GAB Decision 035; 036
March 14, 1977 Harrison County Community Action Agency, Inc.; Docket
Nos. 75-5 and 76-7; Grant No. H3034; Audit Control Nos. 04-46656 and
04-56647 York, Edward; Malone, Thomas Wilner, Irving
This is an appeal from determinations disallowing costs upon audit.
Since 1968, the Harrison County, Mississippi Civic Action Committee,
Inc., ("Grantee") has been administering the County Head Start program
authorized by the Economic Opportunity Act of 1964, as amended (Tit.
II, Part B, Section 222). During each of the program years 1973 and
19748 the period here pertinent, the Federal contribution to the Program
was to an amount of about $2,000,000, and that of non-Federal sources a
sum of approximately $400,000.00. Because of the similarity in the
nature of the 1973 disallowed cost to one of the disallowed cost items
in 1974, we consolidated the respective dockets for consideration and
decision.
I. (Docket No. 75-5)
On March 13, 1975, the Assistant Regional Director for Human
Development, Region IV ("ARD") communicated to Grantee a decision
of the
Audit Appeal Board disallowing the sum of $9,100 expended by Grantee in
the 1973 funding year in connection with the renovation of two
facilities employed in the Head Start program, and demanding a refund of
this amount out of non-Federal sources. It appears that the contracts
for the renovation work were let in consequence of a classified
advertisement in the form of a legal notice inserted by the Grantee in a
local newspaper to the one contractor who responded. Disallowance was
for failure of the Grantee to solicit, directly, quotations of bids from
qualified contractors which normally would result in competitive
bidding, as required by applicable official issuances. Grantee argues
that there is no procedure available to determine the fair market value
of the work performed or to determine what the cost would have been had
contractors competed for the job.
While the record discloses vague suggestions by the Grantee that, in
addition to advertising, it has also made additional "contacts" with
contractors and suppliers, there is no reason for doubting that grantee
did not make an earnest effort to obtain more than one bid and that it
did not, in fact, obtain competitive bids. It is equally clear that the
grantee did not seek a waiver of the bidding requirement from any
competent official. The basis for the bidding requirement is found in
Office of Economic Opportunity, Community Action Program, Cap Memo #64
B-7, June 22, 1967; Grantee's Management Instructions, Purchasing, 3.2;
OEO Instruction 7001-01a, b(2) (d), and CAP Guide: Grantee Financial
Control Technique, OEO Guidance 6801-1, C.4, (August 1968).
Competitive bidding requirements are not a product of bureaucratic
caprice, nor are they merely technical, as suggested by the Grantee.
They are more proerly the product of experience going to the very
essence and integrity of the audit function in the Federal grants field
concerned with administering annual expenditures of billions of dollars
of public funds and requiring alertness to minimize as much as possible
opportunities for waste, inefficiency, and fraudulent practices.
Similarly, we see no merit in grantee's argument that insistence on
bidding from more than one source will tend toward a restrictive
selectivity of bidders to the detriment of small businessmen and
minorities. A short answer to this argument is that two out of nine
topics addressed in the General Conditions attached to the Grant
Statement of the Grantee herein caution against discriminatory
practices, and that there is nothing in the nature of the requirement
that would necessarily or logically produce the dire consequences
suggested by the Grantee. Moreover, the Economic Opportunity Act of
1964, as amended, 42 USC 2835 (a)(d);id. 2942(n) explicitly vests
far-reaching regulatory authority (to establish "such policies,
standards, criteria, and procedures prescribing rules and regulations"),
and wide discretion ("and generally perform such functions and take such
steps as he may deem to be necessary or appropriate to carry out the
provision of this chapter") in the Director and his subordinate
officials. Power to disallow costs is expressly conferred upon OEO as
an incident of the audit process, 42 USC 2835(c), and OEO regulations
were made applicable to the DHEW pursuant to delegation of authority as
to Head Start, 34 F. R. No. 182. It follows that the issuances of the
OEO concerning competitive bidding applicable to Head Start projects of
which Grantee had been repeatedly apprised from 1971-74, are within the
statutory premises and are legislative rather than merely interpretive
in character. Cf, Skidmore v. Swift and Co. 323 US 134, 140 (1944).
This being our view of the matter, Grantee's challenge directed to the
alleged lack of wisdom in the bidding regulations must fail as
irrelevant.
Insofar as the $9,100 cost disallowed in the 1973 audit is concerned,
Grantee has alleged a variety of extenuating circumstances for failing
to obtain competitive bids, viz, low profit margin on work performed on
Government projects, involved procedure for obtaining payment, a
painter's strike, pressure to have renovation jobs completed before the
opening of the centers for the up-coming school year due to delay
occasioned by changing local health requirements, etc. As to the last
cited justification, information supplied by the Grantee at our request
affords no substantiation for the asserted fact. But irrespective of
the essential correctness of the matter asserted in justification or
extenuation of the non-compliance, and without deciding whether the
scope of review of this Board is limited by the same considerations as
would be applicable to judicial review of administrative action, see,
e.g., Amer. Fed. A.F.L. - C.IO., etc., v. Secretary of Labor, 484 F.2d
339 (CCA.6, 1973); Gaines v. Martinez, 353 F. Supp. 780 (1972), it is
our view that the ARD had sufficient statutory authority in the premises
for the exercise of a discretionary judgment and that he did exercise
his discretion with respect to the Grantee's excuses based on hardship
in a reasonable manner, and with due regard to the evidence and to the
applicable rules. In Oregon State-wide Allocation Plan, Docket No.
75-7, Decision No. 22, this Board held that it will not substitute its
discretion for that of the Regional Director where his decision is in
accordance with the rules and his exercise of discretion is
reasonable.Furthermore, even if all of the circumstances alleged by the
Grantee by way of extenuation be conceded, arguendo, no reason or
explantion appears for Grantee's failure to seek a waiver of the bidding
requirement from the Regional Office. (Part D. Head Start Manual 6108-1
September 1967. See, also, OEO Inst. 7001-01a(3).)
Accordingly, we sustain the disallowance in the sum of $9,100 charged
to the grant in the 1973 program year.
II. (Docket No. 76-7)
On March 1, 1976, the ARD informed the Grantee of his approval of the
June 11, 1975 determination upon audit to disallow the following
expenditures charged to the grant for the program year ending. July 31,
1974:
1. For failure to comply with the competitive bidding requirements
in connection with renovation contracts and purchase of equipment . . .
$13,700.00.
2. For excessive accumulation of educational and housekeeping
supplies . . . $22,449.
3. For inadequate documentation in connection with expenditures of
Parent Activity Fund . . . $4,745.00.
1. The determination of non-compliance with bidding requirements as
to the 1974 contracts rests on the same legal premises as those which
led to the disallowance for an identical reason in the 1973 funding
year. Significantly, in its representation to the Audit Appeal Board in
opposition to the 1974 disallowance, the Grantee did not argue any
extenuating circumstances but relied on the bold proposition that "Once
an agency has legally advertised for bids that the technical
requirements are satisfied."
For the reasons outlined with reference to the 1973 disallowance, we
reject grantee's argument with reference to the 1974 parallel
non-compliance, and sustain the disallowance in the sum $13,700.00.
2. It appears that allegedly excessive purchases of educational
materials accounted for $18,599. This was the only amount questioned by
the Grantee's CPA. The difference between this amount and the amount of
$22,449 ($3,850) represents cost incurred for the purchase of janitorial
supplies, office supplies and cafeteria items disallowed by the Regional
Office notwithstanding its adoption, generally, of the CPA's findings
The disallowance was on the ground of instructions and policy statements
which identify excessive accumulation of inventory by a grantee as a
ground for questioning costs for unreasonableness, especially when the
accumulation occurs near the end of a grant period, which was the case
here. Furthermore it is claimed by the Regional office that the
educational supplies were not actually needed until the second month
following the comencement of the 1974-5 school year. In response to our
request for expanding the record the Grantee states that "The materials
were needed at the beginning of the program year" (emphasis ours),
incidental to a training program for the teaching staff, without
specifying the portion of the supplies needed for that purpose.
Alleged inflation and the scarcity of paper products during the
relevant period were circumstances invoked by the Grantee in
justification, and it contends that these have had the effect of
changing the OEO policy against more-than-ordinary accumulation of
supplies which it said were, in some unexplained way, inconsistent with
the policy of the Office of Child Development (OCD). Grantee's auditor
commented that while grantee might indeed have saved money by increasing
inventory in the manner it did, this consideration might have been
outweighed by loss due to obsolescence and pilfering by employees.
There is nothing in the file to show that either the positive or
negative effects of the claimed over-acquisition have in fact
materalized. The Grantee's auditor did recommend that if Grantee
desired to continue such practice, it should institute a perpetual
inventory system as recommended in relevant guidance material.
Under Criteria for Questioning Costs, OEO Manual 2410-1 E.1, (July,
1968) lists "costs which are unreasonable" and gives as an example,
purchase of a six months' supply of materials during the last month of
the grant year, while stressing the distinction between costs which are
questionable and those which are unallowable. This instruction appears,
in substance, in OEO Manual 2410-1, May 1973, Accounting-System Survey
and Audit Guide for OEO Grants, VI, d.5. (p. 25). See, also, id.
Appendix K.I.E.1, Section F.5, and Appendix A p. 13 which addresses the
test of whether the purchased items, especially toward the end of the
funding period, "appear to be necessary to the completion of the
program." OEO Guidance 6801-1 CAP Management Guide, Grantee Financial
Control Techniques, p. 20 contains the direction of Perpetual Inventory
Control Records when purchases are not made on the basis of need.
It is readily seen that the official issuances relevant to the item
of alleged excessive inventory, are phrased in terms such as
"reasonable", "need" "excessive", obviously calling
for evaluative
exercise of discretion by responsible officials. But the power to
"evaluate" is explicitly granted to OEO in the Economic Opportunity
Amendments of 1967, 42 USC Sec. 2835(b). Even under the Grantee's view
of the matter, it is highly unlikely that all or even the greater part
of the material would have been required for the teachers' training
program during the first month of the school year. It, therefore,
appears that the disallowance determination, insofar as it relates to
the amount of $18,599, representing cost of purchased educational
materials, is based on undisputed evidence. The ARD's finding that this
purchase was unreasonable or excessive, while not a compelled one in
view of all the circumstances, including Grantee's concern about
prospective scarcity of paper products and a prevailing inflationary
trend, represents a permissible -- clearly not an obviously erroneous -
inference from the aggregate of the evidence. We, therefore, sustain
the disallowance to the extent questioned by the external auditor in the
amount of $18,599.
The basis for the disallowance of the sume of $3,850 representing
allegedly excessive accumulation of material other than education
supplies is less clear. At p. 11 of their report for the program year
1974, the management auditors made the following comment: "Our tests
with regard to this inventory were observation followed by test counts
and vouching. The portion of the inventory that appears excessive under
the above guidelines is included in the inventory of educational
supplies." (Emphasis supplied). In his response of January 18, 1976 to
our Statement Identifying Issues, the ARD employs a highly technical
explanation for including the cost of the non-educational supplies in
the disallowance figure, to the effect that the creation of a
"(voluntary) reserve fund of $22,449 of supply inventory in this
instance was merely an accounting device to circumvent the proper
classification of unapplied fund balance." This argument is somewhat
less than persuasive, particularly when considered in the light of the
practical rationale supplied by the management auditor for not
questioning the cost of this part of the purchased supplies.
Furthermore, OEO Manual 2410-1, p. 25, (July, 1968) contains the
following provision: "Before a cost disallowance decision is made, the
Grantee will be given an opportunity to present any additional
information or justification which may have a bearing on the ultimate
allowability of the costs questioned."
In the proceeding before us, the Grantee was not accorded such
opportunity. The record shows that on March 10, 1975, the Regional
Audit Director, HEW Audit Agency, Region II, forwarded a list of
questioned items to the Grantee which stated only $18,599 as the amount
questioned for excessive accumulation of supplies, and requested that
grantee respond "to each item identified."
In the letter of the ARD of March 1, 1976, he informed Grantee that
the Audit Appeal Board sustained the action of the Technical Assistance
Chief, Office of Financial Management, DHEW, shown in his report of June
11, 1975. That report informed the Grantee that "deficiencies in the
following areas detailed by your auditor are hereby sustained" and
proceeded to list as "questioned costs disallowed" (Underscoring ours),
a disallowance, under the heading of "supplies", in the amount of
$22,449 -- an amount not to be found among the questioned costs. Nor
does the record before us indicate whether the amount of $3,850 appeared
as a carry-over in the 1975 budget. In view of this confusion, it can
not fairly be said that the Grantee was clearly advised of his right to
offer information or justification concerning the cost for
non-educational supplies.
The Board sustains the appeal as to this cost item of $3,850.00.
3. Involvement of parents of Head Start enrolless in the Head Start
program through active participation in its educational and
administrative activities has been regarded by the OEO and OCD as of
great importance to assure the overall success of the program.
Memorandum of Understanding Between OEO and DHEW incidental to
Delegation of Authority, June 30, 1969; Head Start Policy Manual
Instruction I-31 Section B.2, The Parents, 8/10/1970. In furtherance of
such involvement, Parent activity funds are usually provided for in Head
Start budgets. During the 1974 funding year, Grantee charged to the
Grant Parent Activity costs in the amount of $4,745. This cost item was
questioned and ultimately disallowed. It appears that contrary to
applicable instructions, see Head Start Manual, supra, and MCD IV/40,
Instruction #35 (June 2, 1977), there was a lack of internally created
parent budget approved by the Policy Council with participation from
Center parent committees. Also, while the parents could elect to use
the accounting system of the Grantee as their own, no Policy Council
minutes reflecting such election were found. Additionally, Grantee was
unable to produce any receipts or canceled invoices evidencing the
manner in which the funds were expended.
While the grantee asserts that a budget had informally been agreed
upon and that an official of OCD had orally authorized expending the
funds as represented to be authorized by the Policy Council, it does not
controvert the basic fact that no documentation required by relevant
instructions and by principles of sound management practices were made
available to the private or official auditors.
There is merit in Grantee's contention that official issuances in the
area of parent fund activity contain a degree of built-in conflict
between provisions for a large measure of autonomy for parents and their
groups in administering their activities and funds on one hand, and the
ultimate responsibility and accountability of Grantee for such funds, on
the other, OEO Guide 6801-1 CAP Management Guide, Grantee Financial
Control Techniques, Chapter I. But the solicitude towards parents
manifest in the guidance material nowhere goes as far as to deprive the
Grantee of the right or relieve it of the duty to review and exercise
final judgment concerning controls established by the parent groups in
accordance with Instruction #35, especially in a situation exemplified
by the instant proceeding where it is claimed that Grantee agreed that
its accounting method be used to account for the parents fund.
Allegation of conflict in regulatory purposes is not, of itself, a basis
for a finding of lack of authority in the administrative officials to
require the grantee in the circumstances shown, to account for the funds
charged to the grant, Gaines vs. Martinez, supra, especially where
there is even the absence of a showing that the funds were spent in
furtherance of the purposes of the Head Start grant. It follows that
the disallowance of the cost of parent activity funds ($4,745.00) was
proper, and Grantee's appeal concerning this determination is denied.
In his audit report for the 1974 program year, the agency accountant
questioned the sum of $624 representing salary increases in excess of
the percentage allowed by pertinent applicable instructions. In several
submissions to his Board the parties refer to this item as if it
constituted a subsisting issue.
We decline consideration of this matter. The charter of this Board,
45 CFR. 16.2(a); 5, is clearly to the effect that our jurisdiction is
limited to determinations. In the absence of any determination
disallowing the sum of $624.00, there can be no dispute constituting an
issue within the meaning of id. Section 16.1.
In his representation to this Board the Grantee takes sharp issue
with a statement by the ARD in his letter of March 13, 1975, to the
effect that in disallowing costs incurred without adhering to acceptable
bidding procedure, the Audit Appeal Board was strongly influenced by
grantee's commission in the past of "the same type of violation" every
year since 1970. Grantee argues, in effect, that this statement shows
prejudice and improper motive on the part of the ARD and the Audit
Appeal Board, since a disallowance for failure to comply with bidding
requirements had occurred only once (in 1970).
We do not read the expression "same type of violation" in the limited
sense of non-compliance with bidding requirements, but in the more
expanded sense of deficiencies in fiscal management. Thus understood
there is abundant evidence in the file to support the ARD's statement.
We add that we find no impropriety in the consideration by the Regional
auditing officials of a grantee's past violations of official policy and
acceptable management practices involving handling of grant funds, as a
factor in the exercise of discretion concerning allowability of a cost
item in a current funding year. Amer. Fed., A. F.L.-C.I.O., etc. v.
City of Cleveland and Secretary of Labor., supra.
Accordingly, we sustain the disallowance in the amount of $9,100.00
for non-compliance with bidding requirements in FY 1973, (Docket No.
75-5), and the disallowance of the amount of $13,700.00 for an identical
reason, in FY 1974 (Docket No. 76-7).
We sustain the disallowance in the reduced amount of $18,599, on
account of excessive accumulation of educational materials, and the
disallowance in the amount of $4,745.00 representing expenditures of
Parent Activity funds, for inadequate documentation in FY 1974 (Docket
No. 75-7.)
OCTOBER 04, 1983