If an auditor were walking alone in the forest and a tree fell on him, would any one notice?
Each Division is required to develop monitoring tools in the following six areas (see Bureau of Contract Management (BCM) Monitoring Handbook, pages 24, 25) : • 1. Program/Service Requirements • 2. Client Wellness • 3. Objective Based Performance Measures • 4.Fiscal Accountability • 5. Federal Assurances; Standard Terms and Conditions; and • 6. Additional Requirements
There is some overlap in the definition of fiscal monitoring: Section 1 (Program Service Requirements found in BCM Monitoring Handbook page 32) discusses monitoring of • 1. the administration and maintenance of client and service records, • 2. staff qualifications, and • 3. staff to client ratios
Why do fiscal monitoring? • To determine whether or not purchased services were in fact provided • To determine if charges were allowable
While doing fiscal monitoring, you may identify areas of concern or “red flags” that may warrant a more thorough review/audit by DHS financial auditors. Call us to discuss your review or to report “red flags”. • Bob Downing 538-9805 • Tom Obray 538-8261 • Rich Sallstrom 538-9895
Monitoring may be best understood if we divide it into levels. Level 1 is the most basic. Contract monitors can perform Level 1 monitoring with very little “fiscal” background or experience.
Fiscal Monitoring training Cost Reimbursement (Cost of Service) Contracts Rate Based Contracts Protective Payee
Cost Reimbursement Contracts • Preparation prior to on-site review: • 1. Obtain a copy of the contract and become familiar with program and budget. Are there fiscal issues unique to this provider that should be reviewed? • 2. Consider if you want to see their audited financial statements (if they have them). • 3. Consider the timeframe your review will cover.
Cost Reimbursement Contracts • Preparation prior to on-site review (continued): • 4. Consider which months would be most meaningful to sample and perform your test work. • 5. Have there been prior audits by yourself or others that should be reviewed? • 6. Would it be useful to interview case workers or others prior to starting? • 7. Have a system to document your review work and findings.
Federal funding sources pay their share of actual costs for programs. State dollars used in programs share the same principle. • All fiscal monitoring ties back to this fundamental concept. • The rates in rate-based contracts are set using actual costs for a program. • Cost reimbursement contracts pay actual costs to run a program. • When monitoring, keep in mind we will pay for only actual costs to run our program. • Costs of another program cannot be charged to our program. • Costs must be allowable (no alcoholic beverages, for example). • Costs must be supported with documentation (receipts, time sheets allocating time, for example).
Cost Reimbursement Contracts • There are two general areas of review • A.Comparison of contract budget categories to actual expenditures as reported on the 1032 billing form. • B. Track expenditures reported on the 1032 billing form to supporting documentation.
Cost Reimbursement Contracts Objective: Is the provider in compliance with the budget category requirements specified in the contract? Steps: 1.a. Interview the provider to determine if their system of accounting separates administrative costs from program costs (and capital costs, if any). Note: if the accounting system does not separate costs based on the contract budget categories (especially if the provider has more than one program) you cannot perform this test. The provider is not in compliance with the contract requirement to maintain an adequate accounting system. (This is your finding and corrective action is necessary.). • A. Budget Categories
Cost Reimbursement Contracts 2.a. If there are capital costs, were they incurred as allowed by contract? 2.b. Using numbers from the accounting system, compare expenditures for the year (or year-to-date if you are monitoring a partial year) with expenditures shown on the contract budget by category. Provider should explain discrepancies. The contract states: The Contractor may not make any adjustment in budgeted funds from Category III (“Program Expenses”) to either Category I (“Administration”) or Category II (“Capital Expenditures”) or between Categories I and II, without prior written approval by DHS/____(See Part VI A:2.a.) • A. Budget Categories (Continued)
Cost Reimbursement Contracts • A. Budget Categories (Continued) 3. For many programs, the contract will describe the positions our contract will pay for (whether administrative or program). It will also describe what space, vehicle, utilities, and other costs we will pay for, and how the amounts are calculated. Using your judgement, you may choose to verify whether we are paying these costs as agreed upon in the contract. This review may or may not bring issues of importance to your attention.
Cost Reimbursement Contracts • B. Test expenditures billed on the 1032 form: 1. Select a sample (one or two months) of 1032 billing forms to test (because costs are usually itemized on the 1032 form, the best method to select the sample test month(s) is to look at all 12 months and select the month(s) with unusual amounts). 2. For each line item billed, trace it to supporting documentation (for example, trace office supplies to a store receipt; trace personnel time to a timesheet; trace office space to a lease agreement, trace car expense to a mileage log). 3. For each line item, trace it to the accounting system or cancelled check to ensure the expense was actually paid.
Cost Reimbursement Contracts Recall the State and Federal government wants to pay the actual cost of a program. 1. Federal Cost Principles - OMB Circular A-87 government entity, OMB Circular A-122 for- profit and not-for-profit. 2. DHS Cost Principles - Our Department’s additions to the Federal Cost Principles -- not many. The contract states: The Contractor shall bill DHS/__ only for actual costs allowable under federal and DHS cost principles, and shall maintain records that adequately support such costs (see Part I A:4.a). • Advanced Level 2 Review
Cost Reimbursement Contracts • Federal and DHS Cost Principles (list of some of the more significant items) 1. When a provider has more than one program (or more than one contract), especially with different funding sources, they must keep perpetual time records that detail time spent on each program. That time chargeable to the DHS contract must be allocated to program or administration based on actual activity. 2. For persons in managerial positions (whether administration or program management), total work time from all work, including outside employment and participation in other entities, must be disclosed. Work time by these persons charged to the DHS contract must be supported by a perpetual time record that supports time billed to the DHS contract.
Cost Reimbursement Contracts • Federal and DHS Cost Principles (continued). 3. Time spent by a provider in fund raising activities cannot be billed to DHS. The time record must indicate time spent in fund raising. Advertising and other related costs of fund raising are not allowable. 4. Administrative costs of each contract cannot exceed 25% of program costs (without prior approval from the DHS Executive Director). (Example: Actual program costs = $100,000, Actual Admin costs = $30,000, Allowable Admin costs = $25,000 ($100,000 X 25%)).
Cost Reimbursement Contracts • Federal and DHS Cost Principles (continued). 5.Related Party Costs: Payments by a Contractor to related parties without prior written consent of the State may be disallowed. Related party includes blood or marriage relationships, or when a provider makes payments to a contractor when the provider or officers own or partner directly or indirectly 10% of the voting interest of the contractor, or the provider can establish policy or make decisions for the contractor. Prior written consent should be granted only in such situations if it can be shown by the provider that the cost does not exceed fair market value. 6. Personal Expenses: DHS will not reimburse a contractor for personal expenses (spouse travel, cellular phones for personal use, undocumented car expenses, business lunches not connected with training, and others).
Cost Reimbursement Contracts • Federal and DHS Cost Principles (continued). 7. Interest Expense: When a provider is buying its building or has a capital lease (not an operating lease), the portion of interest and principal allowable to charge DHS cannot exceed the cost had the provider rented (operating lease) the building in an arms-length transaction. 8. Allocable Costs: All charges to the DHS contract must benefit the DHS program. Some costs are charged to DHS based on allocations -- for example, Director’s office space. If a Director works on three programs and does fund raising: allocation of the cost of the space must be done based on a reasonable method, such as percent of time (for example if -- continued on next slide).
Cost Reimbursement Contracts • Federal and DHS Cost Principles (continued). 8. (continued) Program 1 10 hours 25% X $1,000/month = $250 Program 2 15 hours 37.5% X $1,000/month = $375 Program 3 10 hours 25% X $1,000/month = $250 Fund Raising 5 hours 12.5% X $1,000/month = $125 Grand Total $1,000 Only $250 can be charged to DHS for the Directors office space for Program 1.
Cost Reimbursement Contracts • Federal and DHS Cost Principles (continued). 9. Capital expenditures exceeding $5,000 must receive prior approval from the State. You can be more restrictive than $5,000 if you choose. 10. Overtime, extra-pay shift, and multi-shift premiums are allowable with prior approval. Prior approval is not needed when the function is indirect, such as administration, maintenance or accounting, when it results in overall lower cost to DHS, or in emergencies.
Rate Based Contracts • Level 1 Review • The client(s) identified in the billing forms 295 or 520 were actually receiving the specified services. • Are they billing appropriate expenditures? • The caseworker should review the billing documentation prior to payment.
Rate Based Contracts • Level 1 Review • The itemized services by client matches the sum of the billing. • Have they billed more or less than they are authorized to bill?
Rate Based Contracts • Level 1 Review • Verify the rate paid is not more than the amount in the contract. • Have they billed more than they are authorized to bill? • The contract states: DHS / ___ shall pay the Contractor no more than the rates specified in Part IV (“Contract Cost, Billing and Payment Information”) (Part IA:4.a.) .
Rate Based Contracts • Level 2 Review • Verify through other records (examples are client service records or population reports) that the client received the services the Contractor billed. • Have they billed more than they are authorized to bill? • Know first and last day when the client was in the program.
Rate Based Contracts • Level 2 Review • Verify the service is appropriately billed on the correct billing form and is the appropriate service code. • Will the service be appropriately posted to the correct Activity? • Some services are Medicaid eligible, eligible for grants, etc.
Rate Based Contracts • Level 2 Review • Verify the Contractor has not billed more than the total limit (for service codes that have limits). • Have they billed more than they are authorized to bill? • Example is special needs clothing
Protective Payee • Level 1 Review • Contractor keeps financial records and maintains documentation for each client. • Are records available to determine if money has been spent appropriately? • Check registers should be kept current and reconciled to the bank statements. • Bank statements should be available for review. • Receipts should be numerically organized by check number and agree with the check amount. • Inventory lists of client assets should be available for review.
Protective Payee • Level 1 Review • Verify purchases from client accounts are reasonable. • Are client purchases appropriate? • Client funds should be spent only on the client. • Raise a “red flag” when large purchases, especially for cash, do not have documentation. • Raise a “red flag” when checks are written out for cash without supporting documentation (receipts). • Checks should not be made out to staff. • Receipts should match the date of the check and should agree with the check amount.
Protective Payee • Level 1 Review • Verify the person who handles client money does not also reconcile the bank statement. • Are internal controls in place to safeguard the money? • There is a much greater risk of client money being stolen when Contractors lack separation of duties.
Protective Payee • Level 2 Review • Verify the client trust fund balances are not too high or too low. • Balances that are too high make the client ineligible for Medicaid. Balances that are too low raise a “red flag” causing concern that client monies are being stolen. • Are trust funds being appropriately managed?
Protective Payee • Level 3 Review • Verify bank statements are appropriately reconciled to the check register. Verify the Contractor has effective independent reviews to help safeguard client money. • Are effective internal controls in place to safeguard client funds?