Overview
During our audit period, Brockton Area Multi-Services, Inc. (BAMSI) charged $11,311 in expenses to its state contracts that were nonreimbursable because they were undocumented, unallowable, or not related to BAMSI’s social service program activities. BAMSI 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. BAMSI could have used this $11,311 to pay for reimbursable expenses to benefit the clients in its state-funded programs.
During our testing of nonreimbursable expenses, we determined that certain program expenses and expenses incurred by, or for the benefit of, the president and chief executive officer (CEO) were improperly charged as reimbursable to state contracts on the UFRs. Two of the 70 expenses we reviewed should have been charged as nonreimbursable. One was $2,189 for vehicle insurance for the president and CEO’s leased vehicle. The second was $2,000, comprising three life insurance policies for the president and CEO. Because BAMSI only offers the president and CEO additional life insurance, and one policy lists BAMSI as the beneficiary, the insurance is not a reimbursable expense.
We also identified one expense (a $488 restaurant expense) from our review of BAMSI’s credit card charges that should have been reported as nonreimbursable because BAMSI could not provide supporting documentation for it. We identified a $25 alcohol purchase that was also unallowable.
Two of the 103 non-payroll expenses we tested lacked supporting documentation (i.e., receipts). One charge was $158 for staff travel and the other was $15 for gasoline.
From our testing of purchases of assets that cost less than $5,000 (referred to in this report as non-capital fixed assets), we identified one $141 sales tax expense.
Finally, during our test of 195 vehicle-related expenses incurred by the president and CEO, including gasoline and oil, we recalculated the percent of the expenses that was for personal use and the percent that was for business use. We compared our percentages to the charges allocated to state contracts and determined that vehicle gas purchases totaling $6,295 that were charged to state contracts were for personal use and should not have been charged.
Below is a table summarizing nonreimbursable expenses charged to state contracts during the audit period.
Nonreimbursable Expenses Charged as Reimbursable
|
Fiscal Year |
Type of Expense |
Amount |
|---|---|---|
|
2018 |
Life Insurance |
$2,000 |
|
2018 |
Sales Tax |
141 |
|
2018 and 2019 |
Undocumented Restaurant Expenses, Travel, and Gas or Oil |
661 |
|
2019 |
Vehicle Insurance |
2,189 |
|
2019 |
Vehicle Fuel for Personal Use |
6,295 |
|
2019 |
Alcohol |
25 |
|
Total |
|
$11,311 |
Authoritative Guidance
In relation to the life insurance policy, Section 1.05(9)(a) of Title 808 of the Code of Massachusetts Regulations (CMR) states that “fringe benefits to the extent that they are not available to all employees under an established policy of the Contractor” are unallowable.
Also regarding life insurance, Para. (8)(g)(4) of Appendix B of Part 230 of Title 2 of the Code of Federal Regulations (CFR) states,
Costs of insurance on the lives of trustees, officers, or other employees holding positions of similar responsibility are allowable only to the extent that the insurance represents additional compensation. The costs of such insurance when the organization is named as beneficiary are unallowable.
In addition, 808 CMR 1.02 defines reimbursable operating costs as follows and provides additional cost standards regarding allowable costs:
Those costs reasonably incurred in providing the services described in the contract . . . with the exception of costs enumerated in 808 CMR 1.05 and costs excluded in the Authorized Price. Operating costs shall be considered “reasonably incurred” only if they are reasonable and allocable using the standards contained in Federal Office of Management and Budget Circular A-122.
Federal Office of Management and Budget Circular A-122 states that tax payments are a reasonable expense except “taxes from which exemptions are available.” Section 6(e) of Chapter 64H of the Massachusetts General Laws provides a sales tax exemption to organizations like BAMSI that are exempt from taxation under Section 501(c)(3) of the federal Internal Revenue Code.
Further, 808 CMR 1.04(1) explains how to document expenses:
The Contractor . . . shall keep on file . . . supporting documents . . . which reflect . . . costs incurred in or allocated to any Program of services rendered under the Contract.
Additionally, 808 CMR 1.05(26) details specific costs that are nonreimbursable to contractors and cannot be charged to state contracts:
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.
Section AU-C 500.05 of the American Institute of Certified Public Accountants’ Codification of Statements on Auditing Standards defines audit evidence as follows:
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based [including] both information contained in the accounting records underlying the financial statements and other information.
The section also defines accounting records as including supporting records such as receipts.
Regarding vehicle insurance and vehicle fuel for personal use, Para. (8)(h)(4) of Appendix B of 2 CFR 230 states,
That portion of the cost of organization-furnished automobiles that relates to personal use by employees (including transportation to and from work) is unallowable as fringe benefit or indirect costs regardless of whether the cost is reported as taxable income to the employees.
Finally, 808 CMR 1.05(23) defines “all costs associated with luxury items including . . . alcoholic beverages” as nonreimbursable.
Reasons for Issues
BAMSI officials stated that the expenses were erroneously charged to state contracts because of staff turnover and that two missing receipts could not be produced because they had been misfiled. BAMSI does not have internal controls in place to ensure that its staff reviews all the president and CEO’s expenses for reasonableness and allowability before they are paid.
Recommendations
- BAMSI should cooperate with OSD to resolve the identified issues regarding $11,311 of nonreimbursable costs and should reimburse the Commonwealth for any such costs that OSD determines must be repaid.
- BAMSI should implement internal controls to ensure that its staff reviews all the president and CEO’s expenses for reasonableness and allowability before they are paid.
Auditee’s Response
BAMSI agrees to cooperate with OSD to reimburse the Commonwealth for any costs that OSD determines must be repaid. BAMSI has instituted policies and procedures to review the CEO’s expenses on a regular basis. This review is conducted both internally ([chief financial officer] or [vice president] of Finance) as well as externally (Board of Directors). BAMSI has also eliminated the use of a Company vehicle for the CEO as well as any life insurance policies that claimed the CEO as the beneficiary.
Auditor’s Reply
Based on its response, BAMSI is taking measures to address our concerns in this area.
| Date published: | June 1, 2021 |
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