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There are several advantages to such a report. First, it shows the Smithsonian as one institution, while highlighting the individual contributions of major units through the color spread described in the attachment. The color spread will be of special value to bureaus and offices represented, because it will convey in a striking format--using color photography and lively text--some significant aspect of each unit's accomplishments for the year. Second, its shorter and more attractive format will give the recipient of the report more incentive to read it. Third, it will be more valuable to donors and for marketing the Institution and its organizational units to its multiple constituencies.

The proposed format meets all of the Smithsonian's legislative and archival requirements. And the Smithsonian will continue to publish a supplement with all of the appendices that appeared in the past. This supplement will be available as hard copy and on microfiche.

The Secretary and Under Secretary consider this an experiment, recognizing that there may not be a consensus on this new approach. They are prepared to review and evaluate achievement of the objectives of Smithsonian Year 1991 prior to the call for entries for fiscal year 1992.

RECENT INDIRECT COST AND AUDIT ISSUES FOR FEDERAL GRANTS AND CONTRACTS

Background

Throughout fiscal year 1991, the U.S. Government increased scrutiny of educational institutions under OMB Circular A-21 cost principles (which the Smithsonian currently is required to follow) in light of the perception that abuses of indirect cost recovery were occurring. As a result of the much-publicized Congressional hearings with Representative John D. Dingell's committee, Stanford University was found to have violated the cost principles and over-billed the government for its indirect costs. Other research institutions have assessed their indirect cost calculations and methods of recovery and are electing to reduce their rates of indirect cost recovery. Finally, in June 1991, OMB proposed changes to Circular A-21 to tighten the cost principles used by educational institutions. For example, OMB proposed a 26% cap on the reimbursement of administrative costs associated with federally sponsored research projects. The regulations also provide for the establishment of a dedicated facilities fund, requiring that the portion of Federal indirect cost recovered for depreciation or use allowance under sponsored agreements must be identified and set aside in a separate restricted fund.

OMB Circular A-133, which covers audit requirements, has recently been issued. Although the development of this circular predates the Stanford-raised issues, it too is affected by them. Compliance with the circular is expected to improve accountability as well as the cost effectiveness of the audit process.

Indirect cost recovery is critical to the Smithsonian. It provides a source of unrestricted funding to cover part of the Institution's administrative and support costs. A three-year summary of the Smithsonian's indirect cost recovery from government grants and contracts shows a steady