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Question. In the past, you have said that a lack of government-wide accounting standards limits the auditing work that can be performed, will the CFO Act change this?
Answer. One of the problems which we think will be found in the preparation of financial statements is the lack of coverage in the current accounting standards for dealing with certain financial arrangements that the Federal government makes. Generally, such financial arrangements are not acknowledged through transactions in the accounting records.
For example, the government has a reversionary interest in funds and assets provided to grantees on a conditional basis. When we know that a certain segment of the grantee population is not complying with these conditions, should we treat the applicable funds or assets as accounts receivables or perhaps as some kind of a contingent receivable? Generally accounting standards do not recognize contingent receivables.
These kinds of issues may be difficult for auditors to address because there may be problems in finding suitable guidance for handling them. These issues will not make it impossible to audit the statements, but may result in the need for numerous explanations of why the auditors could not reach a conclusion about whether the financial statements are fairly stated.
The passage of the CFO Act will not directly effect an improvement in Federal accounting standards. However, the creation of the Federal Accounting Standards Advisory Board (FASAB) may result in a longrange improvement in this situation. The FASAB was created at about the same time the CFO Act was passed. It was created to bring about improvements in Federal accounting standards and to put in place a process for developing accounting standards on a broader authority than was previously the case. Previously, Federal accounting standards were promulgated by the General Accounting office. The FASAB has a composition which is quite broad; it should thus result in standards which are more broadly accepted by the Federal financial management community. As the FASAB becomes productive, the issues which management and auditors find troublesome in the preparation and audit of financial statements should be considered and resolved.
Question. Are you in favor of the Department's request to waive the CFO Act's audit requirements for some parts of HHS?
As I stated in my testimony, I support
moving ahead with the auditing of financial statements as quickly as possible. However, adequate financial systems may not be in place to prepare financial statements at this point in time.
Question. In your opinion, would financial statements of Federal agencies be useful for this Committee? If so, what types of information should be provided in the statements?
Answer. In our opinion, Federal agency financial statements could become very useful to the Committee. Presuming that financial statements include information on such areas as outputs, accomplishments or productivity, and combine this with information on the cost of these efforts, then there will be great benefit from the statements. Comparing the information in such statements over several years should inform the Committee whether productivity is increasing and/or whether the cost of production is being reduced. Such information could be of use in determining the effects of budget cuts on program outputs or the additional funding needed to produce increases in program outputs.
Question. Mr. Kusserow, as you know, the issue of indirect costs has been in the news recently after it was reported that Stanford University is including the cost of the university yacht in its NIH indirect costs reimbursements. As you probably know, indirect costs range from 6.3 percent for the foundation at the New Jersey Institute of Technology to 155 percent for the Michigan Cancer Foundation. For colleges and universities the rate ranges from 26.3 percent for New Mexico State University to 108 percent for Gettysburg College.
Mr. Kusserow, do you believe that we should focus on the question of indirect costs? Does the system need to be reformed?
Answer. Yes, I believe we should focus on this question. Indirect costs represented about 46 percent of total direct NIH research dollars expended in FY 1989, or about $1.2 billion of the total cost of doing research at colleges and universities. This is obviously a significant part of the total cost of research and requires our close attention. Also, as illustrated by the revelations coming out of the Stanford situation, we need to be concerned about those items of cost which are charged to Federal research through the indirect cost process.
You note in your question that indirect costs vary significantly among Federal grantees, and I share your concern in this area. our studies have shown that for major colleges and universities (118 receiving $6
million or more in research) under the cognizance of our Department, the rates as of November 1990 varied from a low of 37 percent to a high of 77 percent. The average rate for these schools is about 51 percent. We are currently planning to study some of the reasons often cited as contributing to these variances. For example, we will be reviewing the level of salaries at private versus public schools, facilities replacement (infrastructure concerns), and energy costs.
clarification is required, however, regarding the specific examples cited in the committee's question. The 108 percent rate for Gettysburg College is a percentage of direct salaries and wages, while the rates for the larger universities are percentages of total direct costs (less certain exclusions such as equipment purchases). The OMB indirect cost guidelines permit two methods for computing indirect cost rates by colleges and universities: a simplified method for small colleges, which produces an indirect cost rate expressed as a percentage of direct salaries and wages, and a "regular" method for larger institutions, which results in a rate expressed as a percentage of total direct costs. Since the two types of rates are expressed as percentages of a different group of direct costs, they are really not comparable.
Gettysburg College qualifies as a "small college" under the OMB guidelines, since it has only one small Federal grant (funded at $86,000) which reimburses indirect costs. The college has also elected to treat all employee fringe benefit costs as indirect costs, while most other institutions directly charge these costs. The effect of both practices is essentially the same, and both are permitted by the OMB guidelines. If the indirect cost rate for Gettysburg College were expressed as a percentage of total direct costs (with fringe benefits treated as direct costs), the rate would be about 50 percent. A similar situation exists for the Michigan Cancer Research Foundation.
Conversely, the 26.3 percent rate cited for New Mexico State University is not the University's regular indirect cost rate for on-campus research projects; instead, it is a special indirect cost rate for the University's Physical Science Laboratory. These types of laboratories usually have low rates, since they are frequently constructed and equipped with direct Federal funds and often charge certain costs directly that are treated as indirect for regular on-campus research projects. The regular on-campus research rate at New Mexico State University is currently 43.2 percent.
with regard to the second part of your question, we have a number of studies both underway and planned which will deal, in part, with the adequacy and effectiveness of the current process for reimbursing indirect costs. Our reviews will consider the need for making changes to this system. For example, one of our reviews will examine the types of expenditures included in indirect cost centers and eventually allocated to Federal research. Our reviews will not be limited to determining whether charges are allowable under OMB circular A-21. We will also review the cost principles in OMB Circular A-21 to determine whether they effectively ensure the inclusion of only reasonable costs. For example, in the Stanford situation we have seen that certain costs which are currently allowable under A-21 appear to have no direct or indirect relationship to research.
Other reviews we have planned will explore the use of alternative methods of reimbursing indirect costs, such as the use of fixed rates or caps. Other options may emerge as our reviews progress and as we gain more experience and insight into this complex process. We are finalizing a set of work plan items that will address the changes that may be needed in this process, to ensure that only allowable and properly allocable costs that are appropriate in supporting research are charged to the Federal research effort. We will provide you with a copy of our work plan under separate cover, and will advise you of the results of our studies and recommendations as they are completed.
Finally, we would note that my office has been working very closely with the Department's Division of Cost Allocation (DCA) an office within the Assistant Secretary for Management and Budget which negotiates indirect cost rates at colleges and universities. perform joint reviews with the DCA at selected schools which they have identified as requiring a more intensive examination of records supporting indirect cost proposals. About 20 schools have been identified for such review in FY 1991. Our experience to date shows that these reviews have been effective in identifying unallowable or improperly allocated indirect costs.
SUBCOMMITTEE RECESS Senator HARKIN. The subcommittee will stand in recess to reconvene at 2 p.m., when we will meet to hear from the Administrator of the Health Care Financing Administration, Gail R. Wilensky.
[Whereupon, at 12:36 p.m., Thursday, March 7, the subcommittee was recessed, to reconvene at 2 p.m., the same day.)