Finding 2025-002: Payroll Costs Not Supported by Actual Time and Effort - Material Weakness Federal Agency: Department of Education Federal Program Title: Education Innovation and Research Federal Assistance Listing Number: 84.411 Compliance Requirement: Allowable Costs/Cost Principles Criteria 2 CFR §§ 200.403 and 200.405 require that costs charged to a federal award be adequately documented and allocable to the award. Under 2 CFR § 200.430(i), charges for salaries and wages must be based on records that accurately reflect the work performed, supported by a system of internal control that provides reasonable assurance that the charges are accurate, allowable, and properly allocated. Where an employee works on multiple awards or activities, the records must support the distribution of the employee's salary or wages among those activities. Budget estimates alone are not sufficient to support charges to a federal award. Additionally, 2 CFR § 200.303 requires the Organization to establish and maintain effective internal control over federal awards. Condition We tested 60 payroll transactions totaling approximately $589,000 charged to the Education Innovation and Research Program and identified 12 exceptions totaling approximately $6,600. The exceptions were related to payroll costs allocated among multiple funding sources that were not supported by documentation accurately reflecting actual time and effort performed. Specifically, the Organization allocated payroll costs using methodologies that were not supported by after-the-fact records demonstrating the actual work performed, as required by federal regulations. Context Payroll costs charged to the program were approximately $589,000, or 60% of total federal expenditures of $981,559. Exceptions were identified in 12 of 60 payroll transactions tested, with known questioned costs of approximately $6,600. Cause Management did not establish, implement, and maintain an effective system of internal control over payroll expenditures charged to federal awards. Specifically, management did not ensure that payroll allocation methodologies were adequately documented, consistently reviewed, or verified against actual work performed. Supervisory review procedures designed to validate payroll distributions and supporting documentation were either not established or were not performed consistently throughout the audit period. In addition, periodic reconciliations between payroll records, general ledger activity, and amounts charged to federal programs were not performed in a timely manner. Management also did not implement sufficient monitoring activities to identify, investigate, and correct payroll allocation errors before costs were charged to federal awards. As a result, control deficiencies were not detected or corrected timely, increasing the risk that unallowable, unsupported, or inaccurately allocated payroll costs would be charged to federal programs. Effect As a result of the control deficiencies, payroll costs charged to the federal program could not be relied upon to be accurate, allowable, or adequately supported. The deficiencies resulted in material noncompliance with federal requirements governing allowable costs and cost principles. Questioned costs Known questioned costs of $6,600 were identified through audit testing. Identification of a repeat finding This is not a repeat finding. Recommendation The Organization should establish and implement formal policies and procedures governing payroll costs charged to federal awards. The procedures should identify the required supporting documentation, payroll allocation methodologies, review and approval responsibilities, reconciliation requirements, and monitoring activities necessary to ensure compliance with federal requirements. Management should require periodic supervisory review of payroll distributions and reconciliations between payroll records and amounts charged to federal programs. In addition, management should promptly investigate and correct identified discrepancies and provide ongoing training to personnel responsible for payroll processing and grant administration to ensure payroll costs charged to federal awards are accurate, allowable, and adequately supported. Views of responsible officials Management agrees with the finding and acknowledges that improvements are needed in the design and operation of internal controls over payroll costs charged to federal awards. The Organization will establish formal written procedures for payroll allocations, documentation requirements, supervisory review, reconciliation processes, and compliance monitoring activities. Management will assign responsibility for reviewing payroll costs charged to federal programs and performing periodic reconciliations between payroll records, accounting records, and federal reimbursement requests. The Organization will also provide training to personnel responsible for payroll processing and grant administration to strengthen understanding of Uniform Guidance requirements.