jurisdiction: US

text: b"\x0c\x0cAudit of Labor Effort Distribution and\n Reporting System\n\n Vanderbilt University\n Nashville, Tennessee\n\n National Science Foundation\n Office of Inspector General\n\n\n September 24, 2008\n OIG 08-1-014\n\n\n\n\n MANAGEMENT CONSULTANTS &\n CERTIFIED PUBLIC ACCOUNTANTS\n\x0cThis page intentionally left blank\n\x0c EXECUTIVE SUMMARY\n\n This audit report provides the results of our review of the payroll distribution and effort\nreporting system used by Vanderbilt University (Vanderbilt) to record and charge salaries and\nwages to National Science Foundation (NSF) grants. In fiscal year 2006, Vanderbilt had total\nFederal grant expenditures of $315 million,1 of which $13.8 million was directly funded by NSF.\nOf this amount, $4.2 million or 30 percent was for labor costs directly charged to NSF grants.\nThis audit is one of a series of Office of Inspector General\xe2\x80\x99s (OIG) reviews of the labor effort\ndistribution systems being conducted at NSF\xe2\x80\x99s top-funded universities in order to assess the\nadequacy of internal controls to ensure salaries and wages claimed on NSF grants are properly\nmanaged, accounted for, and monitored.\n\n Our audit found that Vanderbilt generally has a well established and sound Federal grants\nmanagement system. Vanderbilt has updated its Federal grants management policies and\nprocedures in 2002 to provide a general framework for after-the\xe2\x80\x93fact confirmation of labor\ncharges to Federal sponsored projects, uses a web-based effort reporting training module to\neducate personnel on the labor certification process, and is developing a new automated payroll\ndistribution and effort reporting system to improve its labor certification process. Also, review\nof 30 sampled employees disclosed that the University\xe2\x80\x99s labor effort reports generally supported\nthe FY 2006 NSF salaries of $623,317 directly charged to NSF grants.\n\n However, Vanderbilt needs to improve its internal controls for managing and\nadministering its payroll distribution and effort reporting system to ensure after-the-fact labor\ncertifications are timely and reliable. Due to inadequate internal controls, five of the 30 sampled\nemployees interviewed reported 10 to 50 percent less actual effort worked on NSF grants than\ncertified on their labor effort reports. In addition, certifying officials did not timely approve 12\nof the 68 effort reports reviewed, representing 16 percent of total salaries tested, within six\nmonths after the end of the reporting period, ranging from 21 to 174 days late. Also, 41 of the\neffort reports reviewed, representing 60 percent of NSF salary charges, lacked documented\ncertification dates.\n\n Without timely or effective controls, Vanderbilt has less assurance that the labor\ncertifications are reliable and reasonably support labor costs charged to NSF grants.\nSpecifically, the University overcharged $17,955 (3 percent) for employee activities not directly\nbenefiting NSF projects and did not have \xe2\x80\x9csuitable means of verification\xe2\x80\x9d supporting another\n$4,584 (1 percent) in FY 2006 salary charges reviewed. Furthermore, late certifications diminish\nthe reliability of Vanderbilt\xe2\x80\x99s after-the-fact confirmation of NSF labor costs because certifying\nofficials are relying on their memory, sometimes going back as long as one year, to validate the\nreported labor effort. Also, without documented certification dates, Vanderbilt cannot determine\nwhether the labor effort confirmations were timely or not. The systemic nature of these control\nweaknesses raises concerns about the reasonableness and reliability of the remaining $3.6\nmillion in FY 2006 labor charges to NSF grants and the salary portion of Vanderbilt\xe2\x80\x99s other $300\nmillion of Federal grant expenditures.\n\n1\n The $315 million of Federal grant expenditures excludes flow-through funds of $39 million and\nDepartment of Education student-aid funds of $61 million.\n\n\n i\n\x0c Furthermore, Vanderbilt needs to provide for accurate reporting of voluntary committed\nlabor effort devoted by faculty members on Federal sponsored projects. Specifically, the\nUniversity did not appropriately track and report uncompensated faculty labor effort when\nfunded principal investigator (PI) effort on NSF grants was replaced with cost shared effort by\nthe faculty members. Our review of the 15 sampled faculty members disclosed that two\nindividuals charged $9,161 less salary to two NSF grants for funded labor effort than included in\nthe award budget proposals. The FY 2006 salary costs associated with such unreported faculty\neffort is approximately 3 percent of the total NSF labor charges for the 15 faculty members\nreviewed. Further, for one of the two PIs, Vanderbilt did not estimate an amount of labor effort\nto include in the organized research base for computing its negotiated Federal indirect cost rate,\nas required by Federal regulations.\n\n These weaknesses occurred because Vanderbilt has not established adequate internal\ncontrols to provide for proper administration and oversight of its payroll distribution and labor\neffort reporting system. Specifically, the University has not (i) established comprehensive effort\nreporting policies and procedures, (ii) provided adequate employee training to ensure clear\ncampus understanding of the effort reporting process; and (iii) performed sufficient monitoring\nto ensure campus implementation and compliance with established University and Federal effort\nreporting policies and procedures. To address the weaknesses, recommendations made were\nprimarily directed at the need to enhance Vanderbilt\xe2\x80\x99s written policies to improve the timeliness\nand reliability of the labor confirmation process.\n\n A draft audit report requesting comments on the findings and recommendations was\nissued to Vanderbilt. In general, the University agreed to implement the audit recommendations\nand believed its new web-based Electronic Personnel Action Change (ePAC) system for labor\neffort reporting will address many of the control weaknesses identified in the audit findings.\nVanderbilt\xe2\x80\x99s comments and proposed corrective actions were generally responsive to the audit\nrecommendations. Therefore, NSF should work with the cognizant Federal audit agency to\nensure the University develops an acceptable corrective action plan to resolve each\nrecommendation. The corrective action plan should establish clear milestone dates for all\nproposed corrective actions; including updates to Vanderbilt\xe2\x80\x99s Effort Reporting Policy to reflect\nchanges in its effort reporting process brought about by the recent implementation of the new\nePAC system. Furthermore, it is essential for the University to establish written instructions and\nprocedures to clearly define the role and responsibilities for all campus personnel involved in the\nnew web-based effort reporting system. Written and current policies and procedures are the\ncornerstone to a sound Vanderbilt internal control structure.\n\n\n\n\n ii\n\x0c Table of Contents\n\n\nEXECUTIVE SUMMARY .........................................................................................................i\n\nINTRODUCTION\n\n Background ...............................................................................................................................1\n\n Objectives, Scope, and Methodology .......................................................................................2\n\nFINDINGS AND RECOMMENDATIONS\n\n Finding 1: Internal Control Improvements Needed in Payroll Distribution and Effort\n Reporting System......................................................................................................................4\n\n Finding 2: Improvements Needed to Properly Report Uncompensated Faculty Labor\n Effort on Sponsored Projects ....................................................................................................21\n\nAPPENDICES\n\n Appendix A \xe2\x80\x93 Schedule of FY 2006 Questioned Salaries and Wages ....................................25\n\n Appendix B \xe2\x80\x93 Schedule of Faculty with Uncompensated Effort on NSF Grants Not\n Properly Reported in FY 2006 .................................................................................................26\n\n Appendix C \xe2\x80\x93 Vanderbilt\xe2\x80\x99s Comments to Draft Audit Report .................................................27\n\n\nACRONYMS\n\nNSF National Science Foundation\nOIG Office of Inspector General\nOMB U. S. Office of Management and Budget\nPAF Personnel Action Form\nPI Principal Investigator\nOCGA Office of Contracts and Grants Accounting\nDSR Division of Sponsored Research\n\x0c INTRODUCTION\n\nBackground\n Approximately one-third of the National Science Foundation (NSF) award funds are\nprovided for salaries and wages, amounting to about $1.3 billion annually at universities. Also,\nin recent years, there have been several civil settlements involving overcharges of labor costs to\nFederal grants, amounting to millions of dollars at several major universities, including some\nfunded by NSF. Because of these legal actions and the material amounts of labor costs paid from\nNSF awards, the Office of Inspector General (OIG) is undertaking a series of reviews of the\nlabor effort distribution systems at NSF\xe2\x80\x99s top-funded universities in order to assess the adequacy\nof internal controls to ensure salaries and wages costs claimed on NSF grants are properly\nmanaged, accounted for, and monitored. This audit, involving Vanderbilt University\n(Vanderbilt), is one of several planned reviews of such labor effort distribution systems.\n\n Vanderbilt University, founded in 1873, is a private nonsectarian institution devoted to\nresearch and teaching in liberal arts and sciences, engineering, music, education, and human\ndevelopment. The University is located in Nashville, Tennessee and is comprised of 10 schools,\na public policy institute, and a medical center. It has approximately 2,689 faculty members,\n17,567 administrative and support staff, 6,378 undergraduates, and 5,229 graduate and\nprofessional students. Generally, Vanderbilt faculty members in the non-medical area are\nawarded nine-month academic year appointments, thus dedicate a majority of their summer\neffort to Federal sponsored research projects.\n\n In fiscal year 2006, Vanderbilt revenues totaled $2.48 billion, of which $278 million or\n11 percent was received from Federal Government grants and contracts. A majority of the\nUniversity\xe2\x80\x99s revenues, 64 percent, was derived from health care services provided by its medical\ncenter. Total Vanderbilt FY 2006 direct Federal grant expenditures totaled $315 million, of\nwhich $13.8 million (4 percent) was for NSF awards. Of the $13.8 million in NSF expenditures,\n$4.2 million or 30 percent was for salaries and wages.\n\n Vanderbilt\xe2\x80\x99s management and oversight of Federal grant programs for its non-medical\narea is shared between the Office of Contracts and Grants Accounting (OCGA) and the Division\nof Sponsored Research (DSR). OCGA is responsible for financial administration and monitoring\nof active Federal awards and ensuring Vanderbilt\xe2\x80\x99s compliance with Federal grant regulations\nand sponsoring agency requirements. As such, OCGA develops Vanderbilt\xe2\x80\x99s policies and\nprocedures for Federal grants management. DSR is primarily responsible for pre-award grant\nfunctions.\n\n Within each Academic Department, Business Administrators are tasked with the\nmanagement and oversight of sponsored projects by providing assistance to faculty members in\nadministering their Federal grants. Typically, such Business Administrators are responsible for\nensuring that awards and their budgets are created accurately in the University\xe2\x80\x99s financial\nsystems, award expenditures are monitored on a monthly basis, and labor effort certification\nreports are reviewed and approved by the employee or project PI. Specifically, PIs, in\nconjunction with the Business Administrators, have primary responsibility for all aspects of the\n\n 1\n\x0csponsored projects including approval of all charges and ensuring that the research is conducted\nin accordance with the award terms and conditions.\n\nObjectives, Scope, and Methodology\n Review Objectives. Our review objectives were: (a) to evaluate whether Vanderbilt\xe2\x80\x99s\ninternal controls are adequate to properly manage, account for, and monitor salary and wage\ncharges to NSF grants in accordance with OMB and NSF grant requirements and (b) to\ndetermine whether the salaries and wages are allowable, allocable, and reasonable in accordance\nwith Federal cost principles and NSF grant terms and conditions.\n\n Scope and Methodology. The audit focused on Vanderbilt\xe2\x80\x99s payroll distribution and\neffort reporting system and, accordingly, we reviewed internal controls for ensuring that labor\ncosts charged to NSF were (i) actually incurred; (ii) benefited NSF awards; (iii) were accurately\nand timely recorded; and (iv) were for allowable and allocable-type activities, as required by\nFederal and NSF grant requirements.\n\n To address each of these control objectives, NSF-OIG engaged a statistician to provide\nassistance in selecting a statistical sample of employee salary records for testing. The use of\nstatistical tools and methodology is to enable the NSF-OIG to project the audit results to the\nentire population of universities included in its planned reviews of payroll distribution and effort\nreporting systems nationwide. However, due to the small statistical sample size of 30 employees\ntested, we are not able to make any projections to the total Vanderbilt population of labor costs\ncharged to NSF grants. Specifically, the FY 2006 salaries and wages costs for the 30 sample\nemployees tested amounted to $623,317 and were supported by 68 effort reports. The statistical\nsample was derived from a total population of 352 employees, who charged $4,182,488 of\nsalaries to NSF grants during FY 2006. This population excluded (a) any employee with total\nsalary costs of $100 or less, and (b) all salary charges for undergraduate students. These\namounts were excluded because of their small dollar value and the difficulty in locating\nundergraduate students for personal interviews.\n\n We compared Vanderbilt\xe2\x80\x99s policy and procedures to Federal and NSF requirements for\nallocating labor costs to Federal awards, and interviewed Vanderbilt personnel to gain an\nunderstanding of the controls in operation to ensure that salaries and wages charged to NSF\nawards were reasonable and allowable. For each statistically selected salary record, we obtained\nthe following documentation to determine whether the labor costs that Vanderbilt charged NSF\nawards met the control objectives:\n\n \xe2\x80\xa2 Labor effort reports documenting 100 percent of each employee\xe2\x80\x99s compensation\n allocated to sponsored and non-sponsored projects for each reporting period.\n\n \xe2\x80\xa2 Appointment letters or other documents supporting the approved annual salary for\n employees.\n\n \xe2\x80\xa2 Payroll distribution information detailing the actual salaries and wages charged to\n sponsored projects and other activities for each employee during the fiscal year.\n\n\n 2\n\x0c \xe2\x80\xa2 Award documents to determine whether the grants had any terms and conditions that\n would affect allowable labor charges to the award.\n\n To ensure that salaries and wages charged to NSF awards were incurred and benefited\nNSF awards, we corroborated the information on Vanderbilt\xe2\x80\x99s labor effort reports by\ninterviewing the 30 sampled employees. We inquired whether (a) the labor charges documented\nwere actually incurred on projects and activities, (b) the approximate percentage of effort\nactually worked on each sponsored project and/or activity was reasonably consistent with labor\ncharges to NSF, and (c) the type of work performed on NSF projects was generally consistent\nwith the scope of the awards. We also interviewed selected Business Administrators in\nAcademic Departments to determine procedures for processing and monitoring employee salary\ncharges to Federal grants. Additionally, we interviewed selected PIs to determine the number of\nprojects and personnel they were responsible for, and their processes for verifying work\nperformance prior to approving and signing labor effort reports.\n\n To determine whether labor costs were accurately recorded and charged to NSF, we\nobtained appointment letters or other documentation supporting the authorized Vanderbilt salary\nrate for each employee in our selected sample. We recalculated labor costs charged to NSF\nprojects by using the salaries shown on supporting documentation and apportioning it by the\ndistribution percentage and period of time represented on the labor effort reports. We also\nreviewed labor transactions to determine whether Vanderbilt followed Federal, NSF, and\nUniversity requirements for charging such costs to Federal sponsored projects.\n\n We determined whether Vanderbilt officials approved and signed effort reports in a\ntimely manner, by comparing the date the effort reporting period ended to the date the reports\nwere approved and signed. Because Vanderbilt did not have an established time frame for effort\ncertification, we used six months from the end of the reporting period as criteria during our\nreview. Based on similar audits performed at other universities nationwide, the six month\ncriteria is reasonable because all the universities had timeliness standards of less than six months\nfrom the end of the effort reporting period. Also, as required by Vanderbilt\xe2\x80\x99s policy, we\ndetermined whether the effort reports were properly reviewed and signed by the employee, the\nresponsible project PI, or a cognizant individual with \xe2\x80\x9csuitable means of verification.\xe2\x80\x9d\n\n Also, we met with Vanderbilt\xe2\x80\x99s independent public auditors who performed the OMB\nCircular A-133 audit.2 Selected audit working papers were reviewed to ascertain the actual\naudit scope and procedures used in order to (i) preclude any duplicative audit work and (ii)\ndetermine the specific audit procedures performed on the labor effort reporting system.\n\n Onsite review work at Vanderbilt was performed for a 2-week period in May 2007 and a\n3-week period in July 2007. The remainder of our review work was completed through phone\ninterviews, emails, and documentation requests through June 2008. We were engaged to\nperform the review by the NSF-OIG and the audit was conducted in accordance with the\nComptroller General\xe2\x80\x99s Government Auditing Standards and accordingly included such tests of\naccounting records and other auditing procedures, as we considered necessary, to fully address\nthe audit objectives.\n\n\n2\n OMB Circular A-133 is entitled Audits of States, Local Governments, and Non-Profit Organizations.\n 3\n\x0c FINDINGS AND RECOMMENDATIONS\n\nFinding 1: Internal Control Improvements Needed in Payroll Distribution and Effort\nReporting System\n\n Federal grant requirements provide that salaries and wages charged to sponsored projects\nbe supported by labor effort reports signed and approved by the employees or officials who are\nin a position to know whether the work was performed. Such reports are required to represent\n100 percent of an individual\xe2\x80\x99s activity and provide an after-the-fact confirmation or\ndetermination that the effort report represents a reasonable estimate of the actual effort expended\non sponsored projects. Although Federal requirements do not specify when a labor effort report\nshould be completed, university officials should provide the after-the-fact confirmation as close\nto the end of the reporting period as possible to ensure its reliability.\n\n Our review of 30 sampled employees disclosed that Vanderbilt\xe2\x80\x99s labor effort reports\ngenerally supported the FY 2006 NSF salaries of $623,317 directly charged to NSF grants.\nHowever, Vanderbilt needs to improve its internal controls for managing and administering its\npayroll distribution and effort certification system to ensure after-the-fact labor certifications are\ntimely, and reasonably reflect the actual work performed on sponsored projects. Review of 68\nlabor effort reports for the 30 sampled employees found the following control weaknesses:\n\n \xe2\x80\xa2 Twelve effort reports, representing 16 percent of total salaries tested, were not timely\n certified within six months after the end of the reporting period, ranging from 21 to\n 174 days late. In addition, 41 of the reports, representing 60 percent of NSF salary\n charges reviewed, lacked a certification date.\n\n \xe2\x80\xa2 Five employees reported 10 to 50 percent less actual effort worked on NSF grants\n during interviews than the labor effort certified on effort reports.\n\n \xe2\x80\xa2 One labor effort report was inappropriately certified by an individual without\n \xe2\x80\x9csuitable means of verification\xe2\x80\x9d to validate the reasonableness of the actual work\n performed on the NSF grant.\n\n Without timely or effective controls, Vanderbilt has less assurance that the labor\ncertifications are reliable and reasonably support labor costs charged to NSF grants.\nSpecifically, the University overcharged $17,955 (3 percent) for employee activities not directly\nbenefiting NSF projects and did not have \xe2\x80\x9csuitable means of verification\xe2\x80\x9d supporting another\n$4,584 (1 percent) in FY 2006 salary charges reviewed. Furthermore, late certifications diminish\nthe reliability of Vanderbilt\xe2\x80\x99s after-the-fact confirmation of NSF labor costs because certifying\nofficials are depending on their memory to validate the reported labor effort. Similarly, without\ndocumented certification dates, Vanderbilt cannot determine when the effort reports were\nreviewed and therefore, whether they were timely. The systemic nature of these control\nweaknesses raises concerns about the reasonableness and reliability of the remaining $3.6\nmillion in FY 2006 labor charges to NSF grants and the salary portion of Vanderbilt\xe2\x80\x99s other $300\nmillion of Federal award expenditures.\n\n\n 4\n\x0c These weaknesses occurred because Vanderbilt did not establish adequate internal\ncontrols to provide for proper administration and oversight of its payroll distribution and labor\neffort reporting system. Specifically, the University has not (i) established comprehensive\nwritten effort reporting policies and procedures; (ii) provided adequate employee training to\nensure clear campus understanding of the effort reporting process; and (iii) performed sufficient\nmonitoring to ensure campus compliance with established University and Federal effort\nreporting policies and procedures.\n\nLabor Effort Reports Must Be Timely Certified as Accurate and Reflect Work Benefiting NSF\nAwards\n\n OMB Circular A-21, Cost Principles for Educational Institutions, requires certification of\nlabor effort/activity contributed by employees on Federal awards. Specifically, paragraph\nJ10.b.(2) states a payroll distribution system is required that will \xe2\x80\x9c\xe2\x80\xa6reasonably reflect the\nactivity for which the employee is compensated by the institution; and encompass both\nsponsored and all other activities on an integrated basis.\xe2\x80\x9d Such a system must provide for after-\nthe-fact confirmation of employee activity by a responsible person with \xe2\x80\x9csuitable means of\nverification that the work was performed.\xe2\x80\x9d The Circular also requires that the University provide\nfor periodic independent internal evaluations to ensure the system\xe2\x80\x99s effectiveness and\ncompliance with the Federal standards.\n\n Circular A-21 recognizes that labor charges may be made initially to sponsored\nagreements on the basis of estimates made before services are performed. But when \xe2\x80\x9csignificant\nchanges in the work activity\xe2\x80\x9d occur, such changes in employee salary distributions must be\nidentified and entered into the system. Further, Circular A-21 recognizes that a precise\nallocation of labor effort is not always feasible and states that reliance can be placed on\n\xe2\x80\x9cestimates in which a degree of tolerance is appropriate.\xe2\x80\x9d Furthermore, the Circular recognizes\nthat each institution \xe2\x80\x9cshould employ sound management practices\xe2\x80\x9d in applying the Federal cost\nprinciples for charging costs on sponsored projects.\xe2\x80\x9d3 As such, Vanderbilt should have written\nprocedures defining (1) what constitutes \xe2\x80\x9csignificant changes in work activity\xe2\x80\x9d that are required\nto be entered into the payroll distribution system and (2) what level of \xe2\x80\x9cprecision\xe2\x80\x9d is acceptable\nbetween actual effort and reported effort that is considered to be tolerable and does not have to\nbe adjusted in the payroll distribution system.\n\n Consistent with the Circular A-21 requirement for \xe2\x80\x9csound business management\npractices,\xe2\x80\x9d OMB Circular A-110, Uniform Administrative Requirements for Grants and\nAgreements with Institutions of Higher Education, Hospitals, and Other Non-Profit\nOrganization,4 requires entities receiving Federal awards to establish and maintain internal\ncontrols that are designed to reasonably ensure compliance with Federal laws, regulations, and\nprogram requirements. Further, OMB Circular A-133, Audits of States, Local Governments, and\nNon-Profit Organizations, defines internal controls as a \xe2\x80\x9cprocess effected by an entity\xe2\x80\x99s\n\n3\n Paragraphs A.2.d. and A.2.e of OMB Circular A-21, Cost Principles for Educational Institutions.\n4\n Section .21 of OMB Circular A-110, requires that a grantee\xe2\x80\x99s financial management system provide for\n\xe2\x80\x9cEffective control over and accountability for all funds, property, and assets. . . Written procedures for determining\nthe reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable cost\nprinciples and terms and conditions of the award.\xe2\x80\x9d\n\n 5\n\x0cmanagement and personnel, designed to provide reasonable assurance regarding the achievement\nof objectives in the following categories: (1) Effectiveness and efficiency of operations; (2)\nReliability of financial reporting; and (3) Compliance with applicable laws and regulations.\xe2\x80\x9d\nInternal control is considered a major part of managing an organization and comprises the plans,\nmethods, and procedures used to meet missions, goals, and objectives. Management sets the\nobjectives, puts the control mechanisms in place, and monitors, and evaluates whether the\ncontrol is operating as intended. People are what make internal control work, thus sufficiently\ntrained personnel in an organization and clear job descriptions and responsibilities are critical\nelements of a successful internal control program.\n\n Pursuant to OMB requirements, Vanderbilt has established three different effort reporting\nprocesses to provide for after-the-fact certification of the reasonableness of actual employee\neffort devoted to Federal sponsored projects: the Personnel Action Form (PAF) for exempt\nemployees; a certification report for faculty summer salaries; and bi-weekly timesheet\ncertification for non-exempt employees. The PAF is a multi-purpose document5 used to both\nallocate employee salaries to sponsored projects on a prospective basis and to provide for after-\nthe-fact certification of the reasonableness of such salaries charges. Specifically, Vanderbilt\nprocedures require the employee or the project PI to review and approve the certification section\nof the PAF at least once annually or whenever there is a change in an employee\xe2\x80\x99s salary\ndistribution. Each of the University\xe2\x80\x99s Academic Departments is responsible for distributing the\nPAFs to the employee or project PI, obtaining the after-the-fact confirmation of salary charges to\nsponsored projects, and maintaining copies of the certified reports. In addition, Vanderbilt\npolicy requires a separate labor certification report for faculty summer salary charges to Federal\nsponsored projects. The Office of Contracts and Grants Accounting (OCGA) is responsible for\ncompiling, distributing, obtaining confirmation, and maintaining copies of the separate effort\ncertification reports for faculty summer salaries.\n\nMany Labor Effort Reports Not Timely Certified or Dated\n\n Although Federal regulations do not specify when labor effort reports should be reviewed\nand certified, sound internal control dictates that University officials should provide the after-\nthe-fact confirmation as close to the end of the reporting period as possible to ensure its\nreliability. However, Vanderbilt did not establish any specific time frames for review and\napproval of either of the two effort certification reports. Therefore, for audit purposes, we used\nsix months from the end of the reporting period to evaluate the timeliness of the University\xe2\x80\x99s\nlabor effort certification process. The six-month time frame is reasonable because we found that\nthe established turnaround time at the other universities reviewed to date have all been less than\nsix months.\n\n Therefore, using the six-month criteria, only 15 of the 68 FY 2006 labor effort reports for\nthe 30 sampled employees were certified on time. The certifying officials did not timely approve\n12 reports, representing $98,415 (16 percent) of the total NSF labor charges reviewed. The\nnumber of days late beyond six months from the end of the reporting period ranged from 21 to\n174 days. Specifically, all 12 late certifications were for the confirmation reports for faculty\nsummer salaries charged to NSF grants. Furthermore, for the remaining 41 PAFs reviewed,\n\n5\n The PAF is also used to document other employee personnel and payroll information such as new hires, terminations,\ncharges in personal data, salary increases, etc.\n 6\n\x0crepresenting $374,227 or 60 percent of the total FY 2006 NSF salary charges, we were unable to\ndetermine whether certifying officials approved the PAFs timely because the signature dates\nwere not documented.6 The following table summarizes the number of days late beyond six\nmonths from the end of the reporting period that Vanderbilt officials took to review and approve\nthe labor effort certifications as well as the number of reports that were not dated to permit an\nevaluation of timeliness.\n\n\n Effort Reports Certified on Time, Late, or Not Dated\n % of Total % of\n # of Effort Effort Affected Affected\n Number of Days Reports Reports Salaries Salaries\n\n Reports 15 22% $150,675 24%\n Certified Timely\n\n 1-50 11 16% $83,415 13%\n 51-100 0 0\n 101-150 0 0\n 150-200 1 2% $15,000 3%\n\n Reports 12 18% $98,415 16%\n Certified Late\n\n Reports Not 41 60% $374,227 60%\n Dated\n\n SUBTOTAL \xe2\x80\x93 53 78% $472,642 76%\n Reports Late or\n Not Dated\n\n TOTAL 68 100% $623,317 100%\n\n Timely approval of labor effort reports is essential to ensure labor charges to NSF grants\nare reliable because certifying officials are generally relying on their memory when approving\nreported work activity for themselves and the individuals that work for them. Vanderbilt\nemployees or project PIs must at a minimum remember as far back as one year in many instances\nto confirm the reasonableness of reported employee activity since PAF certification are only\nrequired annually. Additionally, many PIs have multiple awards and many employees for whom\nthey are responsible, which increases the risk that the PI\xe2\x80\x99s memory of the amount and type of\n\n6\n Cognizant Vanderbilt officials believed that the dates other Department officials signed the multi-purpose\nPAF should be used to document the labor effort certification date. However, these other Department officials were\nreviewing and approving the PAF data for other purposes, thus it would not be valid to use such dates for labor\neffort certification purposes.\n 7\n\x0cactivities performed will be less reliable as time increases. For example, one PI had a dual\nappointment in the Departments of Radiology and Biomedical Engineering and was responsible\nfor overseeing the research activities of two medical students and three graduate students on two\nNSF research projects as well as other Federal funded projects. Thus, limiting the review and\ncertification of PAFs to the shortest amount of time possible helps ensure a more reliable\ncertification of labor costs associated with such activities on Federal awards.\n\nSalary Charges Did Not Directly Benefit NSF Grants\n\n Interviews of 30 sampled employees found that the actual FY 2006 labor effort for five\nemployees on NSF sponsored projects was less than what was reported and certified on their\nPAFs, with deviations ranging from 10 to 50 percent. The differences were for employee\nactivities that did not directly benefit the NSF projects and totaled $17,955. Specifically, while\ncharging their salaries to NSF projects, (i) two employee were inappropriately working on other\nsponsored research projects and (ii) three employees were devoting time and effort to grant\nproposal writing and other administrative activities, which cannot be directly charged to Federal\ngrants. The following table summarizes the impacted salary costs for the five subject Vanderbilt\nemployees.\n\n Employee Salary Costs Not Benefiting NSF Grants\n\n Employee Effort Spent\n on Administrative\n Total Salary Costs\n Sample Employee Employee Effort Spent on Activities and/or Grant Not Benefiting NSF\n # Type Other Research Activities Proposal Writing Grants\n\n Dollar Dollar # of Dollar\n Percent Impact Percent Impact employees Impact\n\n\n 2 PI 10% $1,812 $1,812\n\n 10 PI 34% $5,666 $5,666\n Grad.\n 28 Student 50% $5,207 $5,207\n 29 PI 20% $2,787 $2,787\n 30 PI 10% $2,483 $2,483\n\n\n Total 2 employees $10,873 3 employees $7,082 5 employees $17,955\n\n\n\n\n 8\n\x0c The following examples provide further details to illustrate that Vanderbilt\xe2\x80\x99s labor effort\ncertifications did not always reasonably support the actual FY 2006 employee effort devoted to\nNSF projects.\n\n \xe2\x80\xa2 During three summer months in 2005, a PI spent approximately 66 percent of her\n research effort working on three NSF projects and 22 percent on a Vanderbilt project.\n However, the PI improperly charged $16,667 or two-thirds (67 percent) of her total\n summer salary to two NSF grants even though she had only devoted 44 percent actual\n effort; an overcharge of $5,666.\n\n \xe2\x80\xa2 For the nine-month academic year from September 2005 to May 2006, a graduate student\n divided his research effort equally between a NSF project and a related privately-funded\n project. According to the student, the NSF-funded portion of the project was for the\n theoretical side of the research, while the privately-funded portion was for the practical\n application aspect of the research. However, from September 2005 to January 2006, the\n graduate student improperly charged 100 percent of his salary, totaling $10,415, to the\n NSF grant; resulting in an overcharge of 50 percent or $5,207.\n\n \xe2\x80\xa2 During the summer months of 2005 and 2006, a PI worked on a NSF grant and charged\n salary totaling $13,936 during FY 2006. During an interview, the PI stated he spent\n approximately 80 percent of his time on NSF research activities and 20 percent writing\n grant proposals during the summer months. However, he improperly charged 100\n percent of his summer salary to the NSF project; resulting in an overcharge of 20 percent\n or $2,787.\n\nCertifying Official Lacked Suitable Means to Verify Effort Report\n\n A Vanderbilt certifying official inappropriately approved the labor effort report for one\nsampled employee without \xe2\x80\x9csuitable means of verification\xe2\x80\x9d to validate the reasonableness of the\nNSF salary charges. Specifically, a Department Chair certified the labor effort report for a PI,\nrepresenting $4,585 of the PI\xe2\x80\x99s NSF salary charges, without having any first hand knowledge of\nthe work performed on the NSF project or obtaining any documentary evidence to validate the\nNSF charges were for actual work performed on the sponsored projects. Since the Department\nChair was not directly supervising or involved in the subject NSF project, he would not have had\na valid basis to certify the PI\xe2\x80\x99s labor effort to the research project.\n\nPotential Excess Labor Charges\n\n Without timely or appropriate controls for certifying labor effort reports, Vanderbilt can\nprovide less assurance to NSF that the University\xe2\x80\x99s after-the-fact confirmation of labor charges is\nreliable and reasonably supports actual effort on NSF sponsored projects. As discussed in the\nabove report sections, control weaknesses resulted in the University (a) overcharging NSF\n$17,955 (3 percent) of FY 2006 salary charges for activities of five employees not directly\nbenefiting the sponsored projects (see Appendix A) and (b) not having adequate documentation\nto support another $4,585 (1 percent) in salary charges. Furthermore, late certifications for 16\npercent of NSF salary charges reviewed increases the risk that such certification are not reliable\nbecause employees are depending on their memory to validate the reported labor effort. For\n 9\n\x0cexample, one PI interviewed could not confirm the reasonableness of $13,209 charged to two\nNSF grants because she could not remember how much effort she had devoted to the projects\nduring FY 2006. Also, without a certification date for an additional 60 percent or $374,227 of\nNSF salary costs reviewed, Vanderbilt could not document when officials certified the associated\neffort reports; thereby raising questions about the reliability of its after-the-fact confirmation\nprocess for a significant portion of the sampled NSF labor charges. The systemic nature of these\ncontrol weaknesses raises concerns about the reasonableness and reliability of the remaining $3.6\nmillion of FY 2006 labor charges to NSF grants as well as the salary portion of Vanderbilt\xe2\x80\x99s\nother $300 million of direct Federal grant expenditures.\n\nSeveral Factors Contributed to Effort Reporting Weaknesses\n\n These weaknesses occurred because Vanderbilt did not establish adequate internal\ncontrols to provide for proper management and oversight of its payroll distribution and labor\neffort reporting system to mitigate the risk of the University\xe2\x80\x99s decentralized organizational\nstructure for Federal grants management. Because each of Vanderbilt\xe2\x80\x99s Academic Departments\nis assigned primary responsibility for management of its own effort reporting process, it is\nimportant that the University (i) establish detailed written labor effort reporting policies,\nprocedures, and implementation guidance, (ii) provide adequate training to all cognizant\npersonnel to ensure clear understanding of its labor effort reporting process, and (iii) enhance\nmonitoring to ensure proper implementation and campus compliance with University and\nFederal requirements.\n\nComprehensive Effort Reporting Policy and Procedures Needed to Improve Timeliness and\nReliability of Labor Certification Process\n\n While Vanderbilt\xe2\x80\x99s Effort Reporting Policy, issued in January 2002, provided a general\nframework for the after-the-fact confirmation of labor charges to Federal sponsored projects, the\nUniversity\xe2\x80\x99s policy lacked detailed procedures for ensuring timely and reliable certification of\nlabor charges to Federal sponsored projects. Specifically, the University\xe2\x80\x99s policy required\nfaculty and other employees to utilize the certification section of the multi-purpose PAF\ndocument to provide after-the-fact confirmation of salary charges to Federal projects at least\nonce annually. However, neither the policy nor the PAF itself required the certifying official to\ndate the required certification statement. In addition, while the policy required separate\ncertifications for faculty summer salaries, it did not establish any specific time frames for\ncompilation, distribution, and approval of either the PAF certification reports or the separate\nsummer salary certification reports. Consequently, Vanderbilt did not have any quantifiable\nstandards to ensure timely review and approval of the reasonableness of salary charges to Federal\nprojects to help ensure the reliability of the effort certification process. OCGA officials\nindicated that draft policies and procedures were being developed to address timeliness issues\nwith the University\xe2\x80\x99s labor effort certification process.\n\n Furthermore, Vanderbilt\xe2\x80\x99s policy did not establish any standard effort reporting periods\nand lacked detailed guidance explaining the use of the multi-purpose PAF for labor certification\npurposes. Specifically, PAF effort certifications were performed annually for all employees at\nthe time the University awarded its salary increases each year. In addition, the employee or\nproject PI was also required to certify reported labor effort whenever a new PAF was submitted\nto change an employee\xe2\x80\x99s status and/or salary distribution. As such, PAF effort certifications\n 10\n\x0cwere performed at different times throughout the year and covered different reporting periods for\ndifferent employees. As a result, certifying officials did not always clearly understand the PAF\neffort certification process and/or their certification responsibilities because they were confused\nwith receiving multiple labor effort reports at various times during the year.\n\n For example, a graduate student was working on a NSF and industry-funded research\nproject during the 2005-06 academic year upon returning from a summer internship in August\n2005. The following multi-purpose PAFs were processed to document the student\xe2\x80\x99s personnel\nactions, salary distributions, and labor effort certifications.\n\n \xe2\x80\xa2 Upon returning from his summer internship, a PAF was processed to re-hire the\n student on August 29, 2005. The effort certification section of the PAF was signed\n by the PI confirming the student\xe2\x80\x99s 100 percent actual effort to the NSF grant.\n However, the purpose of this certification was unclear because the student did not\n work on the NSF grant during the summer months since his departure for internship\n on May 17, 2005, as documented on a prior termination PAF.\n\n \xe2\x80\xa2 On February 1, 2006, a PAF was processed to change the graduate student\xe2\x80\x99s salary\n allocation from 100 percent on the NSF grant to 50 percent on the NSF project and 50\n percent on an industry-funded project. The PAF effort certification section was\n appropriately signed confirming the individual\xe2\x80\x99s 100 percent actual effort on the NSF\n grant for the 5-month period from the prior PAF, effective August 29, 2005.\n\n \xe2\x80\xa2 On May 1, 2006, a PAF was processed to award the student his annual salary\n increase. The PAF effort certification section was signed confirming the 50% split\n allocation to the NSF and industry projects for the 2-month period from the prior\n PAF, effective February 1, 2006. However, the primary purpose of the PAF was to\n process the student\xe2\x80\x99s annual salary increase in the University\xe2\x80\x99s payroll system, not to\n confirm the labor charges to the sponsored projects; yet Vanderbilt procedures\n required the labor certification to be completed.\n\n During our audit, several certifying officials interviewed stated that they confirmed the\nreasonableness of the PAF reported labor effort under the assumption that only annual\ncertifications were required and did not give any consideration to any changes in effort\nperformed. As illustrated in the above example, the PI\xe2\x80\x99s certification of labor effort on the PAF\nto rehire the graduate student after his summer internship indicates that the PI did not have a\nclear understanding of what exactly he was certifying to when he signed the various PAFs. This\noccurred because Vanderbilt lacked detailed written guidance clearly explaining the process for\nusing the multi-purpose PAF for both employee personnel actions, such as changes in home\ndepartment codes and increases in salary rates, as well as to provide for payroll distribution and\nlabor effort certifications on Federal sponsored projects.\n\n In addition, the University did not provide formal training to certifying officials and other\ncognizant campus officials to promote a comprehensive understanding of the University\xe2\x80\x99s labor\neffort reporting processes and requirements to fully comply with Federal regulations. Vanderbilt\nofficials believed that its web-based effort reporting training module was adequate to educate\ncampus personnel on the labor certification process. However, given the lack of standard PAF\nlabor effort reporting periods, it is particularly important that Vanderbilt provide formal\n 11\n\x0cemployee training explaining the different aspects of its effort reporting processes to help ensure\nthe reliability of its certifications of salary charges to Federal sponsored projects.\n\n Currently, Vanderbilt is in the process of developing a new automated payroll\ndistribution and effort reporting system to improve its labor certification process. The new\nsystem will allow certifying officials to review and certify the labor effort reports electronically.\nTherefore, Vanderbilt officials believe the time period for review and approval will be shortened\nsince the effort reports will no longer be required to be physically distributed to certifying\nofficials. Also, it believes the new automated system will be more transparent and will assist\nboth Department and central OCGA staff in monitoring the timely certification of effort reports\nby readily identifying any delinquent reports for prompt resolution.\n\n While we agree that the automated system should allow for easier monitoring of timely\nlabor effort report certifications, it is essential that Vanderbilt establish formal written policies\nand operating procedures for proper administration of the new system and provide formal\ntraining to all campus personnel in such procedures. Such written guidance should establish an\nexplicit monitoring process and assign clear responsibilities to both the Academic Departments\nand a central University oversight office, such as OCGA, for campus compliance with timely\ncertification of labor effort reports. The monitoring process should include periodic reminder\nnotices for late effort reports using an increasingly graduated scale to higher levels of Vanderbilt\nmanagement officials, such as the Department Chair, the Dean, and the Provost, as the period of\ndelinquency increases.\n\n Furthermore, we do not see the issue being resolved until Vanderbilt holds senior\nmanagement officials, such as Department Chairs, accountable for timely labor effort report\ncertification. Such senior officials have more leverage than Department grant administrative\nstaff in ensuring employees or project PIs review and certify effort reports timely. Because such\nsenior officials would have the responsibility for securing and retaining Department staff and\nfaculty members and recommending salary increases, tenure, and promotion. Hence, they would\nhave more influence in getting certifying officials to respond positively to timely review and\ncertification of labor effort reports.\n\n\nComprehensive Written Standards and Better Understanding of Certification Responsibilities\nWill Preclude Salary Overcharges to Federal Awards\n\n Vanderbilt certifying officials approved labor effort reports reflecting more effort than\nactually worked on NSF awards because of the lack of detailed University written guidance and\ninadequate employee training provided for its labor effort certification process. Specifically,\nVanderbilt\xe2\x80\x99s effort reporting policy did not define the types of employee activities included in\ninstitutional base salary, such as grant proposal writing or university committee meetings, which\nshould not be charged to Federal projects. It also did not establish quantifiable standards for\nproperly certifying the reasonableness of employee work activity on Federal sponsored projects.\nThe lack of such written guidance and formal training resulted in University certifying officials\nnot clearly understanding and properly executing their effort certification responsibilities. In\nparticular, the certifying officials did not appropriately consider all of an employee\xe2\x80\x99s work\nactivities and whether such activities were allowed to be directly charged to Federal grants. In\naddition, officials did not have any guidance defining \xe2\x80\x9csignificant change\xe2\x80\x9d in estimated labor\n 12\n\x0ceffort required to be entered into the payroll distribution system and/or acceptable \xe2\x80\x9cprecision\xe2\x80\x9d or\n\xe2\x80\x9ctolerance\xe2\x80\x9d limits for after-the-fact certification of such estimated labor effort.\n\n Explicit written guidance and formal training are essential to clearly define the various\nclasses of employees charging salaries to sponsored projects; their different job activities related\nto instruction, research, and general administration; and which of those activities should be\ncharged to University funds versus Federal grant funds. Without such guidance and knowledge,\ncertifying officials did not take the necessary steps to carefully consider all employee work\nactivities, particularly proposal writing time and administrative type tasks, when approving the\nlabor effort reports for themselves or employees working on sponsored research projects for\nwhich they were responsible. Pursuant to OMB grant regulations, activities that do not directly\nbenefit a sponsored project are not allowable as direct grant charges.\n\n Furthermore, Vanderbilt has not established quantifiable standards for certifying the\nreasonableness of employee work activity on Federal sponsored projects. While the University\xe2\x80\x99s\nPAF system provides for initiating prospective changes in labor estimates to ensure \xe2\x80\x9creasonable\ndistributions to sponsored projects and other departmental centers,\xe2\x80\x9d its Effort Reporting Policy\ndoes not quantitatively define what constitutes \xe2\x80\x9csignificant changes in work activity\xe2\x80\x9d that must\nbe identified and entered into the payroll distribution system, as required by OMB Circular A-21.\nSimilarly, Vanderbilt\xe2\x80\x99s policy has not addressed or defined what level of \xe2\x80\x9cprecision\xe2\x80\x9d or\n\xe2\x80\x9ctolerance\xe2\x80\x9d is expected between actual labor effort and the estimated effort that officials review\nand approve when certifying labor effort reports. Without a specific range or variance within\nwhich the University expects the documented labor effort to fall, Vanderbilt certifying officials\nlack a basis to determine how much an employee\xe2\x80\x99s actual effort can differ from their estimated\neffort before a cost transfer is required to be processed in the labor effort reporting system. At\nsome universities, the acceptable variance has been established at five percent.7\n\n Similarly, without written Vanderbilt guidance and formal employee effort reporting\ntraining, a Department Chair inappropriately certified a labor effort report for a PI because he\nwas not aware that he was required to have suitable means of verifying that the employee\nactually performed the reported labor effort. Cognizant Department grants management staff\nwere not aware that without direct oversight and management of the subject NSF project, the\nDepartment Chair did not have first hand knowledge of the PI\xe2\x80\x99s actual research activities in order\nto properly validate the reported labor effort. Furthermore, Vanderbilt policy did not define the\nspecific steps an official should take to obtain documentation to demonstrate that \xe2\x80\x9csuitable\nmeans of verification\xe2\x80\x9d was used to certify the reported labor effort.\n\nFormal Policy and Procedures Needed for Internal Evaluation of Effort Reporting System\n\n While Vanderbilt\xe2\x80\x99s Internal Audit Department performed the Federally-mandated\nindependent evaluation of its payroll distribution and effort reporting system in 2005, the audit\nreport recommendations did not properly require the University to establish formal written\n\n7\n A March 2007 report entitled \xe2\x80\x9cPolicies and Practices: Compensation, Effort Commitments, and\nCertification,\xe2\x80\x9d issued by the Council on Governmental Relations, stated that the 5-percent standard used by some\nuniversities was based on a 1979 interpretation by the prior Department of Health, Education, and Welfare stating\n\xe2\x80\x9cAs a general rule of thumb, a change applicable to a given project or activity of 5% or more of an employee\xe2\x80\x99s total\neffort would warrant an adjustment by the employee or the official.\xe2\x80\x9d\n\n 13\n\x0cstandards for the labor effort certification weaknesses identified. Comprehensive written policies\nand procedures are a critical element of a sound internal control structure for properly managing\nVanderbilt\xe2\x80\x99s business functions, including its effort reporting systems and ensuring that those\nsystems operate effectively and efficiently. This occurred because Vanderbilt\xe2\x80\x99s effort reporting\npolicy did not include any formal procedures for the required OMB Circular A-21 evaluation.\nThus, there was no guidance which clearly defined the required scope and objectives for\nevaluating Vanderbilt\xe2\x80\x99s effort reporting system to ensure its effectiveness and compliance with\nFederal standards.\n\nOther Audit Matters:\n\nVanderbilt Lacks Adequate Segregation of Duties and Access Controls Within the Payroll\nDistribution System\n\n While Vanderbilt has established policy and procedures for its labor effort reporting\nsystem, its internal control activities were not always sufficient to ensure that risks were\nminimized in achieving the University\xe2\x80\x99s goals and objectives for efficient and effective\noperations and full accountability for labor costs charged to Federal sponsored projects.\nSpecifically, the audit identified a lack of segregation of duties over the Human Resources and\nPayroll functions for the payroll distribution and labor effort reporting system. The current\npayroll distribution system allows employees within the Payroll Department to make changes to\npayroll data such as salary rate, chargeable cost centers, and associated labor allocations; without\nproper independent review and approval. In addition, the risk is increased that inappropriate\nchanges in such payroll information, most importantly employee salary rates, could go\nundetected due to a lack of edit controls and exception reports, which would aid in identifying\nimproper or erroneous changes.\n\n In addition, we found a lack of adequate controls over access and security of data\nmaintained in Vanderbilt\xe2\x80\x99s payroll distribution and labor effort reporting system. Specifically,\nthe University has not established policy and/or automated controls requiring routine password\nchanges by Human Resources and Payroll Department personnel to access the system. Given the\nsensitive nature of human resource data and the high risk associated with payroll transactions, it\nis imperative for Vanderbilt to establish automated controls requiring all employees to\nperiodically change their security codes to access such electronic information. The lack of\nperiodic password changes increases the risk that unauthorized entry to the system could occur\nand result in sensitive personnel and payroll information being improperly changed and/or\ncompromised.\n\nQuestioned Fringe Benefit Costs Charged\n\nVanderbilt overcharged a NSF grant $518 for a graduate student\xe2\x80\x99s fringe benefit costs for the\nmonths of February, March, and June of 2006. Upon the University\xe2\x80\x99s subsequent review of the\nstudent\xe2\x80\x99s salary charges, the individual\xe2\x80\x99s status was retroactively changed to exempt the\nstudent\xe2\x80\x99s salary from FICA taxes. While the FICA tax withholding was reimbursed to the\ngraduate student, the $518 was never appropriately credited to the subject NSF grant. (see\nAppendix A)\n\n\n\n 14\n\x0cRecommendations\nWe recommend that the NSF Director of the Division of Grants and Agreements and the\nDirector of the Division of Institution and Award Support, coordinate with the cognizant audit\nagency, as needed, to implement the following recommendations:\n\n1.1 Work with the Vanderbilt officials to enhance its internal control structure to provide for\n an effective and timely labor certification system that reasonably reflects the actual\n effort/activity employees devote on sponsored projects. At a minimum, Vanderbilt\n should take the following corrective actions:\n\n a. Institute formal written standards to improve the timeliness for review and approval of\n labor effort reports as follows:\n\n i. Establish the maximum number of days after the end of the labor effort reporting\n period to compile and distribute the labor effort reports to certifying officials for\n review and approval.\n\n ii. Establish the maximum number of days, after labor effort reports are distributed\n for certifying official review and approval.\n\n iii. Establish a clear requirement for certifying officials to date the certification\n statement on PAF labor certifications.\n\n iv. Establish procedures and time frames for reminder notices to follow-up on\n delinquent labor effort reports using an increasingly graduated scale to higher\n level management officials.\n\n v. Assign specific Vanderbilt senior management officials, such as Department\n Chairs, accountability for timely PI review and approval of labor effort reports.\n\n Vanderbilt Response\n\n In the spring of 2008, Vanderbilt deployed a new Electronic Personnel Action\n Change (ePAC) system, a web-based effort reporting system developed by the\n University. Accordingly, Vanderbilt plans to update its Effort Reporting Policy to\n reflect the changes in the labor effort reporting process brought about by its ePAC\n implementation. The updated Policy will reflect a reasonable time frame for\n distributing and certifying effort reports and prescribe the protocol for follow-up on\n any delinquent effort certifications. As part of this process, central administration\n will work with senior research management officials, Department Chairs, and\n Business Officers to develop and implement accountability measures to enhance the\n effort reporting process on campus and to ensure Vanderbilt's compliance on effort\n reporting. Regarding the dating of certifications, the deployment of ePAC will\n automatically date stamp all certifications in the system when reviewed and approved.\n\n\n\n\n 15\n\x0c Auditor\xe2\x80\x99s Comments\n\n Once fully implemented, Vanderbilt\xe2\x80\x99s proposed corrective actions to formally update\n its Effort Reporting Policy should address the audit recommendations.\n\nb. Develop detailed written procedures and guidance documenting the process for using the\n multi-purpose PAF to both estimate the allocation of salary charges to sponsored projects\n on a prospective basis and to provide for the after-the-fact certification of the\n reasonableness of such salary charges.\n\n Vanderbilt Response\n\n With its new ePAC application, Vanderbilt no longer uses the PAF document to\n capture labor effort certifications. Thus, it is not necessary at this time to develop any\n procedures addressing the effort process in relation to the other functions performed\n by the PAF form.\n\n Auditor\xe2\x80\x99s Comments\n\n We agree that procedures are no longer required for the PAF document. However,\n Vanderbilt needs to develop clear written instructions for its new web-based ePAC\n system to ensure all users clearly understand their responsibilities for the different\n applications replacing the multi-purpose PAF document.\n\nc. Develop written procedures and guidance defining the typical instructional, research, and\n administrative work responsibilities included in the institutional base salary for various\n types of Vanderbilt employees, and which of those activities do not directly benefit\n Federal Awards and should not be charged to them.\n\nd. Develop written policy defining what percentage difference constitutes a \xe2\x80\x9csignificant\n change\xe2\x80\x9d in work activity that is required to be entered into the payroll distribution system\n on a prospective basis.\n\ne. Develop written policy establishing a quantifiable \xe2\x80\x9cprecision\xe2\x80\x9d or \xe2\x80\x9ctolerance\xe2\x80\x9d range of\n accuracy to be used for certifying the reasonableness of reported effort on labor\n confirmation reports versus actual effort worked on Federal projects.\n\n Vanderbilt Response\n\n As the OIG audit was in process, Vanderbilt's Provost Office issued written guidance\n in July 2007 that defined work responsibilities included in institutional base salary,\n what constituted a significant change in work activity, and what tolerance range of\n accuracy was acceptable for effort report certifications. The University will continue\n to work with the faculty, departments, and schools to ensure their understanding of\n these basic concepts so that sound effort certifications are collected.\n\n\n\n\n 16\n\x0c Auditor\xe2\x80\x99s Comments\n\n Vanderbilt actions taken were responsive to the audit recommendations. The\n guidance issued provides clarification on the work activities included in employee\n institutional base salaries and what activities should and should not be charged to\n Federal sponsored projects. Also, a 2.5 percent threshold was established for what\n constitutes a significant change in work activity requiring a change in the payroll\n distribution system and the tolerance range of accuracy for effort report certification.\n However, such important guidance clarifying Vanderbilt\xe2\x80\x99s effort report procedures\n and processes must be formally incorporated into its Effort Reporting Policy as part\n of the University\xe2\x80\x99s planned update, as discussed in recommendation 1.1.a. above.\n\n f. Define what steps a certifying official should perform to document that he/she had\n \xe2\x80\x9csuitable means of verification\xe2\x80\x9d to confirm that the work was actually performed and\n require that such documentation be maintained in award files.\n\n Vanderbilt Response\n\n Vanderbilt's policy allows for the supervisors to certify in those rare instances that the\n individual is not available and have the requisite knowledge to confirm the work\n performed. With ePAC implementation, the instances of someone other than the\n individual actually certifying their own effort is further decreased due to ePAC being\n a web-based application.\n\n Auditor\xe2\x80\x99s Comments\n\n We agree that only in rare instances is Vanderbilt senior-level supervisors required to\n certify labor effort reports when an employee and/or principal investigator is not\n available. However, in those instances, it is important that Vanderbilt have a process\n for documenting that the supervisor did, indeed, have requisite or first-hand\n knowledge to confirm the work performed. We believe that such a process is equally\n important in the new ePAC application; where documentation must be maintained to\n support an override of system controls to allow an alternate individual to certify an\n individual\xe2\x80\x99s labor effort report. Therefore, we re-affirm our audit recommendation.\n\n1.2 Work with Vanderbilt officials to ensure that an adequate labor effort training program is\n established and provided to all officials involved in the effort reporting process. Such\n training should include a thorough discussion of the different aspects and requirements of\n the University\xe2\x80\x99s two different certification processes, specific responsibilities of\n certifying officials, and the various types of employee activities that do not directly\n benefit Federal Awards and should not, therefore, be charged to them.\n\n Vanderbilt Response\n\n Since the audit was conducted, Vanderbilt has engaged in numerous faculty and\n departmental administrator meetings around campus and presented sessions on\n compliance with Federal regulations as it relates to effort reporting rules and provided\n 17\n\x0c details on the specifics of how labor effort is certified. These meetings will continue\n on an ongoing basis to emphasize the importance of the critical process for those\n working on Federal projects. Other training materials are also being developed to\n support the rollout of ePAC and to create several different types of mediums to house\n key information related to effort reporting to ensure that all impacted audiences are\n reached either by face-to-face meetings, web-based training tutorials, campus-wide\n memos, or policy updates and changes\n\n Auditor\xe2\x80\x99s Comments\n\n Vanderbilt\xe2\x80\x99s actions are responsive to the audit recommendation. We agree that it is\n essential that appropriate training materials, as well as instruction manuals, be\n developed to support the recent implementation of its new ePAC application so that\n all users clearly understand their labor effort responsibilities.\n\n1.3 Establish formal monitoring policies and procedures and assign clear responsibility to a\n central Vanderbilt oversight office, such as the Office of Contract and Grant\n Administration, to ensure Academic Departments and other cognizant campus offices are\n administering their effort reporting responsibilities to ensure effective and timely\n certification of labor charges to sponsored projects that are fully compliant with\n established University and Federal requirements.\n\n Vanderbilt Response\n\n Vanderbilt will continue to develop and fine-tune the monitoring procedures for the\n oversight of effort reporting to reflect the change brought about with the deployment\n of ePAC. Reports are being designed and tested that will provide the central offices\n with tools to allow them oversight of the status of all effort reports generated. These\n reports will also provide the departments and schools the ability to monitor effort\n reports and to work with the central offices to ensure that all faculty and staff paid\n from Federal sources are in compliance with Vanderbilt's effort reporting policy.\n\n Auditor\xe2\x80\x99s Comments\n\n Vanderbilt\xe2\x80\x99s proposed corrective actions are generally responsive to the audit\n recommendation and its plans to develop ePAC management reports to oversee the\n timeliness of labor effort reports generated and certified will be an excellent\n monitoring tool. However, given the decentralized organizational structure of the\n University\xe2\x80\x99s labor effort reporting process, it is essential for a central Vanderbilt\n office to be assigned clear oversight responsibility to ensure University-wide\n compliance with its effort reporting policy, thus we reaffirm our audit\n recommendation in this regard.\n\n1.4 Establish a formal written requirement for an independent internal evaluation of the\n payroll distribution and labor effort reporting system to ensure its effectiveness and full\n compliance with Federal, NSF, and University standards. Such a requirement should\n include procedures to ensure a systematic review that will identify reasons for any\n deficiencies and make appropriate recommendations, identify the specific Vanderbilt\n 18\n\x0c office responsible for performing the evaluation, and how often such an evaluation\n should be conducted.\n\n Vanderbilt Response\n\n Vanderbilt's Internal Audit department performs assurance services to assist the\n University in meeting its oversight and operating responsibilities. Audit resources are\n generally allocated using a risk-based approach. Annually, Internal Audit selects a\n sampling of departments across campus for review, and part of the departmental\n reviews involve the labor effort process for those individuals paid from Federal\n sources. Vanderbilt will continue to include the payroll distribution and labor effort\n reporting system in the annual risk assessment process performed by Internal Audit.\n The frequency of the audit will be based on criteria reviewed during the process such\n as changes to the effort or payroll systems, changes in regulations, changes in key\n personnel, feedback received from senior management, and the amount of time\n elapsed since the last review.\n\n Auditor\xe2\x80\x99s Comments\n\n We agree that it is appropriate for Vanderbilt\xe2\x80\x99s Internal Audit department to perform\n independent evaluations of the effectiveness of the University\xe2\x80\x99s labor effort reporting\n system and to use a risk- based approach in determining the periodic need for such\n reviews. However, Vanderbilt needs to establish a formal written requirement in its\n Effort Reporting Policy for such an evaluation with assigned responsibility to the\n Internal Audit department, as specified in the audit recommendation.\n\n1.5 Establish appropriate internal control procedures to ensure adequate segregation of duties\n and mandatory periodic password changes within the Human Resource and Payroll\n functions.\n\n Vanderbilt Response\n\n With the full implementation of the ePAC system, payroll data such as salary rate,\n chargeable cost centers, and associated labor allocations will be electronically entered\n at the department level with electronic approvals as needed to achieve the proper\n controls. This should eliminate the need for the Payroll department making such\n changes. Within the next year, Vanderbilt will implement a new electronic security\n password system which will require periodic password change requirement.\n\n Auditor\xe2\x80\x99s Comments\n\n When fully implemented, Vanderbilt\xe2\x80\x99s proposed corrective actions should address the\n audit recommendation.\n\n1.6 Resolve the $31,325 in total questioned salaries costs and associated fringe and indirect\n costs for improper charges for employee activity not directly benefiting NSF grants.\n (see Appendix A)\n\n 19\n\x0cVanderbilt Response\n\nVanderbilt management will coordinate with NSF to resolve all questioned costs.\nThe costs related to the FICA Tax overcharge have already been removed and the\ncosts refunded to the appropriate NSF entity.\n\nAuditor\xe2\x80\x99s Comments\n\nNSF\xe2\x80\x99s Office of Institution and Award Support should work with Vanderbilt to\nresolve the subject questioned costs.\n\n\n\n\n 20\n\x0cFinding 2: Improvements Needed to Properly Report Uncompensated Faculty Labor\nEffort on Sponsored Projects\n\n Federal regulations require a payroll distribution system that will \xe2\x80\x9creasonably reflect the\nactivity for which individuals are compensated by the institution.\xe2\x80\x9d The system must encompass\nthe time and effort expended by employees on both sponsored projects and all other activities on\nan integrated basis. Further, a January 2001 OMB Clarification Memorandum8 provides\nadditional guidance for cost sharing requirements for faculty effort on sponsored projects.\nSpecifically, the OMB Memorandum clarifies that faculty effort on organized research includes:\n(i) PI salary and wages directly charged to sponsored projects, (ii) PI effort required as\nmandatory cost sharing, and (iii) PI effort pledged and quantified as \xe2\x80\x9cvoluntary committed cost\nsharing\xe2\x80\x9d in a proposal. Voluntary committed cost sharing is defined as effort not required by the\nsponsor, but proposed in the sponsored project narrative and/or budget with no corresponding\nfunding requested. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxn\nxxxxxxxxxxxxxxxxxx9 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\n\n Consistent with the OMB Clarification Memorandum, our review of the 15 faculty\nmembers, included in our 30 sample employees, found that Vanderbilt\xe2\x80\x99s labor effort reporting\nsystem properly tracked and reported voluntary committed cost shared effort pledged by PIs in\nNSF grant proposals. However, the University did not appropriately report committed cost\nsharing when NSF funded PI effort on grants was replaced with cost shared effort. Specifically,\ntwo of the 15 faculty members reviewed (13 percent) charged $9,161 less salary to two NSF\ngrants for funded PI effort than included in the award budget proposals (see Appendix B). Such\n\xe2\x80\x9cuncharged PI labor effort\xe2\x80\x9d represented voluntary committed cost sharing and must be properly\naccounted for in Vanderbilt\xe2\x80\x99s labor effort reporting system. The unreported amount of such\ncommitted cost sharing represented about 3 percent of the total FY 2006 salaries of $298,646\ncharged by the 15 faculty members to NSF grants. Also, one of the two PIs had an additional\nNSF grant, with no faculty salary support, where Vanderbilt did not properly estimate or impute\nan amount of PI effort to xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.\n\n The following example illustrates where Vanderbilt did not properly report committed\ncost sharing of PI effort on NSF grants, as required by the OMB Clarification Memorandum:\n\n \xe2\x80\xa2 A PI had four NSF grants active during the summer of 2005. xxx summer labor\n effort report showed one month\xe2\x80\x99s salary charged to each of two NSF awards and the\n third summer month\xe2\x80\x99s salary charged to a University-funded research project. For the\n remaining two NSF awards, the faculty member had one summer month committed in\n\n8\n OMB Memorandum M-01-06, dated January 5, 2001, Clarification of OMB A-21 Treatment of Voluntary\nUncommitted Cost Sharing and Tuition Remission.\n9\n Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Paragraph B.1.b.,\nDefinition of terms, of OMB Circular A-21 states that \xe2\x80\x9cOrganized research means all research and development\nactivities of an institution that are separately budgeted and accounted for.\xe2\x80\x9d\n\n 21\n\x0c the budget proposal, but did not charge any summer salary to this award. The\n uncharged PI effort of one month\xe2\x80\x99s salary or $5,556 should have been reported as\n committed cost sharing. In addition, for the fourth NSF grant, without any direct or\n cost shared PI effort, an imputed amount should have been calculated and included in\n the organized research base.\n\n Without accurate reporting of committed cost sharing of PI effort, Vanderbilt is unable to\nvalidate to NSF that the two PIs provided the level of effort explicitly committed in the two grant\nproposals to accomplish project objectives. NSF expected these faculty members to provide the\namount of effort that the individuals have agreed to contribute in their original grant proposals.\nIt is important for the Federal Government to be able to validate that a sufficient level of PI effort\nwas committed to a sponsored project that is commensurate with the complexity and nature of\nthe research and dollar amount of grant funding. As such, accurate labor effort reports are\nessential to document both direct Federally-funded and voluntary committed effort devoted by\nfaculty members to sponsored projects.\n\n In addition, the lack of accurate reporting of committed cost sharing of PI effort and the\nabsence of properly imputing an amount for donated PI effort to sponsored projects, resulted in\nNSF potentially assuming a disproportionate share of Vanderbilt\xe2\x80\x99s indirect costs. Specifically,\nwhen such amounts are not accurately quantified and included in the organized research base, the\nindirect cost rate charged to Federal grants would be higher because xxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\n\n Specifically, for the 15 faculty members reviewed, we found that at least $9,161 of\nadditional faculty voluntary committed cost sharing for two PIs should have been reported and\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Given that (i) the two PIs represented 13\npercent of the PIs reviewed and (ii) the $9,161 constituted 3 percent of their total FY 2006 NSF\nsalary charges, the total potential PI salary xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nresearch base could be significant for the over 2,800 full-time Vanderbilt faculty members.\nXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\n\n These weaknesses occurred because Vanderbilt\xe2\x80\x99s Policy for Cost Sharing on Sponsored\nProjects did not provide guidance on how to address situations when Federal funded PI effort on\nsponsored grants was replaced with cost shared effort. Specifically, it did not establish\nprocedures addressing how PI effort should be documented in its labor effort reporting system\nwhen faculty members originally committed a certain amount of effort in their grant proposal\nsubmission, but subsequently decided only to charge partial or no salary directly to the sponsored\nprojects. However, NSF and other sponsoring agencies have an expectation that the PIs would\nfulfill such effort commitments necessary to accomplish the projects\xe2\x80\x99 research objectives. If the\n 22\n\x0cUniversity cannot document that such committed PI effort was actually provided, then Federal\nregulations require Vanderbilt to obtain sponsoring agency approval in advance when there is\nmore than a 25 percent reduction10 in PI time devoted to the grants.\n\n In addition, Vanderbilt had not performed adequate monitoring and oversight to ensure\nthat PIs and Co-PIs were complying with the University\xe2\x80\x99s requirement, specified in its cost\nsharing policy, that some level of committed faculty effort must be provided to all Federal\nsponsored projects; either in the form of a direct salary charge or voluntary committed cost\nsharing. As such, Vanderbilt had not established a process to identify Federal awards without\nsome level of committed faculty effort xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxx\nxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx\n\nRecommendations\nWe recommend that the NSF Director of the Division of Grants and Agreements and the\nDirector of the Division of Institution and Award Support, coordinate with the cognizant audit\nagency, as needed, to ensure that Vanderbilt implements the following recommendations:\n\n2.1 Establish formal policy and institutional processes to provide for proper tracking and\n reporting of cost sharing commitments created by replacing funded PI effort on\n sponsored projects with cost shared effort.\n\n Vanderbilt Response\n\n Vanderbilt will amend its cost sharing policy to provide for the proper tracking and\n reporting of cost share commitments created by replacing funded PI effort on sponsored\n projects with cost shared effort.\n\n Auditor\xe2\x80\x99s Comments\n\n Vanderbilt\xe2\x80\x99s proposed corrective action is responsive and when implemented should fully\n address the audit recommendation.\n\n2.2 Establish formal policy and institutional processes for estimating the amount of faculty\n effort to include in the organized research base for Federally-sponsored projects without\n some level of committed faculty effort. Ensure the methodology for calculating the\n estimated amount is supported by adequate documentation.\n\n Vanderbilt Response\n\n Vanderbilt will provide guidance and monitor to ensure faculty include some level of\n effort over the life of any Federally- sponsored research project, either in the form of a\n direct charge to the project or as committed cost sharing. It will also require that PIs\n include a minimum percentage of effort on all Federally-sponsored research proposals.\n This effort will be tracked in accordance with our effort reporting policy.\n\n\n\n\n 23\n\x0cAuditor\xe2\x80\x99s Comments\n\nVanderbilt\xe2\x80\x99s alternate proposed action to require PIs to include a minimum level of effort\nin all Federal research proposals and monitor such effort commitments during the life of\nthe grant appropriately addresses the intent of the audit recommendation. When such\nguidance is issued and properly implemented, such actions should fully address the audit\nrecommendation.\n\n\n\n\n 24\n\x0c Appendix A\n\n Schedule of FY 2006 Questioned Salaries and Wages\n\n Employee Effort Spent on Other Research Activities\n Sample Fringe\n Number Award Number Salary Costs Benefits Indirect Costs Total\n 10 XXXXX $2,833 $590 $1,780 $5,203\n 10 XXXXX $2,833 $590 $1,780 $5,203\n 28 XXXXX $5,207 $0 $2,708 $7,915\n\n Subtotal $10,873 $1,180 $6,268 $18,321\n\n Employee Effort Spent on Unallowable Administrative or Grant Proposal Writing Activities\n Sample Fringe\n Number Award Number Salary Costs Benefits Indirect Costs Total\n 2 XXXXX $1,812 $377 $1,138 $3,327\n 29 XXXXX $2,787 $580 $1,751 $5,117\n 30 XXXXX $2,483 $516 $1,560 $4,559\n\n Subtotal $7,082 $1,473 $4,449 $13,004\n\n Employee FICA Tax Overcharged\n Sample Fringe\n Number Award Number Salary Costs Benefits Indirect Costs Total\n 9 XXXXX $0 $518 $269 $787\n\nTOTAL QUESTIONED $17,955 $2,653 $10,717 $31,325\nCOSTS\n\nNote: Vanderbilt does not assess fringe benefits to graduate student salaries charged to Federal\nawards.\n\n\n\n\n 25\n\x0c Appendix B\n\n Schedule of Faculty with Uncompensated Effort on NSF\n Grants Not Properly Reported in FY 2006\n\n PI Person Months NSF\n Committed in Budget Grants\n Proposal Uncharged With No\nSample NSF PI Labor PI Effort\nNumber Award # Academic Summer Effort Reported\n\n 10 XXXXX 0 1 $5,556\n\n XXXXX 0 0 X\n\n 21 XXXXX 0 2 $3,605\n\n TOTAL $9,161 1 grant\n\n\n\n\n 26\n\x0c Appendix C\n\n\n\n\n27\n\x0c28\n\x0c29\n\x0c30\n\x0c31\n\x0c32\n\x0c33\n\x0c34\n\x0c"