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January 31, 2007: 

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

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

Dear Senator Coburn: 

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

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

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

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

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

Results in Brief: 

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

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

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

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

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

Background: 

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

Indirect Cost Rates and Reimbursements: 

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

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

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

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

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

Administration and Oversight of Grants: 

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

Audits Involving NIH Research Grants: 

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

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

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

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

[See PDF for image] 

Source: GAO analysis of NIH data. 

[End of figure] 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Audit number: A-04-04-01001; 
Fiscal year during which audit was completed: 2004; 
Costs audited by OIG: $4,070,528; 
Costs questioned by OIG: $565,820a; 
Costs insufficiently justified and recovered by NIH: $565,820. 

Audit number: A-01-06-01501; 
Fiscal year during which audit was completed: 2006; 
Costs audited by OIG: 761,219; 
Costs questioned by OIG: 249,525; 
Costs insufficiently justified and recovered by NIH: 249,525. 

Audit number: A-01-04-01505; 
Fiscal year during which audit was completed: 2005; 
Costs audited by OIG: 1,720,000; 
Costs questioned by OIG: 281,993; 
Costs insufficiently justified and recovered by NIH: 23,686. 

Audit number: A-01-02-01502; 
Fiscal year during which audit was completed: 2003; 
Costs audited by OIG: 1,900,000; 
Costs questioned by OIG: 102,378; 
Costs insufficiently justified and recovered by NIH: 19,323. 

Audit number: A-01-03-01503; 
Fiscal year during which audit was completed: 2004; 
Costs audited by OIG: 890,848; 
Costs questioned by OIG: 245,174; 
Costs insufficiently justified and recovered by NIH: 4,994. 

Audit number: A-01-04-01506; 
Fiscal year during which audit was completed: 2005; 
Costs audited by OIG: 2,730,000; 
Costs questioned by OIG: 37,780; 
Costs insufficiently justified and recovered by NIH: 1,512. 

Audit number: A-01-03-01502; 
Fiscal year during which audit was completed: 2004; 
Costs audited by OIG: 525,188; 
Costs questioned by OIG: 61,215; 
Costs insufficiently justified and recovered by NIH: 0. 

Audit number: Total; 
Fiscal year during which audit was completed: [Empty]; 
Costs audited by OIG: $12,597,783; 
Costs questioned by OIG: $1,543,885; 
Costs insufficiently justified and recovered by NIH: $864,860. 

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

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

[End of table] 

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

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

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

Agency Comments and Our Evaluation: 

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

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from this date. At that time, we will send copies of this report to the 
Secretary of HHS and appropriate congressional committees. We will also 
make copies available to others on request. In addition, the report 
will be available at no charge on GAO's Web site at http://www.gao.gov. 

If you or your staff have any questions, please contact Cynthia A. 
Bascetta at (202) 512-7101 or bascettac@gao.gov or Robert E. Martin at 
(202) 512-9508 or martinr@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in the enclosure. 

Sincerely yours, 

Signed by: 

Cynthia A. Bascetta: 
Director, Health Care: 

Signed by: 

Robert E. Martin: 
Director, Financial Management and Assurance: 

Enclosure: 

GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Cynthia Bascetta, (202) 512-7101 or bascettac@gao.gov Robert E. Martin, 
(202) 512-9508 or martinr@gao.gov: 

Acknowledgments: 

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

(290570): 

FOOTNOTES 

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

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

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

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

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

[6] 31 U.S.C. 7501-7507. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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