«Audit Report Consumer Federation of America Foundation - Costs Claimed Under EPA Cooperative Agreements CX825612-01, CX825837-01, X828814-01, ...»
In fact, during the period covered by the audit, the Foundation did have some written guidance on which the responsible officials relied "for determining the reasonableness, allocability and allowability of costs."11 That guidance was supplemented by OMB Circular A-122. However, we agree in principle that more formal written procedures are preferable to the guidance on cost allowability that was used. In fact, when the EPA Grants Management Office called the requirements of 40 CFR §30.21 to our attention in March 2002, we promptly prepared and adopted a more detailed "Cost Policy Statement" covering the relevant cost accounting principles. The "Cost Policy Statement" merely formalized procedures that are wellestablished in the assistance management field, and that our financial management staff was already applying during the period covered by the audit.
The DAR suggests that the Foundation’s alleged failure to have written accounting procedures "prevented proper evaluation of reported direct and indirect costs under the cooperative agreements." This comment is ambiguous. It may mean that, without "written accounting procedures," OIG was unable to evaluate reported direct and indirect costs. But it is difficult to understand how this could be the case.
Our Circular A-133 auditor had no difficulty evaluating our direct and indirect costs.
Moreover, the OIG has access to volumes of guidance on this point, and could easily have resolved any uncertainties by discussing them with us.
On the other hand, if the DAR is suggesting that, without "written accounting procedures," the Foundation was unable to "evaluat[e] reported direct and indirect costs," we strongly disagree. It does not follow that we failed to use consistent cost allocation practices. On the contrary, all our decisions on cost allocation were made by professionals with extensive experience in accounting, with the assistance (on
indirect cost rate proposals) with experts in the field of Federal grants accounting and administration. Direct and indirect costs are supportable as such by examination of the invoice(s) from the vendor(s) that identifies the purpose of the expense. The propriety of direct costs can further be examined by tying the purpose of the expense to the program objective or workplan. Such information was provided to the OIG.
Furthermore, one would expect that errors or inconsistencies in our practice, if any, would have been noted in our Circular A-133 audits between 1997 and 2002. But the independent auditor who conducted those audits and reviewed our allocation of direct and indirect costs found no reportable conditions or other problems.
We believe it would be unreasonable to conclude that direct and indirect costs were misallocated simply because of alleged shortcomings in our "written procedures."
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The basis of the DAR’s finding is OMB Circular A-122, Attachment A, subparagraph E(2), which requires a non-profit organization to submit an initial indirect cost proposal to its cognizant Federal agency not later than three months after the effective date of award, and organizations with a negotiated indirect cost rate to submit a new indirect cost rate proposal within six months of the close of each fiscal year. However, the standard terms and conditions in each of the Foundation’s CAs specifically instructed the Foundation not to submit any indirect cost rate proposals to EPA.
For example, the "Terms and Conditions" incorporated in CA CX 825837-01 provide that:
Furthermore, when we prepared a formal indirect cost rate proposal based on 1998 cost data for an award from the U.S. Information Agency ("USIA"), and sought to submit it to EPA as well, we were told by Joan Clark, our EPA Grants Management officer, that "EPA does not accept indirect cost rate proposals from non-profit organizations." In light of the fact that EPA was the Foundation’s "cognizant federal agency," the standard "Terms and Conditions," confirmed by the Grants Management Office, superseded the requirements of Attachment A, subparagraph E(2). Consequently, during the period covered by the audit, the Foundation was not required to prepare and submit an indirect cost rate proposal to EPA.
The OIG is surely aware of EPA’s policy of refusing new indirect cost rate proposals from non-profits, and of the basis for that policy - namely, that EPA has a significant backlog of indirect cost rate proposals from non-profit organizations submitted but not yet reviewed. In fact, CFA submitted an indirect cost rate proposal to EPA in 1994; ten years later, that proposal has not yet been reviewed or approved.
We acknowledge, however, that the standard "Terms and Conditions" did require the Foundation to prepare an indirect cost rate proposal for 1997, and to maintain that proposal in its files. We did not prepare such a proposal until 1999, in connection with our award from US Information Agency. Nevertheless, we believe this to be, at worst, a technical violation of our agreements that caused no prejudice to EPA, considering the fact that the proposal would have remained locked in our files, and that a comprehensive review of our indirect cost rates, and the establishment of final rates, will take place as part of CA close-out. If the final rates show that, over the life of the CAs, we recovered more in indirect costs than we were entitled to recover, EPA will, of course, be entitled to a refund.
In that connection, we note that we have already prepared an indirect cost rate proposal for 1997, which was shown to the OIG audit team, and are in the process of completing a proposal for 2003 (based on 2002 data), which we will submit once the OIG audit process is completed. In addition, we have reviewed our final cost data for the other years covered by the audit. Our preliminary analysis indicates that, for the period covered by the audit, we recovered significantly less in indirect costs than we were entitled to recover, and that the Foundation has underrecovered approximately $600 thousand in indirect costs. We will present our findings on this point to EPA as soon as they are completed.
We acknowledge that our indirect cost rates for 1999 through 2001 were miscalculated; it appears that, in the fraction used to calculate the rate, the numerator and denominator were inadvertently reversed. That error was identified and corrected during the review and analysis referenced in Part 6[A].
As noted above, we expect this correction, along with other appropriate corrections and revisions, will lead to a significant increase in the indirect costs payable to the Foundation under the CAs.
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Section 30.43 of the EPA Uniform Regulation, 40 CFR §30.43, provides that "all procurement transactions" under a cooperative agreement "shall be conducted in a manner to provide, to the maximum extent practical, open and free competition."
In addition, for each procurement transaction in excess of the small purchase threshold ($100,000), the recipient must maintain "procurement records and files" that include, at a minimum, "the basis for contractor selection; justification for lack of competition when competitive bids or offers are not obtained; and basis for award cost and price." 40 CFR §30.46. On request, these records and files must be made available for EPA review. 40 CFR §30.44(e).
The first contract (the "Radon PSA Contract") was awarded just after the execution of CA CX825612-01 in July 1997 to PlowShare Group ("PlowShare") of Stamford, Connecticut, an advertising firm specializing in public service campaigns for nonprofit organizations. The contract called for the development and delivery of public service announcements ("PSAs") for a public service campaign to increase consumer awareness about the health hazards of radon, and to encourage consumers to test their homes for the presence of radon. From 1998 through 2002, as EPA amended CA CX825612-01 to provide annual increments in funding for the Radon PSA campaign, the Foundation extended the Radon PSA Contract as well. Each annual extension increased the total contract amount by more than the $100,000. So although there was only a single procurement contract under CA CX825612-01, there were a total of five (5) procurement transactions under that CA in excess of the $100,000 small purchase threshold.
The second procurement contract (the "ETS Contract") was awarded in October 1997 under CA CX825837-01, also to PlowShare. The contract called for the development and delivery of PSAs for a public service campaign - the ETS campaign - to alert the general public to the dangers of secondhand smoke to children. From 1998 through 2002, as EPA amended CA CX825837-01 to provide annual increments in funding for the ETS campaign, the ETS Contract was extended as well. Each annual extension except the last (in 2002) increased the total contract amount by more than the $100,000. So although there was only a single procurement contract under CA X825837-01, there were a total of four (4) procurement transactions under that CA in excess of the $100,000 small purchase threshold.
These nine (9) procurement transactions - five (5) under CA 825612-01, and four (4) under CA X825837-01 - were the only procurement transactions in excess of the $100,000 small purchase threshold under the Foundation’s CAs during the period covered by the audit.
The DAR alleges that these contracts, and the extensions thereto, were awarded without competition, and without justification to support the lack of competition. On this point, the DAR is incorrect.
transferred into the new CA without change - i.e., it wanted the same scope of work, performed by the same program staff and program contractors. Because PlowShare was already engaged under the expired CA to produce and distribute the Radon PSA, the Foundation notified EPA in its application for funds that it intended to continue using PlowShare for those services under the new CA. After EPA approved the application, the Foundation entered into a contract with PlowShare as indicated in the application. Under the circumstances, there were at least two well-recognized sole-source justifications available to the Foundation to support its award to PlowShare. First, because of EPA’s desire to transfer the Radon PSA campaign intact, PlowShare was, in effect, EPA’s designated contractor for production and distribution, requiring the Foundation to contract with PlowShare without competition.12 Second, to the extent, if any, that the Foundation had discretion in the choice of a contractor for PSA production and distribution, the sole-source selection of PlowShare was justified as a follow-on to the work PlowShare was performing under the expired CA. Indeed, given the nature of the services that PlowShare was providing to the Radon PSA campaign, and the contractor’s special expertise in public service campaigns (in particular, those involving radon), this justification is particularly compelling.13 The ETS Contract was awarded on the basis of a competitive procurement, conducted from August to October 1997, in which four (4) competing offers were received and evaluated.14 PlowShare’s offer was one of the two lowest in price, and included more services and more distribution options than the other offers submitted.15 Furthermore, in negotiations, we were able to obtain additional price EPA was also instrumental in the selection of PlowShare as a contractor under the expired CA. After the unacceptable performance by a large "Madison Avenue" agency (Bates) on PSAs on indoor air quality, EPA concluded that a small, specialized agency would offer lower costs and better results. Around that time, PlowShare’s president, who had managed a radon PSA campaign while at the Ad Council, contacted EPA, and EPA in turn suggested that PlowShare be engaged to produce and distribute the Radon PSA.
This point is discussed in greater depth in connection with contract extensions on page 18 below.
Mary Ellen Fise to Files, "Advertising Agency Selection for ETS Campaign" (October 3, 1997)(Attachment #6).
Appendix B concessions from PlowShare, further reducing its already low competitive price.16 As a result, PlowShare was awarded the contract as the offeror whose proposal was deemed most advantageous, price, quality and other factors considered. See 40 CFR §30.43.