GAB Decision 355
October 29, 1982 Council on Rural Service Programs, Inc.; Docket No.
82-34 Garrett, Donald; Teitz, Alexander Ford, Cecilia
The Council on Rural Service Programs, Inc. (Council) appealed a
decision by the Office of Human Development Services (Agency/OHDS) to
disallow $262,183 in charges associated with the Council's Head Start
grant. The disallowance represents the Council's non-federal share
($135,835), which was disallowed due to inadequate documentation, and
numerous individual charges to the Council's Head Start grant
($126,348). During the course of this appeal, both parties have made
extensive efforts to resolve the issues through negotiation. As a
result of those negotiations, the Council submitted documentation which
the Agency determined was sufficient to justify the Council's
non-federal share, and the disputes about all but two of the individual
charges were settled. /1/ The costs still in dispute are: audit costs
totalling $8,850 and data processing costs of $2,750. For the reasons
discussed below, we uphold the disallowance of these items.
I. Audit Costs
The Department of Health and Human Services' Office of the Inspector
General (OIG) audited the Council's Head Start program for the period
December 1, 1975 to November 30, 1979. The Audit Report (Audit Control
No. 05-11452) was the basis for this disallowance. The Council had
engaged a local accounting firm to audit its Head Start program during
the years 1976 through 1978. After reviewing the local audits and the
underlying workpapers, the OIG auditors concluded that those audits did
not meet applicable governmental standards. The Audit Report stated
that the local auditors did not examine the Council's system of internal
controls. /2/ Audit Report, p. 5. After reviewing the Council's
internal (2) controls, the OIG auditors concluded that the weaknesses in
those controls ultimately enabled a former Council Executive Director to
embezzle $69,387 in Head Start funds. Audit Report, pp. 10-11. OIG
concluded that the audit costs were not an allowable charge to federal
funds because the local auditors did not examine the Council's system of
internal controls.
The Council did not deny the findings of the OIG. In a February 4,
1981 letter to the OIG audit team, the Council submitted a detailed list
of actions taken to improve its internal controls. See, Appendix to
Audit Report. The Council argued that, in spite of the shortcomings in
the audits, the audits provided the "financial baseline" for
administering the Head Start program. Appellant's Submission, April 26,
1982, p. 4. The Council argued further that the disallowance was
punitve in that the Council was being punished for an inadequate job by
the local auditors.The Council contended that, if the work performed by
the audit firm did not warrant action against the firm's license, then
the costs should be allowed. Appellant's Submission, August 11, 1982,
p. 2.
Each Head Start grantee is required to have its program audited on an
annual basis to determine:
(1) whether the grantee is complying with the terms and conditions of
the grant, including the applicable laws, regulations and directives;
and (2) whether appropriate financial and administrative procedures and
controls have been installed and are operating effectively. /3/
The audit and report of audit must be performed in accordance with
the Audit Guide for Head Start and Other Child Development Programs
(1973) (Audit Guide). The Audit Guide states that one of the specific
objectives of a Head Start audit is "to determine whether the grantee
and its delegate agencies, if any, have: Established systems of
internal control, . . . and have exercised proper controls in the
operation of and accounting for funds provided by the program." pp. 3 -
4, September 1973. A considerable portion of the Audit Guide is devoted
to discussing internal controls. The local auditors concluded in a
summary fashion that the internal controls were adequate. The Council
has not disputed the OIG auditors' conclusion that it had weak internal
controls and that this shortcoming was overlooked by the private audit
firm. Thus, a primary purpose of Head Start audits was not accomplished
by the local audits.
(3) The Council's allegation that the audits benefitted the program
in some way may indicate that some audit costs are allocable to Head
Start. This does not necessarily mean that the costs were allowable.
In determining the allowability of professional service costs as a
charge to a federal grant, consideration must be given to several
factors including:
(1) The nature and scope of the service rendered in relation to the
service required.
45 CFR Part 74, Appendix F, Section G.31(b) (1975).
Head Start guidelines clearly require an examination of a grantee's
system of internal controls as a major part of the annual audit of a
grantee's program. In this instance there was no such examination and,
as both parties agree, the failure of the local auditors to conduct this
examination contributed to the embezzlement of more than $69,000. Thus,
the service the grantee was required to obtain was not the service
rendered.
Although the Council claimed that the disallowance is punitive, we do
not think the disallowance was taken as "punishment." The Council
is
responsible for the ultimate disposition of grant funds it receives from
the Agency. The manner in which those funds are expended is guided by
various regulations with which the Council, or any grantee, must be
familiar. In order for the costs of the local audits to be chargeable
to federal funds, the audits had to comply with federal guidelines, as
set out in 45 CFR Part 74, the OHDS Manual and the Audit Guide. The
local audits did not comply with federal guidelines; therefore, it was
reasonable for the Agency to disallow the costs.
The Council argued there should be no disallowance without an action
against the local auditors' license to practice. However, it is not the
federal government's responsibility to take action against the auditors
hired by the grantee, but to determine whether the costs incurred meet
federal standards.
We uphold the Agency's decision to disallow the audit costs.
II. Data Processing Costs
The second part of the disallowance involved data processing costs.
The dispute here focused not upon the individual items comprising those
costs, but rather upon the method used to determine the costs. The
Council operated several programs in adiition to its Head Start program.
All those programs employed a central source of data processing. In
calculating the percentage of data processing pages attributable to its
Head Start program, the Council first calculated a percentage of pages
allocable to its Head Start program for each of three data processing
categories (checks written, report pages, and payroll pages). The (4)
percentages represented the ratio of Head Start pages to total pages in
each category. The Council averaged those percentages and submitted
that figure (35%) as the percentage of data processing costs
attributable to its Head Start grant. The Agency, on the other hand,
argued that the proper method for determining the data processing costs
chargeable to Head Start funds was to divide the total number of Head
Start pages by the total number of pages produced. This calculation
resulted in a somewhat lower charge (28.3%) to Head Start funds.
The council generated 2,488 data processing pages for its Head Start
program. The total number of data processing pages it produced was
8,802. Dividing the number of Head Start pages by the total number of
pages clearly shows that Head Start data processing comprised 28.3% of
the Council's data processing production. The flaw in the Council's
method is in averaging percentages which do not apply to the same base.
This leads to an incorrect result. For example, 10 is 50% of 20 and 20
is 20% of 100, but 30 is not 35% of 120.
We uphold the Agency's determination on this issue.
Conclusion
For the reasons discussed above, we uphold the Agency decision to
disallow the audit costs and the data processing costs. /1/ Some of
these issues were resolved in either the Council's or the
Agency's favor, while the parties compromised on others. /3/ OHDS
Manual, Head Start Program, Policies and Procedures Applicable to
Financial Assistance, 42 Fed. Reg. 21081, April 22, 1977. (OHDS Manual)
OCTOBER 22, 1983