April 17, 2013

By Troy Rector, CPA

The second of a two-part series covering the Proposed Uniform Guidance recently issued by the Office of Management and Budget (OMB). Part 1 provided an overview of the overall Proposed OMB Uniform Guidance document and specific changes to cost principles and administrative requirements applicable to Federal awards. Part 2 discusses OMB’s proposed changes to the Single Audit Act.

Sweeping changes such as the ones in the Proposed Uniform Guidance don’t happen often. In fact, OMB Circular A-133 – Audits of States, Local Governments and Non-Profit Organizations – currently in use was issued under the Single Audit Act of 1984 and the Single Audit Act Amendments of 1996.

The most recent revisions to the Act itself occurred in June 2003 and June 2007, and these changes were fairly narrow in scope. The A-133 Compliance Supplement (Appendix B to OMB A-133) is updated each year; however, the Supplement’s changes are generally in direct response to new or discontinued Federal programs, or to changes in compliance requirements the Federal government expects to be incorporated into the Single Audit. Likewise, the OMB circulars governing Federal award administrative requirements were most recently amended in 1999 and those related to cost principles in 2004.

This Proposed Uniform Guidance would update specific policies and requirements governing Federal grants and cooperative agreements to non-Federal entities as well as combine the Circulars into a framework of one “Super Circular.”

The U.S. government spends more than $600 billion annually in the form of grants and cooperative agreements to non-Federal entities. More than 45,000 Single Audits were submitted to the Federal Clearinghouse in 2011. The proposed changes are intended to increase the efficiency and effectiveness of Federal programs, reduce audit and compliance requirements that may add relatively little value, and focus on areas expected to result in achieving better outcomes at lower cost. Although these changes are focused on the audit process, they will have a direct effect on you, the auditee.

Following is a summary of the more significant proposed changes to OMB Circular A-133 and the Single Audit Requirements.

1. Increase the Threshold for Single Audit from $500,000 to $750,000

The threshold for the Single Audit Requirement would be raised from $500,000 to $750,000. This change is intended to reduce the audit burden on relatively smaller organizations, while allowing Federal agencies to focus more directly on higher risk entities and increase audit follow-up. The change would relieve approximately 5,000 non-Federal entities from the Single Audit Requirement while maintaining audit requirements of approximately 99% of Federal funds currently covered, according to the Federal Register. Organizations whose Federal expenditures fall below $750,000 may be required to obtain a Single Audit under the terms of a specific award in limited circumstances. Records for all organizations must be made available for review or audit by appropriate officials of the Federal agency, pass-through entity, and the Government Accountability Office.

2. Streamline the Types of Compliance Requirements in the Compliance Supplement

The proposed guidance limits the types of compliance requirements in the Compliance Supplement and focuses on those, if violated, deemed most likely to result in disallowed costs, waste, fraud, or abuse. The number of types of compliance requirements would be reduced from 14 to the following 6:

  • Activities Allowed or Unallowed and Allowable Costs/Costs Principles (the proposed guidance notes that this requirement could include some testing of Period of Availability and Matching)
  • Cash Management
  • Eligibility
  • Reporting
  • Subrecipient Monitoring
  • Special Tests and Provisions

The proposal would permit Federal agencies to request that certain of the deleted types of compliance requirements be added to the Special Tests and Provisions requirement for programs where they could be considered essential to the oversight of the program. This change is not reflected in the draft proposal but would be implemented through the first OMB Compliance Supplement to be issued after the proposed change becomes final.

3. Changes in the Major Program Determination

The proposed guidance would change all four steps the auditor takes in determining which programs will be audited. The goal is to reduce the audit burden on non-Federal organizations that materially comply, as evidenced by consistent unqualified audit opinions with no material internal control weaknesses or material questioned costs reported. The change would increase focus on highest risk programs and reduce the number of programs tested.

Under the current risk-based approach, the auditor begins by segregating programs between “Type A” (relatively large) and “Type B” (relatively smaller) programs, and then follows several steps with prescribed criteria to identify the major programs to be tested. The proposed guidance would increase the minimum threshold for Type A programs from $300,000 to $500,000 (or alternatively, 3% of total Federal awards expended). The way the auditor performs the required risk assessment steps would be modified and is expected to result in fewer Type B programs audited. Additionally, the calculation for smaller Type B programs (normally not required to be audited) would be simplified.

The proposed guidance would also reduce the minimum audit coverage required. Currently, the auditor must audit programs whose expenditures, in aggregate, encompass at least 50% of an organization’s total Federal expenditures, or 25% for a low-risk auditee. The updated coverage threshold would be reduced to 40%, and to 20% for low-risk auditees.

4. Clarified Definition of Low-Risk Auditee

As noted above, required coverage for a low-risk auditee is lower, thus generally reducing the number of major programs audited. Under current rules, an organization qualifies as a low-risk auditee if:

  • Single Audits were performed on an annual basis
  • The auditor opinions on both the financial statements and the schedule of expenditures of federal awards were unqualified
  • No deficiencies in internal control deemed to be material weaknesses under government auditing standards were reported
  • In the prior two years none of the following were reported concerning a major program audited:
  • A material weakness in internal control
  • Material non-compliance with requirements for a major program
  • Known or likely questioned costs exceeding 5% of the major program audited

The proposed guidance retains these requirements. However, language has been added to clearly specify the data collection form submission must have been made within the required timeframe. The guidance also specifies that the auditor must not have reported a substantial doubt about the auditee’s ability to continue as a going concern.

5. Increase in Threshold for Questioned Costs

The threshold for reporting questioned costs would increase from $10,000 to $25,000 to focus on audit findings presenting the greatest level of risk. This is expected to reduce the number of smaller audit findings that require follow-up time, yet may not be indicative of significant weaknesses in internal control.

6. Reporting Packages Submitted to the Federal Clearinghouse Made Publicly Available

The contents of the reporting package submitted to the Federal Clearinghouse would not change. However, the proposed guidance specifies that the “Federal Clearinghouse designated by OMB is authorized to make the reporting package and the form publicly available on a website….” Therefore, organizaitons should expect that their entire reporting package, not just the data collection form, will likely be made available to the public.

7. Additional information

There are a number of sources and tools available that provide detailed information on the proposed changes including “crosswalks” from proposed guidance to the sources of existing guidance. There are also text comparisons available for administrative and audit requirements as well as for cost principles. The complete text of the proposed guidance and a crosswalk of policy changes can be found at: https://www.whitehouse.gov/omb/grants_docs#proposed.

A summary and discussion of the proposed guidance can be found at: https://1.usa.gov/XEqUNM.

The proposed guidance would result in the most significant changes in financial management and operation of Federal programs in many years. The changes are intended to strengthen accountability through policies that minimize waste, fraud and abuse. At the same time, the OMB reports that processes would be streamlined to reduce the time spent complying with administrative requirements and increase time spent toward achieving program objectives. Keep in mind, however, these changes are still under consideration.

If you’d like to submit a comment on the proposed changes, the OMB has extended the comment period through midnight, June 2, 2013. Comments on the proposed guidance must be submitted electronically at www.regulations.gov.

Clark Nuber will be closely monitoring the progress of the Proposed Uniform Guidance and will provide additional information as it becomes available.

© Clark Nuber PS, 2013.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.