GAB Decision 594
November 19, 1984
Council for Economic Opportunities in Greater Cleveland;
Garrett, Donald; Settle, Norval Teitz, Alexander
Docket No. 83-127
The Council for Economic Opportunities in Greater Cleveland
(appellant) appealed a decision by the Office of Human Development
Services (OHDS, respondent) to disallow $166,018 in costs which the
appellant charged to its Head Start grant for the period February 1,
1975 through January 31, 1979. /1/ For the reasons discussed below, we
uphold the disallowance.
Discussion
Section 2928 of 42 U.S.C. describes the purpose of Head Start grants
as follows:
(The) planning, conduct, administration, and evaluation of a
Headstart program focused primarily upon children from low-income
families who have not reached the age of compulsory school attendance
which (1) will provide such comprehensive health, nutritional,
educational, social, and other services as will aid the children to
attain their full potential, and (2) will provide for direct (2)
participation of the parents of such children in the development,
conduct, and overall program direction at the local level.
The appellant's Head Start program has been operational for 19 years,
and has eight delegate agencies. The appellant is accountable for all
of its Head Start program expenditures including those of its delegate
agencies. 45 CFR 1301.1-2.
Part 74, Subpart Q, Appendix F, paragraph B. of 45 CFR states, in
part:
2. Factors affecting allowability of costs. Factors to be considered
in determining the allowability of individual items of cost include (a)
reasonableness, (b) allocability, (c) application of those generally
accepted accounting principles and practices appropriate to the
particular circumstances, . . .
3. Definition of reasonableness. A cost is reasonable if, in its
nature or amount, it does not exceed that which would be incurred by an
ordinarily prudent person in the conduct of competitive business. . . .
4. Definition of Allocability. A cost is allocable if it is
assignable or chargeable to a particular cost objective, such as a
grant/contract, project, product, service, process, or other major
activity, in accordance with the relative benefits received or other
equitable relationship. . . .
The documentation submitted by the appellant has been reviewed by the
respondent and the Board. A major portion of the documentation
consisted of copies of receipts, checks, and vouchers which the
appellant asserted documented the amounts claimed. In light of the
amount of documentation submitted, the Board will not attempt to comment
on each individual item. Although the relevancy of the documentation
will be discussed below, generally, the major portion of the
documentation submitted by the appellant was not relevant to the
concerns which led to OHDS' disallowance. While all costs require
documentation to be allowable, costs must also be reasonable, allocable,
and of benefit to the program. Except for one instance, "Inadequate
Documentation" which will be discussed later, costs were not disallowed
for lack of documentation. In four out of the five disallowed cost
areas, the appellant submitted documentation related to the costs but
failed to show the reasonableness, allocability, or benefit of the costs
to the program.
The Board has held in previous decisions that the burden of
documenting the allowability of costs rests with the appellant. See,
e.g. Somerset Community Action Program, Decision (3) No. 254, February
9, 1982. Similarly, the burden is on the appellant to document a cost's
reasonableness and allocability. See, e.g. Philadelphia Department of
Public Health, Decision No. 364, December 7, 1982. As will be discussed
in the following sections, the appellant has not fulfilled its
obligations.
The following areas and amounts remain in dispute and will be
discussed separately below:
a. Audit Costs $117,000 b.
Inadequate Documentation $36,446 c. Unrelated
Expenditures $ 1,635 d. Duplicate Claims
$ 7,211 e. Unallowable or Overstated Costs $ 3,726
a. Audit Costs port of an audit to the Departmant of Health and
Human Services (DHHS) fport of an audit to the Department of Health and
Human Services (DHHS) for that period performed by an independent
auditor. 45 CFR 1301.2-3 (1978). Head Start agencies may either
include delegate agency audits as a part of their own audits or may
provide for separate independent audits of their delegate agencies. 45
CFR 1301.2-3(a). In this case, the delegate agencies were included in
the appellant's audit.
The appellant contracted with a private audit firm (the audit firm)
to perform the audits for the years ending 1976, 1977, and 1978. The
respondent disallowed the total audit costs of $117,000 because the
audit failed to review several major areas required in the Head Start
audit guide; therefore, the appellant failed to receive the services
that it paid for. Specifically, the respondent noted that some of the
major areas in which the audit firm did not provide adequate support
were: program funding, cost sharing (non-federal share), review of
costs, review of programs, particularly United States Department of
Agriculture (USDA) and Head Start (HS) food programs, prior audit
findings, and use of unauthorized carry-over funds. The respondent's
auditors stated, in part:
Federal funds withdrawn under the letter of credit were not
reconciled with (the) authorized limited specified in the letter of
credit. . . . Federal funds received were not compared to the approved
budgets. With respect to the non-Federal share, there was no indication
in the workpapers that amounts reported were audited or confirmed in
anyway or that the costing of in-kind (4) contributions was reasonable.
. . . line item budget restrictions were apparently not reviewed . . .
the workpapers did not include sufficient detail of expenditures sampled
by which a determination of allowability could be made. . . .
Workpapers pertaining to USDA reimbursements of food costs did not
include a review to determine whether HS and USDA were being charged for
the same costs. Duplicate claims did, in fact, occur. Although the
reports included repeat findings, there was no indication that the
recommended corrective actions had been reviewed to determine the extent
and adequacy of the actions. (Respondent's August 3, 1984 submission,
Exhibit 14)
Further, although the General Accounting Office (GAO) said that the
appellant had excess cash up to 10 times its monthly disbursement needs,
the audit firm's review failed to report on this situation and referred
to only one inactive bank account.
Initially, the appellant did not claim that the audit was
satisfactory, but claimed that it had to pay for it and could not get
the money back. Later, the appellant argued that the audit costs should
be allowed because the audit firm stated that all work was performed
using generally accepted audit standards. Additionally, the appellant
argued that correspondence from the auditors indicated that reviews of
their work papers disclosed no material deficiencies. The audit firm,
in a letter dated September 15, 1983, stated that there was never any
indication from DHHS that it questioned the scope or the adequacy of
their audit. The record indicates otherwise, however.
During the exit conference on April 21, 1980, the DHHS auditor made
comments relating to the work done by the audit firm and which
contradicts the firm's September 1983 letter. The respondent
transcribed the DHHS auditor's handwritten notes, made at that time, and
he attested to their accuracy. The DHHS auditor noted:
We raised questions that we felt should have been answered had we
done the work ourselves, . . . They would ultimately say our questions
were broader than their review. In other words their review was not
done in sufficient detail to resolve the items in question.
(Respondent's September 10, 1984 submission, p. 2)
Additionally, the respondent submitted two letters, dated February
23, 1977, and September 6, 1977, written by the audit firm in which the
firm responded to questions raised by the DHHS auditors concerning items
in the audit report that required further clarification. (Respondent's
August 3, 1984 submission, Exhibits 18 and 19) Further, two exhibits
were (5) submitted by the respondent indicating that the 1976 and 1977
audit reports by the audit firm were rejected by the DHHS audit agency.
(Respondent's August 3, 1984 submission, Exhibits 21 and 22) There is,
therefore, evidence in the record that the appellant and its audit firm
had notification of the deficiencies in the questioned audits.
Finally, as an indication of the unsatisfactory nature of the audit
firm's work, appellant's Head Start program had to be audited again.
The Head Start program, therefore, did not benefit from the first
audits.
In light of the foregoing, we find that the appellant has not shown
that the audit costs were reasonable in view of the services received.
/2/
b. Inadequate Documentation
The respondent disallowed costs under this heading because sufficient
evidence or documentation did not exist to support the claims.
The appellant argued that all of the costs questioned were incurred
and paid by delegate agencies. However, the appellant admitted that it
could not locate any documentation to support $27,831 of its claim.
Therefore, without any evidence to support the allowability of the
costs, the Board must uphold the respondent's disallowance of these
costs.
The appellant argued that it was able to locate $8,615 in personnel
costs of the Catholic Diocese which it claimed were for cost of living
increases. The documentation provided, however, is inadequate to prove
the allowability of the costs.
(6) A letter from the Catholic Diocese, dated May 16, 1984, stated
that salary levels were below comparable salaries; therefore, the
Deputy Superintendent awarded a 2-week pay salary adjustment to the
staff. However, since the checks were supplemental, there were no
related time cards. (Appellant's May 21, 1984 submission, Exhibit E)
Section 74.61 of 45 CFR states, in part:
(b) Accounting records. Records which identify adequately the source
and application of funds for grant- or subgrant- support activities.
* * *
(g) Source documentation. Accounting records shall be supported by
source documentation such as cancelled checks, paid bills, payrolls,
contract and subgrant award documents, etc.
The appellant argued that $8,615 should be allowable as personnel
costs for cost of living increases awarded by the Catholic Diocese, one
of its delegate agencies. The Catholic Diocese stated that it was
unable to provide related documentation such as time cards or other work
related records. For example, the appellant did not submit any evidence
to show who the employees were and their Head Start positions, what they
were being paid, and their benefit to the Head Start program, and what
comparable workers in other Head Start programs were paid. Further, the
appellant did not submit any evidence to show that OHDS policy allowed
for such adjustments to salaries wich had been set at a certain level
and been made part of the grant award through the grant application.
Additionally, the May 16, 1984 letter submitted by appellant is
insufficient to prove the allowability of the costs. The letter was not
contemporaneous with the expenditures in question and was written
specifically for the purposes of this appeal, in response to a request
by appellant. As such, it might be considered self-serving. Nor did
the delegate agency assert that it based its statements on any records
that it maintained. It is the responsibility of the appellant to
maintain such records in order to document its allowable costs. By the
appellant's own admission, the appellant has not complied with
accounting records and source documentation requirements of 45 CFR
74.61.
c. Unrelated Expenditures
Under this category several different expenditures were disallowed as
unrelated to the Head Start program. Although the appellant submitted
documentation in this category, it is (7) irrelevant because the
documentation for these costs was not at issue. The respondent
questioned the benefit to the Head Start program, not whether the
amounts were expended.
The respondent disallowed $250 for a trip to Niagara Falls. The
appellant argued that the trip to Niagara Falls was not solely to view
one of the "Wonders of the World," but also for the group, American
Indian students, to visit an Indian reservation. The appellant argued
that this trip served to expose the students to a personal experience
relating to their heritage, thereby enhancing their self-esteem.
Although Head Start field trips in all cases are not unallowable, the
appellant has not demonstrated that its trip to Niagara Falls, New York
was allowable. Except for the argument noted above, the appellant did
not provide any information about the trip including how many children
want and how time was spent. Further, the appellant did not argue that
a similar experience was not available in the surrounding Cleveland
area. The appellant failed to show the benefit to the program or that
costs were reasonable.
The respondent disallowed the remaining costs in this category for
Cleveland Brown football tickets, theater tickets, Christmas gifts, and
a Staff/Parent Christmas party. The appellant argued that purchase of
football tickets served as a way of getting fathers involved in the
program. Further, the appellant argued that activities such as a
Christmas party act to maintain parent involvement in the program, and
that, traditionally, toys, candy, and other related items were purchased
for the children and their families. The appellant argued that this
practice has never been challenged as a questioned cost in former audits
and should be an acceptable expenditure. The appellant did not comment
on the purchase of theater tickets.
Part 74 of 45 CFR, Appendix F, G. 12 states:
Entertainment costs. Costs of amusement, diversion, social
activities, ceremonials, and incidental costs relating thereto, such as
meals, lodging rentals, transportation, and gratuities, are unallowable.
The appellant argued that the purchase of football tickets was made
to encourage participation by the fathers, but the appellant failed to
show how this activity benefitted the child or how it furthered the
goals of the Head Start program. The Head Start program involves
children of approximately 3 to 5 years of age. It is unclear whether
these children accompanies their parents to football games or the
theater, and even if they did, there is no showing how this would bring
the participation of the parents in the development, conduct, or
direction of the Head Start program. The (8) appellant has not shown
why the purchase of football and theater tickets should not be viewed as
mere entertainment costs.
Similarly, as with trips, the provision of toys and the holding of
parties with the children present might in some circumstances be
considered as being within the Head Start purpose of "providing social
benefit as will aid the children to their full potential." However, the
appellant did not sufficiently document the benefit to the program. For
example, the appellant did not show how a staff/parent party, without
children, would benefit the Head Start program. The appellant did not
provide a list or other evidence to show the amount of money spent on
gifts for the staff, for the parents, and for the children, and if gifts
were bought for people other than the children, how they would benefit
the program. The appellant did not provide any documentation to show
those costs which were directly allocable to the children and,
therefore, would possibly have been allowable.
d. Duplicate Claims
The respondent disallowed $300 of a $600 payment claimed for
utilities because the payment was inconsistent with the lease agreement
under which the payment was made and appeared exorbitant. The
respondent found that the lease agreement required $300 payments and,
therefore, disallowed the remaining $300 as duplicative. The
appellant's delegate agency stated that an informal agreement, in
addition to the formal lease, existed whereby the delegate agency agreed
to pay an increased amount for utilities at its center of $300 per
month. The delegate agency did not state whether this agreement was
made with a utility company, the owner of the building, or someone else.
(Appellant's June 8, 1984 submission, Exhibit D at page 6) The appellant
stated that it had no information regarding the usual amount paid for
utilities under the terms of the lease, but that it believed the amount
to be reasonable and allowable.
Duplicate payments are unallowable and provide no benefit to the Head
Start program. 45 CFR Part 74, Subpart Q, Appendix F, paragraph B.2.
Whether or not the oral agreement is binding between its makers, the
appellant has not shown why the respondent should allow these costs.
The appellant's delegate agency did not contest the fact that it had a
written agreement which provided for $300 utility payments, only that it
had an additional oral agreement. The respondent was responsible only
for $300 payments approved by it and as stated in the written lease
agreement. Moreover, a statement by the appellant that it believed the
costs to be reasonable, without further documentation, is a mere
conclusory statement.
(9) The respondent disallowed $4,309 for double payments to employees
which also resulted in double payments of $260 for duplicate fringe
benefits. The respondent disallowed an additional $2,342 for duplicate
payroll checks. The appellant argued that the disallowance by the
respondent for double payments to employees was in error because the
additional payments were actually bonuses. (Appellant's June 8, 1984
submission, Brief, p. 2) Similarly, in one submission, the appellant
argued that the disallowance for duplicate payroll checks was in error
because the payments were bonuses. (Appellant's June 8, 1984 submission,
Brief, p. 2) In an earlier submission, on January 31, 1984, the
appellant argued that these payments were made in order to assure that
comparable salaries were paid.
Duplicate payments to employees or duplicate fringe benefits are not
allowable costs to be charged to a Head Start grant. The Guide for
Audits of Head Start Program Grants provides that auditors must
determine whether:
The salary or wage rate of each individual whose pay is tested agrees
with the organization's approved rate for that individual;
The grantee's salary rates for professional personnel do not exceed
that specified in the approved grant proposal or as otherwise approved
in writing by OCD;
The hours paid for the based upon approved time sheets or other
supporting documents.
Part 74 of 45 CFR, Appendix F. G.6.(B)(1) states:
Compensation is paid in accordance with policy, programs, and
procedures that effectively relate individual compensation to the
individual's contribution to the performance of grant or contract work,
result in internally consistent treatment of employees in like
situations, and effectively relate compensation paid within the
organization to that paid for similar services outside the organization.
The appellant argued that the duplicate payments were really bonuses
(made by delegate agencies to their employees). The appellant did not
provide any evidence to show that it had received respondent's approval
of the bonuses if the salaries were increased above the grant approved
level, or whether the bonuses would increase the salary levels to market
rates, or whether the same individuals were receiving only one bonus.
The regulation at 45 CFR Part 74, Appendix F, G.6 requires compensation
paid within a grantee's organization to effectively relate to what is
paid for similar services outside the organization. Moreover, the
appellant did not provide (10) any written personnel policies for
granting bonuses, which is also a requirement of 45 CFR Part 74.
Indeed, the appellant's delegate agency, Neighborhood Centers
Association, stated that it had no provision for bonuses in its
personnel practices and that the payments represented cost of living
increases. (Appellant's June 8, 1984 submission, Exhibit D)
Neither of the appellant's arguments regarding duplicate payroll
checks are sufficient to overturn the disallowance. If, as in the
appellant's earlier argument, the payments were cost of living
increases, the source documentation requirements of 45 CFR 74.61 would
be applicable. If the payments were in fact bonuses, the standards as
discussed above would be applicable. In neither instance has the
appellant provided the required documentation.
e. Unallowable or Overstated Costs
The respondent argued that twenty-four payments totalling $3,736
listed in the audit report as overtime payments were really bonuses paid
from surplus funds. The appellant argued that the payments were
actually cost of living increases, and that the retroactive additional
payments were issued as separate checks to avoid excessive income tax
had the payments been combined with regular paychecks. Whether a
payment is considered a "cost of living" increase or a "bonus,"
the
extra money is taxable income to an employee on which taxes will
eventually have to be paid. Therefore, the appellant's explanation for
the separate checks is not reasonable.
Even if we were to accept the appellant's position, although the
appellant has not produced any evidence to support its claim that the
payments were actually cost of living increases, the appellant has
failed to provide any records in accordance with 45 CFR Part 74,
Appendix F, G.6 which requires the appellant to relate compensation paid
within the organization to that paid for similar services outside the
organization. Moreover, as stated in the Inadequate Documentation
section noted above, it is the responsibility of the appellant to
maintain the required records to document its allowable costs.
(11) Conclusion
For the reasons discussed above, we uphold the disallowance of
$166,018. /1/ Over a period of several months following receipt of the
disallowance, the appellant submitted a substantial amount of additional
documentation in support of its claim. At the Board's request, the
respondent reviewed the material and made subsequent reductions in the
disallowance and issued a revised disallowance letter. The appellant
continued to appeal the revised disallowance. The respondent noted the
total amount in dispute as $165,008 in its August 3, 1984 submission.
This is an error in calculation or typographical in nature. A review of
the actual figures indicated that, originally, the disallowance and
amount appealed totalled $1,310,024. The revised disallowance issued on
May 1, 1984 was $177,653. The respondent withdrew an additional $7,378,
and the appellant accepted $4,257 of the disallowance and submitted a
check for that amount to respondent, which reduced the disallowed amount
to $166,018. /2/ Moreover, for the period February 1, 1975
through January 31, 1976, the respondent pointed out instances, not at
issue here, where the audit firm overlooked cases of fraud and abuse
discovered by GAO although the firm had certified that adequate internal
controls existed within the appellant's organization. (Respondent's
August 3, 1984 submission, pp. 12-16) Obviously, the internal controls
were not adequate, given that GAO found evidence of embezzlement and
illegal loans. Additionally, we noted that for the year ending January
31, 1978, the audit firm apparently reached no conclusion on internal
controls (Exhibit 29, pp. 13-14) even though the Audit Guide for Head
Start Programs listed this as one of the purposes of an audit.
MARCH 19, 1985