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Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  


SUBJECT: Latino Resource Organization

DATE: April 28, 2005

 


 

Docket No. A-04-101
Control No. A-09-98-00065
Decision No. 1974
DECISION
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DECISION

The Latino Resource Organization (LRO) appealed a March 30, 2004 determination of the Office of Community Services (OCS), a component of the Administration for Children and Families (ACF), disallowing $95,102 claimed under a grant awarded on September 28, 1993 pursuant to the Urban and Rural Community Economic Development discretionary grant program under then-current section 681(a)(2) of the Community Services Block Grant Act (CSBG Act), 42 U.S.C. � 9910(a)(2)(1993). (This authority is currently under section 680(a)(2) of the CSBG Act, 42 U.S.C. � 9921(a)(2).) The disallowance was based on audit findings that the claims were for costs that were either unallowable, inadequately documented, or incurred after the close of the grant period. For the reasons set forth below, we uphold the disallowance in full.

Factual Background

On September 28, 1993, OCS awarded LRO a two-year grant of $500,000 for a project to invest in a clothing manufacturer to create jobs for unemployed and low income persons in the area. OCS Ex. 3, at 1. Under the original proposal, the entire federal grant was to be invested. OCS Ex. 3. In March 1995, LRO received approval for a requested 12-month no-cost extension of the grant period because of difficulties in carrying out its proposal. OCS Ex. 5. In August 1996, OCS approved a second no-cost extension and a revised work plan that involved a substantial change in the project to instead invest in an auto body repair corporation. OCS Ex. 6. Under the revised work plan, the amount invested was reduced to $340,000, and the remaining amount budgeted was to cover LRO's costs in administering the project. The grant period, as extended, ended on February 28, 1997.

In January 1998, the Office of the Inspector General (OIG) initiated an audit, and issued a report in January 1999. OCS Ex. 7. The OIG auditors concluded that the equity investment did not result in either business expansion or the anticipated new jobs. Furthermore, they concluded that, because of LRO's lack of effective oversight and the lack of accountability by the auto body repair shop, the auditors could not determine how the majority of the $340,000 investment furthered the purposes of the grant. The auditors recommended that LRO transfer its control of its equity interest to another entity rather than disallowing or questioning the $340,000 claim for invested funds.

At issue in this case are OIG audit findings relating to the $160,000 claimed by LRO for costs of administering the grant. The audit identified $12,546 in claims for unallowable costs and "set aside for resolution by OCS" an additional $82,556 in claims that were inadequately documented by LRO. OCS Ex. 4, at 13. The audit recommended that LRO refund the $12,546 found unallowable, and recommended that LRO "[c]oordinate with OCS on the resolution of the costs set aside totaling $82,556." Id.

LRO responded to a draft version of the OIG audit, by letter dated January 15, 1999 from the LRO Acting Executive Director, stating: "Latino Resource Organization (LRO) is basically in concurrence with the recommendations in the draft report . . . . The acting executive director does not understand the recommendation that LRO refund $12,546. LRO is unable to make this refund." LRO Ex. B; OCS Ex. 4, at 13. The final OIG audit noted this response and indicated that in communications subsequent to this letter, LRO informed the OIG that "they were not disagreeing with any of the financially related findings disclosed in the report" and that the lack of understanding referenced in their letter "related to how the organization was to make this refund since the organization did not have the monies to do so." OCS Ex. 4, at 13.

On March 30, 2004, OCS disallowed both the $12,546 that the auditors found unallowable and the $82,556 that the auditors questioned as inadequately documented. LRO timely appealed the disallowance. (1)

Discussion

LRO asserts that the disallowance was "apparently based upon LRO's agreement with the January, 1999 audit report" but that, in fact, there was no such agreement. LRO Brief at 1. The record indicates, however, that LRO is mistaken in its assertion that the disallowance was based upon that agreement. The basis for the disallowance was detailed in an exhibit attached to the final OIG audit report and summarized in the March 30, 2004 disallowance letter. OCS Ex. 4, at 14-17 (Exhibit, pages 1-3); LRO Ex. C. In general, the basis specified in both the OIG audit and the disallowance letter was the lack of adequate supporting documentation to establish that LRO's claimed expenditures were grant-related.

The exhibit to the audit report set forth explanations and precise amounts that the auditors found unallowable ($12,546) and the amounts "set aside for resolution by OCS" based on inadequate documentation ($82,556) (2) in eight of nine categories of claimed expenditures. Specifically, the exhibit explains that the auditors:

  • Set aside for resolution $42,998 claimed for the salary of the Executive Director, finding that LRO had not documented the work performed in personnel activity reports consistent with the requirements of Office of Management and Budget (OMB) Circular A-122. (3)


  • Set aside for resolution $2,112 in associated payroll taxes claimed for the Executive Director, for the same reasons noted above.


  • Set aside for resolution by OCS $22,088 in claims for consulting costs, finding that the supporting invoices included grant-related and other activities (rather than being limited only to costs for grant-related activities) and set aside $3,000 claimed as consulting costs (that the invoice indicated were actually general accounting costs), finding no documentation of any benefit to the grant project. The auditors also identified as an overpayment $800 that had been claimed based on a payment in excess of the invoice for consulting services.


  • Set aside $11,658 in claims for accounting costs, finding no supporting documentation establishing that the costs were grant related, and identified as unallowable $4,534 in claims for accounting services either because the services were performed after the end of the grant period or the claims were in excess of actual incurred costs.


  • Identified as unallowable $5,000 for auditing services that were performed and obligated after the end of the grant period pursuant to an engagement letter dated after the end of the grant period.


  • Set aside $700 claimed for legal services, finding a lack of supporting documentation to show that the services benefitted the OCS project.


  • Identified as unallowable $1,653 for travel that occurred in April 1997, after the grant period ended.


  • Identified as unallowable $559 in claimed advertising costs, finding that LRO was unable to provide documentation showing that the costs had been incurred.

OCS Ex. 4, at 15-17.

Even if the draft audit report did not include the detailed exhibit discussing each disputed cost, the final audit report and the disallowance letter clearly identified the basis for the disallowance. Thus, the basis for the disallowance was clear, and was not dependent on LRO's agreement or disagreement. Nevertheless, LRO failed to provide any argument or documentation on appeal that addresses the basis for the disallowance.

LRO argues instead that the delay in OCS action prejudiced LRO because LRO now lacks complete documentation to contest the disallowance. LRO Brief at 1. LRO notes that a grant closeout letter sent by OCS on August 22, 1997 stated that LRO must retain its records for only three years. LRO Ex. B.

LRO cannot reasonably complain about the delay in OCS action because it was on notice that there were unresolved financial issues that required retention of records. The OCS grant closeout letter cited by LRO expressly stated that "[w]e reserve the right to re-open our files on this grant in the event of a subsequent audit." This statement placed LRO on notice that, in the event of an audit, the grant closeout communication should not be viewed as final resolution of its claims. Moreover, applicable regulations at 45 C.F.R. � 74.53(b) establish a general three-year record retention requirement but expressly provide an exception "if any litigation, claim, financial management review, or audit is started before the expiration of the 3-year period, the records shall be retained until all litigation, claims, or audit findings involving the records have been resolved and final action taken." 45 C.F.R. � 74.53(b)(1). This exception was triggered by the January 1999 OIG audit report, and LRO should have known that it needed to retain relevant records. Regulatory grant closeout provisions at 45 C.F.R. � 74.72(a) also provide that grant closeout does not affect the right of the HHS awarding agency to "disallow costs and recover funds on the basis of a later audit or other review." As we discussed above, the audit report clearly included audit findings that questioned the disputed claims and were not resolved.

Furthermore, LRO at no time suggests that it had documentation that addressed the auditors' concerns. LRO did not respond to the audit findings with any offer of documentation. Nor did LRO provide any evidence of its recordkeeping, accounting or record retention practices that would support a conclusion that LRO ever had documentation to support the disputed claims. The absence of any such evidence in the record that LRO had responsive documentation is a further reason why we do not find credible LRO's assertion of prejudice due to any delay in the disallowance action.

LRO also asserts that all the questioned claims were "duly budgeted and approved" by OCS "during the closing period." LRO Brief at 1. While LRO did not clearly specify what it meant by the "closing period," we assume it is referring to a period shortly after the end of the term of the grant. Specifically, LRO asserted that it had made unquestioned equity investments during that closing period pursuant to the grant terms, and thus should be permitted to claim for expenses incurred in connection with those equity investments. Id.

This argument by LRO focuses on the audit finding that some of the expenditures were made after the close of the grant period, but LRO fails to understand that the key issue is the timing of the obligation to make expenditures rather than the timing of the payments. (4) For example, the audit report confirms that LRO made equity investment payments pursuant to the grant in January, March, April and May 1997, even though the grant period ended in February, 1997. OCS Ex. 4 at 5. The record indicates that those equity investment payments were made under an obligation entered into during the grant period in a purchase agreement entered into November 29, 1996. LRO Ex. D. In contrast to these equity investments, however, the record contains no evidence that disputed expenditures for travel, auditing, or accounting services made after the close of the grant period were made pursuant to obligations entered into during the grant period. Thus, LRO did not rebut the precise issue raised by the OIG auditors. OCS Ex. 4, at 15-17 (Audit Report Exhibit at 3).

LRO's final argument is that it is a "small organization that at no time had sufficient expertise or capability to administrate [sic] this grant" and "lacks sufficient funds to make repayment . . . ." LRO Brief at 2. LRO asserted that "[c]ollection efforts by the Department would inevitably drive LRO into Bankruptcy." Id.

As we have indicated in our prior cases, the burden or financial hardship which repayment might cause the grantee is not relevant to our consideration of this, or any disallowance. See, e.g., Bedford Stuyvesant Restoration Corp., DAB No. 1404 (1993). In effect, LRO is seeking equitable relief (i.e., the disallowance should be forgiven, not because OCS is wrong, but because LRO cannot afford to repay). The Board is empowered to resolve legal and factual disputes. We cannot provide equitable relief; we are bound by all applicable laws and regulations. 45 C.F.R. �  16.14. We conclude that the law applicable to this disallowance clearly requires LRO to repay the disallowed grant funds.

Conclusion

For the reasons set forth above, we uphold the disallowance in full.

 

JUDGE
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Judith A. Ballard

Donald H. Garrett

Daniel Aibel
Presiding Board Member

FOOTNOTES
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1. Proceedings in the appeal were stayed until October, 2004 to permit mediation.

2. LRO implicitly asserts that, while it understood that the auditors were requesting a refund of $12,546, it did not understand that further action would or could be taken regarding the $82,556 in claims set aside. In the context of the audit report, however, the meaning of the term "set aside" is clear. The audit report recommended that "LRO . . . coordinate with OCS on the resolution of the costs set aside totaling $82,556." From this language, LRO should have understood that it bore the burden of working with OCS to establish that the claims set aside were allowable. Furthermore, once the disallowance was issued, LRO had a further opportunity to provide documentation for the disputed amounts. The record contains no evidence that LRO submitted further documentation or otherwise worked with OCS to address the claims set aside.

3. The terms and conditions of the grant award make applicable general grant rules at 45 C.F.R. Part 74 and the cost principles set forth in OMB Circular A-122. OCS Ex. 1, at 3 (Attachment to Grant Award, page 2).

4. As OCS pointed out, the grant award limited funding to allowable costs "resulting from obligations which are incurred during the grant period." OCS Ex. 1, at 13. OCS did not dispute that, as the grant award expressly stated, "[v]alid obligations incurred before the end of the grant period for purchased services, equipment, and supplies identified in the approved application shall be considered allowable grant period costs to the extent of actual subsequent expenditures (liquidation of invoices)." OCS Brief at 13, citing OCS Ex. 1, at 13.

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