A new audit of the local United Way's handling of federal employee donations shows that the group held onto about $1.3 million it should have distributed to charities, took an unexplained $3 million short-term loan from the contributions and ran up more than $120,000 in questionable or unsupported expenses.

The report released yesterday by federal auditors recommends that the United Way of the National Capital Area pay more than $1.5 million to charities it shortchanged.

"Nothing demonstrates our ethics better than getting this money back out -- and we have already begun to do that," said the group's interim executive director, Robert Egger.

The audit follows a year of turmoil at the United Way of the National Capital Area, which is under new management after repeated revelations of financial irregularities. Egger and other leaders stressed that the questionable practices of the past are being eliminated. The group had already begun to hand over more than $300,000 of federal employee contributions owed to charities, and it has put in place an array of new financial controls.

"Frankly, we welcome the audit because it validates some of the measures we have already taken," Egger said. "It just reaffirms that we are on the right track here."

The United Way has been the conduit for roughly $90 million annually in payroll contributions made to charities by hundreds of thousands of employees in the region. About half of that money in recent years has come from federal employees through an effort known as the Combined Federal Campaign, which was the focus of the audit.

Kay Coles James, director of the U.S. Office of Personnel Management, said she was "disturbed by the improper activities" but confident that new accounting procedures prompted by the audit will prevent future trouble. "The integrity of the Combined Federal Campaign is intact," James said. "It gives me great pleasure to be able to move forward and continue the fundraising that so many charities in the Washington area rely upon."

A federal grand jury began investigating the Washington area United Way this summer after revelations that the organization had withheld donations from charities, inflated its donation totals and allowed a former executive to take a retirement payment that was not authorized by the pension's rules.

The group's most recent chief executive, Norman O. Taylor, resigned in September. He is now seeking a severance package of more than $300,000. U.S. Sen. Charles E. Grassley (R-Iowa) repeated yesterday that no payout should be made until "all audits and investigations" of the charity are complete.

Several big employers have severed ties to the charity in the wake of the revelations, including Marriott, the World Bank, DynCorp, the International Monetary Fund, Lockheed Martin and some major law firms. Other companies, including The Washington Post and ExxonMobil, are sticking with the United Way but also are opening their workplace fundraising drives to United Way competitors.

This season's contributions from federal employees appear to be running at the same pace as last year's, said Melissa J. Allen, interim chairman of a volunteer committee that oversees federal employee contributions. "This is testimony to the fact that people believe that the United Way has turned itself around," Allen said.

The largest financial discrepancy reported by investigators -- $1.3 million -- arose out of the United Way's method of accounting for uncollected donor pledges.

Under a practice first detailed by The Washington Post in June, the United Way essentially shaved 1 percent to 3 percent off millions that were donated. The organization said the money was withheld to cover pledges that were never collected. But in practice, the money was collected. The audit recommended that the United Way return the $1.3 million to charities, and Egger has agreed. The organization already has returned about $300,000 of it, along with $700,000 improperly withheld from donations by private-sector workers.

The other discrepancies involve: about $120,000 of expenses that were charged against federal employee donations but lacked documentation and apparently did not relate to the cost of raising those funds; about $165,000 in donations that were left in a money market account rather than being distributed to charities as intended; and $1,800 in travel expenses by an unnamed executive that were not related to the federal campaign.

Details of the $3 million loan that the United Way took from the Combined Federal Campaign are murky. The United Way took an "unauthorized loan" of $3 million in March 1999, according to the audit. The loan was repaid with a "reasonable amount of interest" the next month. The United Way "was unable to provide a reason for the loan," the audit said.