Finding Text
Criteria or Specific Requirement: Federal regulations (45 CFR 1635.4(a) and 2 CFR 200.430), state that federal award recipients must base allocations of salaries and wages costs to grants on records that accurately reflect the work performed. Federal regulations (45 CFR 1630.5 and 2 CFR 200.403) state that expenditures are allowable under an LSC (or federal) grant or contract only if the recipient can demonstrate that the cost was consistent with accounting policies and procedures that apply uniformly to both LSC (or, federal)-funded and non-LSC (of, federal) -funded activities.
Condition: During our testing we noted: Payroll transactions: Eleven instances of errors totaling a net amount of $2,009 (an absolute value amount of $2,009) where the incorrect percentages were utilized in the allocation of the employee's pay, the incorrect employee's time was used in the allocation of the employee's pay, or there were unsupported amounts added to the allocation of the employee’s pay, and
Payroll transactions: Seven instances of errors totaling a net amount of $109 (an absolute value amount of $4,405) where an unsupported allocation percentage was used to allocate the employee's pay to the grant - typically, employee salaries are allocated to LSC and two other private grants using an allocation base of a LSC cost driver for the period divided by the total cost driver coded to the Organization’s general fund.
Fringe-benefit transactions: Two instances of an error totaling $91 where an unsupported allocation percentage was used to allocate employer-paid employee insurance costs to the grant - typically, costs are allocated to LSC and two other private grants using an allocation base of a LSC cost driver for the period divided by the total cost driver coded to the Organization’s general fund.
Fringe-benefit transactions: Two instances of errors totaling $275 where employer-paid employee insurance and HSA contribution deductions per the employee's pay stub were allocated to the grant at a rate of 100%.
Non-payroll and fringe transactions: one instance of an error totaling $884 where an unsupported allocation percentage was used to allocate general costs to the grant - typically, costs are allocated to LSC and two other private grants using an allocation base of a LSC cost driver for the period divided by the total cost driver coded to the Organization’s general fund. Additionally, we noted inconsistency in the general fund (LSC and two other private grants) allocation basis used during the year - grant hours and projected revenue were both utilized at different times during the year. Additionally, we noted that allocations in the general fund are done using projected revenue. However as revenue was recognized as expenses were incurred for the general fund the allocation based on revenue approximated an allocation method based on costs. As such, the costs mentioned above were allocated in an inconsistent manner to other grant costs and were not fully representative of the employees’ time and effort. However, we noted a lower frequency of differences in sample selections that occurred during the last several months of the year after management implemented a change to its allocation processes in response to the prior year audit.
2024 – 002: Cost Allocation of Expenses to LSC Grants (Continued)
Questioned Costs: A net amount of $3,150 of allocated salary expense described above, which is related to Assistance Listing Number 09.706060.
Context: These 23 instances were noting during testing of 55 disbursements.
Cause: The Organization’s cost allocation methodology is primarily based on time and effort records, and periodic calculations of a LSC cost driver for the period divided by the total cost driver coded to the Organization’s general fund, but it often includes manual adjustments based on review of individual time records, expense and other data. Therefore, the methodology is challenging to apply consistently, document contemporaneously, and apply in accordance with federal regulations.
Effect: The inclusion of frequent manual adjustments in the Organization’s cost allocation methodology could cause costs to be allocated to grants that are not reflective of the time and effort spent on grant activities and in a manner where costs are not applied uniformly to both LSC (or, federally)-funded and non-LSC (of, federally) -funded activities.
Repeat Finding: The finding is a repeat of findings in the immediately prior year. The prior year finding numbers were 2023-003 and 2023-004.
Recommendation: We recommend that the Organization consider updating its cost allocation methodology and process to reduce the frequency of manual adjustments based on review of individual time records and expense data and maximize the use of automated allocations that are calculated in a consistent manner that ensure costs are applied uniformly to respective benefited activities, and that are reflective on employees’ time and effort records
Views of responsible officials: Management partially agrees with this finding. First, 45 CFR Part 1635 codifies the timekeeping requirement. CLS keeps track of every case and time dedicated by staff in strict compliance with this requirement. Additionally, the distribution of expenses in the general fund, which includes LSC and two other funding sources, represents a fair method and allocation. Regarding the questioned costs, CLS disagrees with the finding of material weakness given the extremely low total dollar value.
Auditor’s Concluding Remarks: Management’s response did not persuade the auditor to revise the finding. Federal regulations state that expenditures are allowable under an LSC (or federal) grant or contract only if the recipient can demonstrate that the cost was consistent with accounting policies and procedures that apply uniformly to both LSC (or, federal)-funded and non-LSC (of, federal) -funded activities.