Financial Compliance

Contents

 

What’s the Worst that Could Happen?

University Financial Consequences Chart

The consequences of not following financial compliance rules in managing sponsored projects can range from detrimental to devastating – adversely affecting personal careers, university funds, and institutional reputations.Note the negative audit findings and consequences for some universities in recent years listed in the image on the right.And even though the faces pictured in the chart are not actual staff photos, remember that these statistics relate to more than just numbers and findings.Here is a short list of potential negative effects:

  • Loss of funding
  • Legal liability – individual/organizational
  • Institutional suspension
  • Compliance integrity agreements
  • Harm to institutional reputation
  • Harm to researcher reputation
  • Loss of public trust

Review this important Financial Compliance section of the SPA Guide thoroughly to learn more about managing the high risk financial issues in award management and how to reduce potential audit findings.

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Who is Responsible for Financial Compliance?

There is an easy answer to that question: We are all responsible!

Compliance must be a joint venture across campus to be successful. The Office of Contracts and Grants as well as hundreds of people across campus (Principal Investigators, Research Officers, accounting staff, etc.) who handle the financial aspects on research (ledger 5) accounts share this responsibility.

As an essential employee in our university research community, it is your responsibility to review compliance rules and ask compliance questions as necessary when processing fiscal transactions on research project accounts.

Click to Review the Following Charts

View SHARED RESPONSIBILITIES Chart »

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Shared Resposibilities Chart

View COLLEGE & UNIT RESPONSIBILITIES Chart »

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College Responsibilities Chart

View Office of CONTRACTS & GRANTS Chart »

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CNG Chart

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Pre-Audit Responsibilities

The university has delegated important pre-audit responsibilities related to financial compliance to College Business or Research Offices or Departments as outlined in the following chart. (To print or bookmark this chart, click on the chart and it will open in a new tab or window.)

Pre-Audit Responsibilities

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OMB site logo and linkFollowing the Rules

We must make sure that our proposal budgeting and award management complies with a number of rules and regulations to avoid audit findings and potential penalties as described in the previous section.

Since the rules are complex, this section is structured with links to other web pages as well as detailed charts and content below.

Tell Me More – Basic Types of Costs

Review the chart below for general definitions of the types of costs that apply to sponsored projects.

Compliance Term Definitions

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Important Note – The Buck Stops Here!

You cannot rely on a sponsor’s approval of a budget to ensure that your specific cost items are allowable. The sponsor assumes that the university has complied with Circular A-21, the F&A cost rate proposal assumptions, and all other regulations cited. However, sponsors may approve one of our budget items that may be allowable at other institutions as a direct charge but may not be allowable at our university because of the decisions made at our institution regarding the Disclosure Statement and the F&A cost rate proposal process. Because of these variables, the sponsor cannot reliably make a determination of allowability for our university.

It is also possible that even if the agency approves an expenditure, various auditors (e.g., Department of Health and Human Services (DHHS) sponsor, state, or internal auditors) could disallow the expenditure based on their review, judgment, or lack of appropriate documentation.

For these reasons, it is the our responsibility to exercise judgment on each cost before including it in a budget for agency approval.

The Big Picture – Making the Decision to Include Budget Items

Before reviewing the specifics that follow, note the decision chart below. The chart illustrates the logical thought process that we should use before including items as direct costs in proposal budgets.

Decision Chart

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 American FlagsWhich Rules Apply?

Almost all of our awards fall under the requirements of certain federal Circulars and Cost Accounting Standards (CAS). Seventy five percent or more of our awards fall under one of the first two categories and most other awards fall under the other categories listed below. Contracts (rather than grants) fall under the Federal Acquisition Regulation (FAR).

These Cost Accounting Standards (CAS) apply to sponsored awards that meet any one of the following criteria:

  • FEDERAL AWARDS: All federal awards (including federal fixed price awards)
  • FEDERAL FLOW-THROUGH MONEY: All awards that contain any federal flow-through money. If you discover that the project is being funded with federal flow-through money after the award period has started, any unallowable direct charges must be removed from the account.
  • REFERENCE A-21 OR CAS: The terms and conditions of the proposal or award documents reference OMB Circular A-21 or Cost Accounting Standards.
  • COST-SHARING ON CAS PROJECT: Any sponsored project whose funds are being used as cost sharing on a CAS covered project. Only the individual cost(s) being used as cost sharing will be subject to the definitions of direct charges and “unlike circumstances.”
  • SPONSOR PAYING FULL F&A RATE: The sponsor is paying the University’s full negotiated Facilities and Administrative (indirect) cost rate (unless the project meets the University’s definition of a non-federal “Fixed Price” project).

Awards not covered under CAS administration are still subject to the requirements listed in the award as well as all University and State guidelines. Even if an award is not under CAS administration, expenditures unrelated to the award cannot be charged. All expenditures on an award must be reasonable, allocable, and allowable.

Main Federal Regulations

The chart below lists the basic elements of the main federal regulations that we must follow. You may review our explanatory notes that follow and click each section under the Policy heading to access the federal links (open in a new tab or window). (To print or bookmark this chart, right-click on the chart, select “View Image” to open the chart in a new tab or window.)

Federal Regulations Chart

A-21 CAS A-110 A-133

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Additional Policies and Regulations

In addition to the federal regulations cited above, sponsored awards must also comply with the following policies and authoritative documents. Click each section under the Policy heading to access the links (open in a new tab or window). (To print or bookmark this chart, right-click on the chart, select “View Image” to open the chart in a new tab or window.)

Other Federal Regulations Chart

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Order of Precedents Video

Order of Precedents Illustration

You may also view the optional 3-minute Order of Precedents video below that was produced by the National Council of University Research Administrators (NCURA).

The video presents an overview of how to follow the pyramid hierarchy illustrated on the right to answer the question, “Do I Follow the Award or the Circulars?” when deciding what rules and regulations apply to your projects.

Note that these NCURA videos are useful as additional references on our RAMP Guide topics, but be sure to refer to our specific university policies, procedures, and contacts when making project decisions.

Before clicking the play arrow below, take a moment to grab your ear buds or adjust your computer’s volume up or down to listen in your work environment.

FDP IV link NCSU regs link CFR link FAR link

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Allowable vs. Unallowable Costs

Section J

Unallowable Costs ChartUnder the regulations cited above as well as our university policies, costs are classified as allowable or unallowable. Unfortunately, there is not a simple list of allowable and unallowable costs or set of rules that easily fit every project. In fact, generally it is not the type of cost that determines allowability, but rather the purpose and circumstance of the expenditure. For example, just because a cost is “direct” doesn’t automatically make it allowable. In this section, you’ll find a number of tests and decision criteria to help you analyze charges as they relate to each project.

Generally, experienced PI’s and Research staff charge and track most common project costs accurately. Unfortunately, however, charges that are not handled correctly can result in audit findings and university penalties. Be sure to work with your college and departmental research staff and contact Sponsored Programs and Regulatory Compliance Services (SPARCS) and the Office of Contracts and Grants (CNG) when you have any questions about whether certain charges are allowable, being tracked and posted correctly, and that you have all of the documentation required to back up your decision to include a charge.

Review the chart on the right for commonly cited unallowable charges. Keep in mind that this list is not all inclusive and under certain circumstances the starred costs might be allowable with advance approval from the sponsor.

To print or bookmark the chart above, right-click on the chart, select “View Image” to open the chart in a new tab or window.

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Allowable Costs

Allowable ChargesThe Allowable Costs chart on the right and the bullet lists below contain “short lists” of commonly allowable charges and whether they are generally characterized as “Direct” or “Facilities or Administrative” (F&A) costs.

Common allowable costs that are DIRECT include the following:

  • PI or technical salaries and wages
  • Research supplies
  • Travel related to project
  • Copy charges directly related to project
  • Long distance phone calls
  • Special purpose equipment
  • Subcontracts

Common allowable costs that are considered part of F&A rates include the following:

  • Clerical salaries and wages
  • Office supplies
  • Office furniture
  • Cell phones
  • Telephone line charges
  • Postage
  • Memberships and subscriptions

(To print or bookmark the chart above, click the chart to open in a new tab or window.)

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Caution: Curvy Roads Ahead

Curvy Road Sign
Note that the charts above are a starting point only!

Review the following sections for important information regarding whether a cost is an allowable expense for each award and other criteria affecting the correct expense category (Direct or F&A).

Policies Related to Common Charges

Before reviewing the sections that follow detailing the general rules and regulations, you may want to read through some specific information on the common charges displayed below. Click the Policies content image below to go to this section of the CNG Cost Accounting Standards (CAS) site and then click any or all of the links there to learn more about each category. (Don’t forget to bookmark the section for future reference.)

Link to CAS Section

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Allowable Direct Costs: The Plot Thickens!

Curvy Road SignWhen direct costs do not fit neatly in the realm of the commonly acceptable, we need to examine each cost to make sure it meets the rules cited in the federal Cost Accounting Standards.

Review this section for a “plain English” primer, but be sure to check the regulatory language in OMB Circular A-21 to make sure that you are including allowable costs.


Relative Ease and High Degree of Accuracy

All of the direct costs charged to a project must be specifically identifiable with that individual project. The federal rules cite the concept of “relative ease and high degree of accuracy” meaning that the university must be able to easily explain how each charge relates directly to the project.

This assertion that a cost is allowable must also meet the following criteria:

  • Necessary: Must be needed to accomplish the approved goals and objectives of the project
  • Reasonable: Must be prudent given the stated goals and objectives (See chart below for more detail.)
  • Timely: Must be charged to the project on a timely basis (All charges requiring subsequent transfers and adjustments must be completed within 90 days of their original incurrence.)
  • Non-Personal: Cannot be of a personal nature or result in a benefit not normally provided to employees
  • Consistent: Costs must be applied in the same manner in “like circumstances” (See Like and Unlike Circumstances section below for more detail on this concept.)

Review the following chart for more detail on the “Reasonable” criteria cited above. (To print or bookmark this chart, click on the chart to open in a new tab or window.)

Reasonable Chart

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The Concept of Allocability

All of the direct costs as well as F&A costs charged to a project must also meet the definition of allocability. The federal rules cite this allocability concept related to whether or not a cost or portion of costs benefits a particular sponsored agreement.

Review the chart below for an overview of this concept. (To print or bookmark this chart, click on the chart to open in a new tab or window.)

Allocability Definition

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F&A TitleFacilities & Administrative Costs: Tell Me More!

Usually, the decision on whether to charge common expenses under Direct or F&A costs is clear.

Sometimes, however, the expenses may not be as clear-cut, so be sure to review all of the information in the two subsections that follow: Common F&A Costs and Unlike Circumstances.

And be careful when characterizing expenses as Direct costs or F&A costs – we cannot charge a sponsor twice (in both categories) for the same cost!

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Common F&A Costs

Click the site excerpt below to go to the Direct vs. Facilities and Administrative (F&A) Costs section of the CNG site for a primer on the definitions, criteria and specifics regarding this important determination of the correct category for your expenses.

Pay particular attention to the following excerpts from the page linked below:

  • All expenditures to a sponsored award must meet the definition of a direct cost. It is important to look at the purpose of the individual project. What may be considered a normal direct cost for one project may not be reasonable for another.
  • Questions arise frequently about certain items and how they should normally be charged. Review the information related to areas that are frequently questioned including: general office supplies, computers, printing and binding, cell phones, memberships and subscriptions, department-owned vehicles, and home internet access.

Link to Direct vs. F&A C&G pageYou may also want to go to the F&A Costs index page of the CNG site for even more information on F&A.

 

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LIKE and UNLIKE Circumstances

Curvy Road SignIn the previous section, you read the following statement: Costs must be applied in the same manner in “like circumstances.” This means that costs incurred for the same purpose in like circumstances must be treated consistently as either direct or F&A costs. To explain further, think of asking “How is this usually handled?” if you are trying to make sure that you are correctly classifying an expense as Direct or Indirect (F&A).

For example, if you can say that it is common practice to classify postage as a F&A expense, including postage in F&A fits the “like circumstances” concept.

Sometimes, however, even though postage is normally treated as an F&A cost, a particular project may have a special need for extra postage for mailing hundreds of survey questionnaires. In this case, it would be appropriate to charge the postage to mail the questionnaires as a Direct Cost for this project, since this would constitute “unlike circumstances” compared to routine postage requirements.

A narrative budget justification that explains the nature of “unlike circumstances” must be prepared if any of the following types of costs are budgeted as Direct Costs:

1. Administrative and clerical salaries (Salaries/Wages)
2. General office supplies (Supplies and Materials)
3. Postage (Current Services)
4. Telephone (Current Services)
5. Individual memberships and subscriptions (Fixed Charges)

For more detail on these expenses and the meaning of “unlike circumstances” as they relate to common charges, click the image below to review this section carefully if you have not already done so:

 Link to CAS Section

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Projects With UNLIKE Circumstances

The following types of “off the map / out of the norm” projects are likely to incur costs that meet the definition of unlike circumstances:

  • Off the Map AnalogyLarge, complex programs that entail assembling and managing teams of investigators from a number of institutions.
  • Projects that are geographically inaccessible to normal departmental administrative support and services, such as sea-going vessels, radio astronomy projects, and other such field sites that are remote from campus. (NOTE: Administrative support staff must reside at the remote site).
  • Projects that require extensive travel/meeting arrangements for large numbers of participants, such as conferences and workshops.
  • Projects that involve extensive data accumulation, analysis and entry, surveying, tabulation, cataloging, searching literature, and reporting.
  • Projects whose principal objective is the preparation and production of large reports, manuals, books, manuscripts, and monographs (excluding routine progress and technical reports).
  • Individual projects requiring project-specific database management; individualized graphics or manuscript preparation; human or animal protocols; and multiple project-related investigator coordination and communications.

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Watch Out for UNLIKE Circumstances Red Flags

The following are “red flags” to avoid when trying to use the “unlike circumstances” justification for charging expenses as Direct Costs:

red flag Costs representing a financial need versus being directly related to the purpose of the award

red flag Pooling proposals together for the sole reason of justifying expenses as direct costs

red flag Making up for insufficient or no F&A cost money from the sponsor

red flag Sponsor willing to pay the cost as Direct even though the university consistently charges these types of costs as F&A for other projects

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CAUTION! Important Financial Compliance Procedures

Review the following cautions to make sure that your college is not responsible for audit findings.

Caution SignCOST TRANSFERS:

  • Charge costs to sponsored awards only if those costs directly relate to the goals and objectives of that project.
  • Make all cost transfers within 90 days of the original date of incurrence.
  • Re-certify effort reports within the appropriate time period (depending on where we are in the certification process) to assure that what was paid in labor distribution matches actual effort. This policy applies to all salary charges (both monthly and biweekly) as well as non-salary expenditures.
  • The Director of the Office of Contracts and Grants must approve transfers of salary expenditures made later than 90 days. A written explanation, signed by the Dean, must be submitted for approval of the transfer. For transfers of non-salary expenditures, an adequate explanation should be documented on the appropriate journal entry. The justification “to move charges to correct account” is NOT an adequate justification.
  • A delay in the expected receipt of future funding IS NOT justification for making charges to another sponsored award, even if the projects are related. Instead, request a “Pre-Award” account from SPARCS.

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Caution SignBUDGET OVERDRAFTS:

  • The College and Principal Investigators are responsible for preventing budget overdrafts. Federal, State and Private Sponsors DO NOT permit the transfer of costs to other sponsored projects for the purpose of:
    • Eliminating overdrafts caused by expenditure overruns
    • Avoiding restrictions
    • Other reasons of convenience
  • Transfer all cost overruns within 90 days of occurrence or sooner if at closeout of the project. The following procedures also apply:
    • The Office of Contracts and Grants reserves the right to transfer these expenditures to the College’s or the Department’s operating budget if not transferred within the 90-day time frame.
    • The College is responsible for all over-expenditures in the event that future funding is not received.

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Caution SignPURCHASES MADE IN THE LAST FEW MONTHS:

  • Auditors often question purchases made in the last few months of an award, especially the last three (3) months.
  • Do not make purchases in an attempt to “spend-out” an account balance. Ensure that purchases made near the end of the project’s funding period can meet the definition of “allowable” and are required in order to meet the specific goals and objectives of the award being charged.
  • Frequently, items or services purchased late in an award period are scrutinized to ensure that the costs can meet the criteria of “allowable direct” costs. These criteria include:
    • Reasonableness
    • Necessity/Purpose
    • Allocability
  • If the expenditure cannot meet these criteria, the cost may be considered an unallowable charge against the sponsored award. This is especially true with purchases of equipment and supplies since these types of costs are generally associated with the technical aspects of the project. Generally speaking, unless a no-cost extension is in progress, these types of costs should not be as frequent near the end of a project’s life.
  • Journal Voucher entries processed near the end of an award period also present a concern. These are considered “red flags” to auditors as they represent the movement of costs between funding sources.

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Caution SignRECORD RETENTION:

  • Retain all supporting documentation for at least three (3) years after the date of last financial transaction, depending on the specifics of the individual sponsored award.
  • The Office of Contracts and Grants will provide the college a list of projects that have been destroyed in C&G. At that time, you can then destroy any related college/departmental files.

Caution SignSUBCONTRACTORS:

  • The college/department should ensure that proper internal controls are in place for subcontractor invoices.
  • Since the University is acting as the primary agency for these invoices, the college/department should verify dates, calculations, work performed, etc. before approving for payment.

Caution SignSERVICE CENTER FACILITIES:

  • Any service center facility or “recharge” facility that provides a good or service to a “ledger 5″ project should have an approved use rate.
  • The Office of Contracts and Grants approves these rates.
  • See the Service Center section of this guide and  Service Center Reg10.05.09 for more information.

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REMINDERS…

Don't Charge Twice for Same  Cost
No Unallowable Costs

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spa-related-contacts-header

  • Send an e-mail to a University expert if your College Business Office cannot help on related questions.
  • Send an e-mail to the webmaster for this site if you discover broken links or want to make suggestions for improvement of this guide.

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Last Update: September 10, 2013