Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: North Dakota Children's Services Coordinating Committee
DATE: March 24, 1993
Docket No. A-92-152
Audit Control No. A-08-91-15977
Decision No. 1399
DECISION
The North Dakota Children's Services Coordinating Committee
(CSCC)
appealed a determination by the Administration for Children and
Families
(ACF) disallowing $94,521 charged to a grant awarded under the
Temporary
Child Care for Handicapped Children and Crisis Nurseries Act of
1986
(Act), 42 U.S.C. 5117--5117d. Based on an audit report issued by
the
North Dakota Office of State Auditor, ACF determined that CSCC had
not
properly documented $85,421 in payroll costs and $9,100 in
contract
costs.
During Board proceedings, CSCC presented documentation in response to
the
audit findings which it asserted supported its payroll and
contract
costs. The State auditor reviewed CSCC's documentation and
found it
adequate to substantiate $16,452 in payroll costs and $1,297 in
contract
costs. Accordingly, ACF reduced the disallowance to $76,772,
$68,969
for payroll costs and $7,803 for contract costs.
For the reasons stated below, we find that CSCC failed to
maintain
documentation adequate to demonstrate that the contested payroll
and
contract costs were allowable charges to the project grant in
question.
We further find that ACF reasonably determined to allow only those
costs
which the State auditor found were substantiated by
CSCC's
documentation. Therefore, we uphold the disallowance. 1/
Background
The Act made funds available for grants to states for "temporary
emergency
services and care for children." States were authorized to
assist
private and public agencies to provide "crisis nurseries for
children at risk
of or experiencing abuse or neglect, or in families
receiving child
protective services." 53 Fed. Reg. 25262 (July 5,
1988). CSCC
received a demonstration grant for a "Model Program to
Provide Crisis Child
Care" by a notice of award dated September 28,
1988. The approved
project period, as extended, was September 30, 1988
through June 30,
1990. (A competing continuation award further extended
the project
period through November 30, 1991.) CSCC implemented this
grant using
two regional entities (Families First Regions III and IV)
which dealt
directly with the families served. CSCC's project
encompassed "24 hour
crisis counseling and child care as well as
comprehensive case management
services." CSCC grant application at 21,
CSCC's supplemental
memorandum, Exhibit (Ex.) A.
A report issued by the Office of State Auditor reviewed costs charged
to
this grant as part of an audit of CSCC for the three-year period
ending
June 30, 1990 (State fiscal years (FYS) 1988, 1989, and 1990).
With
regard to this grant, the audit report found:
Amounts reported as federal expenditures are not supported
by
adequate documentation which would allow testing to determine
if
the expenditures were in accordance with federal regulations.
Audit report at 30, CSCC's June 15, 1992 submission.
The audit examined payroll costs for the two regional entities as well
as
two FY 1989 contracts (for $2,000 and $3,000), each for up to "800
hours of
crisis child care," and two FY 1990 contracts (each for $2,050)
for fiscal
agent services. CSCC's supplemental memorandum, Exs. B, C,
D, and E
(the contracts).
The audit report found that CSCC made payments to its contractors
"in
advance of any services being provided" and that there was
"no
documentation" or "follow up" to verify that services were
actually
provided. Audit report at 31, CSCC's June 15, 1992
submission.
Based on the audit report, ACF disallowed the questioned payroll
and
contract costs. CSCC's May 18 and June 15, 1992 submissions.
As noted
above, ACF adjusted the disallowance downward to reflect later
audit
findings that CSCC had presented documentation adequate to
substantiate
some of the questioned costs.
Applicable Requirements
The cost principles for state and local governments are contained
in
Office of Management and Budget (OMB) Circular A-87 (A-87), which
was
made applicable to this grant by 45 C.F.R. . 74.171(a). 2/ OMB
A-87,
Att. B, B.10.b. provides, in relevant part:
Payrolls must be supported by time and attendance or
equivalent
records for individual employees. Salaries and wages
of
employees chargeable to more than one grant program or
other
cost objective will be supported by appropriate
time
distribution records. The method used should produce
an
equitable distribution of time and effort.
Costs charged to federal grants must not only be reasonable in amount,
but
must also be "necessary" to the administration of a grant and
"allocable
thereto." OMB A-87, Att. B, B.10.a, and Att. A, C.1.a.
Costs are only
"allocable to a particular cost objective to the extent
of benefits received
by such objective." Id. at Att. A, C.2.a.
In addition, 45 C.F.R. Part 74 contains the applicable
financial
management standards. Section 74.61(b) provides that
accounting records
which "identify adequately the source and application of
funds for
grant- or subgrant-supported activities shall be maintained."
Section
74.61(g) provides that "[a]ccounting records shall be supported
by
source documentation such as cancelled checks, paid bills,
payrolls,
contract and subgrant award documents, etc." Section 74.61(f)
further
provides that "[p]rocedures shall be established for determining
the
reasonableness, allowability, and allocability of costs in
accordance
with the applicable cost principles."
Discussion
I. Payroll costs
With regard to payroll costs for Families First Regions III and IV,
the
audit report questioned $85,421 in payroll costs and found that --
[p]ayroll expenditures are . . . not supported by
adequate
documentation. . . . [A]mounts used for payroll are
for
employees of the regional offices. At the regions,
hourly
employees prepare time cards and salaried employees maintain
a
time log to verify the total time worked in a given
period.
These time cards and time logs are maintained at the
regional
offices. At the end of each pay period, monthly, an
individual
from the regional offices will telephone the [CSCC] office
in
Bismarck with the total number of hours each employee
has
worked.
Per discussion with the client, no reconciliation between
the
number of hours paid and the number of hours on the time
cards
is ever performed. In addition, there is no breakdown as to
how
much time is spent on federal programs as opposed to
other
programs. Determination of amounts used for salaries was
based
on the original budget submitted with the grant application.
Audit report at 31, CSCC's June 15, 1992 submission.
At the outset of this appeal, CSCC acknowledged that at the time of
the
audit the payroll records of its two regional entities did
not
adequately identify time spent on federal programs. CSCC's May 18,
1992
notice of appeal at 1. However, CSCC asserted that it had
recalculated
its payroll costs for its regional offices "utilizing the case
managers
time logs and their case notes for each family served."
CSCC's
September 21, 1992 submission. CSCC stated that the time logs
were a
daily record showing the services provided and the amount of time
spent
with each family. To support its appeal, CSCC submitted
summary
schedules showing for each regional entity the amount of
recalculated
payroll costs it allocated to this grant and to its other
activities.
CSCC's May 18, 1992 notice of appeal. Its recalculated
payroll costs
totaled $3,907.11 for FY 1989 ($1,882.08 for Region III and
$2,025.03
for Region IV) and $68,633.61 for FY 1990 ($42,189.16 for Region
III and
$26,444.45 for Region IV). CSCC submitted schedules showing the
payroll
costs it allocated for each employee as well as time logs and case
notes
for one month for one employee in each region. CSCC stated that
the
time logs and case notes it submitted were representative of
the
documentation maintained by the regional offices. CSCC's September
21,
1992 submission. The regions used different forms. For Region
III, the
time logs list activity codes for activities such as "parent
education"
or "direct service" and have columns for the employee to list for
each
day what activities were performed. For Region IV the time logs
have
columns corresponding to various activities such as "direct service"
or
"collateral contacts" so that the time spent each day for
various
activities can be listed under each column. The case notes give
the
contacts with a family by date and contain a brief description of
the
worker's interaction.
The State auditor reviewed the documentation provided by CSCC to
support
the recalculated payroll costs. The auditor examined schedules
showing
the allocation of payroll costs and time logs. The auditor
found that
the documentation was not adequate to determine the distribution
of
time. The auditor only verified that "[i]f [CSCC's] . . . procedure
was
100% accurate" payroll costs were $72,540.72. Auditor's July 6,
1992
letter (ACF Ex. A). However, at ACF's request, the auditor
performed an
additional review of CSCC's supporting documentation for
the
recalculated costs. The auditor reviewed the time logs and case
notes
for a sample of employees and concluded that --
[b]ased on projections, the results indicate that if
we were to
have tested all individuals for the
entire period the records would
substantiate $16,452
in payroll costs which would have been
allowable.
. . . Based on our subsequent testing, we
stand by our original
conclusion [that] the payroll
expenditures are not supported by
adequate
documentation.
Auditor's letter of October 27, 1992 (ACF Ex. B).
In its supplemental memorandum submitted on December 14, 1992,
CSCC
asserted that --
[t]he payroll costs, as recalculated by the auditor, are
based
on documentation of case management direct service time
provided
to families who had been, or were at risk, of abusing
and
neglecting their children. All case management direct
services
provided to these families by the Families First
organizations
were charged to the Crisis Nurseries program in
accordance with
the grant application. Therefore, the total
recalculated
payroll costs ($70,515) should be allowed under the
grant.
In light of these assertions, ACF again sought advice from the auditor.
By
letter of January 4, 1993 (ACF Ex. C), the auditor responded that --
[a]t no time during the additional review process did the
North
Dakota State Auditor's Office . . . find $70,515 in
payroll
costs. This represents the amount which the
appellant
recalculated and provided to this office during the
review
process. . . .
. . . The reason we could not substantiate the full
amount
tested [for the recalculated costs] was that the
documentation
provided shows no dates, times, or descriptions of
activities
which can be relied upon to show that activities were
related
to allowable [activities] under the grant.
ACF reduced the payroll costs disallowance by the $16,452 substantiated
by
the auditor as allowable. However, based on the auditor's January
4,
1993 letter, ACF continued to assert that CSCC had not
presented
information adequate to demonstrate that the remaining
recalculated
payroll costs were allowable. 3/
In response, CSCC argued that its documentation was sufficient to
show
"the total amount of direct service time provided to
vulnerable
families" and that ACF had not addressed CSCC's position that
"[a]ll
case management direct services provided to these families" was
properly
charged to this project. CSCC's January 25, 1993
submission.
We find CSCC's arguments unpersuasive and conclude that ACF
reasonably
rejected the documentation underlying CSCC's recalculated payroll
costs
and accepted only the $16,452 which the State auditor found
was
supported by adequate documentation. CSCC's arguments fail to take
into
account the essential point that it was obliged under the terms of
its
grant agreement to document its costs. Even if CSCC is correct that
all
case management services costs for the families served under
this
project were incurred for grant purposes, CSCC is not thereby
relieved
of its obligation to document the allowability of all such costs
charged
to this project.
The Board has consistently held that the federal
recordkeeping
requirements and cost principles place the burden on grantees
to
document their costs. Moreover, the Board has stated that it
is
reasonable to disallow costs which may in fact have been incurred when
a
grantee is unable to document that the costs are properly charged to
its
federal grant. See Michigan Dept. of Mental Health, DAB No. 1291
(1992)
at 4. CSCC conceded that the Families First regional offices
failed to
maintain the time distribution records required by federal
cost
principles (OMB A-87) to substantiate payroll costs. The
deficiencies
in the payroll records were detailed in the audit report.
The failure
to maintain the required records deprived the federal grantor
agency of
the assurance that payroll costs charged to the federal program
were
reasonable and necessary costs properly allocated to this
project.
Since CSCC's regional offices admittedly failed to maintain the
required
records, payroll costs can be charged to this project only if
CSCC
provides adequate alternative documentation to meet
federal
requirements.
In lieu of the documentation which was required by the terms of its
grant,
CSCC sought to substantiate its payroll costs with the time logs
and case
notes of its service workers. However, there is nothing on the
face of
the time logs and case notes to link the activities described to
this grant
as opposed to the regional offices' other activities. These
time logs
and case notes do not provide any specificity about the nature
and amount of
grant-related work performed on particular occasions.
While CSCC asserted
that the recalculated payroll costs reflected total
case management services
time, this conflicts with the State auditor's
examination of this supporting
documentation. The State auditor
examined the case notes and time logs
which CSCC asserted supported in
excess of $70,000 in payroll costs and found
them adequate to support
only $16,452. The State auditor's findings are
restated above. CSCC
disagreed with the auditor's findings and asserted
that he was too
restrictive when assessing which payroll costs were allocable
to this
grant. Nevertheless, CSCC has not explained how the
documentation in
fact supports payroll costs in addition to those found
substantiated by
the auditor. The auditor clearly found CSCC's
documentation inadequate
to show the activities and time expended for the
grant project. CSCC's
conclusory assertion that this grant was to pay
for all case management
services does not establish any connection between
the entries on the
time logs and case notes and the grant project beyond what
the State
auditor found. Since the documentation itself does not
establish a link
with this project, CSCC is relying on its
non-contemporaneous assessment
of regional activities in an effort to justify
the questioned payroll
costs. The Board has generally been reluctant to
find that
non-contemporaneous documentation met applicable record
keeping
requirements and has stated that such documentation must be
closely
scrutinized. See Second Street Youth Center, Inc., DAB No. 1270
(1991)
at 5. We consider CSCC's non-contemporaneous recalculation based
on
documents which were never intended to substantiate payroll
charges
similarly subject to close scrutiny. Here, such scrutiny was
provided
by the State auditor who at ACF's request examined the documentation
and
found that only a small proportion of the recalculated costs
were
substantiated. Even if it were likely that payroll costs in excess
of
those found by the auditor were in fact incurred, ACF is not required
to
allow the disputed costs to be charged to this project. This is
so
because of the burden on CSCC to document the existence and
allowability
of costs charged to a federally funded project. CSCC's
general
arguments provide no reasons for ACF to reject the State
auditor's
findings as to the amount of payroll costs allocable to this
project.
Therefore, since CSCC failed to assure that regional payroll costs
were
supported by the required time distribution records, ACF was
reasonable
when it determined to allow only those payroll costs substantiated
by
the State auditor based on CSCC's alternative documentation.
II. Contract costs
The audit report found that CSCC had paid its contractors in advance
of
any services and that it had no documentation to verify that
services
were actually performed. Audit report at 31, CSCC's June 15,
1992
submission. During Board proceedings CSCC submitted documents
which it
asserted supported the questioned contract costs. ACF accepted
$1,297
in expenditures made by one of the fiscal agents, the Grand Forks
Public
School District; CSCC conceded that the remaining amount charged to
the
grant for this contractor's costs, $753, should be returned to
ACF.
CSCC September 21, 1992 submission at 2.
CSCC submitted copies of the contracts (CSCC's supplemental
memorandum,
Exs. B, C, D, and E), an expenditure report for the other fiscal
agent,
and reports from the child care contractors (CSCC's September 21,
1992
submission). The State auditor reviewed the expenditure report
from the
First American Bank of Minnewaukan and reports from Nokomis Child
Care
Center, Inc. and Belmont Baby Care. The auditor found that
the
proffered documents were inadequate to substantiate any expenditures
for
these three contracts. Auditor's January 4, 1993 letter (ACF Ex.
C).
ACF rejected the documentation submitted by CSCC for these
contractors
based on the State auditor's findings. We uphold ACF's
determination
for the reasons discussed below.
Fiscal Agent Contractor
o First American Bank of Minnewaukan -- The auditor reviewed
an
expenditure report which showed funds advanced of $2,050. The
report
shows no expenditures and a beginning and an ending balance of
$2,050
for a reporting period from May 10, 1989 through June 30, 1989.
ACF's
Ex. C, Att. B. The auditor stated that "[t]his report provides
no
evidence that any of the funds were spent." Auditor's January 4,
1993
letter (ACF Ex. C). Since there is no documentation of any
expenditures
by the fiscal agent, the amount advanced to the contractor
cannot be
charged to the grant.
Child Care Contractors
o Nokomis Child Care Center -- CSCC advanced $2,000 to the
Nokomis
Child Care Center, Inc. The contract with Nokomis required "at
least
800 hours of crisis child care to children at imminent risk of abuse
or
neglect and whose parents would benefit from an emergency child
care
service." CSCC's supplemental memorandum, Ex. D. The record
contains
an unsigned and undated one-page document entitled "Narrative
Final
Report," purportedly detailing services provided by Nokomis under
this
grant as well as a one-page 1990 Nokomis "Year End Report"
describing
the types of families served and stating that it provided 70,074
hours
of child care at a cost of $215,420. CSCC's September 21,
1992
submission. The narrative report states that grant funds were used
to
provide care to children not meeting Nokomis' regular
enrollment
criteria (working parents or in school). The report
identified two
families served. 4/ For case number one, the report
stated:
We provided these children with care on 3 days a
week while the mom
attended counseling,
appointments, medical appointments, and had
some
basic respite time to take care of herself.
For case number two, the report stated:
We serve the children 2 days a week on a regular
basis for which
the family pays. We also serve
as a drop in center during mom's
medical emergencies
(which amounted to over 250 hours during 1990).
ACF's Ex. C, Att. C.
The auditor found that --
[f]rom an audit stand point this narrative report is
not
adequate documentation. What should have been required is
a
breakdown of the specific days and hours each child was
cared
for. In addition a per hour cost for this care should have
been
reported. Last, the report should be signed and dated by
an
appropriate representative of the child care center
certifying
that the information is correct that the services were
provided.
Auditor's January 4, 1993 letter (ACF Ex. C).
o Belmont Baby Care -- CSCC advanced $3,000 to Belmont Baby Care.
The
contract with Belmont required "up to 800 hours of crisis child care
to
children who are at imminent risk of abuse or neglect and whose
parents
will benefit from an emergency child care service."
CSCC's
supplemental memorandum, Ex. E. The record contains an
unsigned,
undated, and handwritten two-page schedule which lists for each
month
from June through November of 1990 several children and a total
amount,
presumably indicating when and to whom care was provided and at
what
cost. CSCC's September 21, 1992 submission. The amounts
attributed to
the children total $3,000. There are no dates or hours of
service
listed.
The auditor found that --
[w]hile this report shows the total $3,000 to have been
earned,
the report does not provide adequate documentation
to
substantiate that the provisions of the contract were fulfilled.
From an audit stand point this report is not
adequate
documentation. First, I can place no reliance on this
report as
anyone can obtain a four column ledger sheet and add
names,
dates and amounts. What should have been required is
a
breakdown of the specific days and hours each child was
cared
for. In addition, a per hour cost for this care should
have
been reported. Last the report should be signed and dated by
an
appropriate representative of the child care center
certifying
that the information is correct and that the services
were
provided.
Auditor's January 4, 1993 letter (ACF Ex. C).
CSCC provided the Nokomis and Belmont reports as the only support for
the
allowability of its contract costs; it gave no reasons why ACF
should find
these reports sufficient when the State auditor did not.
CSCC argued only
that its contractors had provided these final reports
to CSCC and that it had
required no other reports. CSCC's supplemental
memorandum.
As we explained above, it is a fundamental principle that a grantee
have
documentation to support its claim for costs. Further, grant funds
may
be used only for allowable costs, and a grantee must maintain
control
and accountability for all grant funds. 45 C.F.R. .
74.61(b). The
applicable financial management standards required that
CSCC maintain
records showing how funds were applied for grant supported
activities,
as well as maintain source documentation to support its
accounting
records. 45 C.F.R. . 74.61(b) and (g). OMB A-87
provides that a state
grantee "assumes the responsibility for seeing that
federally-assisted
program funds have been expended and accounted for
consistent with . . .
program objectives." OMB A-87, Att. A,
A.2.b. These financial
management and cost principle requirements
imposed a duty on CSCC to
monitor its contractors to assure that costs
charged to federal funds
were adequately documented. Nevertheless, CSCC
simply advanced the
$2,000 and $3,000 payments to these contractors and
received no
contemporaneous reports showing how these child care funds were
applied
for purposes of the grant.
The Belmont and Nokomis reports do not satisfy the requirement for
source
documentation since they are not contemporaneous records of care
provided
under this project. As we stated above,
non-contemporaneous
documentation is subject to close scrutiny. The
Nokomis and Belmont
reports were undated and unsigned, containing no
reference to any
underlying records which were the source for the entries on
the reports
as to children served under this project or the time and cost of
that
care. The State auditor found that these reports were
deficient
primarily because they did not provide a breakdown of the days and
hours
each eligible child was cared for, stating a per hour cost, and
because
the reports were not properly certified by a contractor
official. CSCC
clearly failed to maintain adequate supporting
documentation for these
contract costs. Under these circumstances, it
was reasonable for ACF to
adopt the auditor's findings and disallow the
contract costs for child
care.
Conclusion
Based on the foregoing analysis, we uphold ACF's reduced disallowance
in
the amount of $76,772.
M. Terry Johnson
Norval D. (John) Settle
Cecilia Sparks Ford
Presiding
Board Member
1. In order to assure full development of the record, the Board held
a
telephone conference and permitted the parties to file
supplemental
memoranda in addition to the briefing submitted under the
procedures at
45 C.F.R. . 16.8.
2. Until October 1, 1988, the administrative requirements for grants
to
state and local governments stated in OMB Circular A-102
were
implemented by 45 C.F.R. Part 74. As of that date,
administrative
requirements for many grants to states and local governments
were
implemented by means of a uniform rule codified for this Department
at
45 C.F.R. Part 92. ACF and the auditor both relied on the uniform
rule
which was implemented in Part 92. However, the notice of award for
this
grant was dated September 28, 1988 and cited to 45 C.F.R. Part 74
as
stating the applicable terms and conditions of award. ACF January
25,
1993 submission. There is no document in the record showing that
the
requirements of 45 C.F.R. Part 92 were later substituted.
Therefore, we
look to Part 74 for the applicable cost principles and
financial
management requirements for this grant. Since the relevant
substantive
requirements are essentially the same and the cost principles in
OMB
A-87 would apply whether we use Part 74 or Part 92, this is merely
a
technical point we are clarifying for the parties' information.
3. CSCC conceded that it should repay $14,906 in payroll
costs,
representing the amount by which the questioned costs exceeded
its
recalculated costs ($85,421 - $70,515). There is nothing in the
record
to explain the discrepancy between the initial figure confirmed by
the
auditor for recalculated costs of $72,540.72 and the later
$70,515
figure used by both parties. Since we find the documentation
inadequate
to support the allowability of any of the recalculated costs
except
those accepted by the auditor, we do not need to resolve
this
discrepancy.
4. It is unclear from the narrative report whether five or six
children
were served since the report stated that five children were served
but
described each family as having three