COMMONWEALTH OF PENNSYLVANIA

GOVERNOR'S OFFICE

HARRISBURG

March 27, 1998

Dear Secretary Riley:

 I wish to formally extend my appreciation to you and your staff for their hard work and dedication provided during the recent Cooperative Audit Resolution and Oversight Initiative (CAROI) process with Pennsylvania. As you are aware, during the last six months, officials from USDE and affected Pennsylvania agencies resolved 119 prior single audit findings, included in the Commonwealth's single audit reports for the years ended June 30, 1990 through 1996.

 The CAROI process represents a giant step forward in audit resolution. By including the people involved with the day to day operations of the programs in the resolution process, project teams quickly got to the heart of the audit issues. Teams determined the true effects on the administration of the programs and worked to arrive at solutions that are acceptable to all parties, without compromising the intent of the federal programs.

The CAROI process helps everyone better understand the importance of audits as a management tool. Decisions made during resolution can now be used by federal and state agencies to improve the program effectiveness, avoid repeat findings, and avoid the high cost of litigation. CAROI teams are now in position to address and resolve future issues as soon as they are discovered or reported.

 This process could not have happened at a better time for Pennsylvania. We have resolved all prior single audit findings, for which USDE is the responsible federal agency. In our attempt to share the success of the CAROI concept, we intend to publish the enclosed article in the National Association of State Accountants, Comptrollers and Treasurers (NASACT) journal. It would also be beneficial if you attempt to persuade other federal agencies to adopt similar resolution practices.

 If you have any questions, do not hesitate to contact me at (717) 787-6496.

Enclosure

cc: Congressman William F. Goodling, 19th Congressional District, Chairman of      Committee on Education and the Work Force

Honorable Robert A. Bittenbender, Secretary of the Budget, Commonwealth of       Pennsylvania

Mr. Donald Rappaport, Chief Financial and Chief Information Systems Officer, USDE

Ms. Hazel Fiers, Director of Financial Improvement, Receivables and Post-Audit        Operations, USDE-OCFO

Cooperative Audit Resolution and Oversight Initiative (CAROI)

"US Department of Education and Commonwealth of Pennsylvania Administer Joint Audit Resolution Process"

The US Department of Education (USDE) and affected Pennsylvania agencies recently concluded a six month process of resolving 119 single audit findings, some of which date back to the June 30, 1990 fiscal year. The process, formally known as the "Cooperative Audit Resolution and Oversight Initiative" (CAROI), was introduced by USDE as an alternative to the traditional audit resolution process. Most federal agencies attempt to resolve single audit findings through a lengthy impersonal letter writing process. The CAROI process is based on building and maintaining person-to-person communications between the federal agency and state agencies and their independent auditors.

The goal of CAROI is to improve education programs and student performance at the state and local levels by effectively using the single audit process as a management tool. Strategies include an ongoing dialogue with states; working to resolve open audits or audits under appeal; improving the single audit process; and providing audit coordination, monitoring, and technical assistance.

The CAROI process in Pennsylvania started last June when state officials received an invitation from USDE to meet and discuss the resolution process. State policy directs that findings cannot be considered closed until some communication from the federal agency is received stating the findings are resolved. As of June 1997, Pennsylvania had 361 unresolved prior audit findings for which USDE was responsible for resolving 119. After several face to face meetings and obtaining management support from the Governor's Office and affected state agencies, Pennsylvania agreed to participate in the CAROI process. An aggressive six month timetable was established to resolve all 119 findings, by the target date of February 27, 1998.

The six month project was co-chaired by Harvey C. Eckert from the Commonwealth of Pennsylvania, and Hazel E. Fiers for USDE. As Deputy Secretary for Comptroller Operations, Mr. Eckert coordinated the process with staff from the Office of the Budget, and Pennsylvania Department of Education, Labor and Industry, Public Welfare, and Health. Ms. Fiers is Director of Financial Improvement, Receivables and Post-Audit Operations in USDE's Office of the Chief Financial and Chief Information Officer. She coordinated the process with members of other USDE offices including Elementary and Secondary Education, Special Education and Rehabilitative Services, Vocational and Adult Education, Inspector General and General Counsel.

Part of the project's success was a result of including the people involved with the day to day operations of the programs in the resolution process. Four project teams were established to address groups of common findings. Each team included a mix of program and fiscal personnel, attorneys, and auditors, from the Pennsylvania Department of the Auditor General which performs the Commonwealth's Single Audit. Having the appropriate people involved allows the teams to quickly get to the heart of the audit issues, determine the true effects on the administration of the programs, and work to arrive at solutions that were acceptable to all parties, without compromising the intent of the federal programs.

While project teams were being established, a matrix of the unresolved findings was prepared by Commonwealth officials. Of the 119 findings in the matrix, USDE previously considered 71 of those findings closed due to immateriality or the nature of the issue. However, no communication of those closures was ever received by state officials. Project teams and CAROI committee members met regularly from September 1997 through February 1998, in person and by teleconference to resolve the remaining 48 findings.

Several factors contributed to CAROI's success in Pennsylvania. The first was an intense time commitment from all levels of all offices, especially project team leaders. The second was the building of trust between USDE, Pennsylvania agency and Auditor General team members. Trust was built rather quickly after it became evident that all parties were working for the common purpose of resolving audit findings with solutions that were acceptable to all and in the best interest of the programs. For each finding, the project team reviewed auditor recommendations and Commonwealth actions taken or proposed. Upon reaching concurrence on the adequacy of the corrective actions, USDE closed findings by periodically issuing Program Determination Letters throughout the process.

The outcomes of the process were tremendous. On the surface, 119 findings were resolved, including some long standing issues that had been cited as repeat findings in up to five concurrent audit reports. Also addressed was the $108 million of questioned costs, which was reduced to approximately $2 million of costs actually disallowed. This alone saved an enormous amount of legal costs for issues that were already in litigation. Other outcomes of the CAROI process may be less visible but are more important. By resolving outstanding issues, USDE is effectively completing the audit process. Decisions made during resolution serve to improve program effectiveness. Through this process, CAROI team members have established a network of important contacts to address future single audit issues.

The success of the CAROI process was regionally shared with the National Association of State Comptrollers Conference attendees at their March meeting held in Washington, D.C. Mr. Eckert also discussed the process in a separate meeting with other federal agency chief financial officers. Both presentations were intended to encourage other states and federal agencies to adopt CAROI, or a similar process, as a means of effectively using the single audit process to improve federal program administration at the state and local levels.

USDE previously used the CAROI process in Mississippi, Washington and Florida. Resolution in those states was relatively easy compared to Pennsylvania. The other states either had very few findings, or had only one state agency to deal with. After completion of the Pennsylvania process, USDE is confident it now has a working model to use for other states and to share with other federal agencies.

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