We have audited the Statement of Claimed, Accepted and Questioned Costs (Exhibit A) of MFET for the period July 1, 1992 through June 30, 1996 for Grant Numbers 99-1-0309-56-305-02, 99-1-3345-56-314-02, 99-1-3288-56-323-02, and C-5454-5-00-81-55. The amounts reported in the Statement of Claimed and Questioned Costs are the responsibility of MFET's management. Our responsibility is to express an opinion on the costs claimed based on our audit.

    We conducted our audit in accordance with generally accepted auditing standards and the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the costs claimed are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the costs claimed. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the costs claimed. We believe that our audit provides a reasonable basis for our opinion.

    The claimed costs in Exhibit A were evaluated in accordance with applicable grant regulations, including OMB Circular A-122 (Cost Principles for Nonprofit Organizations) and specific conditions outlined in the grant.

In our opinion, except for the questioned direct costs of $62,584 and the recommended reductions to the indirect cost pool, the accompanying Statement of Claimed, Accepted and Questioned Costs (Exhibit A), presents fairly, in all material respects, the acceptable costs claimed for the period July 1, 1992 through June 30, 1996, in accordance with the aforementioned criteria.

    This report is intended solely for the information and use of the U.S. Department of Labor and MFET management and should not be used for any other purpose. This restriction is not intended to limit the distribution of this report which, when issued, is a matter of public record.

    This report is dated February 2, 1998, which represents the last day we received information from MFET.
 

/S/
JOHN J. GETEK
Assistant Inspector General
    for Audit

February 2, 1998

Mr. Raymond L. Bramucci
Assistant Secretary
    for Employment and Training
Employment and Training Administration
U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, DC 20210
 
 

    We have audited the Statement of Claimed, Accepted and Questioned Costs (Exhibit A) of MFET for the period July 1, 1992 through June 30, 1996, for Grant Numbers 99-1-0309-56-305-02, 99-1-3345-56-314-02, 99-1-3288-56-323-02, and C-5454-5-00-81-55, and have issued our report thereon dated February 2, 1998.

    We conducted our audit in accordance with generally accepted auditing standards and the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the costs claimed are free of material misstatement.

    In planning and performing our audit of the costs claimed by MFET for the period July 1, 1992 through June 30, 1996, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the costs claimed and not to provide assurance on the internal control structures.
 

    MFET's management is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit MFET's preparation of Financial Status Reports in accordance with generally accepted accounting principles and Federal regulations. Because of inherent limitations in any internal control structure, errors or irregularities may nevertheless occur and not be detected. Also, projection of any evaluation of the structures to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate.

    We obtained an understanding of the design of relevant policies and procedures and whether they have been placed in operation, and we assessed control risk for MFET.

    Our consideration of the internal control structures would not necessarily disclose all matters in the internal control structures that might be material weaknesses. A material weakness is a condition in which the design or operation of the specific internal control structure elements does not reduce to a relatively low level the risk that errors and irregularities in amounts that would be material to a Federal award program being audited may occur and not be detected within a timely period by employees in the normal course of performing their functions.
We noted no matters involving the internal control structures and their operation that we consider to be material weaknesses as defined above.

    This report is intended solely for the information and use of the U.S. Department of Labor and MFET management and should not be used for any other purpose. This restriction is not intended to limit the distribution of this report which, when issued, is a matter of public record.
 

    This report is dated February 2, 1998, which represents the last day we received information from MFET.
 

/S/
JOHN J. GETEK
Assistant Inspector General
    for Audit

February 2, 1998

Mr. Raymond L. Bramucci
Assistant Secretary
    for Employment and Training
Employment and Training Administration
U.S. Department of Labor
200 Constitution Avenue, N.W.
Washington, DC 20210
 
 

    We have audited the Statement of Claimed, Accepted and Questioned Costs (Exhibit A) of MFET for the period July 1, 1992 through June 30, 1996, for Grant Numbers 99-1-0309-56-305-02, 99-1-3345-56-314-02, 99-1-3288-56-323-02, and C-5454-5-00-81-55, and have issued our report thereon dated February 2, 1998.

    We conducted our audit in accordance with generally accepted auditing standards and the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the costs claimed are free of material misstatement.

    Compliance with laws, regulations, and the terms of its grants is the responsibility of MFET's management. As part of obtaining reasonable assurance about whether the costs are free of material misstatement, we performed limited tests of MFET's compliance with certain provisions of laws and regulations. However, our objective was not to provide an opinion on overall compliance with such provisions. Accordingly, we do not express such an opinion.

We noted several instances wherein MFET did not fully comply with provisions of laws, regulations, or terms of the grant regarding personnel practices and the allowability of costs charged to the Government grants. These matters are discussed, in detail, in the Findings and Recommendations section of this report.

    This report is intended solely for the information and use of the U.S. Department of Labor and MFET management and should not be used for any other purpose. This restriction is not intended to limit the distribution of this report which, when issued, is a matter of public record.

    This report is dated February 2, 1998, which represents the last day we received information from MFET.
 
 

/s/
JOHN J. GETEK
Assistant Inspector General
    for Audit

February 2, 1998

    MFET charged all of the Board of Directors' travel costs ($60,507) as direct costs to the DOL grants instead of being charged to MFET's overhead pool and then allocated to all benefiting activities. MFET also charged as direct costs to the DOL grants unreasonable delivery costs ($1,053) and unnecessary costs for the rental of local hotel rooms ($1,024).
 
 

TRAVEL COSTS FOR BOARD MEMBERS

    MFET charged costs totaling $60,507 for Board members' travel as direct costs to the DOL grants instead of charging these costs to the overhead pool.⁽¹⁾ All of MFET's funding sources benefited from Board members' activities and, thus, travel costs for Board members should have been either: (a) charged to the overhead (indirect cost) pool and allocated to all benefiting activities, or (b) directly allocated to all benefiting activities.

    A review of the minutes from each of MFET's Board of Directors' meetings disclosed that topics and discussions covered all of MFET's programs and activities, essentially benefiting all funding sources. However, MFET charged 100 percent of the costs associated with Board members' travel to the DOL grants, instead of being allocated to all activities by being charged to the overhead pool or directly allocated to all activities.

        20 CFR, Part 633, Subpart C, Paragraph 633.304 (c)(1)(ii), Section 402 Cost Allocations,
 

states:
 

    "Allowances and reimbursement costs for governing boards and advisory councils shall be prorated wherever applicable as administrative costs among all the grants, from whatever source, administered by the grantee."

    As such, we question MFET Board of Directors' travel costs totaling $60,507 that were charged exclusively to the DOL grants as follows.

AUDITEE'S RESPONSE AND AUDITOR'S COMMENTS

The OIG's tentative finding that MFET charged all of the Board of Directors' travel to the DOL grants instead of being charged to MFET's overhead pool and then allocated to all benefitting activities is incorrect. MFET did charge Board of Directors' travel as direct costs, however, the OIG fails to note that MFET pro-rated its Board travel and other funding sources were charged directly as well. MFET provided additional documentation to show, as an example, that $8,245 of board travel had been charged to other grants. According to MFET, the amount charged to the DOL grants correctly reflects the proportion of all MFET's federal (90%) and state (10%) grants. Therefore, MFET believes that the OIG should disregard this finding and recommend no questioned costs.

    We disagree that MFET prorated its Board travel and that the amounts correctly reflect the proportion of MFET's Federal and state grants. Notwithstanding that during the course of our audit fieldwork, we informed MFET of the Board travel issue and continually requested any information or documentation from MFET regarding this issue, we analyzed the additional documentation submitted by MFET. This additional documentation showed that MFET charged $8,160 (or 99 percent) of the $8,245 of additional Board travel to one other activity (cost center 6000). MFET provided no cost allocation plan or methodology to support that these costs were charged in a fair and equitable manner. In fact, based on the information presented, it appears the costs were not distributed equitably so that all benefiting activities absorb their fair share of the costs. Further, we were informed by MFET's financial officer that MFET did not utilize any methodology to distribute Board travel costs; instead, the costs were charged "haphazardly" to one or two other grants.

    MFET received funding from four Federal agencies, several state and local sources and several private foundations and grants. The purpose of an indirect cost rate (or a direct cost allocation) is to provide an equitable means to distribute certain costs so that all benefiting activities are charged their fair share of the costs. In order for all benefiting activities to equitably share in their fair share of MFET's Board members' travel costs, we continue to recommend that the $60,507 of Board travel costs charged directly to the DOL grant be disallowed and, instead, be charged to MFET's overhead pool. We also recommend that the additional costs of $8,245 for Board travel, as well as any other Board travel costs, incurred by MFET be charged to the overhead pool and allocated to all benefiting activities.

DELIVERY COSTS

    MFET charged airfare of $923 and per diem of $163 for one person to travel (on January 20 and 21, 1993) from St. Cloud, Minnesota, to Washington, D.C., and return for the sole purpose of hand delivering its grant proposal to the ETA national office. We consider these costs to be unreasonable because MFET could have shipped the documents by means of overnight delivery and accomplished the same purpose.
 

---

OMB Circular A-122, Attachment A, paragraph A.3., Reasonable Costs, states that:

"A cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the costs. The question of the reasonableness of specific costs must be scrutinized with particular care in connection with organizations or separate divisions thereof which receive the preponderance of their support from awards made by Federal agencies. In determining the reasonableness of a given cost, consideration shall be given to:

            a.    whether it is the type of cost generally recognized as ordinary and necessary for
                   the conduct of the grantee's business or grant performance;

            b.     . . . generally accepted sound business practices; and

            c.     whether the individuals concerned acted with prudence . . ., considering their
                    responsibilities to the organization, its members, employees, and clients, the
                    public at large, and the Government."

    MFET stated that the grant proposal was hand delivered because of the significance of the subject matter and it was extremely important that ETA receive the proposal on time. MFET worked on the proposal until the last possible minute and this required hand delivery. MFET stated that its overall administrative costs were not exceeded and, therefore, the costs should be allowable.

    We disagree. MFET has a responsibility to the government and the public at large to minimize costs and eliminate excessive expenditures. We believe it is unreasonable for MFET to charge the grant excessive travel and per diem costs of $1,086 to hand deliver a document that could have been shipped overnight (Federal Express) for the relatively small charge of $33. We, therefore, question the $1,053 ($923 plus $163 minus $33) of unreasonable delivery costs charged to the DOL grant.
 

AUDITEE'S RESPONSE AND AUDITOR'S COMMENTS

MFET disagrees with the finding. As previously stated, MFET's position is that the cost of delivering three (3) grant proposals producing income of $2,846,377 for MFET meets the reasonable costs test as prescribed by OMB Circular A-122. MFET believes that this expenditure is reasonable both in its nature and amount and that it does not exceed that "which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the costs." MFET's Executive Director determined the expenditure was reasonable because: (1) DOL's SGA permitted hand delivery of grant proposals, and (2) MFET's hand delivery method was the only method available to permit MFET to make changes and additions to the grant proposals up to the due date and hour. Therefore, MFET needed same day delivery rather than overnight delivery as suggested by the OIG conclusion. Finally, MFET believes that the OIG's analysis of the issue is incorrect because it essentially sets a limit of the Federal Express charge of $33.00. This has the effect of eliminating hand delivery of all grant proposals except to those organizations within approximately 100 mile round trip of DOL. MFET does not believe that the grant officer intended to eliminate hand delivery of grant proposals. OIG's analyzes the cost benefit on a retrospective basis. In retrospect, it is easy to say that one would rather pay $33 than $1,053 to obtain $2.8 million, but at the time the decision was made the prudent person did not have this luxury available.

    As previously stated, MFET has a responsibility to the government and the public at large to minimize costs and eliminate excessive expenditures. We continue to believe that it is unreasonable for MFET to charge the grant excessive travel and per diem costs of $1,086 to hand deliver a document that could have been shipped overnight (Federal Express) for the relatively small charge of $33. We believe that this is not the type of expenditure that a prudent business person would incur. MFET presented no compelling evidence which demonstrated that having these documents shipped overnight was a prudent use of Federal funds.

    MFET charged local hotel room costs of $1,024 to the DOL grants. MFET stated that the purpose of incurring the local hotel room costs was to hold staff meetings in the hotel rooms instead of in its own conference room. MFET stated that this avoided distractions and improved employee morale.

    We were told by MFET employees that only a few staff members attended the meetings and that, after the meetings, the Executive Director would spend the night in the hotel room rather than drive 75 miles to his place of residence in Minneapolis. We believe that it is unreasonable for MFET to rent local hotel rooms for staff meetings/Executive Director lodging. MFET should have held the staff meetings in its own conference room instead of renting local hotel rooms.
 

OMB Circular A-122, Attachment A, paragraph A.3., Reasonable Costs, states that:

"A cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the costs. The question of the reasonableness of specific costs must be scrutinized with particular care in connection with organizations or separate divisions thereof which receive the preponderance of their support from awards made by Federal agencies. In determining the reasonableness of a given cost, consideration shall be given to:

        b.     . . . generally accepted sound business practices; and

        c.     whether the individuals concerned acted with prudence . . ., considering their
                responsibilities to the organization, its members, employees, and clients, the public
                at large, and the Government."

    Again, we do not believe that it was reasonable for MFET to rent local hotel rooms to hold conferences which could have been held in MFET's own conference room and then, in turn, for MFET's Executive Director to use these hotel rooms for personal lodging. We, therefore, question $1,024 in local hotel room costs which consisted of: (1) check no. 126689 dated January 20, 1993, in the amount of $569, and (2) check no. 142210 dated May 18, 1994, in the amount of $455.

AUDITEE'S RESPONSE AND AUDITOR'S COMMENTS
 

MFET disagrees with the OIG's tentative finding. It appears that the OIG only considered two of MFET's stated reasons: to avoid distractions and improve employee morale. MFET's complete rationale for obtaining outside conference space was:

    1.     Group was too large for the St. Cloud conference room and for the purpose of the
            meeting.
    2.     St. Cloud office does not have sufficient rest rooms to accommodate the group during
            breaks.
    3.     Hotel has better access to coffee, cokes, snacks, etc.
    4.     Avoid disruptions.
    5.     Deadlines to meet.
    6.     Employee morale.
    7.     Produce atmosphere conducive to people providing more open discussion.
    8.     Management meetings to implement immediate corrective actions.
    9.     Management retreats is probably a better word for the purpose of these meetings,
            although to avoid the appearance associated with a retreat, management decided not
            to travel to a Northern Minnesota retreat location.
 

The OIG appears to believe that the Executive Director utilizing a meeting room as lodging would be considered a benefit to the Executive Director. The OIG only needs to consider that this same room is used all day and most evenings by 8 to 10 people and never cleaned - not even the bathroom - to recognize that this is simply not a benefit. In both instances cited by the OIG the topics were directly related to MFET's 402 JTPA program and thus complies with OMB Circular A-122 in that these meetings were necessary for MFET's performance. Considering that DOL did not question MFET's performance during the period of the amount herein discussed, MFET believes that $1,024 over a four year period is a reasonable amount to accomplish a satisfactory performance record. It appears that if MFET used the standard set by the OIG in this instance, no agency, including DOL could utilize local meeting space away from the office.

    We continue to question the reasonableness of MFET renting local hotel rooms to hold staff meetings instead of using its own conference room. MFET stated that the group attending the conference was too large for their own conference room. We were told by MFET that the maximum number of staff attending these meetings was eight. During the course of our audit, the audit team met on several occasions with MFET management staff in the St. Cloud conference room. There were eight individuals comfortably present in MFET's St. Cloud conference room, with room for additional individuals. MFET maintains that the St. Cloud office did not have sufficient rest rooms (the St. Cloud office has two) to accommodate the group, yet in a later statement maintains that the local hotel room was of no benefit to the Executive Director because everyone used the rest room (one) and it was not cleaned after the meeting. MFET stated that because program performance was not an issue in the audit report, that the local hotel costs are reasonable. This issue is not whether MFET met the performance goals outlined in its grant agreement, but instead whether it is reasonable for MFET to rent local hotel rooms to hold meetings that could be held in its own conference room and, then, for MFET's Executive Director to use these hotel rooms as personal lodging and charge the costs to the DOL grants. We believe that MFET has a responsibility to the government and the public at large to minimize costs and eliminate excessive expenditures. As such, we continue to question the $1,024.
 

While we did not conduct an indirect cost audit, we identified that MFET charged improper costs totaling $131,392 to its indirect cost pools for: (1) unreasonable salary and fringe benefits paid to its Executive Director ($117,843), (2) personal travel expenses of its Executive Director ($10,659), and (3) office renovation costs for work that was not done ($2,890).

SALARY AND FRINGE BENEFITS

    MFET charged costs totaling $117,843 to its overhead pool for excessive and unreasonable salary and fringe benefits paid to its Executive Director during PYs 92 through 95. The salary for MFET's Executive Director was increased approximately 92.3 percent during PY 92. On July 1, 1992 (the beginning of the program year), the Executive Director had a salary of $33,900. He then received an increase of 7.3 percent, which raised his salary to $36,400. On September 16, 1992, approximately 75 days later, he received another increase, this time 85
percent, which raised his salary to $65,200 (a 92.3 percent increase from his original $33,900
salary).

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