Uniform Administrative Requirements, Cost Principles, and · Compliance Overview – ACUA’s...

ACUA’s Virtual Event: 2020

Learning Objectives

1. Define the Office of Management and Budget's (OMB)

Uniform Administrative Requirements, Cost Principles, and

Audit Requirements for Federal Awards (Uniform

Guidance) requirements that are often subject to Federal

audit scrutiny

2. Identify red flags of non-compliance and tips for monitoring

and auditing these areas

3. Discuss concrete internal audit methodologies for auditing

sponsored research compliance in these areas

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Compliance Overview

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Compliance Overview –Applicable Regulations • Federal regulations

• The Office of Management and Budget’s (OMB) Uniform Administrative Requirements,

Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance)

• Federal Acquisition Regulation (FAR)

• Cost Accounting Standards (CAS)

• All other applicable laws and acts of Congress

• Sponsor/agency requirements• National Institutes of Health (NIH), National Science Foundation (NSF), Department of

Defense (DoD), Department of Education (Ed)

• Award terms and conditions

• State and local laws

• University policies

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Compliance Overview –Regulatory Order of Precedence

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Federal Law

Office of Management & Budget Regulations, Standards & Principles

Sponsoring Agency Requirements

University Policy

Grant Agreement

Terms & Conditions


Uniform Guidance Overview

The Office of Management and Budget’s (OMB) Uniform Administrative Requirements,

Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance)

• Implemented December 2014

• Incorporates and replaces OMB Circulars A-21, A-87, A-110, A-122, A-89, A-102, A-

133, and A-50

• Objectives: To reduce the administrative burden on award recipients and, at the same

time, guard against the risk of waste and misuse of Federal funds by:• Removing previous guidance that is conflicting and establishing standard language

• Directing the focus of audits on areas identified as at risk for waste, fraud and abuse

• Laying the ground work for Federal agencies to standardize the processing of data

• Clarifying and updating cost reporting guidelines for award recipients

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Uniform Guidance Overview – Outline

Subpart A – Acronyms and definitions

Subpart B – General provisions

Subpart C – Pre-Award Requirements and Contents

to Federal Awards

Subpart D – Post Federal Award Requirements

Subpart E – Cost Principles

Subpart F – Audit Requirements

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Cost Allowability

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Cost Allowability – Salary Costs

• Per section 200.430 of the Uniform Guidance, salaries charged must be based on records accurately reflecting the work performed, which must:

• Be supported by a system of internal control • Be incorporated into the official records of the organization• Reasonably reflect total activity • Encompass both federally funded and all other compensated activities on

an integrated basis• Comply with the established accounting policies and practices of the

organization• Support the distribution of the employee’s salary among specific activities

or cost objectives

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Cost Allowability – Salary Costs

• Charges for work performed during the summer months (or

other periods) not included in the Institutional Base Salary

(IBS) will be determined based on the relative amount of

base salary that would be paid

• Personnel costs are a risk since they account for

approximately two-thirds of direct research costs

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Cost Allowability –Salary Costs in the COVID-19 Era• Salary and stipends for research personnel can continue to be

charged to research awards as long as it is charged in a manner consistent with institutional policy; however, there are additional considerations by agency

• National Institutes of Health (NIH) allows continuation of salary charging even if there is a significant reduction in productivity

• Per the Council on Governmental Relations (COGR), “If employers ask employees to work remotely and if employees can work successfully in that environment, then their salary can continue to be paid on federally funded sponsored awards, provided there is no agency-specific restriction.”

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Internal Audit Methodologies –Salary Costs

• Review effort certification reports for alignment with the effort

stated in award documentation; identify and investigate

significant variances

• Verify effort percentages against interview commentary of

roles

• Assess understanding of effort reporting by researchers and

administrators

• Examine effort reports for proper approval

• Review the timeliness of certifying effort certification reports

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Cost Allowability – Cost Charging

Per Subpart E – Cost Principles of the Uniform Guidance costs

charged to federal awards must be:

• Allowable (i.e., not expressly prohibited by the cost principles)

• Supportable (documented, with clear business purpose)

• Within the approved budget and scope (justifiable)

• Aligned with institutional policies and procedures

• Able to pass the “AARC test” (see next page)• This is not a specific “test” listed in the regulations, but a helpful

pneumonic to remember all the cost requirements

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Cost Allowability – Cost Charging

An important test for costs charged to federally-sponsored awards is to determine if the cost is:• Allowable: Is this cost prohibited for any reason, either by sponsor

requirements or federal regulations?• Allocable: Can this cost (or a portion of the cost) be supportably

charged to this award?• Reasonable: Will a “prudent person” make the same decision on

the purchase in similar circumstances?• Consistently treated: Does your institution follow consistent

practices in charging that type of cost?

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Cost Allowability – Direct and Indirect (F&A) Costs

• Identification with the Federal award rather than the nature of

the goods and services involved is the determining factor in

distinguishing direct from indirect costs

• Per section 200.413 of the Uniform Guidance direct costs

are:• Costs that can be identified specifically with a particular final cost

objective, such as a Federal award, or other internally or externally

funded activity, or that can be directly assigned to such activities

relatively easily with a high degree of accuracy.

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Cost Allowability – Direct and Indirect (F&A) CostsPer section 200.414 of the Uniform Guidance:• Facilities are defined as, “…depreciation on buildings, equipment

and capital improvement, interest on debt…”• Administration is “...general expenses such as the director’s office,

accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories…”

• Charged based on the negotiated F&A rate for your institution• If issuing subawards, a pass-through entity must honor the

negotiated rate of the subrecipient• Most commonly applied to Modified Total Direct Costs (MTDC)

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Cost Allowability – Additional Risk Areas

Information on the following cost allowability risk areas can be

found in the appendix:

• Administrative and clerical costs

• Computers and equipment

• Conference costs

• Travel costs

• Procurement costs

• Cost transfers

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Subrecipient Monitoring

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Regulatory Requirements

• Per section 200.331 of the Uniform Guidance pass-through

entities must:• Ensure that every subaward is clearly identified to the subrecipient as a

subaward and must evaluate each subrecipient’s risk of non compliance

• Flow-down provisions are the terms and conditions that must be

carried through to the subrecipient agreement

• The pass-through entity is responsible for reviewing financial and

performance reports, and resolving audit findings

• Subrecipients can often be seen as “low-hanging fruit” during

audits

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• Per section 200.93 of the Uniform Guidance:• “Subrecipient means an institution that receives a subaward from a pass-

through entity to carry out part of a Federal program”

• Though costs incurred (and subsequently invoiced) are typically beyond the control of the prime awardee, the same AARC requirements apply for these costs to be passed along to a federal sponsor

• Subrecipients may use the rates that they negotiated with Federal agencies

• If no such rate exists, the pass-through entity negotiates a rate with the subrecipient, or the de minimis rate of 10 percent

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Key Risks

• Subrecipient may incur costs that are unallowable per the award

• Subrecipient may charge for costs that are not fully supported or

will withstand audit scrutiny

• Costs charged by the subrecipient may not align with technical

progress made

• Progress reporting may be inaccurate

• Subrecipient may not successfully achieve technical progress

• Subrecipient may exceed budget and be unable to complete the

scope of work

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Internal Audit Methodologies –Subrecipient Monitoring• Review subrecipient risk assessments to evaluate the risk

assessment process• For subrecipients where risk was rated as other than “low,” verify

that appropriate mitigation procedures were implemented• Select a sample of subrecipient costs and review supporting

documentation to determine whether costs are reasonable, allocable, and allowable with respect to award terms

• Review a sample of subrecipient invoices for PI approval and alignment with technical progress

• Confirm cumulative expenditures are in line with budget and technical progress and timely

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Indirect Cost Rates/Allocations

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Per section 200.414 (c) of the Uniform Guidance:

• All federal agencies are required to accept an institution’s

negotiated rate, unless restricted by law or statute• If issuing subawards, a pass-through entity must honor the

negotiated rate of the subrecipient

• Institutions (including subrecipients) without a negotiated rate

can elect to receive a de minimis rate of 10%

• Institutions can elect a one-time extension of their current

negotiated rate for up to four years

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Key Risks

• Lacking an understanding of how indirect cost rates are

defined, distributed, and displayed in a proposal budget

• Underestimating indirect costs to make research grants more

competitive

• Charging the incorrect rate (on-campus vs off-campus,

research vs. other sponsored activities, time period covered)

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Key Risks

• Failure to exclude unallowable costs from the rate calculation

• Lack of automated systems to timely and accurately calculate

MTDC and F&A

• Assigning responsibility for preparing or reviewing indirect

cost rate proposals

• Double recovering overhead costs (i.e., building overhead

cost into direct cost categories of a proposal grant budget

and also accepting a fixed dollar amount for indirect costs)

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Internal Audit Methodologies –Indirect Cost Rates/Allocations

• Review all costs in the F&A pool to determine whether they

are allowable

• Assess whether all relevant costs are included in the F&A

base, including unallowables

• Review specific grants at your institution to determine

whether the correct F&A rate is applied (e.g., on versus off-

campus, research versus other sponsored programs, time

period covered)

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Cost Share/Matching

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Per section 200.306 of the Uniform Guidance:

• Cost sharing is the portion of total costs of a sponsored

project paid for by the institution, rather than the sponsor

• Federal regulations require that cost sharing be:• Allowable

• Incurred during the period of the award

• Not from other federally-funded sources

• Verifiable

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• Many times cost sharing is accomplished by:• Covering a portion of salary

• Not charging F&A

• Sharing the cost of major equipment

• Paying for necessary facility upgrades or improvements

• In-kind contributions

• Without a system to identify, monitor, and report cost sharing,

institutions can get into trouble

• Common audit findings: inadequate documentation for costs and

inappropriate source of funds

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Key Risks

• All cost sharing for awards should be tracked and reported to

the sponsor (especially as it related to effort reporting)

• Loss of funding as a result of not meeting cost share

requirements

• Lack of monitoring may result in project overrun

• May reduce the ability to maximize reimbursement from

external sponsors

• Accurate records to verify cost share funds have been

provided, as promised, to meet the project's objectives

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Internal Audit Methodologies –Cost Share/Matching

• Review your institution’s documentation retention guidelines

to ensure cost sharing is verifiable

• Review your institution’s cost share reporting policies and

procedures to ensure they include all required elements

• Review monitoring activities over cost share

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Service Centers

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Per section 200.468 of the Uniform Guidance:

• The costs of services provided by highly complex or specialized

facilities operated by the institution, such as computing facilities, are

allowable, provided the costs:• Do not discriminate between activities under Federal awards and other activities

of the institution, including usage by the institution for internal purposes

• Are designed to recover only the aggregate costs of the services (direct and

indirect); service center rates must be adjusted at least biennially and adjust for

previous period over/under applied costs

• Are charged to the applicable awards based on actual usage of the services

• Where the costs incurred for a service are not material, they may be allocated as

indirect (F&A) costs

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Key Risks

• Inadequate policy and/or oversight to monitor service centers• Including service center costs in the calculation of indirect cost

rates• Surplus balances are not carried forward or are misused• Including duplicate or unallowable costs in the calculation of billing

rates• Billing some entities at reduced rates• Inadequate accounting software or system for service centers

such as a management software to track, invoice, and collect regularly

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Internal Audit Methodologies –Service CentersInternal audits or reviews of service centers should look for:

• History of surpluses (revenues exceeding expenditures) without an accompanying rate

adjustment

• Frequency of service center rate reviews and “true-ups”

• Costs not following Cost Accounting Standards for reasonableness, allocability,

allowability, and consistent treatment

• Unrelated business income tax issues, when primary function of specialized services

facilities (i.e., service centers) are not part of the core mission of the institution

• Fluctuations in payroll costs, which may indicate departments “parking” expenditures

or using service center funds as bridge funding while there are gaps in other

sponsored projects

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Program Income

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• Per section 200.307 of the Uniform Guidance:• Program income means gross income directly generated by a supported activity or earned as a

result of the Federal award during the period of performance

• Costs incidental to the generation of program income can typically be deducted from gross

income to determine program income (provided the same costs are not charged to the award

separately)

• One common source of program income is conference fees for Federal supported conferences

• Taxes, special assessments, levies, fines, and other such revenues are not program income

• Proceeds from the sale of real property, equipment, or supplies are not program income

• Recipients are required to track and account for all program and report program

income earned and spent on the Federal Financial Report (FFR)

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Use of program income:

• Generally in higher education use option (2) Addition per the

Uniform Guidance.• Program income is added to the Federal award and must be used for the

purposes and under the conditions of the award

• Alternately, option (3) Cost sharing per the Uniform Guidance.• With prior approval of the Federal awarding agency, program income may

be used to meet the cost sharing or matching requirement of the Federal

award

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Key Risks

• Incorrectly tracking, accounting, and reporting program

income

• Charging unallowable costs as program income

• Not disbursing funds from program income, rebates, refunds,

contract settlements, audit recoveries, and interest earned on

such funds before requesting additional cash payments

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Key Risks

• Not using the recipient’s negotiated F&A rate with the Federal

government

• Build up of program income from a lack of spending

• Using program income out of line with sponsor’s requirement

(i.e., deduction, addition, cost share or matching)

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Internal Audit Methodologies –Program Income

• Test a sample of costs charged as program income to identify

whether they were allocated appropriately (e.g., cost can be

included as program income per Uniform Guidance) and

consistently

• Review your institutions accounting methodology to

determine whether program income is being tracked

accurately and correctly

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Appendix – Additional Cost Allowability Risk Areas

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Cost Allowability – Overview

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Administrative and Clerical

Costs

Computers and

Equipment

Conference Costs

Indirect Costs Salary CostsSubrecipient

Costs

Travel Costs Cost Sharing Procurement Cost

Transfers


Cost Allowability –Administrative and Clerical Costs• Administrative and clerical expenses like salaries of administrative personnel, office

supplies, and postage should normally be treated as indirect (F&A) costs

• Direct charging may be appropriate only if all of the following conditions are met:1. Administrative or clerical services are integral to a project or activity

2. Individuals involved can be specifically identified with the project or activity

3. Such costs are explicitly included in the budget or have the prior written approval of the

Federal awarding agency

4. The costs are not also recovered as indirect costs

• There is a risk that preapproval was not obtained, that the administrative employee or

cost benefits multiple projects without a clear allocation, or that the institution does not

have a consistent approach to treating these costs

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Internal Audit Methodologies –Administrative and Clerical Costs

• Judgmentally select costs like salaries of administrative

personnel, office supplies, and postage and request

receipts/invoices for appropriateness

• Review justifications for administrative and clerical costs

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Cost Allowability –Computers and Equipment• Charging computers to a research award has long been one of the most debated cost

items

• Section 200.453(c) of the Uniform Guidance includes a specific reference to costs of

computing devices within the description of materials and supplies, specifically:• “In the specific case of computing devices, charging as direct costs is allowable for devices that

are essential and allocable, but not solely dedicated, to the performance of a Federal award.”

• Equipment is any tangible personal property with a life of more than one year. Section

200.439(b) says• “Capital expenditures for special purpose equipment are allowable as direct costs, provided that

items with a unit cost of $5,000 or more have the prior written approval of the Federal awarding

agency or pass-through entity.”

• Since laptops and computers can be used for many different purposes it can be a

challenge to prove allocability to specific project

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Internal Audit Methodologies –Computers and Equipment

• Assess whether computer costs and equipment are essential

and allocable to the award by requesting detailed

use/purpose

• Assess whether the cost appears to be charged consistently

compared to similar costs

• Look for purchases made towards the end of the award

period, which may indicate an attempt to “spend down”

excess funds

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Cost Allowability – Conference Costs

• “Allowable conference costs paid by the institution as a sponsor or host of the

conference may include rental of facilities, speakers’ fees, costs of meals and

refreshments, local transportation, and other items incidental to such

conferences...”

• Hosts of the conference must ensure that costs are appropriate, necessary,

and managed in a way that minimizes costs to the award

• Conference costs can be an area of auditor focus because: • Entertainment and cost of amusement are unallowable

• Timing of presenting research results typically near the end (or after) the grant budget

period

• Justification/support for allocability of conference costs to a specific grant

• Equipment purchase for the conference is unallowable

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Internal Audit Methodologies –Conference Costs

• Judgmentally sample costs related to conference activities

and review supporting documentation to assess legitimacy

• Compare conference costs to budget justifications

• If conference costs aren’t specifically stated in budget

justifications, request evidence of sponsor approval (e.g.,

email correspondence)

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Cost Allowability – Travel Costs

• 200.474 “Travel costs are the expenses for transportation, lodging, subsistence, and related items incurred by employees who are in travel status on official business of the institution. “

• While travel expenses are a common direct cost, there are many associated challenges and compliance concerns:

• Domestic versus international travel funds• Fly America Act• Use of per diem or actual expense reimbursement• Split allocation of travel costs• Specific conferences (or any conference activity) are often not detailed in the

project budget, including sending graduate students or research assistants

• Incorrectly charging travel costs may lead to reimbursement to the funding agency

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Internal Audit Methodologies –Travel Costs

• Review departments’ understanding of Federal and institution

travel cost guidelines

• Obtain supporting documentation to determine the nature of

the expense

• Determine if the cost is allowable per Federal Regulations,

allocable to the project as charged (based on review of award

documentation), and reasonable

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Cost Allowability – Procurement Costs

• All procurement activities are expected to be made through “full and open competition” according to the Uniform Guidance.

• Institutions must also “maintain records sufficient to detail the history of the procurement.” This includes:

• Rationale for the method of procurement• Selection of contract type• Contractor selection or rejection• Basis for the contract price

• Since procurement covers a large portion of costs supporting documentation (i.e., invoices, purchase orders, approvals, vendor selection reasons) is needed to verify appropriateness of the costs

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Internal Audit Methodologies –Procurement Costs

• Review who is responsible for particular procurement

activities including review, approval, and monitoring

• Assess your institution’s policies and procedures with regards

to documentation retention

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Cost Allowability – Cost Transfers

• A cost transfer is a reassignment of charges on sponsored projects to another account

• To comply with allowability and allocability requirements support must be made available for the reason of the transfer

• Generally cost transfers should be submitted no later than 90 days after discovery of the error or 120 days from the date of the transaction

• Costs should never be moved to free up or spend down available budget

• Cost transfers are an expected component of research operations but may draw increased audit scrutiny. When a transfer is necessary, it’s better to have cost transfers on (or off) an award than to have an inappropriate cost!

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Internal Audit Methodologies –Cost Transfers

• Review the timeliness of cost transfers

• Review cost transfer justification for appropriateness

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Disclosure

Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.

The content in this presentation is a resource for Baker Tilly Virchow Krause, LLP clients and prospective clients. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

© 2020 Baker Tilly Virchow Krause, LLP

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