Finding Text
Finding 2025-002: Reportable finding considered a significant deficiency - Noncompliance with Payroll Allocation Controls Program name: Headstart Cluster Assistance Listing: 93.600 Federal awarding agency: U.S. Department of Health and Human Services Award identification numbers: 03CH012075-04-00, 03CH012075-05-00, 03CH012317-02-00, 03CH012317-03-00 Award Years: 2024/2025 Criteria: Under 2 CFR § 200.430(g)(1), charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must be supported by a system of internal control that provides reasonable assurance that the charges are accurate, allowable, and properly allocated. The records must also support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. Condition: Certain employees allocate time to the various projects within the headstart cluster, however, incorrect allocations resulted in payroll costs being charged to Federal awards using the wrong allocation percentages for approximately six months before the error was detected. The errors were mostly identified and corrected by the Organization; however, this correction occurred roughly six months after the incorrect allocation began. Management processed correcting entries such that the total payroll costs charged to the Head Start Federal awards for the fiscal year were corrected in the accounting records. Cause: The error resulted from a combination of data entry errors when setting up the allocation in the payroll allocation system; and insufficient review and monitoring controls over payroll allocation setup and ongoing allocations, including the lack of a documented, periodic review to confirm that allocations continue to reflect actual time and effort and the relative benefits received by Head Start and other programs. As a result, an incorrect allocation remained in place for several months before being identified and corrected. Effect: For approximately six months, payroll costs were allocated among the various Head Start awards and other programs using incorrect allocation percentages. This resulted in a control deficiency in the Organization’s internal control over compliance with Federal requirements for payroll and payroll allocations, including the requirement for effective control over and accountability for all funds in 2 CFR § 200.302(b)(4) and periods during which costs charged to the Head Start Federal awards were not aligned with the relative benefits received by the program, which is inconsistent with the allocability requirements of 2 CFR § 200.405(a). Although management corrected the year-end totals charged to the Head Start Federal awards, the delayed detection of the error indicates that similar errors could occur and remain undetected, potentially resulting in unsupported or unallowable payroll charges in future periods. Management’s response and corrective action plan (unaudited): See corrective action plan. Repeat finding: This is not a repeat finding. Questioned costs: None identified, as the expenditure appeared otherwise allowable. However, the control deficiency presents a risk for future noncompliance. Perspective: In our original sample of 40 payroll allocation transactions related to the Head Start program (ALN 93.600), we noted 5 errors impacting 2 employees. We did not increase our sample size because the error was pervasive across multiple employees. Additional testing over compliance was performed and noted that the errors were materially corrected by management during the year. Recommendation: We recommend that the Organization: • Strengthen payroll allocation setup and review controls by implementing and documenting a review and approval process (by someone independent of the preparer) for new or modified payroll allocation setups in the payroll system for employees whose salaries are charged in whole or in part to Head Start. • Implement periodic after-the-fact reviews of payroll allocations for employees whose salaries are allocated to Head Start and other programs to confirm that allocations remain consistent with actual time and effort and the relative benefits received by each program, and that necessary adjustments are recorded timely. • Enhance documentation and training related to payroll allocations, including: o Written procedures describing how allocations affecting Head Start are established, reviewed, and monitored; and o Training for staff responsible for entering and reviewing payroll allocations on the requirements of 2 CFR § 200.302, § 200.405, and § 200.430, and the importance of timely identification and correction of errors. These actions should help ensure that payroll costs charged to the Head Start Federal award are accurate, properly supported, and allocable in accordance with Federal requirements.