SUBJECT:

Utica Head Start Children
and Families, Inc.

DECISION

Utica Head Start Children and Families, Inc. (Utica), appealed a determination by the Administration for Children and Families (ACF) to terminate Utica's federal financial assistance under the Head Start program based on Utica's alleged violation of federal requirements. In letters dated November 24, 1999, and February 8, 2000, ACF identified deficiencies in Utica's operation of its Head Start program which ACF found Utica had failed to correct or address, despite repeated admonitions by ACF. These alleged deficiencies included Utica's failure to correct in a timely manner a conflict of interest between Utica's Executive Director and Fiscal Director, as well as Utica's failure to submit various types of documentation required by regulation and requested by ACF.

At Utica's request, the Board held a hearing in this matter in Washington, D.C. During the three days of testimony, the Board heard from various ACF officials, Utica's auditor, and several officials associated with Utica.⁽¹⁾

For the reasons discussed below, we find that the evidence overwhelmingly establishes that a conflict of interest existed at Utica, which the Utica Board of Directors and Utica management failed to address in a timely and appropriate fashion. Utica's conflict of interest deficiency was a sufficient basis in and of itself for the termination of Utica's Head Start funding. We also find that Utica failed to timely submit documentation to ACF that it was under a regulatory obligation to provide, which provides a second independent basis for Utica's termination. Accordingly, we sustain ACF's termination of Utica's Head Start funding.

Applicable Regulations

The Head Start program is designed to deliver comprehensive health, educational, nutritional, social and other services to economically disadvantaged children and their families. See 42 U.S.C. � 9831 and 45 C.F.R. � 1304.1-3. ACF provides funds to grantees to serve as Head Start agencies within designated communities and periodically reviews their performance in meeting program and fiscal requirements. See generally 42 U.S.C. � 9836.

As relevant to this appeal, the Head Start regulations provide that -

Financial assistance may be terminated for any or all of the following reasons:

(3) The grantee has failed to comply with the required fiscal or program reporting requirements applicable to grantees in the Head Start program;
(4) The grantee has failed to timely correct one or more deficiencies as defined in 45 CFR Part 1304;

(6) The grantee has failed to comply with the Head Start grants administration requirements set forth in 45 CFR Part 1301;

(9) The grantee fails to abide by any other terms and conditions of its award of financial assistance, or any other applicable laws, regulations, or other applicable Federal or State requirements or policies.

45 C.F.R. � 1303.14(b).

The regulations at 45 C.F.R. � 1304.3(a)(6) define the term "deficiency" as follows:

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

(A) A threat to the health, safety, or civil rights of children or staff;

(B) A denial to parents of the exercise of their full roles and responsibilities related to program governance;

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

(D) The misuse of Head Start grant funds.

(ii) The loss of legal status or financial viability, as defined in part 1302 of this title, loss of permits, debarment from receiving Federal grants or contracts or the improper use of Federal funds; or

(iii) Any other violation of Federal or State requirements including, but not limited to, the Head Start Act or one or more of the regulations under parts 1301, 1304, 1305, 1306 or 1308 of this title, and which the grantee has shown an unwillingness or inability to correct within the period specified by the responsible HHS official, of which the responsible HHS official has given the grantee written notice pursuant to section 1304.61.

Burden of Proof

The Board has held that, under the provisions of 45 C.F.R. � 1303.14, ACF bears the burden to make a prima facie case that there exists sufficient evidence to satisfy the regulatory standards for termination of a Head Start grant. Community Action of Greene County, Inc., DAB No. 1674, at 7 (1998); Lake County Economic Opportunity Council, Inc., DAB No. 1580, at 5 (1996). Once ACF has put forth legally adequate grounds to support a termination and has provided sufficient specificity for the grantee to respond, the grantee then has the burden to demonstrate that it has operated its federally funded program in compliance with the terms and conditions of its grant and the applicable regulations. See, e.g., Lake County at 5 (1996); Meriden Community Action Agency, Inc., DAB No. 1501, at 41 (1994); Rural Day Care Association of Northeastern North Carolina, DAB No. 1489, at 8, 16 (1994); see also 45 C.F.R. � 74.21(b)(2). Moreover, a grantee is clearly in a better position to establish that it did comply with applicable requirements than ACF is to establish that it did not. Therefore, the Board has held that the ultimate burden of persuasion is on the grantee to show that it was in compliance with program standards. Greene County at 8.

Factual Background

Utica has been the recipient of Head Start grants for over 25 years.

During an on-site review of Utica in May 1998, the leader of the ACF review team received an anonymous letter, dated May 5, 1998, containing numerous allegations, including that Utica's Fiscal Director, Deborah Brown, was the daughter of Utica's Executive Director, Mattie Brown, and that there was a wide range of instances where Head Start funding may have been misused by the Fiscal Director, the Executive Director, and possibly other members of the management of Utica. Tr. at 278; ACF Ex. 44.

In a July 8, 1998 letter to Utica's Board, ACF stated that it had become aware of a possible family relationship between Utica's Executive Director and Fiscal Director that was in violation of prohibitions against employees using their position for purposes of, or the appearance of, private gain for themselves or family members. ACF Ex. 1. ACF directed that the Utica Board submit an explanation of the situation by August 1, 1998. Id. In a July 28, 1998 letter, the President of Utica's Board acknowledged the existence of the family relationship (mother-daughter), but stated that Utica had obtained an oral waiver from an ACF official to hire Deborah Brown as Utica's bookkeeper some time in either 1986 or 1987. ACF Ex. 2.

In an October 27, 1998 letter, ACF responded that it had no record of a waiver being granted for Deborah Brown's hiring. ACF Ex. 3. Citing 45 C.F.R. � 1301.30 as requiring Head Start programs to be conducted free of family favoritism, ACF declared that the family relationship between Utica's Executive Director and Fiscal Director was a conflict of interest that created a deficiency in Utica's operation of its Head Start program, and directed that Utica correct this deficiency within 60 days or face termination. Id. Utica responded on November 23, 1998, proposing that the conflict be resolved by having the Fiscal Director's performance, as well as that of the Executive Director, be evaluated by Utica's Executive Committee, comprised of officers of Utica's Board and Policy Council. ACF Ex. 4.

During late summer or early fall 1998, several of Utica's Board members requested that the CPA firm of Dorfman-Robbie conduct an investigation of the allegations of abuse and improprieties at Utica previously described in the anonymous letter sent to ACF. Tr. 17. This firm had previously conducted several annual fiscal audits for Utica. The audit resulted in the issuance of a preliminary draft report on special audit, dated December 18, 1998 (Dorfman-Robbie draft report). ACF Ex. 20. This draft audit addressed numerous areas in which allegations had been made of fiscal abuse or impropriety at Utica, including the following potentially unauthorized or inappropriate expenditures and potential violations of existing policies on internal controls and accounting procedures:

• excessive salaries and cost of living adjustments (COLAs) to top members of Utica's management in 1998. The Fiscal Director received a salary of $86,580, which was a 24.32% increase over her 1997 salary; the Executive Director had a salary of $106,685 in 1998, which was an increase of 17.25% over her 1997 salary. ACF Ex. 20, Schedule 1.
• lack of transportation logs or other written documentation concerning the use of four vans owned by Utica and Utica's gas credit cards.
• questionable practices at Utica for conference participation and travel reimbursement, including premature issuance of travel advances, travel advances to employees who had been issued credit cards, lack of documentation for claimed hotel expenses, higher per diem meal allowances of up to $100 per day for certain employees, lack of documentation for claimed miscellaneous expenses, claimed meal expenses for a conference where the conference fee included all meals, the double claiming of hotel charges, and the failure to reimburse Utica for excess travel advances.
• questionable use of American Express credit cards issued to the Executive Director, Fiscal Director, and another Utica employee. Various aspects of the credit card use were questioned, including: the extensive use of the cards with monthly charges ranging from $2,000 to $16,000; a large number of charges for items of a personal nature, e.g., women's apparel and cosmetics; and the lack of supporting documentation that the items purchased were necessary costs for Utica's programs. For the 12 months ending November 30, 1998, the credit cards issued to the Fiscal Director had $10,121 in questioned costs and $910 in various small costs. Schedule 4.
• questionable petty cash expenditures, including a $420 cash expenditure to Niagara Mohawk, an electric utility, with a receipt showing that the cash expenditure was made by the Fiscal Director's son and showing the Fiscal Director's home address. This expenditure was charged under "Other Expense" with no documentation provided why this was a necessary Utica cost.

The draft report also noted that a review of IRS Form 1099s (required for any individual who received more than $600 for personal services) issued by Utica for calendar year 1997 showed that Utica, at the Fiscal Director's direction, did not issue a Form 1099 for either the Fiscal Director's son or daughter who received payments from Utica of, respectively, $3,487 and $888 in 1997. The Fiscal Director's son also received $4,451 in payroll compensation during 1998. ACF Ex. 20, at 5.

The auditor testified at the hearing that, when he presented the Dorfman-Robbie draft report to Utica's Board of Directors on December 18, 1998, the Board agreed that Utica's management would respond to the allegations by the end of January 1999. Tr. at 18. The auditor testified, however, that he did not receive a response until June 18, 1999. Id.; Utica Ex. 10-2, at 7.⁽²⁾

On April 14, 1999, ACF had notified Utica that its proposal for resolving the conflict of interest, which had been submitted on November 23, 1998, was unacceptable. ACF stated that having family members occupying high level, supervisory positions within the organization violated the Head Start Act, federal regulations, the HDS Grants Administration Manual, and Utica's own personnel policies. ACF Ex. 5. ACF stated that Utica's employment of the family members constituted a deficiency as defined at 45 C.F.R. � 1304.3(a)(5)(i) and a violation of the terms and conditions of Utica's Head Start grant. Id. at 2. ACF gave Utica until July 31, 1999 to correct the deficiency or face termination of its Head Start grant. Id.

Utica's Executive Director and Fiscal Director then initiated negotiations, followed by negotiations between the Executive Director and the Fiscal Director's attorney, regarding the terms and conditions of the Fiscal Director's resignation from Utica. ACF Exs. 7 - 12. The attorney for the Fiscal Director requested that Utica give Deborah Brown a severance package consisting of two years' salary and health insurance coverage in exchange for her resignation. ACF Ex. 11. In a July 23, 1999 letter, Mattie Brown, the Executive Director, agreed to these terms of the severance package for her daughter. ACF Ex. 12. On July 27, 1999, Deborah Brown submitted her resignation as Utica's Fiscal Director, subject to the fulfillment of the terms of the severance package. ACF Ex. 13. A "Conditions and Terms of Resignation Based on Agreement," signed by Deborah Brown on July 26 and Mattie Brown on July 29, 1999, provided that the "amount of $151,940 is due consideration for perceived damages and to end the conflict of interest issue." ACF Ex. 14 (emphasis in original). This document further provided that the funds expended under the agreement were "from Federal and Non-Federal Resources," with $100,000 being charged to Utica's Fiscal Year 17's Head Start grant award. Id.

On July 29, 1999, four checks totaling $151,940 were issued to Deborah Brown under the signature of Mattie Brown and a stamped signature of Utica's former Board President. ACF Ex. 48. On that same day, Utica's Executive Director sent a memo to Utica's senior accounts bookkeeper, directing that Deborah Brown be removed from Utica's payroll. ACF Ex. 15. On July 30, 1999, ACF requested documentation demonstrating the resolution of the conflict of interest at Utica. ACF Ex. 16. Utica's Executive Director responded on August 4, 1999, certifying that as of July 30, 1999, Deborah Brown was no longer employed by Utica. ACF Ex. 17.

In the first week of August, an official at Utica's bank noticed the large drawdown on Utica's account and contacted Utica's senior bookkeeper, who immediately went to the new Treasurer on Utica's Board. The Board Treasurer and the bank official managed to put a halt to the transaction involving the four checks, with the result that Deborah Brown retained none of the money specified in the severance package.⁽³⁾

On August 16, 1999, the Utica Board passed a resolution placing the Executive Director on a 90-day leave of absence pending an investigation of her actions in connection with the resignation of the Fiscal Director, the investigation of Utica's finances for the fiscal years 1997 through 1999, and other matters relating to her management of Utica. ACF Ex. 27, at 3.

In an August 26, 1999 letter, ACF placed Utica on "high-risk status," explaining that Utica's management practices raised serious questions about its ability to ensure proper programmatic use and financial stewardship of grant funds. ACF Ex. 19. ACF stated that its designation of Utica as high-risk was based on five factors, including: the failure of the Board of Directors to exercise its fiduciary responsibilities to ensure Utica's effective operation of its Head Start program; and serious weaknesses in Utica's internal controls as identified in the Dorfman-Robbie draft report. Id. As a result of the high-risk designation, ACF directed Utica to submit documentation regarding specified areas of concern, including a plan of action addressing the allegations and findings in the Dorfman-Robbie draft report. Id. at 2.

On September 3, 1999, ACF suspended all federal financial assistance under the Head Start Act to Utica based on its determination that there was a serious risk of loss of federal Head Start funds and a risk of violation of criminal statutes. ACF Ex. 21. ACF stated that its decision to suspend Utica's funding was based on nine factors, including the questionable severance payment to Utica's Fiscal Director.⁽⁴⁾ Id. at 2.

During the months of August and September 1999, several events occurred concerning the status of Deborah Brown's employment at Utica. On her payroll register for the period ending July 30, 1999, Deborah Brown received her two-week salary of $2,892 and a payment of $2,892 for 72.5 hours of annual leave. ACF Ex. 46, at 1. Although Deborah Brown's employment at Utica allegedly ended July 30, 1999, she still received paychecks for the pay periods ending August 13, 1999, August 27, 1999, and September 10, 1999, with her employment status listed as "terminated" for the period ending August 13 and "active" for the August 27 and September 10 periods. ACF Ex. 29. Moreover, for the pay period ended August 27, 1999, Deborah Brown received a paycheck for double her stated salary for a two-week pay period, $5,783 versus $2,892. Id. at 2. An ACF senior auditor testified that these payments to Deborah Brown were regular pay and not pay for annual leave as they did not bear the marking for annual leave used in processing Utica's payroll.⁽⁵⁾ Tr. at 90.

Furthermore, even though she had supposedly resigned from Utica on July 30, 1999, Deborah Brown, listing herself as Utica's Fiscal Director, submitted on September 8, 1999, a Federal Cash Transaction Report for the period April 1, 1999 through June 30, 1999. ACF Exs. 28 and 45. Additionally, Deborah Brown signed bank withdrawal slips from Utica's account on August 31, September 1, and September 2, 1999.⁽⁶⁾ ACF Ex. 30.

The record contains no evidence of any final resolution of Deborah Brown's employment status with Utica. On August 27, 1999, Deborah Brown's attorney wrote to ACF, stating the action of Utica's Board of Directors in stopping payment on the severance checks "has turned back the clock to the date prior to my client's resignation. Consequently, she remains and is technically an employee of Utica Headstart. . . ." ACF Ex. 25. On September 2, 1999, Deborah Brown's attorney wrote Utica's interim Executive Director, requesting Deborah Brown's return to Utica as "[o]fficially, her resignation has been nullified and she remains an employee." ACF Ex. 26. At the hearing, the President of Utica's Board testified that the employment status of Deborah Brown at Utica between July 31 and the end of September 1999 "was in limbo" and that the Utica Board recognized her status during that period as "a legal matter." Tr. at 438 and 517.

At a November 17, 1999 meeting, the Utica Board and Policy Council decided not to extend Mattie Brown's leave of absence and reinstated her as Executive Director. Utica Ex. 7. On November 30, 1999, Utica's Board President informed ACF of the decision to reinstate Mattie Brown, stating that the sole reason for taking any adverse action against Mattie Brown was due to her negotiation of the severance agreement with her daughter, which Mattie Brown acknowledged was "a serious mistake." ACF Ex. 31, at 2. The Board President further stated that Utica's Board knew of no other mistakes on Mattie Brown's part that constituted grounds for any adverse action against her. Id.

On November 24, 1999, ACF terminated Utica's Head Start grant because of Utica's failure to timely correct the conflict of interest issue. On December 29, 1999, ACF informed Utica that its failure to submit documentation in five areas constituted deficiencies which had to be corrected within 30 days or would result in additional grounds for termination. ACF Ex. 32. On February 8, 2000, ACF notified Utica that it had added other grounds for its termination action. These additional grounds included Utica's failure to submit the following: a final financial status report for the budget period ended May 31, 1999; an organization-wide audit report (Form A-133) for the budget period ended May 31, 1998;⁽⁷⁾ an independent audit certification regarding its current internal controls; and a report from Utica's Board addressing the findings in the Dorfman-Robbie draft report.

Discussion

I. Utica failed to conduct its program in a manner free of family favoritism as required by the Head Start Act, regulations and policies, and Utica failed to correct this deficiency within the time frame afforded it by the responsible ACF official in accordance with applicable regulations.

A. Utica violated the rules on family favoritism through the employment of its Executive Director and Fiscal Director, who had a mother-daughter relationship.

Under the Head Start Act and implementing regulations which are incorporated into the terms and conditions of Utica's Head Start grant, grantees must:

Observe standards of organization, management and administration which will assure, so far as reasonably possible, that all program activities are conducted in a manner consistent with the purposes of this subchapter and the objective of providing assistance effectively, efficiently and free of any taint of . . . personal or family favoritism.

42 U.S.C. � 9839; see 42 C.F.R. � 1301.30.

The HDS Grants Administration Manual (GAM), which expressly applies to discretionary grants such as Head Start (51 Fed. Reg. 6936), states with respect to conflicts of interest and nepotism:

The recipient's personnel policies shall prohibit the hiring of any individual if a member of that individual's immediate family is employed in an administrative capacity in the agency or is a member of the governing board. The term "immediate family" means wife, husband, son, daughter, mother, father, brother, sister, or relative by marriage of comparable degree; the term "administrative capacity" means a position having responsibilities relating to the selection, hiring, or supervising of employees. When a recipient organization cannot adequately staff positions without hiring such an individual, the recipient may deviate from this policy. However, employment records must provide evidence that no other individual within the service area is qualified and available for the employment.

GAM at 5-1.⁽⁸⁾

Utica did not dispute that the mother-daughter relationship between its Executive Director and its Fiscal Director placed it in violation of the general rule prohibiting the hiring of an individual in the immediate family of someone who is already employed in an administrative capacity for the Head Start agency. The mother-daughter relationship clearly fits within the definition of "immediate family" as defined by the GAM and by Utica's own personnel policies. The Executive Director moreover holds the most important administrative position within Utica's organization. Indeed, the Fiscal Director is also a highly significant administrative position within the organization and received the second highest salary in the organization after the Executive Director. ACF Ex. 20, Schedule 1.

Utica, however, argued that the exception to the rules on hiring family members applied to it because when it originally hired Deborah Brown, the Fiscal Officer, as a bookkeeper approximately 13 years before the time in question, there was no other individual within the service area qualified and available for employment as bookkeeper. Arcuri and Mathis Letter dated July 28, 1998, ACF Ex. 2. Utica also argued that it had obtained an oral waiver to hire Deborah Brown from an ACF official (Nicholas Cordasco, now deceased). Utica argued that this official directed Utica to the GAM provision (quoted above) and confirmed that Utica met the criteria to justify hiring a member of the immediate family of someone who already held an administrative position within the agency. Id.

We conclude that Utica's arguments concerning the exception to the rules on family favoritism are both unsubstantiated and unreasonable. First, the GAM policy requires that the organization's employment records must provide evidence that there is no other individual within the service area qualified and available for the employment. We conclude that there is no evidence from Utica's employment records that the exception applied when Deborah Brown was first hired as an employee of Utica in either 1986 or 1987. Specifically, Utica failed to produce any employment records that established that no other individual within the service area was qualified and available for employment as bookkeeper at that time. Utica moreover failed to produce any evidence demonstrating there was generally a short supply of bookkeepers in its service area for any period in the past. Utica asserted that it did not need to maintain such records as an organization may generally dispose of records after a three-year period under 45 C.F.R. � 74.53. Under the circumstances here, however, this type of record would obviously have continuing relevance to Utica's compliance with the family favoritism rules for the duration of the employment of these two individuals since employment of both individuals was on its face a violation of the rules. We thus conclude that Utica was obliged to retain employment records that might have established that the requirements of the exception were met for as long as the family relationship issue continued to exist in its organization.

We also conclude that there is no credible evidence in the record that any ACF official "waived" the family favoritism requirements at the time that Deborah Brown was hired as bookkeeper. There is no written confirmation of a waiver in the record from either ACF or Utica. A written waiver would be the best, if not the only credible, evidence of a waiver granted approximately 13 years ago. Nor indeed is there any credible testimonial evidence concerning the terms and rationale for a waiver, including whether any evidence in personnel records in support of a waiver has ever existed.

Furthermore, in relying on its allegation that it had a waiver at the time Deborah Brown was hired, Utica overlooks the fact that the issue currently before us is not just whether Utica properly hired Deborah Brown as bookkeeper, but also whether Utica properly promoted Deborah Brown to the position of Fiscal Director in view of her close family relationship with the Executive Director. The GAM policy permits an exception when there is no other person within the service area who is qualified and available for the particular position the person was "hired" to fill. The reference to "hiring" in the GAM must reasonably include not only the initial hiring but also the promotion or lateral transfer of the family member within the organization. Obviously, the promotion of an immediate family member to a higher, supervisory position has the potential of raising completely different issues of availability and qualification within the service area than were raised when the family member was hired initially for a lower level position. Moreover, the promotion of an immediate family member to a higher, supervisory position within the organization may if anything raise heightened issues of family favoritism. The higher the family member climbs within the organization, the more potential both family members have to make decisions that might benefit each other. It is also possible that since both family members are already employees of the organization, the promotion process itself may more likely be subject to issues of family favoritism.

Thus, when Utica decided that it wished to place the daughter of its Executive Director into the position of Fiscal Director, it clearly had an obligation under the GAM policy to consider whether there was any other individual within the service area who was qualified and available for employment as Fiscal Director. Utica, however, failed to even allege such consideration and failed to provide any supporting employment records to establish that when it placed Deborah Brown in the position of Fiscal Director, there was no other individual in the service area who was qualified and available for that position. Nor did Utica provide evidence or even allegations of a waiver from ACF occurring at that time. We therefore conclude that Utica's inability to establish that it met the only exception to the rules on family favoritism when Deborah Brown was first hired as bookkeeper and then when she was promoted to Fiscal Director meant that Utica was in violation of the Head Start rules on family favoritism for as long as Deborah Brown remained employed in the organization.

B. ACF gave Utica the full opportunity contemplated by regulation to correct this violation prior to terminating the grant.

The Head Start regulations permit termination where a grantee has been notified of a "deficiency" to be corrected and given an opportunity to correct the deficiency either "immediately" or pursuant to a Quality Improvement Plan (QIP). 45 C.F.R. � 1304.60(b). Not every level of non-compliance qualifies as a "deficiency" under the amended regulations, however. The regulations define the term "deficiency" as including an "area of performance" that is out of compliance and that meets one of four additional conditions. 45 C.F.R. � 1304.3(a)(6)(i)(A)-(D). These conditions include: the misuse of Head Start funds (section 1304.3(a)(6)(i)(D)) and a failure to perform substantially the requirements related to Program Design and Management (section 1304.3 (a)(6)(i)(C)). In addition, a deficiency is "any other violation" which "the grantee has shown an unwillingness or inability to correct within the period specified by the responsible HHS official, of which the . . . official has given the grantee written notice . . . pursuant to section 1304.61." 45 C.F.R. � 1304.3(a)(6)(iii). Thus, a deficiency exists either when section 1304.3(a)(6)(i) is applicable or when an item of non-compliance becomes a deficiency after a grantee has had an opportunity to correct the non-compliance within a "specified" time, but failed to do so. In the latter instance, the grantee is entitled to an opportunity to correct what has become a deficiency either immediately or pursuant to a QIP before the grant can be terminated.

As we discussed in the Background section, ACF provided Utica with not one but two separate notices (October 27, 1998 and April 14, 1999) that identified the family favoritism violation as a deficiency and that afforded Utica a period of several months from the date of the notice to correct the deficiency. Utica argued that ACF erred in providing termination procedures applicable to a "deficiency" in its notices when the type of non-compliance that allegedly was occurring at that time did not yet qualify as a deficiency under the regulation. ACF alleged that Utica's non-compliance with the conflict of interest requirements qualified as a "deficiency" because the existence of the conflict of interest had given rise to very serious allegations of the misuse of Head Start funds (section 1304.3(a)(6)(i)(D)) and also because the non-compliance involved the failure to perform substantially the requirements related to Program Design and Management (section 1304.3(a)(6)(i)(C)).

We conclude that ACF reasonably interpreted Utica's violation of the conflict of interest requirements to involve the misuse of Head Start funds within the meaning of section 1304.3(a)(6)(i)(D). The whole question of the conflict of interest first came to ACF's attention during an on-site review of Utica as a result of an anonymous letter received by ACF, dated May 5, 1998. This letter identifies the existence of the mother-daughter relationship along with a litany of potential financial abuses or improprieties occurring within the organization involving these two individuals and possibly other members of management. ACF Ex. 44. Several members of Utica's Board then asked the organization's auditors to conduct an investigation of these allegations. Tr. at 17. The auditors subsequently released the Dorfman-Robbie draft report, dated December 18, 1998. This report addressed several areas of financial abuse or impropriety first raised in the anonymous letter.

The record demonstrates that the auditors concluded that no adequate response for issues covered by the draft report had ever been received from Utica's management. Moreover, ACF has repeatedly asked Utica's Board of Directors to fully investigate the preliminary findings in the draft report to determine if abuse or improprieties had been substantiated. No such investigation has ever been completed and no report by the Board of Directors has ever been issued in spite of a resolution by the Board dated August 16, 1999, requiring the investigation of these and other matters enumerated in the resolution. Moreover, even though no investigative report has ever been issued by the Board on the issues raised in the Dorfman-Robbie draft report, the individuals in question and the Board have taken corrective actions at least some of which serve as admissions that potential misuse of funding had in fact occurred.⁽⁹⁾

Thus, regardless of whether any or all of the allegations of improprieties can ever be fully resolved, the anonymous letter and, more significantly, the Dorfman-Robbie draft report clearly provided ACF with a reasonable basis as of April 14, 1999 to conclude that Utica's conflict of interest violation "involved" misuse of grant funding in several areas by one or both family members in question and that Utica's conflict of interest violation could reasonably be viewed as a "deficiency" within the meaning of 45 C.F.R. � 1304.3(a)(6)(i)(D). Because of the seriousness of the allegations (and because of the dilatory actions of the grantee organization in resolving the allegations), ACF certainly did not have to wait until it could absolutely establish that funding had been misused before viewing this violation as a deficiency. ACF thus followed the appropriate procedures on April 14, 1999, in requiring Utica to resolve this deficiency within a three and a half month time frame or risk termination of its grant funding.⁽¹⁰⁾

We also agree with ACF that giving Utica approximately three and a half months to resolve the deficiency was a reasonable interpretation under the circumstances of the regulatory requirement that a Head Start grantee be required to correct a deficiency "immediately" to avoid termination of its funding. Utica appeared to argue that ACF's termination was procedurally deficient because ACF gave Utica too much time to correct this deficiency when the regulation prescribed an "immediate" correction. We conclude that the amount of time given by ACF clearly fits within a reasonable range of what might be required by the regulation under the circumstances, since the organization might first be expected to resolve serious allegations of abuse and improprieties on the part of the two top management officials in question and then to resolve the conflict of interest raised by the employment of the two individuals.

Accordingly, based on the foregoing, we conclude that ACF followed the requisite procedures contemplated by regulation to allow Utica to correct its conflict of interest violation prior to terminating the grant.⁽¹¹⁾

C. Utica failed to fully and responsibly correct the conflict of interest deficiency as of the date set by ACF, July 31, 1999.

In considering whether Utica fully corrected its family favoritism deficiency by July 31, 1999, we have carefully examined the performance of Utica's Board of Directors, the governing body that ultimately had the responsibility for correcting this deficiency. Under 45 C.F.R. � 1304.50(g)(1) and (2), Utica had to have written policies that defined the responsibilities of its governing body, its board of directors, and in turn had to ensure by means of those policies that appropriate internal controls were established and implemented to safeguard federal funds in accordance with 45 C.F.R. � 1301.13. All of ACF's notices pertaining to the conflict of interest deficiency were directed to the person who was then the Chairperson of Utica's Board of Directors, so the Board of Directors was obviously fully aware of the nature and seriousness of the family favoritism issue for the organization. As we discussed above, ACF first brought this issue to the attention of the Utica Board on July 8, 1998. ACF then notified the Utica Board on October 27, 1998, that, if the Board did not correct the conflict of interest within a 60-day period, a letter of termination would be issued. The Utica Board had already authorized its auditors to prepare an audit report on allegations of abuse and improprieties identified in the anonymous letter received by ACF during its on-site review in May 1998. Tr. at 17. Subsequently, ACF notified the Utica Board on April 14, 1999, that the Board's proposal for resolving the conflict of interest was unacceptable and that ACF would initiate steps to terminate the grant if the "deficiency" was not corrected by July 31, 1999.⁽¹²⁾ Thus, ACF's second notice of termination on this issue gave Utica's Board of Directors approximately a three and a half month period to correct the conflict of interest deficiency.

Utica implied by its briefs and examination of witnesses that ACF was derelict in not advising Utica on how the conflict of interest had to be corrected and that ACF's failure or unwillingness somehow excused Utica from fully and adequately correcting the deficiency by the July 31, 1999 deadline. We categorically reject that argument. The responsibility for the type of personnel action required for the correction of this deficiency rested squarely with the grantee organization under the Head Start program, and not ACF. Moreover, there were obviously a range of personnel options available to the organization. Once having created this deficiency, Utica and Utica alone had the responsibility to weigh the various options available to it in order to correct the deficiency, just as it must handle other personnel issues on a regular basis.⁽¹³⁾

We also conclude that the necessary steps for the Board of Directors to correct this deficiency were not difficult for the Board of Directors to discern. The obvious first step in correcting the deficiency by July 31, 1999 would have been to resolve as promptly as possible all allegations of abuse and improprieties involving the two individuals in question that had arisen when the conflict of interest had first come to ACF's attention in May 1998. Determining the responsibility of each of these individuals for any abuse or impropriety that may have been connected with the conflict of interest would have assisted the Utica Board in determining how to correct the conflict of interest, e.g., by deciding to terminate the employment of one or both of these individuals. The obvious second step for Utica to have taken to correct the deficiency would have been for the Board of Directors to have terminated the employment of one or both of the individuals involved in a manner consistent with Utica's personnel policies. It was unreasonable on its face to expect the two principal individuals involved in the conflict of interest to take the requisite personnel actions without the leadership and involvement of the Board of Directors. It was clearly up to the Board of Directors to determine whether one or both employment relationships had to be terminated under the circumstances and to make sure that any personnel actions undertaken by the organization fully protected Head Start funds and were consistent with the organization's personnel policies generally.

As we discuss in detail below, the Utica Board of Directors failed altogether in carrying out its responsibilities to correct this deficiency because it took no steps whatsoever by the July 31, 1999 deadline set by ACF. This failure placed approximately $100,000 in Head Start funding at grave risk when the Executive Director attempted to implement the severance agreement she had negotiated with her daughter. Indeed, the Board's failure ultimately placed the entire Utica Head Start organization into substantial turmoil, requiring the Executive Director to be placed on an indefinite leave of absence and leaving the employment status of the Fiscal Director in a legal limbo that as far as the record here indicates has not been resolved to this day.

1. The Board of Directors failed to timely and adequately resolve allegations of abuse and improprieties involving the Executive Director and the Fiscal Director.

In correcting the conflict of interest deficiency, the first issue confronting the Board of Directors was whether either or both of the officials involved in the conflict of interest had been responsible for any of the abuses and improprieties under investigation by Utica's own auditors since the late summer and early fall of 1998. These abuses along with the conflict of interest issue were first brought to ACF's attention in an anonymous letter dated May 5, 1998. The auditors had prepared their draft report dated December 18, 1998 with preliminary draft findings in five areas of abuses and improprieties potentially involving either or both officials. The auditors required further information and cooperation from these officials (and possibly other members of Utica management) before they could finalize their findings on the issues considered. In spite of numerous requests from the auditors for a response to their preliminary findings (and Utica's Board's original commitment to submit a management response by January, 1999), the Utica Board of Directors did not provide the auditors with a management response until June 18, 1999. Tr. at 19-20. Moreover, the auditors concluded that the response did not address all of the issues that had been raised and was not adequate. Id. When it appeared to the auditors that they had reached an impasse with the management officials concerning the adequacy of management's response, the auditors were left with no choice but to leave their report in the form of a preliminary draft audit report rather than a final audit report. Tr. at 21. Utica presented no credible evidence to this Board that Utica's Board of Directors took all reasonable steps available to it to ensure that the two management officials involved (or other involved members of Utica's management) provided full and adequate responses concerning all of the abuses and improprieties, so that the audit report could be completed and finalized in a timely fashion. The management response in the record focused on changes in management procedures to ensure that similar abuses or improprieties could not occur in the future without clearly identifying what responsibility, if any, either of the two individuals involved had with respect to each of the areas of abuse or impropriety. Utica Ex. 10-3. Moreover, as we discuss in greater detail below, ACF repeatedly asked the Utica Board to perform its own independent investigation of the alleged abuses and improprieties identified in the Dorfman-Robbie draft report, and the Utica Board has never even completed an investigation by its ad hoc committee, much less issued a report.

Thus, in addressing the conflict of interest involving the two officials in question, Utica's Board of Directors failed to take adequate action to ensure that the charges of abuse and improprieties involving these officials were resolved in a timely fashion. Timely resolution of the charges of abuse and improprieties would have aided the Utica Board in fully and adequately correcting the conflict of interest deficiency itself.

2. The Board of Directors took no responsibility to resolve the conflict of interest before the July 31, 1999 deadline, and the evidence of record clearly demonstrates that the conflict of interest deficiency had not been fully and responsibly resolved by the July 31, 1999 deadline.

The obvious means of correcting the conflict of interest deficiency at issue would have been for the Utica Board of Directors to terminate the employment of one or both of the officials in question by July 31, 1999. The evidence of record demonstrates that the Board of Directors altogether failed to discharge its fiduciary and governance responsibilities in this regard and did not know what was happening within its own agency concerning the resolution of the conflict of interest deficiency during the critical months prior to the July 31, 1999 deadline imposed by ACF. Because the Board of Directors had no effective involvement in the resolution of this conflict, the record demonstrates that the very two individuals involved in the conflict of interest were left to their own devices in attempting to bring the conflict to resolution. The Executive Director ultimately negotiated a severance agreement with her own daughter and her daughter's attorney, whereby the daughter was to receive $151,940 as "due consideration for perceived damages and to end the conflict of interest issue." ACF Ex. 14. The daughter was also to receive two years' worth of health insurance coverage. The agreement itself provided that funds expended under the agreement were in part to be derived from federal "Resources," with $100,000 being charged to Utica's Fiscal Year 17 Head Start grant award. ACF Ex. 14. The Executive Director then prepared four checks totaling $151,940 in the name of Deborah Brown dated July 29, 1999, with her own signature and the stamped signature of Utica's former Board President. Utica failed to establish that the Executive Director's use of the former Board President's signature was with that individual's knowledge or authorization. Moreover, since that individual was no longer the Board President at the time of the issuance of the checks, that individual presumably lacked authority in any event to issue the checks.

The execution of the severance agreement and the issuance of the checks were carried out without any involvement or indeed awareness on the part of any member of the Board of Directors. When an official at Utica's bank notified the Utica Board Treasurer of the attempted cashing of the four checks totaling such a large sum during the first week of August, the Board Treasurer put a halt to the transaction, with the result that Deborah Brown has never received any of the money authorized by the severance package. The Board Treasurer's actions represented the first instance of involvement by the Board in the resolution of the conflict of interest since ACF's April 14, 1999 notice. Rather than conclusively resolve the conflict, however, the Treasurer's actions in the first week of August, 1999 left Deborah Brown's status with the organization unresolved. Utica has never substantiated what Deborah Brown's employment status was after July 31, 1999, or indeed whether the Utica Board has ever taken any subsequent action whatsoever to definitively resolve the employment status. (Indeed, Utica never presented any evidence to explain the Treasurer's motivation for stopping payment on the checks.) The Utica Board effectively nullified the agreement in its entirety when it stopped payment on the four checks. According to Deborah Brown's lawyer, the Board's actions turned back the clock and Deborah Brown remained an employee of Utica. ACF Ex. 25. The President of Utica's Board testified at the hearing that the employment status of Deborah Brown at Utica between July 31 and the end of September 1999 "was in limbo" and that the Utica Board recognized her status during that period as "a legal matter." Tr. at 438 and 517. Utica moreover has never provided this Board with evidence of any further development in Deborah Brown's employment status after September 1999, e.g., evidence she was fired, that she resigned with a modified severance agreement, or that she still remained an employee on a leave of absence.

Against this backdrop of legal uncertainty, the Utica organization and Deborah Brown herself took several actions following July 31, 1999 that suggested that Deborah Brown was still employed by Utica as Fiscal Officer in spite of her erratic appearances at Utica's offices:

• Deborah Brown received salary payments for the six- week period from July 31, 1999 through September 10, 1999, and her employment status was listed as active for the period from August 14 through September 10, 1999. For the pay period ended August 27, 1999, Deborah Brown received a paycheck for double her stated salary for a two-week period. All of the salary payments appear to be regular pay and not pay for annual leave.

• Deborah Brown submitted a Federal Cash Transaction Report on September 8, 1999 listing herself as Utica's Fiscal Officer.
  

• Deborah Brown signed bank withdrawal slips from Utica's accounts in late August and early September.

Thus, the record demonstrates that Deborah Brown's employment status at Utica Head Start was not fully and responsibly resolved by July 31, 1999. Utica never conclusively resolved whether this individual was responsible for any of the abuses and improprieties considered in the Dorfman-Robbie draft report; the Board of Directors never took any actions at all to resolve her employment status before July 31, 1999; the Board remained in ignorance while the Executive Director and Fiscal Officer negotiated a severance agreement for the Fiscal Officer which placed $100,000 of Head Start funding at risk; the Board effectively nullified the agreement by stopping payment on the checks but has never taken further action to definitively resolve the Fiscal Officer's employment status; the Board failed to provide adequate oversight during the period following July 31, 1999, so that Deborah Brown continued to receive salary payments for a six-week period as Fiscal Officer (including a double payment for one two-week period); and Deborah Brown took official actions as the holder of the Fiscal Officer position during that time.

The record also demonstrates that the Utica Board has never completed an investigation of the Executive Director's responsibility for possible abuses and improprieties in Utica's finances, or for the excessive severance agreement for her daughter that was not brought to the attention of the Board of Directors in a timely fashion by the Executive Director herself, or for the Executive Director's use of an unauthorized signature stamp in the implementation of that agreement. Thus, the record demonstrates that the Utica Board did not timely carry out a full and independent investigation of any fiscal abuses and improprieties and the circumstances surrounding the execution of the severance agreement and did not issue a report that fully exonerated the Executive Director, even though the Board decided to reinstate her on November 17, 1999 as Executive Director after having previously placed her on a 90-day leave of absence.

Accordingly, on the basis of Utica's failure to fully and responsibly resolve its conflict of interest deficiency by the July 31, 1999 deadline set by ACF, we uphold ACF's determination to terminate Utica's Head Start funding. Although we proceed to discuss an additional set of grounds to terminate funding, the conflict of interest deficiency is sufficient basis in and of itself to support termination of Utica's Head Start funding.

II. Utica failed to submit documentation required by regulation and requested by ACF.

In addition to the allegation of uncorrected family favoritism in the management of Utica as ground for termination of Utica's Head Start grant, ACF found that Utica's failure to submit certain documentation constituted deficiencies that warranted termination of Head Start funding. On December 29, 1999, ACF had given Utica 30 days to submit the following: a final financial status report for the budget period ended May 31, 1999; an independent auditor's certification that internal controls were in place and working to ensure the safeguarding and effective use of federal funds; and a report from Utica's Board of Directors satisfactorily addressing the allegations and related findings in the Dorfman-Robbie draft report.⁽¹⁴⁾ ACF Ex. 32. On February 8, 2000, ACF formally notified Utica that it was adding the following deficiencies as grounds for its termination of Utica's Head Start funding:

• violation of 45 C.F.R. � 74.52(a)(1)(ii) - failure to submit the final financial status report for the period ended May 31, 1999.
• violation of 45 C.F.R. � 1301.13(a) - failure to submit an accounting system certification.
• violation of 45 C.F.R. � 1304.50(g) - failure of the Utica Board to exercise its responsibilities as governing body. ACF specifically cited to Utica's failure to respond to ACF's repeated requests for a report or evidence of an execution of a plan by the Utica Board of Directors which satisfactorily addressed the allegations and related findings in the Dorfman-Robbie draft report.

The production of such documentation is essential not only to enable ACF to perform its oversight responsibilities that federal grant funds are being properly expended, but also to allow the grantee itself to manage effectively the grant funds it receives.

A. Utica failed to provide ACF a final financial status report as required under the regulations.

In its December 29, 1999 notification of deficiencies, ACF advised Utica that two financial status reports (FSR or SF-269) were past due: the second semi-annual FSR for the period ended May 31, 1999, covering the period December 1, 1998 through May 31, 1999, which had a submission due date of June 30, 1999; and the final FSR for the budget period ended May 31, 1999, covering the budget period June 1, 1998 through May 31, 1999, which had a submission due date of August 31, 1999. ACF Ex. 32.

An ACF official (Frank Carino), a financial management operations specialist for the Head Start program, testified that a Head Start grantee is required to submit three financial status reports each year, two semi-annual reports and a final report. Tr. at 285. Regulations require that a grantee submit a FSR no later than 30 days after the end of the reporting period for semi-annual reports and 90 calendar days for annual and final reports. 45 C.F.R. � 74.52(a)(1)(iv).

Utica argued that it had submitted a FSR on December 21, 1999 for the period June 1, 1998 through May 31, 1999. ACF Ex. 34. Utica maintained that, after it had received ACF's December 29, 1999 letter, it had sought clarification from ACF on what more was needed to comply with ACF's concerns about the FSRs. Utica contended that its new Fiscal Director, unable to reach ACF's Head Start Division Manager (Alan Jones) by telephone, sent a telefacsimile to this ACF official on January 4, 2000. Utica Ex. 8. In that telefacsimile the new Fiscal Director stated that he understood ACF's request for two FSRs for the period ended May 31, 1999 to mean two separate columns on the same report and that the FSR submitted on December 21, 1999 should be considered the final report "although there may be changes based on the Audit covering the period." Id.

An ACF official (Mr. Carino) testified that while the FSR submitted by Utica on December 21, 1999 could be considered to be the second semi-annual report, it could not be considered to be a final FSR for two reasons. Tr. at 288 - 89. First, box 6 on the FSR designating whether the FSR was a final report had a checkmark in the "no" box. ACF Ex. 34. Second, line k on the FSR listed $65,403 in unliquidated obligations. Id. The ACF official testified that, under principles set forth in 45 C.F.R. Part 74 and the GAM, in order for a FSR to be considered a final report, the unliquidated obligations line should be zero. Tr. at 289 - 90.

The record does not support Utica's position that its December 21, 1999 FSR constituted a final FSR or that any purported failure to submit the required FSRs is excused by the fact that its new Fiscal Director sought clarification from ACF about the requirements for a FSR. It is evident that Utica's Fiscal Director did not intend the December 21, 1999 FSR to be considered the final FSR as he specifically checked the box indicating that it was not the final report. Furthermore, another ACF official (Alan Jones), responsible for the management of Utica's Head Start program, testified that he never saw either the FSR dated December 21, 1999 or the January 4, 2000 facsimile from Utica's Fiscal Director addressed to him seeking clarification on ACF's December 29^th letter until February 22, 2000, when ACF counsel showed them to him. Tr. at 127 - 29. Utica never offered any testimony or evidence to rebut the testimony of either Mr. Carino or Mr. Jones. For example, Utica failed to present any testimony from Mr. Richard Penna, Utica's Fiscal Director during the time when the final FSR should have been prepared.

Consequently, we find that Utica failed to meet the regulatory requirement specified in 45 C.F.R. � 74.52(a)(1)(iv) of submitting a final FSR for the year ending May 31, 1999. Timely submission of the annual FSR was particularly significant under the circumstances here when Utica's fiscal operations were subject to charges of mismanagement and improprieties.

B. Utica failed to provide ACF with an independent auditor's certification as required under the Head Start regulations.

In its August 26, 1999 letter placing Utica on high-risk status, ACF notified Utica that it must submit an independent auditor's certification. ACF Ex. 19. ACF found as one basis for termination of Utica's Head Start grant that no such certification was ever submitted.

Head Start regulations provide:

Upon request by the responsible HHS official, each Head Start agency . . . shall submit an accounting system certification, prepared by an independent auditor, stating that the accounting system or systems established by the Head Start agency . . . has appropriate controls for safeguarding assets, checking the accuracy and reliability of accounting data, and promoting operating efficiency.

45 C.F.R. � 1301.13(a).

Utica maintained that ACF never provided it with any guidance or explanation regarding what ACF was requesting in regard to this certification. Utica argued that within six days of requesting the auditor's certification ACF summarily cut off all federal funds to Utica, thereby unreasonably imposing a new requirement upon Utica at the same time denying Utica any federal assistance to accomplish the audit certification. Utica's Board President testified that because of ACF's suspension of funds Utica could not afford to hire an auditor for a certification. Tr. at 423. Utica further contended that ACF's request for an auditor's certification came after ACF's own on-site review of Utica, which had no findings of non-compliance or deficiency. Moreover, according to Utica, the final audit (A-133) report for the fiscal year ending May 31, 1998, stated that no material weaknesses in Utica's internal controls were found. Utica maintained that the A-133 audit covered all of the issues identified in 45 C.F.R. � 1301.13(a) and that there was no way a grantee could know that a certification under section 1301.13 differed from an A-133 audit.

Under 45 C.F.R. � 1301.13(a), the submission of an accounting system certification is a discretionary requirement that may be imposed by the responsible HHS official when the circumstances merit it. We conclude that, under the circumstances of this case, ACF acted reasonably in imposing this requirement on Utica. Since its on-site visit, ACF had become aware of the Dorfman-Robbie draft report, which had disclosed numerous questionable and serious practices at Utica involving Utica's internal controls on the expenditure of Head Start funds in such areas as travel reimbursement, credit card charges, and petty cash use. Furthermore, the highly questionable severance package of $151,000 to the Fiscal Director had been finalized, with the Executive Director using the signature stamp of the Board's President to countersign the four settlement checks. Thus, ACF did not abuse its discretion to request an auditor's certification under the circumstances here.

Moreover, Utica is incorrect in arguing that the audit prepared for the year ending May 31, 1998, contained the requested certification. The Dorfman-Robbie auditor testified that the audit for that year did not contain a certification that Utica's current internal controls were appropriate. Tr. at 27. The auditor explained that his firm was hired to perform an A-133 audit under generally accepted audit standards and government standards, but that did not mean a certification of Utica's internal control for accounting systems. Tr. at 55. The auditor stated that, in order to issue a certification of internal controls, expanded additional testing specifically related to internal controls was needed. Tr. at 57 - 58.

We note that the provision of an independent auditor's certification is not an ordinary procedure required of all Head Start grantees. There is nothing in the record moreover to indicate that Utica had ever been asked for an auditor's certification in the past. Nevertheless, when Utica received notices from ACF on August 26 and September 3, 1999 that an independent auditor's certification was needed, it should have sought guidance from ACF if it did not understand what this entailed. There is nothing in the record showing that Utica requested any such assistance. Therefore, we do not accept Utica's argument that it had no way of knowing that an independent auditor's certification differed from an A-133 audit. Moreover, Utica could have learned more about the meaning of a certification from its own auditor who provided testimony at the hearing about what would have been required. Tr. at 25 and 57.

Finally, Utica cannot reasonably rely on the suspension of funding as an excuse for its failure to comply with this or any other regulatory requirement applicable to its Head Start program. Utica moreover could have appealed the suspension of its funding, but chose not to pursue its appeal after first initiating it.

Utica had the obligation to provide an independent auditor's certification once it was requested by ACF on August 26, 1999. ACF gave Utica sufficient time, more than five months, to produce the certification. Accordingly, by not providing an independent auditor's certification, Utica failed to comply with 45 C.F.R. � 1301.13(a). Again, this deficiency was significant in view of the unresolved charges of mismanagement and improprieties at Utica.

C. Utica's Board failed to respond to the allegations and related findings contained in the Dorfman-Robbie draft report.

As discussed in the Factual Background section of this decision, several of Utica's Board members requested that its auditing firm conduct an investigation of various practices at Utica. This investigation resulted in the Dorfman-Robbie draft report. ACF Ex. 20. This report detailed various questionable expenditures, already set forth on pages 5 and 6 of this decision. The issues discussed by the report were never definitively resolved by a final audit report or by other means taken by Utica. ACF accordingly as early as August 26, 1999, asked the Utica Board of Directors to issue a report on the questionable expenditures and related issues. ACF Ex. 19.

ACF found that Utica violated 45 C.F.R. � 1304.50(g) by failing to submit a report addressing the Dorfman-Robbie draft report. This regulation provides, under the heading "Governing body responsibilities":

(1) Grantee and delegate agencies must have written policies that define the roles and responsibilities of the governing body members and that inform them of the management procedures and functions necessary to implement a high quality program.
(2) Grantee and delegate agencies must ensure that appropriate internal controls are established and implemented to safeguard Federal funds . . . .

Utica argued that there is no requirement in the Head Start Act or the implementing regulations that a grantee respond to a draft audit report. Utica disputed that the August 16, 1999 resolution by the Utica Board to establish an ad hoc committee to investigate the allegations contained in the report created a binding obligation for which Utica's Head Start program can be terminated if the resolution is not carried out. Citing Human Development Corporation of Metropolitan St. Louis, DAB No. 1703 (1999), Utica contended that termination of a grantee's Head Start grant is permissible only where the grantee has failed to correct a deficiency after an opportunity to correct. Utica argued that its Board's ability to carry out an investigation pursuant to its resolution was made impossible by events that occurred subsequent to the passage of the resolution, most notably, ACF's suspension of all training and technical assistance, but also investigations by the Office of the Inspector General and the FBI. Utica asserted that damaging media coverage of Utica's suspension and termination hindered the development of an ad hoc committee composed of community volunteers to conduct the investigation. Utica maintained that its Board strove to resolve all the issues raised by ACF and to fulfill all its obligations under the Act and regulations, despite all the obstacles it encountered.

As to Utica's claim that the regulations do not require a response to a draft audit, 45 C.F.R. � 1304.50(g) explicitly imposes upon grantees the obligation to ensure that internal controls are established and implemented to safeguard federal funds. Considering the serious nature of the allegations contained in the Dorfman-Robbie draft report that federal funds were being mismanaged and misspent, ACF reasonably concluded that Utica had the responsibility under 45 C.F.R. � 1304.50(g) to investigate those allegations and to report on the implementation of procedures to prevent such events from recurring. Obviously, such an investigation might be expected to have a bearing on whether Utica should establish new or modified internal controls to safeguard federal funds. We also find that, contrary to Utica's arguments, the record in this case undeniably indicates a lack of inclination on the part of Utica's Board to investigate not only the serious allegations contained in the Dorfman-Robbie draft report, but also other instances of possible mismanagement and improprieties involving Utica's Fiscal Director and the Executive Director.

The Dorfman-Robbie draft report was given to Utica's Board on December 18, 1998. Many of the allegations of impropriety in that report centered on actions by Utica's Fiscal Director. Yet when the report was presented to the Board, the Board elected to have Utica's management, i.e., Utica's Executive Director, the Fiscal Director's mother, respond to the report. The response from Utica's management was due by the end of January 1999, but was not delivered until June 18, 1999. The response of Utica's management focused on such proactive measures as the adoption of reporting requirements regarding travel and canceling the Fiscal Director's credit card, but totally failed to provide clear explanations of her responsibility for alleged abuses in each instance and her repayments, if any. For example, one questionable practice cited in the Dorfman-Robbie draft report involved the alleged use of Utica's petty cash to pay the home electric utility bill of the Fiscal Director. The Utica management's response to this was limited to, "All petty cash funds were reconciled and deemed necessary expenditures." Utica Ex. 10-2, at 3. By any standard, this was an inadequate response to the report's serious allegation. The Dorfman-Robbie draft report also detailed how the Fiscal Director had hired her own children to work at Utica but directed that no IRS Form 1099s be prepared for them. The response prepared by the Executive Director made no mention of this questionable practice involving her daughter and grandchildren.

When the Dorfman-Robbie draft report was delivered to Utica's Board in December 1998, the Fiscal Director was still operating in that capacity and would continue to do so until the end of July 1999. Yet there is no evidence in the record that Utica's Board at any time ever sought to interview the Fiscal Director about any of the serious allegations in the Dorfman-Robbie draft report, including her credit card charges and travel reimbursement claims.

The fact that the Utica Board turned to the Executive Director to respond to a report containing allegations of misappropriation of funds and other improprieties by the Executive Director's daughter evidences a dereliction of duty on the Board's part to oversee the operation of Utica and to ensure the proper expenditure of Head Start funds. The allegations of mismanagement and fiscal improprieties were directed at the highest levels of Utica's management. It was the Board's responsibility to investigate and resolve these matters in a reasonable way. Delegating this responsibility to the Executive Director, whose ability to deliver an impartial response was doubtful, was not reasonable.

Utica's assertion that events beyond its control precluded it from conducting an investigation to respond to the Dorfman-Robbie allegations is unpersuasive. Irrespective of any lack of financial and technical assistance from ACF, Utica's Board at a minimum could have conducted an investigation of the Dorfman-Robbie allegations by simply inviting the Fiscal Director and Executive Director to appear before the Board and answer questions. There is no indication in the record that Utica's Board undertook even such minimum actions that would have entailed no cost to Utica. For example, there is no indication that the Board ever asked Deborah Brown or Mattie Brown about their personal use of Utica's vehicles. Tr. at 454.

As was extensively discussed above, Utica's Board effectively divorced itself from the resolution of the family favoritism issue, allowing the Executive Director and her daughter, the subjects of the issue, to reach a settlement, thereby compounding the conflict of interests question even further. Even the current President of Utica's Board agreed that the prior Board was negligent in its duties in the resolution of the family favoritism issue. Tr. at 531.

Even when Utica's Board did apparently attempt to fulfill its oversight responsibilities of Utica's management, individual members of the Board acted to undercut this effort. When the Utica Board passed a resolution on August 16, 1999, placing the Executive Director on a leave of absence, she was directed to cease all contact with Utica and return all keys, vehicles, and credit cards. ACF Ex. 27, at 3. The Board President testified, however, that he was present when another Board member verbally gave the Executive Director permission to use and keep a Utica vehicle. Tr. at 455. He further testified that this became a concern to the Board only when ACF found out about it. Id. The Board President also testified that he was aware of the Executive Director's scheduled participation in a conference to be held in Puerto Rico even though she had been placed on a leave of absence, stating that in "hindsight" it might have been appropriate to cancel her trip. Tr. at 458 - 59.

These examples are illustrative of the failure of Utica's Board to understand what its responsibilities were under the regulations. Contrary to Utica's position, the Board's failure to exercise its duties under 45 C.F.R. � 1304.50(g) to establish internal controls to safeguard federal funds constituted a deficiency for which termination of federal funding is an appropriate remedy. Utica had more than adequate notice that it was required to submit evidence of the execution of a plan to satisfactorily address the allegations of the Dorfman-Robbie draft report, yet Utica failed to do so. We therefore find that by not providing such a response to the Dorfman-Robbie draft report, Utica failed to comply with 45 C.F.R. � 1304.50(g). Again, this deficiency was significant in view of the unresolved charges of mismanagement and improprieties at Utica.

Conclusion

For the reasons discussed above, we find that the evidence overwhelmingly establishes that a conflict of interest existed at Utica, which the Utica Board of Directors and Utica management failed to address in a timely and appropriate fashion. Utica's conflict of interest deficiency was a sufficient basis in and of itself for the termination of Utica's Head Start funding. We also find that Utica failed to timely submit documentation to ACF that it was under a regulatory obligation to provide, which provides a second independent basis for Utica's termination. Accordingly, we sustain ACF's termination of Utica's Head Start grant.

Judith A. Ballard

M. Terry Johnson

Donald F. Garrett
Presiding Board Member

1. Four months after the hearing the Board received an unsolicited letter from one of Utica's witnesses (the former Acting Executive Director) attempting to clarify various points in her testimony. Utica objected to the inclusion of this letter into the record for this appeal and we do not include it in the record. See 45 C.F.R. � 16.21.

2. Utica's Management Response and Corrective Action Plan, in response to the Dorfman-Robbie draft report's concerns about unauthorized expenditures, stated that: signed monthly vehicle logs would be maintained, with all gasoline credit card purchase slips retained for review; all staff must turn in all travel receipts upon return from their trips; credit cards for the Fiscal Director and a senior bookkeeper had been canceled; and all petty cash funds were reconciled and deemed necessary expenditures. Utica Ex. 10-3. The auditor testified that Utica's corrective action plan and response did not address all the issues raised in the Dorfman-Robbie draft report and was not adequate in relation to the findings expressed in the draft report. Tr. at 20 - 21. He stated that, because a conclusion with Utica could not be reached on all the issues raised in the draft report, his firm did not issue a final report and judged that it would be more appropriate for the federal government to be the final judge on the issues. Tr. at 39.

3. Two of the checks were actually cashed by Deborah Brown and moved into an investment account; the other two checks were not cashed. Tr. at 98. An amount reflecting the two cashed checks was subsequently returned to Utica's account.

4. Utica subsequently requested, pursuant to 45 C.F.R. � 1303.12(c)(5), an informal review by ACF to show cause why the suspension should not be rescinded. Utica and ACF then held an informal meeting on September 28, 1999, to discuss the alleged deficiencies that were the basis for ACF's determination to suspend funding. On October 5, 1999, ACF sent Utica an official notification that it had determined to continue the summary suspension of all federal assistance under the Head Start Act. Utica timely filed an appeal of the suspension of funding with this Board and requested the Board to direct ACF to reinstate funding during the pendency of the appeal. In its October 21, 1999 Acknowledgment of the Notice of Appeal and Request for Clarification, the Board informed Utica that it had no authority to order a federal agency to make an award of funds and thus it could not order ACF to continue funding during the appeal process. Utica then requested and received a stay of proceedings while it sought a preliminary injunction with the United States District Court for the District of Columbia to require ACF to continue funding during the pendency of the administrative appeal proceedings. On February 4, 2000, the District Court denied Utica's motion for preliminary injunction. Utica Head Start Children and Families, Inc., v. Shalala, Civ. No. 99-3201. Utica then informed the Board that it would only appeal ACF's termination of funding before the Board, as Utica did not have the resources to challenge the summary suspension. February 17, 2000 Appellant's Report to the Departmental Appeals Board.

5. Additionally, the payments could not have been for annual leave as Utica's personnel policies prohibit the accumulation of more than 120 hours of annual leave and Deborah Brown had been paid for all of her 72.5 hours of accumulated leave according to her July 30, 1999 pay statement. Utica Ex. 13, � 502; ACF Ex. 46, at 1.

6. At the hearing, Utica strenuously objected to the introduction of copies of these bank withdrawal slips on the basis that any signatures on the slips were illegible. The Board inquired at the hearing whether clearer copies were available. Following the hearing, an Assistant U.S. Attorney, at ACF's behest, submitted a copy of a withdrawal slip dated August 31, 1999, on which the signature of Deborah Brown is clearly discernible. We therefore accept that Deborah Brown's signature was on the slips.

7. After ACF received on February 9, 2000, Utica's Form A-133 for the period ended May 31, 1998, ACF removed this ground for Utica's termination. February 17, 2000 Report at 9.

8. Utica's personnel policies permit the hiring of relatives for certain positions, but require that no relative may be assigned to a position supervising a relative and that members of the immediate families of administrative employees may not be employed. Utica Ex. 13, � 305. Utica's policies further provide that ACF may waive these requirements, provided that Utica "must be sure that no other individual within its service area is qualified, available and willing to accept the salary for the position for employment and document its recruitment efforts." Id.

9. Examples of these actions were detailed in ACF's Reply to Utica's Post-Hearing Brief at 7-9. Thus, with respect to the charge of corporate credit cards having been used for purchases of a personal nature, Utica noted that all personal charges (which may have exceeded $10,000 in 1998 alone) "have been paid to the agency." See Utica Ex. 10, at 32.

10. Moreover, the conflict of interest involved arguably the two most important management officials of the organization and thus created a highly significant void in potential oversight within the highest level of management of the organization. Because of the existence of the conflict of interest, either the Executive Director or the Fiscal Director (or both) may have been less inclined to provide the necessary oversight to prevent these very instances of misuse or potential misuse from occurring. Indeed, the lack of oversight involving these two positions ultimately allowed the Executive Director to negotiate a severance agreement with the Fiscal Director that provided for a severance payment of $151,940, a substantial portion of which was charged to the Head Start account, and allowed the Executive Director to issue four checks totaling the entire severance amount through the unauthorized use of the signature stamp of Utica's former Board President.

11. Although we conclude that the conflict of interest violation clearly involved the misuse of Head Start funding, as discussed above, we agree with ACF that the violation could also be treated as involving Utica's failure to perform substantially requirements related to Program Management. Indeed, the statutory provision barring family favoritism requires Head Start organizations to observe standards of "management" which will ensure so far as reasonably possible, that all "program" activities are conducted free of any taint of "family favoritism." 42 U.S.C. � 9839. Thus, the statute itself clearly places the conflict of interest requirements within the realm of standards of program management and the conflict of interest requirements would effectively permeate requirements of program management set forth in Subpart D of 45 C.F.R. Part 1304, including the sections cited by ACF such as 45 C.F.R. �� 1304.52(a)(1) and (h).

12. Utica made much ado in its arguments about the amount of time it took ACF to respond to the Utica Board's proposal. Utica, however, did not provide evidence that ACF's delay had any effect on Utica's ability to correct this deficiency by the deadline. If anything, the delay gave Utica additional time to complete its audit of the alleged abuses and improprieties and to explore its options to resolve the conflict in the event ACF were to find its proposal unacceptable.

13. Any suggestion that the scheduled turnover in the membership of Utica's Board during the summer of 1999 or the fact that Utica's Board traditionally held no meetings in July or August due to vacations is no excuse for the Board's failure to take action regarding the conflict of interest. As stated above, ACF put the Board on notice on October 27, 1998, that the issue had to be resolved and further notified the Board on April 14, 1999 that Utica's proposed resolution was unacceptable. The Board President testified that the Board gave no direction to the Executive Director on how to handle the conflict of interest because most of the Board members were on vacation and Mattie Brown was therefore unable to consult with anyone before executing the severance agreement. Tr. at 408 and 442. Given that the Board had part of April and the full months of May, June and July to arrive at an acceptable solution to the conflict of interest, we find the excuse of the unavailability of Board members to be particularly unpersuasive and a further indication of the Board's abdication of its fiduciary duties. Furthermore, the Board could have appointed an ad hoc committee or made other special arrangements to resolve the conflict of interest if the entire Board would not always be available during the period of time leading up to the deadline. Finally, the fact that the subsequent August, 1999 incoming Board was not afforded technical training for new members originally scheduled for late August, 1999 (see Utica Post-Hearing Br. at 12) does not excuse the Board in existence as of April 14 through July 31, 1999 from taking action on a termination issue it had been aware of for almost an entire year.

14. This notification also directed Utica to provide a second semi-annual financial status report for the budget period ended May 31, 1999, and an organization-wide (A-133) audit report for the period ended May 31, 1999. Utica subsequently provided these two documents.