270 WASHINGTON STREET, S.W. (404) FAX. December 10, 2013

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1 OFFICE OF INTERNAL AUDIT AND COMPLIANCE (404) PHONE 270 WASHINGTON STREET, S.W. (404) FAX ATLANTA, GEORGIA Dr. Paul Jones President (Interim) Darton State College 2400 Gillionville Rd. Albany, GA Dear Dr. Jones: December 10, 2013 The Board of Regents audit staff has concluded its limited scope audit of Darton State College. Audit fieldwork was conducted from June 2013 through September Attached is the final report that includes your response to the draft report. As this report contains several issues rated as material and significant, your personal attention will be required to correct the issues noted in the report. In compliance with our standards, our office will verify the described resolution of these issues following their implementation. Please note that the results of this report will be summarized for the Board of Regents at their January 2014 meeting. The information contained in this report was obtained from institutional records and systems, through discussions with institution personnel and through tests of sampled records and data. The audit does not constitute a detailed review of all financial transactions. Therefore, it is possible that errors, irregularities and/or illegal acts may go undetected. However, we believe that our audit provides a reasonable basis for our opinion. The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing. The status of all audit findings should be reported to Internal Audit no later than the end of each quarter via the TeamCentral online system. If you have any questions, please contact me at (404) Thank you for your cooperation. Sincerely, JMF/jtb Enclosure John M. Fuchko, III Chief Audit Officer and Associate Vice Chancellor cc: Members, Board of Regents of the University System of Georgia Henry M. Huckaby, Chancellor Dr. Steve Wrigley, Executive Vice Chancellor for Administration, BOR Dr. Houston Davis, Executive Vice Chancellor for Academic Affairs, BOR John E. Brown, Vice Chancellor for Fiscal Affairs and Treasurer, BOR Dr. Curt Carver, Vice Chancellor for Information & Instructional Technology/CIO, BOR Dr. Gary Barnette, Vice President of Academic Affairs and Student Affairs, DSC "Creating A More Educated Georgia"

2 Ronnie Henry, Vice President for Business and Financial Services, DSC Stan Brown, Assistant Vice President for Business and Financial Services, DSC Tracy Cosper, Chief Technology Officer, DSC Martha Snow, Auxiliary Contract Liaison and Events Coordinator, DSC Mike Kiefer, Athletic Director and Interim Chair of Health and Physical Education, DSC Tracy Goode, Dean of Public Relations and Interim Dean for Institutional Advancement, DSC Randy Pearman, Interim Executive Director of Internal Audit, BOR Kenyatta Morrison, Director of Information Technology Audit, BOR Claire Arnold, Director, Education Audit Division, DOAA Chloe Haidet, Director, Technology Risk & Assurance, DOAA

3 EXECUTIVE SUMMARY The Office of Internal Audit and Compliance (OIAC) conducted an assurance audit at Darton State College (DSC) from June 2013 through September Our focus in conducting an assurance audit is to evaluate key internal controls, assess major financial and operating risks, and review operational effectiveness and efficiency. As such, our report highlights recommendations for implementation that we believe will accomplish these goals. Our report also addresses exceptions to current policy or procedures noted during our engagement. The following is a summary of our recommendations and audit issues. Detailed information is provided in the report s main body. Our recommendations are as follows: Reviews of Satisfactory Academic Progress (SAP) were not properly performed to determine eligibility for federal student aid. (Material) Regulations governing federal financial aid require institutions to develop standards to measure student progress toward degree completion. Students receiving federal financial aid are monitored for SAP by the DSC Office of Student Financial Aid. Students are not eligible for federal financial aid if they do not demonstrate SAP. Minimum standards, including qualitative and quantitative measures of progress, must be achieved by the end of any given enrollment period. The monitoring practices employed by DSC to evaluate SAP were incorrect, resulting in the potential over-award of a currently estimated $894,000 in federal financial aid for four semesters (Fall 2011, Spring 2012, Summer 2012 and Fall 2012). We recommend DSC a) perform all necessary adjustments for those students who received federal aid in error, b) correct the SAP monitoring processes to prevent similar occurrences in the future, and c) communicate to the U.S. Department of Education (DOE), the Chancellor, and the Board of Regents as to the extent and impact of these errors and the corrective actions DSC will perform to ensure similar issues do not occur in the future. See Issue 1 for more detail. 1

4 Restricted funds were not spent in accordance with grant requirements. (Material) Funds received from two local hospitals totaling over $592,000 during the mid- to late-2000s for nursing stipends were not spent. Instead, the institution used state appropriations to fund the stipend payments with the intent of using the local hospital funds for potentially related but undetermined future uses. As the original grant funds were to be used for a restricted purpose as stated in the agreements, those funds can only be used for those stated purposes. We recommend DSC reimburse their state funds account with these grant funds and close the restricted accounts, thereby allowing these grant funds to lapse back to the Georgia Office of the State Treasury and compensating for the original error. Subsequent to the completion of fieldwork, the funds were included in the institution s FY13 surplus and returned to the Georgia Office of the State Treasury. See Issue 2 for more detail. Time and effort reports were not completed in accordance with federal requirements. (Material) At the time of the audit engagement, time and effort reports for various grants were not completed. U.S. Office of Management and Budget (OMB) Circular No. 21, Revised establishes principles for determining the costs applicable to grants, contracts, and other agreements between federal agencies and educational institutions. All employees whose salaries are fully or in part paid by federal grant funds must maintain time and effort reports. These employees must document the time they spend working on the grant s objectives in order to demonstrate that the amounts budgeted and claimed as due from grant funds are accurate. Employees must understand their reporting responsibilities, ensure their workload accurately reflects the distribution of their salary, and maintain records to support this distribution. DSC grant personnel were unaware of these requirements. We recommend DSC develop an acceptable process for time and effort reporting for employees who are in part or fully compensated via federal grant funds. Additionally, DSC should ensure that grant personnel receive training in federal grant compliance. Typically, an after-the-fact system of record is appropriate for non-professional employees, and a plan confirmation system of record is appropriate for professorial and professional employees. See Issue 3 for more detail. An IRS tax form (1099-MISC) was not completed for a vendor who provided services to DSC from 2005 through 2012; payments were made to vendors by the institution without the use of contracts or adherence to required procurement processes. (Material) 2

5 IRS tax form 1099-MISC was not completed and distributed to a former DSC employee who retired in 2003, and subsequently performed work for the President on ad hoc basis from 2005 to the present. The services were not bid, a contract was not executed, detailed invoices describing the work performed were not provided, and the Georgia Teachers Retirement System (TRS) was not notified of this work and related compensation. During the audit engagement, the former employee and the IRS were provided with the appropriate 1099-MISC documents, which totaled $27,329 for all years where services were performed. In another instance, the DSC Foundation entered into a contract with a vendor. The original contract between the Foundation and the vendor called for monthly payments for services rendered. The Foundation made six such payments (totaling $33,000) to the vendor, after which the institution assumed responsibility for these payments and during which time DSC made three payments to the vendor with institution funds. However, the institution did not enter into a contract with the vendor, nor were required procurement processes followed, such as bid solicitations for this work. See Issue 4 for more detail. Salary paid to the Director of Grants was in excess of job duties and responsibilities. (Material) The former Academic Computing Director retired March 31, 2005, and was then reemployed by DSC as the part-time Director of Grants on May 1, Her salary at time of retirement was $86,330. Her current salary is $70,000 for work as a part-time employee, that is, work which does not exceed 49% of regularly scheduled hours for salaried staff. If this position was paid at a fulltime rate, the salary would be $142,000, making it the third highest paid position at DSC and significantly exceeding the salaries of comparable positions within the University System of Georgia. Teachers Retirement System (TRS) requirements state that retiree part-time employment salary cannot exceed 49% of the normal salary for the position to which the retiree returns to parttime service. We recommend DSC adjust the salary for this position so that it is commensurate with stated job duties and responsibilities, and that TRS be notified of this adjustment. See Issue 5 for more detail. Costs for DSC Athletics were allocated inappropriately, distorting the depiction of the department s actual financial condition. (Material) The costs of some DSC Athletics staff were shared between the Athletics department and the grounds keeping function within the Plant Operations department. While these staff members perform some grounds keeping duties, the current allocation of their salary exceeds the time spent performing duties outside the realm of the athletics program. Additionally, BOR Policy Manual 3

6 7.2.2 Auxiliary Enterprises Revenues and Expenditures states, Each auxiliary enterprise operation shall be charged for its share of plant operations and maintenance expense as a direct expense.... This policy means the athletics program should actually incur the costs of grounds keeping duties, rather than use institution revenue streams as a means of providing for athletics staff salaries. In this instance, Athletics department expenditures were understated by approximately $165,000. We recommend DSC reflect the full cost of all auxiliary departments in the origination program, and tailor operations to match available revenue streams. See Issue 6 for more detail. The Darton Boosters, Inc. and Darton College Foundation, Inc. should establish additional policies to reduce its audit risk and improve operations. (Significant) The Darton Boosters Club, Inc. and Darton College Foundation, Inc. did not have comprehensive and detailed policies related to conflict of interest, document retention, and whistleblowers. These policies are necessary in order to provide appropriate guidance and maintain public trust while reducing the overall risk of these entities. We recommend DSC and its affiliated organizations develop such policies and establish appropriate procedures. See Issue 7 for more detail. Inadequate segregation of duties existed among the roles and responsibilities of the Vice President for Business and Financial Services. (Significant) The institution s Vice President for Business and Financial Services serves as the Treasurer of the Foundation and can also execute contracts on behalf of the Darton College Foundation, Inc., Darton Boosters, Inc., and Darton Capital Projects I, LLC. In this capacity, the Vice President has fiduciary responsibilities to both the institution and the affiliated organizations. This can be perceived as a conflict of interest. We recommend DSC separate the roles and duties of the Vice President for Business and Financial Services from similar external organization responsibilities. See Issue 8 for more detail. The original bond financial analysis for the Housing and Student Center projects did not include a detailed analytical review. (Significant) The bond financial analysis did not include a) a projection to bond maturity, b) a comparison between actual income/expenses and the bond pro forma, and c) a means of balancing to system of record financial information. Additionally, the cash flow projections were not reviewed with the Foundation s board members, nor documented in board minutes. See Issue 9 for more detail. 4

7 Governance for the human resources function lacks a formal structure and negatively impacts personnel operations. (Significant) The Vice President for Business and Financial Services also serves as the Director of Human Resources. We noted that a) performance evaluations were not regularly performed for faculty and staff, b) documentation of individuals who completed ethics training was incomplete, and c) documentation to support salary increases and promotions was inadequate. We recommend DSC hire a Director of Human Resources, and that an emphasis be placed on compliance with all BOR human resources policy requirements. See Issue 10 for more detail. The following issues are rated as comments, indicating a need for attention and corrective action by management. However, they are not of a significant nature and pose limited risks to the institution s operations and strategic objectives. While we do not require a response to the recommendations for these issues, management has provided such at its discretion. These comments are included in full in Appendix A, and are presented here in summary form: Auxiliary five-year plans contained inaccurate financial information. (Comment) DSC auxiliary five-year plans contained inaccurate financial information as part of projected revenues and expenditure statements. Specifically, amounts for FY 2012 actuals did not match final FY 2012 trial balance accounts. DSC auxiliary departments which have incurred deficits over multiple previous fiscal years were not described as loss-leaders, and did not have narrative information describing the institution's plan to resolve the deficits. Additionally, the allocation of salary and other expenses between state appropriated and auxiliary fund sources did not match services provided, resulting in an inflated auxiliary services reserve balance. We recommend DSC review financial information in the auxiliary five-year plans for accuracy, develop plans to address recurring deficits, and allocate expense in a manner compliant with BOR policy. See Issue 11 for more detail. Senior Fitness Program participants were incorrectly classified as students at DSC. (Comment) 5

8 Participants in the Senior Fitness Program were classified as active students. These participants are granted access to DSC athletics facilities, including the indoor track and aquatic center. They are registered by DSC Athletics staff into a class titled Walking I or Walking II. However, per DSC staff, these actually are not classes with an instructor and a prescribed curriculum or other educational content. This causes the headcount enrollment counts used for monitoring and projection purposes at the University System of Georgia to reflect inaccurate data (though it does not affect funding received via the state appropriation formula). See Issue 12 for more detail. 6

9 Table of Contents EXECUTIVE SUMMARY... 1 ISSUE DETAILS... 8 Issue 1: Satisfactory Academic Progress... 8 Issue 2: Restricted Funds Issue 3: Time and Effort Reports Issue 4: Completion of Tax Forms; Payments to Vendors without Contracts Issue 5: Director of Grants Salary Issue 6: DSC Athletics Cost Allocation Issue 7: Governance Policies for Affiliated Organizations Issue 8: Segregation of Duties Issue 9: Bond Financial Analysis Issue 10: Human Resources Governance APPENDIX A: Advisory Issues APPENDIX B: Scope and Objectives APPENDIX C: Background and Methodology APPENDIX D: Other Information APPENDIX E: Exception Ratings

10 ISSUE DETAILS Issue 1: Satisfactory Academic Progress Reviews of Satisfactory Academic Progress (SAP) were not properly performed to determine eligibility for federal student aid. Rating Material Office of Management and Budget (OMB) Circular A-133 requires nonfederal entities receiving federal awards establish and maintain internal controls designed to reasonably ensure compliance with federal laws, regulations, and program compliance requirements. Effective internal controls should include procedures that ensure compliance with all applicable laws and regulations. Noncompliance could jeopardize current and future funding. Observation Students receiving federal financial aid are required to demonstrate Satisfactory Academic Progress (SAP) in order to continue receiving this funding. These reviews are performed by the DSC Office of Student Financial Aid, and involve a qualitative review (maintaining a minimum Grade Point Average (GPA)) and a quantitative review (completing enough classes in order to demonstrate progress toward successfully obtaining a degree). We reviewed students receiving federal financial aid for the Fall 2011, Spring 2012, Summer 2012, and Fall 2012 terms. Our review indicated DSC has not properly assessed SAP. We provided DSC management with our analysis, and the institution is currently completing a full review of all students who received federal financial aid for the four terms noted above. As of the time of this report, the current estimate of the potential over-awards is approximately $894,000. DSC is currently acquiring additional external assistance to verify the accuracy of their review. We noted the following procedural errors committed by DSC in performing qualitative reviews: a) The Office of Student Financial Aid uses the GPA calculated by the Registrar as the qualitative standard to determine a student s compliance with SAP. The Registrar uses the GPA computation coded in the BANNER system, which represents the institutional cumulative GPA. Remedial coursework is not assessed in the computation of institutional cumulative GPA. The U.S. DOE Student Financial Aid Handbook guidelines require 8

11 remedial courses to be included in the calculation of the GPA used to assess the qualitative standard for SAP. b) The DSC SAP policy does not explain how to calculate a student s GPA used in order to assess the qualitative standard for SAP. The DSC catalog describes the GPA required to maintain good academic standing for students with hours, hours, and 51 or more hours. However, the catalog does not provide an academic standard for students who attempt less than 30 hours. For these students, a minimum GPA requirement is not stated, and those credit hours attempted between the zero and 30 hour marks are described as not classified. Therefore, students who have less than 30 credit hours are not provided with a qualitative measurement that can be used to demonstrate SAP. c) The Office of Student Financial Aid assesses a student s eligibility to receive financial aid using end of term course results as opposed to using cumulative academic results for all completed terms, which is required by U.S. DOE policy. We noted the following procedural errors employed by DSC in performing quantitative reviews: a) The pace (that is, the number of completed hours compared to attempted hours) calculated by the Office of Student Financial Aid is inconsistent with federal policy, which requires a 67% cumulative completion ratio. For example, if a student attempts 13 hours, but only completes eight hours, the student will have achieved less than the necessary 67% completion rate (pace), which could affect the student s eligibility for federal financial aid. The pace requirements in the DSC course catalog and SAP policy refers to completion rates that do not satisfy federal requirements. b) The DSC SAP policy does not accurately explain how enrollment in remedial courses and/or how drop/add or withdrawal from courses can impact future eligibility for federal financial aid. Additionally, the policy does not indicate that credit hours earned at another institution that are accepted toward the student s degree program at DSC must be counted in the student s cumulative attempted and completed hours, and previously awarded financial aid can be counted towards a student s lifetime cap for received federal financial aid. One year of remedial coursework may be paid using Title IV financial aid programs. This year is equivalent to 30 semester hours of remedial coursework. At DSC, the two-year associate degree program typically 9

12 requires a minimum of 60 semester hours of college level coursework for completion. For example, the combination of 30 hours required remedial coursework plus the 60 hours of degree coursework would total 90 hours. At 15 hours per semester, this would exhaust student financial aid eligibility in six semesters. Thus, the use of federal financial aid for remedial coursework diminishes a student s access to this aid over the course of their academic program. This situation may be further exacerbated by semesters in which a student failed, repeated, dropped/added, or withdrew from semesters where federal financial aid was used as a means to pay tuition. Criteria Code of Federal Regulations 34 CFR This code establishes that an institution must implement a SAP policy to provide general guidance for determining if a student is demonstrating academic progress in his or her educational program, and whether he or she remains eligible to receive federal financial aid. The policy must specify the qualitative (GPA) and quantitative (pace) criteria for assessing SAP. Code of Federal Regulations 34 CFR (5)(i)(ii) The institution s SAP policy must specify the quantitative measure or pace at which a student must achieve through his or her program in order to ensure the student will complete the program within the maximum timeframe allowable. Pace is calculated by dividing the cumulative number of hours successfully completed by the cumulative number of hours the student has attempted. Code of Federal Regulations 34 CFR (6) This code establishes that an institution s SAP policy must describe how a student s GPA and pace of completion are affected by course incompletes, withdrawals, repetitions, or transfers of credit from other institutions. Credit hours from another institution that are accepted toward the student s degree program must count as part of their cumulative attempted and completed hours. Cause Lack of knowledge regarding SAP policies and requirements Risks Students who are ineligible for such awards may receive federal financial aid Monetary loss incurred due to the refund of funds to the U.S. DOE Title IV program 10

13 Recommendation We recommend DSC continue to assess the extent of SAP assessment errors, and ensure the correct application of policy for students currently receiving federal financial aid. DSC will need to make adjustments for the current academic year and the previous four academic terms (Fall 2011, Spring 2012, Summer 2012, and Fall 2012) for any student who received federal financial aid in error. This will entail a full return of federal financial aid for those students not eligible due to the failure to demonstrate SAP. However, these adjustments should not be made until there is a plan to address the issues, and a communication regarding this plan is sent to the U.S. DOE. The plan should include the following: Proper application of federal SAP requirements, Procedures to ensure students receive the correct award amounts according to policy, Revision of the DSC SAP policy, Publication of the revised DSC SAP policy, and A review of all SAP operational processes at DSC. After this, DSC should work with the U.S. DOE to determine the process and amount of repayment of funds incorrectly awarded to students. Financial settlements of $100,000 must be approved at the System level. DSC should ensure that the Office of Legal Affairs and the Office of Student Affairs are involved in the U.S. DOE disclosure process. Management Response We concur. The Vice President for Business and Financial Services charged the Financial Aid Staff with implementing a new SAP policy that brings us into compliance and to determine the appropriate funding to the Department of Education. As of December 3, 2013 the staff of the Financial Aid Office has determined that a total of 189 students received federal financial aid awards, which may have produced potential over-awards of $893,919. In January 2014, the college will be notifying the federal Department of Education of these potential over-awards. Additionally, the college will submit a copy of our notification to the Office of the Chancellor and the Office of Internal Audit and Compliance. Furthermore, the college will provide the Office of the Chancellor and the Office of Internal Audit and Compliance with updates of communications between the college and the Department of Education until this issue is resolved. 11

14 The college implemented additional reviews of students financial aid accounts during fall semester 2013 to correct any problems with student financial aid awards in this first semester of the current fiscal year. Additionally, effective December 3, 2013, the college completed and implemented a Satisfactory Academic Progress (SAP) policy change. This new policy is being published and distributed to students and prospective students, who are interested in financial assistance for their education through the Department of Education. The college is in the process of planning and implementing enhancements in our technology resources (a) to increase electronic processing of our financial aid data, (b) to realize a higher level of accuracy in the reports of our financial aid data, and (c) to provide timely reporting of financial aid data for the Financial Aid Office. To ensure that we will be successful in achieving our technology goals, we will be utilizing the services of a consultant, who is current with the use of best practices in technology for financial aid offices. Estimated completion date: July 31, 2013 Issue 2: Restricted Funds Rating Observation Restricted funds were not spent in accordance with grant requirements. Material Noncompliance with grant requirements damages donor relationships and impacts the ability to raise funds in the future. Funds received from two local hospitals totaling over $592,000 during the mid- to late-2000s for nursing stipends were not spent. Instead, the institution used state appropriations to fund the stipend payments with the intent of using the local hospital funds for potentially related but undetermined future uses. As the original grant funds were to be used for a restricted purpose as stated in the agreements, those funds can only be used for those stated purposes. The contracts with the hospitals states the following requirements: Establish in the College s Restricted Accounts an account for Nursing Program Faculty Incentive Stipends, and, Transfer from the College s Restricted Account to the College s General Operating Account the actual amount of incentive stipends and any related fringe benefits costs required for each payroll system. 12

15 Criteria USG Business Procedures Manual 2.21 Current Funds o Restricted expenditures are to be separately identified and matched in amount with restricted revenues. USG Business Procedures Manual 1.32 Budgetary Accounting in Georgia o The laws of the state of Georgia require that funds appropriated for a specific fiscal year must be expended or obligated in that fiscal year, or lapse and be returned to the state treasury to be available for future appropriations. Cause Noncompliance with grant restrictions Risks Lapse of funds Poor donor relations Funds not used for intended purpose Recommendation Management Response Subsequent to fieldwork, the funds were included in the institution s FY13 surplus returned to the Georgia Office of the State Treasurer. Going forward, 1) the institution should fully comply with all restricted fund agreements and 2) the Business and Finance area should review restricted account balances for funds received but not spent. We concur. The college s FY13 Annual Financial Report (AFR) and the State Auditor s completed audit of our 2013 APR reflect that the college has recorded these restricted funds as surplus funds, and, as surplus funds, sent these funds to the Georgia Office of the State Treasurer. Estimated completion date: March 31, 2014 Issue 3: Time and Effort Reports Time and effort reports were not completed in accordance with federal requirements. Rating Material Office of Management and Budget (OMB) Circular A-21 establishes the principles for determining costs applicable to grants, contracts, and other agreements between federal agencies and educational institutions. All federal agencies sponsoring research and development, training, and other work at educational institutions must 13

16 apply the provisions of this circular in determining the costs for such work. Noncompliance could result in significant fines and penalties, as well as reputational risk. Observation Time and effort reporting is a process utilized to monitor monthly payroll expenses attributed to contract and grant awards. It serves as a tool to ensure the actual activity incurred as related to a grant award is reflected proportionally in the amount of staff salaries charged to the grant. During fiscal year 2013, there were two active federal grants at DSC. The largest grant was awarded by the U.S. Army Medical Research and Command for approximately $1.4M, to be expensed over multiple years. The purpose of this grant included providing nursing programs for military personnel and their families and civilians at the Fort Benning U.S. Army Post facility. At the time of the audit engagement, time and effort reports had not been completed in relation to this grant. OMB Circular No. 21, Revised establishes the principles for determining costs applicable to grants, contracts, and other agreements between federal agencies and educational institutions. Charging employee salaries to federal grants creates the need for time and effort reports. Any employee whose salary is funded in whole or part by federal grants must document the time they spend working on the grant s objectives in order demonstrate that the amounts budgeted and claimed are accurate. Employees and institutions must understand their reporting responsibilities, ensure their workload accurately reflects the distribution of their salary, and maintain records to support this distribution. Quarterly reports submitted to the granting agency indicated there were nine individuals receiving some level of funding from the grant. Therefore, all nine of these staff members should have reported time and effort. Further, although effort was reported in the quarterly reports, this alone does not satisfy the requirements of time and effort reporting. For instance, the principal investigator s effort was reported as 49 percent. This ratio would actually describe part-time employment status. The actual effort spent on (or work activities related to) the grant, was closer to full-time employment (a ratio of 100 percent). Criteria OMB Circular A-21 Cost Principles for Educational Institutions, section J.8, provides the criteria for acceptable methods of charging 14

17 salaries to grant projects. In addition, Circular A-21 requires institutions to develop a mechanism for determining or confirming the manner in which individuals actually expend effort during a specified time period. These efforts must be performed on a regular schedule and be certified by individuals who have first-hand knowledge of the entirety of the employee s compensated activities (that is, both those funded by the grant, and those funded by other sources). In most cases, this would be the employee or the employee s direct supervisor. Cause The institution did not perform the following activities: Establish a time and effort reporting system, Define what constitutes suitable means of verification, Require the training or involvement of key grants management personnel in the effort certification process, and Maintain proper procedures and processes related to time and effort reporting. Risks Loss of funding and privileges for future grant activity Fines and penalties Settlement costs and/or damages arising from actions under the Federal False Claims Act Damage to the institution s reputation Debarment, suspension, or criminal and/or civil sanctions of the principal investigator Recommendation We recommend DSC coordinate with the appropriate federal agencies to implement the following, as needed: Work to establish an internal control structure that provides for a system which reasonably reflects the actual effort employees devote to sponsored projects via the following actions: o Ensure the DSC effort reporting system remains effective and in full compliance with federal standards. o Develop a detailed definition of suitable means of verification and first-hand knowledge that adheres to federal regulations and includes the definition in procedures. o Define clearly what steps an administrative official should perform to demonstrate and document that a suitable means of verification was obtained prior to certifying effort reports, and require such documentation be maintained in the 15

18 award files. o Ensure all individuals involved in the effort reporting process receive periodic labor effort training. Such training should include a thorough discussion of effort reporting certification responsibilities and requirements. o Ensure that the Director of Grants and departmental staff fully understands all federal grant rules. o Codify and distribute all procedures to the appropriate personnel. Management Response We concur. The staff in the Grants Office has developed and began a time and effort reporting process to ensure full compliance of federal requirements. We will further enhance this process by establishing an internal control structure that provides for a system, which reasonably reflects the actual effort employees devote to sponsored projects in accordance with the actions in the recommendation. The current director of the Grants Office has also been notified that her services will end December 31, All employees will receive formal training on an annual basis. Estimated completion date: June 30, 2014, in conjunction with ongoing annual staff training Issue 4: Completion of Tax Forms; Payments to Vendors without Contracts Rating Observation An IRS tax form (1099-MISC) was not completed by Business and Financial Services staff for a vendor who provided services to DSC from 2005 through 2012; payments were made to vendors by the institution without the use of contracts or adherence to required procurement processes. Material Employment of vendors without the use of contracts, adherence to procurement law and policy, and the satisfactory maintenance of tax forms creates an increased risk of liability related to noncompliance, and poses reputational risk. IRS Form 1099-MISC is prepared for each person to whom annual payments of $600 or more have been paid for services rendered on a contractual basis. Form 1099-MISC was not completed and distributed to a former employee who retired in 2003 and performed contract work for the president from 2005 to the present. The services were not bid, a contract was not executed, detailed invoices were not provided and 16

19 Teacher Retirement System (TRS) was not annually notified of the contractual relationship. During the audit engagement, the contractor and Internal Revenue Service were provided the appropriate 1099-MISC documents (totaling $27,329 for all years except 2010, when no services were performed). We were informed that the decision to not prepare 1099-MISC was based on verbal conversations. Further compounding the weak internal controls was the absence of a review, reconciliation, and approval process of Form1099-MISC. In another instance, the DSC Foundation entered into an arrangement with a vendor tasked with providing marketing, public relations, and fundraising services. The original contract between the Foundation and the vendor called for monthly payments of $5,500 for services rendered. The Foundation made six such payments to the vendor, after which the institution assumed responsibility for these payments. Following this transfer, DSC made three payments to the vendor with institution funds. However, the institution did not enter into a contract with the vendor prior to the receipt of services or payment for services rendered. Similarly, as the total potential payments to the vendor could total as much as $66,000, procurement policies and state law required the solicitation of bids for the receipt of the described services prior to the award of such a contract. DSC did not follow the processes and policies related to procurement of vendor services in either situation. Criteria Internal Revenue Code Section (a) Imposition of penalty (1) In general In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $100 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000. (2) Failures subject to penalty For purposes of paragraph (1), the failures described in this paragraph are (A) any failure to file an information return with the Secretary on or before the required filing date, and (B) any failure to include all of the information required to be shown on the return or the inclusion of incorrect information. USG Business Procedures Manual 5.5 Determination of Status Employee vs. Independent Contractor 17

20 o IRS regulations make it imperative that the University System of Georgia provides guidelines for determining whether certain personal service arrangements create an employer/employee or an independent contractor relationship. This has significance in that the institution is responsible for the payment and/or withholding of federal and state unemployment taxes, FICA, and income taxes for those individuals where an employee/employer relationship exists. Independent contractors are responsible for their own liabilities. BOR Policy Manual 7.9 Contracts o all contracts necessary for the daily operation of the institution and all contracts for goods and services not regulated by the Georgia Department of Administrative Services can be executed by the head of each institution or his/her designee. O.C.G.A o Contracts under $25,000 do not have to be competitively bid USG Business Procedures Manual 3.4 Contracts o Generally, the authority to sign contracts for the dayto-day operations of an institution has been delegated to the individual institutions. It is imperative that the documented authority is available in the permanent files of the institution as proof of such authorization. Cause Management did not require a contract prior to a vendor's payment for services rendered; nor did management solicit bids for the provision of these services. Similarly, management did not establish effective and functional internal controls and properly apply tax regulations. Risks Financial penalties IRS scrutiny and unfavorable public perception Limited competition Unauthorized/unnecessary purchases Excessive costs Recommendation We recommend that the institution ensure that all services provided by vendors are managed via the use of approved contracts between both parties, in accordance with state law and BOR policies. Additionally, 18

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