Non Payroll Federal Expenditure Cost Transfer Guidelines

INTERNAL CONTROL GUIDELINES FOR COST TRANSFER

PURPOSE
The Financial Analysis Office has prepared these guidelines to assist the campus Internal Auditors in their efforts to strengthen the internal controls over cost transfers to Federal grants and contracts. The purpose of these guidelines are to provide questions to determine if the transfer is allowable.

In prior cost transfer audits, the Department of Health and Human Services found some instances where the University did not comply with Federal regulations when transferring costs to Federal projects. The auditors identified unacceptable transfers made: 1. to eliminate cost overruns, 2. to use up unexpended funds, 3. charging projects based on unacceptable allocation methods, and 4. containing unallowable costs. This situation occurred because Federal and University guidelines were not consistently followed. Documentation at the department level was not always adequate to ensure that the transfers were acceptable.
BACKGROUND
Recent Federal audit reports have cited instances where grantees have transferred costs from other projects or programs to Federal grants many months after the original charges had been recorded in the grantee's accounting records. In many cases, the transfers were not supported by documentation which adequately explained why the transfers were made. The Federal government recognizes that transfers of costs from one project to another are occasionally necessary to correct bookkeeping or clerical errors in the original charges. The Federal government also recognizes that closely related work may be supported by more than one funding source and that in such cases a transfer of costs from one funding source to another may be proper. However, frequent, tardy, and unexplained (or inadequately explained) transfers, particularly where they involve projects with significant cost overruns or unexpended fund balances, raise serious question about the propriety of the transfers themselves as well as the overall reliability of the grantee's accounting system and internal controls.
REGULATIONS
1. Federal
  Federal regulations require that costs claimed on specific contracts and grants be allocable to the project being charged. Section C.4. a. of Office of Management and Budget (OMB) Circular A-21 states:
  
  "A cost is allocable to a particular cost objective (i.e., a specific function, project, research agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship..."
  
  Section C.4. b. further states that:
  
  "Any costs allocable to a particular sponsored agreement under the standards provided in this Circular may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored agreement, or for other reasons of convenience."
  
  The Public Health Services Grants Administration Manual provides further guidance regarding the issue of cost transfers. Chapter 6 of the Manual states that:
  
  "...frequent, tardy, and unexplained (or inadequately explained) transfers, particularly where they involve projects with significant cost overruns or unexpended fund balances, raise serious questions as to the propriety of the transfers..."
  
  "The transfers must be supported by documentation which contain a full explanation of how the error occurred and a certification of the correctness of the new charge. An explanation which merely states that the new transfer was made "to correct error" or "to transfer to correct project" is not sufficient..."
2. University
  The University guidelines regarding cost transfers are found in Business and Finance Bulletin A-47 Section V. Page 7
  
  These guidelines require that expenditure adjustments must be fully explained and justified. In addition, the Bulletin requires that the campus accounting office review transfers for compliance with applicable policies and terms of funding.
COST TRANSFER GUIDELINES
1. General
  1. Are formal policies and related procedures governing cost transfers incorporated in the campus policies and procedures manual?
  2. Have cost transfers been made to, from, or between Federal awards?
  3. Are cost transfers supported by documentation which adequately explains and justifies why the transfers were made?
  4. Are cost transfers caused by work which is supported by more than one funding source?
  5. Are cost transfers promptly booked?
  6. When direct salaries/wages are transferred, is there a reconciliation between the salaries and wages transferred and the applicable certified PAR form?
  7. Are interdepartmental cost transfers certified by both the losing and acquiring department?
  8. Are cost transfers dated?
  9. Do cost transfers involving Federal grants/contracts specify the contract and grant numbers, account and fund numbers of the award?
  10. Are cost transfers involving Federal awards systematically reviewed by the Accounting Office and/or the Contracts and Grants Office for adequacy of justification, certification, and timeliness?
2. Cost Transfer to Correct Errors
  1. Are cost transfers to Federal awards which represent correction of clerical or bookkeeping errors made promptly after discovery?
  2. Are cost transfers of this nature made prior to submission of expenditure reports to the Federal government?
  3. Are cost transfers supported by documentation which fully explains how the error was made?
  4. Does an appropriate official certify to the correctness of the new charge?
3. Cost Transfers Resulting from Closely Related Work
  When closely related work is supported by more than one funding source and cost transfers from the originally charged funding source are made to Federal awards, does the transfer contain the following:
  1. Costs that are allowable charges to the Federal program?
  2. Documentation which includes a full explanation and justification of the transfer?
  3. A certification by the principal investigator or other responsible official?
  4. Review and approval by a responsible financial or administrative official or the Accounting Officer?
  5. Transfer is completed within 120 days of original charges?
  6. If transfer is not made within 120 days of the original charge, is an explanation provided?
EXAMPLES OF UNALLOWABLE COST TRANSFERS TO FEDERAL PROJECTS
1. TRANSFERS ELIMINATING COST OVERRUNS
  Transfers made to shift costs to other sponsored agreements in order to meet deficiencies caused by cost overruns are unallowable.
  1. Was the cost transferred from a project which was in an overrun condition?
  2. Was the project terminated at the time of the transfer?
  3. Was the project terminated within 120 days of the transfer?
  4. Was the transfer caused by work which was supported by more than one funding source?
  5. Was the work performed under the project charged closely related to the work performed under the project originally charged?
  6. Were the costs charged to the projects in proportion to the benefits received by the project?
  7. Was the transfer supported by adequate source documentation (i.e., timesheets, vouchers, acceptable allocation procedures, etc.)?
2. TRANSFERS CHARGING PROJECTS BASED ON UNALLOWABLE ALLOCATION METHODS
  Transfers based on an unacceptable allocation basis are unallowable. The allocation of costs between projects must be reasonable and in realistic proportion to the benefit provided or equitable relationship.
  1. Was the allocation method used equitable, (i.e., did it result in overcharges to the project)?
  2. Were the costs charged to the project in proportion to the benefits received by the project?
3. TRANSFERS CONTAINING UNALLOWABLE COSTS
  Transfers that contain unallowable costs are unallowable.
  1. Were the costs transferred allowable charges to Federal programs under OMB Circular A-21?
  2. Were the costs transferred in accordance with the budget provision of the award?
  3. Were the costs transferred allowable under the award with prior approval?

PHS GRANTS POLICY STATEMENT MANUAL 7-18

COST TRANSFERS

Transfers of cost to, or from grant-supported projects or programs may sometimes be necessary to correct bookkeeping or clerical errors in original charges.

Transfers of costs to PHS grants by grantees, subgrantees and contractors under grants that represent corrections of clerical or bookkeeping errors must be made promptly after the error is discovered. The transfers must be supported by documentation that contains a full explanation of how the error occurred and a certification of the correctness of the new charge by a responsible financial or administrative official of the recipient organization. An explanation which merely states that the transfer was made "to correct error" or "to transfer to correct project" is not sufficient. It should be noted that frequent errors in the recording of costs may indicate the need for improvements in the grantee's accounting system and/or internal controls. Therefore, where such errors occur, grantees are encouraged and may be required to evaluate the need for improvements in these areas and to make what improvements are deemed necessary.

Health professions capitation grants are not subject to the policy stated above because of the general support nature of these awards and the latitude and flexibility allowed recipients in the use of these funds.

Documentation of cost transfers by grantees must be maintained and be made available for audit review pursuant to 45 CFR 74, Subpart D (see "Postaward Administration-Record Retention and Access").

CLOSELY-RELATED WORK

When closely-related work is supported by more than one funding source, the grantee may transfer costs from the originally charged funding source to a PHS grant, or between PHS grants, with written prior approval from the PHS awarding office Grants Management Officer, provided all of the following conditions are met:

The projects are scientifically and technically related;
The projects are under the direction of the same principal investigator;
The projects have been funded by the same PHS awarding office;
There is no change in the scope of the individual grants involved;
The relating of costs will not be detrimental to the conduct of work approved under each individual award; and
The relatedness will not be used to circumvent the terms and conditions of an individual award.

PHS GRANTS POLICY STATEMENT MANUAL 7-19

APPLICABLE CREDITS

The term "applicable credits" refers to those receipt or negative expenditure types of transactions that operate to offset or reduce expensive items that are allocable to grant-supported projects and activities as direct or indirect costs. Typical examples are purchase discounts, rebates, allowances, recoveries or indemnities on losses and adjustments or overpayments or erroneous charges.

Applicable credits to direct charges made to PHS grants must be treated as an adjustment on the grantee's Financial Status Report, whether those credits accrue during or after the period of grant support. The PHS awarding office will notify the grantee of any additional actions that may be necessary (see "Postaward Administration Reporting- Expenditure Report").

COST TRANSFERS MUST MEET THE FOLLOWING CRITERIA:

COSTS MUST BE A PROPER AND ALLOWABLE CHARGE OF THE PROJECT TO WHICH IT IS TRANSFERRED.
THE TRANSFER MUST BE SUPPORTED BY DOCUMENTATION WHICH CONTAINS A FULL EXPLANATION AND JUSTIFICATION FOR THE TRANSFER.
THE TRANSFER MUST BE CERTIFIED BY A RESPONSIBLE PROGRAM OFFICIAL AS TO IT'S PROPRIETY.
THE TRANSFER MUST BE APPROVED BY AN ADMINISTRATIVE OFFICIAL OF THE UNIVERSITY (ACCOUNTING OFFICE).
THE TRANSFER SHOULD BE MADE WITHIN 120 DAYS OF THE ORIGINAL CHARGE. IF THE TRANSFER IS DONE AFTER THIS PERIOD OF TIME, IT MUST INCLUDE AN ADDITIONAL EXPLANATION AS TO WHY THE TRANSFER WAS LATE.