Federal Audit Update

Federal Audit Update

Association of Government Accountants

April 22, 2014

© 2013 EYGM Limited. 2014 Public Sector UpdateSlide 2

Our presenters

► John Good, Executive Director, EY- Americas Professional Practice-Auditing

► Steve Baloga, Partner , Mitchell & Titus – Market Segment Leader – State and Local Government

Lesson objectives

► Illustrate the background that led to the development of OMB’s new uniform grant guidance

► Illustrate the impact of OMB’s new uniform grant guidance on federal grant grant-making agencies, recipients, subrecipients and auditors with respect to:► revised administrative requirements, ► combined and rationalized cost principles,► audit requirements.

Uniform guidance background

► OMB created the Council on Financial Assistance Reform (COFAR) in 2011► Co-chaired by the OMB-it includes the eight largest federal grant

making agencies as well as one rotating member

► In late 2011, COFAR developed potential reforms to streamline and improve policies for federal grant funds

Uniform guidance background (cont.)

► OMB issued Advanced Notice of Proposed Guidance on February 24, 2012

► OMB issued Proposed OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards► Over 300 comment letters were received in the aggregate

OMB Revisions to its Grant Guidance

► 2 CFR Chapter I and Chapter II Parts 200, 215, 220, 225 and 230, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance) ► Issued on December 26, 2013► Streamlines and consolidates eight existing OMB Circulars into

one document

COFAR Q and A document

► FAQ #1 for New Uniform Guidance at 2 CFR 200 issued in February 2014► Should is not a presumptively mandatory requirement like it is in

audit guidance but a “best practice” in the context of the Uniform Guidance

OMB uniform guidance objectives

► Streamline guidance for federal awards to ease administrative burden

► Strengthen oversight over federal funds to reduce risks of waste, fraud and abuse

► Focus grant policies on areas that emphasize the achievement of better grant outcomes at a lower cost while ensuring the financial integrity of taxpayer dollars

Effective dates

► Effective for awards or increments of awards issued after December 26, 2014► Could be challenging for auditees that will have awards within a

particular fiscal year that are subject to the existing guidance and the new uniform guidance

► The audit requirements in Subpart F are effective for fiscal years beginning on or after December 26, 2014► Early implementation is not permitted!

OMB uniform guidance — streamlining of related circulars and guidance

► A-21,Cost Principles for Educational Institutions► A-87, Cost Principles for State, Local and Indian Tribal Governments► A -89, Federal Domestic Assistance Program Information► A-102, Awards and Cooperative Agreements with State and Local

Governments► A-110, Uniform Administrative Requirements for the Awards and

Other Agreements with Institutions of Higher Education, Hospitals and Other Nonprofit Organizations

OMB uniform guidance — streamlining of related circulars and guidance (cont.)

► A-122, Cost Principles for Non-Profit Organizations► A-133, Audits of States, Local Governments and Non-

Profit Organizations► A-50, Audit Follow Up, related to single audits

Organization of Uniform Guidance by subpart

► A: Acronyms and Definitions► B: General Provisions► C: Pre-Federal Award Requirements and Contents of Federal Awards► D: Post Federal Award Requirements► E: Cost Principles► F : Audit Requirements► Appendices

Key Changes Subpart C – Pre-Federal Award Requirements and Contents of Federal Awards

Administrative requirements

► The Uniform Guidance consolidates administrative requirements of OMB Circulars A-102 and A-110 into a uniform set of administrative requirements for all federal award recipients► A-110 appears to have been adopted except for procurement

which originates from A-102 and which is less flexible

Pass-through entity responsibilities

► While many of these responsibilities are implicit today or contained in the current OMB Circular A-133 audit requirements the OMB grant guidance more clearly enumerates them

► Expansion of pass-through entity responsibilities► Must provide certain information in sub awards at the time of the

federal award and with each annual continuation of the sub award

► Must provide for indirect costs of recipient► Either negotiated or a flat rate of 10%

Pass-through entity responsibilities

► Pass-through entities are expected to refocus their efforts, particularly in documenting risk assessments of subrecipients for purposes of determining the nature, timing and extent of monitoring procedures► Extent and results of federal awarding agency monitoring

► Prior experience with similar sub awards

► Results of previous audits

► Whether subrecipient has new personnel or systems

Key changes for grant recipients — administrative requirements

► Must have effective internal controls over compliance with federal awards► Should comply with the internal control requirements issued by the

Governmental Accountability Office (GAO) in Standards for Internal Control in the Federal Government also known as the “Green Book” and the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control Integrated Framework

► Internal controls over compliance requirements moved from OMB Circular A-133

Internal controls over compliance with federal awards

► Part 6 of the OMB Circular A-133 Compliance Supplement contains a framework for internal control over compliance with federal awards that include suggested internal controls for each of the five elements of the COSO framework for each of the A-N compliance requirements

► However, this compliance supplement has historically been considered a document that helps auditors as opposed to explicit internal control criteria for recipients

COFAR FAQ #1— internal controls clarification

► There is no expectation or requirement that the recipient document or evaluate internal controls prescriptively in accordance with COSO or the Green Book or that the recipient or auditor reconcile technical differences between them

► COSO and Green Book are provided solely to alert recipients to source documents for best practices

Green Book

► The Green Book comment period ended on February 15, 2014

► The Green Book is essentially an adaptation of the 5 components and 17 principles of COSO to the federal government and now the potentially broader recipient community as a best practice document for internal controls over compliance

Key changes for grant recipients — administrative requirements

► Agency review of the merits of proposals and risk proposed by applicants

► Announcement of funding opportunities► Generally made available for at least 60 days

► Standard format to be used

► Interest earned on advances► Threshold to remit interest increased to $500, can be remitted

annually and to only one federal agency-HHS

Key changes for grant recipients — administrative requirements (cont’d)

► Property standards► Equipment no longer needed for the federal program it was

purchased for can be used to support other programs

► The term contractors replaces vendors► Could cause confusion in subrecipient relationships that use a

“contract “ to pass funds down

► Look at nature of the relationship and not the name of the document► Using a contract does not make someone a contractor

Key Changes Subpart E – Cost Principles

Cost principles

► OMB Circulars A-21, A-87 and A-122 consolidated into one.

► United States Department of Health and Human Services Cost Principles for Hospitals at 45 CFR Part 74 Appendix E-not incorporated in the Uniform Guidance► OMB will conduct further review of the cost principles for hospitals

to determine whether they should be added

Key changes for grant recipients — cost principles

► Indirect costs► Entities are given the option of extending the negotiated rate for up to four

years with the approval of the appropriate indirect cost cognizant agency► A minimum rate of 10% of modified total direct costs is established to

ensure that entities that are not able to negotiate receive a minimum reimbursement

► Pass-through entities will have to honor the indirect cost rates negotiated at the federal level, negotiate a rate in accordance with federal guidelines or provide a minimum flat rate

Compensation for personal services — current state

► Significant differences in time and effort documentation requirements under the three existing cost circulars

► A-21 is based on estimates that produce a reasonable estimation of actual activity

► A-87 and A-122 are based on periodic (at least monthly) time and effort reporting of employees

Compensation for personal services

► Uniform guidance provides less prescriptive guidance on documentation and increases emphasis on internal controls

Compensation for personal services (cont.)

► Time and effort reporting► Focus is on broad principles of how an entity may establish internal

controls to validate personnel related costs► Less prescriptive guidance on documentation

► Entities will be allowed to document personnel costs by using performance-based reporting based on milestones rather than time and effort reports

► This new option could significantly reduce the administrative burden of documenting positions funded by multiple grants that essentially serve the same population of program participants

Time and effort reporting

► Charges to federal awards for salaries and wages must be based on records that accurately reflect the work

► Certification periods up to 12 months must be established to provide oversight of federal awards

► Budget estimates made before services are performed do not qualify as support but may be used for interim accounting purposes in certain circumstances

Key changes for grant recipients — cost principles

► Collection of improper payments► Allowed to keep amounts collected to cover the expense of collection

efforts► Contingency provisions► Cost accounting disclosure statement

► Increase in threshold to file to $50,000,000► Depreciation

► Restrictions on recovery of indirect costs for depreciation or use allowance

Key changes for grant recipients — cost principles (cont.)

► Idle facilities and idle capacity► Costs associated with excess or idle capacity will be allowable

costs

► Intangible assets► Updates cost principles to treat intangible assets such as

computer software capitalized in accordance with US GAAP similar to other fixed assets

Key changes for grant recipients — cost principles (cont.)

► Material and supply costs► Cost of computing devices not otherwise subject to inventory

controls will be considered allowable direct cost supplies► Guidance sets a threshold of the lesser of $5,000 or the grantees

capitalization policy minimum

► Utility costs► Allows a utility cost adjustment of up to 1.3% to be included in the

negotiated indirect cost rate for all institutions of higher education in accordance with two options for utility cost reimbursement

OMB uniform grant guidance — next steps for recipients

► Read the uniform grant guidance► Including Q and A document

► Develop an internal implementation and training plan► Identify changes to policies and procedures and internal

controls to comply► Familiarize yourself with COSO and the Green Book

Key Changes Subpart F – Audit Requirements

Strengthening Oversight

► Several significant changes were made to single audits which will be covered on the next several slides ► OMB’s goal was to ensure that single audit efforts are focused on

the largest impact and highest risk grants and grantees

► These changes should serve to reduce the overall number of programs covered by Single Audits

Single Audit Report Standardization– Findings

► Emphasis on proper perspective information in findings► Information on audit sampling in the body of the finding when

findings involve items identified in auditor samples► Indicate whether sampling used was statistically valid

► Indicate whether current year finding was a repeat of a prior year finding and the prior year finding number

► Threshold for reporting questioned costs findings increases from $10,000 to $25,000

OMB uniform guidance– Schedule of Expenditures of Federal Awards

► Amounts provided to subrecipients by federal program required on the face of the Schedule of Expenditures of Federal Awards (SEFA)► Currently it is provided on the face or the notes of the SEFA, to the extent practical

► The notes to the SEFA will have to disclose whether the entity used the flat 10% indirect cost rate

OMB uniform guidance– Schedule of Expenditures of Federal Awards► The face of the SEFA must now include all federal awards expended

including:► Noncash assistance

► Loan guarantee programs

► Loan programs-

► Beginning balance of outstanding loans plus loans disbursed during the period plus interest subsidy, cash, or administrative cost allowance

Uniform Guidance-other reporting package items

► Financial statement findings, not just federal award findings are required in the Summary Schedule of Prior Audit Findings

► More clearly articulates that the Corrective Action Plan is a separate auditee document outside and apart from the management’s response and planned corrective actions section of the respective current year findings in the Schedule of Findings and Questioned Costs

Audit Finding Follow-ups

► As provided in §200.513 Responsibilities, paragraph (a)(7), the cognizant agency for audit must be responsible for coordinating a management decision for audit findings that affect the programs of more than one Federal agency.

► As provided in §200.331 Requirements for pass-through entities, paragraph (d), the pass-through entity must be responsible for issuing a management decision for audit findings that relate to Federal awards it makes to sub-recipients.

► The Federal awarding agency or pass-through entity responsible for issuing a management decision must do so within six months of acceptance of the audit report by the FAC.

OMB uniform guidance — single audit thresholds

► Raises the threshold of annual federal expenditures that triggers an A-133 audit from $500,000 to $750,000► Will provide audit relief for approximately 6,000 entities while

approximately 99% of the federal expenditures subject to audit will still be covered under the increased threshold

OMB uniform guidance — changes to the major program determination process

► Minimum Type A program threshold increased from $300,000 to $750,000 for entities with annual expenditures less than $25 million

► Change in the tiered scale to determine Type A programs for entities with annual federal expenditures exceeding $25 million► If total federal awards expended are between $25 million and $100

million then the Type A program threshold is .03 of federal awards expended

Changes in Type A program threshold

► If total federal awards expended are between $100 million and $1 billion then the Type A program threshold is $3 million

► If total federal awards expended are between $1 billion and $10 billion then the Type A program threshold is .003 of total federal awards expended

► If total federal awards expended are between $10 and $20 billion then the Type A program threshold is $ 30 million

► If total federal awards expended are $ 20 billion or more then the Type A program threshold is .0015 of total federal awards expended

Effect of loan programs on Type A program threshold

► Incorporates the guidance on large loans/loan guarantee programs that is currently in the OMB Circular A-133 Compliance Supplement

► However, modifies the guidance as it relates to a cluster of programs► When loan program is less than 50% of the cluster that the loan

program is included in, the cluster is not considered a loan program, so all amounts would be included in the Type A program threshold calculation

Effect of loan programs on Type A threshold — part of a cluster

► Community colleges or entities where Pell and Work Study dominate the Student Financial Assistance Cluster such that the loan component of the cluster is less than 50%, will see an increase in the Type A threshold and likely less major programs will have to audited

Type A high risk programs

► The criteria for prior-year findings that make a Type A program high risk in the current year have been narrowed to only findings that either:► Caused the program to not receive an unmodified compliance

opinion

► Were material weaknesses in internal control over compliance

► Represented known or likely questioned costs exceeding 5% of the program’s expenditures

Type A high risk programs (cont.)

► If a Type A program has not been audited as a major program in 1 of the 2 most recent audit periods, it will still be a high-risk program and have to be audited as major► A Type A program that had a significant deficiency in the prior year

is no longer an automatic high risk program

► A Type A program that had a reportable compliance finding in the prior year that did not result in a modified compliance opinion nor known or likely question costs that exceeded 5% of the expenditures of the program is no longer an automatic high risk program

Change in default criteria for a Type A high - risk program

► This change focuses risk assessment on whether the program received a modified opinion on compliance, had material known or likely questioned costs or a material weakness rather than virtually all types of findings, including those that are less significant

Type A program risk assessment changes

► A Type A program that has been audited once in the 2 previous years that has no prescribed audit findings in the prior year is a required low risk Type A program► Can not use auditor judgment and say it is a high risk program

because program is inherently risky or complex, etc. (SFA & R&D)

► Exceptions for risk indicated by results of audit follow-up on federal or pass through entity audit findings or any changes in personnel or systems affecting the program that indicate significant increased risk to preclude low risk designation

OMB uniform guidance — changes to Type B program risk assessment process

► Eliminates the two Type B program risk assessment options in the current Circular A-133

► Instead, we will perform risk assessments on Type B programs until high risk Type B programs have been identified up to 25% of the low risk Type A programs► Should result in fewer Type B program risk assessments

► May result in fewer Type B programs subject to audit

OMB uniform guidance — changes to Type B program risk assessment process (cont.)

► Reduce the number of high risk Type B programs that must be tested as major programs from at least one-half to at least one-fourth of the number of low risk Type A programs

► Small Type B programs that would not be subject to Type B program risk assessment would be increased to a flat 25% of the Type A program threshold

Minimum percentage of coverage changes

► Percentage of coverage requirement reduced from 50% to 40% for an entity that is not a low risk auditee

► Percentage of coverage requirement reduced from 25% to 20% for a low risk auditee

Changes to low - risk auditee criteria

► The criteria for low-risk auditee now more clearly includes data collection form submission within required time frames (as enumerated in the current OMB Circular A-133 Compliance Supplement) as a criteria

► Adds a criteria that the auditor did not report a substantial doubt about the auditee’s ability to continue as a going concern

Changes to low - risk auditee criteria (cont.)

► Adds a criteria that the financial statements reported on have to be prepared in accordance with GAAP or another basis of accounting if required by state law

Changes to major program determinations

► OMB believes that the changes will result in more targeted audit coverage of programs with material weaknesses and material noncompliance and:

► Burden relief for entities that materially comply as evidenced by an unmodified audit opinion, no material weaknesses in internal controls over compliance and no material questioned costs

► Incentive for entities to focus on correcting material weaknesses and material noncompliance

Changes to major program determinations (cont.)

► Entities that are dominated by one large program may not realize burden relief because that program has to be audited each year as major to achieve minimum percentage coverage

► We may see situations where there are fewer Type A programs and we are selecting additional programs (the current Type A programs) to achieve minimum percentage coverage with minimal impact on number of major programs

Changes to 2015 Supplement to be considered

► Whether the types of compliance requirements which require the auditor to test beyond the normal financial system (e.g., performance reporting, special reporting, and certain special tests and provisions) can be reduced

► Updates to Part 6 – Internal Control to be consistent with the GAO’s “Green Book” (when its revisions are finalized) and the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

► Whether certain compliance requirements can be merged, streamlined or eliminated consistent with initial Circular comment document

Uniform Guidance — other reporting package items

► Financial statement findings, not just federal award findings are required in the Summary Schedule of Prior Audit Findings

► More clearly articulates that the Corrective Action Plan is a separate auditee document outside and apart from the management’s response and planned corrective actions section of the respective current year findings in the Schedule of Findings and Questioned Costs

OMB uniform guidance — other

► Next business day is the due date for the data collection form and related reporting package when nine month Circular A-133 deadline falls on a weekend

OMB uniform guidance — other areas

► Full Circular A-133 reporting packages, including the audited financial statements will be publicly available► Processes with respect to preventing Protected Personally Identifiable

Information (PII) and other confidential information from being included in the reporting package will need to be developed► Senior level representative of the audited entity is to make a certification of

such in the data collection form

► A national Circular 133 audit quality study is required to be performed every six years beginning in 2018

Effective Dates

► Effective for awards or increments of awards issued after December 26, 2014

► The audit requirements in Subpart F are effective for fiscal years beginning on or after December 26, 2014► Early implementation is not permitted!

Transition Audit Issues

► For example, Audits for fiscal years ending on June 30, 2015 and December 31, 2015-will be auditing against recipient criteria under current OMB Circulars for part of the fiscal year and the Uniform Guidance for another part of the fiscal year

Resources

► EY Technical Line, Federal grant policies for recipients are streamlined and changed, January 9, 2014

► OMB Uniform Guidance and related crosswalks located at► http://www/whitehouse.gov/omb/grants_docs#final

►COFAR FAQ document at https://cfo.gov/cofar

Federal Audit Update

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