GAB Decision 718
January 8, 1986
District of Columbia Department of Human Services;
Ballard, Judith A.; Garrett, Donald F. Settle, Norval D.
Docket No. 85-56
The District of Columbia Department of Human Services (D.C. or
Appellant) appealed a decision of HHS's Deputy Regional Director, Region
III (HHS or Region III), which upheld a determination of the Division of
Cost Allocation in Region III related to the allocation methodology D.C.
proposed to use to distribute the costs of audits for fiscal year 1981
among federal and non-federal programs.
Based on our review of the record, we conclude that Region III erred
in
its determination that D.C.'s proposed allocation of audit costs
was
improper. As discussed below, we do not reach certain other
potential
issues that developed during the course of the appeal.
I. Background.
(a) Single audits.
The U.S. Office of Management and Budget's (OMB's) Circular
A-102
("Uniform Administrative Requirements for Grants-in-Aid to State
and
Local Governments") had an "Attachment P" entitled "Audit
Requirements."
Appellant's Appeal File, Exhibit 1, pp. 14-17. Although
Attachment P
has been superseded, the parties agreed that it was applicable
to this
dispute. Attachment P established two policies: it
reduced the direct
federal role in auditing, by encouraging grantees to
conduct their own
audits using independent auditors (generally under
contract), and it
established the "single audit," a reform meant to assure
that audits of
federally-funded programs would be performed on an
organization-wide
basis, rather than on a grant-by-grant basis.
The dispute in this case concerns how the costs of the single
audit
process in D.C. should be distributed among federal and
non-federal
programs for the period involved here.
(b) Treatment of audit costs.
A different OMB Circular (A-87) established rules for determining
costs
applicable to grants with state and local governments.
It(2)defines
allowable and unallowable costs, and the concept of a "cost
allocation
plan" for allocating allowable joint costs by some agreed
upon
methodology among all benefitted cost objectives. The cost
allocation
plan of the grantee must be approved by HHS. The costs of
the single
audit process are typical joint costs, because the costs of the
audit
cover many activities of the grantee. OMB Circular A-87 specifies
that
audits can be allowable costs.
(c) D.C.'s allocation of audit costs.
In May, 1984, D.C. submitted a proposed amendment to its cost
allocation
plan to deal with costs of its single audit process. The
amendment, and
a subsequent modification, basically proposed that the
expenditures for
the audit of federal programs would be allocated solely
among Medicaid,
AFDC, and other federal programs on a proportionate basis.
Appellant's
Documents 1, 3, 5. Region III rejected this approach,
maintaining that
these audit costs could not be allocated only to federal
programs, but
had to be allocated proportionately to D.C.'s own programs as
well.
Id., Documents 2, 4.
D.C. responded that it had performed an Annual Financial Audit which
dealt
with all D.C. programs (federal and non-federal), and a later
separate audit
which dealt exclusively with federal programs and
benefitted no others.
D.C. said that no audit work performed during the
second audit was used for
the Annual Financial Audit. Id., Document 5.
Region III continued to
reject this approach, and issued the decision
which led to this appeal.
Id., Document 6.
The first audit (D.C.'s Annual Financial Audit) was performed
under
contract by Arthur Andersen and Company. The second audit was
conducted
by the firm of Lucas and Tucker, under subcontract with Arthur
Andersen.
/1/
(3)$T(d) Things that are not in issue in this case.
As developed before this Board, the record in this case shows
the
following elements which it should be understood are not in dispute:
-- Neither party disputed that a "single audit" for purposes
of
Attachment P can consist of more than one audit undertaking. Two
or
more discrete audits may be conducted in a way which produces a
combined
result meeting the requirement for a coordinated,
organization-wide
"single audit." The two audits involved here together form
the required
"single audit" in D.C.
-- How the audits themselves were conducted in this case,
and
specifically the methodology and audit workplans which resulted in
two
audits and their conduct here, are not matters in issue.
Furthermore,
it is not disputed that the audit methodology and workplans
were
developed and implemented in close consultation with auditors from
HHS's
Office of Inspector General, and the audit results themselves
are
undisputed.
-- The allocation of costs of the first audit to federal
and
non-federal programs was approved by Region III some time before
the
issue of the second audit's costs arose. Nothing in that
earlier
allocation is in issue before us in this case.
-- As noted in footnote 1, we express no opinion concerning
what, if
any, difference the new Single Audit Act and implementing rules
would
make if this dispute were to arise again.
II. Discussion.
Reduced to essentials for purposes of discussion, what happened
here
is this: D.C. performed its "single audit" using two separate
audits, a
year or more apart. D.C. allocated the first audit's costs to
federal
and non-federal programs on a basis approved by Region III.
D. C.
proposed to allocate all of the costs of the second audit to
federal
programs only (of course, D.C. would bear its matching share of
the
allocated costs). Region III maintained that since the two
audits
together formed the required A-102 "single audit," the costs of both
had
to be shared (and Region III chose as the sharing methodology
the
agreed-upon basis used for allocating(4)costs of the first audit).
The
practical effect of Region III's approach is to make D.C.
responsible
for about $65,000 of audit costs which D.C.'s cost allocation
plan
amendment would allocate among various federal programs. See
Attachment
A to Region III's submission of October 22, 1985.
These are the reasons why we conclude that Region III's position
is
unreasonable:
1. OMB Circular A-87, Attachment A, Para. C.2., specifies that "a
cost
is allocable to a particular cost objective to the extent of
benefits
received by such objective." This is the fundamental principle
behind
all other rules on cost allocation. To find that D.C. should
share in
the costs of the second audit, we would have to find that the two
sets
of audit costs literally could not be separated or that
D.C.'s
non-federal programs received some palpable benefit from the
second
audit. The record does not support either proposition.
D.C.
maintained that the second audit was conducted solely of federal
program
expenditures; that all "overhead" type expenditures (which
would
involve a review of records common to D.C.'s own and D.C.'s
federal
programs) were examined exclusively in the first audit; and
that the
second audit did not bear directly or indirectly on any
non-federal
programs. See, e.g., Affidavit of Bert T. Edwards, pp. 8,
10
(Appellant's Appeal File, Document 8); Tapes of Telephone
Conferences
of November 15 and 20, 1985; Appellant's Brief, pp. 7-8;
Appellant's
Reply Brief, p. 2. Region III offered no evidence which
would give us a
basis to find other than as D.C. has shown. D.C.
admitted that the
first audit benefitted both D.C. and federal programs, and
allocated
audit costs among these programs in proportions not in dispute in
this
appeal. The second audit was clearly discrete and separable, and
all
the evidence in the record supports the finding that the second
audit
did not benefit non-federal programs. Under OMB Circular A-87,
then,
there is no basis for Region III's position that costs identified
with
only the federal programs should be charged to non-benefitting
programs.
2. OMB Circular A-102, Attachment P, contains no definitive guidance
on
the issue here. The Attachment contains nothing to support
the
proposition that D.C. should bear extra costs for the second audit.
The
only reference to costs of audits is contained in the(5) preamble
of
Attachment P; this provision refers the reader to A-87. /2/
3. Region III suggested that separating the two audits here
raised
questions about consistent treatment of costs. See, e.g., Tape
of
Conference of August 15, 1985; Respondent's Brief, p. 3. It is
true
that a basic principle of accounting for costs is that the
accounting
must be done consistently. See, e.g., OMB Circular A-87,
Attachment A,
Para. D.2. But Region III's argument is not persuasive
because
consistent treatment of audited costs is not an issue before
us: the
only issue before us is allocation of the costs of doing the
audit. It
was undisputed that Region III found no fault with the way
the audits
were performed, or the audit results, and on the face of it, there
is
nothing inconsistent about charging costs benefitting D.C. programs
to
those programs while charging costs benefitting federal programs to
the
latter. Furthermore, as mentioned under (1) above, we find
nothing
substantial in the record to rebut D.C.'s
affirmatively-presented
position that no "common cost" items were reviewed
other than in the
first audit (costs of which were allocated as agreed among
D.C. and
federal programs). This being the case, the issue of
consistent
treatment is simply not present, as a practical matter, in the
facts of
this case.
4. A main concern expressed by HHS in oral presentations was
that
accepting the allocation of costs to only federal programs in the
second
audit impeached, or rendered inequitable, the allocation among
federal
and non-federal programs in the first audit. In fact, when all
was said
and done, it appeared that this (6) concern was at the heart of
the
dispute; HHS suggested that our finding for D.C. on the issue
of
allocation of the second audit's costs might even compel
reexamination
of the fairness of allocation of the first audit's costs.
That dispute
is not before us here, and we have no basis in the record here
to
determine whether or not Region III could reopen a matter
which
apparently had been settled by agreement for some time. There
also is
nothing in the record here to show that the allocation
methodology
approved earlier had been set to produce different charges to
federal
and non-federal programs than otherwise would have been the case,
in
anticipation of the subsequent audit of federal programs.
5. Region III also indicated concern that there might be
some
duplication of effort between the two audits leading to duplicate
costs.
Region III presented nothing here other than speculation, and
D.C.
argued that its approach was actually less expensive than a
unitary
audit. If Region III chooses to focus on this issue, it would
seem
possible to determine easily whether, in fact, there was
any
duplication; if the parties are unable to resolve this, D.C. may
return
to the Board.
CONCLUSION.
We conclude that Region III presented no convincing argument or
evidence
that D.C. was required to allocate the costs of the second audit
to
non-federal programs as well as federal programs (in the facts of
this
case). As discussed above, two issues which arose during the
course of
the appeal--the propriety of the allocation of the costs of the
first
audit and whether there was any duplication of costs between the
two
audits--were not developed here sufficiently for Board review.
/1/
While the action D.C. appealed
was Region III's disapproval of a
cost allocation plan amendment, without
reference to a time frame, the
record as developed indicates that the
specific concern is the
allocation of costs of the Arthur Andersen and Lucas
and Tucker audits,
which apparently had been conducted before the cost
allocation plan
amendment was submitted. See Region III's "Exhibit A"
submitted with
letter dated October 22, 1985, and Tape of Telephone
Conference of
November 15, 1985. Region III has never raised any issues
of
retroactivity, and we do not address this matter. We also do
not
address the impact, if any of the Single Audit Act of 1984
(effective
for states' fiscal years beginning after December 31, 1984) and
the
implementing OMB Circular A-128. The parties agreed that the Act
and
the Circular were not applicable
here. /2/ The preamble to
the
"final policy" which was Attachment P contained the following
OMB
response to a comment made on the proposed policy: Comment:
Several
commenters said that additional audit costs would be incurred to
achieve
full compliance with the Circular. They suggested that the
mechanism
for funding these audits be addressed in the Attachment.
Response:
Circular 74-4, "Cost principles for grants to State and
local
governments," (Circular 74-4 was the form in which Circular A-87
was
published at the time) establishes rules for determining
allowable
costs. This Circular provides that the cost of audits is
allowable. 44
Fed. Reg. 60958 (October 22, 1979).
MARCH 28, 1987