National Oceanic and 

Atmospheric Administration

Audit of Indirect Cost Plans and Rates 

Pacific States Marine Fisheries Commission 

Portland, Oregon

Final Report No. OIG-11-025-A 

 May 19, 2011 

FOR PUBLIC RELEASE 

OIG Office of Audit and Evaluation 

U.S. DEPARTMENT OF COMMERCE

Office of Inspector General
May 19,2011

MEMORANDUM FOR: Arlene Simpson-Porter, Director

NOAA Grants Management Division

FROM: Ann C. EilersJAA

Inspector

t fZ

Principal Assistant General

for Audit and Evaluation

SUBJECT: Audit ofIndirect Cost Plans and Rates

Pacific States Marine Fisheries Commission

Portland, Oregon

Final Report No. OIG-11-025-A

We are attaching a copy ofthe audit report on the Pacific States Marine Fisheries Commission's

indirect cost plans and rates and administrative rates for the fiscal years ending June 30, 2002,

through 2008 for your action in accordance with DAO 213-5, "Audit Resolution and Follow-up."

This is the first of three related reports. We are currently evaluating the Commission's response

to the second draft report, which presents the results of our audit oftwo NOAA cooperative

agreements awarded to the Commission. We expect to issue the third report in final form,

presenting the results of our audit ofthree task orders under a NOAA contract, to the NOAA

contracting officer concurrently with the final report to you on the two cooperative agreements.

The original ofthis indirect cost report has been sent to the Pacific States Marine Fisheries

Commission. The Commission has 30 days from the date ofthe transmittal to submit comments

and supporting documentation to you (we have attached a copy of our transmittal letter for your

records). A copy ofthis report will also be made available to the public on the Office of

Inspector General (OIG) website.

Under DAO 213-5, you have 75 calendar days from the date ofthis memorandum to reach a

decision on the actions you propose to take on each audit finding and recommendation and to

submit an audit resolution proposal to this office. However, because all three ofthese reports

share indirect cost issues, we recommend that you, the NOAA Contracting Officer, and the

Department's Indirect Cost Coordinator consider all three reports and collaborate to ensure

uniform, consistent resolution proposals and action plans. Therefore, we offer to make the

deadline for your response to this report identical to the deadline established for responses to the

final cooperative agreement and contract reports.

As applicable, the written proposals must include the rationale and/or legal basis for reinstating

any questioned cost in the report and should refer to any supporting documentation relied on.

Your comments should also address any funds to be put to better use cited in the reports. Under

UNITED STATES DEPARTMENT OF COMMERCE

Office of Inspector General

Washington. D.C. 20230
the DAO, OIG must concur with your proposal before it may be issued as a final determination

and implemented. The DAO prescribes procedures for handling any disagreements we may have

with the audit resolution proposal. Please also copy us when the audit determination letter is sent

to the auditee and when you issue your accounting notice.

Any information or inquiry regarding this final report should be directed to Jerry McMahan,

Assistant Regional Inspector General, at (404) 730-2065, and should reference the report title.

Attachment

cc: Barry Berkowitz, Senior Acquisition Executive and Director, Office of

Acquisition Management

Mitchell 1. Ross, Director, NOAA Acquisition and Grants Office

John Stein, Ph.D., Acting Science Director, NOAAINWFSC

Susan Sherrell, Director, NOAA Western Acquisition Division

William Stelle, Jr., Regional Administrator, NOAAINMFS NWR

Mack Cato, Director, NOAA Audit and Information Management Office
UNITED STATES DEPARTMENT OF COMMERCE

Offic~ of Inspector General

Washington. D.C. 20230

May 19,2011

Mr. Randy Fisher, Executive Director

Pacific States Marine Fisheries Commission

205 SE Spokane Street, Suite 100

Portland, OR 97202

Dear Mr. Fisher:

Enclosed is a copy of our final audit report concerning the Commission's indirect cost plans and

rates and administrative rates for the fiscal years ending June 30, 2002, through 2008. We

evaluated and considered your March 18, 2011, response to the draft audit report in preparation

ofthis final report. Your response, excluding the 18 attachments, appears at appendix C; a

synopsis of your response and our comments is also included as appendix D. Copies ofthe

attachments are on file at our office and will be made available for review upon request. A copy

ofthis final audit report will also be made available to the public at OIG's website.

This letter is notice of your opportunity and responsibility to review the report and develop a

complete response that addresses each audit finding and recommendation. If you believe the final

report is in error in any respect, or if you disagree with any ofthe findings and recommendations,

it is important that you explain the error or your reasons for disagreement and submit to the

department evidence that supports your position. You should also explain how each documentary

submission supports the position you are taking; otherwise, we may be unable to evaluate the

information.

Your complete response will be considered by the Department in arriving at a decision on what

action to take with respect to the findings and recommendations in the audit report. Enclosure 1

is an explanation of applicable administrative dispute procedures.

Your response to this report must be postmarked no later than 30 days from the date of this letter.

There will be no extensions to this deadline. If you do not submit a response within the required

time frame you will have no other opportunity to submit comments, arguments or documentation

before the Department makes a decision on the audit report. Please send your response

(including documentary evidence) to:
Arlene Simpson-Porter, Director

NOAA Grants Management Division

Silver Spring Metro Center Building 2 (SSMC2)

9

th Floor

1325 East-West Highway

Silver Spring, MD 20940-3280

Please send a copy of your response to:

Jerry McMahan, Assistant Regional Inspector General for Audits

United States Department of Commerce

Office ofInspector General

401 W. Peachtree Street NW, Suite 2742

Atlanta, GA 30308

If you have any questions about the final report or the audit process, please call Jerry McMahan

at (404) 730-2065 and refer to this report's title.

SJ: t £It~ Ann C. Eilers

Principal Assistant Inspector General for

Audit and Evaluation

Enclosures

cc: Barry Berkowitz, Senior Acquisition Executive and Director, Office of

Acquisition Management

Mitchell J. Ross, Director, NOAA Acquisition and Grants Office

Susan Sherrell, Director, NOAA Western Acquisition Division

Mack Cato, Director, NOAA Audit and Information Management Office
Enclosure 1

NOTICE TO AUDITEE

Financial Assistance Audits

1. Audit requirements applicable to a particular financial assistance award may be established

by law, regulation, policy, or the terms ofthe recipient's financial assistance agreement with

the Department of Commerce.

2. The results of any audit will be reported to the bureau or office administering the financial

assistance award and to the recipient/auditee, unless the Inspector General ofthe Department

determines that it is in the Government's interest to withhold release ofthe audit report.

3. The results of an audit may lead to adverse consequences for the auditee, including but not

limited to the following actions (which are subject to applicable laws and regulations):

• suspension and/or termination of current awards;

• referral of identified problems to other federal funding agencies and entities as deemed

necessary for remedial action;

• denial of eligibility for future awards;

• canceling the authorization for advance payment and substituting reimbursement by

check;

• establishment ofspecial conditions in current or future awards; and,

• disallowance of costs, which could result in a reduction in the amount of federal

payments, the withholding of payments, the offsetting of amounts due the Government

against amounts due the auditee, or the establishment of a debt and appropriate debt

collection follow-up (including referrals to collection agencies).

Because ofthese and other possible consequences, an auditee should take seriously its

responsibility to respond to audit findings and recommendations with explanations and

evidence whenever audit results are disputed and the auditee has the opportunity to comment.

4. To ensure that audit reports are accurate and reliable, an auditee may have the following

opportunities to point out errors (offact or law) that the auditee believes were made in the

audit, to explain other disagreements with audit findings and recommendations, to present

evidence that supports the auditee's positions, and to dispute final recommendations:

II During the audit, the auditee may bring to the attention ofthe auditors at any time

evidence which the auditee believes affects the auditors' work.
" At the completion ofthe audit on-site, as a matter of courtesy, the auditee is given the

opportunity to have an exit conference to discuss the preliminary audit findings and to

present a clear statement of the auditee's position on the significant preliminary findings,

including possible cost disallowances.

• Upon issuance ofthe draft audit report, the auditee may be given the opportunity to

comment and submit evidence during the 30-day period after the transmittal ofthe report.

(There are no extensions to this deadline.)

• Upon issuance ofthe final audit report, the auditee is given the opportunity to comment

and to present evidence during the 30-day period after the transmittal ofthe report.

(There are no extensions to this deadline.)

• Upon issuance ofthe Department's decision (the "Audit Resolution Determination"), on

the audit report's findings and recommendations, the auditee has the right to appeal for

reconsideration within 30 calendar days after receipt ofthe Determination letter if monies

are due the government. (There are no extensions to this deadline.) The Determination

letter will explain the specific appeal procedures to be followed.

• After an appeal is filed, or after the opportunity for an appeal has expired, the Department

will not accept any further submissions of evidence concerning an auditee's dispute ofthe

Department's decisions on the resolution ofthe financial assistance audit. If it is

determined that the auditee owes money or property to the Department, the Department

will take appropriate collection action but will not thereafter reconsider the merits ofthe

debts.

• There are no other administrative appeals available in the Department.
Report In Brief e

U.S. Department of Commerce Of

port In

fi ce of Inspector General

 Brief

May 19, 2011

National Oceanic and Atmospheric Administration

Audit of Indirect Cost Plans and Rates 

Pacific States Marine Fisheries Commission

Portland, Oregon (OIG-11-025-A)

 

Background

Why We Did This Review

The Pacific States Marine Fisheries Commission is a quasi-governmental organization operating under an interstate compact 

authorized by federal statute. 

It is composed of five member 

states (Alaska, California, Idaho, 

Oregon, and Washington) that 

work together to better utilize and 

protect the resources of fisheries 

under their jurisdictions. 

Most of the Commission’s funding 

comes from the administration 

of federal contracts and financial 

assistance agreements related to 

fisheries resource management. 

Since 2003 the Department of 

Commerce has provided most of 

the Commission’s federal funding 

and has acted as its cognizant 

federal agency. In this capacity, 

the Department is responsible for 

reviewing, negotiating, and approving the Commission’s indirect 

cost rates.

Federal cost principles require 

governmental units desiring to 

claim indirect costs under federal 

awards to prepare rate proposals, certifications, and specified 

documentation. These principles 

also set forth the rules for developing, supporting, and negotiating 

acceptable indirect cost rates. In 

addition, Commerce policy requires that acceptable indirect cost 

rates be developed by grantees 

and included in approved award 

budgets. 

During the audit period (July 1, 

2001, through June 30, 2008), the 

Commission recovered more than 

$15 million in indirect costs, as 

well as almost $3 million in administrative fees. The main objective of our audit was to determine 

whether the Commission complied 

with federal cost principles and 

departmental requirements for 

recovering indirect costs.

What We Found

What We Recommended

The Commission did not comply with the minimum requirements necessary to recover 

indirect costs under federal awards. We found significant deficiencies in every area of 

indirect cost we tested. The Commission did not submit, certify, or adequately support 

its indirect cost rate proposals. In addition, the Commission’s unsubmitted indirect cost 

proposals and rates were not allowable in accordance with federal guidelines in that (1) 

implementation of its cost accounting system was inadequate; (2) it had not established an 

adequate indirect cost methodology or policies, procedures, and controls; (3) its method of 

distributing costs was inequitable; and (4) it had not adjusted proposed indirect cost rates 

to reflect actual costs. Therefore, all indirect costs claimed by the Commission during the 

audit period are called into question; none of the $15.6 million in costs or the $2.9 million 

in administrative fees recovered by the Commission during the audit period is allowable for 

federal participation.

Because the Department acts as the Commission’s cognizant federal agency, we directed 

our recommendations to the NOAA Grants Officer: 

1. Require the Commission to comply with minimum federal standards for financial management, such as improving its cost accounting system; establishing adequate indirect 

cost policies; and developing and documenting indirect cost rate proposals and supporting documentation.

2. Establish a deadline for the Commission to develop and submit revised indirect cost 

plans and certifications in accordance with federal cost principles and department polices, and recover any excess amounts claimed by the Commission.

3. Suspend payment of indirect costs under all current awards and prohibit recovery for 

future awards until the Commission develops and negotiates acceptable indirect cost 

rates. 

4. Advise the Commission that its unsupported fees and assessments are unallowable for 

federal participation on all current and future awards, and require the Commission to 

identify and remit all such assessments claimed from 2002 to the present.

5. Advise the Department’s Indirect Cost Program Coordinator in the Office of Acquisition Management of the results of this audit and our recommendations. The Department, in its cognizant agency role, should then immediately notify all of its bureaus 

as well as other federal agencies that have provided federal financial and acquisition 

assistance to the Commission from 2002 through the present.
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

Contents

Introduction ......................................................................................................................................1

Findings and Recommendations ......................................................................................................3

I. The Commission Did Not Submit, Certify, or Adequately Support Indirect Cost Rate 

Proposals ....................................................................................................................................3

II. The Commission’s Unsubmitted Indirect Cost Proposals were Inadequate, and Rates and 

Claims Were Unallowable .........................................................................................................6

III. Conclusion ...............................................................................................................................11

IV. Subsequent Events ...................................................................................................................12

V. Recommendations ....................................................................................................................12

Appendix A: Objectives, Scope, and Methodology.......................................................................14

Appendix B: Detail of Indirect Cost Audit ...................................................................................16

Appendix C: Commission Response (Cover Letter Only) ..........................................................21

Appendix D: OIG Comments on Commission Response ..............................................................46
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

Introduction

The Pacific States Marine Fisheries Commission is a quasi-governmental organization operating 

under an interstate compact authorized by federal statute in 1947. It is composed of five member 

states (Alaska, California, Idaho, Oregon, and Washington) that work together “to promote the 

better utilization of fisheries, marine, shell, and anadromous, which are of mutual concern, and to 

develop a joint program of protection and prevention of physical waste of such fisheries in all of 

those areas of the Pacific Ocean and adjacent waters over which the compacting states jointly or 

separately now have or may hereafter acquire jurisdiction.”1 Its principal offices are located in 

Portland, Oregon. 

Outside of nominal state membership dues and some funds received under agreements with 

states, most of the Commission’s funding comes from the administration of federal contracts and 

financial assistance agreements related to fisheries resource management. From 2002 through 

2009, approximately 89 percent of the Commission’s revenue came from federal financial 

assistance and contracts. Since 2003 the Department of Commerce has provided the majority of 

the Commission’s federal funding and has held cognizant federal agency status for indirect cost 

rate negotiation. In this capacity, the Department is responsible for reviewing, negotiating, and 

approving the Commission’s indirect cost rates. These rates apply to all federal agencies 

providing funds to the Commission unless prohibited or limited by statute.2 

This report presents the results of our audit of the Commission’s indirect cost plans, claimed 

rates, and administrative assessments for its fiscal years ending June 30, 2002, through June 30, 

2008.3

During the audit period (July 1, 2001, through June 30, 2008), the Commission recovered 

$15,635,147 of indirect costs—$8,532,322 from Commerce and $7,102,825 from other federal 

agencies. The Commission also recovered $2,885,365 in administrative fees—$2,116,782 from 

Commerce and $768,583 from other federal agencies. The objectives of our audit were to 

determine whether the Commission’s indirect cost and administrative assessment rate 

computations 

1. were supported by and consistent with certified indirect cost proposals and established 

rate negotiations; 

2. produced an equitable allocation of costs to projects and activities; 

3. were allowable in accordance with the requirements of Office of Management and 

Budget (OMB) Circular A-87, Cost Principles for State, Local, and Indian Tribal 

Governments; 

 

1 Pacific States Marine Fisheries Commission Compact, Article I. 2

 OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, attachment E at E.1. and 3. 3

 The results of this indirect cost audit will be used as the basis for questioning indirect cost claimed by the 

Commission under NOAA cooperative agreement numbers NA17FN2284 and NA17FN2536. These agreements 

cover the periods February 1, 2002, through June 30, 2006, and June 1, 2002, through August 31, 2007, respectively. 

We will issue a separate audit report covering these agreements. 

1
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

4. were appropriately and consistently applied; and 

5. were adjusted when appropriate. 

See appendix A for details regarding our audit objectives, scope, and methodology. 

We found the Commission did not comply with the minimum requirements necessary to recover 

indirect costs under federal awards. Therefore, all indirect costs claimed during the audit period 

are called into question. The details of our findings are described in the following pages. 

Numerous examples of unallowable costs, unsupported costs, inconsistently treated expenses, 

and direct costs treated as indirect are included as appendix B. 

On March 18, 2011, the Commission responded to our draft report with comments and 

supporting documentation, which we have evaluated and considered in preparation of this final 

report. Due to the volume of the response, we included only the full text of the Commission’s 

cover letter at appendix C; we provided our comments in appendix D. A copy of the 

Commission’s complete response, including 18 attachments, is available for review at our office. 

2
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

Findings and Recommendations

Federal cost principles require governmental units desiring to claim indirect costs under federal 

awards to prepare indirect cost rate proposals, certifications, and specified documentation. These 

principles also set forth the rules for developing, supporting, and negotiating acceptable indirect 

cost rates.4

 In addition, Department of Commerce policy stipulates that indirect costs are not 

recoverable under the Department’s financial assistance awards unless they are supported by 

acceptable indirect cost rates developed in accordance with federal cost principles and authorized 

by inclusion in approved award budgets. Department policy also limits indirect cost recovery to 

the lesser of (1) the amount authorized in the approved award budget, or (2) the federal share of 

the total indirect cost allocable to the award computed using the indirect cost rate approved by a 

cognizant or oversight federal agency and current at the time the cost was incurred (provided that 

the rate used was approved on or before the award end date).5

 

The Commission did not comply with the minimum requirements necessary to recover indirect 

costs under federal awards. It did not submit, certify, or adequately support its indirect cost rate 

proposals. In addition, the Commission’s unsubmitted indirect cost proposals and rates were not 

allowable in accordance with OMB Circular A-87 in that (1) implementation of its cost 

accounting system was inadequate; (2) it had not established an adequate indirect cost 

methodology or policies, procedures, and controls; (3) its method of distributing costs was 

inequitable; and (4) it had not adjusted proposed indirect cost rates to reflect actual costs. 

Therefore, all indirect costs claimed by the Commission during the audit period are called into 

question. 

I. The Commission Did Not Submit, Certify, or Adequately Support Indirect Cost Rate 

Proposals 

The Commission retained its indirect cost proposals on file rather than submitting them to the 

Department of Commerce, despite the National Oceanic and Atmospheric Administration 

(NOAA) Grants Officer’s multiple requests for the proposals. In addition, except for the 

certification of its fiscal year 2007 indirect cost rate, which was submitted to the Department of 

Commerce on May 1, 2008—several months beyond the 6-month deadline—the Commission 

had not prepared, signed, or submitted indirect cost rate certifications for fiscal years 2002 

through 2008.6

 Thus, none of the indirect cost rates the Commission used to recover 

$15.6 million (with over half of that amount for Commerce) during those years had been 

 

4

 OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, attachment E. 5

 This departmental policy appears in all of the editions of its Financial Assistance Standard Terms and Conditions 

applicable to the audit period. In December 2007 and April 2008, Commerce issued an updated and expanded 

indirect cost policy specifically requiring annual submission of indirect cost certificates to include not only the 

provisions of OMB Circular A-87, attachment E at D.3., but also to make the certificates subject to the provisions of 

the Program Fraud Civil Remedies Act of 1986 (31 U.S.C. § 3801 et seq.), the False Claims Act ( 31 U.S.C. § 3729 

et seq.), and 18 U.S.C. § 1001 and 18 U.S.C. § 287, prohibiting false statements. 6

 During our audit fieldwork in late March 2009, the Commission submitted a certificate of indirect cost and 

administrative fees along with its indirect cost rate proposal for fiscal year 2008 in support of financial assistance 

applications for fiscal year 2009. 

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U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

negotiated or accepted by the Department for use by all federal agencies, and only one had been 

certified. 

A. The Commission Did Not Submit Indirect Cost Proposals to the Department 

In 1996 the Commission negotiated an indirect cost rate agreement with the Bonneville Power 

Administration, a component of the Department of Energy, which at that time was the 

Commission’s cognizant federal agency for indirect costs. The agreement established fixed 

indirect cost rates with carry-forward provisions for the Commission’s fiscal years 1993 through 

1997, and then lapsed. Starting in 2003, based on its providing the majority of the Commission’s 

federal funding, Commerce assumed federal agency cognizance for the Commission. 

Federal cost principles do not require governmental entities such as the Commission to submit 

indirect cost proposals unless requested by their cognizant agency.7 However, Department 

conditions specifically required the Commission to submit the “documentation (indirect cost 

proposal, cost allocation plan, etc.)” necessary to evaluate its indirect cost methodology or 

negotiate a fixed indirect cost rate, and directed that a copy of the letter transmitting the 

submission also be sent to the NOAA Grants Officer.8 Subsequent updates of the standard 

conditions issued in 2005, 2007, and 2008 also required grant recipients to submit indirect cost 

proposals annually within 6 months after the close of the recipients’ fiscal years.9

 The Grants 

Officer repeatedly noted that the Commission’s negotiated indirect cost rate had expired and 

directed the Commission to comply with Department of Commerce Financial Assistance 

Standard Terms and Conditions regarding indirect costs. 

B. The Commission Did Not Certify Indirect Cost Proposals 

In addition to setting forth the specific documentation required to support indirect cost rate 

proposals, federal cost principles 

• require state and local recipients to prepare and sign indirect cost certificates to 

accompany the proposals, and 

• permit the Department to disallow all indirect cost when the recipient has not submitted a 

certified proposal in accordance with requirements.10 

Commerce’s Financial Assistance Standard Terms and Conditions also require recipients for 

which the Department is cognizant to submit indirect cost proposals and supporting 

documentation and certifications for review and negotiation of rates. 

Indirect cost certifications attest that the recipient properly prepared its indirect cost rate proposal 

in accordance with award terms and conditions and federal cost principles. In addition, 

 

7

 OMB Circular A-87, attachment E at D.1.b. 8 Department of Commerce Financial Assistance Standard Terms and Conditions (2001 and 2004) at A.05.c.1. and 

(2005 and 2007) at A.05.c.1 (a) and c.1.2. 

9 Department of Commerce Financial Assistance Standard Terms and Conditions (2005, 2007, and 2008) A.05.c.3. 10 OMB Circular A-87, attachments A at H and E at D.3. 

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U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

certifications assert that unallowable costs have been properly excluded from the indirect cost 

pool and documented in the cost allocation plan. The certifications specifically provide that 

• all costs are properly allocable to federal awards on the basis of a beneficial or causal 

relationship, 

• the same costs have not been claimed both as direct and indirect, 

• similar types of costs have been accounted for consistently within and between 

accounting periods, and 

• the federal government will be notified of any accounting changes that would affect the 

predetermined rates.11

Commission personnel stated that they had tried to submit their indirect cost proposals for review 

but had been told, despite award provisions and the Grants Officer’s directions to the contrary, 

that the Commission had only to retain its indirect cost rate proposals on file in the event of an 

audit. The Commission did not provide evidence that the NOAA Grants Officer had granted it an 

exemption from award terms and conditions. 

C. The Commission Did Not Retain Required Documentation in Support of Its Indirect Cost 

Plans 

The Commission retained its indirect cost rate proposals for 2002 through 2008 on file. 

However, it had not developed and retained the required documentation in support of its 

proposals.12 The Commission lacked 

• subsidiary worksheets and other relevant data, cross referenced and reconciled to 

supporting financial data; 

• copies of financial data (such as financial statements, comprehensive annual financial 

report, executive budgets, accounting reports) upon which the rate is based; 

• the approximate amount of direct base costs incurred under federal awards, broken out 

between salaries and wages and other direct costs; 

• organization charts documenting the Commission’s organization structure for the 

proposal periods; and 

• functional statements describing the duties and responsibilities of all Commission units.13

 

11 In December 2007 and April 2008, Commerce issued updated and expanded indirect cost policy specifically 

requiring annual submission of indirect cost certificates to include not only the provisions of OMB Circular A-87, 

attachment E at D.3., but also to make the certificates subject to the provisions of the Program Fraud Civil Remedies 

Act of 1986 (31 U.S.C. § 3801 et seq.), the False Claims Act (31 U.S.C. § 3729 et seq.), and 18 U.S.C. § 1001 and 

18 U.S.C. § 287, prohibiting false statements. 

12 OMB Circular A-87, attachments E at B.1 and 2, D.1.a., and D.2.a. through d. 13 OMB Circular A-87, attachment E at D.2. 

5
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

II. The Commission’s Unsubmitted Indirect Cost Proposals were Inadequate, and Rates 

and Claims Were Unallowable 

The Commission did not follow required procedures for submitting, supporting, and certifying its 

indirect cost proposals. While it retained proposals in support of its claimed indirect cost rates for 

2002 through 2008 on file, our initial tests of the Commission’s indirect cost proposals disclosed 

that the proposals were so deficient as to be unauditable. We suspended our audit to provide the 

Commission the opportunity to develop an indirect cost methodology and cost policy and to 

prepare adjusted rate proposals. However, when we resumed the audit nearly 2 months later, 

testing disclosed that the proposals, rates, and indirect costs claimed remained unallowable 

because the Commission 

• based its rate development on an inadequate cost accounting system; 

• had not developed adequate indirect cost methodology, policies, procedures, or controls; 

• used an indirect cost method that failed to equitably distribute indirect costs; and 

• failed to adjust fixed indirect cost rates to reflect actual costs. 

Consequently, we concluded that the indirect cost rates claimed were inadequately supported; 

included unallowable, unsupported, inconsistently treated, and duplicative costs; and failed to 

ensure equitable distribution of indirect costs to projects and programs in proportion to the 

benefits received. 

A. The Commission’s Cost Accounting System Was Inadequate 

The Commission administers numerous projects and activities. Developing an acceptable 

indirect cost proposal and accurately tracking and reporting the financial results of each project 

and activity requires an adequate, accurate cost accounting system. While the Commission’s 

automated accounting system appeared to offer the necessary cost accounting framework, its 

underlying costing policy, which defined projects and costs as direct or indirect and provided for 

identification and segregation of allowable and unallowable costs, was not clearly drawn or 

consistently implemented. In addition, key controls over the cost accounting system were either 

unavailable or overridden. We found that 

• direct projects were misidentified as indirect activities; 

• costs were improperly shifted from one direct project to another; 

• costs were misclassified, unallowable, unsupported, or inconsistently identified as direct 

or indirect; and 

• ancillary rates and fees duplicated or adversely affected the allocation of indirect costs. 

Direct Projects Were Misidentified as Indirect Activities. Review of the Commission’s indirect 

cost rates and conversations with staff revealed several activities that had been charged to the 

indirect cost pool, but which were in fact direct activities that should have been assigned direct 

project codes and assessed a fair share of indirect costs rather than being allocated to other direct 

projects. For example, financial and executive personnel administered two fisheries disaster 

6
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

programs totaling $230 million; front office staff engaged in event planning; accounting staff 

performed bookkeeping for the Pacific Fisheries Management Council; and, early in the audit 

period, accounting staff operated the Commission’s building rental activities. 

These costs should have been charged to direct costs but were incorrectly charged to indirect 

costs. Therefore, the costs and related revenues associated with the Commission’s actual 

management and administration of these activities could not be readily isolated. Each of the cited 

activities constituted a specific direct project that warranted a project number to which all related 

expenses and revenues should have been charged; each activity should also have been included 

in the Commission’s modified total direct cost base and absorbed its fair share of indirect cost. 

Miscoding of projects and activities not only overstated the Commission’s indirect costs and 

understated direct costs; it resulted in distributing the costs to projects that received no benefits 

from them. It also precluded an accurate management assessment of the financial results of 

individual projects and activities, as well as the financial results of overall Commission 

operations. 

Costs Were Improperly Shifted from One Direct Project to Another. During our concurrent 

audit of two large NOAA cooperative agreements awarded to the Commission, we noted that it 

did not always allocate labor and fringe benefits to projects based on the hours employees 

recorded in its time distribution systems. These systems were capable of identifying time charged 

to projects and activities, but the Commission improperly shifted labor and fringe benefits from 

one direct project to another. Because the Commission allocated indirect costs to projects and 

activities using a total modified direct cost base, which includes direct labor and related fringe 

benefits, these shifts among projects resulted in inequitable allocations of indirect costs. 

Costs Were Misclassified, Unallowable, Unsupported, or Inconsistently Identified as Direct or 

Indirect. Commission management had a documented system of policies and procedures for 

some administrative processes. However, the processes and controls necessary to ensure proper 

identification and classification of costs as direct or indirect and allowable or unallowable were 

missing or not consistently followed. Our tests of the Commission’s indirect cost pools for fiscal 

years 2002 through 2008 disclosed numerous examples, which are detailed in appendix B, of 

unallowable costs, unsupported costs, inconsistently treated expenses, and direct costs treated as 

indirect. 

Ancillary Rates and Fees Duplicated or Skewed Indirect Cost Allocations. The Commission 

also applied ancillary rates and fees to recover elements of cost that it contended were not 

recovered (in whole or in part) by applying its indirect cost rate. Commission management stated 

that in select cases, such as the fisheries disaster awards and some projects funded by the State of 

California, sponsoring agencies would not permit the Commission to directly charge the awards 

for administrative or management services. Therefore, the Commission resorted to applying a 

2 percent administrative assessment to the fisheries disaster monies and assessing a management 

fee for California-sponsored projects to recoup these costs. The Commission also assessed the 

2 percent administrative assessment on other pass-through funds and levied a data-processing fee 

on select projects and indirect activities in several of the years audited. Our review disclosed that 

the 2 percent administrative rate was unsupported and that it duplicated the Commission’s 

indirect cost recoveries; and the administrative, management, and data processing assessments 

all caused an inequitable distribution of indirect costs to projects: 

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Office of Inspector General May 19, 2011 

• Administrative Assessments - The Commission applied a 2 percent administrative 

assessment to two fisheries disaster programs funded by two NOAA awards totaling 

$230 million. While the Commission recorded the administrative assessments and the 

revenues received, its project cost accounts did not identify, track, and account for the 

actual administrative costs incurred as a related direct project expense. Rather, the related 

expenses were recorded in the indirect cost pool. 

Similarly, the Commission also applied a 2 percent administrative assessment to passthrough monies of direct-billed projects, ostensibly to recover the costs of accounting, 

procurement, and management of the pass-through activities. As with the fisheries 

disaster awards, the Commission had no support for the rationale, methodology, or 

development of the 2 percent rate; therefore, the assessments on pass-through funds, like 

those for the fisheries disaster awards, are unallowable for federal participation.14 In 

aggregate, the Commission collected nearly $2.9 million in administrative assessments 

during the period under audit—$2.1 million from Commerce and $768,583 from other 

federal agencies. 

• Management Fees - In lieu of directly charging for labor and related expenses, the 

Commission assessed management fees to cover its oversight of a number of projects 

funded by the State of California. The management fees were assessed based on the 

contractual agreement without adjusting for actual expenditures. The difference between 

the management fees received and the related expenses incurred for these direct projects 

was inappropriately included in the indirect cost pool and affected the calculation of the 

indirect cost rate. Therefore, the net costs were improperly allocated among all the 

Commission’s direct projects via the Commission’s indirect cost rate. During the fiscal 

periods under audit, the annual net increase in the indirect cost pool ranged from $12,999 

to $112,567. 

• Data Processing Fees - The Commission charged select direct projects and indirect 

activities for data processing services, using budget projections of data processing costs 

and estimates of expected usage. Revenues received based on these projections, as well 

as actual data processing expenses incurred, were included in the Commission’s indirect 

cost pool. The Commission did not perform a year-end reconciliation of estimates to 

actual data processing cost and usage as required by OMB guidance.15 As a result, like 

the management fees the Commission applied to California-sponsored projects, the net 

funds were distributed to all direct projects via the Commission’s indirect cost rate. 

Without a reconciliation of budgeted assessments to actual expenses and usage, and 

adjustment of the data processing charged directly to projects, there is no assurance that 

the difference was equitably distributed. The Commission followed this practice for fiscal 

years 2002 through 2005 and 2007 through 2008, during which time the impact on the 

indirect cost pool ranged from a net annual understatement of $6,282 to a net annual 

overstatement of $114,619. 

 

14 The Commission has used the 2 percent administrative assessment from at least 1993 through the present. 

15 OMB Circular A-87, attachments E at F.2. and C at G.4. 

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Office of Inspector General May 19, 2011 

In fiscal year 2006, the Commission eliminated direct project and select indirect activity 

assessments for data processing and instead charged all actual data processing expenses, 

totaling $357,806, to the indirect cost pool. Not only was this a departure from the 

Commission’s past practices, it also perpetuated the problem of distributing data 

processing costs uniformly, but inequitably, to all direct projects via the indirect cost rate. 

Because neither method met the minimum standards for either support or consistent 

treatment of costs, we questioned the total of data processing costs claimed. 

In cases such as the fisheries disaster awards and the State of California-sponsored projects, 

where the Commission contends that the funding agencies imposed limits on the amount or 

method of collection of administrative or management costs allowed, cost principles prohibit 

shifting amounts allocable to, but not recoverable under, one award to another.16 Because the 

Commission did not account for the costs it incurred to administer these projects as direct costs, 

but rather absorbed the costs in the indirect cost pool, there is no assurance that the fees it billed 

matched those it incurred, or that under-recoveries were not improperly shifted to other direct 

projects through the Commission’s indirect cost rate. 

B. The Commission Had Not Developed Adequate Indirect Cost Methodology, Policies, 

Procedures, and Controls 

Coupled with an accurate, adequate, and properly implemented cost accounting system, an 

indirect cost methodology would have provided a platform for developing, documenting, and 

certifying the Commission’s annual indirect cost rate proposals. An indirect cost methodology 

sets forth indirect cost recovery goals; documents the recovery method to be used; establishes the 

costing policy; details the components of the indirect cost pool(s); identifies the direct cost 

allocation base(s); establishes policies, procedures, and controls for developing, supporting, 

certifying, submitting, using, and adjusting the rate(s); and delineates authorities and 

responsibilities. 

During the period audited, the Commission had not established an indirect cost methodology to 

focus preparation of its indirect cost plan, promote consistency from year to year, exclude 

unallowable costs, ensure that its indirect cost proposals produced an equitable distribution of 

allowable indirect costs to projects in proportion to the relative benefits received, and 

consistently guide its rate proposal and adjustment process.17 

C. The Commission’s Indirect Cost Method Failed to Equitably Distribute Indirect Costs 

Indirect cost distribution can take several forms but must result in an equitable distribution of 

indirect costs to direct projects in proportion to the relative benefits derived.18 Where a 

recipient’s indirect costs benefit its major functions in varying degrees, equity and federal cost 

principles require that the costs be accumulated in separate groupings, each of which is allocated 

 

16 OMB Circular A-87, attachment A at C.3.c. and F.3. 17 OMB Circular A-87, attachment A at C.1.e. and f., C.3.d., D.2., F.1; attachment E at B.1. and 2., D.1.a. and D.2.a. 

through d. 

18 OMB Circular A-87, attachment E at C.2.c. 

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Office of Inspector General May 19, 2011 

individually to benefiting activities by means of a base or bases that best measure the relative 

benefits.19

Lacking an indirect cost methodology tailored to its specific circumstances, the Commission 

elected to recover indirect costs using the simplified indirect allocation method, and distributed a 

single indirect cost pool to projects on a single modified total direct cost base. This cost base 

excludes extraordinary or distorting expenditures such as capital expenditures, subawards, 

contracts, assistance payments, and pass-through funds and in the proper circumstances can be 

an acceptable distribution base. 

By employing a simplified method, the Commission in effect asserted that its major functions 

benefited from indirect costs to approximately the same degree because that is the only case in 

which this method is appropriate. However, as noted in previous sections of this report, in 

addition to including misclassified, unallowable, unsupported, and duplicative costs in its single 

indirect cost pool, the Commission also (1) included several items in the pool that benefited 

some—but not all—projects and programs included in the total modified direct cost base 

(page 8), (2) excluded some projects and activities from the base that should have absorbed a fair 

share of indirect costs (page 6), and (3) improperly shifted labor and fringe benefits in the base 

from one direct project to another (page 7). Therefore, even if all the other deficiencies presented 

in this report were corrected, the Commission’s application of the indirect cost rates produced 

using the simplified method would still fail to achieve the equitable distribution of indirect costs 

required by federal cost principles and Commerce policy. 

D. The Commission Did Not Adjust Fixed Indirect Cost Rates to Reflect Actual Costs 

The Commission did not employ the carry-forward provision required to adjust its fixed indirect 

cost rate to the actual, allowable indirect costs incurred. The carry-forward provision provides 

for identifying the difference between estimated indirect costs and the actual, allowable indirect 

costs for an entity’s fiscal year and carrying the difference forward as an adjustment to the fixed 

rate computation for the subsequent fiscal year. As shown in table 1, the Commission made no 

adjustment to its fixed indirect cost rates for fiscal years 2002 through 2005 and 2007 through 

2008.20 

Table 1. Indirect Cost Rates Proposed and Accepted by Audit 

Actual Indirect Revised Actual 

Cost Rate Indirect Cost 

Attached to or Indirect Cost Proposed by Rate Proposed 

Proposed in Rate Claimed the by the 

 Award by the Commission in Commission in Accepted 

Fiscal Applications Commission January 2009 March 2009 by Audit 

Year Rates as a Percent of Total Modified Direct Costs 

2002 15.1 15 16.09 15.74 NONE 

2003 15 15 12.26 12.28 NONE

2004 15 15 13.32 11.47 NONE

 

19 OMB Circular A-87, attachment E at C.3. and 4. 20 The Commission applied a 15 percent indirect cost rate to total modified direct cost each year since at least 1993 

through 2006, when in mid-year it retroactively adjusted its claimed rate to 13 percent. 

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Table 1. Indirect Cost Rates Proposed and Accepted by Audit 

Actual Indirect Revised Actual 

Cost Rate Indirect Cost 

Attached to or Indirect Cost Proposed by Rate Proposed 

Proposed in Rate Claimed the by the 

 Award by the Commission in Commission in Accepted 

Fiscal Applications 

Year 

2005 15

Commission January 2009 March 2009 

Rates as a Percent of Total Modified Direct Costs 

 15 12 11.77 

15 revised to 13 

by Audit 

NONE

as of July 1, 

2006 15 

2007 13

2005 15.03 16.25 

 13 13 13.25 

Version 1—14.47

NONE 

NONE

2008 13

Source: Commission 

 13 Version 2—11.72 15.81 NONE 

11

The Commission did not use the roll-forward adjustment provision in fiscal year 2006 either. 

Rather, in mid-fiscal year 2006, the Commission introduced a different, unacceptable practice by 

retroactively adjusting the indirect cost rate it initially applied in 2006 to an unsupported rate of 

13 percent. 

III. Conclusion 

As described in the first finding of this report, the Commission failed to properly prepare, 

support, and certify its indirect cost rate proposals for fiscal years 2002 through 2008. The 

Commission incurred indirect cost during the period under audit; however, until it brings its 

indirect cost proposals and rates into compliance with federal requirements, none of its indirect 

cost rates, claims, and administrative assessments for the audit period 2002 to 2008 are allowable 

for federal participation. 

The deficiencies described in finding I alone would result in disallowance of any indirect cost 

claim. However, as described in finding II, we also tested and found significant deficiencies in 

the cost accounting system; indirect cost methodology; policies, procedures, and controls; and 

cost distribution system. These deficiencies would also have to be corrected for indirect cost 

claims to be allowable. 

We found significant deficiencies in every area of indirect cost we tested. The Commission’s 

indirect cost claims did not meet the requirements of OMB Circular A–87. Consequently, none 

of the $15.6 million the Commission recovered during that period is allowable for federal 

participation.21 In addition, the NOAA Grants Officer should disallow any indirect cost claims 

subsequent to the audit period for which the Commission has not corrected the deficiencies we 

describe here. Finally, no administrative assessments or direct charges for data processing fees 

should be allowed on on-going or future awards. See the following section, “Subsequent 

Events,” for a discussion of events that occurred after the audit period. 

 

21 OMB Circular A-87, attachment A at C.3.d. and H; attachment E at D.
U.S. Department of Commerce Final Report 

Office of Inspector General May 19, 2011 

IV. Subsequent Events 

For its fiscal year ending June 30, 2009, the Commission used a proposed indirect cost rate of 

13 percent, applied to modified total direct costs, to recover indirect cost of $1,151,951 from 

Commerce and $997,155 from other federal sources. It also used a rate of 2 percent, applied to 

pass-through funds and select projects, to collect administrative fees of $3,497,837 from 

Commerce and $108,178 from other federal sources.22 The Commission based its 2009 proposed 

indirect cost rate on an unacceptable computation for 2008. No support was provided for the 

administrative fee. 

As detailed in this report, we do not accept the Commission’s indirect cost rates or administrative 

fees for fiscal years 2002 through 2008; therefore, the NOAA Grants Officer should not accept 

indirect cost claims subsequent to 2008 until the Commission corrects the deficiencies described 

in this report. 

V. Recommendations 

We recommend the NOAA Grants Officer 

1. Require the Commission to comply with minimum federal financial management 

standards, to include the following: 

a. Improving its project cost accounting system and related controls to ensure that all 

direct projects are identified and assigned a project number, that related expenses and 

revenues are tracked, and that each project receives a fair share of indirect costs in 

proportion to the benefits received. 

b. Developing and documenting an indirect cost methodology to include the rationale 

for the rate(s), including underlying pool(s) and base(s) selected, a cost classification 

policy, and a process for identifying and excluding unallowable costs. This should 

include documenting whether the indirect cost base(s) selected provides for equitable 

distribution of indirect costs to projects in proportion to the benefits received and 

whether a single or multiple indirect cost pools better allocate costs to projects. 

c. Establishing the processes, procedures, and controls to develop, support, submit, and 

subsequently adjust indirect cost rate proposals to actual cost incurred, and 

identifying the related responsibilities and authorities. 

d. Documenting the Commission’s indirect cost rate proposals and certifications and 

submitting data in accordance with federal cost principles, the terms and conditions of 

the award, and specific directions of the Grants Officer. 

2. Establish a deadline for the Commission to develop and submit revised indirect cost plans 

and certifications in accordance with federal cost principles and department polices for 

negotiation of actual indirect cost rates. Recover indirect costs claimed in excess of the 

 

22 The Commission provided the amount of indirect cost and administrative fees recovered in fiscal 2009. 

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Office of Inspector General May 19, 2011 

negotiated rates; or, if the Commission declines to revise or certify its plans or fails to 

meet the established deadline, recover all Commission indirect cost claims for the period 

2002 to the present as provided by OMB Circular A-87, attachment A at H.1. and 2, and 

attachment E at E.4. In the event prior indirect cost claims are recovered, the amount of 

recovery will be $8,742,475 ($8,532,322 from page 1, plus $1,151,951 from page 11 less 

$941,798 to be recovered under the related OIG audit report on the Commission’s 

cooperative agreements). 

3. Suspend payment of indirect costs under all current awards and prohibit recovery for 

future awards until the Commission develops and negotiates acceptable indirect cost 

rates. 

4. Advise the Commission that its unsupported 2 percent administrative and direct data 

processing assessments are unallowable for federal participation on all current and future 

awards. Require the Commission to identify and remit all administrative and direct data 

processing assessments claimed for the period 2002 to the present. The amount of 

recovery for administrative fees will be $5,316,759 ($2,116,782 from page 1, plus 

$3,497,837 from page 11 less $297,860 to be recovered under the related OIG audit 

report on the Commission’s cooperative agreements. 

5. Advise the Department’s Indirect Cost Program Coordinator in the Office of Acquisition 

Management of the results of this audit and our recommendations. As the Commission 

receives both financial assistance and acquisition funding from multiple federal sources, 

the Department, in its cognizant agency role, should then immediately notify all of its 

bureaus as well as other federal agencies that have provided federal financial and 

acquisition assistance to the Commission from 2002 through the present. The Grants 

Officer should then obtain and provide evidence to OIG that the bureaus and other federal 

agencies have been notified. 

 

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Appendix A: Objectives, Scope, and Methodology

The objectives of this indirect cost audit were to determine whether the rate computations for 

indirect cost and administrative assessments (1) were supported by and consistent with certified 

indirect cost proposals and established rate negotiations; (2) produced an equitable allocation of 

indirect costs to Commission projects and activities; (3) were allowable in accordance with the 

requirements of the Office of Management and Budget (OMB) Circular A-87; (4) were 

appropriately and consistently applied; and (5) were accurately adjusted using roll-forward 

provisions. 

Our audit methodology included 

• review of award and contract files at the Commission and award, contract, and technical 

files provided by the National Oceanic and Atmospheric Administration (NOAA); 

• examination of financial, personnel, and performance records; 

• interviews with NOAA and Commission staff; 

• application of relevant analytical procedures using a risk-based approach to select areas 

for audit, and nonprobability sampling to identify select elements within those areas for 

detailed transaction testing; and 

• review of OMB Circular A-133 single audit reports and related work papers and 

management letters issued by the Commission’s external auditor for the fiscal years 

ending June 30, 2002, through June 30, 2008. 

We conducted fieldwork in the Commission’s Portland, Oregon, office during the periods of 

January 20 to February 4 and March 30 to April 17, 2009; at the Commission’s independent 

audit firm in Lake Oswego, Oregon; and at the offices of three of the Commission’s contractors 

in Salem, Oregon, and Olympia and Seattle, Washington. 

The audit included an evaluation of the Commission’s internal controls and its compliance with 

laws and regulations as they related to financial assistance award provisions, specifically those 

provisions pertaining to financial management and reporting. Key criteria we considered in 

conducting the audit included the Commission’s applications and application assurances; the 

NOAA awards and their respective standard and special terms and conditions; Department of 

Commerce Financial Assistance Standard Terms and Conditions; OMB Circular A-87, Cost 

Principles for State, Local, and Indian Tribal Governments; and 15 CFR Part 24, Uniform 

Administrative Requirements for Grants and Cooperative Agreements to State and Local 

Governments. Our review disclosed that the Commission did not adhere to applicable award 

requirements as detailed in this report. 

The Commission used computer-based accounting systems to track and report the financial 

results of the project. To address the objectives of this audit, we obtained the Commission’s 

payroll information in electronic format for the period July 1, 2001, through December 31, 2008. 

As a result of an accounting system conversion, general ledger and accounts payable information 

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Office of Inspector General May 19, 2011 

were received electronically for the period of March 15, 2002, through mid-January 2009. For 

the initial portion of the Commission’s fiscal year 2002 excluded from the electronic submission, 

the Commission provided system summary reports. To assess the reliability of the electronic 

revenue and expenditure data, we 

• looked for obvious errors in accuracy and completeness; 

• interviewed Commission employees that were knowledgeable about the data; 

• worked closely with Commission employees to identify any data problems; 

• agreed general ledger totals from the electronic files to the audited financial statements; 

• traced financial claims and contract invoices to the automated accounting systems and to 

source documents; and 

• for costs in the indirect cost pool, traced selected accounts payable documents to the 

general ledger. 

We did not rely solely on the computer-generated data as the basis for our audit conclusions. We 

traced indirect cost proposals to the Commission’s automated accounting systems and to source 

documents. 

The audit was performed under the authority of the Inspector General Act of 1978, as amended, 

and Department Organization Order 10-13, dated August 31, 2006. We conducted this 

performance audit in accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

 

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Appendix B: Detail of Indirect Cost Audit

While the Commission incurred indirect costs during the period under audit, we could not 

determine the actual amount of allowable indirect costs. Our testing was risk-based but did not 

use statistical sampling, and we could not project the results of our testing to the universe of 

indirect costs to derive audit-accepted indirect cost rates. The inability to project the results of 

our testing of component cost does not affect our conclusions about the lack of acceptability of 

the Commission’s indirect cost rates. 

The Commission was deficient in every area that we tested. It did not submit indirect cost 

proposals, nor did it submit the certifications necessary to appropriately claim indirect costs. In 

addition, the deficiencies presented in this appendix also result in unallowable indirect cost 

claims. Our indirect cost findings starting on page 3 of this report detail a significant number of 

deficiencies contributing to our inability to accept the Commission’s indirect cost rates for 2002 

through 2008; however, they do not detail the reasons for our conclusion that recalculated 

indirect cost rates continued to include unallowable costs, unsupported costs, inconsistently 

treated expenses, and direct costs treated as indirect. A discussion of our specific concerns 

regarding the component cost aspect of the Commission’s indirect cost rates follows. 

A. The Commission Treated Bonuses Inconsistently 

Federal cost principles state that, to be allowable to a federal award, costs must be accorded 

consistent treatment.23 A cost may not be assigned as a direct cost to a federal award if any other 

cost incurred for a similar purpose in like circumstances has been allocated to the federal award 

as an indirect cost. 

The Commission did not treat individual costs consistently. Our review of costs charged to the 

indirect cost pool identified three bonus payments totaling $24,481 that were inconsistently 

charged to the indirect cost pool. Salary costs for the employees associated with these bonus 

payments were generally charged directly to federal programs. For example, during fiscal year 

2008 the Commission charged 85 percent of the bonus costs paid to one employee to the indirect 

cost pool and the remaining 15 percent directly to the federal program. However, other 

employees whose regular salaries were charged directly to programs received bonus payments 

that were also charged directly to the federal program. The Commission’s failure to develop an 

adequate costing policy resulted in an inconsistent treatment of costs. 

B. The Commission Charged Unallowable Costs to the Indirect Cost Pool 

Our review of costs charged to the indirect cost pool for fiscal years 2002 through 2008 revealed 

the following instances of non-compliance with federal cost principles: 

1. Necessary and Reasonable Costs - Federal cost principles require that costs charged 

either directly or indirectly to federal programs be necessary and reasonable for proper 

 

23 OMB Circular A-87, attachment A at C.1.f. 

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and efficient performance and administration of federal awards.24 A cost is reasonable if, 

in its nature and amount, it does not exceed that which would be incurred by a prudent 

person under the circumstances prevailing at the time the decision was made to incur the 

cost.25 Although the determination of “reasonableness” may be somewhat subjective, a 

determination of reasonableness shall consider whether the cost is, in part, generally 

recognized as ordinary and necessary for the operation of the governmental unit or the 

performance of the federal award and the market prices for comparable goods or 

services.26

Our review of travel expenditures paid during fiscal years 2002 through 2008 revealed 

the Commission leased a vehicle for the exclusive use of a senior official at a cost of 

approximately $75,689, including monthly lease payments, insurance, repairs, and 

maintenance. Commission management stated that no cost-benefit analysis of the lease 

options was conducted. We requested mileage logs supporting the personal mileage 

charged as a taxable fringe benefit to the official, which should have been excluded from 

the Commission’s indirect cost pool. The official reported that he kept a log during the 

year, but did not retain the logs. 

2. Direct Cost Charged to Indirect Cost - Federal cost principles provide that costs are 

allocable to a particular cost objective if the goods or services involved are chargeable or 

assignable to such cost objective in accordance with the relative benefits received.27

Costs charged to the Commission’s indirect cost pool should be costs that, although not 

directly benefitting a specific project or activity, provide a benefit to all projects and 

activities and should, therefore, be charged using the indirect cost rate. Costs that are 

specific to a federal program or other direct-funded project are not allocable to the 

indirect cost pool because these costs do not benefit all direct-funded programs. The 

Commission is charging direct-funded program costs to the indirect cost pool. For 

example, the Commission paid a software developer $40,000 for software required to 

administer the pikeminnow program, a Department of Energy direct-funded activity that 

was inappropriately charged to the indirect cost pool and allocated to other direct 

projects. 

We also identified instances in which the Commission’s front office staff was paid to 

plan and coordinate conferences for other federal and state agencies. For instance, the 

front office staff planned and coordinated a conference for the National Oceanic and 

Atmospheric Administration (NOAA). Although NOAA paid the Commission for its 

services, we identified travel costs associated with planning the conference that were 

charged to the indirect cost pool and, therefore, charged to direct-funded programs 

through application of the indirect cost rate. We were unable to determine the exact costs 

charged to the indirect cost pool for these activities because the costs are not associated 

with a direct-funded project code in the general ledger. 

 

24 OMB Circular A-87, attachment A at C.1.a. 

25 OMB Circular A-87, attachment A at C.2. 26 OMB Circular A-87, attachment A at C.2.a. and c. 27 OMB Circular A-87, attachment A at C.1.b. and C.3. 

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3. Inadequate Documentation of Costs - Federal cost principles and uniform administrative 

requirements state that costs must be adequately documented.28 Our tests of costs charged 

to the indirect cost pool revealed costs totaling $38,121 were not adequately supported. 

Receipts were either missing or failed to include sufficient detail to determine the 

allowability of the charges. 

4. Undocumented and Excessive Travel Costs - The Commission established a written travel 

policy based on federal travel regulations. Our tests of travel costs charged to the indirect 

cost pool identified costs totaling $24,221 that either did not comply with the travel 

policy or did not contain sufficient information with which to determine compliance. In 

addition, the Commission’s travel policy required all travelers to submit travel claims for 

reimbursement that document the purpose of the travel, the per diem reimbursement for 

the destination, and other incidental costs paid during the trip. We noted that a senior 

official did not submit the required travel claim forms, and several reimbursements 

exceeded the per diem amount for the location of the travel. 

5. Entertainment Costs - Federal cost principles state that the cost of entertainment, 

including amusements, diversions, and social activities and any directly associated costs 

(such as tickets to shows or sport events, meals, lodging, rentals, transportation and 

gratuities), are unallowable.29 Our tests of expenditures charged to the indirect cost pool 

during fiscal years 2002 through 2008 identified a total of $40,790 in what appear to be 

entertainment costs. For example, Commission staff calculated that the Commission paid 

$30,722 for its annual holiday parties between 2002 and 2008. Our audit identified 

additional costs associated with holiday parties that were not included on the 

Commission’s list, leading us to believe that the actual entertainment costs paid by the 

Commission are likely higher than amounts identified by either the Commission or by 

our review. 

6. Capital Expenditures Charged to Expenses - Federal cost principles and uniform 

administrative requirements define equipment as non-expendable tangible personal 

property having a useful life exceeding one year and an acquisition cost that equals the 

lesser of $5,000 or the governmental unit’s own capitalization threshold.30 The 

Commission’s capitalization policy states that “capital expenditures are any purchase of 

equipment of property costing more than $1,000 and with a life expectancy of more than 

one year.” 

The indirect cost rate proposals the Commission initially provided us in January 2009 

improperly included in the indirect cost pool a significant number of equipment 

purchases that met the Commission’s $1,000 capitalization threshold. For this and other 

reasons, we requested Commission management to prepare corrected proposals, which 

were provided to us in March 2009. According to Commission management, capital costs 

had been removed from the indirect cost pool. However, tests of the revised indirect cost 

 

28 OMB Circular A-87, attachment A at C.1.j., and 15 CFR § 24.20(b)(2), (5), and (6). 

29 OMB Circular A-87 (1995) at attachment B.18 and OMB Circular A-87 (2004) at attachment B.14. 30 OMB Circular A-87 (1995) at attachment B.19.a.(2); OMB Circular A-87 (2004) at attachment B.15.a.(2); and 

uniform administrative requirements, 15 CFR 24.3. 

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proposals identified costs totaling $53,872 for items that should have been capitalized. 

For example, we identified a search engine costing $27,005 that the Commission 

accounting staff agreed was an asset that should have been capitalized, but the 

Commission expensed the cost, charged it to the indirect cost pool, and failed to remove 

it from the revised indirect cost proposal. 

7. Contributions - Federal cost principles state that recipient contributions, including cash, 

property and services, to others are unallowable.31 Our tests of the Commission’s revised 

indirect cost pools identified transactions totaling $20,215 for unallowable gifts and 

donations. For example, we identified a number of payments for such items as gifts, 

memorials, charitable donations, and a $1,500 gift given to a retiring NOAA official. 

8. Lobbying Costs - Federal cost principles provide that the cost of certain influencing 

activities associated with obtaining grants, contracts, cooperative agreements, or loans is 

unallowable.32 During the audit period, the Commission paid a lobbying firm for both 

lobbying and non-lobbying activities. However, the firm’s invoices did not provide 

sufficient detail to ensure that they did not contain unallowable lobbying costs. Our 

testing identified invoices totaling $11,618 that lacked sufficient detail to determine 

whether the costs were allowable. 

9. Bonus Payments Inadequately Supported - Federal cost principles require, in part, that 

salary costs be charged to cost objectives in accordance with the relative benefits 

received and in accordance with governmental unit’s established policy.33 The Circular 

further details the minimum documentation required to support allowable labor 

allocations. Tests of salary costs charged to the indirect cost pool revealed the 

Commission charged employee bonuses totaling $311,445 without the support required 

to demonstrate that payments complied with the Commission’s bonus policy. For 

example, the Commission paid a bonus totaling $34,276 to a manager in March 2007; 

however, there was no performance evaluation to support the bonus. 

10. Salary and Bonus Cost Charged to Incorrect Project - Federal regulations require that 

employees charging salary costs to multiple cost objectives complete personnel activity 

reports documenting the actual time and effort worked on each cost objective as the basis 

for allocating cost to direct projects and indirect activities.34 As discussed in this report, 

the Commission had time distribution systems and a project cost accounting system that, 

if properly implemented, would have adequately accounted for direct and indirect labor 

and related fringe benefits. However, the systems were not properly implemented and 

were subject to arbitrary override. As a result, tests of labor and fringe benefits charges 

• Identified seven employees whose salary costs of $1,812,223 were charged to the 

indirect cost pool even though at least part of the employees’ job responsibilities 

related to direct-funded projects. 

 

31 OMB Circular A-87 (1995) at attachment B.13 and OMB Circular A-87 (2004) at B.12. 

32 OMB Circular A-87 (1995) at attachment B.27 and OMB Circular A-87 (2004) at B.24. 

33 OMB Circular A-87 (1995) at attachment B.11 and OMB Circular A-87 (2004) at B.8. 34 OMB Circular A-87 (1995) at attachment B.11.h. (4) and (5) and OMB Circular A-87 (2004) at B.8.h.(4) and (5). 

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• Disclosed that a number of Commission employees received bonuses in fiscal year 

2008 due to their work on the Salmon Disaster Program. Because this program is a 

direct-funded activity, it should be established as a direct program in the 

Commission’s project cost accounting system and general ledger, and indirect costs 

should be allocated to the program as done with other federally funded projects. 

However, the Commission treated the Salmon Disaster Program as an indirect activity 

and charged all associated costs, including labor and benefits, to the indirect cost 

pool. In the absence of personnel activity reports, we were unable to quantify 

mischarged costs related to this project. 

• Revealed instances in which three staff members and a senior official performed 

direct-funded activities; however, their salary costs were charged to the indirect cost 

pool. We were unable to quantify the salary costs attributable to the direct funded 

activities because the costs were not separately identified in the general ledger or 

supported by the requisite personnel activity reports. 

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Appendix C: Commission Response 

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Appendix D: OIG Comments on Commission Response 

OIG reaffirms our conclusion that the Commission did not comply with the minimum 

requirements necessary to recover indirect costs. Consequently, all indirect costs claimed by the 

Commission during the audit period are called into question; none of the $15.6 million in indirect 

costs or the $2.9 million in administrative fees recovered by the Commission during that period 

is allowable for federal participation. We also reaffirm our recommendations to the NOAA 

Grants Officer. This appendix discusses the basis for our findings and directly addresses the 

Commission’s response, which is available at our office. 

As a longtime recipient of federal financial assistance, the Commission has significant 

experience with federal cost principles, including those principles requiring the preparation of 

indirect cost rate proposals, certifications, and adequate supporting documentation in order to 

claim indirect costs. Yet even though its previous indirect cost agreement lapsed around 1997, at 

the time of our audit—13-plus years later—the Commission still had not negotiated a new 

agreement, despite its acknowledgement that it had experienced significant growth. Likewise, 

although the Commission claims that any disallowance of its funding would have an adverse 

effect on its work, it risked disallowance by choosing not to revise its indirect cost rate despite its 

familiarity with federal principles regarding indirect cost claims. In January 2009, the OIG audit 

team found such serious deficiencies that we delayed our audit to allow the Commission to 

develop revised cost proposals, methodology, and policies. Even with the additional time, the 

Commission produced inadequate proposals that did not equitably distribute indirect costs. 

Moreover, in preparing its response to our draft report, the Commission again did not provide 

necessary details and supporting documentation for its assertions that it has revised its indirect 

cost rate proposals for the audit period. Had it done so, we would have evaluated those actions 

and may have been able to credit the Commission with those accomplishments in this final 

report. 

Finding I: The Commission Did Not Submit, Certify, or Adequately Support Indirect Cost 

Rate Proposals 

Despite multiple notifications by the Department of Commerce, the Commission did not submit, 

certify, or adequately support its indirect cost rate proposals as required in order to claim indirect 

costs. The Commission disagreed with our finding because, it claimed, it had not been formally 

notified that Commerce was the cognizant federal agency for indirect cost, Commerce did not 

request the submission of indirect cost rate proposals, and Office of Management and Budget 

(OMB) Circular A-87 did not require it to submit its proposals. OMB does not specifically 

designate cognizant agencies for indirect cost for all federal grantees, including the Commission; 

however, as the Commission’s primary federal funding source since 2003, the Department of 

Commerce is clearly cognizant for the Commission’s indirect cost, in accordance with the 

following provisions of OMB Circular A-87, attachment E at section D.1.b.: 

...The cognizant agency for all governmental units or agencies not identified by 

OMB will be determined based on the Federal agency providing the largest 
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amount of Federal funds. In these cases, a governmental unit must develop an 

indirect cost proposal in accordance with the requirements of this Circular and 

maintain the proposal and related supporting documentation for audit. These 

governmental units are not required to submit their proposals unless they are 

specifically requested to do so by the cognizant agency.... 

The Commission had multiple opportunities to submit its indirect cost proposals and supporting 

data over the years: 

1. The Department’s financial assistance agreements, executed by both the National 

Oceanic and Atmospheric Administration (NOAA) Grants Officer and the Commission, 

not only incorporated OMB Circular A-87 by reference but also included other indirect 

cost requirements fully consistent with the circular. 

2. NOAA’s award notification letters accompanying its financial assistance offers clearly 

include directions to the Commission to follow the Department’s Financial Assistance 

Standard Terms and Conditions pertaining to indirect cost, which are incorporated by 

reference in each award. Those provisions set forth submission and support requirements 

for indirect cost rate proposals. 

3. The Department of Commerce pre-award notification requirements for grants and 

cooperative agreements, published in Federal Registers spanning the audit period, 

provide specific instructions directing the submission of indirect cost rate proposals and 

supporting documentation. These requirements are incorporated by reference in NOAA 

financial assistance awards. 

4. NOAA’s Administrative Standard Terms and Conditions contains specific provisions 

addressing expired indirect cost rates and directing award recipients to submit a request 

to renegotiate the indirect cost rate agreement, along with required documentation, to 

their cognizant federal agency to update their negotiated rate agreements. These 

provisions are included in each financial assistance award. 

The Commission’s previous negotiated indirect cost agreements, dated 1986 and 1996, have long 

since lapsed. As we reported, the 1996 agreement with the Bonneville Power Administration 

covered rates for 1993 through 1997. The Commission asserts that its methodology was accepted 

at that time and has not changed in the intervening years—despite the Commission’s significant 

growth, addition of new programs and activities, and indirect cost rate proposals that show the 

contrary. When we requested its indirect cost methodology and costing policy in January 2009, 

the Commission was unable to produce an approved methodology that was still applicable for the 

audit period. We then suspended the audit—in part to give the Commission an opportunity to 

develop the methodology and policy—but when we resumed the following March, neither the 

methodology nor the policy were available. 

Initial testing of the rates provided to us in January 2009 disclosed serious deficiencies in the 

Commission’s rate proposals. When we suspended the audit that month, we allowed the 

Commission to prepare revised proposals, which it provided in late March 2009. Preliminary 
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testing of the revised proposals demonstrated that they were still inadequate for reasons detailed 

in this report; therefore, we questioned the rates as they had been calculated and applied. 

At the time of our audit, the Commission was only able to provide an indirect cost rate 

certification for its fiscal year 2007, and it prepared the certification for 2008 while we were on 

site. Commission management advised us that there were no indirect cost rate certifications 

prepared for the other years in our audit period. The certificates for fiscal years 2002 through 

2006 (which the Commission included in attachment 7 of its response) were for cost allocation 

plans35 rather than indirect cost rate plans;36 therefore, these certifications are not applicable. 

As we reported in appendix A, we met with the Commission’s independent auditors and 

reviewed the work accomplished in support of the Commission’s single audits to determine the 

extent to which our audit could build upon that work. Contrary to the Commission’s statement 

that the indirect cost rate is calculated on an annual basis as part of the Commission’s A-133 

annual financial audit, representatives of the Commission’s audit firm confirmed that the 

Commission’s single audits did not include review of the indirect cost rate proposal beyond 

ensuring that the rates charged to federal awards agreed with the rates proposed. 

The Commission also asserted that by accepting and approving its final financial status reports, 

the Grants Office did not disallow any portion of the indirect cost charges identified in the 

reports. However, a Grant Officer’s acceptance and approval of such reports in the award closeout process does not affect a federal agency’s right to disallow costs and recover funds on the 

basis of a later audit or other review.37 More specifically, refunds are required where indirect 

cost rate proposals are later found to have included unallowable or unallocable costs.38 

Finding II: The Commission’s Unsubmitted Indirect Cost Proposals Were Inadequate, and 

Rates and Claims Were Unallowable 

The Commission disagreed with our finding, contending that the application of its indirect cost 

rates produced consistent and equitable distributions of indirect costs, and the indirect cost rate 

proposals included as attachment 7 of its response are (with a few minor exceptions) the same as 

those provided to us in January 2009. However, the Commission also acknowledged that it had 

revised, or was planning to revise, its handling of numerous activities to ensure equity in the 

future. For the many reasons detailed in our draft report and reaffirmed here, both groups of 

indirect cost rate proposals provided to us in January and March 2009—and thus the rates and 

indirect cost claims based on these proposals—are not allowable for federal participation due to 

the inclusion of unallowable costs, use of inconsistent costing policies, and inequitable 

distribution of costs to projects. We also specifically note that the Commission’s proposals 

clearly demonstrate inconsistency in its handling of data processing fees, offsets for 2 percent 

administrative fees, and carry-forward adjustments. 

 

35 OMB Circular A-87, attachment C at E.4. 36 OMB Circular A-87, attachment E at D.3. 37 Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, 

15 CFR § 24.51(a). 

38 OMB Circular A-87, attachment E at E.4. 
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In its response, the Commission referred to shifting time between projects to correct employee 

coding errors. While we had no objections to these corrections, we did disagree with the 

Commission’s decision to override the actual hours recorded by employees in its time 

distribution system and instead charge time to projects based on budgeted percentages, or adjust 

blocks of time between projects. Because direct labor is a part of the modified total direct cost 

base the Commission uses to allocate indirect cost to projects, such shifts not only produce 

inequitable distributions of indirect cost to projects but also, as demonstrated in our report on two 

of the Commission’s cooperative agreements, can result in unallowable claims of indirect cost in 

excess of the approved budget line items. 

The Commission also downplayed the initial impact of indirect costs that had been misclassified 

as direct. But improper identification can overstate the indirect cost pool, understate the modified 

total direct cost base, increase the indirect cost rate, and possibly inequitably distribute the cost 

of the direct activity to other projects. 

The Commission’s consistent implementation of its cost accounting system should not be 

influenced by the choice of billing mechanisms used for any project (such as the fisheries 

disaster awards or the suite of State of California projects). All projects should be assigned a job 

number and must follow the same cost accounting method, recording all direct costs applicable 

to the job and applying the Commission’s indirect cost rates. Revenues should be credited to the 

project cost account. Project losses due to the use of an inadequate billing method cannot be 

transferred to other projects or recovered through the indirect cost rate.39 Because the 

Commission is a regional government entity and because it operates cost-reimbursable awards, 

any gains must be returned to the funding source. Furthermore, project gains and losses cannot 

be used to offset indirect cost without producing unallowable, inequitable distributions to the 

remainder of the Commission’s projects. 

If, as the Commission asserts, activities such as the fisheries disaster projects, the State of 

California suite of projects, and pass-through awards demand different levels of administration, 

in the future it may wish to consider whether a multiple-allocation-base indirect cost method or 

special indirect cost rates better address those differences. Whatever course the Commission 

chooses, it must adhere to OMB guidance. Unsupported assessment rates that are not 

subsequently reconciled to actual costs, such as the 2 percent applied to the fisheries disaster 

awards and pass-through activities and the fees attached to the suite of State of California 

projects, are not allowable. 

The Commission also asserted that its application of the 2 percent ancillary fees was covered 

under OMB Circular A-87, attachment A at section A.2.b. Alternative reimbursement systems 

for administrative costs are acceptable only if the fees generated are periodically reconciled to 

actual costs,40 but the Commission had no such provision for fee reconciliation. Furthermore, 

fee-for-service tests must be worked out with federal funding agencies as an alternative, rather 

than a supplementary, mechanism for paying administrative costs. Such arrangements are 

 

39 OMB Circular A-87, attachment A at C.3.c. and F.3.b. 40 OMB Circular A-87, attachment E at A.3, and A Guide for State, Local and Indian Tribal Governments: Cost 

Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Agreements with the 

Federal Government, ASMB C-10 at 2.11, 2-1. 

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intended to reduce the burden associated with maintaining systems for charging these costs to 

projects and preparing and approving cost allocation plans. If the Commission intends to pursue 

this method in the future, it should consult with the Department’s Indirect Cost Coordinator to 

determine an acceptable alternative mechanism to its indirect cost rate. 

The Commission contended that, by adjusting its indirect cost pool by the amount of ancillary 

fees collected on pass-through funds, it eliminated the potential for duplicate recovery of the 

costs to administer pass-through activities. These costs are included in the indirect cost pool and 

distributed to all other direct projects. However, the Commission did not use the administrative 

fees it collected as an offset to the indirect cost pool until its fiscal year 2006. This is just one of 

the reasons that the indirect cost rates for fiscal years 2002 through 2005 were determined to be 

inequitable. Administrative fee recoveries for 2002 through 2005 ranged from $225,169 to 

$255,367, according to the Commission’s indirect cost rate proposals. 

From 2006 through 2009, the Commission offset the indirect cost pool by the amount of 

administrative fees it collected on pass-through funds. However, as we have demonstrated, 

because the Commission does not identify the administrative expenses associated with passthrough activities, there is no assurance that the offsets did not include unallowable gains or 

losses inequitably distributed to all of the Commission’s direct projects. Also, the fisheries 

disaster awards were direct projects, and the associated costs to manage or oversee these projects 

represent direct costs that must be excluded from the indirect cost pool and included in the 

modified total direct cost base in order to bear a fair share of indirect cost. Had the Commission 

properly handled these costs, the indirect cost rates would have been further reduced. Further, 

although the Commission contended that the 2 percent fee was applied because funding agencies 

improperly and arbitrarily imposed limits on indirect cost recovery, (1) it was not forced to 

accept the funding agencies’ offer of the awards and (2) agreeing to use a different billing 

method does not excuse the Commission from the requirement to consistently apply its normal 

cost accounting practice. 

Additionally, the Commission appears to have misunderstood the context of the column entitled 

“Accepted by Audit” in table 1 of the report. The column refers to the OIG audit, not the 

Commission’s independent auditors. However, as noted above and contrary to the Commission’s 

assertions, representatives of its independent audit firm stated that its single audits did not 

include a review of the Commission’s indirect cost rate proposal beyond ensuring that the rates 

charged to federal awards agreed with the rates proposed. 

The Commission’s response to the draft audit report confirmed that although it used a fixed 

indirect cost rate with a carry-forward provision, for several years (fiscal years 2002 through 

2005) it did not adjust its estimated indirect cost rates to actual rates. As we reported, in 2006 the 

Commission retroactively adjusted its claimed indirect cost rate for its fiscal year 2006 from 15 

to 13 percent. However, that adjustment and those for subsequent years did not properly employ 

the carry-forward provision, which provides for identifying the difference between estimated and 

actual indirect costs for an entity’s fiscal year and carrying that difference forward as an 

adjustment to the subsequent fiscal year’s indirect cost pool and fixed indirect cost rate 

computation. A review of the Commission’s indirect cost rate proposals for 2007 through 2009 

shows that rather than applying the dollar difference to the indirect cost pool of the following 

fiscal year, it selectively applied either none or a portion of the difference between the estimated 

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indirect cost rate claimed and the actual rate incurred to the rate computed for the following 

fiscal year. If there was a residual percentage left, it carried that forward to yet another fiscal 

year. Rolling forward the difference in rates rather than the difference in indirect dollars and 

applying this amount forward over several years fails to accurately and timely adjust indirect cost 

recoveries to actual.

Conclusion

The Commission disagreed with our conclusion and contended that if NOAA disallowed its 

indirect cost claims, its work would be jeopardized because it has no other funding source for the 

administration of its awards. 

Nevertheless, we reaffirm our findings. The Commission’s response stated that it has taken 

several corrective actions; however, since our September 2009 exit conference and even since 

the issuance of our draft report, the Commission has not made sufficient progress in the 

following areas: 

• reconstructing acceptable indirect cost rates for 2002 through the present and identifying 

a cumulative net carry-forward adjustment, 

• developing a revised indirect cost rate methodology, 

• negotiating a corrective action plan for past excess indirect cost claims and ancillary fees, 

and 

• negotiating an indirect cost rate agreement with the Department for future years.41 

Subsequent Events

The Commission disagreed with our discussion of its proposed indirect cost rates for 2009, and 

claimed that its 2 percent administrative fee for pass-through funds is an accepted and approved 

rate. Furthermore, the Commission contended that our report’s statement that “we do not accept 

the Commission’s indirect cost rates or administrative fees...” implies that OIG disallows, rather 

than questions, the costs. (Disallowance is the purview of Department of Commerce 

management.) 

 

41 With regard to developing an indirect cost rate methodology for the future and reconstructing acceptable indirect 

cost rates that factor in a proper carry-forward provision, we recommend the Commission review the provisions of 

OMB Circular A-87, attachment E at E, A.3; A Guide for State, Local and Indian Tribal Governments: Cost 

Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Agreements with the 

Federal Government, ASMB C-10; and U.S. Department of Labor Guidance at 

http://dol.gov/oasam/programs/boc/costdeterminationguide/main.htm, which includes technical assistance, exhibits, 

cost policy statements, checklists and other indirect cost guidance referenced by the U.S. Department of Commerce 

General Indirect Cost Rate Program Guidelines for Grantee Organizations, dated December 18, 2007, and April 17, 

2008. 

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However, we reaffirm our findings. The Commission used a 13 percent rate for proposing 

indirect cost for fiscal year 2009. According to data provided in attachment 7 of its response, the 

Commission proposed a 12.38 percent rate for 2010 based on a 12.37 percent incurred rate for 

2009. 

As we reported, the Commission’s 1996 indirect cost negotiation agreement with the Bonneville 

Power Administration, which included a 2 percent administrative assessment rate, applied to the 

period from July 1, 1992, through June 30, 1997, and is no longer applicable. The Commission 

had no support for its 2 percent rate. It did not account for administrative expenses associated 

with pass-through funds and therefore could not demonstrate whether the assessment represented 

either an over- or under-recovery of pass-through administration costs. Offsetting the indirect 

cost rate by either over- or under-recovered fees is not allowable. 

With regards to the terminology we used, not accepting indirect costs is equivalent to 

questioning them. We did not disallow the costs but rather recommended disallowance and 

recovery. The authority to disallow costs is reserved exclusively for the federal Grants Officer. 

Appendix A: Objectives, Scope, and Methodology 

The Commission objected to our statement that the audit was a performance audit conducted in 

accordance with generally accepted government auditing standards, and contended that based on 

the audit objectives it should have been conducted under financial audit standards. However, 

OIG maintains that the standards used were appropriate. 

Appendix B: Detail of Indirect Cost Audit 

A. The Commission Treated Bonuses Inconsistently

The Commission disagreed with our findings concerning the methods it used to calculate 

bonuses for its employees. However, its response underscores a lack of consistency in its 

treatment of bonuses as direct or indirect costs and acknowledges a change in its bonus 

methodology before and after fiscal year 2006. Federal cost principles applicable to the 

Commission require that each item of cost—either direct or indirect—be treated consistently in 

like circumstances. 

The Commission’s assertion that it included a portion of the project managers’ bonuses in the 

indirect cost pool because they were providing management oversight of all projects for the 

benefit of the Commission is inconsistent with our audit findings. In the examples we cited, 

Commission staff charged all of their time to a direct project; however, their bonuses were 

charged—in whole or in part—to the indirect cost pool. Under a pay-for-performance system, if 

an employee applied time exclusively to specific direct projects, the bonus is calculated based on 

the employee’s performance on those projects. The bonus should thus be charged to the direct 

project, in keeping with the Commission’s policy statement that any rewards will be paid from 

the project/program budget. Charging the bonus to the indirect cost pool would result in an 

inequitable distribution of the bonus to all direct projects through the application of the 

Commission’s indirect cost rate. 

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The Commission provided additional information justifying its treatment of select immaterial 

service costs under the purchase method of accounting; accordingly, we have deleted that portion 

of the draft report in preparing this final report. 

B.1. Necessary and Reasonable Costs

The Commission gave further details regarding the vehicle it leased for use by a senior official. It 

supplied some dollar amounts to justify its decision to lease the Lexus but provided no leaseversus-purchase analysis or other documentation in support of the figures. Furthermore, the 

Commission does not dispute that the official was unable to provide logs to distinguish between 

official and personal use of the vehicle. 

In the absence of the necessary support, we questioned the Commission’s inclusion of the total 

cost of the Lexus as well as the related maintenance, repair, fuel, and insurance costs in the 

indirect cost pool when the vehicle was clearly provided to the official for both business and 

personal use. Contrary to the Commission’s assertion, our report did not question this official’s 

pay, fringe benefits, bonuses, or perquisites. However, in future deliberations of whether to 

convert from a mileage-based to a monthly automobile allowance, the Commission should be 

aware that, given its position as a regional government entity receiving virtually all of its funding 

from federal and state governments, the personal use of a Lexus, reimbursements for local meals, 

and U.S. government executive-level pay risks challenge under federal cost principles 

concerning whether the individuals concerned acted responsibly.42

B.2. Direct Cost Charged to Indirect Cost 

While the Commission did not explicitly concur with our finding exemplified by the accounting 

system upgrade and its event planning practices, it claimed to have taken necessary corrective 

actions in 2009 and 2010, respectively. 

B.3. Inadequate Documentation of Costs 

The Commission agreed that some of its documentation was insufficient. It commented that its 

process was burdensome and stated that in 2010 it implemented an electronic system to ensure 

that its rates comply with Commission policies and that required receipts are retained and 

submitted prior to reimbursement. While the Commission did not explicitly concur with our 

finding, we accept its corrective actions as concurrence. However, we note that because these 

actions were not taken until 2010, the changes apply only to the future. 

B.4. Undocumented and Excessive Travel Costs 

The Commission stated that its prior travel policy was based in part on federal regulations, but 

agreed that the policy was not clear. It did not specifically concur with our finding, but noted that 

it has since updated and finalized a new travel policy applicable to all employees from now on. 

The policy defines the support required by travel type, assures that travel costs are necessary and 

reasonable, and requires valid justification for departure from established policies. 

 

42 OMB Circular A-87, attachment A at C.2. and C.2.d. 

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B.5. Entertainment Costs 

The Commission contended that the costs of its annual holiday party constituted employee 

morale, health, and welfare costs. As such, these costs were not unallowable entertainment 

expense because the events provided opportunities to thank and reward employees for their 

service during the year. The Commission further asserted that the auditors did not discuss these 

issues with its staff during the audit. 

Federal cost principles do state that certain expenses related to employee health, morale, welfare, 

and performance, as well as employer-employee relations, are allowable.43 However, the costs of 

entertainment, including amusements, diversions, and social activities, and any costs directly 

associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, 

transportation, and gratuities) are unallowable.44 The expenses we questioned were related to 

events identified as holiday or Christmas parties, which were either held at downtown hotels or 

catered at Commission offices. In all instances alcohol was served. Costs associated with such 

events are unallowable.45

We do not agree with the assertion that our auditors did not discuss this issue with Commission 

staff during the audit. We specifically requested supporting documentation for numerous holiday 

party charges in January 2009 and again in March in conjunction with our tests of the 

Commission’s indirect cost rate proposals. We also received a workbook from Commission 

accounting staff in support of prospective adjustments to the indirect cost rate proposals; the 

workbook included a spreadsheet titled “Christmas and Xmas Sort.” 

B.6. Capital Expenditures Charged to Expenses 

Regarding our finding concerning capital expenditures that had been charged to expenses, the 

Commission asserted that it had done an extensive analysis during the audit to identify assets 

requiring capitalization in keeping with its $1,000 capitalization threshold. It further contended 

that discussion during the audit regarding the Google search engine, which it characterized as 

software, was brief and inconclusive. The Commission also stated that it had not received a 

detailed list of questioned costs from the auditors despite requests for such information at the exit 

conference and in subsequent emails. 

In response to our January 2009 request that the Commission correct its indirect cost rate 

proposals, it identified select equipment charges that should have been capitalized and eliminated 

from the indirect cost pool. However, our subsequent tests of the March 2009 revised indirect 

cost rate proposals identified other items, including the Google search engine, that met the 

Commission’s capitalization threshold but that had not been removed from the indirect cost pool. 

The discussion of the search engine during the audit was brief principally because the 

Commission’s supervisory accountant characterized this item as hardware and agreed that it 

should have been capitalized and removed from the indirect cost pool. Therefore, we reaffirm 

our finding. 

 

43 OMB Circular A-87 (1995) attachment B at 17 and (2004) attachment B at 13. 44 OMB Circular A-87 (1995) attachment B at 18 and (2004) attachment B at 14 45 The Commission excluded the cost of the alcohol as unallowable. 

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During the audit we had extensive discussions with the Commission’s staff regarding items we 

tested, and Commission staff assisted in locating supporting documentation for those items. We 

acknowledge that the Commission also requested a list of questioned costs, but the volume of 

information for this project limited that request. 

B.7 and B.8. Contributions and Lobbying Costs 

The Commission’s certification of its indirect cost rate proposal included a statement that to the 

best of its knowledge and belief all costs included in the proposal are allowable in accordance 

with award provisions and the federal cost principles of OMB Circular A-87. However, our 

findings and the Commission’s responses demonstrate that certification to be incorrect. First, the 

Commission provided a newly revised chart of accounts (as response attachment 12) that 

included a new series of accounts to identify and segregate unallowable costs. The Commission 

stated that it also reviewed all financial data for 2002 through 2008 and removed potentially 

questionable items to the new general ledger accounts, but its response did not provide us either 

revised proposals or supporting documentation. Additionally, the Commission agreed that 

invoices for legal services were insufficient to identify the portion applicable to unallowable 

lobbying. It stated that it had discussed with its legal firm the need to identify the time spent on 

lobbying so that unallowable costs are properly excluded in the future, but this corrective action 

appears to be limited to instructing the legal firm to supply sufficiently detailed invoices; the 

Commission made no mention of obtaining the information necessary to identify and exclude 

lobbying expenses. 

B.9. Bonus Payments Inadequately Supported 

During our fieldwork, we reviewed employee personnel files for evidence of the documentation 

required to support bonuses as set forth in the Commission’s bonus policy. When required 

support was either incomplete or missing from the files, we gave the Commission an additional 

opportunity to locate and provide the missing documentation. We questioned bonuses only when 

neither our search nor the follow-up efforts by the Commission produced the necessary support 

for the bonuses awarded. The Commission reported that supporting documentation for program 

managers’ and executive staff members’ bonuses had not been forwarded to Human Resources 

for proper filing, but the situation has been corrected. It provided no support for its statement. 

B.10. Salary and Bonus Cost Charged to Incorrect Project 

As we reported, the Commission’s time distribution system, if properly implemented, would 

provide an adequate basis for allocating time among direct projects and indirect activities. 

However, some labor, fringe benefits, and bonus distributions did not match where staff actually 

charged their time. 

Additionally, the Commission neither had a cost policy statement nor followed a consistent 

practice for costing bonuses. In some instances, the Commission charged employee bonuses 

direct and in proportion to where the employee charged his time. In other instances, bonuses for 

staff charging direct to projects were charged to the indirect cost pool. The Commission needs to 

develop a cost policy statement that specifically addresses bonuses and follow it consistently. 

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The Commission’s response confirms that it initially classified direct projects, such as event 

planning and the fisheries disaster projects, as indirect activities. While the Commission 

contended that it recently received sufficient funding for event planning to establish it as a direct 

project, that does not change the effects of the initial handling of the project on past indirect cost 

rate proposals and net carry-forward adjustments. Similarly, the Commission’s contention that 

once it understood the level of effort involved, it directed staff to allocate time to a project 

account to be offset by the 2 percent administrative assessment neither corrects the improper 

handling of these projects in the past nor properly accounts for them now. 

Closing 

During our audit, we found significant deficiencies in every area of indirect cost we tested. The 

Commission did not submit, certify, or adequately support its indirect cost rate proposals. In 

addition, its unsubmitted indirect cost proposals and rates were not allowable in accordance with 

federal guidelines in that (1) implementation of its cost accounting system was inadequate; (2) it 

had not established an adequate indirect cost methodology or policies, procedures, and controls; 

(3) its method of distributing costs was inequitable; and (4) it had not adjusted proposed indirect 

cost rates to reflect actual costs. 

Therefore, for the reasons outlined in this appendix, we reaffirm our findings that the 

Commission did not comply with the minimum requirements necessary to recover indirect costs 

under federal awards. We also reaffirm the recommendations we made to the NOAA Grants 

Officer. 

(OAE-19467) 

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