Finding No.: 2024-002 – Allowability – Significant deficiency Federal Agency: Various Program Name: Research and Development Cluster ALN Number: Various Federal Award Year: July 1, 2023 – June 30, 2024 Criteria: In accordance with 2 CFR 200.303(a), non-Federal entities must establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with the guidance in “Standards for Internal Control in the Federal Government” issued by the Comptroller General of the United States or the “Internal Control Integrated Framework”, issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).Conditions Found: I. Indirect Cost Expenditures (IDC): To ensure compliance with federally funded grants, particularly concerning indirect cost rates, the institution must adhere to specific criteria. Firstly, compliance with the Uniform Guidance (2 CFR Part 200) is essential. This regulation establishes uniform administrative requirements, cost principles, and audit requirements for federal awards to non-federal entities. The institution must follow these guidelines, which include the proper application and calculation of indirect cost rates. Additionally, adherence to approved indirect cost rates as specified in 2 CFR 200.414 is required. The institution must apply the federally approved indirect cost rates when charging costs to federal awards, ensuring that any deviations, such as using a de minimis rate, are appropriately justified and documented.During our audit we found 3 out of 15 samples selected for our compliance testwork, the College used an incorrect IDC rate. This represents an overcharge, as the IDC rate is intended to cover general administrative expenses that cannot be directly attributed to a specific project. In utilizing a higher rate, the College effectively inflated the administrative costs charged to the federal grants. II. Fringe Rates: When applying fringe rates to federally funded R&D grants, institutions must comply with specific laws, regulations, and requirements to ensure adherence to federal guidelines. The primary regulatory framework is outlined in the OMB Uniform Guidance (2CFR Part 200), which provides the Uniform Administrative Requirements, Cost Principles,and Audit Requirements for Federal Awards. This regulation specifies that fringe benefits,which include employee-related expenses such as health insurance and retirement contributions, are allowable costs only if they are necessary, reasonable, and allocable to the federal award. Additionally, the Federal Acquisition Regulation (FAR) Part 31 outlines the cost principles and procedures for determining the allowability of costs under government contracts, reinforcing the need for costs to be necessary, reasonable, and allocable. Institutions must apply fringe benefit rates that align with the approved rates set by the overseeing federal agency. Overcharging or applying incorrect rates can result in noncompliance with federal regulations. Adequate internal controls are necessary to ensure the correct application of fringe rates, which includes regular monitoring and verification. In cases of noncompliance, corrective actions must be taken to address and rectify discrepancies. Proper documentation and recordkeeping are also essential to support the application of fringe rates and demonstrate compliance with federal guidelines. During our audit we found 5 out of 20 samples selected for our compliance testwork, the College charged an incorrect fringe rate. After inquiry of management, we noted during thefirst quarter of the period under audit, the College charged a fringe benefit rate of 19.9%,instead of the actual rate of 18.65%. KPMG noted for our 15 of 20 samples which were incurred during quarters two, three, and four, the appropriate fringe rate was utilized. Cause: I. Indirect Cost Expenditures (IDC): The cause of the condition is that the College’s internal controls over the review of the rates applied to calculate the IDC charges were not operating effectively to the awards throughout the year. The College manually calculates what the IDC costs are based upon outdated rates and was booked into their financial reporting system without a supplemental review or reconciliation. II. Fringe Rates: The cause of the condition found is the institution not maintaining appropriately functioning controls to review the rates applied to the fringe benefit charges applied to theawards throughout the year. The College manually reviews the fringe benefits charges afterthe expenditure process and therefore is not designed to catch noncompliance prior to the charges to grant. The College identified they were using the incorrect fringe rates during the first quarter, however, did not go back and correct the error as they deemed it to be immaterial. Possible Asserted Effect: I. Indirect Cost Expenditures (IDC): The inflated rate has led to an unwarranted increase in administrative costs charged to federal grants, potentially resulting in the overcharge. II. Fringe Rates: The possible effect of the condition found is that the Institution is overcharging future federal grants for an excess of fringe more than what is deemed as allowable. Questioned Costs The known questioned costs are $3,835 (IDC known questioned costs are $1,703 and fringe known questioned costs are $2,132) and the likely questioned costs are $4,767. Statistical Sampling: Neither samples were intended to be, and were not, a statistically valid sample. Repeat Finding: The conditions found do not constitute a repeat finding from the prior year. Recommendation: I. Indirect Cost Expenditures (IDC): We recommend that management review its internal controls and establish a routine audit and monitoring process to regularly review the application of indirect cost rates and ensure compliance with federal regulations.