Finding Text
Finding 2025-007: Inadequate Controls Over Payroll Allocations and Allowable Costs – Significant Deficiency and Instance of Noncompliance Federal Program: Health Center Program (Assistance Listing 93.224) Criteria: Uniform Guidance requires non-Federal entities to maintain records that accurately reflect the work performed and support the distribution of salary and wages charged to federal awards. Internal controls should provide reasonable assurance that payroll costs charged to federal programs are based on records that accurately reflect the employee's actual work performed and that compensation costs are properly allocated among funding sources. Condition: Management represented that employee compensation costs are allocated to federal programs based on time worked and that employee time records are maintained and approved by employees and supervisors. However, the Organization does not have adequate controls to ensure payroll allocations charged to federal programs agree to approved time records or that overtime compensation is allocated in accordance with the employee's actual distribution of work performed. During testing of 40 payroll selections comprising 83 payroll allocation instances, we identified the following exceptions: • Ten payroll allocation instances were noted where the hours charged to the Health Center Program did not agree to the hours reflected on the employee's approved timecard. Management indicated that, for salaried employees, timecards are maintained for internal reporting purposes only and are not used as the basis for allocating payroll costs to grant programs. As a result, payroll costs allocated to the program were manually adjusted and did not consistently agree with the employees' approved time records. • Seven payroll allocation instances were noted where overtime compensation was allocated based on the distribution of regular hours charged to the program rather than the actual hours worked during the overtime period. As a result, overtime costs were not allocated in a manner consistent with the work performed. Cause: The Organization has not implemented effective controls to ensure payroll allocations are based on approved time records and that employees and supervisors are adequately trained regarding timekeeping and program coding requirements. In addition, management has not established procedures to review payroll allocations for consistency with approved time records or to verify that overtime compensation is allocated based on actual work performed. Effect: Because payroll allocations are not consistently supported by approved time records and overtime costs are not allocated based on actual work performed, there is an increased risk that compensation costs charged to federal programs may be inaccurate, unsupported, or improperly allocated. This may result in federal programs being charged for costs that do not reflect the actual services performed for the program. Questioned Costs: $3,447.45, consisting of $3,440.89 related to payroll allocations that did not agree to approved time records and $6.56 related to improper allocation of overtime compensation. Context: During testing of 40 payroll selections and 83 payroll allocation instances, we identified 17 instances where compensation costs were not allocated in accordance with approved time records or actual work performed. The exceptions resulted from manual adjustments to program allocations that differed from employee-approved time records and from the use of allocation methodologies for overtime compensation that did not reflect actual overtime hours worked on the program. The exceptions indicate a systemic deficiency in controls over payroll allocations and compensation cost documentation. Repeat Finding: This is not a repeat finding. Recommendation: We recommend management strengthen controls over payroll allocations by requiring compensation costs charged to federal programs to be supported by employee and supervisor-approved time records that accurately reflect actual work performed. Employees and supervisors should receive training regarding program coding requirements, and management should implement a documented review process to verify that payroll allocations, including overtime compensation, are consistent with approved time records before costs are charged to federal programs. Management Response: Management concurs with the finding. The Organization acknowledges deficiencies in controls over payroll allocation processes and recognizes the importance of ensuring compensation costs charged to federal programs are supported by records reflecting actual work performed. Management is implementing revised payroll allocation procedures requiring allocations to be supported by approved time records and documented review processes. Specifically, compensation charged to each federal award will be based on timesheets or other time and effort records that reflect the actual hours worked on each program, are signed by the employee, and are approved by the employee’s direct supervisor, in accordance with the standards for documentation of personnel expenses under the Uniform Guidance (2 CFR 200.430(g)). Overtime will require advance supervisory approval and will be charged only to the program on which the overtime hours were worked. Additional training will be provided to employees and supervisors regarding timekeeping and grant coding requirements, and management will periodically review payroll allocations to verify compliance with federal requirements. Each pay period, the Accounting Department will reconcile payroll allocations recorded in the payroll system to approved time records before posting related costs to the general ledger and charging them to federal programs, and will investigate and correct any discrepancies before including the costs in a reimbursement request form. Where budgeted allocations are used for interim purposes, they will be compared to actual effort at least quarterly and adjusted as necessary so that final amounts charged to federal awards reflect actual work performed. The Chief Financial Officer (CFO) will review the results of these reconciliations, and all time records, approvals, and reconciliations will be retained in accordance with the record retention requirements of the Uniform Guidance (2 CFR 200.334).