American Indian Center of Omaha, Inc., DAB No. 1141 (1990)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: American Indian Center

DATE: March 26, 1990 of Omaha, Inc. Docket No. 89-233
Decision No. 1141

DECISION

The American Indian Center of Omaha, Inc. (Grantee) appealed a
determination by the Administration for Native Americans (ANA, Agency)
in the Office of Human Development Services denying refunding of a
Social and Economic Development grant. 1/ Refunding was denied by the
Agency for the 1989-90 grant year, which was the final year of the
three-year project period specified in two prior awards. The denial of
refunding was based on the Agency's determination that Grantee had
materially failed to comply with the terms and conditions of its 1988-89
grant. As discussed below, we conclude that the Agency properly
exercised its discretion in denying the continuation grant because
Grantee failed to comply with the requirement to provide an audit of its
federal grants at least every two years and failed to be present for a
scheduled site visit. Accordingly, we sustain this determination.

Factual Background

The following facts appear from the record. Grantee first received a
Social and Economic Development grant for the budget period 9/1/87
through 8/31/88. The grant award document also showed a project period
of 9/1/87 through 8/31/90. The grant was awarded following a review of
Grantee's records for 1984 through 1986 conducted by a consultant for
the ANA, who indicated to Grantee's then Executive Director that
Grantee's fiscal, personnel, and management systems were adequate. A
second award was made for the budget period 9/1/88 through 8/31/89 which
again specified a project period extending through 8/31/90. In March of
the second grant year, the Agency notified Grantee that it had been
classified as a high-risk grantee because of "serious deficiencies" in
operating its grant. The deficiencies listed were Grantee's failure to
have any non-federal audits of its ANA grants for the past five years,
in violation of 45 C.F.R. 74.62, and the existence of an "investigation
into the expenditure of Federal funds" under the grant. 2/ Grantee was
advised that, as a consequence of the high-risk classification, grant
funds would be paid under the reimbursement rather than the advance
payment system. Letter from McCarron to Kemp dated March 23, 1989. Of
the $130,810 awarded for the second grant year, Grantee received
$119,740. The remaining $11,070 was never released by the Agency.

On June 1, 1989, Grantee presented a plan to the Agency "to satisfy . .
. [its] outstanding audit requirements . . . ." Grantee's plan called
for the performance of an audit for the years 1984, 1985 and 1986 using
$3,500 of the funds awarded for the 1988-89 grant year. Grantee stated
that it had engaged a certified public accountant (C.P.A.) firm to
perform the audit and would "immediately proceed to an audit" upon the
Agency's approval of a proposed budget revision for the grant which
included $3,500 for the audit. Grantee also stated that an audit for
the years 1987 and 1988 would be performed in the early part of the next
grant year with funds from that grant. Letter from Kemp to McCarron
dated June 1, 1989. 3/ Grantee's then Executive Director stated that
he "received a telephonic acceptance of . . . [this plan] from William
J. McCarron on about June 15, 1989." Affidavit of Timothy F. Woodhull
dated December 5, 1989. Mr. McCarron was the Chief of the Discretionary
Grants Management Branch in OHDS. However, the Acting Executive
Director who succeeded Mr. Woodhull stated that Mr. McCarron later
reversed his position, advising him by telephone in July 1989 that he
had "questions" about the audit plan. Affidavit of John Wilson
Wagstaffe III dated December 5, 1989.

On approximately August 21, 1989, Grantee was contacted by Geraldine A.
Farrell of the ANA, who stated that she and Mr. McCarron wished to
conduct an on-site review of the grant from August 30 to September 1,
1989. Grantee responded in writing on August 23, stating that it would
have "serious difficulty" in attending the site visit because "the week
beginning August 28 has traditionally been the time when we sponsor and
participate in the Dodge Park Pow-Wow, a large urban cultural event
which also offers many opportunities to reach new clients and to offer
economic development assistance under our grant." Grantee's letter also
stated that it had already scheduled its non-federal audit to begin on
August 28, 1989, "which would cause three weeks of significant
disruption in our fiscal office, at least in terms of providing any
records to any person other than the auditor." Grantee asked that the
site visit be postponed until September 18 or later. Letter from Kemp
to McCarron dated August 23, 1989. On August 25, 1989, Grantee received
a telegram from the Acting Commissioner, ANA, stating that the request
for a postponement was not approved, and that the on-site review would
be conducted as planned on August 30 through September 1, 1989. Grantee
was instructed to be prepared to meet with Mr. McCarron and Ms. Farrell
at 9:00 a.m. on August 30 at Grantee's offices, and to have all
programmatic and fiscal records pertaining to the grant available for
their review. In addition, Grantee was instructed that Board and staff
members in addition to Grantee's chairman should plan to be available
during the course of the site visit. Telegram from Mastrapasqua to Kemp
dated August 25, 1989.

According to a site visit report prepared by Mr. McCarron and Ms.
Farrell, Grantee's offices were closed when they arrived at 9:00 a.m. on
August 30. A sign in the window stated:

Dear Indian Community: The American Indian Center will be closed
due to our 'Dodge Park Pow Wow' Closed: 8/29/89 to 9/6/89.

Thank you, Board of Directors

Agency's appeal file, Ex. 8, p. 1. Mr. McCarron and Ms. Farrell
further reported that they subsequently drove to the site of the Dodge
Park Pow Wow and remained there from 10:00 to 11:00 a.m. None of
Grantee's Board members or staff were there, and Mr. McCarron and Ms.
Farrell were informed by park caretakers and others present that no
activities were scheduled at Dodge Park until September 1. Id., p. 2.
According to Grantee, its personnel were engaged in preparatory work for
the Pow Wow at the homes of private individuals on August 30. Affidavit
of John Wilson Wagstaffe III dated February 7, 1990.

Mr. McCarron and Ms. Farrell reported that they then drove to the office
of the C.P.A. firm engaged by Grantee to conduct the audit and met with
two auditors, who advised them that the audit of the years 1984, 1985
and 1986 was originally scheduled for July 17, 1989 but that the auditor
found Grantee's offices closed on that date. The audit was rescheduled
several times but was never performed. Agency's Ex. 8, pp. 2, 4.

The Agency received Grantee's application for a continuation grant on
August 31, 1989. By letter dated September 27, 1989, the Agency
notified Grantee that its application was denied because Grantee had
materially failed to comply with the terms and conditions of the grant
award. The Agency's letter stated that the lack of compliance consisted
of Grantee's failure to conduct an audit for its ANA grants for five
years as well as Grantee's failure to provide ANA officials with program
and fiscal records at the site visit scheduled for August 30, 1989. The
Agency concluded that, as a result of these deficiencies, continued
support was not in the best interest of the federal government.

Applicable Requirements

Uniform requirements for the administration of HHS grants are contained
in 45 C.F.R. Part 74. 4/ Section 74.62 of Part 74, captioned
"Non-Federal audits," states in pertinent part --

Recipients that are not governments shall comply with the
requirements concerning non- Federal audits in OMB Circular No.
A-110, in- cluding any amendments to those requirements published
in the Federal Register by OMB.

Attachment F of Office of Management and Budget (OMB) Circular A-110
sets forth standards for financial management systems and requires that
recipients' systems provide for --

Examinations in the form of audits or internal audits. Such audits
shall be made by qualified individuals who are sufficiently
independent of those who authorize the expenditure of Federal funds
to produce unbiased opinions, conclusions or judgments . . . .
These examinations are intended to ascertain the effectiveness of
the financial management systems and internal procedures that have
been established to meet the terms and conditions of the
agreements. It is not intended that each agreement awarded to the
recipient be examined. Generally, examinations should be conducted
on an organization-wide basis to test the fiscal integrity of
financial transactions as well as compliance with the terms and
conditions of the Federal grants and other agreements. Such tests
would include an appropriate sampling of Federal agreements.
Examinations will be conducted with reasonable frequency, on a
continuing basis or at scheduled intervals, usually annually, but
not less frequently than every two years . . . .

In addition, section 74.24(b) provides, under the heading "Access to
Records," that --

HHS and the Comptroller General of the United or any of their
authorized representatives, shall have the right of access to any
books, documents, papers, or other records of the grantee which are
pertinent to the HHS grant, in order to make audit, examination,
excerpts, and transcripts.

A similar provision is found in the Native American Programs Act at 42
U.S.C. 2991g(b).

Grantee was also bound by regulations promulgated by the ANA. These
regulations define the term "program period" as --

the total time for which the recipient's project or program is
approved for support, including any extension, subject to the
availability of funds, satisfactory progress, and a determination
by HHS that continued funding is in the best interest of the
Government.

45 C.F.R. 1336.10 (1983).

In addition, the 1986 HDS (Human Development Services) Grants
Administration Manual, which was referred to in the terms and conditions
of the 1988-89 grant award, states in pertinent part that --

[N]either the approval of a project period nor the award of a grant
gives the recipient any legal entitlement to receive additional
awards. The HDS granting office's commitment to fund the project
in succeeding budget periods of the project period is subject to
the conditions listed in Chapter 1.A.4.

Chapter 10.A.2.

Chapter 1.A.4. states --

In completing the budget information on the application form,
applicants shall provide estimates of Federal funds needed to
support the project for future budget periods. Based on this
information, the HDS granting office may choose to reflect on the
"Notice of Financial Assistance Awarded" a recommended level of
support for the remainder of the project period. The grantee may
use the recommended level of support as the basis for requesting
funds on a continuation application. However, such estimated
amounts do not constitute a commitment by the HDS granting office
to award future funds beyond the current budget period. Continued
support for a project will be based on the availability of funds,
satisfactory progress by the recipient, and a determination that
continued funding is in the best interest of the Federal
Government.

The terms and conditions of Grantee's 1988-89 grant award also stated --

Future support is contingent on satisfactory progress by the
grantee, availability of funds, and whether continued support is in
the best interest of the government.

Grantee's Argument

Grantee took the position that it was not a reasonable basis for the
denial of refunding that it had not had a non-federal audit. It pointed
to the fact that it had a plan to correct this deficiency, and asserted
that it failed to carry out this plan only because of the actions of Mr.
McCarron. In addition, Grantee contended that the denial of refunding
was arbitrary and capricious because the Agency could have warned it
earlier than March 1989 that it was out of compliance and given it an
opportunity to perform an audit. Grantee argued, moreover, that the
lack of an audit did not mean that it had misspent federal funds or
failed to perform program objectives during the 1988-89 grant year, or
would do so in the next grant year, noting that it had been found
fiscally responsible for the period January 1, 1984 through December 31,
1986 when evaluated prior to the award of the Social and Economic
Development grant.

Grantee also took the position that it was not a reasonable basis for
the Agency's action that Grantee's offices were closed on the date of
the site visit. It pointed out that it had not refused to allow a site
visit but had instead informed Agency officials that it would not be
available on the proposed date and requested a postponement. Grantee
also asserted that the Agency failed to provide proper written
notification of the time of the site visit.

Finally, Grantee argued that the Agency's action was attributable to
undue influence exerted on grants management by a competitor of Grantee.

Discussion

As noted above, the Agency denied refunding based on Grantee's failure
to have an audit for a five-year period (as of 1989) and its failure to
appear for the site visit scheduled by the Agency. The Agency stated
that this constituted a material failure to comply with the terms and
conditions of the grant. Under 45 C.F.R. 74.115(a) (1980), this is the
standard which must be applied in order to terminate an existing grant.
A continuation award can properly be denied on the same basis as well,
since both actions are designed to cut off the flow of federal funds to
a grantee, with the type of action depending simply on the point in the
funding cycle at which the Agency determines this is required. See 45
C.F.R. 74.113 (1980). The decision whether to award a continuation
grant can also be justified on other grounds, however. The grant award
for the 1988-89 grant notified Grantee, consistent with the ANA
regulations and the provisions of the HDS Grants Administration Manual,
that third-year funding was contingent on (1) satisfactory progress by
the Grantee, (2) the availability of funding, and (3) a determination
that continued support was in the best interest of the government.
Indeed, the Agency's notice to Grantee of the denial of refunding, in
addition to stating that Grantee had failed to comply with a term or
condition of the grant, concluded that continued support was not in the
best interest of the government.

We conclude that the lack of an audit constituted a material failure to
comply with the terms and conditions of the 1988-89 grant and was thus a
sound basis for the Agency's denial of a continuation award. We further
conclude that the Agency reasonably determined, based on the lack of an
audit, that it was not in the best interest of the government to make a
continuation award.

As indicated previously, OMB Circular A-110 requires that a grantee
arrange to be audited at least once every two years. The audit
requirement was a grant term or condition since it was made applicable
to Grantee by 45 C.F.R. Part 74, which in turn was referred to in the
grant award document. As of March 1989, Grantee had been a recipient of
ANA grants, including two Social and Economic Development grants, for at
least five years, 5/ but had not been audited once during this period.
The absence of any audit during a period when two audits should have
been performed clearly constituted a "material" failure to comply with
the grant terms and conditions. (Although the OMB circular does not
specify the time within which an audit must be performed, it cannot be
seriously argued that it contemplates a five- year delay in performing
the required audits.) Moreover, since an audit is the principal
mechanism for assuring that grant funds are properly expended, it was
reasonable for the Agency to determine that it would not be in the best
interest of the government to award a further grant to a grantee who had
not been audited for an extended period of time.

Although Grantee did not dispute that it had not had an audit for a
five-year period, it nevertheless contended that the lack of an audit
was not a basis for denying the continuation award since the Agency had
thwarted its efforts to comply with the audit requirement. We are not
persuaded that the Agency was responsible for the lack of an audit here,
however. Grantee alleged that the Agency raised questions in July 1989
about its plan to come into compliance with the audit requirement.
However, even if the plan had been implemented, Grantee would still have
been out of compliance with the audit requirement at the end of the
1988-89 grant year (when the decision on refunding was made), since its
plan did not call for an audit of 1987 and 1988 until the 1989-90 grant
year.

Moreover, the record shows that Grantee in fact engaged an audit firm to
perform an audit for the years 1984, 1985 and 1986, and made
arrangements for the auditors to begin the audit on July 17, 1989.
While Grantee postponed the audit scheduled for that date as well as
subsequent dates, there is no indication that it did so due to any
questions raised by the Agency.

Grantee also argued that the lack of an audit did not show that it had
misspent 1988-89 grant funds or failed to perform program objectives for
that grant, or that it would do so in the next grant year. We agree
with Grantee that the fact that it was not audited does not mean that it
was not otherwise in compliance with applicable requirements for the
1988-89 grant year. Nevertheless, at the time it had to decide whether
or not to make a continuation award, the Agency had no way of knowing
whether Grantee was in compliance with these requirements and no basis
for predicting how Grantee would perform in the future. (Even if the
review of Grantee's fiscal, personnel, and management systems performed
for ANA prior to the award of the first grant gave Grantee a clean bill
of health, it was too old to be a reliable basis for predicting
Grantee's performance in a third grant year.) Thus, Grantee's failure
to comply with the audit requirement was a reasonable basis for denying
the continuation award since there was no basis upon which the Agency
could reliably determine that prior year grant funds had been properly
spent.

Grantee argued in addition that the Agency should have notified it prior
to March 1989 that it considered the lack of an audit a serious
deficiency, which presumably would have allowed Grantee to be audited
before a decision on the continuation grant was required. However, as
the Agency correctly pointed out, Grantee had legal notice of the audit
requirement. That the grant may not have been monitored as closely as
might have been desirable does not excuse Grantee from failing to comply
with applicable requirements. In any event, since the decision not to
refund the grant was made six months after the notice to Grantee of the
audit deficiency, Grantee should have been able to make more progress
than it did towards completing the necessary audits.

Our conclusion that the Agency properly denied the continuation award is
also supported by the fact that Grantee failed to appear at its offices
on the first day of the scheduled site visit. The Agency scheduled the
site visit in a last-minute attempt to determine, in the absence of the
required audits, whether grant funds were being properly spent. Once
the Agency had denied Grantee's request to postpone the site visit,
Grantee should have made at least some effort to accommodate the Agency
(for example, by having even one individual available at its offices who
could show the Agency the relevant records). By closing its offices
without notice to the Agency, Grantee strengthened the impression,
already created by the lack of any audits, that it was unwilling to have
its records examined because federal funds were being misspent. Under
these circumstances, we conclude that the Agency reasonably determined
that the award of the continuation grant would not be in the
government's best interests.

In view of our conclusion that the Agency properly relied on the lack of
any audits and Grantee's failure to appear for the site visit in denying
refunding, we need not determine whether the Agency was spurred by an
alleged competitor of Grantee to take this action, as Grantee suggested.
Regardless of the Agency's motives, Grantee's obligation to document
that grant funds were properly expended remained unchanged. See Metro
Community Health Centers, Inc., DAB No. 1098 (1989), at p. 10.
Conclusion

For the reasons discussed above, we conclude that the Agency properly
denied refunding for a third year Social and Economic Development grant,
and sustain the determination appealed from.

__________________________ Cecilia Sparks
Ford

__________________________ Donald F.
Garrett

__________________________ Alexander G.
Teitz Presiding Board Member

1. Grants for social and economic development are authorized by the
Native American Programs Act of 1974. Under this statute, refunding may
not be denied without affording the grantee an opportunity for a full
and fair hearing. 42 U.S.C. 2991h(2). ANA regulations provide that a
denial of refunding is appealable to this Board. 45 C.F.R. 1336.52
(1983).

2. This apparently referred to an FBI investigation which resulted
in the indictment in June 1989 of Grantee's then Executive Director,
Timothy Woodhull, for conspiracy to distribute cocaine and related acts.
The record indicates that Mr. Woodhull entered a not guilty plea, but is
silent regarding any later developments.

3. Later correspondence from the auditors indicates that the years
referred to were grantee's fiscal years, which ended October 31.

4. These regulations are directly applicable to Grantee. They are
also referred to in the 1988-89 grant award document as well as in the
ANA regulations at 45 C.F.R. Part 1336 (1983).

5. Grantee stated that it "has been funded through the
Administration for Native Americans on at least four occasions since
1984 . . . ." Grantee's brief dated 12/5/89, p.