AUDIT GUIDE

ADEQUACY AND COMPLIANCE AUDITS OF

DISCLOSURE STATEMENTS

SUBMITTED BY

EDUCATIONAL INSTITUTIONS

OFFICE OF INSPECTOR GENERAL

MAY 1999

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES


TABLE OF CONTENTS

Page

INTRODUCTION 1

AUDIT OBJECTIVE 1

BACKGROUND 1
Cost Accounting Standards and OMB Circular A-21 1
Disclosure Statement Submission Requirements 2
Cognizant Agency Responsibilities 3
Privileged and Confidential Information 4

SCOPE OF AUDIT 4

SURVEY 6
Relying on the Work of Others 6
DS-2 Preparation 6

DATA COLLECTION AND ANALYSIS 8
Direct Charging Practices (DS-2 Section 2.1) 8
Cost Sharing (DS-2 Sections 2.1, 2.5.2) 9
F&A Costs Not Subject to the 26% Administrative Rate Cap
(DS-2 Sections 3.1.0, 3.4.0) 10
Specialized Service Facilities/Service Centers (DS-2 Section 3.2) 11


Depreciation (DS-2 Sections 4.10 - 4.5) 12


Space Costs (DS-2 Sections 3.1 Through 3.5) 13
Identification and Treatment of Unallowable Costs


(DS-2 Section 1.3) 13


Cost Transfer Policy (DS-2 Section 2.9) 14
Compliance with OMB Circular A-21 14

REPORTING. 14

ATTACHMENTS

A - DS-2 Transmittal Memorandum to the Division of Cost Allocation
B- DS-2 Report Format


INTRODUCTION

This guide was developed to assist the auditor in conducting audits of Cost Accounting Standards Board (CASB) Disclosure Statements (DS-2s) submitted by educational institutions. Educational institutions are required to submit DS-2s to cognizant Federal agencies. A DS-2 is a formal description, prepared and certified by the institution, of the educational institution’s cost accounting practices. The DS-2 explains the methodology for distinguishing “direct” from “facilities and administrative" (F&A) costs and identifies the methodology for accumulating and basis for allocating the F&A costs. The DS-2 is intended to establish a clear understanding of the practices under generally accepted accounting principles that the educational institution follows or proposes to follow.

The Director, Department of Health and Human Services (HHS), Division of Cost Allocation (DCA), is responsible, on behalf of HHS, for making the determination of whether (1) the submitted DS-2 adequately discloses the educational institution’s cost accounting practices, and (2) disclosed practices are compliant with applicable Cost Accounting Standards (CAS) and the requirements of Office of Management and Budget (OMB) Circular A-21, Cost Principles for Educational Institutions. The Office of Audit Services (OAS) will perform adequacy and compliance audits to assist DCA.

AUDIT OBJECTIVE

The objective of these audits is to provide information to the DCA to assist in making the determination of the adequacy and compliance of the educational institution’s DS-2 with CAS and the requirements of OMB Circular A-21.

BACKGROUND

COST ACCOUNTING STANDARDS AND OMB CIRCULAR A-21
In accordance with Public Law 100-679, certain contractors and subcontractors are required to: (1) comply with CAS, and (2) disclose in writing and follow consistently their cost accounting practices. On November 8, 1994, CASB issued final rules (Title 48 of Code of Federal Regulations, Parts 9903 and 9905) that require certain educational institutions to file a description of their accounting practices with their cognizant agencies. To minimize confusion over CASB requirements for educational institutions, all current CASB requirements have been and future CASB requirements will be incorporated into OMB Circular A-21. Failure to file an adequate DS-2 may prevent an educational institution from receiving a grant or contract.

The OMB Circular A-21 establishes principles for determining costs applicable to grants, contracts, and other agreements with educational institutions. The principles are designed to


provide that the Federal government bear its fair share of total costs, determined in accordance with generally accepted accounting principles, except where restricted or prohibited by law.

The CAS (48 Code of Federal Regulations (CFR), Chapter 99, Part 9903 and 9905) and OMB Circular A-21 require educational institutions to submit a DS-2 and adhere to the following four standards:

t Consistency in Estimating, Accumulating and Reporting Costs: The purpose of this standard is to ensure that each educational institution’s practices used in estimating costs for a proposal are consistent with cost accounting practices used by the educational institution in accumulating and reporting costs.

t Consistency in Allocating Costs Incurred for the Same Purpose: The purpose of this standard is to require that each type of cost is allocated only once and on only one basis to any contract or other cost objective.

t Accounting for Unallowable Costs: The purpose of this standard is to facilitate the negotiation, audit, administration and settlement of contracts by establishing guidelines covering:

1. Identification of costs specifically described as unallowable, at the time such costs first become defined or authoritatively designated as unallowable.

2. The cost accounting treatment to be accorded such identified unallowable costs to promote the consistent application of sound cost accounting principles covering all incurred costs.

t Consistency in Using the Same Cost Accounting Period: The purpose of this standard is to provide criteria for the selection of the time periods to be used as cost accounting periods for contract cost estimating, accumulating and reporting.

The latest requirements provide for disclosure of an institution’s cost accounting practices in a structured manner that is more efficient and effective than the previous unspecified process. By applying the CAS standards and the CASB Disclosure Statement to sponsored agreements, OMB will: promote uniformity and consistency in the cost accounting practices followed by educational institutions when they estimate, accumulate, and report costs under sponsored agreements; and facilitate the award and administration process. Moreover, it will (1) reduce the potential for after-the-fact disagreements over the educational institutions’ cost allocation processes, (2) establish a more structured process for resolving cost accounting issues, and
(3) benefit both the Government and the educational institutions.

DISCLOSURE STATEMENT SUBMISSION REQUIREMENTS

Any educational institution that receives aggregate sponsored agreements equal to or in excess of $25 million during its latest completed fiscal year is required to submit a DS-2. An educational institution may meet the submission requirement by submitting, with the approval of the cognizant negotiation agency, a DS-2 for each business unit that receives awards, in the aggregate, equaling or exceeding $25 million.

COGNIZANT AGENCY RESPONSIBILITIES
The CAS and the revised OMB Circular A-21 state that the cognizant Federal agency shall:

t Prescribe regulations and establish internal procedures to promptly determine on behalf of the Federal Government that a DS-2 adequately discloses the educational institution’s cost accounting practices.

t Establish procedures to determine that disclosed practices are compliant with applicable CAS and requirements of OMB Circular A-21.

Adequacy Determination

The HHS is responsible for reviewing DS-2s submitted by educational institutions to determine whether the DS-2 adequately describes the educational institution’s cost accounting practices. The OMB left the determination of adequacy up to the cognizant agency. The CAS (48 CFR, Chapter 1, Part 30.202-7(a)) states that a DS-2 is adequate if it is complete, accurate and current. In consultation with DCA, OAS considers:

t A DS-2 to be complete if it is not vague and no required disclosures are missing.

t A statement to be accurate if it correctly describes the actual method of accounting the educational institution uses or intends to use.

t A disclosed practice to be current if it is the practice which the educational institution currently follows or intends to follow.

In determining whether a disclosed practice is current and accurate, a key consideration is timing. For example, if a disclosed practice was in effect two years ago but is not in effect at the time of the DS-2 submission, then the practice is not current. If a practice never was in effect, then the disclosed practice is not accurate.

The DCA will perform an initial desk review of the DS-2 and the OAS will perform an on-site audit to provide information to the DCA to assist in making the determination of the adequacy and compliance of the educational institution’s DS-2.

Division of Cost Allocation Desk Reviews

The DCA will conduct a desk review to identify: (1) areas that are inconsistent with DCA’s
first-hand knowledge of the educational institution’s practices, (2) vagueness, (3) non-compliances with the CAS and OMB Circular A-21, and (4) missing items. Based on this review, DCA in requesting OAS assistance will apprise OAS of specific concerns.

In addition to its other responsibilities, the DCA acts as the Administrative Contract Officer for those educational institutions which have a facilities and administrative cost agreement with
HHS and which are required to submit a DS-2. In this capacity, the DCA is the management official responsible for (1) issuing determinations of adequacy and compliance, and
(2) negotiating and resolving issues involving the DS-2.

OAS Audits

The OAS will conduct on-site adequacy audits to verify whether the disclosed practices are current, accurate, and complete. A disclosed practice is current if it is the practice which the educational institution currently follows or intends to follow. A statement is accurate if it correctly describes the actual method of accounting the educational institution uses or intends to use. A statement is complete if it is not vague and no required disclosures are missing.

Compliance Determination

In conjunction with the adequacy audit, the OAS shall conduct a detailed compliance audit to provide information to the DCA to assist in making the determination of the compliance of the educational institution’s DS-2 with CAS and the requirements of OMB Circular A-21. The compliance audit can be performed as a desk audit by comparing disclosed practices with criteria.

SCOPE OF AUDIT

Audits of DS-2s submitted by educational institutions should be performed in accordance with Government Auditing Standards. To complete these audits timely and efficiently, the auditor should rely on the work of others to eliminate unnecessary work. The auditor should focus primarily on DCA’s concerns and the specific areas in the Data Collection and Analysis section of this guide. The auditor can supplement those areas by selecting other areas for testing based on his/her judgement. To accomplish the audit objective, the auditor should, as appropriate:

t Review DCA’s concerns raised during its desk review of the DS-2, and conduct follow-up discussions with DCA officials.

t Contact the institution’s independent public accountants (IPA) who conducted the latest audit in accordance with OMB Circular A-133, Audits of States, Local Governments, and Non-profit Organizations and review selected working papers supporting the IPA’s audit.

t Interview the institution’s officials who prepared the DS-2 and those officials who provided information for inclusion in the DS-2.

t Review the institution's financial statements, financial status reports, accounting policies and procedures, detailed transaction listings and supporting documentation, as necessary.


To satisfy the audit objective, the auditor need not develop all five attributes of a fully developed finding. In this regard, the audit reports should not contain the effect or cause of the inaccurate, non-current statement, incomplete, or non-compliant statement/practice. Reports will recommend whether the DCA should request the institution to submit a revised DS-2 and/or revise its cost accounting practices.

The following reference materials will be needed to conduct the audits:

t OMB Circular A-21, Cost Principles for Educational Institutions.


t 48 CFR Part 9903, Procurement Practices and Cost Accounting Standards.
t 48 CFR Part 9905, Cost Accounting Standards for Educational Institutions.


The auditor should focus primarily on:

1. The concerns expressed by the DCA negotiator.
2. Direct Charging Practices.
3. Cost Sharing.


1. F&A - Charging of administrative costs subject to the 26% cap elsewhere through other F&A pools. For example, be alert for 1) the establishment of new recharge centers which used to be part of the administrative pools, and 2) library expenses which represent departmental libraries (which are actually departmental administration expenses).
2. Specialized Service Facilities/Service Centers
3. Depreciation.
4. Space Costs.


7. Identification and treatment of unallowable costs.


5. Cost Transfers.


As stated above, the auditor should consider limiting audit work to only those concerns raised by DCA and the high risk areas identified above. However, the auditor should use judgement in deciding further areas to test. Further, the auditor should not fully develop all five attributes of a finding; therefore, testing should be limited.

In those instances where the auditor determines that selected cost accounting practices reported in the institution’s DS-2 do not reflect a current and accurate description, the auditor should still determine whether actual practices are in compliance with CAS and OMB Circular A-21. This determination is necessary to issue the compliance report in a timely manner.



SURVEY

The focus of the survey is twofold:

t To identify those parts of the DS-2 for which OAS may rely on the work of others.

t To determine if management controls over the preparation of the DS-2 are sufficient.


RELYING ON THE WORK OF OTHERS
To complete this audit timely, wherever possible auditors should rely on the audit work performed by the educational institution’s IPAs and the DCA negotiator’s knowledge of current practices. Auditors should contact the educational institution’s IPAs and the DCA negotiators.

1. The OMB Compliance Supplement for Audits of Institutions of Higher Learning and Other Non-Profit Institutions provides suggested audit procedures for the IPA to audit and evaluate the institution’s accounting system and internal controls, as well as the allowability and allocability of costs claimed against Federal awards. As such, auditors should interview the institution’s IPAs to determine the scope of their audit in relation to the areas covered by the DS-2. This interview will enable the auditor to determine where the OMB Circular A-133 audit work may be sufficient for OAS to rely upon and, therefore, eliminate further audit work.

a. Consider reviewing the applicable working papers. If sufficient audit work was performed in a particular area and the data in the DS-2 is accurate, auditors should rely on the OMB Circular A-133 audit and not perform any further audit procedures for that area of the DS-2.

b. Determine if the IPA is aware of any changes to the institution’s cost accounting practices that have occurred since the end of the audit period. If so, determine if the IPA has concluded whether the changes are in compliance with generally accepted accounting principles, CAS and OMB Circular A-21.

2. Interview the DCA negotiators to determine the extent of their first-hand knowledge of the institution’s actual accounting practices.

3. Determine whether the IPAs and DCA negotiators are aware of any inconsistencies between the DS-2 and their first-hand knowledge of the institution’s practices.

DS-2 PREPARATION
The auditor should determine whether the institution’s methodology for preparing the DS-2 is sufficient to ensure disclosed practices are in place throughout the institution.


1. Obtain a sufficient understanding of management controls in place, relative to preparing the DS-2, to plan the audit.

a. Evaluate the approach the institution took in preparing the DS-2.

-- When evaluating the approach, consider the level of corroboration between the various offices and departments in preparing the DS-2. The greater the corroboration between senior management, accounting and budgeting departments and the office which prepared the DS-2, the less risk of disclosed practices differing from actual practice.

b. Determine if the institution’s IPAs or consultants provided any guidance or assistance in the preparation of the DS-2. If so, to what extent?

-- Did the IPAs review the DS-2 prior to submission?

2. Interview the individual(s) who prepared the DS-2 to determine the sufficiency, competency and relevancy of the information utilized to prepare the DS-2, as well as the extent such information was verified.

a. Determine the source and nature of the documentation supporting statements included in the DS-2.

-- Were written responses received from all appropriate administrators?

-- If input was received from all appropriate administrators, are the practices disclosed in the DS-2 the practices reported by all departments/offices or only a majority of the departments/offices? Consider testing those departments/offices that did not provide input or were not reviewed by institution personnel to ensure that the disclosed practices are being followed by all departments.

-- If some departments/offices did not report the disclosed practices or reported practices other than the practice disclosed in the DS-2, what action did the institution take?

-- Determine how, if at all, the individual(s) who prepared the DS-2 verified that reported practices are the actual practices.

3. Discuss with institution personnel whether any accounting changes have been made since the period covered by the latest OMB Circular A-133 audit.

4. Identify the disclosed practices which are intended future practices and do not conduct testing in those areas.


5. Obtain an understanding of the degree of centralization or decentralization of each segment or business unit covered by the DS-2. The more decentralized a segment or business unit, the higher the risk that disclosed practices will not be current or accurate.

6. As necessary, obtain a listing of Federally sponsored agreements awarded to each segment or business unit covered by the DS-2. Determine the significance of the various segments or business units with regard to sponsored research.

Prior to testing, it will be necessary to obtain a thorough understanding of the methodology utilized to prepare the institution’s most recent F&A Cost and Fringe Benefit Proposals. It will be necessary to understand what types of summary schedules were utilized to progress from the institution’s trial balance to the step down schedules. Also review the reconciliation of the F&A cost proposal to the financial statements and the adjustment and reclassification schedules. This will serve as a basis for the auditor to understand the major organizational components, subgroupings of expenses and elements of costs included in the various F&A cost pools and the various bases used for allocating costs. Thus the auditor will have a roadmap to understanding the institution’s practices for accumulating and allocating F&A costs enabling the auditor to verify whether selected practices as described in the DS-2 are an accurate and current description of either actual practices or those practices the institution intends to follow.

DATA COLLECTION AND ANALYSIS

As discussed in the scope section of this audit guide, the auditor should consider limiting audit work to the concerns expressed by DCA and the high risk areas identified in this guide. The following are the high risk areas which auditors should consider focusing on: 1) direct charging practices; 2) cost sharing (salaries, endowment/gift expenditures, service center subsidies);
3) F&A costs not subject to the 26% administrative rate cap; 4) specialized service facilities/service centers; 5) depreciation; 6) space costs; 7) the treatment of unallowable costs; and 8) cost sharing policy. In addition to the DCA concerns and the high risk areas identified in this guide, the auditor should use judgement in deciding whether to test additional areas of the DS-2. The following are general audit procedures to assist the auditor in reviewing the DS-2 with respect to the identified high risk areas:

DIRECT CHARGING PRACTICES (DS-2 SECTION 2.1)


1. Review written policies for: (1) determining how costs, such as postage and office supplies, incurred for the same purpose, in like circumstances, are treated consistently as either direct costs or facilities and administrative costs, and (2) charging administrative and clerical salaries as direct costs versus facilities and administrative costs.


* See OMB Circular A-21, Section F.6.b. which provides that administrative and clerical staff salaries should usually be treated as F&A costs. The direct charging of these costs may be appropriate where the nature of the work performed under a particular project requires an extensive amount of administrative or clerical support which is significantly greater than the routine level of such services provided by academic departments. See Exhibit C of OMB Circular A-21 for examples of “major projects” where direct charging of administrative or clerical salaries may be appropriate.

2. Were the policies provided to appropriate individuals within the departments?

* Discuss practices with officials from selected segments or business units to determine if officials have been made aware of the institution’s policy (Does the segment or business unit maintain a copy of the policy?) and that the practice is consistent among segments and business units.

3. Should testing be deemed necessary, obtain a listing of administrative/clerical costs that were charged directly to grants.

* Select a limited sample of administrative/clerical costs for review.
* Review grant documents to determine if direct charging of administrative/clerical costs was justified and that the costs were “unlike” circumstances. As administrative/clerical costs are typically indirect costs, such costs should be charged directly only in unusual circumstances. Those circumstances should be specifically described in the grant documents.

4. Consider interviewing principle investigators and others, as appropriate.

6. Conclude as to whether the DS-2 adequately describes the institution’s policies pertaining to “same costs in like circumstances” and administrative and clerical costs. Be alert for DS-2 language such as “we rely on the judgement of the contracting officer or sponsoring agency” as criteria for determining how costs are charged.


COST SHARING (DS-2 SECTIONS 2.1, 2.5.2)


7. Determine whether the institution has a written policy on cost sharing.

* Does the policy require cost sharing to be included in the research Modified Total Direct Cost (MTDC) base?
* How much was identified as cost sharing for the research function?
* Does the cost sharing policy address 1) the National Institutes of Health (NIH) salary cap; 2) service center subsidized losses; and 3) expenditures from endowment/gift accounts?

8. Was the policy provided to appropriate individuals within the departments?

* Discuss practices with officials from selected segments or business units to determine if officials have been made aware of the institution’s policy (Does the segment or business unit maintain a copy of the policy?) and that the practice is consistent among segments and business units.


9. How is cost sharing captured? Is it captured by the accounting system or are manual adjustments necessary? This will aid the auditor in determining testing methodology, should testing be deemed necessary.

10. Determine if the amount identified as cost sharing was included in the research base.

11. Determine if the institution has adequate controls to ensure that Principal Investigators’ salaries pertaining to contributed effort are included in the research MTDC, either as direct charges or as cost sharing. In addition, auditors should assess the institution’s treatment of salaries subject to NIH’s Salary Cap. Currently, the NIH limits the salaries, which may be directly charged to grants, to an annual rate of $125,900. Any salaries in excess of that rate should be considered cost sharing.

* One way to test the cost sharing system is as follows: Select a limited number of grants for review. Be alert for budgets which show that a PI will devote a particular percentage of effort (15%, for example) but charge a different percentage of his salary (5%, for example). The institution should be able to demonstrate how the remaining 10% of salary was included in the MTDC base.

12. Determine if research expenditures funded from endowment/gift accounts were included in the research MTDC base. All research expenditures meeting the definition of MTDC expenditures, regardless of the funding source, should be included in the research base.

* One way to test is as follows: Scan the MTDC report (if applicable) to determine whether endowment/gift accounts were included in the report. If those accounts were not included, consider reviewing endowment/gift files to determine the purpose of the endowment/gift. If the purpose was research related, some expenditure should have been included in the MTDC base. If those accounts were included, interview institution personnel to determine how they determined the appropriate amount to include in the MTDC base.

13. Does the DS-2 adequately describe, either by describing the practices or by citing the policy, the institution’s practice for the identification and treatment of cost sharing?

F&A COSTS NOT SUBJECT TO THE 26% ADMINISTRATIVE RATE CAP
(DS-2 SECTIONS 3.1.0, 3.4.0)


14. The OMB Circular A-21 states that administrative costs charged to sponsored agreements shall be limited to 26% of the MTDC. Review F&A cost pools which are not subject to the 26% rate cap to determine whether they include General and Administrative (GA), Departmental Administration (DA), or Sponsored Projects Administration (SPA) expenses. Two major concerns are Libraries (departmental) and service centers which were previously considered administrative expenses.


* Determine whether the library cost pool includes departmental libraries. Departmental libraries are typically expense related to departmental administration and, therefore, shouldbe included in the DA cost pool.

* Consider touring the buildings in which “library expenses” were incurred. Consult with DCA

* Determine whether any new service centers were previously charged through the administrative cost pools. Consult with DCA negotiators. In addition, consider reviewing expenditures charged through selected service center accounts to determine if they include expenditures that should have been included in the administrative cost pools.

15. Consider testing other pools, such as Operations & Maintenance (O&M), to determine whether administrative expenses were inappropriately charged through those pools.

SPECIALIZED SERVICE FACILITIES/SERVICE CENTERS (DS-2 SECTION 3.2)


16. Per OMB Circular A-21, charges for the use of specialized services should be designed to recover not more than the aggregate cost of the services. Specialized Service Facility/Service Center (center) deficits and surpluses are typically addressed by adjusting future billing rates to offset the prior year deficit.

* For selected centers with a deficit or a surplus, determine whether the user rates were adjusted to offset the deficit/surplus.

* Some institutions choose to subsidize center deficits (e.g., the animal care facility) rather than adjusting billing rates. These subsidies should be identified as cost sharing and included in the MTDC base.

* If the deficits were subsidized, determine the amount of the deficit and trace to the MTDC base.

* In addition, it would be inappropriate to allocate center deficits through the F&A cost proposal. Verify that this did not occur.

* For surpluses, review the user rate documentation to determine whether the surplus was the result of the inclusion of a “markup” in the development of the user rates. Prior OAS audits found that some institutions did include a markup in billing rates.

* For selected centers with surpluses, determine whether user rates were adjusted to offset the surplus in subsequent years.


* If rates were not adjusted, determine how the year end surplus was treated. Prior OAS audits disclosed that some institutions were not adjusting user rates but were utilizing surplus funds for unrelated purposes.

17. Center user rates should typically include the appropriate space costs. Institutions may choose to exclude the space costs from the user rates. However, those space costs must then be included in the research MTDC base as cost sharing. Prior OAS audits found that some institutions inappropriately exclude space costs from center user rates while also excluding those costs from the research MTDC (not reported as cost sharing).

* Review service center policies and rate calculations for selected service centers to determine whether space costs are included in the rate calculation. If they are excluded, determine whether the space costs are included in the research MTDC base as cost sharing.

18. Determine whether the institution has controls to ensure that duplicate or unallowable costs are not included in the calculation of center billing rates.

* When calculating billing rates, institutions should not include the full cost of equipment as an expense in the year acquired. Instead, only the applicable depreciation expense should be included.

* Equipment used in centers should not be included in the depreciation cost pool to be allocated through the F&A cost proposal.

19. Determine whether the institution has controls to ensure that center funds are used only for related purposes. Prior OAS audits found that specialized service facility funds were used to purchase unrelated goods or services such as (1) an accounting system to serve the entire institution; (2) renovations of academic offices; and (3) supplements to an academic department’s funds.

DEPRECIATION (DS-2 SECTIONS 4.10 - 4.5)


20. Determine whether the institution recently switched from use allowance to depreciation.

* Is the switch disclosed in the DS-2?

* Was the switch in accordance with OMB Circular A-21, which requires depreciation be computed as if the asset had been depreciated over its entire life?

2. Review the institution’s equipment capitalization practices to ensure consistency between Federal and nonFederal contracts.

* Equipment purchased for nonFederal contracts should not be capitalized and depreciated and then allocated to research. Instead, such equipment should be treated as a direct cost of the nonFederal contract.
*



D21. etermine whether the institution’s basis for the useful life of assets is supportable and reasonable. Consult with DCA.

* Is the basis consistent with the DS-2?

* If a use allowance is claimed for assets that have outlived their useful life, was prior approval obtained from DCA.

22. Review a sample of equipment items to determine whether the total depreciation amount or use allowance claimed exceeds the acquisition cost.

23. Determine whether the depreciation method for financial statement purposes is consistent with the method for F&A purposes.

SPACE COSTS (DS-2 SECTIONS 3.1 THROUGH 3.5)


24. Determine whether the institution has adequate procedures to ensure that space costs (depreciation, O&M, interest) are charged to the same functions as the associated direct costs. Auditors should pay particular attention to:

* Research training. It would be inappropriate if research training were classified as instruction, but the space where the training takes place to be classified, disproportionately, as research space.

25. Does the institution conduct a space survey in conjunction with the submission of its F&A cost proposal?

* Review the instructions to the space survey and assess whether they will result in the appropriate allocation of space.

* Review the results of the survey. Conduct a limited analysis to determine whether the results were consistently applied (e.g., was depreciation allocated based on the same percentages as interest?)

IDENTIFICATION AND TREATMENT OF UNALLOWABLE COSTS
(DS-2 SECTION 1.3)


26. Determine whether the institution has written policies for the identification and treatment of unallowable costs.

* Does the institution ensure unallowable costs remain in their appropriate base?

* Verify through the F&A Cost Proposal.
*



R27. eview the F&A cost proposal to determine whether the unallowable costs were treated in a manner consistent with the DS-2.

* Are adjustments/reclassifications adequately disclosed in the DS-2?

28. Does the DS-2 adequately describe the institution’s practices for the identification and treatment of unallowable costs?

COST TRANSFER POLICY (DS-2 SECTION 2.9)


29. Determine whether the institution has a written cost transfer policy in effect.

30. Was the policy disseminated to appropriate individuals?

31. Review the policy to determine whether it is in accordance with OMB Circular A-21. Further guidance is contained in the PHS Grants Policy Statement.


COMPLIANCE WITH OMB CIRCULAR A-21


The compliance audit can be a desk audit to assist DCA in determining whether reported practices are in compliance with applicable cost principles and standards contained in CAS and OMB Circular A-21. However, auditors should also assess the compliance of the DS-2 in conjunction with the adequacy audit. The auditor will review disclosed practices to determine whether they comply with the relevant sections of CAS and OMB Circular A-21. Further, the auditor will determine whether, as a whole, the DS-2 complies with the four applicable CAS, as detailed in OMB Circular A-21, Sections C.10 through C.13. Auditors should note that compliance determinations pertaining to actual practices which were inadequately disclosed, will be contingent upon the institution submitting a revised DS-2 which adequately describes the practice in question.

REPORTING

The OAS will issue one report for both adequacy and compliance. The report will be addressed to the DCA and signed by the appropriate Regional Inspector General for Audit Services. The report should not be issued in draft for formal comment to the institution. However, care should be exercised to ensure that advance discussion of any findings are held with the institution prior to inclusion in the final report. One way to accomplish this is to discuss a working draft of the report with the institution. A copy of all adequacy and compliance reports should be provided to OAS Region I.

With regard to the report content on:

t Adequacy



* Each material inaccurate, non-current, or incomplete statement in the DS-2 should be reported.

t Compliance

* Any material instance where a disclosed practice is not in compliance with CAS or the OMB A-21 should be reported. In those instances where the auditor determined that a practice was inadequately disclosed, the auditor should report on whether the actual practice is in compliance with CAS and/or the OMB A-21.

The attached transmittal memorandum and report format have been approved by the Public Health Service Audit Division. The Exhibits to the Report summarizing audit findings have not been revised. If necessary, contact Region I for examples of report exhibits.

The report should recommend whether the DCA should request the institution to submit a revised DS-2 and/or revise its cost accounting practices. As such, the report may have to state that a determination of adequacy or compliance is contingent upon the institution submitting a revised DS-2 or revising its cost accounting practices.

Two copies of the report should be distributed to the DCA Headquarters, and one copy to the DCA Regional Office, OAS Audit Planning and Implementation, OAS Public Health Audit Division, OAS regional office performing the audit, and OAS Region I. Since the distribution of DS-2 reports is restricted, it is up to the DCA to determine if the report should be distributed to other parties, including the institution. These reports will not be published on the OAS website. Requests for such reports should be referred to the responsible official.

For report cover and title page requirements, see Chapter 20-04, Special Audits (section 20-04-60, Limited Distribution).



ATTACHMENT A
Page 1 of 2

Transmittal Memorandum to the Division of Cost Allocation

Name
Regional Inspector General for Audit Services

Adequacy and Compliance Audit of XXXXX University’s Disclosure Statement Covering Its University Area Segment and Central Administration

Name
Director, HHS Division of Cost Allocation

Attached are two copies of the U.S. Department of Health and Human Services (HHS), Office of Inspector General's report entitled Adequacy and Compliance Audit of XXX University’s Disclosure Statement. The objective of our audit was to provide information to the Division of Cost Allocation to assist in making the determination of the adequacy and compliance of XXXX University’s Disclosure Statement (DS-2) with Cost Accounting Standards (CAS) and the requirements of Office of Management and Budget Circular A-21, Cost Principles for Institutions.

Several descriptions in XXXX University’s DS-2 were not adequate and/or compliant. With regard to the adequacy of the DS-2, we found XXXX descriptions in the DS-2 which are not complete and XXXX which are not accurate. We did not identify any issues pertaining to whether the disclosed practices are current. With regard to the compliance of the DS-2, we found XXXX descriptions in the DS-2 to be noncompliant. University officials apprised us that XXX University will revise the DS-2 to address the issues disclosed in this report. The following table summarizes the type of issue by DS-2 Part.

SUMMARY OF ADEQUACY AND COMPLIANCE ISSUES BY DS-2 PART 

   

ADEQUACY ISSUES 

 

PART

TITLE

# NOT COMPLETE

# NOT ACCURATE

COMPLIANCE ISSUES

I

General Information

X

X

X

II

Direct Costs

X

X

X

III

Indirect Costs

X

X

X

IV

Depreciation and Use Allowances

X

X

X

V

Other Costs and Credits

X

X

X

VI

Deferred Compensation and Insurance Costs

X

X

X

Total   

X

X

X 


ATTACHMENT A

Page 2 of 2

We discussed the issues in this report with University officials. Based on our review and discussions of the findings, University officials apprised us that XXX University will revise the DS-2 to address the issues in the attached report. In this regard, University officials were cooperative during this audit and plan to submit a revised DS-2.

We would appreciate your views and the status of any further action taken or contemplated on our recommendations within the next 60 days. If you have any questions, please contact me or have your staff contact Name of our staff at Telephone Number.

XXXX University filed its DS-2 under condition that it will be treated as privileged and confidential information pursuant to CAS 9903.202-4. As such, this report contains restricted information for official use.

To facilitate identification, please refer to Common Identification Number XXXXX in all correspondence relating to this report.

Name

Attachments - as stated


ATTACHMENT B

Page 1 of 4

Report Format

Name

Regional Inspector General for Audit Services

Adequacy and Compliance Audit of XXX University’s Disclosure Statement

Name

Director, HHS Division of Cost Allocation

The purpose of this memorandum is to apprise you of the results of the Office of Inspector General, Office of Audit Services’ Adequacy and Compliance Audit of XXXX University’s Disclosure Statement (DS-2) X. We performed this audit in response to your request dated XXXX. Several descriptions in XXX University’s DS-2 X were not adequate and/or compliant. We recommend that the Division of Cost Allocation (DCA) request the University to submit a revised DS-2 which addresses the issues identified in the attached Exhibits A and B.

Educational institutions are required to submit DS-2s to cognizant Federal agencies. A DS-2 is a formal description, prepared and certified by the institution, of the institution’s cost accounting practices. The DS-2 explains the methodology for distinguishing “direct costs” from “facilities and administrative costs" and identifies the methodology for accumulating and basis for allocating the facilities and administrative costs. The DS-2 is intended to establish a clear understanding of the practices under generally accepted accounting principles that the educational institution follows or proposes to follow. The Director, HHS Division of Cost Allocation (DCA), is responsible, on behalf of the Federal Government, for making the determination of whether (1) the submitted DS-2 adequately discloses XXX University’s cost accounting practices, and (2) disclosed practices are compliant with applicable Cost Accounting Standards (CAS) and the requirements of Office of Management and Budget (OMB) Circular

A-21, Cost Principles for Educational Institutions.

OBJECTIVE

The objective of our audit was to provide information to the DCA to assist in making the determination of the:

t Adequacy of XXX University’s DS-2 covering the University Area Segment and Central Administration.

t Compliance of XXXX University’s DS-2, covering the University Area Segment and Central Administration, with CAS and OMB Circular A-21.


ATTACHMENT B

Page 2 of 4

Page 2 - Name, Director, HHS Division of Cost Allocation

RESULTS

Several descriptions in XXXX University’s DS-2 were not adequate and/or compliant. The inadequate and noncompliant descriptions are summarized in the attached Exhibits A and B. The Cost Accounting Standards (CAS) state that a DS-2 is (1) adequate if it is complete, accurate and current, and (2) compliant if all disclosed cost accounting practices are in compliance with OMB Circular A-21 We recommend that DCA request the University to submit a revised DS-2. We have discussed the issues with University officials who have agreed to submit a revised DS-2.

INTRODUCTION

BACKGROUND

In accordance with Public Law 100-679, certain contractors and subcontractors are required to: (1) comply with CAS, and (2) disclose in writing and follow consistently their cost accounting practices. The CAS (48 Code of Federal Regulations (CFR), Chapter 99, Parts 9903 and 9905) and revisions, dated May 8, 1996, to OMB Circular A-21, Cost Principles for Educational Institutions, require any educational institution that receives aggregate sponsored agreements equal to or in excess of $25 million during its latest completed fiscal year to submit a DS-2 and adhere to the following four standards:

t CAS 9905.501 - Consistency in Estimating, Accumulating and Reporting Costs

t CAS 9905.502 - Consistency in Allocating Costs Incurred for the Same Purpose

t CAS 9905.505 - Accounting for Unallowable Costs

t CAS 9905.506 - Consistency in Using the Same Cost Accounting Period

The new requirements provide for disclosure of an institution’s cost accounting practices in a structured manner that is more efficient and effective than the current unspecified process.

By applying Cost Accounting Standards Board (CASB) standards and the CASB Disclosure Statement to sponsored agreements, OMB will: promote uniformity and consistency in the cost accounting practices followed by educational institutions when they estimate, accumulate, and report costs under sponsored agreements; and facilitate the award and administration process. Moreover, it will (1) reduce the potential for after-the-fact disagreements over the educational

institutions’ cost allocation processes, (2) establish a more structured process for resolving cost accounting issues, and (3) benefit both the Government and the educational institutions.


ATTACHMENT B

Page 3 of 4

Page 3 - Name, Director, HHS Division of Cost Allocation

Federal research support at XXX University grew from $XX million in fiscal year 1994 to

$XXX million in fiscal year 1995.

SCOPE

The objective of our audit was to provide information to the DCA to assist in making the determination of the adequacy and compliance of XXX University’s DS-2 with CAS and the requirements of OMB Circular A-21.

To accomplish our audit objective, we:

t Reviewed the University Area DS-2 and consulted with DCA negotiators.

t Obtained an understanding of XXX University’s approach to reviewing its cost accounting policies and practices in preparation for submitting the DS-2.

t Obtained an understanding of the cost accounting practices identified in the DS-2 by

(1) interviewing its preparers and other individuals as appropriate, (2) reviewing applicable documentation/reports, and (3) reviewing the identified methodologies contained in the latest Facilities and Administrative Cost Proposal submitted to DCA.

t Reviewed XX University’s OMB Circular A-133, Audits of Institutions of Higher Education and Other Nonprofit Organizations, audit report and supporting working papers for the University’s year ended June 30, 1995.

t Performed a risk assessment to identify those material parts of the DS-2, for which the disclosed practices present a high risk of not being complete, accurate or current, and performed additional testing as necessary.

t Determined whether the disclosed practices comply with OMB Circular A-21.

We conducted our audit in accordance with generally accepted government auditing standards during xxxx through xxxxx 1998 at xxxx University. We discussed the issues in this report with University officials.

FINDINGS AND RECOMMENDATIONS

Several descriptions in xxxx University’s DS-2 were not adequate and/or compliant. The inadequate and noncompliant descriptions are summarized in Exhibits A and B. University officials apprised us that xxxx University will revise the DS-2 to address the issues disclosed in this report.


ATTACHMENT B

Page 4 of 4

Page 4 - Name, Director, HHS Division of Cost Allocation

The OMB left the determination of adequacy up to the cognizant agency. The CAS (48 CFR, Chapter 1, Part 30.202-7(a)) states that a DS-2 is adequate if it is complete, accurate and current. Relative to determining whether a DS-2 is adequate, in consultation with DCA, we considered:

t A DS-2 to be complete if it is not vague and no required disclosures are missing.

t A statement to be accurate if it correctly, clearly, and distinctly describes the actual method of accounting the educational institution uses or intends to use.

t A disclosed practice to be current if it is the practice which the educational institution currently follows or intends to follow.

The CAS (48 CFR, Chapter 1, Part 30.202-7(b)) states that a DS-2 is compliant if all disclosed cost accounting practices are in compliance with OMB Circular A-21.

Issues relating to adequacy primarily pertain to (1) type of cost system, extent of integration of the cost system with general accounts, and treatment of unallowable costs; (2) criteria for determining how costs are charged, and salary and wage cost accumulation system; (3) the identification of service centers, and composition of indirect cost pools and allocation basis;

(4) criteria for capitalization, and the methods of depreciation or use allowance used; and (5) method of adjusting projected costs of self insurance programs to actual. For a detailed description of each issue, see Exhibit A - Adequacy Issues.

Issues relating to compliance pertain to (1) treatment of unallowables; (2) criteria for determining how costs are charged, cost transfers; and F&A cost accumulation and allocation relative to libraries and expenses from departmental accounts; (3) depreciation; and (4) treatment of library income. For a detailed description of each issue, see Exhibit B - Compliance Issues.

Based on our review and discussions of the findings, University officials apprised us that xxx University will revise the DS-2 to address the issues.

RECOMMENDATIONS

We recommend that DCA request the University to submit a revised DS-2 which addresses the issues disclosed in the Exhibits. If the revised DS-2 sufficiently addresses the issues raised in this report and is otherwise satisfactory, we recommend that DCA issue a determination that the revised DS-2 adequately discloses xxxx University’s cost accounting practices and those practices are compliant with applicable CAS and the requirements of OMB Circular A-21.

If you have any questions, please contact Name of our staff at Telephone Number.

Name

Exhibits - as stated


1 Note that the term “facilities and administrative'' costs is synonymous with “indirect'' costs, as previously used in OMB Circular A-21 and as currently used in Appendices A and B of that Circular.

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