Overview
During our audit period, ServiceNet, Inc. charged $38,278 in 223 separate expenditures against its state contracts for expenses that were nonreimbursable in accordance with state regulations because they were undocumented, not reasonably incurred, or not program-related. A summary of these expenses by fiscal year follows.
|
Expenses* |
Fiscal Year 2017 |
Fiscal Year 2018 |
Total |
|---|---|---|---|
|
Goods and Services without Any Documentation |
$3,562 |
$2,292 |
$5,854 |
|
Meals and Travel without Adequate Documentation |
6,402 |
3,343 |
9,745 |
|
Goods and Services without Adequate Documentation |
12,161 |
6,345 |
18,506 |
|
Nonreimbursable Fundraising Expenses |
0 |
999 |
999 |
|
Nonreimbursable Luxury Items* |
769 |
184 |
953 |
|
Nonreimbursable Employee Morale Expenses† |
927 |
319 |
1,246 |
|
Late Payment Fees and Interest Paid |
0 |
90 |
90 |
|
Sales Taxes Not Reasonably Incurred |
190 |
695 |
885 |
|
Total |
$24,011 |
$14,267 |
$38,278 |
* These included items such as alcohol and an external retirement party.
† These included items such as gift cards, prizes, and sympathy arrangements.
This $38,278 could have been used by ServiceNet’s state contracting agencies to pay for program-related expenses of other contractors.
Authoritative Guidance
Section 1.04(1) of Title 808 of the Code of Massachusetts Regulations (CMR), promulgated by the state’s Operational Services Division (OSD), requires contractors to maintain documentation supporting costs incurred in state programs:
The Contractor . . . shall keep on file . . . supporting documents . . . which reflect . . . costs incurred in or allocated to any Program of services rendered under the Contract.
In addition, 808 CMR 1.02 defines reimbursable operating costs as follows:
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 ServiceNet that are exempt from taxation under Section 501(c)(3) of the federal Internal Revenue Code.
Further, 808 CMR 1.05 details specific costs that are nonreimbursable to contractors and cannot be charged to state contracts:
(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.
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 invoices and records supporting cost allocations.
Finally, 808 CMR 1.05(27) also defines the following as nonreimbursable costs that cannot be charged to state contracts:
Administration and Support Costs. Costs which are otherwise non-reimbursable under the provisions of 808 CMR 1.05 may not be reimbursed through Administration and Support Costs.
Reasons for Issue
ServiceNet’s policies and procedures for agency expenses are inadequate in that they do not require adequate documentation. Additionally, ServiceNet does not have internal controls in place to ensure that all expenses are reviewed by the agency’s staff for reasonableness and allowability before they are paid.
Recommendations
- ServiceNet should cooperate with OSD to resolve the identified issues regarding nonreimbursable costs and should reimburse the Commonwealth for any such costs that OSD determines must be repaid.
- ServiceNet should amend its policies and procedures to ensure that all expenses charged to state programs are properly documented and establish internal controls to ensure that these policies and procedures are adhered to.
Auditee’s Response
ServiceNet should not be required to reimburse the Commonwealth.
The State Auditors have determined that there are $14,267 and $24,011 of non-allowable costs for FY 2018 and FY 2017, respectively. Our Uniform Financial Statement and Independent Auditor's Reports [UFR], as timely filed, show eligible non-reimbursable/fundraising expense revenue offsets in excess of reported non-reimbursable expenses [UFR Schedule A, Line 12N] in the amounts of $387,919 and $183,603 for FY 2018 and FY 2017, respectively. This shows that even if we had reported those questioned costs to be nonreimbursable at the time we filed our UFR's, we had enough non-state funds to pay for them.
Accordingly, the Commonwealth has not been harmed, we have not misused state funds and we should not be required to reimburse these amounts for either fiscal year.
ServiceNet, Inc. does have policies and procedures to ensure proper documentation and these policies and procedures are monitored consistently. For each of fiscal years 2018 and 2017, we retained highly qualified independent certified public accountants to perform a Single Audit of financial statements. Those auditors, also using [American Institute of Certified Public Accountants] auditing standards, had no audit findings relative to documentation.
Auditor’s Reply
During our audit period, ServiceNet charged $38,278 in nonreimbursable expenses against its state contracts, a fact not disputed by the agency. These expenses were reported in ServiceNet’s UFR filings, which were audited by ServiceNet’s private accounting firm and approved by ServiceNet’s management and board of directors as state contract expenses. Although ServiceNet may have had other non-state funds available to pay for these expenses, its UFRs state that no non-state funds were used for them. ServiceNet’s management is responsible for having controls in place to ensure that any expenses the agency incurs that are nonreimbursable under its state contracts are properly identified, classified, documented in its financial records, and reported in its UFRs and that no state funds are used to pay for the expenses. As our audit points out, ServiceNet needs to improve its controls in this area.
We do not dispute the fact that ServiceNet has policies and procedures in place for the processing of agency expenses. We cannot comment on the work performed by ServiceNet’s private accounting firm in this area, since we did not review the firm’s work. However, as noted above, our audit found that the policies and procedures ServiceNet had established in this area were deficient in that they did not require adequate documentation to be retained to support the appropriateness and reasonableness of expenses. Therefore, we again urge ServiceNet to implement our recommendations.
| Date published: | November 6, 2019 |
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