DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Minnesota Department of Human Services
Docket No. 87-78
Decision No. 911
DATE: October 19, 1987
DECISION
The Minnesota Department of Human Services (State, Minnesota) appealed
a
determination by the Family Support Administration (FSA,
Agency)
disallowing $531,194 claimed by the State under Title IV-A of the
Social
Security Act (Aid to Families with Dependent Children (AFDC)).
FSA
disallowed the costs on the basis that the claim was filed later
than
the two-year time limit provided in federal statute and
regulations.
Minnesota maintained that the time limit was not applicable
because its
claim resulted from an "audit exception" and thus qualified for
a
statutory exception from the limit.
The sole issue in this case is whether the Agency review which led to
the
disallowed claim was an "audit" for purposes of Title IV-A; if so,
it is
undisputed that the "audit exception" applies and the claim is
not
time-barred.
As our analysis below explains, the following conclusions are clear
from
the record: (a) the Agency could point to no explicit statutory
or
regulatory definition of the term "audit," and the Agency's review
here
clearly falls within the ordinary meaning of the term; and (b)
the
Agency's review in this case was an extensive financial review which
did
not differ significantly from a regular audit (such as a review by
HHS
auditors from the Office of Inspector General (OIG)) in either
its
elements or its effect. Therefore, the Agency's disallowance
was
unreasonable and cannot be upheld.
Factual Background
This case involves State claims submitted under two related programs
now
administered by components of FSA: the Refugee Resettlement
Program
administered by FSA's Office of Refugee Resettlement (ORR), and the
AFDC
program administered by FSA's Office of Family Assistance (OFA).
Each
program pays 50 percent of a state's administrative costs related
to
persons eligible for assistance under both programs. As a result of
an
ORR review (the "audit" in question) completed in March, 1985,
ORR
determined that Minnesota had improperly claimed 100 percent
of
administrative costs from the refugee program during the period
October
1981 through December 1984. ORR told Minnesota to adjust its
claim to
meet the 50 percent limit, and indicated that the State should seek
the
rest of the costs from AFDC. Minnesota did not contest ORR's
decision.
On June 18, 1985, Minnesota submitted a claim for the
now-unfunded
portion of costs to OFA. OFA allowed costs claimed within the
two-year
statutory limit, but disallowed those outside that limit
(i.e.,
expenditures made from October 1981 through March 1983). The
question
of timeliness aside, FSA did not dispute the State's assertion
that
these costs are otherwise allowable under AFDC. State Brief, p.
12.
The Financial Review
An ORR Financial Operations Specialist conducted a nine-day series
of
"monitoring visits" in January and March 1985. ORR letter
announcing
visit, State Ex. B. These visits were characterized by the
State as
"the most extensive inspection of the financial operations
of
Minnesota's Refugee Assistance Program ever undertaken. . . ."
State
Brief, p. 8. During this review, the ORR Specialist examined:
1) the Minnesota Refugee
Assistance Program budget and
spread
sheets 1/;
2) abstracts of the financial
reports submitted by the
counties
to the
State 2/;
3) Financial Status Reports,
prepared by the State for ORR 3/;
4) the payroll records of the Minnesota Department of
Human
Services,
including the records of employees whose
salaries
were
paid in part by ORR;
5) the work papers detailing how
the State
allocated
administrative costs among its programs;
6) the Minnesota Department of
Human Services
Statewide
Accounting System Budget-Expenditure-Encumbrance Report;
7) the Minnesota Department of
Finance Statewide
Accounting
System Expenditure by (type of) AID Report;
8) several social service
contracts between the State and
third
parties;
and
9) a sample of county case files
containing information
on
individual
eligibility determinations and benefit payments.
State Ex. A, A-1 through A-8.
On March 29, 1985, at the conclusion of her visits, the ORR
Specialist
conducted an exit conference with the director of the Minnesota
Refugee
Assistance Program and several other State employees. At
this
conference, she informed them of the billing error, instructed them
to
recalculate the ORR claim, and indicated that AFDC should be billed
for
the ORR-ineligible costs. State Ex. A, p. 6; Ex. C, p. 3.
Statutory and Regulatory Background
Section 1132(a) of the Social Security Act requires claims by states
for
expenditures during a calendar quarter under the various
public
assistance programs to be filed "within the two year period which
begins
on the first day of the calendar quarter immediately following
such
calendar quarter," or payment will not be made. It further
provides
that this requirement is not to be applied "so as to deny payment
with
respect to any expenditure involving court-ordered retroactive
payments
or audit exceptions, or adjustments to prior year costs."
(Emphasis
added).
These statutory provisions are implemented by 45 CFR Part 95, Subpart
A
(1981). The regulatory provisions on time limits in general track
the
statutory requirements; the exceptions in the statute are restated in
45
CFR 95.19.
The section pertinent to this appeal is 95.4, Definitions. It
includes
the following:
Audit exception means a proposed
adjustment by the responsible
Federal
agency to any expenditure claimed by a State by virtue
of
an audit.
The term "audit" is not defined in section 1132 or Part 95, Subpart A.
Analysis
A. THE STATE'S ARGUMENT
In its brief, the State contended that the financial management
review
conducted by the ORR Financial Operations Specialist was an
audit. The
State relied on the Board's acceptance in prior cases of the
common
understanding of the term "audit" as involving the formal inspection
of
accounting and financial records. This common understanding
derives
from the ordinary dictionary meaning. 4/ See also,
Black's Law
Dictionary.
In support of its argument, the State recounted that during the nine
day
review the ORR Specialist inspected numerous accounting and
financial
records, analyzed spread sheets, reviewed the counties' claims
for
reimbursement and their supporting reports, and reviewed the
State's
cost allocation plan to determine whether it properly allocated
the
administrative costs of providing assistance to refugees. The
State
contended that ORR thoroughly investigated the nature and extent of
the
problems with the State's claims for Refugee-AFDC administrative
costs.
The State argued that this review "bears a close resemblance to
an
audit" and "little resemblance" to a "monitoring" or "program
review."
The State cited a regulatory definition of program review as
an
"examination of case records and quality control systems to
monitor
recipient eligibility." The State contended that by regulation
an audit
is conducted to determine whether State programs are being operated
in a
manner that encourages prudent use of program funds and provides
a
reasonable degree of assurance that federal funds are being
properly
expended for an appropriate purpose. State Brief, p. 10,
citing 45 CFR
201.12. The State also maintained that the ORR review was "for
all
practical purposes" an audit because the Specialist examined the
same
financial and accounting documents that would have been inspected
during
an HHS audit agency audit and the effect of the review was identical
to
an audit.
B. THE AGENCY'S ARGUMENT
The Agency's position was that the ORR review was not an audit,
conceding
that "[i]f, indeed, the 1985 ORR review had been an actual
audit, the
expenditures in question would have qualified for the
statutory exception to
the time limit." Agency Brief, p. 6. The
Agency emphasized
that in defining an audit for purposes of determining
exceptions to the
timely claims requirement, the Board should adhere to
the principle that
"these exceptions were only intended to be available
in a small number of
cases, such as when circumstances beyond the
state's control prevented the
filing of its claims on time," citing New
York State Department of Social
Services, Decision No. 521, March 6,
1984, and Massachusetts Department of
Public Welfare, Decision No. 796,
October 6, 1986. Id. at 5.
The Agency relied heavily on the declaration of an official of its
Office
of Financial Management. That official alleged that the Agency
did not
conduct audits of Refugee Resettlement or Title IV-A programs as
that term is
used in the Comptroller General's Standards for Audit of
Governmental
Organizations, Programs, Activities, and Functions (the
"Yellow Book") and
the American Institute of Certified Public
Accountants' Statement of Auditing
Standards (SAS). He alleged that the
Inspector General's Office of
Audit is authorized by 45 CFR 201.12 to
audit Title IV-A programs and that
the financial management review by
ORR was an exercise of management
responsibilities. Agency Ex. J.
The Agency argued that the ORR review was not an audit because 1) the
ORR
Specialist had worked closely with the State, whereas auditors do
not foster
close working relationships with the State staff concerning
programs to be
audited; 2) the ORR Specialist did not quantify the 50
percent federal share
improperly billed to the Refugee Resettlement
Program, but asked the State to
do so, whereas an auditor always seeks
to determine the amount of improper
expenditures and would not have
asked the State to do so; and 3) the ORR
report required Minnesota to
comply with certain actions, whereas an audit
only recommends corrective
actions to management staff. Agency Brief,
p. 11. The Agency concluded
that FSA's characterization of the ORR
review deserved substantial
deference. Id. at 12.
The Agency noted that in Illinois Department of Public Aid, Decision
No.
715, January 6, 1986, the Board emphasized that there must be a
"direct
cause and effect relationship between the audit exception and
the
claim." Illinois, p. 6. The Agency maintained that the
quantification
of deficiencies is a required step in the conduct of an audit
and that
the ORR Specialist's asking the State to perform that task disturbed
the
cause and effect relationship. The Agency also disagreed with
the
State's contention that the effect of the financial management
review
was the same as that of an audit, for the same reason. Finally,
the
Agency warned that if the Board found the ORR review to be an audit,
FSA
would be discouraged from examining the propriety of questionable
claims
because of the possibility that as soon as it chose to act the
audit
exception would be triggered.
C. DISCUSSION
This case involves administrative costs that presumably are
otherwise
allowable and were initially timely claimed. When the Agency
examined
the State's financial and other records, it discovered that the
State
had billed ORR for 100 percent of the cost when it should have
billed
AFDC for 50 percent and ORR for 50 percent. By then more than
two years
had elapsed since the expenditures were made and the claim against
AFDC
was not timely unless it was the result of an audit exception.
As
explained below, we find that it was.
"Audits" vs. "OIG Audits"
The ORR review was an audit within the plain meaning of that term as
used
in the statute and regulations on timely claims. The Agency does
not
dispute that the ORR review was a formal inspection of the State's
accounting
and financial records. There is no other definition of audit
in the timely
claims statute or its implementing regulations. It is
also undisputed
that the effort was extensive and detailed, and it is
obvious on the face of
the record that the scope of the fiscal records
examined would be about the
same if the review had been performed by
regular auditors. The Agency
nevertheless contended, in effect, that
the review was not an audit because
it was not conducted by the OIG
Office of Audit. In Oklahoma Department
of Human Services, Decision No.
809, November 18, 1986, p. 6, the Board held
that it would be "unduly
restrictive" to make the OIG audits the only audits
for purposes of the
audit exception relief from the two year claims limit,
where the effort,
effect, and scope of records examined were essentially the
same as an
OIG audit would have involved. We have considered anew the
Agency's
arguments for its position, and we are persuaded that if a
review
otherwise materially qualifies as an audit, the statutory and
regulatory
purpose is met by allowing the exception, even though the audit
was not
performed by the OIG Office of Audit. Nothing in the statute or
its
legislative history suggests otherwise. In the absence of a
regulation
making the difference explicit and binding, it is unreasonable to
deny
the State a benefit provided by law merely on the basis of
an
organizational assignment of responsibilities internal to HHS.
The Accounting Standards
Beyond the argument just discussed, the Agency relied on the
stated
standards for performing audits (see p. 5 above). The
Agency's
arguments essentially were that the ORR review was not an audit
because
the ORR Specialist worked too closely with the State to be
independent
as an auditor should be; the ORR Specialist asked the entity
being
audited (the State) to quantify the overpaid (by ORR) federal share
of
administrative costs, whereas an auditor actually would have
computed
this amount; and the ORR Specialist told the State what to do
directly,
whereas an auditor makes recommendations only. We find no
basis in the
statute, regulations, or record for giving these distinctions
the status
of meaningful differences in this case.
The State did not dispute its close working relationship with the
ORR
Specialist. We recognize that arguably the best way to
guarantee
objectivity is by the use of an auditor who has total independence
from
both the party being audited and the administering agency, but in
the
absence of a showing that this extensive review was flawed by an
actual
lack of objectivity, we do not find this to be a reason to
disqualify
the review as an audit for the purposes of this case. The
Agency did
not cite any aspect of the review which demonstrated a lack
of
objectivity on the part of the Specialist. Obviously, the Agency
itself
is relying on the review. In New York State Department of
Social
Services, Decision No. 521, March 6, 1984, p. 7, the Board held that
the
state itself could perform an audit, so long as the federal
agency
accepted the audit and required the adjustment. In fact, this is
just
what is contemplated by the Single Audit Act, Pub. L. 98-502, and
its
implementation in OMB Circular A- 128. The ORR Specialist here
was
arguably at least as objective as the State or its contract
auditors
would have been; in any event, there is no evidence to the
contrary.
For similar reasons, we are also persuaded that the review is
not
disqualified as an audit merely because the State was asked to
compute
the amount of the potential adjustment. The ORR Special- ist
did not
have to accept the State's calculation and was free to do her
own.
Apparently, no part of the claim, timely or untimely, was rejected
for
insufficiencies in calculation. We recognize here, too,
that
computation by the auditor would further enhance the
desired
independence, but we cannot find that having the State perform this
task
changed an audit into a non- audit management review. See New
York
State Department of Social Services, supra, and the Single Audit
Act.
To the contrary, we think it was appropriate to ask the State to
prepare
what the ORR Specialist no doubt anticipated would be (and later was)
a
claim against the AFDC program for the amount of the ORR
audit
exception. Also, as the State pointed out, Minnesota was required
by
Agency regulation to comply with an ORR request to submit statistical
or
programmatic information. 45 CFR 400.10(b). The Agency did not
dispute
this. The State should not be penalized for complying with a
regulatory
requirement when it supplied the ORR Specialist with the
requested
calculation.
The Agency relied on the same circumstance -- that the State
had
calculated the amount of the adjustment to its ORR claim -- in
support
of the argument that this action by the State somehow destroyed
the
"cause and effect" relationship between the audit exception and
the
claim, which we said was required in Illinois, supra. Unlike
the
situation in Illinois, however here there was a "cause and
effect"
relationship in that the claim to AFDC was for the same
expenditures
reviewed by ORR and followed directly from and was a consequence
of the
audit exception. Evidence of this is the fact that the ORR
specialist
suggested that the State file a claim against AFDC as a result of
the
financial review.
The State did not dispute that the ORR Specialist ordered the State
to
comply with her findings, but correctly pointed out that ORR would
have
ordered the State to comply had it been reviewing an OIG audit.
The ORR
report, signed by its Region V Director, recounted that "the State
has
been instructed to make a financial adjustment to the refugee
program"
(apparently by the ORR Specialist). State Ex. C, p. 3.
In the context
of this case, where the State was led to believe it merely had
to shift
its claim to the AFDC program, it is not surprising or
inappropriate
that the ORR Specialist ordered the State directly to make
the
adjustment instead of merely recommending that action to the
ORR
Regional Director. In fact, this type of action is provided for in
the
ORR Specialist's job description. State Ex. D-2. We note that
other
actions were merely recommended by the ORR Specialist, and the
ORR
Director gave the order to implement the recommendations. We
cannot
deny that it is better practice for the Agency's auditor to
concentrate
on making findings and recommending courses of action and to
leave it to
Agency management to implement those recommendations. At
the same time,
FSA's position appears disingenuous when one observes that the
Agency is
attempting to exploit an alleged lack of independence of its
own
reviewer from its own management, in relation to a financial review
and
determination which it fully relies on as valid -- except as it
relates
to the statutory exception Minnesota seeks. In any event, there
is
evidence of some independent determination on the part of the
reviewer,
and of separate decision-making by managers.
In effect, if not explicitly, FSA was arguing that a financial
review
rises to the status of an audit only when conducted in strict
accordance
with the detailed auditing/accounting standards cited, so that
any
technical inconsistency with these standards renders the
financial
review ineligible for consideration as a basis for the audit
exception.
While this policy view might be a valid basis for rulemaking to
that
effect, in the absence of such a rule FSA cannot show that
the
interpretation is so obvious as to justify denying the exception
to
Minnesota now. There simply is an insufficient link between
the
particular time limit and exception in Section 1132(a) of the Act
and
all of the detailed standards applicable to accounting audits.
Of
course, the existence of these standards may constitute support
for
requiring, as a general matter, that financial reviews be thorough
and
accurate to qualify under Section 1132(a); if so, the financial
review
here qualifies. This is fully consistent with the generic
meaning of
the word "audit" that the explicit language of the statute and
the
regulations most readily supports.
Other Arguments
FSA expressed concern that a less restrictive concept of "audit"
would
tend to "insulate subsequent state actions from the two-year
statutory
time limitation," and thwart the intention of Congress in setting a
time
limit for filing claims. However, the Agency is free to propose a
more
restrictive definition of audit in a regulation or
appropriate
guidelines. Furthermore, this decision does not mean that
just any
review can be considered an audit. It is not the Board's job
to define
where the line should be drawn, and each case should be considered
on
its own merits; in this case, we have decided only that the
particular
extensive review involved was so "audit-like" in all meaningful
ways
that, in the absence of any contrary announced policy, it
is
unreasonable to deny Minnesota the benefit of the audit exception.
To
hold otherwise would mean that FSA could effectively repeal
the
statutory exception by simply avoiding the use of OIG personnel or
the
label "audit."
We do not agree that the outcome of this case will in any way hamper
FSA
from "scrupulously examining the propriety of questionable
claims."
Brief, p. 17. A claim of unallowable costs cannot become a
claim of
allowable costs based merely on the kind of review which disclosed
the
impropriety. This decision has no conceivable affect on FSA's
ability
to review costs to determine if they are allowable. To the
extent that
a state sometimes can use the audit exception to escape the time
limit
on a claim for old (and otherwise allowable) costs, it would appear
that
this is precisely what the statute contemplates. New York, supra,
p. 8.
At least, FSA has shown no evidence of contrary legislative intent.
The Agency asked that we defer to it in deciding whether the ORR
review
was an audit. Generally, we do defer to a state or a federal
agency
when we are faced with a question of the meaning of a statute
or
regulation which the state or federal agency has been charged
to
implement. But the principle of deference cannot be stretched to
cover
an interpretation of an otherwise undefined term at odds with the
plain
meaning of the term as it arises in a particular factual context.
As
the discussion above shows, FSA's financial review in this
particular
case was tantamount to an audit under any reasonable reading of
the
regulations and the circumstances of this case.
Conclusion
For the reasons stated above, we reverse the disallowance.
________________________________
Cecilia
Sparks Ford
________________________________ Norval
D.
(John) Settle
________________________________
Alexander
G. Teitz Presiding Board Member
1. These documents detailed the actual and estimated refugee
caseload,
the cost per case, and the summarized estimated quarterly
expenditures.
2. The abstracts summarized the expenditures for which the
counties
claimed reimbursement.
3. The reports detailed the expenditures made by the State to or
on
behalf of refugees.
4. An audit is "a formal or official examination of books of
account"
or "a methodical examination and review of a situation or
condition."
Webster's Third New International Dictionary, G. & C.
Merriam Co.,
Springfield, Massachusetts, p.