Finding 588289 (2021-004)

Criteria: Title 2 of the Code of Federal Regulations (2 CFR), Part 200, Subpart E defines and discusses the federal cost principles that apply to federal awards administered by nonprofit organizations. The applicable sections of these cost principes are as follows: • 2 CFR 200.403 Factors affecting allowability of costs • 2 CFR 200.404 Reasonable costs • 2 CFR 200.405 Allocable costs • 2 CFR 200.413 Direct costs • 2 CFR 200.414 Indirect (F&A) costs Condition: The following were noted as related to compliance with allowable costs, cost allocation and federal cost principles: • Internal control on time spent by employees related to administrative functions or other indirect cost activities has not been properly designed or implemented. • All employee time, including employees and professional services contractors are being recorded directly to programs. Time spent on indirect activities is not being properly identified or properly allocated to programs. • A portion of time of the Operations Manager (Chief Executive of the Organization) is spent related to administrative time or other indirect cost activities. However, none of that time has been identified or charged as indirect costs. • The time card for the Operations Manager (Chief Executive of the Organization) is not reviewed or approved by a board member or other senior executive of the Organization. • The accounting services of AIRS is being provided by a third-party outsourced accountant. The costs related to these services were improperly recorded as direct personnel costs to the program rather than properly classified as indirect costs. • Payroll taxes, employee benefits and other allowable employee related expenses were allocated to the program in a manner that does not accurately reflect the relative benefits received. These costs were allocated to the program as a percentage of total payroll costs, however, the percentage used exceeds that actual percentage of these costs as a percentage of total payroll costs. • A reasonable, consistent and uniform cost allocation methodology has not been properly designed or implemented. Costs that benefit both federal programs, non-federal programs and indirect costs are not being allocated properly across and to federal programs, non-federal programs and indirect costs in a reasonable, consistent and uniform manner. • Certain direct costs charged to the program were not based on actual costs incurred and the amounts charged were not adequately supported. • Indirect costs were not properly identified and segregated from direct costs. • Allowable indirect costs were not charged to the federal program. Cause: AIRS accounting staff and senior management do not appear to have a full and complete understanding of Uniform Guidance or of the applicable federal cost principles. Management has not properly applied the applicable federal costs principles in 2 CFR, Part 200, Subpart E to the costs charged to the federal program. Effect: Payroll costs and allowable employee related expenses, certain direct costs, allocable direct costs and indirect costs were not properly charged to the federal program. In order to estimate the questioned costs, the auditor, with the assistance of management, developed a costs allocation methodology that charges costs to the federal program in a reasonable, consistent and uniform manner in compliance with the costs principles contained in 2 CFR, Part 200, Subpart E. The primarily characteristics of this methodology are as follows: • Based upon discussions with management, review of the job description, roles and responsibilities of the Operations Manager and using prior experience and comparison to similar nonprofit organizations; an estimate of the percentage of time spent by the Operations Manager related to administration and other indirect activities was developed. • The time for the outsourced accounting services provider was removed from direct personnel costs and charged to indirect costs. • After the above revisions were made, the auditor assisted management in reallocating payroll costs across all federal and nonfederal programs and to indirect costs in a reasonable, consistent and uniform manner. • Allowable payroll taxes, benefits and other employee related expense charges were estimated using the actual percentage of these expenses as a percentage of total allowable payroll costs. • Non-allocable direct costs were charged to the program at the actual amount of those costs incurred. • Allocable direct costs charges were estimated by allocating those costs to the federal program on the basis of allowable payroll costs charged to program as a percentage of total allowable payroll costs (percentage of payroll methodology). This methodology is in compliance with the requirements of 2 CFR 200.405 and appears to produce a result that reasonably estimates the proportional benefit of these costs to all federal and non-federal programs, and to indirect cost activities. • Indirect costs were estimated and charged to the program using the 10% de minimis indirect cost rate as defined in 2 CFR 200.414. Questioned Costs: Using the methodology described above, the auditor has estimated total federal expenditures allowable to the program of $247,119. However, AIRS has charged federal expenditures of $272,781 to the program. Therefore, the estimated questioned costs related to this program are $25,662. Repeat Finding from Prior Year: No Recommendation: Senior management and accounting personnel should create procedures to ensure that direct program costs are charged at the actual amounts incurred, develop a payroll cost allocation methodology, and an allocable direct cost allocation methodology that ensures that costs are reasonably, consistently and uniformly charged to and across all federal and non-federal programs and to indirect costs relative to the proportional benefit of those costs, and in compliance with the applicable federal cost principles in 2 CFR, Part 200, Subpart E. Management and the board should consider providing senior management, accounting personnel and applicable program personnel additional training and education related to the proper application of and compliance with the federal costs principles as defined in 2 CFR, Part 200, Subpart E. Management and the board may also want to consider engaging a third-party CPA or other accounting professional who has extensive prior skills, knowledge and experience related to Uniform Guidance and federal cost principles. Views of Responsible Officials: Management concurs with this audit finding.