SCDSS Cost Report Training Presented by: Johnny Strait, Director of SCDSS - IAD Sharon Pate, CPA Cliff Hedgepath, CPA 1

SCDSS Cost Report Training

Presented by:Johnny Strait, Director of SCDSS - IAD

Sharon Pate, CPACliff Hedgepath, CPA

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General Information About Cost Reports

• The due date for the next Cost Report has been switched to a biennial basis (i.e. once every two years), with the next Cost Report not being due to the SCDSS Internal Audit Division until January 31, 2015.

• Providers are still required to have an annual “audit” performed by a Certified Public Accounting firm that produces an audit report containing audited financial statements. A copy of the audit report should be sent annually to the SCDSS Internal Audit Division, once it has been completed.

• The Cost Report should contain one full year’s worth of audited financial data based on the provider’s fiscal year and on their last annual audited financial statements that were completed prior to the next due date for the Cost Report (i.e. which is January 31, 2015 in this case).

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Problems With the Providers’ Cost Reports

We noted the following problems with providers’ Cost Reports that were due to be sent to SCDSS by January 31, 2013:

• About 60% of the Cost Reports were sent to us after the January 31, 2013 deadline; which caused a delay in our ability to review and analyze cost data from those reports.

• Some providers submitted “unaudited” financial statements (i.e. either compilations or reviews) to support the amounts reported on their Cost Reports, which is technically a violation of the fixed price bid/contract. Due to this problem, we could not determine for certain if the cost figures reported on these Cost Reports were valid and reliable.

• Sometimes we had to request that a provider submit a copy of their “audited” financial statements that were used as the basis for their Cost Report; which delayed our reconciliation of the provider’s Cost Report to their “audited” financial statements.

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• Sometimes the provider was a subsidiary of a national or multi-state parent organization that had a consolidated set of audited financial statements that did not contain separate supplemental financial information for the provider/subsidiary that sent in the Cost Report. Therefore, we could not determine for certain if the cost figures reported on those provider/subsidiary’s Cost Reports were valid and reliable.

• Some common types of mistakes made by providers that caused reconciliation variances between the Cost Report and the audited financial statements included the following:

Dropping or adding a digit (e.g. a zero) to an expense figure, or transposing digits within an expense figure recorded on the Cost Report.

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¾ Recording the same expense amount twice (i.e. in more than one field or column on the Cost Report).

¾ Not adding certain expense subtotals and/or totals correctly when the Cost Report was prepared manually, or accidentally changing the formulas for subtotals or totals on an electronically prepared Cost Report.

¾ Forgetting to record all of the expenses that were on the audited financial statements onto the Cost Report, or adding or deducting certain costs from the total expenses.

¾ Excluded some expenses attributable to non-SCDSS children or expenses for other programs/activities from the Cost Report altogether (i.e. instead of recording them in the “Other Expenses” column of the Cost Report).

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¾ Recording a wrong amount for an expense on the Cost Report (i.e. recording an amount for an expense line item that belongs to a different expense).

¾ Many times even when the grand total for all of the expenses on the Cost Report and the audited financial statements agreed, individual expense line item amounts did not agree with their corresponding amounts on the audited financial statements (i.e. causing offsetting variances between expense line item totals).

• The most frequent types of mistakes made by providers in reporting their Salaries and Fringe Benefits on their Cost Reports included the following:

¾ The grand totals of the gross salaries and fringe benefits reported on page 2 of the Cost Report, sometimes did not agree with what was reported for these expenses on the audited financial statements.

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¾ In a few cases the Personnel Schedule on page 3 of the Cost Report (where gross salaries are listed by job function) was not fully completed to show the allocation of the gross salaries between the various columns on the Cost Report for each job description type.

¾Sometimes the gross salaries entered on the Personnel Schedule on page 3 of the Cost Report did not appear to have been allocated correctly by the provider between the various columns (i.e. Administrative Expenses, Service Expenses, Child Care Expenses, and Other Expenses), or match the gross salaries reported on page 2.

¾The total gross salaries reported on The Personnel Schedule on page 3 of the Cost Report, sometimes did not agree with what was reported as total gross salaries on the audited financial statements.

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• Mistakes sometimes made by providers in the allocation of their costs on their Cost Reports included the following:

¾ Expenses were not always allocated between the various columns on the provider’s Cost Report in the same way as they were allocated (between Administrative Expenses, Program Expenses, and Fundraising Expenses) on the Statement of Functional Expenses included in the provider’s audited financial statements.

¾ Expenses attributable to non-SCDSS children that were provided similar services and levels of care as our SCDSS children, were sometimes combined together with the expenses for our SCDSS children and included in the “Child Care Expenses” and/or “Services Expenses” columns, instead of those expenses attributable to non-SCDSS children all being entered in the “Other Expenses” column of the Cost Report.

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¾ Sometimes the costs allocated to the “Child Care Expenses” and “Other Expenses” columns appeared disproportionate to the amounts reported for SCDSS and non-SCDSS revenue sources and/or the related number of service days reported on the Cost Report by the provider.

¾ Sometimes where providers had to file multiple Cost Reports for the multiple

services/levels of care that they provided to our SCDSS children, it was difficult to ensure that some costs of the providers (especially “Administrative Expenses”) had not been allocated more than once.

¾ We sometime noted instances, where we thought a provider may have disproportionately over-allocated the expenses in the “Administrative Expenses” column to the “Child Care Expenses” and “Service Expenses” columns for our SCDSS children, when these indirect administrative expenses would have benefited all services/levels of care and programs/activities that the organization had and should have been proportionately spread to all the columns of the Cost Report.

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¾ Sometimes the provider may have recorded an expense amount 100% to the Administrative Expense column that probably should have been reported at least in part as a direct expense under the “Child Care Expenses” and “Services Expenses” columns for our SCDSS children.

¾ On some Cost Reports, expenses for our SCDSS children were classified in the “Service Expenses” column, when we thought they should have been reported in the “Child Care Expense” column (or vice versa).

• The most common types of mistakes made by providers related to the reporting of Revenues and the Service Information on the Cost Reports included the following:

¾ Sometimes the total revenues on the Cost Report did not agree with the total revenues reported on the audited financial statements, or occasionally a particular revenue line item might not have matched its corresponding revenue amount.

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¾ Occasionally it appeared that the provider chose not to list all of their revenues on the Cost Report (i.e. especially non-SCDSS revenues).

¾ In at least one instance, revenues from non-SCDSS sources were all combined together by the provider under the “Contributions” revenue title on the Cost Report.

¾ Sometimes SCDSS and non-SCDSS revenues for similar services/levels of care were combined together in one total, instead of broken down by Agency and by service/level of care.

¾ Sometimes expenses were inappropriately netted against related revenues and then recorded as net revenues in the revenue section of the Cost Report (e.g. thrift store expenses netted against thrift store revenues, or bad debt expense for fundraising netted against contribution revenues).

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¾Sometimes the number of service days for SCDSS children reported on the Cost Report by a provider, did not match what SCDSS had for this in their records or did not match an estimate of the number of service days based on the revenues reported divided by the contract rate per day.

¾Sometimes the number of licensed beds reported on the Cost Report by a provider, did not match what SCDSS had for this in their records.

¾Sometimes an older version of the Cost Report was used by the provider that did not have as much breakdown concerning the service day information for SCDSS children vs. service days for other children that the provider served.

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• Problems noted with “unallowable” expenses reported on the Cost Reports included the following:

¾We detected some instances where providers did not record all of their unallowable expenses on the Unallowable Expenses/Costs Schedule on page 7 of the Cost Report under the “Other Expenses” column.

¾ Unallowable expenses were sometimes mistakenly recorded as allowable expenses under the “Child Care Expenses”, “Service Expenses”, and/or “Administrative Expenses” columns of the Cost Report.

¾ Some common examples of unallowable expenses mistakenly recorded

as allowable expenses on the Cost Report included such items as: fundraising expenses, thrift store expenses, bad debt expenses, and donations/gifts to other non-profits.

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• The most frequent types of mistakes made by providers related to the way that In-Kind Expenses were handled on the Cost Reports included the following:

¾ In at least one case, In-Kind Expenses were omitted from the Cost Report entirely, even though they were included in the provider’s audited financial statements.

¾Sometimes the In-Kind Expenses were not reported separately on the In-Kind (Donated) Goods and Services Schedule included on page 8 of the Cost Report, and instead were combined with other similar but paid for expenses of the provider.

¾Sometimes there was a lack of agreement between what was reported as total In-Kind Expenses on the Cost Report, and what was reported for this on the audited financial statements.

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¾ In some cases, we felt that the In-Kind Expenses (e.g. for food, clothing, supplies, volunteer work, etc.) were material enough that they probably should have been included an In-Kind Expense amount on the provider’s audited financial statements, or disclosed in a note to the financial statements (but they were not).

¾Sometimes the provider failed to include supporting documentation

and a Narrative Page describing how they arrived at the “unaudited” fair market value for In-Kind Expenses reported on their Cost Report, that were not included on their audited financial statements.

• Problems related to the reporting of depreciation expense on the Cost Report and the preparation of Supplemental Schedule I - Schedule of Fixed Assets and/or Supplemental Schedule II - Schedule of Permanent Improvements included the following:

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¾Sometimes the provider failed to prepare Supplemental Schedule I - Schedule of Fixed Assets and/or Supplemental Schedule II - Schedule of Permanent Improvements, when assets were purchased and depreciation expense was reported on the Cost Report and the audited financial statements.

¾Depreciation expense was sometime omitted on the Cost Report altogether, when there was depreciation expense reported on the audited financial statements.

¾The totals shown on Supplemental Schedules I - Schedule of Fixed Assets and/or Supplemental Schedule II - Schedule of Permanent Improvements for the ending cost basis, depreciation expense, and ending accumulated depreciation sometimes did not match similar totals on the audited financial statements.

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¾The depreciation expense entered on the Cost Report occasionally did not match the depreciation expense recorded on Supplemental Schedule I and/or II, or the audited financial statements.

¾ In one case, the provider mistakenly recorded their ending accumulated depreciation balance as their depreciation expense on their Cost Report.

¾ In one case, the depreciation expense was mistakenly recorded twice on the Cost Report.

• The Supplementary Schedule III – Schedule of Compensation was either not prepared at all or incomplete in a significant number of cases. Without this schedule we could not determine the reasonableness of compensation paid to owners, board members/trustees, officers, key employees, independent contractors, and family members of those persons named.

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• We noted the following problems with Supplemental Schedule IV– Transactions with Related Organizations:

Supplemental Schedule IV–Transactions with Related Organizations was sometimes not prepared when the audited financial statements for a provider identified related party transactions. In other instances, the schedule was incomplete, and/or the amounts on the schedule applied to other services/levels for the same provider.

Examples of transactions with related organizations that should have been reported on Schedule IV but sometimes were not, mainly involved instances where providers/subsidiaries paid parent organizations significant management fees, and rent/lease expenses for buildings and/or equipment. Without this schedule we could not verify for certain if those related party costs reported on the provider’s cost report were reasonable. Also, sometimes the lease/rental agreements that were supposed to be attached to the Cost Report as supporting documentation were not.

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• The following problems and deficiencies were noted with Narratives that were supposed to be prepared by the providers and attached to their Cost Reports:

Narratives sometimes did not fully describe how direct personnel costs and other direct operating expenses were allocated on the Cost Reports.

Narratives sometimes did not fully describe the cost allocation method and the distribution base used to allocate the total indirect costs in the “Administrative Expenses” column to the other columns on the Cost Report.

Some Narratives failed to give a description of the allocation method and distribution base used for allocating depreciation expenses between the various columns on the Cost Report.

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• Narratives did not always describe what expense items and corresponding amounts from the financial statements composed certain expense items on the Cost Reports that many times would have included combined expenses such as: “Other Employer Contributions”, “Other Supplies”, “Other Contractual Services”, “Other Fixed Charges”, and/or “Miscellaneous Expenses”.

• Some Narratives did not provide an explanation for what caused variances

when either Total Expenses or Total Revenues per the Cost Report did not match similar figures on their audited financial statements.

• Some providers forgot to include any Narrative pages at all with their Cost Reports.

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Problems With the Providers’ Audit Reports

A total of forty-eight (48) providers turned in Cost Reports that were due January 31, 2013, along with related supporting documentation for the costs they reported (i.e. which usually were audit reports containing audited financial statements). The audit reports used as supporting documentation for the Cost Reports had fiscal year ends as early as 6/30/11 and as late as 12/31/12. The following are some of the problems noted with those providers’ audit reports:

Auditor’s Report

• Nine (9) of the 48 Providers or (19%) did not submit an audit report. Instead, they sent in “unaudited” supporting documentation for the costs they reported (i.e. compiled or reviewed financial statements, trial balances, or general ledgers). Therefore, SCDSS could not determine for certain if the cost figures reported on these Cost Reports were valid and reliable.

• One (1) audit report was missing the auditor’s opinion letter.

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• Of all the Providers that presented a “Statement of Functional Expenses”, we found three (3) reports did not reference this financial statements in the auditor’s opinion letter.

• One (1) audit report presented supplemental schedules with the financial

statements but, there was no supplemental paragraph in the auditor’s opinion letter identifying the accompanying information or statement that described the degree of responsibility, if any, the auditor was taking.

• Three (3) of the auditor’s opinion letters referencing supplementary

information in a separate paragraph in the report did not include all of the standard required language.

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• One (1) Organization submitted an “Accountant’s Report” instead of an audit report; however, this report was not signed by the CPA firm.

Statement of Financial Position (or Balance Sheet)

• One (1) audit report was missing a Statement of Financial Position

• One (1) report showed no fixed assets on the Statement of Financial Position;

however, depreciation expense was reported on the Statement of Functional Expenses.

• Stock information such as class, number of shares authorized, issued and

outstanding, par or stated value, etc. was not disclosed on the face of one (1) for-profit provider’s Balance Sheet.

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Statement of Activities

• We noted in four (4) audit reports that “Net Assets Released from Restrictions”

was not reported properly on the Statement of Activities. Administrative and other expenses were deducted directly from temporarily or permanently restricted net assets, instead of reporting these amounts as net assets released from restrictions and showing transfers to the unrestricted expense category.

• Beginning and ending net assets by type did not agree with the Statement of

Financial Position in one (1) audit report.

• For two (2) audit reports’ the Statement of Activities stated an “Increase in Net

Assets”, but should have reported a “Decrease in Net Assets” or, the auditor could have used the term “Changes in Net Assets” to avoid confusion.

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Statement of Cash Flows

• We noted in two (2) audit reports where the Statement of Cash Flows was not provided, even though it was listed in the Table of Contents.

• In two (2) audit reports, the ending cash balance did not agree with the cash

balance on the Statement of Financial Position.

• Depreciation expense was reported on the Statement of Functional Expenses, but was not shown on the Statement of Cash Flows in one (1) audit report.

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• In one (1) audit report, the financial statement used language such as “Net Cash Used by Investing Activities” when it should have been “Net Cash Used by Financing Activities” (and vice versa) in a second audit report. Additionally, there was a decrease in cash from operating activities and the auditor used the term “Provided by” instead of “Used by”.

• One (1) Cash Flow Statement was incorrectly prepared. An equipment

purchase was reported as a financing activity instead of an investing activity; and, amounts debited should have been credited (and vice versa).

Statement of Functional Expenses• One (1) report included an unaudited Statement of Functional Expenses

instead of an audited statement.

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• Expenses were not reported by functional classification on the Statement of Functional Expenses in one (1) audit report.

• One (1) report revealed fundraising expenses that were not properly reported. These expenses were shown as development expense under “Program Services”, instead of being reported as a separate functional category.

Footnote Disclosures

We noted several minor deficiencies with the footnote disclosures as follows:

• One (1) audit report was missing all of its footnote disclosures.

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• Cash and Cash Equivalents

Three (3) Organizations that submitted audit reports did not disclose their policy on cash and cash equivalents.

• Use of Estimates

One (1) audit report failed to include a footnote about the Provider’s use of estimates.

• Fixed Assets

Four (4) reports did not include the Provider’s capitalization policies.

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One (1) report did not include a definition of the major classes of depreciable property.

One (1) report did not include the basis of valuation of fixed asset acquisitions.

• Income Taxes

One (1) report did not disclose information about the Provider’s income tax status, such as the Internal Revenue Code section under which it is exempt from federal income taxes or excise taxes (for non-profit organizations).

The status of income taxes was not disclosed on the Statement of Income for one (1) for-profit Provider.

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• Operating Leases

Two (2) Providers having leases did not disclose rent expense for the period or calculate future minimum rentals.

• Notes Payable and/or Line of Credit

Three (3) Providers’ footnote disclosures on notes payable and lines of credit were incomplete. Maturities and sinking fund requirements for the next five years were not disclosed. Also, information such as interest rates, due dates and repayment terms were not disclosed for lines of credit.

• Postemployment Benefits

One (1) Provider expended a significant amount of funds on retirement benefits, but no report disclosure was included.

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• Contributed (Donated In-Kind) Services

We identified one (1) instance where the Provider did not disclose the nature and extent of contributed services received. In another instance, the footnote stated that donated services have been included in revenue and expenses, but none had been recorded and received during the audit period.

• Fair Value Measurements

We identified three (3) Providers whose footnotes on fair value did not disclose the level within the fair value hierarchy in which the fair value measurements fall.

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• Endowment Fund

One (1) Provider’s footnote on endowment funds revealed a second written paragraph containing financial information that did not agree with the financial statements.

• Donated Materials

Donated materials received by one Provider appear to have been improperly reported. The offsetting entry to the in-kind revenue reported was advances to affiliates. However, the donation was not reported as a related party transaction. The materials, consisting of software, were not capitalized or expensed, and remains in the ending temporarily restricted net assets balance.

• Subsequent Events

The date through which subsequent events were evaluated was not disclosed in four (4) reports.

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Government Auditing Standards (GAS) Report on Internal Control over Financial Reporting and on Compliance and Other Matters• We noted one (1) GAS report that did not include a statement in the second

paragraph that management is responsible for establishing and maintaining effective internal control over financial reporting. This report also did not have a title that included the word “independent”.

Schedule of Federal Awards• In one (1) audit report, the “Schedule of Expenditures of Federal Awards” did

not identify the pass through entities for Title IV-E funds.

• In another audit report, the notes to the “Schedule of Expenditures of Federal Awards” were incomplete. The report omitted the description of significant accounting policies used in preparing the schedule including the basis of accounting.

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How to Improve the Reporting of Cost Information

The following are some suggestions on how the providers can improve on the reporting of their cost information to SCDSS, when filling out their Provider Financial and Statistical (Cost) Reports that are due on January 31, 2015:

• Providers should ensure that they turn in their next biennial Cost Report in a timely manner (i.e. by the due date of January 31, 2015), to decrease the delay in our review and analysis of their cost information.

• Providers should have an annual “audit” of their organization performed by an independent certified public accounting firm as required by the SCDSS Fix Price Bid/Contract. They should use the figures from their last annual audited financial statements (completed prior to the due date of the Cost Report) as the basis for their Cost Report, so that SCDSS can be assured of the validity of the cost information contained in their Cost Report.

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• When providers send us their Cost Reports, they should ensure that they attach a copy of their annual audited financial statements upon which the Cost Report is based, so that there are no delays in having the information necessary for us to be able to reconcile their Cost Report to their annual audited financial statements.

• Parent organizations should consider what the additional cost would be of adding supplemental schedules to their consolidated audited financial statements that would give detailed financial information on what the un-consolidated revenues and expenses were for each of their organization’s subsidiaries.

• Detailed un-consolidated supplemental financial information for any provider/subsidiary would provide them with valid financial information needed as support for the filling out of their Cost Report. It could also have the added benefit of providing beneficial financial information to the management of the parent organization and its subsidiaries, as well as to other users of the consolidated audited financial statements.

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• The preparer of the Cost Report needs to be careful not to add or drop digits, or transpose digits for expense amounts being reported.

• It is preferable for the preparer of the Cost Report to use an electronic version of the Cost Report that has formulas to help automatically add various subtotals and totals on the Cost Report. Just be sure not to delete or change the formulas for subtotals and totals by accident.

• If you decide to prepare the Cost Report manually, be sure you re-check your math to ensure that your subtotals and totals add up correctly.

• Providers should confirm that each expense line item total reported on their Cost Reports, either matches or can be reconciled to its corresponding expense amount on their audited financial statements, to ensure that the details of the expenses reported on the Cost Report are correct and match their audited financial statements. (That way any variances on the Cost Report should be offsetting variances between expense line item totals).

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• Providers should always verify that the “Total Expenses” on Page 5 of their Cost Report, either matches or can be reconciled to what the “Total Expenses” are on their audited financial statements, to ensure that all expenses from their financial statements have been reported on their Cost Report. This will also help prevent expense amounts from being entered twice, incorrectly, or not at all on the Cost Report.

• Providers should verify that the total gross salaries and fringe benefits reported on Page 2 of the Cost Report, agrees with what was reported for these expenses on their financial statements.

• Providers should ensure that they completely fill out the Personnel Schedule on Page 3 of the Cost Report, and properly allocate their gross salaries for each job description type between the various columns on the Cost Report.

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• Providers should base their allocation of gross salaries between the various columns on the Personnel Schedule on Page 3 of Cost Report, on either detailed time sheets that they keep on a regular basis (i.e. weekly, monthly, etc.) or on detailed time studies they perform for a limited representative time period. This supporting documentation for this allocation should be retained for auditing purposes.

• Providers should always verify that the grand total of all the gross salaries, as well as the total gross salaries per column that are reported at the bottom of the Personnel Schedule on Page 3 of the Cost Report, matches similar totals for gross salaries at the top of Page 2 of the Cost Report.

• Providers should always verify that the grand total of all the gross salaries, reported at the bottom of the Personnel Schedule on Page 3 of the Cost Report, agrees with similar gross salary totals on the provider’s audited financial statements.

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• Providers should ensure that they include in the “Child Care Expenses” column of the Cost Report the following costs for SCDSS children (only):

¾The cost of room and board expenses for our SCDSS children for the particular type of service/level of care being reported. This would include such operating expense items as: food, clothing, shelter, daily supervision and monitoring, school supplies, personal incidentals, and reasonable travel expenses for our SCDSS children. Also, direct operating expenses related to child care for our SCDSS children.

¾ In addition, for the Child Placing Agencies (CPAs) the “Child Care

Expenses” column would also include the costs of recruiting, licensing, training, and supervising and monitoring the foster homes for our SCDSS children.

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¾The “Child Care Expenses” column would also be used to add an allocated portion of the indirect “Administrative Expenses” that relate to the cost of providing child care to SCDSS children for the particular type of service/level of care that is being reported on the Cost Report. The addition of an allocated portion of these indirect “Administrative Expenses” is performed at the bottom of Page 5 of the Cost Report.

• Providers should ensure they include in the “Service Expenses” column of the Cost Report the following costs for SCDSS children (only):

¾The cost of any psychological counseling and/or medical costs related to the type of service/level of care that is being reported on the Cost Report for our SCDSS children. Also direct operating costs related to providing those service expenses for our SCDSS children.

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¾ The “Service Expenses” column would also be used to add an allocated portion of the indirect “Administrative Expenses” that relate to the cost of providing psychological counseling and/or medical costs to SCDSS children for the particular type of service/level of care that is being reported on the Cost Report. The addition of an allocated portion of these indirect “Administrative Expenses” is performed at the bottom of Page 5 of the Cost Report.

• Providers should ensure that they include in the “Other Expenses” column of the Cost Report the following costs:

¾ The costs of the various services/levels of care that you may have supplied to non-SCDSS children from another Agency (SCDJJ, SCDDSN, SCDMH, SCCOC, etc.) or to private placement children.

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¾ The costs of psychological counseling and/or medical expenses for non–SCDSS children from another Agency, or for private placement children.

¾ The costs of all “other” programs/activities your organization might have provided that are not services/levels of care for our SCDSS children, and which have not already been entered in any of the columns of the Cost Report that we have already described above.

¾ Any “unallowable” expenses as described on the Unallowable Expense/Cost Schedule on Page 7 of the Cost Report, which would end up being transferred automatically from that schedule to the “Other Expenses” column of the Cost Report (including fundraising expenses).

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¾ The “Other Expenses” column would also be used to add an allocated portion of the indirect “Administrative Expenses” that relate to the cost of providing services/levels of care for other Agency’s non-SCDSS children, psychological counseling and medical costs for non-SCDSS children, costs of other programs/activities, and any unallowable expenses that the provider might have had. The addition of an allocated portion of these indirect “Administrative Expenses” is performed at the bottom of Page 5 of the Cost Report.

• Providers should ensure that they include in the “Administrative Expenses” column of the Cost Report the following costs:

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• The way that the Cost Reports are formatted it is best if the “Administrative Expenses” column is used to pool together indirect administrative costs that benefit all types of service/levels of care and programs/activities that a provider might have. These would be administrative costs, which have not already been reported and allocated as direct costs in one of the other columns on the Cost Report such as “Child Care Expenses”, “Service Expenses”, or “Other Expenses”.

• These pooled indirect costs listed in the “Administrative Expenses” column

can then be allocated and a portion can be added to each of the rest of the expense columns on the Cost Report (i.e. “Child Care Expenses”, “Service Expenses”, and “Other Expenses”) to arrive at the Total Expenses (after allocation of Administrative Expenses) for those columns, which is at the bottom of Page 5 – Line K on the Cost Report.


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• The Statement of Functional Expenses that is sometimes included in the audited financial statements of a non-profit organization contains certain financial information listed in columns that can be very useful to providers in filling out and reconciling their Cost Report in the following ways:

¾The “Management and General Expenses” column of the Statement of Functional Expenses contains the indirect administrative expenses that benefit all types of services/levels of care and programs/activities of the organization. These indirect administrative expenses can be transferred directly to the “Administrative Expenses” column of the Cost Report.

¾The Program Expenses column(s) of the Statement of Functional Expenses contains program expenses that should be reported either under the “Child Care Expenses”, “Service Expenses”, or “Other Expenses” columns of the Cost Report as direct expenses.


¾ The total for the Fundraising Expenses column of the Statement of Functional Expenses should be reported as an unallowable expense on an Unallowable Expense/Cost Schedule on Page 7 of the Cost Report (along with any other unallowable expenses) and the total Unallowable Expense will be transferred automatically to a line on Page 5 of the Cost Report and placed in the “Other Expenses” column.

• Providers should use the “Child Care Expenses” and/or “Service Expenses” columns on the Cost Report to report costs that would be associated with the particular type of service/level of care that they are reporting on their Cost Report for our SCDSS children (only). They should not include in those two columns costs associated with providing services/levels of care for another Agency’s children (e.g. SCDJJ, SCCOC, SCDDSN, or SCDMH, etc.) or private placement children. All of those costs for another Agency’s children should be reported under the “Other Expenses” column of the Cost Report.

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• Providers can generally use whatever allocation method and base that they deem is best for allocating their expenses. However, it needs to accurately and fairly allocate their expenses on their Cost Report, and be one of the accepted allocation methods and bases for allocation discussed in OMB Circular A-122 “Cost Principles for Non-Profit Organizations”.

• Providers that provide care to both SCDSS children and non-SCDSS

children need to be careful that the amount of operating and administrative expenses that are allocated on their Cost Reports for the types of services/levels of care provided appear to be reasonable, and are not substantially at variance with the number of service days they provided for SCDSS children, versus the number of service days they provided for any non-SCDSS children.

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• Providers that provide multiple types of services/levels of care need to be careful to ensure that the same costs (especially “Administrative Expenses”) are not being allocated more than one time between the multiple types of services/levels of care and programs/activities that they supply. [The newly revised version of the Cost Report should help to prevent that from happening.]

• Providers should be careful not to over-allocate indirect “Administrative Expenses” in a disproportionate way (i.e. 100% to one of the rest of the columns on the Cost Report), when the indirect “Administrative Expenses” would benefit all of the other columns on the Cost Report.

• Providers should be careful not to record 100% of an expense as an indirect cost in the “Administrative Expense” column on the Cost Report, when it is clearly an expense that would have had a portion that should have been a directly allocated expense under one or more of the rest of the columns on the Cost Report (with only a small portion in the “Administrative Expenses” column).

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• For Revenues and other statistical information on Page 6 of the Cost Report the providers should ensure that the following is true:

¾Providers should confirm that each revenue line item total reported on their Cost Reports, either matches or can be reconciled to its corresponding revenue amount on their audited financial statements, to ensure that the details of the revenues reported on the Cost Report are correct and match their audited financial statements. (That way any variances on Page 6 of the Cost Report should be offsetting variances between revenue line item totals).

¾Providers should not combine different Revenues all together under one revenue type (i.e. such as Contributions), but should instead be broken down.

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• Providers should include a more detailed breakdown of their revenues on Page 6 of their Cost Report by type of service/level of care and by State Agency. [The Cost Report has been revised to capture more details about the breakdown of the provider’s revenues by type of service/level of care and by State Agency].

• Providers should not record revenues on Page 6 of their Cost Report as net of related unallowable expenses (e.g. fundraising revenues net of fundraising expenses, thrift store revenues net of thrift store expenses, contributions net of bad debt expense, etc.). Instead, the revenues should always be reported at the gross revenue amounts on Page 6 of the Cost Report.

• Providers should always verify that the “Total Revenues” on Page 6 of their Cost Report, either matches or can be reconciled to the total revenues on their audited financial statements, to ensure that all revenues from their financial statements have been reported in the revenue section of their Cost Report.

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• Providers should ensure that the statistical data they report on Page 6 of the Cost Report related to the number of service days, licensed beds, and children served for the reporting period are correct. [The Cost Report has been revised to give more breakdown related to this information].

• Some ways for providers to improve on the reporting of unallowable expenses on the Cost Report include the following:

¾Ensure that all unallowable expenses (e.g. fundraising expenses, thrift store expenses, bad debt expenses, and donations/gifts to other non-profits, etc.) are recorded on an Unallowable Expense/Cost Schedule on Page 7 of the Cost Report. A total from that schedule will automatically carry-over to an “Unallowable Expenses” line item on page 5 of the Cost Report under the “Other Expenses” column.

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¾ Ensure that the amounts for any unallowable expense items reported on the schedule on Page 7 of the Cost Report, either match or can be reconciled to its corresponding unallowable expense amount on the provider’s audited financial statements.

• Some ways for providers to improve on the reporting of in-kind expenses on

the Cost Report include the following:

¾ Ensure that all in-kind (donated) expenses (e.g. in-kind food, in-kind supplies or in-kind volunteer services, etc.) are recorded on the In-Kind (Donated) Goods and Services Schedule on Page 8 of the Cost Report, instead of combining them with similar “paid-for” expenses in other places on the Cost Report. A total from that schedule will automatically carry-over to an “In-Kind Expenses” line item toward the bottom of page 5 of the Cost Report

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¾ Ensure that the amounts for any in-kind expense items reported on the schedule on Page 8 of the Cost Report, either match or can be reconciled to its corresponding in-kind expense item on the provider’s audited financial statements.

¾ If no in-kind expenses are reported on their audited financial statements, but the provider wants to claim in-kind expenses on their Cost Report anyway, they should ensure they provide a Narrative page and supporting documentation related to how they arrived at the fair market value claimed for their in-kind expenses on their Cost Report.

¾ Some providers if they have substantial in-kind expenses (e.g. for such things as food, clothing, supplies, volunteer work, etc.) may want to discuss with the Certified Public Accounting firm that does their annual audit if the value of those in-kind expenses need to be included on their audited financial statements, or in a note to the audited financial statements.

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• Some ways for providers to improve on the reporting of depreciation expenses on the Cost Report include the following:

¾ Ensure that Supplementary Schedule I - Schedule of Fixed Assets and/or Schedule II - Schedule of Permanent Improvements are filled out and attached to the Cost Report, when provider’s have purchased assets and/or have depreciation expense on their audited financial statements.

¾ Ensure that you do record the correct depreciation expense from the audited financial statements in the appropriate places on Page 5 of the Cost Report (instead of the ending accumulated depreciation balance).

¾ Ensure that the amount of depreciation expense reported on Supplementary Schedules I and II matches the amount of depreciation expense you recorded on Page 5 on the Cost Report, and the audited financial statements.

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¾Ensure that the ending historical cost, depreciation expense, and accumulated depreciation recorded on Supplemental Schedule I and II equal what is recorded for these items on the provider’s audited financial statements.

¾Remember to include a description on one of the Narrative Pages attached to the Cost Report of what allocation method and base was used to allocate depreciation expenses between the various columns on Page 5 of the Cost Report.

• Providers (whether for-profit or non-profit) should ensure that they fill out the Supplementary Schedule III–Schedule of Compensation (when it applies). That schedule is used to give SCDSS information on:

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¾Compensation vs. hours worked for owners, board members, trustees, and officers of the provider’s organization (no matter what their compensation level).

¾ Compensation vs. hours worked for highly paid independent contractors or other highly paid key employees that got paid $100,000 per year or more.

¾Compensation vs. hours worked for family members of the persons mentioned above, who also worked for the same provider.

• Providers should ensure that they fill out the Supplementary Schedule IV–Transactions with Related Organizations (when it applies) and should be aware of the following:

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¾ Supplementary Schedule IV–Transactions with Related Organizations is used to give SCDSS information on the fairness of related party transactions that the provider who is filling out the Cost Report may have had with related entities.

¾ Related party transactions would include expenses incurred or revenues earned by the provider for such items as: supplies, rent, management fees, or consultant fees, etc.

¾ The independent certified public accounting firm that prepared the

provider’s audited financial statements may also have disclosed related party transaction information in one of the Notes included in the audited financial statements. This might help the providers in filling out Supplementary Schedule IV–Transactions with Related Organizations.

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• Providers should ensure they attach a copy of their rental/lease agreements as supporting documentation for any rent/lease expenses reported for Real Property, Equipment/Furniture, or Motor Vehicles that they claim on their Cost Report. This is especially true for any rent/lease expenses between the provider and a related organization/party.

• Providers should ensure that they include Narrative Pages attached to their Cost Reports that describe the following:¾ How personnel costs (salary & fringe benefits) and other direct operating

costs were allocated across the various columns on the Cost Report.

¾ The cost allocation method and base used by the provider to allocate their indirect costs that were accumulated in the “Administrative Expenses” column to the other columns on the Cost Report.

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¾What expense items and corresponding amounts from the financial statements composed certain expense amounts entered on the Cost Reports such as for: “Other Employer Contributions”, “Other Supplies”, “Other Contractual Services”, “Other Fixed Charges”, and/or “Miscellaneous Expenses”.

¾ What caused any variance between Total Expenses per the Cost Report and Total Expenses per the audited financial statements (when this occurred).

¾What caused any variance between Total Revenues per the Cost Report and Total Revenues per the audited financial statements (when this occurred).

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Changes Made to the New Version of the Cost Report

The following are the main revisions that were made to the new version of the Provider Financial and Statistical (Cost) Report to help simplify the process and to improve on the quality of the cost information being received from the Group Homes and Child Placing Agencies (CPAs):

Changes Made to Page 1 of the Cost Report• The new version of the Cost Report that will be used for the next due date

of January 31, 2015, can now contain cost information for all levels of care/services that a provider supplied to our SCDSS children on one Cost Report (i.e. instead of having to use a separate Cost Report for each level of care/service supplied to our SCDSS children).

• We changed Item #8 for “Service Information” on Page 1 of the Cost Report from indicating “Check One” level of care/service to “Place a check mark beside all levels of care/services for SCDSS children that are included in this report”.

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• At the bottom of Page 1 of the Cost Report we added blocks for additional information concerning the Cost Report preparer such as: E-mail address, Fax number, and Date the report was prepared. This will provide SCDSS with additional ways to contact the Cost Report preparer and/or to be able to send to or request from them additional information (if needed). Also, we will have information on the date the Cost Report was completed.

Similar Changes Made to Pages 2, 3, 4, and 5 of the Cost Report• We added multiple columns to the Cost Report on Pages 2, 3, 4, 5, and 8 that

included “Service Expenses” and “Child Care Expenses” columns for each of the nine (9) possible services/levels of care that a provider could possibly have for our SCDSS children. This was done for the following reasons:¾ So that we could capture on one Cost Report all the cost information

for a provider that supplied multiple services/levels of care to our SCDSS children (i.e. instead of having to have a separate Cost Report for each service/level of care).

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¾ To help better document and ensure that the indirect Administrative Expenses that benefit all program/activities that a provider might have are only being proportionally allocated one time to each of the services/levels of care that the provider actually supplied to our SCDSS children and to any other programs/activities the provider might have.

• Due to the multiple columns added to the Cost Report on Pages 2, 3, 4, 5, and 8; instead of each of these pages being printed on one (1) page, we now will have to print each of them on three (3) pages, in order to be able to read the cost information that will be included on each page.

• We added either columns or rows as necessary to the Cost Report on Pages 2, 3, 4, 5, and 8 to compare Total Expenses per the Cost Report to the Total Expenses per the Financial Statements. We also added either a column or row to show any over or (short) Variance between these two figures. The purpose of this change to the Cost Report was to help ensure that all expenses on the audited financial statements of a provider have been included in their Cost Report.

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Changes Made to Page 2 of the Cost Report • A change was made to a notation at the bottom of Page 2 of the Cost Report to

better clarify to the providers that if they had any “Other Employer Contributions” related to fringe benefits that we would need to know in a Narrative page what expenses/amounts from the Financial Statements comprised that total on the Cost Report.

• We added a notation at the bottom of Page 2 of the Cost Report to help ensure that a provider allocates all of their Gross Salaries on their Cost Report that were included on their Financial Statements, and that certain totals on the Cost Report for Gross Salaries on Page 2 equal similar totals on page 3.

• We added a question at the bottom of Page 2 of the Cost Report to help determine if “Service Expenses” for SCDSS children were Medicaid Reimbursed.

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Changes Made to Page 3 of the Cost Report • A change was made to a notation at the top of Page 3 of the Cost Report

(Personnel Schedule) to better clarify to the providers that Gross Salaries for each job position should be allocated based on the percentage of time spent working on the services/activities/programs listed.

• Also, a change was made to another notation at the top of Page 3 of the Cost Report (Personnel Schedule) to better clarify to the providers that we need a Narrative describing the methodology, basis, and supporting documentation that was used for the salary allocation.

• We added a notation at the bottom of Page 3 of the Cost Report(Personnel Schedule) to help ensure that the provider allocates all of their Gross Salaries on their Cost Report that were included on their Financial Statements, and that certain totals on the Cost Report for Gross Salaries on Page 3 equal similar totals on page 2.

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Changes Made to Page 4 of the Cost Report • A change was made to a notation on Page 4 of the Cost Report to better clarify to the

providers that if they had any “Other Contractual Services” or “Other Supplies” listed on their Cost Report that we would need to know in a Narrative page describing what expenses/amounts from the Financial Statements comprised those expense totals on their Cost Report.

• A change was made to the Instructions for Page 4 of the Cost Report to request that Child Placing Agencies describe on a Narrative Page attached what their average foster care board payments per day are to their foster parents for each service/level of care provided to SCDSS children (i.e. for treatment foster home services and medical treatment foster home services).

• We changed the wording on Page 4 of the Cost Report for line A.6 from “Interest Expense (on operating loans)” to read “Interest Expense (on secured operating loans)”, to help clarify that we believe only Interest Expense on secured operating loans that have provider assets backing them as collateral are actually an allowable expense.

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Changes Made to Page 5 of the Cost Report

• A change was made to notations on Page 5 of the Cost Report to better clarify

to the providers that if they had any “Other Fixed Charges” or “Miscellaneous Expenses” listed on their Cost Report that we would need to know in a Narrative what expenses/amounts from the Financial Statements comprised those expense totals on their Cost Report.

• On Page 5 of the Cost Report for Line I –“Total Unallowable Expenses” the

amount is automatically entered under the “Other Expenses” column from an electronic link to a total from a “Schedule for Unallowable Expenses/Costs” that the provider fills out on Page 7 of the Cost Report. However, to prevent the providers from mistakenly entering a number into any of the rest of the available columns for Page 5- Line I, we filled the rest of the columns for that line (except for the “Other Expenses” column) with XXXXXXXXXX.

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• On Page 5 of the Cost Report for Line K- “Total Expenses (after allocation of Admin. Exp.)” the “Administrative Expenses” column for that line should not have any amount in it, because Line K is supposed to show the costs after the allocation of any Administrative Expenses. Therefore, to prevent the provider from mistakenly entering an amount under the “Administrative Expenses” column for Page 5 - Line K, we filled it in with XXXXXXXXXX.


• We felt that the original Cost Report on Page 6 under Section A–Revenues did not give enough detailed breakdown from the providers concerning their revenues received from SCDSS and from other State Agencies (i.e. SCDJJ, SCDMH, SCCOC, and SCDDSN) for the various levels of care/services the providers gave to the children from those Agencies. Therefore, we added specific rows for SCDSS and those other State Agencies mentioned to capture a breakdown of revenues by State Agency under the columns we added for each of the three levels of: Group Care, TFH, and MTFH.

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• Also under Section A - Revenues on Page 6 of the Cost Report we added rows for some common type of “Other Revenues” that the providers might have had such as: Private Placement Revenues, Food Program Revenues, Other Program/Grant Revenues, Rent Income, and Investment Income, etc.; which will all be captured under a column we added called “All Other Activities/Programs”.

• We added a row at the bottom of Section A- Revenues on Page 6 of the Cost Report to compare Total Revenues per the Cost Report to the Total Revenues per the Financial Statements. We also added a row for any over or (short) Variance between these two figures. The purpose of this change to the Cost Report was to help ensure that all revenues on the Financial Statements of a provider have been included on their Cost Report.

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• We added rows and columns to Section B – Service Information on Page 6 for the providers to give more of a breakdown of the number of children they served and the number of service days they provided by State Agency and by levels of care/services for the children they served that were from SCDSS and any other State Agencies.

• We changed the wording for some of the service information toward the bottom of Section B – Service Information on Page 6 to more clearly indicate that the for the “Maximum number of Licensed Beds” and the “Beds Normally Available Based on Staffing and Other Factors” that we needed this for the Group Care levels of care/services (only). Also, to prevent the providers from mistakenly entering a number for those service information lines in the wrong column, we filled the rest of the columns (except the “Group Care” columns) with XXXXXXXXXX.

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• Due to the multiple columns added to the Cost Report on Pages 6 instead of printing one page, we now will have to print Page 6 on three (3) pages, in order to be able to read more detailed revenue and service information that will be included on Page 6.


• We added a line to the Schedule of Unallowable Expenses/Costs for

“Interest Expense (on unsecured operating loans)”, to help clarify that we believe that interest expense on unsecured operating loans is an unallowable expense, (and that only Interest Expense on secured operating loans that have fixed asset collateral backing them are an allowable expense).

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• A change was made to one of the notations at the bottom of Page 7 of the Cost Report to better clarify to the providers that if they had any “Other Unallowable Expense/Costs” listed under the Schedule of Unallowable Expenses/Costs that we would need to know in a Narrative what expenses/amounts from the Financial Statements comprised that “Other Unallowable Expense” total on their Cost Report.

• A Note was added to the bottom of Page 7 explaining that the provider had the option of just entering a Total for Fundraising and Thrift Store Expenses on the Schedule of Unallowable Expenses/Cost; which would automatically get carried over to Page 5 under the “Other Expenses” column. The other option instead would be to enter the individual expense line items that make up the columns shown for Fundraising and/or Thrift Store Expenses on the Statement of Functional Expenses in the Audit Report on pages 2, 4, & 5 of the cost report under the “Other Expenses” column.

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• The changes that were made to Page 8 of the Cost Report for In-Kind (Donated) Goods & Services have already been discussed in this section of the training presentation above under the heading called “Similar Changes Made to Pages 2, 3, 4, and 5 of the Cost Report”

Changed Made to Supplemental Schedule IV

• We changed the name of Supplemental Schedule IV from “Transactions With Related Organizations” to “Transactions With Related Parties” to help clarify that the provider could have transactions with “related parties” other than just a “related organizations” such as a subsidiary or a parent organization, etc. For example the provider could be paying expenses to or receiving revenue from a related party such as an owner, trustee, board member, member of management, employee, etc. for such items as supplies, rent, management or consulting fees, purchase/sales of fixed assets, etc. (i.e. because any type of related party transactions whether between related individuals or related organizations can be at an above fair market value).

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Documents

SCDSS Cost Report Training Presented by: Johnny Strait, Director of SCDSS - IAD Sharon Pate, CPA Cliff Hedgepath, CPA 1