Trends and Patterns in Federal Audits and Enforcement Actions

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1 Trends and Patterns in Federal Audits and Enforcement Actions Jeff Seo, J.D., LL.M. Executive Director Office for Academic and Research Integrity Harvard Medical School

2 Introduction / Disclaimers 2

3 NSF Audit of NYU (June 2014) Repayment request of only $75K Covered 394 active NSF grants (7/09 6/12), totaling $72.6 million $35K in unallowable IDC resulting from inappropriate MTDC rate $30K in unreasonable foreign travel costs; most of which arose from one award which budgeted only domestic travel and was supposed to expire January 31, 2013.

4 NSF Audit of NYU 5 foreign trips by PI in 2012 (CAREER: Identifying and Measuring the Economic Value of Information on the Internet) 3 locations in India Tanzania Again to 2 of 3 locations in India Seoul, S. Korea Munich, German repayment was required because the trips partially or wholly benefitted other research projects. NYU was unable to provide documentation showing that the costs were allocable to award or were allocated to it in accordance with relative benefits received or another equitable relationship.

5 NSF Audit of NYU $10K in unreasonable equipment purchases at end of grant; NYU claimed because it was a member of the Federal Demonstration Partnership (FDP) it has expanded authority to make such purchases, regarding its acquisition of a number of workstations, and a computer with a widescreen monitor. $1,100 in unallocable conference fees under a 3 year award to develop a software design methodology that takes values into account when designing software systems. $194 for meals $931 for 27 bottles of wine and 10 cocktails

6 Data Analytics Data analytics-driven, risk-based methodology to improve oversight Identify institutions that may not use Federal funds properly Techniques to surface questionable expenditures Life cycle approach to oversight Mapping of end to end process to identify controls 100% review of key financial and program information Focus attention to award and expenditure anomalies

7 Introduction to Sponsored Project Compliance Perspective on the Current Industry Landscape The sponsored project administration environment grows increasingly complex with changing regulations, inconsistencies among agencies, lack of information (meaningful and timely reports), thus generating more risk than institutions recognize. There remains a vast disconnect between: The award environment, during which the funding agency and the PI focus primarily on the programmatic work itself The degree of flexibility that is perceived to exist while the work is being conducted The audit environment during the life of award through when an award is closed and subsequent audits take place The current environment will likely place increased emphasis on accountability during a time when many institutions are faced with significant financial strain and pressures to reduce staff. 7

8 Introduction to Sponsored Project Compliance Regulatory Environment 8 A decrease in federal and non federal funding for sponsored projects has required award recipient institutions to proactively address internal and external concerns and challenges in recent years. Recoveries from federal investigations/audits are significant and receivables resulting from penalties increased in recent years. In FY 2014, OIG reported $4.9 billion in financial penalties resulting from federal audits and investigations consisting of: $834.7 million in audit receivables $4.1 billion in investigative receivables Additionally, in the first half of FY 2014, the number of annual criminal actions against individuals or entities totaled 971 and 533 civil actions. Civil actions include false claims and unjust enrichment lawsuits filed in Federal district court, CMP settlements, and administrative recoveries related to provider self disclosure matters. Regulatory Trends: Receivables in Billions $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $- $3.2 Investigative Receivables by Fiscal Year $4.0 $3.8 $4.6 $6.9 $5.0 $ Fiscal Year Source: Department of Health and Human Services Office of the Inspector General Work Plan FY

9 Introduction to Sponsored Project Compliance Regulatory Environment Diverging fiscal and regulatory compliance issues creates a complex charge for the sponsored project compliance program. Fiscal Cost Transfers Cost Sharing Effort Reporting Extra Service Compensation Animal Subject protections (IACUC) Human Subject protections (IRB) Conflicts of Interest Environmental Health & Safety Clinical Trial Billing Direct charging practices Equipment Claims Financial Reporting Regulatory Export Controls HIPAA Privacy Laws Invention Disclosures and Reporting Responsible Conduct of Research Other Support Recharge Centers Program Income Reporting Unallowable Costs Scientific Overlap Scientific Misconduct Sub recipient Monitoring 9

10 False Claims Act Settlement Triggers Qui Tam Action Report of an Informal Whistleblower Referral of a government audit or review

11 University of Minnesota Misuse federal funds $32 million 2004 George Washington Univ $1.8 million 1991 Stanford Inflated research grant costs $1.2 million 2005 Univ Alabama/Birmingham Effort Certification & Clinical Research Billing $3.4 million Examples of FCA Settlements 2005 Florida International Univ Effort Certification & Direct Costs $11.5 million 2004 Harvard/BIDMC Costing Issues Self-Reported $3.25 million 2004 Johns Hopkins Univ Effort Certification $2.7 million 2005 U. Conn. Service centers billing rates $2.5 million FCA Applied to Sponsored Research 2008 Yale Univ Effort Reporting Cost Transfers Subrecipient Monitoring $7.6 million 1997 New York University Medical Center Inflated research grant costs $15.5 million 2005 Mayo Foundation Mischarging federal grants $6.5 million Cornell Medical (2) Clinical Research Issues Other Support/Commitments $4.4 million / $2.6 million 2003 Northwestern University Committed Time/Effort $5 million

12 A Word on the Uniform Guidance To address the weaknesses with the existing the OMB Circulars, President Obama began the effort to improve these regulations with Executive Orders dating back to November 2009: Executive Order Reducing Improper Payments and Eliminating Waste in Federal Programs Reduces improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the Federal Government. January 2011: Executive Order Improving Regulation and Regulatory Review Requires retrospective analysis of existing significant rules and greater coordination across agencies to simplify and harmonize redundant, inconsistent, or overlapping requirements, thus reducing costs. February 2011: Presidential Memorandum Memorandum on Administrative Flexibility Revises guidance concerning cost principles, burden minimizations, and audits for state, local, and tribal governments in order to eliminate, to the extent permitted by law, unnecessary, unduly burdensome, duplicative, or low priority recordkeeping requirements and effectively tie such requirements to achievement of outcomes. 12

13 Uniform Guidance: Goals Eliminating duplicative and conflicting guidance Focusing on performance over compliance to provide accountability for Federal funds Encouraging efficient use of information technology and shared services Providing for consistent and transparent treatment of costs Setting standard business processes using data definitions Encouraging non Federal entities to have family friendly policies Limiting allowable costs to make the best use of Federal awards Strengthening oversight Targeting audit requirements on risk of waste, fraud and abuse

14 Subpart D - Post Award Requirements Standards for Financial and Program Management Internal Controls

15 Internal controls The phrase internal control(s) is used 74 times in the Final Uniform Guidance document issued by the Office of Management and Budget (OMB) 30 times in the background material 44 times in the regulation The word control(s) alone is used an additional 42 times Should vs must The word must is used to indicate requirements. The word should is used to indicate best practices or recommended approaches.

16 Internal Controls The non Federal entity must: Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non Federal entity is managing the federal award in compliance with Federal statutes, regulations, and the terms and conditions of the award. These internal controls should be in compliance with guidance in Standards for Internal Control in the Federal Government [i.e., the Green Book] issued by the Comptroller General of the United States and the Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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18 Internal Controls Cannot Guarantee Success Internal controls provide only reasonable assurance that operational, financial, and compliance objectives were met. These assurances are not absolute. Threat Management Override Human Error Substance over Form Conflicts of Interest Failure to Anticipate Certain Risks Collusion Limitation A well designed control system, if set aside at management s discretion, can be equivalent to no control in terms of risk. Mistakes happen Controls may appear to be well designed and still lack substance. When an employee s loyalties are divided there is a distinct risk that the employee will choose a course of action detrimental to the organization. Management may fail to anticipate certain risks, and thus fail to design and implement appropriate controls. Two or more employees may agree to circumvent internal controls.

19 Subpart D - Post Award Requirements Standards for Financial and Program Management Subrecipient Monitoring and Management Subrecipient and contractor determinations Requirements for pass-through entities Fixed amount subawards

20 Subrecipient Monitoring Requirements for Subrecipient Monitoring ( (d)) Review reports required by the pass through entity Follow up to ensure subrecipient takes appropriate action on all deficiencies pertaining to the subaward from the pass through entity identified through audits, on site reviews, and other means Issue a management decision for audit findings pertaining to subawards made by the pass through entity Monitoring Tools ( (e)) Providing subrecipient training and technical assistance Performing on site reviews Arranging for agreed upon procedures engagements No listed tool is required nor is the list of tools all inclusive Determination on which tools is a matter of judgment for the pass through entity based upon its assessment of risk 20

21 Subrecipient Monitoring Case Studies: Examples of Audits NSF Johns Hopkins University, January 2012 HHS UMass Medical school, August 2006 HHS Yale University, February 3,

22 Cost Principles / Cost Allocation Case Studies: Examples of Audits Administrative and Clerical Charges HHS Audit of Duke University, January 2009 HHS Audit of Florida State University, July 2012 HHS Audit of University of South Florida, April

23 HHS OIG Audit of UNC-Chapel Hill June 2014 FINDINGS The University did not always claim selected costs charged directly to HHS awards in accordance with Federal requirements. Of the 163 transactions totaling $8,496,835 that we reviewed, 155 transactions totaling $8,160,961 were allowable, but 8 transactions2 totaling $335,874 were either not allowable or partially allowable. In addition, the University claimed unallowable facilities and administrative (F&A) costs totaling $16,969 that were related to the unallowable transactions. The University claimed unallowable costs under HHS awards because PIs and OSR staff did not comply with University policies and procedures for adequately documenting cost transfers, adequately reviewing costs charged to awards, and assuring that costs are treated consistently.

24 UNC Chapel Hill Costs Were Not Adequately Documented Scientific Equipment, Supplies, and Services The University claimed the costs of research related equipment, supplies, and services totaling $284,865 that it had transferred from University fund accounts (or other accounts) to HHS award accounts without documenting the basis for the amounts transferred, the reason the transfers were necessary, or why transfers occurred several months after the University initially recorded the charges. For example, the University claimed $265,000 for scientific equipment that it initially charged to a University trust fund account3 but transferred the amount to an HHS grant 10 months later. The documentation supporting the transfer was limited to a note that stated that, after review, the University determined that a portion of the equipment should be charged to the grant. The University did not document the allocation basis for the amount transferred and did not document why it took so long to transfer the costs. The University also claimed $10,301 for other scientific equipment, $7,694 for research animal care, and $1,870 for lab supplies transferred from University fund accounts (or other accounts) to HHS award accounts without adequately documenting the nature or justification of the transfers.

25 UNC Chapel Hill Foreign Housing and Subsistence The University claimed $13,410 under a foreign award for the costs of a housing rental and an expatriate allowance with documentation that did not support that costs were incurred. The University s documentation of the housing rental was limited to a letter requesting rent payment for a 6 month period and a memo approving payment for an expatriate allowance. The University told us the letter reflected a housing valuation used to determine a reimbursement rate for renting the property. However, the University also stated that the University employee requesting reimbursement for the rental owned the property. Thus, the documentation of the housing rental did not reflect costs incurred.

26 UNC Chapel Hill Costs Were Not Reasonable The University claimed $34,557 in various costs charged to a foreign award that were duplicate costs and were therefore not reasonable and allowable. For example, the University claimed $19,667 for audit fees to meet accountability status requirements with foreign regulatory bodies; however, the University claimed two charges for the fees: one for $19,667 and another for $6,667 (reflecting an allocated portion of the total fees). The University agreed that it should have only claimed the $6,667 and told us it would credit the award for the $19,667. Similarly, the University claimed $5,429 for foreign housing, $5,303 for equipment insurance, and $4,158 for scientific equipment that was unallowable because the University had already claimed these costs under other transactions. The University agreed that the amounts were duplicate charges that should not have been claimed.

27 UNC Chapel Hill Costs Were Not Treated Consistently The University claimed $3,042 for the costs of a laptop computer and printer cartridges that had not been treated consistently as F&A costs; thus, the costs were unallowable. According to University policies and procedures, the University generally treated computer hardware as an F&A cost unless an awarding agency approved in advance the direct charging of the cost. Likewise, the University classified general administrative supplies, such as printer cartridges, as F&A costs. The University had not obtained prior approval for charging these costs as direct costs and had not otherwise justified this inconsistent treatment.

28 University of South Florida April 2014 Why We Did This Review The University of South Florida (the University) received a high level of Department of Health and Human Services (HHS) funding, including funds from the American Reinvestment and Recovery Act (ARRA). Also, audits conducted by the HHS Office of Inspector General (OIG) and by the Florida Auditor General included significant findings. For example, the Florida Auditor General found that Federal grant expenditures were not monitored to ensure that expenditures were properly approved, valid, reasonable, or necessary. On the basis of the findings of these prior audits, we are concerned that the University s grant management is a high risk area.

29 USF What Auditors Found The University did not always claim selected costs charged directly to HHS awards in accordance with Federal regulations and NIH guidelines. In our sample of 112 salary transactions, 78 were allowable but 34 were not, and in our sample of 110 nonsalary transactions, 70 were allowable but 40 were not. On the basis of our sample results, we estimated that, of approximately $24.8 million in transactions, the University charged at least $6.4 million in unallowable transactions and related facilities and administrative costs to HHS awards during fiscal years 2010 and These unallowable transactions occurred because the University did not provide adequate oversight to ensure consistent compliance with Federal regulations.

30 USF Twenty seven transactions were for salary costs for administrative and clerical work such as ordering supplies, performing general information technology work, and supervising data collections. These costs should not have been charged directly to the award because they involved salaries of administrative and clerical staff, and neither the nature of the work performed on the projects nor any other circumstances justified any unusual degree of administrative support or showed that the employees were necessary for the performance of the awards. Two transactions on NIH awards included amounts in excess of NIH guidelines that limit graduate student compensation. Graduate student pay must not exceed the stipend levels set by NIH for National Research Service Awards. One transaction was salary for an employee hired for the sole purpose of distributing promotional items. However, promotional items and memorabilia are unallowable, so the compensation paid to any individual to distribute such items would also be unallowable. One transaction was not allocated correctly. The University charged 100 percent of a payout for a terminated employee to one grant rather than allocating the payout on the basis of the employee s former workload. We questioned only the amount that should not have been charged to the NIH award. A cost is allocable to a sponsored agreement if it benefits both the sponsored agreement and other work of the institution in proportions that can be approximated through use of reasonable methods.

31 USF Sixteen transactions that were otherwise allowable had F&A claimed in excess of the allowable amount. The University treated these transactions as vendor costs when they were actually subcontract costs. The amount of F&A that can be claimed on subrecipient costs which includes subcontract and subgrant costs is limited, but no such limit exists for vendor purchases. OMB Circular A 133 B.210(b) lists characteristics of a subrecipient relationship. These characteristics include when the organization [h]as its performance measured against whether the objectives of the Federal program are met; [h]as responsibility for programmatic decision making; has responsibility for adherence to applicable Federal program compliance requirements; [and u]ses the Federal funds to carry out a program of the organization as compared to providing goods or services for a program of the pass through entity. Meanwhile, vendors provide goods or services that are ancillary to the operation of the Federal program (OMB Circular A 133 B.210(c)(4)). The criteria state that the substance of the relationship is more important than the form of the agreement (OMB Circular A 133 B.210(d)). In this case, the University treated a subcontractor as a vendor even though the substance of the work performed by the entity was central to the work of the award. The entity had responsibility for dealing directly with other subcontractors, giving them a decision making role and responsibility for program compliance. By classifying subcontract costs as vendor purchases, the University claimed F&A on costs for which it should not have received F&A. Therefore, the F&A related to these transactions was unallowable because the University had already exceeded the dollar limit on subrecipient costs.

32 USF Eleven transactions were not supported with sufficient documentation. The University charged shipping fees without documenting that the costs were allocable to the grant. It did not track the destination or contents of the shipment. Therefore, the shipment could not be tied to the award. According to 45 CFR 74.21(b)(7), recipient financial management systems shall provide for accounting records, including cost accounting records that are supported by source documentation. Four transactions related to two specialized service centers were not charged in accordance with Federal regulations. The University did not provide a schedule of rates or a cost basis for its telecommunications center and did not always document the allocation of animal center costs on the basis of usage. The costs of services provided by specialized facilities must be charged based on actual usage of the services and based on a schedule of rates or established methodology (the Circular J.47.b.). Four transactions were for general use supplies such as toner, computers, and tablet computers, which should have been treated as F&A costs and not charged directly to the award. Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as F&A costs (the Circular F.6.b.(3)).

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34 Univ. of Florida Settlement Covered HHS grants from ; Internal audit in 2006 first uncovered weaknesses in system verification of salaries charged to grants; Routine federal audit in 2008 indicated that bookkeeping system failed to routinely verify amount of time/expenses UF employees charged against grants. 34

35 UF Settlement Rapid expansion of the university s sponsored research and an unexpectedly difficult rollout of a complex new universitywide accounting system significantly contributed to these issues. This lack of specificity was unintentional but resulted in technical errors respecting the government s accounting requirements. UF Vice President for Research, David Norton, University of Florida News, November 20,

36 UF Settlement Corrective Actions Adopted new software platform to improve capacity to manage verification process for federal projects; Comprehensive assessment to improve fiscal compliance functions over research grants/projects; New policies and procedures; Mandatory PI training re: federal accounting practices; New dashboard (myinvestigatorgator) to monitor projects. 36

37 Monitoring Examples Institution A Central audit office identifies top 10 ($) grants, and conducts two internal audits per year on a rotating basis ( Find It & Fix It Program ). Reports are made to senior officials and to the Department. Occasionally, funds have been returned to sponsors based on audit.

38 PEER MODELS Institution B Leveraged a federal audit to implement a transparent report card for each department. Each Department is ranked by performance which is available to view by all Departments. Administrators at the top performing Departments receive financial bonuses based on results.

39 PEER MODELS Institution C Solicited credit reporting company to develop solution to filter sponsored transactions in realtime. Filters are suggested by institution and company develops algorithm to generate lists of potentially problematic transactions for secondary review by central office. Benefits of pro active approach: mitigates the need for cost transfers, journal adjustments.

40 Thank you! The opinions expressed in this presentation are personal to the speaker and do not reflect the positions of any institution or association to which the speaker is affiliated. The contents of this workshop should not be construed, interpreted or relied upon as legal or professional advice.