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Spotlight: Allowability, Allocability, Reasonableness | Part 2: Internal Controls Strengthen Financial Integrity

By SRAI News posted 12-12-2024 05:37 PM

  

Spotlight: Allowability, Allocability, Reasonableness | Part 1: Incorporating AAR into the Research Administrator’s Daily Routine

This month, the Spotlight continues its study of allowability, allocability, and reasonableness (AAR) by exploring the essential role of internal controls in safeguarding financial resources and discusses how universities can implement effective procedures at both institutional and departmental levels. Click here to catch up on Part 1: Incorporating AAR into the Research Administrator’s Daily Routine.

In today’s increasingly complex higher education landscape, universities face the critical challenge of maintaining financial integrity while complying with a myriad of regulations and funding requirements.

A critical component of this effort is the establishment of robust internal controls at every level of the institution. These controls maintain that AAR principles are consistently applied in the management of university funds – particularly in relation to sponsored research, federal grants, and other external funding sources.

Departmental Controls

In the proposal development stage, departments play a crucial role in ensuring that the proposed budget aligns with the funding agency's guidelines and that all costs meet the fundamental AAR principles. The typical first step in the proposal development process is a thorough review of funding opportunity announcements. These documents outline terms and conditions of the grant, including eligible costs, specific guidelines for project deliverables, and any restrictions or limitations on how funds can be allocated. Department research administrators must assure that they fully understand the sponsor’s requirements and expectations before moving forward with budgeting and project planning. Furthermore, department research administrators should verify that all researchers and staff involved in grant management are trained and knowledgeable in AAR standards.

Another key control at the departmental level is confirming that there is a direct and justifiable link between the scope of work and the proposed budget. The scope of work describes the project’s objectives, activities, and expected outcomes, while the budget breaks down the resources needed to achieve those goals. Personnel costs, including salaries and wages, are often a significant portion of the project budget. The department must provide adequate backup documentation to support these costs and make sure they meet the sponsor’s criteria for allowability and reasonableness.  An important area of departmental review is the justification and documentation for supplies and purchases included in the proposal budget. Implementing policies to demonstrate that costs are properly allocated to the grant based on actual project activity or usage is essential for compliance. Allocations should be made on a fair and consistent basis.

Once the initial proposal draft has been created, department research administrators should perform a final compliance review of both the sponsor’s guidelines and internal policies. This includes cross-checking the budget against the scope of work to corroborate all costs are justifiable and appropriately allocated, confirming compliance with institutional cost principles to ensure consistency with the university’s financial policies and rates, and affirming that all documentation for salaries, supplies, and purchases is complete and accurately reflects the project’s needs.

Post-award research administration starts with the notice of award (NOA).  Once this is received by the research administrator, the first step would be reviewing the proposal with the pre-award specialist.  This will guide the research administrator with the research project’s intent and define and justify the budget categories. This review will also help the research administrator become familiar with any nuances of the sponsor, terms and conditions at proposal time such as required travel to sponsor events, and any special circumstances that might exist.  

After the proposal is reviewed and understood, the research administrator will review the NOA, documenting any changes from the proposed budget, the terms and conditions, and relevant reporting requirements.  A new award meeting to review these items, as well as personnel effort, milestones, and deliverables, is a great way to set internal controls in place at the start of an award.

During the award’s project period, review and compliance determination of each expense is vital.  Recurring meetings with the principal investigator (PI) and relevant lab members to review changes in effort, summer salary, if applicable, non-salaried expenses, and subrecipient monitoring – while keeping AAR as a main focus – will guarantee a smooth closeout at the award’s end.

Central Office Controls

At the central office level, the primary role in the proposal development stage is to provide oversight and confirm compliance with institutional policies, sponsor guidelines, and federal regulations. While departments are responsible for drafting the budget and scope of work, the central office verifies that all costs proposed are allowable, allocable, and reasonable. This includes conducting a final budget review to guarantee costs are tied directly to the project’s objectives and that they comply with sponsor regulations and institutional policies, such as salary caps, indirect cost rates, and allowable expenditures.

The central office also affirms that salaries, subcontractor fees, and indirect costs are reasonable, allocable, and fully justified. This includes verifying salary rates and effort commitments against institutional policies, reviewing subcontractor and consultant costs for compliance with sponsor guidelines, and ensuring the proper allocation of indirect costs. Additionally, the central office validates that the university’s negotiated indirect cost rates are applied correctly, and that all expenses are consistent with the scope of the project. By overseeing these controls, the central office minimizes compliance risks and helps maintain financial integrity across the university's research proposals.

From the post award perspective, the central office provides an additional AAR review level for award expenses. As the PI and department generate expenses such as salary distributions, vendor payments, purchase orders, and subcontractor invoices, the central office audits for compliance. This unit also prepares invoices, financial reports, and closeout documentation for the sponsoring agencies. Documentation is generated from the institution’s financial database.

Effective monitoring of a federal grant requires a comprehensive approach to successfully execute AAR fundamentals. Compliance with grant terms and federal regulations relies on strong internal controls, such as regular expense reviews, segregated duties for payment approval, and detailed expense documentation. Periodic internal or external audits help verify accuracy of financial transactions, while maintaining comprehensive records provides transparency. Ongoing staff training on federal regulations and financial policies helps promote proper cost management and compliance. These key practices underscore the prominence of internal controls through proposal, award, and closeout.

Authored by Crina Gandila, Research Administrator,
Southern California University of Health Sciences
SRAI Catalyst Committee Member

Authored by Betty Morgan, CRA, Assistant Director of Post Award Administration, College of Sciences Research Office
North Carolina State University
SRAI Catalyst Committee Member


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#December2024
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