National Institutes of Health Extramural Research Grants
Oversight of Cost Reimbursements to Universities Gao ID: GAO-07-294R January 31, 2007The Department of Health and Human Services' (HHS) National Institutes of Health (NIH) is the nation's leader in conducting and sponsoring biomedical research. More than 80 percent of NIH's budget, which totaled over $28 billion in fiscal year 2006, is used to support extramural research, which is primarily conducted at over 500 universities nationwide. NIH reimburses universities for direct costs that can be specifically attributed to research sponsored by NIH grants, including costs for labor and materials used solely to carry out the research. It also reimburses universities for indirect costs, which include various facility and administrative expenses incurred by the universities for the shared support of such research. To be reimbursed for direct and indirect costs, universities must properly identify and claim them in accordance with federal guidance. Because indirect costs cannot be specifically attributed to a particular research grant, they are charged via an indirect cost rate that is applied to the direct costs for each grant agreement. The oversight responsibilities of NIH's institutes and centers (IC) include the financial management of grants as well as ensuring that grantees comply with the terms of the grants. Audit responsibility for NIH research grants is shared between nonfederal auditors and HHS's Office of Inspector General (OIG). Because any incorrect allocation or claiming of costs could put federal funds at risk, Congress asked us to review indirect costs associated with NIH extramural research grants and oversight of direct and indirect costs claimed by universities receiving these grants. In response, we (1) describe the trends in indirect costs for NIH extramural research grants awarded to universities for fiscal years 2003 through 2005, (2) describe HHS's current key controls to ensure that grantees comply with federal guidance in claiming costs, (3) determine the frequency and scope of single and OIG audits of grantees, and (4) determine what actions NIH has taken to address auditors' findings of improper claiming of direct and indirect costs.
The proportion of NIH extramural research grant funds awarded to universities for reimbursement of indirect costs was stable at about 28.5 percent annually during fiscal years 2003 through 2005. The stability of the proportion of indirect costs reimbursed can be attributed to the stability of indirect cost rates during this period. During this period, indirect cost rates were stable because there was little change in the largest component of the indirect cost rate--the administrative component--and because indirect cost rates generally remain valid for 2 to 4 years once they are negotiated. HHS's key controls intended to ensure that grantees comply with federal guidance in claiming costs include the review of information submitted by universities when indirect cost rates are set and when grant applications and annual progress reports are submitted. Key controls for setting indirect cost rates are administered by HHS's Division of Cost Allocation (DCA) and involve reviewing indirect cost rate proposals. They can also include conducting on-site reviews and examining cost accounting practice disclosure statements. In carrying out these functions, DCA focuses much of its efforts on universities with the highest dollar value of federal funding received. HHS's key controls for overseeing reimbursements of costs claimed by universities are administered by NIH's institutes and centers and consist primarily of reviews that occur when universities apply for new grants and when universities submit their annual progress reports. Almost three-quarters of the approximately 530 universities receiving NIH extramural research grants--or about 390 of them--were required to have single audits conducted by nonfederal auditors annually in fiscal years 2003 and 2004, and about 4 per year received OIG audits during fiscal years 2003 through 2006. The scope of these two types of audits differed. The single audit includes an audit of the university's financial statements at the organization level and its system of internal control and compliance with federal laws and regulations that affect all federal funding, including grants, rather than specifically focusing on whether costs associated with universities' NIH grants were properly claimed. The OIG audits generally focused on a particular grant and the university's compliance with rules and regulations that pertained to that grant, rather than providing a broad examination of the university's internal controls and compliance with federal laws and regulations over all federal funding, including extramural grants. NIH required universities to address auditors' findings relating to a procedure or internal control that led--or could have led--to incorrect claiming of direct or indirect costs and to reimburse any questioned costs that it determined were not sufficiently supported. To resolve findings related to a procedure or internal control, NIH required each university to develop a corrective action plan, outlining the steps it would take to address the problem. Our review of the audit resolution files indicated that universities submitted evidence to NIH, such as a revised policy or documentation of their implementation of new controls, to show that the problems were addressed. To resolve findings concerning questioned costs, NIH determined how much of the amount in question the university was required to return. In resolving findings from OIG audits completed in fiscal years 2003 through 2006, NIH required universities to reimburse the full amount of questioned costs that it found were not sufficiently justified. In two audits, NIH required universities to reimburse the full amount of costs questioned by OIG, and in five other audits it determined that universities sufficiently justified either all or some of the costs questioned by OIG and did not require the universities to reimburse those costs.
GAO-07-294R, National Institutes of Health Extramural Research Grants: Oversight of Cost Reimbursements to Universities
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January 31, 2007:
The Honorable Tom Coburn, M.D.
Ranking Minority Member:
Subcommittee on Federal Financial Management, Government Information,
and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
Subject: National Institutes of Health Extramural Research Grants:
Oversight of Cost Reimbursements to Universities:
Dear Senator Coburn:
The Department of Health and Human Services' (HHS) National Institutes
of Health (NIH) is the nation's leader in conducting and sponsoring
biomedical research. More than 80 percent of NIH's budget, which
totaled over $28 billion in fiscal year 2006, is used to support
extramural research, which is primarily conducted at over 500
universities[Footnote 1] nationwide. NIH reimburses universities for
direct costs that can be specifically attributed to research sponsored
by NIH grants, including costs for labor and materials used solely to
carry out the research. It also reimburses universities for indirect
costs, which include various facility and administrative expenses
incurred by the universities for the shared support of such research.
To be reimbursed for direct and indirect costs, universities must
properly identify and claim them in accordance with federal guidance.
Office of Management and Budget (OMB) Circular No. A-21[Footnote 2]
establishes the principles for determining the types of direct and
indirect costs that are allowed to be claimed and the methods for
allocating such costs to federally funded research. Because indirect
costs cannot be specifically attributed to a particular research grant,
they are charged via an indirect cost rate that is applied to the
direct costs for each grant agreement. Each university develops a
proposed indirect cost rate, based on information such as the amount of
physical space used for conducting research. A university's final
indirect cost rate is generally determined by negotiating its proposed
rate with HHS's Division of Cost Allocation (DCA).[Footnote 3] DCA is
responsible for ensuring that the final negotiated indirect cost rate
complies with OMB Circular No. A-21. Additionally, for each university
that received $25 million or more in federal funds for its most
recently completed fiscal year, DCA reviews its disclosure statement,
which details the university's cost accounting practices. The oversight
responsibilities of NIH's institutes and centers (IC)[Footnote 4]
include the financial management of grants as well as ensuring that
grantees comply with the terms of the grants.
Audit responsibility for NIH research grants is shared between
nonfederal auditors[Footnote 5] and HHS's Office of Inspector General
(OIG). Universities receiving NIH grants are subject to the provisions
of the Single Audit Act,[Footnote 6] as amended, and as implemented in
OMB Circular No. A-133. These provisions, as implemented by OMB
Circular No. A-133, require each university that expends $500,000 or
more in a year in federal awards to obtain a "single audit" from a
nonfederal auditor. These organizationwide audits[Footnote 7] are
required to include a financial statement audit and cover internal
controls[Footnote 8] and compliance with laws and regulations
pertaining to major programs[Footnote 9] that affect all federal
funding, including grants. OIG responsibilities for NIH research grants
include determining potential program vulnerabilities, identifying
specific areas that warrant review, conducting its own audits of
grantees, and providing recommendations for corrective action to the
Secretary of HHS and to the Congress.
Because any incorrect allocation or claiming of costs could put federal
funds at risk, you asked us to review indirect costs associated with
NIH extramural research grants and oversight of direct and indirect
costs claimed by universities receiving these grants. In response, we
(1) describe the trends in indirect costs for NIH extramural research
grants awarded to universities for fiscal years 2003 through 2005, (2)
describe HHS's current key controls to ensure that grantees comply with
federal guidance in claiming costs, (3) determine the frequency and
scope of single and OIG audits of grantees, and (4) determine what
actions NIH has taken to address auditors' findings of improper
claiming of direct and indirect costs.
To describe trends in indirect costs for NIH extramural research grants
awarded to universities for fiscal years 2003 through 2005, we obtained
information from NIH on the total dollar amount of indirect and direct
costs allocated to all NIH extramural grants to universities. In
addition, we obtained and analyzed more detailed cost data from DCA for
the 100 universities that received the most NIH funding for fiscal
years 2003 through 2005 among universities for which DCA negotiates
indirect cost rates.[Footnote 10] We also interviewed HHS officials
having oversight responsibility for setting indirect cost rates and
ensuring that universities properly claim indirect costs. Further, we
obtained information on HHS's efforts to ensure the quality of its data
and determined the cost data to be sufficiently reliable for the
purpose of this analysis. To describe HHS's current key controls to
ensure that grantees comply with federal guidance in claiming costs, we
reviewed HHS's policy guidance. To corroborate that the controls
described by DCA were in place, we then selected and reviewed five
files from DCA's Washington, D.C., office, including files for each of
three universities where the reviewers conducted a site visit. These
files contain supporting documentation related to HHS's process for
reviewing indirect cost rate proposals for universities. In addition,
we reviewed six reports from an HHS contractor that examined cost
accounting practice disclosure statements, choosing them from five
universities that had problems identified by audits that affected at
least one NIH grant. We also interviewed HHS management and compliance
staff with knowledge specific to key controls used to oversee costs at
three ICs. To corroborate that the controls described to us by HHS were
in place, we obtained and reviewed six randomly selected files
documenting its reviews. To determine the frequency and scope of single
and OIG audits of universities that received NIH extramural grant
funds, we identified the universities where single audits were required
to be conducted during fiscal years 2003 and 2004[Footnote 11] and
where OIG audits were conducted from fiscal year 2003 through fiscal
year 2006. To determine the actions NIH has taken to address auditors'
findings, we interviewed OIG and NIH staff about steps taken to resolve
problems and reviewed supporting documentation from 15 selected audits
from fiscal year 2003 through fiscal year 2006. To select these audits,
we obtained information on the number of audits with findings of
problems with internal controls or claimed costs for NIH extramural
grants. We then obtained and analyzed a random sample of seven files
documenting the resolution of such findings for single audits and all
eight files documenting the resolution of such findings for OIG audits,
where all steps to resolve findings had been completed. Except for the
OIG audit resolution findings, the results from the limited samples we
reviewed cannot be generalized to the universe from which they were
drawn. We performed our work from September 2006 through January 2007
in accordance with generally accepted government auditing standards.
Results in Brief:
The proportion of NIH extramural research grant funds awarded to
universities for reimbursement of indirect costs was stable at about
28.5 percent annually during fiscal years 2003 through 2005. The
stability of the proportion of indirect costs reimbursed can be
attributed to the stability of indirect cost rates during this period.
During this period, indirect cost rates were stable because there was
little change in the largest component of the indirect cost rate--the
administrative component--and because indirect cost rates generally
remain valid for 2 to 4 years once they are negotiated. Because the
total amount of NIH funding for extramural research grants to
universities increased from about $13.9 billion in fiscal year 2003 to
about $15.2 billion in fiscal year 2005, the amount of indirect costs
awarded to universities increased from about $3.9 billion to about $4.3
billion.
HHS's key controls intended to ensure that grantees comply with federal
guidance in claiming costs include the review of information submitted
by universities when indirect cost rates are set and when grant
applications and annual progress reports are submitted. Key controls
for setting indirect cost rates are administered by HHS's DCA and
involve reviewing indirect cost rate proposals. They can also include
conducting on-site reviews and examining cost accounting practice
disclosure statements. In carrying out these functions, DCA focuses
much of its efforts on universities with the highest dollar value of
federal funding received. HHS's key controls for overseeing
reimbursements of costs claimed by universities are administered by
NIH's ICs and consist primarily of reviews that occur when universities
apply for new grants and when universities submit their annual progress
reports.
Almost three-quarters of the approximately 530 universities receiving
NIH extramural research grants--or about 390 of them--were required to
have single audits conducted by nonfederal auditors annually in fiscal
years 2003 and 2004, and about 4 per year received OIG audits during
fiscal years 2003 through 2006. The scope of these two types of audits
differed. The single audit includes an audit of the university's
financial statements at the organization level and its system of
internal control and compliance with federal laws and regulations that
affect all federal funding, including grants, rather than specifically
focusing on whether costs associated with universities' NIH grants were
properly claimed. The OIG audits generally focused on a particular
grant and the university's compliance with rules and regulations that
pertained to that grant, rather than providing a broad examination of
the university's internal controls and compliance with federal laws and
regulations over all federal funding, including extramural grants.
NIH required universities to address auditors' findings relating to a
procedure or internal control that led--or could have led--to incorrect
claiming of direct or indirect costs and to reimburse any questioned
costs that it determined were not sufficiently supported. To resolve
findings related to a procedure or internal control, NIH required each
university to develop a corrective action plan, outlining the steps it
would take to address the problem. Our review of the audit resolution
files indicated that universities submitted evidence to NIH, such as a
revised policy or documentation of their implementation of new
controls, to show that the problems were addressed. To resolve findings
concerning questioned costs, NIH determined how much of the amount in
question the university was required to return. In resolving findings
from OIG audits completed in fiscal years 2003 through 2006, NIH
required universities to reimburse the full amount of questioned costs
that it found were not sufficiently justified. In two audits, NIH
required universities to reimburse the full amount of costs questioned
by OIG, and in five other audits it determined that universities
sufficiently justified either all or some of the costs questioned by
OIG and did not require the universities to reimburse those costs.
We provided a draft of our report to HHS for review. HHS provided
technical comments, which we incorporated where appropriate.
Background:
NIH conducts and sponsors biomedical research through its ICs, each of
which is charged with a specific mission. ICs' missions generally focus
on a given disease; a particular organ; or a stage in development, such
as childhood or old age. ICs accomplish their mission chiefly through
intramural and extramural research. Intramural research entails
government scientists working in the ICs' own laboratories and clinics,
whereas extramural research is conducted at outside research
institutions, including universities, by scientists who have competed
for extramural research grants by submitting an application to an IC.
NIH provides extramural research grants that reimburse universities for
the direct costs of research that are allowable under OMB Circular No.
A-21 and an allowable portion of the indirect costs of administering
the universities and maintaining their facilities for research
use.[Footnote 12]
Indirect Cost Rates and Reimbursements:
In order for NIH to reimburse universities for indirect costs related
to extramural grants, an indirect cost rate must be established for
each university in accordance with OMB Circular No. A-21. The
university is responsible for calculating its proposed indirect cost
rate. OMB Circular No. A-21 requires the university to first allocate
its annual total costs from the previous year's activity into three
categories: (1) direct costs that are closely tied to specific grants
or projects; (2) excluded costs--direct costs that are excluded for the
purpose of calculating the indirect cost rate, such as costs for
equipment and for subcontracts over a certain threshold[Footnote 13];
and (3) indirect costs, that is, shared expenses related to the
facilities or administration of the university.
A university's indirect costs are then organized into a number of
components, within two categories--facilities and administrative.
Facilities costs that can be allowable for indirect cost reimbursement
include (1) allowances for depreciation and use of buildings and
equipment; (2) interest on debt associated with building and equipment;
(3) operation and maintenance expenses, such as for utilities and
janitorial services; and (4) library expenses, such as for the use of
the library and library materials purchased for research use.
Administrative costs that can be allowable for indirect cost
reimbursement include (1) general costs, such as those for central
offices for the president and management information systems; (2)
departmental administrative costs, such as costs for academic deans,
secretaries, and office supplies; and (3) administrative costs for
sponsored projects, such as for a separate office that administers
contracts and grants.
To calculate the indirect cost rate, a percentage of each indirect cost
component is allocated to the university's research function on the
basis of benefits received from that component by the research
function. For example, a university can measure the square footage of
floor space used for research and use this measure to allocate the
amount of costs it claims for operating and using the space as a
component in its indirect cost rate proposal. Each indirect cost
component allocated to research is divided by the university's
"modified total direct costs"--that is, its direct costs minus the
excluded costs--to obtain an individual rate for each component. These
individual rates are then summed to obtain the university's indirect
cost rate for research.
OMB Circular No. A-21 stipulates the maximum proportion of certain
components of indirect costs that can be reimbursed to a university,
the most important of which is administrative costs. Between 1966 and
1991, the amount of indirect costs reimbursed to universities climbed
steadily, because there were no restrictions on the amount of indirect
costs that could be claimed. To curb such growth, OMB revised Circular
No. A-21 in 1991 to impose a cap on the amount of administrative costs
that could be claimed for reimbursement, limiting them to 26 percent of
a university's modified total direct costs.
The universities submit their indirect cost rate proposals to the
federal agency responsible for approving them.[Footnote 14] This agency
is usually DCA, which negotiates indirect cost rates for about 90
percent of universities receiving NIH extramural research
grants.[Footnote 15] Each university that received $25 million or more
in federal funds during the previous fiscal year is also required to
prepare a disclosure statement detailing the cost accounting practices
used to develop its proposal. By completing the cost accounting
practice disclosure statement, the university attests that its cost
accounting practices comply with OMB Circular No. A-21. DCA is
responsible for providing technical assistance and guidance to the
grantee community in developing indirect cost rate proposals, reviewing
cost accounting practice disclosure statements, and negotiating and
approving university indirect cost rates. Additionally, DCA developed a
review guide to assist its cost rate negotiators as they review
universities' indirect cost rate proposals.
Administration and Oversight of Grants:
While grantees are responsible for managing the day-to-day grant
activities in accordance with NIH requirements, responsibility for the
administration and oversight of costs claimed by grantees for NIH
extramural research is decentralized within NIH to the ICs. Each IC is
responsible for ensuring compliance with applicable federal
requirements for the grants it administers. Grant project periods
average 4 years, but grantees must annually submit progress reports to
obtain funding for subsequent years. The progress reports provide
information regarding the scientific progress of the grant as well as
financial information. ICs are responsible for reviewing applications
for new grants and annual progress reports. In their reviews of
applications for new grants, ICs assess the reasonableness of the
proposed budget as it relates to the scientific research the grantee
plans to undertake to ensure that the proposed cost of the grant is
reasonable given the research intended. ICs are responsible for
reviewing universities' annual progress reports to determine if
scientific progress has been made, as well as the financial status of
their grants to determine whether the university is expending funds as
planned and whether its management of grant funding is consistent with
the scientific progress that has been made. On the basis of the reviews
of the annual progress reports, ICs are responsible for determining
whether grantees should continue to receive funding in the following
year.
Audits Involving NIH Research Grants:
Two types of audits that can examine compliance of universities with
OMB guidance on claiming costs for NIH research grants are single and
OIG audits. Universities that expend $500,000 or more in a year in
federal awards are required by the Single Audit Act, as amended and as
implemented by OMB Circular No. A-133, to obtain a single audit for
that year.[Footnote 16] These organizationwide audits are not intended
to focus specifically on an individual grant awarded by a particular
agency. OIG conducts audits at its discretion, depending on the
availability of its resources to conduct such audits. In some cases,
OIG determines that a particular grant warrants review, and in other
cases OIG examines broader issues related to grants, such as how
particular costs are documented. OIG considers various factors in
deciding whether to conduct an audit, including the amount of federal
funding a university receives, as well as triggers that would indicate
potential vulnerabilities, such as allegations of improper costs
claimed that are made by university employees. NIH is responsible for
resolving findings that result from both types of audits. As it does
so, grantees have an opportunity to address audit findings on the
propriety of questioned costs with NIH.
Proportion of Indirect Costs to Total Amount Awarded for Extramural
Research Was Stable during Fiscal Years 2003 through 2005:
The proportion of NIH extramural research grant funds awarded to
universities for reimbursement of indirect costs remained stable during
fiscal years 2003 through 2005. The amount in indirect costs awarded
annually equaled about 28.5 percent of the total amount awarded in
extramural research grants to universities. (See fig. 1.) This was
similar to the percentages for fiscal years 1992 through 2002, when
indirect costs ranged from about 28.5 percent to about 30 percent of
the total amount NIH awarded in extramural research grants to
universities annually. While the proportion of indirect costs awarded
was stable, the total amount of funding that NIH allocated to
extramural research grants to universities increased from about $13.9
billion in fiscal year 2003 to about $15.2 billion in fiscal year 2005.
As a result, the amounts NIH awarded to universities for direct and
indirect costs associated with these grants also increased over the 3-
year period. Indirect costs increased from about $3.9 billion in fiscal
year 2003 to about $4.3 billion in fiscal year 2005, by an average of
about 4.5 percent each year.
Figure 1: Percentage and Dollar Amount of Total Costs Awarded for
Reimbursement of Direct and Indirect Costs to Universities Receiving
NIH Extramural Research Grants, Fiscal Years 2003 through 2005:
[See PDF for image]
Source: GAO analysis of NIH data.
[End of figure]
The stability of the proportion of indirect costs awarded during fiscal
years 2003 through 2005 can be attributed to the stability of indirect
cost rates during this period. For the 100 universities that received
the most NIH funding for fiscal years 2003 through 2005 and for which
DCA negotiates indirect cost rates, we found that average indirect cost
rates were stable over the 3 years we examined. For each of these 3
years, indirect cost rates averaged about 51 percent of the modified
total direct costs associated with NIH extramural research
grants.[Footnote 17]
The relative stability in average indirect cost rates for the
universities in our sample can, in part, be attributed to the stability
in the rate for administrative costs, the component that makes up the
largest portion of the indirect cost rate. The annual average amount of
the administrative component of the indirect cost rate, which is capped
at 26 percent of modified total direct costs, ranged from 25.6 percent
in fiscal year 2003 to 25.8 percent of total costs in fiscal year 2005.
In addition, once indirect cost rates are negotiated, they remain in
effect, and therefore stable, for about 2 to 4 years.
HHS's Key Controls Include Reviewing Proposals, Applications, and
Reports:
HHS's key controls intended to ensure that grantees comply with federal
guidance in claiming costs include the review of information submitted
by universities when indirect cost rates are set and when grant
applications and annual progress reports are submitted. Key controls
for setting indirect cost rates are administered by HHS's DCA. The
controls involve reviewing universities' indirect cost rate proposals.
This can also include conducting on-site reviews and examining cost
accounting practice disclosure statements to determine whether the
statements comply with OMB Circular No. A-21 requirements. In carrying
out these functions, DCA focuses much of its effort on high-dollar
universities.[Footnote 18] HHS's key controls for overseeing
reimbursements of costs claimed by universities are administered by
NIH's ICs. They include reviewing grant applications and annual
progress reports as well as the financial status of their grants.
DCA reviews indirect cost rate proposals and documents its results as a
key control to support negotiation of the rate for each of the
universities for which it is responsible.[Footnote 19] DCA reviews
information provided by the universities in the proposals on the
indirect, as well as direct, costs of research that are used to develop
the proposals. During fiscal year 2006, DCA officials informed us that
staff completed indirect cost rate negotiations that year for 56
universities that were classified as high dollar, as well as for 324
universities with federal funding below the high-dollar threshold.
On the basis of a risk assessment, DCA performs a more extensive review
for certain universities and a more limited one for the rest. As part
of its reviews, DCA conducts a preliminary analysis of universities'
indirect cost rate proposals to determine the extent of its review as
either full or limited. DCA's determination is based on a risk
assessment performed by the cost rate negotiator, which entails a
comparative analysis of the proposed rates to the previously negotiated
rates, a review of the historical work paper file, and a discussion
with the previous negotiator, and takes into account whether the
university is classified as high dollar.
When DCA performs a limited review, it generally applies the
preliminary steps outlined in DCA's review guide for assessing indirect
cost proposals. DCA officials explained that for limited reviews, cost
rate negotiators evaluate certain aspects of the proposal to determine
whether it appears reasonable and consistent with OMB Circular No. A-
21, such as performing a trend analysis, reconciling the proposal to
financial statements, and testing the rates for variability.
When DCA performs a full review, the cost rate negotiators generally
cover most steps contained in DCA's review guide for assessing indirect
cost proposals. These steps involve tasks such as a more detailed
analysis of specific components of indirect cost rates, including
allocation of depreciation, interest, maintenance costs, and space.
However, whether the cost rate negotiator conducts all or a subset of
the steps identified in the review guide depends on DCA's risk
assessment of the proposal. DCA's negotiators are expected to use their
professional judgment in determining the number and extent of review
steps needed to ensure that the university's proposed rate is
reasonable and consistent with OMB Circular No. A-21. If the cost rate
negotiator is confident that a particular component of the rate
proposal is reasonable and allowable, the negotiator can conduct a less
in-depth review for a related step outlined in the review guide.
For fiscal year 2006, DCA officials told us that their staff conducted
full reviews for 28 of the 56 high-dollar universities, most of which
included on-site reviews. DCA officials also told us that their cost
rate negotiators and management use professional judgment to determine
whether an on-site review is needed as part of a full review to better
perform the indirect cost rate negotiation process. An on-site review
typically assesses how a university allocates space to research and its
other functions[Footnote 20] to determine how the costs associated with
these activities should be assigned. During fiscal year 2006, DCA
conducted on-site reviews for 25 of the 28 high-dollar universities for
which it conducted full reviews. Our examination of 5 of these 28 high-
dollar university DCA case files showed evidence of these reviews. If
an on-site review reveals that a university improperly allocated space
to its various functions, DCA makes adjustments to the university's
proposed indirect cost rate. For example, during one on-site review,
DCA found that a university had used an unacceptable methodology to
allocate its space. As a result, DCA cost rate negotiators proposed
adjustments to the university's indirect cost rate. This information,
as well as other adjustments, became part of the negotiation process in
arriving at the final indirect cost rate, which was lower than the rate
proposed by the university.
DCA staff informed us that, as part of the negotiation process, its
cost rate negotiators examine cost accounting practice disclosure
statements for the universities that are required to provide them, that
is, those universities that received $25 million or more in federal
funds during the previous fiscal year. During fiscal year 2006, DCA had
a contractor review cost accounting practice disclosure statements for
the 37 high-dollar universities that met the requirement to submit
disclosure statements. These statements were reviewed to determine
whether they adequately described the university's cost accounting
practices and whether the described practices, in principle, complied
with cost accounting standards contained in OMB Circular No. A-
21.[Footnote 21] DCA officials informed us that a university with
deficiencies in its cost accounting practice disclosure statement is
required to correct any cost accounting practices that do not comply
with OMB Circular No. A-21, revise the statement to reflect the changes
in such practices, and resubmit it to DCA. Our examination of six cost
accounting practice disclosure statement reviews corroborated the
process described by DCA.
HHS's key controls for overseeing reimbursements of costs claimed by
universities are administered by NIH's ICs and consist primarily of
reviews that occur when universities apply for new grants and when
universities submit their annual progress reports. The grants
management staff we interviewed from three ICs informed us that they
review grant applications to ensure that the project budget submitted
is reasonable in terms of the research planned and that budgeted costs
are allowable and allocable to the project. Specifically, IC staff
analyze proposed cost elements and examine data to determine the
necessity for, and the reasonableness and allowability of, the costs
included in the application budget. In the reviews, IC staff also look
for budgetary overlap, which occurs when budgetary items (for example,
costs associated with equipment and salaries) that are requested in an
application duplicate, or are equivalent to, items or services that are
provided by another source.
IC staff review progress reports to determine the level of funding to
provide in the upcoming budget year. NIH officials explained that IC
staff make these decisions based in part on whether a grantee is
spending money at a rate that is about equal to, faster than, or slower
than what was outlined in the terms of the original grant agreement. A
discrepancy could indicate, for example, that scientific progress is
lagging in relation to costs, which may result in the IC's delaying
funding or reducing the grant amount. IC grants management staff told
us that they also examine financial status reports, which provide the
grantees' expenditures and unobligated balances, as they are submitted
by universities. Using this information, IC staff compare the amounts
spent by the grantee relative to approved award amounts that remain
unobligated for the same budget period to determine if the university
is expending funds as planned. They then make decisions regarding the
level of funding they will provide in the upcoming budget year. If
review of the progress report or financial status report indicates that
additional analysis is warranted, ICs then compare scientific progress
noted in the university's annual progress report to information from
HHS's records of funds drawn down by the grantee. Our review of six
randomly selected grant case files from two NIH ICs indicates that, as
NIH officials had told us, IC staff reviewed the application budget and
examined financial status and progress reports and other documents
submitted by the universities.
Almost Three-Quarters of the Universities Were Required to Be Audited
Annually:
Almost three-quarters of the approximately 530 universities that
received NIH extramural grant funds were required to receive single
audits from nonfederal auditors annually in fiscal years 2003 and 2004,
and about 4 per year received OIG audits during fiscal years 2003
through 2006. Under the Single Audit Act, as amended, and as
implemented in OMB Circular No. A-133, each university that expends
$500,000 in federal awards annually must have a single audit conducted
by nonfederal auditors. For fiscal years 2003 and 2004, about 390
universities were required to have single audits for each of these
years.[Footnote 22] They made up about 73 percent of the universities
receiving NIH funds for extramural research annually. In addition to
single audits completed by nonfederal auditors, OIG completed an
average of three audits per year during fiscal years 2003 through 2006
of NIH grants at universities.
The scope of these two types of audits differed. The single audit
includes an audit of the university's financial statements at the
organization level and its system of internal control and compliance
with federal laws and regulations that affect all federal funding,
including grants, rather than specifically focusing on whether costs
associated with universities' NIH grants were properly claimed. As part
of their overall examinations of internal controls, nonfederal auditors
examined transactions under various federal grants or contracts during
their single audits, which resulted in questioning costs claimed by NIH
grantees. OIG conducts its audits at its discretion subject to the
availability of its audit resources.[Footnote 23] The OIG audits issued
from fiscal years 2003 through 2006 that we reviewed generally focused
on particular grants and the university's compliance with rules and
regulations that pertained to them, rather than providing a broad
examination of the university's internal controls and compliance with
laws and regulations pertaining to federal funding.[Footnote 24]
However, focusing on problems in claiming costs for a specific grant
can uncover systemic internal control problems that could affect other
federal grants.
Although the scope of the single and OIG audits differed, findings
resulting from these audits identified similar issues. For example, one
single audit found that a university did not have effective internal
controls to ensure that labor costs associated with an NIH grant, as
well as with other federally funded programs, were properly documented
and claimed. Similarly, an OIG audit found that a university
overcharged $37,780 in direct and indirect costs associated with an NIH
grant, which, in turn, revealed a systemic weakness in the university's
procedures intended to ensure proper accounting for the time and
activity of individuals working on its grants. Other issues that were
identified as a result of both OIG and single audits included
unallowable costs claimed, incorrect accounting for indirect costs,
allocation of costs to the wrong grant, and insufficient monitoring of
subrecipients.
NIH Required Universities to Address Systemic Weaknesses and Reimburse
the Questioned Costs That It Determined Were Not Sufficiently
Supported:
We found that NIH required universities to address all single and OIG
audit findings and also required them to reimburse the costs questioned
in the OIG audits to the extent that NIH determined the questioned
costs were not sufficiently justified. Single and OIG audits in fiscal
years 2003 through 2006 sometimes found nonmonetary problems related to
a procedure or internal control or monetary problems with specific
costs claimed for NIH extramural research grants. Overall, for fiscal
years 2003 through 2006, 109 single audits and 9 OIG audits resulted in
findings that required NIH resolution.
For the 15 files that we reviewed documenting NIH's resolution of
findings resulting from single or OIG audits, all contained nonmonetary
findings resulting primarily from procedural weaknesses in need of
resolution.[Footnote 25] NIH officials told us that findings resulting
from single audits are typically nonmonetary in nature, such as
inadequate documentation of costs claimed or insufficient monitoring of
subrecipients of grants. OMB policy requires universities to develop
corrective action plans to address single audit findings, and NIH has a
similar requirement for OIG audits. In reviewing audit resolution
files, we found that NIH obtained universities' documentation to
address problems. These included corrective action plans and any
revised policies and procedures cited in the corrective action plans
for resolving particular nonmonetary findings, such as to ensure
adequate documentation is maintained for claimed costs or to improve
the process for monitoring subrecipients.
For the 15 files we reviewed documenting NIH's resolution of findings
resulting from single or OIG audits, 10 contained monetary findings of
specific costs questioned that needed to be resolved. Three of these
were single audits, and 7 were OIG audits. To resolve monetary
findings, NIH determined how much of the amount in question the
university was required to return. In doing so, NIH officials reviewed
the monetary findings and discussed them with university officials. NIH
officials explained to us that in determining whether the costs claimed
should be accepted, NIH considered information from its staff
responsible for overseeing a grant's scientific progress, including
whether the research funded by the grant was complete and adequate, in
addition to the documentation provided. Officials stated that NIH
considered the facts of each case and determined whether the
information provided to justify the costs claimed was sufficient.
NIH officials told us that for single audits with monetary findings,
NIH typically obtains the full amount of costs questioned from the
universities. Two of the three single audits that contained such
findings identified unallowable costs specific to NIH grants, and these
costs were relatively small, totaling $4,296. In both cases, NIH
recovered the full amount of these costs. The third audit questioned
whether $153,529 in costs should be included in the calculation of a
university's indirect cost rate. To resolve the issue, NIH required the
university to reopen negotiation on its indirect cost rate.
Subsequently, the university's indirect cost rate changed from 63
percent in fiscal year 2003 to 60 percent in fiscal year 2004.
For monetary findings resulting from the OIG audits completed in fiscal
years 2003 through 2006, we found that NIH did not always require
universities to reimburse the full amount of costs questioned. Of the
seven OIG audit files we reviewed with monetary findings, NIH recovered
the full amount of costs questioned in two cases and recovered less
than the full amount in five cases. In total, OIG questioned about 12
percent of the funds that it audited. Of the $1.5 million in funds
questioned, NIH recovered $864,860. This represents about 56 percent of
the OIG's questioned costs that NIH determined were insufficiently
justified. (See table 1.)
Table 1: NIH's Resolution of Monetary Issues Identified by OIG Audits:
Audit number: A-04-04-01001;
Fiscal year during which audit was completed: 2004;
Costs audited by OIG: $4,070,528;
Costs questioned by OIG: $565,820a;
Costs insufficiently justified and recovered by NIH: $565,820.
Audit number: A-01-06-01501;
Fiscal year during which audit was completed: 2006;
Costs audited by OIG: 761,219;
Costs questioned by OIG: 249,525;
Costs insufficiently justified and recovered by NIH: 249,525.
Audit number: A-01-04-01505;
Fiscal year during which audit was completed: 2005;
Costs audited by OIG: 1,720,000;
Costs questioned by OIG: 281,993;
Costs insufficiently justified and recovered by NIH: 23,686.
Audit number: A-01-02-01502;
Fiscal year during which audit was completed: 2003;
Costs audited by OIG: 1,900,000;
Costs questioned by OIG: 102,378;
Costs insufficiently justified and recovered by NIH: 19,323.
Audit number: A-01-03-01503;
Fiscal year during which audit was completed: 2004;
Costs audited by OIG: 890,848;
Costs questioned by OIG: 245,174;
Costs insufficiently justified and recovered by NIH: 4,994.
Audit number: A-01-04-01506;
Fiscal year during which audit was completed: 2005;
Costs audited by OIG: 2,730,000;
Costs questioned by OIG: 37,780;
Costs insufficiently justified and recovered by NIH: 1,512.
Audit number: A-01-03-01502;
Fiscal year during which audit was completed: 2004;
Costs audited by OIG: 525,188;
Costs questioned by OIG: 61,215;
Costs insufficiently justified and recovered by NIH: 0.
Audit number: Total;
Fiscal year during which audit was completed: [Empty];
Costs audited by OIG: $12,597,783;
Costs questioned by OIG: $1,543,885;
Costs insufficiently justified and recovered by NIH: $864,860.
Source: GAO analysis based on NIH's audit resolution documentation.
[A] OIG also set aside $1,786,568 in costs claimed for NIH to determine
if these costs were properly supported. NIH determined that they were.
[End of table]
NIH recovered less than the full questioned costs in the OIG audits
because when NIH staff reviewed the audits, it determined that the
costs in five cases were sufficiently justified by information provided
by the grantee and input from NIH staff responsible for overseeing
scientific progress associated with the grant. NIH staff sometimes
accepted documents that OIG did not accept as sufficient evidence to
support claimed costs. For example, for one university OIG could not
determine who requested certain services and whether the costs were
allocable to the grant. Although the university had presented invoices
as support, the corresponding purchase requisitions, which contained
the necessary information to address OIG's inquiry, had not been
retained. Subsequently, NIH accepted the invoices as support and
determined that approximately $119,000 of questioned costs were
acceptable and need not be reimbursed.
In other cases, the universities provided additional documentation to
justify the costs that were claimed. For example, in one case, OIG
found that costs associated with time and effort spent by summer and
part-time labor were unsupported and other costs were incorrectly
charged. The university provided alternate documentation for these
costs, which OIG did not accept. However, after a review of the facts
of the case and internal discussions with NIH staff responsible for
overseeing scientific progress associated with the grant, NIH accepted
the documentation in conjunction with additional explanatory
information from the university and ultimately determined that the
approximately $193,000 in costs claimed were acceptable.
NIH officials told us that if a university does not agree with NIH's
determination of the appropriate resolution of the audit, the agency
issues an audit determination letter. The audit determination letter
specifies the amounts to be returned, including accrued interest, and
any corrective actions to be taken by the university. According to NIH
officials, an audit determination letter is rarely needed because the
universities and NIH almost always agree on the resolution of audit
findings. In the event NIH issues such a letter, universities have the
right to appeal an audit determination.
Agency Comments and Our Evaluation:
We provided a draft of our report to HHS for review. HHS provided
technical comments, which we incorporated where appropriate. HHS
indicated in its technical comments that, in addition to the key
controls discussed in this report, it also has several other controls
to oversee costs claimed by universities. Specifically, HHS mentioned
ICs' use of the terms and conditions of the grant and prior approval
requirements, the NIH Office of Financial Management's review and
approval of financial status reports, and the HHS Division of Payment
Management's reconciliation of federal cash transaction reports. While
there is an element of professional judgment that enters into our
determination of whether a control is key or not, we believe the
controls we have identified are the most significant in the context of
our engagement objectives. HHS also provided additional context on
single audit coverage for universities receiving NIH research grants,
stating that nearly all of NIH's research grant funding for fiscal
years 2003 and 2004 was awarded to universities required to have a
single audit for those years.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from this date. At that time, we will send copies of this report to the
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will be available at no charge on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions, please contact Cynthia A.
Bascetta at (202) 512-7101 or bascettac@gao.gov or Robert E. Martin at
(202) 512-9508 or martinr@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in the enclosure.
Sincerely yours,
Signed by:
Cynthia A. Bascetta:
Director, Health Care:
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
Enclosure:
GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Cynthia Bascetta, (202) 512-7101 or bascettac@gao.gov Robert E. Martin,
(202) 512-9508 or martinr@gao.gov:
Acknowledgments:
In addition to the contacts named above, Sheila K. Avruch, Assistant
Director; Kimberly Brooks, Assistant Director; Paul Caban; Nora Hoban;
Keyla Lee; and Roseanne Price made key contributions to this report.
(290570):
FOOTNOTES
[1] We are using the term university to refer to any domestic
institution of higher education.
[2] 2 C.F.R. pt. 220 (2006).
[3] OMB assigns responsibility for negotiating indirect cost rates to
HHS's DCA or the Department of Defense's Office of Naval Research,
normally depending on which department provided more funds to the
educational institution over the past 3 years. According to DCA, its
staff negotiates rates for more than 90 percent of the universities
that receive NIH grants.
[4] NIH has 27 ICs, 24 of which have the authority to award grants.
[5] We are using the term nonfederal auditors to include independent
public accountants and state and local governmental audit
organizations.
[6] 31 U.S.C. §§7501-7507.
[7] If a university meets the funding threshold for having expended
$500,000 or more in federal awards in the year, but only expends these
funds under one federal program, it can choose to have an audit
specific to that program, instead of an organizationwide single audit.
[8] Internal controls are plans, methods, and procedures used by
organizations to meet their missions, goals, and objectives; to serve
as the first line of defense in safeguarding assets; and to prevent and
detect errors and fraud.
[9] Under OMB Circular No. A-133, grants from different sources for the
same broad purpose, such as research and development, can be combined
and considered a major program for audit purposes.
[10] The total amount awarded to these universities accounted for over
80 percent of the total amount awarded to all universities receiving
NIH extramural research grants during fiscal years 2003 through 2005.
[11] We did so by matching names from a file of universities and their
federal funding levels that we obtained from HHS with a file of
universities that received NIH extramural research grants. Because of
technical difficulties in matching these files, we are likely to have
underestimated the number of universities that received NIH extramural
research grants and were required to have single audits. In addition,
we could not determine the frequency of single audits required from
universities receiving NIH extramural grants for fiscal years 2005 and
2006 because HHS did not have complete information for these years at
the time of our review.
[12] Indirect costs are often referred to as facility and
administrative, or F&A, costs.
[13] Costs for subcontracts over $25,000 and equipment are excluded
because they can involve very large expenditures but usually do not
require the university's facilities and administrative support.
[14] Predetermined indirect cost rates, which are set through
negotiation, were first authorized by law in 1962. Pub. L. No. 87-638,
76 Stat. 437.
[15] The Office of Naval Research in the Department of Defense is
responsible for reviewing and approving indirect cost rate proposals
for the other universities.
[16] On June 27, 2003, OMB amended Circular No. A-133 to, among other
things, raise the dollar threshold for single audits. Universities with
fiscal years ending prior to January 1, 2004, and that expended
$300,000 or more in federal awards were required to obtain single
audits. For universities with fiscal years ending after December 31,
2003, the threshold amount to require single audits was set at $500,000
in expended federal awards.
[17] Modified total direct costs are those that are closely tied to
specific grants or projects minus the costs excluded for the purposes
of calculating an indirect cost rate.
[18] DCA classified universities for review purposes based on a dollar
threshold for the amount of federal funding each received in the fiscal
year prior to the year in which the university submitted its indirect
cost rate proposal. High-dollar universities are those receiving over
$21 million in federal funding during this period.
[19] According to DCA officials, DCA is responsible for negotiating
rates for most universities receiving NIH extramural research grants,
and the rates generally remain in effect for 2 to 4 years.
[20] Other university functions include, for example, teaching and
training activities.
[21] This examination did not include determining whether universities'
implementation of cost accounting practices complied with the cost
accounting standards in OMB Circular No. A-21.
[22] In fiscal year 2003, 534 universities received NIH extramural
research grants; 385 of these were required to have single audits. In
fiscal year 2004, 532 universities received NIH extramural research
grants; 392 of these were required to have single audits.
[23] Because of the risk of improper payments under the Medicare and
Medicaid programs, the majority of OIG funding is used for audit work
related to these federal programs.
[24] According to OIG officials, audits currently under way for fiscal
year 2007 involve the examination of broader issues across several
universities, such as whether universities are appropriately allocating
administrative costs to their indirect cost rates.
[25] We reviewed seven randomly selected single audits and eight OIG
audits, which represented all of the OIG audits from fiscal years 2003
through 2006 involving NIH grants in which all steps to resolve the
audit findings had been completed.
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