CORPORATION FOR PUBLIC BROADCASTING
OFFICE OF INSPECTOR GENERAL
AUDIT OF PBS AND CPB GRANTS AWARDED
TO THE FRED ROGERS COMPANY
FOR THE PRODUCTION OF “ODD SQUAD”
FOR THE PERIOD JULY 1, 2012 THROUGH SEPTEMBER 30, 2015

REPORT NO. APT1702-1705
March 31, 2017

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Office of Inspector General
Corporation for Public Broadcasting

Report No. APT1702-1705
March 31, 2017

Report in Brief
Why We Did This Audit
We performed this
examination based on our
annual audit plan.
Our objectives were to
determine whether the Fred
Rogers Company (FRC):
a) financial report fairly
presented total project grant
expenditures; b) costs were
incurred in accordance with
grant requirements; and
c) complied with grant
requirements for the period
July 1, 2012 through
September 30, 2015.
This report contains the views
of the Office of Inspector
General (OIG). The
Corporation for Public
Broadcasting (CPB) will make
the final decision on our
findings and
recommendations.

Audit of PBS and CPB Grants Awarded to The Fred
Rogers Company for the Production of “Odd Squad” for
the Period July 1, 2012 through September 30, 2015

What We Found
We disclaimed an opinion on
the $18.2 million FRC reported
as costs for this production.
Our audit identified significant
deficiencies in internal control
to ensure compliance with
various grant requirements for:
•
•
•

The audit’s scope was limited
when we were not given access
to FRC’s subcontractor’s
records to obtain sufficient
audit evidence to opine on
FRC’s final financial report.

CPB’s requirement that the final financial report be reconciled to
grantee’s general ledger;
CPB’s requirement to access subcontractor’s financial records to
verify total project costs; and
Ready to Learn’s (RTL) financial records requirement to identify
the application (expenses) for federally sponsored activities.

FRC did not agree with our findings. CPB management will make
the final determination on our findings and recommendations.

What We Recommend
CPB should:
•

•

Send all inquiries to our
office at (202) 879-9669 or
email OIGemail@cpb.org or
visit www.cpb.org/oig
Listing of OIG Reports

•
•

require FRC to obtain from its subcontractor a reconciliation of the
final cost reports submitted to CPB to the subcontractor’s general
ledger and a written certification of their accuracy;
require that FRC’s final financial report for its current production
disclose the basis for reporting project costs and the amount of its
subcontractor’s reported costs that were not recorded in FRC’s
accounting records;
require FRC to comply with all CPB grant terms in its current
production, including access; and
ensure its oversight of grantees reinforces RTL requirements.

  
  
 

   

   

Corporation
for Public
Broodcosting

Of?ce of Inspector General

Date: March 31, 2017

To: Jackie Livesay, Vice President. Compliance
Debra Sanchez, Senior Vice President. Education Children?s Content Operations

From: Mary Mitchelson, Inspector General ?rza7% 

Subject: Audit of PBS and CPB Grants Awarded to The Fred Rogers Company for the
Production of "Odd Squad" for the Period July 1. 2012 through September 30. 2015.
Report No. APT1702-1705

Enclosed please ?nd our ?nal report, which contains our ?ndings and recommendations. CPB
of?cials must make a ?nal management decision on the findings and recommendations in accordance
with established audit resolution procedures.

We request that you provide us with a draft written response to our ?ndings and recommendations
within 90 days ofthe final report. We will review your proposed actions and provide our feedback
before you issue a ?nal management decision to the grantee, which is due within 180 days of the ?nal
report. For corrective actions planned but not completed by the response date, please provide speci?c
milestone dates so that we can track the implementation ofcorrective actions needed to close the audit
recommendations.

We will post this report to the Of?ce of Inspector General?s website as required by the Inspector
General Act of 1978. as amended. Please refer any public inquiries about this report to our website or
our of?ce.

Enclosure

cc: Lori Gilbert, Chair. CPB Board ofDirectors
Bruce M. Ramer, Chair, CPB Audit and Finance Committee
US. Senate Committee on Homeland Security and Governmental Affairs
US. House of Representatives Committee on Oversight and Government Reform
US. Senate Committee on Commerce. Science and Transportation
US. House of Representatives Energy and Commerce Committee
US. Senate Committee on Appropriations
U.S. Senate Labor-HI?IS-Education Appropriations Subcommittee
US. House of Representatives Committee on Appropriations
US. House of Representatives Labor-I?II?lS-Education Appropriations Subcommittee

(101 Ninth Street. NW
Washington, DC 20004-2129
202.879.9669 202.879.9699 fax
wt-chpoorgtoig

TABLE OF CONTENTS
Executive Summary..………………………………………………………………………..1
Background ………………………………………………………………………………....2
Results of Audit …………………………………………………………………………….4
Findings and Recommendations ...…………………………………………………..……...6
Exhibits
A — Odd Squad Season 1 – Final Financial Report………………………………14
B — Scope and Methodology….……………………………………………….....16
C — The Fred Rogers Company’s Response to Draft Report……………….……17

 EXECUTIVE SUMMARY
We initiated an audit of the Corporation for Public Broadcasting (CPB) grant to the Fred Rogers
Company (FRC) for the Odd Squad Season 1 production, including Department of Education
Ready to Learn (RTL) pass through grant funds awarded through PBS. Our objectives were to
determine whether FRC: a) financial report fairly presented total project grant expenditures; b)
costs were incurred in accordance with grant requirements; and c) complied with grant
requirements.
We have not been able to obtain sufficient audit evidence of FRC’s subcontractor’s Sinking Ship
Entertainment (Sinking Ship) expenses to provide an audit opinion on the total reported project
costs. Accordingly, we do not express an opinion on FRC and Odd Squad Season 1 final
financial report in Exhibit A for the period July 1, 2012 through September 30, 2015.
Our audit identified significant deficiencies in internal control to ensure compliance with various
grant requirements:
•
•
•

CPB’s requirement that the final financial report be reconciled to grantee’s general
ledger;
CPB’s requirement to access subcontractor Sinking Ship’s financial records to verify
total project costs; and
RTL’s requirement to maintain financial records that identify the application (expenses)
for federally sponsored activities.

We recommend that CPB:
1) require FRC to obtain from Sinking Ship for Odd Squad, Season 1 and the current Odd
Squad, Season 2, projects:
a) a reconciliation of the final cost reports submitted to CPB to Sinking Ship’s general
ledger; and
b) a written certification of the accuracy of the final cost reports;
2) require that FRC’s current Odd Squad, Season 2 final financial reports disclose:
a) the basis for reporting project costs (i.e., based on actual costs incurred or on a percentage
of completion basis for the fixed price contract); and
b) the amount of Sinking Ship’s reported costs that were not recorded in FRC’s accounting
records;
3) ensure FRC takes corrective actions regarding its current Odd Squad, Season 2 CPB grant to
comply with all RTL and CPB grant terms for financial reporting, recordkeeping, and access
to subcontractor financial records requirements; and
4) periodically monitor PBS’s oversight of its large RTL subrecipients to verify grant recipients
are compliant with federal grant requirements to maintain financial records that identify the
application of federal RTL activities including project budgets and financial reports.
In response to our draft report, FRC did not agree with our finding that it had significant
deficiencies in internal control and compliance with RTL requirements. FRC said there were
deficiencies in the structure of the agreement regarding financial reconciliations, and that the
1

 project budget did not separately identify RTL costs to discretely account and report on the use
of federal funds. FRC also stated it was not required to include access provisions in its vendor
contract agreement. FRC’s written response to the draft report is presented in Exhibit C.
We performed this audit based on the Office of Inspector General’s (OIG) 2016 annual plan. We
conducted our audit in accordance with Government Auditing Standards for financial audits.
Our scope and methodology is discussed in Exhibit B.
This report presents the conclusions of the OIG and the findings do not necessarily represent
CPB’s final position on the issues. While we have made recommendations we believe would be
appropriate to resolve the findings, CPB officials will make final determinations on our findings
and recommendations in accordance with established CPB audit resolution procedures. Based on
FRC’s response to the draft report, we consider our recommendations unresolved pending CPB’s
final determination.
BACKGROUND
The Corporation for Public Broadcasting (CPB) is authorized by the Communications Act of
1934, as amended, 47 U.S.C. § 396, to award grants to public telecommunications entities;
national, regional, and other systems of public telecommunications entities, and independent
producers and production entities. Specifically, CPB awards grants to fund projects for
broadcast and other uses by public telecommunications and educational systems and had five
active grants to The Fred Rogers Company (FRC) during our audit period. In addition, in 2010
CPB received a grant award from the Department of Education (DOE) Ready to Learn (RTL)
program to fund CPB’s Expanded Learning Through Transmedia Content program. 1 CPB was
responsible for distributing the RTL grant funds to support the program and subgranted a portion
of these RTL funds to PBS, which in turn made subawards to various independent producers,
including FRC. Additionally, CPB partially funds PBS’s National Program Service (NPS)
activities, including awards to FRC. 2 CPB, RTL, and CPB’s NPS funding is shown in the table
below:
CPB Funds Awarded to FRC
CPB Grant
Number

Project

CPB Education
Initiative Funds

14816

Odd Squad Season 1

$3,000,000

15436

Odd Squad Season 2

2,250,000

PBS/CPB/RTL 3

Peg + Cat Season 1

3,000,000

15322

Peg + Cat Season 2
Daniel Tiger's
Neighborhood Season 2

2,250,000

15059
Total

RTL
$7,950,000
7,990,845

1,708,772
$12,208,772

CPB NPS

$15,940,845

Total CPB and
RTL Funding

Total Budget
as Amended

$10,950,000

$18,225,715

2,250,000

11,630,303

10,990,845

16,801,782

2,250,000

13,029,049

1,600,000

3,308,772

14,732,918

$1,600,000

$29,749,617

$74,419,767

PBS is a nonprofit organization whose members are America’s public TV stations.
1

PR/Award Number U295A100025, CFDA No. 84.295A.
CPB by statute awards national television programming grants to PBS, which include the NPS funding for Daniel
Tiger’s Neighborhood Season 2.
3
PBS/CPB/RTL joint agreement funded Peg + Cat Season 1.
2

2

 The PBS agreement with FRC states that, “…PBS is responsible for delivering to its public
television stations a national program service (… “NPS”) for home and educational use in
various media.”
FRC is an independent producer and major supplier of children’s programming for PBS. It is a
501(c)(3) non-profit founded in 1971 to produce the television series Mister Roger’s
Neighborhood. Its mission is: “The FRC strives to build on Fred Rogers’ legacy by creating
quality children’s media that models an enthusiasm for learning and earns the trust of parents and
caregivers.”
FRC, with its wholly owned subsidiary Odd Productions, LLC and its Canadian co-venture
producer Sinking Ship, produces the Odd Squad half-hour live action comedy series and
transmedia property to teach math concepts to early elementary school-aged children (5-8). The
40-episode series and transmedia suite launched in 2014 on PBS KIDS (on air and online).
Funding was provided by the 2010-2015 RTL grant, PBS, CPB, and Sinking Ship.
The deal structure with Sinking Ship to take advantage of the Canadian tax credits was
complicated. FRC created a related entity, Odd Productions, LLC (OP) and formed a co-venture
with Sinking Ship, a Canadian corporation, to co-produce and co-finance the Odd Squad series in
compliance with the Canadian Radio-television and Telecommunications Commission (The
“CRTC”) in order to qualify for federal and provincial tax credits. This arrangement included
the distribution and exploitation of the Initial Cycle Episodes (the PBS Production Series). The
co-venture entered into a fixed price Production Services Agreement (PSA) with Sinking Ship
(Odd Squad) Productions Inc., a wholly owned subsidiary of Sinking Ship, to produce the
programs for the Initial Cycle Episodes.
FRC’s grant proposal for the Odd Squad production states that “Sinking Ship is an
award-winning production and new media company that specializes in groundbreaking
live-action programming and cross-platform content.” Sinking Ship acquired the rights to Odd
Squad from the show’s creators, award-winning children’s television writers, Hundredth Town
Productions, Inc.
FRC stated it is proud of its Emmy winning Odd Squad production, along with DOE’s annual
Government Performance and Results Act review giving it the highest ratings for its transmedia
curriculum execution.
This report discusses our audit of the Odd Squad Season 1 production with CPB and RTL
funding as shown below:

3

 CPB Funding
Grant
Number
14816

Project
Odd Squad
Season 1

CPB Education
Initiative Funds
$3,000,000

RTL 4
$7,950,000

Total CPB and
RTL Funding

Total Budget as
Amended

$10,950,000

$18,225,715

The final financial report for Odd Squad Season 1 is shown on Exhibit A.
RESULTS OF AUDIT
We initiated an audit of FRC and Sinking Ship’s final financial report for the PBS RTL grant and
CPB Grant No. 14816, Odd Squad, Season 1, (Exhibit A) submitted to CPB covering the
activities through September 30, 2015. The financial report is the responsibility of FRC
management. Our responsibility is to express an opinion on this report based on our audit.
Except as described in the basis for disclaimer of opinion paragraph, we conducted our audit in
accordance with Government Auditing Standards for financial audits and auditing standards
generally accepted in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial reports are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial reports to determine compliance with the grant agreement
requirements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
reports. However, because of the matter described in the basis for disclaimer of opinion
paragraph, we were not able to obtain sufficient appropriate evidence to provide a basis for an
audit opinion. FRC prepared the accompanying final financial report to comply with the grant
financial reporting requirements.
Basis for Disclaimer of Opinion
FRC did not provide access to Sinking Ship’s financial records. FRC reported $18,232,555 in
project costs for Odd Squad on its final financial report to CPB for Grant No. 14816. FRC did
not provide us access to documentation supporting $5,282,555 of that amount, all Sinking Ship
costs, which were not recorded on FRC’s books. FRC claimed Sinking Ship is a vendor and not
subject to audit. FRC further contended that it had a fixed price contract with Sinking Ship and
the costs Sinking Ship incurred in excess of FRC’s financing obligation were not FRC’s
responsibility. FRC also asserted it was responsible for reporting only up to the fixed price
contract amount. However, FRC acknowledged that the PBS and CPB agreements required that
all project costs be reported in accordance with the project budget, and therefore FRC reported
all costs, including the $5,282,555 in Sinking Ship’s costs that were not recorded on FRC’s
books and were not paid by FRC.
We were not provided access to Sinking Ship’s financial records, therefore we were unable to
complete certain tests of transactions and balances or perform other procedures necessary to
4

RTL Funding provided under PBS NPS agreement dated October 1, 2012.
4

 opine on the final financial report presented in Exhibit A. As the $5,282,555 million in Sinking
Ship’s costs represents 29 percent of the total amount reported, the lack of access to Sinking
Ship’s records is a material scope limitation. The accuracy of the total costs reported impacts the
calculation of a production surplus or deficit and the future reporting of ancillary revenues.
Because of the significance of the matter described in the above paragraphs, we have not been
able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
Accordingly, we do not express an opinion on FRC and Sinking Ship Odd Squad Season 1 final
financial report in Exhibit A for the period July 1, 2012 through September 30, 2015.
In accordance with Government Auditing Standards, we considered FRC’s internal control over
financial reporting and its compliance with provisions of law and grant agreement requirements.
The purpose of the following explanations are to describe the scope of our testing of internal
control over financial reporting and compliance, and the results of that testing, and not to provide
an opinion of the effectiveness of internal control over financial reporting or on compliance.
Accordingly, this information is not suitable for any other purpose.
Internal Control over Financial Reporting
In planning and performing our audit of the final financial report submitted to CPB, we
considered FRC’s internal control over financial reporting to design audit procedures that are
appropriate in the circumstances for the purpose of expressing our opinion on the financial
reports provided to CPB but not for the purpose of expressing an opinion on the effectiveness of
internal control. Accordingly, we do not express an opinion on the effectiveness of FRC’s
internal control.
Our consideration of internal control was for the limited purpose described in the first paragraph
of this section and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies. Given these limitations, during our audit we did
not identify any deficiencies in internal control that we consider to be material weaknesses.
However, material weaknesses may exist that have not been identified. Our audit identified
significant deficiencies in internal control to ensure compliance with various CPB and RTL grant
requirements for:
•
•

CPB’s requirement that the final financial report be reconciled to grantee’s general
ledger; and
CPB’s requirement to access subcontractor Sinking Ship’s financial records to verify
total project costs incurred.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect and correct misstatements on a timely basis. A material weakness is a
deficiency or a combination of deficiencies in internal control, such that there is a reasonable
possibility that a material misstatement on the entity’s financial reports will not be prevented or
detected and corrected on a timely basis. A significant deficiency is a deficiency or a

5

 combination of deficiencies in internal control that is less severe than a material weakness, yet
important enough to merit attention by those charged with governance.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether FRC’s financial reports are free from
material misstatements, we performed tests of its compliance with certain provision of law and
grant agreement requirements, noncompliance with which could have a direct and material effect
on the determination of financial report amounts. However, providing an opinion on compliance
with those provisions was not an objective of our audit, and accordingly, we do not express such
an opinion. The results of our tests disclosed noncompliance with federal RTL and CPB grant
requirements as discussed further in the Findings and Recommendations section of the report.
FINDINGS AND RECOMMENDATIONS
Financial Reporting, Recordkeeping, and Access to Subcontractor Records
FRC and Sinking Ship’s Odd Squad Season 1 financial report could not be reconciled to
underlying accounting records because access to Sinking Ship’s books and records was not
provided, nor were CPB audit access provisions incorporated into FRC’s PSA with Sinking Ship.
Further, FRC also did not adequately track federal RTL expenses.
Financial Reporting
FRC’s final financial report was not reconcilable to FRC’s general ledger, because FRC did not
record in its general ledger the full $18.2 million amount of the project’s costs incurred by its
subcontractor Sinking Ship. As illustrated in the following table, FRC reported $5,282,555 in
costs that were not recorded on FRC’s general ledger. Included in this amount were $1,305,614
in additional costs over Sinking Ship’s fixed price PSA contract with FRC. CPB amended its
grant budget to cover these additional costs; PBS did not revise its total budget but accepted the
budget variances.
CPB Agreement Total Budget for Odd Squad, Season 1

Total Budget Per
CPB Amendment
$18,225,715

Final Cost
Report
$18,232,555

FRC Sinking
Ship PSA
Contract &
PBS Budget
Amount

Reported
Costs
exceeding PSA
Contract

$16,926,941

$1,305,614

FRC General
Ledger
$12,950,000

Reconciling
Difference to
Sinking Ship
Cost Report
$ 5,282,555

FRC through its co-venture subcontracted 100 percent of the Odd Squad series production
budget of $16,926,941 to Sinking Ship, a Canadian producer, for a fixed price payment
obligation of $12,950,000. FRC contends that the difference between the project budget and its
financing obligation was the anticipated Canadian tax credits and license fees Sinking Ship
expected to receive to cover these costs and was not FRC’s responsibility. According to FRC,
Sinking Ship planned to finance any deficit and eventually recover its costs with the tax credits
and licensing fees, while fulfilling its contractual obligations. However, under the PBS
6

 agreement, FRC was the fiduciary agency responsible for all legal and financial aspects of the
agreement, including providing access to support for all costs reported to PBS and CPB.
FRC did not record the total project costs of $18,232,555, which included the $1.3 million in
costs above the original budget. Instead, FRC recorded on its books only the $12,950,000 fixed
price obligation funded by PBS, RTL, and CPB. 5 FRC explained that the remainder of the
project’s costs totaling $5,282,555 were on Sinking Ship’s books, which were not made available
to OIG to audit. While FRC certified to CPB that the final financial report reconciled to its
general ledger, FRC subsequently informed us it did not, because the costs incurred by Sinking
Ship were not recorded on FRC’s general ledger.
Recordkeeping
FRC did not separately account for costs covered by its federal RTL funds within its project
expenditure general ledgers, as required by RTL grant regulations. FRC was not consistent in
how it accounted for federal funds received from RTL versus other federally funded grants. We
found FRC comingled RTL, CPB, and PBS funded expenses on a total project basis for the Odd
Squad production. In contrast in a grant project funded with NSF federal funds for the Peg + Cat
project, FRC discretely accounted for the NSF funds within the project’s accounting
classification system. FRC did separately identify RTL revenues for the Odd Squad project in a
subsidiary receipts schedule, although the funds were comingled in its general ledger account for
revenues, but it did not separately account for detailed RTL expenses. RTL expenses were
commingled with PBS and CPB expenses.
The PBS/RTL agreement states FRC’s role in the production agreement as:
The Fred Rogers Company…will be the contracting Producer for the Series and will
serve as the fiduciary agency throughout the production. It will be ultimately responsible
for all legal and financial aspects of the relationship with PBS and CPB (and thus,
indirectly, RTL).
PBS National Program Service Production and Distribution Agreement, Exhibit A, VIII Key
Personnel.
Access to Subcontractor Records
In addition, the CPB grant agreement incorporated CPB’s 2013 terms and conditions for budget
and financial reporting and subcontracts and required the grantee to maintain adequate records
and permit access to them for audits.

5

As of the 9/30/15 final financial report date, FRC had booked only $12,150,000 of obligated expenses for its
contract obligation with Sinking Ship. FRC booked the expense when it was reimbursed from PBS/RTL and CPB,
the difference of $800,000 was reimbursed in October and December 2015. FRC stated that it used Sinking Ship’s
reported final financial report as of 7/31/15 to prepare the final financial report to CPB. Since we did not have
access to Sinking Ship’s general ledger, we could not verify these amounts.
7

 4G. Records – A Grantee must keep books, records and accounts relating to the Grant
and the Grant Project sufficient to…
ii) Allow CPB, by examination of Grantee’s general ledger and other records, to account
for the Grant Project Level of activities in sufficient detail to enable an audit to verify the
investment of the CPB funds in the approved expenses of the Grant Project;
iii) disclose fully the amount and use of the proceeds of the Grant, the Total Project Cost,
and amount and nature of any portion of the Total Project Costs supplied by other than
CPB…
4H. Audit. Each Grantee and its subcontractors, if any, are required to allow CPB and
the Comptroller General of the United States or their representatives access, for the
purpose of audit and examination, to any books, documents, papers, and records that
relate to a Grant or any other funds received from CPB.
4K. All Financial reports shall, … be reconcilable to Grantee’s General ledger.
CPB Terms and Conditions, Section 4 – Budget and Financial Reporting.
These obligations are to flow down to grantee’s subcontractors, as well.
Section 8 –Delegation and Subcontracts 8B –Subcontracts. A Grantee must include in
any and all subcontracts or other delegation contracts a provision that will effectuate the
Grantee’s obligations to CPB. Any subcontracts or other delegation contracts must also
allow CPB and the Comptroller General of the United States or their representative’s
access to and the right to examine and audit pertinent books, documents, papers and
records of such subcontractor or assignee involved the Grant Projects for three (3) years
following the final disbursements by CPB under the Grant Agreement.
8C – Conditions Attached to CPB Funds. As a condition of the distribution of funds by
CPB and to Grantee hereunder (“CPB Funds”), including funds distributed by Grantee to
a delegee or subcontractor (individually, a “Subgrantee”; collectively, (“Subgrantees”),
Grantee shall include in any production agreement funded by Grantee with CPB funds:
…
iv) a provision requiring that Subgrantees provide for CPB audit rights, as well as
requirement that sub-grantees to maintain their general ledger and other records in detail
sufficient to account for project level activities and which will provide an audit trail
enabling CPB to verify the investment of CPB funds in the approved expenses of the
funded projects; …
CPB Terms and Conditions, Section 8 - Delegation and Subcontracts.
Further, the RTL program is governed by the Education Department General Administrative
Regulations (EDGAR) that also require documentation of expenses. They provided that a
grantee must maintain:

8

 (b)(2) Records that identify adequately the source and application of funds for federallysponsored activities.
EDGAR Title 34 CFR Subtitle A Part 74-Administration of Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, Subpart CPost-Award Requirements, Financial and Program Management § 74.21 Standards for financial
management systems.
FRC’s agreement with PBS specifically required compliance with the RTL regulations:
(e)(ii) “[…] Subcontractor must comply with the applicable administrative requirements
of OMB Circular A-110 (2 CFR Part 215) / 34 CFR Part 74 and OMB Circular A-133.
Subcontractor’s financial management system must provide records that identify
adequately the source and application of funds of federally-sponsored activities […]
Public Broadcasting Service National Program Service Production and Distribution Agreement:
Odd Squad Season 1, Exhibit D-1, Section 4-Payments.
In response to our findings FRC, said it does not believe that it is required to provide CPB or
OIG access to Sinking Ship’s accounting records for audit purposes and stated its method of
project accounting adequately tracked the RTL funds. FRC’s position is that Sinking Ship was a
vendor and therefore any provisions for subcontracts were not applicable to its agreement with
Sinking Ship. Further, as this was a fixed price PSA contract, FRC’s funding obligation was
limited to the $12,950,000 reimbursement amount recorded in its books, and it provided OIG
access to its books.
FRC said PBS choose Sinking Ship to be the production company for the Odd Squad series
production and asked FRC to perform as fiduciary agent for the production. FRC asserts that its
subcontract with Sinking Ship is a vendor contract that provided services to FRC as the
pass-through recipient of the federal funds, and that FRC has the federal compliance
responsibilities, not its subcontractor. We discussed this relationship with PBS officials. They
stated that FRC was PBS’s subrecipient for the RTL funding and monitoring since FRC had the
final editorial control. Further, FRC advisors and digital producer made the decisions to meet
the RTL curriculum and PBS editorial standards for PBS Kids, not Sinking Ship officials. These
FRC advisors and digital producer were funded through the subcontract with Sinking Ship.
FRC monitored Sinking Ship’s performance, communicated with PBS and CPB via its grant
reporting narrative and financial reports, and kept PBS and CPB informed of variances and
budgetary changes and project deliverables throughout the project. FRC said Sinking Ship
provided it with the cost reporting and variance explanations, which FRC then provided to PBS
and CPB. FRC did not audit Sinking Ship’s reported project costs. CPB amended its grant
budget based on FRC’s reporting of the project costs and explanation of variances. PBS did not
amend its budget but did approve the reported variances.
CPB officials confirmed that under the CPB grant, any subcontracted or delegated work required
the inclusion of CPB’s delegation and subcontract provisions that provide CPB access to the
9

 subcontactor’s records. CPB further stated that the vendor classification had no bearing on
CPB’s access to subcontractor records, particularly when the full costs of the subcontractor were
included in the project’s final financial report and represented 100 percent of the total project
costs.
Finally, FRC’s own Financial Policy, Appendix D: Grantor-Imposed Accounting requirements
state that FRC will follow grantors’ requirements and also apply the federal guidance to federal
funded grants, which includes RTL.
Where, in the view of management, there is a conflict between the grantor’s requirements
and these policies and procedures, the grantor’s requirements will prevail… Examples of
grantors with special accounting requirements include the Corporation for Public
Broadcasting and National Science Foundation. Such grants are reviewed by Chief
Operating Officer and the Director of Finance to ensure compliance with provisions
which may not otherwise be detailed in these policies and procedures. Often, such grants
refer to federal regulations, and even where they do not FRC observes the following
procedures containing federal funds: Federal Cost Principles OMB Circular A-122;
Federal Management Standards OMB Circular A-110; Federal Audit Requirements OMB
Circular A-133…
FRC did not comply with CPB financial reporting and access to records requirements, the federal
requirement to adequately identify the use of federal RTL funds in the project’s accounting
records, and FRC’s own policies and procedures.
Because FRC did not provide us access to verify the total $18.2 million in costs it reported to
CPB, we have not been able to obtain sufficient evidence to form an opinion and must therefore
disclaim an opinion on the accuracy of the final report. The ability to audit total reported costs is
important to provide funders with accountability over the project’s total costs. Further, as FRC
officials have acknowledged, the accuracy of total project costs is critical to calculating
production surpluses or deficits and the future reporting and distribution of ancillary revenues.
Recommendations
We recommend that CPB:
1) require FRC to obtain from Sinking Ship for Odd Squad, Season 1 and the current Odd
Squad, Season 2, projects:
a) a reconciliation of the final cost reports submitted to CPB to Sinking Ship’s general
ledger; and
b) a written certification of the accuracy of the final cost reports;
2) require that FRC’s current Odd Squad, Season 2 final financial reports disclose:
a) the basis for reporting project costs (i.e., based on actual costs incurred or on a percentage
of completion basis for the fixed price contract); and
b) the amount of Sinking Ship’s reported costs that were not recorded in FRC’s accounting
records;

10

 3) ensure FRC takes corrective actions regarding its current Odd Squad, Season 2 CPB grant to
comply with all RTL and CPB grant terms for financial reporting, recordkeeping, and access
to subcontractor financial records requirements; and
4) periodically monitor PBS’s oversight of its large RTL subrecipients to verify grant recipients
are compliant with federal grant requirements to maintain financial records that identify the
application of federal RTL activities including project budgets and financial reports.
FRC Response
FRC did not agree with our findings that it had deficiencies in its internal controls because it
could neither reconcile the final financial reports submitted to CPB to its general ledger nor
provide access to its subcontractor Sinking Ship’s financial records to verify total project costs
incurred and reported. FRC also did not agree that it did not comply with Federal award
requirements to track RTL disbursements.
Reconciliation
FRC’s stated what it had previously explained to OIG that due to the nature of the agreements
with its Canadian co-producers, it could reconcile only the costs that it had disbursed for the
project to its general ledger and not the actual costs reported to PBS/CPB. FRC said the
difference was the cost of work performed and financed in Canada, which were not recorded on
FRC’s books. FRC said the agreements required that all costs be reported, even the costs FRC
was not obligated to pay. FRC “believes this is a deficiency in the structure of CPB’s agreement
rather than internal control.” FRC said it was never going to be possible to reconcile the
project’s total costs to its general ledger.
Access to Sinking Ship’s Records
FRC disagreed with our finding that the CPB grant agreement required that its subcontract with
Sinking Ship include access provisions to enable CPB to verify the total project costs reported.
FRC reiterated that Sinking Ship was a vendor and because of FRC’s fixed price contract with
Sinking Ship, the vendor’s actual costs were irrelevant. Only the costs that FRC was required to
pay Sinking Ship were relevant to CPB’s audit access. FRC also explained that since there was
RTL funding in the PBS agreement it followed OMB A-133 rules, which excluded both
commercial and non-U.S. based vendors from such provisions.
FRC explained that its contracts with its Canadian partners had to satisfy requirements of the
Canadian government to receive the Canadian tax credits. FRC said these requirements required
they enter into several complex agreements, the most significant being the PSA that engaged a
Canadian contractor (an affiliate of Sinking Ship) to provide many of the services in the
approved $17 million PBS budget, for a fixed price of only $13 million. The balance of $4
million was the anticipated Canadian tax credit.
FRC said it is assumed that the Canadian vendor would finance the deficit and eventually
recover it through the tax credit, but regardless the Canadian partner was obliged to provide the
contracted services. FRC further stated that it was of no consequence to FRC, PBS, or CPB what
11

 the actual costs incurred by the Canadian vendor might be, because FRC was obligated to pay
only the fixed contract fee of $13 million. FRC went on to say that the Canadian vendor was
reluctant to undertake the burden of OIG’s request to review its records given that it had a fixed
fee contract with FRC.
FRC contended that the access provisions for vendor costs is a technical disagreement based on
how the PSA agreement was classified and noted that Sinking Ship did incur additional costs
over the fixed price amount that were reported. The PBS agreement provided that PBS at its
discretion could approve the additional costs and permitted the producer to recoup them before
beginning to share its profits. FRC stated that had PBS and CPB needed support for these
additional costs, they should have requested documentation at the time they approved them.
Tracking Disbursements
FRC did not agree with our finding that it was noncompliant with federal award requirements to
adequately track RTL funded costs, because the agreement’s budget did not separately identify
RTL budgeted costs. Further, FRC did not agree that the NSF cost reimbursable grant funds for
the Peg+ Cat production project was comparable to the Odd Squad PBS RTL agreement.
FRC stated that all funds from PBS, RTL, and CPB were applied to the Odd Squad production
and each one of these component amounts could be easily derived from FRC’s books.
OIG Review and Comment
Based on FRC’s response to our draft report’s recommendations one through four remain
unresolved, pending CPB’s final management decision.
Reconciliation
We disagree with FRC’s assertion that, pursuant to the PBS and CPB agreement terms, it had to
provide us access to only its records supporting the amount it paid, $12.9 million, and not the
$18.2 million amount FRC reported as total project costs. According to the agreement, FRC was
the fiduciary agent responsible for all legal and financial aspects of the agreements. Therefore, it
had an obligation to ensure that grant compliance requirements were met and total cost reporting
was verifiable. Without access to Sinking Ship’s records we could not independently verify that
Sinking Ship had incurred the total $18.2 million in costs reported to CPB and PBS. As a result,
our scope was limited.
It is noteworthy that in our audit of another production contract where the producer had
subcontracted work with a Canadian partner, we found that all project costs and funding, whether
fixed or actual, were recorded on the producer’s financial books and could be audited. FRC
could have done the same and thus met the terms of the agreement.

12

 Access to Sinking Ship’s Records
We disagree with FRC’s assertion that we should not have access to Sinking Ship’s records
because of the fixed price contract with Sinking Ship, its classification as a vendor, or that OMB
A-133 guidelines did not apply to commercial and non-U.S. based vendors.
While FRC’s PSA with Sinking Ship was fixed price, FRC was nonetheless required to report all
costs to PBS/CPB. The nature of the PSA was irrelevant. Similarly irrelevant is Sinking Ship’s
classification as a commercial contractor or a vendor under OMB A-133 guidelines, because
FRC was required to report all costs to PBS/CPB. FRC provided no support for $5.3 million in
Sinking Ship costs reported because they were not on FRC’s books, and FRC as fiduciary agent
for the total project did not provide us access to Sinking Ship’s books to audit these costs.
Further, FRC as the subrecipient of federal funds was required to comply with procurement
regulations under EDGAR Title 34 CFR Subtitle A Part 74-Administration of Grants,
Subpart C-Post Award Requirements, Procurement Standards, § 74.43-46 and § 74.48.
Specifically, § 74.48 requires that negotiated contracts include audit access provisions for the
federal awarding agency, the Comptroller General of the United States, or any of their duly
authorized representatives. The Sinking Ship agreement was a negotiated fixed price contract.
FRC as the pass-through entity, was responsible for ensuring for-profit contractor compliance
with grant requirements and in this case providing access to Sinking Ship’s financial records to
audit total reported costs.
Finally, regardless of the federal provisions, CPB’s grant terms required that CPB have access to
FRC’s subcontactor’s records. Such access would have enabled us to verify the accuracy of the
total costs reported for this project.
Tracking Disbursements
We disagree with FRC’s response that because the PBS budget did not separately identify RTL
funds, it could not separately identify the use and application of RTL funds. FRC did separately
identify RTL revenues within its accounting system. FRC could have decided what cost
categories to spend the RTL funds on and establish a separate code to track the federal RTL
expenses. We are aware of another PBS/CPB/RTL production agreement that the independent
producer’s budget and financial reports separately identified RTL costs from other funding
sources. We did not change our finding but, based on FRC’s response, we modified
recommendation four to include in future RTL agreements the requirement that independent
producers identify RTL costs in their detailed budgets and separately report RTL costs in their
financial reports to ensure full accountability over RTL funds.

13

 Exhibit A
Odd Squad Season 1
The Fred Rogers and Sinking Ship Entertainment
Final Financial Report as of September 30, 2015

Budget Category
Revenue 6
PBS/RTL
CPB
PBS 7
Production Deficit
Canadian Tax Credit
Canadian License Fee
Total Project Funds
Expenses 8
Canadian co-venture partner
Scenario
Producer
Director
Cast
Extras
Production Staff
Design Labor
Construction Labor
Set Dressing Labor
Property Labor
Special Effects Labor
Wardrobe Labor
Makeup/Hair Labor
Camera Labor
Electrical Labor
Grip Labor
Production Sound Labor
Transportation Labor
Fringe Benefits
Production Office Expenses

Budget

Actual Reported

$7,950,000
3,000,000
2,002,540
1,298,774
3,599,401
375,000
$18,225,715

$0

$2,248,000
824,815
380,000
1,640,000
428,500
1,466,500
350,000
450,000
230,000
415,000
7,500
320,000
115,000
560,000
228,000
130,000
85,000
78,000
317,000
494,000

$2,251,530
824,815
379,068
1,635,250
427,158
1,465,972
358,112
448,624
229,289
413,958
7,243
324,605
118,299
556,872
227,669
129,590
84,827
78,003
317,010
494,208

6

Variance
(under)/over

$3,530
(932)
(4,750)
(1,342)
(528)
8,112
(1,376)
(711)
(1,042)
(257)
4,605
3,299
(3,128)
(331)
(410)
(173)
3
10
208

% Variance

0.2%
0.0%
(0.2%)
(0.3%)
(0.3%)
0.0%
2.3%
(0.3%)
(0.3%)
(0.3%)
(3.4%)
1.4%
2.9%
(0.6%)
(0.1%)
(0.3%)
(0.2%)
0.0%
0.0%
0.0%

FRC did not report funding sources on this report but asserts it provided this information to CPB and PBS in
accordance with PBS agreement Exhibit C requirements.
7
PBS actual funding is $2,000,000 per agreement narrative, but the budget exhibit showed it as $2,002,540. The
$2,540 difference should be included as part of the production deficit or funding from the Canadian tax credits and
license fees.
8
For report presentation purposes, we summarized FRC’s final detailed budget line item expense report into these
line item categories.
14

 Exhibit A (continued)
Odd Squad Season 1
The Fred Rogers and Sinking Ship Entertainment
Final Financial Report as of September 30, 2015

Budget Category
Studio/Backlot Expenses
Site Expenses
Unit Expenses
Travel and Living Expenses
Transportation
Set Dressing
Props
Special Effects
Animals
Wardrobe Supplies
Makeup/Hair Supplies
Studio
Camera Equipment
Electrical Equipment
Grip Equipment
Sound Equipment
Videotape Stock
Editorial Labor
Editorial Equipment
Video Post Production (Picture)
Video Post Production (Sound)
Film Post Production Sound
Music
Versioning
Additional Project Components
General Expenses
Indirect Costs
Miscellaneous 3.2%
Transmedia Production
Total Project Expenses

Budget
150,000
383,500
135,500
217,000
137,000
121,000
12,000
14,000
118,000
23,500
1,050,000
165,000
241,000
87,650
61,000
17,000
642,000
82,000
957,000
439,000
500
185,000
140,000
118,000
460,500
945,750
$555,500
$18,225,715

15

Actual Reported
2,825
151,589
382,122
140,054
219,523
137,624
121,136
11,776
14,030
116,791
23,644
1,032,805
167,051
241,807
87,650
61,041
17,523
638,945
82,357
958,057
436,809
649
188,926
141,721
119,069
460,740
949,387
$554,802
$18,232,555

Variance
(under)/over
2,825
1,589
(1,378)
4,554
2,523
624
136
(224)
30
(1,209)
144
(17,195)
2,051
807
41
523
(3,055)
357
1,057
(2,191)
149
3,926
1,721
1,069
240
3,637
($698)
$6,840

% Variance
NA
1.1%
(0.4%)
3.4%
1.2%
0.5%
0.1%
(1.9%)
0.2%
(1.0%)
0.6%
(1.6%)
1.2%
0.3%
0.0%
0.1%
3.1%
(0.5%)
0.4%
0.1%
(0.5%)
NA
2.1%
NA
0.9%
0.1%
0.4%
(0.1%)
0.04%

 Exhibit B
SCOPE AND METHODOLOGY
We planned our audit in accordance with Government Auditing Standards for financial audits to
determine whether The Fred Rogers Company (FRC): a) submitted a financial report that fairly
presented total project grant expenditures; b) incurred costs in accordance with grant
requirements; and c) complied with grant requirements including federal Ready to Learn (RTL)
terms. We performed our audit field work during the period May 2016 through November 2016.
The scope of the audit included reviews and tests of the costs reported by FRC on CPB Grant
Number 14816, Odd Squad Season 1 during the period July 1, 2012 through September 30, 2015.
The financial report is provided in Exhibit A.
In conducting our audit, we reviewed CPB’s grant files and discussed the award and
administration of the grant with CPB officials from the Office of Business Affairs, Office of the
Chief Financial Officer, Education and Children’s Content Operations, as well as PBS officials.
We also reviewed the PBS distribution agreement with RTL funding and RTL grant awards. We
also discussed with various FRC officials, including its Chief Operating officer, VP of Broadcast
and Digital Media and Director of Finance, the grant agreements and related co-venture,
production services and distribution agreements, as well as management’s policies and
procedures.
We reconciled the financial data maintained by FRC in its accounting records to its audited
financial statements but could not reconcile the total costs FRC reported to CPB to FRC’s
accounting records, because it did not record all of Sinking Ship’s costs through its
subcontracted production services agreement contract.
We tested the accuracy of grant expenditures that FRC claimed for payments to Sinking Ship
based on its contractual payment obligations, as well as payments FRC made to some U.S.
contractors as fiscal payment agent for Sinking Ship. We were not provided access to all the
contracts and records for these contractors as they were not FRC’s agreements. We also
evaluated compliance with the grant agreement terms, in part, by testing 42 or $3,688,197
judgmentally selected expenditure payments from the universe of $18,232,555 in expenses
reported under the grant to supporting documentation maintained by FRC. We did not have
access to the Canadian co-venture production services agreement expenses reported totaling
$5,282,555 that were not recorded on FRC’s books. This lack of access represents a material
scope limitation, representing 29 percent of the total reported costs.
We gained an understanding of the internal controls over the preparation of the grant financial
reports, cash receipts, and payment authorizations. We also gained an understanding of FRC’s
policies and procedures for compliance with CPB and RTL grant agreement terms for allowable
costs. We used this information to assess risks and plan the nature and extent of our testing to
conclude on our objectives. We also performed tests of compliance with certain provisions of
law and grant agreement requirements, when noncompliance could have a direct and material
effect on the grant report amounts.
16

 the

Fred Rogers

Exhibit C

company

The legacy lives on.

William J. Richardson III
Deputy Inspector General
Corporation for Public Broadcasting
401 Ninth Street, NW
Washington, DC 20004
March 10, 2017
Dear Mr. Richardson:
Thank you for providing us with a copy of the OIG draft report No. APT1702-XXXX
dated February 8th, 2017 concerning "Odd Squad". We have considered the report's
findings\ and welcome this opportunity to respond.
In the interests of brevity, we have used the following terms:
"CPB" means the Corporation for Public Broadcasting;
"DED" means the Department of Education;
"FRC" means The Fred Rogers Company;
"PBS" means the Public Broadcasting Service;
"PTV Entity" means PBS and CPB;
"RTL" means the DED 'Ready to Learn' pass-through grant funds;
"SS" means Sinking Ship Entertainment.
In addition, we have used the PBS NOLA code and a number representing the season
when referring to the programs. Thus, for example, "ODDS1" means the first season of
"Odd Squad" (episodes 1-40).
I

Deficiencies in internal control

(a) Reconciliation

OIG noted that it was not possible to reconcile the final financial report to FRC's books.
A key feature of this production was that certain work was performed in Canada and
financed in Canada. By definition, costs being incurred in Canada, and separately
funded there, do not show as costs or revenues on FRC's books.

1 The report concludes that OIG is unable to express an opinion, and so the issues discussed here may not
technically be 'findings'. We have nevertheless tried to respond as fully as possible.

1
2100 Whorton Street , Suite 700 , Pittsburgh, PA 15203 • 4 12 .687 .2990

www.fredrogers .org

 As OIG notes, it was a requirement in the CPB agreement that the final financial report

could be reconciled to FRC's general ledger. However, the format of that report is not
specified in detail, other than that it should be presented "in the form of the Detailed
Budget".
Of course, if the budget for the series had only included Canadian costs which were U.S.funded, and if FRC's cost reports only showed what it actually disbursed, then it would
easily have been possible to reconcile such cost reports to FRC's books. Unfortunately,
CPB did not wish to see either the budget or the cost reports presented in this way, and
asked that they show all costs on the production, including those not on FRC's books.
It was therefore always going to be impossible to reconcile the cost reports to the general
ledger. We believe that this is a deficiency in the structure of the agreement rather than
in internal control.
(b) Access to Sinking Ship's Financial Records
Its inability to express an opinion on the Final Financial Report for ODDS1 is principally
attributed by OIG to the fact that it did not have access to the books of an affiliate of The
Fred Rogers Company's production partner, Sinking Ship. There was a lengthy
discussion of this issue between the parties during the audit.
There are two separate program agreements governing ODDS1 - one with CPB and
one with PBS. The latter agreement contained provisions for DED RTL pass-through
funding and was administered by PBS, although it was part of this audit exercise. The
CPB agreement specified 30 episodes, and was subsequently amended to 40 episodes.
The PBS agreement contained provisions for three separate budgets with varying
numbers of episodes, the last of which was for 40 episodes. The 40-episode budgets in
both agreements were the same, and came to $16,926,941.
The total PBS/CPB funding provided by their respective agreements for these 40
episodes is shown as $12,952,540, and so the PBS agreement places an obligation on
The Fred Rogers Company to fund the approximately $4 million shortfall. It notes that
the deficit will likely be met by Canadian tax credits.
Canadian contributions to the funding of the series are therefore significant, and exceed
PBS's or CPB's own individual contributions. In order to benefit from the Canadian tax
credits, The Fred Rogers Company has to satisfy the requirements of the Canadian
government, which call for a number of complex agreements. Only one needs to
concern us here: the Production Services Agreement, or PSA. That agreement engages a
Canadian contractor (an affiliate of Sinking Ship) to provide many of the services
detailed in the PBS Approved Budget (coming to approximately $17 million in value)
but at a fixed price of only $13 million. The differential is the anticipated Canadian tax
credit. It is assumed that the Canadian vendor will finance the deficit in some manner
and eventually recover it from tax credits, but he is obliged to deliver the specified
services regardless of whether he ultimately obtains those credits. It should be noted
that the PSA requires FRC to pay only the specified (fixed price, $13 million) fee,

2

 regardless of any cost under- or over-runs. This fixed price fee was paid and can be
reconciled easily to FRC's books.
OIG nevertheless asked to audit the Canadian production company which was a party to
this agreement. We were unclear as to the rationale for this request since
1.
OIG, in its opinion, cites references in its Terms and Conditions governing flowdown access. These references variously use the terms 'subcontractor', 'delegee' and
'subgrantee' but do not define these terms. By all generally-accepted and customary
tests, the Canadian company was performing services as a vendor, and vendors are not
typically subject to such flow-down provisions.

In discussions with OIG, FRC used the analogy of a cost on its books for sending a
FedEx envelope to Los Angeles: if it appeared in the ledger as $40, it would have been
reasonable to ask for the invoice for this amount, and evidence of payment. It would not
have been reasonable or relevant to expect to have the right to audit FedEx and see what
its costs actually were - whatever they were, FRC's cost was $40. FedEx would, of
course, be unlikely to consent to such a request.
Only with FRC's written permission could there have been an increase in the
fixed contract fee (and none was requested), nor as part of the arrangement was there
any provision for any cost saving to be passed back to FRC, PBS or CPB. It is therefore
of no consequence to either FRC or the PTV Entity what the actual costs incurred by the
vendor might be.
2.

We understand that OIG has the right to inquire into our costs, but take the position
that the costs of our vendors are beyond the purview of the audit. This particular vendor
was rightly reluctant to undertake the burden of this request given that it had a fixed fee
contract with us that was not in any way dependent on the costs. We also valued the
significant financial contribution made by the government of Canada to this series,
which could not have been made without that contribution, and were concerned about
possible repercussions from this exercise.
It therefore remains the position of the Fred Rogers Company that we provided all

relevant supporting information, and the position of OIG that FRC should have
provided CPB with access to the vendor's books in the Production Services Agreement.
In that respect, when drafting this agreement we followed OMB A-133 rules, which
exclude both commercial and non-U.S. based vendors from such provisions.
We
disagree with this noncompliance finding.
So far, this concern relating to post hoc access to the vendor's books is a technical or
theoretical disagreement about the correct interpretation of federal provisions and
whether the company performing the services was a subrecipient, a subcontractor, a
delegee, a subgrantee, or a vendor. It is also a straightforward dispute about the
relevance of any cost overages in the context of a fixed-price arrangement.

3

 There is, however, a practical aspect to this issue which is mentioned in passing in OIG's
report, and that is the fact that the Canadian work did cost the vendor more than the
fixed price contract (by approximately $i.3 million). The PBS agreement provided that
in this event PBS could, in its sole discretion, approve the additional cost and permit the
producer to recoup it before beginning to share profits (if any) from the series. Any
approval by PBS of the overage would therefore have had an effect on net revenues.
The CPB agreement contains no specific language concerning overages or changes to the
budget, but says that net revenue shall be calculated in accordance with the PBS
agreement.
This would have been the logical point at which either or both parties to the PTV Entity
could have requested complete documentation for all these costs. Even in the absence
of any access provisions in the vendor's contract, such a request would have carried
great weight simply because of the power of the purse. Without supporting vouchers,
the PTV Entity could have disallowed all these additional costs.
In the event, PBS approved the overage, and so did CPB, which amended the agreement
accordingly.
II

Federal Award Noncompliance

(a)

Tracking disbursements by projects

OIG finds that
" ... FRC did not separately account for federal RTL funds within its project expenditure
general ledgers, as required by RTL grant regulations. FRC was not consistent in how it
accounted for federal funds received from RTL versus other federally funded grants. We
found FRC comingled RTL, CPB, and PBS funded expenses on a total project basis for·
the Odd Squad production. In contrast in a grant project funded with NSF federal funds
for the Peg + Cat project, FRC discretely accounted for the NSF funds within the
project's accounting classification system. FRC did separately identify RTL revenues for
the Odd Squad project in a subsidiary receipts schedule, although the funds were
comingled in its general ledger account for revenues, but it did not separately account
for detailed RTL expenses. RTL expenses were commingled with PBS and CPB
expenses."
Since the budgets in both the relevant agreements did not distinguish between RTL
expenses, PBS expenses, CPB expenses, or any other kind of expenses, it is difficult to
see how FRC could possibly have satisfied this requirement. In the absence of any detail
in the agreement specifying which part of the budget an RTL dollar might be spent on,
we took the view that it was fungible and could be spent on anything, as long as it was
part of the grant project. Nevertheless, the general requirement that records 'identify the
source and application of funds for federally-sponsored activities' was met: the source of
the funds was RTL, CPB and PBS, and the application of the funds was exclusively
4

 ODDSL The precise amount of each one of these component figures is easily derived
from FRC's books.
OIG notes that, on the other hand, FRC was not consistent when it did discretely
account for NSF funds and costs. But consistency needs to be assessed by comparing
apples to apples: the NSF grant, unlike the PTV Entity funding of ODDS1, was awarded
on a straightforward cost-reimbursement basis, and included a budget specifically
identifying costs matching the grant. Because of this, we were able to properly account
to NSF.
We disagree that this is a noncompliance issue. If this level of financial reporting was
required, the necessary and sufficient precondition would have been a budget showing
line-item detail allocations to RTL, CPB and PBS. We would be happy to operate in this
way in the future.
All are agreed that these agreements are complex. We believe that the OIG report
provides helpful observations for all parties on a number of issues, and look forward to
working with PBS and CPB in the future to address them.
Sincerely,

~
I'

Kevin Morrison,
Chief Operating Officer

cc:
cc:
cc:

I

Paul Siefken, President and CEO
Debra Sanchez, SVP, Education and Children's Content Operations, CPB
Jackie J. Livesay, Vice-President, Compliance, CPB

5