
Network Vulnerability Assessment EPA's Las Vegas Finance Center, Report No. 09-P-0054, December 9, 2008;
EPA OIG, Results of'Technical Network I'vlnerahiloy Assessment: EPA's Research Triangle Park Campus, Report
No. 09-P-OQ55. December 9. 2008; EPA OIG. Results vf Technical Network I'ulnerabiiin Assessment. EPA
Headquarters, Report \o. 09-P-0097. Kcbruary 23. 2009; EPA OIG. Remits of Technical \chtvrk f'vlmtrot»lUy
Assessment EPA s Great £«*« National Prngram Office. Report No. 09-P-O185, June 30,2009; EPA OIG, Results
 •  :'•. ,/atwal fretwork i'ulnerabUay Assessment: EPA's National Computer Center. Report No. 09-P-OI86, June 30,
2009: EPA OIG. Rtsvia of Technical tfetwort V'ulntrabtlm Assessment  Region X, Report No. W-P-Q187, June 30,
2009; EPA OIG. Results of Technical Network Vulnerability Assessment  LPA 's Potomac Yard Buildings. Report
No, OT-P-0] B8, June 30, 2009; EPA OIG, Results ofTecitnical Newark Yulnerahtltn Assessment  EPA's 1310 L
Street Building. Report No. 09-P-OI89. June 30.2009: EPA OIG. Results cf Technical Network Futnerablluy

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       •  Take steps to improve the reliability of data used to assess the status of its
          information security program and posture with regard to known network threats. 8
       «  Train EPA's information security community on testing and documenting
          information systems security controls, and enhance the quality assurance process [o
          verify that .self-assessments evaluate all required security controls,*9
       »  Develop and implement comprehensive log review policies and procedures, establish
          a management control process to review the performance of the contractors
          conducting these reviews, and update and approve the WAN security plan and
          properly certify and accredit future significant WAN configuration changes prior to
          moving them into production.lfl
       *  Develop and implement a network traffic analysts methodology to be used to identify
          abnormal network traffic,"
       «  Deploy a system of obtaining full network packet capture of all traffic within and
          traveling outside of its domain, to have the ability to historically understand cyber'
          incidents that occur and any loss of sensitive data.

Taking these actions would enhance BPA's ability to effectively (T) identify what key data
(intellectual, confidential, privacy) have been stolen, (2) determine collateral damage to the
Agency's trusted business partners, (3) remediate threats as they occur, and (4) better defend its
network domain. EPA's limitation in these areas is alarming, because a large-scale cyber attack
could be as devastating to (he U.S. economy and infrastructure as a terrorist bombing.71

EPA's  Framework  for Assessing and Managing Chemical Risks

EPA's framework for assessing and managing chemical risks has not yet achieved the goal of
protecting human health and the environment. In 1976. Congress passed the Toxic Substances
Control Act (TSCA). authorizing EPA to collect information on, and to regulate the
production and distribution of,  chemicals. TSCA required EPA to (I) create an inventory of
"existing chemicals" already in commerce, (2) regulate unreasonable risk from "new
chemicals" introduced into commerce subsequent to the act, and (3) make health and safety
Asieamaa: EPA's Research Triangle Park Finance Center, Report No OWMJ227, August 31. 2009; EPA OIG,
Results of Technical b'tiv/ork t'tilnerabiltty Afseuments: EPA 's Andrew W. Sreidenbac'h Environmental AtueorfA
Center, Report No. IO-P-02JO, September 7,2010; EPA OIG, Results ofTectoui-ai fretwork t'utnerahitii}'
Assessment: EPA j Erlanger Building. Repofl No. IO-P-0311. September 7, 2010; EPA OIG, Results of Technical
Network VulntroW% Aauesvn&a. EPA 's Ronald Reagan Building, RtTJort No. 10-P-Q212, Sefrtember 7,2010;
F-PA OIG, Result-i a/Technical Network Vulnerability Assessment- EPA '* Region 4, Report No. 1Q-P-0213,
September 7. 2010.
™ EPA OIG, Setf-reported Data Unreliable for Assessing EPA 's Computer ."wfwrin,- Pnrgram, Report No. IO-P-
005 8, February 2,2010,
"* F.PA OIG, Improvements Needed in Key EPA Infwmativn S&ttm StewOy Praeufe.1, Report No. 10-P-fl 146, June
15,2010.
70 EPA OIG, Improvements Needed in ETA's Network Traffic Management Practices, Report Ho. 1 l-P-0159, Mareh
14,2011.
'' EPA OIG, Imprtn'maenti Needed in EPA's Network Tn$ic Management Pradit&, Report Mo. 1 l-P-0159, March
14,2011.
n CW.comftetftnategy, "U.S. at Risk of Cyber ABacks, Experts Sa>'," AugusH 18.2008.

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information available for examination while protecting manufacturers' confidential business
information,

EPA's effectiveness in assessing and managing chemical risks is hampered in part by
limitations on the Agency's authority to regulate chemicals under TSCA. When TSCA was
enacted, it authorized the manufacture and use. without any evaluation, of all chemicals that
were produced for commercial purposes in 1976 or earlier years. Tims, manufacturers of these
grandfathered chemicals were not required to develop and produce data on toxicity and
exposure, which are needed to properly and fully assess potential risks. Further compounding
this problem, the statute never provided adequate authority for LPA to evaluate existing
chemicals as new concerns arose or as new scientific information became available. As
enforcement is critical to ensuring environmental protection, while TSCA authorizes EPA to
conduct inspections, issue subpoenas, and impose civil penalties for violations, the statute
lacks the broad information-gathering and enforcement provisions found in other major
environmental protection statutes. For example. TSCA docs not provide EPA the
administrative authority to seek injunctivc relief, issue administrative orders, collect samples.
and quarantine and release chemical stocks.

On September 29, 2009, the Administration outlined core principles to strengthen U.S. chemical
management laws. Administrator Jackson testified before Congress on December 2.2009, on the
need to revise and modernize TSCA. In the absence of new legislation, we found that EPA could
better manage existing authorities. In 2010, we published a report on the New Chemicals
Program that showed that EPA did not have integrated procedures and measures in place to
ensure that new chemicals do not pose an unreasonable risk to human health and the
environment. 'JWe recommended that EPA better coordinate risk assessment and oversight
activities by establishing a management plan that contains new goals and measures that
demonstrate the results of EPA actions. Additionally, we recommended that EPA establish
criteria for selecting chemicals or classes of chemicals for low-level exposure and cumulative
risk assessments, and develop confidential business information classification criteria to improve
EPA's transparency and information sharing. Finally, we recommended that EPA develop a
management plan for Core TSCA enforcement that includes training, consistent enforcement
strategies across regions for monitoring and inspection protocols, and a list of manufacturers and
importers of chemicals for strategic targeting. The Agency agreed with our recommendations,
and in November 2010. we accepted the Agency's corrective action plan outlining the steps it
intends to take to address our recommendations.

EPA's framework for assessing and managing chemical risks from endocrine disrupters is also
failing to show results. In August 1996, Congress passed both the ! und Oualitj I'rutcuiion ACL
and amendments to the Safe Drinking Water Act. calling for the screening and testing of
chemicals and pesticides for possible endocrine-disrupting effects (i.e., adverse effects on the
development of the brain and nervous system, the growth and function of the reproductive
system, as well as  the metabolism and blood-sugar levels), EPA established  the Endocrine
Disruption Screening Program in 1998. The Endocrine Disruption Screening Program was
mandated to use validated methods for the screening and testing of chemicals to identify
71 EPA GIG, EPA Needs a Coordinated Plan to Oversee t(s Toxic Substances Central Act Kexpfmsibilniei, Report
No. 1CMMKJ66, February 17, 2010.
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potential endocrine disrupters. In 2000, EPA estimated that approximately 87,000 chemicals
would need to be screened for potential endocrine-disrupting effects. As of February 25, 2010,
EPA issued test orders to industry for 67 pesticide active inpedients and high-production
volume chemicals with some pesticide inert uses, llius, 14 years after the passage of the Food
Quality Protection Act and amendments to the Safe Drinking Water Act EPA has yet to regulate
the endocrine-disrupting effects of any chemicals.

Though we have not yet completed any additional reports on EPA's activities under TSCA, \ve
have identified some potential challenges tor the Agency. To address the unique properties of
nanornaterials and to better address children's health concerns, revisions to EPA's regulations
and management approaches may be necessary, In 2009. EPA launched a new initiative to
enhance the Agency's current chemicals management program within the limits of existing
authorities. Since then. EPA has proposed several new regulations under TSCA that may allow it
to better address both children's health and nanomaterials. As EPA implements these steps to
improve its management of chemical risks, it must institute sufficient internal controls to ensure
the success of its efforts. Specifically, the Agency should create performance measures that
demonstrate the impact and overall success in reaching the desired outcome. The Agency must
also have a clear strategy that formalizes intra-agency coordination and prioritizes activities to
maximize the impact of available resources in pursuit of its goals, ensuring that the most
significant risk areas arc addressed firs. '*
'* EPA OIG, £PA '3 Endocrine Dtsruptor Screening Program Should Establish Management Controls to Ensure
Mart Timtfy Results, Report No. 11 -P-0215, May 3,2011.
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Challenge #1 - Need for Greater Coordination of Environmental Efforts

Agency Response: The EPA maintains its position as originally stated in its April 20, 2010 response to
the Draft Special Report:  National Environmental Policy and Quadrennial Review Needed. The EPA's
view is that a national environmental policy exists in the form of authorizing statutory goals and
mandates in the National Environmental Policy Act. Further, the EPA and other federal agencies are
already coordinating on high priority, complex issues.

For example, the agency routinely coordinates with federal, state and local funding partners to facilitate
the delivery of often first time drinking water and wastewater services to small communities, while
minimizing the administrative burden on them. Coordination, collaboration and leveraging resources in
concert with program partners are key aspects of US-Mexico Border Water Infrastructure Program
implementation throughout the project selection, development and construction phases. The agency, in
coordination with its partners, uses a risk-based prioritization process to identify and fund border water
infrastructure projects that will have the greatest public health and environmental benefits. Also, the
EPA ensures that its resources are used efficiently through a program policy that stipulates the EPA
construction grants be used only as a last resort after all other possible funding sources have been
explored  and the EPA funding is deemed essential to make affordable high priority projects that
otherwise could not be implemented in communities that have limited institutional capacity. In doing so,
the EPA ensures that project funding is necessary, is directed to the communities that are most in
need, is coordinated across agencies and is not duplicative. The EPA will continue to partner,
coordinate, and leverage resources as it implements the US-Mexico Border Water  Infrastructure
Program  to address the significant public health and environmental needs along the border.

Additionally, the EPA is continuing to take the lead in working across the federal government and the
water sector to close the water infrastructure gap and move the nation's water infrastructure to  a more
sustainable footing. In October of 2010, the EPA released its Clean Water and Drinking Water
Sustainability Policy. The Policy represents the agency's efforts to bring focus to the issue and  to define
the focal  points that will affect change to reduce the infrastructure gap. The Policy emphasizes: 1) the
need for robust and effective  planning  for water infrastructure; 2) capacity development and effective
utility management to enhance the sustainability of all aspects of water sector systems; and 3)
integrating water infrastructure into cross sector planning efforts to foster the sustainability of our
communities. The EPA is actively pursuing a suite of programs and activities in each of these areas,
including efforts to encourage and work with state SRFs as they incorporate sustainability
considerations into their programs.

The agency will continue its efforts to coordinate environmental issues across the federal government
and state and local partners.

Challenge #2 - Oversight of Delegations to States

Agency Response: The EPA acknowledges that state oversight is a very complex and changeable
arena. Through federal statutes,  implementing regulations and program design, states are allowed
flexibility  in how they manage and implement environmental programs. Within the EPA, national
program  managers are directly responsible for state oversight of individual programs. The agency has
committees, workgroups, special  projects and initiatives to continuously improve agency programs
delegated to states. Below are a few examples of these programs and the efforts made to enhance
oversight or correct issues with state delegation.

Improving Oversight through Better Data Quality:

As OIG noted, having adequate data is important to the EPA's  ability to understand and oversee state
programs. The agency and its state partners continually look for ways to improve public health
protection and data quality. The EPA is undergoing a comprehensive review of SDWIS/FED and

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SDWIS/State as we develop the next generation of SDWIS, which is a key management tool for the
drinking water program. In addition, the EPA is currently working with state representatives to develop
standard definitions for facility availability codes in SDWIS and update standard operating procedures.
To ensure that emergency wells are reviewed  on an individual and recurring basis, we will issue
guidance to states regarding reviewing emergency sources as part of state oversight programs,
including sanitary surveys. This guidance will clarify that emergency sources should  be reviewed on a
recurring basis as part of routine state oversight.

Strengthening State-EPA Implementation of Water Programs:

Beginning in June 2008, ECOS Officers asked the agency to provide more collaboration at the national
level to meet the challenges of increasing workload and declining resources. In November of 2008,
work with the states culminated in the creation of the Partnership Council of the Office of Water and
States to 'test' the early and ongoing engagement of the states in planning, budgeting, and
implementation activities for the national water program. Since its creation, PCOWS  has engaged
regularly to discuss strategic priorities with the states, to ensure that core and key program activities
are given appropriate priority in budget decisions, and to identify opportunities to maximize resources
and reduce barriers in support of key joint priorities. Recently, the agency met with PCOWS to identify
opportunities to streamline and reduce burdens from administrative activities, in response to the
President's February 2011 Memorandum on Administrative Flexibility.

NPDES Program Withdrawal Requests:

The EPA currently has 21 pending NPDES authority withdrawal petitions in 16 different states. The
petitions can be broad reaching or focused on narrow issues. Three of those 16 petitions have been
filed since Jan 1 of this year. Eight Regions  have at least one petition filed within their respective states.
The last petition to be resolved was two years ago in July of 2009. Efforts have recently been re-
doubled on a national level to address the concerns cited in withdrawal petitions. These efforts manifest
in the form of increased withdrawal petition specific discussions with the Regions,  the corresponding
states, other agency offices and with Senior EPA management. While the recent efforts have yet to
result in any  new petition resolutions, the EPA is confident several will be resolved prior to the
conclusion of CY2011.

Improving RCRA Oversight and Data Limitations:

In response to the OIG's findings that the Commonwealth of Pennsylvania did not collect ground water
monitoring data at the Bruin Lagoon site as  required by the terms of the Superfund State Contract, The
EPA's Region 3 office developed new documentation procedures to address any future instances of
non-compliance. The procedures, as documented in an October 2010 memorandum from the Director
of the Office  of Superfund Site Remediation, include consulting with Regional Counsel and
documenting the non-compliance  in a letter  to the State. In instances  of continued non-compliance, the
issue will be  elevated within the EPA and the state, and counsel will determine necessary actions to
ensure a state carries out its obligations.

The RCRA program provides adequate oversight of state programs through several means. For
instance, the EPA sets out national baselines and state commitments for grant funding. The EPA
monitors the progress toward these goals through the Government Performance and Results Act and
our Annual Commitment System, through discussions with our Regions (who meet directly with states
to assess progress), and through frequent interaction with Association of State and Territorial Solid
Waste Management Officials. The RCRA program works closely with  ASTSWMO  at  the board-level, as
well as in subgroups for particular topics (e.g., corrective action,  permitting).  In addition, the EPA works
closely with states to issue  rules and guidance to address issues of concern and provide
implementation assistance for state programs.


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In terms of addressing data limitations, the agency agrees with the OIG audit recommendation as far as
making suggestions and recommendations to the States regarding the importance of document
retention. Each state creates its own policy, and we will continue to stress this during our National
Conferences and during our training sessions and outreach activity.

Improving State-EPA Collaborations Through National Environmental Performance Partnership
System:

Through the National Environmental Performance Partnership System, the EPA and the states have
developed a strategic, performance-based working relationship based on a clearer understanding of
mutual issues and priorities and improved allocation of resources. Building on this successful platform,
the EPA and the states are working together to share the workload more efficiently and effectively to
achieve environmental and public health outcomes. In FY2011, the EPA and states will collaborate on a
focused effort to identify opportunities for enhanced worksharing and resource and workload flexibility
in order to maintain the effectiveness of core programs, particularly in light of widespread state budget
reductions due to the economic downturn. The  EPA established a task force with states to determine
parameters for worksharing, identify program activities where worksharing can be more broadly applied
areas where statutes or regulations prohibit worksharing, and share best practices for effective
worksharing arrangements.

Challenge #3 - Safe Reuse of Contaminated Sites

Agency Response: Cleaning up contaminated sites and ensuring their safe reuse over the long term is
an agency priority and central to the EPA's mission. The agency believes that it is doing an effective job
of communicating site risks and remedies,  and providing site users with information needed to ensure
protectiveness.

For sites remediated under the Comprehensive Environmental Response Compensation and Liability
Act, the EPA performs five-year reviews  to ensure that sites remain protective. In rare situations where
a site is not subject to a five-year review, the EPA uses its Comprehensive Environmental Response,
Compensation and Liability Information System to identify sites where new contaminant information
may lead to questions of long-term protectiveness. Under its Return to Use Initiative, the EPA also
makes specific inquiries of the site managers and other stakeholders about new issues that might affect
site risks if the site goes into reuse.

Additionally, the EPA may select institutional controls as a component of remedial action at a site where
residual contamination remains in place. Institutional controls help minimize the potential for exposure
to contaminant and/or protect the integrity of a remedial action and are subject to the same periodic
five-year reviews as other remedy components. The agency has developed cross-program guidance,
Institutional Controls: A Guide to Planning, Implementing, Maintaining and Enforcing Institutional
Controls at Contaminated Waste Sites, which stresses the need for the EPA site managers and
attorneys to coordinate early and often with State and  local governments, tribes, responsible parties,
communities, and other stakeholders to ensure that institutional controls are  properly implemented,
maintained (monitored and reported to the EPA),  and enforced over their lifetime.

Promoting reuse sends communities a strong message about involving the EPA in their reuse
discussions. Seeing the EPA as a collaborator rather than an impediment means that communities
involve the EPA in the reuse process, allowing the agency to communicate key messages about
protectiveness. Once communities are ready to discuss a site, the EPA can offer a number of tools to
ensure the reuse is appropriate and will enhance  long-term protectiveness. These include:

   Ready for Reuse Determinations—environmental status reports that reiterate the limitations and
   opportunities associated with the reuse of sites.  While not mandatory, these may be useful for
   sharing information about the site to a broader audience.

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   Comfort and status letters—issued by the Regions to convey the status of the site remediation,
   describe site limitations and protectiveness issues, and clarify liability issues.

   Prospective purchaser inquiry calls—provide consistent and reliable information about limitations
   and opportunities at sites. Frequently, these calls result in prospective purchasers determining that
   sites are not appropriate, thereby serving their purpose of providing information prospective users
   need to understand before using a site.

   EPA-funded reuse planning—offers communities and key stakeholders the opportunity to engage in
   an informed and realistic dialogue with the EPA project managers about the reuse of sites, including
   institutional controls and long-term stewardship.

   Site reuse fact s/?eefe-highlight critical remedial  components in place, long-term maintenance
   activities and institutional controls.

The EPA will continue to explore  new tools and approaches for sharing this information to ensure that
sites remain safe for future use.

Challenge #4 - Limited Capability to Respond to  Cyber Security Attacks

Agency Response: The EPA acknowledges that Advanced Persistent Threats pose a significant
challenge for the agency, as well  as for all federal agencies. The EPA continues to make significant
progress in enhancing situational awareness across  the agency and increasing invisibility into network
activities. To address this challenge, the agency has identified specific automated tools to address
cyber security concerns that are being implemented  in a secure manner. The agency has fully deployed
a Security Information and Event Management Tool to facilitate greater vigilance in log reviews and
activity monitoring. The agency's Computer Security Incident Response Capability office is working to
build stronger relationships with internal organizations such as the Office of Homeland Security, for
threat intelligence sharing.

Challenge #5 - The EPA's Framework for Assessing and Managing Chemical Risks

Agency Response: GAO continues to identify "Transforming EPA's Processes for Assessing and
Controlling Chemicals" as a high-risk area, and OIG  continues to identify "EPA's Framework for
Assessing and Managing Chemical Risks" as a management challenge. In October 2009, the EPA
acknowledged "Streamlining Chemical Assessments Under IRIS" as an agency-level weakness under
the Federal Financial Managers' Integrity Act and has made progress in addressing concerns raised by
both oversight organization.

Improving IRIS Process:

In May 2009, the agency released a new Integrated Risk Information System process for completing
health assessments. The goal of  the new process is  to strengthen program management, increase
transparency and expedite the timeliness of  health assessments. Since that time,  the agency's  National
Center for Environmental Assessment has completed 20 assessments, more than the number of
assessments completed in the previous five  years. Additionally, the agency is making significant
progress on health hazard assessments of numerous high  priority chemicals (e.g. formaldehyde,
trichloroethylene, perchloroethylene, dichloromethane, arsenic, chromium VI, methanol,
benzo[a]pyrene and Libby asbestos), including finalizing one assessment and completing of milestones
for interagency science consultation, or external review for the others. Progress on these and other
IRIS assessments is available at  http://www.epa.gov/IRIS/. Assessments of health effects for chemicals
found in environmental mixtures including PAHs, dioxins, phthalates and PCBs are being developed.
These cumulative assessments will increase the number of chemicals that are addressed by the IRIS
Program and are based upon the expressed needs of the agency. The EPA's Human Health Risk

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Assessment program will continue to lead innovation in risk assessment science based on expanding
scientific knowledge.

The EPA recently unveiled a new database that facilitates public access to the scientific studies that
underpin key agency decisions. The Health Environmental Research Online database contains the key
studies the EPA uses to develop environmental risk assessments for the public. It includes references
and data supporting the Integrated Risk Information System which supports critical agency
policymaking. The HERO database is publicly accessible so anyone is able to review the scientific
literature behind the EPA science assessments. The HERO database strengthens the transparency of
the science supporting agency decisions.

The IRIS update  project is in a pilot phase. Toxicity values in IRIS that are more than 10 years old have
been identified, screened, and prioritized based on agency needs; the first group of 15 high priority
assessments has been selected for update. A Federal Standing Science Review Committee (FSSRC),
consisting of reviewers from the EPA and other federal agencies has been assembled. An independent
contractor will lead  and conduct independent external peer reviews of these assessments. A second
batch of nine assessments should be ready for the FSSRC by December 2011, and  a Federal Register
notice announcing a new set of 20-30 chemicals should be published  by this summer.

In July 2011, the  EPA announced additional measures to strengthen the scientific quality of IRIS
assessments based on comments from the National Academy of Sciences.  These measures include
making assessment documents clearer, shorter and more transparent. The  EPA will  evaluate the
strengths and weaknesses of critical studies in a more uniform way and  clearly indicate which criteria
were most influential in weighing scientific evidence supporting its choice of toxicity values. Also, the
EPA will continue to track progress to determine if new timelines need adjustment.

Management of Endocrine Disrupting Chemicals:

The EPA has had three major tasks to complete before it could issue test orders to pesticide registrants
and chemical manufacturers to commence testing. Validation to establish the relevance  and reliability
of the assays was the largest of these tasks. The EPA has followed a  five-stage assay validation
process that included:  1) test development, 2) pre-validation testing, 3) inter-laboratory validation
studies, 4) peer review and 5) regulatory acceptance, as described at the EDSP website:
(http://www.epa.gov/scipolv/oscpendo/pubs/assayvalidation/status.htm). Each of the first three of these
stages typically took a year or more to complete and had to be completed sequentially as the
knowledge developed in one stage was essential to the conduct of the next stage. Peer  review of these
assays was completed in mid-2008.

A second task was  the prioritization of chemicals to be screened. The EPA planned on using the high
throughput in vitro assays used by the pharmaceutical industry as a means  to rapidly identify those
chemicals that may interact with the endocrine system. In a demonstration with 65 chemicals
conducted in 1998-99, the high throughput screens failed to correctly identify most of the chemicals
known to interact with hormone receptors; thus, the EPA was forced to adopt a different approach for
selecting chemicals. A pilot demonstration of the utility of existing information led the EPA to the
conclusion that this was also not a cost-effective way to prioritize and  select chemicals for screening.  In
2005, the EPA finally proposed and took comment on using exposure information only to identify
chemicals, primarily pesticides, in the first round of Tier 1 screening. This approach led to the proposal
of the first list of chemicals for screening in 2007.

The third task was to develop the policies and procedures which would apply to test order recipients.
These include the procedures for responding to test orders, minimizing duplicative testing, providing for
data compensation, and protecting sensitive information. In addition, the EPA developed cost estimates
for conducting the Tier 1 battery which formed the basis of an Information Collection  Request submitted


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to OMB in 2008. The ICR was approved in the fall of 2009, and the first test orders were issued in
October 2009.

In addition to the Food Quality Protection Act provisions that require the screening of all pesticide
chemicals, the 1996 Safe Drinking Water Act provides the EPA with the authority to test substances
that may be found in sources of drinking water to which a substantial population may be exposed. As
instructed by the House Appropriation Committee, the EPA developed a second list of not less than 100
chemicals for screening. The agency published the second list in the Federal Register on November
17, 2010 along with a draft amended Information Collection  Request and draft policies and procedures
covering Safe Drinking Water Act chemicals. The List 2 chemicals are drawn from three sources:
chemicals that have a National Primary Drinking Water Regulation, chemicals lists on the
Contaminated Candidate List 3, and pesticides that are on the Registration Review Program schedule
for FYs 2007 and 2008. The proposed second list to receive EDSP test orders contain 134 chemicals
that are used as pesticides, personal care products, Pharmaceuticals and/or in commerce. The agency
has coordinated this effort internally and is currently reviewing and considering the comments
submitted by the public and developing responses to the public comments before finalizing the second
list.

As the EDSP progresses, the EPA continues to obtain information on endocrine related health effects.
Despite the fact that the EDSP has only begun to screen chemicals, the EPA has been obtaining useful
information regarding endocrine-related health effects, as documented by annual reports to Congress.
EPA routinely requires pesticide applicants to submit data for a range of toxicity studies (see 40 CFR
Part 158) for regulatory actions associated with the current and on-going registration of pesticide
products in accordance with the Federal Insecticide, Fungicide, and Rodenticide Act and the Federal
Food, Drug, and Cosmetic Act. A  number of these studies provide information on endocrine-related
effects. The agency evaluated 1,159 unique pesticide active ingredients and pesticide inert chemicals
in connection with the Reregistration Program, Registration  Review Program, Registration Program and
tolerance action between August 3,  1999 and September 30, 2010. Of these 1,159 chemicals for which
regulatory decisions were made, the agency received data on an estimated 600 unique chemicals that
provided information on endocrine-related effects through one or more toxicity studies. In evaluating
potential risks of a pesticide, the EPA's regulatory decisions ensure protection of human health and
wildlife from the most sensitive adverse effects observed in the information base provided through
mammalian and wildlife studies such as those required in 40 CFR  Part 158. Of the 1,159 chemicals,
endocrine-related effects were the most sensitive effects observed within the information base for 79
pesticides and, therefore, used in regulatory determination. All of the 1,159 chemicals evaluated by the
EPA meet the required statutory safety standards based on  available information.  Under the FFDCA,
the EPA has found that there is a reasonable certainty that no harm will result from exposure via the
diet and other non-occupational pathways. Moreover, in the associated registration decision under
FIFRA, the EPA has concluded that the use of the pesticides will not pose unreasonable risks to the
environment.

The agency plans to finalize the second list along with the ICR and policies and procedures covering
the SWDA chemicals. The agency also plans on implementing the EDSP for pesticides on a routine
basis by continuing to issue orders for pesticides entering Registration Review. The Registration
Review program requires all pesticides currently registered to be re-evaluated to ensure they meet
current scientific and regulatory standards.

An important part of the continuation of the EDSP is the development of a Comprehensive
Management Plan. This plan, will  detail how the program  is organized, managed, and how resources
are allocated across the agency and tasks. In addition EDSP is developing a work plan that will outline
the steps necessary to move the screening program from its current state into a new form that is less
reliant on whole animal based assays, using computational models and higher throughput/shorter time
in vitro methods to screen for the  potential for endocrine disruption. The work plan is part of the


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Comprehensive Management Plan. In response to an OIG evaluation of the EDSP, the Comprehensive
Management Plan is due to be completed in mid-calendar year 2012.

The complexity of the scientific and regulatory process associated with the full implementation of the
EDSP warrant the designation of the program as a management challenge. However, the EDSP
continues to progress towards full implementation with the on-going evaluation of the chemicals,
prioritization of the universe of chemicals and issuance of test orders.

GAO has stated that the EPA's framework for assessing and managing chemical risks has not yet
achieved the goal of protecting human health and the environment and the EPA's effectiveness in
assessing and managing chemical risks is hampered in part by limitations on the agency's authority to
regulate chemicals under TSCA. In a similar vein, OIG believes the EPA needs to transform its
processes for assessing and controlling toxic chemicals.

The EPA has announced its principles to strengthen US  chemical management laws, and initiated a
comprehensive effort to enhance the agency's current chemicals management program within the limits
of existing authorities, and is proposing expansions of that effort in the FY 2012 President's Budget.
This effort includes:

   Using all available authorities under TSCA to take immediate and lasting action to eliminate or
   reduce identified chemical risks and develop safer alternatives;

   Using regulatory mechanisms to fill remaining gaps in critical exposure and health and safety data
   for chemicals already in commerce and  increasing transparency and public access to information
   on TSCA chemicals;

   Using data from all  available sources to  prioritize chemicals for assessment and conducting detailed
   chemical risk assessments to inform and support development and implementation  of risk
   management actions; and,

   Preventing introduction of unsafe new chemicals into commerce.

Reducing Chemical Risks:

In FY 2010  and FY 2011, the  EPA increased use of regulatory authorities currently provided under
TSCA and took non-regulatory action to reduce known chemical risks. The agency:

   Issued a Final Significant New  Use Rule restricting the use of elemental mercury in  various
   measuring devices  (published in July 2010);

   Initiated a rulemaking under section 6 of TSCA to phase out or ban the use of mercury in a range of
   switches, relays, measuring devices, and other products (expected publication fall 2011);

   Published final SNURs for two  carbon nanotubes on  September 17, 2010, requiring companies to
   provide  EPA 90 days notice before they manufacture or import the two carbon nanotubes and to
   comply with restrictions the EPA had already imposed on their original manufacturer;

   Issued a proposed rulemaking  on glymes under section 5(a)(2) of TSCA to require prior notification
   to the agency of any new consumer of monoglyme, diglyme and ethylglyme;

   Issued an Advance Notice of Proposed Rulemaking on the agency's potential reassessment of its
   current authorization for PCB use and distributi9on in commerce;
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   Initiated four Alternative Assessments for BPA in thermal paper, the flame retardants decaBDE and
   HBCD, and NPE surfactants; and

   Continued implementing the global Perfluprppctampoc Acid Steward Program to reduce
   perflurooctanoic acid and related chemicals from emissions and product content, in which eight
   participating companies committed to achieve, no later than 2010, a 95% reduction in
   perfluorooctanioc acid emissions and the elimination of these chemicals from emissions and
   products by 2015 (2010 results are due in October 2011).

In FY 2012, the agency will continue expanding its portfolio of risk management actions,  including:

   Furthering implementation of risk management actions initiated in FY 2010 and continued in FY
   2011, including:

          o  Section  6 use restrictions addressing long chain perfluorinated chemicals,
             hexabromocyclododecane, lead wheel weights, and mercury used in switches and
             certain measuring devices;

          o  Section  5 Significant New Use Rules addressing; polybrominated diphenyl ethers,
             nonylphenol and nonylphenol ethoxylates, elemental mercury in products, benzidine
             dyes,  certain short chain chlorinated paraffins, certain phthalates and
             hexabromocyclododecane; and,

          o  Section  5(b)(4) chemicals of concern listings addressing phthalates, bisphenol A and
             PBDEs;

   Initiating five new risk management actions in FY 2012, including additional Section 6 use
   restrictions/prohibitions, Section 5 Significant New Use Rules and Section 5(b)(4) chemicals of
   concern listings, informed and supported by the 10 detailed chemical risk assessments to be
   initiated and completed in FY 2012 (see Assessment section below);

   Proposing, evaluating public comments and developing two final regulations implementing  ten
   actions mandated under the recently enacted TSCA Title VI (Formaldehyde Standards  for
   Composite Wood Act) establishing national emission standards for formaldehyde  in new composite
   wood products - the statute requires the EPA to finalize and promulgate these regulations by
   January 1, 2013;

   Initiating stewardship activities including commitments from industry to adopt viable safer
   alternatives, safer best practices, voluntary withdrawal of dangerous chemicals and/or products
   from the market,  and stewardship programs to reduce emissions;

   Promoting development of safer chemicals, chemical management practices and  technologies by
   assessing risks and efficacy of alternatives associated with existing chemicals which  present
   significant risks; and

   Issuing a final SNUR under section 5(a)(2) of TSCA for 14 glymes requiring persons who intend to
   manufacture, import or process these chemical substances for the designated significant new uses
   to notify the EPA at least 90 days before commencing.

The EPA has and will continue to work closely with other federal agencies,  such as FDA and CPSC, to
coordinate efforts on these chemicals.
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Obtaining, Managing and Making Public Chemical Information:

In FY 2010 and FY 2011, the EPA increased its use of TSCA regulatory authorities to meet critical
existing chemical data needs and increase transparency and public access to chemical information,
including:

   Publishing the Final HPV Test Rule 2, covering 19 chemicals

•   Advancing the Proposed HPV Test Rule 3, covering 29 chemicals

•   Advancing the Proposed HPV Test Rule 4, covering an anticipated 29 chemicals

   Issuing a new confidential business information policy for review of CBI  chemical identify claims for
   TSCA Section 8(e) notices of substantial risk in January 2010, and a notice of a new policy in May
   2010 for review of CBI chemical identify claims for all health and safety studies to allow the public
   access to important information that would have otherwise remained secret;

   For the first time ever, providing in FY 2010 free online access to the TSCA Chemical Substance
   Inventory, allowing the public easy and free access to the listing of 84,000 chemicals in commerce;

   Integrating information on  3,800 TSCA facilities and 6,300 chemicals into Envirofacts, the EPA's
   single point of access on the internet for information about environmental activities;

   Proposing to modify the 2006 TSCA Inventory Update  Reporting rule that would require
   manufacturers, including importers, to submit information electronically, make the data public more
   quickly, limit the information that can be treated as confidential, and require more reporting from
   chemical manufacturers;

   Developing a  PMN/CBI Amendment for PMN submissions claiming chemical  and micro-organism
   identify as confidential in health and safety studies submitted under TSCA prior to the
   commencement of manufacturer; and

   Initiating development of a Sunset Provision relating to claims for CBI submitted under the TSCA
   that would require the periodic reassertion and resubstantiation of such claims (NPRM is scheduled
   to publish in 2012).


In FY 2012, the EPA will continue expanding use of regulatory mechanisms to fill remaining gaps in
critical exposure and health and safety data for chemicals already in commerce, improve management
of TSCA information resources and maximize their availability and usefulness to the  public, including:

   Issuing and implementing  TSCA Section 4 Test Rules to obtain data needed to evaluate the safety
   of existing chemicals, including:


          o  More than 100  HPV chemicals not sponsored under the HPV Challenge Program;

          o  125 or more chemicals newly identified as HPV chemicals in TCSA Inventory Update
             Reports submitted to the EPA in 2011; and,

          o  Several other chemicals including bisphenol A and certain nanoscale  materials;
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   Implementing the expanded TSCA Inventory Update Reporting rule to develop more robust
   exposure data sets on all reported chemicals—not just HPV chemicals—and rapidly make those
   data publicly available:


          o  In August 2010, the EPA proposed modifications to the IUR rule under section 8 of
             TSCA, presenting a range of options for public comment to make the reporting of
             chemical use information more transparent, more current,  more useful and more useable
             by the public; and

          o  The EPA expects to issue  final amendments in FY 2011 and in FY 2012 to process
             submission of 2011 IUR data reports for approximately 6,000 to 7,000 chemicals
             produced in volumes of greater than 25 thousand pounds per year.

   Increasing transparency by reviewing all new TSCA chemical health and safety studies claimed in
   FY 2012 as CBI and 4,400 CBI cases submitted prior to 2010, challenging claims and declassifying
   studies where appropriate;

   Digitizing over 20,000 TSCA documents received under TSCA Sections 4, 5 and 8, and making
   those data, where appropriate, available to the public; and,

   Expanding electronic reporting to include all TSCA health and safety submissions and fully
   deploying 21st century information technology to more effectively and efficiently store and
   disseminate TSCA  information.

Screening and Assessing Chemical Risks:

In FY 2012, the EPA will assess the risks of priority chemicals to determine what risk management is
needed and to inform and support development and implementation of risk management actions, as
appropriate, including:

   Initiating twelve detailed chemical  risk assessments of priority chemicals that will inform the need
   for and support development of risk management actions, with seven of the assessments being
   completed in FY2012;

   Developing hazard  characterizations for 500 additional HPV chemicals using the data obtained
   through TSCA test  rules, the TSCA IUR and previous voluntary industry submissions, bringing the
   cumulative total by  the end of FY 2012 to 2,165 of the 2,900 HPV chemicals identified prior to the
   2011 TSCA IUR;

   Increasing use of intelligent testing approaches to improve our ability to understand chemical risks;

   Developing methodologies and tools to better assess risks from high priority chemicals such as
   PBT chemicals in consumer products to support risk management actions on these chemicals;

•   Analyzing the data  the EPA has received through its Nanoscale Materials program to understand
   which nanoscale materials are produced, in what quantities, and what other risk-related data are
   available. The EPA will use this information to understand whether certain nanoscale materials may
   present risks to human health and the environment and warrant further assessment, testing or other
   action; and

   Enhancing the RSEI tool to help identify geographic areas with particularly high risk scores
   associated with toxics releases and the facilities and chemicals responsible for those conditions.
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Preventing Introduction of Unsafe New Chemicals Into Commerce:

Through its New Chemicals Program, the EPA serves as America's gatekeeper for Industrial and
commercial chemicals, ensuring that new chemicals introduced into U.S. commerce do not pose
unreasonable risks to humans or the environment. In January 2010, the EPA published a final rule that
enables and, by April 6, 2012 requires manufacturers and importers to submit PMNs and other TSCA
Section 5 documents to the EPA electronically via the internet. The agency developed software to
assist companies in preparing and executing their electronic submissions and is conducting training
sessions via webinar and other means to help companies prepare to comply with these new
requirements.

In FY 2006 to measure performance under the New Chemical Program, the EPA adopted a measure to
reflect the program's statutory mission, establishing a "zero tolerance" performance standard for the
number of new chemicals or micro-organisms introduced into commerce that pose an unreasonable
risk to human health or the environment.
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                               IMPROPER PAYMENTS

In accordance with the Improper Payments Elimination and Recovery Act of 2010, which amends the
Improper Payments Information Act of 2002, the EPA reviews its programs and activities for improper
payments. The EPA is committed to improving program performance by taking corrective action for any
programs that are determined to be susceptible to significant improper payments. IPERA defines an
improper payment as any payment that should not have been made or that was made in an incorrect
amount (including overpayments and underpayments) under statutory, contractual, administrative or
other legally applicable requirements. Improper payment reviews are conducted in accordance with the
OMB Circular A-123, Management's Responsibility for Internal Control, Appendix C, Requirements for
Effective Measurement and Remediation of Improper Payments.

I. Risk Assessments

OMB Circular A-123, Appendix C, requires executive agencies to conduct risk assessments of their
programs or activities to determine if programs are susceptible to significant improper payments. Given
the large number of small, unique programs at the EPA, OMB has approved the agency's method of
reporting on improper payments by payment stream. Every year, the EPA conducts quantitative risk
assessments of its principal payment streams - grants, contracts, commodities, and the Clean and
Drinking Water State Revolving Funds. The SRFs are former Section 57 programs for which OMB
requires detailed reporting. Results from the agency's risk assessments are published below in Section
IV, "Improper Payments Reporting." These quantitative risk assessments demonstrate that the EPA's
principle payment streams are not "susceptible to significant improper payments", defined by OMB as
exceeding both $10 million of improper payments and 2.5 percent of program outlays.

II. Statistical Sampling
A) State Revolving Funds

ARRA provided the SRFs with an additional $6 billion of spending authority. As a result, during the FY
2010 and FY 2011 improper payments reporting cycles, the SRF program broadened its sampling
process to include state expenditures of ARRA funds. This involves the testing of four cash draws per
state - twice per year - during the EPA's on-site visits. Similarly, the sampling of base appropriations
involves the testing of at least four cash draws per state per year. A cash draw is a disbursement from
Treasury for the payment of state grants. Each disbursement can refer to a single invoice or a batch of
invoices, which are reviewed by the EPA for improper payments. Of the total $3.6 billion in SRF
outlays, approximately $1.7 billion consisted of ARRA funds. Furthermore, of the total $14.2 million of
improper payments identified, 97.6 percent originated from ARRA funds, and 2.4 percent originated
from base appropriations. Although a majority of SRF errors originated from the ARRA  program, 90
percent of ARRA funds have now been disbursed. In addition, with less than $350,000  of errors
identified in the base program, this small amount is a good indication of the low level of long-term risk in
the SRF program.

It should be noted that the transaction testing conducted by the EPA during FY 2011 pertains to
expenditures made by the states during State FY 2010. In most cases, the State FY begins on July 1
and ends on June 30. Given the time lapse between the states' expenditure of SRF funds and the
implementation of the EPA's on-site reviews, the agency has obtained OMB's approval to continue
using the preceding State FY as its alternative twelve-month reporting period for SRF improper
payments.

B) Grants

Every November since 2006, a list of recipients with active grants receiving more than $20,000 during
the prior fiscal year is  pulled from  the Integrated Grants Management System. From this list, a sample

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of 60 nonprofit recipients is selected for detailed review. The recipients are randomly assigned to either
a Desk Review or an On-Site review. Each review is conducted in accordance with standard protocol,
and a checklist is provided to the reviewers as a guideline. A minimum of three non-consecutive draws
from different grants is reviewed for each recipient, and the recipient is required to provide supporting
documentation for the selected draws. Examples of supporting documentation include approval
signatures, timecards, contracts and invoices. The type of supporting documentation may vary,
depending on the programs or services supported by the  grants.

Based upon  historical data, the EPA considers the nonprofit grantees to be at greater risk of improper
payments than all other grantees. As a result, the agency specifically analyzes the nonprofits for
improper payments, using them as a proxy for all grants. However, since IPERA requires agencies to
expand their efforts at identifying and recapturing  improper payments, the EPA has broadened its
sampling, review and reporting process to include state and local governments, universities and tribes.
This expanded sampling began during Calendar Year 2011, and results of these reviews will be
available for inclusion in the agency's FY 2012 improper payments report. The ongoing Calendar Year
2011 review includes the random selection of 120 grant recipients, which are stratified into higher-risk
and lower-risk categories. These two categories were developed based upon  an analysis of five years
of post award reviews. Of the 120 grant recipients, 90 recipients were selected proportionally from the
higher-risk group consisting of nonprofits, local governments and  tribes, and 30 recipients were elected
proportionally from the lower-risk group consisting of state governments and universities. Preliminary
data indicate that the EPA's grants will remain below the OMB threshold for susceptibility to significant
improper payments and full results will be published in the agency's FY 2012 improper payments
submission.

C) Commercial Payments (contracts and commodities)

In February 2006, the agency centralized all commercial payments at the Research Triangle Park,
North  Carolina Finance Center, as part of an A-76 competition won by the agency. Previously, all non-
contract (Simplified Acquisitions, utilities, training) invoices were paid by the 10 regional finance
centers. The consolidation resulted in much greater discipline  in the management and internal controls
through the center's standardization of standard operating procedures and sophisticated payment
systems.

The EPA does not use a statistical sampling methodology in its audit of commercial improper payments
since each payment is subject to financial review, invoice approval and payment certification. Various
post audits are performed as  well. The following provides a brief summary of process controls in place
on the agency's commercial invoice payment process.

The payment processing cycle requires all invoices be subjected to rigorous review and approval by
separate entities. Steps taken to ensure payment accuracy and validity, which serve to prevent
improper payments from occurring include: 1) the Finance Center's review for adequate funding and
proper invoice acceptance, 2) comprehensive system edits to  guard  against duplicate payments,
exceeding ceiling cost and fees, billing in wrong period of performance dates,  and payment to wrong
vendor, 3) electronic submission to agency Project Officers and Approving Officials, with a copy of the
invoice, for validation of proper receipt of goods and services,  period of performance dates, labor rates,
appropriateness of payment,  citing disallowances or disapprovals of  costs if appropriate and 4) review
by the Finance Center of suspensions and disallowances, if taken, prior to the final payment
certification for Treasury processing. Additional preventive reviews are performed by the Finance
Center on all credit and re-submittal invoices. Additionally, agency Contracting Officers perform annual
review of an invoice on each contract they administer, and DCAA audits are performed at the request of
the agency on large cost reimbursable contracts.

Additionally,  monthly Finance Center Improper Payment Reports  are provided to agency management.
This information tracks the number and dollar amount of improper payments, the source and reason for

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the improper payment, the number of preventive reviews conducted, and the dollar amount of
recoveries made for current and prior years.

III. Corrective Actions

As published in previous improper payment reports, the EPA has demonstrated great success at
maintaining low rates of improper payments in its principle payment streams. In FY 2011, it was
determined that none of the EPA's payment streams was susceptible to significant improper payments.
The agency maintains an internal payment recapture audit program that prevents, identifies and
recovers improper payments. Of the improper payments that are identified, most of them consist of
Administrative and Documentation errors, which arise from the incorrect processing of payments.
Typical root causes of error include payments in the wrong amount, duplicate payments and payments
to an incorrect vendor. The agency  has consistently maintained  low rates of improper payments across
all payment streams. As a result, the EPA emphasizes adherence to sound internal  controls, which
serve to prevent the occurrence of improper payments, and aggressively recovers any that do occur.

In addition to the agency's existing improper payment reviews, the EPA initiated an agency-wide effort
in 2011 to review and verify implementation of the Recovery Act Stewardship Plan, the agency's
comprehensive risk assessment and risk mitigation strategy for its ARRA-funded activities. The policy
verification included a statistical random sample of 110 awards across seven functional areas, including
grants, contracts, and interagency agreements. Drawing directly from the RASP, the agency developed
a review protocol based on: 1) the risks identified in the RASP and 2) the associated policies and
procedures established by the RASP to mitigate each identified risk. Detailed, on-site reviews were
then conducted for each sample award in the EPA regions, finance centers and headquarters program
offices.

A number of review elements, such as indirect cost rate agreements, focus on improper payments.
Though the report is still pending, once the report is finalized,  OCFO will better understand the
estimated scope of improper payments across all ARRA award activities, as well as corrective actions.

IV. Improper  Payment Reporting
A) State Revolving Funds

The SRFs are state-administered programs that provide Federal funds  to the states and Puerto Rico to
capitalize revolving loan fund programs. The states receive invoices from fund recipients (e.g.,
municipalities), review them for eligibility and accuracy, and electronically submit cash draw requests
for a batch of  invoices to the EPA. The agency makes payments to the  revolving loan funds and
conducts annual on-site reviews in each state. The EPA conducts transaction testing, reviews invoices
for eligibility, confirms that the total amount of invoices matches the amount of cash  draw, and
examines accounting records to confirm that the states made matching deposits.

Prior to IPERA, the agency established an overall improper payments target of 0.30 percent for the
SRFs. This target remains an ambitious one, and the EPA has been consistent in meeting it over the
years. In FY 2011, it was determined that the SRFs  made improper payments totaling $14.2 million,
with an error rate of 0.39 percent, indicating that they remain below the OMB threshold for significant
improper payments. Historical SRF  improper payments data are summarized below:
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Figure 1 : Clean Water and Drinking Water SRFs
(Figures 1-4 provide information on the EPA's payment streams, supplementing Tables 1-6 from Circular A-1 36)
Fiscal Year
2007
2008
2009
2010
2011
Outlays
$2.3 billion
$2.1 billion
$1.9 billion
$4.8 billion
$3.64 billion
Improper Payments
$1.64 million
$8.3 million
$1.1 million
$1.8 million
$14.18 million
Error Rate
0.07 percent
0.39 percent
0.06 percent
0.04 percent
0.39 percent
As a result of transaction testing and its oversight of state activities, the SRF program vigorously
recovers overpayments. During its annual reviews, the agency tests four base transactions and eight
ARRA transactions per state, examining all  associated invoices. Whenever improper payments are
identified, the EPA's financial analysts discuss them with the state during the review. Many of the
payment errors are immediately corrected by the state or can be quickly resolved by adjusting a
subsequent invoice. For issues requiring more detailed analysis, the state provides the agency with a
plan for resolving the improper payments. This agreement is described in the agency's Program
Evaluation Report, and the EPA follows up with the state to ensure compliance. As a result of this
process, the SRF program is highly successful at correcting errors and recovering improper payments.
In the current year, the SRF program achieved a recovery rate of 99.9%.

                        Table 1: Improper Payment Reduction Outlook
              (Dollars in Millions; Tables 1-6 refer to the corresponding tables in OMB Circular A-136)



Clean
Water and
Drinking
Water SRFs
(1)

FY10 FY10 FY10
Outlays IP% IP$

$4,800

030
target
0.04
actual

$3.5

FY11 FY11
FY11 FY11 FY11 Over- Under-
Outlays IP% IP$ pmt pmt

$3,645

030
target
0.39
actual

$14.18


$14.17


$0.01


FY12 FY12 FY12
Outlays IP% IP$

$3,562
[est.]


0.30
target


$10.7
[est.]


FY13 FY13 FY13
Outlays IP% IP$

$3,289
[est.]


0.30
target


$9.9
[est.]


FY14 FY14 FY14
Outlays IP% IP$

$3,300
[est.]


0.30
target


$9.9
[est.]

       (1) The SRF program is listed here because it is a former Section 57 program of OMB Circular A-11. However, the SRF program
       does not exceed OMB's threshold for significant improper payments of $10 million and 2.5 percent of program outlays.

B) Grants

The EPA continues to monitor grantees to ensure payment accuracy and recover improper payments.
In Calendar Year 2010, the agency sampled 59 active, nonprofit grantee recipients to identify improper
payments. Of these 59 grantees, five had actual erroneous payments.

It should be noted that, similar to the SRFs, the EPA has obtained OMB's approval to continue using an
alternative twelve month period for reporting improper payments for grants. The agency uses the prior
calendar year as its twelve-month reporting period for conducting grantee reviews. In the FY 2011
improper payments reporting cycle, the EPA is publishing the results of grantee reviews conducted
during Calendar Year 2010. In Calendar Year 2011, the EPA has expanded its sampling of recipients to
include state and local governments, universities and tribes, and will publish the result of these reviews
in the FY 2012 improper payments report.

Results from the past five reviews are provided in the table below. The table also updates information
on recovered costs and results from the appeals process for these years.
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Figure 2: Nonprofit Grantees Review/Audit Results

Nonprofit Grantees
Review/Audit
Results
Total dollars drawn
Actual erroneous
payments
(unallowed costs)
Costs that have
been recovered
Percent of
erroneous payments
CY 2006
Review
$29,373,772
$39,167
$19,798
0.133%
CY 2007
Review
$22,544,462
$13,433
$13,433
0.059%
CY 2008
Review
$120,209,284
$111,329
$111,329
0.093%
CY 2009
Review
$10,258,129
$12,697
$4,647
0.124%

CY2010
Review
$21,242,755
$7,110
$7,110
0.033%
In addition to the sampling process described above, the EPA maintains internal controls to help
prevent the occurrence of improper payments in grants. Since 2008, the agency has implemented
annual "baseline" monitoring of all active assistance agreements that review fund drawdowns for
appropriateness. As part of the baseline monitoring, each assistance agreement is reviewed
programmatically by a Project Officer, and administratively by a Grants Specialist. Both the Project
Officer and Grants Specialist review financial drawdowns for consistency with the project's duration and
progress. Any irregularities found are examined with the recipient and further scrutinized when
warranted.  Project Officers also review quarterly reports submitted by recipients, to ensure projects are
on schedule and progress matches the amount of funding used. Additionally, the EPA's Las Vegas
finance center routinely monitors grant payments made under the agency's Automated Standard
Application Payment system for irregularities.

C) Commercial Payments

Due to the historical low percentage of improper payments in the contracts and commodities payment
streams, the EPA relies on its internal review processes to detect and recover associated improper
payments. Additional post audit findings (OIG, A-123, DCAA) that warrant inclusion of improper
payments are captured in Table 6  below. The agency continues to use its monthly Improper Payment
Reports for both contracts and commodities as its primary tool for monitoring improper payments.
Combined,  the agency processed  79,000 commercial payments for $1.9 billion in FY 2011,
representing an overall improper payments rate of 0.12 percent, with a recovery rate of 99.7 percent.
Data for FY 2007 through FY 2011 for contracts and commodities are summarized below.

Contracts:
Figure 3: Results of the EPA's Improper Contract Payments Report

Fiscal Year
2007
2008
2009
2010
2011 (1)
Number of Erroneous
Payments
14 (of 29,828)
12 (of 32,043)
31 (of 35,929)
35 (of 39,060)
21 (of 38,965)
Erroneous Payments
(Dollars in Thousands)
$65.3
$324.0
$716.4
$882.6
$162.9
Error Rate for
Dollars
0.01%
0.03%
0.05%
0.08%
0.01%
       (1) DCAA audit results are presented in Table 6.
                                             187

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Commodities:
Figure 4: Results of the EPA's Improper Commodity Payments Report

Fiscal Year
2007
2008
2009
2010
2011
Number of Erroneous
Payments
63 (of 45, 859)
48 (of 43,629)
32 (of 41, 585)
34 (of 39,571)
44 (of 40, 083)
Erroneous Payments
(Dollars in Thousands)
$176.5
$215.4
$193.7
$166.3
$2,178.5(1)
Error Rate for
Dollars
0.06%
0.08%
0.07%
0.05%
0.67%
       (1) A single overpayment in the amount of $1,664,837 represents 76 percent of all commodities improper payments
       identified in FY 2011. It was paid to the vendor instead of the vendor's assignee and was immediately recovered.

V. Recapture of Improper Payments
The EPA maintains an internal payment recapture audit program run by agency employees who
continuously monitor the agency's payment streams to prevent, identify and recover improper
payments. In FY 2004, the EPA contracted with a recovery auditor to sample a universe of $6.5 billion
of contracts and commodities outlays. It was determined that the agency made only $50 thousand of
improper payments during a period of five fiscal years, demonstrating the EPA's success at preventing
improper payments. The recovery auditor noted in its final report that "The total recovery represents an
error rate that is materially negligible in relation to the volume of transactions processed during our
audit period."

Based upon this experience, the EPA determined that it would  be preferable to establish an internal
payment recapture audit program, in lieu of contracting with a recovery auditor. The agency's payment
recapture audit program consists of agency employees reviewing grants, contracts, commodities and
the SRFs for improper payments. No programs or activities are excluded from these reviews.2

The EPA's payment recapture audit program has recovered approximately $20.8 million across all
payment streams. This amount consists of approximately $1.8  million from contracts, $4.0 million from
commodities (beginning in FY 2004 for each), $156,000 from grants (beginning with the CY 2006
review), and $14.9 million from the SRFs (beginning with the FY2010 review).
 A-123 reviews of payroll, travel, and purchase cards efforts are an integral internal control mechanism for reducing improper payments, but
these areas are not required for reporting under IPERA. As they involve payments to federal employees, they are exempt from the definition of
improper payments, per OMB M-11-16, question 2.

                                               188

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                                           Table 2: Payment Recapture Audit Reporting
                                     (Tables 1- 6 refer to the corresponding tables in OMB Circular A-136)
Program
or Activity




SRFs(l)
Grants (2)
Contracts
(3)
Commodities
Type of
Payment




grants
grants
contracts
small
purchases
Amount Subject
to Review for CY
Reporting




3,644,665,300
21,242,755
1,600,132,236
326,151,314
Actual Amount
Reviewed and
Reported (CY)




1,129,881,840
5,745,676
1,600,132,236
326,151,314
Amount
Identified for
Recovery
(CY)



14,165,798
7,110
20,570
2,178,910
Amount
Recovered
(CY)




14,154,293
7,110
20,570
2,150,810
%of
Amount
Recovered
out of
Amount
Identified
(CY)
99.9%
100%
100%
98.7%
Amount
Outstanding
(CY)




11,505
0
0
28,100
% of Amount
Outstanding
out of
Amount
Identified
(CY)

0.1%
0%
0%
1.3%
Amount
Determined
Not to be
Collectable
(CY)


0
0
0
0
% of Amount
Determined Not
to be
Collectable out
of Amount
Identified (CY)

0%
0%
0%
0%
Amounts
Identified for
Recovery
(PYs)



726,577
176,626
1,772,200
1,844,089
Amounts
Recovered
(PYs)




726,577
149,207
1,772,200
1,841,448
Cumulative
Amounts
Identified for
Recovery
(CY + PYs)


14,892,375
183,736
1,792,770
4,022,999
Cumulative
Amounts
Recovered
(CY + PYs)



14,880,870
156,317
1,792,770
3,992,258
Cumulative
Amounts
Outstanding
(CY+PYs)



11,505
27,419(4)
0
31,850
Cumulative
Amounts
Determined
Not to be
Collectable
(CY+PYs)

0
0
0
1,200
(1)  For the SRFs, in Tables 2-6, "Current Year" refers to the transaction testing conducted during State FY 2010, and "Prior Year" refers to the transaction testing conducted
    during State FY 2009.
(2)  For grants, in Tables 2-6, "Current Year" results are from reviews performed in Calendar Year 2010, and "Prior Year" results are from reviews performed in Calendar Years
    2006-2009.
(3)  For contracts and commodities, "Current Year" refers to FY2011, and "Prior Year" refers to FY 2004-2010.
(4)  In certain instances, recipients continue to appeal the agency's unallowed cost determinations for prior years.

                                              Table 3: Payment  Recapture Audit Targets
Program or
Activity
SRFs
Grants
Contracts
Commodities
Type of
Payment
Grants
Grants
Contracts
small purchases
CY
Amount
Identified
$14,165,798
$7,110
$20,570
$2,178,900
CY
Amount
Recovered
$14,154,293
$7,110
$20,570
$2,150,800
CY
Recovery Rate (Amount
Recovered /Amount
Identified)
99.9%
100%
100%
98.7%
CY+1
Recovery
Rate Target
87%
80%
90%
90%
CY + 2
Recovery
Rate Target
89%
85%
91%
91%
CY + 3
Recovery Rate Target
90%
87%
92%
92%
                                                                    189

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                                            Table 4: Aging of Outstanding Overpayments
Program or
Activity
SRFs (1)
Grants (2)
Contracts
Commodities
Type of
Payment
grants
Grants
Contracts
small purchases
CY Amount Outstanding
(0-6 months)
$11,505
$0
$0
$28,100 (3)
CY Amount Outstanding
(6 months to 1 year)
$0
$0
$0
$0
CY Amount Outstanding
(over 1 year)
$0
$0
$0
$0
       (1)  For the SRFs, "Current Year" data refers to the state reviews conducted during State FY 2010. This table shows amounts outstanding for the
           SRFs, beginning Oct. 1,2010.
       (2)  For grants, "Current Year" results are from reviews performed in Calendar Year 2010.
       (3)  Three commodities overpayments were detected in September 2011, totaling $28,100. They will be recovered in FY2012.

                                              Table 5: Disposition of Recaptured Funds
Program or
Activity (1)
SRFs
Grants (2)
Contracts
Commodities
Type of Payment
grants
grants
contracts
small purchases
Agency Expenses to
Administer the Program
$66,994
$23,183
$17,123
$13,528
Payment
Recapture
Auditor Fees
$0
$0
$0
$0
Financial
Management
Improvement
Activities
$0
$0
$0
$0
Original
Purpose
$0
$0
$0
$0
Office of
Inspector
General
$0
$0
$0
$0
Returned to
Treasury
$0
$0
$0
$0
(1)  No recoveries originated from expired funds appropriated after the enactment of IPERA. Therefore, all recoveries were returned to their original appropriation.
(2)  Since the SRFs are revolving loan funds, all SRF recoveries are automatically returned to the program (per OMB's guidance).

                            Table 6: Overpayments Recaptured Outside of Payment Recapture Audits
Source of Recovery
SRF Single Audit
Reviews
SRF state testing
DCAAAudits(l)
Amount
Identified
(CY)
$10,504
$379,758
$97,198
Amount
Recovered
(CY)
$10,504
$379,758
$97,198
Amount
Identified
(PY)
n/a
n/a
n/a
Amount
Recovered
(PY)
n/a
n/a
n/a
Cumulative
Amount
Identified
(CY+PYs)
$10,504
$379,758
$97,198
Cumulative
Amount
Recovered
(CY+PYs)
$10,504
$379,758
$97,198
         (1) As shown in the "Defense Contract Audit Agency Audits" section of the AFR, $97,198 was collected. Of the $2,538,189 reported as "Other", $1,979,255 is related
            to indirect cost rate adjustments, which are not considered to be improper payments since contracts are allowed to bill at a provisional indirect cost rate. The
            remaining $558,934 is subject to further review due to late receipt of information.
                                                                   190

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VI. Accountability

As previously outlined, the agency continues to strengthen already strong internal controls in
key payment processes. Information on erroneous payments from reviews and audits of the two
SRFs, the EPA's largest grant programs, is reported semi-annually to management in both the
Office of Water and the OCFO. In all cases, action is taken with the appropriate officials to
ensure that improper payments are recovered and to avoid future improper payments.

VII. Agency Information Systems and Other Infrastructure

The agency's internal controls, human capital, information systems and other infrastructure are
sufficient to monitor the reduction of improper payments to targeted levels.

VIM. Barriers

None.

IX. Conclusions

The agency's internal payment recapture audit program has been  highly effective at identifying
and recovering overpayments. In the first year of IPERA reporting, all of the EPA's payment
streams have already exceeded OMB's recovery target rate of 85  percent by FY 2013. Although
the agency's payment streams continue to demonstrate low levels of risk for improper
payments, the EPA plans to continue assessing risk annually.

In addition, the agency commits to the following  activities in FY 2012:

    Maintain a higher level of sampling for SRF base funding by reviewing at least four cash
    draws per state per year.

    Report results from the expanded Calendar Year 2011 review of state and local
    government, university,  tribe and nonprofit grantees.
                                         191

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 Appendix A
Public Access
      192

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The EPA invites the public to access its newly redesigned website at www.epa.gov to obtain the
latest environmental news, browse agency topics, learn about environmental conditions in their
communities, obtain information on interest groups, research laws and regulations, search
specific program areas, or access the EPA's historical database.

American Recovery and Reinvestment Act of 2009: www.epa.gov/recovery

EPA newsroom: www.epa.gov/newsroom
   News releases: www.epa.gov/newsroom/newsreleases.htm
   Regional newsrooms: www.epa.gov/newsroom/tfregions

Laws, regulations, guidance and dockets: www.epa.gov/lawsregs
   Major environmental laws: www.epa.gov/lawsregs/laws/index.html
   EPA's Federal Register website: www.epa.gov/fedrgstr

Where you  live: www.epa.gov/epahome/whereyoulive.htm
   Search your community: www.epa.gov/epahome/commsearch.htm
   EPA regional offices: http://www.epa.gov/epahome/regions.htm

Information sources: www.epa.gov/epahome/resource.htm
   Hotlines and clearinghouses: www.epa.gov/epahome/hotline.htm
   Publications: www.epa.gov/epahome/publications.htm

Education resources: www.epa.gov/epahome/students.htm
   Office of Environmental Education: www.epa.gov/enviroed

About EPA: www.epa.gov/epahome/aboutepa.htm
   EPA organizational structure: www.epa.gov/epahome/organization.htm

EPA programs with a geographic focus: www.epa.gov/epahome/places.htm

Partnerships: www.epa.gov/partners
   Central Data Exchange: www.epa.gov/cdx
   Business Guide to  Climate Change Partnerships:
   www.epa.gov/partners/Biz guide  to  epa climate partnerships.pdf

EPA for business and nonprofits: www.epa.gov/epahome/business.htm
   Small Business Gateway: www.epa.gov/smallbusiness
   Grants, fellowships, and environmental financing: www.epa.gov/epahome/grants.htm

Budget and performance: www.epa.gov/performance/

Careers: www.epa.gov/careers
   EZ Hire: www.epa.gov/ezhire

EPA en Espanol: www.epa.gov/espanol
EPA ^^t:  ^Hlft£: www.epa.gov/chinese
EPA 3*3C:  l^tffi^: www.epa.gov/chinese/simple/
EPA tiing Viet: www.epa.gov/vietnamese
EPA t.1"^"0!: www.epa.gov/korean
                                       193

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       Appendix B




A cronyms and A bbre via tions
            194

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APR        Agency Financial Report
APR        Annual Performance Report
ARRA       American Recovery and Reinvestment Act
ASSERT     Automated System Security Evaluation and Remediation Tracking

BPD        Bureau of Public Debt

CBI         Confidential Business Information
CERCLA     Comprehensive Environmental Response Compensation and Liability Act
CFC        Cincinnati Finance Center
CFO        Chief Financial Officer
CO         Contracting Officer
CPC        Contractor Property Coordinator
CPIC        Capital Planning and Investment Control
CWA        Clean Water Act

DCAA       Defense Contract Audit Agency
DHS        U.S. Department of Homeland Security
DOJ        U.S. Department of Justice
DOT        U.S. Department of Transportation
DWSRF     Drinking Water State Revolving Fund

EAS        U.S. Environmental Protection Agency Acquisition System
ECHO       Enforcement and Compliance History Online
EPA        U.S. Environmental Protection Agency
EPM        Environmental Programs and Management

FAS        Fixed Assets Subsystem
FASAB      Federal Accounting Standards Advisory Board
FBWT       Fund Balance with Treasury
FECA       Federal Employees Compensation Act
FERS       Federal Employees Retirement System
FFDCA      Federal Food, Drug and Cosmetic Act
FFMIA       Federal Financial Management Improvement Act of 1996
FIFRA       Federal Insecticide, Fungicide and Rodenticide Act
FISMA       Federal Information Security Management Act
FMFIA       Federal Managers' Financial Integrity Act of 1982
FQPA       Food Quality Protection Act
FSSRC      Federal Standing Science Review Committee
FY          Fiscal Year

GAAP       Generally Accepted Accounting Principles
GAO        Government Accountability Office
GIS         Geographical Information System
GSA        U.S. General Services Administration

HPV        High Production Volume

ICIS        Integrated Compliance Information System
ICR         Information Collection Request
                                       195

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IFMS        Integrated Financial Management System
IP          Improper Payment
IPERA      Improper Payments Elimination and Recovery Act
IPIA         Improper Payments Information Act
IRIS         Integrated Risk Information System
IUR         Inventory Update Reporting

LUST       Leaking Underground Storage Tank

MAS         National Academy of Sciences
NPDES      National Pollutant Discharge Elimination System
NPL         National Priorities List

OCFO      Office of the Chief Financial Officer
ODD        Operating Division Director
OECA      Office of Enforcement and Compliance Assurance
OEI         Office of Environmental Information
OFM        Office of Financial Management
OIG         Office of the Inspector General
OMB        Office of Management and Budget
OPM        Office of Personnel Management
ORD        Office of Research and Development

PAH         Polyaromatic Hydrocarbon
PAR         Performance and Accountability Report
PCBs       Polychlorinated Biphenyls
PCOWS     Partnership Council of the Office of Water and States
PCS         Permit Compliance System
PM         Performance Measure
PMN        Pre-Manufacture Notice
PP&E       Plant, Property and Equipment
PRP         Potential Responsible Parties

QIC         Quality Assurance/Quality Control

R&D         Research and Development
RA         Remedial Action
RAM        Regional Acquisition Manager
RASP       Recovery Act Stewardship Plan
RCRA      Resource Conservation and Recovery Act
RMDS      Resource Management Directives System
RP         Responsible Party
RTP         Research Triangle Park

SARA       Superfund Amendments and Reauthorization Act of 1986
SDWA      Safe Drinking Water Act
SDWIS      Safe Drinking Water Information System
SFFAS      Statement of Federal Financial Accounting Standards
SNUR      Significant New Use Rule
SRF         State Revolving Fund
SSC         Superfund State Contracts
                                       196

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STAG       State and Tribal Assistance Grants

TMDL       Total Maximum Daily Load
TSCA       Toxic Substances Control Act
TVA        Tennessee Valley Authority
TWG        Targeted Watershed Grants

LIST        Underground Storage Tanks
UV         Ultraviolet

WCF        Working Capital Fund
                                       197

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                           WE WELCOME YOUR COMMENTS!

Thank you for your interest in the U.S. Environmental Protection Agency's Fiscal Year 2011 Agency
Financial Report. We welcome your comments on how we can make this report a more informative
document for our readers. We are particularly interested in your comments on the usefulness of the
       information and the manner in which it is presented. Please send your comments to:

                            Office of the Chief Financial Officer
                             Office of Financial Management
                            Environmental Protection Agency
                              1200 Pennsylvania Ave., NW
                                 Washington, D.C. 20460
                      This report is available on OCFO's home page at
                            http://www.epa.gov/planandbudget/

Printed copies of this report are available from the EPA's National Service Center for Environmental
              Publications at 1-800-490-9198 or by email at nscep@bps-lmit.com.
                          U. S. Environmental Protection Agency
                         Fiscal Year 2011 Agency Financial Report
                                   EPA-190-R-11-008
                                   November 15, 2011

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