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entitled 'Head Start: Comprehensive Approach to Identifying and 
Addressing Risks Could Help Prevent Grantee Financial Management 
Weaknesses' which was released on March 18, 2005. 

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Report to Congressional Requesters:

United States Government Accountability Office:

GAO:

February 2005:

Head Start: 

Comprehensive Approach to Identifying and Addressing Risks Could Help 
Prevent Grantee Financial Management Weaknesses:

GAO-05-176:

GAO Highlights:

Highlights of GAO-05-176, a report to congressional requesters

Why GAO Did This Study:

In fiscal year 2004, Congress appropriated $6.8 billion to serve 
919,000 poor children through 1,680 Head Start grantees nationwide. 
Recent reports of financial improprieties at a number of Head Start 
programs raised questions about the effectiveness of the oversight by 
the Department of Health and Human Services’ (HHS) Administration for 
Children and Families (ACF) in identifying and resolving financial 
management weaknesses in Head Start grantees. In this report, GAO 
provides information on whether (1) ACF can consistently identify 
financial management weaknesses, if any, in Head Start grantees and (2) 
ACF ensures that grantees effectively resolve any problems, in a timely 
manner, when detected. 

What GAO Found:

While ACF uses many processes to collect and analyze information on 
Head Start grantees, it has not designed its processes and integrated 
this information to consistently identify Head Start grantees' 
financial management weaknesses. For example, ACF has not developed a 
comprehensive risk assessment to identify weaknesses that could limit 
the program’s ability to achieve its objectives. Furthermore, ACF has 
no process in place to ensure that its on-site reviews are conducted in 
accordance with the framework it has designed to assess grantee 
compliance with program and financial management requirements. 
Moreover, financial reports and audits are not effectively used in day-
to-day monitoring activities to identify high-risk grantees and resolve 
their problems. 

Head Start grantees who were judged out of compliance in a review by 
ACF in 2000 with one or more of the program's financial management 
standards were about as likely to remain out of compliance as attain 
full compliance over the succeeding 3 years. ACF’s failure to ensure 
that more grantees promptly resolve such problems creates opportunities 
for financial losses or instability that affect services to children 
and families. After working with one grantee to correct severe 
financial management problems for 3 years—including failure to account 
for over $400,000 in grant funds that were not spent on Head Start 
services to children and their families—ACF notified the organization 
that it no longer would receive funding. While ACF may terminate 
grantees with serious financial weaknesses such as recurring failure to 
comply with federal management standards, this process is rarely used: 
ACF most often encourages grantees to voluntarily relinquish their 
grants. In a small number of cases, ACF must proceed with formal 
termination, which can be difficult and lengthy owing, in part, to 
grantees' right to continued funding during its appeal, regardless of 
merit, and their ability to finance appeals with grant funds.
High Incidence of Continued Noncompliance with Head Start Standards 
among Grantees Reviewed by ACF in 2000: 

[See PDF for image]

[End of figure]

What GAO Recommends:

To improve oversight of Head Start grantees, GAO recommends that the 
Assistant Secretary for Children and Families develop a comprehensive 
risk assessment of the Head Start program and improve the processes it 
currently uses to collect information on program risks. ACF agreed with 
the recommendations. GAO also recommends that, once ACF makes the 
improvements, it should make greater use of its authority to seek 
competition in communities that are currently served by poorly 
performing grantees. ACF raised concerns about our interpretation of 
its authority to do so; therefore, Congress may wish to consider 
clarifying its intent on this matter. 

www.gao.gov/cgi-bin/getrpt?GAO-05-176. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Marnie Shaul at (202) 512-
7215 or shaulm@gao.gov. 

[End of section]

Contents:

Letter:

Results in Brief:

Background:

ACF Lacks a Comprehensive Strategy to Assess Head Start Risks:

ACF Does Not Ensure That Grantees Effectively Resolve Financial 
Management Problems:

Conclusions:

Matter for Congressional Consideration:

Recommendations for Executive Action:

Comments from the Administration for Children and Families and Our 
Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Comments from the Department of Health and Human Services:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Acknowledgments:

Related GAO Products:

Head Start and Other Early Childhood Programs:

Internal Controls:

Grants Management:

Tables:

Table 1: ACF's Oversight Processes for Monitoring Grantees' Financial 
Management:

Table 2: Summary of Results for PIR Data Reliability Tests, 2002-2003 
Program Year:

Table 3: Grantees and Head Start Funds Allocated to the Largest 
Regional Offices:

Table 4: Reasons for Selecting and Reviewing Grantees, by Region:

Figures:

Figure 1: Federal Head Start Funding (Fiscal Years 1990-2005):

Figure 2: ACF Organizational Chart:

Figure 3: Average Timeline for Audit Review Process for Files Reviewed:

Figure 4: Grantees with Recurring Financial Management Problems (2000- 
2003):

Figure 5: A Case Study: Northwest Arkansas Head Start Human Services, 
Inc. 

Abbreviations:

ACF: Administration for Children and Families:

ACYF: Administration on Children, Youth, and Families:

FBI: Federal Bureau of Investigation:

FMFIA: Federal Managers' Financial Integrity Act:

HHS: Department of Health and Human Services:

IG: Inspector General:

NEAR: National External Audit Review Center:

OMB: Office of Management and Budget:

PIR: Program Information Reports:

PMS: Payment Management System:

PRISM: Program Review Instrument for Systems Monitoring:

TANF: Temporary Assistance for Needy Families:

United States Government Accountability Office:

Washington, DC 20548:

February 28, 2005:

Congressional Requesters:

Recent reports of financial improprieties at a number of Head Start 
programs around the country raised questions about the effectiveness of 
the Department of Health and Human Services' (HHS) oversight of Head 
Start grantees. Head Start is one of the largest federal early 
childhood programs, providing grants to local organizations to give 
preschool education and other supplemental services to poor children 
and their families. In fiscal year 2004, the Congress appropriated $6.8 
billion to serve 919,000 poor children through 1,680 Head Start 
grantees nationwide. HHS's Administration for Children and Families 
(ACF) administers the Head Start program through its network of 
regional offices. Head Start was last reauthorized in 1998 for fiscal 
years 1999 through 2003; it received appropriations in 2004 and 2005 to 
fund the program and it is currently scheduled for reauthorization. 

Unresolved financial management weaknesses among Head Start grantees 
can reduce the quality or amount of services that are provided to 
children or result in a grantee's services being discontinued. 
Recently, some concerns have been expressed that the lack of reliable 
information on the financial integrity of Head Start grantees leaves 
little assurance that all the children the program is funded to serve 
are receiving the "head start" they deserve. In this report, we are 
providing information on (1) whether ACF can consistently identify 
financial management weaknesses, if any, in Head Start grantees and (2) 
whether ACF ensures that grantees effectively resolve any problems in a 
timely manner when they are detected. 

To assess whether ACF can consistently identify financial management 
weaknesses, we reviewed and analyzed relevant agency documentation of 
the processes used to oversee Head Start grantees' financial management 
practices. To guide our work we used the Office of Management and 
Budget's (OMB) Circular A-123: Management Accountability and Control 
and our own Standards for Internal Control in the Federal Government as 
a basis to collect and analyze information on ACF's oversight structure 
for the Head Start Program. We interviewed senior Head Start and ACF 
officials in Washington, D.C., and four of ACF's 10 regional offices-- 
Philadelphia, Pa. (Region III); Atlanta, Ga. (Region IV); Chicago, Ill. 
(Region V); and Dallas, Tex. (Region VI), which collectively administer 
more than 50 percent of all Head Start funds and oversee more than 50 
percent of the nation's Head Start grantees. These 4 ACF regional 
offices are among the nation's 5 largest in terms of total Head Start 
funding and funded enrollment. During each of our regional office 
visits we met with senior Head Start officials and regional office 
management to obtain their views on the strengths and weaknesses of the 
different processes used to oversee Head Start grantees. We also 
conducted interviews by telephone with Head Start officials and senior 
management from the six other ACF regional offices. To learn how ACF 
ensures that grantees effectively resolve their financial management 
problems, we reviewed ACF data on the reviews that it conducts of its 
Head Start grantees at least every three years and the Federal Audit 
Clearinghouse--a federal database that contains summary information on 
each of the grantee's annual audits. Based on this review we selected 
55 grantees with known financial management weaknesses in the four 
regional offices and reviewed the regional offices' files on these 
grantees for the period 2001 through 2004 to follow the use of audit 
findings and actions related to the grantees' weaknesses. We also met 
with program and financial specialists who work with Head Start 
grantees in each of the four regional offices we visited. Finally, for 
all grantees ACF reviewed from 2000 through 2003, we examined patterns 
of results from those reviews in areas related to financial management. 
Furthermore, we tested the reliability of two data sets--Head Start's 
Program Review Instrument for Systems Monitoring (PRISM) and Head 
Start's Program Information Reports (PIR)--and found the PRISM data set 
to be sufficiently reliable for our purposes. Our tests identified some 
concerns about the reliability of the PIR database that we discuss more 
fully in this report. For additional details about our scope and 
methodology, see appendix I. Our work was conducted from January 
through December 2004 in accordance with generally accepted government 
auditing standards. 

Results in Brief:

Although ACF uses many processes to collect and analyze information on 
grantee financial management--such as on-site reviews, annual surveys 
of grantees, and reviews of financial reports and audits--ACF has not 
designed its processes or consistently used the findings from the 
existing processes to assess overall program risks. Such an assessment 
is an important step in identifying and addressing weaknesses that 
limit the program's ability to achieve its objectives. Moreover, the 
processes ACF uses to collect data on grantee financial management 
performance have significant flaws. For example, we found that ACF has 
no process in place to ensure that its reviewers consistently follow 
the standards for on-site reviews, lacks procedures to independently 
verify information from grantee surveys, and makes limited use of 
financial reports and financial audits to identify high-risk grantees. 
ACF recently began to train its reviewers and certify that they have 
the skills they need to assess grantee compliance with the program's 
rules; however, the limited scope of the training and failure to 
conduct verification of the reviewers' credentials may limit the 
benefits of these new initiatives. With respect to financial reports, 
actual cash withdrawals are not routinely reconciled with the grantees' 
reported expenditures in a timely manner. As a result, unchecked 
problems may worsen. Although infrequent, there have been cases in 
which grantees have furloughed employees or temporarily closed centers-
-thereby disrupting services to children and their families--because 
they spent their grants too quickly and did not adequately manage their 
grants to ensure that funds were available throughout the school year. 
Many program specialists in ACF regional offices that we visited told 
us they most frequently learn that a grantee is having trouble through 
a call from a parent or teacher reporting a problem. Although program 
specialists said that such calls were a routine part of their day-to- 
day monitoring activities, over-reliance on this approach to 
identifying problems can result in missed opportunities to help 
grantees address management challenges before they become problems. 

When ACF identifies grantees with financial management weaknesses, the 
agency does not consistently ensure that grantees effectively resolve 
problems. Lack of more aggressive action to ensure that grantees 
address their problems can allow weaknesses to persist that affect 
program services. Our analysis of the results of all of ACF's on-site 
reviews conducted in 2000 shows that 53 percent of the grantees 
identified by ACF with financial management problems were again cited 
in the grantee's next review. In our detailed review of the actions ACF 
takes to ensure that grantees address financial management problems 
focused on problems that were identified between 2000 and 2003, we 
found that in most of the 55 cases we reviewed ACF only required the 
grantee to self-certify that it corrected its problems and pursued no 
further action. One of the more aggressive approaches ACF can take to 
address long-standing problems is to require the grantee to develop and 
implement a quality improvement plan, but first ACF must declare the 
grantee "deficient" --a term it uses to identify grantees with severe 
problems. Yet, we noted inconsistencies in the process used by the 
regional offices to determine the severity of the problems. Some of the 
regional office managers we spoke with told us that they treated each 
case differently and largely based their decisions on their previous 
experiences working with the grantees, so one grantee might be deemed 
deficient while another, with similar problems, would not. Once a 
grantee is found deficient, ACF may allow it up to 1 year to correct 
its problems and then must revisit the grantee. We found that ACF makes 
little use of its authority to replace an existing grantee that is not 
meeting performance or financial management requirements. When awarding 
new funds each year, ACF gives priority to the current grantee even if 
the grantee has financial management weaknesses. While ACF has the 
authority to terminate a grantee, this process is rarely used; ACF most 
often works to encourage grantees to voluntarily relinquish their 
grants. When ACF does turn to termination proceedings, it must continue 
to fund the grantee and to cover the legal costs of the grantee's 
appeal. Senior Head Start officials in two of ACF's regional offices we 
visited told us that they are reluctant to pursue terminations because 
the processes used to collect information to support such an action are 
inadequate, and the termination procedures are a drain on scarce staff 
resources. As a result, the process to remove a grantee that 
consistently fails to perform up to standards is protracted and that 
grantee can continue to receive funds long after financial management 
weaknesses have been identified. The community will frequently have no 
other options for Head Start services until the termination process is 
complete. 

To address these issues and to improve oversight of the Head Start 
program, we are recommending that the Assistant Secretary for Children 
and Families develop a comprehensive risk assessment of the Head Start 
program and improve the processes it uses to collect information on 
program risks. Once these improvements have taken hold, ACF should make 
greater use of its authority to recompete grants that are currently 
awarded to poorly performing grantees. ACF agreed with many of our 
recommendations to improve the oversight processes it uses to collect 
information on the financial management of Head Start grantees. ACF 
also agreed that it would explore ways to increase the accuracy of its 
annual survey of Head Start grantees. These improvements should go a 
long ways towards ensuring that those responsible for overseeing the 
Head Start program and its 1,680 grantees have the information they 
need to target oversight resources effectively and reduce the program's 
risks. ACF did not, however, directly address two of our 
recommendations that would increase the effectiveness of its oversight 
processes. Namely, ACF did not address our recommendation to more 
comprehensively estimate the extent of improper payments nor did it 
address our recommendation to hold ACF regional management, staff, and 
contract reviewers accountable for following its own guidance when 
conducting on-site reviews. Finally, ACF expressed concerns about our 
legal interpretation of its authority to recompete Head Start grants. 
Congress may wish to consider clarifying ACF's authority to recompete 
grants if ACF finds that the Head Start grantee currently serving in a 
community fails to meet program or financial management requirements. 

Background:

Started in 1965 as part of the Johnson Administration's War on Poverty, 
Head Start was designed to deliver comprehensive educational, social, 
health, nutritional, and psychological services to poor children. Head 
Start offers poor children below the age of school entry and their 
families a range of services, including preschool education, family 
support, health screenings, dental care, and efforts to access medical 
insurance. The program may either provide the services directly or 
facilitate access to existing services. Head Start is authorized to 
serve children at any age prior to compulsory school attendance. The 
program was originally aimed at 3-to 5-year-olds. Early Head Start, a 
companion program begun in 1994, focuses on making these services 
available to children from birth to 3 years of age and to pregnant 
women. 

Head Start Grantees, Funding, and Eligibility:

The federal government makes Head Start grants directly to nearly 1,700 
local organizations, including community action agencies, school 
systems, for-profit and nonprofit organizations, other government 
agencies, and tribal governments or associations. Many Head Start 
grantees provide services by subcontracting with other organizations, 
known as delegate agencies. 

To accomplish Head Start's goals, the Congress provided $6.9 billion in 
federal funds for fiscal year 2005. In addition, Head Start grantees 
must match the federal grant with 20 percent of their own funds which 
can include in-kind contributions, local or state funds, and donations. 
Federal appropriations for Head Start increased threefold, in real 
terms, during the 1990s. While federal funds have not grown as quickly 
from 2000 to 2005 as they did in the 1990s, funding has kept pace with 
inflation. (See fig. 1.)

Figure 1: Federal Head Start Funding (Fiscal Years 1990-2005):

[See PDF for image]

[End of figure]

Head Start funds are allotted among the states based on their 1998 
allocation and, for funds exceeding that amount, by a formula based on 
the number of children in each state under the age of 5 from families 
whose income is below the federal poverty level.[Footnote 1] Head Start 
regulations require that at least 90 percent of the children enrolled 
in Head Start come from families with incomes at or below the federal 
poverty level, from families receiving public assistance, or from 
families caring for a foster child. Grantees may fill up to 10 percent 
of their slots with children from families that exceed the federal 
poverty level. 

Grants Management:

The Head Start program is one of more than 1,000 federally funded grant 
programs. Each of these programs has specific objectives and all rely 
on third parties--states, local governments, and not-for-profit 
organizations--to provide direct services to eligible beneficiaries. 
Federal grants have historically served as vehicles through which the 
federal government attempted to achieve a variety of national goals by 
providing funding to other levels of government to carry out specific 
federal policies. In particular, economists have cited the role federal 
grants play in encouraging state and local governments to provide more 
of the public goods and services deemed beneficial from a national, 
rather than a purely local, perspective.[Footnote 2]

While funding third parties through grants provides many benefits to 
federal policymakers, the limited federal role in providing services 
creates challenges as well. Decades of research on federal grants and 
our own work have identified management and oversight challenges that 
federal agencies must work to overcome to ensure that their grant 
programs are operating effectively and are succeeding in meeting their 
goals. For example, we have reported in our series of reports on Major 
Management Challenges and Program Risks that HHS's ability to ensure 
financial accountability was hampered by weaknesses in key financial 
processes, including financial analysis, reporting, and grant 
accounting.[Footnote 3] Since the federal government relies on third 
parties to work directly with program beneficiaries, these management 
challenges stem, in part, from the limited federal role in grant 
programs: setting national goals and objectives, identifying qualified 
grantees, providing funds to grantees that agree to use the funds in 
accordance with federal laws and regulations, and monitoring the 
grantees' compliance with those conditions. 

All recipients of federal grant funds must periodically report on their 
expenditures of federal funds, and every federal grantee that spends 
more than $500,000 in federal funds each year must obtain an audit of 
its financial statement that includes verification of compliance with 
federal rules.[Footnote 4] In addition, each grant program has specific 
rules. For example, Head Start has eligibility rules based on family 
income to target federal Head Start funds to those children in greatest 
need. The auditor need not check that every rule is followed in every 
instance; instead, the auditor checks if the grantee has a system of 
plans, methods, or procedures in place that would allow employees to 
prevent or detect problems in the normal course of their assigned 
duties. Federal agencies are required to have a similar system of 
internal controls in place to improve the accountability and 
effectiveness of federal programs and operations. Among other things, 
these systems should include the establishment of processes to collect 
information on grantee performance. 

GAO's Internal Control Framework:

Internal controls help government program managers achieve desired 
results through effective stewardship of public resources. Internal 
controls comprise the plans, methods, and procedures used to meet 
missions, goals, and objectives and, in doing so, support performance- 
based management. Internal controls also help managers safeguard assets 
and prevent and detect errors and fraud. Internal controls provide 
reasonable assurance that an organization achieves its objectives of 
(1) effective and efficient operations, (2) reliable financial 
reporting, and (3) compliance with laws and regulations. 

Our publication, Standards for Internal Control in the Federal 
Government, provides a road map for entities to establish control for 
all aspects of their operations and a basis against which entities can 
evaluate their control structures. Also, our publication, Executive 
Guide: Strategies to Manage Improper Payments: Learning from Public and 
Private Sector Organizations, focuses on the internal control standards 
as they relate to reducing improper payments--a focus of ongoing 
concern in Head Start and other programs for which ACF has oversight 
responsibility.[Footnote 5]

The five components of internal controls are:

* Control environment--creating a culture of accountability within the 
entire organization--program offices, financial services, and regional 
offices--by establishing a positive and supportive attitude toward the 
achievement of established program outcomes. 

* Risk assessment--identifying and analyzing relevant problems that 
might prevent the program from achieving its objectives. Developing 
processes that can be used to form a basis for measuring actual or 
potential effects of these problems and manage their risks. 

* Control activities--establishing and implementing oversight processes 
to address risk areas and help ensure that management's decisions--
especially about how to measure and manage risks--are carried out and 
program objectives are met. 

* Information and communication--using and sharing relevant, reliable, 
and timely information on program-specific and general financial risks. 
Such information surfaces as a result of the processes--or control 
activities--used to measure and address risks. 

* Monitoring--tracking improvement initiatives over time and 
identifying additional actions needed to further improve program 
efficiency and effectiveness. 

Through the implementation of these five internal control components, 
agencies can help ensure compliance with financial management 
requirements and strengthen program accountability. 

ACF's Organizational Structure and Oversight Processes:

ACF is responsible for federal programs that promote the economic and 
social well-being of families, children, individuals, and communities-
-such as the Temporary Assistance for Needy Families (TANF) program, 
the Child Care and Development Block Grant, and Adoption Assistance 
programs. ACF administers the Head Start program by awarding grants to 
nearly 1,700 grantees nationwide each year. The Head Start Bureau, a 
program office within ACF's Administration on Children, Youth, and 
Families (ACYF), develops program policy and designs the program- 
specific oversight processes. Other offices within ACF also play key 
roles in overseeing Head Start grantees. For example, ACF's Office of 
Financial Services develops and provides guidance on general grants 
management issues such as financial reporting processes for all ACF 
programs. ACF's 10 regional offices, operating through ACF's Office of 
Regional Operations, implement most of the oversight processes 
prescribed by the various program offices--such as the Head Start 
Bureau--and the Office of Financial Services. (See fig. 2.)

Figure 2: ACF Organizational Chart:

[See PDF for image]

[End of figure]

ACF has a number of processes it uses to collect information on grantee 
performance and financial management. The Head Start Act mandates that 
each grantee and delegate be assessed at least once every 3 years to 
ensure compliance with Head Start's performance standards. The Head 
Start Bureau develops the protocols for these assessments--the Program 
Review Instrument for Systems Monitoring (PRISM) Guide. The Head Start 
Bureau estimates that about 700 reviews are conducted each year-- 
covering about one-third of all grantees and selected delegate 
agencies. During these on-site reviews, a team of reviewers assesses 
whether the Head Start program is in compliance with statutory, 
regulatory, and policy requirements. The Head Start Act specifies that, 
whenever possible, these teams should be led by an employee of HHS who 
is knowledgeable about the Head Start program. In most cases, these 
teams are lead by staff from ACF's regional offices. The act also 
specifies that the rest of the team be knowledgeable about Head Start 
programs and, whenever possible, be knowledgeable about the diverse 
needs of eligible children and their families. Head Start has more than 
2,600 reviewers on contract that it sends out on week-long trips to 
visit grantees and conduct reviews. Many of the reviewers that ACF 
contracts to take part in PRISM reviews are employees of Head Start 
programs throughout the country. The size of each review team and the 
expertise of the various members of the team depends on the complexity 
of the issues anticipated at each grantee. 

Another key process ACF uses to monitor grantees is the annual survey 
of grantees, or the Program Information Reports (PIR). PIR is the only 
source of national data on Head Start programs. PIR data describe 
important program characteristics that may provide information for 
assessing risks to program finances or specific program objectives, 
such as:

* the different program designs and staffing patterns;

* the funded and actual enrollment of children (and pregnant women in 
Early Head Start programs with children ages 0 to 3);

* the number and types of health, education, disability, and family 
services delivered to enrolled children and families; and:

* the demographic, social, and other characteristics of the Head Start 
and Early Head Start children and families served. 

ACF also uses its reviews of financial reports and audits to monitor 
grantees. ACF requires Head Start grantees to report on their 
expenditures of federal funds once every 6 months. These financial 
reports are standard reporting forms for all federal grantees and, as 
such, do not include great detail on how a grantee spent its Head Start 
funds. The reports identify how much the grantee has spent and how much 
is left unspent. In addition, Head Start grantees' withdrawals are 
recorded in the Payment Management System (PMS)[Footnote 6] and made 
available for review by ACF staff monitoring grants. Grantees' Single 
Audits must be completed within 9 months of the end of the grantees' 
fiscal year. Table 1 summarizes ACF's key oversight processes. 

Table 1: ACF's Oversight Processes for Monitoring Grantees' Financial 
Management:

Monitoring process: On-site review (PRISM); 
Required frequency: Triennial; 
Purpose and description: To determine whether a grantee meets standards 
established in the Head Start Act, including those related to financial 
management, teams of federal staff and contracted consultants' conduct 
a weeklong, on-site review using a structured guide known as the 
Program Review Instrument for Systems Monitoring (PRISM). 

Monitoring process: Survey of grantees (PIR); 
Required frequency: Annual; 
Purpose and description: To provide management information to the 
Bureau and policymakers, all programs (grantees and delegates) are 
mandated by federal regulations to submit performance data, including 
key financial measures such as enrollment and teacher salary ranges. 
Grantees report these data through a survey known as the Program 
Information Report (PIR). 

Monitoring process: Review of financial reports; 
Required frequency: Semiannual; 
Purpose and description: To account for use of grant funds, all 
grantees must submit semiannual reports on the status and use of their 
federal funds. 

Monitoring process: Review of audits; 
Required frequency: Annual; 
Purpose and description: To ensure that federal grantees' financial 
statements are accurate, that they have adequate controls in place to 
protect federal funds, and that they are in compliance with key 
regulations, under the Single Audit Act all grantees must obtain an 
annual audit of their financial statements and compliance with selected 
federal laws and regulations. 

Monitoring process: Day-to-day contacts with grantees; 
Required frequency: Variable; 
Purpose and description: To assist Head Start programs, program 
specialists in ACF regional offices respond to grantee queries and 
other calls from grantee staff, parents, and others with an interest in 
their local Head Start programs. 

Monitoring process: Renewal application; 
Required frequency: Annual; 
Purpose and description: To provide information to support 
determination of the grantee's future funding level, grantees are 
required to submit renewal applications each year to the ACF regional 
office. 

Source: GAO analysis. 

[End of table]

ACF Lacks a Comprehensive Strategy to Assess Head Start Risks:

ACF uses many processes to collect information on grantee performance-
-including financial management performance--but does not bring 
together this information to comprehensively assess the program's risks 
and identify areas where it might need new or improved processes to 
collect key information. A comprehensive risk assessment is an 
important step in identifying and addressing weaknesses that might 
limit the program's ability to achieve its objectives. In a sign of 
their willingness to improve their own processes, during the course of 
our review, staff from ACF's Head Start Bureau expressed an interest in 
incorporating a risk assessment strategy into the financial segment of 
the PRISM review process, and such actions were taken during our 
review. ACF has acted less effectively to elevate the risk assessment 
strategy to its own operations, such as grants management in its 
regional offices. Although ACF collects information that would be 
useful in assessing Head Start's risks, we found that many of its 
monitoring processes have flaws that limit the reliability and 
usefulness of the information collected. Improving the reliability of 
the information it collects may help ACF identify financial management 
weaknesses in its grantees sooner. 

ACF Has Engaged in Limited Analysis of Financial Risks to Head Start:

Many of the efforts that ACF makes, through its component 
organizations, to collect information and assess program risks are 
poorly integrated. While we identified a number of risk assessment 
activities throughout ACF, we could not identify any effort to bring 
the various monitoring processes together and make a comprehensive 
assessment of Head Start's risks--including financial management risks. 
All federal grant programs, including Head Start, face some risks from 
grantees that might fail to comply with program-specific requirements, 
such as Head Start's income eligibility and enrollment restrictions. 
Other risks stem from failing to comply with general grants management 
requirements such as failure to develop cost allocation strategies to 
ensure that grantees spend federal funds on program beneficiaries and 
not on excessive overhead costs or other purposes. 

Program-Specific Risk Assessments:

In May 2004, the Head Start Bureau announced a new initiative focusing 
on increasing accountability in Head Start. But, this effort--ACF's 
Head Start Management Initiative--targets risks that were identified 
externally--in our recent reports, news articles, and congressional 
inquiries--and does not represent a comprehensive, proactive effort. 
The Initiative focuses on four risks: underenrollment, improper 
payments, failure to comply with program regulations, and excessive 
executive and administrative personnel compensation. To address these 
risks, ACF plans to strengthen on-site monitoring and develop an online 
management information system to track enrollment, fiscal, and 
programmatic data. Though these efforts are key first steps, ACF 
officials say they will be implemented in 2005, and it is too early to 
assess their effectiveness. However, the Initiative does not address 
other risks such as failures of board governance, which a senior Head 
Start official cited as a problem for most grantees with serious or 
persistent problems. The Head Start Bureau has offered governance 
training for Head Start program board members in (1) their fiduciary 
responsibilities, (2) their liability as board members if problems 
arise, and (3) effective board operations. ACF said that it is the 
responsibility of each grantee to train the members of its boards. ACF 
provided training on governance issues via satellite broadcast in 
September 2004 and ACF also said it made one-time training funds 
available to support such training needs. 

Until recently, ACF had not collected information that it could use to 
estimate the extent of improper payments and recent efforts have been 
limited in scope. ACF has recently collected data on the extent to 
which grantees may be enrolling children from families that exceed the 
program's income eligibility guidelines--a program risk because many 
eligible children may not have access to the services they deserve. 
However, ACF's implementation of a governmentwide effort to reduce the 
risk of improper payments has focused solely on measuring the risks 
that payments were made to grantees that enrolled too many children 
from families that did not meet the income eligibility requirements. 
ACF's approach has excluded improper payments that might be made for 
other purposes such as payments for unallowable program activities, 
improper payments to contractors, payments to grantees whose programs 
are significantly under-enrolled, and other unauthorized payments. To 
estimate the extent of improper Head Start payments owing to enrollment 
of income-ineligible families, ACF sampled 50 grantees and--projecting 
this sample to the program as a whole--found that about 4 percent of 
the families served by the program should not have been allowed to 
participate in the program. While ACF plans to continue to monitor this 
risk of improper payments by sampling grantees each year, it does not 
have plans to identify and estimate risks brought about by other types 
of improper payments. 

Grants Management Risk Assessments:

ACF relies on each of its regional offices to assess grant management 
risks in their own operations; but ACF has not recently conducted an 
independent compliance review, which is important to ensure that grants 
policies are followed and ACF's financial interests are protected. The 
Federal Managers' Financial Integrity Act (FMFIA) requires federal 
agencies to conduct self-assessments to ensure that their internal 
controls are adequately maintained and evaluated. As part of its self- 
assessment, each regional office reports on weaknesses it identified 
each year, efforts to correct previously identified weaknesses, and 
potential material weaknesses that represent broader threats to ACF's 
operations as a whole.[Footnote 7] For example, one region reported its 
Head Start property grant files did not contain complete, permanent 
records on all real property acquired or renovated with Head Start 
funds--a problem also identified in a HHS Inspector General (IG) report 
as early as 1996.[Footnote 8] Both the IG and the regional office 
reports said that as a consequence ACF was unable to protect federal 
interests in facilities acquired or renovated with Head Start funds. 
Although in its next FMFIA self-assessment the region reported that it 
was making progress addressing those risks and expected to complete 
rebuilding the files by March 2005, ACF told us in its comments on a 
draft of this report that it currently expected that this project would 
not be complete until September 2005. 

While the FMFIA self-assessments enable the regional offices to focus 
on some grants-management risks, periodic independent compliance 
reviews are also key to ensuring that the regional offices follow ACF's 
own oversight processes. As part of HHS's Balanced Scorecard 
Initiative,[Footnote 9] ACF reported in 2000 that some grants 
management offices received late reports from grantees, did not have 
systems in place to monitor grantee funds to identify excessive 
drawdowns, and might not be accounting for grant funds in a timely 
manner. The scorecard report recommended that ACF consider conducting 
formal compliance reviews of ACF regional offices to identify risks and 
correct any grants management problems. Officials with ACF's Office of 
Administration said that constraints on staffing and travel funds have 
prevented them from conducting any compliance reviews to ensure that 
regional offices staff follow ACF's oversight processes. 

ACF Has Multiple Processes to Oversee Grantees' Financial Management, 
but Each Has Weaknesses:

ACF's main processes for collecting information on the financial 
management of Head Start grantees--on-site reviews, annual grantee 
surveys, and analyses of financial reports and audits--could form the 
foundation for systematically collecting and analyzing grantee 
information, but we found flaws in each method that limit the value of 
the information collected. 

Lack of Effective Evaluation of On-Site Reviews:

Although ACF has made some progress in improving its on-site reviews, 
we found that it has no process to ensure that the review teams follow 
the Head Start Bureau's guidance or that managers and staff in ACF 
regional offices are held accountable for the quality of the reviews. 
PRISM reviews are ACF's primary tool to assess whether grantees are in 
compliance with statutory and regulatory requirements. Since the last 
time we reported on the on-site review process in 1998,[Footnote 10] 
ACF has made substantial revisions to its PRISM guide, which now 
focuses on three elements of a successful Head Start program: Child 
Development and Health Services, Family and Community Partnerships, and 
Program Design. Financial management issues are addressed under the 
Program Design component. The effectiveness of the PRISM review in 
systematically identifying grantees with financial management 
weaknesses depends on some assurance that PRISM is implemented as 
designed and the team members who are conducting the reviews have the 
skills they need to assess grantee compliance with the Head Start 
performance standards. 

There is evidence that some reviewers may not follow PRISM guidelines 
and, as a result, some grantees are not reviewed as rigorously as 
others. In 2003 and 2004, the Head Start Bureau re-reviewed 5 grantees 
after the initial PRISM reviews, which was conducted by regional office 
staff and contract reviewers, found few problems. In each case, the 
subsequent review, which was led by reviewers selected by the Head 
Start Bureau, found that each grantee was out of compliance with many 
Head Start performance standards. Head Start regional managers said the 
reviewers selected by the Head Start Bureau were more skilled and that 
they followed the PRISM guidelines more closely than the teams of 
reviewers lead by the regional office staff. 

In addition, different review teams reported different findings for the 
same grantees. For example, to limit disruption to Head Start grantees, 
ACF's team reviewing improper payments accompanied PRISM reviewers in 
2004 and conducted their review of the grantees' eligibility and 
recruitment systems simultaneously. In its sample of 50 grantees, ACF's 
improper payments reviewers found that 42 percent (21 grantees) failed 
to meet the program's income eligibility requirement. However, the 
PRISM teams that were supposed to have reviewed the children's files at 
the same grantees and at the same time, found only 3 grantees--of the 
same 50 reviewed in the sample--out of compliance with the income 
eligibility requirements. Both sets of reviewers should have come to 
the same conclusions as both assessed compliance with the same 
standard. 

It is unclear whether the failure to reach similar conclusions in these 
specific cases was the result of poor training, lack of skills, or 
other causes. The Head Start Bureau has raised concerns about the lack 
of independence of PRISM review team leaders, who are employees of 
ACF's regional office with responsibility for the Head Start programs 
in their region. Until 2001, the PRISM reviews were led by the same 
employee responsible for the day-to-day communications with that 
grantee. In 2001, the Head Start Bureau asked that ACF regional office 
staff not lead the reviews on grantees that they work with on a regular 
basis. 

ACF's new team leader policy is intended to help ensure that the 
results of the review are independent and credible but, as the examples 
noted above illustrate, there are still concerns about whether the 
PRISM teams are rigorously applying the PRISM framework to achieve a 
thorough and reliable result. Although regional office staff no longer 
lead reviews for grantees for which they have day-to-day oversight 
responsibilities, the way many regional offices implement the PRISM 
process may still affect the independence--and, therefore, the 
credibility--of the PRISM reviews. Once the review team has returned 
from its on-site visit, the regional office management team responsible 
for working with those grantees on a day-to-day basis reviews the 
findings of the PRISM team and prepares the PRISM report. This 
management team makes the determination regarding the status of the 
grantee and any corrective actions the grantee needs to take to address 
problems identified in the review. 

Regional office staff we spoke with told us that the contractors on 
their teams were ill-prepared and lacked the knowledge necessary to 
conduct a PRISM review. The Head Start Bureau has the responsibility 
for identifying and training qualified reviewers to conduct the 
reviews.[Footnote 11] In 2004, Head Start embarked on an effort to 
begin training the members of its reviewer pool. They began the effort 
by training fiscal reviewers because they said this was the area of 
PRISM that had the greatest and most immediate need. In October 2004, 
Head Start trained about 400 fiscal reviewers in a 2-day session on a 
new fiscal management checklist to prepare them for the 2005 reviews. 
While there was no assessment at the end of the training, Head Start 
plans to require that more experienced fiscal reviewers accompany new 
reviewers during their first few PRISM reviews. In August 2004, the 
Head Start Bureau also provided a 2-day training course for nearly all 
its reviewers that focus on program design and management issues--a 
critical area that senior Head Start officials said needs more 
attention. 

It is unclear whether this training on the PRISM process alone will 
adequately equip those responsible for assessing the management of the 
Head Start grantees. ACF may need to seek greater assurances that its 
reviewers have the skills and knowledge they need to apply the PRISM 
process to the circumstances at every grantee they review. In 2004, the 
Head Start Bureau began to develop qualifications for PRISM reviewers 
and began asking the reviewers to provide a list of their 
qualifications. Head Start officials said that the first set of 
qualifications they developed were for fiscal reviewers. The new 
qualifications include a bachelor's degree or higher in accounting--or 
other business-related degree--and experience with the Head Start 
program and federal grants management. According to officials 
responsible for overseeing contractor recruitment, they do not check 
reviewers' credentials or references. The lack of verification of the 
reviewers' qualifications and the limited scope of any training 
provided to these reviewers may present challenges, especially as the 
Bureau tries to implement PRISM's new fiscal management checklists. 

The Head Start Bureau also implemented two new procedures to support 
improvements on PRISM reviews. First, contracted team members are 
encouraged to evaluate each others' performance during the PRISM 
review. Head Start Bureau officials said they plan to use the 
assessments of the contracted PRISM reviewers to determine future 
training needs and to evaluate whether poorly rated reviewers should 
continue to participate in PRISM reviews. However, there is no process 
to evaluate the federal team leader's performance. Second, in 2002 the 
Head Start Bureau began to critique final PRISM reports to ensure that 
the reports were issued within 45 days of the PRISM review and to 
improve the quality of the evidence that supported the findings. For 
example, a finding of noncompliance with a regulation should be 
supported by two forms of corroborating evidence. 

These two procedures may help Head Start improve the quality of the 
PRISM reviews and the written reports, but neither provides the 
independent verification needed to ensure that all reviewers 
consistently follow the PRISM guidelines. There is no procedure to 
independently--and systematically--verify the quality of the review nor 
whether the team of reviewers rigorously followed the framework. The 
Director of ACF's Regional Operations expressed reluctance to solicit 
feedback on the team leaders' performance from nonfederal contract 
workers. However, one of ACF's regional office administrators said that 
she would welcome such information. According to this administrator, 
the Head Start Bureau does not provide the regional offices with 
information on the PRISM reviews that they can use to compare their 
staff's performance with staff in other regional offices. 

Lack of Procedures to Independently Verify the Accuracy of Grantee 
Performance Data:

ACF surveys all grantees annually to measure key aspects of the 
program's performance nationally, but does not independently verify the 
data submitted by the grantees. The PIR survey--the only source of 
national data on Head Start grantees--provides the Congress, the 
administration, federal agencies, Head Start grantees, legislatures, 
state and local agencies, and the public a description of Head Start 
program performance in order to oversee grantee progress, manage 
federal resources, and develop Head Start policies. Despite its 
widespread use in providing the public with information on the national 
Head Start program and in overseeing grantees, our analysis raises 
significant concerns about the reliability of the data from this 
survey. 

We found discrepancies in the database that raise questions about the 
accuracy of the data that grantees provided. Our December 2003 report 
on Head Start enrollment found that ACF does not know if grantees are 
fully-enrolled because the data it collects on enrollment through the 
PIR survey contained inaccuracies that we determined made the data 
unreliable for our purposes. Moreover, when ACF attempted to verify the 
data submitted by 75 grantees that had reported particularly higher or 
low enrollment, it found that approximately half had erroneously 
reported their actual numbers.[Footnote 12]

During the current review, we found, despite more than 700 checks for 
internal inconsistency, instances where the data were not internally 
consistent. For example, data from the 2003 survey showed that the 
number of Family and Community Partnership staff without degrees but in 
career path training vastly exceeded the total number of Family and 
Community Partnership staff reported in the survey. We conducted 29 
tests to check for data consistency. Our tests were designed to ensure 
the reliability of (1) some of the more 700 tests already included in 
the PIR database and (2) grantee data that were not covered by PIR 
checks for data consistency. These tests included all three sections of 
the PIR database: enrollment and program operations, program staff and 
qualifications, and child and family services. In 18 of our 29 tests, 
PIR data summed to different totals than they should have, given the 
internal consistency checks, or contained inconsistent data that did 
not sum to the expected total. (See app. I for more information about 
our testing and analysis of the PIR database.)

ACF relies on PIR's internal consistency checks and the regional 
offices to ensure the accuracy of the PIR data. However, as long as the 
grantee reports data consistently throughout its PIR report, internal 
checks will not detect inaccurate data. The only way to determine 
whether the grantee has accurately completed its survey is to verify 
the data against the grantee's own records, but regional office staff 
have only about 6 weeks from the time they receive preliminary data 
until the database is finalized each year. During this time, regional 
office staff will work with grantees that have not finished their 
surveys and with grantees that have filed a survey that did not pass 
the internal consistency checks. Regional office staff said there is 
little time to verify even key data--such as enrollment and teacher 
qualifications--before the database is finalized and closed for further 
data entry. 

Limited Use of Financial Reports and Audits:

ACF officials do not routinely reconcile a grantee's withdrawals with 
its reported expenditures until after all the funds have been spent. 
Regional ACF staff said that such a reconciliation is difficult because 
the reporting format for the expenditure information is different from 
the format used to report withdrawals. For example, Head Start grantees 
report aggregate expenditures every 6 months whereas information on the 
grantees' withdrawals is not aggregated and cannot be easily reconciled 
to the same time period. However, not reconciling withdrawals and 
expenditures more frequently impedes ACF's ability to identify grantees 
that might be drawing down excess funds at the beginning of the grant 
period and creating shortfalls at the end of the year. 

Regarding audits, ACF officials cited limitations in the scope and 
timing of the audits as an explanation for failing to use them more 
systematically in their day-to-day monitoring activities.[Footnote 13] 
However, this explanation reflects a misunderstanding of the nature and 
meaning of the audit findings. For example, many Head Start grantees 
spend funds from a number of federal programs. While it is true that, 
under a single audit, a large entity that runs multiple federal grant 
programs might not have its Head Start grant audited every year, the 
auditor would focus its attention on the grantee's internal controls-- 
the management systems it has in place to ensure that it can comply 
with all federal regulations--regardless of the specific programs to 
which they apply. 

ACF regional office staff also cited lengthy delays in receipt of the 
audit reports as a limitation in the usefulness of the audits for 
oversight purposes. ACF officials told us that it can take up to 6 
months from the date the audit is completed to receive the official 
copy of the audit report.[Footnote 14] As a result of these delays, 
regional staff told us that they wait for the next audit to verify that 
findings from previous audits have been corrected. To address the 
problems created by these delays, some regional offices ask for copies 
of the audits from the grantees so they can identify problems earlier, 
but it was not clear they had authority to do so. 

In focusing on the limitations of the audits, these ACF officials may 
overlook some valuable information on the grantee's financial 
management practices. Even if an audit does not cite the Head Start 
program in particular, any material weaknesses in internal controls 
should raise concerns about the grantee's ability to manage its federal 
funds and should be factored into the overall assessment of the risks 
associated with that grantee and the impact those risks might have on 
the entire program. 

ACF Does Not Ensure That Grantees Effectively Resolve Financial 
Management Problems:

We found that longstanding financial management problems continued in 
many grantees even after ACF had identified their problems and cited 
the grantees for failing to comply with program requirements. In our 
review of the files of 55 grantees with financial management weaknesses 
and interviews with agency staff, we assessed the range of actions 
taken by ACF staff responsible for overseeing these grants. While our 
review of selected files was limited to 4 of ACF's regional offices and 
may not represent the entire range of actions employed nationwide by 
ACF officials to resolve such weaknesses,[Footnote 15] we found a 
limited use of ACF's authority to require grantees to take corrective 
action. We also noted inconsistencies in the process used by the 
regional offices to determine the severity of the grantees' problems. 
As a result, grantees with similar problems may be treated differently. 
When problems are severe, ACF may try to convince grantees to 
relinquish their grants in order to expedite transition to a different 
provider. ACF makes limited use of its authority to deny funding to 
problematic grantees. 

ACF's Approach to Addressing Grantee Problems Does Not Resolve Many 
Grantees' Long-standing Management Challenges:

Among the tools available to ACF to resolve grantees' problems-- 
including self-certification, special award conditions, and site 
visits--ACF most commonly relied on grantees to self-certify that they 
had corrected any problems identified during audits or PRISM reviews. 
We tracked 30 audits from the date the auditor completed the audit and 
identified financial management weaknesses until the regional office 
staff considered the auditors' findings resolved. In all 30 cases, the 
ACF regional office asked the grantee to send a letter explaining how 
those findings had been resolved and did not conduct a site visit or 
other follow up with the grantee. Regional staff said that they do not 
typically visit grantees to resolve audit findings but instead rely on 
subsequent audits to ensure that all findings have been addressed. We 
found that it frequently takes up to 2 years from the point the first 
audit identifies a problem until the regional office receives the 
second audit, during which time the grantee continues to receive 
federal grant funds. (See fig. 3.)

Figure 3: Average Timeline for Audit Review Process for Files Reviewed:

[See PDF for image]

[End of figure]

ACF rarely uses other tools, such as special award conditions, to 
ensure that grantees are working to correct problems. When ACF 
designates a grantee high-risk, it imposes more restrictive conditions 
(a special award condition) than normally required of grantees, such as 
more frequent financial reporting, or it can require the grantee to 
seek prior approval from the ACF program specialist before it can spend 
any federal funds. However, we found that the regional offices take 
such steps infrequently. 

The third tool, site visits, is used infrequently to help grantees' 
resolve their financial problems. Program specialists in the regional 
offices cited a heavy workload as the key reason they are not able to 
make more frequent visits to grantees with financial management 
problems. As a result, many grantees are only visited by ACF officials 
once every three years during their regularly scheduled PRISM review. 
Many program specialists in ACF regional offices that we visited told 
us they most frequently learn that a grantee is having trouble through 
a call from a parent or teacher reporting a problem. Although program 
specialists said that such calls were a routine part of their day-to- 
day monitoring activities, over-reliance on this approach to 
identifying problems can result in missed opportunities to help 
grantees address management challenges before they become problems. ACF 
regional office managers said that program specialists with 
responsibility for overseeing Head Start grantees typically are 
responsible for about 12 grantees. Regional office managers working on 
Head Start programs noted concerns that future caseloads may increase 
as staff retire and limits on future hiring constrain their ability to 
replace these workers. 

Our review of files showed that ACF relied most often on self- 
certification rather than its other tools. We reviewed the files of 34 
grantees with financial management weaknesses that were identified 
during PRISM reviews. In 18 cases, ACF determined that the grantees' 
problems were not severe enough for the grantee to be deemed deficient. 
Of those 18 grantees, the regional office required 16 to submit letters 
indicating resolution had been achieved, and no further action was 
pursued. In the 2 cases that ACF decided to return to visit, it found 
that the grantees had not corrected the problems identified in the 
PRISM review. Because they had not corrected their problems as required 
by law, ACF deemed the grantees deficient and required them to develop 
and implement a quality improvement plan. When ACF then revisited these 
grantees, it verified that the problems had been corrected. It was not 
clear from our file review how ACF prioritized these 2 grantees for 
follow-up, but in revisiting these grantees ACF took an aggressive step 
to ensure compliance. Similar assurances that the other 16 grantees 
addressed their problems cannot be ascertained until they are visited 
again during their next PRISM review. 

Despite the application of tools such as self-certification, special 
award conditions, and follow up visits to the grantee, our review of 
Head Start's PRISM databases for fiscal years 2000-2003 showed that 
many of the same grantees that were noncompliant with financial 
management standards in 2000, were noncompliant in those same areas in 
their subsequent reviews. The 2000 PRISM reviews identified 838 
grantees (about 76 percent of all those reviewed) out of compliance 
with one or more financial management standards--either in fiscal 
management, program governance, or record keeping and reporting. Many 
of those grantees were cited in more than one of those three areas. The 
next time those same grantees were reviewed, 440--or 53 percent--were 
cited again for problems in those same areas. As figure 4 shows, for 
those 440 grantees, there was little change from one review to the 
next. The repeat problems could be a result of failure to correct the 
problems in the first place--something that might have been identified 
with a follow up review--or an initial correction that did not take 
hold. One senior official in a regional office said that many Head 
Start grantees will fix a problem identified in the PRISM report in the 
short term but fail to make lasting changes to their financial 
management systems. For example, a grantee might try to meet financial 
reporting deadlines for a few months after being cited by a PRISM 
review team for missing deadlines, but if the grantee did not implement 
a system to ensure that these reports are on time consistently, the 
improved performance may not be sustained. 

Figure 4: Grantees with Recurring Financial Management Problems (2000- 
2003):

[See PDF for image]

[End of figure]

While grantees usually self-certify the resolution of problems 
identified through their financial audits, when the PRISM review 
identifies a severe problem--deemed a deficiency--there are specific 
actions required by law that grantees must take to resolve the 
deficiency. However, we noted inconsistencies in the process used by 
the regional offices to determine the severity of the problems. For 
example, reports based on the on-site reviews for 20 of the grantees we 
reviewed showed similar problems in the quantity of violations and the 
severity of the weaknesses, but only 10 were deemed deficient by the 
ACF regional office. In comparing the problems cited in two grantees' 
PRISM reports, we noted that both had serious violations in program 
governance and fiscal management issues, but the ACF regional office 
only deemed one deficient and not the other. According to each 
grantee's PRISM report, the governing boards of both grantees failed to 
exercise their responsibilities fully, did not participate in the 
development of the funding applications, did not participate in 
developing the strategies associated with planning the grantees' 
program, and did not help develop the grantees' eligibility and 
recruitment procedures. Similarly, both grantees were cited for failing 
to meet a number of financial management requirements, such as 
comparing actual expenditures to their budgets or ensuring that they 
had adequate insurance coverage. The first grantee was not found 
deficient and was required to correct the problems cited in its report 
and self-certify that all problems had been resolved. The other 
grantee, deemed deficient, was required to develop and implement a 
quality improvement plan that was monitored closely by the regional 
office staff throughout the next year and in a follow-up review a year 
later. While regional office staff and their managers in all the 
regional offices we visited said they meet to discuss any problems 
identified during the review process to determine the severity of the 
problems, they said they treat each case differently and largely base 
their decisions on their previous experiences working with the 
grantees. However, based on our discussion with regional office staff, 
we could not discern an objective pattern justifying such disparate 
treatment. 

ACF Has Made Little Use of Authority to Fund New Grantees to Replace 
Poorly Performing Grantees:

ACF has not made full use of its authority to identify new 
organizations to take over from poorly performing grantees. The Head 
Start Act requires that, when awarding funds for Head Start service, 
ACF give preference to current Head Start grantees. But, under the Head 
Start Act, ACF is not required to give a priority to the grantee if it 
determines that the grantee fails to meet program, financial 
management, and other requirements established by the agency.[Footnote 
16] However, we found that ACF continues to fund a grantee--even a 
deficient grantee--until the grantee either relinquishes the grant or 
the grantee is terminated. Of the 55 files we reviewed of grantees with 
known financial management weaknesses, we found that in less than half 
(26 cases) the program specialist noted problems identified in a PRISM 
review or audit in deciding whether to recommend refunding the grant. 
In each of these 26 cases, the ACF approving officer recommended 
continued funding despite the problems cited in the reports. In the 
other 29 cases, ACF's approving officer also recommended refunding 
without noting in the files that there were concerns relating to 
financial management weaknesses. 

While ACF may remove grantees that have demonstrated poor performance-
-including poor financial management--through termination, ACF rarely 
uses its authority to do so. Between 1993 and 2001, 27 grantees were 
terminated. Senior Head Start officials in 2 of the ACF regional 
offices we visited told us that, although mechanisms are in place to 
ensure continuity of Head Start services following a 
termination,[Footnote 17] they are reluctant to pursue terminations 
because the processes used to collect information to support such an 
action are inadequate and the procedures required to terminate a 
grantee can be a drain on scarce staff resources. 

More often, when dealing with poorly performing grantees, ACF tries to 
convince them to relinquish the grant in lieu of initiating termination 
proceedings and then seeks another grantee to serve the community. 
Between 1993 and 2001, 117 grantees voluntarily relinquished their 
grants or did so at HHS's request; about 54 percent of those grantees 
experienced problems with fiscal management issues. If a grantee 
refuses to relinquish its grant, ACF can proceed by notifying the 
grantee that its grant will be terminated. 

Both termination and negotiations toward relinquishment can be 
protracted, in part because a Head Start grantee's right to receive 
funding throughout its appeal may prolong the termination process. A 
senior Head Start official noted that there is an incentive for 
grantees to appeal ACF decisions to terminate programs, because their 
legal costs are covered and they can continue to operate their programs 
while their appeal is pending. According to an administrative judge 
with HHS's Departmental Appeals Board, continued receipt of funding 
through the appeals process makes Head Start unique among other HHS 
grant programs. While grantees of other programs can appeal an adverse 
funding decision, they cannot continue to receive federal funds unless 
the decision is reversed. 

When grants are allowed to remain with poorly performing grantees, 
children being served may not be getting the "head start" they deserve 
because the grantees continuously fail to meet program and financial 
management standards. For example, in 2003, ACF tried to convince a New 
Mexico grantee to relinquish its grant; at the time the grantee had 
been accused of failure to provide pertinent information to federal 
officials investigating allegations of fraud and abuse and meet other 
program standards. Although the ACF regional office had demanded 
repayment of $526,000 after records obtained by the Federal Bureau of 
Investigation (FBI) and HHS's Inspector General indicated that many of 
the enrolled families were ineligible, the grantee appealed that 
decision, maintaining that it required records taken by the FBI and 
without them it could not properly prepare for its appeal. The appeal 
was still pending as of our file review, but on July 1, 2004, ACF 
awarded $2 million to this grantee to serve a reduced number of 
children and their families in its community. 

Similarly, a West Virginia grantee announced that it would appeal ACF's 
July 2004 decision to terminate its grant. This grantee had been cited 
for failing to meet federal financial requirements in every audit since 
1997. Moreover, a 2002 PRISM review could not determine how the grantee 
had spent over $400,000 in grant funds but noted that it was clearly 
not spent providing Head Start services to children and their families. 
Before initiating the termination process with this grantee, ACF worked 
for more than a year to get the grantee to develop and implement a 
quality improvement plan. During this time, the grantee continued to 
receive federal funding and was the only Head Start program available 
to families in that community. (See fig. 5 for a detailed description 
of some of the challenges ACF faced addressing one grantee's financial 
management problems.)

Figure 5: A Case Study: Northwest Arkansas Head Start Human Services, 
Inc. 

Northwest Arkansas Head Start Human Services, Inc., provides Head Start 
services in Rogers, Arkansas, and surrounding communities. The grantee 
has operated a Head Start program since 1982 and expanded considerably 
in the last decade. In 2004, the grantee received a $3.5 million grant 
to serve 504 children and their families. After 2 decades of operation, 
the program still faces financial management problems. 

Single audits as early as 1998 showed that the grantee had not complied 
with financial management requirements. Specifically, the 1998 and 1999 
audits reported significant cash management problems. Grantee staff and 
board members attribute these problems to a general lack of financial 
management expertise and unsound financial management practices. For 
example, the grantee did not set aside reserves for accrued leave time 
and other contingencies. As a result, when employees left the 
organization and they were paid for their accumulated leave, there were 
shortfalls in the program's budget for current operating expenses. 
Moreover, audits for 2000 and 2001 were never completed and submitted 
to the grantee's board. 

The problems persisted until June 2002, when the regularly scheduled 
PRISM review deemed the grantee deficient for failing to comply with 
many of Head Start's financial management requirements and other 
program requirements. The grantee was given a year to develop and 
implement a quality improvement plan. When a PRISM review team returned 
in April 2003, it found that the grantee had resolved all its financial 
management problems. 

Despite this positive assessment from the April 2003 review team, the 
fiscal year 2003 audit reported that the grantee had given $25,000 of 
its grant funds to another program it operates--a violation of federal 
grants management policies. Moreover, in August 2003, a newly hired 
fiscal director reported to the press that the grantee faced a severe 
budget crisis and would not be able to stay open without additional 
funding. Calls from parents and teachers to the Head Start Bureau 
spurred ACF officials to conduct a fourth PRISM review in December 
2003. This team--selected by the Head Start Bureau--found the grantee 
deficient and took aggressive action to protect federal Head Start 
funds by requiring that the regional office approve every expenditure 
that grantee makes. 

The Northwest Arkansas Head Start Human Services, Inc., board president 
said the agency has been working to implement its quality improvement 
plan to ensure that improved financial management practices are 
lasting. 

Source: GAO analysis. 

[End of figure]

Unless ACF exercises its authority to remove problematic grantees from 
the program, poor links may persist between a grantee's funding and its 
performance. Poorly performing grantees--such as those noted above-- 
continue to receive federal grant funds for years without making the 
improvements to program design and management that are called for. 
Children and their families in communities served by these grantees 
continue to have access to a federally funded Head Start program, but, 
because their Head Start grantee continually fails to meet the 
program's requirements, it is unclear whether these children are 
receiving the level of services they should. 

Conclusions:

The federal government relies on nearly 1,700 grantees to provide Head 
Start services to nearly one million children and their families each 
year. As the federal investment in Head Start grew in the 1990s, the 
challenges of overseeing nearly $7 billion in federal grant funds also 
grew. While federal policymakers and program managers are continually 
seeking ways to improve accountability for Head Start, ACF has not 
implemented a well-integrated monitoring system to oversee the Head 
Start program, including its financial management. 

Until ACF builds a foundation for overseeing its Head Start program 
that incorporates a comprehensive assessment of the program's risks-- 
including financial management risks--whenever poor grantee performance 
attracts attention ACF will be unable to ascertain how widespread the 
problems are. A risk assessment can help to identify what type of 
information an organization needs to gather on grantee performance--
especially financial management. Some of the processes ACF currently 
uses to collect data have flaws that prevent the agency from being able 
to rely on the data to ensure that Head Start is indeed achieving the 
expected outcome of helping poor children and their families. Until 
ACF's data collection processes are improved and reasonable assurances 
are put in place to ensure the reliability of the data collected, ACF 
is not in a strong position to base future funding decisions on grantee 
performance. Similarly, while it has begun to train staff and to 
implement key monitoring processes, it is unclear whether these efforts 
are sufficient to ensure the reliability of the data ACF collects on 
grantee financial management. 

If ACF improves the processes it uses to collect and analyze data on 
grantee financial management, ACF will be in a stronger position to 
link funding opportunities to performance. For example, ACF may be able 
to make greater use its authority to recompete grants that are 
currently awarded to poorly performing grantees. Currently, in order to 
ensure the continuity of Head Start services in a given community, ACF 
relies on current grantees--even those with weak financial management 
systems--to provide those services until it completes the termination 
process and the current grantee has exhausted all appeals or has 
voluntarily agreed to relinquish its grant. Competition for grants 
might create a stronger incentive for those grantees that are not 
performing up to standards to correct their problems and develop sound 
systems of financial management; if these grantees are unable to 
correct their problems, ACF may be able to more quickly identify a 
grantee that can better meet the program's performance standards. 

Matter for Congressional Consideration:

Because of ACF's uncertainty about the scope of its authority to 
implement our recommendation to make greater use of its authority to 
recompete Head Start grants, Congress may wish to clarify ACF's 
authority to recompete grants if ACF determines that the current 
grantee fails to meet Head Start's program or financial management 
requirements. 

Recommendations for Executive Action:

To improve oversight of the Head Start program and the financial 
management of Head Start grantees, we are making the following 8 
recommendations to the Assistant Secretary for Children and Families to:

* Produce a comprehensive risk assessment of the Head Start program 
that incorporates information from the various components of ACF with 
oversight responsibilities for Head Start grantees and assesses actual 
or potential risks of mismanagement. This assessment should be updated 
periodically to provide reasonable assurances to Head Start management 
that the program's grantees are financially sound and that program 
objectives are being met. 

* To better establish and assess program risks, ACF should develop 
plans to collect data on and estimate the extent of improper payments 
made for unallowable activities, payments to grantees whose programs 
are significantly underenrolled or other unauthorized payments. ACF 
currently collects data on the extent to which over-income families are 
enrolled in Head Start programs and has estimated the number of such 
families nationwide. Additional efforts should be made to collect data 
on other types of improper payments and to use the data to more 
comprehensively assess the program's risks. 

* To improve the processes it currently uses to collect and analyze 
information on program risks, ACF should:

* ensure that training and certification for all PRISM reviewers, 
including federal team leaders, is provided to enable the reviewers to 
perform their responsibilities in accordance with the review framework 
developed by the Head Start Bureau;

* develop an approach that can be applied uniformly across all of ACF's 
regional offices to assess the results of the PRISM reviews and ensure 
consistent treatment of grantees with similar problems when determining 
whether grantees should be deemed deficient; and:

* implement a quality assurance process to ensure that the framework 
for conducting on-site reviews is implemented as designed, including 
holding ACF's regional management accountable for following this 
framework and for the quality of the reviews. 

* To enhance the usefulness of the data ACF collects through its annual 
PIR survey in assessing the program's risks, ACF should ensure that 
information it uses for program management--and reports to the Congress 
and the public--is accurate. This may require independently verifying 
key data submitted through the annual survey or ensuring that the 
grantee has a system in place to collect and report accurate, 
verifiable data. 

* To more quickly identify financial risks associated with 
mismanagement of federal funds, ACF should make greater use of the 
information it currently collects on the status and use of federal 
funds. For example, ACF should reconcile all grantees' reported 
expenditures with their actual withdrawals more frequently to ensure 
that grantees are not drawing down excess funds at the beginning of 
their grant period and have enough funds to provide services to 
eligible children and their families for the entire year. 

* Prior to refunding a grant, ACF should take steps to obtain 
competition for the grant if it has determined that the current 
recipient of those grant funds fails to meet program, financial 
management, or other requirements. In these instances, ACF should use 
its existing authority to conduct such competitions without giving 
priority to the current grantee, while ensuring that the grantee is 
afforded all applicable statutory protections, including reasonable 
notice and an opportunity for a full and fair hearing. 

Comments from the Administration for Children and Families and Our 
Evaluation:

ACF provided written comments on a draft of this report; these comments 
appear in appendix II. ACF also provided technical comments that we 
incorporated as appropriate. ACF agrees that Head Start grantees must 
be efficient, effective, and held accountable. ACF agreed to implement 
a number of our recommendations to improve the processes it uses to 
collect and analyze information on grantee performance--including 
financial management. 

ACF did not directly address our recommendation that it seek ways to 
hold regional management accountable for following the PRISM framework 
and for the quality of the reviews. ACF regulations require that 
regional management assess grantee compliance with program 
requirements. In order to ensure that grantees are held accountable, it 
is also important to create a culture of accountability throughout ACF, 
including the regional offices. To aid in accomplishing this objective, 
we continue to recommend that ACF develop a method to hold regional 
management accountable for following the PRISM framework and for the 
quality of the PRISM reviews. 

ACF did not directly address our recommendation that ACF develop plans 
to collect data on and estimate improper payments made for unallowable 
activities. ACF's technical comments noted that audit reports and other 
reviews will identify other possible improper payments. However, 
reliance on these oversight tools will not provide ACF with a 
systematic way to assess risks associated with other types of improper 
payments. We continue to recommend that in order to better estimate 
program risks, ACF should develop plans to collect data on and estimate 
the extent of improper payments made for other unallowable activities. 

ACF expressed concerns about its authority to implement our 
recommendation to recompete Head Start grants under certain 
circumstances. ACF did not elaborate on its concerns other than to 
state that in order to replace a grantee it must terminate the grant. 
Because of ACF's uncertainty about the scope of its authority, Congress 
may wish to consider clarifying ACF's authority to obtain competition 
for any grant if it determines that the current recipient of those 
grant funds fails to meet program or financial management requirements. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its issue date. At that time, we will send copies of this report 
to the Assistant Secretary for HHS's Administration for Children and 
Families, relevant congressional committees, and other interested 
parties. We will also make copies available to others upon request. In 
addition, the report will be made available at no charge on GAO's Web 
site at http://www.gao.gov. 

Please contact me at (202) 512-7215 if you or your staffs have any 
questions about this report. Other contacts and major contributors are 
listed in appendix III. 

Signed by: 

Marnie S. Shaul: 
Director, Education, Workforce, and Income Security Issues:

List of Congressional Requesters:

The Honorable Michael B. Enzi: 
Chairman: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate:

The Honorable Lamar Alexander: 
Chairman: 
Subcommittee on Education and Early Childhood Development: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate:

The Honorable Judd Gregg: 
United States Senate:

The Honorable John A. Boehner: 
Chairman: 
Committee on Education and the Workforce: 
House of Representatives:

The Honorable Michael N. Castle: 
Chairman: 
Subcommittee on Education Reform: 
Committee on Education and the Workforce: 
House of Representatives:

[End of section]

Appendix I: Scope and Methodology:

To assess whether the Department of Health and Human Services' (HHS) 
Administration for Children and Families (ACF) can consistently 
identify Head Start grantees' financial management weaknesses, we 
reviewed and analyzed agency policies, manuals, publications, and other 
documents to identify the oversight framework and processes it uses to 
manage grants and oversee Head Start grantees. We confirmed our 
understanding of the key oversight processes in interviews with ACF and 
Head Start Bureau headquarters officials. To learn how these oversight 
processes are implemented, we interviewed Head Start officials and 
reviewed selected case files during site visits to 4 ACF regional 
offices. We also conducted telephone interviews with Head Start 
officials at the 6 other ACF regional offices. 

We viewed financial management[Footnote 18] weaknesses as occurring 
when ACF, the grantee's auditor, or HHS' Office of Inspector General 
(IG) determined that a grantee did not adhere to financial management 
requirements contained in applicable laws, federal regulations, Office 
of Management and Budget (OMB) circulars, and related HHS guidance. ACF 
identifies financial management weaknesses through its monitoring 
activities, such as its triennial reviews or its audit resolution 
activities.[Footnote 19] The grantee's independent auditor identifies 
financial management weaknesses as it performs the required annual 
audit, and the IG's National External Audit Review Center (NEAR) 
identifies financial management weaknesses through its review of the 
annual audit and related documents.[Footnote 20] For example, a grantee 
is required to have source documents and accounting records to support 
the periodic statements it provides to its governing board, the 
semiannual financial reports it sends to ACF, and the annual financial 
statement that is subject to the Single Audit process. Other examples 
of financial management weaknesses include failure to establish and 
adhere to accounting policies or to maintain the source documents and/ 
or accounting records necessary to prepare periodic or annual 
statement, concerns that a grantee has inadequate operating funds to 
remain a going concern, and failure to obtain and properly account for 
the required nonfederal 20 percent share of program costs. 

We analyzed the Head Start oversight framework using the internal 
control framework contained in our Standards for Internal Control in 
the Federal Government and required by federal program management in 
accordance with OMB's Circular A-123: Management Accountability and 
Control. Our analysis of the Head Start oversight framework addressed 
Head Start's control environment, ACF's analysis and assessment of the 
risks the program faces, the control activities that ACF established to 
address these risks and help ensure that program objectives are met, 
ACF's methods of communicating the results of its oversight activities, 
and ACF's efforts to monitor and track the results of its efforts to 
improve program efficiency and effectiveness. 

We assessed the reliability of information from two computer-based 
systems that ACF uses to manage the program, report to Congress and the 
public on program results, and record the results of on-site PRISM 
monitoring reviews. The systems are the Program Information Reporting 
(PIR) system used to collect enrollment, staffing, and program 
information from each Head Start grantee and delegate; and the Program 
Review Instrument for Systems Monitoring (PRISM) used to record the 
results of on-site PRISM monitoring reviews. We conducted the data 
reliability assessments to ascertain the internal consistency, 
completeness, and timeliness of these automated data. 

We assessed the reliability of PIR data for the 2002-2003 program year, 
the most recent reporting year for which complete data were available 
at the time of our review. Using software provided by the contractor, 
grantees submit PIR survey data to the contractor for inclusion in the 
PIR database. Grantee data undergoes internal consistency checks 
developed by the contractor in consultation with the Head Start Bureau. 
We conducted 29 tests to check for data consistency. Our tests were 
designed to ensure the reliability of (1) some of the more than 700 
tests already included in the PIR database and (2) grantee data that 
were not covered by PIR checks for data consistency. These tests 
included all three sections of the PIR database: enrollment and program 
operations, program staff and qualifications, and child and family 
services. In 18 of the 29 tests, PIR data contained different totals 
than they should have, given the internal consistency checks, or 
contained inconsistent data that did not sum to the expected totals. 

Table 2: Summary of Results for PIR Data Reliability Tests, 2002-2003 
Program Year:

Section of PIR database: Enrollment and Program Operations; 
Number of PIR data elements tested: 6; 
Number of tests that passed: 5; 
Number of tests failed: 1. 

Section of PIR database: Program Staff and Qualifications; 
Number of PIR data elements tested: 10; 
Number of tests that passed: 1; 
Number of tests failed: 9. 

Section of PIR database: Child and Family Services; 
Number of PIR data elements tested: 13; 
Number of tests that passed: 5; 
Number of tests failed: 8. 

Section of PIR database: Total; 
Number of PIR data elements tested: 29; 
Number of tests that passed: 11; 
Number of tests failed: 18. 

Source: GAO analysis. 

[End of table]

These data inconsistencies occurred in 9 cases for which the PIR 
contractor had already developed checks for data consistency and among 
data for which such checks had not been developed. ACF, Head Start, and 
contractor officials concurred with the technical approach we followed 
as an appropriate strategy to assess the reliability of PIR data and 
with the results of our assessment. As noted in our report, we found 
some discrepancies in the database that raise questions about the 
accuracy of the underlying data that grantees provided. As a result, we 
did not use this database in our analysis. 

We also assessed the reliability of automated data maintained in PRISM 
data sets from the 2000 through 2003[Footnote 21] reporting periods. 
PRISM review teams submit electronic information to the database 
contractor, and the contractor enters the information in the PRISM data 
sets. The database contractor reviews the information, submitted by 
review teams to help prevent inaccuracies in the reported information 
and the database contains other quality assurance procedures to help 
ensure the consistency of the information it contains. To assess the 
reliability of the PRISM data sets, we tested whether information for 
each of the years 2000 through 2003 related only to PRISM reports 
compiled for that year, whether chronological information had been 
compiled in the correct order, and whether each year's database 
contained all required information, including the information required 
to determine if a grantee complied with standards for each area 
reviewed. Our reliability assessment found the information contained in 
the databases to be reliable for our purposes. 

To assess the number of grantees with recurring financial management 
problems, we analyzed the results of PRISM reviews conducted from 2000 
through 2003. We identified grantees with financial management problems 
as those cited for not complying with program requirements in financial 
management, record-keeping and reporting, or program governance. 
Financial management requirements include the development and 
certification of grantee accounting systems for checking the accuracy 
and reliability of financial information and promoting operating 
efficiency. Record-keeping and reporting requirements include 
communicating timely and accurate financial information to control 
program quality, maintain program accountability, and advise grantee 
management of program progress. Program governance requirements include 
establishing and implementing appropriate internal controls to 
safeguard federal funds. 

To learn how ACF ensures that grantees effectively resolve their 
financial management problems, we visited 4 regional offices and 
selected a nonprobability sample[Footnote 22] of 55 grantees with known 
financial management weaknesses and reviewed the regional offices' 
files for these grantees for the period 2001 through 2004. The 4 
regional offices we visited accounted for more than 50 percent of 
grantees and more than 50 percent of Head Start funds allocated for 
fiscal year 2003. 

Table 3: Grantees and Head Start Funds Allocated to the Largest 
Regional Offices:

Regional office: Atlanta; 
Grantees (FY 2003): Number: 288; 
Grantees (FY 2003): Percent of total grantees: 17%; 
Allocated funds (FY 2003): Amount (in millions): $1,119; 
Allocated funds (FY 2003): Percent of total Head Start funds: 18%. 

Regional office: Chicago; 
Grantees (FY 2003): Number: 269; 
Grantees (FY 2003): Percent of total grantees: 16%; 
Allocated funds (FY 2003): Amount (in millions): $983; 
Allocated funds (FY 2003): Percent of total Head Start funds: 16%. 

Regional office: Dallas; 
Grantees (FY 2003): Number: 219; 
Grantees (FY 2003): Percent of total grantees: 13%; 
Allocated funds (FY 2003): Amount (in millions): $800; 
Allocated funds (FY 2003): Percent of total Head Start funds: 13%. 

Regional office: Philadelphia; 
Grantees (FY 2003): Number: 178; 
Grantees (FY 2003): Percent of total grantees: 11%; 
Allocated funds (FY 2003): Amount (in millions): $481; 
Allocated funds (FY 2003): Percent of total Head Start funds: 8%. 

Total of 4 offices[A]; 
Grantees (FY 2003): Number: 954; 
Grantees (FY 2003): Percent of total grantees: 57%; 
Allocated funds (FY 2003): Amount (in millions): $3,382; 
Allocated funds (FY 2003): Percent of total Head Start funds: 56%. 

Source: GAO analysis of ACF data. 

[A] Totals may not add due to rounding. 

[End of table]

We limited our selection to grantees that received $1 million or more 
annually. Furthermore, in selecting grantees with deficiencies and 
noncompliances, we also considered the existence of audit findings. At 
each office, we selected grantees from each group in proportion to 
their prevalence. We reviewed 55 grantees in the 4 offices for the 
reasons shown in table 4. 

Table 4: Reasons for Selecting and Reviewing Grantees, by Region:

ACF region: Atlanta; 
Basis for Selection: PRISM deficiency: 2; 
Basis for Selection: PRISM noncompliance: 9; 
Basis for Selection: Single Audit findings only: 3; 
Total: 14. 

ACF region: Chicago; 
Basis for Selection: PRISM deficiency: 4; 
Basis for Selection: PRISM noncompliance: 9; 
Basis for Selection: Single Audit findings only: 1; 
Total: 14. 

ACF region: Dallas; 
Basis for Selection: PRISM deficiency: 4; 
Basis for Selection: PRISM noncompliance: 8; 
Basis for Selection: Single Audit findings only: 3; 
Total: 15. 

ACF region: Philadelphia; 
Basis for Selection: PRISM deficiency: 3; 
Basis for Selection: PRISM noncompliance: 7; 
Basis for Selection: Single Audit findings only: 2; 
Total: 12. 

ACF region: Total; 
Basis for Selection: PRISM deficiency: 13; 
Basis for Selection: PRISM noncompliance: 33; 
Basis for Selection: Single Audit findings only: 9; 
Total: 55. 

Source: GAO analysis. 

[End of table]

In making our selection, we used data from the information system used 
to record PRISM data, which as discussed above, we had found reliable 
for our purposes; and from the Single Audit Clearinghouse database 
maintained by the Bureau of the Census. The Department of Commerce's 
Inspector General determined that a high reliance can be placed on the 
system of internal controls covering the accuracy and completeness of 
the data in the clearinghouse database. 

In reviewing each grant file, we recorded information on:

* the grantee's funding levels, years in the program, and contact 
information,

* results of PRISM reviews and the related follow-up actions,

* Single Audit reports and related follow-up actions,

* PIR information,

* grant application processing, and:

* grantee monitoring. 

Where necessary, we also met with program and financial specialists for 
these grantees to obtain relevant information that was not in the grant 
files. A second GAO analyst reviewed the data collection instrument to 
ensure that information from the grant file was properly recorded. 

Our work was conducted from January through December 2004 in accordance 
with generally accepted government auditing standards. 

[End of section]

Appendix II: Comments from the Department of Health and Human Services:

DEPARTMENT OF HEALTH AND HUMAN SERVICES:
ADMINISTRATION FOR CHILDREN AND FAMILIES: 
Office of the Assistant Secretary, Suite 60: 
370 L'Enfant Promenade, S.W.
Washington, D.C. 20447:

DATE: 
FEB 8 2005:

TO: Marnie S. Shaul:
Director, Education, Workforce, and Income Security Issues:

FROM: (Signed by): Wade F. Horn, Ph.D.: 
Assistant Secretary for Children and Families:

SUBJECT: Comments on the General Accounting Office's Draft Report 
entitled, "Head Start: Comprehensive Approach to Identifying and 
Addressing Risks Could Help Prevent Grantee Financial Management 
Weaknesses," (GAO-05-176):

Attached are the Administration for Children and Families' comments on 
the above-referenced GAO draft report.

Should you have any questions regarding our comments, please contact 
Joan E. Ohl, Commissioner, Administration on Children, Youth and 
Families at (202) 205-8347.

Attachment:

COMMENTS OF THE ADMINISTRATION FOR CHILDREN AND FAMILIES ON THE GENERAL 
ACCOUNTING OFFICE'S DRAFT REPORT TITLED "HEAD START: COMPREHENSIVE 
APPROACH TO IDENTIFYING AND ADDRESSING RISKS COULD HELP PREVENT GRANTEE 
FINANCIAL MANAGEMENT WEAKNESSES," (GAO-05-176):

The Administration for Children and Families (ACF) appreciates the 
opportunity to comment on this General Accounting Office (GAO) draft 
report.

GAO Recommendations:

To improve oversight of the Head Start program and the financial 
management of Head Start grantees, GAO made the following eight 
recommendations to the Assistant Secretary for Children and Families:

* Produce a comprehensive risk assessment of the Head Start program 
that incorporates information from the various components of ACF with 
oversight responsibilities for Head Start grantees and assesses actual 
or potential risks of mismanagement. This assessment should be updated 
periodically to provide reasonable assurances to Head Start management 
that the program's grantees are financially sound and that program 
objectives are being met.

- To better establish and assess program risks, ACF should develop 
plans to collect data on and estimate the extent of improper payments 
made for unallowable activities, payments to grantees whose programs 
are significantly underenrolled or other unauthorized payments. ACF 
currently collects data on the extent to which over-income families are 
enrolled in Head Start programs and has estimated the number of such 
families nationwide. Additional efforts should be made to collect data 
on other types of improper payments and to use the data to more 
comprehensively assess the program's risks.

- To improve the processes it currently uses to collect and analyze 
information on program risks ACF should:

** ensure that training and certification for all Program Review 
Instrument for Systems Monitoring (PRISM) reviewers, including federal 
team leaders, is provided to enable the reviewers to perform their 
responsibilities in accordance with the review framework developed by 
the Head Start Bureau;

** develop an approach that can be applied uniformly across all of 
ACF's regional offices to assess the results of the PRISM reviews and 
ensure consistent treatment of grantees with similar problems when 
determining whether grantees should be deemed deficient; and:

** implement a quality assurance process to ensure that the framework 
for conducting on-site reviews is implemented as designed, including 
holding ACF's regional management accountable for following this 
framework and for the quality of the reviews.

- To enhance the usefulness of the data ACF collects through its annual 
Program Information Reports (PIR) survey in assessing the program's 
risks, ACF should ensure that information it uses for program 
management-and reports to the Congress and the public-is accurate. This 
may require independently verifying key data submitted through the 
annual survey or ensuring that the grantee has a system in place to 
collect and report accurate, verifiable data.

- To more quickly identify financial risks associated with 
mismanagement of federal funds, ACF should make greater use of the 
information it currently collects on the status and use of federal 
funds. For example, ACF should reconcile all grantees' reported 
expenditures with their actual withdrawals more frequently to ensure 
that grantees are not drawing down excess funds at the beginning of 
their grant period and have enough funds to provide services to 
eligible children and their families for the entire year.

* Prior to refunding a grant, ACF should take steps to obtain 
competition for the grant if it has determined that the current 
recipient of those grant funds has failed to meet program, financial 
management, or other requirements. In these instances, ACF should use 
its existing authority to conduct such competitions without giving 
priority to the current grantee, while ensuring that the grantee is 
afforded all applicable statutory protections, including reasonable 
notice and an opportunity for a full and fair hearing.

ACF Comments:

ACF believes effective results-oriented oversight and management of the 
Head Start program is vital to ensure that local Head Start programs 
are providing high-quality services and achieving the Administration's 
ultimate goal of strengthening Head Start for the children and families 
of this great nation. Therefore, ACF agrees that the nation's 1,670 
Head Start grantees must be efficient, effective and accountable so 
that children will achieve better outcomes as they prepare for school.

ACF will take the necessary steps to develop and implement an annual 
comprehensive risk assessment that draws information from a variety of 
data sources and Operating Divisions, including data relating to Head 
Start program oversight and/or management responsibilities, either 
directly or indirectly. Also, with regard to other specific 
recommendations:

* ACF will continue to focus on ensuring that Head Start grantees are 
serving all of the children for which the grantees have been funded and 
will take appropriate steps in those situations where grantees are 
found to be underenrolled.

* ACF, in the last several months, has provided PRISM training to 
federal team leaders and to fiscal and early childhood consultants. ACF 
will schedule additional training events for consultants in other areas 
of expertise later this year to ensure that all reviewers have been 
appropriately trained.

* ACF, in FY 2005, will be implementing a quality-assurance system 
designed to ensure that all reviews are being conducted in an 
appropriate manner and that there is consistency among ACF Regional 
Offices in the conduct and outcomes of PRISM reviews.

* ACF will continue to explore ways to increase the accuracy of PIR 
data.

* ACF has serious concerns about GAO's legal interpretation of ACF's 
authority to recompete Head Start grants. Therefore, the Head Start 
Bureau will work with GAO to resolve this issue.

* ACF agrees that improving ACF's reconciliation of funds drawn to 
funds expended could be improved. ACF will explore a variety of methods 
for comparing expenditure data that ACF has with grantee drawdown 
information provided by the Program Support Center's Payment Management 
System. 

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Betty Ward-Zukerman, (202) 512-2732, wardzukermanb@gao.gov; 
Bill J. Keller, (202) 512-8971, kellerbj@gao.gov:

Acknowledgments:

In addition to those named above, Kimberly Brooks, Richard Burkard, 
Gabrielle Fagan, Neal Gottlieb, Curtis Groves, Diane Morris, Luann Moy, 
Corinna Nicolaou, James Rebbe, Tovah Rom, Kathryn Rooney, and Mark Ward 
made key contributions to the report. 

[End of section]

Related GAO Products:

Head Start and Other Early Childhood Programs:

Head Start: Better Data and Processes Needed to Monitor 
Underenrollment. GAO-04-17. Washington, D.C.: December 4, 2003. 

Head Start: Increased Percentage of Teachers Nationwide Have Degrees, 
but Better Information on Classroom Teachers Qualifications Needed. GAO-
04-3. Washington, D.C.: October 1, 2003. 

Education and Care: Head Start Key among Array of Early Childhood 
Programs, but National Research on Effectiveness Not Completed. GAO-03- 
840T. Washington, D.C.: July 22, 2003. 

Head Start and Even Start: Greater Collaboration Needed on Measures of 
Adult Education and Literacy. GAO-02-348. Washington, D.C.: March 29, 
2002. 

Early Childhood Programs: The Use of Impact Evaluations to Assess 
Program Effects. GAO-01-542. Washington, D.C.: April 16, 2001. 

Title I Preschool Education: More Children Served, but Gauging Effect 
on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.: 
September 20, 2000. 

Early Education and Care: Overlap Indicates Need to Assess Crosscutting 
Programs. GAO/HEHS-00-78. Washington, D.C.: April 28, 2000. 

Early Childhood Programs: Characteristics Affect the Availability of 
School Readiness Information. GAO/HEHS-00-38. Washington, D.C.: 
February 28, 2000. 

Education and Care: Early Childhood Programs and Services for Low- 
Income Families. GAO/HEHS-00-11. Washington, D.C.: November 15, 1999. 

Head Start: Challenges in Monitoring Program Quality and Demonstrating 
Results. GAO/HEHS-98-186. Washington, D.C.: June 30, 1998. 

Head Start Programs: Participant Characteristics, Services, and 
Funding. GAO/HEHS-98-65. Washington, D.C.: March 31, 1998. 

Internal Controls:

TANF and Child Care Programs: HHS Lacks Adequate Information to Assess 
Risk to Assist States in Managing Improper Payments. GAO-04-723. 
Washington, D.C.: June 18, 2004. 

Major Challenges and Program Risks: Department of Health and Human 
Services. GAO-03-101. Washington, D.C.: January 2003. 

Strategies to Manage Improper Payments: Learning From Public and 
Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 
2001. 

Internal Control Management and Evaluation Tool. GAO-01-1008G. 
Washington, D.C.: August 2001. 

Standards for Internal Controls in the Federal Government. GAO/AIMD-00- 
21.3.1. Washington, D.C.: November 1999. 

Grants Management:

Single Audit: Single Audit Act Effectiveness Issues. GAO-02-877T. 
Washington, D.C.: June 26, 2002. 

Single Audit: Actions Needed to Ensure that Findings Are Corrected. GAO-
02-705. Washington, D.C.: June 26, 2002. 

Welfare Reform: Federal Oversight of State and Local Contracting Can Be 
Strengthened. GAO-02-661. Washington, D.C.: June 11, 2002. 

Single Audit: Survey of CFO Act Agencies. GAO-02-376. Washington, D.C.: 
March 15, 2002. 

Single Audit: Update on the Implementation of the Single Audit Act 
Amendments of 1996. GAO/AIMD-00-293. Washington, D.C.: September 29, 
2000. 

Federal Grants: Design Improvements Could Help Federal Resources Go 
Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996. 

Single Audit: Refinements Can Improve Usefulness. GAO/AIMD-94-133. 
Washington, D.C.: June 21, 1994. 

FOOTNOTES

[1] For 2003, the federal poverty line for a family of four was $18,400 
within the 48 contiguous states and the District of Columbia. In Alaska 
and Hawaii, the guidelines were $23,000 and $21,160, respectively. The 
poverty guidelines are updated periodically in the Federal Register, by 
the U.S. Department of Health and Human Services under the authority of 
42 U.S.C. 9902(2). 

[2] See GAO, Federal Grants: Design Improvements Could Help Federal 
Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18, 1996), 
36. 

[3] GAO, Major Challenges and Program Risks: Department of Health and 
Human Services, GAO-03-101 (Washington, D.C.: Jan. 2003). 

[4] These audits are conducted under OMB Circular A-133 and the Single 
Audit Act (31 U.S.C. §§ 7501-7507). Under the act and implementing 
guidance, independent auditors audit federal awards to state and local 
governments and nonprofit organizations to assess compliance with 
federal financial requirements, including those for Head Start. 
Organizations are required to have single audits if they spent at least 
$300,000 in federal funds for fiscal years before December 31, 2003, 
and $500,000 for years after. The single audit focuses audit resources 
on the grantees' internal controls which cover an entity's operations 
and financial reporting for all its federal awards. In addressing 
compliance issues, the single audit may only review provisions of laws 
and regulations that have a direct and material effect governing 
selected grant awards. 

[5] For more information on internal controls, see GAO-02-69G and GAO/ 
AIMD-00-21.3.1. 

[6] The Payment Management System is a fully automated cash management 
system that is designed to receive payment requests from grantees, edit 
them for accuracy, transmit the payment to the grantee's bank account, 
and record the payment transactions and corresponding disbursements in 
the appropriate account. PMS is operated out of HHS's Division of 
Payment Management and is used by HHS agencies (including ACF) and 
other federal departments and agencies. 

[7] A material weakness is a condition in which the design or operation 
of one or more internal control components--or monitoring processes-- 
does not reduce to a relatively low level the risk that any 
noncompliance would be material and not be detected within a timely 
period by employees in the normal course of performing their assigned 
duties. 

[8] Department of Health and Human Services, Office of Inspector 
General, Review of Facility Purchases by the Head Start Program during 
Fiscal Years 1993 and 1994 (A-09-94-00085) (Washington, D.C.: 1996). 

[9] HHS's Balanced Scorecard initiative seeks to improve its management 
activities by measuring its performance, making improvements, and 
assessing how well the organization is positioned to perform in the 
future. The balanced scorecard is a private-sector concept introduced 
by Robert Kaplan and David Norton in 1992 to assess organizational 
performance and is used by several federal agencies. 

[10] GAO, Head Start: Challenges in Monitoring Program Quality and 
Demonstrating Results, GAO/HEHS-98-186 (Washington, D.C.: June 30, 
1998). 

[11] The Head Start Act requires that whenever possible the review 
teams are lead by HHS staff familiar with the Head Start program--PRISM 
team leaders are usually ACF regional office staff that work on the 
Head Start program. In October 2004, the Head Start Bureau provided 
regional office staff that will lead PRISM reviews in 2005 with a half- 
day training course via video conference on recent changes to the PRISM 
guide for 2005. 

[12] GAO, Head Start: Better Data and Processes Needed to Monitor 
Underenrollment, GAO-04-17 (Washington, D.C.: Dec. 4, 2004). 

[13] We have previously reported that ACF made limited use of audit 
reports. See GAO, Welfare Reform: Federal Oversight of State and Local 
Contracting Can Be Strengthened, GAO-02-661 (Washington, D.C.: June 11, 
2002) for more information. 

[14] Grantees are required to have their financial statements audited 
within 9 months after the end of their fiscal year. 

[15] We interviewed managers in other offices who generally described 
similar procedures. For more information on selection criteria and our 
methodology, see appendix I. 

[16] 42 U.S.C. 9836(c)(1). See also, Action For Boston Community 
Development, Inc., v. Shalala, 136 F.3d 29 (1st Cir. 1998). In that 
case, the court found that a Head Start grantee with deficiencies at 
one of the Head Start centers it operated was not entitled to priority 
in a competition for a grant to replace another grantee at a different 
location. 

[17] Whenever ACF terminates or suspends a grant, it brings in a 
contractor to continue serving children and families until a new 
grantee is found to serve that community. 

[18] Financial management encompasses the systems and processes 
(policies) a grantee uses to authorize, document, record, and report 
transactions and related events. 

[19] We identified financial management weaknesses as occurring when 
ACF cited a PRISM noncompliance in either fiscal management or 
recordkeeping and reporting. We included record-keeping and reporting 
as indicators of financial management weaknesses because of the close 
relationship, recognized in the PRISM guidance, between authorizing and 
recording financial transactions and reporting them to the appropriate 
parties. 

[20] We identified financial management weaknesses as occurring when 
the auditor or the IG NEAR office reports included reportable 
conditions, questioned costs, or weaknesses in the grantee's internal 
controls. 

[21] Because ACF was in the midst of its 2004 PRISM cycle at the time 
of our review, we did not include that information in our reliability 
assessment. 

[22] A nonprobability sample is selected on the basis of a population's 
characteristics. The results from a nonprobability sample cannot be 
generalized to the population from which the selections were made. 

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