DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: City of Chicago
Department of Human Resources
Docket No. 86-91
Audit Control Nos. 05-15033 and 05-15364
Decision No. 820
DECISION
The City of Chicago Department of Human Resources (Grantee) appealed
the
April 22, 1986 decision of the Office of Human Development
Services
(Agency) disallowing $286,002 charged by Grantee to its Head Start
grant
for program year (PY) 1978. 1/ Grantee later withdrew its appeal
with
respect to $59,849 of the disallowed costs. (Grantee's reply
brief, p.
3) Grantee contended principally that the disallowance was
improper
since the Agency had previously issued a
determination which Grantee
argued allowed the costs. As discussed
below, we find that Grantee
reasonably believed that the Agency's earlier
determination allowed the
costs now in dispute. We further find that,
because of its reliance on
the earlier determination apparently allowing the
costs, Grantee no
longer has available to it
documentation which it had
previously
assembled in support of all but $35,877 of the disputed
costs. There is
no evidence, however, that Grantee ever had supporting
documentation for
the $35,877. Accordingly, we reverse the disallowance
in the amount of
$190,276 [$286,002 - ($59,849 + $35,877)], and uphold the
disallowance
of the remaining amount.
Background
The costs in question were originally disallowed by the Agency
on
September 30, 1982 on the ground that there was no documentation
which
supported them. The disallowance was based on an original
and
supplemental audit (ACN 05-15033 and
ACN 05-15364) performed by an
auditor, Washington, Pittman and McKeever
(WPM), hired by Grantee to
comply with the requirement at 42 CFR 1301.12 for
an independent audit
each fiscal year that grant funds are received.
The disallowance letter
listed all the costs in question under the heading
ACN 05-15033 although
some of the costs were in fact questioned in ACN
05-15364. Grantee's
appeal of that disallowance (docketed as
No. 82-196) was dismissed
by the Board without
prejudice to permit the Agency to consider
additional documentation to be
provided by Grantee.
A revised disallowance determination was issued by the Agency on
November
17, 1983, purporting to be the Agency's "final determination
with respect to
the costs questioned in our September 30, 1982
correspondence." The
revised determination consisted of a listing, by
audit control number, of the
amount of the "Original Disallowance" based
on various audit findings and the
amount of the "Final Disallowance" for
each finding. It showed a "Final
Disallowance" of "0" for $35,887
claimed as in- kind contributions
which was originally disallowed based
on ACN 05-15033. It omitted any
mention of $353,590 originally
disallowed based on ACN 05-15364 which
represented expenditures incurred
under various programs run by Grantee's
delegate agencies. (The revised
determination did not list ACN 05-15364
or show the $353,590 under ACN
05-15033.) The revised determination
also disallowed amounts for
program years other than PY 1978, which Grantee
appealed to this Board.
That appeal (docketed as No. 83-272) was dismissed
without prejudice so
that the Agency could review WPM workpapers which
Grantee contended
supported the charges to the grants for those years.
In reviewing the workpapers, however, the HHS Audit Agency noted that
the
revised determination had erroneously omitted the $353,590 component
of the
September 30, 1982 disallowance. It recommended that this
disallowance
be reinstated except to the extent that additional
documentation which
Grantee had provided to WPM supported the costs.
The Agency subsequently
issued the disallowance in question here, which
reinstated $250,115 of the
$353,590 as well as the $35,887 specifically
allowed in the Agency's November
17, 1983 revised determination. The
Agency contended in its brief
submitted to the Board in the present case
that the reduction of the $35,887
disallowance to zero in the revised
determination was a typographical
error.
Grantee's Position
Grantee asserted that it understood the
Agency's November 17, 1983
revised
determination to allow the costs in question
here and
that, as a result, it was not alerted that relevant documentation
should
be located or preserved. Grantee stated specifically that
original
documentation relating to expenditures made by one of its
delegate
agencies, the Chicago Board of Education (CBE), had not been
retained
when CBE moved its records sometime after the date of the
revised
determination. Grantee argued that it should not be penalized for
its
failure to have the necessary documentation under
these
circumstances.
Grantee asserted, moreover, that $353,590
was
properly
documented prior to the issuance of the revised determination
on
November 17, 1983, thus
justifying its belief that these
costs
had been allowed. Grantee pointed out that, in letters it
received from
its auditor dated March 2 and April 12, 1983, WPM had
"cleared," or
found allowable, all but $59,849 of the $353,590
based on additional
documentation furnished by
Grantee. (In addition, Grantee contended
initially that the remaining
$59,849 was cleared in informal meetings
between WPM and Agency staff prior
to the revised determination.
However, the Agency responded that there was no
evidence supporting this
contention, and Grantee later stated that it was not
disputing the
$59,849 disallowance.)
Grantee also argued that the Agency should have allowed $22,108 in
CBE
costs originally questioned by WPM which WPM later cleared. The
Agency
declined to allow the costs based on the Audit Agency's finding that
WPM
had cleared the costs without performing any testing to
determine
whether they were adequately documented. Grantee argued that
it should
not be held responsible for any errors in judgment or procedure
made by
WPM, asserting that this was a matter of concern only between WPM
and
the Agency. (Since the $22,108 was part of the costs apparently
allowed
in the revised determination, this was an alternative argument.)
Finally, although Grantee asserted that no original documentation of
any
of the CBE costs in dispute was any longer available, it submitted
some
evidence which it contended supported the costs. Specifically,
Grantee
contended that an independent audit of CBE performed for 1982 and
1983
(by a firm other than WPM) validated CBE's accounting system.
Grantee
also alleged that an audit by the City Comptroller's Office of all
CBE
vouchers for Head Start PY 1978 found that Grantee's
allowable
expenditures exceeded the reimbursement it received.
Discussion
Grantee's argument that it reasonably understood the revised
determination
to allow the costs in question and that it should not be
penalized for any
failure to retain the necessary documentation appears
to be predicated on
records retention requirements in the applicable
regulations. Subpart D
of 45 CFR Part 74 provides that records shall be
retained three years from
the day the grantee submits to HHS its
expenditure report for the grant
period, and that, if an audit or other
action has been started before the
expiration of the three-year period,
the records shall be retained until
completion of the audit and
resolution of all issues
which arise from it. Thus, Grantee
would
not have had to retain documentation for the costs in question after
the
revised determination was issued if it had had reason to believe
that
this resolved the audits questioning the costs. (The three-year
period
would have expired before the issuance of the revised
determination
assuming that Grantee submitted its expenditure report within
90 days
after the end of PY 1978, as required
by 45 CFR 74.73(d).)
We find that Grantee was justified in assuming that the
$353,590
originally disallowed based on ACN 05-15364 was allowed by the
revised
determination. In its letters dated March 2 and April 12, 1983,
WPM
found, based on additional documentation provided by Grantee, that
a
total of 293,741 of the $353,590 originally questioned in ACN
05-15364
was "satisfactorily resolve[d]." (Grantee's appeal file, Ex. 6 and
8)
The mere existence of the letters was not a sufficient basis for
Grantee
to assume that the costs were allowed since the function of an
auditor
is merely to recommend the appropriate treatment of audited
costs. (See
Pennsylvania Department of Public Welfare, Decision No.
451, July 29,
1983) However, the Agency's November 17, 1983 revised
determination
stated:
We have
reviewed the additional documentation submitted by
.
.
. [WPM] regarding the above audit control and
docket
numbers [which included ACN 05-10533 and Docket No.
82-196].
The following represents our final determination
with
respect to the costs questioned in our September 30,
1982
correspondence.
(Grantee's appeal file, Ex. 10) As noted previously, the
original
disallowance identified the $353,590 disallowed based on ACN
05-15364
under the number of the original audit, ACN 05- 10533. Thus,
there is
no reason to believe that the documentation referred to in the
revised
determination did not include documentation for the costs questioned
in
ACN 05-15364 which were cleared in WPM's March 2 and April 12,
1983
letters. Grantee might have believed, therefore, that the $353,590
was
omitted from the revised determination because the Agency had
allowed
the costs based on this documentation. We reach this conclusion
despite
the fact that WPM's March 2
and April 12, 1983 letters did
not
clear the full $353,590 originally questioned in ACN 05-15364.
While it
is conceivable that Grantee could have noted this discrepancy if it
had
gone back and performed an item-by-item comparison involving
the
original disallowance, the revised determination, and all
relevant
supporting documentation, Grantee would have had no reason to make
such
a comparison in view of the assurance that the revised determination
was
a "final" resolution of the costs previously questioned.
Particularly
in this case, such a comparison would have been quite burdensome
since
the disallowance involved several program years and several items
of
cost for each year. Moreover, Grantee here alleged that it had
been
under the impression that the remaining amount had been resolved
in
informal conferences before the revised determination was
issued.
Accordingly, we conclude that Grantee reasonably understood the
Agency's
revised determination to allow the $353,590
originally disallowed on
September 30, 1982, of which $250,115 is now in
dispute.
Since Grantee reasonably thought the $353,590
had been allowed,
it
was not required to retain supporting documentation for these costs
beyond
the three-year period specified in 45
CFR 74.21. However,
this Board has previously
held that the expiration of the records
retention period would not
necessarily preclude a disallowance for
failure to document costs. This
caveat results from the interplay
between the records retention requirement
and the fundamental principle
of grants management (articulated in the cost
principles at 45 CFR Part
74) that a grantee is required to document its
costs. Missouri
Department of Social Services, Decision No. 395, February 28,
1983.
(See also California Department of Health Services, Decision No.
666,
June 28, 1985)
Here, however, the extenuating circumstances referred to in Missouri
are
not present and we think it would be unjustfiable to impose the
burden
to document on the Grantee several years after the 1983 expiration
of
the document retention period. Grantee clearly had
supporting
documentation for that part of the $353,590 now in dispute, as
evidenced
by WPM's March 2 and April 12, 1983 letters. A significant
portion of
that documentation was disposed of when Grantee's delegate agency,
CBE,
moved its records to another facility. There is no indication in
the
record that any of the remaining documentation, generated by
numerous
delegate agencies, is readily retrievable at present. Moreover, as
we
previously indicated, Grantee acted reasonably in relying on the
November 17, 1983 revised determination as a final resolution of the
costs
previously questioned and in not attempting any further efforts to
retrieve
and retain documentation relating to those costs. Accordingly,
we
conclude that these costs cannot now be disallowed for lack of
documentation
since the records retention period expired.
In the case of the $35,887 originally disallowed
based on ACN
05-15033, however, there is no
indication in the record that Grantee
provided documentation to support these
costs prior to the date of the
revised determination either to WPM or to the
Agency. Accordingly,
regardless of whether Grantee reasonably believed
that the costs had
been allowed, it cannot, in accordance with our Missouri
and California
decisions, use the records retention requirement as a shield
to overcome
its failure to document the costs.
As additional support for our reversal of all but $35,887 of the amount
in
dispute, we note that an analysis of the disallowance submitted with
the
Agency's brief indicates that the Agency allowed $182,157 based on
WPM's
March 2, 1983 letter. (Agency's appeal file, Ex. 2) Although
this
analysis of the disallowance is inconsistent with the analysis
accompanying
the April 22, 1986 disallowance letter, the Agency's
revised analysis
submitted with its brief gives explicit indication that
the Agency had
accepted the March 2, 1983 clearance letter.
In view of our conclusion that the costs related to ACN 05-15364 which
are
now in dispute are allowable, we need not address Grantee's argument
that
$22,103 of this amount cleared by WPM without adequate testing
was
allowable. We also need not address Grantee's
contention that the
independent audit and the City Comptroller's audit of CBE
adequately
support the disallowed costs attributable to CBE.
Conclusion
On the basis of the foregoing, we uphold $95,726 of the disallowance
and
reverse the remainder.
_________________________ Norval D.
(John)
Settle
_________________________ Alexander G. Teitz
_________________________ Donald
F.
Garrett Presiding Board Member
1. This was part of a disallowance totalling
$392,022 for PY 1976
through 1979. Grantee only appealed that part of
the disallowance
relating to PY