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Audit Report - A-02-95-00002

Office of Audit

Audit of Administrative Costs Claimed by the New Jersey Department of Labor for its Division of Disability Determinations - A-02-95-00002 - 6/20/97

This final report presents the results of our audit of administrative costs claimed by the New Jersey Department of Labor (NJDOL), for its Division of Disability Determinations (NJDDD). The NJDDD performs disability determinations under the Social Security Administration`s (SSA) Disability Insurance (DI) and Supplemental Security Income (SSI) programs. The objectives of our audit were to:

  • determine whether costs claimed on the State Agency Report of Obligations for SSA Disability Programs (Form SSA-4513) for the period October 1, 1993 through September 30, 1994, were allowable and properly allocated;
  • o determine if the aggregate of the Federal funds drawn down were in excess of total actual cash disbursements for the Fiscal Year (FY) 1994 disability determinations; and
  • o evaluate internal controls over the accounting and reporting of the administrative costs claimed, as well as of the drawdown of Federal funds.

We reviewed the administrative costs of $34,029,741 for SSA disability determinations claimed as of December 31, 1994 for the year ended September 30, 1994. Our procedures were designed to determine whether costs were allowable and properly allocated and Federal funds were accounted for properly. Also, we reviewed internal controls over the accounting, recording, and reporting of transactions. The obligations reported to SSA for this period should have been reduced by a net amount of $85,786 to adjust for both overstated unliquidated obligations and understated disbursements (see Appendix A). Also, based on its accounting records, as of December 31, 1994, $390,137 of the Federal funds drawn by NJDOL were in excess of total actual cash disbursements and are due back to SSA with applicable interest. Controls over accounting records, financial reporting, and Federal funds drawdowns need to be strengthened to minimize the likelihood of these reporting, accounting, and drawdown deficiencies occurring in the future.

NJDOL submitted to SSA a final Form SSA-4513 on April 26, 1997 for the FY ended September 30, 1994. NJDOL also provided us with comments on our report which generally agreed with our findings and recommendations. However, NJDOL continues to disagree with our audit adjustment on the drawdown of excess funds. Based on adjustments to its costs subsequent to our fieldwork, we have adjusted the drawdown of excess funds to $204,336. Please refer to the section NJDOL COMMENTS AND THE OFFICE OF THE INSPECTOR GENERAL CONCLUSIONS for more details.

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The DI program was established in 1954 under title II of the Social Security Act (the Act). The program is designed to provide benefits to wage earners and their families in the event the wage earner becomes disabled. In 1974, Congress enacted the SSI program (Public Law 92-603). Title XVI of the Act provides a nationally uniform program of income to financially needy individuals who are aged, blind or disabled.

SSA is primarily responsible for implementing the general policies governing the development of disability claims under the DI and SSI programs. Disability determinations under both DI and SSI are performed by an agency in each State in accordance with Federal regulations. In carrying out its obligations, each State agency is responsible for determining the claimants` disabilities and ensuring that adequate evidence is available to support its determinations. To assist in making proper disability determinations, each State agency is authorized to purchase medical examinations, x-rays, and laboratory tests on a consultative basis to supplement evidence obtained from claimants` physicians or other treating sources.

SSA reimburses the State agency for 100 percent of allowable expenditures. Each year, the State agency submits a budget request to SSA for review and approval. Once approved, NJDOL is allowed to withdraw Federal funds through the Department of Health and Human Services’ (HHS), Payment Management System to meet immediate program expenses. The HHS, Division of Payment Management (DPM) is responsible for operating this centralized payment system. Cash drawn from the Treasury to pay for program expenditures are to be drawn in accordance with 31 Code of Federal Regulations, Part 205 and, since July 1, 1994, a Treasury/State agreement under the Cash Management Improvement Act. At the end of each quarter of the Federal FY, the State agency submits a "State Agency Report of Obligations for SSA Disability Programs" (Form SSA-4513) (Federal financial report) to account for program disbursements and unliquidated obligations. Reimbursement for costs under the program is subject to the requirements set forth in the Office of Management and Budget`s Circular A-87, "Cost Principles for State and Local Governments." Allocation of indirect costs is done in accordance with NJDOL`s cost allocation plan which is approved by the Federal Department of Labor.

The NJDDD is an agency within the NJDOL and operates from two locations, a headquarters and main office located in Newark and a branch office located in New Brunswick. The agency employs approximately 410 personnel and has a budget of $34 million. A budget of $34,477,680 was authorized by SSA for disability determinations for FY 1994 and the only Federal program for which the NJDDD conducts operations is the disability determination program. The NJDDD`s accounting functions are performed primarily by the NJDOL Comptroller`s Office in Trenton. The Office of Leasing Operations is New Jersey`s primary agent for the procurement and control of leased space.

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Our audit was conducted in accordance with generally accepted government auditing standards. The objectives of the audit were to:

  • determine whether costs claimed on the State Agency Report of Obligations for SSA Disability Programs (Form SSA-4513) for the period October 1, 1993 through September 30, 1994, were allowable and properly allocated;
  • determine if the aggregate of the Federal funds drawn down were in excess of total actual cash disbursements for the FY 1994 disability determinations; and
  • evaluate internal controls over the accounting and reporting of the administrative costs claimed, as well as of the drawdown of Federal funds.

To accomplish the audit objectives, we:

  • reviewed Federal laws, regulations, and instructions pertaining to administrative costs incurred by NJDDD and to the drawdown of Federal funds;
  • reviewed NJDDD`s policies and procedures, and internal controls regarding the administration of the disability determination activities;
  • performed an examination of the administrative expenses (e.g., personnel costs, employee benefits, employee travel costs, office space and maintenance, indirect costs, etc.) incurred by NJDDD and claimed by NJDOL for the period October 1, 1993 through September 30, 1994;
  • reviewed purchased medical service costs incurred by NJDDD;
  • reviewed the reconciling of the official accounting records to the administrative costs reported by NJDOL to SSA on the SSA-4513 report for the period October 1, 1993 through September 30, 1994; and
  • compared the amount of Federal funds drawn for support of program operations to the allowable expenditures.

Our audit included examining on a test basis documentation supporting the costs claimed by the NJDOL for the period October 1, 1993 through September 30, 1994, as reported to SSA as of December 31, 1994. Except as noted under "Findings and Recommendations," the results of our tests indicated that, with respect to the items tested, the NJDOL complied in all material respects with the Federal cost principles and regulations. For those items not tested, nothing came to our attention to indicate that the untested items were not in compliance with applicable laws and regulations.

The field work was performed from February 1995 through March 1995 at the NJDOL headquarters in Trenton, New Jersey, the NJDDD headquarters in Newark and the branch office in New Brunswick. Additional field work was performed during August through September 1996 to address cash management issues. We held discussions with officials from the New Jersey State Auditor`s Office, KPMG Peat Marwick (Single Audit CPA firm for New Jersey), and the SSA’s New York Regional Office (see Appendix C for organization of SSA). An exit conference to discuss the draft report was held February 25, 1997.

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The reconciliation of the accounting records to the administrative costs claimed by the NJDOL showed that disbursements were understated and unliquidated obligations were overstated. During FY 1994, the NJDOL had not claimed net disbursements of $72,878. Also, the NJDOL claimed $158,664 of unliquidated obligations that are not allowable. As a result, total costs reported to SSA by the NJDOL for the period should be reduced by a net amount of $85,786 to adjust for both understated disbursements and overstated obligations (see Appendix A). Based on its records, NJDOL had drawn Federal funds of $390,137 in excess of its reported disbursements for FY 1994.


NJDOL did not claim net disbursements totaling $72,878 because errors were made in accounting for and reporting disbursements. The following disbursement amounts should be adjusted:

  • A-87 Indirect Costs - $73,620: NJDOL claimed $258,248 for indirect costs on the Form SSA-4513 as of December 31, 1994 although its accounting records contained disbursements of $340,275 for such costs. However, our review found that only $331,868 of the recorded indirect costs were valid. Therefore, the disbursed indirect costs claimed should be increased by $73,620 ($331,868 - $258,248).
  • EDP Maintenance - $9,208: EDP maintenance disbursements should be increased by $9,208 for one invoice in the NJDOL accounting records that was not claimed on the Form SSA-4513.
  • Professional Fees - $5,774: Claimed professional fee disbursements should be reduced by a total of $5,774. This consists of one invoice for $5,070 for part-time clerical services that was recorded twice in the accounting records and $704 consisting of two amounts, $318 and $386, that were not supported by invoices.
  • Transcription Services - $4,162: A disbursement claimed for transcription services should be decreased by $4,162 for which the supporting invoice could not be located.
  • Supplies -$14: Claimed disbursements for supplies should be reduced by a net amount of $14. This consists of claimed unsupported disbursements of $1,049, consisting of three payments which were offset by three valid disbursements totaling $1,035 for supplies that were not claimed by NJDOL.


Unliquidated obligations are cost commitments for orders placed, contracts awarded, and services received that have not been paid. The unliquidated obligations claimed for FY 1994 should be reduced by $158,664. This reduction occurred in the following expenses categories.

  • Transcription Services - $144,800: Transcription Services totaling $289,600 should be reduced by $144,800 because obligations were recorded twice.
  • Professional Fees - $9,362: Professional fees of $9,362 should be decreased because services were canceled.
  • EDP Maintenance - $4,502: A purchase order originally obligated for $5,000 resulted in a purchase for $498. Therefore, the unliquidated obligations balance should be reduced by $4,502.


Effective July 1, 1994, the State of New Jersey and the U.S. Department of the Treasury entered into an agreement under the Cash Management Improvement Act (CMIA). The agreement covers disability determinations and specifies the funding techniques to be applied. For nonmedical costs, Federal funds are to be drawn down biweekly. The amount drawn should be the actual amount of administrative expenses for the most recent prior quarter for which data is available divided by the number of pay periods in the current quarter. At the end of the current quarter, if the total draws do not equal the total actual disbursements for the current quarter, an adjustment for the difference is required to be made to the next biweekly request for Federal funds. For medical costs, Federal funds are scheduled by NJDOL to be drawn weekly in the amount of the total medical costs paid during the week. The Federal/State agreement provides that New Jersey will receive Federal funds for disability determinations via the automated clearing house (ACH). The ACH is an electronic fund transfer "next business day" direct deposit method. Recipients using ACH are expected to drawdown only the Federal funds needed for actual immediate disbursement since the funds are normally available the next business day after making a request.

We reviewed the NJDOL drawdowns for the period October 1, 1993 through June 30, 1994 (prior to the inception of the CMIA agreement). The NJDOL was in conformity with Federal regulations as it was not holding Federal funds in excess of its current disbursement needs. In fact, as of June 30, 1994, the Federal funds it had drawn were $734,950 less than its paid disability determinations costs, as follows:

For the Period October 1, 1993 Through June 30, 1994

Disbursements - Per Form SSA-4513 $ 21,917,140
Less: Federal funds drawn - Per NJDOL records 21,182,190
Balance $ 734,950

Beginning July 1, 1994, NJDOL should have drawn down Federal funds using the funding techniques contained in the CMIA agreement described above. However, NJDOL did not implement Federal fund drawdowns under the CMIA agreement until the quarter beginning April 1, 1995. Rather, it continued with the previous funding technique under which the amount of the drawdowns of Federal funds was to be as close as feasible to New Jersey`s actual disbursements. When NJDOL finally began to drawdown funds under the CMIA agreement, it did not utilize the authorized funding technique for its administrative costs. Instead of initially basing its drawdowns on prior quarter actual amounts, it utilized an estimate of the administrative expenses for the current quarter. The latter technique is authorized under the CMIA agreement for some other programs but not DDS’. NJDOL believes this technique had not been authorized for disability determinations due to an error in the preparation of the CMIA agreement. Our review of NJDOL`s records supporting its drawdowns from July 1, 1994 to December 31, 1994, for FY 1994 disability determinations, disclosed that NJDOL had drawn excess Federal funds of $390,137 as follows

Federal Fund Balance (under drawn as of 6/30/94)

($ 734,950)

Add: Federal Funds Drawn Down (7/1/94 - 12/31/94)


Total Federal Funds Available


Less: Disbursements (7/1/94 - 12/31/94)



$ 463,015

Adjustment for Unreported Net Disbursements-Per Audit


Excess Drawdowns of Federal Funds (as of 12/31/94)

$ 390,137

We discussed the drawdown of excess Federal funds with NJDOL staff and were informed that a Federal fund drawdown on October 21, 1994 for $1,195,639 had been erroneously recorded in the agency`s accounting records. Of this amount, according to the officials, $759,420 had been recorded as a FY 1994 Federal fund drawdown but should have been recorded as a drawdown for FY 1995. We were unable to verify the validity of this assertion as we were informed the supporting documentation could not be located. Moreover, DPM advised us that for the period of our audit its records did not identify the year or years to which drawdowns pertained.


The accounting and reporting of administrative costs, as well as the drawdown of Federal funds are performed by one NJDOL employee. The responsibilities of the function require the employee to receive, record, and report the receipt of billings and expenditures. Specifically, the employee is responsible for:

  • monitoring all expenditures incurred for operating the DDS program,
  • drawing down Federal funds,
  • accounting for drawdowns,
  • preparing quarterly expenditure reports (Form SSA-4513), and
  • preparing quarterly cash reports.

The performance of these functions by one employee results in weak internal controls. The errors identified by our review were not detected because of a lack of checks and balances. Due to the lack of separation of duties and compensating controls there is a high risk for errors and irregularities to occur.

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We recommend that SSA require NJDOL to:

1. Increase the reported disbursement amounts on the Form SSA-4513 for FY 1994 by a net total of $72,878 to adjust for the disbursements not claimed or not supported.

2. Decrease the total unliquidated obligations on the Form SSA-4513 by a total of $158,664 to adjust for the unliquidated obligations which should be canceled or were duplicated.

3. Refund $390,137, the amount of the excess drawdown of Federal funds and any applicable interest.

4. Strengthen internal controls over its accounting records through the segregation of duties or compensating controls over the accounting, recording, and reporting of transactions.



On April 10, 1997, the Commissioner, Department of Labor, State of New Jersey, provided comments in response to our draft report. The full text of the NJDOL comments are in Appendix B of this report. We appreciate the cooperation and prompt action by the State of New Jersey to resolve the issues identified in our draft report. The NJDOL generally agreed with our recommendations. Subsequent to our audit, NJDOL submitted a final Form SSA-4513 to SSA and incorporated audit adjustments applicable to recommendations 1 and 2. NJDOL does not agree with recommendation 3 on drawdowns of excess funds and did not comment on recommendation 4 to strengthen internal controls over its accounting records. We continue to believe that SSA should require NJDOL to strengthen its internal controls. NJDOL comments and our conclusions to recommendations 1, 2, and 3 are summarized below:

Recommendation 1 - Accounting for Disbursements

The NJDOL final Form SSA-4513 reported indirect costs of $331,868 which agrees with our draft report findings. NJDOL considered the other four disbursement findings, with a net over reporting of $742, too small to pursue. We concur with its position on these four disbursements.

Recommendation 2 - Accounting for Unliquidated Obligations

The NJDOL final Form SSA-4513 shows that all unliquidated obligations were canceled. Transcription services of $144,799.56 were canceled in the exact amount identified in our audit and outstanding obligations for EDP maintenance and temporary services were canceled in amounts less than we recommended.

The NJDOL also reported in its final Form SSA-4513 total obligations of $33,704,541. This amount is $ 239,414 lower than the $33,943,955 allowed in our draft audit report. Since NJDOL is reporting obligations lower than amounts allowed in our audit report and these amounts according to NJDOL were subject to the States’ single audit review, we recommend that no further action be taken on this recommendation.

Recommendation 3 - Drawdown of Excess Funds

The NJDOL does not agree with the audit position concerning cash management. The NJDOL contends that the cash position of a major program changes daily as funds are drawn and program disbursements occur. The audit attempts to identify one single point in time and recover the excess drawdown of Federal funds on that day. Further, the NJDOL contends that never under CMIA are Federal funds returned.

We do not agree because the disability service grant is funded on a FY basis. As such, specific distinctions are made between FYs. Each FY is subject to a budget request and approval. Moreover, at the end of each quarter, submission of an expenditure report (Form SSA-4513) accounting for program disbursements and unliquidated obligations by program FY is required. The NJDOL is implying that the distinctions between FYs is not important because the program is ongoing in nature. As described in this report, CMIA is only a funding technique which provides guidance for calculating the amount of drawdowns of specific expenses and its frequency. Accordingly, a refund is due for an excess drawdown of Federal funds.

As a result of changes made by the NJDOL subsequent to our fieldwork as evidenced in the response to our draft report, including the submission of a final Form SSA-4513, we recalculated the amount of the excess drawdown. This also includes an update to reflect the total amount of funds drawn down for the FY 1994 period.

The last drawdown for FY 1994 was made February 10, 1995. The revised over draw for FY 1994 is $204,336 calculated as follows:

Federal funds drawn-10/1/93 - 12/31/94 per report $33,734,777

Add: Federal funds drawn-1/1/95 - 2/10/95 174,100

Total funds drawn for FY 1994 $33,908,877

Less: Disbursements-10/1/93 - 3/31/96 per final Form SSA-4513 33,704,541

Excess drawdowns of Federal funds (as of 3/31/96) $ 204,336

Pamela J. Gardiner
Assistant Inspector General
for Audit

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FOR FY 1994 AS OF DECEMBER 31, 1994

































































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