Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Puerto Rico Treasury
Department
Docket No. A-96-26
Control No. A-02-94-02000
Decision No. 1593
DATE: August 2, 1996
DECISION
The Puerto Rico Treasury Department (PRTD) appealed part
of a September 29, 1995 determination by the Department
of Health and Human Services' (HHS) Division of Audit
Resolution (DAR) disallowing $25,830,450. The
disallowance concerned federal funding claimed by the
Commonwealth of Puerto Rico under various HHS programs.
The Commonwealth drew down federal funds and then issued
a wide range of checks, covered in whole or in part by
these funds, to carry out program mandates. A number of
checks were never cashed, however, and were subsequently
cancelled by PRTD after their expiration date. DAR
determined that for the period July 1, 1986 through June
30, 1993 PRTD failed to meet its obligation under
applicable federal requirements to refund the federal
portion of these cancelled uncashed checks (CUCs). DAR
computed this amount to be $25,830,450.
PRTD appealed $13,706,655 of the disallowance, which it
characterized as "the difference from the amount we feel
is a fair settlement ($12,123,795) and the total amount
disallowed ($25,830,450)." PRTD Notice of Appeal at 2
(October 23, 1995).
The record in this case consists of the parties' briefs
and exhibits. Based on our analysis of the record, we
conclude that DAR used a reasonable approach in
calculating the amount owed for PRTD's CUCs in light of
the particular circumstances here. Therefore, we sustain
the disallowance in its entirety.
Background
This disallowance arose following an August 1994
Inspector General Review (I.G. audit) for the period July
30, 1986 through June 30, 1993. See DAR Exhibit (Ex.) 1.
The audit examined the operations of the PRTD and
various state agencies in the treatment of CUCs. 1/
The introduction to the audit provides a cogent history
of the previous times that PRTD had been audited on the
very same issues.
In November 1981, the I.G. issued an audit report for the
period July 1, 1975 through June 30, 1979 that revealed
that federal programs were not receiving credit for their
share of CUCs. The report attributed this problem to a
lack of coordination between PRTD and its state agencies;
specifically, that the state agencies were not receiving
any follow-up information from PRTD. The I.G. noted that
PRTD had agreed with the audit findings and assured the
I.G. that a plan of action was being developed to
implement the I.G.'s recommendations. DAR Ex. 1 at 1.
In December 1987, the I.G. issued a follow-up audit
report for the period July 1, 1979 through June 30, 1986.
The follow-up audit was conducted to determine the
extent and adequacy of the actions taken by PRTD to
implement the recommendations stemming from the 1981
audit. The 1987 audit report reiterated the 1981
findings that:
1. Revised PRTD policies and procedures did
not provide for immediate credits to Federal
programs upon cancellation of unclaimed checks.
2. PRTD had failed to systematically produce
and distribute monthly computer printout
reports to State agencies which contained
credits due Federal Programs.
3. There was a lack of coordination with State
agencies and an absence of instructions to
State agencies and PRTD personnel for handling
computer printout reports of unclaimed expired
checks.
Id.
In the audit report that gave rise to the current
disallowance, the I.G. asserted that PRTD's accounting
system suffered from "a myriad of financial management
inadequacies," most of which had been cited in the
earlier audits. DAR Brief (Br.) at 5. The I.G. Audit
found that neither PRTD nor the state agencies for which
it disbursed federal funds had a coordinated scheme to
manage CUC reimbursement. For example, PRTD did not
maintain or distribute timely lists of CUCs. Thus,
program agencies were at a loss to determine their share
of CUCs. When PRTD did provide these lists, they were
often incomplete and contained only payroll CUCs and not
vendor CUCs. PRTD did not provide program agencies with
instructions for processing CUCs. Finally, PRTD did not
retain essential financial data and had even erased tapes
containing information on CUCs. DAR Ex. 1 at 1, 3-5, 9
and 12.
The report concluded that, because of the deficiencies in
the accounting systems for CUCs, PRTD's central
accounting records did not provide an adequate means of
determining the amount of CUCs by fiscal year, agency and
account. Id. at 4. The report noted that PRTD's central
accounting records included two separate accounts
payable--one for CUCs issued from federal accounts
(identified in the record as account 5972) and the other
for CUCs issued from state accounts (identified in the
record as account 5971). The report concluded, however,
that federal and state funds from both accounts had been
extensively commingled and that the commingled funds from
the state accounts had been periodically transferred to
the Commonwealth General Fund. Id.
The audit report "estimated" the total amount of CUCs
processed by PRTD from July 1, 1986 through June 30, 1993
to be "at least $55.2 million." Id. at 5. To reach this
estimate, the report added together all of the funds it
could identify as having been transferred to the
Commonwealth General Fund during the period at issue
($28,513,093) along with the balances, as of June 30,
1993, of the state account of CUCs ($18,580,725) and the
federal account of CUCs ($8,147,360). The total of these
amounts equalled $55,241,178 or $55.2 million.
Following the issuance of the audit report, DAR and PRTD
entered into extensive negotiations in order to determine
the proper amount of funding that should be returned to
HHS for the CUCs. Both parties eventually agreed during
these negotiations that both the federal and state
accounts of CUCs maintained by PRTD should be used to
compute the total amount of CUCs subject to recovery
(referred to as the "universe" of CUCs), since funds from
both accounts had been extensively commingled. Both
parties eventually agreed that based on prior audits of
the various agencies in Puerto Rico receiving federal
funding, 36.4% of the universe of CUCs would be the HHS'
portion.
The parties, however, were not able to reach agreement
concerning the amount of the universe of CUCs that would
be subject to recovery. In an effort to resolve this
issue, DAR initially requested that PRTD supply it with a
detailed accounting for both the federal and state CUC
accounts that would show the monthly net change in each
account from July 1, 1986 to June 30, 1993. DAR Ex. 3 at
3, 7. Although PRTD submitted records showing monthly
balances (PRTD Ex. 2), DAR remained concerned that these
balance sheets "simply listed monthly debits and credits
for each account without any explanation of the changes
or accompanying documentation." DAR Ex. 3 at 3, 8.
After extensive further negotiations between the parties,
including discussions between representatives of the
I.G.'s office and PRTD, DAR decided that PRTD had not
provided the detailed monthly accounting requested even
for the final two years of the period, 1992 and 1993.
DAR concluded that PRTD's explanations of specific
adjustments in the account balances and of its accounting
procedures "raised more questions than they answered."
DAR Ex. 3 at 6, 14. DAR also remained concerned about
PRTD's inability to provide any independent supporting
documentation of its estimates. Id.
After giving PRTD one further opportunity to make
documentation available and not receiving responses to
its telephone inquiries (DAR Ex. 3 at 7, 15), DAR
thereupon decided that it would have to establish the
universe of CUCs by using the highest accumulated
balances in the federal and state CUC accounts, and then
allowing only those adjustments to those balances that
PRTD had been able to adequately document. DAR Br. at
11. In order to compute the universe, therefore, DAR
used the largest balance for each of the two accounts
during the period at issue. The largest balance for the
federal account (account 5972) was $13,720,624 for fiscal
year 1991 and the largest balance for the state account
(account 5971) was $59,529,302 for fiscal year 1990. DAR
further found that the only downward adjustment that PRTD
had been able to document was an adjustment of $2,287,427
for income tax return checks in its state account. Id.;
see also PRTD Ex. 4 at 3. Thus, DAR determined that the
total universe of CUCs for the audited period was
$70,962,499. By applying the 36.4% rate to the
$70,962,499 universe, DAR computed the disallowance to be
$25,830,450. Id. DAR was unable to rely on the
"estimate" of the universe of $55.2 million identified in
the audit report because the estimate had used PRTD's
account balances at the end of the audit period in
question rather than at their highest points, and had
thereby incorporated downward adjustments in the balances
that PRTD had never been able to substantiate.
Applicable authorities
Applicable HHS regulations provide explicit guidance
concerning the refund of federal financial participation
(FFP) for CUCs:
If a check remains uncashed beyond a period
of 180 days from the date it was issued, i.e.,
the date of the check, it will no longer be
regarded as an amount expended because no funds
have actually been disbursed. If the State has
claimed FFP [federal financial participation]
for the amount of the uncashed check, it must
refund the amount of FFP received.
45 C.F.R. § 201.67(c)(1) (applies to the Aid to Families
with Dependent Children program and various assistance
programs); 42 C.F.R. § 433.40(c)(1) (applies to the
Medicaid program).
Failure to refund CUCs will result in disallowance of
those funds. 42 C.F.R. § 433.40(d)(3); 45 C.F.R. §
201.67(d).
Further, the regulations at 45 C.F.R. §§ 74.27(a) and
92.22(b) expressly provide that allowable costs in HHS
grant programs to state governments will be determined in
accordance with the cost principles found in Office of
Management and Budget (OMB) Circular A-87. OMB Circular
A-87 as in effect during the applicable period here
provides that allowable costs must be net of all
applicable credits. OMB Circular A-87, Attachment A,
C.1.g (1981). Applicable credits refer to "those
receipts or reduction of expenditure-type transactions
which offset or reduce expense items allocable to grants
as direct or indirect costs." Id. at C.3.a.
Applicable credits accruing to a governmental unit shall
be credited to the federal award either as a cost
reduction or cash refund.
Analysis
The parties agree that, based on previous auditing of
state programs, a rate of 36.4% may be applied to the
total universe of CUCs in order to determine the federal
portion of the CUCs. See DAR Reply Br. at 2. The
parties also agree that the universe may properly include
the funds from both the state and federal CUC accounts
maintained by PRTD in view of the degree to which these
accounts had been commingled in the past. However, the
parties have been unable to reach agreement on the total
universe of CUCs subject to recovery by HHS.
As we stated previously, PRTD conceded only that a
disallowance of $12,123,795 would be appropriate.
Initially, the I.G. audit estimated the base amount of
CUCs as "at least $55.2 million" ($55,241,178). See DAR
Ex. 1 at i, 3 and 5. This base figure would have
resulted in a disallowance of slightly more than $20.1
million. See PRTD Ex. 4 at 3. PRTD calculated a revised
CUC base of slightly more than $33.3 million, applying
several downward adjustments to the universe used in the
I.G. Audit estimate. This universe would have resulted
in a disallowance of $12,123,795, which PRTD asserted is
appropriate. Id.
PRTD summarized its position as follows --
I. DAR originally intended to use $55.2
million as the base of CUCs upon which the
disallowance would be based. Following the
I.G. Audit, PRTD informed the I.G. that a
double counting of funds would occur with that
computation. Nevertheless, DAR arbitrarily
devised a new, higher, base figure. This new
base figure was not supported by sufficient
audit procedures or evidentiary documentation.
II. DAR denied PRTD due process by not
allowing it sufficient time to review and
comment on the new base or the underlying
methodology.
III. Contrary to DAR's assertions before the
Board, PRTD repeatedly and consistently
complied with "the exact requests" of DAR and
I.G. for further information.
IV. DAR has sought to penalize PRTD, rather
than reach a fair and correct settlement of the
case.
V. PRTD is taking corrective actions to
prevent a recurrence of this problem.
See PRTD Reply Br. at 9 and 13.
The primary issue in this appeal is whether DAR was
entitled to rely upon the amount of $70,962,499 as the
universe of CUCs for the audited period ending June 30,
1993. For the reasons discussed at length below, we
conclude that DAR was entitled to rely on that amount,
and that none of PRTD's arguments to the contrary has
merit.
This Board has repeatedly held that federal record-
keeping requirements as well as the cost principles
applicable to state governments receiving federal grants
place the burden on the grantee to document how it uses
the grant funding it receives. See e.g. New York State
Dept. of Social Services, DAB No. 1076, at 21-24 (1989),
Pennsylvania Dept. of Public Welfare, DAB No. 1089, at 7
(1989) and New York State Dept. of Social Services, DAB
No. 520 (1984). HHS regulations provide that the
financial management systems of grantees must identify
adequately the source and application of all grant funds
and that accounting records must be supported by source
documentation. 45 C.F.R. §§ 74.21(b) and 92.20(b). Each
and every CUC identified for the period at issue in this
appeal represents an amount of HHS grant funding which
was never actually used to cover a grant expenditure and
which therefore must be returned to the funding source,
the federal government. 2/ Under the circumstances
here, PRTD had the burden to document what happened to
the grant funds represented by the CUCs. Such
documentation would necessarily include acceptable
explanations supported by appropriate source
documentation of every adjustment in the balances in the
federal and state accounts PRTD maintained in its central
accounting records for the entire audit period.
DAR found that during the period at issue the federal and
state account balances of uncredited CUCs reached their
highest points at the end of fiscal years 1991 and 1990
respectively. DAR Br. at 11; PRTD Ex. 2. DAR further
found that with one exception in its state account, PRTD
was unable to demonstrate the propriety of any downward
adjustments which PRTD subsequently made to these
accounts. DAR therefore concluded that the disallowance
should be computed based on the highest account balances,
allowing only one downward adjustment in the state
account. We find that DAR's position is fully consistent
with PRTD's fundamental burden to maintain documentation
adequate to account for the grant funds at issue.
DAR may reasonably focus on the highest amounts of the
account balances during the period at issue here as
established by PRTD's own documentation. PRTD did not
here demonstrate that these balances were not the most
accurate reflection available of the total universe of
the CUCs subject to federal credit as of the point in
time for which they were identified. 3/ PRTD moreover
failed to provide persuasive explanations supported by
appropriate source documentation to justify any of the
subsequent downward adjustments which PRTD attempted to
make in the account balances, aside from the one
adjustment DAR allowed. It was clearly PRTD's burden to
document each adjustment to these account balances for
the period at issue and PRTD simply failed to do so.
This is particularly so since DAR had indicated that it
had reason to believe that the "only" significant
downward adjustments were made based merely on transfers
to the Commonwealth's General Fund after the passage of
time or the annulment of salary checks (PRTD Ex. 7), and
Puerto Rico has never offered evidence to demonstrate
otherwise. In effect, Puerto Rico, through transferring
CUC funds to its General Fund would be asserting
ownership of federal funds which were drawn down to cover
checks, but were never used for that purpose.
PRTD argued that DAR failed to comply with Government
Auditing Standards in computing the disallowance. PRTD's
argument clearly misconstrues the purpose of the I.G.
audit and the subsequent negotiations between PRTD and
DAR that led to the disallowance at issue here. Once DAR
concluded that PRTD was unable to adequately meet its
burden to document the universe of the CUCs, DAR
necessarily had to rely to some degree on the
documentation PRTD had submitted in order to compute the
disallowance. Moreover, it would clearly be inconsistent
with PRTD's burden here to conclude that DAR, rather than
PRTD, was obliged to seek out further documentation and
perform additional audit procedures to confirm the
validity of subsequent account balances which PRTD itself
had failed to adequately substantiate with its own
documentation or to confirm the validity of adjustments
which PRTD itself had been unable to adequately
substantiate, after having ample opportunity to do so.
DAR need rely only on the most reliable documentation of
the highest account balances provided by PRTD and only on
those subsequent downward adjustments which were
adequately substantiated. Further, it would be
unreasonable, in view of PRTD's acknowledged lapses in
its system of documentation and in its record keeping for
CUCs in general, to rely on the lower subsequent account
balances (such as the one here proposed by PRTD) that may
be less likely to identify the full amount of CUCs that
should be credited than the earlier balances relied upon
by DAR.
PRTD's burden to document CUCs extended to the entire
period under consideration. In the circumstances here,
DAR may reasonably focus on the highest balances in the
federal and state accounts (reached during fiscal years
1991 and 1990 respectively) and require PRTD to document
each and every subsequent downward adjustment. In the
absence of documentation from PRTD, DAR may properly
disallow based on those balances (with further
adjustments only as substantiated) for determining the
universe of CUCs subject to recovery.
PRTD also argued that DAR gave PRTD an insufficient
opportunity to identify and substantiate lower account
balances for the universe of CUCs. We disagree. PRTD
has been aware of problems relating to crediting CUCs to
the federal government since November of 1981. Further,
PRTD had specific notice of the need for adequate
documentation related to its account balances for
uncredited CUCs for the entire period at issue here since
the issuance of the most recent audit report in August
1994. PRTD's difficulties in providing documentation
apparently arose from undisputed problems over a very
extensive period of time with its central accounting
systems, its coordination with state agencies and its
retention of source documentation. While DAR and the
I.G. may reasonably attempt to assist PRTD to fashion
solutions to meet PRTD's burden to document in the face
of these problems, any failure to provide adequate
documentation under these circumstances is still
obviously PRTD's responsibility. Moreover, given the
extensive amount of negotiations that had already taken
place, it was clearly within the discretion of DAR to
decide that further attempts at negotiations to surmount
these problems would be unavailing and that a
disallowance determination should be forthcoming.
Even following the disallowance determination dated
September 29, 1995, PRTD has had an opportunity before
this Board to document a lower universe of CUCs subject
to federal recovery. Although PRTD argued that it lacked
sufficient time to rebut DAR's computation of the amount
of the universe of CUCs before DAR issued the
disallowance, PRTD gave the Board no indication how it
would have used additional time to substantiate a
different figure or what additional evidence it could
have submitted. In any event, the Board provides a de
novo review of disallowances and grantees typically
present additional documentation in their appeal files to
support their positions during the pendency of their
appeal before the Board. PRTD, however, here failed to
present additional explanation or documentation to
substantiate further downward adjustments in the account
balances. Nor did PRTD request an evidentiary hearing or
oral argument in order to substantiate its position.
PRTD also argued that DAR was somehow bound by the figure
of $55.2 million, which was identified as an "estimate"
of the universe of CUCs in the I.G. audit report. The
I.G. audit report, however, nowhere suggested that this
estimate was conclusive or that it had been adequately
substantiated by PRTD. In using PRTD's account balances
at the end of the period in question rather than at their
highest points, this estimate necessarily incorporated
downward adjustments in the balances that PRTD was never
able to substantiate. Thus, DAR properly did not rely on
the estimate in computing the disallowance here.
In any event, even if the "estimate" were to be viewed as
a formal audit finding (which it cannot reasonably be in
the context here), it is a well-established principle in
Board decisions that audit findings do not necessarily
constitute final agency determinations, but rather are
considered to be recommendations. See Nebraska Dept. of
Public Welfare, DAB No. 422 (1983); see also Pennsylvania
Dept. of Public Welfare, DAB No. 451 (1983). Auditors
make recommended findings which the agency is free to
reject if they do not comport with applicable
requirements. Pennsylvania Dept. of Public Welfare, DAB
No. 1508, at 10-11 (1995).
Finally, we conclude that this disallowance is in no
sense a penalty. Rather, this disallowance is merely a
recovery by the federal government of federal funds where
Puerto Rico has failed to establish that it is entitled
to the funds through incurring allowable expenditures.
PRTD has long known about its obligations to establish
reliable accounting systems and to document its
expenditures. This disallowance results from PRTD's
inability to document the basis for any additional
adjustments (other than the single adjustment allowed by
DAR) in account balances for CUCs after those balances
reached their highest points in fiscal years 1990 and
1991. As we have explained elsewhere, having accepted
federal funding, PRTD is charged with the responsibility
to properly account for it. PRTD noted that, in
September 1995, it issued "Circular Letter 1300-7-95"
which sets out "stronger requirements" to correct the CUC
problems in the future. PRTD asserted that this Circular
was evidence of "its good faith and intent to correct the
deficiencies" which, it pointed out, occurred under the
watch of a "previous political administration." PRTD
Reply Br. at 2. The fact that PRTD has taken much-
belated corrective action for the future, however, does
nothing to enable it to account for the federal funding
at issue here and cannot be a basis for reducing the
disallowance.
Conclusion
On the basis of the foregoing, we sustain the
disallowance in its entirety, including the amount
($13,706,655) appealed by PRTD.
Judith A. Ballard
Cecilia Sparks Ford
Donald F. Garrett
Presiding Board Member
* * * Footnotes * * *
1. The Commonwealth of Puerto Rico is treated as
a "state" for purposes of the programs at issue (see e.g.
45 C.F.R. §§ 74.2 and 92.3), and the audit reports and
other documents of record referred to it as such. For
purposes of accountability under the cost principles,
moreover, the definition of a "state" includes "any
agency or instrumentality of a State exclusive of local
governments." Id. "Grantee" is defined to include,
under 45 C.F.R. § 92.3, "the entire legal entity even if
only a particular component of the entity is designated
in the grant award document."
2. Indeed, PRTD has never contested the general
principle that the federal funding represented by each
CUC must be returned to the funding source.
3. Although PRTD argued that use of balances from
two different years was "incongruent," it failed to
substantiate why such an approach was unreasonable or
prejudicial under the circumstances.