Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: American Indian Center
DATE: May 17, 1990
of Omaha, Inc. Docket No. 89-234
Decision No. 1157
DECISION
The American Indian Center of Omaha, Inc. (Grantee) appealed a
determination by the Administration for Native Americans (ANA, Agency)
in the Office of Human Development Services (OHDS) disallowing $130,810
awarded for a Social and Economic Development grant for the year ended
August 31, 1989. 1/ The disallowance was taken on the ground that
Grantee failed to document that the grant funds were properly expended.
As discussed in detail below, Grantee acknowledged that it had not
provided the necessary documentation; however, Grantee did not avail
itself of repeated opportunities offered by both the Agency and the
Board to provide such documentation. Accordingly, we sustain the
disallowance in full.
Factual Background
The following facts appear from the record. Grantee first received a
Social and Economic Development grant for the budget period 9/1/87
through 8/31/88. The grant award document also showed a project period
of 9/1/87 through 8/31/90. The grant was awarded following a review of
Grantee's records for 1984 through 1986 conducted by a consultant for
the ANA, who indicated to Grantee's then Executive Director that
Grantee's fiscal, personnel, and management systems were adequate. A
second award was made for the budget period 9/1/88 through 8/31/89 which
again specified a project period extending through 8/31/90. In March of
the second grant year, the Agency notified Grantee that it had been
classified as a high-risk grantee because of "serious deficiencies"
in
operating its grant. The deficiencies listed were Grantee's failure to
have any non-federal audits of its ANA grants for the past five years,
in violation of 45 C.F.R. 74.62, and the existence of an "investigation
into the expenditure of Federal funds" under the grant. 2/ Grantee was
advised that, as a consequence of the high-risk classification, grant
funds would be paid under the reimbursement rather than the advance
payment system. Letter from McCarron to Kemp dated March 23, 1989.
On June 1, 1989, Grantee presented a plan to the Agency "to satisfy .
.
. [its] outstanding audit requirements . . . ." Grantee's plan called
for the performance of an audit for the years 1984, 1985 and 1986 using
$3,500 of the funds awarded for the 1988-89 grant year. Grantee stated
that it had engaged a certified public accountant (C.P.A.) firm to
perform the audit and would "immediately proceed to an audit" upon
the
Agency's approval of a proposed budget revision for the grant which
included $3,500 for the audit. Grantee also stated that an audit for
the years 1987 and 1988 would be performed in the early part of the next
grant year with funds from that grant. Letter from Kemp to McCarron
dated June 1, 1989. 3/ Grantee's then Executive Director stated that
he "received a telephonic acceptance of . . . [this plan] from William
J. McCarron on about June 15, 1989." Affidavit of Timothy F. Woodhull
dated December 5, 1989. Mr. McCarron was the Chief of the Discretionary
Grants Management Branch in OHDS. However, the Acting Executive
Director who succeeded Mr. Woodhull stated that Mr. McCarron later
reversed his position, advising him by telephone in July 1989 that he
had "questions" about the audit plan. Affidavit of John Wilson
Wagstaffe III dated December 5, 1989.
On approximately August 21, 1989, Grantee was contacted by Geraldine A.
Farrell of the ANA, who stated that she and Mr. McCarron wished to
conduct an on-site review of the grant from August 30 to September 1,
1989. Grantee responded in writing on August 23, stating that it would
have "serious difficulty" in attending the site visit because "the
week
beginning August 28 has traditionally been the time when we sponsor and
participate in the Dodge Park Pow-Wow, a large urban cultural event
which also offers many opportunities to reach new clients and to offer
economic development assistance under our grant." Grantee's letter also
stated that it had already scheduled its non-federal audit to begin on
August 28, 1989, "which would cause three weeks of significant
disruption in our fiscal office, at least in terms of providing any
records to any person other than the auditor." Grantee asked that the
site visit be postponed until September 18 or later. Letter from Kemp
to McCarron dated August 23, 1989. On August 25, 1989, Grantee received
a telegram from the Acting Commissioner, ANA, stating that the request
for a postponement was not approved, and that the on-site review would
be conducted as planned on August 30 through September 1, 1989. Grantee
was instructed to be prepared to meet with Mr. McCarron and Ms. Farrell
at 9:00 a.m. on August 30 at Grantee's offices, and to have all
programmatic and fiscal records pertaining to the grant available for
their review. In addition, Grantee was instructed that Board and staff
members in addition to Grantee's chairman should plan to be available
during the course of the site visit. Telegram from Mastrapasqua to Kemp
dated August 25, 1989.
According to a site visit report prepared by Mr. McCarron and Ms.
Farrell, Grantee's offices were closed when they arrived at 9:00 a.m. on
August 30. A sign in the window stated:
Dear Indian Community: The American Indian Center will be closed
due to our 'Dodge Park Pow Wow' Closed: 8/29/89 to 9/6/89.
Thank you, Board of Directors
Agency's appeal file, Ex. 8, p. 1. Mr. McCarron and Ms. Farrell
further reported that they subsequently drove to the site of the Dodge
Park Pow Wow and remained there from 10:00 to 11:00 a.m. None of
Grantee's Board members or staff were there, and Mr. McCarron and Ms.
Farrell were informed by park caretakers and others present that no
activities were scheduled at Dodge Park until September 1. Id., p. 2.
According to Grantee, its personnel were engaged in preparatory work for
the Pow Wow at the homes of private individuals on August 30. Affidavit
of John Wilson Wagstaffe III dated February 7, 1990.
Mr. McCarron and Ms. Farrell reported that they then drove to the office
of the C.P.A. firm engaged by Grantee to conduct the audit and met with
two auditors, who advised them that the audit of the years 1984, 1985
and 1986 was originally scheduled for July 17, 1989 but that the auditor
found Grantee's offices closed on that date. The audit was rescheduled
several times but was never performed. Agency's Ex. 8, pp. 2, 4.
On September 27, 1989, the Agency notified Grantee that it was
disallowing $130,810 for the period September 1, 1988 through August 31,
1989 for failure to meet the terms and conditions of the grant. The
Agency stated, more specifically, that the disallowance was based on
Grantee's failure to document or support claims for federal funds, and
on the lack of non-federal audits for the past five years. Although the
amount of the disallowance stated by the Agency was $130,810 -- the
total amount of the grant award -- the Agency noted that it was only
requiring Grantee to return $116,240. The remaining amount consisted of
$11,070 which was never released to Grantee and $3,500 which was
budgeted for an audit. The Agency stated that "[t]he audit will be
conducted or the funds returned to the Federal government." The Agency
also stated that "[d]ocumentation which supports the claim could reduce
the disallowance."
Grantee subsequently requested the auditors to return the $3,500 audit
fee, less expenses already incurred. The Agency also requested the
auditors to return the $3,500. In a letter to Grantee and the Agency
dated October 4, 1989, the auditors noted these requests but stated that
they had decided to hold the $3,500 and were ready to perform the audit
for 1984, 1985, and 1986 as soon as records were made available to them.
They further stated that they were willing to audit 1987 and 1988 for an
additional fee to be agreed upon. Agency's Ex. 11.
In its notice of appeal, Grantee asserted that it would provide evidence
in its appeal file in support of its expenditures under the grant.
However, in its brief, Grantee stated that the amount of documentation
would be "excessively voluminous," and that an audit would in any
event
constitute better proof that funds were properly expended, and requested
that it be permitted to proceed with the audit. In its reply brief,
Grantee stated that it had "made the error of claiming [in its notice of
appeal] the ability to" produce documentation.
In a letter to the parties dated March 28, 1990, the Presiding Board
Member stated that he would like to hold a telephone conference call in
order to explore the feasibility of an audit of the 1988-89 grant,
followed by an opportunity for Grantee to give the Agency documentation
of any costs questioned in the audit. The letter stated that this
appeared to be consistent with the Agency's disallowance determination.
Although both parties agreed to participate in such a conference call,
Grantee did not answer its telephone on the date originally set for the
call. A second call was scheduled, with the same result.
Applicable Requirements
Uniform requirements for the administration of HHS grants are contained
in 45 C.F.R. Part 74. 4/. These regulations include several provisions
pertaining to documentation of grant costs. Section 74.61(b) provides
that --
Records which identify adequately the source and application of
funds for grant or subgrant-supported activities shall be
maintained.
Section 74.61(g) provides that --
Accounting records shall be supported by source documentation such
as cancelled checks, paid bills, payrolls, contract and subgrant
award documents, etc.
In addition, section 74.24(a) provides, under the heading "Access to
Records," that --
HHS and the Comptroller General of the United States, or any of
their authorized representatives, shall have the right of access to
any books, documents, papers, or other records of the grantee which
are pertinent to the HHS grant, in order to make audit,
examination, excerpts, and transcripts.
(A similar provision is found in the Native American Programs Act of
1974 at 42 U.S.C. 2991g(b).)
The HHS grants administration regulations also make OMB (Office of
Management and Budget) Circular A-122 applicable to grants to nonprofit
organizations such as Grantee. 45 C.F.R. 74.174. Attachment A, A.2.g.,
of the Circular provides that, to be allowable under an award, costs
must "[b]e adequately documented."
Finally, the HHS grants administration regulations make the requirements
for non-federal audits in OMB Circular A-110, Attachment F, applicable
to non-governmental grant recipients. 45 C.F.R. 74.62(b). The
Circular requires specifically that a recipient's financial management
system provide for --
Examinations in the form of audits or internal audits. Such audits
shall be made by qualified individuals who are sufficiently
independent of those who authorize the expenditure of Federal funds
to produce unbiased opinions, conclusions or judgments . . . .
These examinations are intended to ascertain the effectiveness of
the financial management systems and internal procedures that have
been established to meet the terms and conditions of the
agreements. . . . Examinations will be conducted with reasonable
frequency, on a continuing basis or at scheduled intervals, usually
annually, but not less frequently than every two years . . .
Discussion
This case involves the obligation of a grantee to document that costs
charged to a grant were properly spent. This obligation is clearly set
out in the regulations discussed above. The Board has consistently held
that failure to meet this obligation is a basis for disallowing grant
costs. See Seminole Nation of Oklahoma, DAB No. 951 (1988), and cases
cited therein. Here, because Grantee had not been audited for a number
of years and failed to apppear for a scheduled site visit, the Agency
questioned whether Grantee had any documentation showing that it
properly expended grant funds. The Agency thus took a disallowance
which was subject to reduction to the extent that Grantee provided
satisfactory documentation. The disallowance was appropriate in light
of Grantee's basic obligation to document costs charged to the grant.
Grantee initially offered to satisfy this obligation by providing source
documentation as part of its appeal file. It later decided that this
would not be feasible, suggesting instead that an audit now be performed
to establish that its costs were properly documented. As noted above,
however, Grantee failed to participate in telephone conference calls
scheduled by the Board to discuss the possibility of such an audit.
Since Grantee thus failed to document its costs despite numerous
opportunities to do so, we conclude that the disallowance must be
sustained.
Grantee argued in the alternative, however, that the disallowance should
not be sustained even if an audit was not performed. Grantee argued
first that the Agency was responsible for the lack of a non-federal
audit, alleging that the Agency raised questions in July 1989 about its
plan to come into compliance with the audit requirement. Since the plan
did not provide for an audit of Grantee's fiscal year 1988 until the
1989-90 grant year, however, Grantee would not have documented its
1988-89 grant costs in a timely fashion even if the plan had been
implemented. Moreover, the record shows that Grantee in fact engaged an
audit firm to perform an audit for the years 1984, 1985 and 1986, and
made arrangements for the auditors to begin the audit on July 17, 1989.
While Grantee postponed the audit scheduled for that date as well as
subsequent dates, there is no indication that it did so due to any
questions raised by the Agency.
Grantee also argued that the Agency's disallowance was arbitrary and
capricious because the Agency could have warned Grantee earlier than
March 1989 that it was out of compliance and given it an opportunity to
have an audit performed. However, Grantee had ample legal notice of the
audit requirement. More importantly, it declined subsequent
opportunities to arrange for an audit. Thus, its failure to support its
costs through an audit is not excused simply because the grant may not
have been monitored as closely as it might have been.
Grantee argued in addition that neither the lack of an audit or its
failure to appear at its offices on the first day of the scheduled site
visit showed that it was unable to document its costs. However, the
burden was not on the Agency to establish that Grantee could not
document its costs; rather, as noted above, Grantee had an affirmative
obligation to document its costs. Thus, absent an audit or some other
showing that grant funds were properly expended, the disallowance was
justified. 5/
Grantee also asserted that it had been found fiscally responsible for
the period January 1, 1984 through December 31, 1986 by the reviewer
hired by ANA who evaluated Grantee during the summer of 1987. This
review could not establish that Grantee properly expended funds awarded
for the 1988-89 grant year, however.
Grantee asserted further that it had submitted all reports required to
be submitted during the grant year, including an 8-month Objective
Progress Report, Reports of Federal Cash Transactions, and Requests for
Reimbursement. However, Grantee subsequently clarified that it was not
taking the position that this satisfied its obligation to document that
all costs charged to the grant were properly expended. Grantee's reply
brief dated 2/7/90, pp. 4-5.
The Agency reasonably relied on Grantee's failure to appear for the site
visit even if Grantee had a legitimate reason for requesting that the
site visit be postponed. Once the Agency denied this request, Grantee
should have made at least some effort to accommodate the Agency (for
example, by having even one individual available at its offices who
could show the Agency the relevant records).
Finally, Grantee argued that the Agency's actions were attributable to
undue influence exerted on grants management by a competitor of Grantee.
Regardless of the Agency's motives, however, Grantee's obligation to
document that grant funds were properly expended remained unchanged.
See Metro Community Health Centers, Inc., DAB No. 1098 (1989), at pp.
9-10.
Conclusion
For the reasons discussed above, we conclude that the Agency properly
disallowed costs charged to the 1988-89 grant. Accordingly, we sustain
the disallowance in the amount of $130,810. This amount includes the
$119,740 advanced to Grantee, which must be refunded, 6/ as well as
the $11,070 awarded but never released by the Agency.
__________________________ Cecilia Sparks
Ford
__________________________ Donald F.
Garrett
__________________________ Alexander G.
Teitz Presiding Board Member
1. Grants for social and economic development are authorized by the
Native American Programs Act of 1974.
In a separate decision, the Board upheld the Agency's determination
denying refunding of a Social and Economic Development grant for the
year ended August 31, 1990. American Indian Center of Omaha, Inc., DAB
No. 1141 (1990).
2. This apparently referred to an FBI investigation which resulted
in the indictment in June 1989 of Grantee's then Executive Director for
conspiracy to distribute cocaine and related acts. The record indicates
that the then Executive Director entered a not guilty plea, but is
silent regarding any later developments.
3. Later correspondence from the auditors indicates that the years
referred to were grantee's fiscal years, which ended October 31.
4. These regulations are directly applicable to Grantee. They are
also referred to in the 1988-89 grant award document as well as in the
ANA regulations at 45 C.F.R. Part 1336.
5. The Agency reasonably relied on Grantee's faliure to appear for the
site visit even if Grantee had a legitimate reason for requesting that
the site visit be postponed. Once the Agency denied this request,
Grantee should have made at least some effort to accommodate the Agency
(for example, by having even one individual available at its offices who
could show the Agency the relevant records).
6. The Agency indicated its willingness to allow $3,500 of this
amount for a non-federal audit, regardless of whether the other costs
were documented. This amount is clearly unallowable since an audit has
not been performed nor is there any basis in the record to expect that
one will be performed within a reasonable