Common Single Audit Findings and Remediation Series: Activities Allowed and Allowable Costs

June 1, 2018
Auditor verifying the accuracy of information in a report

I have been asked many times what people should focus on to ensure proper grant compliance. My standard response, to the chagrin of many, is “everything in the Compliance Supplement, Code of Federal Regulations, and in the grant award.”

Not very helpful? Then maybe this article will be.

While it’s certainly important to understand all of the compliance requirements, the real concern is how to avoid the big mistakes. You know, the ones that will have you justifying your findings to the Board or Auditee Committee or, worse yet, to a regulator. Everyone makes mistakes, but it’s important to understand how to remediate them or avoid them altogether. With that goal in mind, this article will focus on activities allowed and allowable costs. Other compliance requirements will be covered in subsequent articles.

Unfortunately, errors or lack of proper oversight regarding activities allowed and allowable costs often lead to questioned costs, which are what receive the most attention from regulators. Additionally, repaying questioned costs may lead to significant consequences from a cash flow or budget perspective. The following will list some of the common findings and potential solutions for issues regarding activities allowed and allowable costs.

Payroll Allocation
The first finding is related to payroll, and is probably one of the most commonly encountered. Payroll seems easy and is relatively automated for many organizations, so what is the rub for single audit? Simply put, the allocation of time spent for employees who work on multiple grants or activities within the organization needs to be documented, and the allocated costs must be computed properly. Many organizations have budgeted FTE’s for each department, office, grant, etc., and employee compensation is generally allocated based on the budgeted FTE breakdown. For compliance purposes, compensation must be allocated based on actual time spent on each grant in proportion to the overall time worked during the time period. This applies to both hourly and salaried employees. Many payroll systems are not set up to handle the difference between budget and actual, and a lot of the tracking systems are not equipped to accommodate this requirement. Many will assume that “budget is the approximation of their actual time spent, so it is the same.” However, unless there is the record-keeping to support that claim, the claim will inevitably result in a finding.

So, what is the remedy? It is as simple as keeping timesheets. I know many of you are exception reporters who only report hours such as sick time or vacation, so keeping a timesheet may seem archaic or cumbersome. However, the regulations require that records be maintained to support the allocation of payroll, and timesheets are an easy way to meet those requirements. Timesheets can also help grant managers monitor actual versus budget on an ongoing basis and allow said managers to be proactive rather than reactive to payroll and budget concerns.

Indirect Costs
Another common finding is related to an area that is unpopular, challenging, and confusing to many: cost allocation. Cost allocation plans can be difficult to understand, and many grant accountants simply upload or enter expenses into an Excel workbook that calculates the final amount to claim for reimbursement. Unfortunately, Excel workbooks and other cost allocation software needs to be programmed and mapped by humans, so human errors occur. Initially, with all the testing around implementation, these mapping and allocation issues tend to get ironed out. The common findings tend to come about later when updates are needed. Sometimes the cost allocation plan narrative is updated and those updates are not reflected in the Excel workbook or allocation software. However, it is usually the opposite; updates in the Excel workbook or software often don’t make it back to the approved cost allocation plan. Depending on the size of your organization and your cost allocation plan, this can lead to significant questioned costs, because the cost allocation methods in the approved plan must match the allocated costs submitted in practice.

So what is the fix here? It’s a thorough review. Grant managers need to be reviewing the cost allocation methods back to the approved plan, not just the initial expense input. The expenses may tie to the trial balance, but if the methods are not reviewed and discrepancies are missed, this will still lead to questioned costs.

Specific Direct Costs
The last finding we will look into here focuses on unallowable direct costs. This finding is relatively broad, because it varies for each grant; thus, it is hard to pinpoint specific direct costs that are commonly charged inappropriately. If organizations want to avoid this type of finding, they don’t need to be an expert and know every single allowable or unallowable direct cost. Rather, what grant personnel need to know is where they can find the information to reference.

Common cost principles are outlined in Subpart E of Title 2 Part 200 in the Code of Federal Regulations. There are basic considerations and specific provisions over 55 different types of costs. The other two places to check are both the grant award and Part 4 of the Compliance Supplement. It’s important to read the terms and conditions of the grant award carefully and review (at least annually) the Compliance Supplement. This will allow grant personnel responsible for determining allowable costs to be current on any new legislation impacting the program. With these reference materials, grant personnel should be able to avoid any unallowable direct costs. In addition, if there are still questions, personnel should not be afraid to reach out to the federal representative for approval. When reaching out, we recommend grant personnel submit the approval of the costs in question in writing for audit support purposes.

The old saying that “it is better to ask for forgiveness than permission” may be appropriate in some circumstances, but it is generally not appropriate when it comes to grant compliance. Taking a proactive approach in these areas that are subject to judgment may prevent a finding in the long run.

Should you have any questions regarding these matters, please don't hesitate to reach out to your local Eide Bailly professional.

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