DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Puerto Rico Gericulture DATE: January 13, 1989 Commission
Docket No. 87-169 Decision No. 1009
PARTIAL DECISION
The Puerto Rico Gericulture Commission (Puerto Rico) appealed a
determination by the Administration on Aging (Agency) disallowing a
total of $14,299,245 claimed as the federal share of costs which Puerto
Rico incurred under the Older Americans Act for the period from October
1, 1979 to September 30, 1983. The disallowance was based on a review
by the Office of the Inspector General Office of Audit of independent
non-federal audit reports submitted by Puerto Rico for the central
commission, which was the grant recipient, and for ten subrecipient
regional committees.
The disallowance involved three categories of costs: 1) costs not
audited by independent non-federal auditors ("unaudited" costs); 2)
costs questioned by Puerto Rico's independent auditors ("questioned"
costs); and 3) costs covered by audit reports which Puerto Rico's
independent auditors disclaimed because of deficient internal controls
and record keeping at individual subrecipient committees ("disclaimed"
costs). As a result of additional audit reports and information
submitted during the course of this proceeding, the Agency reduced the
disallowance of the federal share of unaudited costs to $61,085 and
reduced the disallowance of the federal share of questioned costs to
$145,086. The disallowance of the federal share of disclaimed costs
remained at $4,935,948. Agency Response, p. 3.
This is a partial decision, addressing the remaining unaudited costs and
questioned costs. As we discuss below, we uphold the disallowance of
these costs, totalling $206,171, because we find that Puerto Rico did
not verify the alleged costs with independent non-federal audit reports
or otherwise document that the costs were actually incurred by Puerto
Rico in the operation of its programs under the Older Americans Act.
Background
Title III of the Older Americans Act, 42 U.S.C. 3001 et seq., provides
for grants to states to foster development and implementation of
comprehensive state programs to provide services to older individuals.
The term "state" is defined in this statute to include the Commonwealth
of Puerto Rico. 42 U.S.C. 3022(6). In order to participate in the
program, a grantee must submit a state plan to the Commissioner on Aging
which includes, among other requirements,
satisfactory assurance that such fiscal control and fund accounting
procedures will be adopted as may be necessary to assure proper
disbursement of, and accounting for, Federal funds paid under this
subchapter to the State, including any such funds paid to the
recipients of a grant or contract . . . .
42 U.S.C. 3027(a)(7).
Under the regulations implementing the Older Americans Act, grantees
must meet the general grant administration requirements of 45 C.F.R.
Part 74, with the exception of Subpart N. 45 C.F.R. 1321.5(b).
Grantees are required under Part 74 to maintain accurate records of the
source and application of funds for all grant-related activities and
have available source documentation to support these accounting records.
45 C.F.R. 74.61(b) and (g). Governmental grant recipients are also
required to be audited by independent non-federal auditors at least once
every two years, and must act to resolve audit findings and
recommendations in a timely and appropriate manner. 45 C.F.R. 74.62; 45
C.F.R. 74.61(h).
The Puerto Rico Gericulture Commission administers activities under the
Older Americans Act for the Commonwealth of Puerto Rico. Prior to
fiscal year 1980, the Gericulture Commission administered all funds
directly. Starting in fiscal 1980, in response to amendments to the
Older Americans Act, Pub. L. 95-478, the central Gericulture Commission
established ten regional committees which coordinate all activities
within their jurisdictions and receive grant funds from the central
committee. Puerto Rico Brief, pp. 1-4. We refer below to the regional
committees as subrecipients, although the record contains no evidence
that they were truly independent legal entities (45 C.F.R. 74.3 states
that "grantee" includes the entire legal entity even if a component
of
that legal entity is named in grant award documents). Puerto Rico did
not dispute that the central commission, as the direct recipient of
federal grant funds, was responsible for ensuring that the regional
committees met all applicable requirements for federal grant funds.
Puerto Rico alleged that this structure gave the regional committees
considerable autonomy and made difficult the imposition of financial
controls and auditing requirements. Puerto Rico further alleged that
changes in political leadership and staff in both the central commission
and the regional committees inhibited initiatives to require strict
financial controls and timely audits. Id.
Discussion
A. Unaudited Costs
The Agency originally disallowed the federal share of $9,437,111 in
alleged expenditures by Puerto Rico which were not within the scope of
any of the independent non-federal audits submitted by Puerto Rico.
During the course of the proceeding, Puerto Rico submitted additional
audits of subrecipient committees for various time periods. After
reviewing these additional audits, the Agency reduced the disallowance
of the federal share of unaudited costs to $61,085.
Puerto Rico did not specifically contest the remaining disallowance of
unaudited costs. While Puerto Rico argued generally that it had
complied with all documentation requirements, it did not allege that the
remaining disputed costs were within the scope of any of the audits
performed, and it failed to explain why the costs remained unaudited.
Nor did Puerto Rico provide any independent evidence that the unaudited
costs had actually been incurred and were allowable under the grant
program.
As we note above, 45 C.F.R. 74.62 requires that grantees meet the
requirements for independent non-federal audits set out in OMB Circular
A-102 (as we discuss in note 2, prior to May, 1980 these requirements
were set out in 45 C.F.R. 74.61(h)). The audit requirements do not
require that auditors must do a hundred percent review of source
documentation to assure proper accounting for federal funds; auditors
may use sampling techniques which test the integrity of the grantee's
accounting on an organization-wide basis. See 45 C.F.R.
74.61(h)(2)(1978); OMB Cir. A-102, Attachment P, secs. 1 and 7. But the
regulations and OMB Circular A-102 contemplate that all grant costs
incurred by a particular organization should be within the overall scope
of an audit report, even if not specifically examined by the auditors.
While they permit reliance on a representative number of charges to
federal awards, this method must "be representative of (1) the universe
of Federal awards received and (2) all cost categories that materially
affect the award." OMB Cir. A-102, Attachment P, sec. 7; see also 45
C.F.R. 74.61(h)(2).
Puerto Rico's internal difficulties in fulfilling its audit
requirements, described at great length in the initial brief, do not
diminish its responsibility to account for federal grant funds and meet
audit requirements under 45 C.F.R. Part 74. The unaudited costs were
not within the scope of any independent non-federal audit, and Puerto
Rico provided no explanation of why the costs were unaudited and
provided no other evidence that the costs were allowable or, in fact,
incurred at all.
Since the record shows that Puerto Rico did not meet the audit
requirements for these costs, we uphold the entire remaining
disallowance of the federal share of unaudited costs.
B. Questioned Costs
Independent non-federal auditors questioned $1,654,800 in alleged
expenditures that were unsupported by source documents. The audit
reports contained no response or rebuttal by Puerto Rico or the regional
committees. The Agency disallowed the federal share of the amount
questioned by the auditors. During the course of this proceeding,
Puerto Rico provided a report of a supplemental review of these
questioned costs. This report indicated that the original non-federal
auditors had reviewed supplemental documentation which substantiated all
but $145,086 of the federal share of the questioned costs. The Agency
accepted the results of this supplemental review and reduced the amount
of the disallowance to $145,086.
Puerto Rico argued generally that it had satisfied all documentation
requirements since it had, for the most part, reduced the category of
questioned costs by providing additional documentation. While the
additional documentation apparently satisfied documentation requirements
for the amounts by which the disallowance was reduced, that reduction is
not a basis to eliminate the disallowance entirely since some costs
remain undocumented. Even if the amount of undocumented costs could be
considered inconsequential or "de minimis", we know of no exception
to
documentation requirements under 45 C.F.R. Part 74, even for small
amounts. In any event, $145,086 is obviously too large a sum to be
considered de minimis here.
Puerto Rico also argued that it should not be responsible for fiscal
year 1980 questioned costs of the Arecibo regional committee because all
supporting documentation for fiscal year 1980 had been destroyed by a
flood in 1981. The independent auditors reconstructed from other
records most of the expenditures of the Arecibo regional committee
(although the auditors disclaimed the financial statements because of
deficiencies in internal financial controls and record keeping). The
auditors specifically questioned $59,978 for fiscal year 1980 because of
a total lack of documentary support ($56,340 in specific undocumented
claimed expenditures and $3,638 based on the overall difference in total
outlays between the audit and the final liquidation report used for
Puerto Rico's claim). See Arecibo Old Age Regional Committee Financial
and Compliance Audit, dated October 31, 1984 (submitted with notice of
appeal).
Puerto Rico provided affidavits and other evidence indicating that water
had leaked into the storage area containing documentation for fiscal
1980 during a season of general flooding, that the stored documentation
had been damaged, and that, therefore, the committee had discarded the
documentation. Puerto Rico Exhibit 6. Puerto Rico argued that it
should not be held responsible for an unanticipated destructive act of
nature. But Puerto Rico cited no legal authority to support its
argument that documentation requirements must be waived in the event of
a flood and did not respond to the Agency's assertion that there was no
such legal authority.
The Agency argued that there was no basis to excuse Puerto Rico from
documentation requirements in this instance, stating:
At best the destruction of document[at]ion might constitute an
equitable basis for granting some relief from the consequences of
the failure on the part of the Commission to document its costs.
The equities of the instant situation, however, would argue against
granting any such relief. Despite the fact that the flood is
alleged to have taken place in December, 1981, there is no
indication in the record of any attempt by the Commission to notify
the Agency of the fact of the flood at or near that time. The
Commission must have realized that its ability to document its
expenditures would be affected, but there is no indic[a]tion that
they sought any guidance from the Agency as to how best to proceed.
Nor is there any indication of any attempt to reconstruct the
records on the basis of the documents that were merely damaged
rather than destroyed by the flood. Instead, apparently acting on
their own initiative, they simply discarded the documents. By
discarding these records the Commission eliminated any possibility
of reconstructing documentation on the basis of the damaged
records. In addition, by letting years go by they reduced the
possibility of ever reconstructing the events in question, with or
without guidance from the Agency.
Letter from Agency to Board, dated December 15, 1988.
We find that the record contains no authority for the Board to excuse
Puerto Rico from requirements to have some form of documentation to
support claims for federal funds. See, e.g., 45 C.F.R. 74.61
(a),(b),(g). The Board is bound by all applicable laws and regulations.
45 C.F.R. 16.14. The Board has stated in prior cases that when
contemporaneous documentation is lost and a reasonable explanation
exists why the documentation is not available, other documentation may
be presented to establish the existence or allowability of a claimed
expenditure (although the Board indicated it would carefully scrutinize
the sufficiency of non-contemporaneous documentation). See, e.g.,
Indiana Dept. of Public Welfare, DAB No. 772 (1986). Here, there is a
reasonable explanation of why the original documentation is unavailable,
at least with respect to documentation totally destroyed by the flood.
However, Puerto Rico offered no documentation, contemporaneous or
otherwise, to this Board or to the independent auditors, who found
documentation to reconstruct other costs but specifically questioned
these costs.
Moreover, even if the Board could grant some form of equitable relief
when a grantee attempted in good faith to meet documentation
requirements despite an unanticipated act of nature, the record before
us would not support equitable relief. As the Agency pointed out, there
is no possible evidence that Puerto Rico attempted to mitigate the
damage by preserving any usable records or reconstructing missing
records in a timely manner. Instead, Puerto Rico discarded the records
without any attempt to preserve a documentary record of their contents.
Nor did Puerto Rico consult with the Agency in a timely manner about
this problem. Therefore, we conclude that there would be no basis for
equitable relief here.
Thus, we uphold the disallowance of the remaining questioned costs in
full.
Conclusion
For the reasons discussed above, we uphold the part of the disallowance
relating to unaudited and questioned costs in the full amount of
$206,171. The remaining part of the disallowance, relating to
disclaimed costs, will be handled pursuant to the parties' agreement on
remaining appeal procedures.
________________________________ Judith A. Ballard
________________________________ Alexander G. Teitz
________________________________ Donald F. Garrett Presiding
Board