The document provides a detailed overview of audits conducted by the Department of Health and Human Services (HHS) and the National Science Foundation (NSF) on the Federal Demonstration Partnership (FDP) Payroll Certification Systems (PCS) pilots at four universities: George Mason University (GMU), Michigan Technological University (MTU), University of California - Irvine, and University of California - Riverside. The audits aimed to determine whether the pilot payroll certification systems adequately supported the allocation of labor costs to federal awards and whether these costs were properly certified and reported. The audit processes were collaboratively designed by HHS and NSF and included statistical sampling of transactions and IT control reviews. Key distinctions emerged between the NSF and HHS contexts: NSF's focus was largely on graduate student stipends, which typically involved single-award allocations, resulting in simpler reviews; HHS audits dealt with faculty allocating time across multiple projects, introducing greater complexity and risk.
The audits identified several issues, including incomplete or inadequate internal controls, lack of proper documentation, and insufficient audit trails, particularly at the University of California campuses. For instance, Irvine's lack of a reconciled, auditable data trail prevented both HHS and NSF from verifying the validity and accuracy of their payroll records, while Riverside experienced high error rates in both the traditional effort-reporting and pilot PCS systems, highlighting significant risks of unallowable costs. The findings emphasized the importance of strong internal policies, consistent documentation, regular reconciliations, and robust IT controls to protect federal funds, ensure compliance, and mitigate risks associated with financial mismanagement. The report also discussed broader implications, including potential financial, operational, and compliance risks, and recommended the implementation of proven internal control frameworks (such as the GAO Green Book and COSO guidelines) to ensure integrity and accountability in managing federally funded research grants.
