The Colorado Audit The Colorado Audit A Case Study in Audit ResolutionA Case Study in Audit Resolution

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Bonnie Little, Esq.blittle@bruman.comBrustein & Manasevit, PLLCFall Forum 2011

Amount in DisputeAmount in Dispute

$23,962,000 in unsupported personnel costs charged to Federal grants

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Draft Audit ReportDraft Audit Report

Draft Audit ReportDraft Audit ReportAudit limited to CDE’s methodology for allocating personnel costs to Federal education grants

Audit covered the two-year period July 1, 2007 through June 30, 2009

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CDE’s Time Distribution CDE’s Time Distribution SystemSystemColorado Personnel Payroll System◦“CERT” defined as “cost center for which time is charged for expense”

◦CDE employee compensation is allocated to various state and federal funding sources according to the employee’s CERT code(s)

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OIG ReviewOIG ReviewOIG interviewed 8 CDE employees

◦“CDE’s documentation for reporting employee activity met only three of the four standards for personnel activity reports” Prepared monthly Signed by the employee Accounted for total activity BUT, did not reflect “after-the-fact”

distribution of actual activity of each employee

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OIG ReviewOIG Review

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“[W]e concluded that the timesheets we reviewed reflected the normal payroll reporting practices that are used throughout CDE.”Employees reported their time

based on predetermined allocation percentages

OIG ReviewOIG ReviewOIG noted that timesheets are not

submitted in time to impact the payroll

Accordingly, any adjustments would need to be made after the pay date◦CDE informed the auditors that

only one employee performs the payroll-related adjustments

“not possible to process the number of monthly adjustments that would be required”

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OIG Draft FindingOIG Draft Finding$23,962,000 inadequately supported personnel costs◦OIG questioned all CDE personnel

costs charged to Federal funds during fiscal years 2008 and 2009

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OIG RecommendationsOIG RecommendationsProvide documentation based on actual

work performed supporting the costsMake necessary adjustments for

personnel costs that were charged to Federal grants and do not meet OMB Circular A-87 requirements

Work with ED to determine appropriate approach to account for personnel costs

Develop and implement policy and procedures for a compliant system

Provide training for all CDE employees, supervisors, and managers

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CDE ResponseCDE ResponseCDE concurs with the draft

finding, but…◦Employees working on single cost

objective satisfied OMB Circular A-87 requirements

◦Actual effort for the vast majority of employees working on multiple cost objectives aligned with budgeted effort over each12-month period

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CDE ResponseCDE ResponseAgreed to do the reconstruction

◦Based on interviews with supervisors and employees, determined actual effort and reconstructed documentation supporting personnel costs for the two fiscal years

Agreed to make any necessary adjustments based on actual effort

Agreed to develop a new methodology and provide training

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Final Audit ReportFinal Audit Report

OIG Final Audit ReportOIG Final Audit Report

$23,962,000 in unsupported costs◦“We commend CDE for initiating

timely corrective action in response to the audit’s finding and recommendations.”

◦“The actions that CDE describes … would appear to address our finding, but the Department will ultimately make this determination.”

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CDE ResponseCDE ResponseCorrective actions:CDE developed and implemented a fully compliant time distribution system.

◦Provided new policy, instructions, and “frequently asked questions”

CDE conducted mandatory training◦Provided training materials and

attendance sheets15

CDE ResponseCDE ResponseReconstructionEmployees and supervisors

reviewed notes, calendars, work product, email and other documentation to determine an accurate breakdown of their effort during the two-year period◦If an employee was no longer available,

supervisors with first-hand knowledge attested to the employee’s actual effort

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CDE ResponseCDE ResponseThrough reconstruction, CDE

documented actual effort to support 98% of the personnel costs

$525,591 - unsupported effort

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CDE ResponseCDE Response

Equitable Offset accounts for the remaining funds at issue

CDE identified 3 employees that CDE could have paid using federal funds, but instead used state funds◦Employees worked on allowable

activities under IDEA, but were charged to state funds

◦ Job descriptions, affidavits, salary information

◦Salaries totaled $620,81118

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ED Final DeterminationED Final Determination

ED Final DeterminationED Final DeterminationSustain finding, require corrective actions◦“The methodology that CDE used to

allocate personnel costs paid with Federal funds did not comply with the requirements for time distribution systems contained in [OMB Circular A-87].”

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ED Final DeterminationED Final Determination“[W]e cannot accept the affidavits CDE provided as evidence of how employees who work on multiple programs actually allocated their work among those programs.”

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ALJ Decisions - ALJ Decisions - ReconstructionReconstruction

Application of the New York State Department of Education (April 21, 1995)◦After-the-fact affidavits and other pertinent

documentation are admissible as evidence.Consolidated Appeals of the Florida

Department of Education (June 26, 1990)◦Accepted affidavits completed by

supervisors years later as credible and useful evidence.

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ED Final DeterminationED Final DeterminationTo sustain a prima facie case for

recovering funds, ED must provide sufficient evidence that funds were misspent

Could not establish a prima facie case based on OIG’s judgmental sample of 8 employees

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ED Final DeterminationED Final DeterminationFootnote 7:

◦“However, because we find that the affidavits are not legally sufficient to support a prima facie case for recover of funds, we do not ask that CDE return any funds based on the difference in allocations as determined by the affidavits and the actual allocations made to the grant programs.”

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ED Final DeterminationED Final DeterminationReviewed CDE’s new policies and

determined that they “generally appear sufficient to establish an effective system”◦Clarifying questions:

Are predetermined percentages populated on the form, and then adjusted based on actual effort?

Do the percentages entered affect funds paid to employees, or must supervisors inform the finance office if adjustments are needed?

How and when are adjustments made to payroll records to reflect variances from budget estimates?

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ED Final DeterminationED Final DeterminationOther concerns

◦Sign-in sheets indicated that not all employees received training on the new system

◦FY 2010 single audit stated “a few employees are continuing to report time based on the budgeted allocation rather than actual allocations.”

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ED Final DeterminationED Final Determination

$23,942,000

$0

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