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.