A new federal government audit has questioned nearly half of the $6.7 million the Canaan Valley Institute spent from five federal grants over the last four years.

The U.S. Environmental Protection Agency's Inspector General questioned $3.2 million in costs under the grants, according to an audit made public this week.

Auditors urged the EPA to recover the money unless the institute can provide sufficient documentation to support the spending, according to the report.

About $1.7 million of the disputed spending is linked to the institute's method of calculating "indirect costs" - such as facilities and administration - of the EPA-funded programs. Another $1.1 million in disputed costs involved the organization's method for reporting its direct costs, such as employee benefits and travel.

"It doesn't mean there was a $3 million embezzlement going on," said Eileen McMahon, a spokeswoman for the EPA IG office. "It may just be a paperwork problem."

The Canaan Valley Institute describes itself as a "nonprofit, non-advocacy organization that helps organizations identify, solve and implement solutions to serious water issues impacting their daily lives."

The audit comes amid investigations by federal authorities of federal earmarks that Rep. Alan Mollohan, D-W.Va., steered to the institute.

The 47-page IG audit, made public Tuesday, examined five "cooperative agreements" between EPA and the Thomas-based institute since October 2004.

Under the agreements, the institute was to work with local citizens on water projects, flooding issues, environmental restoration, and other related issues.

Inspector General auditors found that the institute reported costs for services outside the scope of one agreement, did not comply with contract terms, and improperly used EPA funds to match another federal program.

Also, the auditors concluded that the institute did not credit program income back to the agreements, and did not demonstrate that it performed cost analysis of contracts.

"The recipient's internal controls were not sufficient to ensure that reported outlays complied with federal regulations," the audit concluded.

During the 2006 primary election season, a conservative ethics watchdog group, the National Legal and Policy Center, filed a complaint that questioned federal money that Mollohan secured for several nonprofit organizations in his district, including the Canaan Valley Institute.

Mollohan has said he did nothing wrong, defended the nonprofit groups, and said he welcomed any investigation into their finances.

"I'm confident this will confirm the good practices that these organizations have engaged in," Mollohan told The Associated Press in April 2006. "I think that, at the end, people will be very impressed with the results."

In August 2007, the House voted to kill $1.5 million in funding for three projects that the Canaan Valley Institute was to receive in an Agriculture Department funding bill. The three earmarks won initial approval from the House Appropriations Committee, but were killed by a procedural vote at the recommendation of the chairman, Rep. David Obey, D-Wis.

Kienna Smith, the institute's executive director, was out of the office and not available for comment Tuesday.

Through a spokesman, Mollohan issued a brief statement on the EPA audit.

"It is my understanding that this process is ongoing, and it is up to CVI and EPA to resolve their differences over these matters," Mollohan said.

To contact staff writer Ken Ward Jr., use e-mail or call 348-1702.