United States Government Accountability Office

Washington, DC 20548 

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 universities1

 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-212

 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 

 1

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

2

2 C.F.R. pt. 220 (2006). 

3

OMB 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. 

GAO-07-294R Extramural Research Grants 
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. 

Audit responsibility for NIH research grants is shared between nonfederal auditors5

 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 audits7 are required to include a financial 

statement audit and cover internal controls8

 and compliance with laws and regulations 

pertaining to major programs9

 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 

 4

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

5

We are using the term nonfederal auditors to include independent public accountants and state and 

local governmental audit organizations.

6

31 U.S.C. §§7501-7507. 

7

If 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. 

8

Internal 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. 

9

Under 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. 

2 GAO-07-294R Extramural Research Grants
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 200411 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. 

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 

 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.

3 GAO-07-294R Extramural Research Grants
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. 

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. 

4 GAO-07-294R Extramural Research Grants
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 threshold13; 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. 

5 GAO-07-294R Extramural Research Grants
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. 

6 GAO-07-294R Extramural Research Grants
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. 

7 GAO-07-294R Extramural Research Grants
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 

0

10

20

30

40

50

60

70

80

90

100

2003 2004 2005

Percentage

Fiscal year

Indirect costs

Direct costs

Source: GAO analysis of NIH data. 

28.4 28.6 28.4

71.6 71.4 71.6

Indirect costs

Direct costs

$3,945,506,253 $4,304,951,026

$9,939,048,005

$4,203,165,147

$10,474,238,270 $10,870,222,485

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. 

8 GAO-07-294R Extramural Research Grants
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 

 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.

9 GAO-07-294R Extramural Research Grants
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. 

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 functions20 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 

 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. 

10 GAO-07-294R Extramural Research Grants
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. 

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 

 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. 

11 GAO-07-294R Extramural Research Grants
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. 

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.

12 GAO-07-294R Extramural Research Grants
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

Audit number

F

w

c

C

by

C

recovered

iscal year during

hich audit was 

ompleted

osts audited

by OIG

Costs questioned

OIG

osts insufficiently 

justified and 

by 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. 

a

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

that they were. 

13 GAO-07-294R Extramural Research Grants
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. 

- - - - - 

14 GAO-07-294R Extramural Research Grants
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If you or your staff have any questions, please contact Cynthia A. Bascetta at (202) 512-7101 

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Sincerely yours, 

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Director, Financial Management and Assurance 

Enclosure

15 GAO-07-294R Extramural Research Grants
Enclosure Enclosure

GAO Contacts and Staff Acknowledgments 

GAO Contacts 

Cynthia Bascetta, (202) 512-7101 or bascettac@gao.gov

Robert E. Martin, (202) 512-9508 or martinr@gao.gov

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) 

16 GAO-07-294R Extramural Research Grants 
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