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Audit Report

Budget and Management Office: Indirect Cost Accounting Practices

The audit sought to determine whether:
1. The data being input into the City’s 2017 Federal Cost Allocation Plan was accurate, allowable, and allocable;
2. The methodology used for allocating costs in the 2017 Federal Cost Allocation Plan was accurate and in accordance with the method disclosed in the plan; and
3. The 2017 rates from the Indirect Cost Rate Proposal and Colorado Department of Human Services reimbursement were calculated correctly.

Watch the Audit Committee presentation here soon.

This interactive visualization gives you the ability to explore the impact of the Citywide Cost Accounting Plan on Denver International Airport. The airport reimbursed Denver for $11,571,223 worth of support that they received. The first ring of the chart shows the general areas of support that make up the total, the second ring shows the specific departments, and the third ring shows the function as it is described in the cost allocation plan. You can click any segment to get additional information on the individual functions that make it up. You can get exact figures by hovering your mouse over any segment. To return to the previous circles, click the inner-most circle and you’ll be expanded out again.

City departments account for their direct costs, such as staff, contracts with vendors and the purchase of equipment and supplies.  In addition, they also account for indirect costs —  such as occupying space in city buildings and using central services such as IT and payroll.

The Budget Management Office is responsible for oversight and management of the contract with MGT Consulting Group; the organization that is hired to calculate the annual Citywide and Federal Cost Allocation Plans.

These errors are a sign that the Budget Management Office’s review process is not detecting errors in the Citywide Cost Allocation Plan which could mislead city management about the true costs of city functions.

The audit recommends the Budget Management Office develop a well-documented review process to ensure submitted reimbursement requests are supported, accurate and complete.

Our evaluation of the City and County of Denver’s (City) annual cost allocation process identified weaknesses in the City’s Budget and Management Office (BMO) practices that impact the City’s ability to provide an accurate and consistent process for compiling its cost allocation plans.

We found that BMO does not have a process in place to ensure the State of Colorado reimbursement schedule is accurate and consistent with supporting schedules contained in the Federal Cost Allocation Plan. This led to BMO submitting an incorrect reimbursement to the State of Colorado in 2017.

Additionally, we found that BMO did not ensure the City’s contractor, MGT, accurately allocated costs. Further, we identified instances where the bases used to allocate costs were not supported by adequate documentation. These oversights led to an underpayment from one of the City’s Enterprise funds to the City’s General Fund. Further, we were unable to verify the accuracy of some of the cost allocations performed in the two plans due to a lack of supporting documentation.

Lastly, due to a lack of involvement, BMO did not ensure that MGT accurately adjusted the City’s costs for income adjustments, credit adjustments, and unallowable cost adjustments prior to allocating costs. This led to an under allocation by the City’s Technology Services Department and an over allocation by the City’s Human Resources Department.

To enhance the accuracy of the City’s two cost allocation plans and increase BMO’s oversight and involvement in the construction of the plans, we offer six recommendations to BMO.

1.1 The City’s Budget and Management Office needs to develop a documented procedure by which the Federal Cost Allocation Plan’s summary schedule is reconciled to the state’s reimbursement schedule prior to submitting a reimbursement request to the state. Further, the Budget and Management Office should ensure that the settlement process between the State of Colorado and City and County is resolved.
Agency Response: Agree, Implementation Date – July 31, 2018

1.2 The City’s Budget and Management Office should develop and incorporate a well-documented review process with corresponding written procedures that cover the primary elements included in both cost allocation plans specific to the supporting schedules to ensure submitted reimbursement requests are supported, accurate, and complete. Procedures should include:
• Ensuring uniform department descriptions, fund numbers, and organizational codes within both plans; and
• Collaboration between the City’s Budget and Management Office and MGT to ensure that changes to either plan are fully documented to ensure accuracy.
Agency Response: Agree, Implementation Date – August 31, 2018

1.3 The City’s Budget and Management Office should work with the airport to rectify the $108,541 understatement that occurred as a result of the 2017 Citywide Cost Allocation Plan.
Agency Response: Agree, Implementation Date – December 31, 2018

1.4 The City’s Budget and Management Office should develop a written policy to increase its involvement in the preparation of the Federal Cost Allocation Plan incorporating the following activities:
a) Actively participating in meetings between MGT and City departments
b) Using its knowledge of the City’s departments and functions to assist MGT in the proper identification of necessary adjustments from gross costs
c) Retrieving supporting documentation when MGT is unable to obtain it
d) Reviewing the types, amounts, and departments that MGT has identified as having adjustments from gross costs to identify potential overlooked items or incorrect adjustments
Agency Response: Agree, Implementation Date – August 31, 2018

1.5 The City’s Budget and Management Office should review the federal Uniform Guidance that dictates allocable costs to gain an understanding of the composition of costs that are permitted to be allocated. The Budget and Management Office should then ensure MGT gains a similar understanding and applies the provisions in the ongoing and future cost allocation process.
Agency Response: Agree, Implementation Date – July 31, 2018

1.6 The City’s Budget and Management Office should develop a process to analyze expenditures for allowability at a more detailed level. For example, the Budget and Management Office could consider using the City’s financial system, Workday, to facilitate a more detailed description of specific expenditures.
Agency Response: Agree, Implementation Date – December 31, 2018

Follow-up report

A follow-up report is forthcoming.

Other related reports

None at this time.

In the news

Our release:

Audit Team: Dawn Wiseman, Jared Miller, Patrick Schafer, Robert Persichitte, Chris Wat

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