A Question of Interpretation

A rash of headlines appeared in national publications earlier this fall, when federal auditors charged that Harvard owed the U.S. government $1.7 million in research funds, which they said the University had mismanaged and accounted for poorly.

"Significant weakness" existed in the way Harvard charged costs in the approximately $78 million worth of federally funded projects Medical School researchers worked on between 1975 and 1978, a team of auditors from the Department of Health and Human Services (HHS) alleged.

But the immediate uproar over the potentially damaging allegations masked a broader and more complicated ongoing dispute between the University and government authorities over the proper approach to handling federal grants. The dispute--which is by no means peculiar to Harvard--may eventually prove harmful to the whole relationship between the University and the government, high-ranking financial officials fear.

Specifically the controversy is over the interpretation and approach to the regulations governing the University's accountability for the roughly $100 million it receives from federal agencies yearly for research.

Harvard officials say that the auditors have too narrowly interpreted the regulations, while the feds assert that they are merely following the rules.

That's how the battlelines essentially shape up over the recently completed audit of the Med School's research activities.

The final HHS audit report--released last September--cites a number of areas in which Harvard accounting procedures failed. But the basic complaint is about alleged improper "cost transfers" between various federally funded projects. One and a half million dollars of the $1.7 million the auditors want to disallow belong to this category.

HHS charges, for example, that Harvard regularly and improperly used the extra funds of one grant to pay for the cost overruns of another; had illegally certified salary costs to one project, and then charged it to another project; and had often made a cost transfer "without appropriate explanations or documentation."

In short, concludes HHS Regional Audit Director Edward A. Parigian, the system of grant management at the University "needs significant improvement to provide appropriate accountability of federal funds."

Not surprisingly, Harvard officials vehemently disagree, arguing that the federal auditors are too concerned with process and not results.

HHS thinks "that if the transfer process was late or was not properly documented that the charge should be disallowed." Financial Vice-President Thomas O'Brien says to explain the government attitude.

"We believe that you should look at the place where the charge eventually landed and go as far as necessary to satisfy yourself that that was an appropriate place for the charge to be made," he says.

And Administrative Vice-President Robert F. Scott says that the rules could be construed tightly, but that they are really not intended to be.

He puts it this way: A cost transfer is made between two grants. A federal auditor then immediately charges an impropriety. But, Scott adds, in most cases the auditor didn't look far enough.

For example, he goes on, the two grants in question are often for the same project, but for two succeeding fiscal years. The funding for the first year ends on one date, but sometimes official approval for the next year is not won for a few months. The funding for the new grant is then retroactive to the end of the last fiscal year, but the University has in the meanwhile had to transfer funds temporarily to cover the costs of the project. These are the sort of cases. Scott says, where the feds don't look "far enough" to see what actually happened.

O'Brien and other officials assert confidently that these charges are indeed correct. The documentation could be improved, they admit, but they stress that that is not the vital issue.

"The important thing is," says O'Brien, "was the federal money appropriately charged, not was the process perfect."

The Med School flap, and a similar dispute over an audit performed at the School of Public Health, is part of a larger national controversy between federal authorities and major research universities, many of which have suffered problems similar to Harvard's.

Increasingly complex federal regulations and Congressional worries over the stewardship of research grants has led to a number of major audits of universities' federally funded projects.

One particular source of contention has been the federal requirements that professors submit "effort reports" detailing the percentage of time spent on research, teaching, advising, and working on particular federally-sponsored projects. Although rules concerning this sort of bookkeeping procedure were recently cased, the whole idea, educators say, reflects a misunderstanding of how universities are run.

"Universities cannot compartmentalize costs as narrowly as the government would like," explains Milton Goldberg, head of the Council on Governmental Relations, which represents 100 major research universities--including Harvard--in their dealings with executive agencies.

Goldberg and other Washington lobbyists sympathize with Harvard's recent dilemma at the Med School. They said that in similar cases involving other universities, an initial uproar is made, but the final settlement is for less than 10 percent of the original charge.

While Goldberg says there is "always some truth" in the audits, the auditors are generally applying a far too fine line to universities' handling of research monies.

"HHS auditors display an attitude of: 'We're here for the sole reason of finding difficulty at your institution,'" he says, adding that the personalities of the officials in question often have something to do with this.

Federal officials, on the other hand, say the auditors are just doing their job. "One can't blame the auditors too much," elaborates Robert Newton, a senior staffer at the National Science Foundation (NSF), admitting that often the rules "don't make much sense."

He adds that government agencies are right now trying to loosen rules governing such parts of auditing as cost transfers.

And Richard J. Powers, a high financial official at the National Institute of Health (NIH), says simply that sloppy documentation often obscures reasonable accounting practices. If Harvard had better documentation, he explains, "I suspect that maybe the auditors would have recognized that [the cost transfers] were legitimate."

NSF supplied Harvard with $17.5 million last fiscal year, and NIH gave part of the $74 million in HHS funds the University received. HHS has the responsibility to audit all of Harvard's federally funded research.

Right now it is unclear what the resolution of the Med School audit will be. The audit report now is in Washington in the hands of Henry Kirschenmann, an HHS deputy assistant. Through an aide, Kirschenmann has refused comment on the eventual deposition of the case, though both Parigian and Harvard officials say there will be a period of negotiations between the government and Harvard over how much money will have to be paid back.

But this doesn't mean that Harvard's going to be conceding much to the government. Officials say they owe nothing. As Scott says, the University "is quite deliberately taking a tough attitude" in the case because of the desire to clear up the general problem, and not just come away with an expedient solution for Harvard.

Moving Forward

Scott and O'Brien say they expect the Med School audit to be tied up in one package with the $2.2 million still to be negotiated from the School of Public Health audit, but will not comment further on the state of the negotiations. But another official, Harvard's chief federal lobbyist Parker L. Coddington, says that the negotiating process is "making its way towards a quite acceptable conclusion."

One reason for Harvard officials' tough stand is--not surprisingly--another audit, this one an experimental audit conducted by the University's private accountant, Coopers and Lybrand.

Last year, Coopers completed the audit conducted of all the research money the University received in 1978, for all departments and schools. The certified public accountants found that Harvard accounted correctly for about 98 percent of the money, with "no fraud, abuse, or diversion of federal funds."

More to the point, O'Brien says, the type of cost transfers disallowed by the HHS auditors were found to be "appropriately made" by Coopers.

O'Brien also pointedly brings up Coopers's finding that Harvard didn't charge the government nearly $3 million it could have for certain salaries of faculty members working on federal projects. O'Brien adds that in one particular contract--which he won't specify--a good argument can be made that Harvard overcharged the government by $1.5 million.

Harvard is not trying "to conceal the fact that there's a lot of money they can claim with a lot of strength," he adds. But O'Brien stresses these have to be contrasted against the money Harvard is not claiming from the federal government.

As the garrulous financial vice-president states: "I'll argue that the preponderance of evidence on 99 percent of that is in our favor."

O'Brien concludes that "some improvements in our systems" ought to be made, but he resolutely maintains Harvard doesn't owe the government anything, as far as the Med School is concerned. "We think our interpretation will prevail, but I don't know."

Meanwhile O'Brien and officials in Washington stew over the harm the disputes have on the higher education-federal relation. The audit problem has "probably been the leading cause of damaging what was heretofore a fairly cordial relationship," Goldberg flatly states.

Harvard officials emphasize as well that the auditing system cannot be made 100 percent accurate, that the cost of making no errors is prohibitive.

The University's goal, O'Brien emphasizes, is "not to apply a very sharp pencil to our dealings with the federal government," but to advance research at reasonable rates.

"Harvard does not want to defraud the federal government," O'Brien adds emphatically.