DEPARTMENT OF HEALTH &.

HUMAN SERVICES
OFFICE OF INSPECTOR GENERAL
OFFICE OF AUDIT SERVICES

150 S. INDEPENDENCE MALL WEST

SUITE 316

PHILADELPHIA, PENNSYLVANIA 19106-3499

JULIO Z007
Report Number: A-03-04-00515

Ms. Sherry Kidd

President, DRN Board of Directors
1414 N Cameron Street, Suite C
Harrisburg, Pennsylvania 17103

Dear Ms. Kidd:

Enclosed are two copies of the U.S. Department of Health and Human Services (HHS), Office of
Inspector General (OIG), final report entitled "Pennsylvania Protection & Advocacy, Inc.
Procurement Practices and Potential Conflicts of Interest During Fiscal Years 2001 Through
2003." A copy of this report will be forwarded to the HHS action officials noted below for
review and any action deemed necessary.

The HHS action officials will make final determination as to actions taken on all matters
reported. We request that you respond to the HHS action officials within 30 days from the date
of this letter. Your response should present any comments or additional information that you
believe may have a bearing on the final determination.

In accordance with the principles of the Freedom ofInformation Act (5 U.S.C. 552, as amended
by Public Law 104-231), OIG reports issued to the Department's grantees and contractors are
made available to the public to the extent the information is not subject to exemptions in the Act
that the Department chooses to exercise (see 45 CFR part 5).

Please refer to report number A-03-04-00515 in all correspondence.

Sincerely,

Stephen Virbitsky
Regional Inspector General
for Audit Services
Enclosure - as stated
Page 2 - Ms. Sherry Kidd

Direct Reply to HHS Action Officials:

A. Kathryn Power, M.Ed.
Director, Center for Mental Health Services
Substance Abuse and Mental Health Services Administration
1 Choke Cherry Road
Room 6-1057
Rockville, Maryland 20857

Patricia Morrissey, Ph.D.

Commissioner, Administration on Developmental Disabilities
Administration for Children & Families
200 Independence Avenue, S.W.
Room 405 -D
Washington, DC 20201
Department of Health and Human Services

OFFICE OF

INSPECTOR GENERAL

PENNSYLVANIA PROTECTION &

ADVOCACY, INC. PROCUREMENT

PRACTICES AND POTENTIAL

CONFLICTS OF INTEREST

DURING FISCAL YEARS

2001 THROUGH 2003

Daniel R. Levinson

Inspector General

July 2007

A-03-04-00515

 Office of Inspector General

http://oig.hhs.gov

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as
amended, is to protect the integrity of the Department of Health and Human Services (HHS)
programs, as well as the health and welfare of beneficiaries served by those programs. This
statutory mission is carried out through a nationwide network of audits, investigations, and
inspections conducted by the following operating components:

Office of Audit Services

The Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting
audits with its own audit resources or by overseeing audit work done by others. Audits examine
the performance of HHS programs and/or its grantees and contractors in carrying out their
respective responsibilities and are intended to provide independent assessments of HHS programs
and operations. These assessments help reduce waste, abuse, and mismanagement and promote
economy and efficiency throughout HHS.

Office of Evaluation and Inspections

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide HHS,
Congress, and the public with timely, useful, and reliable information on significant issues.
Specifically, these evaluations focus on preventing fraud, waste, or abuse and promoting
economy, efficiency, and effectiveness in departmental programs. To promote impact, the
reports also present practical recommendations for improving program operations.

Office of Investigations
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations of
allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment
by providers. The investigative efforts of OI lead to criminal convictions, administrative
sanctions, or civil monetary penalties.

Office of Counsel to the Inspector General

The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG,
rendering advice and opinions on HHS programs and operations and providing all legal support
in OIG’s internal operations. OCIG imposes program exclusions and civil monetary penalties on
health care providers and litigates those actions within HHS. OCIG also represents OIG in the
global settlement of cases arising under the Civil False Claims Act, develops and monitors
corporate integrity agreements, develops compliance program guidances, renders advisory
opinions on OIG sanctions to the health care community, and issues fraud alerts and other
industry guidance.
 Notices

THIS REPORT IS AVAILABLE TO THE PUBLIC

at http://oig.hhs.gov

In accordance with the principles of the Freedom of Information Act

(5 U.S.C. 552, as amended by Public Law 104-231), Office of
Inspector General, Office of Audit Services reports are made
available to members of the public to the extent the information is
not subject to exemptions in the act. (See 45 CFR Part 5.)

OAS FINDINGS AND OPINIONS

The designation of financial or management practices as questionable

or a recommendation for the disallowance of costs incurred or
claimed, as well as other conclusions and recommendations in this
report, represent the findings and opinions of the HHS/OIG/OAS.
Authorized officials of the HHS divisions will make final determination
on these matters.
 EXECUTIVE SUMMARY

BACKGROUND

We performed this review at the request of the Administration for Children and Families (ACF)
and Substance Abuse and Mental Health Services Administration (SAMHSA) within the
Department of Health and Human Services (HHS). The purpose of the review was to assess
procurement practices and potential conflicts of interest at Pennsylvania Protection & Advocacy,
Inc. (PP&A), and to evaluate the organization’s financial management controls over its
contractors.

PP&A, established in 1977, is a private nonprofit corporation that provides protection and
advocacy services to people with disabilities. The mission of PP&A is to assist eligible persons
with disabilities to obtain the rights and benefits to which they are entitled.

OBJECTIVES

The objectives of the review were to:

• assess procurement practices,

• assess potential conflicts of interest regarding the executive director’s continuing

relationship with a contractor, and

• evaluate PP&A’s monitoring of its contractors.

SUMMARY OF FINDINGS

PP&A’s contracting practices did not reflect the use of open competition as required by Federal
law. Instead, PP&A awarded legal services contracts to the same two law centers without using
a bidding process and open competition. Also, there were two situations involving conflicts of
interest in violation of Federal law. Such conflicts of interest, real or apparent, could hinder
PP&A’s ability to act or appear to act in an objective and independent manner in order to ensure
that its Federal grant monies were spent in accordance with Federal cost principles.

In addition, contrary to contract provisions, PP&A’s legal services contractors billed their
services each month based on 1/12th of the approved budget amount instead of the actual
incurred costs. These problems occurred because PP&A failed to comply with Federal
regulations and did not verify that costs billed were allowable, allocable, and reasonable.

Procurement Practices Did Not Reflect the Use of Open Competition

Contrary to Federal requirements, PP&A awarded legal services contracts to two law centers
without a bidding process and open competition. Specifically, PP&A selected the Disabilities
Law Project (DLP) and the Education Law Center to provide legal services without solicitation
and open competition for over the past 20 years.

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Relationships with Contractor Posed Conflicts or the Appearance of Conflicts of Interest

The following relationships involving PP&A’s management posed conflicts of interest that call
into question the organization’s ability to either act or appear to act in an objective and
independent manner.

• PP&A’s current executive director was the founder and former principal officer of DLP,
one of PP&A’s legal services contractors. However, the executive director did not
terminate her employment relationship with DLP after accepting the executive director
position at PP&A in June 2003. Instead, she arranged a leave of absence status with
DLP, and continued to serve PP&A while its board of directors awarded annual contracts
to DLP. PP&A’s fiscal year (FY) 2003 contract to DLP, totaling $252,000, was signed
by PP&A’s executive director on her first official day as executive director of PP&A.

• PP&A accepted $200,000 in contributions from its largest contractor, DLP.

Pennsylvania Protection & Advocacy, Inc. Did Not Adequately Monitor Its Contractors

PP&A did not adequately monitor its contractors’ financial management systems to ensure that
its contractors recorded expenses properly and verify that billed services were based on actual
costs incurred that were allowable, allocable, and reasonable.

RECOMMENDATIONS

We recommend that PP&A:

• use open competition to the maximum extent practical in procuring legal services
contracts, and document the limited availability of applicants and the process followed to
determine the selection of contractors or, alternatively, stop sole source contracting and
establish in-house legal services expertise;

• require its executive director to terminate her conflicting employment relationship with
DLP;

• decline acceptance of future contributions from any of its contractors; and

• enforce contract requirements to ensure legal services contractors fully comply with
Federal regulations, bill their services based on incurred costs, and verify that actual costs
billed are allowable, allocable, and reasonable.

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DISABILITY RIGHTS NETWORK OF PENNSYLVANIA COMMENTS

In its comments to our draft report, Disability Rights Network of Pennsylvania (DRN), the
successor to PP&A, concurred with all of our recommendations, but respectfully disagreed with
our second and third findings. We continue to believe that our findings are correct. DRN’s
comments are included in their entirety in the appendix.

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 TABLE OF CONTENTS

Page

INTRODUCTION ..................................................................................................................1

BACKGROUND .............................................................................................................1

OBJECTIVES, SCOPE, AND METHODOLOGY.........................................................2

Objectives ............................................................................................................2

Scope ..................................................................................................................2

Methodology ........................................................................................................2

FINDINGS AND RECOMMENDATIONS ............................................................................3

PROCUREMENT PRACTICES DID NOT REFLECT OPEN COMPETITION ..........3

Federal Requirements and Grantee’s Procurement Policy ..................................3

Grantee Did Not Practice Open Competition for Awarding Contracts ...............4

Grantee May Not Have Received the Best Price for Quality Services................4

RELATIONSHIPS WITH CONTRACTOR POSED CONFLICTS OR THE

APPEARANCE OF CONFLICTS OF INTEREST ......................................................4

Federal Requirements and Grantee’s Conflict of Interest Policy ........................5

Conflicts of Interest..............................................................................................6

ADEQUATE MONITORING OF CONTRACTORS WAS LACKING........................8

Federal Requirements and Grantee’s Provisions for Monitoring

Subrecipients......................................................................................................8

Grantee Did Not Require Its Two Legal Services Contractors to Bill

Allowable, Allocable, and Reasonable Costs Incurred......................................8

Use of Federal Funds Could Not Be Determined ................................................9

RECOMMENDATIONS.................................................................................................9

DISABILITY RIGHTS NETWORK COMMENTS AND OFFICE

OF INSPECTOR GENERAL RESPONSE ...................................................................9

APPENDIX

DISABILITY RIGHTS NETWORK OF PENNSYLVANIA COMMENTS

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 INTRODUCTION

BACKGROUND

We performed this review at the request of the Administration for Children and Families (ACF)
and Substance Abuse and Mental Health Services Administration (SAMHSA) within the
Department of Health and Human Services (HHS). The purpose of the review was to assess
procurement practices and potential conflicts of interest at Pennsylvania Protection & Advocacy,
Inc. (PP&A), and to evaluate the organization’s financial management controls over its
contractors.

PP&A, established in 1977, is a private nonprofit corporation that provides protection and
advocacy services to people with disabilities. The mission of PP&A is to assist eligible persons
with disabilities to obtain the rights and benefits to which they are entitled.

During fiscal years (FY) 2001 through 2003, PP&A received a total of $10,808,667 in Federal
grants from the following three funding sources.

• HHS provided $7,681,870, or 71 percent. Of this amount, $4,130,041 was from ACF’s
Protection and Advocacy for Persons with Developmental Disabilities program;
$3,514,872 was from SAMHSA’s Protection and Advocacy for Individuals with Mental
Illness program; and $36,957 was from the Health Resources and Services
Administration’s Traumatic Brain Injury State Demonstration program.

• Department of Education provided $1,920,675, or 18 percent in two grants. One grant

provided funding for protection and advocacy for the rights of eligible individuals with
disabilities. The other provided funding for assistive technology services.

• Social Security Administration provided $1,206,122, or 11 percent in two grants. One

grant provided funding for employment related services to disabled beneficiaries. The
other provided funding to disseminate information to disabled beneficiaries about work
incentive programs.

PP&A contracted $5,070,643 or about 47 percent of the total Federal grant funds to other
nonprofit organizations that engaged in similar missions.

OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The objectives of the review were to:

• assess procurement practices,

• assess potential conflicts of interest regarding the executive director’s continuing

relationship with a contractor, and

• evaluate PP&A’s financial management controls over its contractors.

Scope

Our review included FYs 2001 through 2003 (October 1, 2000, through September 30, 2003),
during which PP&A received $10,808,667 in Federal funding. Our review was more limited
than that which would be necessary to express an opinion on the adequacy of PP&A’s operations
taken as a whole. Furthermore, we did not review, nor do we express an opinion on, the
adequacy of the services provided by PP&A nor that of any of PP&A’s contractors.

PP&A contracted out a significant portion of its Federal funding to two law centers. Our review
included the $3,218,209 received from PP&A by the Disabilities Law Project (DLP) and the
$1,511,074 received from PP&A by the Education Law Center (ELC) during the review period.

We conducted our fieldwork at the PP&A offices in Harrisburg, Pennsylvania, and the DLP and
ELC offices in Philadelphia, Pennsylvania.

Methodology

To accomplish our objective, we:

• Obtained an understanding of PP&A’s procurement practices, accounting and financial

management controls, and conflict of interest policies;

• Interviewed program officials from ACF and SAMHSA and obtained relevant documents
from them;

• Reviewed applicable Federal laws and regulations including:

o 45 CFR part 74;
o 42 CFR part 51;
o Office of Management and Budget (OMB) Circular A-122, “Cost Principles
for Nonprofit Organizations;” and
o terms and conditions of grants, and contract agreements;

• Interviewed the executive director and other officials at PP&A;

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 • Reviewed board minutes, bylaws, personnel policies and PP&A and DLP health

insurance policies;

• Evaluated the executive director’s continued relationship with a PP&A contractor;

• Reviewed PP&A’s audited financial statements, general ledger, trial balance and

financial status reports; and

• Visited DLP and ELC offices and reviewed audited financial statements, general ledger
and budget proposals. We also reviewed the two contractors’ procurement policies and
practices, board minutes, bylaws and personnel policies.

Our review was conducted in accordance with generally accepted government auditing
standards.

FINDINGS AND RECOMMENDATIONS

PP&A’s contracting practices did not reflect the use of open competition as required by Federal
law. Instead, PP&A awarded legal services contracts to the same two law centers for over 20
years without using a bidding process and open competition. Also, there were two situations
involving conflicts of interest in violation of Federal law. Such conflicts of interest, real or
apparent, could hinder PP&A’s ability to act or appear to act in an objective and independent
manner in order to ensure that their Federal grant monies were spent in accordance with Federal
cost principles.

In addition, contrary to contract provisions, PP&A’s legal services contractors billed their
services each month based on 1/12th of the approved budget amount instead of the actual
incurred costs. These problems occurred because PP&A failed to comply with Federal
regulations for procuring contract services and avoiding conflicts of interest, and did not verify
that actual costs billed were allowable, allocable, and reasonable.

PROCUREMENT PRACTICES DID NOT REFLECT OPEN COMPETITION

PP&A awarded sole source contracts to two law centers without using a bidding process and
open competition. PP&A selected DLP and ELC to provide legal services without solicitation of
bids and open competition. Sole source contracting discourages other law firms from competing
for PP&A business. The lack of a bidding process diminishes PP&A’s opportunity to identify
the best vendor or get the best possible prices for quality services. Because it did not follow
Federal regulations for procuring contract services, PP&A might not have received the best price
for quality legal services.

Federal Requirements and Grantee’s Procurement Policy

Recipients of Federal funds are required to follow Federal regulations and their own procurement
policies in administering Federal awards. Open and competitive bidding is critical to ensure that

Federal monies are spent efficiently and effectively. Federal regulations state, “All procurement
transactions shall be conducted in a manner to provide, to the maximum extent practical, open
and free competition…” (45 CFR § 74.43). The regulations further state, “…the recipient shall
be alert to organizational conflicts of interest as well as noncompetitive practices among
contractors that may restrict or eliminate competition or otherwise restrain trade….”

PP&A’s own procurement policy prohibits no-bid contracts. It states that PP&A will provide for
full and open competition and will make awards to the bidder or offeror whose bid or offer is
responsive to the solicitation and is the most advantageous to PP&A, price, quality and other
factors considered. Regardless of whether PP&A failed to follow its own policy, it failed to obey
Federal requirements.

Grantee Did Not Practice Open Competition for Awarding Contracts

During our audit period, PP&A contracted exclusively with two nonprofit law centers, DLP and
ELC, to provide legal advocacy services. During the past 20 years, PP&A did not engage in
open bidding or solicit new providers for these legal services. Therefore, PP&A did not
purchase these legal services through competitive means in violation of Federal regulations,
which provides for full and open competition. PP&A provided written justification for its sole
source contracting practice during our review. However, the justification did not address why
PP&A did not follow Federal regulations to provide for open and free competition. There was
no indication that PP&A advised ACF or SAMHSA of its intention to use services contracts
awarded without full and open competition. Furthermore, we believe it is immaterial whether
the contracts with the two law centers were for legal services to PP&A itself or for the execution
of PP&A’s statutory legal and advocacy services to its client populations. In either case, the
award of the contracts appears to violate Federal requirements with respect to open procurement
practices.

Grantee May Not Have Received the Best Price for Quality Services

Open and competitive bidding is critical to ensure that PP&A receives the best price for quality
services for persons it represents with mental illness and developmental disabilities. Sole source
contracting eliminates competition and restrains trade and, as a result, discourages other law
firms from competing for PP&A business. The lack of a bidding process diminishes PP&A’s
opportunity to identify the best vendor or get the best possible prices for quality services.

RELATIONSHIPS WITH CONTRACTOR POSED CONFLICTS OR THE

APPEARANCE OF CONFLICTS OF INTEREST

The following relationships involving PP&A’s management constitute conflicts of interest that
call into question the organization’s ability to either act or appear to act in an objective and
independent manner. Specifically, we noted that: (a) PP&A’s current executive director did not
terminate her employment relationship with DLP, continued her health insurance coverage with
DLP and signed a FY 2003 contract from PP&A to DLP for $252,000 without competition and
(b) PP&A accepted $200,000 in contributions from its largest contractor, DLP. In doing so,
PP&A failed to comply with Federal regulations regarding conflicts of interest.

4
Federal Requirements and Grantee’s Conflict of Interest Policy

In general, a conflict of interest exists when someone in a position of trust has competing
professional or personal interests that would either make it difficult to fulfill his or her duties
fairly, or would create an appearance of impropriety that could undermine public confidence.
Recipients of Federal funds are required to follow Federal regulations regarding conflicts of
interest.

Federal requirements applicable to PP&A include the following:

• “Codes of Conduct,” (45 CFR § 74.42) states in part, “No employee, officer, or agent
shall participate in the selection, award, or administration of a contract supported by
Federal funds if a real or apparent conflict of interest would be involved. Such a conflict
would arise when the employee, officer, or agent, or any member of his or her immediate
family, his or her partner, or an organization which employs or is about to employ any of
the parties indicated herein, has a financial or other interest in the firm selected for an
award. The officers, employees, and agents of the recipient shall neither solicit nor
accept gratuities, favors, or anything of monetary value from contractors, or parties to
subagreements. However, recipients may set standards for situations in which the
financial interest is not substantial or the gift is an unsolicited item of nominal value.”

• “Competition,” (45 CFR § 74.43) states, “The recipient shall be alert to organizational
conflicts of interest as well as noncompetitive practices among contractors that may
restrict or eliminate competition or otherwise restrain trade.”

• “Conflict of Interest,” (42 CFR § 51.26) states, “The P&A system must develop

appropriate policies and procedures to avoid actual or apparent conflict of interest

involving clients, employees, contractors and subcontractors, and members of the

governing authority and advisory council . . .”

• OMB Circular A-122 Attachment A Section (A)(3)(b)-(c) states that, to determine

whether cost is reasonable, one must look at “…such factors as generally accepted sound
business practices, arms length bargaining . . .” and “[w]hether the individuals concerned
acted with prudence in the circumstances, considering their responsibilities to the
organization, its members, employees, and clients, the public at large, and the Federal
Government.”

PP&A’s conflict of interest policy in effect for the first 2 years of our audit was dated
September 16, 1995, and stated that if a board member believes that he or she has a conflict of
interest with regard to any affairs of the board, the board member must declare the conflict and
abstain from participating in business related to the conflict of interest. PP&A amended its
policy on September 27, 2002, at the end of the second year covered by our audit, to specify the
situations that create an actual or potential conflict of interest, as follows:

• an officer or director serves as an officer, director or key employee of an organization

that competes with or does business with the corporation; or

5
 • an officer or director has an ownership or investment interest in or compensation
relationship with an organization with which the corporation does or proposes to do
business or an organization that competes with the corporation; or

• an officer or director receives remuneration for performing services for the corporation
and the corporation is determining his or her remuneration.

The amendment further strengthened the language in the policy by stating that the director who
may have a conflict of interest shall recuse himself or herself from voting on the subject and
shall leave the room while the matter is discussed. Recusing himself or herself shall not prevent
a director from participating in other activities or discussions where no conflict of interest exists.

Conflicts of Interest

Grantee’s Executive Director Did Not Sever Her Relationship With Disabilities Law Project

PP&A’s board of directors hired the current executive director in June 2003 on an interim basis.
Prior to PP&A employment, the executive director was a key employee of DLP, the largest
contractor of PP&A. This executive director founded DLP in 1977, and served as its executive
director for over 25 years until June 2003. DLP has been PP&A’s major legal services
contractor for over 20 years and received approximately 90 percent of its annual revenue from
PP&A for the last 3 years.

At the time of our audit, the PP&A executive director was on a leave of absence status as a staff
attorney from DLP. It is our understanding that DLP kept her on leave status instead of ending
the employment relationship so that she could maintain her DLP health insurance benefits. But,
the regulations do not provide for such an exception to the conflict of interest prohibition. A
letter dated July 2, 2003, and signed by the current executive director of DLP stated that: “The
leave of absence runs from June 7, 2003 through no later than June 6, 2005. Please contact me in
the event that you wish to return to DLP prior to June 6, 2005.”

By being on a leave of absence with the ability to return to DLP prior to the end of her
employment commitment with PP&A, the PP&A executive director did not sever her
employment relationship with DLP, an organization which received more than 90 percent of its
funding from PP&A. Thereby, the executive director retained a conflicting interest in the
continued existence and prosperity of the contractor. We found no indication that the executive
director recused herself from administering or monitoring the DLP contract. In fact, DLP
received a developmental disabilities contract for FY 2003 totaling $252,000 from PP&A that
was signed by the PP&A executive director on her first official day as executive director of
PP&A. The PP&A board of directors had authorized a DLP contract earlier, but it was never
executed until the executive director signed a noncompetitive contract with DLP 8 months after
the start of the contract year.

The executive director cannot be presumed to maintain her objectivity when she has an interest
in the continued existence and well being of the organization with whom her organization is

contracting. Clearly, the executive director felt that she could only maintain an acceptable level
of health benefits by retaining the policy offered by DLP, her former employer. It is likely that,
if PP&A had not awarded DLP the FY 2003 legal services contract, which allegedly made up
over 90 percent of DLP’s funding, DLP would have ceased functioning, and the executive
director would have lost her insurance. Additionally, because she maintained a significant
interest in DLP’s continued operation, the executive director would have had little incentive to
diligently monitor the contract with DLP to ensure that PP&A was obtaining the full benefit.
The executive director stood to lose an essential benefit if DLP ceased to function, so it is hard to
see how no actual or apparent conflict existed when she signed and administered the DLP
contract. Her failure to resign completely from DLP violated 45 CFR § 74.42.

PP&A’s outside legal counsel provided a written opinion on September 2, 2003, on the question
of whether PP&A could contract with an organization in which its executive director or board
members have a relationship. The counsel’s opinion correctly noted and warned PP&A that:

• There is clearly an appearance of self-dealing particularly where noncompetitive

contracts were awarded.

• It is impossible for the executive director of PP&A or its board members to objectively
monitor the contractor’s work because PP&A would be, in essence, monitoring itself.
Clearly this is not the monitoring procedure intended by the regulations.

In December 2003, after the end of the audit period under review, PP&A’s board of directors
adopted a new conflict of interest policy that accorded with the advice of PP&A’s outside legal
counsel’s interpretation of Federal conflict of interest requirements. However, we found no
indication that PP&A cancelled or disallowed the award it made to DLP.

Grantee Accepted Contributions From its Largest Contractor, the Disabilities Law Project

Federal rules prohibit a grantee from accepting contributions from contractors. Specifically, 45
CFR § 74.42 states that, “The officers, employees, and agents of the recipient shall neither solicit
nor accept gratuities, favors, or anything of monetary value from contractors, or parties to
subagreements.” A contribution of $200,000 is something of monetary value and should not
have been accepted by PP&A. Indeed, the acceptance of the gift was inconsistent with Federal
regulations. PP&A received unrestricted contributions from DLP in the form of two payments,
$140,000 on March 29, 2002, and $60,000 on September 17, 2002, designated for PP&A’s use in
FY 2003.

According to PP&A’s current executive director, who was DLP’s executive director when the
contributions were made, the purpose of the contributions was to help PP&A overcome budget
and cash flow problems. Regardless of the source or purpose of DLP’s contribution, acceptance
of the gift by PP&A clearly violated Federal regulation 45 CFR § 74.42, which prohibits PP&A
from accepting anything of monetary value from its contractors. PP&A’s executive director
suggested that DLP’s contribution to PP&A does not violate 45 CFR § 74.42 because it is a
transaction between “corporations” rather than between individuals. We believe this argument is
unpersuasive because an officer, employee, or agent of PP&A must have accepted the

7
contribution on PP&A’s behalf. And a gift of this magnitude would create, at the very least, the
appearance of a conflict of interest, which violates 45 CFR § 74.42.

We believe that each of the two aforementioned situations posed a conflict of interest prohibited
by Federal regulations. These conflicts occurred because PP&A disregarded Federal regulations
regarding conflicts of interest. Those conflicts of interest call into question PP&A’s ability to
either act or appear to act in an objective and independent manner. Furthermore, the ongoing
nature of the conflicts calls into question PP&A’s ability to comply with Federal rules and the
responsibilities required of being a Federal grantee.

ADEQUATE MONITORING OF CONTRACTORS WAS LACKING

PP&A did not adequately monitor its two legal service contractors, DLP and ELC. Because
PP&A did not follow Federal regulations and policy, and did not adequately enforce its own
contract provisions, the contractors billed their services based on the approved budget instead of
actual costs incurred. As a result, we could not verify that costs billed were allowable,
allocable, and reasonable.

Federal Requirements and Grantee’s Provisions for Monitoring Subrecipients

• “Monitoring and Reporting Program Performance” (45 CFR § 74.51), states, “Recipients
are responsible for managing and monitoring each project, program, subaward, function
or activity supported by the award.”

• OMB Circular A-122, 3.b, states that Federal cost principles are applicable to subawards,
subcontracts and subgrants to a nonprofit organization.

• OMB Circular A-122, Attachment A, 2.g, states that for a cost to be allowable under an
award, among other things, a cost must be adequately documented.

• PP&A’s legal services contract provisions require contractors to bill their services based
on actual costs incurred. For each month, contractors must submit reports to PP&A on
the actual personnel and non-personnel costs incurred by the grant.

Grantee Did Not Require Its Two Legal Services Contractors to Bill Allowable, Allocable,
and Reasonable Costs Incurred

PP&A did not have adequate monitoring controls in place. PP&A did not ensure that its legal
services contractors adhered to Federal regulations and contract requirements. The contractors
billed and were paid by PP&A each month based on 1/12th of the approved budget rather than
actual costs incurred because the contractors, according to PP&A, incurred program expenses
significantly higher than the budgeted amounts they received in payment from PP&A.

Furthermore, PP&A did not adequately enforce Federal regulations and contract provisions to
ensure that DLP and ELC fully complied with requirements to bill actual costs that were
reasonable, allocable, and allowable during any of the 3 years that we audited.

8
Use of Federal Funds Could Not be Determined

PP&A is responsible for ensuring the Federal funds are spent appropriately, and part of that
responsibility involves determining what costs are reasonable. PP&A, though, reimbursed its
contractors regardless of the reasonableness of the expenses and regardless of their fiscal
responsibilities as required by OMB Circular A-122. By not making their contractors
responsible and in compliance with Federal law and cost principles, PP&A itself failed to
comply with the cost principles. While PP&A said it changed the billing process after our audit
period to reflect actual incurred expenses, we could not determine whether costs claimed were
allowable, allocable, and reasonable and whether Federal funds were used for their intended
purposes and furthered the objectives of the program.

RECOMMENDATIONS

We recommend that PP&A:

• use open competition to the maximum extent practical in procuring legal services
contracts, and document the limited availability of applicants and the process followed to
determine the selection of contractors or, alternatively, stop sole source contracting and
establish in-house legal services expertise;

• require its executive director to terminate her conflicting employment relationship with
DLP;

• decline acceptance of future contributions from any of its contractors; and

• enforce contract requirements to ensure legal services contractors fully comply with
Federal regulations, bill their services based on incurred costs, and verify that actual costs
billed are allowable, allocable, and reasonable.

DISABILITY RIGHTS NETWORK OF PENNSYLVANIA COMMENTS AND OFFICE

OF INSPECTOR GENERAL RESPONSE

In its comments to our draft report, Disability Rights Network of Pennsylvania (DRN), the
successor to PP&A, concurred with all of our recommendations, but respectfully disagreed with
our second and third findings. DRN’s comments are included in their entirety in the appendix.

DRN disagreed with our second finding that PP&A’s executive director had a conflict of interest
as a matter of fact or law when she signed a contract with DLP that was authorized by PP&A’s
board of directors. Nevertheless, the executive director said she eliminated this issue on
September 1, 2006, when she completely terminated her employment relationship with DLP and
ceased to be covered through DLP’s health insurance policy. We continue to believe that the
executive director’s failure to resign completely from DLP during the audit period violated the
Federal conflict of interest rules.

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DRN disagreed with our third finding that it violated Federal conflict of interest rules when
PP&A accepted the $200,000 contribution from DLP. DRN agreed not to accept any future
contributions from contractors. DRN said that it is impossible for it to repay DLP the $200,000
since any obligation of PP&A to DLP and any right of DLP to receive payment have been
merged and completely offset in DRN, which is the successor company to the merger of PP&A
and DLP. Accordingly, we modified our third recommendation. However, we continue to
believe that PP&A’s acceptance of the contribution during the audit period was a clear violation
of the Federal conflict of interest rules.

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APPENDIX

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