CRITERIA: In accordance with The Uniform Guidance Compliance Supplement, Part III, Section B., “Allowable Costs/Cost Principles” and more specifically, 2 CFR Part 200 “Cost Principles for Nonprofit Organizations”, direct costs are those costs that can be identified specifically with a particular final cost objective, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Such payments must be made in an accurate amount and may not include overpayments or underpayments to eligible recipients. Costs must be necessary and reasonable for the performance of the federal award and allocable under the principles of 2 CFR Part 200, Subpart E. CONDITION: The Organization’s records erroneously overstated workers’ compensation expense in fiscal year 2024-25. Accordingly, the amount allocated to Federal Head Start Program was overstated for the 2024-25 fiscal year. QUESTIONED COSTS: The known questioned cost totaled $34,888. CAUSE: A data entry error resulted in an inaccurate workers’ compensation percentage which was accrued bi-weekly in the Organization’s payroll system. Accordingly, the liability for workers’ compensation was overstated along with the corresponding expense in fiscal year 2024-25. Management’s review of the financial statements did not identify this error in a timely manner. EFFECT: The Organization did not ensure accuracy in the costs charged to the Federal Head Start Program during the program year and therefore, it was not in compliance with the regulation. RECOMMENDATION: We recommend that management correct the payroll system data, ensuring accurate percentages are entered for workers’ compensation, and implement a review procedure to monitor payroll liabilities each month for accuracy. Further, we recommend that program management consult with their Head Start coordinator for further guidance on corrective actions regarding the 2024-25 overstatement. MANAGEMENT RESPONSE: Management did identify the error at the close of the 2024-25 fiscal year and suspended the bi-weekly allocation of workers compensation expense, allowing payments to relieve the overstated liability throughout the 2025-26 fiscal year. Accordingly, the Federal Head Start Program will not be charged with workers’ compensation expense in the 2025-26 program year to correct for the 2024-25 overstatement.
CRITERIA: Internal controls over federal programs are to be sufficient to prevent the overstatement of costs charged to federal programs. CONDITION: The Organization’s internal control over compliance failed to prevent the overstatement of workers' compensation expense charged to the Federal Head Start program in fiscal year 2024-25. CAUSE: The Organization experienced turnover in key program management and fiscal positions in fiscal year 2025, as well as staffing shortages. Accordingly, the performance of timely internal control procedures such as reviews over payroll processing, monitoring of payroll liability balances, and financial statement reviews suffered. EFFECT: The effect of this deficiency in internal controls over federal programs was the Organization’s failure to comply with the Allowable Costs requirements and identify overstatement of expense. RECOMMENDATION: We recommend that personnel responsible for Head Start Program compliance carefully review the financial statements each month to ensure expenses appear accurate. Further, we recommend that fiscal personnel implement reviews over bi-weekly payroll processing and monitor the balances in payroll liability accounts each month to ensure reasonableness. MANAGEMENT RESPONSE: In October 2025, the Organization contracted with an outside payroll processor for payroll services. By alleviating the processing of payroll, the Organization’s fiscal team will have more time to review and monitor payroll, including payroll liabilities, to ensure accuracy in the allocation of expenses to federal programs.