Second Street Youth Center Foundation, Inc., DAB No. 1270 (1991)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Second Street Youth Center Inc. 

DATE: August 6, 1991
Docket No. 90-197
Audit No. A-02-89-05392
Decision No. 1270

DECISION

The Second Street Youth Center Foundation, Inc. (Second Street) appealed
a determination by the Administration for Children and Families (ACF)
disallowing $14,233 in claimed costs for Second Street's Head Start
program. 1/  The disallowance was based on an audit conducted by an
independent auditor covering the period from June 1, 1988 through
December 31, 1988.  The auditor concluded that Second Street had failed
to provide adequate supporting documentation for five cost items, four
payments for personal compensation to Second Street's executive
director, business manager, and bookkeeper, as well as a vendor payment.
The Regional Inspector General for Audit and ACF offered opportunities
for Second Street to provide supporting documentation to demonstrate
that the questioned costs were allowable, but Second Street failed to
submit any documentation.  ACF proceeded with this disallowance.

On appeal, Second Street requested that the briefing schedule be stayed
so that it could submit documentation  to ACF which it alleged would
substantiate the allowability of the costs questioned by the independent
auditor.  ACF reviewed the documents and determined that the documents
were insufficient to demonstrate that four items, totalling $14,233,
were allowable, but did accept the documentation of a $607 payment to
Second Street's bookkeeper.

For the reasons discussed below, we uphold the disallowance in full.

I.  Payments for Personal Compensation

In this section we discuss the three items still in dispute that were
questioned by the auditor relating to payments for personal
compensation.  The audit report referred to the payments as follows:

o  $5,808 paid to Mr. Christopher Toscano, Executive Director - refer
check # 410389 dated 7/28/88  (For the period 1/1/88 to 7/24/88).

o  $5,775 paid to Ms. Theresa Chou, Business Manager -  refer check #
410394 dated 7/28/88 (Period covered not stated).

o  $2,450 paid to Ms. Theresa Chou, Business Manager - refer check #
410671 dated 11/3/88 (Period covered not stated).

ACF Ex. 2, p. 15.

The auditor questioned these payments based on Second Street's failure
to produce "detailed time reports" that demonstrated that these
individuals performed sufficient activities or services on behalf of
Second Street's Head Start program to justify these payments.

The Head Start Act provides that "each recipient of financial assistance
. . . shall keep such records . . . which fully disclose the amount and
disposition by such recipient of the proceeds of such financial
assistance . . . and such other records as will facilitate an effective
audit.  42 U.S.C. S 9842(a).  The regulations applicable to the Head
Start program require that grantees make and retain accounting records
that adequately identify expenditures and that grantees support these
records with source documentation.  45 C.F.R. 74.61(b) and (g).

Moreover, the regulations at 45 C.F.R. 74.174(a) provide that the
principles to be used in determining allowable costs of activities
conducted by nonprofit organizations are contained in Office of
Management and Budget (OMB) Circular A-122.  OMB Circular A-122 provides
as a "Basic Consideration" that in order to be allowable under an award,
a cost must be reasonable for the performance of the award, allocable to
the award, and adequately documented.  Att. A, Part A, Para 2(a) and
(g).  More specifically, the Circular provides that, to be allowable,
personal compensation (i.e., salaries, wages) must be "based on
documented payrolls approved by a responsible official(s) of the
organization [and] . . . supported by personnel activity reports. . . ."
Att. B, para. 6.l(1). 2/  The Circular further provides that personnel
activity reports must meet the following standards:

 (a)  The reports must reflect an after-the-fact determination of
 the actual activity of each employee . . . .

 (b)  Each report must account for the total activity for which
 employees are compensated . . . .

 (c)  The reports must be signed by the individual employee, or
 by the responsible supervisory official having first hand
 knowledge of the activities performed by the employee, that the
 distribution of activity represents a reasonable estimate of the
 actual work performed by the employee during the periods covered
 by the reports.

 (d)  The report must be prepared monthly and must coincide with
 one or more pay periods.

Att. B, para. 6.l(2).

Although Second Street produced a wide variety of documents on behalf of
the allowability of these payments, many of which were attached to the
six affidavits discussed below, Second Street has never been able to
provide the documented payrolls and personnel activity reports that meet
the specific requirements of the Circular. 3/  Indeed, none of the
records of meetings, correspondence, transmission documents, memoranda,
telephone records and other related documents submitted by Second Street
as attachments to affidavits specifically relate to the questioned
expenditures.  These documents, therefore, fail to establish that the
two officials in question performed Head Start related activities on
specific dates and for a particular period of time.  Second Street did
not provide the Board with any reasonable explanation for the absence of
the contemporaneous records.  Second Street's Acting Chief Executive
Officer did concede that "the former CEO seldom used the time clock and
none of his time cards are available," but this admission neither
constitutes a reasonable explanation nor addresses at all the payments
to the business manager.  ACF Ex. 4.

Second Street did not operate a Head Start program for the period of
January 1, 1988 through May 31, 1988, yet, based on the audit report
description of the payments and the timing of the payments, substantial
portions of the payments were apparently intended to cover services
provided during that period.  While some of the records suggest that
these individuals may have been involved in activities which were
designed to regain funding for the Head Start program, these allegations
alone are insufficient source documentation for the payments under the
regulations and cost principles.

Second Street also submitted six affidavits that allegedly support the
allowability of these costs.  See ACF Ex. 7, which contains five
affidavits and the second statement of Diane L. Kearney, which was
submitted by ACF on June 17, 1991.  Affidavits, however, are not the
type of contemporaneous documentation that is required by OMB Circular
A-122. 4/  Generally we will not consider such non-contemporaneous
evidence in support of a questioned cost, unless a reasonable
explanation of the absence of the required records is provided.  Second
Street, as noted above, offered no such explanation.  Even when the
Board does review such evidence, we must scrutinize it more closely.
See, e.g., Indiana Dept. of Public Welfare, DAB No. 772 at 4 (1986).
None of the affidavits here is sufficient to support the allowability of
these payments under the most generous interpretation.

In his affidavit, Harold Umansky, Second Street's treasurer from January
1, 1988 through October 1, 1988, asserts that he never signed a check
without a payment voucher and a check request form.  Even if true, such
a procedure could not substitute for specific time records demonstrating
the date and the amount of time an official spent on program-related
activities.  Moreover, various checks for the two officials in question
were attached to the affidavit, but none of the checks and documentation
relates to the questioned payments.  Mr. Umansky failed to provide any
explanation as to why support documentation exists for these other
checks, but not for the questioned payments.  If anything, the other
checks raise further questions concerning the questioned payments, since
they purport to cover services for a period that partially overlaps the
period apparently covered by the questioned payments, and may therefore
duplicate those payments.

The affidavits of Ruth Moore, Second Street's former acting Head Start
Director and Barbara Penn-Bracey, Second Street's former administrative
assistant, merely assert their belief that the two officials receiving
the payments in question worked on Head Start activities for the first
three months of the year.  Clearly this assertion provides insufficient
information to support the payments in issue, since it is self-serving
and prepared for this litigation.

The affidavit of Richard Taylor, Second Street's current executive
director, asserts that documents from the  files of Second Street for
calendar year 1988, which were attached to the affidavit, provide
additional proof of the quantum of work performed by Mr. Toscano.  The
affidavit asserts that the documents indicate that work was performed
during this period to remove Second Street from its "high risk"
designation and to regain funding for the Head Start program.  Again,
however, the affidavit and the attached documentation fail to document
with any specificity the nature and amount of grant-related work
performed and how that work related to the payment in question.
Moreover, the affidavit does not attempt to address the two questioned
payments for Ms. Chou.

Finally, in a separate submission, Second Street presented a
supplemental affidavit by Diane Kearney, Second Street's former
bookkeeper.  The supplemental affidavit accompanied "Payroll Time
Sheets" for the period in question.  The affidavit asserts that the time
sheets demonstrate that the two officials' time was "recorded properly."
The affidavit further asserts that the hours recorded on the payroll
sheets should be split between two programs, Head Start and Day Care, by
specific percentage rates for each of the two officials.

We conclude, as did ACF, that neither the affidavit nor the payroll time
sheets demonstrate the allowability of the payments.  For the former
executive director, Mr. Toscano, the payroll sheets merely indicate the
hours he worked; they provide no indication whether any of those hours
related to the Head Start program.  For Ms. Chou, although the payroll
sheets show a breakdown between Head Start and Day Care beginning in the
second half of April, 1988, we have no information concerning how that
breakdown was reached or whether any of the Head Start hours listed were
supposed to be covered by the payments here. 5/  Further, the breakdown
in time between Head Start and Day Care on these payroll sheets for Ms.
Chou bears no relationship to the percentage breakdown for Ms. Chou
proposed by Ms. Kearney in her affidavit.  We also note that Ms. Kearney
provided no supporting basis for the percentage breakdowns proposed in
her affidavit and we therefore have no means of verifying the
reliability of those breakdowns.  See Acadia-Vermillion Community Action
Program, Inc., DAB No. 1201 at 5 (1990) (handwritten notations of
breakdowns on time sheets unacceptable absent explanation of basis).
Thus, neither the affidavit nor the accompanying payroll sheets meet the
minimum requirements of OMB Circular A-122 for adequate documentation of
payments for personal compensation, and accordingly neither establishes
the allowability of these payments.

II.  Payment to Vendor

The disallowance also included a $200 payment by Second Street to a
vendor, Cheryl Lang, which was questioned by the auditor for "lack of
independent supporting documentation."  ACF Ex. 2, p. 15.  The only
support for this payment supplied here by Second Street was the
following reference in an affidavit by the former bookkeeper, Diane
Kearney:

 I have been advised that one of the disallowed amounts by DHHS
 related to a $200.00 payment to Cheryl Lang on August 14, 1988,
 for which there was no independent supporting documentation.  I
 personally know that Ms. Lang rented a truck from a local U-Haul
 facility in order to move furniture from the Bethel Presbyterian
 Church, which had been a satellite Head Start location, to 935
 South Second Street, the main SSYC location. I know this because
 I accompanied Ms. Lang at that time.  Thus, I believe that this
 payment to Ms. Lang was reimbursement for a valid Head Start
 expense.

ACF Ex. 7.

ACF rejected this affidavit because it allegedly related to an event
that took place more than two years earlier and because the affidavit
was not supported by any contemporaneous documentation.  We find that
the Agency was acting consistently with applicable regulations and cost
principles in rejecting this affidavit and in requiring some further
support documentation for this expenditure.  Second Street could not
even supply documentation of Ms. Lang's payment to the U-Haul agency for
the truck.  Accordingly, we uphold the disallowance of this item as
well.

III.  Other Arguments by Second Street

In its brief, Second Street relied on two additional arguments which can
be disposed of briefly.  They conceded that the regulations clearly
required them to maintain the documentation discussed above and required
the auditor to question and the agency to disallow these costs in their
absence.  Second Street brief at 3-4.  They admitted that "[t]hrough
some reason which no one seems able to effectively state," the required
records cannot be produced.  Id.  However, they then asked the Board to
consider such circumstances as Second Street's current level of
compliance, its employees' diligence in the refunding effort, and the
community need for its programs.  Essentially this argument seeks to
have the Board make "ad hoc exceptions to a regulation" or even to
"violat[e] a regulation."  Id. at 11.  The Board has no such authority.
We have repeatedly held that we are bound by all applicable regulations.
45 C.F.R. 16.14; see, e.g., North Carolina Dept. of Human Resources, DAB
No. 1110 at 5 (1989).

Further, Second Street complained that ACF was inconsistent in accepting
secondary evidence in support of the payment to the bookkeeper but
refusing to credit such evidence in support of the other questioned
payments.  Id. at 9.  However, the payment to the bookkeeper was
supported by her own affidavit personally attesting to specific hours
worked, detailing the work performed for the benefit of the Head Start
program during those hours, tying those hours to the relevant payment,
and indicating that the original records had existed but were lost.
Thus it was not unreasonable for ACF to accept this evidence as
sufficient to justify the allowability of the payment to her, while
finding no such sufficient evidence in support of the other payments.

Conclusion

On the basis of the foregoing analysis, we uphold the disallowance in
full.

 

 

 Norval D. (John) Settle

 

 

 Alexander G. Teitz

 

 

 Donald F. Garrett Presiding Board Member. 1.   This is the
current name for the grantor agency for Head Start, which had been the
Office of Human Development Services until recent organizational
changes.  We use the current designation throughout, although the former
name was in effect at the time of the disallowance.

2.   Although the record suggests that Second Street may have claimed
the costs in question as reimbursement for services performed by
consultants or contractors, the costs of professional or consultant
services are not allowable if such services are performed by employees
or officers of the organization.  Att. B, para. 34.  Therefore, the
claimed costs at issue here would only be allowable if they met the
requirements for personal compensation in Att. B, para. 6.

3.   The only directly relevant documents were the checks made to the
individuals referred to in the audit report.

4.   The regulations require that where a grant is renewed annually, as
is the case here, the grantee is required to retain financial records
and supporting documents for three years from the date the grantee
submits its last expenditure report for the period, or if later, until
any audit involving the records (which was begun before the three-year
period had expired) has been resolved.  45 C.F.R. 74.21 and 74.22.
Thus, Second Street's obligation to retain records relating to this
disallowance has clearly not expired.                      5.   ACF also
asserted that the absence of any  breakdown for Mr. Toscano on the
payroll time sheets in the face of the breakdown for Ms. Chou undercuts
the position that any amounts of Mr. Toscano's time were devoted to the
Head Start program during this