Compliance Issues Related to Direct Charging, Clerical and Administrative Costs NCURA FRA Conference New Orleans, LA March 5, 2013

1. Introduction 2. History 3. Learning Objectives 4. HHS OIG Audit Issues 5. Tips for Audit Preparation 6. During the Audit 7. After the Audit 8. New NSF Audits Using Analytics 9. Other Federal Audits on the Horizon 10. Questions 11. Closing Copyright Agenda

Mark C. Davis Partner Attain Higher Education Phone – Robert S. Klein Consulting Associate Attain Higher Education Phone – Introduction Copyright

OMB Circular A-21 provides criteria for determining when clerical and administrative costs may be charged directly to projects. The Department of Health and Human Services Office of Inspector General (OIG) conducted an initial set of reviews at four universities late in the last decade to determine if universities are complying with OMB A-21 requirements. An additional eight universities were subsequently selected and are being reviewed. History Copyright

The purpose of this training is to provide: An understanding of the regulations related to direct charging of clerical and administrative salaries, including a review of examples where such costing treatment is appropriate. An understanding of when it would be appropriate to direct charge non- salary expenses that are normally treated as F&A costs. How to prepare for an OIG review of this area, including organizing and managing the supporting data requirements, adequately documenting the propriety of direct charges, submitting requested data to the OIG and negotiating issues that may arise during the conduct of the audit. Learning Objectives Copyright

The regulations governing the propriety of direct charging clerical and administrative salaries and direct charging of non-salary expenses that are normally treated as F&A costs are included in three parts of OMB Circular A-21: Paragraph F.6.b. provides guidelines for the determination of departmental administrative costs as direct or F&A costs. Exhibit C provides examples of “major Project” where direct charging of administrative or clerical salaries may be appropriate. Appendix A - CAS provides the Cost Accounting Standard which requires consistency in allocating costs incurred for the same purpose by educational institutions. Background - regulations Copyright

OMB A-21 Paragraph F.6.b provides that the salaries of administrative and clerical staff should normally be treated as F&A costs. These costs may be directly charged only under exceptional circumstances: “Major Project” Individuals are specifically identified with the project or activity The project explicitly budgeted for the administrative and clerical personnel. Background- Paragraph F.6.b Copyright

A “Major Project” requires an extensive amount of administrative or clerical support. This support is significantly greater than the routine level of support provided by academic departments. Should have written justification and approval Background – Paragraph F.6.b Copyright

Examples of “Major Project” – Direct charging of administrative and clerical salaries may be appropriate under the following circumstances: Large complex programs - Center grants, Program projects Extensive data accumulation, analysis, reporting, surveying, tabulation (e.g. epidemiological studies, clinical trials) Making travel and meeting arrangements for large numbers of people (e.g. conferences and seminars) Principal focus is preparation and production of manuals, large reports, books, monographs (excluding routine progress, technical reports) Geographically inaccessible to normal departmental administrative services (e.g. research vessels) Project specific database management; individualized graphics or manuscript preparation; human or animal protocols; multiple project- related investigator coordination. Background – Exhibit C Copyright

Provides for consistency in allocating costs incurred for the same purpose by educational institutions. Basic principle is that all costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. Prevents “double charging” of costs Key is in the interpretation and application of the phrases “incurred for the same purpose” and “like circumstances” Background – CAS Copyright

Non-salary expenses normally treated as F&A costs Office supplies Postage Local (basic) telephone services Membership dues Journals and subscriptions Examples of exceptional circumstances Postage – mail survey Local telephone – dedicated phone lines for telephone survey Background – F.6.b Non-Salary Copyright

Stated objective of the review at UCSF was: “To determine whether the University of California, San Francisco (University) has claimed reimbursement for administrative and clerical expenses as direct charges to the National Institutes of Health (NIH) grants and contracts when those costs should have been treated as indirect costs and recovered through the University’s negotiated Facilities and Administrative (F&A) rates.” HHS OIG Audit - UCSF Copyright

The audit objective specifically related to (1) non-academic salaries and (2) administrative costs other than salaries, A stratified variables random sampling methodology was employed by the HHS OIG to select the expenditure items to be reviewed. This methodology was applied so that the HHS OIG could project the dollar impact of the findings to the entire universe. Payroll – 195 items in three strata were selected Non-Payroll – 114 items in two strata were selected HHS OIG Audit - UCSF Copyright

Scope of the Review: Limited to two fiscal years – FYE’s ended June 30, 2005 and Limited to charges on NIH projects Scope included charges to subawards, as well as direct charges to awards. HHS OIG Audit - UCSF Copyright

UCSF preparations for the audit: Once the expense items were selected by sampling, a separate folder was created for each item in the sample. Each sampling item was treated as a separate “mini-audit”. A detailed check list was completed for each item in the sample. This required that all of the required documentation to support the transaction was obtained. In addition, people involved in the transaction were identified. The folders and checklists were essential in controlling the item’s status, and ensuring that the appropriate materials were sent to the HHS OIG. HHS OIG Audit - UCSF Copyright

UCSF preparations for the audit continued: Relevant criteria were included in the checklists. For instance, for sampling items that involved cost transfers, it would be essential to demonstrate that cost transfers were timely, approved at the appropriate level and adequately justified. The award document and revisions (including budgets), as well as the proposal documents related to the award against which the sampling item were charged were included in the folder. This proved absolutely essential in providing justification for direct charging the sampled item. HHS OIG Audit - UCSF Copyright

Issues during the audit: Obtaining required supporting information was more complex than may be expected. Significant coordination was needed with the UCSF Audit Management Group (including consultants), the UCSF accounting department, departmental personnel and payroll personnel in order to fully document each item. In some cases, the problem was made more acute, because certain departmental personnel had left UCSF. A significant amount of effort was spent going through proposal documents, award documents and amendments to awards to support the treatment of expense items as direct costs, rather than as F&A costs. This was the application of the OMB Circular A-21 criteria. HHS OIG Audit - UCSF Copyright

Major issues included: Payment issues Payroll expense transfers Internal control / allocation issues Award documentation issues Sub award issues PAR issues Non-payroll expense transfers Departmental issues HHS OIG Audit - UCSF Copyright

Ensure that policies are in place and are followed. Conduct necessary training sessions. Conduct an internal review to ensure compliance with policies Ensure that expense items are properly reviewed before charging them as direct expenses to projects. Ensure that adequate documentation is obtained and retained at the time the expense is incurred. Ensure that approval for unusual expenses is received from awarding agencies. Assure that employees understand the regulations. Tips for Audit Preparation Copyright

Know the objective and the scope of the audit. To the extent possible, control the pace and the timing of the audit. Create a system to stay organized during the audit. Notify everyone who may be involved with the audit upfront and keep them involved. Form an Audit Management Team including (1) Internal Audit, (2) Cost Analysis, (3) Accounting, (4) Payroll, (5) Legal Counsel, etc. Carefully monitor and control OIG interviews with employees. During the Audit Copyright

Make sure that any written information sent to the auditors has been carefully reviewed internally. This will help ensure that the auditors receive what they have requested. Anticipate issues that the auditors may have with particular expense items. It may be that additional supporting information is needed to support the costing treatment of some items. If errors in approving cost items are encountered, correct them, and inform the auditors of the corrections. This can “take the wind” out of potential issues. The federal government likes it when institutions take responsibility for corrective actions. Be prepared to challenge and negotiate issues in the audit report. During the Audit Copyright

Review other fiscal years not included in the audit scope to determine if compliance issues exist in those years. Create / modify policies and procedures as needed to ensure compliance. Create training modules for employees who are new or need a refresher course. Retain all documentation related to the audit for the period prescribed by regulation. After the Audit Copyright

The NSF OIG has started a series of comprehensive audits at universities, which include the F.6.b. issue as well as other compliance issues. The University of California campuses at Santa Barbara and Davis and Los Angeles are going through this review. The NSF Audits include a review of: Summer salaries Cost Sharing F.6.b. issues Application of the F&A rate Charging for unallowable costs Propriety of use of fellowship funds NEW NSF AUDITS WITH ANALYTICS Copyright

NSF Audit is using “analytics” to test compliance, rather than statistical sampling. Analytics involves analysis of transactions by use of automated systems to identify “areas of risk”. The work involves use of computer generated data from the university and from NSF databases. Specific transactions that were identified as non compliant were questioned. Use of analytics is controversial because of the use of the databases leads to questions about the reliability of the databases. Also, the NSF practice of requesting information through many sources at the UCSB campus, rather than through one central source, is controversial and not standard audit practice. NSF Audit - Analytics Copyright

Additional HHS OIG audits on the F.6.b. issue are possible Additional NSF Compliance audits, using analytics, are possible The HHS OIG is planning audits of the Federal Demonstration Partnership campuses which are testing the new new “project based” time and effort reporting system. Other Federal Audits on the Horizon Copyright

QUESTIONS AND DISCUSSION Questions and Discussion. Copyright

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