The Colorado Audit A Case Study in Audit Resolution

1. The Colorado Audit A Case Study in Audit Resolution Bonnie Little, Esq. blittle@bruman.com Brustein & Manasevit, PLLC Fall Forum 2011

2. Amount in Dispute • $23,962,000 in unsupported personnel costs charged to Federal grants

3. Draft Audit Report

4. Draft Audit Report • Audit limited to CDE’s methodology for allocating personnel costs to Federal education grants • Audit covered the two-year period July 1, 2007 through June 30, 2009

5. CDE’s Time Distribution System • Colorado Personnel Payroll System • “CERT” defined as “cost center for which time is charged for expense” • CDE employee compensation is allocated to various state and federal funding sources according to the employee’s CERT code(s)

6. OIG Review • OIG interviewed 8 CDE employees • “CDE’s documentation for reporting employee activity met only three of the four standards for personnel activity reports” • Prepared monthly • Signed by the employee • Accounted for total activity • BUT, did not reflect “after-the-fact” distribution of actual activity of each employee

7. OIG Review • “[W]e concluded that the timesheets we reviewed reflected the normal payroll reporting practices that are used throughout CDE.” • Employees reported their time based on predetermined allocation percentages

8. OIG Review • OIG noted that timesheets are not submitted in time to impact the payroll • Accordingly, any adjustments would need to be made after the pay date • CDE informed the auditors that • only one employee performs the payroll-related adjustments • “not possible to process the number of monthly adjustments that would be required”

9. OIG Draft Finding • $23,962,000 inadequately supported personnel costs • OIG questioned all CDE personnel costs charged to Federal funds during fiscal years 2008 and 2009

10. OIG Recommendations • Provide documentation based on actual work performed supporting the costs • Make necessary adjustments for personnel costs that were charged to Federal grants and do not meet OMB Circular A-87 requirements • Work with ED to determine appropriate approach to account for personnel costs • Develop and implement policy and procedures for a compliant system • Provide training for all CDE employees, supervisors, and managers

11. CDE Response • CDE concurs with the draft finding, but… • Employees working on single cost objective satisfied OMB Circular A-87 requirements • Actual effort for the vast majority of employees working on multiple cost objectives aligned with budgeted effort over each12-month period

12. CDE Response • Agreed to do the reconstruction • Based on interviews with supervisors and employees, determined actual effort and reconstructed documentation supporting personnel costs for the two fiscal years • Agreed to make any necessary adjustments based on actual effort • Agreed to develop a new methodology and provide training

13. Final Audit Report

14. OIG Final Audit Report $23,962,000 in unsupported costs • “We commend CDE for initiating timely corrective action in response to the audit’s finding and recommendations.” • “The actions that CDE describes … would appear to address our finding, but the Department will ultimately make this determination.”

15. CDE Response Corrective actions: • CDE developed and implemented a fully compliant time distribution system. • Provided new policy, instructions, and “frequently asked questions” • CDE conducted mandatory training • Provided training materials and attendance sheets

16. CDE Response Reconstruction • Employees and supervisors reviewed notes, calendars, work product, email and other documentation to determine an accurate breakdown of their effort during the two-year period • If an employee was no longer available, supervisors with first-hand knowledge attested to the employee’s actual effort

17. CDE Response • Through reconstruction, CDE documented actual effort to support 98% of the personnel costs • $525,591 - unsupported effort

18. CDE Response Equitable Offset accounts for the remaining funds at issue • CDE identified 3 employees that CDE could have paid using federal funds, but instead used state funds • Employees worked on allowable activities under IDEA, but were charged to state funds • Job descriptions, affidavits, salary information • Salaries totaled $620,811

19. ED Final Determination

20. ED Final Determination • Sustain finding, require corrective actions • “The methodology that CDE used to allocate personnel costs paid with Federal funds did not comply with the requirements for time distribution systems contained in [OMB Circular A-87].”

21. ED Final Determination • “[W]e cannot accept the affidavits CDE provided as evidence of how employees who work on multiple programs actually allocated their work among those programs.”

22. ALJ Decisions - Reconstruction • Application of the New York State Department of Education (April 21, 1995) • After-the-fact affidavits and other pertinent documentation are admissible as evidence. • Consolidated Appeals of the Florida Department of Education (June 26, 1990) • Accepted affidavits completed by supervisors years later as credible and useful evidence.

23. ED Final Determination • To sustain a prima facie case for recovering funds, ED must provide sufficient evidence that funds were misspent • Could not establish a prima facie case based on OIG’s judgmental sample of 8 employees

24. ED Final Determination • Footnote 7: • “However, because we find that the affidavits are not legally sufficient to support a prima facie case for recover of funds, we do not ask that CDE return any funds based on the difference in allocations as determined by the affidavits and the actual allocations made to the grant programs.”

25. ED Final Determination • Reviewed CDE’s new policies and determined that they “generally appear sufficient to establish an effective system” • Clarifying questions: • Are predetermined percentages populated on the form, and then adjusted based on actual effort? • Do the percentages entered affect funds paid to employees, or must supervisors inform the finance office if adjustments are needed? • How and when are adjustments made to payroll records to reflect variances from budget estimates?

26. ED Final Determination • Other concerns • Sign-in sheets indicated that not all employees received training on the new system • FY 2010 single audit stated “a few employees are continuing to report time based on the budgeted allocation rather than actual allocations.”

27. ED Final Determination $23,942,000 $0

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