Pennsylvania Department of Public Welfare, DAB No. 1089 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Pennsylvania Department DATE: August 22, 1989 of Public
Welfare Docket No. 89-52 Audit Control No. A-03-87-06056
Decision No. 1089

DECISION

The Pennsylvania Department of Public Welfare (State) appealed a
determination by the Family Support Administration (FSA) disallowing a
total of $1,259,351 in federal financial participation (FFP) claimed
under the Work Incentive (WIN) and WIN Demonstration (WIN Demo) programs
for fiscal years 1982 and 1983. This amount reflects two separate
disallowances. FSA disallowed $886,479 for part-time personal service
costs for the WIN and WIN Demo grants, finding that the State failed to
provide adequate source documentation of such costs. FSA also
disallowed $372,872 in telecommunication costs for the WIN Demo grant,
finding that the State provided insufficient documentation of such
costs.

For the reasons stated below, we find that the State has failed to
document its claims as required by applicable regulations. Accordingly,
we uphold the entire disallowance.

Applicable Authority

Part 74 of 45 C.F.R. (1981-1983) sets out general requirements for the
administration of Health and Human Services grants including
requirements for documenting costs. Section 74.61(b) provides that
accounting records which "identify adequately the source and application
of funds for grant-or subgrant-supported activities shall be
maintained." Section 74.61(g) defines source documentation as
"cancelled checks, paid bills, payrolls, contract and subgrant award
documents, etc." Section 74.61(f) provides that procedures shall be
established for determining the reasonableness, allowability and
allocability of costs, in accordance with Subpart Q and the terms of
individual grants.

Section 74.171 of 45 C.F.R. provides that Office of Management and
Budget (OMB) Circular A-87 and its amendments be used to determine the
allowable costs of activities conducted by governments. Circular A-87,
Attachment B, sets forth the standards for selected cost items. Section
B.10.b. specifically requires that--

[a]mounts charged to grant programs for personal services, . . .
will be based on payrolls documented and provided in accordance with
generally accepted practice of the State, local, or Indian tribal
government. Payrolls must be supported by time and attendance or
equivalent records for individual employees. Salaries and wages of
employees chargeable to more than one grant program or other cost
objective will be supported by appropriate time distribution
records. . . .

OMB Circular A-87, Attachment A, Part J, requires that grantees prepare
and obtain approval for cost allocation plans to support the
distribution of joint costs related to grant programs. Such costs must
be supported by "formal accounting records" which substantiate charges.
See also Subpart E of 45 C.F.R. Part 95 (1982).

Analysis

I. Personal Service Costs

According to the audit report, the State improperly charged part-time
wages and fringe benefits in the amount of $886,479 FFP to its WIN and
WIN Demo grants. The State's response to the audit report was that it
had based its claims on allocations documented on the State's Form
PA-232, a part-time WIN staff form.

FSA set forth the specific inadequacies of the State's documentation in
its disallowance decision (Final Decision). FSA concluded, first, that
the forms provided by the State were inadequate source documentation
because they were summaries which were not prepared and maintained by
individual employees, and they did not account for 100% of employees'
time. FSA said that it could not verify the costs because the majority
of the forms were summarized by cost center, there were no forms
documenting Allegheny County part-time costs included on the work papers
supporting Financial Status Reports for July 1982 to September 1982, and
the State did not provide the detail of individual names or amounts
supporting Form PA-232 cost center summaries. Furthermore, FSA found
that the allocation methodology the State used to assign part-time costs
to the WIN program based on Form PA-232 information was not included in
the State's cost allocation plan and there was no documentation showing
it was an approved method. FSA also found that the State had failed to
keep its back-up documentation because it misinterpreted the retention
requirement of 45 C.F.R. 74.20 et seq.

The State made several arguments on appeal. It asserted that: (1) Form
PA-232 constituted adequate source documentation because it accounted
for individual employees, was maintained by the office where the work in
question was performed, in the usual course of business, while the work
was being done, and for the purpose of maintaining a running record of
staff time use, and was signed by a responsible official; (2) the
regulatory requirements were unclear; (3) FSA's failure to apprise the
State of the inadequacy of Form PA-232 indicated that it considered such
documentation satisfactory; and (4) generally accepted accounting
standards and the auditing standards of the Comptroller General permit
flexibility in the determination of documentary competency. The State
argued that Form PA-232 satisfied the regulatory requirements because
the regulations and applicable OMB Circulars do not require "any
specific form," and that FSA's after-the-fact demand for a specific form
of documentation is arbitrary, unfair, and an abuse of discretion.
(State's brief, p. 6)

Although we agree with the State that no single, specific form is
required for adequate source documentation, we find that this is not the
basis of the disallowance. The basis for FSA's disallowance is the fact
that the State was required to document its costs adequately and failed
to do so. FSA's emphasis on the lack of source documentation other than
the deficient Forms PA-232 supplied by the State merely reflects the
regulatory standards which require documentation of time distribution
for employees who work on more than one program.

Inherent in the concept of time distribution, records of which are
specifically required by OMB Circular A-87, is the obligation to account
for 100% of an employee's time; among other things, this is necessary to
enable an auditor to verify that the total hours charged for an employee
did not exceed the hours the employee actually worked. We agree with
the Agency that there is some question regarding the sufficiency of Form
PA-232 for this purpose since the forms (even if properly completed)
would account only for the time allegedly spent on WIN or WIN Demo. The
State did not provide any documentation which even purports to show how
the individual employees in question spent 100% of their time. The
record indicates that the State understood that this was required; the
State apparently generated time distribution records for individual
employees supporting the Forms PA-232, but destroyed them prematurely
because of a misinterpretation of the record retention requirement of 45
C.F.R. 74.20 et seq.

Moreover, even if we were to find that the information called for on the
Forms PA-232 would be sufficient, we would not reverse the disallowance
here. The State's arguments about the sufficiency of its documentation
imply that this dispute concerns properly completed Forms PA-232.
However, the State never denied the findings of the FSA Final Decision
that the majority of the Forms PA-232 used by the State during the audit
period merely summarized information by cost center, and that there were
no forms for Allegheny County part-time costs for the period of July
1982 to September 1982, nor names and amounts supporting cost center
summaries. Thus, we must conclude that, for the most part, the State
failed to complete the Forms PA-232 according to the form's own
accompanying instructions. The instructions for completing the form
(State's Att. B, pp. 169-A-13 - 169-A-15) clearly indicate the need to
list each individual staff member engaged in the WIN program, and the
form, itself, asks for the enumeration of all employees and their total
monthly hours worked.

The State apparently would have us accept the only completed Form PA-232
which it submitted (State's Att. B, p. 5) as a representative example of
the documentation it had. We cannot do so in light of the State's
failure to dispute FSA's findings that most of the forms did not contain
the information called for. Moreover, the one completed form submitted,
which contained the handwritten date "March 1983" at the top, was an
outdated version of the form providing a monthly summary for three
individual employees and a monthly total of hours each allegedly worked
on the WIN program. Unlike the version which became effective in 1981
according to the State's own instructions, the outdated version did not
contain a space for approval by the executive director. If the State
had documentation providing the information called for in its own
instructions for this period, or other supporting documentation
verifying that the employees did work as indicated, the State should
have provided it.

We find, therefore, that FSA correctly determined that the State did not
satisfy the regulatory requirements of 45 C.F.R. Part 74 that it
maintain source documentation permitting a determination of the
reasonableness, allocability, and allowability of costs. The State also
failed to meet the requirements of OMB Circular A-87 that it have time
distribution records. Without such information, it is impossible to
ascertain the extent to which the time of individual employees in fact
benefited the WIN or WIN Demo programs.

It was the contention of the State that FSA should have apprised it of
the necessary detail of documentation and of the inadequacies of its
documentation of expenditures during previous oversight reviews of the
State's financial management system. The fact that FSA "found no need
at all to suggest any improvements in the system," argued the State, is
evidence of FSA's "belief that none was needed in light of Federal
review results." (State's brief, p. 5) FSA has, however, merely applied
here the applicable regulatory requirements, which were available to the
State. The oversight reviews on which the State purportedly relied for
its assurance of the adequacy of the form, were, furthermore, not audits
which entailed detailed examinations of the documentation.

Furthermore, this assertion by the State does not address the undisputed
FSA finding that the State failed to follow its own instructions for
using the form. And again, the State's position is undercut by its own
acknowledgment that it had maintained contemporaneous documentation in
addition to the Forms PA-232, which it failed to keep because of its
misinterpretation of the record retention requirement of 45 C.F.R. 74.20
et seq.

We also reject the State's argument that generally accepted accounting
standards and the auditing standards established by the Comptroller
General of the United States permit flexibility in the determination of
the competency of documentary evidence. An evaluation of the competency
of documentary evidence, the State contended, should turn on the
validity and completeness of such evidence and the possibility of
obtaining additional evidence. The State argued that its evidence
satisfied both of these standards.

We note, first, that the State did not cite any standards pertaining to
how the State should account for the types of costs at issue here; the
standards cited by the State are criteria for auditing, not for record
maintenance. The auditors here could not be expected to go beyond the
documentation the State provided; without specific information
regarding individual employees, auditors were unable to verify the costs
claimed by the State. We also note that the State failed to provide the
affidavit on accounting standards to which it referred in its brief
(State's brief, p. 12). Finally, and most important, we note that the
recordkeeping requirements make it the State's burden to come forward
with documentation supporting its claims. Even if the auditors did not
use every means possible to verify the State's claims, the State had an
opportunity to present to us any documentation which might support its
claims. The State relied instead on general arguments about the
sufficiency of its PA-232s, without even establishing that it had
completed forms in support of its claims, contrary to FSA's findings.

The State relied on several past Board decisions in support of its
contention that the Board has been flexible regarding documentary
evidence in circumstances where there was less compliance by other
grantees with regulatory requirements. We find all of these decisions
inapplicable to the instant case. In the most relevant case cited by
the State, New Jersey Dept. of Human Services, DAB No. 899 (1987),
substitute documentation failed to satisfy the requirements of
substantiation with adequate source documentation. The Board applied
the regulatory requirement which is applicable in the instant case, that
payrolls be supported by time and attendance or equivalent records, and
in circumstances requiring the allocation of costs to more than one
grant, by appropriate time distribution records. The Board concluded
that substitute documentation was properly rejected because New Jersey
did not explain the unavailability of more detailed documentation, nor
show that the substitute documentation verified actual expenditures.
Although there may not be a strict formula for such documentation, it
must satisfy the regulatory requirements. In DAB No. 899, as in the
instant case, the State failed to satisfy the requirements of the
applicable regulations.

In sum, we reject all of the State's specific arguments regarding the
personal services costs, and conclude that, even if a properly completed
PA-232 could be considered adequate source documentation, the State
failed to provide the information on individual employees required by
the form, and failed to document how such individual employees' time was
allocated. Thus, the regulatory requirements were not satisfied.

II. Telecommunications Costs

The State claimed telecommunications costs for the installation and
maintenance of computer terminals and phone lines, including freight,
monthly telephone charges, and the rental of terminals and modems, for
the entire period. In support of such claims, it submitted
documentation for three months, and offered the charges for one month
(June 1983) as a representative average, which it used to calculate
costs. The State acknowledged, in its request for review of the audit
findings and in its brief, that it had lost its copies of the
documentation supporting these claims. The vendor also lost or
destroyed its copies of the documentation. (FSA's Ex. 2, p. 3) FSA
decided that the State was unable to provide invoices or other
documentation to support the amount claimed, and that it was unable to
establish that the costs were grant-related.

The State argued that, although it lost the records related to costs for
the installation and maintenance of computer terminals and phone lines
and such records are no longer available from the vendors, these costs
should be allowed because actual expenses for equipment can be verified
from price lists, and the receipt, location and nature of equipment can
be verified through its inventory.

FSA concluded that, although the WIN Demo grant covered the period
October 1982 to June 1983, the State had documented only three months of
telephone installation and recurring monthly charges during that period.
Furthermore, the only concrete documentation which it submitted was for
the month of June 1983, which it offered as a representative average and
the most complete information of the three available months. The State
asserted that FSA made no effort to utilize available price lists and
inventories, but FSA maintained that the documentation submitted by the
State provides no way to verify the accuracy of the asserted charges.

While the State's documentation is sufficient to indicate that it did
incur telecommunications costs, we find it inadequate to substantiate
the State's claims for such costs as benefiting the WIN Demo project.

We are unable to conclude that the documents offered by the State for
the month of June are representative of the entire period of the WIN
Demo grant, October 1982 through June 1983. As FSA pointed out, the
State did not offer the month of June because it is a statistically
sound sample, but as the period for which the State has the most
complete documentation. There are, in fact, indications that certain
expenses incurred during this month are the types of charges that make
it the least representative month. A substantial portion of the charges
which appear in the documentation submitted by the State for the month
of June 1983 were incurred for installation, which is a type of cost
that would not necessarily be incurred more than once. Given the
State's complete failure to explain why such charges should be
considered representative, we must agree with FSA that the documentation
for the month of June cannot function as a representative average.

The State also submitted documentation in support of its claims for
telecommunications costs which included the names of individual
employees for whom equipment was installed. The State failed, however,
to provide any information connecting such names with the WIN Demo
grant, or demonstrating that the equipment was used for the purposes of
the WIN Demo grant. This failure is particularly critical here, in
light of the fact that FSA also found deficiencies in the State's
documentation of part-time personal services costs.

Furthermore, the amounts for which the State maintained it provided
documentation differed from the amounts charged to the WIN Demo grant.
The original disallowance letter and documents in the State's Attachment
D, pages B1-B7, indicate that the telecommunications costs at issue here
were reflected on an Expenditure Adjustment which transferred expenses
from Appropriation 59 (Office of Information Systems) to Appropriation
29 (Pennsylvania Employables Program). The State did not provide an
explanation with the methodology or supporting documentation used as a
basis for the transfer of costs. While the State maintained that the
documentation it submitted supported charging an even greater amount
than it claimed, the difference in amounts is a further reason for
questioning the credibility of the State's calculation. (State's Att.
D, p. 1)

As FSA indicated in the Final Decision, 45 C.F.R Part 74 requires that a
grantee's financial management system provide for accounting records
which are supported by source documentation and procedures for
determining the reasonableness, allowability, and allocability of costs,
in accordance with OMB Circular A-87. The documentation submitted by
the State fails completely to substantiate the telecommunications costs
claimed, and does not begin to approach the standards of reliability
which a submission of substitute documentation must meet. We,
therefore, uphold the disallowance with respect to the claimed
telecommunications costs.

Conclusion

For the foregoing reasons, we uphold the entire disallowance of
$1,259,351.

_____________________________ Donald F. Garrett

_____________________________ Alexander G. Teitz

_____________________________ Judith A. Ballard Presiding Board