DECISION

Child Opportunity Program, Inc. (COP), appealed a determination by the Administration for Children and Families (ACF) disallowing $87,000 in costs charged to COP's Head Start grant in its Head Start Grant Year (GY) 15, November 1, 1993 through October 31, 1994. ACF maintained that COP had not satisfied a requirement imposed on it by the Board in Child Opportunity Program, Inc., DAB No. 1700 (1999), that COP provide documentation supporting the allowability of its expenditure of this amount. For the reasons discussed below, we find that, under the circumstances present in this case, COP has satisfactorily documented that the grant funds it received during the relevant time period were applied to expenditures for purposes related to its Head Start program which were otherwise allowable. Since ACF has provided no other basis for disallowing these costs, we therefore reverse the disallowance.

Background

The subject matter of this disallowance had been previously before this Board in an appeal of a larger disallowance determination by ACF. ACF had disallowed the $87,000 in question here on the ground that the funds were authorized for the purchase of buses but had been spent for another purpose. In DAB No. 1700, the Board found that the specific supplemental grant award that included the disallowed $87,000 did not include language limiting the expenditure of those funds to buses or other start-up activities. Absent such limiting language, COP was entitled to make revisions between and among the object class categories within the total direct costs of the project, provided that the funds were used for allowable costs of the project. OHDS Discretionary Grants Administration Manual, Chapter 1, § L.2. Based on the reasoning set forth in Community Action Council for Lexington-Fayette, Inc., DAB No. 1258 (1991) (discussed below), the Board concluded that the costs were not properly disallowed on the basis articulated by ACF. However, the record did not contain sufficient documentation to support COP's assertion that the funds had all been used for allowable costs, so the Board remanded the matter, directing COP to provide documentation in support of its position that all funds received during GY15 were expended for proper purposes.

Following the directive of DAB No. 1700, COP resubmitted to ACF its Exhibit C, attachments 6 and 7, and informed ACF that the documents from which the information therein was compiled were contained in 42 volumes of records consisting of general ledgers and were available for inspection at the office of COP's counsel.¹ In response, ACF issued a new disallowance determination, stating that COP had failed to provide records that showed that all the GY 15 grant funds had been expended for "purposes related to its Head Start program and otherwise properly charged to start-up funds . . ." Disallowance determination dated December 14, 1999, at 2, quoting DAB No. 1700 at 9. ACF further stated that COP's invitation to review the 42 volumes of records was unresponsive to the Board's remand order in DAB No. 1700, which, according to ACF, required COP to produce specific documentation to show that all grant funds it received under that year's supplemental award were expended for start-up costs. Id.

On appeal, COP alleged that ACF's refusal to review the proffered documentation and issuance of another disallowance ignored the Board's directive in DAB No. 1700.

After a telephone conference with the parties, the Board issued an order to show cause why the disallowance should not be dismissed on the basis that ACF failed to establish grounds for the disallowance. In its order, the Board explained that its intent in DAB No. 1700 was that, if COP could produce documentation establishing that the $87,000 in question was expended for allowable, allocable costs corresponding to any purposes related to its Head Start program in GY 15, not necessarily for start-up activities, then there would be no basis to disallow the $87,000. The Board noted in its order that there was no indication in the record that the documents proffered by COP had not been independently audited as required by regulation or that the independent audits were not accepted by the Office of Inspector General (OIG). Consequently, it appeared that COP had fulfilled its obligations regarding the production of documents, and it was incumbent on ACF to show a basis for its determination to disallow the $87,000.

In response to the order, ACF maintained that it was impossible to use the independent audits submitted by COP to reconcile COP's Head Start expenditures for a particular grant year because those audits were based on COP's fiscal year, which began January 1 and ended December 31, while COP's Head Start grant year began November 1 and ended October 31. ACF argued that the documents proffered by COP did not address the allocation of its Head Start expenditures by grant year. ACF alleged that the Board's order to show cause enlarged the holding in Lexington-Fayette to require that ACF now accept any Head Start expenditures that a grantee may have made without requiring the grantee to show that the expenditures were either related to the purpose for which the supplemental grant was made, start-up costs, or that they were for allowable program costs that ACF would have approved had the grantee requested approval. ACF disagreed with this interpretation, arguing that the burden should be placed on COP to show that it reprogrammed its GY 15 budget to spend the $87,000 in supplemental funding for GY 15. ACF contended that the Board's order improperly shifted the burden to ACF to examine 42 volumes of records when it is always the obligation of a grantee to document the allowability of costs claimed.

Analysis

A recipient of federal grant funds is required to have a financial management system that provides records that identify adequately the source and application of funds for HHS-sponsored activities. 45 C.F.R. § 74.21(b)(2).² Nonprofit organizations like COP are subject to the audit requirements contained in the Office of Management and Budget Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations." 45 C.F.R. § 74.26(a)(1). The Single Audit Act Amendments of 1996 requires a single audit for all programs, so that no separate audit for a particular grant is required. A Head Start grantee is required to undertake an independent audit every program year to determine whether the agency's financial statements are accurate; whether the agency is complying with the terms and conditions of the grant; and whether appropriate financial and administrative procedures and controls have been installed and are operating effectively. 45 C.F.R. § 1301.12(a). These audits are submitted to the OIG for review.

There is no dispute that COP complied with this requirement for every grant year, including GY 15. Furthermore, there is no indication that the OIG did not accept these independent audits as proper.³ Nor is there any indication that the OIG or the responsible ACF official ever objected to having an annual audit of COP's fiscal year that did not correspond to COP's Head Start grant year. Therefore, ACF's complaint that the documentation offered by COP is unreliable because of the two-month differential between its fiscal and grant years is not persuasive.

In addition, we reject ACF's assertion that COP's documentation is inadequate because COP was obliged to document that the $87,000 in question was spent on start-up costs. We disagree with ACF that the Board's order to show cause improperly expanded the holding in Lexington-Fayette and the Board's remand in DAB No. 1700. The Board had specifically rejected ACF's position in DAB No. 1700 that the GY 15 supplemental grant contained any language limiting the use of the funds to a particular purpose or requiring prior approval for using the funds for another purpose. (In contrast, the Board found that a similar grant for the prior year had included such terms.) Consequently, as long as the funds were used by COP for Head Start related activities, in accordance with the applicable regulations and guidelines, those expenditures would be allowable. This is entirely consistent with the Board's holding in Lexington-Fayette, where the Board found that the terms and conditions of a supplemental award, also issued for the purchase of buses, failed to place conditions on how the funds should be spent.

Thus, the Board required COP to provide documentation to support its assertion that the $87,000 at issue was expended for Head Start purposes. In that regard, COP has offered various schedules and 42 volumes of independently audited records of expenditures.⁴ Even after the Board clarified its holding in the order to show cause, ACF has refused the opportunity to examine those 42 volumes of records.

The only other explanation for ACF's refusal to review COP's documents, besides the start-up costs issue, is in ACF's disallowance notification. There, ACF implied that a further review of these documents was unnecessary, because the accountant who conducted the procedures review that resulted in the appealed disallowance resolved in DAB No. 1700 had already examined the documentation offered by COP and that during the review COP was unable to address the issue of the $87,000.

In DAB No. 1700, the Board noted that the procedures review was narrowly focused, with the result that it could not be established that "ACF has definitively found that all the grant funds expended by COP in GY 15 were related to its Head Start program." At 9, n.4. ACF's assertion that the accountant has already reviewed the 42 volumes of records and that a second review would be unproductive ignores the fact that the Board expressly rejected the initial finding of that review that the funds could only be used for buses. Thus, ACF needed to provide a further review and another rationale for demanding the return of these funds. While it is true that, as ACF recites in its disallowance letter, a grantee always bears the responsibility to document the allowability of costs claimed, we conclude that COP has met its responsibility under the circumstances of this case.

COP has complied with its regulatory obligations to have an independent audit of its program and to maintain documents supporting the allowability of its expenditures, and it has offered its ledgers to support its claim that all GY15 funds were expended properly. There is no indication from the audits or the procedures review that the $87,000 in question was applied to unallowable costs. ACF has refused to examine those ledgers and has failed to provide any other basis for its disallowance other than the one that the Board has previously analyzed and rejected. We therefore conclude that ACF has failed to establish grounds for a disallowance, and we accordingly reverse it.

Conclusion

For the reasons discussed above, we reverse the disallowance of $87,000.

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Cecilia Sparks Ford

______________________
Donald F. Garrett

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M. Terry Johnson
Presiding Board Member

[1] Attachment 6 is a schedule reflecting COP's monthly Head Start expenditures by cost category for GYs 14 through 17. Attachment 7 is a schedule reflecting the totals for COP's Head Start grant receipts and program expenditures for GYs 14 through 17. In the prior proceeding, COP had alleged that these documents showed that COP's expenditures during those years exceeded the amounts of federal funds provided to it, i.e., that the disputed $87,000 must certainly have been expended for program purposes.

[2] The general grants administration requirements in 45 C.F.R. Part 74 are specifically made applicable to Head Start grants by 45 C.F.R.§ 1301.10(a).

[3] ACF submitted with its response to the order to show cause the OIG's final determinations on the two audits that included the grant year in question, asserting that the audits were found not to fully meet the requirements for OMB Circular A-133 audits. See OIG letters dated 4/13/95 and 1/11/96 (attached to response to order to show cause). However, the defects found were minor in both cases, so that the OIG neither rejected these audits nor required submission of corrected reports or pages for either audit period. Thus, the Board's statement in the order to show cause that the OIG had accepted COP's independent audits remains unrefuted.

[4] ACF asserted that the spreadsheet for GY 15 offered by COP was unreliable because it was inconsistent with the total amount of Head Start expenditures listed on other documents submitted by COP for that grant year. Response to order to show cause at 4. However, the only document provided by ACF in support of this claim, a SF-269 for GY15 (unnumbered first attachment to response to order to show cause), supports COP's contention that all the funds awarded for that grant year were expended for costs of that grant year.