We identified a material weakness in internal control over compliance related to allowable / unallowable cost requirements for excess drawdowns beyond 8% rate for the REAP program. Criteria: Under 2 CFR 200.414, indirect costs are recovered by applying an approved indirect cost rate to the appropriate base, generally modified total direct costs (MTDC), rather than by drawing the budgeted indirect cost amount. Nonfederal entities must maintain effective control over and accountability for all funds and ensure they are used solely for authorized purposes (2 CFR 200.302). Federal funds are to be drawn only as needed to meet immediate cash requirements for the federal award, minimizing the time between transfer from the U.S. Treasury and disbursement by the Center (2 CFR 200.305). In addition, the Center’s written Indirect Cost Rate Policy requires that indirect costs be applied as a percentage of MTDC, defines the MTDC base (including and excluding specific cost categories), and assigns responsibilities to finance and compliance personnel for ensuring proper calculation, monitoring, documentation, and reporting of indirect costs on federal awards. The policy also requires ongoing monitoring of the correct application of the indirect cost rate to MTDC and retention of supporting documentation for audit and review. Condition: For the Year 1 period of performance under the REAP award, the Center drew down the entire indirect cost budget of $625,013 included in the $8,437,681 Grant Award Notification (GAN), rather than limiting indirect cost draws to the amount calculated by applying the approved 8 percent indirect cost rate to the actual MTDC base. Total expenditures drawn for the period were $6,489,490, which included the full $625,013 of indirect costs. Some drawdowns applied the 8 percent rate to the MTDC base, while other drawdowns exceeded the amount supportable by the rate in order to reach the full budgeted indirect cost. Although the Center has an Indirect Cost Rate Policy that describes how the indirect cost rate is to be applied to MTDC and requires monitoring of the correct application of the rate, the procedures described in that policy were not effectively implemented or followed for this award.There is also an element in which training stipends need to be removed before calculating the allowable indirect cost amount. The Center has stipends that could related to the MTDC based on a template provided by the US Department of Education. Because of the clarity of how these stipends are undefined, this could further impact the calculation. Based on our recalculation, this resulted in approximately $155,875 of indirect costs drawn in excess of the allowable amount under the approved rate and MTDC base. This constitutes noncompliance with the award terms and the Uniform Guidance requirements for charging indirect costs and drawing federal funds based on actual allowable costs incurred. Cause: This was the Center’s first federal award. Management inadvertently misunderstood how to apply the approved indirect cost rate and believed it was appropriate to draw the full indirect cost amount budgeted in the GAN, rather than calculating indirect costs by applying the 8 percent rate to the actual MTDC base. While the Center has an established written Indirect Cost Rate Policy that is consistent with federal requirements and clearly describes the application of the rate to MTDC, the policy was not fully operationalized for this award. Specifically, staff responsible for drawdowns did not consistently follow the policy’s procedures for calculating indirect cost based on MTDC, monitoring the correct application of the rate, and retaining calculation worksheets; and there was no documented supervisory review to ensure compliance with both the policy and the Uniform Guidance prior to submitting drawdown requests. Also, the US Department of Education’s template that demonstrated for training stipend costs as a reduction has not been considered fully based on the definition of those costs. Effect or Potential Effect: By drawing down approximately $155,875 more than the allowable indirect costs for the period, the Center used federal funds in excess of what was permitted under the approved indirect cost rate and MTDC base. These excess draws represent costs that may be disallowed by the U.S. Department of Education and may require repayment. Continued reliance on budgeted indirect amounts, rather than applying the rate to the MTDC base in accordance with both the Uniform Guidance and the Center’s Indirect Cost Rate Policy, increases the risk of further over- or under-recovery of indirect costs and noncompliance with cash management requirements.Questioned Costs: We calculated questioned costs of $155,875 representing the excess of indirect costs drawn over the amount that would have been allowable had the approved 8 percent indirect cost rate been applied to the actual MTDC base for the period. This does not include the potential impact of training stipend costs being excluded in arriving at the allowable indirect cost. Because the questioned costs exceed $25,000, they are required to be reported in the Schedule of Findings and Questioned Costs. At the time of our audit, no portion of the $155,875 had been repaid, and the federal agency had not yet issued a determination regarding the resolution of these questioned costs. Perspective: The total Year 1 GAN amount was $8,437,681, including $625,013 of budgeted indirect costs. During the audit period, the Center drew down $6,489,490 in total, including the full $625,013 of indirect costs. The issue affected multiple drawdowns during the period; some draws were calculated at the approved 8 percent rate, while others either did not exceeded the amount supported by the rate to enable drawing the full budgeted indirect costs. The existence of a written Indirect Cost Rate Policy that was not consistently followed, combined with the pattern of excess indirect draws, indicates a systemic implementation and monitoring issue rather than an isolated error. Recommendation: We recommend that management: 1. Recalculate allowable indirect costs for the period by applying the approved 8 percent indirect cost rate to the actual MTDC base and work with the U.S. Department of Education to resolve the $155,875 in questioned costs, including returning any unallowable amounts as required. This includes ascertaining that training stipends, if applicable by definition, are excluded from total direct cost before the 8% multiplier is applied. 2. Fully implement and operationalize the existing Indirect Cost Rate Policy by: • Ensuring that the MTDC base is correctly determined for this and future awards and that the approved indirect cost rate is applied only to that base; • Requiring preparation and retention of indirect cost calculation worksheets that tie to MTDC and support each drawdown; and • Establishing a documented supervisory review to verify that indirect costs are calculated and drawn in accordance with the Indirect Cost Rate Policy, the GAN, and the Uniform Guidance prior to submission of drawdown requests.Provide targeted training to finance and program staff on the Indirect Cost Rate Policy, including the definition of MTDC, the appropriate application of the indirect cost rate, and the monitoring and documentation requirements described in the policy, to reinforce the otherwise sound policy framework already in place. Views of Responsible Officials: Management agrees with the finding. As this was the Center’s first federal award, management misunderstood the proper application of the approved indirect cost rate for this program and drew the full budgeted indirect cost amount instead of applying the rate to the MTDC base. Management notes that it has adopted an Indirect Cost Rate Policy that is intended to ensure consistent, compliant application and monitoring of indirect costs across federal awards; however, this policy was not consistently followed for the REAP award. Management plans to recalculate allowable indirect costs, consult with the U.S. Department of Education regarding resolution of the $155,875 in questioned costs, and strengthen implementation of its Indirect Cost Rate Policy through enhanced procedures, documentation, supervisory review, and staff training to ensure that future indirect cost calculations and drawdowns comply with both the policy and the Uniform Guidance.