oversight

Performance Audit of Incurred Costs - University of Southern California

Published by the National Science Foundation, Office of Inspector General on 2017-09-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Performance Audit of Incurred Costs –
University of Southern California
REPORT PREPARED BY KEARNEY & COMPANY, P.C.




September 29, 2017
OIG 17-1-009
AT A GLANCE
Performance Audit of Incurred Costs – University of Southern
California
Report No. OIG 17-1-009
September 29, 2017

AUDIT OBJECTIVE
The National Science Foundation Office of Inspector General engaged Kearney & Company, P.C.
(Kearney) to conduct a performance audit of incurred costs at the University of Southern California
(USC) for the period October 1, 2011, to September 30, 2014. The audit encompassed more than $324
million comprising all costs claimed to NSF. The objective of the audit was to determine if costs
claimed by USC during this period were allocable, allowable, reasonable, and in conformity with NSF
award terms and conditions and applicable Federal financial assistance requirements. Kearney is
responsible for the attached auditor’s report and the conclusions expressed in this report. NSF OIG does
not express any opinion on the conclusions presented in Kearney’s audit report.

AUDIT RESULTS
Costs USC charged to its NSF-sponsored agreements did not always comply with Federal and NSF
award requirements. The auditors questioned $639,479 of costs claimed by USC during the audit
period. Specifically, the auditors found $304,290 of unreasonable expenses near award expiration;
$217,387 of misapplied indirect costs (IDC) on subawards; $55,182 of unsupported or incorrect charges
to participant support; $40,199 of unreasonable, unallowable, or unsupported travel costs; $9,364 of
unreasonable or unallocable general expense charges; $8,640 of untimely posting of travel charges; and
$4,417 of unreasonable payroll charges.

RECOMMENDATIONS
The auditors included seven findings in the report with associated recommendations for NSF to resolve
the questioned costs and to ensure USC strengthens its administrative and management controls.

AWARDEE RESPONSE
USC disagreed with the majority of the findings in the report. USC contends that some of the costs
within the findings are allowable and disagreed with the auditors’ conclusions. USC did not dispute the
auditors’ statements that there were weaknesses in management and administrative controls. After
taking USC’s comments into consideration, the auditors continue to question the costs and left the
findings unchanged. USC’s response is attached in its entirety to the report as Appendix B.

FOR FURTHER INFORMATION, CONTACT US AT (703) 292-7100 OR OIG@NSF.GOV.
MEMORANDUM

TO:            Dale Bell
               Director
               Division of Institution and Award Support

               Jamie French
               Director
               Division of Grants and Agreements

FROM:          Mark Bell
               Assistant Inspector General
               Office of Audits

DATE:          September 29, 2017

SUBJECT:       Audit Report No. 17-1-009, University of Southern California

This memo transmits the Kearney & Company (Kearney) report for the audit of costs totaling
approximately $324 million charged by the University of Southern California (USC) to its sponsored
agreements with the National Science Foundation during the period October 1, 2011, to September 30,
2014. The objective of the audit was to determine if costs claimed by USC during this period were
allocable, allowable, reasonable, and in conformity with NSF award terms and conditions and applicable
Federal financial assistance requirements.

In accordance with Office of Management and Budget Circular A-50, Audit Followup, please provide a
written corrective action plan to address the report recommendations. In addressing the report’s
recommendations, this corrective action plan should detail specific actions and associated milestone
dates. Please provide the action plan within 60 calendar days of the date of this report.

OIG Oversight of Audit

To fulfill our monitoring responsibilities, the Office of Inspector General:

   •   reviewed Kearney’s approach and planning of the audit;
   •   evaluated the qualifications and independence of the auditors;
   •   monitored the progress of the audit at key points;
   •   coordinated periodic meetings with Kearney, as necessary, to discuss audit progress, findings,
       and recommendations;
   •   reviewed the audit report prepared by Kearney to ensure compliance with generally accepted
       government auditing standards; and
   •   coordinated issuance of the audit report.
We thank your staff for the assistance that was extended to the auditors during this audit. If you have
any questions regarding this report, please contact Billy McCain at 703-292-7100.

Attachment

cc:
John Anderson              Fae Korsmo                  Carrie Davison              Ken Lish
John Veysey                Teresa Grancorvitz          Allison Lerner              Billy McCain
Ann Bushmiller             Pamela Hawkins              Ken Chason                  Jeremy Hall
Christina Sarris           Alex Wynnyk                 Susan Carnohan
Joan Ferrini-Mundy         Rochelle Ray                Dan Buchtel
University of Southern California

               Audit of Claimed Costs
For the Period October 1, 2011 to September 30, 2014


        National Science Foundation
        Office of Inspector General
                                                          1701 Duke Street, Suite 500, Alexandria, VA 22314
                                                          PH: 703.931.5600, FX: 703.931.3655, www.kearneyco.com




INDEPENDENT ACCOUNTANT’S PERFORMANCE AUDIT
REPORT

To the Inspector General of the National Science Foundation:

Kearney & Company, P.C. (defined as “Kearney,” “we,” and “our” in this report) has conducted
an audit of costs claimed by the University of Southern California (referred to as “USC” or
“University” in this report) on National Science Foundation (NSF) awards made to the
University from the period of October 1, 2011 through September 30, 2014. This performance
audit was conducted under Blanket Purchase Agreement (BPA) #DI4PA00037, Order
#D14PB00558.

The objective of the performance audit is to determine if costs claimed in the sample provided to
us by the NSF Office of Inspector General (OIG) are allowable, allocable, reasonable, and in
conformity with NSF award terms and conditions, as well as applicable Federal financial
assistance requirements. Kearney conducted the performance audit by testing costs claimed by
the University and reporting on only the samples provided to us by the NSF OIG.

Kearney performed testing over NSF OIG’s compiled judgmental sample, which consisted of a
listing of an initial 250 transactions, based on NSF OIG’s criteria and assessment of University
costs claimed. These samples included, but were not limited to, transactions of large dollar
amounts; duplicate transactions; unusual spending trends; inconsistencies; even dollar amounts;
descriptions indicating potentially unallowable costs; frequency; and transactions near or after
award expiration. Based on our initial results, NSF OIG chose to expand testing and selected an
additional sample to include an additional 55 judgmental transactions and 6 cluster issue areas.
In total, Kearney tested the judgmental transactions and 6 cluster issue areas, and we reported the
results and findings within the body of this performance audit report. Please see Appendix A of
this report for more information regarding the scope and methodology of the audit.

Kearney determined that the University costs charged to its NSF-sponsored agreements did not
always comply with applicable Federal requirements. Specifically, we determined that claimed
costs totaling $639,479 were questioned and determined to be either unallowable, unallocable,
unreasonable, and/or not in conformity with NSF award terms and conditions and Federal
requirements. The Findings section of this report further describes the costs in question, the basis
for our findings, and the recommended actions to be taken by the University. The results of our
findings were not projected over the entire award population tested in our audit period.

Kearney conducted this performance audit in accordance with Generally Accepted Government
Auditing Standards (GAGAS), 2011 Revision, issued by the Comptroller General of the United
States. 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


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                                                        1701 Duke Street, Suite 500, Alexandria, VA 22314
                                                        PH: 703.931.5600, FX: 703.931.3655, www.kearneyco.com



audit objectives. NSF OIG assessed the risk and approach for the audit by conducting planning,
data mining, and analytical procedures over the universe of data provided by the University. We
believe that the evidence obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. The results of our findings were not projected over the entire
award population tested in our audit period. The purpose of this report is to communicate the
results of Kearney’s performance audit and our related findings and recommendations.

Thank you for providing us with the opportunity to assist the NSF OIG and conduct the
performance audit of the University. Kearney appreciates the cooperation provided by NSF’s
personnel during the audit.




Kearney & Company, P.C.
Alexandria, Virginia
September 29, 2017




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                                                                                                                               National Science Foundation
                                                                                                                              Audit of Claimed Costs of the
                                                                                                                           University of Southern California




Table of Contents
                                                                                                                                                        Page #

INDEPENDENT ACCOUNTANT’S PERFORMANCE AUDIT REPORT ................................................ i
Objective ....................................................................................................................................................... 1
Background ................................................................................................................................................... 1
Audit Results................................................................................................................................................. 1
  Conclusion ................................................................................................................................................ 2
  Findings .................................................................................................................................................... 3
    Finding 1 – Unreasonable Expenses Near Award Expiration ............................................................... 3
    Finding 2 – Misapplication of Indirect Costs (IDC) on Subawards...................................................... 9
    Finding 3 – Unsupported or Incorrect Charges to Participant Support ............................................... 12
    Finding 4 – Unreasonable, Unallowable, or Unsupported Travel Costs............................................. 16
    Finding 5 – Unreasonable or Unallocable General Expense Charges ................................................ 19
    Finding 6 – Untimely Posting of Travel Charges ............................................................................... 23
    Finding 7 – Unreasonable Payroll Charges......................................................................................... 25
Appendix A: Scope and Methodology of the Audit.................................................................................... 28
  Scope and Limitations............................................................................................................................. 28
  Methodology and Work Performed ........................................................................................................ 28
  Work Related to Internal Controls .......................................................................................................... 29
Appendix B: Management’s Views on Conclusions and Findings ............................................................. 30
Appendix C: Criteria ................................................................................................................................... 49

Abbreviations
AAG                      Award and Administration Guide
CFR                      Code of Federal Regulations
FDP                      Federal Demonstration Partnership
GAGAS                    Generally Accepted Government Auditing Standards
IDC                      Indirect Costs
Kearney                  Kearney & Company, P.C.
MRI                      Major Research Instrumentation
MTDC                     Modified Total Direct Cost
NSF                      National Science Foundation
OIG                      Office of Inspector General
OMB                      Office of Management and Budget
PI                       Principal Investigator
RAM                      Resolution and Advanced Monitoring Branch
University               University of Southern California
USC                      University of Southern California
                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California




Objective
As requested by the National Science Foundation (NSF) Office of Inspector General (OIG),
Kearney & Company, P.C. (defined as “Kearney,” “we,” and “our” in this report) audited a
sample of the University of Southern California’s (defined as “USC” or “University” in this
report) claimed costs on NSF awards. Kearney conducted this performance audit in accordance
with Generally Accepted Government Auditing Standards (GAGAS), issued by the Comptroller
General of the United States.

NSF OIG initiated an audit of costs claimed by the University on NSF awards made to the
University. The audit objective was to determine if costs claimed were allowable, allocable,
reasonable, and in conformity with NSF award terms and conditions and applicable Federal
financial assistance requirements. Kearney conducted the performance audit by testing costs
claimed by the University and reporting on only the transactions and cluster areas provided.

Please see Appendix A of this report for more information regarding the scope and methodology
of the audit.

Background
NSF is an independent Federal agency whose mission is “[t]o promote the progress of science; to
advance the national health, prosperity, and welfare; to secure the national defense...” NSF funds
research and education in science and engineering by awarding grants and contracts to
educational and research institutions in all parts of the United States. Through grants,
cooperative agreements, and contracts, NSF enters into relationships with non-Federal
organizations to fund research education initiatives and assist in supporting internal program
operations. USC, which is located in Los Angeles, CA, is an NSF grant recipient. As of
September 30, 2014, USC received 603 NSF awards, totaling $324,028,578, during the scope of
the audit.

Audit Results
Kearney conducted this performance audit in accordance with GAGAS. 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 objectives. NSF OIG
assessed the risk and approach for the audit by conducting planning, data mining, and analytical
procedures over the universe of data provided by the University. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives. The results of our findings were not projected over the entire award population tested
in our audit period.




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                                                                                       National Science Foundation
                                                                                      Audit of Claimed Costs of the
                                                                                   University of Southern California



Conclusion
When conducting the performance audit, Kearney gathered sufficient evidential matter to support
our findings and conclusions. We summarized our questioned costs identified while conducting
the audit in Table 1.

                               Table 1. Schedule of Questioned Costs
                                                                    Total
                                                                Questioned
                      Finding Description                                                       Reference
                                                                 Costs 1 by
                                                                  Finding
    Unreasonable Expenses Near Award Expiration                  $     304,290                  Finding #1
    Misapplication of Indirect Costs (IDC) on Subawards                217,387                  Finding #2
    Unsupported or Incorrect Charges to Participant Support             55,182                  Finding #3
    Unreasonable, Unallowable, or Unsupported Travel Costs              40,199                  Finding #4
    Unreasonable or Unallocable General Expense Charges                   9,364                 Finding #5
    Untimely Posting of Travel Charges                                    8,640                 Finding #6
    Unreasonable Payroll Charges                                          4,417                 Finding #7
                                                Grand Total       $    639,479
Source: Auditor summary of findings over NSF-provided data from USC during the period October 1, 2011 to
September 30, 2014




1
    Total Questioned Costs include direct and indirect costs.


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                                                                                       National Science Foundation
                                                                                      Audit of Claimed Costs of the
                                                                                   University of Southern California



Findings
Finding 1 – Unreasonable Expenses Near Award Expiration

                          Table 2. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                        $ 20,409
                                                             6,025
                                                            21,899
                                                             2,466
                                                            16,272
                                                            56,696
                                                             1,510
                                                            31,375
                                                            23,012
                                                            10,194
                                                          106,069
                                                             6,434
                                                             1,929
                                   Grand Total:         $ 304,290
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

Expenses for 13 NSF awards, totaling $304,290, claimed near the award expiration did not
appear to benefit the award or appear necessary for the administration of the award. Kearney
questioned the allocability of the purchases, as each was not received in time to provide
meaningful use during the award period. The expenses were questioned based on the criteria
referenced in Appendix C:

    •   Reasonable Costs;
    •   Allocable Costs;
    •   Post-End Date Costs; and
    •   NSF Major Research Instrumentation (MRI) policy.

According to 2 Code of Federal Regulations (CFR) Section 220, Appendix A, Section C.3, to be
considered a reasonable cost under a Federal grant, a cost incurred must reflect the action that a
“prudent person” would have taken under the circumstances prevailing at the time the decision
was made.

2 CFR 220, Appendix A, Section C.4 states that a cost is allocable to an award if it is incurred
solely to advance the work under the award; it benefits both the award and work of the institution
in proportions that can be reasonably approximated; or it is necessary to the overall operation of
the institution and is assignable in part to sponsored projects.




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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



Regarding Post-Expiration Costs, under NSF’s Award and Administration Guide (AAG),
Chapter V, Section A.c, charges to an award must be made on or before the expiration date. A
charge may be deemed valid when equipment is ordered well in advance of the expiration date
but, due to unusual or unforeseen circumstances, delivery of such purchases is delayed beyond
award expiration. Kearney did not feel that sufficient documentation was provided showing the
equipment being ordered well in advance and evidencing a delay in delivery for these charges.

Kearney questioned the following expenses near award expiration:

   •   Award No.             – A hydraulic pump, totaling $20,409, was not operational by the
       end of the award and was installed after the award had expired.
   •   Award No.             – A laboratory clean hood, totaling $6,025, was ordered during the
       last month of the award period and delivered the month after the award had expired. No
       further extension requests were made to NSF after award expiration.
   •   Award No.             – DNA analysis services, totaling $21,899, were completed 3 days
       prior to award expiration. Performing an analysis 3 days prior to award expiration does
       not appear as a reasonable time to incur the expenses and complete the project.
   •   Award No.             – Cell phones from Amazon were purchased for $2,466 in the last
       month of the award. Although the University stated that the cell phones were needed for
       the final Testing Phase in their follow-up response, a cell phone purchase within the last
       month of the award was unreasonable to be the sole benefit of the award. In addition, the
       purchase does not reflect the action of a prudent person, as they charged the full amount
       to the award, when the award will only benefit from a portion of the cell phone’s useful
       life. The cell phones were available for less than 1 percent of the award period (roughly
       24 out of 1,446 days).
   •   Award No.             – A high-precision isotopic piece of equipment was purchased for
       $16,272 and received within the last 4 months of the award period. When an older model
       of the equipment was previously purchased on the award, the purchase of the new
       equipment to be used at the end of award was not reasonable. Kearney did not find it
       reasonable for the equipment purchase to be fully charged to the award when the same
       functioning piece of equipment was in use for a majority of the award period already.
       Specifically, the purchase does not reflect the action of a prudent person, as they charged
       the full amount to the award, when the award will only benefit from a portion of the
       equipment’s useful life. The equipment was available for less than 7 percent of the award
       period (roughly 108 out of 1,477 days).
   •   Award No.             – Lab equipment items, totaling $41,506, were purchased within 1
       month of award expiration, which was not reasonable, given the short period of time
       remaining on the award for which the equipment could be utilized. Additional lab
       equipment items were purchased, totaling $15,190, and arrived after award expiration.
       Total questioned expenses for this award are $56,696.
   •   Award No.             – Hydrogen was purchased to replenish a laboratory within the last
       2 weeks of the award period, totaling $1,510. Justifiable support was not provided for the
       purchase near expiration.
   •   Award No.             – A computer, totaling $31,375, was installed 15 days prior to the
       end of the award. The purchase does not reflect the action of a prudent person, as they



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                                                                                National Science Foundation
                                                                               Audit of Claimed Costs of the
                                                                            University of Southern California



       charged the full amount to the award, when the award will only benefit from a portion of
       the computer’s useful life. The computer was available for use for less than 2 percent of
       the award period (roughly 15 out of 852 days).
   •   Award No.               – Research equipment, totaling $16,193, was used past the
       expiration date and taken by the Principal Investigator (PI) to another university.
       Therefore, this item was not fully allocable to the award. Additionally, the equipment was
       unreasonably charged to the award 1 month prior to expiration. An additional purchase of
       supplies 1 month prior to award expiration, totaling $6,819, was transferred onto the
       award, which was not reasonable. Total questioned expenses for this award were
       $23,012.
   •   Award No.               – A data collection instrument, totaling $10,194, was purchased 4
       days prior to award expiration. Although USC noted future use of the instrument, the
       entire purchase was not used on this specific award and, therefore, is not allocable to the
       award, as it was not received prior to award expiration.
   •   Award No.               – Equipment, totaling $106,069, was unreasonably charged to the
       award, because the equipment was received after award expiration. Due to the timing of
       receipt, the equipment needed to support the scientific and engineering instruments was
       not used until after expiration. As such, the instrument was not operational by the end of
       the award, which does not comply with NSF’s MRI policy.
   •   Award No.               – Lab supplies, totaling $6,434, were ordered in August 2013, and
       award expiration was September 30, 2013. USC did not provide physical documentation
       as to when the items were received to evidence that the items were used for this specific
       award. USC stated that items were still in use for two other awards. As such, the items
       should not have been fully allocated to this award.
   •   Award No.               – A laptop computer purchase, totaling $1,929, was transferred onto
       the award approximately 1 month before the expiration date. When asked about the use
       of the laptop, USC noted that the computer would be used for taking research notes and
       writing papers, which do not appear reasonable, as the computer was unreasonably used
       for additional activities outside of the award itself. The transfer does not reflect the action
       of a prudent person, as they charged the full amount to the award, when the award will
       only benefit from a portion of the computer’s useful life. The computer was available for
       use for less than 4 percent of the award period (roughly 37 out of 911 days).

The cause of charging awards near its expiration may vary on a case-by-case basis. USC did not
properly plan the purchase of items or equipment within the allotted period awarded to be
operational for regular research. Charging grant funds near award expiration may result in
noncompliance with NSF’s administrative terms and conditions determined in the original grant
agreements. Inappropriate use of previously funded grants may result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $304,290 in questioned costs and repay the sustained questioned cost
      amounts, as directed by the NSF Resolution and Advanced Monitoring (RAM) Branch.




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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



   2. Ensure purchases are made timely within the award period of performance to allow the
      purchases to be fully utilized in the actual conduct of the research. For items that are
      needed to be purchased near award expiration, USC should ensure justification is
      supported in the NSF proposal or prior NSF Grant Officer approval is obtained.

Management’s Response:

   •   Award No.              – USC disagrees that this was an unreasonable expense. As this
       award was a Major Research Instrumentation (MRI) Program award and the objective of
       MRI Program grants is the acquisition or development of the instrumentation itself, not
       the use of the instrumentation in support of a separate research objective on the project.
   •   Award No.              – USC disagrees that this was an unreasonable expense because the
       laboratory “PCR” hood was necessary to perform the last portion of data sample analysis.
   •   Award No.              – USC disagrees that this was an unreasonable expense. NSF’s
       Proposal and Award Policies and Procedures Guide (PAPPG) allows for the payment of
       services even past the end date of the award as long as the services were rendered prior to
       the end date. The service was performed prior to the end date of the grant.
   •   Award No.              – USC disagrees that this was an unreasonable expense. The subject
       matter of the PI’s research is mobile computing. As such, the PI regularly purchases
       cellphones for research-related and software development purposes. These cell phones
       were purchased in order to finish experiments.
   •   Award No.              – USC disagrees that this was an unreasonable expense. This charge
       was for the purchase of a high-precision isotopic piece of equipment that was used to
       make necessary measurements for the project, which occurred well before the project end
       date.
   •   Award No.              – USC disagrees that this was an unreasonable expense. As this
       award was a MRI award and the objective of MRI grants is the acquisition or
       development of the instrumentation itself, not the use of the instrumentation in support of
       a separate research objective on the project.
   •   Award No.              – USC disagrees that justifiable support was not provided for the
       purchase near award expiration. The questioned transaction involved the purchase of
       hydrogen gas, which is indispensable to the operation of the PI’s crystal growth
       equipment, a fundamental tool used in this project up through its end date. The PI
       allocated the total expense based on usage between the award under review, a then-active
       award from another Federal sponsor, and non-sponsored funds, as reflected in supporting
       documentation provided to OIG.
   •   Award No.              – USC disagrees that this was an unreasonable expense. This
       equipment was a custom-made special upgrade that took a significant amount of time to
       both build and then to install. Although this equipment was charged 10 days prior to the
       end of the grant, it was ordered over eight months before the end date of the award. The
       equipment was in use during its installation for roughly 2and a half months prior to the
       end date of the award, not 15 days. The purchase benefitted this grant because prior
       equipment used to perform the functions the computer enabled was inoperable and also
       obsolete.




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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



   •   Award No.               – USC disagrees that this was an unreasonable expense. The
       purpose of the fellowship award funding mechanism is to develop the next generation of
       faculty, which it did. The equipment was used by the PI in his research at USC for an
       additional 15 months after the end date of the award, and the PI has continued to use the
       equipment at his new institution. In addition, the equipment questioned here and its
       relationship to the aims of the grant were documented by the PI in the Final Report.
   •   Award No.               – USC disagrees that this expense is not allocable to the award
       under review. The OIG’s characterization of this award is incorrect. While the data
       collection instrument was purchased 4 days before the end date of a grant period, the
       grant was continued through August 2017. In addition, one of the explicit purposes of the
       award under review was to develop novel instrumentation to support this continuing
       research effort. This charge was for the purchase of a data acquisition board, which was a
       line item in the equipment budget for this award, and this purchase enabled the
       equipment to work as intended.
   •   Award No.               – USC disagrees that this was an unreasonable expense. As this
       award was a MRI Program award and the objective of MRI grants is the acquisition or
       development of the instrumentation itself, not the use of the instrumentation in support of
       a separate research objective on the project.
   •   Award No.               – Due to an inadvertent oversight, USC did not provide physical
       documentation as to when the items were received. We have included such
       documentation as an attachment to this response.
   •   Award No.               – While the laptop was necessary for a student to support core
       activities related to the research such as writing papers, taking research notes, and
       developing and compiling code which can then be installed and run on a smartphone,
       USC does not contest this finding.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

   •   Award No.             – For the hydraulic pump, totaling $20,409, that was not installed
       and fully developed until after the award had expired, it is reasonable that USC should
       have expected delays due to the “highly technical installation.” While Kearney agrees the
       grant was to acquire equipment, USC stated in their original follow-up response that the
       purpose of the award “was to purchase and install robot instrumentation.” However, the
       equipment purchased was not installed by the end of the award period. USC should have
       appropriately monitored purchases and requested an award extension if they knew about
       the delayed receipt and installation of award equipment. Additionally, USC used MRI
       guidance from 2015 in its response, which would not be applicable to the costs in
       question. Thus, the explanation provided did not change our conclusion that the expenses
       were unreasonable.
   •   Award No.             – For the laboratory clean hood, totaling $6,025, that was ordered
       during the last month of the award period and delivered the month after the award had
       expired, both the equipment and the related work occurred outside of the award period.



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                                                                          National Science Foundation
                                                                         Audit of Claimed Costs of the
                                                                      University of Southern California



    Award period extension requests were made to NSF after award expiration. The
    explanation provided did not change our conclusion that the expenses were unreasonable.
•   Award No.              – For the DNA analysis services, totaling $21,899, that were
    completed 3 days prior to award expiration, our opinion is not changed that performing
    an analysis 3 days prior to award expiration does not appear reasonable. Services
    provided 3 days before the end date of an award are in jeopardy of not being completed
    prior to the award end date. Also, 3 days prior to the award end date does not provide
    sufficient time to fully incorporate the results of the analysis into the project. The
    explanation provided did not change our conclusion that the expenses were unreasonable.
•   Award No.              – For the cell phones, totaling $2,466, in the last month of the
    award, it is unreasonable to be the sole benefit of the award when the cell phones were
    available for less than 1 percent of the award period. One month does not provide
    adequate time to test the phones and report the results in the grant period. Additionally,
    USC states that the PI regularly purchases cell phones for research. If this is a regular
    occurrence, the cell phone purchases would be expected to be outlined as a necessary and
    reasonable purchase within the award, and the cell phones purchases are not specifically
    budgeted. The report finding and recommendations remain unchanged.
•   Award No.              – For the high-precision isotopic piece of equipment, purchased for
    $16,272, it remains unreasonable for the equipment purchase to be fully charged to the
    award. The same functioning piece of equipment was in use for a majority of the award
    period already and it was received within the last 4 months of the award period. The
    report finding and recommendations remain unchanged.
•   Award No.              – Lab equipment items, totaling $41,506, were purchased within 1
    month of award expiration. Additional lab equipment, totaling $15,190, arrived after
    award expiration. USC stated in their original follow-up response that the equipment was
    necessary for testing. However, the equipment items were unable to be fully utilized for
    testing, as they did not arrive timely prior to award expiration. USC should have
    appropriately monitored purchases and requested an award extension if they knew about
    the delayed receipt of award equipment. Additionally, USC used MRI guidance from
    2015 in its response, which would not be applicable to the costs in question. Thus, the
    report finding and recommendations remain unchanged.
•   Award No.              – USC did not concur with the questioned costs for the hydrogen to
    replenish a laboratory within the last 2 weeks of the award period, totaling $1,510.
    Regardless of any allocation method used, additional justifiable support was not provided
    for the purchase of supplies so close to the grant expiration. Replenishing hydrogen in a
    laboratory using NSF award funding near award expiration makes the purchase
    unreasonable and unallocable, as the purchased hydrogen did not benefit this award. The
    explanation and support provided did not change our conclusion that the expenses were
    unreasonable.
•   Award No.              – For the computer, totaling $31,375, although it may have been in
    use during installation, this still represents less than 9 percent of the award period
    (roughly 75 out of 852 days). Additional justifiable support was not provided for the
    purchase near expiration. The explanation and support provided did not change our
    conclusion that the expenses were unreasonable.




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                                                                                National Science Foundation
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                                                                            University of Southern California



   •   Award No.               – Additional justifiable support was not provided to support the
       research equipment, totaling $16,193, or the additional purchase of supplies 1 month
       prior to award expiration, totaling $6,819. The explanation and support provided did not
       change our conclusion that the expenses were unreasonable. Total questioned expenses
       for this award remain $23,012.
   •   Award No.               – For the data collection instrument, totaling $10,194, that were
       purchased 4 days prior to award expiration, our conclusion remains unchanged. Although
       USC noted future use of the instrument in Continuing Grant No.               , this instrument
       is not allocable to Award No.             and, thus, should have not been charged to the
       award. The report finding and recommendations remain unchanged.
   •   Award No.               – For the equipment, totaling $106,069, the finding remains
       unchanged that the equipment was received after award expiration. Specific sponsor
       approval does not mean that the costs should automatically be considered reasonable and
       appropriate when not in compliance with NSF’s MRI policy. While Kearney agrees the
       grant was to acquire equipment, NSF 09-502, MRI Program Solicitation for Instrument
       Development and Acquisition, states: “Instruments are expected to be operational for
       regular research use by the end of the award period.” The equipment purchased was not
       acquired until after the grant’s expiration and thus not operational for research by the end
       of the grant. USC should have appropriately monitored purchases and requested an award
       extension if they knew about the delayed receipt and operation of award equipment.
       Additionally, USC used MRI guidance from 2015 in its response, which would not be
       applicable to the costs in question. Thus, the report finding and recommendations remain
       unchanged.
   •   Award No.               – For the lab supplies, totaling $6,434, USC provided additional
       documentation through an invoice, but it did not provide documentation to support the
       receipt of good date. Although the invoice had a ship date and notes “UPS 3 Day
       Ground,” that does not mean the receipt actually occurred within 3 days. Further, the
       documentation provided by USC did not evidence that the supplies were used only on
       Award No.             . The explanation and support provided did not change our
       conclusion that the expenses were unreasonable.
   •   Award No.               – For the laptop computer purchase, totaling $1,929, USC did not
       contest the finding. The report finding and recommendations remain unchanged.

Finding 2 – Misapplication of Indirect Costs (IDC) on Subawards

Kearney questioned the application of IDCs for several subawards on NSF Award No.           ,
totaling $217,387. We determined that the $25,000 IDC limitation requirement was not properly
followed based on the following criteria, referenced in Appendix C:




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                                                                                       National Science Foundation
                                                                                      Audit of Claimed Costs of the
                                                                                   University of Southern California



      •   Exclusions of Some Costs from IDCs Recovery Calculations and
      •   Modified Total Direct Cost (MTDC)

Kearney determined that USC did not limit IDCs for subawards so that IDCs were only applied
up to the allowable amount. We totaled the transactions for each subawardee that were classified
under the “Sub Contracts, $25,000” object code and noted subawards exceeding the $25,000
threshold and, thus, having applied IDCs over the allowable amount, shown in Table 3.

                          Table 3. Questioned Cost Breakdown by Award
                                                                                     Questioned Cost
                                                            Total Charges to
                                                                                          Amount
                     Subaward                              Object Code 15310 2
                                                                                     B = (A – 25,000) *
                                                                   A
                                                                                            .62
    University of Hawaii at Manoa                                    $ 113,052                  $ 54,592
    Bigelow Lab for Ocean Sciences                                      88,612                    39,439
    University of Tennessee                                             79,670                    33,895
    Woods Hole Oceanographic Institution                                57,491                    20,145
    University of Delaware                                              57,474                    20,134
    California State University – Monterey Bay                          50,257                    15,659
    Photon Systems Inc.                                                 48,745                    14,722
    Rutgers University                                                  35,548                     6,540
    University of North Carolina                                        33,198                     5,082
    Western Washington University                                       30,031                     3,119
    Colorado School of Mines                                            28,697                     2,292
    East Carolina University                                            27,851                     1,768
                                                                         Total                 $ 217,387
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

Per the 2 CFR Part 220, MTDC consists of “all salaries and wages, fringe benefits, materials and
supplies, services, travel, and subgrants and subcontracts up to the first $25,000 of each subgrant
or subcontract (regardless of the period covered by the subgrant or subcontract).”

Due to the nature and complexity of the award, USC collaborated with many other subawarded
universities. USC divided the subawards into separate purchase orders that each had its own
objective and unique scope of work, rather than treating each university as a stand-alone
subaward. USC applied the IDC threshold requirement to each subaward purchase order, instead
of the aggregate level, thus causing subaward universities to exceed the $25,000 threshold
requirement. Kearney did not receive support to evidence that this purchase order IDC
application approach was approved by the NSF Grant Officer.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:
2
 The NSF OIG analyzed USC’s financial data relating to USC’s General Ledger Object Code Name “SUB
CONTRACTS < $25 000.” Subawards with multiple transactions were aggregated together for the total amount
charged to each university.


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                                                                                National Science Foundation
                                                                               Audit of Claimed Costs of the
                                                                            University of Southern California




   1. Resolve the $217,387 in questioned costs and repay the sustained questioned cost
      amounts, as directed by the NSF RAM Branch.

   2. Avoid questioned costs as they relate to the application of IDCs on subawards by
      obtaining prior NSF approval from its assigned Grant Officer for changes to the grant
      agreement or for exceptions to grant policies and procedures, especially for large and
      complex awards.

Management’s Response: USC disagrees with this finding. There is no requirement that USC
aggregate all subawards made to a single institution and treat them as a single subaward for
purposes of applying USC’s F&A rate to the first $25,000 of direct charges. Rather, as noted in
the finding, the prime awardee’s F&A cost rate is to be applied to a modified total direct cost
(MTDC) base that includes the first $25,000 of each subaward, regardless of whether the
subaward is made to one institution or multiple institutions.

The specific subawards under review involved the collection of unique samples at different field
sites around the world, each of which required the use of different collection, analysis, and
reporting activity at each site. Oversight of these efforts required monitoring separate
workstreams, collecting and analyzing distinct reports, and ensuring that each subproject was
performed appropriately from both a scientific and programmatic perspective. Under NSF’s
Cooperative Agreement Financial & Administrative Terms and Conditions (CA-FATC), prior
approval is not required before implementing the subaward methodology USC employed, as
suggested by the OIG. Each subaward was therefore executed and administered separately, and
the costs that USC incurred for administering two or more subawards to the same institution
were the same costs that USC would have incurred for administering two subawards to two
different institutions. Accordingly, USC’s approach of applying its F&A rate to the first $25,000
of each subaward was appropriate, regardless of whether there were multiple subawards to the
same institution.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged. Because of the nature and complexity of the award, USC chose to divide the
subawards under NSF Award No.                 into individual purchase orders to separate objectives
and the unique scope of work, rather than treating each university as a stand-alone subaward for
USC’s convenience. USC applied the IDC threshold requirement to each subaward purchase
order, instead of the aggregate level, thus causing subaward universities to exceed the $25,000
threshold requirement. USC’s response to this finding does not warrant proper interpretation of
MTDC requirements under OMB Circular A-21 for awards made prior to December 26, 2014, as
Kearney considers each university a stand-alone subawardee. Additionally, USC used CFR
§200.68, Modified Total Direct Costs guidance in its response, which would not be applicable to
the costs in question. Further, we did not receive support to evidence that this purchase order
IDC application approach was approved by the NSF Grant Officer. Thus, the explanation
provided by USC did not change our conclusion that the IDCs were misapplied.



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                                                                                       National Science Foundation
                                                                                      Audit of Claimed Costs of the
                                                                                   University of Southern California



Finding 3 – Unsupported or Incorrect Charges to Participant Support

                          Table 4. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                         $ 1,540
                                                               517
                                                             5,828
                                                             1,663
                                                            20,873
                                                                69
                                                             8,122
                                                            11,293
                                                             5,277
                                   Grand Total:         $ 55,182
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

Expenses for nine NSF awards, totaling $55,182, were incorrectly charged as participant support.
University employee charges to participant support are unallowable. The expenses were
questioned based on the following criteria, referenced in Appendix C:

    •   Participant Support Costs.

NSF AAG, Chapter V, Section 8.a defines participant support costs as direct costs for items such
as stipends or subsistence, travel allowances, and registration fees paid to or on behalf of
participants or trainees in connection with conferences or training projects. Participant support
costs should not be used for University employees, unless specifically permitted under that
provision.

Kearney questioned the following expenses that were incorrectly charged to participant support:

    •   Award No.              – Travel reimbursement expenses related to a USC employee
        attending a conference in Colorado totaled $1,540 and were incorrectly charged as
        participant support.
    •   Award No.              – Reimbursement expenses related to a USC employee attending a
        conference in California totaled $517 and were incorrectly charged as participant support.
        Of the $517 expenses in question, $46 related to unallowable alcohol expenses charged to
        the award. USC agreed that these charges were related to a USC employee and that the
        alcohol charges should not have been charged to the award in any case.
    •   Award No.              – Two expenses relating to travel to Japan were charged to
        participant support, totaling $5,828. USC agreed that the charge totaling $3,661 for a
        student satellite project was incorrectly charged to participant support. USC stated that
        the other charge, totaling $2,167, was an expense related to a non-enrolled student in the
        summer of 2012 who was not considered a staff or faculty employee. However, Kearney
        noted that the individual had a USC employee ID number and was paid a research


                                                      12
                                                                               National Science Foundation
                                                                              Audit of Claimed Costs of the
                                                                           University of Southern California



       assistant’s salary for the months of April and May 2012. The travel end date for the
       expenses related to the award was within this timeframe.
   •   Award No.               – Expenses relating to travel to Japan and reimbursed to a USC
       employee, totaling $1,663, were incorrectly charged as participant support.
   •   Award No.               – Payroll expenses were incorrectly charged to participant support,
       totaling $20,873. The costs were noted to not be participant support, but evidence to
       support that conclusion was not provided. Therefore, the participant support expenses in
       question were not fully supported and appear to be commingled between participant and
       non-participant support accounts within the same award.
   •   Award No.               – A USC employee included herself in a conference meal
       reimbursement with other participants. The charges related to the USC employee totaled
       $69 and were incorrectly charged as participant support.
   •   Award No.               – Participant support charges, totaling $8,122, related to speaker
       fees were unallowable. The charges do not meet the requirements of a participant support
       charge, as a speaker is neither a participant nor a trainee.
   •   Award No.               – A reimbursement expense, totaling $11,293, for a USC employee
       to travel to                for a special study was incorrectly charged to participant
       support.
   •   Award No.               – Three expenses, totaling $5,277, related to travel reimbursement
       for USC employees to attend a workshop in Washington, D.C. were incorrectly charged
       as participant support.

The cause of incorrectly charging participant support accounts may vary on a case-by-case basis.
Clerical errors or PI oversight were the main reasons for the incorrect charges. USC’s Office of
Financial Analysis does not have oversight to determine which accounts relate to NSF awards
and should be charged to participant support. The PIs of the awards are responsible for tracking
their participant support accounts. System incapability of tracking participant support, as well as
incorrectly charging funds to participant support accounts, may result in noncompliance with
NSF’s administrative terms and conditions determined in the original grant agreements, as well
as noncompliance with the terms of the award. Finally, inappropriate use of grant funds may
result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $55,182 in questioned costs and repay the sustained questioned cost amounts,
      as directed by the NSF RAM Branch.

   2. Ensure that PIs are informed on the NSF AAG, as well as applicable 2 CFR compliance
      requirements over participant support charges. Additionally, USC should periodically
      monitor its PIs participant support accounts to ensure appropriate use.

   3. Ensure participant support accounts entered into the accounting system are appropriately
      flagged to be used for participant support charges only.




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                                                                               National Science Foundation
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                                                                           University of Southern California



Management’s Response:

   •   Award Nos.             ,          ,        , and           – USC is not contesting these
       findings. While the reimbursements did support the aims of the respective awards, they
       were inadvertently charged to the participant support companion accounts in error.
   •   Award No.              – USC is not contesting this finding. At the time, USC was
       transitioning between systems and the participant support expenses on this account were
       comingled. In early 2015, USC strengthened existing procedures to ensure that separate
       companion accounts were created for any awards with participant support.
   •   Award No.              – USC is not contesting this finding. While the reimbursement did
       support the aims of the award, it was inadvertently charged to the participant support
       companion account in error.
   •   Award No.              – USC does not agree with this finding. These participants were all
       named in the proposal for supplemental funding to this award, which was approved and
       funded by NSF. In addition, the amount in question was separately budgeted and charged
       to a companion account where no indirect charges were applied. As such, USC did not
       inappropriately burden this charge with indirect costs, nor did USC bill the NSF for
       indirect costs as claimed in this finding.
   •   Award No.              – USC is not contesting the directly charged portion of this finding.
       However, the amount in question was separately budgeted and charged to a companion
       account where no indirect charges were applied. As such, USC did not inappropriately
       burden this charge with indirect costs, nor did USC bill the NSF for indirect costs as
       claimed in this finding.
   •   Award No.              – USC is not contesting this finding. While the reimbursement did
       support the aims of the award, it was inadvertently charged to the participant support
       companion account in error.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

   •   Award No.              – For the travel reimbursement expenses related to a USC employee
       attending a conference in Colorado, totaling $1,540, USC did not contest the finding. The
       report finding and recommendations remain unchanged.
   •   Award No.              – For the reimbursement expenses related to a USC employee
       attending a conference in California, totaling $517, USC did not contest the finding. The
       report finding and recommendations remain unchanged.
   •   Award No.              – For the two expenses relating to travel to Japan charged to
       participant support, totaling $5,828, USC did not contest the finding. The report finding
       and recommendations remain unchanged.
   •   Award No.              – For the expenses relating to travel to Japan and reimbursed to a
       USC employee, totaling $1,663, USC did not contest the finding. The report finding and
       recommendations remain unchanged.




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                                                                            National Science Foundation
                                                                           Audit of Claimed Costs of the
                                                                        University of Southern California



•   Award No.              – For the payroll expenses incorrectly charged to participant
    support, totaling $20,873, USC did not contest the finding. The report finding and
    recommendations remain unchanged. USC indicated that they strengthened procedures to
    segregate participant support in the companion account. While these strengthened
    procedures were not subject to audit or review, we commend USC’s actions to strengthen
    controls.
•   Award No.              – For the USC employee including herself in a conference meal
    reimbursement with other participants, totaling $69, USC did not contest the finding. The
    report finding and recommendations remain unchanged.
•   Award No.              – USC disagreed that the participant support charges, totaling
    $8,122, related to speaker fees were unallowable. Based on discussions with USC,
    Kearney noted that the participant support crosswalk provided to NSF and Kearney was
    difficult to gather because, at the time of the audit scope, the system previously in place
    did not track participant support accounts from a systems standpoint. Based on previous
    discussions, USC stated that in order to provide the participant support crosswalk, USC
    personnel had to ask the PI on the grant to identify which account was classified as
    participant support. For that reason, during discussions, USC stated that there may be
    accounts in the crosswalk that were mistakenly identified as participant support. As NSF
    was unable to rely on the initial participant support crosswalk provided during the risk
    assessment and review. Kearney is unable to rely on the participant support crosswalk
    that USC provided, as there has been a noted breakdown in the system. Additionally,
    USC did not provide further evidence to confirm IDCs were not charged under this
    award. Thus, the report finding and recommendations remain unchanged.
•   Award No.              – USC did not contest the direct cost portion of a USC employee’s
    travel to               , totaling $11,293, but it did contest the indirect portion. Based on
    discussions with USC, Kearney noted that the participant support crosswalk provided to
    NSF and Kearney was difficult to gather because, at the time of the audit scope, the
    system previously in place did not track participant support accounts from a systems
    standpoint. Based on previous discussions, USC stated that in order to provide the
    participant support crosswalk, USC personnel had to ask the PI on the grant to identify
    which account was classified as participant support. For that reason, during discussions,
    USC stated that there may be accounts in the crosswalk that were mistakenly identified as
    participant support. As NSF was unable to rely on the initial participant support
    crosswalk provided during the risk assessment and review. Kearney is unable to rely on
    the participant support crosswalk that USC provided, as there has been a noted
    breakdown in the system. Additionally, USC did not provide further evidence to confirm
    IDCs were not charged under this award. Thus, the report finding and recommendations
    remain unchanged.
•   Award No.              – For the three expenses incorrectly charged as participant support,
    totaling $5,277, USC did not contest the finding. The report finding and
    recommendations remain unchanged.




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                                                                                        National Science Foundation
                                                                                       Audit of Claimed Costs of the
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Finding 4 – Unreasonable, Unallowable, or Unsupported Travel Costs

                          Table 5. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                            12,671
                                                             3,729
                                                            17,279
                                                             6,520
                                   Grand Total:          $ 40,199
Source: Auditor analysis of NSF-provided data from USC during the period of October 1, 2011 to September 30,
2014

Travel expenses for five NSF awards, totaling $40,199, were questioned as unreasonable,
unallowable, or unsupported. The travel expenses were questioned based on the following
criteria, referenced in Appendix C:

    •   Reasonableness Costs and
    •   Allocable Costs.

According to 2 CFR Section 220, Appendix A, Section C.3, to be considered a reasonable cost
under a Federal grant, a cost incurred must reflect the action that a “prudent person” would have
taken under the circumstances prevailing at the time the decision was made.

Per 2 CFR 220, Appendix A, Section C.4, a cost is allocable to an award if it is incurred solely to
advance the work under the award; it benefits both the award and work of the institution in
proportions that can be reasonably approximated; or it is necessary to the overall operation of the
institution and is assignable in part to sponsored projects.

Kearney questioned the following expenses related to travel:

    •   Award No.               – Travel expenses, totaling $12,671, related to an                car
        rental and travel to and/or from             University,              , and          were
        unallowable. USC agreed that these expenses should not have been charged to the award
        and will repay the funds to NSF.
    •   Award No.               – PI travel expenses to a conference in Germany, with a separate
        trip to collaborate at a university in     , were charged to the award, totaling $3,729.
        USC stated that the PI’s collaboration “focused on the analysis of primitive equations of
        the atmosphere, consistent with the research aims of the grant under review.” The
        separate trip to       is questioned for reasonableness, as USC’s response does not
        provide enough evidence showing the amount incurred for the              travel reflects the
        action of a prudent person and the         collaboration was not listed within the award’s
        Annual or Final Project Report. In addition, the Final Project Report states that no
        international collaboration occurred for the PI.




                                                      16
                                                                                 National Science Foundation
                                                                                Audit of Claimed Costs of the
                                                                             University of Southern California



   •   Award No.              – The PI traveled to            ,          ,             , and
       from January 2013 through August 2013 to collaborate with universities. The travel
       expenses for one trip totaled $13,831, and the collaborations were not included in the
       initial NSF proposal submitted. This trip was not mentioned in the award proposal for an
       8-month travel period. As the PI returned early (July), another flight home was purchased
       and charged to the award. The original round trip flight was not used and was not
       refundable. An additional trip to            , totaling $3,448, charged to the award for
       further collaborations was questioned. Based on supporting documentation provided,
       only certain costs were charged to the grant (i.e., airfare, car rental, and a 1-night stay in a
       hotel). USC stated that the purpose of this trip was to collaborate with professors and
       work on joint publications; however, the documentary evidence provided was not
       sufficient to support this and the trip was not mentioned in the Annual or Final Project
       Report. Because this specific travel was not included in the budget and the total travel
       exceeded the budgeted amount, the aforementioned travel booked does not reflect the
       action of a prudent person. Additionally, there is no documented evidence of how this trip
       directly benefitted the award; therefore, Kearney questioned these travel charges. Total
       questioned expenses for this award were $17,279.
   •   Award No.              – PI travel expenses, totaling $6,520, were unreasonably charged to
       the award. The expenses related to a conference in Massachusetts to publish research
       results. The PI had to travel from         to attend the conference in Massachusetts;
       however, publishing the results could have been achieved in other ways, such as through
       a publication, and international travel was not considered prudent. Travel was not
       budgeted in the original proposal, but 33 percent of the award budget was rebudgeted for
       travel. Travel should have been considered within the original budget if the PI planned to
       publish results at a conference outside of          .

The cause of unreasonable, unallowable, or unsupported charges to awards may vary on a case-
by-case basis. One cause is that travel expenses were charged to the awards in error.
Additionally, USC is authorized to re-budget among budget categories, including travel
expenses, without obtaining prior approval from NSF, per the Federal Demonstration Partnership
(FDP) terms and conditions, as long as the rebudgeting does not constitute a change in scope.
However, significant changes to the budget within the original award may call into question the
reasonableness and prudence of the charge and how it relates to the administrative terms and
conditions determined in the original grant agreement. Unreasonable, unallowable, or
unsupported charges of previously funded awards may result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $40,199 in questioned costs and repay the sustained questioned cost amounts,
      as directed by the NSF RAM Branch.

   2. Avoid questioned costs as they relate to re-budget authority and allowability by obtaining
      prior NSF approval from its assigned Grant Officer for significant changes in budget
      from the original grant agreement.


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                                                                               National Science Foundation
                                                                              Audit of Claimed Costs of the
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Management’s Response:

   •   Award No.               – USC is not contesting this finding.
   •   Award No.               – USC disagrees with this finding. The PI used the General Services
       Administration (GSA)-approved per diem rates for              , an approved form of travel
       reimbursement per OMB Circular A-21 and USC Travel Policy. The PI did budget for
       international travel in      proposal, which was approved and awarded by the NSF. In
       addition, listed travel to            in the Final Project Report, although chose not to
       identify any international collaboration in the Final Project Report because and
             collaborator had not successfully solved the problem.
   •   Award No.               – USC disagrees with this finding. This trip was mentioned in the
       Final Project Report in the International Travel Section. In an earlier response, the PI
       provided a detailed itinerary, documenting his collaborations and noting two papers that
       resulted from this collaborative trip and cited this award and the continuation award. The
       papers also included and acknowledged            collaborators in        . The itinerary and
       these two papers both document the direct benefit of this trip to the award. In terms of the
       flight charged, the research was completed ahead of schedule but it would have cost more
       to change the flight return date than to buy a second one way ticket.
   •   Award No.               – It appears that this travel was found unreasonable because the trip
       was not originally budgeted in the award proposal. However, under the Federal
       Demonstration Partnership (FDP), of which NSF is a member, universities are authorized
       to rebudget for travel without advance approval.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

   •   Award No.               – For the travel expenses, totaling $12,671, related to an
                     car rental and travel to and/or from            University,             , and
               , USC did not contest the finding. The report finding and recommendations remain
       unchanged.
   •   Award No.               – USC disagreed with the finding for the questioned PI travel
       expenses to a conference in Germany, with a separate trip to collaborate at a university in
            , totaling $3,729. As the Final Project Report was not in agreement with itself, by
       including the          travel, but not the collaboration, and USC did not provide a
       sufficient additional explanation and supporting documentation, our conclusion remains
       unchanged.
   •   Award No.               – For the PI travel to collaborate with universities, USC disagreed
       with the finding. Total questioned expenses for this award were $17,279, consisting of
       one trip totaling $13,831 and an additional trip to             totaling $3,448. While the
       Final Project Report mentioned the international collaboration, it only specified a
       timeframe of travel and did not include any explanation of the actual collaboration.
       Kearney expected to review further details of the trip within the Annual or Final Project
       Report for appropriate allocation and to evidence how all the additional university visits


                                                18
                                                                                       National Science Foundation
                                                                                      Audit of Claimed Costs of the
                                                                                   University of Southern California



        directly benefitted the grant. However, the reports did not provide that sufficient detail.
        The explanation provided did not change our conclusion; the report finding and
        recommendations remain unchanged.
    •   Award No.              – PI travel expenses, totaling $6,520, were unreasonably charged to
        the award, as we do not feel it was appropriate to spend $6,520 to attend a conference
        rather than simply publishing the papers without traveling from           to Massachusetts.
        Additionally, there was no travel budgeted, and the travel occurred one month prior to
        award expiration. The explanation provided did not change our conclusion; the report
        finding and recommendations remain unchanged.

Finding 5 – Unreasonable or Unallocable General Expense Charges

                          Table 6. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                         $      71
                                                             1,129
                                                               225
                                                             6,939
                                                               340
                                                               230
                                                               205
                                                               225
                                   Grand Total:            $ 9,364
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

General expenses, totaling $9,364, charged to eight NSF awards were not in accordance with
Office of Management and Budget (OMB) Circular A-21, Cost Principles for Educational
Institutions. The general expenses were questioned based on the following criteria, referenced in
Appendix C:

    •   Reasonableness Costs;
    •   Allocable Costs; and
    •   Non-University Employees.

According to 2 CFR Section 220, Appendix A, Section C.3, to be considered a reasonable cost
under a Federal grant, a cost incurred must reflect the action that a “prudent person” would have
taken under the circumstances prevailing at the time the decision was made.

Per 2 CFR 220, Appendix A, Section C.4, a cost is allocable to an award if it is incurred solely to
advance the work under the award; it benefits both the award and work of the institution in
proportions that can be reasonably approximated; or it is necessary to the overall operation of the
institution and is assignable in part to sponsored projects.




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Additionally, per USC’s non-University employee policy, USC must first consult with the
Human Resources Office to confirm that the assignment cannot be filled by a university
employee prior to hiring a non-University employee.

Kearney questioned the following general expenses:

   •   Award No.               – Lunch expenses with research collaborators, totaling $71, were
       unreasonably charged to the award. No agenda or itinerary was provided to support that
       the meeting benefitted this specific award.
   •   Award No.               – Temporary employment expenses, totaling $1,129, for a summer
       internship was given to a non-USC student. Kearney questioned the reasonableness, as a
       USC student could have performed these tasks. USC did not provide evidence that it
       consulted its Human Resources Office prior to hiring a temporary employee to perform
       the work. Additionally, the Annual and Final Project Reports did not support that the
       individual performed work directly benefitting the award.
   •   Award No.               – A 3-night hotel stay was charged to the award for a 1-day
       conference, totaling $225 per night. Kearney determined the charges for the night before
       the conference and the night of the conference were reasonable; however, we questioned
       the reasonableness of the additional 1 night’s stay, as USC was unable to provide any
       type of justification for the extended stay.
   •   Award No.               – Lab usage expenses for individuals, totaling $6,939, were charged
       to the award. These individuals were not mentioned in the Final Project Report. Other
       individuals on the invoice were listed as people who worked on the grant in the Final
       Project Report. Since the list of individuals included within the Final Project Report were
       inconsistent with the lab usage invoice charges, Kearney questioned whether the
       individuals used the lab for the direct benefit of the award.
   •   Award No.               – Parking expenses for a         competition, totaling $340, were
       transferred onto the award. The original charges were made to NSF Award No.               ,
       which directly relates to the          competition. USC stated that these charges were used
       to support participant middle school teachers who served as mentors for the student
       participants in the          competition. The transaction under review transferred the
       parking charges for teacher participants in the          competition event at USC.
       However, the expenses were transferred to NSF Award No.                 , where the
       competition is not directly mentioned. The award originally charged, Award No.
                , does mention the           event. The same PI is in charge of both of these
       awards. Kearney questioned the allocability of the transfer due to the incorrect award
       account being charged.
   •   Award No.               – Lunch meeting expenses, totaling $230, were charged to the
       award 2 days prior to the expiration period. No agenda or itinerary was provided to
       support that the meeting benefitted this specific award.
   •   Award No.               – Lunch expenses with the PI’s research students, totaling $205,
       were unreasonably charged to the award. No agenda or itinerary was provided to support
       that the meeting benefitted this specific award.




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   •   Award No.            – A stipend for a USC research associate professor, totaling $225,
       was incorrectly charged to participant support. USC agreed that these expenses should
       not have been charged to the award and stated the funds will be repaid to NSF.

The cause of unreasonable or unallocable general expense charges may vary on a case-by-case
basis. One cause is that the PIs overseeing the awards may not closely review OMB Circular A-
21 requirements or seek approval prior to charging the award. Unreasonable or unallocable
charges to awards may result in noncompliance with NSF’s administrative terms and conditions
determined in the original grant agreements. Inappropriate use of previously funded awards may
result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $9,364 in questioned costs and repay the sustained questioned cost amounts,
      as directed by the NSF RAM Branch.

   2. Ensure that PIs are informed on the applicable cost principles of reasonableness and
      allocability for Federal awards in OMB Circular A-21 for awards made prior to
      December 26, 2014 and 2 CFR Part 200, Uniform Administrative Requirements, Cost
      Principles, and Audit Requirements for Federal Awards, for awards made after
      December 26, 2014. Additionally, USC should periodically monitor its PIs’ accounts to
      ensure appropriate use.

Management’s Response:

   •   Award No.             – USC disagrees with this finding, as the lunch was to further the
       research collaboration. It is reasonable for researchers be allowed to participate in
       research collaboration meetings that directly benefit the award without having to create
       an agenda or itinerary.
   •   Award No.             – USC disagrees with this finding. This student was paid from a
       Research Experiences for Undergraduates (REU) Supplement. REU Supplements are
       open to application by undergraduate students from any university. In addition, this
       student worked on projects benefiting the grant.
   •   Award No.             – USC is not contesting this finding.
   •   Award No.             – All individuals listed used the lab for the direct benefit of the
       award. Only those who charged salary to the award were listed in the Final Project
       Report. Others received departmental and fellowship support, so were not listed but still
       worked in support of the award objectives. Several publications credit these individuals,
       as well as acknowledge funding from this award.
   •   Award No.             – At the time of proposal, the PI was not aware that the GCER
       (Global Conference on Educational Robotics) would take place in Los Angeles so the
               competition was not directly mentioned in the proposal. The Final Project Report
       described the overall program, which included, but did not specifically mention, the
               competition. The charge was allocated between two awards based on the number



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       of participants attending from each award which is a reasonable and appropriate
       allocation methodology.
   •   Award No.              – USC disagrees with this finding, as the lunch was to further the
       research collaboration. It is reasonable for researchers be allowed to participate in
       research collaboration meetings that directly benefit the award without having to create
       an agenda or itinerary.
   •   Award No.              – USC disagrees with this finding, as the lunch was to further the
       research collaboration. It is reasonable for researchers be allowed to participate in
       research collaboration meetings that directly benefit the award without having to create
       an agenda or itinerary.
   •   Award No.              – USC does not contest this finding. This stipend was charged to
       the main account, not the participant support companion account.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

   •   Award No.               – USC disagreed that lunch expenses with research collaborators,
       totaling $71, were unreasonably charged to the award. USC did not provide
       documentation (e.g., agendas, itineraries) to support this lunch was directly related to the
       award scope and objectives. The explanation provided did not change our conclusion; the
       report finding and recommendations remain unchanged.
   •   Award No.               – USC disagreed that temporary employment expenses, totaling
       $1,129, for a summer internship given to a non-USC student should be questioned. USC
       stated that the student was paid from an REU Supplement open to all undergraduates.
       Additional supporting documentation was not provided to demonstrate the application
       was open to all undergraduates. Therefore, the explanation provided did not change our
       conclusion; the report finding and recommendations remain unchanged.
   •   Award No.               – USC did not contest the reasonableness of 1 night of a 3-night
       hotel stay that was charged to the award for a 1-day conference, totaling $225 per night.
       The report finding and recommendations remain unchanged.
   •   Award No.               – USC disagreed with the questioned lab usage expenses for
       individuals, totaling $6,939, that were charged to the award. Publications crediting
       individuals not included in the Final Project Report were not provided by USC. The
       explanation provided did not change our conclusion; the report finding and
       recommendations remain unchanged.
   •   Award No.               – USC disagreed with the questioned parking expenses for a
       competition, totaling $340, which were transferred onto the award. Additional supporting
       documentation was not provided and the explanation provided did not change our
       conclusion; the report finding and recommendations remain unchanged.
   •   Award No.               – USC disagreed with the questioned lunch meeting expenses,
       totaling $230, that were charged to the award 2 days prior to the expiration period. USC
       did not provide documentation (e.g., agendas, itineraries) to support this lunch was
       directly related to the award scope and objectives. The additional supporting



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        documentation was not provided and the explanation provided did not change our
        conclusion; the report finding and recommendations remain unchanged.
    •   Award No.             – USC disagreed that the lunch expenses with the PI’s research
        students, totaling $205, were unreasonably charged to the award. USC did not provide
        documentation (e.g., agendas, itineraries) to support this lunch was directly related to the
        award scope and objectives. The explanation provided did not change our conclusion; the
        report finding and recommendations remain unchanged.
    •   Award No.             – USC did not contest that the stipend for a USC research associate
        professor, totaling $225, was incorrectly charged to participant support. The report
        finding and recommendations remain unchanged.

Finding 6 – Untimely Posting of Travel Charges

                          Table 7. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                          $ 1,863
                                                             6,777
                                 Grand Total:             $ 8,640
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

Travel expenses for two NSF awards, totaling $8,640, were questioned as unreasonable due to
the untimely posting of the charges to the awards. The expenses were questioned based on the
following criteria, referenced in Appendix C:

    •   Reimbursement;
    •   Reasonable Costs; and
    •   Allocable Costs.

Per USC Expenditure Policies and Procedures, Section 1.5, “Timely and Accurate Processing,”
expenses incurred should be processed and submitted within 60 days of trip or event completion.

Additionally, according to 2 CFR Section 220, Appendix A, Section C.3, to be considered a
reasonable cost under a Federal grant, a cost incurred must reflect the action that a “prudent
person” would have taken under the circumstances prevailing at the time the decision was made.

Kearney questioned the following travel expenses:

    •   Award No.            – Travel conference charges for a trip to Taiwan, totaling $1,863,
        were posted 15 months after the travel end date and eight months after award expiration,
        even though the conference was related to the award. The untimely submission violates
        USC’s expenditure policy regarding timely and accurate processing. In addition, the
        amount incurred for the travel does not reflect the action of a prudent person, as expenses
        should be submitted in a timely manner to be considered reasonable and allocable to the
        award.



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   •   Award No.              – Travel charges, totaling $5,629, were posted 11 months after the
       travel end date and 3 months after award expiration for one transaction. The travel was
       related to charges for a conference in Japan and charges to visit with a collaborator at a
       Japanese university, which related to the award. The untimely submission violates USC’s
       expenditure policy regarding timely and accurate processing. In addition, the amount
       incurred for the travel does not reflect the action of a prudent person, as expenses should
       be submitted in a timely manner to be considered reasonable and allocable to the award.
       In addition, lodging expenses were not supported, and no collaborations were listed in the
       initial proposal, Annual Project Report, or Final Project Report.

       On the same award, conference charges, totaling $1,148, were posted 4 months after the
       award end date. When asked to provide a justification or NSF approval for posting the
       expense untimely, only the award end date was given, which was not a sufficient reason
       for the charge. The untimely submission violates USC’s expenditure policy regarding
       timely and accurate processing. In addition, the amount incurred for the conference does
       not reflect the action of a prudent person, as expenses should be submitted in a timely
       manner to be considered reasonable and allocable to the award.

       Total questioned expenses for this award were $6,777.

The cause of untimely posting charges to awards may vary on a case-by-case basis. One reason
provided for the late posting was due to the PI’s busy schedule. Untimely posting of travel
charges to an NSF award may call into question the charge’s reasonableness as it relates to the
administrative terms and conditions determined in the original grant agreement. Inappropriate
use of grant funds may result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $8,640 in questioned costs and repay the sustained questioned cost amounts,
      as directed by the NSF RAM Branch.

   2. Ensure that charges are posted timely to the award at or around the award expiration. If
      charges for valid expenses incurred are expected to be invoiced to USC after award
      expiration and, therefore, reimbursement requested after award expiration, USC should
      obtain a no-cost grant extension.

Management’s Response:

   •   Award No.               – Although this reimbursement was posted late, the auditors agreed
       that this travel benefited the project. The submission was not a violation of USC policy,
       as the policy states that expenses “should be processed” in a timely manner. This policy
       is in part to ensure that faculty and staff are reimbursed promptly for out-of-pocket costs.
       That was not an issue here since the reimbursee was responsible for submitting his
       reimbursement late.



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    •   Award No.               – Although this reimbursement was posted late, the auditors agreed
        that this travel benefited the project. The submission was not a violation of USC policy,
        as the policy states that expenses “should be processed” in a timely manner. This policy
        is in part to ensure that faculty and staff are reimbursed promptly for out-of-pocket costs.
        That was not an issue here since the reimbursee was responsible for submitting his
        reimbursement late.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

    •   Award No.              – USC disagreed with the questioned costs for the travel conference
        charges for a trip to Taiwan, totaling $1,863, that were posted 15 months after the travel
        end date and 8 months after award expiration. While Kearney agrees that the conference
        was related to the award, the late submission of the travel invoice violated USC’s
        expenditure policy regarding timely and accurate processing, as personal funds should be
        processed and submitted within 60 days. Kearney expects USC to follow up with the
        traveler on a periodic basis to ensure timeliness of submission in order to be fully
        reasonable under the award. The report finding and recommendations remain unchanged.
    •   Award No.              – USC disagreed with the questioned expenses for two transactions
        that were posted untimely for a total of $6,777. One transaction for travel expenses,
        totaling $5,629, was posted 11 months after the travel end date and 3 months after award
        expiration. The second transaction for conference charges, totaling $1,148, was posted 4
        months after the award end date. While Kearney agrees that the expenses were related to
        the award, the late submission of the travel invoice violated USC’s expenditure policy
        regarding timely and accurate processing, as personal funds should be processed and
        submitted within 60 days. Kearney expects USC to follow up with the traveler on a
        periodic basis to ensure timeliness of submission in order to be fully reasonable under the
        award. The report finding and recommendations remain unchanged.

Finding 7 – Unreasonable Payroll Charges

                          Table 8. Questioned Cost Breakdown by Award
                                                 Total Questioned
                                   Award No.
                                                       Costs
                                                           $ 3,750
                                                               667
                                   Grand Total:            $ 4,417
Source: Auditor analysis of NSF-provided data from USC during the period October 1, 2011 to September 30, 2014

Payroll expenses for two NSF awards, totaling $4,417, were questioned as unreasonable. The
payroll expenses were questioned based on the following criteria, referenced in Appendix C:




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   •   Reasonableness Costs and
   •   Allocable Costs.

According to 2 CFR Section 220, Appendix A, Section C.3, to be considered a reasonable cost
under a Federal grant, a cost incurred must reflect the action that a “prudent person” would have
taken under the circumstances prevailing at the time the decision was made.

Per 2 CFR 220, Appendix A, Section C.4, a cost is allocable to an award if it is incurred solely to
advance the work under the award; it benefits both the award and work of the institution in
proportions that can be reasonably approximated; or it is necessary to the overall operation of the
institution and is assignable in part to sponsored projects.

Kearney questioned the following expenses related to payroll:

   •   Award No.              – A member of USC’s staff received a bonus of $3,750 while
       serving as an administrative assistant on the award. USC stated that the reason for this
       bonus was to “compensate [the Administrative Assistant] for the enhanced
       responsibilities he assumed on this grant prior to [a] promotion.” The bonus should have
       not been charged using award funding, as the bonus provided on behalf of the award does
       not reflect the action of a prudent person.
   •   Award No.              – A teaching assistant charge of $667 was transferred onto the
       award 2 months after award expiration. Award expiration was August 31, 2011, and the
       effort certification document stated work was performed by the assistant during the
       month of October 2011.

The cause of unreasonable or unallocable payroll charges may vary on a case-by-case basis. One
cause is that USC did not closely review OMB Circular A-21 requirements or appropriately
support the reasonableness prior to awarding bonuses through the award. Based on discussions
and follow-up responses from USC, the University did not review OMB Circular A-21
requirements prior to awarding a bonus with NSF grant funding. Additionally, the University did
not review a teaching charge to ensure the work was performed within the award’s period of
performance. Incorrectly charging payroll to an award may result in noncompliance with NSF’s
administrative terms and conditions determined in the original grant agreement, as well as
noncompliance of OMB Circular A-21. Inappropriate use of previously funded awards may
result in repayment to NSF.

Recommendations: Kearney recommends that NSF’s Director of the Division of Institution and
Award Support request that USC:

   1. Resolve the $4,417 in questioned costs and repay the sustained questioned cost amounts,
      as directed by the NSF RAM Branch.

   2. Resolve any other improper bonus charges made and ensure that payroll charges comport
      with NSF compliance requirements, as well as OMB Circular A-21 for awards made
      prior to December 26, 2014, and 2 CFR Part 200, Uniform Administrative Requirements,



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       Cost Principles, and Audit Requirements for Federal Awards, for awards or funding
       increments made after December 26, 2014. Additionally, USC should ensure only
       allocable employees may charge to the award.

Management’s Response:

   •   Award No.            – USC disagrees with this finding. The employee performed work
       above and beyond      normal duties and was compensated for this in accordance with
       USC policy. In addition, OMB Circular A-21, allows supplemental compensation for
       excess work. Accordingly, this was a reasonable and allowable charge.
   •   Award No.            – USC is not contesting this finding.

See Appendix B for USC’s complete response.

Auditor’s Response: For these costs that USC disagreed with, our conclusions remain
unchanged.

   •   Award No.                – USC disagreed with the questioned costs for a member of USC’s
       staff to receive a bonus of $3,750 while serving as an administrative assistant on the
       award. USC indicates that the staff member performed work above and beyond normal
       duties and, therefore, the bonus was allowable. USC did not provide sufficient
       documentation to reflect these actions were specifically and solely related to Award No.
                 ; therefore, the report finding and recommendations remain unchanged.
   •   Award No.                – USC did not contest the finding for the teaching assistant charge
       of $667 that was transferred onto the award two months after award expiration. The
       report finding and recommendations remain unchanged.




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Appendix A: Scope and Methodology of the Audit
Scope and Limitations
NSF OIG engaged Kearney to conduct a performance audit of an NSF OIG-selected sample of
costs incurred by USC on NSF awards for the period of October 1, 2011, to September 30, 2014.
Our audit included assessing the allowability, allocability, and reasonableness of the sample of
250 transactions initially selected by the NSF OIG from a population of 91,815 transactions
provided by USC at the request of NSF. As of September 30, 2014, USC received 603 NSF
awards, totaling $324,028,578, during the scope of the audit. Our work required reliance on
computer-processed data obtained from USC and the NSF OIG.

Methodology and Work Performed
Kearney conducted this performance audit in accordance with GAGAS for performance audits,
as prescribed in the most current version of Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require that Kearney plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for the
findings and conclusions based on the audit objectives. We believe that the evidence obtained
provides a reasonable basis for the findings and conclusions based on the audit objectives. As a
basis for our performance audit, the Audit Team used the NSF award documentation; NSF
policies; OMB Circular A-21, Cost Principles for Educational Institutions; and OMB Circular
A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions
of Higher Education, Hospitals, and Other Non-Profit Organizations, to determine whether costs
were in compliance and were allowable, allocable, and reasonable.

To meet the performance audit objectives, Kearney specifically:

    •    Reviewed NSF policy and OMB guidance;
    •    Tested a sample of 250 expenditures selected by the NSF OIG for compliance with grant
         terms and conditions;
    •    Tested a sample of 55 additional expenditures and 6 cluster 3 areas selected by the NSF
         OIG for compliance with grant terms and conditions based upon results of the 250
         expenditures initially tested; and
    •    Requested and reviewed supporting documentation from USC for each sample item to
         ensure validity and compliance with grant requirements.

To ensure completeness of the USC data provided for the audit period, NSF OIG analyzed
schedules and reconciliations prepared by USC and agreed them to the accounting records. After
ensuring completeness, NSF OIG conducted data mining and analytical procedures over the
universe of data provided by USC. NSF OIG compiled a judgmental sample list of an initial 250
transactions based on criteria, including, but not limited to, transactions of large dollar amounts;

3
 Cluster testing involves groups, or clusters, of transactions and/or awards which can be effectively and efficiently
scrutinized together.


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duplicate transactions; unusual spending trends; inconsistencies; even dollar amounts;
descriptions indicating potentially unallowable costs; frequency; and transactions near award
expiration.

Kearney requested supporting documentation for the 250 transactions from USC, and we
reviewed the support provided by USC to determine the allowability, allocability, and
reasonableness of expenditures. When necessary, we obtained additional support or explanations
from USC to determine whether the transactions were valid.

Kearney discussed the preliminary results of our testing with NSF OIG. Based on those results,
NSF OIG chose to expand the sample to include an additional 55 judgmental transactions and 6
cluster issue areas. NSF OIG used Kearney’s preliminary results and assessed potential cluster
issue areas to further expand testing. NSF OIG grouped the cluster issue areas by a set of related
transactions or by NSF award into the following expanded testing areas:

   •   Reporting reconciliation variances noted between NSF data and data provided by USC;
   •   IDC application relating to subawards exceeding the $25,000 threshold;
   •   IDC application adjustments (Part I and Part II) applied at the end of the award period;
   •   Participant support rebudgeting (unallowable) over transactions that did not appear to be
       participant support related; and
   •   Participant support rebudgeting (unobligated balances) over transactions with participant
       support costs budgeted were not fully utilized.

In total, Kearney tested 305 judgmental transactions and 6 cluster issue areas and reported the
results and findings within the body of this Performance Audit Report. The results of our
findings were not projected over the entire award population tested in our audit period.

Work Related to Internal Controls
USC management is responsible for establishing and maintaining effective internal control to
help ensure that Federal award funds are used in compliance with laws, regulations, and award
terms. In planning and performing our audit, we considered USC’s internal control over awards
related to financial reporting solely for the purpose of understanding the policies and procedures
relevant to the financial reporting and administration of NSF awards in order to evaluate USC’s
compliance with laws, regulations, and award terms applicable to the items selected by NSF OIG
for testing, but not for the purpose of expressing an opinion on the effectiveness of USC’s
internal control over award financial reporting and administration. Accordingly, we do not
express an opinion on the effectiveness of USC’s internal control.




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Appendix B: Management’s Views on Conclusions and Findings




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            Finding 1 – Unreasonable Expenses Near Award Expiration

1. Award No.           : A hydraulic pump, totaling $20,409, was not operational by the
   end of the award and was installed after the award had expired.

   Response: USC disagrees that this was an unreasonable expense. This award was a
   Major Research Instrumentation Program (MRI) award. As described by NSF, the MRI
   program serves to increase access to shared scientific and engineering instruments to be
   used in future research and research training by providing opportunities to acquire major
   instrumentation that supports the research and research training goals of the university.
   (https://www.nsf.gov/funding/pgm_summ.jsp?pims_id=5260). The objective of MRI
   grants, therefore, is the acquisition or development of the instrumentation itself, not the
   use of the instrumentation in support of a separate research objective on the project.

   The NSF’s MRI policy does not require that the instrumentation be operational by the
   end of the award. Rather, the MRI policy provides that “[a]n instrument acquired or
   developed with support from the MRI program is expected to be operational for regular
   research use by the end of the award period.” (Emphasis added). This expectation is a
   reflection of the complexity of the MRI program, which contemplates “the acquisition or
   development of a single, shared-use, state-of-the-art, well-integrated instrument”
   comprised of an “ensemble of equipment”. (See
   https://www.nsf.gov/pubs/2015/nsf15012/nsf15012.pdf, FAQ #26).

   The purpose of this award was to purchase and install robot instrumentation to be used in
   future research. The equipment purchase questioned in this finding was a hydraulic
   pump that was used to power the robot. The engagement with the vendor from whom the
   pump was purchased required it to both deliver and install the pump, which was a highly
   technical installation. While the pump itself was delivered nearly a year prior to the end
   of the award, it could not be installed and tested until the robot instrumentation was
   complete.

   Although the PI expected that the instrumentation would be operational prior to the end
   date of the award, the robot required a year lead time and the company that manufactured
   it was acquired during the life of the award, which led to a delay in its acquisition. This
   challenge was explicitly described in the Progress Reports submitted for this award.
   Once the robot was complete, the pump was promptly installed and tested by the vendor.
   The vendor was then paid shortly after the end date of the award.

   Also, consistent with the purpose of the MRI program, the robot has been used in
   connection with several NSF awards, including:

       •   Award No.          (“RI: Small:
                     ); Period of Performance: 8/19/10 – 7/31/16
       •   Award No.          (“MRI-R2:
                                ); Period of Performance: 7/8/10 - 9/30/15



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       •   Award No.           (“AIS:
                                    ); Period of Performance: 9/9/09 – 9/30/17
       •   Award No.           (“RI: Small:                              ”); Period of
           Performance: 9/9/09 – 8/31/15

2. Award No.            : A laboratory clean hood, totaling $6,025, was ordered during the
   last month of the award period and delivered the month after the award had expired. No
   further extension requests were made to the NSF after award expiration.

   Response: USC disagrees that this was an unreasonable expense. The laboratory
   “PCR” hood was necessary to perform the last portion of data sample analysis. At the
   time the PCR hood was ordered, there were no comparable facilities that could provide a
   sterile clean workspace to complete the work. Using this equipment, an additional
   component of the proposed work was completed. The PI published 13 manuscripts
   affiliated with this project and had multiple scientific presentations and education and
   outreach activities, including manuscripts made possible by the purchase of the PCR
   hood, as detailed in the final report. Two of these publications resulted from lab work
   done in the 3 month period after the end of the award.

3. Award No.            : DNA analysis services, totaling $21,899, were completed 3 days
   prior to award expiration. Performing an analysis 3 days prior to award expiration does
   not appear as a reasonable time to incur the expenses and complete the project.

   Response: USC disagrees that this was an unreasonable expense. This invoice is for
   services rendered by the USC core genomics facility, which provides DNA sequencing
   services. As to the provision of services, NSF’s Proposal & Award Policies &
   Procedures Guide (PAPPG), allows for the payment of services even past the end-date of
   the award as long as the services were rendered prior to the end date. (See
   https://www.nsf.gov/pubs/policydocs/pappg17_1/pappg_10.jsp, Chapter X., paragraph c.,
   “Post-End Date Costs”).

   The service provided here was to perform DNA sequencing on a series of samples
   collected from oysters entrained to a tidal cycle and then subsequently held under
   constant conditions. This was performed prior to the end date of the grant and the
   experiment and its outcome are described in detail at the bottom of page in the Final
   Report to NSF on this award. The experiment was also consistent with one of the aims of
   the proposal -- “IOS: Causes and consequences of transcriptional oscillations in intertidal
   mussels”.

   This charge may have been questioned by the OIG because it initially believed that it
   related to an equipment purchase and not a service charge.

4. Award No.             : Cell phones from Amazon were purchased for $2,466 in the last
   month of the award. Although the University stated that the cell phones were needed for
   the final testing phase in their follow-up response, a cell phone purchase within the last



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                                                                          National Science Foundation
                                                                         Audit of Claimed Costs of the
                                                                      University of Southern California



   month of the award was unreasonable to be the sole benefit of the award. In addition, the
   purchase does not reflect the action of a prudent person, as they charged the full amount
   to the award, when the award will only benefit from a portion of the cell phone’s useful
   life. The cell phones were available for less than 1 percent of the award period (roughly
   24 of 1,446 days).

   Response: USC disagrees that this was an unreasonable expense. The subject matter of
   the principal investigator’s research is mobile computing, which seeks to understand how
   to design/improve mobile computing devices (smartphones, tablets). As such, the PI
   regularly purchases cellphones for research-related and software development purposes.
   These cell phones were purchased in order to finish experiments on the automotive
   software called CarMA, which runs on a mobile device and collects sensor readings from
   cars, using which we are able to assess various aspects of car and driver behavior. The
   CarMA software was tested in experiments conducted in a car club in New Jersey, as
   explained more fully in the final report for the grant under review.

5. Award No.             : A high-precision isotopic piece of equipment was purchased for
   $16,272 and received within the last 4 months of the award period. When an older model
   of the equipment was previously purchased on the award, the purchase of the new
   equipment to be used at the end of the award was not reasonable. Kearney did not find it
   reasonable for the equipment purchase to be fully charged to the award, when the same
   functioning piece of equipment was in use for a majority of the award period already.
   Specifically, the purchase does not reflect the action of a prudent person, as they charged
   the full amount to the award, when the award will only benefit from a portion of the
   equipment’s useful life. The equipment was available for less than 7 percent of the award
   period (roughly 108 out of 1,477 days).

   Response: USC disagrees that this was an unreasonable expense. This charge was for
   the purchase of a high-precision isotopic piece of equipment. In 2010, an earlier version
   of this equipment was purchased for the grant. The PI was able to purchase this
   improved and much more precise piece of equipment for a substantial discount, and
   thereby create a superior piece of equipment. The equipment was used to make
   necessary measurements for the project, which occurred well before the project end date.

6. Award No.           : Lab equipment items, totaling $41,506, were purchased within 1
   month of award expiration, which was not reasonable, given the short amount of time
   remaining on the award for which the equipment could be utilized. Additional lab
   equipment items were purchased, totaling $15,190, and arrived after award expiration.
   Total questioned expenses for this award are $56,696.

   Response: USC disagrees that this was an unreasonable expense. This award was a
   Major Research Instrumentation Program (MRI) award. The NSF’s MRI policy does not
   require that the instrumentation be operational by the end of the award. Rather, the MRI
   policy provides that “[a]n instrument acquired or developed with support from the MRI
   program is expected to be operational for regular research use by the end of the award



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                                                                         National Science Foundation
                                                                        Audit of Claimed Costs of the
                                                                     University of Southern California



period.” (Emphasis added). This expectation is a reflection of the complexity of the MRI
program, which contemplates “the acquisition or development of a single, shared-use,
state-of-the-art, well-integrated instrument” comprised of an “ensemble of equipment”.
(See https://www.nsf.gov/pubs/2015/nsf15012/nsf15012.pdf, FAQ #26).
This award was an “Instrument Development for Biological Research (IDBR) award
whose purpose was “to develop novel instrumentation” to advance biological research.
All of the equipment purchased was necessary to test the novel instrumentation
developed under the award in question.

As to the lab equipment items totaling $41,506, the equipment was delivered and used to
acquire and develop the instrumentation prior to end date of the award, consistent with
the objective of MRI grants. Delivery in the last month of the award is consistent with
this objective – the equipment was delivered and assembled prior to the end date of the
award.

As to the lab equipment totaling $15,190 that was delivered one day after award
expiration, the PI has an established reputation in the field and with her vendors, and was
able to try out several different units over the last two years of the award on a loaner basis
in advance of actually placing an order. In that two year period of testing, the PI obtained
data results from one of the pieces of equipment tested, which was subsequently included
in the Final Report to NSF and reflected in a publication where the PI expressly
acknowledged NSF support from the grant under review (See - “
                   ”, Applied Physics Letters       (12),         (2013)). Proceeding in this
fashion allowed for a rigorous evaluation and verification that the unit eventually
purchased and currently questioned by the OIG would be of the most benefit for the
equipment developed on the project.

As described by NSF, the MRI program serves to increase access to shared scientific and
engineering instruments to be used in future research and research training by providing
opportunities to acquire major instrumentation that supports the research and research
training goals of the university.
(https://www.nsf.gov/funding/pgm_summ.jsp?pims_id=5260). The objective of MRI
grants, therefore, is the acquisition or development of the instrumentation itself, not the
use of the instrumentation in support of a separate research objective on the project. In
this case, the instrumentation developed was used in subsequent NSF awards, including:

   •   Award No.             (
                                                ”); Period of Performance: 5/7/10 –
       4/30/14.
   •   Award No.             (

                             ”); Period of Performance: 6.1.14 – 5.31.18.




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                                                                            National Science Foundation
                                                                           Audit of Claimed Costs of the
                                                                        University of Southern California



7. Award No.            : Hydrogen was purchased to replenish a laboratory within the last
   2 weeks of the award period, totaling $1,510. Justifiable support was not provided for the
   purchase near expiration.

   Response: USC disagrees that justifiable support was not provided for the purchase near
   award expiration. The questioned transaction involved the purchase of hydrogen gas,
   which is indispensable to the operation of the PI’s crystal growth equipment, a
   fundamental tool used in this project up through its end date. The total cost of the
   hydrogen gas purchased was $3600. Based on a good faith estimate of the amount of
   projected use prior to the end date of the project under review, the PI allocated the total
   expense based on usage between the award under review, a then-active award from
   another federal sponsor, and non-sponsored funds, as reflected in supporting
   documentation provided to OIG. Under this allocation, the award in question was
   charged approximately 32% of the total cost of the hydrogen.

8. Award No.            : A computer, totaling $31,375, was installed 15 days prior to the
   end of the award. The purchase does not reflect the action of a prudent person, as they
   charged the full amount to the award, when the award will only benefit from a portion of
   the computer’s useful life. The computer was available for use for less than 2 percent of
   the award period (roughly 15 out of 852 days).

   Response: USC disagrees that this was an unreasonable expense. This equipment was a
   custom made special upgrade that took a significant amount of time to both build and
   then to install. Although this equipment was charged 10 days prior to the end of the
   grant, it was ordered over eight months before the end date of the award. The equipment
   was in use during its installation for roughly two and a half months prior to the end date
   of the award, not 15 days. The purchase benefitted this grant because prior equipment
   used to perform the functions the computer enabled was inoperable and also obsolete.

9. Award No.             : Research equipment, totaling $16,193, was used past the
   expiration date and taken by the Principal Investigator (PI) to another university.
   Therefore, this item was not fully allocable to the award. Additionally, the equipment
   was unreasonably charged to the award 1 month prior to expiration. An additional
   purchase of supplies 1 month prior to award expiration, totaling $6,819, was transferred
   onto the award, which was not reasonable. Total questioned expenses for this award
   were $23,012.

   Response: USC disagrees that this was an unreasonable expense. This was a fellowship
   award. The purpose of the award funding mechanism is to develop the next generation of
   faculty, which it did, as the PI received a faculty appointment at another university. The
   equipment was used by the PI in        research at USC for an additional 15 months after
   the end date of the award, and the PI has continued to use the equipment at        new
   institution. In addition, the cryostat questioned here and its relationship to the aims of the
   grant was documented by the PI in the Final Report.




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                                                                            National Science Foundation
                                                                           Audit of Claimed Costs of the
                                                                        University of Southern California



10. Award No.             : A data collection instrument, totaling $10,194, was purchased 4
    days prior to award expiration. Although USC noted future use of the instrument, the
    entire purchase was not used on this specific award and, therefore, is not allocable to the
    award, as it was not received prior to award expiration.

   Response: USC disagrees that this expense is not allocable to the award under review.
   The OIG’s characterization of this award is incorrect. While the data collection
   instrument was purchased 4 days before the end date of a grant period, the grant was
   continued through August 2017 and the PI continued to use the instrument during that
   time period. (See NSF Continuing Grant No.             ; Period of Performance: 9.1.13 -
   8.31.17).

   In addition, one of the explicit purposes of the award under review was to develop novel
   instrumentation, namely a liquid photoelectronic spectrometer, to support this continuing
   research effort. This charge was for the purchase of a data acquisition board which was a
   line item in the equipment budget for this award. The board was necessary for the data
   collection portion of the spectrometer. This purchase enabled the equipment to work as
   intended.

11. Award No.            : Equipment, totaling $106,069, was unreasonably charged to the
    award, because the equipment was received after award expiration. Due to the timing of
    receipt, the equipment needed to support the scientific and engineering instruments was
    not operational by the end of the award, which does not comply with NSF’s MRI policy.

   Response: USC disagrees that this was an unreasonable expense. This award was a
   Major Research Instrumentation Program (MRI) award. As described by NSF, the MRI
   program serves to increase access to shared scientific and engineering instruments to be
   used in future research and research training by providing opportunities to acquire major
   instrumentation that supports the research and research training goals of the university.
   (https://www.nsf.gov/funding/pgm_summ.jsp?pims_id=5260). The objective of MRI
   grants, therefore, is the acquisition or development of the instrumentation itself, not the
   use of the instrumentation in support of a separate research objective on the project.

   The NSF’s MRI policy does not require that the instrumentation be operational by the
   end of the award. Rather, the MRI policy provides that “[a]n instrument acquired or
   developed with support from the MRI program is expected to be operational for regular
   research use by the end of the award period.” (Emphasis added). This expectation is a
   reflection of the complexity of the MRI program, which contemplates “the acquisition or
   development of a single, shared-use, state-of-the-art, well-integrated instrument”
   comprised of an “ensemble of equipment”. (See
   https://www.nsf.gov/pubs/2015/nsf15012/nsf15012.pdf, FAQ #26).

   In this case, although the PI expected the equipment would be operational before the end
   date of the award, later recognized that the questioned equipment would be delivered
   after the award end date and obtained specific sponsor approval for the late delivery from



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                                                                           National Science Foundation
                                                                          Audit of Claimed Costs of the
                                                                       University of Southern California



   the NSF Program Manager. USC provided a copy of this prior approval to the NSF OIG
   in its prior submission.

   As noted in USC’s earlier response, this award was made under the American Recovery
   and Reinvestment Act (ARRA), in connection with which USC contributed $117,000 in
   cost sharing.

   The purpose of this award was to acquire a networked instrument composed of two
   complementary Autonomous Underwater Vehicles (AUV's), which support an extensive
   program of research in robotics, underwater acoustic communication and networking,
   marine biology, oceanography, and biogeochemistry at the Center for Integrated
   Networked Aquatic PlatformS (CINAPS).

   Despite the late delivery (approved by the sponsor), the objective of this grant was
   therefore met and the AUV’s are in use today on NSF Award No.                 (“
                                                            ”).

12. Award No.            : Lab supplies, totaling $6,434, were ordered in August 2013, and
    award expiration was September 30, 2013. USC did not provide physical documentation
    as to when the items were received to evidence that the items were used for this specific
    award. USC stated that items were still in use for two other awards. As such, the items
    should not have been fully allocated to this award.

   Response: Due to an inadvertent oversight, USC did not provide physical
   documentation as to when the items were received. We have included such
   documentation as an attachment to this response.

13. Award No.              : A laptop computer purchase, totaling $1,929, was transferred onto
    the award approximately 1 month before expiration date. When asked about the use of
    the laptop, USC noted that the computer would be used for taking research notes and
    writing papers, which do not appear reasonable, as the computer was unreasonably used
    for additional activities outside of the award itself. The transfer does not reflect the
    action of a prudent person, as they charged the full amount to the award, when the award
    will only benefit from a portion of the computer’s useful life. The computer was
    available for use for less than 4 percent of the award period (roughly 37 out of 911 days).

   Response: While the laptop was necessary for a student to support core activities related
   to the research such as writing papers, taking research notes, and developing and
   compiling code which can then be installed and run on a smartphone, USC does not
   contest this finding. However, USC also notes that use of an allocation methodology that
   derives from the number of remaining open days on an award is not appropriate. If use of
   this methodology was a requirement, an institution would be required to allocate all
   award expenses from the first day after the award start date until the end of the award.
   This is not the applicable standard on allocation.




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                                                                               National Science Foundation
                                                                              Audit of Claimed Costs of the
                                                                           University of Southern California



              Finding 2 – Misapplication of Indirect Costs (IDC) on Subawards

Finding: Per the 2 CFR Part 220: MTDC consists of “all salaries and wages, fringe benefits,
materials and supplies, services, travel, and subgrants and subcontracts up to the first $25,000 of
each subgrant or subcontract (regardless of the period covered by the subgrant or subcontract).”
Due to the nature and complexity of the award, USC collaborated with many other subawarded
universities. USC divided the subawards into separate purchase orders that each had its own
objective and unique scope of work, rather than treating each university as a stand-alone
subaward. USC applies the IDC threshold to each subaward purchase order, instead of the
aggregate level, thus causing subaward universities to exceed the $25,000 threshold requirement.
Kearney did not receive support to evidence that this purchase order IDC application approach
was approved by the NSF Grant Officer.

Response: USC disagrees with this finding. There is no requirement that USC aggregate all
subawards made to a single institution and treat them as a single subaward for purposes of
applying USC’s F&A rate to the first $25,000 of direct charges. Rather, as noted in the finding,
the prime awardee’s F&A cost rate is to be applied to a modified total direct cost (MTDC) base
that includes the first $25,000 of each subaward, regardless of whether the subaward is made to
one institution or multiple institutions. See 2 CFR §200.68 (“MTDC means all direct salaries and
wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first
$25,000 of each subaward (regardless of the period of performance of the subawards under the
award).”)

 The Uniform Guidance indicates that an award qualifies as a subaward if it is “provided by a
pass-through entity to a subrecipient for the subrecipient to carry out part of a Federal award
received by the pass-through entity.” 2 CFR §200.92; see also 2 CFR §200.330 (providing for
the issuance of a subaward “for the purpose of carrying out a portion of a Federal award.”).

As acknowledged in the finding, the questioned cooperative agreement is highly complex $47.6
million dollar award that involves key contributions from a team of investigators who bring
different disciplinary foundations for the intellectual and technical challenges of the research,
including at times more than one investigator with different areas of substantive expertise at the
same subawardee institution or entity. In addition to the lead investigators at the primary
institutions, this project has supported deep biosphere community research at over 40 institutions
in nearly 100 projects, including about 45 graduate student and postdoctoral research
fellowships.

The specific subawards under review involved the collection of unique samples at different field
sites around the world, each of which required the use of different collection, analysis, and
reporting activity at each site. Oversight of these efforts required monitoring separate work
streams, collecting and analyzing distinct reports, and ensuring that each subproject was
performed appropriately from both a scientific and programmatic perspective.

It should also be noted that under NSF’s Cooperative Agreement Financial & Administrative
Terms and Conditions (CA-FATC)



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                                                                            National Science Foundation
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                                                                        University of Southern California



(https://www.nsf.gov/pubs/policydocs/cafatc/cafatc_716.pdf), prior approval is not required
before implementing the subaward methodology USC employed, as suggested by the OIG. (See
CA-FATC, paragraph 3).

Each subaward was therefore executed and administered separately, and the costs that USC
incurred for administering two or more subawards to the same institution were the same costs
that USC would have incurred for administering two subawards to two different
institutions. Accordingly, USC’s approach of applying its F&A rate to the first $25,000 of each
subaward was appropriate, regardless of whether there were multiple subawards to the same
institution.




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                                                                             National Science Foundation
                                                                            Audit of Claimed Costs of the
                                                                         University of Southern California



           Finding 3 – Unsupported or Incorrect Charges to Participant Support

1. Award No.             – Travel reimbursement expenses related to a USC employee attending
   a conference in Colorado totaled $1,540 and were incorrectly charged as participant support.
   Award No.             – Reimbursement expenses related to a USC employee attending a
   conference in California totaled $517 and were incorrectly charged as participant support. Of
   the $517 expenses in question, $46 related to unallowable alcohol expenses charged to the
   award. USC agreed that these charges were related to a USC employee and that the alcohol
   charges should not have been charged to the award in any case.
   Award No.             – Two expenses relating to travel to Japan were charged to participant
   support, totaling $5,828. USC agreed that the charge totaling $3,661 for a student satellite
   project was incorrectly charged to participant support. USC stated that the other charge,
   totaling $2,167, was an expense related to a non-enrolled student in the summer of 2012 who
   was not considered a staff or faculty employee. However, Kearney noted that the individual
   had a USC employee ID number and was paid a research assistant’s salary for the months of
   April and May 2012. The travel end date for the expenses related to the award was within
   this timeframe.
   Award No.             – Expenses relating to travel to Japan and reimbursed to a USC
   employee, totaling $1,663, were incorrectly charged as participant support.

   Response: USC is not contesting these findings. While the reimbursements did support the
   aims of the respective awards, they were inadvertently charged to the participant support
   companion accounts in error.

2. Award No.             – Payroll expenses were incorrectly charged to participant support,
   totaling $20,873. The costs were noted to not be participant support, but evidence to support
   that conclusion was not provided. Therefore, the participant support expenses in question
   were not fully supported and appear to be commingled between participant and non-
   participant support accounts within the same award.

   Response: USC is not contesting this finding. At the time, USC was transitioning between
   systems and the participant support expenses on this account were comingled. In early 2015,
   USC strengthened existing procedures to ensure that separate companion accounts were
   created for any awards with participant support. Participant support budget and expense
   would be segregated in the companion account. Non-participant support budget and expense
   would be on the main grant account. This procedure also enabled identification of
   participant support costs.

3. Award No.            – A USC employee included herself in a conference meal
   reimbursement with other participants. The charges related to the USC employee totaled $69
   and were incorrectly charged as participant support.

   Response: USC is not contesting this finding. While the reimbursement did support the
   aims of the award, it was inadvertently charged to the participant support companion account
   in error.



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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



4. Award No.              – Participant support charges, totaling $8,122, related to speaker fees
   were unallowable. The charges do not meet the requirements of a participant support charge,
   as a speaker is neither a participant nor a trainee.

   Response: USC does not agree with this finding. These participants were all named in the
   proposal for supplemental funding to this award. The supplemental proposal was
   and was exclusively for participant support. These three speakers were the only participants
   named and were listed by name in the “Summary of Proposed Work”, the “Justification for
   Supplemental Funding”, and the “Budget Justification Page”. Accordingly, they were clearly
   identified as participants in the proposal, which was approved and funded by NSF.

   In addition, the amount in question was separately budgeted and charged to a companion
   account where no indirect charges were applied. As such, USC did not inappropriately
   burden this charge with indirect costs nor did USC bill the NSF for $1,675.96 of indirect
   costs as claimed in this finding.

5. Award No.             – A reimbursement expense, totaling $11,293, for a USC employee to
   travel to              for a special study was incorrectly charged to participant support.

   Response: USC is not contesting the directly charged portion of this finding of $6,971.25.
   However, the amount in question was separately budgeted and charged to a companion
   account where no indirect charges were applied. As such, USC did not inappropriately
   burden this charge with indirect costs nor did USC bill the NSF for $4,322.18 of indirect
   costs as claimed in this finding.

6. Award No.            – Three expenses, totaling $5,277, related to travel reimbursement for
   USC employees to attend a workshop in Washington, D.C. were incorrectly charged as
   participant support.

   Response: USC is not contesting this finding. While the reimbursement did support the
   aims of the award, it was inadvertently charged to the participant support companion account
   in error.




                                               41
                                                                                  National Science Foundation
                                                                                 Audit of Claimed Costs of the
                                                                              University of Southern California



                Finding 4 – Unreasonable, Unallowable, or Unsupported Travel Costs

1. Award No.              – Travel expenses, totaling $12,671, related to an        car
   rental, and travel to and/or from           University,              , and  , were
   unallowable. USC agreed that these expenses should not have been charged to the award and
   will repay the funds to NSF.

   Response: USC is not contesting this finding.

2. Award No.              – PI travel expenses to a conference in Germany, with a separate trip to
   collaborate at a university in      , were charged to the award, totaling $3,729. USC stated
   that the PI’s collaboration “focused on the analysis of primitive equations of the atmosphere,
   consistent with the research aims of the grant under review.” The separate trip to         is
   questioned for reasonableness, as USC’s response does not provide enough evidence
   showing the amount incurred for the          travel reflects the action of a prudent person, and
   the       collaboration was not listed within the award’s Annual or Final Project Report. In
   addition, the Final Project Report states that no international collaboration occurred for the
   PI.

   Response: USC disagrees with this finding. The PI used the General Services
   Administration (GSA) approved per diem rates for Paris and per diem reimbursement is an
   approved form of travel reimbursement per OMB Circular A-21 and USC Travel Policy.
   Furthermore, the PI did not claim per diem for the two weekend days he was in    since
   was not providing services benefiting the grant on those days.

   The PI did budget for international travel in     proposal which was approved and awarded
   by the NSF. In addition, listed travel to            in the Final Project Report. chose not
   to identify any international collaboration in the Final Project Report because and his
   collaborator had not successfully solved the problem they were working on.

3. Award No.                – The PI traveled to                                    , and          from
   January 2013 through August 2013 to collaborate with universities. The travel expenses for
   one trip totaled $13,831, and the collaborations were not included in the initial NSF proposal
   submitted. This trip was not mentioned in the award proposal for an 8-month travel period.
   As the PI returned early (July), another flight home was purchased and charged to the award.
   The original round trip flight was not used and was not refundable. An additional trip to
                totaling $3,448, charged to the award for further collaborations was questioned.
   Based on supporting documentation provided, only certain costs were charged to the grant
   (i.e., airfare, car rental, and a 1-night stay in a hotel). USC stated that the purpose of this trip
   was to collaborate with professors and work on joint publications; however, the documentary
   evidence provided was not sufficient to support this and the trip was not mentioned in the
   Annual or Final Project Report. Because this specific travel was not included in the budget
   and the total travel exceeded the budgeted amount, the aforementioned travel booked does
   not reflect the action of a prudent person. Additionally, there is no documented evidence of




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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



   how this trip directly benefitted the award; therefore, Kearney questioned these travel
   charges. Total questioned expenses for this award were $17,279.

   Response: USC disagrees with this finding. This trip was mentioned in the Final Project
   Report for Award           in the International Travel Section, “International Travel: Yes,
            - 0 years, 6 months, 7 days”.

   In an earlier response, the PI provided a detailed itinerary documenting his collaborations and
   noting two papers that resulted from this collaborative trip. The papers cited this award and
   the continuation award,                  . The papers also included and acknowledged
   collaborators in         . The itinerary and these two papers both document the direct benefit
   of this trip to the award.

   In terms of the flight charged, the research was completed ahead of schedule but it would
   have cost more to change the flight return date than to buy a second one way ticket.

4. Award No.             – PI travel expenses, totaling $6,520, were unreasonably charged to the
   award. The expenses related to a conference in Massachusetts to publish research results. The
   PI had to travel from         to attend the conference in Massachusetts; however, publishing
   the results could have been achieved in other ways, such as through a publication, and
   international travel was not considered prudent. Travel was not budgeted in the original
   proposal, but 33 percent of the award budget was rebudgeted for travel. Travel should have
   been considered within the original budget if the PI planned to publish results at a conference
   outside of         .

   Response: It appears that this travel was found unreasonable because the trip was not
   originally budgeted in the award proposal. However, under the Federal Demonstration
   Partnership (FDP), of which NSF is a member, universities are authorized to rebudget for
   travel without advance approval.




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                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



            Finding 5 – Unreasonable or Unallocable General Expense Charges

1. Award No.             – Lunch expenses with research collaborators, totaling $71, were
   unreasonably charged to the award. No agenda or itinerary was provided to support that the
   meeting benefitted this specific award.

   Response: USC disagrees with this finding as the lunch was to further the research
   collaboration. It is reasonable for researchers be allowed to participate in research
   collaboration meetings that directly benefit the award without having to create an agenda or
   itinerary.

2. Award No.             – Temporary employment expenses, totaling $1,129, for a summer
   internship was given to a non-USC student. Kearney questioned the reasonableness, as a
   USC student could have performed these tasks. USC did not provide evidence that they
   consulted its Human Resources Office prior to hiring a temporary employee to perform the
   work. Additionally, the Annual and Final Project Reports did not support that the individual
   performed work directly benefitting the award.

   Response: USC disagrees with this finding. This student was paid from a Research
   Experiences for Undergraduates (REU) Supplement. REU Supplements are open to
   application by undergraduate students from any university with the only stipulation that
   students must be citizens or permanent residents of the US or its territories
   (https://www.nsf.gov/crssprgm/reu/). NSF does not restrict REU educational opportunities to
   students enrolled at the awardee institution. In addition, this student worked on projects
   benefiting the grant.

3. Award No.              – A 3-night hotel stay was charged to the award for a 1-day conference,
   totaling $225 per night. Kearney determined the charges for the night before the conference
   and the night of the conference were reasonable; however, we questioned the reasonableness
   of the additional 1 night’s stay, as USC was unable to provide any type of justification for the
   extended stay.

   Response: USC is not contesting this finding.

4. Award No.              – Lab usage expenses for individuals, totaling $6,939, were charged to
   the award. These individuals were not mentioned in the Final Project Report. Other
   individuals on the invoice were listed as people who worked on the grant in the Final Project
   Report. Since the list of individuals included within the Final Project Report were
   inconsistent with the lab usage invoice charges, Kearney questioned whether the individuals
   used the lab for the direct benefit of the award.

   Response: All individuals listed used the lab for the direct benefit of the award. Only those
   who charged salary to the award were listed in the Final Project Report. Others received
   departmental and fellowship support so were not listed but still worked in support of the




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                                                                             National Science Foundation
                                                                            Audit of Claimed Costs of the
                                                                         University of Southern California



   award objectives. Several publications credit these individuals as well as acknowledge
   funding from this award.

5. Award No.              – Parking expenses for a          competition, totaling $340, were
   transferred onto the award. The original charges were made to NSF Award No.               ,
   which directly relates to the          competition. USC stated that these charges were used to
   support participant middle school teachers who served as mentors for the student participants
   in the         competition. The transaction under review transferred the parking charges for
   teacher participants in the          competition event at USC. However, the expenses were
   transferred to NSF Award No.              , where the        competition is not directly
   mentioned. The award originally charged, Award No.               , does mention the Botball
   event. The same PI is in charge of both of these awards. Kearney questioned the allocability
   of the transfer due to the incorrect award account being charged.

   Response: At the time of proposal of Award No.               , the PI was not aware that the
   GCER (Global Conference on Educational Robotics) would take place in Los Angeles so the
            competition was not directly mentioned in the proposal. Although not mentioned
   specifically, the Final Project Report described the overall program, which included the
            competition. The charge was allocated between the two awards based on the number
   of participants attending from each award which is a reasonable and appropriate allocation
   methodology.

6. Award No.              – Lunch meeting expenses, totaling $230, were charged to the award 2
   days prior to the expiration period. No agenda or itinerary was provided to support that the
   meeting benefitted this specific award.

   Response: USC disagrees with this finding as the lunch was to further the research
   collaboration. It is reasonable for researchers be allowed to participate in research
   collaboration meetings that directly benefit the award without having to create an agenda or
   itinerary.

7. Award No.             – Lunch expenses with the PI’s research students, totaling $205, were
   unreasonably charged to the award. No agenda or itinerary was provided to support that the
   meeting benefitted this specific award.

   Response: USC disagrees with this finding as the lunch was to further the research
   collaboration. It is reasonable for researchers be allowed to participate in research
   collaboration meetings that directly benefit the award without having to create an agenda or
   itinerary.

8. Award No.             – A stipend for a USC research associate professor, totaling $225, was
   incorrectly charged to participant support. USC agreed that these expenses should not have
   been charged to the award and stated the funds will be repaid to NSF.




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                                                                      National Science Foundation
                                                                     Audit of Claimed Costs of the
                                                                  University of Southern California



Response: USC does not contest this finding. This stipend was charged to the main
account, not the participant support companion account.




                                         46
                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



                       Finding 6 – Untimely Posting of Travel Charges

1. Award No.              – Travel conference charges for a trip to Taiwan, totaling $1,863, were
   posted 15 months after the travel end date and eight months after award expiration, even
   though the conference was related to the award. The untimely submission violates USC’s
   Expenditure policy regarding timely and accurate processing. In addition, the amount
   incurred for the travel does not reflect the action of a prudent person, as expenses should be
   submitted in a timely manner to be considered reasonable and allocable to the award.

   Response: Although this reimbursement was posted late, the auditors agreed that this travel
   benefited the project. The submission was not a violation of USC policy as the policy states
   that expenses “should be processed” in a timely manner. This policy is in part to ensure that
   faculty and staff are reimbursed promptly for out of pocket costs. That was not an issue here
   since the reimbursee was responsible for submitting his reimbursement late.

2. Award No.              – Travel charges, totaling $5,629, were posted 11 months after the
   travel end date and 3 months after award expiration for one transaction. The travel was
   related to charges for a conference in Japan and charges to visit with a collaborator at a
   Japanese university, which related to the award. The untimely submission violates USC’s
   Expenditure policy regarding timely and accurate processing. In addition, the amount
   incurred for the travel does not reflect the action of a prudent person, as expenses should be
   submitted in a timely manner to be considered reasonable and allocable to the award. In
   addition, lodging expenses were not supported, and no collaborations were listed in the initial
   proposal, Annual, or Final Project Reports.

   On the same award, conference charges, totaling $1,148, were posted 4 months after the
   award end date. When asked to provide a justification or NSF approval for posting the
   expense untimely, only the award end date was given, which was not a sufficient reason for
   the charge. The untimely submission violates USC’s Expenditure policy regarding timely and
   accurate processing. In addition, the amount incurred for the conference does not reflect the
   action of a prudent person, as expenses should be submitted in a timely manner to be
   considered reasonable and allocable to the award.

   Total questioned expenses for this award were $6,777.

   Response: Although this reimbursement was posted late, the auditors agreed that this travel
   benefited the project. The submission was not a violation of USC policy as the policy states
   that expenses “should be processed” in a timely manner. This policy is in part to ensure that
   faculty and staff are reimbursed promptly for out of pocket costs. That was not an issue here
   since the reimbursee was responsible for submitting his reimbursement late.




                                                47
                                                                              National Science Foundation
                                                                             Audit of Claimed Costs of the
                                                                          University of Southern California



                         Finding 7 – Unreasonable Payroll Charges

1. Award No.               – A member of USC’s staff received a bonus of $3,750 while serving as
   an administrative assistant on the award. USC stated that the reason for this bonus was to
   “compensate [the Administrative Assistant] for the enhanced responsibilities he assumed on
   this grant prior to [a] promotion.” The bonus should have not been charged using award
   funding, as the bonus provided on behalf of the award does not reflect the action of a prudent
   person.

   Response: USC disagrees with this finding. The employee performed work above and
   beyond his normal duties and was compensated for this in accordance with USC policy. In
   addition, OMB Circular A-21, Section J.10 allows supplemental compensation for excess
   work. The section reads:

       Incidental work (that in excess of normal for the individual), for which supplemental
       compensation is paid by an institution under institutional policy, need not be included in
       the payroll distribution systems described below, provided such work and compensation
       are separately identified and documented in the financial management system of the
       institution.

   Accordingly, this was a reasonable and allowable charge,

2. Award No.            – A teaching assistant charge of $667 was transferred onto the award 2
   months after award expiration. Award expiration was August 31, 2011, and the effort
   certification document stated work was performed by the assistant during the month of
   October 2011.

   Response: USC is not contesting this finding.




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                                                                             National Science Foundation
                                                                            Audit of Claimed Costs of the
                                                                         University of Southern California




Appendix C: Criteria
                                      Reasonable Costs
      Reference                                         Description
                          “A cost may be considered reasonable if the nature of the goods or
                          services acquired or applied, and the amount involved therefore,
                          reflect the action that a prudent person would have taken under the
                          circumstances prevailing at the time the decision to incur the cost
                          was made. Major considerations involved in the determination of
                          the reasonableness of a cost are: whether or not the cost is of a
                          type generally recognized as necessary for the operation of the
                          institution or the performance of the sponsored agreement; the
 OMB Circular A-21,
                          restraints or requirements imposed by such factors as arm’s length
 App. A, Section C.3.:
                          bargaining, Federal and State laws and regulations, and sponsored
  “Reasonable costs”
                          agreement terms and conditions; whether or not the individuals
                          concerned acted with due prudence in the circumstances,
                          considering their responsibilities to the institution, its employees,
                          its students, the Federal Government, and the public at large; and,
                          the extent to which the actions taken with respect to the incurrence
                          of the cost are consistent with established institutional policies and
                          practices applicable to the work of the institution generally,
                          including sponsored agreements.”
                                       Allocable Costs
      Reference                                         Description
                          “A cost is allocable to a particular cost objective (i.e., a specific
                          function, project, sponsored agreement, department, or the like) if
                          the goods or services involved are chargeable or assignable to such
                          cost objective in accordance with relative benefits received or
                          other equitable relationship. Subject to the foregoing, a cost is
                          allocable to a sponsored agreement if it is incurred solely to
                          advance the work under the sponsored agreement; it benefits both
 OMB Circular A-21,       the sponsored agreement and other work of the institution, in
 App. A, Section C.4.a,   proportions that can be approximated through use of reasonable
   “Allocable costs”      methods, or it is necessary to the overall operation of the institution
                          and, in light of the principles provided in this [Circular], is deemed
                          to be assignable in part to sponsored projects. Where the purchase
                          of equipment or other capital items is specifically authorized under
                          a sponsored agreement, the amounts thus authorized for such
                          purchases are assignable to the sponsored agreement regardless of
                          the use that may subsequently be made of the equipment or other
                          capital items involved.”




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                                                                               National Science Foundation
                                                                              Audit of Claimed Costs of the
                                                                           University of Southern California



                                Changes in Objectives of Scope
       Reference                                          Description
                            “Neither the phenomena under study nor the objectives of the
                            project stated in the proposal or agreed modifications thereto
                            should be changed without prior NSF approval. Such changes
    NSF Award and
                            should be proposed electronically via use of NSF’s electronic
 Administration Guide
                            systems to the cognizant NSF Program Officer by the PI [Principal
   (AAG), Chapter II,
                            Investigator]/PD. If approved by NSF, the Grants and Agreements
Section B.1.a: “Changes
                            Officer will amend the grant. Prior NSF approval also is required
in Objectives or Scope”
                            for any change to the Facilities, Equipment, and Other Resources
                            section of the approved proposal that would constitute a change in
                            objective or scope.”
                                      Post-End Date Costs
       Reference                                          Description
                            “NSF funds may not be expended subsequent to the expiration date
                            of the grant, except to liquidate valid commitments that were made
                            on or before the expiration date. For example, commitment of
NSF AAG, Chapter V,         project funds is valid when specialized (research) equipment is
Section A.2.c: “Post-       ordered well in advance of the expiration date but where, due to
  Expiration Costs”         unusual or unforeseen circumstances, delivery of such equipment
                            is delayed beyond the expiration date. The costs of equipment
                            ordered after the expiration date, however, may not be charged to
                            the project.”
                                   Participant Support Costs
       Reference                                          Description
                            “(i) Participant support costs are direct costs for items such as
                            stipends or subsistence allowances, travel allowances and
                            registration fees paid to or on behalf of participants or trainees (but
                            not employees) in connection with meetings, conferences,
                            symposia or training projects. For some educational projects
                            conducted at local school districts, however, the participants being
                            trained are employees. In such cases, the costs must be classified
 NSF AAG, Chapter V,        as participant support if payment is made through a stipend or
Section 8.a, “Participant   training allowance method. The school district must have an
    Support Costs”          accounting mechanism in place (i.e., sub-account code) to
                            differentiate between regular salary and stipend payments.

                            (ii) Funds provided for participant support may not be used by
                            grantees for other categories of expense without the specific prior
                            written approval of the cognizant NSF Program Officer. Therefore,
                            awardee organizations must account for participant support costs
                            separately.”




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                                                                            National Science Foundation
                                                                           Audit of Claimed Costs of the
                                                                        University of Southern California



                          Major Research Instrumentation (MRI)
       Reference                                  Description
 NSF MRI policy: NSF
 09-502, MRI Program
                          “Instruments are expected to be operational for regular research
     Solicitation for
                          use by the end of the award period.”
Instrument Development
     and Acquisition
           Exclusions of Some Costs from Indirect Costs Recovery Calculations
       Reference                                       Description
                          “The Federal government in general, and NSF specifically, does
                          not permit indirect costs to be recovered on certain types of costs.
                          Commonly excluded costs include:
NSF Indirect Cost Rates
    policy statement          •   Equipment and capital expenditures
                              •   The portion of subawards or subcontracts that exceed
                                  $25,000
                              •   Participant support costs.”
                           Modified Total Direct Cost (MTDC)
       Reference                                       Description
                          “F&A costs shall be distributed to applicable sponsored
                          agreements and other benefiting activities within each major
                          function (see Section B.1) on the basis of [MTDC], consisting of
2 CFR Part 220, App. A, all salaries and wages, fringe benefits, materials and supplies,
      Section G.2.,       services, travel, and subgrants and subcontracts up to the first
   “Determination and     $25,000 of each subgrant or subcontract (regardless of the period
  Application of F&A      covered by the subgrant or subcontract). Equipment, capital
  Cost Rate or Rates”     expenditures, charges for patient care and tuition remission, rental
                          costs, scholarships, and fellowships as well as the portion of each
                          subgrant and subcontract in excess of $25,000 shall be excluded
                          from modified total direct costs.”
                                      Reimbursement
       Reference                                       Description
                          “REIMBURSEMENTS – For reimbursements to individuals who
    USC Expenditure       used personal funds to pay for university expenses, timely
Policies and Procedures, processing is important in order to avoid financial hardship to an
Section 1.5, “Timely and employee. Expenses incurred using personal forms of payment
  Accurate Processing”    should be processed and submitted to Disbursement Control and
                          Accounts Payable within 60 days of trip or event completion.”




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                                                                     National Science Foundation
                                                                    Audit of Claimed Costs of the
                                                                 University of Southern California



                           Non-University Employees
    Reference                                    Description
                     “EMPLOYEES OF A TEMPORARY AGENCY are not university
                     employees and are not eligible to receive university benefits.
                     Before a department may engage a temporary employee, the
USC Non-University
                     department must consult with their Human Resources office to
 Employee policy
                     confirm that the assignment cannot be filled by a university
                     employee in a regular full-time or part-time, fixed-term, per diem,
                     resource or student employee status paid on USC payroll.”




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