Finding Text
Finding 2024-005: Reportable finding considered a significant deficiency - Inadequate Controls over Identification of Unallowable Costs in the Indirect Cost Pool
Program name: Applies to all federal program utilizing indirect cost rates Assistance Listing: All
Federal awarding agency: All
Pass-through Entity: All
Criteria: In accordance with 2 CFR 200.403 and 2 CFR 200.412–415, costs charged to federal awards, whether direct or indirect, must be allowable under the cost principles of Subpart E. Organizations must have adequate internal controls to identify, segregate, and exclude unallowable costs from charges to federal programs. In particular, indirect cost pools used to calculate rates billed to federal awards must not include unallowable costs such as fundraising, entertainment, or other expressly unallowable expenses.
Condition: During our audit procedures, we noted that the Organization does not identify or code unallowable costs (e.g., fundraising event expenses) within its accounting system at the time of transaction entry. As part of our review of the General and Administrative (G&A) cost pool used for indirect cost rate calculations, we identified unallowable costs included in the detailed listing. Per discussion with management, these costs are not intended to be charged to federal awards. Management explained that federal drawdowns are based on a provisional rate and unallowable costs are manually excluded during the closing and cost submission process.
Cause: The Organization lacks system-based controls and procedures to flag or segregate unallowable costs during transaction coding. The current process relies heavily on manual review and adjustments at year-end, which increases the risk of unallowable costs being inadvertently included in rates charged to federal programs.
Effect: Including unallowable costs in the indirect cost pool—whether or not ultimately billed—represents a significant deficiency in internal control over compliance. Although management asserts that such costs are removed prior to federal reimbursement claims, the absence of preventive controls increases the risk of noncompliance, incorrect cost submissions, and potential disallowed costs during future oversight or audits.
Repeat finding: This is not a repeat finding.
Questioned costs: None identified as costs were reportedly removed prior to billing; however, the issue represents a control weakness.
Perspective: This control deficiency affects the Organization’s system-wide treatment of indirect costs across all federal programs using the provisional rate.
Recommendation: We recommend that the Organization:
• Implement accounting system enhancements or protocols to flag unallowable costs at the point of entry to ensure proper coding and segregation.
• Establish written procedures and staff training to reinforce cost allowability standards under Uniform Guidance.
• Consider performing interim reviews of indirect cost pool activity to ensure early identification and removal of unallowable expenses.
Management’s response and corrective action plan (unaudited): See corrective action plan.