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Navigating the Audit


Navigating the Audit

As you probably know, the 2 CFR Part 200, or the Uniform Guidance, contains the federal regulations dictating what costs can and cannot be charged to federal- or state- funded programs.  According to the Guidance, costs must meet five criteria:

  • Reasonable - Ordinary and necessary to accomplish the purpose of the contract and comparable to market prices
  • Allowable - As per the 2 CFR Part 200 regulations, costs are identified by category as to whether they are allowable or unallowable—only allowable cost categories may be charged
  • Allocable - The expense must benefit the cost objective per the Scope of Work
  • Consistently Applied - You cannot switch methods to generate more revenue or treat one cost as direct for one contract and indirect for another
  • Documented - The methodology for allocating cost must be documented; this includes time studies and functional timesheets

The requirements that costs are allowable, consistently applied, and documented is black and white. Costs are either allowable or unallowable as dictated by the Uniform Guidance and need to be applied consistently throughout the plan, with accompanying documentation. If you understand and follow the guidelines and use the associated record keeping, you should have no issues for these requirements in an audit.

The other requirements for costs to be reasonable and allocable are much more gray.  As a cost-plan preparer, you are responsible for understanding the nature of the programs you are charging costs to, as well as the nature of the services being provided. 

When charges are questioned in an audit, understanding both the direct and indirect services associated with your cost plan will leave you prepared to defend the plan.  The auditor’s job is to ensure that your plan conforms to the Uniform Guidance. As you understand your operation better than they do, you must understand the regulations and provide adequate support in order to be compliant.  Just like you, auditors are learning the new guidelines, and they may make mistakes.  When presented with a finding from an audit, always negotiate your point.   

The CostTree team recently went to bat for a California county over an audit finding from the Health Human Services. This county, like all the other fifty-seven counties in California, charges out purchasing costs in their 2 CFR Part 200 cost allocation plan.  The costs of purchasing are allowable under the regulations. Purchasing actions occur with most projects, and a reasonable basis is easily achieved with a PO count, number of contracts processed or, barring availability of that data, an FTE count. 

For over ten years, this HHS has been preparing a 2 CFR Part 200 compliant cost plan for federal reimbursements and has used a weighted PO count as their allocation base for purchasing costs.  This weighted base was created by a former employee as a means of charging more for certain PO types, taking into account the additional work required by the Purchasing staff.  

In this year’s audit of the plan, a finding was reported for the entire cost of the Purchasing department.  The FTA auditor stated that the county needed to produce documentation for the weighted PO count, or the entire cost of the Purchasing department needed to be thrown out of this year’s plan (over $8 million!).  

The HHS did not have the original documentation for the audit requirement, because the employee who came up with the weight had retired. They could review the basis and, if it still makes sense, write a justification and submit that along with the documented PO count. They only need to produce documentation that the charges are reasonable.  The Uniform Guidance does NOT state how certain costs must be allocated; they must only meet the five criteria discussed earlier in this article. By providing an explanation of how the PO counts were weighted, the county could have nullified the finding and had their plan approved. 

The HHS decided not to defend the old allocation base of weighted POs and, instead, opted to resubmit the plan with an unweighted PO count as the allocation base. The auditor rejected this, citing that the costs must still be thrown out (yes, the entire $8 million!)  This is outside the scope of the auditor’s authority.  The auditor’s job is to ensure that the costs being charged are appropriate under the Uniform Guidance. They cannot tell a submitter that they may not charge costs that are allowed and allocated with a reasonable basis; a PO count for spreading purchasing charges is a reasonable basis.  What costs are allowable is NOT up for negotiation.  The reasonable basis is that the auditor acted appropriately by requesting documentation for the allocation base of the weighted PO count. 

After the HHS requested the use of a non-weighted PO count, the auditor explained that the costs of purchasing must be thrown out of the plan entirely this year, an adjustment be made to the carry-forward calculation, and then the purchasing costs can be brought back into the following year’s cost allocation plan using this non-weighted PO count.  Aside from the loss of a large collection in the current year’s plan, this request added an unnecessary amount of staff effort to implement these carry-forward changes and revise the plan.  These requests were not in-line with the Uniform Guidance.  Even if the best available basis for these purchasing costs were FTEs, they would still be considered an allowable cost to include in the cost plan this year.  The county is fully within their rights to resubmit the plan for this year with a change. Following a series of calls with the auditor to discuss the language and intent of the Uniform Guidance, we pushed back against this audit finding and the county was allowed to include the purchasing costs. 

The more educated both the auditors and the plan preparers become, the more efficient the process will be.  Imagine how much staff time would have been saved by both the FTA and the HHS had this initial finding not been turned into a drawn-out disagreement.  Or worse, consider the money lost if the county had backed down and removed the purchasing charges.

The teachable moment from this is that you, as the report preparer, are not the only one who is learning the requirements of the Uniform Guidance.  Auditors are also learning the guidelines and may make an error.  Educate yourself so that you can defend your plan. Understand what an auditor can and cannot do.