June 30, 2016
Many government and nonprofit entities are subject to a federal single audit. Such audits are based upon provisions of Title 2, Code of Federal Regulations, Part 200, commonly known as the Uniform Guidance. Audits in accordance with Subpart F, Audit Requirements, are required to commence for fiscal years (and of course, calendar years) beginning on or after Dec. 26, 2014. For June 30 governments, the first audit period began on July 1, 2015.
Existing federal awards that were received before Dec. 26, 2014, without any new incremental funding on or after that date, will still have an audit in accordance with the old provisions of Circular A-133. Those audits will also be governed by the terms and conditions of those awards. However, if incremental funding was received on or after Dec. 26, 2014—even for the same award—then the award would be subject to the Uniform Guidance. With regard to federally participating procurements, an additional grace year is included in the Uniform Guidance, but documentation related to the procurement must include which guidance is being followed (A-133 or Uniform Guidance).
This article is broken into two parts. Part 1 focuses on the major differences in a Uniform Guidance Audit from previous audits. Part 2 focuses on the SEFA, findings, due dates and what to look for in the future. Click the links to jump to each part.
What are the Major Differences to Expect in a Uniform Guidance Audit from Circular A-133?
The most visible difference governments and nonprofits may notice is an increase in the threshold requiring a single audit from $500,000 to $750,000 of federal expenditures during the audit period. The threshold for a large, so-called Type A program also rose to $750,000 as part of the Uniform Guidance from the former $300,000. The dollar amount of awards expended that an auditor must test has also changed based upon the level of expenditures and the risk assessment of the federal programs.
The elements of federal programs—the compliance requirements—have also changed. Real property acquisition testing has been removed, but may be part of a special test required by a federal agency. More visibly, Davis-Bacon act testing has also been removed, but consolidated as part of a Wage Rate Requirements Cross-Cutting Section that applies to dozens of federal programs from federal agencies including Transportation, Commerce, Housing and Urban Development (HUD), Treasury, Energy and Education. Testing for “period of availability” focuses now more on whether auditees performed the program-specific requirements related to performance in accordance with the grant during the period, in addition to testing if the funds were used during the period. In other words, outcomes of the program are now as important as the financial and compliance aspects of the program.
Auditees may have also noticed a more cohesive structure of audit finding elements. Program information; the criteria; conditions found; the context of the finding; and questioned costs (if any) all carry to the Data Collection Form. The threshold for reporting known questioned costs has also been raised from $10,000 to $25,000 as part of the Uniform Guidance. However, many states may have requirements for reporting lower thresholds of known questioned costs.
As a reminder, the Data Collection Form, the financial report and any other elements submitted to the federal government with the Data Collection Form as part of the reporting package are now public documents, except for certain circumstances involving tribal nations.
Internal Controls and the Uniform Guidance
Over the past few months, many of our clients have attended webinars and workshops involving the Committee of Sponsoring Organization’s Internal Controls-Integrated Framework (COSO). One reason why Eide Bailly has focused on the COSO is embedded in the Uniform Guidance. Audit testing will now use the COSO as one of the fundamental elements of testing compliance with grant provisions. Auditees should also use the COSO principles as some of the fundamental aspects of monitoring sub-recipients and document how those principles apply. An additional source for auditees to prepare documentation of their processes and procedures related to monitoring sub-recipients could also be the Standards for Internal Control in the Federal Government (Green Book), which is specifically identified in the Compliance Supplement as a source of guidance.
What is Required in the Schedule of Expenditures of Federal Awards (SEFA)?
Similarly to what was presented previous to the issuance of the Uniform Guidance, the SEFA is required to present all federal awards in a prescribed format. Many preparers may miss the value of non-cash assistance, or properly reporting loan or loan guarantee programs. Commonly, amounts passed through to sub-recipients for each program are improperly reported. Note disclosure is also required to the SEFA.
In the Uniform Guidance, expenditures of federal awards are still required by Catalog of Federal Domestic Assistance (CFDA) number by agency and grouped by cluster (if applicable). If no CFDA number is available, but the federal agency is known, then the federal agency prefix must be used, followed by the grant award identification number and a contract number. If the contract number is unknown, the word “unknown” may be used.
For multiple year awards, the Uniform Guidance allows to list the amount of federal awards expended for each award year separately as an option. Also optional is the presentation of nonfederal awards in the SEFA, which may be required due to state law. If nonfederal awards are presented, they must be separated from federal awards in the schedule.
Federal awards are generally expended when transactions occur or disbursements are made. But other categories of transactions are clarified in the Uniform Guidance. For example, loans and loan guarantees are deemed expended when loan proceeds are used, except where institutions of higher education do not make the loan. When that occurs, the value of the loans made in the period that are federally eligible are reported as non-cash awards. Donated property is deemed expended when received. However, food commodities are deemed expended when distributed or consumed. Insurance policies that are reimbursed by federal funds are deemed expended when in force, but not before or after. Program income is deemed expended when received or used.
Finally, notes are required to the SEFA, similarly to the prior guidance. There is a summary of significant accounting policies, including identification of the basis of accounting to prepare the SEFA, which may be different than the rest of the financial reports.
The federal government does not establish a basis of accounting for the SEFA beyond deeming when funds should be reported. Therefore, there is a requirement to include in the notes a reconciliation of the SEFA to the financial statements. Common reconciliation items include the basis of accounting differences between the SEFA and the financial statements and timing differences between when transactions are reconciled in both statements. The Uniform Guidance adds to the notes a requirement to disclose whether your entity has elected to use the 10 percent de minimis indirect rate (which may be passed through another entity to your entity). Year-end federally funded loan balances are also required to be disclosed in the notes.
What Will Happen to My Entity’s Audit Findings?
As previously discussed, the report submission is a public document, now inclusive of your entity’s audit findings. Auditees are responsible for following up and performing any corrective action necessary to remediate the findings. A status schedule of all prior findings and questioned costs, inclusive of “Yellow Book” findings, will be included, which will contain findings corrected, findings not corrected in full or partially (including the reasons why findings were not corrected) and when action will be taken. If a finding was carried forward from a previous audit without a change in status, there will be an explanation as to why things were different from the prior audit.
On the other hand, if the finding is no longer valid or no action is needed, an explanation is also necessary. Valid reasons include the passage of two years since the audit finding was generated without a federal agency not following up with your entity.
For a complete submittal, corrective action plans must include the name of the contact person performing the corrective action, the corrective action planned and expected completion date. If an entity does not agree with a finding, they must describe their reasons. But as a reminder, this document is a public document. Furthermore, some states require formalized corrective action plans on entity letterhead signed by the entity chief executive.
Upon submittal, the finding will be channeled to the federal agency where the grant award was disbursed or the pass-through entity for monitoring purposes. The federal agency or the pass-through entity will then respond to your entity if the finding is to be enforced (sustained,) the reasons for the decision, if there is any expectation to repay any disallowed costs (if applicable), to make financial adjustments or to take some other action. The federal agency or the pass-through entity will establish the timetable for corrective action if no timetable is included from your entity. They could request additional information or establish an appeal process.
When Is All of This Due?
The Uniform Guidance also clarifies the submittal date of the reporting package. The package must be submitted to the federal audit clearinghouse within the earlier of 30 calendar days after the receipt of the audit reports or nine months after the end of the audit period. If the due date falls on a weekend or a holiday, the package is due the next business day. Late submittals are one of the factors in increasing audit risk to high risk, resulting in testing of more programs and internal controls.
What May Change in the 2016 Compliance Supplement?
As you may remember, the annual Compliance Supplement issued by the White House Office of Management and Budget (OMB) and compiled from submittals to federal agencies dictate what compliance requirements are to be followed by entities and tested by auditors. For 2016, OMB has proposed two new HUD programs to be tested related to the Community Development Block Grant Program. The Department of Labor has clarified the names of three Workforce Investment Act programs.
Some of the major changes in the proposed Compliance Supplement include an almost total elimination of American Recovery and Reinvestment Act (ARRA) compliance, as most ARRA funds have been spent. A total of 38 programs so far have what is described as “more than minor changes.” Other changes in the Compliance Supplement are proposed mainly to be clarifications of what was contained in last year’s Supplement. Throughout the document, the references to the former Circular A-133 and ARRA have been largely removed.
Eide Bailly has a number of resources to provide additional information to you on the Uniform Guidance, including a webinar on the Federal Grant Management and the New OMB Circular available here. Finally, a comprehensive set of frequently asked questions is maintained by the Chief Financial Officers Council – Council on Financial Assistance Reform. The link also contains webinars and training.
Audits and operations within the framework of the Uniform Guidance will continue to evolve as federal agencies, pass-through entities and recipients of federal awards continue to gain an understanding of the provisions. Many entities may have to take another look at their policies, procedures and internal controls with regard to federal operations sooner rather than later as the Uniform Guidance becomes fully implemented and the federal awards in existence prior to Dec. 26, 2014, are spent. Should you have any questions, please feel free to reach out to your Eide Bailly professional at any time.