Is Your Institution Meeting Federal Mandates for Unallowable Expenses During Grant Management?

The importance of tracking unallowable expenses during grant management cannot be overstated. This is one of the issues faced by institutions that undergo grant audits conducted by federal granting agencies.

I recently addressed the topic of auditing, as well as findings related to recent cases of fraud, at the March 2015 SRA International North Carolina Chapter Meeting. The presentation was entitled “Review of Recent Audits and Fraud Cases” and looked at many issues, including audit findings related to unallowable expenses.

I’ll be reviewing some of the key points made during the presentation in the next few blog posts. Today the focus is on what are considered unallowable expenses throughout the management of the grant.

Unallowable Expenses during Grant Management

As I noted in the presentation, each institution is responsible for ensuring that direct expenses charged to federally sponsored agreements are allowable under a set of strict cost principles.

Allowable and unallowable costs on federally funded sponsored research awards are defined in Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. As the circular notes, the cost of a sponsored agreement is comprised of the allowable direct and allocable indirect costs, less applicable credits. The cost principles indicate that expenses:

• Must be allowable.
• Must be reasonable.
• Must be allocable to the project.
• Must be treated consistently in like circumstances.

Additionally, an institution should seek the prior written approval from the Federal awarding agency in advance of incurring an unusual cost.

To illustrate, the following items are just a few examples of unallowable costs according to Subpart E – Cost Principles:

• Alumni Activities
• Commencement and convocation costs
• Charitable Contributions
• Entertainment
• Fines and Penalties
• First Class Air Travel
• Fund Raising, Investment Management
• Goods and Services for Personal Use
• Lobbying
• Memberships, subscriptions and professional activity costs
• Selling and Marketing Costs

Recent Audit Findings

As noted in the presentation, audits are conducted to ensure compliance to these mandates, and to uncover any instances of fraud. In the presentation, I shard three such examples of recent audits that uncovered unallowable expenses. The examples include the following:

SUNY Research Foundation

The State University of New York Research Foundation was found to have used federal funding to purchase office supplies – improperly claimed as direct administrative expenditures. Additionally, the purchase of a laptop computer for a graduate assistant was found to be another unallowable expenditure, as it was not related to the project. The audit conducted by the US Department of Health and Human Services (HHS) showed that these expenditures did not solely benefit the sponsored agreement as is stipulated in the circular.

University of California, Santa Barbara

The National Science Foundation conducted a thorough audit of the UCSB research programs, and identified and disallowed unapproved pre-award costs.

Next Steps: Allowable Expenses during Grant Management

For those research institutions looking to avoid audit findings such as the ones summarized above, it’s critical to monitor the potential for unallowable expenses.

Noted here are some key tactics to prevent findings such as the ones summarized in the cases illustrated above. Those steps include:

• The research office should take the time to seek approval for Pre-Award spending
• The research office should treat expenses consistently and disallow as a direct cost, any expense that should be treated as an indirect cost
• The team should question and require justification for purchases to ensure they are related to the project
• There should be a process in place to ensure all purchases are Allowable/Allocable/Consistent/Reasonable
  https://federalregister.gov/a/2013-30465

Throughout the award life, it’s critical to carefully review reports for expenses charge to unallowable object codes
Many institutions turn to grant management systems to help track and manage this process, and help avoid unfavorable audit findings. For further information, contact the IT Works team.

Keep on the lookout for additional summaries of the presentation about avoiding audits.