Internal Control Objectives For Sponsored Program Awards

Internal Control Objectives For Sponsored Program Awards

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The internal control environment encompasses the policies, processes and skills that exist within a department to ensure only valid financial transactions are recorded, that such transactions are recorded accurately, and that rules and regulations are complied with. Internal controls can be thought of as proactive measures to prevent inappropriate charges and to ensure compliance.

Presented below are examples of control objectives and control techniques related to a sample of general types of transaction that are relevant to sponsored programs.

Activities Allowed or Unallowed
Allowable Costs/Cost Principles

Control Objectives To provide reasonable assurance that Federal awards are expended only for allowable activities and that the cost of goods and services charged to Federal awards are allocable and in accordance with applicable cost principles.

Control Techniques

- Reasonable budgets are submitted to the sponsor, reflective of the best estimate of total project costs, thus deterring a bias towards miscoding expenditures
- Department Chair does not tolerate circumstances of misuse of funds
- Administrative staff have a list of allowable and unallowable expenditures
- Computations are checked for accuracy
- Administrative and research staff have adequate knowledge of general and specific requirements applicable to the project
- Budget-to-actual comparisons are monitored
- Administrative staff attend training sessions
- Grant agreements and budgets, and OMB Circulars and sponsor guides are available to administrative staff

Cash Management

Control Objectives To provide reasonable assurance that the draw down of Federal cash is only for immediate needs

Control Techniques

- Establish controls to ensure all valid charges are recorded as they occur and that invalid charges are not recorded
- Establish controls to monitor milestone achievement to bill sponsors timely
- Monitor milestone cash collection and follow up on long outstanding requests for reimbursement

If a federally sponsored account receives an erroneous charge, the amount SPA requests from the federal sponsor may be greater than the true expenditures to date. Likewise, if a federally sponsored account does not receive charges on a timely basis, SPA may not request all funds the University has a legitimate right to, resulting in the University postponing reimbursement that it otherwise would have, including the appropriate amount of any applicable indirect costs. If the net effect of errors is that the University obtains reimbursement in excess of valid expenditures, it needs to pay interest expense to the federal sponsors. If the net effect of errors is that the University incurs expenditures in excess of reimbursements, it foregoes the use of funds otherwise available and perhaps even incurs unnecessary interest expense to borrow funds on its line of credit.

If the project provides for reimbursement through submission of an invoice to the sponsor upon achievement of a milestone, it is important to have controls in place to monitor milestone achievement, the amount that can be billed, and to create the bill timely.

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Bills must be timely, accurate, and complete.

Equipment

Control Objectives To provide reasonable assurance that proper records are maintained for equipment acquired with Federal awards, equipment is adequately safeguarded and maintained, disposition or encumbrance of any equipment or real property is in accordance with Federal requirements, and the Federal awarding agency is appropriately compensated for its share of any property sold or converted to non-Federal use. Refer to
http://www.rochester.edu/ORPA/manual/ .

Control Techniques

- Establish procedures to identify misappropriation or improper disposition of property acquired with Federal funds
- Affix property tags to equipment
- Conduct a physical inventory at least bi-annually and compare to property listing from Property Accounting
- Reimburse federal awarding agency for proceeds of property dispositions acquired with federal funds

Equipment is defined as any unit item with a life expectancy of at least two years and having an acquisition cost of $1,000 or more.

There are generally two types of equipment with regards to sponsored programs—Specific Purpose and General Purpose. It is important to review individual grants to determine if any special conditions or restrictions exist.

General Purpose Equipment should not, in general, be charged to sponsored programs. Exceptions are typically made if the equipment is used exclusively for the actual conduct of the project or is utilized as special purpose equipment (i.e., a computer that is necessary to perform and document scientific studies). In these cases, the criteria must be fully justified via a memo to the file. Examples of general purpose equipment are office furniture, printing and copying equipment, fax machines, word processing equipment, etc.

Refer to University policy (University of Rochester Guidelines on Determining the Allocability and Allowability of Equipment Purchased from Sponsored Program Funds) on the ORPA web page at
http://www.rochester.edu/ORPA/policies/.

Matching, Level of Effort, Earmarking

Control Objective To provide reasonable assurance that matching, level of effort, or earmarking requirements are met using only allowable funds or costs which are properly calculated and valued

Control Techniques

- Establish procedures to identify mandatory cost sharing
- Establish a spreadsheet to track cost share expenditures
- Knowledge of regulations to ensure only valid cost share expenditures are recorded
- Each month, highlight cost share expenditures on ledgers and place in files
- Complete a certificate of cost share effort every 6 months
- Ensure arms-length valuation of costs for donated services and supplies

Refer to the allocability section of this training. Also refer to University policy (University of Rochester Cost Sharing Policy and Procedures) on the ORPA web page at http://www.rochester.edu/ORPA/policies.

Sponsor Approval

Control Objective To provide a reasonable understanding of when approval of the sponsor is required.

Control Techniques

- Maintain a checklist of circumstances that require sponsor approval to determine if any
of those circumstances exist for the ledger being reviewed. Request PI to provide
proof of such approval for any identified circumstances

Prior approvals shall be requested from the sponsor if any of the following apply:
(1) Change in the scope or objective of the project or program
(2) Change in a key person specified in the application or award document, interpreted as being the PI or Co-PI
(3) The absence for more than 3 months, or a 25 percent reduction in time devoted to the project, by the approved project director or principal investigator
[For example, if the budget indicates 40% effort, then effort of 30% or less would need to be communicated, and approval obtained. The sponsor is concerned that the effort anticipated is not being expended. In the example above, if 10% effort is being voluntarily cost shared, and the 10% can be verified as being charged to another appropriate account, the sponsor would not need to be notified because total effort expended approximates the budget, it is just not being funded in totality by the sponsor.]
(4) The transfer of funds allotted for training allowances (direct payment to trainees) to other categories of expense
(5) Unless described in the application and funded in the approved awards, the subaward, transfer or contracting out of any work under an award
(6) Pre-award costs of 90 calendar days prior to award (may be waived on a case by case basis)
(7) One-time extension of the expiration date of the award of up to 12 months for the purpose of using unobligated balances (unless pre-approval is waived or the sponsor prohibits an extension)
(8) Carryforward unobligated balances to future periods

Program Income

Control Objective To provide reasonable assurance that program income is correctly earned,
recorded, and used in accordance with the program requirements.

Control Techniques

- Maintain a list of projects that have the potential to generate program income
- Photocopy checks and send originals to ORPA timely
- Understand how the sponsor wants program income treated (the three options are discussed below

Examples of program income are fees earned from services performed under the award, rental or usage fees for use of computer or laboratory equipment purchased with grant funding, funds generated by the sale of commodities and research materials, and registration fees to participants for a workshop or conference sponsored by a grant.

It is the responsibility of the Principal Investigator to identify sources of actual or potential program income at the proposal stage and to document this program income potential on the University Proposal Sign-Off Form.

As program income is realized, the Department is responsible for collecting such income.

Program income shall be treated in one of three ways, as determined by the Federal awarding agency regulations and the terms and conditions of the award:
(1) added to the funds committed to the project by the Federal awarding agency and recipient and used to further eligible project or program objectives (the “additive” method)
(2) Used to finance the non-Federal share of the project or program (the “matching” method)
(3) Deducted from the total project or program allowable cost in determining the allowable costs on which the Federal share of costs is based (the “deduction” alternative)

If the Federal awarding agency does not specify between the three options, then the “deduction” alternative applies to the program income.

It is noteworthy that Federal and non-Federal sponsors do differ in their treatment of program income.

Refer to the University policy (Program Income Policy) on the ORPA web page at http://www.rochester.edu/ORPA/policies/. The policy delineates the responsibilities of Principal Investigators/Departments regarding program income in addition to the responsibilities of ORPA and SPA.

Subrecipient Monitoring

Control Objectives To provide reasonable assurance that subrecipient activities are monitored.

Control Techniques

- Monitoring occurs to identify and react to changes in subrecipients, such as financial problems that could lead to diversion of grant funds, loss of essential personnel, loss of license or accreditation to operate a program, rapid growth, new activities/products/services, organizational restructuring
- Regular communication with subrecipients and appropriate inquires concerning the progress on Federal programs
- Monitoring subrecipient budgets
- Performing site visits to subrecipients to review financial and programmatic records and to observe operations
- Implementation of a tracking system to ensure timely submission of required financial reports and performance reports

The University is primarily responsible for both the scientific and the financial aspects of the research. In the negotiation phase with a subcontractor, the subcontractor submits a budget, including reference to direct costs, indirect cost rate, and percentage effort of the key research personnel. For clinical trials, there is typically also a mention of the extent of study participant enrollment.

There should be periodic monitoring by the University’s PI of the activities of the subrecipients. For example, for clinical trials, if there is a lower than expected enrollment, then certain direct costs should be lower than the original budget submitted by the subrecipient (honoraria would be lower, for instance). This should be communicated to the department administrator in order to ensure the requests for payment submitted by the subcontractor actually reflect a lower amount for direct costs. The administrator should compare the invoices/requests for payment submitted by the subrecipient against the original budget for consistency. Items that appear inconsistent (for example, a different indirect cost rate) should be questioned and appropriate adjustments should be made. The administrator should also verify the mathematical accuracy of the invoice/request for payment.

The University’s policy on subrecipient monitoring (Procedures for Subrecipient Monitoring Under OMB Circular A-133) can be found at http://www.rochester.edu/ORPA/policies/ and additional information can be accessed in the ORPA Manual at http://www.rochester.edu/ORPA/manual/ .

University Audit
September 2001

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