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The Federal Office of Management and Budget Proposes Changes to The Federal Single Audit and Related Circulars

April 02, 2012

By Reed W. Risteen, CPA
Partner
BlumShapiro

The Federal Office of Management and Budget (OMB) proposed new rules surrounding the federal single audit on February 28, 2012 in the Federal Register Vol. 77, No. 39. This represents the first efforts in many years to revamp the federal single audit process.

Changes in Single Audit Framework

The proposal would raise the threshold for a federal single audit from $500,000 in federal expenditures to $1,000,000 in federal expenditures. Entities that expend between $1,000,000 and $3,000,000 would be required to undergo a “light” federal single audit in which only two compliance requirements would be tested for each major program, one being allowable and unallowable costs and the other identified by the federal agency based on their perception of significance. Entities expending more than $3,000,000 in federal funds would undergo a full federal single audit. The “full” audit would be strengthened through other reforms.

Streamlining the Federal Compliance Supplement

OMB is considering streamlining the federal compliance supplement, which contains the compliance requirements required to be tested for each major federal program. The proposals at this point are more general ideas rather than specific proposed changes. One idea is to reduce the number of requirements to be tested, and to differentiate those requirements that are more significant. For the more significant requirements, increased testing could be required, which could be achieved by requiring larger sample sizes or lower materiality levels. Requirements that are not as significant could become optional to test or subject to smaller sample sizes or increased materiality levels.

Strengthening Federal Follow-Up

The potential reforms in this area would strengthen federal follow-up on single audit findings. OMB envisions establishing a searchable database of single audit reports to aid in follow up and identification of common issues and findings. The idea is that federal agencies’ follow-up would be more timely, informal and helpful.

Reforms to Cost Circulars

Currently there are several federal circulars on cost principles for different types of entities.  OMB is considering encapsulating all cost principles into one circular, with limited variations allowed for certain types of entities. In terms of federal indirect costs, one idea is to allow entities to accept an indirect cost that is discounted from their established rate in lieu having them prepare a new indirect cost proposal each year and having that proposal reviewed by the cognizant agency and negotiated with them. Although this proposal would save grantees work in preparing the proposal, accepting a lower rate just acerbates the continuing decline of funding of administrative costs that is financially strangling many grantees.

On a positive note, the requirement to maintain timesheets to document salary allocations is being reviewed to determine if there are other mechanisms that may be acceptable. Documenting salary allocations has historically been one of the most onerous of federal grant requirements. Relaxation of other specific cost requirements is also being considered.

Reforms to Administrative Requirements Circulars

As with cost principles circulars, consideration is being given to replace the various circulars covering administrative requirements that apply to different types of entities with one circular which applies to all entities. One change being considered is that grant proposals would be evaluated by the federal agencies both as to merit and financial risk. Another proposal would require federal agencies to provide a 90-day notice of available funding opportunities. This would give entities more time to prepare grant applications.

Next Steps

OMB is seeking responses from the public on their preliminary concepts. That feedback will result in specific proposed changes to the various circulars. We will keep you posted on how this develops in future newsletters.

Reed W. Risteen, CPA, is a Partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Rockland, MA.  The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential. For more information about BlumShapiro, visit blumshapiro.com.

 

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