Issue Date July 24, 2009 Audit Report Number 2009-KC-1008 TO: Francis P. McNally, Director - Congressional Grants Division, DECC //signed// FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA SUBJECT: Grace Hill Used Neighborhood Initiative Grant Funds to Pay Unsupported Payroll Expenses and Duplicated Computer Support Costs HIGHLIGHTS What We Audited and Why We audited Grace Hill Neighborhood Health Centers (Grace Hill) because it received nearly $15 million in neighborhood initiative grants through fiscal year 2004, 2005, and 2006 appropriations. Our audit objective was to determine whether Grace Hill properly charged payroll and support expenses to the grants. What We Found Grace Hill charged unsupported salary and benefit costs to the grants because it did not require grant staff to accurately track their time. Additionally, Grace Hill improperly charged computer support expenses as direct costs to its grants. As a result, it charged more than $3.2 million in unsupported payroll expenses to the grants and received $196,690 more than allowable from the grants. What We Recommend We recommend that the U. S. Department of Housing and Urban Development (HUD) require Grace Hill to design and implement a process to track actual staff 1 hours, base future drawdown requests on actual activity, and provide documentation to support salary and benefits charged to the grants or reimburse the grants from nonfederal sources for costs that it cannot adequately support. Additionally, we recommended that HUD require Grace Hill to review the direct and indirect costs and certify that no other duplications have occurred and strengthen the review process by training the reviewer on what is included in the indirect cost rate. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided Grace Hill with our draft report on June 26, 2009. We received its written response on July 14, 2009. Grace Hill generally agreed with our findings. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit Finding 1: Grace Hill Used Improper Payroll Allocation 5 Finding 2: Grace Hill Duplicated Computer Support Expenses 7 Scope and Methodology 9 Internal Controls 10 Appendixes A. Schedule of Questioned Costs 11 B. Auditee Comments and OIG’s Evaluation 12 3 BACKGROUND AND OBJECTIVE Grace Hill Neighborhood Health Centers (Grace Hill) is a nonprofit corporation. It provides primary and preventive health care at five community health center locations, primarily to uninsured and underserved residents of St. Louis, Missouri. Grace Hill received almost $15 million in neighborhood initiative grants funded through fiscal year 2004, 2005, and 2006 appropriations administered through the U. S. Department of Housing and Urban Development (HUD). These grants were for primary prevention activities, including lead remediation and abatement of housing in St. Louis. Grace Hill has completed the first two grants and is currently administering the third. Grace Hill uses the funds to focus on primary prevention activities through the identification of pregnant women and their children who are “at risk” of lead poisoning. This project’s prevention goal was to serve 6,000 families of pregnant women over the three grant years. In addition, the project’s remediation goal was to remediate 900 homes of pregnant women in three years. Grace Hill reports that it is well on the way to meeting and possibly exceeding these goals. Our audit objective was to determine whether Grace Hill properly charged payroll and support expenses to the grants. 4 RESULTS OF AUDIT Finding 1: Grace Hill Used Improper Payroll Allocation Grace Hill improperly charged payroll expenses to its grants. This condition occurred because Grace Hill did not require grant staff to properly track their time. As a result, it charged more than $3.2 million in unsupported payroll expenses to the grants. Grace Hill Improperly Charged Payroll Expenses Grace Hill improperly charged payroll expenses to its grants. Office of Management and Budget (OMB) Circular A-122, attachment B, paragraph 8-m, requires grantees to maintain reports reflecting the distribution of activity for all staff members whose compensation is charged, in whole or in part, directly to awards. Reports maintained to satisfy these requirements must reflect an after- the-fact determination of the actual activity of each employee. Budget estimates (i.e., estimates determined before the services are performed) do not qualify as support for charges to awards. Grace Hill used budget percentages to charge salary, including benefits, to the grants. These charges were determined before the services were performed. As a result, Grace Hill’s payroll charges were not based on actual time spent on grant activities. Grace Hill Did Not Require Staff to Track Time by Activity Grace Hill did not require staff to properly track their time spent on grant activities. We found through interviews that only two of Grace Hill’s staff were tracking their time, but the time they recorded was not used to calculate the charges to the grant. The remaining staff did not track their time by activity. In several cases, the amount of time staff estimated that they spent on grant activity differed from the budgeted percentages charged to the grants. Some staff worked on multiple grants, and they estimated that they spent more or less time on the lead grant than their budgeted percentage. In some instances, staff who were charged at 100 percent to the lead grant reported that they also worked on nongrant activities. Since Grace Hill did not require staff to track time by activity, there was no way to know with certainty how much time each staff member spent on grant activities. 5 Grace Hill Had Unsupported Payroll Charges Grace Hill charged more than $3.2 million in unsupported payroll expenses to the grants. This amount was comprised of direct salary and fringe benefits charged to the two completed grants and the open grant. Grace Hill will charge additional unsupported payroll expenses to the grant if its method of charging these expenses is not corrected. Recommendations We recommend that the Director of Congressional Grants require Grace Hill to 1A. Cease using estimated payroll costs on its drawdown requests. 1B. Design and implement a process to ensure that actual staff hours are accurately tracked. 1C. Use the resulting actual payroll costs on all future drawdown requests. 1D. Provide documentation to support salary and fringe benefits charged to the grants or reimburse the grants from nonfederal sources for costs that it cannot support. These costs should include $3,228,243 charged to the grants through December 31, 2008. 6 Finding 2: Grace Hill Duplicated Computer Support Expenses Grace Hill improperly charged computer support expenses as direct costs to its grants. This condition occurred because the staff reviewing the drawdown requests did not understand that the indirect cost rate already included computer support. As a result, Grace Hill received $196,690 more than allowable from the grants. Grace Hill Duplicated Computer Support Costs Grace Hill improperly charged computer support expenses to the grants. OMB Circular A-122, attachment A, paragraph B, provides that direct costs are those that can be identified specifically with a particular activity of an organization. However, a cost may not be assigned to an award as a direct cost if it has also been allocated to an award as an indirect cost. Grace Hill charged computer support expenses as both direct and indirect costs. It charged $167,253 in computer support costs as direct costs as follows: Grant number Direct costs charged Grant B-04-NI-MO-0025 $42,427 Grant B-05-NI-MO-0019 $60,249 Grant B-06-NI-MO-0024 $64,577 Grace Hill also included these costs in the indirect cost percentage applied to the grant, thus duplicating the direct costs. Grace Hill Performed Ineffective Drawdown Reviews Grace Hill’s reviewer did not understand that the indirect cost rate included computer support expenses. Grace Hill staff indicated that the duplication of computer support expense was a mistake caused by an inconsistent allocation of these expenses. The mistake was not noticed because the reviewer did not understand that the indirect cost percentage included the same costs that were shown again as a direct cost. Duplicate Charges Resulted in Unallowable Costs As a result of the duplicate charges, Grace Hill received $196,690 more than allowable from the grants. This amount included the $167,253 improperly charged as direct costs plus $29,437 in associated indirect costs. 7 Grace Hill, after being made aware of the duplicated charges, offset later drawdown requests. Recommendations We recommend that the Director of Congressional Grants 2A. Verify that Grace Hill appropriately reimbursed the $196,690 in duplicate expenses. 2B. Require Grace Hill to review the direct and indirect costs and certify that no other duplications have occurred. 2C. Strengthen the review process by training the reviewer on what is included in the indirect cost rate. 8 SCOPE AND METHODOLOGY To accomplish our objectives, we reviewed the grant agreements, the grant applications, Grace Hill’s policies and procedures, the results of prior certified public accountant reviews, and OMB Circular A-122. We also interviewed Grace Hill and HUD staff. We obtained a spreadsheet from Grace Hill listing 801 addresses (361 projects) with contract estimate amounts totaling approximately $5.2 million, which had lead remediation work done by contractors selected by Grace Hill. From this list, we chose 19 projects with contract estimate amounts totaling $565,793. We reviewed these projects’ files for evidence of approvals, inspections, contracts, invoices, lien waivers, and payments. We tested whether the contractors used were on Grace Hill’s approved contractors list and reviewed the payees, amounts, and endorsements on the cancelled checks. We also chose six drawdown requests totaling $1.8 million from a universe of 59 requests totaling $10 million, which had been submitted to HUD by Grace Hill during the audit period of January 1, 2006, through December 31, 2008. We reviewed the summary-level support for these draws, added up the summaries, and traced some of the summary figures to general ledger printouts to test for compliance with HUD policies and procedures. We reviewed how Grace Hill charged the computer support, property support, and payroll included in these draws. Additionally, we reviewed the indirect cost rate agreement approved by the U.S. Department of Health and Human Services, which authorized an indirect cost rate of 17.7 percent. We used printouts and reports generated by Grace Hill’s computerized accounting system and supporting documentation to review the lead remediation activities relating to our objective. We also reviewed drawdown requests and their supporting documentation to identify how Grace Hill charged the computer support, property support, and payroll expenses. We assessed the reliability of these data and determined that the data were sufficiently reliable for use in meeting our objective. We performed audit work from January through May 2009. The on-site audit work was performed at Grace Hill’s office at 100 North 12th, St. Louis, Missouri. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 9 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following controls are achieved: • Program operations, • Relevance and reliability of information, • Compliance with applicable laws and regulations, and • Safeguarding of assets and resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. They include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: • Controls over processing and allocating staff time charged to the grants. • Controls over charging support expenses to the grants. We assessed the relevant controls identified above. A significant weakness exists if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weaknesses Based on our review, we believe that the following items are significant weaknesses: Grace Hill did not have adequate controls to • Ensure that staff time was based on actual time devoted to the grants’ activities (finding 1). • Avoid duplicating computer support costs, which were charged as direct costs and then allocated again using the indirect rate (finding 2). 10 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation Ineligible 1/ Unsupported number 2/ 1D $3,228,243 2A $196,690 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or federal, state, or local policies or regulations. In this instance, the duplicated computer expense costs totaling $196,690 were ineligible costs. 2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. In this instance, the $3,228,243 in salary and benefits expenses that were improperly based on the budget rather than actual activity were unsupported costs. 11 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 12 Ref to OIG Evaluation Auditee Comments Comment 1 Comment 2 13 Ref to OIG Evaluation Auditee Comments Comment 3 14 OIG Evaluation of Auditee Comments Comment 1 We appreciate Grace Hill’s prompt action in response to our audit. Comment 2 We appreciate Grace Hill’s position concerning our recommendation which retroactively penalizes it for not properly tracking hours worked by its staff. However, the grant agreements that Grace Hill signed in 2004, 2006, and 2007, notified it that it had to comply with the requirements of OMB Circular A-122. Comment 3 We appreciate Grace Hill’s prompt action in response to our audit. 15
Grace Hill Used Neighborhood Initiative Grant Funds to Pay Unsupported Payroll Expenses and Duplicated Computer Support Costs
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)