Like zombies rising from the dead, inadequate documentation has a way of returning to haunt you in an alarming way. Want an example?
Case Study: Review of Administrative and Clerical Costs Results in $1.7 Million in Unallowable Costs
This week we were looking through some back files of various audit findings and were reminded of the case of Duke University having $1.7 million in costs disallowed by the Inspector General. All those moaning sounds are not just the zombies.
What were the main issues?
The main issues in the findings involved:
#1) Whether the University correctly charged administrative and clerical costs as direct costs (instead of facilities and administrative costs-i.e. indirect costs) to the various projects
#2) Whether the costs were supported by adequate documentation
What were the findings?
First, based on a sample of 234 charges, it was estimated that $1.7 million in unallowable costs were charged to various federal awards.
Next, the University did not maintain adequate controls to ensure the Federal requirements for charging administrative and clerical costs were consistently complied with.
What was the University’s response?
They agreed some costs were not supported by adequate documentation, but believed most of the questioned costs were allowable. The University also didn’t agree that they had not maintained adequate controls to meet the Federal requirements.
Insights and Take-away:
Reading deeper into the report we find some insights into what type of behavior contributed to the findings:
“The project files contained no documentation that the involved grants, contracts, or other agreements met the definition of “major projects.”
This factor is critical if you are trying to charge “normally” indirect costs directly to the sponsored project or program.
Take-away #1: When you take a position contrary to the “norm” (i.e. charging indirect costs such as administrative and clerical costs as direct costs) you should support that position with adequate written documentation of why it is an appropriate choice.
Take-away #2: You must train your staff (and adequately document the training) regarding the specific instances of when it is OK to use that position and what adequate documentation is required to support the charges.
“While the University’s policies and procedures were generally effective, some University employees did not always comply with them.”
Take-away #3: It’s not enough to have good policies if people don’t follow them. You must cover the two main reasons for non-compliance:
Reason #1: Lack of knowledge of the policies
Answer: Provide regular and appropriate levels of training
Reason #2: Disregard of the policies
Answer: Adequate review to detect non-compliance and corrective actions to resolve why the policies are disregarded
How good is your memory?
To add insult to injury, the questioned spending happened in 2002-2004, but the audit findings weren’t published until 2009–five to seven years after the spending occurred.
Most of us can hardly remember what we had for breakfast yesterday. How would you like to try and explain what occurred 6 years ago with someone’s timecard?
Adequate document is time sensitive. Do it now while everybody is here and knows what happened.
How to kill a zombie?
Killing zombies involves destroying their brains, unlike avoiding inadequate documentation which involves actively using your brain.
Put yourself in the future machine and make sure that the documentation in front of you adequately shows (to an auditor and others) the following things:
- Who spent the funds and who authorized the spending?
- What were the funds spent on? (Hint-details matter here)
- Where, that is, what award to charge for the spending?
- When the spending was authorized and when was it spent?
Lucy Morgan CPA, MBA
CEO, Compliance Warrior