LESSONS FROM THE ROAD

A Real Life Federal Audit Experience

Susan KelleyFormer Vice President for Institutional Advancement

Valencia College Orlando, Florida

(retired July 2011)

TERRIBLE THINGS CAN HAPPEN ON THE ROAD, EVEN TO THE WELL-PREPARED

AND THE INNOCENT.

CARS CROSS MEDIANS. TRAVEL CONDITIONS DETERIORATE.

AUDITS HAPPEN.

Managing a federal grant is like a road trip.

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MY COLLEGE WAS HURT IN A COLLISION OF FORCES THAT WE COULD NEVER HAVE

PREDICTED.

YOUR ORGANIZATION COULD BE, TOO.

SO PREPARE WELL.

Prepare for the trip.

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Preparation starts with grant submission.

Just as your vehicle must be the right choice for the specific type of road ahead, a grant should be written so that it can be managed within the regulations that apply.

Preparing for audits begins with writing the grants. Your grant proposal and the applicable regulations provide a roadmap.

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Preparation requires maintenance.

Just as you provide routine maintenance on your vehicle, routine grants management and record keeping will help you to be audit-ready. Records include notes on all conversations and meetings, as well as copies of all written exchanges with funding officials.

Sometimes, well maintained vehicles end up in wrecks, often through no fault of the driver. But, odds of survival are better in well-maintained vehicles.

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Preparation means double-checking.

Even with well-maintained vehicles, we have special check-ups before long and arduous trips. An ounce of prevention is truly worth a pound of cure.

If an audit is imminent, don’t assume all is in order: double check, and use the services of experts.

Brustein & Manasevit, PLLC can review and make recommendations regarding your grants management processes, and they can assist you if you are contacted about an audit.

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Along the road . . .

Don’t operate under the illusion that innocent people don’t get hurt. They do.

An audit impacts a lot of people, including those who should be benefitting from the services of the grant.

Audits are expensive. A lot of money, years of staff time, and outside legal services may be needed to recover from an audit, even an audit that results in no negative findings.

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I’m Retired.

I came here for one reason only:

To help you avoid some of the problems I lived through for a decade.

Don’t assume my story could not be yours.

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The Valencia College Story

1999-2000

In response to a call from our Governor to help low-performing schools, we applied for and won seven GEAR-UP grants to work with seven different middle school cohorts.

The five-year grants totaled over $10 million in federal funds.

Required 1:1 matching included use of facilities and equipment for the program, scholarships, and donated professional services.

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1999-2000

Our partners included local schools, non-profits, and businesses interested in helping middle school students succeed in high school and then go on to college.

We followed directions in the application packet, the OMB regulations, and from the program staff in valuing the in-kind matching.

We established record keeping systems with the grant staff, and reports showed that the grants were running smoothly and meeting goals.

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1999-2000

We reviewed the budgets, including the matching, with the program office staff in DC via a telephone conference as the grants were launched.

At the written direction of the program staff, we revised our matching budgets downward to the 1:1 level required by law. ED staff told us this would reduce our record-keeping burden. We agreed.

Initial program results were very good as students entered in and progressed with the help of the grant-funded services. We were off and running on our road trip, serving 1,400 students.

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The Valencia College Story

2001

We received a site visit by a representative of ED’s Dallas regional office in February 2001. Verbal comments were laudatory.

We received a letter in April announcing that the OIG would audit our grants, and would be arriving in June 2001 for two weeks.

We were confident that there would be no problem, so confident that we did not think to contact specialized legal counsel. This was a key mistake.

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Spring 2001

A wreck was just ahead, but we could not see it.

A team of four auditors from Kansas City came for two weeks in June.

The theme music from the popular theme park ride “Jaws” should be playing in your mind at this point.

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Spring 2001

The OIG staff interviewed college staff who found the experience highly demoralizing.

The OIG team left at the end of two weeks, saying our facilities and equipment matching would not be allowed because we had claimed indirect costs.

They asserted (erroneously) that our indirect cost pool included facilities and equipment. The OIG, at that time, said we were $1.5 million short in matching.

We were stunned.

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Summer 2001

The OIG next communicated that we had “supplanted,” and that we were under-matched for that reason.

They said we had supplanted in counting facilities and equipment as matching, because they said these were included in our indirect costs. However, they were wrong: we had not included facilities and equipment in our negotiated indirect cost pool.

They would not give us a definition of supplanting.

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Summer 2001

The OIG staff said that we were under-matched for a second reason: our proposal budgets had projected higher than the 1:1 match required by law, and we had reduced the budgets to the 1:1 level, at the direction of the program office.

The OIG staff said the program office

lacked the authority to approve reduced budgets, and the College was wrong to follow their directive to reduce them.

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Summer 2001

A written report from the Dallas regional ED office was received in July, speaking positively about our grants and the results we were getting in terms of student academic performance and retention.

The report noted our matching, but took no issue with it. The report advised us to contact program staff in DC if we had any technical questions.

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Summer 2001

The OIG team announced that they would come back for a second visit in the fall.

We consulted Michael Brustein prior to the second visit, which proved instrumental in understanding and asserting our rights.

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Fall 2001

I visited program staff in DC the first week of September 2011, meeting with the Deputy Assistant Secretary, who apologized for how we were being treated by the OIG staff.

I reviewed our record keeping and valuation methods with her and the program officer, and asked for any technical advice they might offer, as the Dallas regional office had suggested.

They told us our records were fine, and that they were baffled by the OIG’s actions.

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Fall 2001

The OIG audit team continued to assert that we had supplanted. While we continued to ask, the OIG staff never defined supplanting, but they were certain that we had committed it.

However, the auditors told us that “if we won” on the supplanting issue, they intended to say that we had used the wrong method of valuation of facilities and equipment (fair market value rather than depreciation).

They had not previously raised the issue of the method of valuation, so that issue was new.

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Fall 2001

Michael Brustein arranged for a visit with ED staff and legal counsel in DC in November, giving us the opportunity to explain what was happening to the College and to ask for assistance in a fair resolution of audit issues being raised.

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November 2001

The OIG team announced that it would return for a third time, close to Thanksgiving, and on our West Campus. However, a date was set for December on another campus due to our work and facilities use schedules.

Michael Brustein was helpful to us in understanding that we could arrange for these visits at a time and place that was less disruptive than that originally requested by the OIG.

A teleconference involving attorneys and audit staff was required to resolve the issue.

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December 2001

In December, OIG staff returned to review records and interview staff. I sat in on the interviews. (They had refused our earlier request to audio-tape the interviews.)

They asked questions of staff such as:

“Your time and effort form shows that you were in a project meeting from 3:00 p.m. – 5:00 p.m. last December 12. How do we know that you were in the meeting the entire two hours?”

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December 2001

As the OIG staff left in December 2001, they continued to assert that our matching would not be allowed, and that we would have to produce alternative match or else refund money to the federal government.

They told us that we had “relied on bad advice” from the program staff in DC on how we valued our matching and in the amount of matching needed.

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2002

We checked with other federal agencies who advised that the proper method of valuation of facilities and equipment was fair market value, and who followed the same OMB circulars that govern ED grants.

We checked with private industry experts, who asserted in writing that it was not possible to accurately assign a depreciation value to facilities used part time.

We received the draft OIG audit report in early 2002, and Valencia submitted a written response in February 2002.

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2003-2008

A year passed. We received the final audit in 2003, and we provided our response.

We voluntarily closed the seven grants July 1, 2003, letting all staff go, since we could not let the clock continue to tick, and the potential bill to grow, if we were to lose the battle.

The media became aware of the audit, and the publicity gave a negative impression to the public, as if we were guilty because we were being audited.

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2003-2008

More time passed. We continued to show a potential liability on our annual college audit.

We received a letter from ED in 2008 stating draft findings.

In the draft, ED agreed with the amount of matching that we owed (1:1), but seemed to be prepared to side with the OIG on the method of valuation of facilities and equipment.

We once again provided our written comments.

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2010-2011

We waited. In 2010, we were invited by ED to submit alternative matching to fulfill the requirements.

We submitted documentation of the scholarship funds raised and awarded.

The scholarship matching amount was $289,966 short of the amount that the Secretary said we must provide or else refund.

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2010-2011

We closed the matter with a wire transfer of that amount to ED in early 2011 – almost ten years after the audit began.

(Because GEAR-UP was authorized under Title IV of the HEA, there was no 5-year statute of limitations that applied.)

While we might have taken the audit to an administrative law judge and continued the battle, the college opted to end the matter, believing a protracted, costly battle would not serve our students.

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DON’T ASSUME THIS WILL NOT HAPPEN TO YOU, OR THAT BAD THINGS DON’T HAPPEN TO GOOD

PEOPLE.

BE SURE YOUR RECORD KEEPING SYSTEMS MEET CURRENT INTERPRETATIONS OF THE

REGULATIONS.

KEEP COMPLETE, UP-TO-DATE, ACCURATE PROJECT RECORDS.

Lessons learned?30

RETAIN LEGAL COUNSEL IF AUDITED.

MICHAEL BRUSTEIN’S FIRM SERVED AS OUR LEGAL “GPS SYSTEM” THROUGHOUT OUR AUDIT TRIP.

THIS CONFERENCE WILL HELP YOU BE PREPARED SHOULD YOU HAVE AN AUDIT IN YOUR FUTURE.

Lessons learned?31

Contact Information

Susan KelleyFormer Vice President for Institutional AdvancementValencia College, Orlando, FL (retired July 2011)

1969 South Alafaya Trail, #141Orlando, FL 32828

(407) 625-9365

susankelley13@msn.com

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