United States

Big changes for grant recipients are on the horizon

TRIBAL NATIONS QUARTERLY  | 

If there was ever a year for decision-makers to pay attention to the federal regulatory climate, it is this year. Upcoming are significant changes in federal grants management that will affect just about every organization in one way or another. On Dec. 26, 2013, the U. S. Office of Management and Budget (OMB) issued its long-awaited final grant reform rules in a document titled, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. OMB is also planning to post supporting material, including a crosswalk from the existing single audit rules to the new rules, on the "Policy Statements" section of its Web site shortly following the Dec. 26 Federal Register issuance. In addition, there have been changes made to the data collection form for 2013 as well as changes to the COSO model which organizations should use in the evaluation and design of its internal controls over financial reporting, compliance and operations.

The OMB grant reform rules

The overarching goal of the reform rules is to make the entire process of federal grants management more efficient. The reforms take special aim at streamlining the A-133 audit process by eliminating multiple circulars, and consolidating them into one circular for all segments.

A second goal is to focus and streamline the audit process. The OMB hopes to make the audit process more relevant and efficient, allowing auditors to focus more narrowly on the important issues, and not waste time with less critical matters. Other changes discussed in the document include new threshold limits, revised cost principles and new or revised administrative requirements.

The OMB has made it clear that it is interested in accelerating the OMB Circular A-133 submission process. Currently, entities have nine months to complete and submit the A-133 to the Federal Audit Clearinghouse (FAC). With the view that nine months may be too long, the OMB would like to shorten that to three or six months. However, the idea has not been well-received by many organizations. Although three or six months may be appropriate for a small organization, a large state or local government would face major difficulties in meeting such a short deadline. In the face of this pushback, the OMB has decided to take no action at the present time; for now, the nine-month deadline continues to be in effect.

The first single audits that will be affected by the new rules will be Dec. 31, 2015, year-ends.

Streamlining of circulars

There has been considerable confusion over the multiple circulars that exist. If you are a typical organization, you are likely using at least three circulars at present, and you also are likely to have found many redundancies and repetitious requirements in these circulars. In order to eliminate all the duplications, the OMB has decided to have only one circular for all types of entities. Eight circulars will be rolled into one super circular. The single consolidated circular will embody the whole life cycle of grants management, including application process, awards process, administration, requirements and closeout. The consolidated circular is expected to make the updating process much easier for everyone.

Among the circulars that will be rolled into one super circular are:

  • A-21 - Cost Principles for Educational Institutions
  • A-50 - Audit Follow-Up, related to Single Audit
  • 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 Awards and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations
  • A-122 - Cost Principles for Non-Profit Organizations
  • A-133 - Audits of States, Local Governments and Non-Profit Organizations

Overview of other changes

Following is a brief rundown of other changes to the OMB document:

Single audit threshold

The audit threshold has been raised from $500,000 to $750,000. Based on single audits submitted to the FAC for 2010, there would be over 6,100 fewer entities subject to a single audit, but there would only be a reduction in dollars covered of approximately 3/10th of 1 percent.

Type A threshold

  • Groupings are based on dollars, with Type A programs defined as those above the dollar threshold, and Type B as those below the threshold.
  • The minimum threshold is increased from $300,000 to $500,000.
  • If the total amount of federal awards expended is $750,000 to $100 million, then Type A programs are those with federal awards expended of the greater of $750,000 or 3 percent of total awards expended.
  • If the total amount of federal awards expended is $100 million to $10 billion, then Type A programs are those with federal awards expended of the greater of $3 million or .3 percent of total awards expended.
  • If the total amount of federal awards expended is $10 billion or more, then Type A programs are those with federal awards expended of the greater of $30 million or .15 percent of total awards expended.

High-risk Type A programs

The default criteria under the old rules for a high-risk Type A program are as follows:

  • Not audited as a major program in one of the two most recent audit periods
  • In most recent period, had any of the following:
    • Significant deficiency in internal control
    • Material noncompliance finding
  • Has ARRA (American Recovery and Reinvestment Act of 2009) expenditures in current year
  • Has received a written request by federal awarding agency to audit as major (with180 days' notice)

The default criteria under the new rules for a high-risk Type A program are as follows:

  • Not audited as a major program in one of the two most recent audit periods
  • In the most recent period, had any of the following:
    • Other than an unmodified opinion
    • Material weakness in internal control
    • Known or likely questioned costs that exceed 5 percent of the total expenditures of the program
  • Has received a written request by federal awarding agency to audit as major (with180 days' notice)

High-risk Type B programs

The Type B risk assessment options under the current rules are as follows:

  • Option 1 – Perform risk assessments on all Type B programs (subject to de minimis threshold), and select one half of Type B programs identified as high risk up to the number of low-risk Type A programs.
  • Option 2 – Perform risk assessments on all Type B programs until as many high-risk Type B programs have been identified as there are low-risk Type A programs.

Under the new rules, risk assessments will be required to be performed on Type B programs (subject to de minimis threshold) until high-risk Type B programs have been identified up to 25 percent of low-risk Type A programs.

Percentage of coverage requirement

The new rules reduce the minimum coverage required as follows:

Type of auditee

Old rules

New rules

Not low risk

50 percent

40 percent

Low risk

25 percent

20 percent

Low-risk auditee

Guidance under old rules:

  • Single audits are performed on an annual basis.
  • Auditor's opinions on financial statements and SEFA (Schedule of Expenditures of Federal Awards) are unqualified.
  • No material weakness under requirements of GAGAS (generally accepted government auditing standards).
  • In either of the preceding two years, none of the Type A programs had:
    • Material weakness
    • Noncompliance with material effect
    • Known or likely questioned costs that exceed 5 percent of total federal awards expended for a Type A program

Guidance under new rules:

  • Full single audits performed on annual basis.
  • Auditor's opinions on financial statements and SEFA are unmodified.
  • No going concern issue opinion.
  • No material weakness under requirements of GAGAS.
  • In either of preceding two audit periods, none of the Type A programs had:
    • Material weakness
    • Other than an unmodified opinion on compliance
    • Known or likely questioned costs that exceed 5 percent of total federal awards expended for a Type A program

Consolidation of OMB cost principles

The new rules consolidate cost principles into a single document by merging the following circulars:

  • OMB Circular A-21 – Educational Institutions
  • OMB Circular A-87 – Governments
  • OMB Circular A-122 – Nonprofit Organizations

Administrative requirements for recipients

The OMB consolidated the administrative requirements of OMB Circulars A-102 and A-110 into a uniform set of administrative requirements for all grant recipients. The basis appears to be A-110, except for procurement requirements, which align with A-102. The small purchase threshold is set at $150,000 for procurement purposes.

Changes to the data collection form (Form SF-SAC)

The A-133 data collection process is also a part of ongoing reform in federal grants management. The data collection form is being revised beginning with 2013 audits, and organizations need to know what parts of the form are changing, what the data is being used for, as well as other changes in data input and collection. The new form and instructions will be applicable for audit periods ending in 2013, 2014 and 2015. The final form was released on Jan. 7, 2014.

Among the changes to Form SF-SAC are:

Part I – General information

  • All audit firms must report their Employer Identification Number (EIN)
  • Secondary auditors must report their EIN on the secondary auditor contact information page

Part III - Federal programs

There are two new items for Part III, Item 6 of the form (sample of form shown below) for each federal program listed:

  • Identify loan and loan guarantee
  • Identify the number of findings reported

 

Part III, Item 7 - Federal awards findings summary

If there are findings identified in column (k) in Part III, Item 6, a new schedule is created and Part III, Item 7 is required to be completed for each finding referred to in Part III, Item 6(k) above. Changes are as follows, with a sample form shown below:

  • Standardized Audit Finding Reference Numbers: YYYY- ###, (ex. 2013-001).
  • Audit findings must be listed once for each federal award affected by that finding.
  • Auditor must report the type of compliance requirement (moved from Part III: Federal programs).
  • Type of finding must be indicated (modified opinion, other matters, material weakness, significant deficiency and other findings).
  • Auditor must report questioned costs related to the finding.

 

Extension of time to file in 2013 only

If a single audit for a fiscal period ending in 2013 is due before the 2013 form is available, auditees will not be able to meet the 30-day deadline prescribed by OMB Circular A-133, section .320(a). Therefore, OMB has granted an extension until Feb. 28, 2014, for reporting packages due on or before that date. The extension is automatic, and there is no approval required. This extension applies only to single audits for fiscal periods ending in 2013.

Revised COSO model

Organizations should consider using the COSO (Committee of Sponsoring Organizations of the Treadway Commission) model in the evaluation and design of its internal controls over financial reporting, compliance and operations. A revision to the model was released on May 14, 2013, including the introduction of 17 principles of control that align with the original five elements of COSO. The new principles are:

Element: control environment

  1. Demonstrates commitment to integrity and ethical values
  2. Exercises oversight responsibility
  3. Establishes structure, authority and responsibility
  4. Demonstrates commitment to competence
  5. Establishes accountability

Element: risk assessment

  1. Specifies relevant objectives
  2. Identifies and assesses risk
  3. Identifies and assesses significant change
  4. Assesses fraud risk

Element: control activities

  1. Selects and develops control activities
  2. Selects and develops general controls over technology
  3. Deploys through policies and procedures

Element: information and technology

  1. Generates relevant information
  2. Communicates internally
  3. Communicates externally

Element: monitoring

  1. Conducts ongoing and separate evaluations
  2. Evaluates and commutates deficiencies

For more information

For more information on this topic, please contact one of the following partners in McGladrey’s national tribal and gaming services practice:

Jeff Altshuler, Irvine, Calif., at 949.255.6600 or at jeffrey.altshuler@mcgladrey.com
Corey Topp, Minneapolis, Minn. at 612.376.9579 or corey.topp@mcgladrey.com
Michelle Horaney, Davenport, Iowa at 563.888.4038 or michelle.horaney@mcgladrey.com