Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Sandoval County Economic Opportunity Corporation
DATE: October 7, 1992
Docket No. A-92-82
Audit Control No. A-06091015798
Decision No. 1362
DECISION
Sandoval County Economic Opportunity Corporation (SCEOC, agency)
appealed
a determination by the Administration for Children and Families
(ACF)
disallowing $1225 of federal Head Start grant funds for the
program year
ended July 31, 1990. ACF based its disallowance on the
findings of an
organization-wide audit of SCEOC for the period October
1, 1989 through
October 31, 1990. The independent auditors questioned a
payment of
$1225 on the ground that it was made for "services that were
not
received." The payment in question was for services performed by
an
accountant who had initiated a Head Start program year audit but who
did
not complete the audit because intervening events required SCEOC
to
perform an organization-wide audit and to cancel the work in progress
on
the program year audit.
We find that, under the circumstances of this case, SCEOC can
reasonably
be viewed to have "received" services from this accountant and
that the
cost of those services was a reasonable charge to the grant.
Head State
regulations required SCEOC to commission a program year audit and
submit
an audit report within four months after the close of each
budget
period. The services in question involved the initial work
leading to
the completion of the audit and the audit report. Thus, at
the time
these services were commissioned and performed, they were
absolutely
necessary for the completion of a grant objective required by
regulation
and clearly allocable to the grant. SCEOC acted reasonably
in
commissioning the services because it did not know at that time that
an
organization-wide audit would be necessary. When intervening
events
occurred that required SCEOC to obtain the organization-wide audit,
ACF
specifically advised SCEOC to discontinue the program year audit
and
SCEOC did so promptly. Moreover, the record clearly supports
the
conclusion that these costs were properly documented, reasonable
in
amount, and consistent with cost principles relating to
professional
services costs. Accordingly, for these reasons, which are
discussed
more fully below, we reverse the disallowance.
Background
The disallowed costs of $1225 represent money paid pursuant to a
contract
entered into on October 15, 1990 between the former Director of
SCEOC and a
Certified Public Accountant (CPA) to perform the Head Start
1990 Program Year
audit. The contract stated that the completed audit
would cost
$4225. This CPA had previously performed Head Start program
year audits
for SCEOC.
After the contract was entered into, the SCEOC Director left the
agency
suddenly and SCEOC was in upheaval. As a result of the
difficulties
SCEOC was experiencing, the agency was required to undergo
an
organization-wide audit which would include the Head Start program
for
the same period. Letters dated February 11, 1992 and July 30, 1992
from
SCEOC to the Board. SCEOC hired a new CPA firm to perform this
audit,
and then learned that the previous Director had already hired the
CPA
for the Head Start program audit. SCEOC then contacted the ACF
Regional
Office for advice. ACF recommended that SCEOC dissolve the
contract
with the CPA for the Head Start program audit in order to avoid
any
duplication of services.
SCEOC dissolved the contract in December, 1990 and requested that the
CPA
return $1225 which SCEOC stated was paid to the CPA as a "retainer."
The CPA
agreed to the dissolution of the contract. The CPA, however,
informed
SCEOC that the $1225 paid was not a retainer but money paid
pursuant to a
progress billing for services rendered prior to
termination of the
contract. The CPA provided a detailed accounting of
the services
rendered which included an itemized account of the number
of hours worked,
the hourly rate, the services performed, and mileage,
clerical, and telephone
costs incurred in performance of the work. The
CPA indicated that he
would accept the progress payment as payment in
full even though his billing
and telephone records indicated an amount
owed in excess of the $1225 already
paid. The CPA pointed out that he
had proceeded in good faith
performance of the contract by conducting
the field and office work necessary
for performance of the entire
contract unaware that there was any conflict or
duplication of services.
The record indicates that SCEOC's Head Start grant was not charged for
the
organization-wide audit from which the findings in dispute here
were
made. SCEOC's Head Start grant was only charged by the new CPA
firm for
a two-month financial and compliance audit of the Head Start
program.
Applicable Law
Every Head Start program must have an annual audit by an
independent
auditor of its prior budget period to determine the accuracy of
the Head
Start grantee's financial statements, its compliance with the terms
and
conditions of the grant, and the effectiveness of its financial
and
administrative operations. 45 C.F.R. .1301.12(a). The audit
report
must be submitted to ACF within four months after the prior
budget
period. 45 C.F.R. .1301.12(c).
For determining allowable costs under the program grant, the Head
Start
regulations specifically incorporate the regulations at 45 C.F.R.
Part
74 which provide principles for the administration of Department
of
Health and Human Services grants. 45 C.F.R. .1301.10. The
regulations
at Part 74 state that "[g]rant funds may be used only for
allowable
costs of the activities for which the grant was awarded" and that
the
principles to be used in determining the allowable costs of
activities
conducted by a nonprofit organization under a grant are contained
in
Office of Management and Budget (OMB) Circular A-122. 45 C.F.R.
.74.170
and .74.174(a).
The cost principles of OMB Circular A-122 provide the considerations
for
determining whether a cost is an allowable cost of a grant. There
are
certain basic considerations of allowability, reasonableness,
and
allocability that are discussed in the cost principles as well
as
principles to be applied in establishing the allowability of
specific
items of cost. OMB Circular A-122, Attachments A and B.
Two provisions of the cost principles are particularly relevant to
this
dispute. First, under the general principles, a cost is
considered
reasonable if --
. . . in its nature or amount, it does not exceed that
which
would be incurred by a prudent person under the
circumstances
prevailing at the time the decision was made to incur the
cost.
. . . In determining reasonableness of a given
cost,
consideration shall be given to:
a. Whether the cost is of a type generally
recognized
as ordinary and necessary for the operation of
the
organization or the performance of the award.
b. The restraints or requirements imposed by
such
factors as generally accepted sound business
practices,
arms length bargaining, Federal and State laws
and
regulations, and terms and conditions of the award.
c. Whether the individuals concerned acted
with
prudence in the circumstances, considering
their
responsibilities to the organization, its
members,
employees, and clients, the public at large, and
the
Government.
d. Significant deviations from the
established
practices of the organization which may
unjustifiably
increase the award costs.
OMB Circular A-122, Attachment A, Section A.3.
Second, Section 34 of Attachment B of the Circular provides that costs
of
professional services by persons who are members of a particular
profession
and who are not officers or employees of the organization are
allowable,
subject to certain factors, when they are reasonable in
relation to the
services rendered and when they are not contingent upon
the recovery of the
costs from the government. OMB Circular A-122,
Attachment B, Section
34.a.
Analysis
The issue here is whether the $1225 paid to the CPA is an allowable
cost
of the Head Start grant. ACF argued that it properly disallowed
the
questioned costs because they were for an audit that was not
performed
and which was of no benefit to SCEOC's Head Start program.
ACF claimed
that since there was no benefit to the grant, the costs are
not
allocable to the Head Start grant and accordingly are unallowable.
ACF
took the position that since the CPA did not produce an audit report,
an
audit was not performed. In ACF's view, the production of an
audit
report was the only service for which SCEOC could charge the grant
and
anything less than full performance of this was a charge to the
grant
for services that were not received.
We disagree. The question of whether a cost is allowable under a
grant
depends in part on whether the cost was reasonable in nature and
amount.
The cost principles provide that one should measure reasonableness of
a
cost against whether the cost would exceed what a prudent person
would
incur under the same circumstances prevailing "at the time the
decision
was made to incur the cost." OMB Circular A-122, Attachment A,
Section
A.3. In making this determination, consideration is given in
part to
whether the cost is recognized as ordinary and necessary for
the
operation of the organization or the performance of the grant
and
whether the individuals involved acted with prudence considering
their
responsibilities to the organization, their clients, and the
federal
government. OMB Circular A-122, Attachment A, Section A.3.a.
and c.
Under the circumstances here, we conclude that the cost of the
accounting
services was a reasonable cost at the time the decision to
enter into the
contract was made. A Head Start grantee is required by
regulation to
have an annual program audit performed by an independent
auditor. 45
C.F.R. .1301.12(a). The former Director entered into the
contract with
the CPA for performance of the program audit in order to
satisfy the
regulatory requirements. He used that particular CPA
because the CPA
had performed the program audit for the Head Start
program in past years and
was familiar with the program and the kind of
audit required. We
therefore find that the former Director acted
prudently when he entered into
the contract and incurred the costs
considering his responsibility under the
regulations to have the program
audited by an independent auditor.
Consequently, when weighed against
the considerations used in the definition
of "reasonable costs" in the
cost principles, the cost of the auditing
services is appropriately
considered the type of cost that would be necessary
for the performance
of the grant.
Moreover, we conclude that the amount paid was reasonable. The
fact
that no audit report was produced does not mean that services were
not
rendered under the contract. ACF viewed the issue as all or
nothing,
failing to acknowledge that the CPA actually performed work under
the
contract for which he was entitled to be paid. The CPA's record of
his
time spent indicates that he began the work necessary for the audit.
1/
While the CPA may not have completed an audit report, the
record
supports the finding that the CPA in fact did perform
professional
accounting services for SCEOC. Furthermore, the CPA did
not charge
SCEOC for the entire contract amount of $4225, but charged
instead
$1225, an amount less than the amount which would cover his time
and
expenses incurred up to the point when the contract was cancelled.
As
we indicated above, professional service costs are allowable costs of
a
grant subject to certain factors. While the Circular states that
no
single factor or any special combination of factors is
necessarily
determinative, the services in question here meet the majority of
the
factors specified in the Circular. 2/ For example --
o The services provided were within the
scope of the services
required. SCEOC contracted for a program audit
and the CPA began to
conduct the necessary field work for the audit.
The contract was then
terminated and he was paid only for the services he in
fact rendered.
o At the time the contract with the CPA
was entered into, SCEOC
was contracting for a program audit that had to be
performed by
regulation within four months of the end of the SCEOC's program
year by
an independent auditor.
o In the past, there was no question that
auditing costs by an
independent auditor were allowable and necessary costs
of the grant.
o In this instance the services could not
be performed more
economically by direct employment because the Head Start
regulations
preclude an audit being performed by an employee of the
grantee
organization. 45 C.F.R. .1301.12(a).
o SCEOC contracted with a qualified CPA
who had performed program
audits for the organization previously.
o ACF did not dispute that the hourly
rate charged by the CPA was
consistent with fees customarily charged by
similarly situated
professionals.
OMB Circular A-122, Attachment B, Section 34.b.(1), (2), (3), (6), (7)
and
(8).
Accordingly, we conclude that the accounting services in question
here
constitute allowable professional service costs under the Circular.
Additionally, we do not agree with ACF that these costs were not
allocable
to SCEOC's Head Start program. ACF incorrectly concluded that
there was
no benefit to the program from the CPA's services unless a
full audit was
completed. While the CPA did not submit an audit report
because of the
dissolution of the contract, he did perform audit field
work and accounting
services necessary for compilation of the audit
report required by the Head
Start regulations. 3/ Consequently, at the
time the services were
rendered and up until the contract was cancelled,
the CPA services furthered
SCEOC's compliance with the Head Start
program regulations. Moreover,
the CPA provided SCEOC with
documentation to show what work he performed and
how long it took him to
perform that work. We evaluated this
documentation and concluded that
the evidence is sufficient to substantiate
that allowable professional
services were performed and received, were
reasonable costs, and were
allocable to the Head Start program.
.Conclusion
For the reasons stated above, we reverse ACF's disallowance of $1225.
Cecilia Sparks Ford
M. Terry Johnson
Donald F. Garrett Presiding Board Member
1. Furthermore, the contract would presumably have been fulfilled
in
full, but for the fact that ACF advised SCEOC to cancel the contract
to
avoid any duplication of costs after ACF decided SCEOC should have
an
organization-wide audit to sort out the state of the organization
after
the departure of the former Director. 2. The Circular lists
eight
factors and SCEOC met six factors. OMB Circular A-122, Attachment
B,
Section 34.b. 3. The issue before us here is distinguishable from
the
issue in Council for Economic Opportunities in Greater Cleveland,
DAB
No. 594 (1985), in which audits were performed unsatisfactorily and
the
Board upheld a disallowance of the audit costs because the grantee
did
show that the costs were reasonable. In that case, the appellant
had to
pay to have the audits performed again, the costs of which were
allowed
under the