National Institutes of Health Extramural Research Grants:	 
Oversight of Cost Reimbursements to Universities (31-JAN-07,	 
GAO-07-294R).							 
                                                                 
The Department of Health and Human Services' (HHS) National	 
Institutes of Health (NIH) is the nation's leader in conducting  
and sponsoring biomedical research. More than 80 percent of NIH's
budget, which totaled over $28 billion in fiscal year 2006, is	 
used to support extramural research, which is primarily conducted
at over 500 universities nationwide. NIH reimburses universities 
for direct costs that can be specifically attributed to research 
sponsored by NIH grants, including costs for labor and materials 
used solely to carry out the research. It also reimburses	 
universities for indirect costs, which include various facility  
and administrative expenses incurred by the universities for the 
shared support of such research. To be reimbursed for direct and 
indirect costs, universities must properly identify and claim	 
them in accordance with federal guidance. Because indirect costs 
cannot be specifically attributed to a particular research grant,
they are charged via an indirect cost rate that is applied to the
direct costs for each grant agreement. The oversight		 
responsibilities of NIH's institutes and centers (IC) include the
financial management of grants as well as ensuring that grantees 
comply with the terms of the grants. Audit responsibility for NIH
research grants is shared between nonfederal auditors and HHS's  
Office of Inspector General (OIG). Because any incorrect	 
allocation or claiming of costs could put federal funds at risk, 
Congress asked us to review indirect costs associated with NIH	 
extramural research grants and oversight of direct and indirect  
costs claimed by universities receiving these grants. In	 
response, we (1) describe the trends in indirect costs for NIH	 
extramural research grants awarded to universities for fiscal	 
years 2003 through 2005, (2) describe HHS's current key controls 
to ensure that grantees comply with federal guidance in claiming 
costs, (3) determine the frequency and scope of single and OIG	 
audits of grantees, and (4) determine what actions NIH has taken 
to address auditors' findings of improper claiming of direct and 
indirect costs. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-294R					        
    ACCNO:   A65434						        
  TITLE:     National Institutes of Health Extramural Research Grants:
Oversight of Cost Reimbursements to Universities		 
     DATE:   01/31/2007 
  SUBJECT:   Allocation (Government accounting) 		 
	     Audit oversight					 
	     Audits						 
	     Colleges and universities				 
	     Cost analysis					 
	     Federal grants					 
	     Fund audits					 
	     Grant administration				 
	     Grant monitoring					 
	     Internal controls					 
	     Program evaluation 				 
	     Research and development costs			 
	     Research grants					 
	     Corrective action					 

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GAO-07-294R

   

     * [1]PDF6-Ordering Information.pdf

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January 31, 2007

The Honorable Tom Coburn, M.D.
Ranking Minority Member
Subcommittee on Federal Financial Management, Government
Information, and International Security
Committee on Homeland Security and Governmental Affairs
United States Senate

Subject: National Institutes of Health Extramural Research Grants:
Oversight of Cost Reimbursements to Universities

Dear Senator Coburn:

The Department of Health and Human Services' (HHS) National Institutes of
Health (NIH) is the nation's leader in conducting and sponsoring
biomedical research. More than 80 percent of NIH's budget, which totaled
over $28 billion in fiscal year 2006, is used to support extramural
research, which is primarily conducted at over 500 universities^1
nationwide. NIH reimburses universities for direct costs that can be
specifically attributed to research sponsored by NIH grants, including
costs for labor and materials used solely to carry out the research. It
also reimburses universities for indirect costs, which include various
facility and administrative expenses incurred by the universities for the
shared support of such research.

To be reimbursed for direct and indirect costs, universities must properly
identify and claim them in accordance with federal guidance. Office of
Management and Budget (OMB) Circular No. A-21^2 establishes the principles
for determining the types of direct and indirect costs that are allowed to
be claimed and the methods for allocating such costs to federally funded
research. Because indirect costs cannot be specifically attributed to a
particular research grant, they are charged via an indirect cost rate that
is applied to the direct costs for each grant agreement. Each university
develops a proposed indirect cost rate, based on information such as the
amount of physical space used for conducting research. A university's
final indirect cost rate is generally determined by negotiating its
proposed rate with HHS's Division of Cost Allocation (DCA).^3 DCA is
responsible for ensuring that the final negotiated indirect cost rate
complies with OMB Circular No. A-21. Additionally, for each university
that received $25 million or more in federal funds for its most recently
completed fiscal year, DCA reviews its disclosure statement, which details
the university's cost accounting practices. The oversight responsibilities
of NIH's institutes and centers (IC)^4 include the financial management of
grants as well as ensuring that grantees comply with the terms of the
grants.

^1We are using the term university to refer to any domestic institution of
higher education.

^22 C.F.R. pt. 220 (2006).

^3OMB assigns responsibility for negotiating indirect cost rates to HHS's
DCA or the Department of Defense's Office of Naval Research, normally
depending on which department provided more funds to the educational
institution over the past 3 years. According to DCA, its staff negotiates
rates for more than 90 percent of the universities that receive NIH
grants.

Audit responsibility for NIH research grants is shared between nonfederal
auditors^5 and HHS's Office of Inspector General (OIG). Universities
receiving NIH grants are subject to the provisions of the Single Audit
Act,^6 as amended, and as implemented in OMB Circular No. A-133. These
provisions, as implemented by OMB Circular No. A-133, require each
university that expends $500,000 or more in a year in federal awards to
obtain a "single audit" from a nonfederal auditor. These organizationwide
audits^7 are required to include a financial statement audit and cover
internal controls^8 and compliance with laws and regulations pertaining to
major programs^9 that affect all federal funding, including grants. OIG
responsibilities for NIH research grants include determining potential
program vulnerabilities, identifying specific areas that warrant review,
conducting its own audits of grantees, and providing recommendations for
corrective action to the Secretary of HHS and to the Congress.

Because any incorrect allocation or claiming of costs could put federal
funds at risk, you asked us to review indirect costs associated with NIH
extramural research grants and oversight of direct and indirect costs
claimed by universities receiving these grants. In response, we (1)
describe the trends in indirect costs for NIH extramural research grants
awarded to universities for fiscal years 2003 through 2005, (2) describe
HHS's current key controls to ensure that grantees comply with federal
guidance in claiming costs, (3) determine the frequency and scope of
single and OIG audits of grantees, and (4) determine what actions NIH has
taken to address auditors' findings of improper claiming of direct and
indirect costs.

To describe trends in indirect costs for NIH extramural research grants
awarded to universities for fiscal years 2003 through 2005, we obtained
information from NIH on the total dollar amount of indirect and direct
costs allocated to all NIH extramural grants to universities. In addition,
we obtained and analyzed more detailed cost data from DCA for the 100
universities that received the most NIH funding for fiscal years 2003
through 2005 among universities for which DCA negotiates indirect cost
rates.^10 We also interviewed HHS officials having oversight
responsibility for setting indirect cost rates and ensuring that
universities properly claim indirect costs. Further, we obtained
information on HHS's efforts to ensure the quality of its data and
determined the cost data to be sufficiently reliable for the purpose of
this analysis. To describe HHS's current key controls to ensure that
grantees comply with federal guidance in claiming costs, we reviewed HHS's
policy guidance. To corroborate that the controls described by DCA were in
place, we then selected and reviewed five files from DCA's Washington,
D.C., office, including files for each of three universities where the
reviewers conducted a site visit. These files contain supporting
documentation related to HHS's process for reviewing indirect cost rate
proposals for universities. In addition, we reviewed six reports from an
HHS contractor that examined cost accounting practice disclosure
statements, choosing them from five universities that had problems
identified by audits that affected at least one NIH grant. We also
interviewed HHS management and compliance staff with knowledge specific to
key controls used to oversee costs at three ICs. To corroborate that the
controls described to us by HHS were in place, we obtained and reviewed
six randomly selected files documenting its reviews. To determine the
frequency and scope of single and OIG audits of universities that received
NIH extramural grant funds, we identified the universities where single
audits were required to be conducted during fiscal years 2003 and 2004^11
and where OIG audits were conducted from fiscal year 2003 through fiscal
year 2006. To determine the actions NIH has taken to address auditors'
findings, we interviewed OIG and NIH staff about steps taken to resolve
problems and reviewed supporting documentation from 15 selected audits
from fiscal year 2003 through fiscal year 2006. To select these audits, we
obtained information on the number of audits with findings of problems
with internal controls or claimed costs for NIH extramural grants. We then
obtained and analyzed a random sample of seven files documenting the
resolution of such findings for single audits and all eight files
documenting the resolution of such findings for OIG audits, where all
steps to resolve findings had been completed. Except for the OIG audit
resolution findings, the results from the limited samples we reviewed
cannot be generalized to the universe from which they were drawn. We
performed our work from September 2006 through January 2007 in accordance
with generally accepted government auditing standards.

^4NIH has 27 ICs, 24 of which have the authority to award grants.

^5We are using the term nonfederal auditors to include independent public
accountants and state and local governmental audit organizations.

^631 U.S.C. SS7501-7507.

^7If a university meets the funding threshold for having expended $500,000
or more in federal awards in the year, but only expends these funds under
one federal program, it can choose to have an audit specific to that
program, instead of an organizationwide single audit.

^8Internal controls are plans, methods, and procedures used by
organizations to meet their missions, goals, and objectives; to serve as
the first line of defense in safeguarding assets; and to prevent and
detect errors and fraud.

^9Under OMB Circular No. A-133, grants from different sources for the same
broad purpose, such as research and development, can be combined and
considered a major program for audit purposes.

Results in Brief

The proportion of NIH extramural research grant funds awarded to
universities for reimbursement of indirect costs was stable at about 28.5
percent annually during fiscal years 2003 through 2005. The stability of
the proportion of indirect costs reimbursed can be attributed to the
stability of indirect cost rates during this period. During this period,
indirect cost rates were stable because there was little change in the
largest component of the
indirect cost rate--the administrative component--and because indirect
cost rates generally remain valid for 2 to 4 years once they are
negotiated. Because the total amount of NIH funding for extramural
research grants to universities increased from about $13.9 billion in
fiscal year 2003 to about $15.2 billion in fiscal year 2005, the amount of
indirect costs awarded to universities increased from about $3.9 billion
to about $4.3 billion.

^10The total amount awarded to these universities accounted for over 80
percent of the total amount awarded to all universities receiving NIH
extramural research grants during fiscal years 2003 through 2005.

^11We did so by matching names from a file of universities and their
federal funding levels that we obtained from HHS with a file of
universities that received NIH extramural research grants. Because of
technical difficulties in matching these files, we are likely to have
underestimated the number of universities that received NIH extramural
research grants and were required to have single audits. In addition, we
could not determine the frequency of single audits required from
universities receiving NIH extramural grants for fiscal years 2005 and
2006 because HHS did not have complete information for these years at the
time of our review.

HHS's key controls intended to ensure that grantees comply with federal
guidance in claiming costs include the review of information submitted by
universities when indirect cost rates are set and when grant applications
and annual progress reports are submitted. Key controls for setting
indirect cost rates are administered by HHS's DCA and involve reviewing
indirect cost rate proposals. They can also include conducting on-site
reviews and examining cost accounting practice disclosure statements. In
carrying out these functions, DCA focuses much of its efforts on
universities with the highest dollar value of federal funding received.
HHS's key controls for overseeing reimbursements of costs claimed by
universities are administered by NIH's ICs and consist primarily of
reviews that occur when universities apply for new grants and when
universities submit their annual progress reports.

Almost three-quarters of the approximately 530 universities receiving NIH
extramural research grants--or about 390 of them--were required to have
single audits conducted by nonfederal auditors annually in fiscal years
2003 and 2004, and about 4 per year received OIG audits during fiscal
years 2003 through 2006. The scope of these two types of audits differed.
The single audit includes an audit of the university's financial
statements at the organization level and its system of internal control
and compliance with federal laws and regulations that affect all federal
funding, including grants, rather than specifically focusing on whether
costs associated with universities' NIH grants were properly claimed. The
OIG audits generally focused on a particular grant and the university's
compliance with rules and regulations that pertained to that grant, rather
than providing a broad examination of the university's internal controls
and compliance with federal laws and regulations over all federal funding,
including extramural grants.

NIH required universities to address auditors' findings relating to a
procedure or internal control that led--or could have led--to incorrect
claiming of direct or indirect costs and to reimburse any questioned costs
that it determined were not sufficiently supported. To resolve findings
related to a procedure or internal control, NIH required each university
to develop a corrective action plan, outlining the steps it would take to
address the problem. Our review of the audit resolution files indicated
that universities submitted evidence to NIH, such as a revised policy or
documentation of their implementation of new controls, to show that the
problems were addressed. To resolve findings concerning questioned costs,
NIH determined how much of the amount in question the university was
required to return. In resolving findings from OIG audits completed in
fiscal years 2003 through 2006, NIH required universities to reimburse the
full amount of questioned costs that it found were not sufficiently
justified. In two audits, NIH required universities to reimburse the full
amount of costs questioned by OIG, and in five other audits it determined
that universities sufficiently justified either all or some of the costs
questioned by OIG and did not require the universities to reimburse those
costs.

We provided a draft of our report to HHS for review. HHS provided
technical comments, which we incorporated where appropriate.

Background

NIH conducts and sponsors biomedical research through its ICs, each of
which is charged with a specific mission. ICs' missions generally focus on
a given disease; a particular organ; or a stage in development, such as
childhood or old age. ICs accomplish their mission chiefly through
intramural and extramural research. Intramural research entails government
scientists working in the ICs' own laboratories and clinics, whereas
extramural research is conducted at outside research institutions,
including universities, by scientists who have competed for extramural
research grants by submitting an application to an IC. NIH provides
extramural research grants that reimburse universities for the direct
costs of research that are allowable under OMB Circular No. A-21 and an
allowable portion of the indirect costs of administering the universities
and maintaining their facilities for research use.^12

Indirect Cost Rates and Reimbursements

In order for NIH to reimburse universities for indirect costs related to
extramural grants, an indirect cost rate must be established for each
university in accordance with OMB Circular No. A-21. The university is
responsible for calculating its proposed indirect cost rate. OMB Circular
No. A-21 requires the university to first allocate its annual total costs
from the previous year's activity into three categories: (1) direct costs
that are closely tied to specific grants or projects; (2) excluded
costs--direct costs that are excluded for the purpose of calculating the
indirect cost rate, such as costs for equipment and for subcontracts over
a certain threshold^13; and (3) indirect costs, that is, shared expenses
related to the facilities or administration of the university.

A university's indirect costs are then organized into a number of
components, within two categories--facilities and administrative.
Facilities costs that can be allowable for indirect cost reimbursement
include (1) allowances for depreciation and use of buildings and
equipment; (2) interest on debt associated with building and equipment;
(3) operation and maintenance expenses, such as for utilities and
janitorial services; and (4) library expenses, such as for the use of the
library and library materials purchased for research use. Administrative
costs that can be allowable for indirect cost reimbursement include (1)
general costs, such as those for central offices for the president and
management information systems; (2) departmental administrative costs,
such as costs for academic deans, secretaries, and office supplies; and
(3) administrative costs for sponsored projects, such as for a separate
office that administers contracts and grants.

To calculate the indirect cost rate, a percentage of each indirect cost
component is allocated to the university's research function on the basis
of benefits received from that component by the research function. For
example, a university can measure the square footage of floor space used
for research and use this measure to allocate the amount of costs it
claims for operating and using the space as a component in its indirect
cost rate proposal. Each indirect cost component allocated to research is
divided by the university's "modified total direct costs"--that is, its
direct costs minus the excluded costs--to obtain an individual rate for
each component. These individual rates are then summed to obtain the
university's indirect cost rate for research.

^12Indirect costs are often referred to as facility and administrative, or
F&A, costs.

^13Costs for subcontracts over $25,000 and equipment are excluded because
they can involve very large expenditures but usually do not require the
university's facilities and administrative support.

OMB Circular No. A-21 stipulates the maximum proportion of certain
components of indirect costs that can be reimbursed to a university, the
most important of which is administrative costs. Between 1966 and 1991,
the amount of indirect costs reimbursed to universities climbed steadily,
because there were no restrictions on the amount of indirect costs that
could be claimed. To curb such growth, OMB revised Circular No. A-21 in
1991 to impose a cap on the amount of administrative costs that could be
claimed for reimbursement, limiting them to 26 percent of a university's
modified total direct costs.

The universities submit their indirect cost rate proposals to the federal
agency responsible for approving them.^14 This agency is usually DCA,
which negotiates indirect cost rates for about 90 percent of universities
receiving NIH extramural research grants.^15 Each university that received
$25 million or more in federal funds during the previous fiscal year is
also required to prepare a disclosure statement detailing the cost
accounting practices used to develop its proposal. By completing the cost
accounting practice disclosure statement, the university attests that its
cost accounting practices comply with OMB Circular No. A-21. DCA is
responsible for providing technical assistance and guidance to the grantee
community in developing indirect cost rate proposals, reviewing cost
accounting practice disclosure statements, and negotiating and approving
university indirect cost rates. Additionally, DCA developed a review guide
to assist its cost rate negotiators as they review universities' indirect
cost rate proposals.

Administration and Oversight of Grants

While grantees are responsible for managing the day-to-day grant
activities in accordance with NIH requirements, responsibility for the
administration and oversight of costs claimed by grantees for NIH
extramural research is decentralized within NIH to the ICs. Each IC is
responsible for ensuring compliance with applicable federal requirements
for the grants it administers. Grant project periods average 4 years, but
grantees must annually submit progress reports to obtain funding for
subsequent years. The progress reports provide information regarding the
scientific progress of the grant as well as financial information. ICs are
responsible for reviewing applications for new grants and annual progress
reports. In their reviews of applications for new grants, ICs assess the
reasonableness of the proposed budget as it relates to the scientific
research the grantee plans to undertake to ensure that the proposed cost
of the grant is reasonable given the research intended. ICs are
responsible for reviewing universities' annual progress reports to
determine if scientific progress has been made, as well as the financial
status of their grants to determine whether the university is expending
funds as planned and whether its management of grant funding is consistent
with the scientific progress that has been made. On the basis of the
reviews of the annual progress reports, ICs are responsible for
determining whether grantees should continue to receive funding in the
following year.

^14Predetermined indirect cost rates, which are set through negotiation,
were first authorized by law in 1962. Pub. L. No. 87-638, 76 Stat. 437.

^15The Office of Naval Research in the Department of Defense is
responsible for reviewing and approving indirect cost rate proposals for
the other universities.

Audits Involving NIH Research Grants

Two types of audits that can examine compliance of universities with OMB
guidance on claiming costs for NIH research grants are single and OIG
audits. Universities that expend $500,000 or more in a year in federal
awards are required by the Single Audit Act, as amended and as implemented
by OMB Circular No. A-133, to obtain a single audit for that year.^16
These organizationwide audits are not intended to focus specifically on an
individual grant awarded by a particular agency. OIG conducts audits at
its discretion, depending on the availability of its resources to conduct
such audits. In some cases, OIG determines that a particular grant
warrants review, and in other cases OIG examines broader issues related to
grants, such as how particular costs are documented. OIG considers various
factors in deciding whether to conduct an audit, including the amount of
federal funding a university receives, as well as triggers that would
indicate potential vulnerabilities, such as allegations of improper costs
claimed that are made by university employees. NIH is responsible for
resolving findings that result from both types of audits. As it does so,
grantees have an opportunity to address audit findings on the propriety of
questioned costs with NIH.

Proportion of Indirect Costs to Total Amount Awarded for Extramural
Research Was Stable during Fiscal Years 2003 through 2005

The proportion of NIH extramural research grant funds awarded to
universities for reimbursement of indirect costs remained stable during
fiscal years 2003 through 2005. The amount in indirect costs awarded
annually equaled about 28.5 percent of the total amount awarded in
extramural research grants to universities. (See fig. 1.) This was similar
to the percentages for fiscal years 1992 through 2002, when indirect costs
ranged from about 28.5 percent to about 30 percent of the total amount NIH
awarded in extramural research grants to universities annually. While the
proportion of indirect costs awarded was stable, the total amount of
funding that NIH allocated to extramural research grants to universities
increased from about $13.9 billion in fiscal year 2003 to about $15.2
billion in fiscal year 2005. As a result, the amounts NIH awarded to
universities for direct and indirect costs associated with these grants
also increased over the 3-year period. Indirect costs increased from about
$3.9 billion in fiscal year 2003 to about $4.3 billion in fiscal year
2005, by an average of about 4.5 percent each year.

^16On June 27, 2003, OMB amended Circular No. A-133 to, among other
things, raise the dollar threshold for single audits. Universities with
fiscal years ending prior to January 1, 2004, and that expended $300,000
or more in federal awards were required to obtain single audits. For
universities with fiscal years ending after December 31, 2003, the
threshold amount to require single audits was set at $500,000 in expended
federal awards.

Figure 1: Percentage and Dollar Amount of Total Costs Awarded for
Reimbursement of Direct and Indirect Costs to Universities Receiving NIH
Extramural Research Grants, Fiscal Years 2003 through 2005

The stability of the proportion of indirect costs awarded during fiscal
years 2003 through 2005 can be attributed to the stability of indirect
cost rates during this period. For the 100 universities that received the
most NIH funding for fiscal years 2003 through 2005 and for which DCA
negotiates indirect cost rates, we found that average indirect cost rates
were stable over the 3 years we examined. For each of these 3 years,
indirect cost rates averaged about 51 percent of the modified total direct
costs associated with NIH extramural research grants.^17

The relative stability in average indirect cost rates for the universities
in our sample can, in part, be attributed to the stability in the rate for
administrative costs, the component that makes up the largest portion of
the indirect cost rate. The annual average amount of the administrative
component of the indirect cost rate, which is capped at 26 percent of
modified total direct costs, ranged from 25.6 percent in fiscal year 2003
to 25.8 percent of total costs in fiscal year 2005. In addition, once
indirect cost rates are negotiated, they remain in effect, and therefore
stable, for about 2 to 4 years.

^17Modified total direct costs are those that are closely tied to specific
grants or projects minus the costs excluded for the purposes of
calculating an indirect cost rate.

HHS's Key Controls Include Reviewing Proposals, Applications, and Reports

HHS's key controls intended to ensure that grantees comply with federal
guidance in claiming costs include the review of information submitted by
universities when indirect cost rates are set and when grant applications
and annual progress reports are submitted. Key controls for setting
indirect cost rates are administered by HHS's DCA. The controls involve
reviewing universities' indirect cost rate proposals. This can also
include conducting on-site reviews and examining cost accounting practice
disclosure statements to determine whether the statements comply with OMB
Circular No. A-21 requirements. In carrying out these functions, DCA
focuses much of its effort on high-dollar universities.^18 HHS's key
controls for overseeing reimbursements of costs claimed by universities
are administered by NIH's ICs. They include reviewing grant applications
and annual progress reports as well as the financial status of their
grants.

DCA reviews indirect cost rate proposals and documents its results as a
key control to support negotiation of the rate for each of the
universities for which it is responsible.^19 DCA reviews information
provided by the universities in the proposals on the indirect, as well as
direct, costs of research that are used to develop the proposals. During
fiscal year 2006, DCA officials informed us that staff completed indirect
cost rate negotiations that year for 56 universities that were classified
as high dollar, as well as for 324 universities with federal funding below
the high-dollar threshold.

On the basis of a risk assessment, DCA performs a more extensive review
for certain universities and a more limited one for the rest. As part of
its reviews, DCA conducts a preliminary analysis of universities' indirect
cost rate proposals to determine the extent of its review as either full
or limited. DCA's determination is based on a risk assessment performed by
the cost rate negotiator, which entails a comparative analysis of the
proposed rates to the previously negotiated rates, a review of the
historical work paper file, and a discussion with the previous negotiator,
and takes into account whether the university is classified as high
dollar.

When DCA performs a limited review, it generally applies the preliminary
steps outlined in DCA's review guide for assessing indirect cost
proposals. DCA officials explained that for limited reviews, cost rate
negotiators evaluate certain aspects of the proposal to determine whether
it appears reasonable and consistent with OMB Circular No. A-21, such as
performing a trend analysis, reconciling the proposal to financial
statements, and testing the rates for variability.

When DCA performs a full review, the cost rate negotiators generally cover
most steps contained in DCA's review guide for assessing indirect cost
proposals. These steps involve tasks such as a more detailed analysis of
specific components of indirect cost rates, including allocation of
depreciation, interest, maintenance costs, and space. However, whether the
cost rate negotiator conducts all or a subset of the steps identified in
the review guide depends on DCA's risk assessment of the proposal. DCA's
negotiators are expected to use their professional judgment in determining
the number and extent of review steps needed to ensure that the
university's proposed rate is reasonable and consistent with OMB Circular
No. A-21. If the cost rate negotiator is confident that a particular
component of the rate proposal is reasonable and allowable, the negotiator
can conduct a less in-depth review for a related step outlined in the
review guide.

^18DCA classified universities for review purposes based on a dollar
threshold for the amount of federal funding each received in the fiscal
year prior to the year in which the university submitted its indirect cost
rate proposal. High-dollar universities are those receiving over $21
million in federal funding during this period.

^19According to DCA officials, DCA is responsible for negotiating rates
for most universities receiving NIH extramural research grants, and the
rates generally remain in effect for 2 to 4 years.

For fiscal year 2006, DCA officials told us that their staff conducted
full reviews for 28 of the 56 high-dollar universities, most of which
included on-site reviews. DCA officials also told us that their cost rate
negotiators and management use professional judgment to determine whether
an on-site review is needed as part of a full review to better perform the
indirect cost rate negotiation process. An on-site review typically
assesses how a university allocates space to research and its other
functions^20 to determine how the costs associated with these activities
should be assigned. During fiscal year 2006, DCA conducted on-site reviews
for 25 of the 28 high-dollar universities for which it conducted full
reviews. Our examination of 5 of these 28 high-dollar university DCA case
files showed evidence of these reviews. If an on-site review reveals that
a university improperly allocated space to its various functions, DCA
makes adjustments to the university's proposed indirect cost rate. For
example, during one on-site review, DCA found that a university had used
an unacceptable methodology to allocate its space. As a result, DCA cost
rate negotiators proposed adjustments to the university's indirect cost
rate. This information, as well as other adjustments, became part of the
negotiation process in arriving at the final indirect cost rate, which was
lower than the rate proposed by the university.

DCA staff informed us that, as part of the negotiation process, its cost
rate negotiators examine cost accounting practice disclosure statements
for the universities that are required to provide them, that is, those
universities that received $25 million or more in federal funds during the
previous fiscal year. During fiscal year 2006, DCA had a contractor review
cost accounting practice disclosure statements for the 37 high-dollar
universities that met the requirement to submit disclosure statements.
These statements were reviewed to determine whether they adequately
described the university's cost accounting practices and whether the
described practices, in principle, complied with cost accounting standards
contained in OMB Circular No. A-21.^21 DCA officials informed us that a
university with deficiencies in its cost accounting practice disclosure
statement is required to correct any cost accounting practices that do not
comply with OMB Circular No. A-21, revise the statement to reflect the
changes in such practices, and resubmit it to DCA. Our examination of six
cost accounting practice disclosure statement reviews corroborated the
process described by DCA.

HHS's key controls for overseeing reimbursements of costs claimed by
universities are administered by NIH's ICs and consist primarily of
reviews that occur when universities apply for new grants and when
universities submit their annual progress reports. The grants management
staff we interviewed from three ICs informed us that they review grant
applications to ensure that the project budget submitted is reasonable in
terms of the research planned and that budgeted costs are allowable and
allocable to the project. Specifically, IC staff analyze proposed cost
elements and examine data to determine the necessity for, and the
reasonableness and allowability of, the costs included in the application
budget. In the reviews, IC staff also look for budgetary overlap, which
occurs when budgetary items (for example, costs associated with equipment
and salaries) that are requested in an application duplicate, or are
equivalent to, items or services that are provided by another source.

^20Other university functions include, for example, teaching and training
activities.

^21This examination did not include determining whether universities'
implementation of cost accounting practices complied with the cost
accounting standards in OMB Circular No. A-21.

IC staff review progress reports to determine the level of funding to
provide in the upcoming budget year. NIH officials explained that IC staff
make these decisions based in part on whether a grantee is spending money
at a rate that is about equal to, faster than, or slower than what was
outlined in the terms of the original grant agreement. A discrepancy could
indicate, for example, that scientific progress is lagging in relation to
costs, which may result in the IC's delaying funding or reducing the grant
amount. IC grants management staff told us that they also examine
financial status reports, which provide the grantees' expenditures and
unobligated balances, as they are submitted by universities. Using this
information, IC staff compare the amounts spent by the grantee relative to
approved award amounts that remain unobligated for the same budget period
to determine if the university is expending funds as planned. They then
make decisions regarding the level of funding they will provide in the
upcoming budget year. If review of the progress report or financial status
report indicates that additional analysis is warranted, ICs then compare
scientific progress noted in the university's annual progress report to
information from HHS's records of funds drawn down by the grantee. Our
review of six randomly selected grant case files from two NIH ICs
indicates that, as NIH officials had told us, IC staff reviewed the
application budget and examined financial status and progress reports and
other documents submitted by the universities.

Almost Three-Quarters of the Universities Were Required to Be Audited
Annually

Almost three-quarters of the approximately 530 universities that received
NIH extramural grant funds were required to receive single audits from
nonfederal auditors annually in fiscal years 2003 and 2004, and about 4
per year received OIG audits during fiscal years 2003 through 2006. Under
the Single Audit Act, as amended, and as implemented in OMB Circular No.
A-133, each university that expends $500,000 in federal awards annually
must have a single audit conducted by nonfederal auditors. For fiscal
years 2003 and 2004, about 390 universities were required to have single
audits for each of these years.^22 They made up about 73 percent of the
universities receiving NIH funds for extramural research annually. In
addition to single audits completed by nonfederal auditors, OIG completed
an average of three audits per year during fiscal years 2003 through 2006
of NIH grants at universities.

The scope of these two types of audits differed. The single audit includes
an audit of the university's financial statements at the organization
level and its system of internal control and compliance with federal laws
and regulations that affect all federal funding, including grants, rather
than specifically focusing on whether costs associated with universities'
NIH grants were properly claimed. As part of their overall examinations of
internal controls, nonfederal auditors examined transactions under various
federal grants or contracts during their single audits, which resulted in
questioning costs claimed by NIH grantees. OIG conducts its audits at its
discretion subject to the availability of its audit resources.^23 The OIG
audits issued from fiscal years 2003 through 2006 that we reviewed
generally focused on particular grants and the university's compliance
with rules and regulations that pertained to them, rather than providing a
broad examination of the university's internal controls and compliance
with laws and regulations pertaining to federal funding.^24 However,
focusing on problems in claiming costs for a specific grant can uncover
systemic internal control problems that could affect other federal grants.

^22In fiscal year 2003, 534 universities received NIH extramural research
grants; 385 of these were required to have single audits. In fiscal year
2004, 532 universities received NIH extramural research grants; 392 of
these were required to have single audits.

Although the scope of the single and OIG audits differed, findings
resulting from these audits identified similar issues. For example, one
single audit found that a university did not have effective internal
controls to ensure that labor costs associated with an NIH grant, as well
as with other federally funded programs, were properly documented and
claimed. Similarly, an OIG audit found that a university overcharged
$37,780 in direct and indirect costs associated with an NIH grant, which,
in turn, revealed a systemic weakness in the university's procedures
intended to ensure proper accounting for the time and activity of
individuals working on its grants. Other issues that were identified as a
result of both OIG and single audits included unallowable costs claimed,
incorrect accounting for indirect costs, allocation of costs to the wrong
grant, and insufficient monitoring of subrecipients.

NIH Required Universities to Address Systemic Weaknesses and Reimburse the
Questioned Costs That It Determined Were Not Sufficiently Supported

We found that NIH required universities to address all single and OIG
audit findings and also required them to reimburse the costs questioned in
the OIG audits to the extent that NIH determined the questioned costs were
not sufficiently justified. Single and OIG audits in fiscal years 2003
through 2006 sometimes found nonmonetary problems related to a procedure
or internal control or monetary problems with specific costs claimed for
NIH extramural research grants. Overall, for fiscal years 2003 through
2006, 109 single audits and 9 OIG audits resulted in findings that
required NIH resolution.

For the 15 files that we reviewed documenting NIH's resolution of findings
resulting from single or OIG audits, all contained nonmonetary findings
resulting primarily from procedural weaknesses in need of resolution.^25
NIH officials told us that findings resulting from single audits are
typically nonmonetary in nature, such as inadequate documentation of costs
claimed or insufficient monitoring of subrecipients of grants. OMB policy
requires universities to develop corrective action plans to address single
audit findings, and NIH has a similar requirement for OIG audits. In
reviewing audit resolution files, we found that NIH obtained universities'
documentation to address problems. These included corrective action plans
and any revised policies and procedures cited in the corrective action
plans for resolving particular nonmonetary findings, such as to ensure
adequate documentation is maintained for claimed costs or to improve the
process for monitoring subrecipients.

^23Because of the risk of improper payments under the Medicare and
Medicaid programs, the majority of OIG funding is used for audit work
related to these federal programs.

^24According to OIG officials, audits currently under way for fiscal year
2007 involve the examination of broader issues across several
universities, such as whether universities are appropriately allocating
administrative costs to their indirect cost rates.

^25We reviewed seven randomly selected single audits and eight OIG audits,
which represented all of the OIG audits from fiscal years 2003 through
2006 involving NIH grants in which all steps to resolve the audit findings
had been completed.

For the 15 files we reviewed documenting NIH's resolution of findings
resulting from single or OIG audits, 10 contained monetary findings of
specific costs questioned that needed to be resolved. Three of these were
single audits, and 7 were OIG audits. To resolve monetary findings, NIH
determined how much of the amount in question the university was required
to return. In doing so, NIH officials reviewed the monetary findings and
discussed them with university officials. NIH officials explained to us
that in determining whether the costs claimed should be accepted, NIH
considered information from its staff responsible for overseeing a grant's
scientific progress, including whether the research funded by the grant
was complete and adequate, in addition to the documentation provided.
Officials stated that NIH considered the facts of each case and determined
whether the information provided to justify the costs claimed was
sufficient.

NIH officials told us that for single audits with monetary findings, NIH
typically obtains the full amount of costs questioned from the
universities. Two of the three single audits that contained such findings
identified unallowable costs specific to NIH grants, and these costs were
relatively small, totaling $4,296. In both cases, NIH recovered the full
amount of these costs. The third audit questioned whether $153,529 in
costs should be included in the calculation of a university's indirect
cost rate. To resolve the issue, NIH required the university to reopen
negotiation on its indirect cost rate. Subsequently, the university's
indirect cost rate changed from 63 percent in fiscal year 2003 to 60
percent in fiscal year 2004.

For monetary findings resulting from the OIG audits completed in fiscal
years 2003 through 2006, we found that NIH did not always require
universities to reimburse the full amount of costs questioned. Of the
seven OIG audit files we reviewed with monetary findings, NIH recovered
the full amount of costs questioned in two cases and recovered less than
the full amount in five cases. In total, OIG questioned about 12 percent
of the funds that it audited. Of the $1.5 million in funds questioned, NIH
recovered $864,860. This represents about 56 percent of the OIG's
questioned costs that NIH determined were insufficiently justified. (See
table 1.)

Table 1: NIH's Resolution of Monetary Issues Identified by OIG Audits

                                                                         osts 
                   iscal year during                   Costs   insufficiently 
                      hich audit was osts audited questioned justified and by 
Audit number             ompleted       by OIG        OIG              NIH 
A-04-04-01001                2004   $4,070,528  $565,820a         $565,820 
A-01-06-01501                2006      761,219    249,525          249,525 
A-01-04-01505                2005    1,720,000    281,993           23,686 
A-01-02-01502                2003    1,900,000    102,378           19,323 
A-01-03-01503                2004      890,848    245,174            4,994 
A-01-04-01506                2005    2,730,000     37,780            1,512 
A-01-03-01502                2004      525,188     61,215                0 
Total                              $12,597,783 $1,543,885         $864,860 

Source: GAO analysis based on NIH's audit resolution documentation.

aOIG also set aside $1,786,568 in costs claimed for NIH to determine if
these costs were properly supported. NIH determined that they were.

NIH recovered less than the full questioned costs in the OIG audits
because when NIH staff reviewed the audits, it determined that the costs
in five cases were sufficiently justified by information provided by the
grantee and input from NIH staff responsible for overseeing scientific
progress associated with the grant. NIH staff sometimes accepted documents
that OIG did not accept as sufficient evidence to support claimed costs.
For example, for one university OIG could not determine who requested
certain services and whether the costs were allocable to the grant.
Although the university had presented invoices as support, the
corresponding purchase requisitions, which contained the necessary
information to address OIG's inquiry, had not been retained. Subsequently,
NIH accepted the invoices as support and determined that approximately
$119,000 of questioned costs were acceptable and need not be reimbursed.

In other cases, the universities provided additional documentation to
justify the costs that were claimed. For example, in one case, OIG found
that costs associated with time and effort spent by summer and part-time
labor were unsupported and other costs were incorrectly charged. The
university provided alternate documentation for these costs, which OIG did
not accept. However, after a review of the facts of the case and internal
discussions with NIH staff responsible for overseeing scientific progress
associated with the grant, NIH accepted the documentation in conjunction
with additional explanatory information from the university and ultimately
determined that the approximately $193,000 in costs claimed were
acceptable.

NIH officials told us that if a university does not agree with NIH's
determination of the appropriate resolution of the audit, the agency
issues an audit determination letter. The audit determination letter
specifies the amounts to be returned, including accrued interest, and any
corrective actions to be taken by the university. According to NIH
officials, an audit determination letter is rarely needed because the
universities and NIH almost always agree on the resolution of audit
findings. In the event NIH issues such a letter, universities have the
right to appeal an audit determination.

Agency Comments and Our Evaluation

We provided a draft of our report to HHS for review. HHS provided
technical comments, which we incorporated where appropriate. HHS indicated
in its technical comments that, in addition to the key controls discussed
in this report, it also has several other controls to oversee costs
claimed by universities. Specifically, HHS mentioned ICs' use of the terms
and conditions of the grant and prior approval requirements, the NIH
Office of Financial Management's review and approval of financial status
reports, and the HHS Division of Payment Management's reconciliation of
federal cash transaction reports. While there is an element of
professional judgment that enters into our determination of whether a
control is key or not, we believe the controls we have identified are the
most significant in the context of our engagement objectives. HHS also
provided additional context on single audit coverage for universities
receiving NIH research grants, stating that nearly all of NIH's research
grant funding for fiscal years 2003 and 2004 was awarded to universities
required to have a single audit for those years.

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Enclosure

                     GAO Contacts and Staff Acknowledgments

GAO Contacts

Cynthia Bascetta, (202) 512-7101 or [email protected] Robert E. Martin,
(202) 512-9508 or [email protected]

Acknowledgments

In addition to the contacts named above, Sheila K. Avruch, Assistant
Director; Kimberly Brooks, Assistant Director; Paul Caban; Nora Hoban;
Keyla Lee; and Roseanne Price made key contributions to this report.

(290570)

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