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increase:  $3,839,616 in fiscal year 1988, $4,984,796 in fiscal year 1989 and $5,760,457 in fiscal year 1990.

Smithsonian's Areas of Vulnerability

The changing environment requires an evaluation of the Smithsonian's operations relative to Federal grants and contracts.  Itemized below are the areas where the Smithsonian is most vulnerable:

1.  The current environment and proposed changes in Circular A-21 could affect the Smithsonian's method for calculating the indirect cost rate and the actual indirect cost recovery.  It is difficult to evaluate at this time the impact on the Smithsonian.

2.  The Office of Naval Research has been reviewing and is changing the process for negotiating indirect cost rates at all Department of Defense cognizant educational and non-profit organizations that fall under Circular A-21.  These changes have caused a delay in approving the Smithsonian's use of the fiscal year 1991 pre-determined fixed rates, resulting in the Smithsonian's under-recovery of two percent in fiscal year 1991 and resolving outstanding issues from prior years.

3.  Additional scrutiny will likely result in the Smithsonian being required to change its methodology for rate calculation to conform more closely to the standard model laid out in Circular A-21.  This has the potential for affecting indirect cost recovery.

Actions Being Taken by the Smithsonian

The Smithsonian is keeping abreast of the changes and revisions being discussed by Congress, OMB, and other OMB A-21 mandated institutions.  Over the last several months, it has reviewed its internal controls and developed strategies and procedures to improve the financial and administrative management of its externally-sponsored projects.

1.  The role of the Office of Sponsored Projects has been expanded to include oversight for post-award financial management of all grants and contracts, and audit liaison with the Defense Contract Audit Agency and the Office of Naval Research in response to our recognition that stronger internal controls and better communication with the Defense Contract Audit Agency and the Office of Naval Research were needed.  While this expansion of the Office of Sponsored Projects' responsibilities was not in response to the external environment that has been much publicized recently, its occurrence reflects the Smithsonian's commitment to improving grant and contract administration so that proper cost allocation will occur.

2.  The Smithsonian is in the process of rewriting OM 722, "Financial Support from Outside the Smithsonian."  Revision of OM 722 will address the need for strong internal controls.  The Smithsonian's policy and procedures for seeking and accepting external grant and contract funding will be restated and widely disseminated.

3.  The Smithsonian will contract with Coopers & Lybrand to perform a vulnerability assessment and diagnostic evaluation of the Smithsonian's