This guide is intended for internal use only and does not create any rights, privileges or benefits, either substantive or procedural, enforceable by law by any person or entity, nor does it limit any rights or privileges that the Office of Inspector General or the U.S. Department of Health and Human Services may assert in any matter.

AUDIT GUIDE
ADEQUACY-AND, COMPLIANCE AUDITS OF DISCLOSURE STATEMENTS

SUBMITTED BY EDUCATIONAL INSTITUTIONS U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

OFFICE OF INSPECTOR GENERAL

DECEMBER 1999

INTRODUCTION

AUDIT OBJECTIVE

COST ACCOUNTING STANDARDS AND 'OMB CIRCULAR A-21

In accordance with Public Law 100-679, certain contractors and subcontractors are required to: (1) comply with CAS, and (2) disclose in writing and follow consistently their cost accounting practices. On November 8, 1994, CASB issued final rules (Title 48 of Code of Federal Regulations (CFR), Parts 9903 and 9905) that require certain educational institutions to file a description of their accounting practices with their cognizant agencies. To minimize confusion over CASB requirements for educational institutions, all current CASB requirements have been and future CASB requirements will be incorporated into OMB Circular A-21. Failure to file an adequate DS-2 may prevent an educational institution from receiving a grant or contract.

The OMB Circular A-21 establishes principles for determining costs applicable to grants, contracts, and other agreements with educational institutions. The principles are designed to provide that the Federal Government bear its fair share of total costs, determined in accordance with GAAP, except where restricted or prohibited by law. The CAS (48 CFR, Chapter 99, Part 9903 and 9905) and OMB Circular A-21 require educational institutions to submit a DS-2 and adhere to the following four standards:

· Consistency in Estimating, Accumulating and Reporting Costs: The purpose of this standard is to ensure that each educational institution's practices used in estimating costs for a proposal are consistent with cost accounting practices used by the educational institution in accumulating and reporting costs.
· Consistency in Allocating Costs Incurred for the Same Purpose: The purpose of this
standard is to require that each type of cost is allocated only once and on only one basis to
any contract or other cost objective.
· Accounting for Unallowable Costs: The purpose of this standard is to facilitate the
negotiation, audit, administration and settlement of contracts by establishing guidelines
covering:

1. Identification of costs specifically described as unallowable, at the time such costs first become defined or authoritatively designated as unallowable.


 

2. The cost accounting treatment to be accorded such identified unallowable costs to promote the consistent application of sound cost accounting principles covering all incurred costs.

The CAS and the revised OMB Circular A-21 state that the cognizant Federal agency shall:

· Prescribe regulations and establish internal procedures to promptly determine on behalf
of the Federal Government that a DS-2 adequately discloses the educational institution's
cost accounting practices.

· Establish procedures to determine that disclosed practices are compliant with applicable
CAS and requirements of OMB Circular A-21.

Adequacy Determination

The HHS is responsible for reviewing DS-2s submitted by educational institutions to determine whether the DS-2 adequately describes the educational institution's cost accounting practices. The OMB left the determination of adequacy up to the cognizant agency. The CAS (48 CFR, Chapter 1, Part 30.2027(a)) states that a DS-2 is adequate if it is complete, accurate and current. In consultation with DCA, OAS considers:

· A DS-2 to be complete if it is not vague and no required disclosures are missing.
· A statement to be accurate if it correctly describes the actual method of accounting the
educational institution uses or intends to use.
· A disclosed practice to be current if it is the practice which the educational institution
currently follows or intends to follow.

In determining whether a disclosed practice is current and accurate, a key consideration is timing. For example, if a disclosed practice was in effect two years ago , but is not in effect at the time of the DS-2 submission, then the practice is not current. If a practice never was in effect, then the disclosed practice is not accurate.

The DCA will perform an initial desk review of the DS-2 and the OAS will perform an on-site audit to provide information to the DCA to assist in making the determination of the adequacy and compliance of the educational institution's DS-2.

Division of Cost Allocation Desk Reviews

The DCA will conduct a desk review to identify: (1) areas that are inconsistent with DCA's firsthand knowledge of the educational institution's practices, (2) vagueness, (3) noncompliances with the CAS and OMB Circular A-21, and (4) missing items. Based on this review, DCA in requesting OAS assistance will apprise OAS of specific concerns.

In addition to its other responsibilities, the DCA acts as the Administrative Contract Officer for those educational institutions which have a F&A cost agreement with HHS and which are required to submit a DS-2. In this capacity, the DCA is the management official responsible for (1) issuing determinations of adequacy and compliance, and (2) negotiating and resolving issues involving the DS-2.

OAS Audits

 

RELYING ON THE WORK OF OTHERS:

To complete this audit timely, wherever possible auditors should rely on the audit work performed by the educational institution's IPAs and the DCA negotiator's knowledge of current practices. Auditors should contact the educational institution's IPAs and the DCA negotiators.

1. The OMB Compliance Supplement for Audits of Institutions of Higher Learning and Other Non-Profit Institutions provides suggested audit procedures for the IPA to audit and evaluate the institution's accounting system and internal controls, as well as the allowability and allocability of costs claimed against Federal awards. As such, auditors should interview the institution's IPAs to determine the scope of their audit in relation to the areas covered by the DS-2. This interview will enable the auditor to determine where the OMB Circular A-133 audit work may be sufficient for OAS to rely upon and, therefore, eliminate further audit work.

a. Consider reviewing the applicable working papers. If sufficient audit work was performed in a particular area and the data in the DS-2 is accurate, auditors should rely on the OMB Circular A-133 audit and not perform any further audit procedures for that area of the DS-2.

b. Determine if the IPA is aware of any changes to the institution's cost accounting

practices that have occurred since the end of the audit period. If so, determine if

the IPA has concluded whether the changes are in compliance with GAAP, CAS

and OMB Circular A-21.

2. Interview the DCA negotiators to determine the extent of their first-hand knowledge of the institution's actual accounting practices.

3. Determine whether the IPAs and DCA negotiators are aware of any inconsistencies between the DS-2 and their first-hand knowledge of the institution's practices.

a. Evaluate the approach the institution took in preparing the DS-2.When evaluating the approach, consider the level of corroboration between the various offices and departments in preparing the DS-2. The greater the corroboration between senior management, accounting and budgeting departments and the office which prepared the DS-2, the less risk of disclosed practices differing from actual practice.

b. Determine if the institution's IPAs or consultants provided any guidance or assistance in the preparation of the DS-2. If so, to what extent?

DIRECT CHARGING PRACTICE (DS-2 SECTION 2.1)

1. Review written policies for: (1) determining how costs, such as postage and office supplies, incurred for the same purpose, in like circumstances, are treated consistently as either direct costs or F&A costs, and (2) charging administrative and clerical salaries and other administrative costs, such as postage and office supplies as direct costs versus F&A costs.

See OMB Circular A-21, Section F. 6.b. which provides that administrative and clerical staff salaries should normally be treated as F&A costs. The direct charging of these costs may be appropriate where the nature of the work performed under a particular project requires an extensive amount of administrative or clerical support which is significantly greater than the routine level of such services provided by academic departments. See Exhibit C of OMB Circular A-21 for examples of "major projects" where direct charging of administrative or clerical salaries may be appropriate. Section F.6.b. also states that office supplies, postage, local telephone costs, and memberships shall normally be treated as F&A costs.

2. Were the policies provided to appropriate individuals within the departments?

3. Should testing be deemed necessary, obtain a listing of administrative/clerical costs that were charged directly to sponsored agreements.

- Select a limited sample of administrative/clerical costs for review.
- Review sponsored agreement documents to determine if direct charging of administrative/clerical costs was justified and that the costs were "unlike" circumstances. As administrative/clerical costs are normally indirect costs, such costs should be charged directly only in exceptional circumstances consistent with Section F. 6.b. and Exhibit C of OMB Circular A-21. Those circumstances should be specifically described in the sponsored agreement documents.

Does the policy require that cost sharing be documented?

Does the organized research base include cost sharing identified to the organized research function?

Does the organized research base also include expenditures for organized research activities funded by endowment/gift accounts and salary costs in excess of the NIH salary cap related to organized research projects?

Note: OMB Circular A-21 makes an important distinction between "organized research" and "departmental research." Organized research is separately budgeted and accounted for, while departmental research is not. Departmental research is considered to be part of the instruction function. See OMB Circular A-21, Sections B.La..(2) and B.Lb.

One way to test the cost sharing system is as follows: Select a limited number ofgrants for review. Be alert for budgets which show that a PI will devote a particular percentage of effort (15%, for example) , but charge a different percentage of his salary (5%, for example). The institution should be able to demonstrate how the remaining 10% of salary was included in the MTDC base.

One way to test this is as follows: Scan the organized research MTDC report (if applicable) to determine whether endowment/gift accounts were included in the report. If those accounts were not included, consider reviewing endowment/gift files to determine the purpose of the endowment/gift. If the purpose was organized research, some expenditure should have been included in the MTDC base. If those accounts were included, interview institution personnel to determine how they determined the appropriate amount to include in the MTDC base.

- Determine whether the library cost pool includes departmental libraries. In certain situations, libraries may be located within departments. Auditors should verify that there are truly library activities by checking for such things as a circulation desk, librarian, and the like.

- Consider touring the buildings in which "library expenses" were incurred. Consult with DCA negotiators.

Is the switch disclosed in the DS-2?

Was the switch in accordance with OMB Circular A-21, which requires depreciation be computed as if the asset had been depreciated over its entire life?

Equipment purchased for nonfederal sponsored agreements should not be depreciated and then allocated to research. Instead, such equipment should be treated as a direct cost of the nonfederal sponsored agreements. Depreciation on the remaining value of this equipment after the nonfederal agreements expire is allowable if the institution has title to the equipment.

Is the basis consistent with the DS-2?

If a use allowance is claimed for assets that have outlived their useful life, was prior approval obtained from DCA?

4. Determine whether the depreciation method for financial statement purposes is consistent with the method for F&A purposes.

Research training. It would be inappropriate if research training were classified as instruction, but the space where the training takes place to be classified, disproportionately, as research space.

Review the instructions to the space survey and assess whether they will result in the appropriate allocation of space.

Review the results of the survey. Conduct a limited analysis to determine whether the results were consistently applied.

-Does the institution ensure unallowable costs remain in their appropriate base?

- Verify through the F&A cost proposal.

Are adjustments/reclassifications adequately disclosed in the DS-2?

· Adequacy

-Each material inaccurate, non-current, or incomplete statement in the DS-2 should be reported.

· Compliance

-Any material instance where a disclosed practice is not in compliance with CAS or the OMB Circular A-21 should be reported. In those instances where the auditor determined that a practice was inadequately disclosed, the auditor should report on whether the actual practice is in compliance with CAS and/or the OMB Circular A-21.

Name

INTRODUCTION

Federal research support at XXX University grew from $XX million in fiscal year 1994 to $XXX million in fiscal year 1995.


SCOPE

The objective of our audit was to provide information to the DCA to assist them in making the determination of the adequacy and compliance of XXX University's DS-2 with CAS and the requirements of OMB Circular A-21.

To accomplish our audit objective, we:

· Reviewed the University Area DS-2 and consulted with DCA negotiators.
· Obtained an understanding of XXX University's approach to reviewing its cost accounting policies and practices in preparation for submitting the DS-2.
· Obtained an understanding of the cost accounting practices identified in the DS-2 by (1) interviewing its preparers and other individuals as appropriate, (2) reviewing applicable documentation/reports, and (3) reviewing the identified methodologies contained in the latest F&A cost proposal submitted to DCA.
· Reviewed XX University's OMB Circular A-133, Audits of Institutions of Higher Education and Other Nonprofit Organizations, audit report and supporting working papers for the University's year ended June 30, 1995.
· Performed a risk assessment to identify those material parts of the DS-2, for which the disclosed practices present a high risk of not being complete, accurate or current, and performed additional testing as necessary.
· Determined whether the disclosed practices comply with OMB Circular A-21.
We conducted our audit in accordance with generally accepted government auditing standards during xxxx through xxxxx 1998 at xxxx University. We discussed the issues in this report with University officials.

FINDINGS AND RECOMMENDATIONS