Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Action, Inc.
DATE: March 25, 1993
Docket No. A-92-215
Audit Control No. A-06-92-17226
Decision No. 1400
DECISION
Action, Inc. (Action) appealed a determination by the Administration
for
Children and Families (ACF) to disallow $174,169 based on an
audit
report of Action's Head Start grant for the period April 1, 1989
through
March 31, 1990 (program year 20). For the reasons discussed
below, we
uphold the disallowance, subject to adjustment as ACF agreed
during
Board proceedings.
Relevant Authority
Section 2928 of 42 U.S.C. describes the purpose of Head Start grants
as
follows:
[T]he planning, conduct, administration, and evaluation of
a
Headstart program focused primarily upon children
from
low-income families who have not reached the age of
compulsory
school attendance which (1) will provide such
comprehensive
health, nutritional, educational, social, and other
services as
will aid the children to attain their full potential, and
(2)
will provide for direct participation of the parents of
such
children in the development, conduct, and overall
program
direction at the local level.
Action is accountable for all of its Head Start program expenditures.
45
C.F.R. .. 1301.1-2. Grant funds for programs such as Head Start may
be
used only for allowable costs of the activities for which the grant
was
awarded. 45 C.F.R. . 74.170; Economic Opportunity Council of
Suffolk,
Inc., DAB No. 679 (1985). Section 74.174 of 45 C.F.R. provides
that the
principles to be used to determine the allowable costs of
activities
conducted by nonprofit organizations, such as Action, are
contained in Office
of Management and Budget (OMB) Circular A-122. OMB
Circular A-122, Att.
A, A. 2. states in pertinent part:
Factors affecting allowability of costs. To be allowable
under
an award, costs must meet the following general criteria:
a. Be reasonable for the performance of the award and
be
allocable thereto under these principles.
Costs that are not specified in the approved budget, in order to
be
allowable, must be approved by the granting agency. 45 C.F.R. .
74.177.
Background
In accordance with grant requirements, Action's Head Start program
was
audited for the program year 20. According to the audit report,
Action
had made interfund transfers in the amount of $184,623 from the
Head
Start general fund and only $10,454 had been later repaid. ACF
notified
Action that $174,169 was being disallowed on the ground that grant
funds
were used for costs that were not allocable to the current program
year.
1/
Action acknowledged that $125,000 of the disallowed amount
represented
expenditures for costs which Action had expended in a prior year,
but
which were in excess of the budget for that year and which therefore
had
previously been questioned by ACF. Action explained that the costs
were
otherwise allowable since the costs were primarily for food and
expenses
of Head Start participants. 2/ Action asserted that
the
over-expenditures had been inadvertent, that Action had taken steps
to
improve its accounting system, and that it operated a model
program.
Action expressed concern that it would not be able to repay the
funds,
since it received very little in unrestricted cash
contributions. Thus,
Action maintained that it should be allowed to
repay the Head Start
program with in-kind contributions.
Further, Action asserted that $49,169 of the disallowance
represented
"normal" interfund transfers which Action typically repaid to the
Head
Start program within a year. Action did not, however, submit
any
documentation showing such repayment. In a February 25, 1993
telephone
conference call convened by the Board, a representative of the
certified
public accounting (CPA) firm which performed the audit for program
year
20 stated that while the $49,169 might have been paid back to the
Head
Start general fund, Action's previous practice of interfund
borrowings
made it impossible to tell if the money had been loaned out
again.
Further, the CPA representative stated that the firm was in the
process
of completing the audit for 1991 and, until it completes the audit
for
1992 (when the interfund borrowings were stopped), it would
be
impossible to state that the Head Start fund had been completely
repaid.
ACF agreed to work with Action in an attempt to develop a
repayment
schedule and stated that it would reconsider Action's request to
repay
the over-expenditures through excess in-kind contributions in
later
years. ACF also agreed to adjust the disallowance to the extent
that
the 1992 audit report confirmed that any "normal" interfund
transfers
had been repaid to the Head Start program. Although
this appeared to
satisfy Action's concerns, ACF asked that the Board issue a
decision
affirming the merits of the disallowance. Tape recording of
Board's
February 25, 1993 Telephone Conference.
Analysis
As previously indicated, Action is accountable for all of its Head
Start
program expenditures. 45 C.F.R. .. 1301.1-2. In this case,
Action
failed to properly account for Head Start funds since it used
those
funds to pay over-expenditures from a prior year and to cover costs
of
other programs, to which the funds were transferred. Thus, the
costs
were not allocable to the project for which the funds were
awarded. 45
C.F.R. . 74.170; OMB Circular A-122, Att. A, A. 2; see also
Economic
Opportunity Council of Suffolk, Inc., DAB No. 679 at 3 (1985), and
El
Grito Head Start Agency, DAB No. 1309 (1992). In addition, the
costs
were not specified in the approved budget of the grant at issue and
were
not approved by ACF as required by regulation. 45 C.F.R.
.74.177. ACF
agreed to adjust the disallowance to the extent "normal"
interfund
transfers have been repaid (and not replaced by other improper
interfund
transfers). Action did not allege that it had repaid any of
the
$125,000 through incurring and paying allowable Head Start
expenditures
in later years with its own funds. Indeed, Action
acknowledged that
virtually all of the cash contributions it received were
funds
restricted to use for other Action projects. Therefore,
ACF's
disallowance was appropriate in this instance.
Moreover, we do not have authority to grant Action's request that it
be
allowed to repay the Head Start program with excess
in-kind
contributions. The discretion to determine Action's repayment
method
lies completely with ACF. The Board has in many decisions stated
that
we decide only the merits of the dispute between the parties.
See,
e.g., Guam Dept. of Public Health and Social Services, DAB No.
1050
(1989), and decisions cited therein.
Finally, we note that ACF has agreed to work out a repayment
schedule
which will address Action's concern that it be able to maintain
its
program. Conclusion
Based on the foregoing, we uphold ACF's disallowance in full subject
to
reduction by ACF, as noted above, when Action's 1992 audit is
completed.
Donald F. Garrett
M. Terry Johnson
Judith A. Ballard
Presiding
Board Member
1. ACF also determined that Action's Head Start program had a
net
expenditure in excess of the approved budget in the amount of
$28,118
for program account number 26. In response to a question from
the
Board, ACF explained that this amount was not included in
the
disallowance because ACF's general practice is to allow a grantee
to
repay its Head Start account without disallowing the amount of an
excess
expenditure in the current program year. ACF stated that if the
amount
is not repaid by the next audited program year or period, then ACF
would
disallow the amount owed.
2. Initially, Action signed a promissory note to the Department
for
repayment of the Head Start over-expenditures. Thereafter, Action
took
out a loan and paid off the note and transferred $125,000 from the
grant
at issue to repay the