Berkshire County Arc, Inc.’s Use of Its Credit Cards Resulted in Nonreimbursable Expenses, Unallowable Use of Reward Travel Miles, and Improper Administration of Fixed Assets.

BCArc employees used organization credit cards to pay for $124,247 in expenses that were non-reimbursable under its state contracts.

Overview

During our audit period, we found issues with Berkshire County Arc, Inc.’s (BCArc’s) credit cards involving nonreimbursable expenses, credit card reward travel miles used for personal travel, and improper administration of fixed assets. These issues are described in detail below.

a. BCArc Charged $124,247 in Nonreimbursable Expenses to Its State Contracts.

During our audit period, BCArc used its credit cards to pay $124,247 in expenses that were nonreimbursable under its state contracts because they were inadequately documented, were not related to BCArc’s social service program activities, or were types that were otherwise specifically prohibited by state regulations (e.g., luxury items). BCArc did not report these costs as nonreimbursable in the Uniform Financial Statements and Independent Auditor’s Reports (UFRs) it filed with the state Operational Services Division (OSD); this indicates that state contract funds were used to pay for them. BCArc could have used this $124,247 to pay for reimbursable expenses for its state-funded programs.

A summary of the unallowable expenses by fiscal year follows.

Expenses	Fiscal Year 2018	Fiscal Year 2019	Total
Conference/Training Expenses without Adequate Documentation	$10,689	$19,383	$30,072
Goods and Services without Adequate Documentation	15,795	17,865	33,660
Fundraising Expenses	7,417	10,226	17,643
Meals without Adequate Documentation	4,738	7,759	12,497
Non-Program General Expenses	6,089	5,925	12,014
Gifts and Gift Cards without Adequate Documentation	6,588	3,870	10,458
Non-Program Related-Party Expenses	5,689	1,375	7,064
Luxury Items	30	693	723
Late-Payment Fees and Penalties	51	65	116
Total	$57,086	$67,161	$124,247

 

Luxury items included valet parking, priority boarding, main-cabin extra seating on airlines, and alcohol. Non-program general expenses included the production of BCArc customized, branded K-cups and a $210 payment for a parking fee for an employee. Inadequately documented expenses included conference/training expenses; meals, goods, and services for which there was no documentation to substantiate the business purposes; and 578 gift cards for which there was no documentation of who the recipients were. Non-program related-party expenses were incurred by one of BCArc’s related-party organizations but paid for by BCArc.

Authoritative Guidance

According to Section 1.04(1) of Title 808 of the Code of Massachusetts Regulations (CMR),

The Contractor . . . shall keep on file . . . supporting documents . . . which reflect . . . costs incurred in or allocated to any Program of services rendered under the Contract.

Section 1.05 of the regulation identifies the following unallowable costs:

(3)        Certain Interest.

(d)        Any interest or penalties incurred because of late payment of . . . indebtedness. . . .

(10)      Fundraising Expense. The cost of activities which have as their primary purpose the raising of capital or obtaining contributions, including the costs associated with financial campaigns, endowment drives, and solicitation of gifts and bequests. . . .

(12)      Non-program Expenses. Expenses of the Contractor which are not directly related to the social service Program purposes of the Contractor. . . .

(23)      Luxury Items. All costs associated with luxury items including . . . alcoholic beverages . . . and all non-Program entertainment expenses. . . .

(26)      Undocumented Expenses. Costs which are not adequately documented in the light of the American Institute of Certified Public Accountants statements on auditing standards for evidential matters.

Additionally, the guidelines in OSD’s UFR Audit & Preparation Manual require BCArc to identify any nonreimbursable costs it incurs in the UFRs it has to submit annually to OSD. According to this manual, if, during an audit, an auditor identifies any nonreimbursable costs that were not reported in an entity’s UFRs, “it is presumed that Commonwealth and Federal funds have been used to defray non-reimbursable costs when those costs are not appropriately disclosed.”

Reasons for Issue

BCArc’s credit card policies and procedures are inadequate: they do not require staff members to submit sufficient documentation to support expenses, and they only require a purchase order and receipt, with no explanation of the business nature of expenses. In addition, BCArc’s management has not established monitoring controls to ensure that required documentation is submitted and that any nonreimbursable expenses are identified before payment, reported as such on BCArc’s UFRs, and not charged to state contracts.

Auditee’s Response

The Office of the State Auditor (OSA) presumes that Berkshire County Arc, Inc. (BCArc) charged $124,247 in nonreimbursable expenses to its State contracts because those expenses were not listed as “nonreimbursable” on BCArc’s Uniform Financial Report (UFR). BCArc annually completes and files a UFR and Independent Auditor’s Report with the State Operational Services Division (OSD) as required. BCArc employs independent auditors, [certified public accountants] specializing in audits of nonprofit entities. The UFR includes a breakdown of all reimbursable and nonreimbursable expenses.

OSA “presumed” that the non-reimbursable expenses were paid for with State funds because the expenses were not specifically listed as nonreimbursable on BCArc’s UFR, not because there is any evidence that State funds were actually used to pay for the identified expenses. OSA’s “UFR Audit and Preparation Manual” states that, “it is presumed that Commonwealth and Federal funds have been used to defray non-reimbursable costs when those costs are not appropriately disclosed” as nonreimbursable on the UFR. . . . Neither BCArc’s independent auditors nor any of BCArc’s regulatory and/or oversight agencies noted deficiencies in BCArc’s use or reporting of State funds.

BCArc’s funds are not segregated according to State vs. non-State sources, nor are expenses “charged” to certain contracts. Nevertheless, BCArc acknowledges that some of the funds identified as nonreimbursable by OSA were not correctly listed on its 2018 and 2019 UFRs. (As described below, a number of the expenses identified as nonreimbursable by OSA were in fact reimbursable.) However, State funds were not misused, nor were they used to pay for nonreimbursable expenses. BCArc had more than sufficient funds to pay the $124,247 alleged by OSA to be nonreimbursable expenses. ($124,247 amounts to <1% of BCArc’s total revenue.) As illustrated in the table below, BCArc received nearly $11 million (16% of its revenue), from non-State sources during the FY2018–2019 audit period—more than sufficient to pay for the $124,247 in expenses considered nonreimbursable by OSA.

	FY2018	FY2019	Total
Revenue from State sources:	29,738,683	31,295,825	61,034,508
Revenue from other sources:	5,935,295	5,876,620	11,811,915
Total BCArc Revenue:	35,673,978	37,172,445	72,846,423

 

OSA concluded that there was “no documentation” identifying the recipients of 578 gift cards. OSA asked BCArc for specific files, which were promptly provided, but OSA never asked for an explanation of the gift cards or requested any documentation concerning the recipients of the gift cards. Had OSA asked, it would have been provided with a copy of the spreadsheet maintained by BCArc detailing each recipient. BCArc maintains the spreadsheet in its accounting files with a schedule of expenses. . . . The 578 gift cards—each for $15—were provided to BCArc staff members as a reward for providing services that went “above and beyond.”

OSA also concluded that certain expenditures, including valet parking, priority boarding and main-cabin extra seating on airlines, were luxury purchases. Here again, OSA apparently followed customary accounting guidance, but was not familiar with the population served by BCArc, and did not request an explanation for the expenditures. For example, had OSA asked, BCArc would have explained that extra main-cabin seating was purchased so an individual with disabilities could attend the National Self Advocacy Conference in 2018.

Although it is a leader in providing service to individuals with intellectual and developmental disabilities, BCArc recognizes that there are always improvements to be made to its bookkeeping systems and its financial policies and procedures. BCArc acts on guidance from OSA, as well as its independent auditors, to ensure compliance with State contracts and proper internal controls.

In response to OSA’s draft audit report BCArc’s Board of Directors (BBOD) updated and revised its credit card policies and procedures in March 2020. . . . The new policies require additional information and documentation for all business expenses. BCArc also updated its old external training form. . . . BCArc adopted a new External Training Form and protocol that requires additional information and recordkeeping. . . . BCArc staff are recognized for their advocacy and participation in regional as well as national training and educational seminars. BCArc’s new procedures will ensure that all such participation is properly documented.

Auditor’s Reply

As noted above, according to OSD guidelines, if, during an audit, an auditor identifies any nonreimbursable costs that were not reported in an entity’s UFRs, “it is presumed that Commonwealth and Federal funds have been used to defray non-reimbursable costs when those costs are not appropriately disclosed.” It is typical, and often most practical, for organizations like BCArc to commingle their state and non-state funds except those that may have restrictions on their use, such as certain donations. This is why OSD requires human service providers such as BCArc that contract with state agencies to be transparent about their nonreimbursable expenses, requiring providers to identify and report them, along with the source/s of non-state funds used to pay for them, in UFRs. OSD’s guidance regarding the audit of nonreimbursable expenses must be followed by any auditors, public and private, who conduct audits of contracted human service providers, and it was the guidance the Office of the State Auditor (OSA) appropriately followed in this audit.

We cannot comment on the results of audits conducted at BCArc by other auditors. However, as noted above, our audit found $124,247 in expenses that we determined were nonreimbursable under BCArc’s state contracts because they were inadequately documented, were not related to BCArc’s social service program activities, or were otherwise specifically prohibited by state regulations. Although BCArc may have had sufficient non-state funds to pay for these expenses according to its UFRs, the funds were not used to do so.

During our audit, OSA asked BCArc to provide us with all the credit card statements, and supporting documentation for the expenses indicated on the statements (including the gift cards), for the audit period. BCArc did not provide us with any information about these gift cards during our audit fieldwork, but with its response, it provided a gift card spreadsheet that purported to detail who received the gift cards, in what years they received them, and how much they received. However, this documentation was incomplete; the dollar value of gift cards distributed according to the spreadsheet does not equal the dollar value of the gift cards OSA identified and questioned. In addition, some of this information appears to be inaccurate. In its response, BCArc asserted that each of the 578 gift cards had a value of $15. However, based on the documentation OSA reviewed, they had values of $10 to $100.

Contrary to what BCArc states in its response, OSA is familiar with the population BCArc serves. The reason OSA is questioning the main-cabin extra seating expense is that the supporting documentation that BCArc provided to OSA indicated that it was purchased by and for BCArc’s chief operating officer (COO), with no indication that it would be used by one of BCArc’s clients.

Based on its response, BCArc is taking measures to address this problem, but we urge it to fully implement all our recommendations on this issue.

b. BCArc’s Chief Executive Officer Used Agency Credit Cards for Personal Travel.

BCArc’s president and chief executive officer (CEO) redeemed credit card reward travel miles earned by BCArc on agency credit cards for his personal use. The president and CEO opened credit card accounts with two different card companies—American Express and Citi—identifying both himself and BCArc as cardholders. Additional cards, which were linked to his account, were issued to various BCArc employees and used to pay for agency expenses. Consequently, all miles earned on these cards accrued to the account in the president and CEO’s name; most of the miles, however, were earned by BCArc charging expenses to the cards.

During our audit period, more than 930,000 miles were earned on the CitiBusiness/AAdvantage Platinum Select card. Of these miles, 625,358 (approximately 67%) were earned from BCArc-related expenses; the others were earned from personal purchases made by the president and CEO that were not paid for by BCArc. According to the president and CEO, he redeemed more than 400,000 of the 930,000 miles. Although BCArc did not provide us with information about his use of the miles, we determined through our analysis that at a minimum, the president and CEO redeemed miles earned by BCArc on agency credit cards to pay for trips made for personal reasons to Hawaii and Mexico.

As a result of this issue, BCArc lost the opportunity to reduce its travel costs (e.g., the miles could have been used for BCArc employees traveling to conferences); the money saved could have been used to provide additional services to its clients.

Authoritative Guidance

BCArc has a Corporate Compliance Program, of which the president and CEO has been designated the Corporate Compliance Officer. The program’s Guiding Principles document states,

[The] Corporate Compliance Program is intended to promote adherence to the highest standards of business and ethical conduct in all aspects of agency operations and to ensure conformance to all federal, state, and local statutory and regulatory obligations. . . .

• No agency staff person or board member will engage in any transaction involving the agency in which they have a financial or personal interest.

This would include the use of agency credit cards for personal benefit.

Under OSD regulation 808 CMR 1.05(9)(a), fringe benefits are nonreimbursable under state contracts “to the extent that they are not available to all employees under an established policy of the Contractor.” BCArc does not have an established fringe benefit policy that allows its staff to make personal use of miles BCArc has earned.

Reasons for Issue

BCArc’s policies and procedures did not require all cards to be issued in the agency’s name rather than those of individual employees. In addition, there is no documentation that the board of directors knew of or consented to the president and CEO’s use of these miles. During our interviews with 4 of the agency’s 11 board members, only 1 member stated that he knew the president and CEO had used these miles. The other 3 stated that they did not know. None of the board minutes indicated that the full board was aware of this situation.

Auditee’s Response

BCArc’s CEO was required to guarantee the credit cards used by BCArc, making the CEO personally liable for the payments. . . . This was a normal requirement, and to the best of BCArc’s knowledge, remains so for most nonprofits in Massachusetts or the United States. As a result, the airline mileage points at issue in the Audit Report were credited to the CEO, as credit card and airline miles accounts were limited to or benefited only an individual and not an organization at the time of their inception.

During the Audit Period, the CEO utilized 475,000 of the airline miles, representing 170,213 more airline miles than the CEO’s personal card contributed to the account. . . . 

The CEO has offered to make a voluntary contribution, in lieu of the miles, to the Agency for all of the remaining airline mileage points (both BCArc- and CEO-earned) in the account, even though they are of little value to BCArc, especially during the pandemic, and are expiring in 2022. These funds as directed by the BBOD will be placed into the “Fundraising Account,” which is solely used to provide for individuals who do not have the financial ability to pay for incidental personal needs.

In further response to the inquiry from OSA about the airline miles, the BBOD and CEO implemented a complete review of BCArc credit card policies and procedures and updated and approved new policies and procedures regarding BCArc’s credit cards, and to end the use of airline miles tied to BCArc’s credit card use. BCArc also applied for and secured a new credit card without personal recourse (i.e., not secured by an individual, although BCArc is required to submit personal info and [supplemental security income] per the Patriot Act). BCArc will continue to pursue a replacement for the CEO-secured credit card, provided it offers an adequate limit, to completely separate any CEO from liability.

The BBOD revised its CREDIT CARD POLICIES AND PROCEDURES as follows:

1. BCArc policy prohibits personal use of credit card benefits (points, cash backs, airline miles, etc.) by any individual.
2. Any and all credit card benefits inure to the benefit of BCArc.
3. Existing points will solely benefit BCArc.
4. Any credit card benefits previously used by the CEO, who personally secured the cards, have been fully ratified and confirmed by the Board as an additional de minimis [too minor to merit consideration] fringe benefit for the CEO under his existing employment agreement.

Auditor’s Reply

Whether or not the president and CEO was required to guarantee the credit cards used by BCArc, we believe he should have accounted for the reward travel miles earned through purchases made by BCArc and ensured that they were used for business, not personal, travel. As noted above, personal use of reward travel miles earned by BCArc is inconsistent with agency policy and is, in OSA’s opinion, noncompliant with OSD regulations. BCArc’s board seems to agree with our concerns, as it has already taken action to stop this activity.

Also, BCArc does not dispute that its CEO used reward travel miles for personal travel. As noted in our report, OSA asked BCArc staff to provide a full accounting of the reward travel miles used by the president and CEO for business and personal purposes so that we could perform a full analysis of this issue. BCArc personnel stated that they could not provide this information. The CEO did provide OSA with a written summary of his reward mile use during the audit period, however. This information could not be verified, so we used other documentation to obtain an understanding of where he traveled during the audit period.

Based on its response, BCArc has taken measures to stop this practice. We recommend that it fully implement all our recommendations on this issue.

c. BCArc Did Not Properly Administer Its Inventory of Fixed Assets.

During our audit period, BCArc did not properly administer its inventory of non–generally accepted accounting principles (GAAP) fixed assets. Specifically, its inventory records lacked key information on each asset, including unique asset identification numbers (tag or serial numbers), specific descriptions, purchase prices, and purchase dates. Therefore, BCArc cannot perform a periodic physical inventory of these assets; this makes them highly susceptible to theft or misuse. In fact, 109 assets (which included air conditioners, a television, a camera, an electric snowblower, and a printer), costing $23,401, that BCArc purchased during our audit period could not be found on its inventory list.

Authoritative Guidance

Regarding inventory of equipment, furnishings, and other non-GAAP fixed assets, the “Fixed Assets—Acquisition Policy” issued jointly by the Office of the Comptroller of the Commonwealth and OSD states,

Non–GAAP Fixed Assets must be recorded in a Department’s inventory and reconciled at least annually. This inventory can be either electronic or on paper, as long as it records the date of purchase, amount, description, location and disposition of an item.

Although not required, this represents best practices that BCArc should follow.

Reasons for Issue

BCArc does not have any policies and procedures for administration of its inventory of non-GAAP fixed assets.

Auditee’s Response

BCArc maintains inventory of all capital items valued at $5,000 or more in accordance with the Agency Capitalization Level that BCArc uses pursuant to its contracts. The inventory of all capitalized items is maintained and kept properly in accordance with Generally Accepted Accounting Principles (GAAP). OSA included a list of 109 items that it maintains should be inventoried. These items were not inventoried because they are valued from $9.99 to $2,078.63, well below BCArc’s capitalization level. . . . OSA’s list also included disposable items that would not be included in an inventory of Capital Items, such as soil test kits, folders, and 3-ring binders. OSA did not ask about BCArc’s contractual capitalization levels. BCArc’s capitalization change . . . demonstrates that BCArc’s capitalization level begins at $5,000 for items not purchased with State funds; BCArc also maintains inventory of any and all assets bought by the State, regardless of value, under “State-owned assets.” The items called out by OSA are not State-owned assets.

Auditor’s Reply

Although BCArc maintained an inventory of its GAAP⁶ fixed assets, it did not properly administer its inventory of non-GAAP fixed assets. OSA acknowledges that BCArc is not required to maintain an inventory of its non-GAAP fixed assets; however, we believe this is a best practice it should follow. Maintaining an inventory of non-GAAP fixed assets is required of all state agencies and safeguards many inventory items, such as cameras, televisions, and printers, that are highly susceptible to theft. Also, BCArc did not provide documentation to indicate that it had developed policies and procedures for the administration of its inventory of fixed assets, a fact that BCArc does not dispute in its response.

In its response, BCArc identifies non-GAAP inventory items, such as disposable items, that it believes are not of significant value. However, OSA’s testing in this area involved sampling anything characterized by BCArc’s accounting records as equipment and furnishings, regardless of its nature or value. Also, the soil test kit was not counted as a separate inventory item but was included with a greenhouse, which could not be located on the inventory list.

Recommendations

1. BCArc should cooperate with OSD and determine how much of this $124,247 of nonreimbursable credit card expenses BCArc should reimburse to the Commonwealth.
2. BCArc should amend its policies and procedures to ensure that all credit card expenses are properly documented according to OSD regulations.
3. BCArc management should establish monitoring controls to ensure that management reviews all credit card expenses before payment and determines whether they are reimbursable to BCArc’s state contracts.
4. BCArc should properly identify and correctly report all nonreimbursable expenses on its UFRs.
5. BCArc should stop using the American Express and Citibank cards that are linked to the president and CEO’s account and obtain new cards issued in its own name.
6. BCArc should enhance its policies and procedures to require that all cards be issued in its name and that any travel rewards or other incentives issued by card companies be used solely for its benefit.
7. BCArc’s board should provide effective oversight over cards by periodically reviewing card statements to determine whether rewards are earned and how they are used.
8. BCArc should develop policies and procedures for the administration of its non-GAAP fixed assets that include a requirement that its inventory records contain all key information and be maintained and current for each asset as suggested in the “Fixed Assets—Acquisition Policy."

6.     The “Fixed Assets—Acquisition Policy” issued jointly by the Office of the Comptroller of the Commonwealth and OSD defines such assets as follows: “Singular assets (including infrastructure) with the following characteristics: All land, regardless of cost[;] All works of art and historical treasures, regardless of cost, acquired or donated to a department after July 1, 2001[;] Vehicles, equipment, furniture, computer software, and all electrical and computer components with a useful life in excess of one year and with an historical cost in excess of $49,999[;] Buildings purchased or constructed . . . with an historical cost of greater than $99,999[;] All road infrastructures with an historical cost in excess of $99,999 per lane mile for road assets[;] All computer software, whether internally or externally developed[;] Software costs above $50,000, but below $1,000,000, are considered a GAAP fixed asset.”

Date published:	May 25, 2021