OIG Audit – Fringe Benefits

Appeal Brief

Summary Paragraph

The Office of Inspector General (OIG) conducted an audit of the Applicant’s projects related to Tropical Storm Frances and recommended disallowing $63,095 from ten Project Worksheets (PWs), due to ineligible overtime fringe benefit charges.  FEMA concurred and de-obligated $63,095 from the ten PWs.  In its first appeal, the Applicant asserted that its project systems team conducted an internal audit of its SAP financial accounting system and confirmed that the payroll overtime additives were accurately calculated.  The Applicant argued that the OIG’s misunderstanding of its financial accounting system led to the misinterpretation of the accounting data.  The Regional Administrator denied the first appeal because the Applicant offered no additional documentation on which to base a challenge to the OIG’s conclusion.  In its second appeal, the Applicant reiterated its argument and provided additional documentation addressing the ineligible overtime fringe benefit costs identified by the OIG audit. 

Authorities and Second Appeals

• 44 C.F.R. § 206.228(a)(4).
• PA Guide, at 37.

Headnotes

• 44 C.F.R. § 206.228(a)(4) states that for the performance of eligible permanent work, straight-time salaries and benefits of a subgrantee’s permanent employees are eligible for reimbursement.

• Fringe benefits are calculated differently between straight-time and overtime labor.  The OIG audit found that the Applicant incorrectly claimed some fringe benefits applicable to regular time on overtime labor.  The Applicant disagreed and provided additional documentation to demonstrate that its SAP financial accounting system accurately calculated all fringe benefits on both regular and overtime labor.

• PA Guide provides that fringe benefits actually paid as part of an established policy are eligible.  The fringe benefit rates are different for regular and overtime hours because certain items in a benefits package, such as health insurance, are not dependent on hours worked. 

• The Applicant argued that the OIG misunderstood its financial accounting system and disallowed certain fringe benefits that should be allowed on overtime hours.  The Applicant provided sufficient documentation to show that its SAP financial accounting system accurately calculated fringe benefit rates that are appropriately different for regular and overtime hours.

Appeal Letter

Appeal Analysis

Background

During the Tropical Storm Frances incident period from September 7 to September 12, 2004, facilities operated by the North Carolina Department of Transportation (Applicant) sustained a variety of storm-related damages.  The Applicant received approximately $12.2 million in Public Assistance (PA) funding for eligible work related to debris removal, emergency protective measures, road repairs and replacement of bridges.  FEMA prepared and obligated a total of 81 large projects and 337 small projects.[1]

On April 15, 2011, the Department of Homeland Security Office of Inspector General (OIG) issued Audit Report Number DA-11-14 (Audit Report) based on an audit of twelve of the Applicant’s large projects totaling approximately $5.4 million.  The OIG audit found that the Applicant claimed $378,732 in force account overtime labor and fringe benefit under Project Worksheets (PWs) 720, 755, 799, 803, 825, 843, 845, 846, 867, and 874, including $63,095[2] in fringe benefits that should be applicable to only regular time, not overtime, labor.[3] The OIG recommended disallowing $63,095 from those ten PWs as ineligible overtime fringe benefit charges.[4]  Prior to the issuance of the Audit Report, the OIG provided written summaries of its findings and recommendations to the Applicant and discussed them at an exit conference on January 20, 2011, where the Applicant concurred with its findings.[5]

On August 8, 2011, the Applicant submitted a written response to the Audit Report, refuting the OIG audit findings.  The Applicant stated that although it initially agreed with the audit results based upon the assumption that the OIG audit team had met with its project systems team and that its SAP financial accounting system was in error, it subsequently tested the accounting system and found no errors and that all payroll overtime additives (i.e., fringe benefit charges) were calculated correctly.  The Grantee notified the Applicant on June 28, 2012 of FEMA’s de-obligation of $63,095 from ten PWs based upon the OIG audit findings.

First Appeal

On August 17, 2012, the Applicant sent its first appeal request to the Grantee, appealing FEMA’s de-obligation based on the OIG audit findings.  The Grantee transmitted the Applicant’s first appeal to Region IV on September 14, 2012, indicating its support of the appeal. 

The Applicant asserted its project systems team conducted an internal audit of the SAP financial accounting system and confirmed that the system accurately calculated the payroll overtime additives.  The Applicant stated that the OIG audit team was familiar with the previous legacy accounting system, but not the SAP financial accounting system newly introduced in 2003, and opined that the lack of understanding of the new system’s report format led to OIG’s misinterpretation of its accounting data. 

The FEMA Region IV Regional Administrator (RA) denied the first appeal on April 12, 2013.  The RA stated that while the Applicant made clear its disagreement with the OIG audit conclusions, it offered no additional data, documentation, or detailed methodology to explain the audit differences with its own findings to support its position.  The RA determined that there was no information provided by the Applicant to merit a challenge to the OIG’s conclusions and FEMA’s de-obligation based upon it.

Second Appeal

On July 3, 2013, the Grantee transmitted and positively endorsed the Applicant’s second appeal letter dated June 25, 2013.  The second appeal reiterated the Applicant’s first appeal argument.  Additionally, the Applicant conducted a detailed review of individual line items of questioned costs in the Audit Report, provided spreadsheets with its comments disputing the OIG finding on each cost item, and addressed the following issues found in the Audit Report:

• Misunderstanding of account titles
• Inconsistencies in questioned costs:
  • Inconsistency in the type of fringe benefits disallowed among projects
  • Allowable overtime fringes disallowed
  • Disallowed fringe benefits associated with regular hours
  • Questioned costs that were not claimed on the projects
  • Key-punch and/or transposition errors in the Audit Report and OIG Working Documents

The Applicant explained that “Cost Element Account Titles” detailed in the labor reports are used to describe the status of employees who charge time to disaster projects, as opposed to identifying a work hour as regular or overtime.  The Applicant acknowledged that the Account Titles, as currently displayed in its SAP accounting system, are not intuitive and could be misleading without an understanding of the FEMA Payroll Master document, which details the payroll additives calculated for each FEMA activity type.

The Applicant also stated that it found two fringe benefit labeling errors during the internal review of its accounting system.

Discussion

Title 44 Code of Federal Regulations (44 C.F.R.) § 206.206 requires that the Applicant’s appeal “contain documented justification supporting the [applicant’s] position...”[6]  The Applicant disputed the OIG audit findings regarding ineligible fringe benefits, and provided annotated spreadsheets as additional documentation to support its position.

The Applicant attributed some of the OIG audit findings to a potential misunderstanding of Account Titles used by its SAP accounting system, which could have led to the misinterpretation of the accounting data.  As an example, the Applicant explained that the FEMA Labor Secondary Cost Element “920000011 Perm Labor Subject: Allow Ovtime/Compt” means the employee is eligible to make overtime but has not yet reached his/her regular 40 hours worked for the week.  If the same employee has reached 40 work hours for the week, he or she would charge to “920000014 Perm Labor Subject: Overtime.”

Along with this explanation, the Applicant provided a copy of the FEMA Payroll Master (Payroll Master) document detailing the payroll additives applicable to each labor type.  This Payroll Master document provided helpful information to understand the difference between regular and overtime labor types in the Applicant’s accounting data.  The details in this Payroll Master document, along with the Applicant’s comments in the backup spreadsheets, enabled FEMA to verify the Applicant’s claim that the majority of the disallowed ineligible overtime fringe benefits were actually eligible fringe benefits applicable to regular time labor.

FEMA regulations provide that “[f]or the performance of eligible permanent restoration under section 406 of the Act, 42.U.S.C. 5172, straight-time salaries and benefits of a subgrantee’s permanently employed personnel are eligible.”^[7]  Public Assistance guidance further explains that “[f]ringe benefits that are actually paid as part of an established policy are eligible.  Because certain items in a benefit package are not dependent on hours worked, such as health insurance, the fringe benefit rate will be different for regular and overtime hours.  The overtime fringe benefit rate is usually significantly lower.”^[8]

The Applicant agreed that some fringe benefits, such as Holiday, Sick Leave, Annual Leave, and Hospital Medical, should not be calculated on overtime labor.  The Payroll Master document confirmed that the Applicant’s accounting system does not calculate these fringe benefits on overtime labor.  The Applicant also explained that the cost of Public Liability, Disability Insurance, Compensatory Leave, and Retirement calculations are related to the number of hours worked and should be eligible for overtime hours, even though they were identified as ineligible overtime fringe benefits by the OIG.  The Payroll Master document showed that these fringe benefits are indeed applicable to both regular and overtime labor.  Therefore, FEMA agrees with the Applicant that these fringe benefits should be considered eligible for overtime labor.

Furthermore, the Applicant claimed that it identified several types of inconsistencies and errors in the Audit Report, and noted them in a separate comments column in the supporting spreadsheets.[9]  Based on the supporting documentation submitted, FEMA agrees with the Applicant that all of these fringe benefits identified by the OIG as ineligible should be eligible.                                                                                                                         

The Applicant also contended that some of the costs questioned in the Audit Report were not claimed on the related PWs, and marked them accordingly in the supporting spreadsheets.  FEMA confirmed this and agrees that these costs should not be disallowed.

Additionally, the Applicant identified some key-punch and transposition errors in the Audit Report.  The Applicant indicated that a questioned amount was listed as $132.80 instead of $132.08 (PW 845) as shown in its accounting system, and $36.36 instead of $39.36 (PW 867).  FEMA verified these errors on the Applicant’s backup spreadsheets.

Lastly, the Applicant acknowledged the discovery of its accounting system mislabeling the following two items: 1) the calculation for “Comp Leave Fringe (920000081)” for a permanent employee working Comp Time was mislabeled as “CL Perm Not Subj: Holiday Wktime” when it should read “CL Perm Subject: Comp Time”; and 2) the calculation for “Comp Leave Fringe (920000166)” for a permanent employee earning Comp Time was mislabeled as “CL Perm Exempt: Holiday Wktime” when it should read “CL Perm Subject: Overtime.”  The Applicant maintained that the fringe benefit calculations for these mislabeled labor hours are correct, despite the incorrect labels.  Although the Applicant did not provide any explanation for the cause of this labeling error, FEMA confirmed that the associated fringe benefits were calculated correctly.

Conclusion

The Applicant submitted sufficient additional documentation with the second appeal to support its assertion that all overtime fringe benefits were calculated and claimed correctly.  Based on this new information, the previous de-obligation of $63,095 from ten PWs should be restored.