The Significance of Cost Transfers

August 12, 2022

Background

Colleges and universities are required to comply with numerous regulations when accepting grants or contracts from a governmental agency, private foundation, or other sponsors. Among these regulations is the requirement that expenditures related to the project are properly allocated and documented. These expenditures could include salaries of faculty and staff as well as supplies, equipment, travel, and other expenses incurred while working on the project. The principal investigator (PI) is responsible for allocating the sponsored project costs to the appropriate project when the costs are incurred.

Under certain circumstances, a cost transfer is allowable, which moves costs to or from a sponsored account to allocate costs properly. However, cost transfers cannot cover cost overruns or draw down on awards that have not been substantially used as the award term ends.

An abundance of cost transfers may alert award sponsors to potential weaknesses in the financial management of award funds. For example, frequent posting of cost transfers more than 90 days after the expense may indicate that the PI is either not performing the required routine reviews (e.g., monthly) of their award expenditures or is not sufficiently overseeing the progress made on the award. Similarly, a lack of oversight or mismanagement is a concern when a large percentage of the dollar amount of an award is transferred toward the end of an award term (e.g., the last quarter of a 2-year award).

Risks and Potential Impact

So, why does this matter? Often, a federal sponsor has committed millions of dollars to an institution across multiple awards. The discovery of any inappropriate use of federal dollars increases the likelihood that the federal sponsor will perform an audit of the institution’s use of dollars across all of its awards. Audit findings of noncompliance with Uniform Guidance or award terms result in fines and penalties, putting all current and future awards at risk. The trickle-down effect of negative publicity could impact the institution’s attractiveness to faculty, researchers, staff and students.

Audit Planning

To mitigate the risk of inappropriate cost transfers or misappropriation, Internal Audit can evaluate existing processes and controls relative to cost transfers, including monitoring activities to ensure compliance with federal or state requirements the sponsored awards.

When planning and scoping an audit for this area, first find out if your post-award office has completed any of the following best practices:

If it has developed its own set of cost transfer policies and procedures to guide PIs and accounting staff on how to record sponsored award expenditures appropriately.
If it has defined the acceptable period in which a cost transfer should be made after the expense has occurred.
If they require supporting documentation for late cost transfers.
It has defined what constitutes appropriate supporting documentation.
It has created and provided training to unit-level accountants.
They’ve required PIs to frequently (e.g., monthly) review sponsored project expenses.
They regularly meet with unit-level accountants to communicate and emphasize the significance of the cost transfer policies.
They include unit heads (e.g., deans, chairs) in the approval process for late cost transfers.
Whether they’ve trained and empowered the post-award staff to reject late cost transfers without appropriate justification.
If they’ve documented and enforced consequences (e.g., move the funds to a non-sponsored departmental account).
Whether they work with other internal departments (e.g., Payroll) to complete the cost transfer process.

For the items above that have been completed, Internal Audit can select a sample of cost transfers and units and review for compliance with internal procedures.

Other Considerations

Depending on the nature and maturity of the systems used by your post-award process, there may be a reliance on disparate systems or, worse, manual processes. This inefficiency increases staff time spent on the cost transfer process, the risk of human fatigue, errors in missed or delayed transfers, and potential noncompliance with federal agency policies.

Consider categorizing the rationale for cost transfers (e.g., delays in receiving awards from sponsors, reconciliation not performed timely, change in F&A rates, etc.). Use data analytics to help the post-award office identify if any units are consistently submitting late cost transfers, large or numerous transfers close to the award end date, and identify trends by unit, sponsor, length of time to complete and justification used on all cost transfers.

It is important to understand if units have access to run necessary cost reports for their sponsored projects. For both PIs and their delegates not accustomed to reviewing expenditures, training is critical. Training materials should be developed and provided for all types of cost transfers (e.g., transfers of both salary and non-salary expenditures and those that are recorded more than 90 days after initial expenditure or discovery of error) should be complete, updated and easily located together.

Conclusion

The cost transfer process at an institution is truly a collaborative effort—typically between the Post-Award Office, Payroll, individual units and PIs. Including Internal Audit in this collaboration helps create consistency throughout the institution and increase the knowledge of risk management to units.

About the Authors

Colleen Tedeschi

Colleen Tedeschi, CIA, is a Senior Auditor within the Audit and Advisory Services department at Rutgers, The State University of New Jersey. A majority of Colleen’s 14 years of auditing and consulting experience has been focused in higher education. Colleen’s professional activities include serving as the Academic Relations Chair for the Central Jersey chapter of the Institute of Internal Auditors, a role where she brings awareness of the internal audit profession to university and college students. She can be reached at colleen.tedeschi@rutgers.edu.

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The Significance of Cost Transfers

Erin Egan

Erin Egan, CPA, CIA, is the Director of Audit and Advisory Services at Rutgers, The State University of New Jersey. After starting her career in auditing and consulting, Erin joined Rutgers in 2009. She enjoys the challenges of working in higher education and appreciates the ability to help the university achieve its mission. Erin has volunteered for ACUA throughout the years by speaking at conferences, writing articles, and currently serves as the Director of the Auditing and Accounting Principles sub-committee. She can be reached at erin.egan@rutgers.edu.

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