Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Second Street Youth Center Inc.
DATE: August 6, 1991
Docket No. 90-197
Audit No. A-02-89-05392
Decision No. 1270
DECISION
The Second Street Youth Center Foundation, Inc. (Second Street) appealed
a
determination by the Administration for Children and Families
(ACF)
disallowing $14,233 in claimed costs for Second Street's Head
Start
program. 1/ The disallowance was based on an audit conducted by
an
independent auditor covering the period from June 1, 1988
through
December 31, 1988. The auditor concluded that Second Street had
failed
to provide adequate supporting documentation for five cost items,
four
payments for personal compensation to Second Street's
executive
director, business manager, and bookkeeper, as well as a vendor
payment.
The Regional Inspector General for Audit and ACF offered
opportunities
for Second Street to provide supporting documentation to
demonstrate
that the questioned costs were allowable, but Second Street
failed to
submit any documentation. ACF proceeded with this
disallowance.
On appeal, Second Street requested that the briefing schedule be stayed
so
that it could submit documentation to ACF which it alleged
would
substantiate the allowability of the costs questioned by the
independent
auditor. ACF reviewed the documents and determined that the
documents
were insufficient to demonstrate that four items, totalling
$14,233,
were allowable, but did accept the documentation of a $607 payment
to
Second Street's bookkeeper.
For the reasons discussed below, we uphold the disallowance in full.
I. Payments for Personal Compensation
In this section we discuss the three items still in dispute that
were
questioned by the auditor relating to payments for
personal
compensation. The audit report referred to the payments as
follows:
o $5,808 paid to Mr. Christopher Toscano, Executive Director -
refer
check # 410389 dated 7/28/88 (For the period 1/1/88 to
7/24/88).
o $5,775 paid to Ms. Theresa Chou, Business Manager - refer check
#
410394 dated 7/28/88 (Period covered not stated).
o $2,450 paid to Ms. Theresa Chou, Business Manager - refer check
#
410671 dated 11/3/88 (Period covered not stated).
ACF Ex. 2, p. 15.
The auditor questioned these payments based on Second Street's failure
to
produce "detailed time reports" that demonstrated that these
individuals
performed sufficient activities or services on behalf of
Second Street's Head
Start program to justify these payments.
The Head Start Act provides that "each recipient of financial assistance
.
. . shall keep such records . . . which fully disclose the amount
and
disposition by such recipient of the proceeds of such
financial
assistance . . . and such other records as will facilitate an
effective
audit. 42 U.S.C. S 9842(a). The regulations applicable
to the Head
Start program require that grantees make and retain accounting
records
that adequately identify expenditures and that grantees support
these
records with source documentation. 45 C.F.R. 74.61(b) and
(g).
Moreover, the regulations at 45 C.F.R. 74.174(a) provide that
the
principles to be used in determining allowable costs of
activities
conducted by nonprofit organizations are contained in Office
of
Management and Budget (OMB) Circular A-122. OMB Circular A-122
provides
as a "Basic Consideration" that in order to be allowable under an
award,
a cost must be reasonable for the performance of the award, allocable
to
the award, and adequately documented. Att. A, Part A, Para 2(a)
and
(g). More specifically, the Circular provides that, to be
allowable,
personal compensation (i.e., salaries, wages) must be "based
on
documented payrolls approved by a responsible official(s) of
the
organization [and] . . . supported by personnel activity reports. . .
."
Att. B, para. 6.l(1). 2/ The Circular further provides that
personnel
activity reports must meet the following standards:
(a) The reports must reflect an after-the-fact determination
of
the actual activity of each employee . . . .
(b) Each report must account for the total activity for
which
employees are compensated . . . .
(c) The reports must be signed by the individual employee,
or
by the responsible supervisory official having first
hand
knowledge of the activities performed by the employee, that
the
distribution of activity represents a reasonable estimate of
the
actual work performed by the employee during the periods
covered
by the reports.
(d) The report must be prepared monthly and must coincide
with
one or more pay periods.
Att. B, para. 6.l(2).
Although Second Street produced a wide variety of documents on behalf
of
the allowability of these payments, many of which were attached to
the
six affidavits discussed below, Second Street has never been able
to
provide the documented payrolls and personnel activity reports that
meet
the specific requirements of the Circular. 3/ Indeed, none of
the
records of meetings, correspondence, transmission documents,
memoranda,
telephone records and other related documents submitted by Second
Street
as attachments to affidavits specifically relate to the
questioned
expenditures. These documents, therefore, fail to establish
that the
two officials in question performed Head Start related activities
on
specific dates and for a particular period of time. Second Street
did
not provide the Board with any reasonable explanation for the absence
of
the contemporaneous records. Second Street's Acting Chief
Executive
Officer did concede that "the former CEO seldom used the time clock
and
none of his time cards are available," but this admission
neither
constitutes a reasonable explanation nor addresses at all the
payments
to the business manager. ACF Ex. 4.
Second Street did not operate a Head Start program for the period
of
January 1, 1988 through May 31, 1988, yet, based on the audit
report
description of the payments and the timing of the payments,
substantial
portions of the payments were apparently intended to cover
services
provided during that period. While some of the records suggest
that
these individuals may have been involved in activities which
were
designed to regain funding for the Head Start program, these
allegations
alone are insufficient source documentation for the payments
under the
regulations and cost principles.
Second Street also submitted six affidavits that allegedly support
the
allowability of these costs. See ACF Ex. 7, which contains
five
affidavits and the second statement of Diane L. Kearney, which
was
submitted by ACF on June 17, 1991. Affidavits, however, are not
the
type of contemporaneous documentation that is required by OMB
Circular
A-122. 4/ Generally we will not consider such
non-contemporaneous
evidence in support of a questioned cost, unless a
reasonable
explanation of the absence of the required records is
provided. Second
Street, as noted above, offered no such
explanation. Even when the
Board does review such evidence, we must
scrutinize it more closely.
See, e.g., Indiana Dept. of Public Welfare, DAB
No. 772 at 4 (1986).
None of the affidavits here is sufficient to support the
allowability of
these payments under the most generous interpretation.
In his affidavit, Harold Umansky, Second Street's treasurer from
January
1, 1988 through October 1, 1988, asserts that he never signed a
check
without a payment voucher and a check request form. Even if true,
such
a procedure could not substitute for specific time records
demonstrating
the date and the amount of time an official spent on
program-related
activities. Moreover, various checks for the two
officials in question
were attached to the affidavit, but none of the checks
and documentation
relates to the questioned payments. Mr. Umansky
failed to provide any
explanation as to why support documentation exists for
these other
checks, but not for the questioned payments. If anything,
the other
checks raise further questions concerning the questioned payments,
since
they purport to cover services for a period that partially overlaps
the
period apparently covered by the questioned payments, and may
therefore
duplicate those payments.
The affidavits of Ruth Moore, Second Street's former acting Head
Start
Director and Barbara Penn-Bracey, Second Street's former
administrative
assistant, merely assert their belief that the two officials
receiving
the payments in question worked on Head Start activities for the
first
three months of the year. Clearly this assertion provides
insufficient
information to support the payments in issue, since it is
self-serving
and prepared for this litigation.
The affidavit of Richard Taylor, Second Street's current
executive
director, asserts that documents from the files of Second
Street for
calendar year 1988, which were attached to the affidavit,
provide
additional proof of the quantum of work performed by Mr.
Toscano. The
affidavit asserts that the documents indicate that work
was performed
during this period to remove Second Street from its "high
risk"
designation and to regain funding for the Head Start program.
Again,
however, the affidavit and the attached documentation fail to
document
with any specificity the nature and amount of grant-related
work
performed and how that work related to the payment in
question.
Moreover, the affidavit does not attempt to address the two
questioned
payments for Ms. Chou.
Finally, in a separate submission, Second Street presented a
supplemental
affidavit by Diane Kearney, Second Street's former
bookkeeper. The
supplemental affidavit accompanied "Payroll Time
Sheets" for the period in
question. The affidavit asserts that the time
sheets demonstrate that
the two officials' time was "recorded properly."
The affidavit further
asserts that the hours recorded on the payroll
sheets should be split between
two programs, Head Start and Day Care, by
specific percentage rates for each
of the two officials.
We conclude, as did ACF, that neither the affidavit nor the payroll
time
sheets demonstrate the allowability of the payments. For the
former
executive director, Mr. Toscano, the payroll sheets merely indicate
the
hours he worked; they provide no indication whether any of those
hours
related to the Head Start program. For Ms. Chou, although the
payroll
sheets show a breakdown between Head Start and Day Care beginning in
the
second half of April, 1988, we have no information concerning how
that
breakdown was reached or whether any of the Head Start hours listed
were
supposed to be covered by the payments here. 5/ Further, the
breakdown
in time between Head Start and Day Care on these payroll sheets for
Ms.
Chou bears no relationship to the percentage breakdown for Ms.
Chou
proposed by Ms. Kearney in her affidavit. We also note that Ms.
Kearney
provided no supporting basis for the percentage breakdowns proposed
in
her affidavit and we therefore have no means of verifying
the
reliability of those breakdowns. See Acadia-Vermillion Community
Action
Program, Inc., DAB No. 1201 at 5 (1990) (handwritten notations
of
breakdowns on time sheets unacceptable absent explanation of
basis).
Thus, neither the affidavit nor the accompanying payroll sheets meet
the
minimum requirements of OMB Circular A-122 for adequate documentation
of
payments for personal compensation, and accordingly neither
establishes
the allowability of these payments.
II. Payment to Vendor
The disallowance also included a $200 payment by Second Street to
a
vendor, Cheryl Lang, which was questioned by the auditor for "lack
of
independent supporting documentation." ACF Ex. 2, p. 15. The
only
support for this payment supplied here by Second Street was
the
following reference in an affidavit by the former bookkeeper,
Diane
Kearney:
I have been advised that one of the disallowed amounts by
DHHS
related to a $200.00 payment to Cheryl Lang on August 14,
1988,
for which there was no independent supporting
documentation. I
personally know that Ms. Lang rented a truck
from a local U-Haul
facility in order to move furniture from the Bethel
Presbyterian
Church, which had been a satellite Head Start location, to
935
South Second Street, the main SSYC location. I know this
because
I accompanied Ms. Lang at that time. Thus, I believe that
this
payment to Ms. Lang was reimbursement for a valid Head
Start
expense.
ACF Ex. 7.
ACF rejected this affidavit because it allegedly related to an event
that
took place more than two years earlier and because the affidavit
was not
supported by any contemporaneous documentation. We find that
the Agency
was acting consistently with applicable regulations and cost
principles in
rejecting this affidavit and in requiring some further
support documentation
for this expenditure. Second Street could not
even supply documentation
of Ms. Lang's payment to the U-Haul agency for
the truck. Accordingly,
we uphold the disallowance of this item as
well.
III. Other Arguments by Second Street
In its brief, Second Street relied on two additional arguments which
can
be disposed of briefly. They conceded that the regulations
clearly
required them to maintain the documentation discussed above and
required
the auditor to question and the agency to disallow these costs in
their
absence. Second Street brief at 3-4. They admitted that
"[t]hrough
some reason which no one seems able to effectively state," the
required
records cannot be produced. Id. However, they then asked
the Board to
consider such circumstances as Second Street's current level
of
compliance, its employees' diligence in the refunding effort, and
the
community need for its programs. Essentially this argument seeks
to
have the Board make "ad hoc exceptions to a regulation" or even
to
"violat[e] a regulation." Id. at 11. The Board has no such
authority.
We have repeatedly held that we are bound by all applicable
regulations.
45 C.F.R. 16.14; see, e.g., North Carolina Dept. of Human
Resources, DAB
No. 1110 at 5 (1989).
Further, Second Street complained that ACF was inconsistent in
accepting
secondary evidence in support of the payment to the bookkeeper
but
refusing to credit such evidence in support of the other
questioned
payments. Id. at 9. However, the payment to the
bookkeeper was
supported by her own affidavit personally attesting to
specific hours
worked, detailing the work performed for the benefit of the
Head Start
program during those hours, tying those hours to the relevant
payment,
and indicating that the original records had existed but were
lost.
Thus it was not unreasonable for ACF to accept this evidence
as
sufficient to justify the allowability of the payment to her,
while
finding no such sufficient evidence in support of the other
payments.
Conclusion
On the basis of the foregoing analysis, we uphold the disallowance
in
full.
Norval D. (John) Settle
Alexander G. Teitz
Donald F. Garrett Presiding Board Member. 1. This is
the
current name for the grantor agency for Head Start, which had been
the
Office of Human Development Services until recent
organizational
changes. We use the current designation throughout,
although the former
name was in effect at the time of the disallowance.
2. Although the record suggests that Second Street may have
claimed
the costs in question as reimbursement for services performed
by
consultants or contractors, the costs of professional or
consultant
services are not allowable if such services are performed by
employees
or officers of the organization. Att. B, para. 34.
Therefore, the
claimed costs at issue here would only be allowable if they
met the
requirements for personal compensation in Att. B, para. 6.
3. The only directly relevant documents were the checks made to
the
individuals referred to in the audit report.
4. The regulations require that where a grant is renewed
annually, as
is the case here, the grantee is required to retain financial
records
and supporting documents for three years from the date the
grantee
submits its last expenditure report for the period, or if later,
until
any audit involving the records (which was begun before the
three-year
period had expired) has been resolved. 45 C.F.R. 74.21 and
74.22.
Thus, Second Street's obligation to retain records relating to
this
disallowance has clearly not
expired.
5. ACF also
asserted that the absence of any breakdown for
Mr. Toscano on the
payroll time sheets in the face of the breakdown for Ms.
Chou undercuts
the position that any amounts of Mr. Toscano's time were
devoted to the
Head Start program during this