GAB Decision 557
Docket No. 83-266
August 2, 1984
Community Health and Counseling Services;
Ballard, Judith; Ford, Cecilia Settle, Norval
The Community Health and Counseling Services (CHCS, Grantee) appealed
a decision by the Alcohol, Drug Abuse, and Mental Health Administration
(ADAMHA, Agency) to disallow $36,412 in costs charged to grants made by
the Agency. For the reasons stated below, we sustain the disallowance.
Our decision is based on the parties' submissions and the recording of a
telephone conference call.
BACKGROUND
The Agency sustained an audit recommendation that costs charged to an
Alcohol Services Grant and a Mental Health Growth grant be disallowed,
and requested that the Grantee refund $50,972. The Grantee requested an
informal appeal in accordance with 42 CFR Part 50, Subpart D. The
Agency denied the Grantee's request, stating that the Agency did not
find the issues raised by the Grantee to be within the scope of the
appeals process. The Grantee appealed the denial of the request for
Part 50 review to the Board. In two telephone conference calls, the
parties stated that they did not object to Board review (instead of
ADAMHA review pursuant to Part 50) of the "substantive issues," the
issues raised in the Grantee's original appeal request, if the Board
found it had jurisdiction over the issues. The Board ruled that $36,412
of the disallowed amount was properly appealable, and stated that it
would hear the arguments related to that amount.
(1) Whether the statute of limitations set forth at 28 U.S.C. 2415
invalidates the Agency's action to sustain the audit recommendation of a
disallowance.
Grantee argued that the portion of the disallowance based on costs
claimed prior to May 28, 1975 is unenforceable by the Agency due to the
statute of limitations set forth at 28 (2) U.S.C. 2415. It can be
gleaned from the record that CHCS's statute of limitations argument
applied to the following grants: 1H16MH00495-01 (1/1/71-12/31/71),
5H16AA00495-04 (1/1/74-12/31/74), a prorated portion of 5H16AA00495-05
(1/1/75-12/31/75), 01H000097-01 (9/1/72-8/31/73), 01H000097-02 (9/1/
73-8/31/74). Subsection (a) of 28 U.S.C. 2415 provides that --
(Every) action for money damages brought by the United States or an
officer or agency thereof which is founded upon any contract express or
implied in law or fact, shall be barred unless the complaint is filed
within six years after the right of action accrues or within one year
after final decisions have been rendered in applicable administrative
proceedings required by contract or by law, whichever is later . . . .
Subsection (b) of 28 U.S.C. 2415 is a general three year statute of
limitations for actions based in tort with certain provisos including a
clause which provides that an action to recover for diversion of money
paid under a grant program may be brought within six years after the
right of action accrues.
Since Grantee argued that the statute barred the taking of
disallowances for costs incurred during grant periods earlier than six
years prior to the date the disallowance was taken, apparently, Grantee
was referring to 28 U.S.C. 2415(a) or the proviso in subsection (b)
referring to diversion of money paid under a grant program.
28 U.S.C. 2415(a) provides that the statute of limitations begins to
run after the right of action accrues or within one year after the final
decision has been rendered in applicable administrative proceedings. In
this case, the right of action will not accrue until the decision is
rendered by this Board. Generally, the right of action accrues when the
final significant event necessary to create the claim occurs. United
States v. Gravette Manor Homes, 642 F. 2d. 231 (8th Cir. 1981). With
claims such as the one at issue, where administrative proceedings are
contemplated, the right of action first accrues at the time of the
administrative board's final decision. See United States v. Winthrow,
593 F. 2d. 802 (7th Cir. 1979). Furthermore, 28 U.S.C. 2415(a) has a
specific provision stating that the complaint is barred unless the
complaint is filed within one year after the final decision of any (3)
applicable administrative proceedings. In this case, as we stated, that
decision will be the decision of this Board, since this proceeding is
the administrative proceeding applicable to grantee appeals such as
CHCS's. 45 CFR Part 16. Grantee has not shown that the right of action
in this case accrued prior to the decision of this Board or how, since
administrative proceedings are still in process, 28 U.S.C. 2415(a) would
invalidate the disallowance in this case.
With respect to the proviso of subsection (b) concerning diversion of
money paid under a grant program, Grantee did not show that the section
applies to a situation such as occurred in this case. Furthermore, the
Grantee has shown no reason that the reasoning of United States v.
Gravette Motor Homes, supra and United States v. Winthrow, supra that
the right of action accrues when the final significant event necessary
to create the claim occurs should not be equally applicable to
subsection (b). In cases with administrative proceedings, the final
significant event is the completion of the administrative proceedings
contemplated. Grantee has not shown that the right of action has
accrued triggering the running of the statute of limitations.
(2) Whether HHS's policies and regulations prohibit the Agency from
disallowing costs charged for any grant period for which the Grantee was
no longer required to retain records.
The Grantee argued that the disallowances for costs incurred prior to
July 1, 1976 are invalid because Department regulations and policies did
not require the Grantee to retain records for periods prior to that
date. The grant periods covered by this argument are: LH16MH00495-01
(1/1/71-12/31/72), 5H16AA00495-04 (1/1/74-12-31/74), 5H16AA00495-05 (1/
1/75-12/31/75), a prorated portion of 5H16AA00495-06 (1/1/76-12/31/76),
01H000097-01 (9/1/72-8/31/73), and 01H000097-02 (9/1/73-8/31/74).
CHCS presented a two-pronged argument with respect to records
retention. CHCS first maintained that 45 CFR 74.21(a) and (b) and 45
CFR 74.22 (1978) limit the authority of the Agency to take
disallowances. /1/ These regulations (4) provide that records shall be
retained three years from the day the grantee submits to HHS its
expenditure report for the grant period, and that, if an audit or other
action has been started before the expiration of the three year period,
the records shall be retained until completion of the audit and
resolution of all issues which arise from it.
The second part of the Grantee's argument relating to records
retention was that Chapter 1-105 (1980) of the HHS Grants Administration
Manual and Chapter 6-70 (1979) of the PHS Grants Administration Manual
preclude the Agency from taking disallowances based on records not
required to be retained under applicable records retention policy.
If we were to accept the Grantee's argument with respect to records
retention, it would be necessary to determine for which grant periods
records were required to be retained. Because we find, for the reasons
set out below, that records retention policies and regulations did not
preclude the Agency taking the specific disallowance at issue, it is
unnecessary to determine for which grant periods records were required
to be retained. /2/
We first consider Grantee's argument relating to 45 CFR Part 74,
Subpart D.
The disallowance here was taken because CHCS reported on its
Financial Status Reports staffing costs that the auditors found were not
in agreement with amounts recorded in accounting records, were not based
on actual payrolls, or were charged to more than one grant. CHCS had
prepared these reports from information recorded on worksheets prepared
by CHCS personnel from payroll records. The Grantee argued that part of
the disallowance was based on missing records since some of the
worksheets, which were related to time distribution records, had been
reconstructed by CHCS personnel just prior to the audit. The Grantee
was unsure, however, whether it ever had original time distribution
records.
(5) The disallowance was based on discrepancies between CHCS' and its
subgrantee's records and the costs claimed. There is nothing before the
Board to indicate that original time distribution records would have any
effect on the auditors' findings. Actual payrolls and other records
were examined, and they failed to support the staffing costs which the
auditors questioned. We cannot therefore conclude that the Grantee has
been prejudiced by a lack of some original documentation, which it is
not sure it ever had. In any event, the auditors' recommendation to
disallow did not rely on information found only in time distribution
records.
There has been no showing in this case by CHCS that records were
destroyed based on the records retention requirement, or that the
auditors based disallowance recommendations upon a lack of
documentation. The Grantee did not argue that the costs disallowed were
actually allowable costs, or that it could show that the costs were
allowable if it had not destroyed documentation previously available.
Nothing in 45 CFR Part 74, Subpart D specifically prohibits the Agency
from disallowing based on records generated by the Grantee and retained
beyond the three-year retention period.
We therefore conclude that 45 CFR Part 74, Subpart D does not
prohibit the Agency from disallowing the costs claimed in this case
based on records retained by the Grantee which affirmatively show that
the costs were unallowable.
The Grantee also argued that the Agency was precluded from taking the
subject disallowances by HHS Grants Administration Manual Chapter 1-105
and PHS Grants Administration Manual Chapter 6-70.
Section 1-105-60(C)(3)(a)(1) specifically provides, "If the costs can
be identified to specific awards, the computation will cover the period
the organization is required to retain records under applicable records
retention requirements." Chapter 6-70 provides a policy of limiting cost
disallowances to costs incurred during the organization's three fiscal
years immediately preceding the starting date of the audit, and
subsequent periods up to the date the deficiencies are corrected in
certain circumstances. /3/
(6) The Agency argued that Chapter 6-70 is inapplicable to the
present dispute, citing the following provisions of the policy: Chapter
6-70 applies to:
1. Audit findings which cite deficiencies in an organization's
management systems and which result in a dollar settlement affecting all
projects of the organization; and
2. Other findings which involve the use of statistical sampling or
projection techniques in determining dollar settlements.
Section 6-70-10.
Chapter 6-70, by its clear terms, is limited to audit findings which
affect all projects of an organization or findings which involve the use
of statistical sampling or projection techniques. The record indicates
that the Grantee here had other projects and that the scope of the audit
here was relatively narrow. OIG Audit Report. No statistical sampling
was involved. Chapter 6-70 is therefore inapplicable to the subject
disallowances.
The Agency argued that even if Section 1-105-60(c)(3)(a)(1) had been
implemented by PHS and was therefore applicable to PHS grants, the
Agency's interpretation of the provision would not preclude the taking
of the disallowance in this case. The Agency, based upon an
interpretation of the Deputy Assistant Secretary for Procurement,
Assistance, and Logistics, whose office has the responsibility for (7)
interpreting policy related to audit resolution, argued that the Chapter
provides instructions to audit resolution officials on how far back to
project a disallowance when an audit is made of a recent period, but the
problem which caused the disallowance also existed in earlier periods.
Basically, the Agency argued that the provision relates to
disallowances based on estimates or projections which might cover many
budget years of a grantee.
As the Grantee pointed out, section 1-105-60(C)(3) does not, with a
literal reading, appear to be limited to audit disallowances based on
estimates or projections. It appears as one of three major subsections
under the section heading "Determinations and Computation of Dollar
Amounts." Section 1-105-60(C)(3), "Time Period for Computing
Disallowances," has been given the same weight (when one diagrams the
structure of the Chapter) as section 1-105-60(C)(2), "Use of Estimates."
Section 1-105-60(C)(3), "Time Period for Computing Disallowances,"
does
not structurally fall within section 1-105-60(C)( 2) "Use of Estimates,"
which deals with unallowable costs based on auditor estimates which may
include the use of techniques such as projections. Furthermore, (C)(3)
does not use the words "estimate" or "projection" at all.
Nevertheless,
we find, that Chapter 1-105-60 does not prohibit the Agency from taking
the disallowance in this case.
In providing these instructions to its auditors, it is unlikely the
Department intended to preclude the government from taking disallowances
found by examining documentation showing that the costs are clearly
unallowable. Furthermore, the language of section 1-105-60(c)(3) does
not prohibit the Agency from taking disallowances such as the one at
issue; it simply provides that if certain costs are to be disallowed,
the computation will cover the period the organization is required to
retain records. It does not state that for all disallowances, the
computation will only cover the period of time records are required to
be retained.
Furthermore, subparagraph 1-105-60(C)(3)(b) provides:
The time periods described in Subparagraph (a) will be modified under
the following circumstances.
(8) (1) The period will be extended as far back as possible in
situations involving fraud or deliberate misrepresentation by an
organization.
(2) The period will be appropriately reduced if part of the period
was covered by an earlier settlement of the same issue.
(3) The period may be appropriately extended in cases where an
organization has submitted a retroactive claim for reimbursement of
costs incurred in an earlier period, or has failed to carry out a prior
commitment to take corrective action which would have prevented the
problem.
This provision does not provide that the situations listed are the
exclusive ones in which the time period will be modified. Nothing in
the provision prohibits the modifying of the time period in a situation
such as the one in this case, where a disallowance was taken based on a
documented finding that certain costs are unallowable.
Moreover, it appears from the record that revised expenditure reports
were filed for certain grant periods, and the disallowed costs may have
been based on the revised expenditure reports. June 28, 1984 Agency
submission, Attachment 11. Such a disallowance based on costs claimed
pursuant to revised expenditure reports may fall within subsection
(C)(3)(b)(3) relating to retroactive claims, thus, in any event, making
a portion of the disallowance fall within one of the specific exceptions
to the time periods prescribed in Chapter 1-105-60.
We do not think it is reasonable to interpret the provision so that
the Agency is precluded from collecting clearly unallowable costs for
which there is a documentary basis. Moreover, the Grantee has not shown
that any other documentation would show that these costs were allowable.
The provisions related to records retention are not mere loopholes in a
game; they fundamentally are intended to assure only that records can
be eventually destroyed without prejudice to a grantee.
We therefore do not find that HHS regulations and policies related to
records retention prohibit the Agency from taking a disallowance for the
subject unallowable costs.
(9) CONCLUSION
For the reasons stated above, we sustain the disallowance in the full
amount appealed of $36,412. /1/ The Grantee cited the 1978 version of
these regulations. Part 74, including the three year records
retention requirement, was promulgated in 1973. Part 74 has been
amended since its promulgation, but the amendments do not affect this
case. /2/ It should be noted that for some grant periods
involved in the disallowances, records were required to be retained
(e.g. 01H000097-02), because the three-year retention period had not
expired prior to the Inspector General Audit of CHCS in October, 1979.
For other grant periods, it appears that the three-year retention period
expired prior to the audit. /3/ The Agency also asserted that
PHS implementation of a policy such as Chapter 1-105 is necessary for
the policy to apply to specific grants, and, the Agency asserted,
implementation of Chapter 1-105 did not occur until Chapter 1-3 of the
PHS Financial Management Manual was issued by PHS on December 6, 1983.
Therefore, the Agency argued, Chapter 1-105 is not applicable to the
disputed disallowance. Because we find that Chapter 1-105 does not
prohibit the Agency from taking the disallowance in this case, we make
no finding with respect to the Agency's implementation argument.
Although in its appeal brief and in the telephone conference, the
Grantee argued that 6-70 was applicable to this appeal, in its reply
brief, the Grantee asserted that Chapter 6-70 was superceded by Chapter
1-105 issued in October, 1980.
NOVEMBER 14, 1984