DISTRICT AUDITING UPDATE INDIRECT COST AND TIME DISTRIBUTION Melissa A. Austin, Audits Manager SC State Department of Education Office of Finance District Auditing and Field Services Section

2 What are Indirect Costs? Indirect costs are those expenses of doing business that are not readily identifiable with the activities of a grant or contract but are, nevertheless, incurred for the joint benefit of those activities and other activities or programs of the organization Two Criteria –they are incurred for a common or joint purpose benefiting more than one cost objective and –they are not readily assignable to the cost objectives specifically benefited.

3 Examples of Indirect Cost Functions accounting auditing budgeting payroll personnel purchasing

4 Examples of Direct Costs Salaries and Wages Supplies and Materials Other employee fringe benefits for direct labor employees Travel of direct labor employees Equipment for a specific program or grant Consultant services for a particular program or grant

5 Computation of Indirect Cost Rates LEAs submit audited expenditures to the SCDE by December 1 of each year. Data is entered into our mainframe system. Reports are run to exclude certain costs and treat certain costs as direct and indirect. Audited expenditures for the second preceding fiscal year are to be used in the completion of the indirect cost proposals for a given fiscal year. For example, the rates for FY generally would have been based on FY data. For FY only, an average method of the past 3 fiscal years rates multiplied by 90% of the average rates were used per the USDE review.

6 EXCLUDED COSTS RESTRICTED AND NONRESTRICTED Facilities Acquisition and Construction (Function 253) Food Services (Function 256, food/supp) Other Charges (Function 400 series, trans. exp.) Debt Service (Function 500 series) Equipment (Object 540 series)

7 INDIRECT COSTS (Restricted) Board of Education (only account audit services) Fiscal Services (Function 252) Internal Services (Function 257) Internal Auditing Services (Function 259) Central Support Services (Function 260 series)

8 Indirect Costs (Unrestricted) Board of Education (only account audit services) Fiscal Services (Function 252) Operation and Maintenance of Plant (Function 254) Internal Services (Function 257) Internal Auditing Services (Function 259) Central Support Services (Function 260 series) Depreciation or Use Allowance on Buildings and Equipment (Data Supplied by LEAs)

9 USE OF RESTRICTED RATE EDGAR 34 CFR Part states that the restricted rate is used for programs with a statutory requirement prohibiting the use of Federal funds to supplant non- Federal funds. This holds true for the grantee and any subgrantees.

10 Federal Review April 2007 – USDE Indirect Cost Group performed a review of the indirect cost allocation plan the SCDE uses for LEA’s Findings noted – –Terminal Leave Payments Creation of new object codes 140 and 150 –0140: Compensation paid to employees for accumulated terminal leave on termination of employment. –0150: The second annual leave payment to eligible TERI employees at retirement Will be charged indirectly to federal programs (However, we may end up excluding the terminal leave payments altogether). –Monitoring of time distribution The SCDE must monitor LEA’s to ensure that they are in compliance with the A-87 requirements for time distribution records.

11 Regulations OMB Circular A-87 “Cost Principles for State, Local, and Indian Tribal Organizations” Paragraph 8h establishes requirements for the support of salaries and wages in regards to federal awards. EDGAR 34 CFR Part 76

12 Documentation Requirements Charges to federal awards for salaries and wages, whether treated as direct or indirect costs, will be based on payrolls documented in accordance with generally accepted practice of the government unit and approved by a responsible official of the government unit

13 Documentation Requirements Certifications – At least semi-annually, employees who are expected to work solely on a single Federal award or cost objective are required to certify that they indeed worked solely on that program for the period covered by the certification. –Single Cost Objective – 100% from a single funding source, 100% with a single type of student/class which may be funded from federal, state, and/or local funds (ex. Voc. Ed, IDEA) Not always possible to tell by looking at funding only whether an employee is single or multiple cost objectives. Single cost objective will be determined by the employee’s activities, not solely by funding Must be signed by the employee or the supervisory official having first-hand knowledge of the work performed by the employee. No standard form

14 Documentation Requirements (Continued) Personnel activity reports – For employees who work on multiple activities or cost objectives, a distribution of their salaries or wages will be supported by PAR’s Required when –More than one federal award –Federal award and non-Federal award –Indirect cost activity and a direct cost activity –Two or more indirect cost activities allocated using different bases –An unallowable activity and a direct or indirect cost activity

15 PAR REQUIREMENTS Must reflect an after the fact distribution Must account for the total activity for which an employee is compensated –For a non-federal activity, it is okay to just state “non-federal activity” without including any additional detail –Federal activities must be described Must be prepared monthly Must be signed and dated by the employee

16 Documentation Requirements (Continued) Salaries and wages of employees used in meeting cost sharing and matching requirements of Federal awards must be supported in the same manner as those claimed as allowable costs under Federal awards

17 Adjustments LEA’s are required to adjust time from budgeted hours to actual hours Adjustments must be made at least quarterly Costs charged to Federal awards to reflect adjustments made as a result of the activity actually performed may be recorded annually if the quarterly comparisons show the differences between budgeted and actual costs are less than ten percent.

18 AUDITS Documentation of certifications and personnel activity records should be readily available for audits by independent auditors, the SCDE, or federal auditors. The length of time documentation should be kept shall be in accordance with state and federal regulations, normally between 3-5 years.

19 REVIEW Certifications, at least semi-annually, are required for employees who are expected to work 100% on a single cost objective Personnel activity records (PAR’s) (at least monthly) are required for those employees who work on multiple cost objectives. Adjustment of budgeted hours to actual hours must be made at least quarterly unless differences are less than ten percent. If less than 10%, the adjustments can be made annually. Keep documentation for the required period of time.

Melissa A. Austin Audits Manager 1429 Senate Street, Room 403 Columbia, SC