By Deby MacLeod, CPA
By now we are familiar with the OMB Uniform Guidance for federal awards, but how much do we know about its effect on non-profits and other non-federal organizations from a practical sense, and what should we be doing now to prepare for its implementation? What should we have already done?
Recall that on December 26, 2013, the Office of Management and Budget (OMB) issued its Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, (Uniform Guidance, or UG) that combined eight OMB Circulars into one comprehensive, uniform set of regulations. Federal agencies had until June 2014 to develop and submit to the OMB their own agency-specific plans for implementation of the UG. The UG, along with the federal agencies’ guidance, became effective for all new federal awards and incremental funding of existing awards after December 26, 2014, without much fanfare or excitement.
Many organizations are struggling to find an easy way to determine how the UG will affect them and what changes their organizations need to make to comply with the UG. With detailed regulations from eight previous OMB Circulars combined into one body of regulations, this is no easy task. Because the UG applies to a broad spectrum of federal and non-federal entities with vastly varying operations and funding, it is difficult to compile a digestible, comprehensive summary of the changes that apply to all entities. Therefore, management will need to determine the areas that most affect their organizations and study those sections of the UG in detail.
To help you identify those areas, we have compiled a “Top 10” list of the changes in the UG, or sections (with section numbers noted) that affect many organizations, along with recommendations for practical steps to take now to begin your implementation.
UG Implementation “Top 10”
① Effective date (200.110) – Now, for all new awards and incremental funding of existing awards after December 26, 2014. However, non-federal entities may elect to manage all federal awards, new and existing, in accordance with the UG as of December 26, 2014.
- Inventory existing awards to identify those that will have incremental funding after December 26, 2014, and are subject to the UG.
- Establish a process for tracking these awards to ensure the changes in UG are applied to the awards identified.
- Review the pros and cons of managing all federal awards under the UG as of December 26, 2014. If your organization elects this option, clearly document the decision and approval process in your records. Consider notifying federal funding agencies and pass-through organizations of your election.
② Conflict of interest (200.112) – This section relates primarily to how decisions are made to select subrecipients and procurements (contractors).
- Review this section closely and update your policy if needed.
③ Procurement (200.317 – 200.326) – These regulations may be more restrictive under the UG than what some organizations are accustomed to. There is a grace period for implementation of the updated procurement standards, and for calendar year-end 2015 and fiscal years ending in 2016, you may elect to adopt the UG or continue to follow the old regulations (OMB Circulars A89, A-102 and A-110). However, you must document your election and ensure your policy is in compliance with the rules elected.
- Review this section of the UG and decide which rules your organization will follow for calendar year 2015 or fiscal years ending in 2016.
- Document your decision and have that document available for your auditors, as your auditor will undoubtedly ask for this.
- Begin considering what revisions or updates are necessary to your current procurement policy to bring it into compliance with the UG.
- Communicate with all stakeholders.
- Ensure your organization has fully documented its procurement policies and procedures, as required under the OMB Circulars and the UG.
④ Internal Controls (200.303) – This is a section that should be reviewed by all organizations. Important items to note are:
- There is more explicit reference to existing internal control requirements in the UG, and this section is included in the administrative requirements. Previously, internal controls were discussed primarily in OMB Circular A-133 as part of the audit – after the costs had been incurred.
- The section clarifies the meaning of “must” and “should.” “Must” is not optional. “Should” is recommended.
- This section says the non-federal entity “must”:
- establish and maintain effective internal control over federal awards that provides reasonable assurance that the non-federal entity is managing the federal award in compliance with federal statutes, regulations and the terms of the award,
- comply with federal statutes, regulations and terms and conditions of awards,
- evaluate and monitor compliance
- take prompt action when instances of non-compliance are identified, and
- take reasonable measures to safeguard personally identifiable information and other sensitive information.
- The internal control structure “should” be in compliance with Standards for Internal Control in the Federal Government (Green Book) issued by the Comptroller General of United States and the Internal Control Integrated Framework issued by the COSO. However, it is not a requirement that the non-federal entity strictly follow the Green Book or the COSO Framework.
- Review this section of the UG in detail.
- Read through the Green Book and review the COSO Framework to evaluate your organization’s existing internal control structure against these standards.
- Update or enhance internal controls where needed.
- Communicate any changes in internal controls to all stakeholders and ensure they are implemented.
- Have an updated, documented internal control manual, if applicable, available for your auditors, as they will undoubtedly ask for this.
- Refer to Part 6 of the OMB Compliance Supplement, as it fully discusses internal controls and best practices. The Compliance Supplement is updated every year, and the 2015 update (not yet finalized) is expected to incorporate the changes noted above (see link to the 2014 Compliance Supplement below).
⑤ Indirect F&A (facilities and administrative) costs (200.414) – Federal agencies and pass-through entities must accept an indirect F&A cost rate negotiated with a federal agency, or notify the OMB as to why the negotiated rate is not accepted and make publicly available the criteria to support the deviation. The updated guidance also allows for a one-time extension of your organization’s current negotiated indirect cost rate for a period of up to four years.
- Review your federal awards for any variances in indirect F&A cost rates and consider contacting the federal agency or pass-through entity to discuss how a consistent rate might be implemented going forward.
- Contact your cognizant federal agency if you are considering applying for a four year extension.
⑥ Indirect F&A cost recovery for subrecipients (200.331 and 200.414) – There has been much confusion in this area, and this section should be read in detail by both organizations passing federal funds through to subrecipients and by subrecipients as well. The UG states:
- Except if the federal program is subject to a reduced indirect F&A rate, a pass-through entity “must” pay a sub-recipient its federally negotiated rate, or,
- If the subrecipient has never negotiated an indirect F&A cost rate with a federal agency, the subrecipient may request a de minimus F&A rate of 10% of modified total direct costs, or negotiate an indirect F&A cost rate with the awarding entity.
- In order to obtain the 10% de minimus rate, the subrecipient must have never had a federally negotiated indirect F&A cost rate.
- For the entity passing federal funds through to other entities:
- Develop a policy to document the rate agreed to for each pass-through award and the basis for the rate (negotiated, de minimus, federally negotiated, other). Particularly if the agreed-to rate is lower than what the sub-recipient might have been entitled to, document that the rate was voluntarily accepted by the subrecipient.
- Develop and document your organization’s policies and procedures for indirect cost rate negotiation.
- For subrecipients:
- Determine if your organization currently has or has ever had a federally negotiated F&A cost rate.
- If your organization has never negotiated a Federal F&A cost rate, consider whether you would like to negotiate F&A cost rates with pass-through entities or elect the 10% de minimus rate.
⑦ Subrecipient monitoring (200.331) – Pass-through entities are required to evaluate the subrecipient’s risk and determine appropriate monitoring activities based on that risk assessment. This section also specifies both mandatory and optional subrecipient monitoring obligations. In addition, audit reports from subrecipients are now expected to be obtained by the pass-through entity from the Federal Audit Clearinghouse (available later in 2015) instead of requesting the audit reports from the subrecipient.
- Review your organization’s existing subrecipient monitoring processes to determine if they incorporate all of the mandatory requirements of the UG.
- Ensure the risk assessment performed on each subrecipient is documented.
- Consider the impact of subrecipients previously required to obtain an A-133 audit, but which are now exempt from the audit requirement due to the increased audit threshold (noted below). This will likely affect the risk assessment.
- Modify and document your procedures to ensure A-133 audit reports are obtained directly from the Federal Audit Clearinghouse beginning in 2015.
⑧ Compensation – personal services (200.430) – Commonly referred to as “time and effort reporting.” This section has been modified and now focuses more on stringent internal controls surrounding compensation costs instead of on specific procedures that must be followed in tracking and allocating the costs. For instance, no specific “certification” of time records is required, and the UG recognizes advances in technology that may result in electronic employee time records incorporated as part of the payroll system. However, many organizations have invested considerable effort in enforcing their current compensation tracking and allocation policies and are hesitant to relax or modify their processes.
- Review this section closely and consider whether modifications to your organization’s current practices would be desirable, keeping in mind that any changes should be fully vetted to ensure a strong internal control system is maintained and is auditable. Your auditor will still need to test internal controls and verify compliance with the regulations.
⑨ Required certifications (200.415) – To assure expenditures are “proper and in accordance with the terms and conditions of the award”, the annual and final fiscal reports or vouchers requesting payment must include a certification, signed by an official who is authorized to legally bind the non-federal entity.
- Review and adjust your organization’s policies to ensure those responsible for signing the annual and final fiscal reports comply with the UG; i.e., they are authorized to legally bind your organization.
⑩ Audit considerations – Subchapter F – If your organization’s year-end is December 31, it is likely there will be little effect to your 2014 audit. But if your fiscal year-end is after December 31, 2014, and your organization has received new federal awards or incremental funding of existing awards, expect your FY2015 audit to include test procedures under both sets of regulations: the OMB Circulars and the UG. The compliance supplement, Part 3, is issued every year and provides guidance to the auditor for auditing the 14 compliance requirements. The 2015 compliance supplement is broken into 2 parts: Part 3.1 addresses federal awards existing before December 26, 2014, and subject to the OMB Circulars; and Part 3.2 addresses new federal awards or incremental funding after December 26, 2014. A draft of Part 3.1 is currently available and is expected to be finalized in March 2015. Both the Davis-Bacon Act and the Real Property Acquisition testing requirements have been removed from Part 3.1. It is expected that the FFATA testing requirements over sub-awards will also be removed. Part 3.2 is not yet available.
Recall that changes to the Single Audit, including the increased threshold from $500k in annual federal expenditures to $750k, are effective for fiscal years beginning after December 26, 2014. Therefore, audits of the 2015 calendar year-end will be the first audits conducted under the UG as it relates to Federal Single Audits.
- Talk with your auditor well before your organization’s next audit begins to share information regarding Federal awards subject to the UG, implementing measures you have developed and deployed, and modifications expected to be made by your auditor in response to the UG.
The effects of the UG will become more apparent during 2015 as federal agencies and non-federal entities implement the guidance. Additional information is published as it becomes available. The UG and additional implementing information can be obtained from the following resources:
Various industry organizations are also publishing information as it becomes available:
Clark Nuber will continue to provide practical information on the UG through our newsletter and various seminars, but feel free to contact us at any time.
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